Affordability is one of the key measures of housing. Traditional measures make assumptions based on house prices and local incomes. These measures, however, are insufficient now that the pandemic has changed how and where some people live. Enter the Zonda Affordability Ratio (ZAR), a new measure that reflects the true state of housing affordability taking into account the work-from-home economy.
The impact of increased migration on the real estate market has been widely reported. Some people, usually from more expensive subways, have taken the opportunity to move in the past two years. Others had already moved before the pandemic but chose to rent before buying. For these tenants, the changes brought by the virus have accelerated their passage to the property.
What is not widely understood is that when people move and keep their current jobs, their income data usually stays at their employer’s location. For example, if someone works for a California company and moves to Nevada but keeps the same job, their income remains coded in California.
Traditional affordability measures do not take this important data into account, and this is where ZAR comes in. The ZAR was created to show the “real” affordability ratio by considering both local incomes and the incomes of individuals in the five markets from which buyers locate. The ZAR is personalized for each metro and shows the percentage of households that can afford the house at the median price.
It is important to note that even though the ZAR is higher than the unadjusted affordability index for many markets due to the previously unreported impact of out-of-town buyers, it does not mean that housing affordability is improving. In fact, we’re at a point where the benefits of low interest rates on the monthly payment are outweighed by the rapid rise in house prices since mid-2020.
Additionally, affordability measures typically mask the impact on low-income homebuyers. For example, median prices in a metro include locations A through F. People looking to buy in a good location with excellent schools will face a greater affordability challenge than the market average suggests. Below is this month’s ZAR, along with some notable highlights:
• A high ratio meets consumer confidence. Cleveland; Louisville, Kentucky; Chicago; Indianapolis; and Cincinnati are the top five markets for best affordability across the country, as those markets still have homes under $ 300,000. As the Midwest stands out as the most affordable region in the country, Zonda’s division president’s survey captures an important point: consumer confidence. Midwestern buyers are showing some hesitation about the extent and speed of the price increase.
• The biggest movers. Affordability in Fresno, California; Tucson, Arizona; and Sacramento, Calif., improved the most after the income adjustment. The best buyers come from Sacramento for Fresno, Phoenix for Tucson, and San Francisco for Sacramento.
• In condition. Not all markets are driven by out-of-state buyers. For example, San Antonio’s ZAR percentage was marked up primarily by other Texas markets including Austin, Houston, and Dallas.
• California. Four of the five least affordable markets are in California. Tight supply of land, high land prices, tight regulations, low inventories and continued strong demand are keeping house prices high in northern and southern California. However, many Bay Area residents working for tech companies, for example, have stocks that are in addition to their base pay. This means affordability is higher for some than the data suggests.
Zonda affordability ratio *
The ZAR is important because builders have seen the direct impact of relocation buyers. For example, throughout 2021, the builders of Zonda’s monthly division presidents survey cited changing buyers as their most active, followed by first steps and moves. Affordability is the key to the success of the housing market in the coming years. With ZAR, Zonda can now regularly provide the most complete picture of this critical metric.