Housing: Part 336 - Incomes And The Housing Market

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Includes: BBRE, CLAW, DRA, DRN, DRV, FREL, FRI, FTY, HOML, IARAX, ICF, ITB, IYR, JRS, KBWY, LRET, NAIL, NRO, PKB, PPTY, PSR, REK, RFI, RIF, RIT, RNP, RORE, RQI, RWR, SCHH, SRS, URE, USRT, VNQ, WREI, XHB, XLRE
by: Kevin A. Erdmann

Long-time readers have probably seen some version of this a number of times, but I have been poking around in the awesome Zillow data, and I don't think I have quite done this before. I have posted individual cities before, but here, I have run regressions of MSA income against rent, prices, and various combinations of these measures. I am trying to get a systematic time series representation of the importance of income on the housing market. Here I have used the largest 64 MSAs.

In cross-sectional regressions against MSA median household income, from the 1990s to 2005, income became a much stronger predictor of both MSA median rents and MSA median Price/Rent. It remains as strong a predictor today as it was in 2005.

Part of what has happened is that income has become a more important factor in MSA housing markets, and part of what has happened is that variance in incomes among MSAs has increased over time.

In the graphs, the blue line is the US median. The red line is the expected level for a city with median household income 1 standard deviation above the US median. The green line is the expected level for a city with median household income 1 standard deviation below the US median.

There is a graph showing rents over time, price/income over time, and mortgage affordability over time. This isn't news to any readers here, but:

1) The bubble wasn't driven by low-income markets. Mortgage affordability was steady in low-income cities from 1995 to 2005 while it shot up nearly 50% in high-income cities.

2) Whatever is causing housing starts to top out now, it sure as heck isn't high mortgage rates. Mortgage affordability in low-income cities is well below any pre-crisis level.

The thing about low mortgage rates is that a low-interest environment actually has some redistributive qualities. Think of the housing market. Home prices are somewhat sensitive to long-term real interest rates. So, when rates are low, people with wealth must pony up larger sums to purchase a home. But borrowers shouldn't really care so much about the price. If they can borrow cheaply, their liabilities and assets get matched up, and they can take out a mortgage with low payments and start to accumulate equity. (Obviously, buyers must be careful about purchasing homes in low rate environments if they may need to sell the home soon when rates are higher, etc.) But, this redistribution can't really happen if mortgage rates are low because there are obstacles to lending that correlate with socioeconomic status.