Housing Affordability Only Means Cheap Houses

by Guest Author Scott Sambucci, Altos Research

Affordability measures price, but Capita per Inventory measures housing demand relative to supply, and isn’t that the point? RIM’s Playbook tablet, originally priced at $499, is now selling for $200. Very affordable compared to Apple’s iPad at $499-800+.  But which tablet do you want for Christmas?

And that’s the point – affordability doesn’t mean “good” or “time to buy,” yet there’s insistence on using this measure to feign the housing market’s recovery with headlines like these.

From the National Association of Homebuilders/Wells Fargo Home Opportunity Index (HOI) report:

The least affordable state is California, as Los Angeles, San Francisco and Orange County all made the top ten least affordable cities on the big metro list. Santa Cruz, San Luis Obispo and Santa Barbara made the top ten least affordable cities on the small metro list.

Calculating Capita per Inventory for a cross-section of the 225 HOI metros shows that the “unaffordable” markets have less supply per capita. Notice how the “unaffordable” California metros (Santa Barbara, San Jose, San Francisco, Los Angeles, and Santa Cruz) have tight housing supply relative to “affordable” metros like Ocala, FL and several of the Rust Belt metros (Flint, Toledo, Lansing, Flint, and Canton).

Plot of median home prices and the number people per available home for sale (“Capita per Inventory”) for 35 metros reported in the NAHB/Wells Fargo Housing Opportunity Index Q3-2011
Altos Research Capita/Inventory vs Wells Fargo Home Opportunity Index Ranking (35 Metros)

So what does this mean?

San Francisco only needs 1 out of 456 people to be able to afford a house.  San Jose only needs 1 out of 408. Heck, Honolulu only needs 1 out of 530 people to be able for afford a house to support home prices at their current level.  But Ocala, FL needs 1 out of 92 people while Portland needs 1 per 46 people.  Ouch.

The NAHB/Wells Fargo HOI uses the measure Median Household Income-to-Median Prices as the key factor in affordability.  For this 35 market sample, the correlation coefficient has a predictably high value of 0.71 for these two measures. However, the correlations for Median Price-to-Capita per Inventory and HOI Rank-to-Capita per Inventory measure at 0.57 and 0.54 respectively, also very solid.  Most importantly, Capita per Inventory captures both housing supply and can be used as a basis for demand when folding population and unemployment rates into a market’s analysis.

Now, add population changes from 2000 to 2010 (US Census Bureau) and September 2011 unemployment rates (US Bureau of Labor Statistics) to the analysis for a complete picture:

Altos Research Capita per Inventory with Population and Unemployment figures

A few things to notice:

  • Honolulu looks very favorable – high Capita per Inventory, increasing population trends, and low unemployment. Let’s all get a house on the island while we still can.  They ain’t getting any cheaper.
  • Markets with relatively low Capita per Inventory can be buoyed with lower unemployment rates – Austin, TX, Harrisburg, PA and Springfield, IL for example.  None of these were bubble and bust markets.
  • Carson City (6th in the Wells Fargo HOI), Lakeland (9th), and Rockford (10th) all have double-digit unemployment, low Capita per Inventory, relatively low population increases (Flint’s in negative).  All are “affordable” but lack the economic fundamentals for anyone to actually buy the houses for sale.
  • The Rust Belt metros all have negative population rates and unemployment rates at or above the national average. But hey they’re “affordable.”
  • Ocala, FL is in big trouble – a 28% population increase AND a high unemployment rate AND a very low Capita per Inventory.  Sure, Ocala is “affordable” but there’s a bunch of people that weren’t living there 10 years ago that need a job. You think they’re going to buy a house right now? (Not to mention that Florida is still in the first inning of their recovery as a judicial state with 900+ days in their foreclosure pipeline.)
  • Bridgeport is a little troubling.  Low unemployment but the Capita per Inventory is low – that could put pressure on home prices very soon.

So are all low-priced markets bad and high priced markets good? Of course not.  But using Capita per Inventory, you get an composite look at housing supply, prices, and a comparative measure for demand by utilizing basic macroeconomic measures like population rates and unemployment.

As for RIM’s playbook, the company is taking a $485 non-cash write-down.  Hmmm… Any ideas for the housing market?

(Self-aggrandizing statement alert: This isn’t the first time we’ve talked about Capita per Inventory.  Mike Simsonen blogged about this waaaaay back in 2006 and again in 2009.)

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