Wednesday, March 20, 2024

Houston's affordability may not have eroded as much as you think

There has been a lot of buzz recently about Houston's decline in affordability. In addition to a sudden pandemic-induced surge of demand meeting limited supply, a lot of that decline can be attributed to mortgage interest rates moving up so much during the late pandemic, but prices have increased as well (see charts, HT Patrick). But I think there are some factors distorting that data to make our affordability decrease look larger than it actually is...

Here are the three pre vs. post-pandemic factors that I think are distorting the data:
  1. Different types of houses being purchased: the pandemic normalized remote work and drove lots of people out of the city to far suburbs and exurbs, where they may have bought larger houses on larger plots of land than the normal pre-pandemic house profile (and fewer in-city townhomes). 
  2. Wealthier buyers: I’d guess the pandemic buyers skewed wealthier, more upper middle class, remote-friendly professions moving to larger homes in the farther suburbs and exurbs.  Different buyer demographics changes the profiles of the homes being bought, which would skew the price of the median sale upwards.
  3. Fewer first-time buyers: Much higher mortgage interest rates knock out a lot of potential first-time buyers from buying less-expensive starter homes, which skews the median home sale price higher.
As you can see, these variables can make the median home sale price an unreliable indicator of what home values are really doing in the metro.  What would be more interesting would be if we could find out what those existing homes that were selling for ~$200k ten years ago are selling for now? (a more true measure of inflation in house prices) I’d bet those homes aren’t going for $320k now – probably more like mid to upper 200s. But that's data we don't have. So just take it with a grain of salt next time you see a headline about Houston's decline in home affordability...

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At 6:24 PM, March 20, 2024, Blogger George Rogers said...

Especially combined with Texas being a nondisclosure State, you will have the price reported based on Californians moving in on cash sales, but the price to clear a house being lower.

At 9:59 AM, March 21, 2024, Blogger TheCastle said...

There are some demographic factors as well driving larger houses. We put a contract on a house before the pandemic to move into a larger house. We did this as my mom was moving in with us and we wanted more room to accommodate her. As we discovered in our neighborhood there are a lot of multi-generational house holds. Also with the finical backing of retired or near retired parents helping people afford larger houses. So this is a contributing factor as well, I'm in my late 40s and lots of my friends are having their mid-late 70s parents move in.


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