Cleveland is in the category with Detroit, St. Louis, etc. There are some non-linearities that bias the model because, I think, there are some problems with regressive local property taxes which lower the market value of low-tier homes. I would need to do some work to control for that. Generally, I would say its supply shortage is minimal. The slope of its price/income line is around -0.5, which is very flat. But rent inflation has been around 5-6% the last couple of years, according to Zillow's ZORI estimate, so I think it is reasonable to assign a small positive number to a housing shortage for Cleveland. It would be lower than any city in the figure here, though.
Price/Rent ratios are positively correlated with price. So, a home that rents for $1,000 might typically sell at a multiple of, say (just tossing out numbers), 12x, while a home that rents for $2,500 would likely sell at a multiple of 20x.
That is always the case, so cheaper homes always have a lower mortgage/rent ratio than more expensive homes do. (This is partly because lack of buyer capital is an important factor that keeps low tier home prices low, and why it is detrimental and regressive to block potential low tier buyers from mortgage access.)
The problem is more pronounced today because the mortgage crackdown pushed low-tier price/rent ratios lower. Where constrained mortgage access has pushed prices so low (and rents so high) that on a cash-to-cash comparison mortgages are cheaper, it is clearly mortgage suppression that is keeping those markets from clearing. Especially since buying activity was just as suppressed when mortgage rates were 3% and the ratio was even lower.
Thanks for taking the time to do this. Since I'm in the Boston metro area I'll focus my comments on that region.
-The 1990's were a period of urban rebound for the city after several decades of stagnation. That rebound happened to coincide with the tenure of Tom Menino, who by and large was pro-development. However.....
-Development, particularly of housing, tended to be concentrated in regions where locals wouldn't push back against higher density. The major investment zone was the Fan Pier district, which was effectively empty except for hundreds of acres of parking lots. Major density increases in traditional single family neighborhoods was conspicuously avoided, even if these neighborhoods were in derelict condition.
-The new development was biased towards high tech office space, which generated more jobs, but started to raise pressure on housing costs that wasn't met with increased production. Any new housing was branded as "luxury" which fed various myths about gentrification and displacement.
-Surrounding suburbs experienced amazing increases in housing valuations, but very little new production. Many single family homes built in the 1930-1970 range were town down to build larger single-family homes. Local backlash against new housing in any form is a consistent element of local politics. Many anti-housing positions rely on the usual arguments about increased congestion, lowered property values, and the lack of affordable options in the new development.
I see no credible path for the Boston metro region to make up the 400,000 unit shortfall of housing in this century. Even if permit and production rates doubled or tripled the supply capacity would not temper housing costs. My best advice for the younger generation who wants to own a home is "go west and go south."
Do you happen to have any data for Cleveland, OH?
Cleveland is in the category with Detroit, St. Louis, etc. There are some non-linearities that bias the model because, I think, there are some problems with regressive local property taxes which lower the market value of low-tier homes. I would need to do some work to control for that. Generally, I would say its supply shortage is minimal. The slope of its price/income line is around -0.5, which is very flat. But rent inflation has been around 5-6% the last couple of years, according to Zillow's ZORI estimate, so I think it is reasonable to assign a small positive number to a housing shortage for Cleveland. It would be lower than any city in the figure here, though.
Thank you. Somewhat relatedly, why does it seem that in the Midwest, owning is relatively cheaper than renting?
Price/Rent ratios are positively correlated with price. So, a home that rents for $1,000 might typically sell at a multiple of, say (just tossing out numbers), 12x, while a home that rents for $2,500 would likely sell at a multiple of 20x.
That is always the case, so cheaper homes always have a lower mortgage/rent ratio than more expensive homes do. (This is partly because lack of buyer capital is an important factor that keeps low tier home prices low, and why it is detrimental and regressive to block potential low tier buyers from mortgage access.)
The problem is more pronounced today because the mortgage crackdown pushed low-tier price/rent ratios lower. Where constrained mortgage access has pushed prices so low (and rents so high) that on a cash-to-cash comparison mortgages are cheaper, it is clearly mortgage suppression that is keeping those markets from clearing. Especially since buying activity was just as suppressed when mortgage rates were 3% and the ratio was even lower.
Thank you, this is fascinating!
Thanks for taking the time to do this. Since I'm in the Boston metro area I'll focus my comments on that region.
-The 1990's were a period of urban rebound for the city after several decades of stagnation. That rebound happened to coincide with the tenure of Tom Menino, who by and large was pro-development. However.....
-Development, particularly of housing, tended to be concentrated in regions where locals wouldn't push back against higher density. The major investment zone was the Fan Pier district, which was effectively empty except for hundreds of acres of parking lots. Major density increases in traditional single family neighborhoods was conspicuously avoided, even if these neighborhoods were in derelict condition.
-The new development was biased towards high tech office space, which generated more jobs, but started to raise pressure on housing costs that wasn't met with increased production. Any new housing was branded as "luxury" which fed various myths about gentrification and displacement.
-Surrounding suburbs experienced amazing increases in housing valuations, but very little new production. Many single family homes built in the 1930-1970 range were town down to build larger single-family homes. Local backlash against new housing in any form is a consistent element of local politics. Many anti-housing positions rely on the usual arguments about increased congestion, lowered property values, and the lack of affordable options in the new development.
I see no credible path for the Boston metro region to make up the 400,000 unit shortfall of housing in this century. Even if permit and production rates doubled or tripled the supply capacity would not temper housing costs. My best advice for the younger generation who wants to own a home is "go west and go south."
Interesting. Thanks for the details!