Thursday, August 30, 2018

Housing: Part 318 - Affordability

Almost anyone you hear talk about the housing market today, and the recent levelling off we have seen in some measures, will mention "affordability" as a headwind on the market.  In some ways, this is true, in the same way that there is an "affordability" issue in bonds.  To get $5 of cash flow next year, you have to invest a lot more in bonds than you used to.  The same is true for housing.  If you are buying a house with cash, in many markets, you have to invest more cash in order to earn the same level of rent (or imputed rent) than you used to.

But, since this is true of both homes and bonds, then for the borrowing homebuyer, the returns are better than ever.  This is especially true in low tier neighborhoods. tracks affordability by tier (bottom, middle, and upper).  Here are the measures for the US and for Atlanta. (Most cities look, more or less, like Atlanta, in this respect.)

For borrowers, homes are more affordable than they were at any time before 2009, especially in bottom tier markets.  In the Atlanta bottom tier, before 2009, the median mortgage required about 30% of the median income.  Now, it requires about 19%.  It isn't even close.  Affordability is absolutely not a problem.

Here is a random home in Atlanta, that, as of today, is for sale for $99,700. That equates to a monthly mortgage payment on a conventional mortgage of about $415.  The Zillow rent estimate is $1,150.  The posting states: "Expand your rental portfolio. Long term tenant wants to stay. Don''t miss out!"

(This isn't the case for middle or upper tier homes, where mortgage and rent payments tend to be more similar.  Some of this might be maintenance on older properties.  But, much of it is regressive tax benefits for owners that inflate upper tier prices, higher management and vacancy costs in low tier rental markets, and higher tenant risk.  Many of those costs and risks can be eliminated by a low-tier owner-occupier who can remain in a property for a long period of time and treat it well.)

I ask you, for the long term tenant who wants to stay, is there an "affordability" problem with the $99,700 price tag?  I would argue that the primary goal of a functional housing financing system should be that it provides a way for a long term tenant who wants to stay in a home like this one to do just that, as an owner.  And while our financial system fails aggressively at that function, the conventional beliefs about the housing crisis are so wrong, they prevent these patterns from being acknowledged or noticed.

The relative affordability of bottom tier housing stock is a natural social leveler - a way for households with low incomes to get higher returns on their investment than savers with more capital can.  In order to do this they need to borrow from those wealthy savers who must accept lower returns on their mortgage securities than the homeowner receives on their bottom tier home equity.  But, the "predator" narrative and "the business model of Wall Street is fraud" narrative, along with the "bubble" narrative and the "keeping up with the Jonses" narrative all lead us to impose public obstructions that prevent millions of households from engaging in this prudent, lucrative form of savings.

When you see stories about the housing market, notice how often you hear "affordability" mentioned as a problem today.


  1. Another thoughtful insightful post.

  2. Off Topic:

    My guess is that houses in most countries are 100% owned. It's just a matter if the houses are owned by occupants, 2nd homeowners or investors. I can see 2nd homeowners leading to more volatile prices. But why would having rental housing supposedly lead to negative results?

    1. Interesting. My initial reactions are:

      1) Australia and New Zealand aren't on the list, and I think they have done pretty well, which might weaken the relationship a bit.

      2) The measure is the change in growth rates. Partly, what makes Germany, Japan, and Switzerland look good here is that their starting growth rate was low (and vice versa for Spain and Ireland). Total growth for the entire period is higher for the high ownership countries than for the low ownership countries. I'm not saying that's causal. But, for instance, the US had about the same growth after 2005 as Japan and Switzerland, and it had higher growth before 2005.
      It seems as though part of what is going on is that countries more poised for growth are hitting this urban housing problem more acutely, because post-industrial economic growth is more urban. I'm not sure why that seems to correlate with high homeownership rates and general ownership incentives, though. But, it does. Maybe just a coincidence?

      3) I suspect that in periods of extreme fluctuations in credit access real low interest rates, owner-occupiers in countries with tax incentives, etc. probably are induced into more volatile price swings and also have more volatile access to credit. Maybe there is even more volatile and pro-cyclical public policy where ownership is more broad. Certainly in the US, a more stable lending environment after 2007 would have maintained higher home prices, higher ownership rates, and more economic growth, and the lending environment was unstable, in part, because of public sentiment against mortgaged homeownership.

    2. Just for kicks, I used the data from the report, and I did a regression of growth rates before and after 2005 against the 2005 homeownership rate. Their regression used the difference between the growth rates before and after 2005.

      A regression of growth rates before 2005 is highly positive with homeownership rates. A regression of growth rates after 2005 is flat. So, the extra volatility comes from higher pre-2005 growth in the high ownership countries, not from lower growth after 2005.

    3. Kevin, do you mind if I post a comment at the Kevin Drum site and refer people here?