America's Housing Affordability Issue

A recent speech by James Bullard, President and CEO of the Federal Reserve Bank of St. Louis provides us with an interesting viewpoint regarding the current state of the U.S. housing market.  In his speech given at the Bi-State Development 2017 Annual Meeting, Mr. Bullard looks at living standards across American metropolitan statistical areas (MSAs) which are defined as an area containing a large population centre and the counties adjacent to that centre, particularly those areas that have a high degree of integration with that population centre as measured by commuting patterns.  In his speech, he focuses on housing and housing affordability, a key part of living standards and a measure that may give us some sense of where the housing market is headed.    

Here is a map which shows the MSAs in the United States:

In 2015, about 86 percent of Americans lived within one of 381 U.S. MSAs and about 56 percent of Americans lived within one of 53 large MSAs which have a population of more than 1 million people.

Mr. Bullard notes that the cost of living across the 381 MSAs varies widely, driven primarily by the cost of housing.  One way to measure the cost of housing is to look at the median price per square foot as shown on this map: 

Zillow data shows that in 2015, the median home value in San Francisco was $479 per square foot compared to only $105 per square foot in St. Louis.

While raw per square foot data is interesting, an even more important measure is affordability.  Here is a map showing the share of households that can afford payments on a median-priced single-family home in their MSA:

As you can clearly see, the sun and sand states that saw their real estate markets decimated in the housing market collapse of the Great Recession are, once again, seeing their housing markets become unaffordable by a majority of their households.  This is particularly the case in coastal California where some MSAs are finding that less than one-third of their households able to afford a median-priced single-family dwelling.  There is an additional problem with the growing lack of affordable housing; households that spend a higher portion of their take-home income on housing are less able to spend on other items and since consumer spending forms a significant portion of GDP as shown here:

...we are increasingly likely to see even slower economic growth rates.

While the S&P/Case-Shiller Composite Home Price Index is showing this seemingly healthy trend:

...it's becoming increasingly apparent that, at least in some large markets, the rise in house prices in unsustainable given that housing is not affordable by a median family in that market.  This affordability problem will become even worse as interest rates begin their slow grind upwards.