Wednesday, January 30, 2013

Real Estate Affordability in the United States - 2013 Version

Updated April 22, 2013

Once again, Demographia has released its annual International Housing Affordability Survey, its ninth annual look at the housing markets in Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom and the United States.  In this posting, I'll provide you with a brief comparison of the affordability of the real estate markets in each of the countries and then take a more detailed look at the most and least affordable real estate markets in the United States.

As I've told my regular readers on previous occasions, Demographia uses a unique approach to calculating real estate affordability.  They use a term "median multiple" which is the median house price in a given market divided by the median gross (before tax) household income in that market.  They then divide the resulting median multiples into four brackets as follows:

In this year's study, Demographia examines the real estate markets in 337 metropolitan areas in the seven aforementioned countries.

Here is a summary of the affordability of all 337 real estate markets in all seven nations for all metropolitan areas:

Here is a chart showing how overall nationwide affordability in these markets has changed over the past eight years:

Notice how affordability in the United States has increased from a median multiple of 4.6 in 2005 to a median multiple of 3.1 in 2012?  Right now, residential real estate in the United States is considered to be just on the margins of the affordability cut-off, a bargain compared to the real estate in Australia, New Zealand and the United Kingdom.  You will also note the massive readjustment of the market in Ireland; when the bottom fell out of the Celtic Tiger, real estate prices plummeted by more than 52 percent to their current level and, have fallen by an additional 14 percent on a year-over-year basis.  That said, compared to last year, housing affordability declined in the 51 major metropolitan markets (population greater than 1 million) from a median multiple of 3.1 to 3.2.

Just for fun, here are the ten least affordable real estate markets among all seven nations in the study:

Now let's look at the most affordable American metropolitan real estate markets when measured using the median multiple metric and how affordability has changed on a year-over-year basis:

The top 20 most affordable real estate markets among the seven nations in the study are all in the United States, many of them located in the economically depressed industrial heartland of Michigan, Ohio, Indiana and Illinois.  As noted above, out of 216 U.S. markets in the study, 100 or 46.3 percent of the total are considered to be affordable, by far the highest percentage of affordable markets in all seven nations.

Here is a list of the ten least affordable American real estate markets and how affordability has changed on a year-over-year basis:

What is surprising is to see how affordability in some markets has declined over the past year alone; the median multiple in Santa Barbara rose by 3.1 to 7.9, moving it from the moderately unaffordable category well into the severely unaffordable category and the median multiple in Santa Cruz moved up from 6.6 to 8.2, pushing real estate in that market even further into the severely unaffordable category.  Please note that a movement of 1.0 in the median multiple is equal to an entire year of a household's wages, not an insignificant amount by any measure!  Four out of six of the severely unaffordable markets are located in coastal California with the median multiple in both San Francisco and San Jose rising to 30 percent or more than at any point during the housing bubble.

While the most recent Case-Shiller report shows that housing prices in the 20-City Composite have risen by 8.1 percent on a year-over-year basis in January as shown here...

...the Demographia study shows that real estate affordability in the United States varies widely and, depending on where you live, may be either severely unaffordable and becoming even more unaffordable or very cheap when compared to the income level of those who live in the area.  After all, in large part, it was the severely unaffordable real estate in the sun and sand states that was responsible for much of the precipitous decline in America's housing market and, from this data, we can see that history may be repeating itself.

Monday, January 28, 2013

Debt and Savings in Low and Moderate Income America

A report by the Employee Benefit Research Institute (EBRI) provides us with a view of household finances in the United States, focussing on households in the bottom 40 percent of all U.S. households with incomes under $35,600 annually.  These households are termed low- to moderate-income or LMI households.  This study used 2010 data gleaned from the Federal Reserve Board's latest Survey of Consumer Finances.

1.) LMI Household Debt Levels:

Most LMI households are not overly indebted; in general, households with debt payments that are greater than 40 percent of household income are considered to have unsustainable debt levels.  In the study, only 13 percent of LMI households had debt in excess of the comfort zone, the same level as was noted in 2007.  As well, only 11 percent of these households had debt that was more than 60 days overdue, slightly higher than the 8 percent level in 2007.  How is it possible that these modest income households have such low problem debt levels?  Largely because only 60 percent of LMI households had ANY consumer or mortgage debt.  Only 22 percent had mortgage debt secured by the equity in their homes, only 28 percent had outstanding credit card balances and only 38 percent had installment loans.  These numbers were at 22 percent, 33 percent and 35 percent in 2007.

2.) Household Savings Levels:

Most professionals advise that households have savings equivalent to at least three months of household income as a buffer for emergency situations.  In the case of LMI households, a typical household thought that it was prudent to have "precautionary savings" of $3000, however, a median household in the study had savings of only $2700 including retirement savings.  Only 37 percent of LMI households had savings of any kind at a bank or credit union.  The median amount in these accounts was $700 for low-income households and $1000 for moderate-income households.  Other than chequing accounts, very few households had savings in the form of certificates of deposit (9 percent), United States Savings Bonds (5 percent) and stocks outside of a retirement plan (5 percent).

For your information, here is a look at the dropping overall personal savings rate for Americans of all income levels showing how LMI households are saving far less than the average:

The personal savings rate is calculated as the ratio of personal savings to disposable personal income.  Since 1959, America's personal savings rate has ranged from a high of 14.6 percent in May 1975 to a low of 0.9 percent in October 2001.  At the beginning of the Great Recession, the personal savings rate rose from 2.6 percent in December 2007 to a peak of 6.5 percent in November and December 2008 and has since fallen to its current level of 3.6 percent.

Fortunately for America's LMI households, their debt loads are unlikely to cause them grief when the next economic slowdown hits.  Unfortunately, as the cost of most goods and services continue to rise and wage increases remain modest at best, it will be difficult for them to get ahead of the curve.

Friday, January 25, 2013

Canada's Housing Market Affordability

The fine researchers at Demographia have once again released their annual International Housing Affordability Survey comparing housing affordability in 337 metropolitan markets throughout Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom and Australia.  In this posting, I'm going to concentrate on the affordability of Canada's housing market as a whole when compared to the other nations in the study and then focus on the country's most and least affordable markets.

Let's open by looking at how Demographia defines housing affordability.  Demographia uses the term "median multiple" which is defined as the median house price divided by the median gross before tax household income in that market.  It then divides the median multiple into four segments based on the size of the multiple as shown on this chart:

Basically, where the median price of housing is less than 3 times the median household income in that particular market, housing is considered affordable.  Where the median price of housing is 5.1 times the median household income in that market, housing is considered severely unaffordable with steps in between the two.

Overall, housing affordability in the nations studied changed very little from 2012 with the most affordable housing markets being found in Canada, Ireland and the United States (with some obvious Canadian exceptions as you'll see further on) and the least affordable overall housing markets being found in Australia, New Zealand, the United Kingdom and Hong Kong as shown on this chart which shows the affordability of major metropolitan markets:

...and this chart which shows all of the markets for all nations:

Even though Canada's national median multiple for major metropolitan markets came in at 4.7 and all markets came in at 3.6, Demographia still considers Canada's real estate market to be moderately or seriously unaffordable on the whole, depending on whether or not you live in a major metropolitan area.  Admittedly, however, on the whole, Canada's real estate would appear to be a great deal more affordable than Australia, New Zealand and the United Kingdom, all of which have average median multiples in the severely unaffordable range.

You'll notice on the second chart, that out of 35 markets, Canada has 8 that are affordable (22.9 percent), 17 that are moderately unaffordable (48.6 percent), four that are seriously unaffordable (11.4 percent) and six that are severely unaffordable (17.1 percent).  By way of comparison, the vastly realigned prices in the United States real estate market have resulted in 46.3 percent of markets being affordable and only 7.4 percent being severely unaffordable.  In the worst case, Australia, no housing markets are either affordable or moderately unaffordable and 76.9 percent of markets are considered severely unaffordable.

The eight affordable real estate markets in Canada include Fredericton, Moncton and St. John, New Brunswick, Windsor and Thunder Bay, Ontario, Trois Rivieres and Saguenay, Quebec and Charlottetown, Prince Edward Island.  The six severely unaffordable markets include Vancouver, Kelowna, Abbotsford and Victoria, British Columbia, Toronto, Ontario and Montreal, Quebec.

Here is a listing of the most affordable markets, showing the year-over-year changes in affordability:

Here is a listing of the least affordable markets, also showing the year-over year changes in affordability:

Let's take a brief look at Canada's most unaffordable market and the second-least affordable market in the study.  Here is a graph showing the median multiple price of a home in Vancouver since 2005:

Over the eight year period, housing prices have risen from $373,000 to $621,300, an increase of $248,300 or 66.6 percent.  Note that between 2006 and 2012, the median household income in Vancouver rose by a measly 15.4 percent, hardly keeping up with the rise in the cost of purchasing a home.

Here is a graph showing what has happened to Vancouver's median multiple over the same timeframe:

This past year, 2012, was the first year in the past eight that the median multiple has shown any sign of slowing its relentless climb.  How quickly can this multiple fall?  This graph shows what happened to the median multiple in Los Angeles, one of America's hottest real estate markets before the bottom fell out:

And yes, the people in Los Angeles thought that prices would never drop!

One thing that I have noted over the years that I've been referring to the Demographia statistics is how slowly household gross incomes have risen.  While housing prices have risen dramatically, median household incomes have barely budged and, in some cases, have actually dropped from 2011 to 2012.  It's almost like the past decade has been the perfect storm for housing affordability; stagnant wages accompanied by rising demand for housing pumped up by our current ultra-low and tempting interest rate environment.

That hardly makes for a sustainable situation, does it?

Thursday, January 24, 2013

Classic Mayor Rob Ford

Now that the Mayor of Toronto is front page news again, here are a handful of classic Rob Ford moments for your perusal.   I realize that these are reruns for some of you, however, not all of us pay attention to everything that goes on in Toronto all of the time:

Manitoba next to Detroit?  I thought that we all learned basic Canadian geography in Grade 4 but apparently not all of us did.

Apparently, despite helping young men with footballs, actually tossing a football is not one of his strengths either:

Here are his comments on bike lanes:

It would appear that he's not much of a cyclist either.

There's a strong message for the Mayor in this one:

Here he is setting a good example for drivers everywhere:

And, lastly, this face-first collision with a video camera:

At least the Mayor of Toronto has kept us amply entertained since the fall of 2010...and before that.