After the Boom, Housing Affordability a Growing Challenge: As Americans' Rate of Home Ownership Nears Historical Highs, Home Prices Have Risen Simultaneously. Ensuring a Supply of Affordable Housing for Those Aspiring to Their Share of the American Dream Remains a Challenge in Many Areas, Including the Southeast

By Smith, William R. | EconSouth, Spring 2007 | Go to article overview

After the Boom, Housing Affordability a Growing Challenge: As Americans' Rate of Home Ownership Nears Historical Highs, Home Prices Have Risen Simultaneously. Ensuring a Supply of Affordable Housing for Those Aspiring to Their Share of the American Dream Remains a Challenge in Many Areas, Including the Southeast


Smith, William R., EconSouth


The housing boom may be over, but the high cost of housing remains a significant economic concern and a potential threat to the federal government's established policy goals of encouraging home ownership as an avenue for wealth creation and social stability.

Between 2002 and 2006, average housing costs nationally increased by about 10 percent per year or a total of 50 percent, according to the Office of Federal Housing Enterprise Oversight. That rate of appreciation is historically high but was even greater in certain markets, particularly in desirable waterfront locations and in fast-growing metropolitan areas. For example, house prices in Florida for the same five-year period increased by about 100 percent--more than twice the national average.

"Housing affordability has become a critical issue not just in the Sixth [Federal Reserve] District, but also nationwide," said John Wieland, founder and chairman of John Wieland Homes and Neighborhoods, which builds homes in Southeastern markets including Louisville, Ky., Charlotte and Raleigh, N.C., Charleston, S.C., Nashville, Tenn., and Atlanta.

Putting affordability into context

When evaluating housing affordability, residential appreciation is an important factor, but there's more to the story than price. A more complete measure of various aspects of purchasing a home is depicted by the Housing Affordability Index (HAI), which is constructed by the National Association of Realtors. The HAI is designed to capture important components of affordability, including home price, a home buyer's income, and the cost of a mortgage (see the table on page 8).

The HAI considers median household income data, which is collected by the U.S. Census Bureau. The U.S. median income for families in 2005 (the most recent year available) was $55,832, compared with $51,742 in 2002--an increase of about 8 percent over four years. Underlying the median family income is employment, and during this same three-year period the job market gained strength. From 2003 to 2006, nearly 7 million new jobs were created nationally, and the unemployment rate declined to 4.6 percent, low by historical standards.

While the additional paychecks have helped to sustain economic growth and support house price appreciation along with household income, median family income has grown at roughly the same pace as inflation. More importantly to the housing affordability equation, median income growth has not kept pace with the rate of house price appreciation in many places.

Along with income growth, demographic changes such as immigrant population growth and the retirement of baby boomers influence house price appreciation. Retiring baby boomers have been buying second homes and in desirable locations within major markets such as intown Atlanta and Miami, condominiums as well. Also, the rapid growth in wages for many skilled jobs has boosted home prices in active job markets. At the same time, wages have stagnated for many lower- or unskilled jobs and in certain industries that have experienced layoffs, aggravating the recent increase in house prices.

In addition to median family income, the HAI also factors in qualifying income, which is the income required to qualify to purchase a median-priced home and is determined partly by the effective interest rate on mortgage loans that have closed on existing homes. While mortgage rates remain low by historical standards, they have increased in recent years.

However, even this modest increase in mortgage rates contributed to a sharp decline in housing affordability in 2006. With only moderate income gains and sharply rising housing costs, would-be home buyers were in a weakened position: The HAI went from 131 in 2003 to 106 in 2006--a 19 percent decline, indicating declining affordability. Depending on how the market adjusts to a sluggish housing sector, home buyers' position could strengthen. …

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After the Boom, Housing Affordability a Growing Challenge: As Americans' Rate of Home Ownership Nears Historical Highs, Home Prices Have Risen Simultaneously. Ensuring a Supply of Affordable Housing for Those Aspiring to Their Share of the American Dream Remains a Challenge in Many Areas, Including the Southeast
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