Thursday, October 16, 2008

CITY BY CITY HOUSING AFFORDABILITY INDEX

Yesterday I posted an item related to the relative affordability of living in Denver compared to other major cities... and as I was continuing to think about that, I discovered a very interesting study on HousingTracker.net last night that really illustrates the point.

This chart is key to understanding what's going on with the national housing market, and why cities like San Diego, Miami and Phoenix are in freefall. The numbers shown for each city are the percentage of household income it takes to make payments on a median priced home with a 20% down payments and a 30-year fixed rate loan.

With "traditional" mortgage underwriting, ratios of 28 and 36 are the standard. That means one's housing payment should not exceed 28% of income, while payments on all installment debts (housing, car, student loans, etc) should not exceed 36%.

Note that Denver's payment to income ratio is 21.7%, while Los Angeles is 63.5%, New York is 56.5% and San Diego is 51.8%. Any wonder why those markets are out of gas?

TOP TEN LEAST AFFORDABLE MARKETS
1) Los Angels 63.5%
2) San Francisco 58.2%
3) New York, 56.5%
4) San Jose, CA 55.0%
5) Orange County, CA 54.3%
6) Honolulu 53.9%
7) San Diego 51.8%
8) Miami 46.8%
9) Riverside, CA 38.8%
10) Newark, NJ 33.7%

Now let's look at a statistic called "mortgage to rent ratio". This statistic shows the ratio of the mortgage payment on a median-priced single family home (again assuming 20% and a 30-year fixed rate loan) to the local median rent for a three bedroom single-family home.

According to HousingTracker.net, Denver's ratio is 1.00, meaning that mortgage payments on a median-priced home are exactly equal to median rent for a three bedroom single-family home.

Now let's match that up with other notable cities:

Seattle: 1.55... or owning a home is 55% more expensive than renting
Portland: 1.36... or owning a home is 36% more expensive than renting
Chicago: 1.27... or owning a home is 27% more expensive than renting

Of course, many of the cities on the first chart in this post (Los Angeles, San Francisco, Honolulu, etc) have ratios that are even more out of line (1.60 or higher) - and this illustrates the clear lack of affordability in these markets.

Interesting stuff... but one of the reasons our market has upside and is insulated to some extent from the corrections going on elsewhere.

One last note - this analysis does not take into account the tax benefits associated with home ownership, which are substantial, especially for landlords.