America's Deteriorating Housing Market - Demographia 2016

As I have done every year since I started this blog, I want to give you a summary of the 2016 edition of Demographia's International Housing Affordability Survey.  From my perspective, this is one of the most interesting analyses of housing affordability because affordability is measured in terms that we can all relate to; our household income.  In this posting, I want to take a look at the most and least affordable housing markets in the United States when the median house price in a given market is measured using the median household income in that same market.  In total, Demographia examines the affordability of housing in 367 markets in nine nations including Australia, Canada, China (Hong Kong), Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States.

Demographia rates housing market affordability using the concept of "median multiple" which is simply the following:

             Median Multiple = Median Price of a Home 

                                        Median Household Income

The affordability rating is defined as follows:

Median Multiple of 3.0 or less - Affordable

Median Multiple of 3.1 to 4.0 - Moderately Unaffordable

Median Multiple of 4.1 to 5.0 - Seriously Unaffordable

Median Multiple of 5.0 or more - Severely Unaffordable

Historically speaking, housing markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States have been remarkably consistent with median house prices ranging from 2.0 to 3.0 times median household income.  Housing markets with a median multiple of 3.0 or less are generally considered sustainable since a median family can easily afford to make the mortgage payments on a house that is considered affordable.  However, in recent years, housing in some markets has decoupled from income levels with housing prices rising at rates that are far in excess of the rate of increase in family income.

To help us put housing affordability in the United States into perspective, here is a table showing the housing affordability ratings by nation for all nine nations in the study, showing us how some nations (particularly Australia, Canada, New Zealand and the United Kingdom) have a significant number of either seriously or severely unaffordable real estate markets:

Now, let's concentrate on affordability in the United States housing market.  Here is the summary for affordability in America's major metropolitan markets (population over 1 million):

Affordable - 13 markets (24.5 percent)

Moderately Unaffordable - 24 markets (45.3 percent)

Seriously Unaffordable - 5 markets (9.4 percent) 

Severely Unaffordable - 11 markets (20.8 percent)

Median Multiple - 3.7

Here is the summary for all United States markets:

Affordable - 75 markets (32.5 percent)

Moderately Unaffordable - 90 markets (39 percent)

Seriously Unaffordable - 37 markets (16 percent)

Severely Unaffordable - 29 markets (12.6 percent)

Median Multiple - 3.5

As we can see, in both major and smaller markets, housing affordability in the United States is, once again, becoming problematic.  When we go back to data from 2007 when the housing bubble was about to burst, Demographia calculated at median multiple of 3.6 for all markets, just above the current level.  At that time, 35.7 percent of all U.S. housing markets were considered affordable compared to 32.5 percent now.  If we go to Demographia's 2009 report, the median multiple for all U.S. housing markets had fallen to 3.2 and 44 percent of all markets were considered affordable, substantially higher than the level is currently.

Now, let's look at the top ten most affordable housing markets in the United States:

As has been the case in the past, the majority of America's most affordable housing markets are located in the de-industrialized belt.  It is also interesting to see that in eight out of ten markets, affordability has improved on a year-over-year basis.

Here are the top ten least affordable housing markets in the United States:

As you can see, America's most severely unaffordable housing markets are located exclusively in California and Hawaii, the sun and sand (or earthquake and volcanic activity) states.  In all markets other than San Diego, housing affordability has declined on a year-over-year basis.  In fact, the situation in California is worse than my table shows; there are seven additional markets in California that are considered severely unaffordable.

Let's close this posting with a graphic that shows the pre-bubble and 2015 housing affordability for America's severely unaffordable markets:

It is quite clear that, despite the collapsing of the real estate bubble during the Great Recession, some of America's largest real estate markets have become increasingly unaffordable by a median family with house prices approximately 75 percent higher relative to income than they were before the real estate bubble formed.  Obviously, California's real estate valuations are increasingly problematic.  While this could be dismissed as a single state issue, with California having, by a wide margin, the largest gross state product in the United States, any significant drop in its real estate prices could have a significant impact on the national economy.