Monday, January 26, 2015

America's Most and Least Affordable Housing Markets - Demographia 2015

Demographic recently released the 2015 version of its International Housing Affordability Survey, a publication that I have posted on for the past four years.  In this annual survey, Demographia examines the housing markets in 378 metropolitan markets in nine countries, Australia, Canada, China, Ireland, Japan, New Zealand, Singapore and the United States and assesses housing affordability based on a measure that we can all relate to, household income.

Demographic uses the term "median multiple" to rate housing affordability; this price-to-income multiple is calculated using the median price of a home in a given market and divides it by the median household income in that market as follows:

  Median Multiple    =        Median Price of a Home     
                                        Median Household Income 

Historically, the median multiple for Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States has been relatively similar, ranging between 2.0 and 3.0 (i.e. a median house is priced at 2 to 3 times the median income in that market) during the 1980s and 1990s.  As well, experts agree that housing is affordable when the median multiple is no more than 3.0, however, as the years have passed and credit has become cheaper and cheaper thanks to the Federal Reserve and their central bank peers, many markets in the study have exceeded the affordability threshold.

Demographic uses the median multiple to assign affordability ratings to each of the 378 metropolitan markets in the study as follows:

Of the 378 total international markets in the study, 98 are considered affordable, (median multiple of 3.0 or less), 119 are considered moderately affordable, 75 are considered seriously unaffordable and 86 are considered severely unaffordable as shown on this table:

Here is a graph showing how housing affordability in major markets (population more than one million) has changed between 2004 and 2014 for each of the nations in the study:

If we include both major and other smaller markets, three nations have severely unaffordable housing in 2014; Hong Kong with a median multiple of 17.0, New Zealand with a median multiple of 5.2 and Australia with a median multiple of 5.5  The median multiple of the United States was 3.4 compared to 3.9 for Canada and 5.0 for the United Kingdom.

With that background information, for this posting, I'm going to focus on housing affordability in the United States.  Among the 52 major markets in the United States, the median multiple is 3.6 with 14 being classified as affordable and 9 being classified as severely unaffordable.  The least affordable major market was in San Francisco with a median multiple of 9.2 and the most affordable major market was in Detroit with a median multiple of 2.1.  Among all 242 American markets,  88 were classified as affordable and 25 were classified as severely unaffordable.  The least affordable market was, once again, San Francisco with a median multiple of 9.2 and the most affordable market was in Rockford, Illinois with a median multiple of 2.0.

Now, let's look at the long-term trend.  Here is a graph showing the trend of housing affordability in the ten largest markets in the United States between 2004 and 2014:

You will notice that in 2014, only one of the top ten largest major metropolitan area had affordable housing; Atlanta which came in with a median multiple of 2.9.  The least affordable major metropolitan area among the top ten largest markets in 2014 was Los Angeles with a median multiple of 8.0.  You will also note that affordability for the ten largest real estate markets in the U.S. declined over the past one or two years, reflecting the upward pressure on housing prices.

Now, let's look at the top ten most affordable housing market among all U.S. markets in 2014.  Please note that I have included a column which shows the median multiple for 2013 where it is available and the year-over-year change from 2013 to 2014:

Note that Detroit, Michigan also holds the distinction of being America's most affordable major metropolitan markets.  It is interesting to note that there is a pretty even split between those housing markets that became less affordable and those that became more affordable during 2014.

Here is a table showing the top ten least affordable housing markets among all U.S. markets in 2014:

Do you notice anything unusual?  All but one of America's least affordable real estate markets is located in California, in fact, 13 out of 25 severely unaffordable (the lowest level of affordability) U.S. real estate markets are located in California.  Again, it's a pretty even split between those markets that became even less severely affordable and those that became more severely unaffordable during 2014. 

On a year-over-year basis, as measured using the median multiple concept, the affordability of residential real estate in the overall United States was the same in both 2013 and 2014 with the average median multiple being 3.4.  This is substantially different than the change in affordability between 2012 and 2013 when the median multiple jumped from 3.1 in 2012 to 3.4 in 2013.  This shouldn't be overly surprising given that house prices appreciated at a far higher rate in 2012 - 2013 than they did in 2014.  What is of concern is that the number of moderately, seriously and severely unaffordable real estate markets still remains at 63.6 percent of all markets, up from 53.7 percent in 2012.  This suggests that there is a significant possibility that another economic downturn could, once again, have a negative impact on the financial condition of American households that are living in houses that are beyond their means.

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