The Most Expensive Housing Markets Are Becoming Even Less Affordable

Asking prices are up 16.3 percent year-over-year in America’s least affordable metros – far ahead of the overall national increase of 9.5 percent.

Image
Shutterstock


Prices Up 9.5 Percent Year-over-Year, and Rising in 98 of 100 Largest Metros

In May, asking home prices rose 1.1 percent month-over-month, seasonally adjusted. That’s slower than in previous months -- asking prices rose 1.4 percent in each of February, March, and April (includes revisions) – but still at a very fast clip. Quarter-over-quarter, prices are up 4.0 percent, seasonally adjusted. Year-over-year, prices are up 9.5 percent nationally and are higher than one year ago in 98 of the 100 largest metros.

May 2013 Trulia Price Monitor Summary

  Percent change in asking prices Number of 100 largest metros with asking-price increases Percent change in asking prices, excluding foreclosures
Month-over-month,
seasonally adjusted
1.1% Not reported 1.4%
Quarter-over-quarter,
seasonally adjusted
4.0% 94 4.5%
Year-over-year 9.5% 98 10.5%


Prices Rising Sharply in the Least Affordable Markets

Recent price gains are squeezing would-be buyers in metros where the cost of owning is steep. We created a measure of local affordability based on current asking prices and the most recent wage data available (from the 2012 third-quarter Quarterly Census of Employment and Wages survey). We estimated how far a typical worker’s wages to go pay the mortgage on a standard-sized home (1800 square feet) at current mortgage rates (3.8 percent), using local wages and local asking prices. (Keep in mind that wages are not the only source of income, and some households have more than one wage-earner while others have none. That means the actual cost-of-housing burden for a particular household may be higher or lower, but our method is designed compare affordability across metros in an apples-to-apples way.) The monthly mortgage payment relative to the typical worker’s wages ranges hugely, from a high of 74 percent in Honolulu and 55 percent in San Francisco to just 8 percent in Detroit and 12 percent in Houston and Atlanta.

Among the 10 least affordable metros, eight had double-digit price gains in the past year. Three had price gains of more than 20 percent: Orange County, Oakland, and San Jose. Among the 10 least affordable metros, the average year-over-year asking price gain was 16.3 percent.

Price Changes in the 10 Least Affordable Housing Markets

  U.S. Metro Percent of monthly average wage needed to pay mortgage* Year-over-year percent change in prices
1 Honolulu, HI 74% 12.8%
2 San Francisco, CA 55% 19.6%
3 Orange County, CA 44% 21.2%
4 Ventura County, CA 41% 15.4%
5 Los Angeles, CA 41% 17.4%
6 San Diego, CA 37% 16.8%
7 Oakland, CA 37% 31.2%
8 Long Island, NY 35% 1.1%
9 New York, NY-NJ 35% 4.6%
10 San Jose, CA 33% 23.2%

Among 100 largest metros. Affordability is measured as the mortgage payment (3.8% 30-year fixed) on an 1,800-square-foot home at the local median asking price per foot divided by the local average monthly wage for a worker.

In contrast, among the 10 most affordable metros, prices rose 9.5 percent on average – same as the national price increase, but well behind the average price gain for the 10 least affordable metros. The affordable metros of Detroit, Atlanta, Memphis, Fort Worth, and Dallas all had double-digit price gains, but the rest of the most affordable metros had price gains below the national rate.

Price Changes in the 10 Most Affordable Housing Markets

  U.S. Metro Percent of monthly average wage needed to pay mortgage Year-over-year change in prices
1 Detroit, MI 8% 17.1%
2 Houston, TX 12% 8.7%
3 Atlanta, GA 12% 13.5%
4 Memphis, TN-MS-AR 13% 10.6%
5 Indianapolis, IN 14% 7.0%
6 Dayton, OH 14% 3.2%
7 Fort Worth, TX 14% 12.4%
8 Cincinnati, OH-KY-IN 14% 5.1%
9 Cleveland, OH 14% 6.8%
10 Dallas, TX 14% 11.1%

Among 100 largest metros. Affordability is measured as the mortgage payment (3.8% 30-year fixed) on an 1,800-square-foot home at the local median asking price per foot divided by the local average monthly wage for a worker.

The Widening Affordability Gap – and Why it Matters

Across all 100 metros, less affordable markets tend to have high price gains. The correlation between the year-over-year price gain and the mortgage-payment-versus-wage measure is 0.3 (statistically significant at the 5 percent level). That means that homeownership affordability is becoming more unequal across the U.S. – the gap between more affordable and less affordable markets is growing. This growing gap means two things for the housing market:

First, as local markets become more unequal, more people will consider moving from less affordable to more affordable areas. The example of California makes this clear: in the years when California home prices were even more out of line with the rest of the U.S., more people left California for other states. Therefore, widening affordability gaps could cause more people to make long-distance moves to a more affordable local housing market.

Second, a widening affordability gap puts pressure on housing policy. It’s harder to come up with one-size-fits-all national housing policies when local markets are becoming more different from each other. For instance, more expensive markets tend to benefit more from the mortgage interest deduction – so as prices become more unequal, it means that the impact of any changes to the mortgage interest deduction would be even more concentrated in some geographic areas.

Rents Rising More Slowly in More Affordable Markets

Rents are up 2.3 percent year-over-year nationally. Rents are rising faster than prices in just 2 of the 25 largest rental markets: Houston and Philadelphia. Among the five least affordable rental markets, rents are rising strongly in Miami and Boston, steadily in New York, but only modestly in San Francisco and Los Angeles. In contrast, in three of the most affordable big-city rental markets – Seattle, Las Vegas, and Sacramento -- rents were flat or falling.

Rent Changes and Rental Affordability

  U.S. Metro Percent of monthly average wage needed to pay rent Year-over-year percent change in rents
1 New York, NY-NJ 58% 3.7%
2 Miami, FL 57% 6.4%
3 Los Angeles, CA 46% 1.8%
4 San Francisco, CA 46% 0.2%
5 Boston, MA 44% 5.5%
6 San Diego, CA 41% 5.1%
7 Orange County, CA 41% 3.4%
8 Oakland, CA 41% 1.3%
9 Riverside-San Bernardino, CA 40% 1.1%
10 Washington, DC-VA-MD-WV 39% 2.0%
11 Chicago, IL 37% 5.0%
12 Baltimore, MD 33% 0.1%
13 Philadelphia, PA 32% 4.5%
14 Houston, TX 29% 9.7%
15 Denver, CO 29% 4.2%
16 Dallas, TX 29% 1.9%
17 Tampa-St. Petersburg, FL 28% 5.4%
18 Minneapolis-St. Paul, MN-WI 28% 1.3%
19 Portland, OR-WA 27% 4.2%
20 Atlanta, GA 27% 1.9%
21 Seattle, WA 26% 0.4%
22 Las Vegas, NV 26% -0.9%
23 Phoenix, AZ 24% 1.7%
24 Sacramento, CA 23% 0.0%
25 St. Louis, MO-IL 22% 2.2%

Among 25 largest rental markets. Affordability is measured as the local median rent for a 2-bedroom unit divided by the local average monthly wage for a worker.

How did we put this report together? To recap the methodology, the Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for the regular seasonal fluctuations in asking prices in order to reveal the underlying trend in prices. The Monitors can detect price movements at least three months before the major sales-price indexes do. Our FAQs provide all the technical details.

Top image: ruigsantos /Shutterstock.com

This post originally appeared on Trulia, an Atlantic partner site.

About the Author