“Average” homebuyer, “typical” house and the problem with “affordability”

Late last year, Southern California residents received what was supposed to be the magic home buying number: $96,513.

That, according to mortgage researcher HSH.com, is the before-tax income a buyer needs to take home annually to “afford” an “average” home in the Los Angeles metropolitan statistical area (MSA) at the “typical” 30-year fixed rate mortgage (FRM) interest rate for (Q3) of 2014.

To arrive at this magical number, HSH.com first considered the median home price in the L.A. metropolitan statistical area (MSA) in Q3 2014: $481,900. From there, the analysis makes a litany of assumptions about a hypothetical buyer who:

• musters a 20% down payment;
• qualifies for a 30-year FRM with a 4.25% interest rate; and
• spends no more than 28% of their monthly pre-tax income on principal, interest, tax and insurance (PITI) payments.

The specificity of the variables at play in establishing this figure is impressive, if not completely mythical.

As practicing agents know, the realities of the California housing market are infinitely more complex and nuanced than this simplistic picture presents. But HSH’s analysis is useful in at least one way: the magic $96,000 number opens the door to discussing what we actually mean when we use the nebulous term “affordable.”

Unpacking the numbers

The first problem with this calculus is the use of a metro-area median home price.

Median, of course, is effectively meaningless – it only tells us what’s in the very middle, without any sense of range. $481,900 may well be the median home price in the L.A. metro for Q3 2014, but that leaves out a lot of the picture of properties both above and below that price point. $481,900 is a numerical placeholder reflective of no actual property in the L.A. MSA.

Median prices flatten and obscure variations across geography, even at the metro level. A mathematical abstraction like a median price for the Greater Los Angeles Area tells us nothing about actual prices in Calabasas, Carson or Commerce, even if it’s a technically accurate median for prices across those places.

A far better metric is a graduated scale such as the industry-standard Case-Shiller Tiered Home Price Index, which splits California home prices into low-, mid- and high- price tiers to account for the vastly different behaviors of home prices at either end of the market.

These issues of contingency are amplified by each of the assumptions inherent in HSH’s “typical” scenario. Working backwards from median L.A. home price as HSH has done, the $96,513 sweet spot will fluctuate based on:

• The down payment a buyer puts up;
• the mortgage interest rate attainable, given the buyer’s unique credit profile; and
• the proportion of monthly income the buyer is able to put toward a PITI payment.

Tweaking just one variable while holding the others constant will change the entire outcome. A smaller down payment, all else equal, will require a higher income, a lower property price or a better interest rate. The buyer who can put a larger chunk of their monthly income toward PITI payments will need less annual income to fit this equation, or, with the same income, can qualify for a more expensive property. The more this matrix is scrutinized, the more it unravels.

Put simply, “you need X to afford Y” requires a set of circumstances so specific and fleeting that, while it makes for a splashy story about housing affordability, it says very little about buyer’s purchasing power and the broader challenges of obtaining shelter in a given location.

What’s affordability anyway?

Anyone who has a job qualifies to buy a home — at some price, somewhere. The key to purchasing a property, however, is not price; it’s income, translated into purchasing power. In a region as vast as Los Angeles, there is a home for every income.

The question of “affordability,” then, is not as straightforward as the level of income at which someone can or cannot purchase a home; it’s one of housing quality and, to an extent, justice. Statements about housing affordability require a series of value judgments which are not easily captured with medians and averages:

• while it may be true that anyone with an income qualifies to purchase a home, does the type of home they qualify for in a particular location meet their need for shelter?
• are employees able to qualify to purchase homes in locations reasonably accessible to their places of employment?
• for those whose income does not qualify them to purchase adequate shelter reasonably accessible to employment, is it just to require them either to travel further for employment or to accept less adequate housing?
• is the focus on homeownership proper? Are there other solutions which more effectively address employment-accessible housing for low- and mid-income earners in labor markets with high housing costs, if such a need exists?

These are complex, thorny questions which deserve answers that won’t be found in slick, headline-friendly equations like HSH’s magic number. Raising the alarm that a region such as Los Angeles is increasingly unaffordable to earners of average income makes for salacious press despite its thin statistical underpinnings.

Housing affordability is a fine cause, but parroting hollow or unrepresentative figures is not a productive way to serve that cause, much less to understand the unique dynamics of the market you service. You’re better off addressing it directly by looking first at the correlation of housing quality to buyer purchasing power, and at housing availability as it relates to job growth in major industries and employment centers. It may not be as sexy, but it’s certainly more revealing.