Housing Affordability: Price to Income
by Ken H. JohnsonThe Research
The resale of existing homes fell 3 percent in September according to the National Association of Realtors.[i] A new wave of foreclosures is scheduled to hit the U.S. housing markets.[ii] Homeownership levels experienced their largest decline since the Great Depression.[iii] Is there any good news about housing? Are there any signs of life in the U.S. property markets?
In fact, there are significant signs that favor a recovery in many markets around the country. Beracha et al. (2011)[iv] reports that housing affordability is at record levels in most of the country.
The study examines housing affordability from a number of different vantage points. The first investigation by the researchers is into the relationship between property prices and average income on a state-by-state basis and the country as a whole. In general, lower ratios (Price/Income) indicate better property affordability. For example, the average affordability score for Florida over the last 30 years is 4.51. In other words, a typical home in Florida has sold for 4.51 times the average annual per capita income in the state over the last 30 years. Today, the property price-to-per capita income ratio in Florida is 3.66, which is a 30-year low. Thus, housing today is more affordable in Florida based on income than at any time in the last 30 years.
This is not just happening in Florida. In fact, 26 states and the country as a whole stand at record levels of property affordability based on this ratio. The 30-year average property price-to-per capita income in the U.S. is 4.45; however, the present measure stands at only 3.94, meaning that, on average, Americans presently purchase homes for roughly four times their annual income. Thus, on the whole and based on income, housing is more affordable today than at any time in the last 30 years.
Implications
The ratio of property price-to-per capita income is a traditional measure of housing affordability. There are issues with the measure. For example, property may not be becoming more affordable, as Americans might be buying lesser quality homes, which would cause the ratio to drop for reasons other than affordability. Historically, however, this has not been the case. Thus, the measure is a proxy for the health of the market place.
As a proxy for market health, these numbers are very encouraging. Clearly, property prices are falling far faster than income (in fact, income has remained relatively stable over the period), making housing more affordable than in recent memory.
Will these record levels of affordability based on income be the engine to reignite housing markets around the country? Only time will tell. Regardless, there do appear to be signs of life in the U.S. housing markets.
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Endnotes
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[i] CNBC, http://www.cnbc.com//id/44973943
[ii] Reuters, http://in.reuters.com/article/2011/10/13/idINN1E79C25020111013
[iii] CNN Money, http://money.cnn.com/2011/10/07/real_estate/home_ownership/index.htm
[iv] Beracha, E., H. Skiba, M. Hirschey, and K.H. Johnson. Ongoing Research. (Fall 2011).
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