Monday, January 30, 2012

Housing Affordability in the United States - 2011

Recently, I submitted a posting that outlined the results for Demographia's 8th Annual International Housing Survey: 2012.  In that posting, I summarized the housing markets for all seven nations in the study, showing the most expensive and least expensive when measured using the concept of median multiplier which is defined as the multiple of the median household income that it takes to purchase a median house in a given market; for example, in a market with a median house price of $150,000 and a median household income of $50,000 the median multiple would be 3.0.  What I'd like to do in this posting, is pick out the markets that are most affordable and least affordable across the United States and compare the 2011 data to Demographia's past database from 2007, just before the Great Recession and collapse of the housing bubble to see how affordability has changed.

To begin, let's remind ourselves how Demographia breaks down its median multiple data into affordability brackets:

Across the United States, Demographia considers housing affordable with a national average median multiple of 3.0.  In 2011, of the 211 markets, 117 (55.5%) were considered affordable, 64 (30.3%) were considered moderately unaffordable, 16 (7.6%) were considered seriously unaffordable and 14 (6.6%) were considered severely unaffordable.  In 2007, of the 107 markets in the study, only 35 (32.7%) were considered affordable, 28 (26.2%) were considered moderately unaffordable, 17 (15.9%) were considered seriously unaffordable and a whopping 27 (25.2%) were considered severely unaffordable.  You can quite quickly see that housing affordability has certainly improved across most markets in the United States.

Here is a list of the top 20 most affordable markets in 2011:

You'll notice right away that the most affordable markets are found in the economically-challenged industrial heartland of America but, from the data in the chart, you'll also notice that the drop in median multiple from the peak was rather small (i.e. housing was quite affordable before the housing market decline), likely because the economy had already suffered from massive de-industrialization prior to the Great Recession.  It is also interesting to note the appearance of 3 "sun and sand belt" markets with Phoenix seeing the greatest affordability adjustment; in 2007, the multiple of 5.1 rendered the market severely unaffordable.  This multiple for this market has plummeted to 2.2 making it America's 20th most affordable real estate market.

Here is a list of the top 20 least affordable markets in 2011:

Honolulu comes in as the least affordable market in the United States (and fourth least affordable in the survey among the seven nations), however it is marginally more affordable than it was in 2007 when the multiple was 10.3.  Most of the remainder of the least affordable markets are in California and the New England States but it is important to note that several of these markets have suffered from severe affordability readjustments, the worst being Los Angeles.  In the case of Los Angeles, in 2007, the median multiple was a stratospheric 11.4, the highest in the six nation study.  A median home was priced at $582,000 with median household income of only $51,800.  In 2011, a median home in Los Angeles had dropped to $324,800, a downward correction of 44 percent.  San Diego also saw its median multiple fall from 10.5 to 6.1 and its median house price drop from $601,900 to a mere $270,000, a massive correction of 68 percent.  Now that's a bursting bubble!

In summary, from this data we can readily see that, on average, housing in the United States in many markets is becoming better (and probably more realistically) valued for a larger number of purchasers.  Unfortunately for the majority of Americans, these price readjustments have been accompanied by a great deal of pain; millions of foreclosures and underwater home owners can most certainly attest to that.  It is an extremely difficult way to learn that housing markets that are priced beyond a certain point are not in equilibrium are likely to correct, a lesson that will ultimately be learned by some homeowners in overheated real estate markets in countries including Canada, Australia and the United Kingdom that have yet to see a housing market correction of any significance.


  1. 3X is a bit low. If a family uses 10% of its monthly income on a monthly mortgage over 20 years, it would mean a loan repayment of 20 x annual income. If, say, that represents interest to principal at 2:1, it would still mean the loan was 6.7X annual income. With the initial down payment, houses would cost more than 6X annual income on a 20 year loan.

    1. The mathematical relationship between housing markets and residents' median incomes is of limited utility when measuring property affordability unless other environmental factors, such as population migration and wealth, are also taken into consideration. For example, retirees with limited incomes, who sell expensive homes and settle in less costly rural communities may increase the latter market's property prices without similarly raising local median incomes.

  2. How does mortgage interest rate affect "median multiples"?

  3. I agree with the above, there are many other factors such as wealth and interest rates that effect the demand side of the equation.
    I guess the best question is, are housing pricing and options a support or drag on a local economies and what direction are these factor pushing or changing the local

  4. Hi,
    I concur..we will ride along the bottom for couple of years.

  5. Good work but one thing which needs to be added to the equation is property taxes.

    Chicago MSA might be affordable but if you include the property taxes it ranks high up there with San fransisco.

    Some of the tax rates in Chicago as high as 3% when the comparable rate is only 1% in SFO.

  6. real estate is a hyper local commodity - taking a broad look at median incomes does not factor the value of real estate - however it does indicate that people are willing to sacrifice more to live in certain places.

  7. Thanks for taking the time to discuss about housing affordibility in US, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.