Tuesday, February 20, 2018

United States Housing Affordability - Demographia's 2018 Edition

While news about the U.S. housing market has been relegated to the back pages of the business section of American online and print news services, there are still some interesting developments that are worth further examination, particularly in some markets.  While housing prices have recovered from the catastrophically low levels that were experienced during the Great Recession, some markets are showing signs of, once again, being severely overvalued, an issue that first occurred in the mid-2000s. 

As I have done for the past few years, this posting will take a look at the most recent version of Demographia's International Housing Affordability Survey for 2018, Demographia's 14th annual report on the state of the housing market in 10 key nations.  Demographia looks at housing markets in Australia, Canada, China (Hong Kong), Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States which, between them, have 92 major metropolitan markets with populations in excess of one million people.  Among the 92 major markets are five megacities with a population of more than ten million people; Tokyo-Yokohama, New York, Osaka-Kobe-Kyoto, Los Angeles and London.  Rather than just looking at raw housing prices, Demographia uses a rather unique measure to determine the affordability of housing, a key measure since declining affordability was the factor that set up the collapse of the housing market in the United States.  Demographia uses a unique measure of affordability called the Median Multiple which is defined as follows:

Median Multiple  =    Median House Price in a Given Market
                                 Median Household Income in that Market

The income used to assess housing affordability is gross, pre-tax, annual median household income.

Demographia goes on to use the Median Multiple to define housing affordability as follows:

Affordable - Median Multiple of 3.0 and less
Moderately Unaffordable - Median Multiple from 3.1 to 4.0
Seriously Unaffordable - Median Multiple from 4.1 to 5.0
Severely Unaffordable - Median Multiple 5.1 and more

Historically speaking, when looking back at decades of records, housing markets are considered to be affordable (and sustainable) when household income is roughly one-third of housing prices.

Here is a table showing housing affordability by nation for all 293 housing markets in the study:

As you can see, when all domestic real estate markets are taken into consideration, the United States had an overall Median Multiple of 3.7 which puts it in the moderately unaffordable category.  In the major housing markets, the Median Multiple was 3.8, again, in the moderately unaffordable category.   Only 49 or 28 percent of the 175 U.S. markets were considered affordable with 67 or 38 percent being classified as either seriously or severely unaffordable.  Despite that, the U.S. housing market still looks quite well valued compared to nations like Australia and New Zealand.

Here is a breakdown of the ten largest housing markets in the United States showing how affordability has deteriorated since the end of the Great Recession:

With that background, let's now look at the ten most affordable housing markets in the United States:

As you can see, many of these markets are located in the former industrial heartland of America.  It is interesting to note that many of America's most affordable housing markets have seen relatively little decline in house price affordability since the Great Recession, largely because the economies in these areas have remained stagnant over the past decade.

Here is a table showing the ten least affordable housing markets in the United States:

While the Median Multiple for eight of the least affordable markets has declined somewhat, the Median Multiples for all of the markets is still well in excess of the 5.1 hurdle that defines "severely unaffordable.  In fact, median housing prices have increased in all but one market (Santa Barbara) and, in the case of San Jose, median housing prices have increased by 16.5 percent on a year-over-year basis. 

The authors of the study note that California has the most "ominous housing market trends in the United States".  A great deal of this is due to decades of highly restrictive land use and environmental regulations that have distorted the state's housing market.  Since 2010, the Median Multiples in the six largest housing markets in California have increased at 7.6 times the rate of major U.S. markets where there are less regulated land use and environmental policies.  Not only are the major California markets suffering from severely unaffordable housing, even the smaller markets are experiencing extremely bleak housing affordability.

One interesting point to note is the median price and household income for both data sets.  In the case of the most affordable housing markets, the average median price is $124,000 and average median household income of $54,060.  In the case of the least affordable housing markets, the average median price is $736,830 and average median household income is $79,620.  When comparing the least and most affordable markets we find the following:

Average median housing prices - 494.2 percent higher

Average median household income - 47.3 percent higher 

I would suggest that this scenario is simply not sustainable, a fact that was learned by tens of millions of U.S. households in the later part of the first decade of the new millennium.

While the United States housing market is, in general, showing that it has recovered from the depths of the Great Recession disaster zone, some of the largest markets are showing the same type of non-sustainable price gains that appeared a decade and a half ago, largely because of this:

Thanks to the Federal Reserve's unfettered and ill-advised beneficence, parts of the United States housing market are once again living in a dream world, a dream that could come crashing down yet again.