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October 18, 2015

What Do Home Affordability Rankings Tell Us?

Every few months, a new rating on housing affordability makes the news. Most recently, a group ranked Muncie the most affordable college town, while earlier ones rank cities by size or region. Communities inevitably bask in the notion of offering affordable options for homebuyers. That, however, is the wrong lesson to draw from these rankings.

The buying and selling of homes is a well-ordered market with transactions agents, many buyers and sellers and formal and informal rules about disclosure of information about the home. So, the price of a house is a very clear measure of how much buyers and seller value that house.

A good affordability ranking accounts for the differences in the construction, age, size and other features of the home itself. So, differences in the prices of homes among regions aren't due to extra bedrooms or brick construction. Instead they are due to neighborhood effects of a wide variety. A simple mental exercise can help explain the matter.

Suppose we have two completely identical homes, but we put them in two different locations. One has top-ranked schools and great walkable neighborhoods; the second is located in an unsafe portion of town with poorly performing schools and is surrounded by abandoned housing. Clearly, one of these houses will be a lot more ‘affordable’ than the others, but in the same way a 1982 Gremlin is more affordable than a 2015 Lexus.

This insight is hardly news, but the lessons that can be derived from this are very valuable. Economists have analyzed hundreds of millions of home transactions with detailed records of home and neighborhood attributes. This allows a researcher to separate the various impacts of different characteristics on price. So, there are fine studies that very clearly measure the impacts on home prices of such factors as school quality, crime, toxic waste dumps, the proximity of a registered sex offender, walking trails, parks, tax rates, playgrounds, airport noise and everything else we can measure. These measures can help communities target their most troubled areas and emphasize what is most beneficial to them.

One consequence of this is that home affordability rankings ought to serve as warning signs to communities that all is not well. But, there is a silver lining to this story. Like most markets, housing markets are imperfect. The Great Recession left in its wake a great deal of poorly priced housing along with a whole generation of young people who are skittish about high-priced housing.

Cities with ‘affordable housing’ may actually have a window of opportunity in which they can attract younger households. The hope is that these new homeowners may place a greater value on affordability than other amenities. In a study I wrote about last week, cities that had lower-priced housing actually did better than expected in worker productivity in 2010. That is potentially good news for Muncie and other places in the Midwest, but only for the communities that are well into remedying their most vexing problems.

Link to this commentary: https://commentaries.cberdata.org/808/what-do-home-affordability-rankings-tell-us


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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