Home affordability math isn't mathing
A popular trope among housing analysts is to perform a sort of DuPont Analysis for housing. It seems like basic math: Housing is too expensive. Some combination of 3 things must correct for it to be affordable again:
Prices must decline
Incomes must rise
Mortgage rates must decline
How could that be wrong? Maybe I’m being pedantic, but I think viewing it this way betrays a fundamental misunderstanding of why and how housing is too expensive.
The first problem, which is common on this topic, is that it focuses on the affordability of ownership. Mortgage rates don’t matter to renters. Prices don’t matter to renters. And, that’s fine if home buyers are your target audience. But, even if it is, the problem for both buyers and renters is that rents are too high. Prices are only too high because rents are too high.
Mortgage rates aren’t particularly high, by historical standards. Rising incomes aren’t making housing any more affordable, either regionally or nationally, because as long as there is a housing shortage, additional income will be used to bid up the elevated prices of existing homes. Our cities with the highest gross incomes have even higher housing costs. Prices are high because rents are high.
There really is only one number that matters - rents - specifically land rents (rent on homes that is elevated because local scarcity leads families to pay more to avoid trading down or being displaced). Homes across the country are expensive for one reason - the rental value of the land they are bundled with is inflated. None of those three factors can sustainably address that.
There are other problems, which I will discuss below the fold.
