For thirteen years,
Demographia has looked at a multi-nation sample, comparing real estate
affordability when measured using their unique metric. This year, they
look at residential housing affordability in Australia, Canada, China (Hong
Kong), Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United
States and compare the affordability in both major metropolitan areas with
populations greater than one million people and smaller urban areas.

Let's open by looking at
how Demographia defines housing affordability. Rather than simply looking
at median house prices in a given market to determine affordability, the
authors of the report use a metric that they call the "median
multiple" which is defined as follows:

Median Multiple =

__Median Price of a Home in a Market__
Median Household Income in that Market

Demographia then divides
the median multiple metric into affordability brackets as shown here, noting
that a median multiple of around 3.0 is historically significant as a
break-over point between affordability and non-affordability as shown here:

Here are Demographia's
house affordability ratings using the median multiple:

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 5.1 or
more - Severely Unaffordable

Let's start by looking at
the housing market affordabilities for all 406 housing markets in the 9 nations
in the study, showing how many markets in each nation fall into each
affordability bracket:

Here is a table showing
the affordability ratings for the 92 major housing markets (population greater
than one million) in each of the nine nations, which shows us that, in general,
the major markets are far less affordable than their smaller counterparts.

Here is a table showing
the ten least affordable major housing markets in the study:

In contrast, here are the
ten most affordable major housing markets, all of which are located within the
United States:

Now, as I have done in
other years, let's focus on the affordability of housing in the United States,
looking at both the most affordable and least affordable markets and how the
affordability has changed from the previous year. Let's start with this
graph which shows the affordability of middle-income housing in the ten largest
real estate markets in the United States between 1995 and 2016:

As we can see, Los
Angeles and Chicago have seen significant decreases in affordability since the
housing market bubble burst in 2007 - 2008. As well, all of the ten
largest major markets in the United States are now considered to be
unaffordable by a household with all of them having a median multiple greater
than 3.1.

Here is a table showing
the ten most affordable real estate markets in the United States using the
entire sample of both large and smaller markets:

As you can see, the
affordability in America's most affordable real estate markets has changed little between 2016 and 2017 where the data is
available for both years.

Here is a table showing
the ten least affordable real estate markets in the United States using the
entire sample of both large and smaller markets:

As in previous years, the
majority of America's least affordable housing markets are located in a single
state with nine out of ten of the nation's least affordable housing markets
being located in California. As well, there are an additional six
California markets that are considered severely unaffordable for a total of 15.
As well, as you can see, affordability has declined in all but two of the
ten least affordable markets with significant affordability declines in Santa
Cruz, Santa Barbara, Salinas - Monterey, San Luis Obispo and Santa Rosa.
It's also an interesting exercise to compare median household incomes in
both groups;

**the median household income in the East Stroudsburg, PA market is $58,500; this compares to $66,500 in Santa Cruz, CA, a difference of $8000 or 13.7 percent annually. Median real estate prices are a whole different story; the median price of a home in East Stroudsburg is $58,500 compared to $774,500 in Santa Cruz, a difference of $716,000 or 1224 percent!**That's as clear an explanation of the variation in housing affordability as one can imagine.
It is quite clear that
the United States real estate market has been split into two parts; the former
industrial heartland where housing is incredibly cheap, even by historical
standards, and the market in California where real estate valuations are
becoming increasingly unsustainable. With the Federal Reserve rattling
the "interest rate cage" on a regular basis, even a small increase in
mortgage rates could prove to be problematic for America's most overvalued real
estate "owners".

So what is really driving the unaffordability? And why now? It must be the extended period of low interest rates, coupled with the increasing mobility of the population.

ReplyDeleteI believe that it is being driven by low interest rates....and forgetting what happened in 2006 - 2008.

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