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| Income and Home Affordability |
| Written by Bill Russell | |
| 07.07.2008 | |
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Discuss this article on the forums. (0 posts) Today I want to consider the relationship between income and affordability. Though income is directly included in the calculation of the affordability index, it only explains about 16% of the resulting index. Obviously, areas with higher income can afford to build nicer homes and support higher levels of urbanization. In addition, economic research has shown that successful cities do not necessitate higher incomes, but cause them through increased productivity, so that a successful city will necessarily have higher incomes than other areas. The above graph shows the relationship between median income and affordability for the 363 biggest markets in the US as of May 2008. It is clear that higher income markets are less affordable than lower income markets, and therefore have homes that are proportionally more expensive than their higher incomes. In fact, if home prices were consistent across all markets, we would expect the richest markets to be more affordable, not less affordable. The graph clearly shows that affordability declines as income increases. It is interesting is to note that 48 of the 50 least affordable markets all fall well below the predicted level of affordability after controlling for income. There is clearly something in addition to higher incomes that makes these markets less affordable. For example, compare Santa Cruz, CA to Atlanta, GA. Both cities have comparable levels of income (Santa Cruz=$63,669 & Atlanta=$65,466), but Santa Cruz is only 1/3 as affordable as Atlanta (45 vs. 158). As I have said before, it is my contention that the least affordable markets in the US cannot be explained away by looking at market fundamentals or failure of the free market. Looking at income and affordability is just one more piece of evidence that something unusual is happening in these markets. After controlling for income, it is clear that these markets still are absurdly unaffordable. The factors most likely responsible for this are zoning and land regulation that by choice keep land and housing prices high, and make homes unaffordable. 
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