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articles about “Affordability

Where Is Homeownership Within Reach of the Middle Class and Millennials?

Despite high household incomes, San Francisco is the least affordable metro, with just 15% of homes within reach of the middle class. Affordability has deteriorated over the past year in Austin and Miami. The most affordable markets are near the Great Lakes.

Jed Kolko, Chief Economist
November 18, 2014

Where can the middle class bear the cost of buying a home? In the past year, affordability has fallen modestly, hurt by rising home prices, but helped by lower mortgage rates. Nationally, 59% of homes for sale are within reach of the middle class, compared with 62% last October. Nonetheless, the big picture is that prices still look undervalued compared with fundamentals and historically low mortgage rates make buying much cheaper than renting. Still, affordability is a growing problem.

We measure affordability as the share of homes for sale on Trulia within reach of a middle-class household. Our standard is whether the total monthly payment, including mortgage, insurance, and property taxes, is less than 31% of the metro area’s median household income. (See note below.) We define middle class separately for each metro based on the local median household income. Thus, what we consider affordable varies from market to market.

For instance, in metro Atlanta, median household income is $55,000. Homes priced under $276,000 are affordable based on the 31% guideline. On November 7, 2014, 71% of the homes for sale in Atlanta were listed for less than $276,000. That means that more than two-thirds of metro Atlanta homes are within reach of the middle class.

Austin and Miami Join California Markets on the Least Affordable List

The five most affordable markets are in Ohio, Indiana, and upstate New York. In those markets, more than 80% of homes for sale are within reach of the middle class. The South is relatively affordable too, with Birmingham, AL and Columbia, SC among the 10 most affordable markets.

Most Affordable Housing Markets for the Middle Class

# U.S. Metro % of for-sale homes affordable for middle class, Nov 2014 Median size of affordable for-sale homes, Nov 2014 (square feet) % of for-sale homes affordable for middle class, Oct 2013
1 Dayton, OH 85% 1400 85%
2 Rochester, NY 83% 1400 76%
3 Akron, OH 83% 1350 86%
4 Gary, IN 81% 1500 84%
5 Toledo, OH 81% 1350 85%
6 Birmingham, AL 80% 1400 82%
7 Kansas City, MO-KS 79% 1400 80%
8 Camden, NJ 79% 1450 79%
9 Columbia, SC 79% 1700 83%
10 Detroit, MI 79% 1050 83%
Find out how affordable each of the 100 largest metros are for the Middle Class: Excel and PDF

Six of the seven least affordable markets are in California. A middle-class household can afford just 15% of homes for sale in San Francisco and 22% in Los Angeles. In New York, only 25% of homes for sale are within reach. Joining the least affordable list for the first time are Austin and Miami. In Austin, just 40% of homes for sale are within reach of the middle class, down from 50% last fall. Miami has seen a similar drop in affordability. In total, in 20 of the 100 largest metros, middle-class households can afford fewer than 50% of homes.

Least Affordable Housing Markets for the Middle Class

# U.S. Metro % of for-sale homes affordable for middle class, Nov 2014 Median size of affordable for-sale homes, Nov 2014 (square feet) % of for-sale homes affordable for middle class, Oct 2013
1 San Francisco, CA 15% 1050 14%
2 Los Angeles, CA 22% 1250 24%
3 San Diego, CA 25% 1100 28%
4 New York, NY-NJ 25% 1050 25%
5 Orange County, CA 26% 1100 23%
6 San Jose, CA 30% 1200 31%
7 Ventura County, CA 33% 1250 32%
8 Honolulu, HI 38% 700 40%
9 Austin, TX 40% 1800 50%
10 Miami, FL 41% 1150 51%
Find out how affordable each of the 100 largest metros are for the Middle Class: Excel and PDF

metro map

 

Surprisingly, high-income metros are generally less, not more, affordable. Housing prices tend to be so high in metros with high incomes that affordability ends up being worse than in low-income metros. Why? High-income households bid up home prices, and high prices push out lower-income households. In addition, higher-income metros tend to have less new construction than lower-income metros do. As a result, high-income metros such as San Francisco and San Jose are among the least affordable, even after taking income into account.

Bucking the trend are Washington, DC and the Bethesda metro next door, where incomes are high and more than 60% of homes are within reach of the middle class.

HousingAffordability

The Least Affordable Parts of the Least Affordable Metros

Of course, affordability varies within metros. To dig deeper in the least affordable metros, we zoom down one level to look at sub-markets – individual counties or, for enormous counties like Los Angeles, the territories covered by telephone area codes. For example, although metro San Francisco is less affordable than metro New York, the borough of Manhattan is less affordable than the city of San Francisco (see note). In fact, Brooklyn and the San Gabriel Valley (east of downtown Los Angeles) are as unaffordable as the city of San Francisco.

So the next time someone says “Oakland is the new Brooklyn,” remind them that housing costs in Brooklyn actually rival those of San Francisco, not Oakland. In Alameda County, which includes Oakland, 32% of homes are within reach of the middle class – similar to Queens (33%), not Brooklyn (12%).

   Least Affordable Housing Sub-Markets for the Middle Class
# U.S. Sub-Market U.S. Metro % of for-sale homes affordable for middle class, Nov 2014
1 Manhattan NYC 2%
2 Pasadena / San Gabriel Valley (626) LA 11%
3 Brooklyn NYC 12%
4 San Francisco (city= county) SF 12%
5 Westside LA/ Beaches/ Coast (310/424) LA 14%
6 Marin SF 15%
7 Downtown LA (213) LA 16%
8 Napa SF 16%
9 San Fernando Valley (818/747) LA 16%
10 San Mateo SF 17%
Note: sub-markets are counties in most metros, including boroughs in New York, but are area code territories in metros where counties are unusually large.

Just Under Half of Homes are Within Reach of Millennials

For younger adults, affordability is yet a bigger challenge. Households headed by millennials – people younger than 35 – are at the age when people begin to think about buying a home. But their incomes are lower than those of older households. To explore affordability for this group, we use metro median income for millennial-headed households.

Nationwide, just 49% of for-sale homes are within reach of the median-income millennial household, compared with 59% for the median household regardless of age. In 45 of the 100 largest metros, the majority of homes for sale are beyond the reach of the typical millennial household. Those metros include not only expensive coastal markets such as Los Angeles and Honolulu, but also such places as Newark, Tucson, and Tacoma, WA. Austin and Oakland are among the 10 least affordable housing markets for millennials.

One surprise in this analysis: In two of the 100 largest metros – San Francisco and New York — the median income for millennial households is actually higher than median income for all households. Those markets have industries that often pay younger people well. But they also are such expensive markets that even well-paid young people must double up to be able to live there. Many find themselves priced out entirely. Even with those high-income millennials, San Francisco and New York are respectively the least and tenth-least affordable markets for millennials.

Least Affordable Housing Markets for Typical Millennial Household

# U.S. Metro % of for-sale homes affordable for median millennial household, Nov 2014 Median income, millennial households Median income, all households
1 San Francisco, CA 16% 90000 86000
2 Orange County, CA 17% 60000 76000
3 Los Angeles, CA 17% 48000 54000
4 San Diego, CA 18% 52000 61000
5 Ventura County, CA 20% 63000 78000
6 Austin, TX 22% 47000 62000
7 Honolulu, HI 25% 56000 73000
8 San Jose, CA 27% 87000 91000
9 Oakland, CA 27% 61000 76000
10 New York, NY-NJ 28% 60000 57000
Find out how affordable each of the 100 largest metros are for the Middle Class: Excel and PDF

For both millennials and the middle class generally, affordability is worsening. Annual home-price gains have slowed to 6.4% and will probably continue to ease. But that’s still a faster pace than gains in median income, which is rising at roughly the rate of inflation (1.5% in 2013). Plus, mortgage rates are likely to rise from their current low levels. Unless incomes increase substantially, homeownership will slip further beyond the reach of many households.

 

Note: We measure affordability as the share of homes for sale on Trulia on November 7, 2014, within reach of a middle-class household. Our standard is whether the total monthly payment, including mortgage, insurance, and property taxes, is less than 31% of the metro area’s median household income. We define middle class separately for each metro based on the local median household income. The total monthly cost includes the mortgage payment assuming a 4.2% 30-year fixed rate mortgage (versus 4.5% in the October 2013 calculation) with 20% down, property taxes based on average metro property tax rate, and insurance. We chose 31% of income as the affordability cutoff to be consistent with government guidelines for affordability. Both the Federal Housing Administration and the Home Affordable Modification Program use 31% of pre-tax income going toward monthly housing payments for assessing whether a home is within reach for a borrower.

Median household income is calculated from the 2013 American Community Survey (ACS) Public Use Microdata Sample (PUMS) using the 2009 metropolitan area definitions. Metro areas and divisions comprise one or more counties. In our sub-market analysis, we used counties or, in metros with very large counties like Los Angeles, the geographic footprints of telephone area codes.

Millennial households are those where the “reference person” (the head of household) is less than 35 years old.

Household incomes are rounded to the nearest $1000. Square footage is rounded to the nearest 50.

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Blue Markets Face Bigger Housing Challenges Than Red Markets

Jed Kolko, Chief Economist
October 27, 2014

The housing crisis hurt Democratic- and Republican-leaning markets similarly, but today blue markets have lower affordability, lower homeownership, and greater income inequality.

As Election Day 2014 approaches, we see sharp differences in local housing markets depending on whether they are blue or red. As the political urgency of the housing crisis fades, longer-term issues like declining affordability, low homeownership, and rising inequality are taking center stage. And these issues play out differently in Democratic- and Republican-leaning metros.

To show this, Trulia categorized the 100 largest metros as red or blue depending on their 2012 presidential vote. In 32 metros—the red markets—the Republican candidate, Mitt Romney, got more votes than the Democrat, President Obama. These include places like HoustonCincinnati, and Salt Lake City. In 40 light-blue markets, including St. LouisAustin, and Buffalo, Obama beat Romney by less than 20 percentage points. And in 28 dark-blue markets, including Los AngelesNew York, and San Francisco, Obama’s margin exceeded 20 points.

When we looked at housing trends in these metros, we found that the housing crisis and recovery affected red and blue markets similarly. But today’s pressing housing issues are more severe in blue markets.

The Housing Crisis Hit Both Red and Blue America

When the housing bubble of the mid-2000s burst, both red and blue markets felt the pain. The markets with the most severe housing busts included dark-blue metros like Detroit and Oakland as well as red markets like Bakersfield and Cape Coral – Fort Myers, FL. The peak-to-trough price decline averaged 16% in red markets, 26% in light-blue markets, and 25% in dark-blue markets. But the relationship between price declines and redness or blueness was not statistically significant. (See note.)

Nor does the recent recovery show any clear bias toward red or blue markets. In September 2014, home prices were up 7.0% year-over-year in red markets, 6.2% in light-blue markets, and 6.3% in dark-blue markets. The markets with the largest price increases included red metros like Palm Bay-Melbourne-Titusville, FL, and Birmingham, AL, and dark-blue metros like Miami and Toledo, OH. The relationship between year-over-year price increases and 2012 voting patterns is not statistically significant. Another recovery measure, the share of homes in foreclosure, also doesn’t show a statistically significant correlation with 2012 voting patterns.

Key Housing Data in the Reddest Metros
U.S. Metro 2012 Vote Margin: Obama vs. Romney Price Decline in Housing Bust, Peak-to-Trough Year-Over-Year Price Change, Sept. 2014 Median Asking Price Per Square Foot, $
1 Knoxville, TN -34% -8% 2.1% $98
2 Tulsa, OK -32% -4% 7.3% $90
3 Greenville, SC -30% -8% 5.9% $92
4 Oklahoma City, OK -27% -3% 4.0% $98
5 Fort Worth, TX -23% -6% 6.4% $94
6 Salt Lake City, UT -21% -22% 4.7% $129
7 Colorado Springs, CO -21% -12% 4.0% $107
8 Birmingham, AL -20% -13% 11.5% $96
9 Jacksonville, FL -19% -38% 7.0% $109
10 Bakersfield, CA -17% -52% 8.2% $126

Note: among 100 largest U.S. metros. Reddest metros are those with highest negative margin for Obama vs. Romney in 2012. See blogpost note for data sources. Data for all 100 metros available here.

Key Housing Data in the Bluest Metros
U.S. Metro 2012 Vote Margin: Obama vs. Romney Price Decline in Housing Bust, Peak-to-Trough Year-Over-Year Price Change, Sept. 2014 Median Asking Price Per Square Foot, $
1 San Francisco, CA 58% -23% 9.9% $613
2 Oakland, CA 50% -39% 11.9% $342
3 New York, NY-NJ 49% -18% 4.3% $320
4 Detroit, MI 47% -40% 11.4% $75
5 San Jose, CA 42% -26% 8.6% $430
6 Los Angeles, CA 42% -35% 6.9% $334
7 Honolulu, HI 39% -11% 4.1% $439
8 Washington, DC-VA-MD-WV 37% -25% 3.2% $177
9 Fort Lauderdale, FL 35% -48% 6.9% $143
10 Seattle, WA 35% -26% 8.9% $197
Note: among 100 largest U.S. metros. Bluest metros are those with highest positive margin for Obama vs. Romney in 2012. See blogpost note for data sources. Data for all 100 metros available here.

 

 

Affordability Is a Bigger Problem for Blue Markets

Things look fundamentally different when we compare red and blue markets in terms of affordability and related measures. The tables above show that none of the 10 reddest markets had a median asking price per square foot above $130 in Sept. 2014. But nine of the 10 bluest markets did. Looking across all 100 largest metros, the correlation between price-per-square-foot and 2012 vote margin was positive, high (0.63), and statistically significant. In fact, the only expensive red market was Orange County, CA, at $363 per square foot. There was a huge drop-off to the next-most-expensive red market—North Port-Bradenton-Sarasota, FL, at $150 per square foot.

When we plot local market home price per-square-foot and the 2012 presidential vote, we see that most of the red metros are clustered in the lower left-hand corner of the figure, where prices were lowest.

margin-vs-ppf

Strikingly, housing costs nearly twice as much in dark-blue markets ($227 per square foot) than in red markets ($119).

MedianAskingPrice

Sure, households in blue markets tend to have higher incomes. But those higher incomes are not enough to offset higher home prices. Our middle-class affordability measure, which reflects the share of homes for sale within reach of a median-income household, is significantly lower in bluer markets. Furthermore, blue markets have lower homeownership and greater income inequality than red markets. As with affordability, the relationships between homeownership and inequality on one hand and 2012 voting patterns on the other hand are statistically significant.

What does all this mean? The point is not that Democrats cause expensive housing, lower homeownership, or greater inequality. Determining whether and how the political views of voters or their elected officials affect local housing markets is the stuff of scholarly research, not short blogposts. But because blue markets are less affordable, have lower homeownership, and have greater income inequality, political leaders in Democratic-leaning and Republican-leaning metros may push for different policies.

Furthermore, these local differences in home prices mean that some national housing policies favor red markets and others blue markets. For instance, the current system of conforming loan limits benefits red markets more because homes in those markets are likelier to fall within local loan limits. But the mortgage interest deduction benefits blue markets more, thanks to higher home prices and more residents in higher tax brackets. Such differences could make it harder to reform these long-standing policies. In short, the differences between blue and red local housing markets may add to the challenge of reaching agreement on national housing policies.

Note: Metro-level 2012 Presidential election data are aggregated from county-level data in the Atlas of U.S. Presidential Elections. Peak-to-trough price declines are calculated from the Federal Housing Finance Agency House Price Index. Year-over-year price changes and median asking prices per square foot are from the Trulia Price Monitor. Correlations mentioned in this post are metro-level, weighted by number of households in the metro, and statistically significant if p<.05. The correlation of price per square foot and vote margin is calculated using the natural log of price per square foot.

 

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Cutting Housing Costs When Financial Hardship Strikes

If forced to spend less on housing, people would rather change where they live than whom they live with. Downsizing is the #1 way people would reduce their housing costs. Furthermore, renters are significantly more willing to move or get a roommate than homeowners are.

In good economic times as well as in bad, financial hardship can always strike. And when it does, people might have to cut back on housing, which is typically the largest household expense. However, cutting housing costs involves hard tradeoffs: moving can be expensive and a hassle, and living with family, friends, or strangers can be a challenge. To understand how people might make these tradeoffs, we asked 2,048 Americans in late March and early April 2014 the following question:

“If you experienced a major financial hardship (e.g., lost your job, unexpected medical bills), and you needed to cut back significantly on your housing costs, which of the following would you most likely do? Please select all that apply.”

Here’s what they told us.

Everyone’s Top Cost-Cutting Strategy: Downsizing
Facing financial hardship that required cutting back on housing, nearly 2 in 5 people (38%) would move to a smaller home — more than any other option by a wide margin. In fact, twice as many people would prefer downsizing than the next most popular actions of (1) renting out part of their home to a roommate or housemate or (2) moving to a more affordable neighborhood. Far fewer people would take the more radical actions of living in their car or not paying the rent or mortgage.

How Would You Cut Your Housing Costs If Hit With A Major Financial Hardship? Share
Move to a smaller home/apartment 38%
Rent out part of my home to a roommate/housemate 19%
Move to a more affordable neighborhood in the same city, metro area, or region 19%
Move to a more affordable city, metro area, or region 16%
Move into my parents’ home 14%
Move into my children’s (or other relative’s) home 8%
Rent out part of my home to vacationers/visitors 6%
Live in my car, office, or another place that’s not intended as housing 5%
Move into a non-relative’s home 4%
I would stay in my current home but stop paying the rent or mortgage 4%

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Despite Home Price Slowdown, Wages Can’t Keep Up With Prices

Asking home prices rose faster than wages in 95 of 100 metros. Still, home prices were flat or falling quarter-over-quarter in the formerly booming markets of Las Vegas, Phoenix, Sacramento, and Orange County.

The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of how asking prices and rents are trending nationally and locally. They adjust for the changing mix of listed homes and therefore show what’s really happening to asking prices and rents. Because asking prices lead sales prices by approximately two or more months, the Monitors reveal trends before other price indexes do. With that, here’s the scoop on where prices and rents are headed.

Prices Rise 8.1% Year-over-Year in June
Both the quarter-over-quarter and year-over-year increases are lower than they were twelve months ago. In June 2014, prices were up 8.1% year-over-year and 2.6% quarter-over-quarter, compared with 9.5% and 3.1%, respectively, in June 2013.

But despite this national slowdown in price gains, price increases continue to be widespread, with 97 of 100 metros posting year-over-year price gains – the most since the recovery began. Furthermore, asking prices in June rose at their highest month-over-month rate (1.2%) in sixteen months.

Trulia_PriceMonitor_LineChart_June2014

June 2014 Trulia Price Monitor Summary
% change in asking prices # of 100 largest metros with asking-price increases % change in asking prices, excluding foreclosures
Month-over-month,
seasonally adjusted
1.2% N/A 1.2%
Quarter-over-quarter,
seasonally adjusted
2.6% 94 2.5%
Year-over-year 8.1% 97 7.4%
*Data from previous months are revised each month, so data being reported now for previous months might differ from previously reported data.

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Where Buying a Home is Within Reach of the Middle Class

More than four out of five homes for sale in Detroit and Cleveland are within reach of the middle class, compared with one out of four in New York and Los Angeles and one out of seven in San Francisco. Middle-class affordability is worsening in expensive markets and won’t improve long-term without more construction.

Where can the middle class afford to buy a home today? Affordability has worsened in the past year, as home prices have climbed faster than incomes and mortgage rates have risen. But compared with the longer-term past, homeownership still looks relatively affordable: home prices are still undervalued and mortgage rates remain near historic lows. In most U.S. markets, the majority of homes for sale are within reach of the middle class, and buying is cheaper than renting in all of the 100 largest metros.

However, in many markets, especially along the coasts, homeownership is out of reach for the middle class. Even having a college degree is no guarantee that homeownership is within reach in the priciest markets. There’s no easy way to make housing more affordable, though new construction can help.

As in our inaugural middle-class affordability report, we calculated the share of for-sale homes on Trulia that are affordable to a middle-class household, based on whether the total monthly payment – mortgage, insurance, and property taxes – was less than 31% of the metro area’s median household income. (See note below.) Because we define “middle class” separately for each metro based on the local median household income, our affordability measure takes into account that a middle-class income is higher in some markets than in others.

For instance, for a middle-class family in the Denver metro area, where median household income is just under $62,500, homes priced under $325,000 are within reach based on the 31% guideline. Of the homes listed for sale in Denver on May 6, 2014, 50% cost less than that – which means that half of Denver homes are within reach of the middle class.

Trulia_MiddleClassReport_Infographic

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