Unison Home Affordability Report 2018 by Region
The topic of housing affordability has become a nationwide conversation, and with good reason. Many would-be home buyers believe that the dream of homeownership is slipping out of their reach. Over the past decade, home prices in almost all major U.S. cities have increased. In some cases, the rise of home prices has been quite dramatic. Cities like San Francisco and Seattle have seen home price appreciation far outpace any historical precedent, growing as much as 10% year-over-year.
Meanwhile, other cities are not far behind, with cities like Denver, Miami, Las Vegas, Portland, and Los Angeles experiencing annualized home price appreciation of 8% or greater from 2011-2016. Many of the metro areas where job growth is occurring are now attracting the demographic groups who would like to buy a home, including Millennials and new families, but the cost to enter the housing market in these areas is proving too daunting for some. At the same time, monthly rents paid by renters in most cities across the U.S. have also increased significantly, putting additional pressure on those who are trying to save up for a down payment on a home. When rental rates increase, individuals and families have a lower capacity to save up on a monthly basis towards a long-term goal of owning a home.
Yet another factor affecting would-be home buyers is student loan debt. With rates of post-degree indebtedness rising over the last decade, many prospective buyers must face the challenge of applying for a mortgage while seeing a large portion of their monthly income taken up by principal and interest payments on a student loan. According to the National Association of Realtors, 41% of first-time buyers said they have student loan debt in 2017, and over half said they owe at least $25,000 on their loans.
This is true for all first-time buyers, but especially true for the Millennial Generation, which is now the largest generation in the U.S., with over 80 million members. In the coming decade, this generation will make up the majority of first-time home buyers. While many of them have doubts about their ability to enter the housing market, they have not given up. Despite some claims to the contrary, this group does have a strong desire to become homeowners. According to Ellie Mae, 91% of Millennials say they intend to own a home one day.
In this report, we show that there is a wide range of housing affordability — not only between metro areas but also within metro areas. While home prices overall have increased, there remain neighborhoods in every metro area that are relatively affordable and every metro area offers solid housing options for almost all types of home buyers.
We also show that affordability is not only determined by housing prices in a given metro area but also by prevailing incomes in the area. In this report, we include for the first time an index of home affordability based on both median income data and housing price data, which we call the Unison Home Affordability Index.
By examining trends within major metro areas and differences between each area, we hope to assist prospective home buyers in identifying the right city and neighborhood for them to buy a home. The best home buyer is an educated home buyer, and education relies upon having the right data at one’s fingertips.
Home Affordability in Major U.S. Metro Areas and Cities
It is common knowledge that housing prices and affordability vary greatly between U.S. metro areas and cities, but the sheer scope and range of differences between some of the biggest cities in the country — from San Diego to Phoenix to Detroit to Boston — is surprising.
The San Francisco-Oakland-Hayward metro area is the least affordable in the country, with an annual salary of $231,216 needed to buy the median home. In fact the top 3 least affordable metro areas in the U.S. can all be found in California. Taking the #2 spot on the list is the Los Angeles-Long Beach-Anaheim metro area, where residents need an income of $157,728 to buy the median home, followed by the San Diego-Carlsbad metro area, where home buyers need a salary of $139,130.
On the list of most affordable metro areas, the top spot goes to Detroit-Warren-Dearborn, where home buyers need a salary of just $35,909 to buy the median home. Following on the list are Kansas City, where a salary of $40,869 is needed, and Tampa-St. Petersburg-Clearwater, where a salary of $43,978 is needed.
Looking only at cities, rather than metro areas, we can see the places that are the most difficult and least difficult to buy a home. In New York City proper, the required salary to buy a median home is an astounding $418,482, which makes it the least affordable city in our report. The runner up is San Francisco proper, where residents would need a salary of $349,650 to buy a median home. Well below these two, Boston is the third on the list with a required salary of $199,755.
But there are also pleasant surprises to be found in the data. For example, in Chicago city proper, the required salary to buy a median priced home is only $64,948, and in Dallas city proper, the required salary is only $48,887. In Kansas City, home buyers earning a salary of $29,036 can afford to buy a median home.
What We Can Learn from The Unison Home Affordability Index
The Unison Home Affordability Index, launched in March 2018, compares housing markets using a combination of home price data and income data. The Index shows how affordable a particular market is by estimating the number of years needed to save up in order to buy a home, given the median salary and median home price for that market. The Index currently shows striking differences between regions of the country. In some of the hottest housing markets, our data shows that it would take more than 15 years to save up enough for a down payment to buy a home.
For March 2018, the top spot in the Index (i.e. the most affordable metro area) goes to Detroit-Warren-Dearborn, where a home buyer with the median income would need just 5.1 years to save up and buy the median home. As a close runner up, Kansas City metro is almost as affordable — with an Index of 5.2.
At the bottom of the list, the San Francisco-Oakland- Hayward metro has an Index of 20.4, meaning a home buyer with the median income would need over 20 years to save up and buy the median priced home. Los Angeles- Long Beach-Anaheim is a close runner up, with an Index of 19.0.
The Role of Home Ownership Investments
While the housing market may look daunting to some prospective buyers, there are solutions available that can drastically increase their purchasing power and give them the opportunity to buy a home. One option is to use a home ownership investment.
Homeowners have traditionally financed their homes solely with mortgage loans. But that is now changing due to the introduction of home ownership investments — a new way to finance a home. Whereas a loan is a debt investment that produces a return to the investor by charging the homeowner interest and collecting monthly payments, a home ownership investment is financing based on partnership and shared incentives between the homeowner and the investor.
In a home ownership investment, an investor provides financing in exchange for the opportunity to share in the gain or loss in the home’s equity value when the homeowner decides to sell their home. There are no interest charges or monthly payments on the financing provided.
A home ownership investment can double or even triple a buyer’s down payment funds — from 5% to 10% or even from 5% to 20% — which can eliminate the need for costly mortgage insurance and enable them to comfortably afford the home they really want. This option gives people a way to not only buy a home but to have greater choice over important considerations like commute, school district and size of home.
Home ownership investments can be the bridge to homeownership for millions of Americans. By giving them the ability to buy a home now rather than wait several years, a home ownership investment gives these new homeowners a chance to start building equity today with their monthly mortgage payments and putting down roots in their chosen communities.
The Unison Home Affordability Report uses recorded property data at the county or local level and automated valuation models (AVMs) to estimate the median property values in each city and zip code. The Report includes all single family residences, condos, and townhomes in each area where there are at least 50 properties.
To estimate how much income one would need to afford a home by city or neighborhood, the Report assumes a 5%, 10% or 20% down payment on the median home value. We then calculate the associated monthly costs at each down payment level, assuming a 4.625% mortgage interest rate on a 30-year fixed-rate mortgage, property taxes of 1.25% per year on the median home value, and home insurance cost of 0.4% per year on the median home value. The required annual incomes reported are then constrained so that the monthly housing costs do not exceed 30% of gross income. This represents a conservative estimate of the percentage of income that can be spent on housing.
The Unison Home Affordability Index, launched in March 2018, compares housing markets using a combination of home price data and income data. The Index shows how affordable a particular market is by estimating the number of years needed to save up in order to buy a home, given the median salary and median home price for that market, assuming a savings rate of 5% of gross income per year.
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