If I Had Infinite Hours in the Day: 20060101
Tradition! Tradition! (Yes, It's a David Gelertner Why Oh Why Can't We Have a Better Press Corps? Moment)

Affordability, Housing Prices, and Interest Rates

Elizabeth Warren questions David Leonhardt's article claiming that housing in America today is "affordable":

TPMCafe || Is Housing More Affordable?: David Leonhardt usually does first-rate work, but his housing piece in the NYT this morning has some real data gaps.... [T]he article talks about the purchase price of a new home relative to household income. The problem is that a fully-employed male today makes (in inflation-adjusted dollars) about $800 less than his counterpart thirty years ago. But... median income for families has shot up dramatically in the intervening years because the typical married couple now sends two people into the workforce. In other words, it now takes two earners to pay a mortgage rather than one. A generation ago, a typical wage-earner could buy a typical house; today, it takes two incomes to buy an average home in fully 75 percent of America's cities. And that means housing is just as affordable as it used to be?...

One last point is worth noting: by picking the reference point as the early 1980s rather than the 1970s or the late 1980s, the NYT is benchmarking off the worst housing market in the second half of the 20th Century. Because inflation was out of control and mortgage rates were stratospheric, home buying was curtailed and housing markets suffered. Is that what we want to hold up as the model for comparison?

The data are complex, and I don't think the NYT is trying to slant the discussion. But describing the news as rosy for homebuyers doesn't reflect reality.

Ezra Klein supports Leonhardt:

TAPPED: December 2005 Archives: Warren's book, The Two-Income Trap, has lots of good data on the increasing percentages of family incomes devoted to essentials, so she should be taken seriously on this. On the other hand, the basic point of the article remains a worthy one: the massive increase in housing costs is primarily a phenomenon of heavily populated, coastal, urban or near-urban areas. When you venture beyond the states that reporters tend to inhabit (say, to Colorado, Arizona, Vermont, or Wisconsin), housing chews up a much more reasonable 15 to 25 percent of your income. Now, not every occupation offers geographic mobility, but assumedly we'll all be telecommuting within 10 years anyway, rendering the middle of the country significantly more inhabitable for the folks currently unable to contemplate it.

And Doug Henwood observes:

Doug Henwood: : What a funny article. In 1985, mortgage rates averaged 12.4%, and mortgage debt service (according to the Fed) took up 9.3% of a homeowner's after-tax income. In 2005, interest rates have averaged 5.8%, and the debt service bite, 10.5%. So interest rates have fallen by more than half, yet the servicing burden has risen. Interest rates better stay low or some people will be in trouble.

Let me say a word for what I think is the basic point underlying Leonhardt's article: one reason that housing prices are high is that interest rates are low, and it's interest rates times housing prices that matter for affordability--not either alone.