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December 30, 2005

Housing Affordability Confusion

From the NY Times yesterday, comes a surprisingly confused article arguing that home ownership has actually gotten less expensive over the last 20 years. Here's the article's upshot (and the part that contains the fishy reasoning):

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company... it remains well below the levels of the early 1980's, when it topped 30 percent.

But median family incomes ain't what they used to be--and comparing family incomes over more than two decades is a case of comparing apples to oranges. To wit: family incomes today are much more likely to include two incomes (even two full-time incomes) than they were in the early '80s when many families were supported by a single primary breadwinner. So--to be overly simplistic with the data for a moment--22 percent of two incomes buys what 30 percent of just one income used to.

The good news here is that the share of women in the labor force has been steadily rising, as has the share of women working full time. Women are also steadily closing the pay gap with men. And because women earn more advanced degrees than men, there's reason to believe the gap may close or even eventually reverse. But the bad news is that families now commonly must employ both adults to make a grab for the brass ring of home ownership. Among other problems, that means substantially less wiggle room in family budgets because if one of the two wage earners falls on hard times, there's no one who can enter the workforce to help pick up the slack.

And there are at least two other glaring problems with the NY Times reasoning. 

Family income is a lousy metric to begin with. Because more and more Americans are delaying marriage (the percentage of unmarried 30 to 34-year-olds has quadrupled since 1970), a smaller and smaller share of us are counted in the family income statistics. This means that the growing ranks of single Americans are facing homeownership with just one income at a time when two are needed.

The Times article also includes a nifty map depicting places where home ownership has gotten more affordable. The curious thing about the map though is that it doesn't appear to say what the writer thinks it does. According to the map, pretty much the entire states of Washington, Oregon, California, Nevada, Hawaii, Florida, New York, New Jersey, Delaware, and Maryland have gotten more expensive. So have the Chicago and Boston areas, along with much of Virginia. So even by the Times' rather lousy definition of affordability, a huge swath of the most populated parts of the country have actually gotten less affordable. 

To cap it off, the article smirks that the hoi polloi don't really understand their own economic conditions:

In a nationwide New York Times/CBS News poll conducted this month, 75 percent of respondents said they thought most families in their community spent a larger share of their income on housing now than in the 1980's. Only 5 percent said the share was smaller.

The lesson for me is that--at least in this case--it's the people who are right and it's the data analysts who don't seem to understand the economy--or even what their data actually means.

UPDATE 1/3/06: Cleaned up some of the typos and atrocious grammar plaguing the first draft.

Posted by Eric de Place | Permalink


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Thanks for this post, Eric. I read that same article and felt like a crazy person for a second as I tried to make sense of it. It was hard to believe a whole story appeared in the New York Times based on a severely limited view of family income data. I'm glad you took the time for a critique.

Posted by: Michael | Dec 30, 2005 6:38:46 PM

Interest rates in the early '80's were probably higher than ever before or since. People who actually bought houses in those days had very high payments for a couple of years, then refinanced at much lower rates. I Bought a large lot in l980 but couldn't even consider construction until the interest rate went down to 12.5% in l983. I doubt my wife and I could buy our house if we were starting over now.

Posted by: sf | Dec 31, 2005 12:44:04 PM

At the risk of being a few days late for this party, I'll nevertheless note that Paul Krugman had a good column in Monday's NYT in which he notes that the nationwide averages hide great diversity in housing affordability in different parts of the country - echoing the point that Eric makes in examining the map a few paragraphs from the end of his posting.

The nut of Krugman's argument:
"[W]hen discussing housing, we should think of America as two countries, Flatland and the Zoned Zone. In Flatland, there's plenty of room to build houses, so house prices mainly reflect the cost of construction. As a result, Flatland is pretty much immune to housing bubbles. And in Flatland, houses have, if anything, become easier to afford since 2000 because of falling interest rates.

"In the Zoned Zone, by contrast, buildable lots are scarce, and house prices mainly reflect the price of these lots rather than the cost of construction. As a result, house prices in the Zoned Zone are much less tied down by economic fundamentals than prices in Flatland."

This analysis does ignore some of the inherent limitations on how far into the boonies the Flatlanders can develop, but his delineation of the Zoned Zone ("most of the Northeast Corridor, coastal Florida, much of the West Coast and a few other locations") mirrors what Eric noted on the map.

Posted by: Seth Zuckerman | Jan 4, 2006 1:38:11 PM

The Zoned Zone is also correlated with availability of amenities and such. Folks in rich countries tend to move to desirable places: good weather, stuff to do, interesting people to meet, which is also where companies relocate to. That translates to places close to the coasts (Chicago and Denver the glaring exceptions, Atlanta getting there). Buildable lots are scarce (hence more pricey) because there's a demand for them.

Posted by: Dan Staley | Jan 4, 2006 4:12:09 PM

Yup, this article richly deserved critique. As the economy becomes more volatile for a wider swath of the workforce, more households will face the primal fear: Will we lose our home if a breadwinner gets downsized or really sick?

Add to this fear the fairly high incidence of divorce, which can often have difficult economic ramifications for families.

Now add the growing usage of variable-rate, interest-only mortgages in high-cost markets such as the Puget Sound. A big spike in interest rates could push some folks over the edge.

It seems to me that when you look at home ownership in context, it by and large appears to be an economically riskier endeavor than it did in the 1980s. Yet the hot residential market in recent years seems to be at least partially driven by a sense of fear about being permanently frozen out of home ownership.

I know a number of young families who, truth be told, weren't economically ready to buy a home but did so because 1) interest rates have been at historically low levels and 2) they were afraid that escalating Puget Sound prices would never fall back to earth.

Posted by: Steven Salmi | Jan 7, 2006 10:21:07 AM