Friday, December 30, 2005
Is housing more affordable today?
The New York Times says that, despite higher housing costs, U.S. housing is actually more affordable today than it was twenty years ago. This is because a decline in interest rates combined with increased incomes more than makes up for the increase in housing prices.
When I compared housing affordability in 1990 with 2000, I used the same interest rate for both years. But actually mortgage interest rates have changes, partly as a reflection of inflation. The Times is saying that when these changes are accounted for, affordability has increased, not declined.
In particular, says this article, housing has become more affordable "in almost every place outside of New York, Washington, Miami and along the coast in California." However, a look at a chart accompanying the article reveals that affordability has also declined in Oregon, Maryland, Virginia, Rhode Island, Washington, Chicago, and most of Florida.
The biggest problem with the article, however, is its selective use of dates. By comparing 1985 with 2005, the article picks a year with some of the highest mortgage rates in U.S. history. While rates were well below 10 percent before 1979 and after 1986, in 1985 they were more than 11 percent. If the article had compared affordability in 1975 (average rate: 8.9%) or 1995 (average rate: 7.6%) with 2005 (average rate: 5.7%), the results would have shown a decline in affordability in far more areas.
The fact remains that, at current rates, most cities in California, DC, Florida, Maryland, Massachusetts, New York, Oregon, Virginia, and Washington remain unaffordable to most of the families living in those cities. A price correction in those places will be needed in the long run, caused by either a stagnation in the local economies or a national recession.
When I compared housing affordability in 1990 with 2000, I used the same interest rate for both years. But actually mortgage interest rates have changes, partly as a reflection of inflation. The Times is saying that when these changes are accounted for, affordability has increased, not declined.
In particular, says this article, housing has become more affordable "in almost every place outside of New York, Washington, Miami and along the coast in California." However, a look at a chart accompanying the article reveals that affordability has also declined in Oregon, Maryland, Virginia, Rhode Island, Washington, Chicago, and most of Florida.
The biggest problem with the article, however, is its selective use of dates. By comparing 1985 with 2005, the article picks a year with some of the highest mortgage rates in U.S. history. While rates were well below 10 percent before 1979 and after 1986, in 1985 they were more than 11 percent. If the article had compared affordability in 1975 (average rate: 8.9%) or 1995 (average rate: 7.6%) with 2005 (average rate: 5.7%), the results would have shown a decline in affordability in far more areas.
The fact remains that, at current rates, most cities in California, DC, Florida, Maryland, Massachusetts, New York, Oregon, Virginia, and Washington remain unaffordable to most of the families living in those cities. A price correction in those places will be needed in the long run, caused by either a stagnation in the local economies or a national recession.
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