Are DC Area Housing Prices Outpacing Income?

By Art Rodgers

Recent articles and posts everywhere, including Greater Greater Washington, have talked about how housing is becoming unaffordable.  However, the graph below suggests that home prices may be more affordable now than they were in 1990.  It was constructed by calculating the purchasing power of household income using prevailing mortgage rates and comparing it to the growth of the Case-Shiller Index over time.

 

Source: HUD, FHLMC, S&P Case-Shiller, DC Office of Planning.

Source: HUD, FHLMC, S&P Case-Shiller, DC Office of Planning.

In 1990 the US Department of Housing and Urban Development (HUD) estimated the Area Median Income (AMI) for the Washington Metropolitan Statistical Area (MSA) was $51,000, and according to FreddieMac the average interest rate for a home mortgage was 10.13 percent!  This suggests the typical household could afford a mortgage of about $144,000[1].  Over time the AMI went up and interest rates went down.  In 2012 HUD estimates the AMI is $107,500 and interest rates average 3.5 percent.  Using the same calculation, the same typical household can now afford a mortgage of $595,000.  When the average annual rate of change in the Case-Shiller Index is applied over time to the same starting point of $144,000, the index suggests a current home price of $527,000.

So yes, housing prices have outpaced household income, but this analysis suggests that it’s primarily due to increased buying power from low interest rates that has inflated housing prices and not a gap between supply and demand or other factors.  If this is the case, it raises some different, but vital questions the region should be asking:

  • If prices are up in large part due to interest rates being kept perhaps artificially low?  What happens when those rates go back up? The Federal Reserve’s program of quantitative easing seeks to offer a soft landing to keep housing prices stabilized.  But unlike everything else, the saying for interest rates is “what goes down must come up.”    A simple increase in interest rates from 3.5 percent to 4.5 percent reduces purchasing power by $67,000 or 11 percent.  Renting will become more attractive. However, to the extent this affects housing prices, how will local budgets be affected by potentially even lower property values?
  • The problem is perhaps not a shortage of housing, but where the housing is in relation to the jobs.  Drive till you qualify is certainly part of the problem.  OP’s study on housing & transportation costs estimated that lower transportation costs in the District can save a household on average $4,000 to as much as $16,000 annually compared to the outlying suburbs, but the lending industry doesn’t recognize the savings from low transportation costs or the expense of a high cost area when underwriting loans.
  • It’s also the region’s overall imbalance, where all the jobs are to the west and all the lower cost housing is to the east.  In Prince George’s County the median sales price is $177,500 and demand has only recently taken note of the opportunity.  The imbalance adds to the region’s traffic congestion, longer commutes, etc.  Therefore, how can we fix the regional jobs/housing imbalance, and create greater housing affordability to the west and more jobs to the east and help people live closer to their work?
  • Finally, the growing barbell distribution of household income is making it harder for a larger percentage of households on the lower end to afford homeownership.  Homeownership does confer several benefits of greater housing cost stability and asset development that can help raise intergenerational wealth.  How can these benefits be extended to a wider range of households while growing the stock of affordable units as population increases?

[1] Using the standard 30 percent of income toward housing costs.  Down payment requirements held constant.

Housing & affordability in the DC region

A recent series of blog posts on Greater Greater Washington have focused on housing in the region.  Over the next few weeks OPinions hopes to continue the conversation and potentially raise additional questions for everyone to discuss.  Please give us your thoughts.

In the meantime, check out this 2011 study by OP and the Center for Neighborhood Technology, H+T in DC: Housing Plus Transportation in DC.

The Best Three Blocks in DC: Columbia Road, NW

By Art Rodgers

Cropped version_A Rodgers_Best 3 blocks mapWhen it comes to hyperbole, “it’s got it all” might be the most overused, but with regards to describing what makes Columbia Road, NW from 19th to 18th Streets a successful urban street, it’s dead on.  Ok, so it doesn’t have a zip line into Rock Creek Park, but with the slope and the trees it could be fabulous.

There are three core elements to the best three blocks in DC and they start with Kalorama Park, which has huge shade trees, two playgrounds, a community garden, a basketball court and a beautiful westward facing slope for catching the sunsets.  It is the community’s center and without it, these three blocks would be far more ordinary.

Next it’s got people living in anywhere from six to eight story buildings, to row houses, to even a few single-family detached homes.  Through tools like rent control, limited-equity coops, and a few nearby subsidized buildings, all kinds of people live in the neighborhood including fixed-income retirees, a few low-income families and of course the ubiquitous young professionals.  That said, I wouldn’t disagree that some more affordable housing, so lower income families could be in boundary and send their kids to one of the District’s best public school at Oyster, would be a good idea.

A Rodgers 3 blocks blog post_Kalorama Park & surrounding apt bldgs at sunset

Kalorama Park and surrounding apartment buildings at sunset (Photo: Art Rodgers)

The final core element is handy daily shopping including two local grocers, three competitive dry cleaners, a liquor store, a gallery/frame shop and an athletic shoe store. Not far away there is a hardware store, an electronics store, a post office, and several import stores.  The stores keep the sidewalks active with people running errands, picking up a carton of milk or other sundries or going out for a tasty frozen treat on a hot summer night. Did I mention the range of restaurants from fabulously affordable Mediterranean and Peruvian Chicken to Brazilian, French and Sushi and how they are adapting to the growing population of toddlers? No? Well I have now.

Note: The delicous new restaurant Mintwood Place almost made it into this graphic, but its too new to be a neighborhood institution, however a recent siting of President Obama builds a really strong case!

Note: The delicous new restaurant Mintwood Place almost made it into this graphic, but its too new to be a neighborhood institution, however a recent siting of President Obama builds a really strong case! (Graphic: Art Rodgers)

I must admit the rest of what makes the best three blocks in DC are an accident of location.  It’s bracketed by Rock Creek to the west, Walter Pierce Park to the north, 18th Street’s entertainment strip and Marie Reed’s comfortably dog eared, but shaded and cool kiddy pool to the east.  Beyond the three blocks in the immediate neighborhood are two more supermarkets, and farther are the adjacent destinations of Woodley Park (Red Line Metro) across the fabulous Duke Ellington Bridge, Columbia Heights (Green Line Metro) connected by the DC Circulator and Dupont Circle (Red Line Metro) with all that they offer.

Others may wish to point out how the assets of their neighborhood make them such wonderful places to live, and that’s actually the point.  Let’s identify what are the elements of urban areas we love and make sure that all the neighborhoods of DC are provided the same opportunity for relatively sane (but never boring), if not high quality urban living.