The National Association of Realtors recently announced that its national median house price for the first quarter of 2011 dropped 4.6 percent from a year ago. Yet, a review of the major metropolitan area median prices suggests that housing is still more costly relative to incomes than it was before the housing bubble.
One of the most frequently used indicators of housing affordability is the median multiple, which is the median house price divided by the median household income. Among the 49 metropolitan areas with populations in excess of one million persons for which there is data, the median multiple remains above its 1982 2000 average.
Still Above Pre-Bubble Level
As of the third quarter of 2010, the 7th Annual Demographia International Housing Affordability Survey placed the median multiple in these metropolitan areas at 3.6, well above the pre-bubble average of 2.9. Since World War II, the median multiple has generally been 3.0 or less, though in metropolitan areas with more intense land-use regulation (such as “smart growth” or “urban containment” policies), higher median multiples have been routine.
Overall, the peak median multiple in these metropolitan areas was 4.8, 63 percent above the pre-bubble average. This figure, however, masks the far greater house price escalation that occurred in the more highly regulated metropolitan areas, which experienced a median multiple increase of 87 percent. This compares to an increase of 25 percent in the markets with less restrictive land-use regulation.
Of course, the comparatively modest median multiple rise in the less regulated markets indicates the extent to which profligate lending and easy money contributed to higher house prices.
Land Use Restrictions Fuel Rise
Conversely, the higher cost increases in the more regulated markets reflect the land use regulation constraints that made it almost impossible to build sufficient housing for the demand, which inevitably led to speculative activity. The house price losses were concentrated in these highly regulated markets, which accounted for 88 percent of the aggregate value losses from the peak to early 2009.
As of the third quarter of 2010, house prices remained higher relative to incomes than in the pre-bubble period in 41 major metropolitan areas out of 49. That leaves just eight markets in which the median multiple had fallen to below pre-bubble levels. This includes markets such as Las Vegas, Phoenix, Riverside San-Bernardino and Sacramento, where unprecedented demand drove up prices, which then collapsed in 2006 and 2007. Even the constrained land supplies in these areas have proven sufficient to accommodate the now modest demand.
Overall, the most recent house price decreases leave housing somewhat more expensive relative to household incomes than it was before the bubble.