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Friday, November 03, 2006

A Question Of Affordability

It is generally accepted that the more desirable an area is, the less affordable it is to live there, and specifically, to buy a home. For instance, homes in San Francisco have always been ridiculously expensive—even considering the higher median income there—because it's considered by many to be a highly desirable place to live.

For reference, here are the affordability indices (definition) for a few cities (using county-wide data from around the country as of the year 2000.

Houston, TX204
St. Louis, MO181
Sioux Falls, SD176
Phoenix, AZ147
Miami, FL121
Seattle, WA94
Boston, MA88
San Diego, CA87
San Francisco, CA58
New York, NY20
I think most people would agree that in general, cities that are lower on this list are more desirable. Obviously everyone has different opinions and preferences about what they like in a city. When I say that City A is "more desirable" than City B, I am not making any personal value judgment, but rather all I am saying is that some statistically significant percentage of people would prefer to live in City A if given the choice.

Allow me to lay out the point of this post in a very logical way.

Premise: More desirable = less affordable (and vice versa)
Fact: King County's affordability index dropped 26.7 points 2000—2005.
Fact: The affordability indices of many less-desirable locations were either stagnant or increased from 2000 to 2005.1
Query: How has King County become 29% more desirable since 2000?

This is a completely serious question. If affordability was dropping nation-wide, then I could buy the argument that massive home price gains are due to "fundamentals." However, that is simply not the case. Huge increases in home prices have been largely limited to cities on the coasts.

If someone would care to make an argument explaining how our area is 29% more desirable now than it was in 2000, I'm all ears. Otherwise, I'm inclined to believe that the 29% affordability drop has more to do with speculation than with "fundamentals."

1For instance, the affordability index for St. Louis, MO dropped just 4 points from 2000 to 2005 (source), while the index for Houston, TX actually increased 20 points (source).


Richard said...

Why have Bremerton, Arlington and Spanaway become so much more desirable?

If the price increases we've seen in Western Washington were limited to desirable areas, I wouldn't be surprised - but when prices in the godforsaken backwaters of Puget Sound cost more than Seattle did 5 years ago, there's an imbalance.

Must be the Meth.

Slinky said...

Your point is spot on, and I have an explanation that will use the one gross outlier in your little dataset to support your conclusion. This is one of those cases where the realtorspeak postulate that "all real estate is local" does actually hold true, but not in the way I think you intended. But first I'm going to launch into a little story that goes along with my point.

In January, I had a back-to-back business trip that took me from Virginia to Houston to Seattle and back home. Going from freezing VA to TX in January felt like being let out of jail. I was wearing short sleeves, going barefoot, and putting the windows down. Going from Houston to Seattle felt like being put back into jail (long sleeves, etc). In Seattle, I went to supper with a couple of friends of mine, one of who has been trying to get me to move to Seattle for years. She told me about the nightlife, the restaurants, the cultural stuff, etc. I said, "Well, you know, if I want xxxx, I can live in Houston." "But what about yyy?" "I can find that in Houston, too, and be closer to my family." She was stunned quiet--obviously had never occurred to her that a city she found horrid might be acceptable to someone else. Back to my point:

Houston is the obvious, glaring standout to that set of cities in terms of affordability to purchase. Toss Phoenix, Sioux Falls, and St. Louis from the mix, and you have a set of large (pop. >2mil) coastal urban areas with a mixture of home-grown industries AND significant port and commercial facilities. Then the list becomes as follows:

Houston 204
Miami 121
Seattle 94
Boston 88
San Diego 87
San Fran 58
New York 20

What makes Houston so different from this group are the local laws. In Texas, ARM, stated-income, and I/O loans are severely restricted. If you are a Texas resident or are purchasing property in Texas, you have to meet stricter lending standards. This is a direct result of the mid-80's oil bust that was followed by a mid-80s savings and loan bust that was followed by a massive recession in most of Texas. It might even be fair to say that Houston underwent a depression from which it did not recover until about 1997-98. The Texas legislature enacted much, much stricter lending laws than the rest of the country, and that is why housing in Texas, outside of Dallas and Austin, has largely avoided the speculative runups seen elsewhere. It really is different there. We've been there, done that, lived with the excruciating pain, and done something about it.

The Houston outlier, then, reinforces the idea that speculation and exotic loan products fueled the massive runup in prices. My little anecdote about supper with my friend could just have easily have had Houston and Seattle replaced by Phoenix and San Diego, or Boston and Vancouver and sounded exactly the same. The local laws and lending standards in Seattle, Phoenix, Boston, San Diego, and Vancouver are all similar in that they're much looser than in Texas, thus permitting the unusual and unprecedented appreciation in home valuation.

cosmos said...


Thanks for that insight.

Christina said...

This is picking nits, but the City of St. Louis, Missouri is not part of St. Louis County, Missouri.

If you wanted to compare the affordability of houses in Saint Louis, Missouri, where the Arch is, where Morgan Quitno has deemed the most dangerous city in America is, use this data instead of using County data. If you look at the County page closely, you will see that Saint Louis is not one of the cities within that county, whereas Florissant, Clayton, Ladue and Kirkwood among others are.

a said...

Slinky: If Texas lending laws saved Houston, why are Dallas and Austin in bubble-land? Same state, same laws. Something doesn't make sense with that explanation.

stephen said...

Grew up in Houston and went to college in Austin. Anything inside the loop (610) in Houston and around the UT campus in Austin (a very large part of Austin) is no different than here really. Folks will pay to live close in. The difference in Houston, Dallas & Austin is that there are no mountain ranges and huge bodies of water keeping everthing going North/South for outlying areas and affordability. Large parts of Houston (with no real barriers in a circular direction) privde cheap land for cheap sprawl. Ditto for Austin and Dallas but their city limits stop much sooner thus numbers don't really reflect the same thing.

My point is that in any of the three areas you can 'drive till you qualify' and not end up hours away from work, here not so much. (I mean you can pick up a decent 2500 square ft house for under 200k)).

I would imagine that using the numbers without facturing in geography will leave out some very powerfull influences on prices and affordability.

(Sorry for grammer/spelling, on the run and working on a laptop keyboard- too lazy to navigate to clean this up and thought it might add to the discussion :-)

AmazedRenter said...

3 words:

Owner Equivalent Rent.

PugetHouse said...

Those are great posts. I'm learning lots.


I don't really follow the relevance of the OER. Taking OER into account would lead to some range of alternative inflation numbers. However, the affordability index leaves inflation entirely out. What were you trying to say?

astute observations. The fact that the affordability index assumes traditional loans begs a reality check. Pity that it is, the preeminence of highly-leveraged loans may be permanent, at least until a catastrophy induces government intervention.

My answer to your query is that inflation, due to the accessibility of bigger loans, gives the appearance of vastly heightened desireability. I agree that the current economic/financial environment is unstable. The only sensible way I see to diffuse this bomb is to follow the regulatory example of Texas by phasing in some restrictions on loan qualifications.

Eleua said...

SLinky is onto something here.

Yes, as a former homeowner in the Dallas area, I can testify to all the lending laws that are different in Texas.

When you have a million people lose their homes in a short period of time, it kinda sticks with you. That phenomenon is probably coming to the US as a whole in a few years.

Austin is the most expensive part of the state, but I don't see where any part of the D/FW area can be considered "bubbly."

Price a home in a city with the equivalent income of a city in the Dallas area.

Mercer Isl., WA - Flower Mound, TX.
Both are comparable in income, education, crime, etc.

Flower Mound is under $200K, but MI is almost a million.

You can run down the list, and find the same thing.

2-3x income is the norm in the Dallas area. If the PNW was 2-3x income, we would lose 3 congressmen in the next census, just due to suicides.

Picture Mercer Island at $200K
Picture Bainbridge at $170K
Picture Medina at $400K
Picture Poulsbo at $100K

You get the picture.

PugetHouse said...

After some digging, I found that eleua examined the fundamental affordability question before in crystal clarity.

Alan said...

Austin is an awesome place to live. My condo there depreciated about 2% over five years. I think it has something to do with the 2-3% property tax in Texas keeping out speculation.