Richard Florida
by Richard Florida
Tue Jul 28th 2009 at 10:30am UTC

Housing and the Crisis, Part III

The past couple of days, we’ve looked at the relationship between past and current housing prices. We saw that there are some regions where housing prices have fallen more than what might be expected based on national trends, while prices have declined considerably less than expected in others.

Today, we shift gears looking at the relationship between housing price and incomes. The graph below compares median housing prices in 2009 to income per capita levels in 2007 (the most recent figures available).

Housing prices and incomes are closely associated with one another: The correlation coefficient is 0.68 and the R2, 0.46. Metros above the fitted line have housing prices that are higher than their incomes relative to the national trend, while those below the line have housing values that are less than what their incomes would predict relative to the national trend.

In Honolulu, for example, the differential was a whopping $371,777. Almost half of the top 10 regions are in California. In San Jose the differential is $120,134, San Diego ($106,625), Los Angeles ($103,278), and San Francisco ($59,633). The differential was also in the Pacific Northwest – Portland ($74,490) and Seattle ($60,848), as well as Salt Lake City ($77,526) and New York ($93,900).

On the other hand, there are metros where housing prices were significantly less than their incomes would predict based on the national trend. In Bridgeport, CT, for example, housing prices were $151,460 less than what its income level could support based on the national trend. In Cape Coral, FL, the figure was $110,460. This was also true in Rustbelt regions like Akron ($106,692) and Cleveland ($105,130) which had differentials greater than $100,000. There were also considerable differentials in two Texas cities, Houston ($93,586) and Dallas ($58,602). In addition to this, Atlanta ($50,166), Chicago ($30,337), Philadelphia ($18,699), and Washington, D.C. ($17,280) all had housing prices that are less than their incomes would predict based on the national trend. We’ve omitted Detroit because it failed to report housing value data for 2009.

3 Responses to “Housing and the Crisis, Part III”

  1. Brandon Says:

    Interesting series of studies.

    While there is obviously a strong correlation between house prices and income levels, I’d be curious to see foreign investment levels overlaid with this study. Honolulu, for example, sees a lot of interest from Asian buyers.

    To me, this seems like the one variable that’s so difficult to really understand. Sure you can look at the income levels within a particular city, but how do you know if there is a bubble? What is the appropriate price point for Honolulu? Foreign buyers can make such a difference.

  2. | Globizen Property Says:

    [...] Richard Florida and the Creative Class Group have an interesting series of studies on housing and the crisis in the United States. The latest examines house prices vs. income levels for various American cities. [...]

  3. ohwilleke Says:

    There is a fit, but it isn’t too strong. Aside from outlier Honolulu (probably driven by large percentages of non-resident property ownership that plays with the income side of the relationship) and New York (where the slow phase out of rent control is an important factor), the vast majority of the cases fit in something closer to a band than a simple single variable correlation.

    Also, financial centers New York and San Francisco has taken a major per capita income hit and seen corresponding collapses in real estate prices, between 2007 and 2009.

    Eyeballing the data, the location of a data point in the band is pretty much a function of whether an area’s economy is growing (above the line), stable, or declining (below the line), relative to the nation as a whole.

    I’ve seen multiple housing value statistics for Detroit (which are dreadfully low — Detroit proper’s median housing value is $6,000 and the metro area median housing value is $50,000), and the metro area per capita income is about $38,100 (per wikipedia), which would probably corroborate the location in the band to economic growth (decline) corrolation, a point in the general vicinity of the dot for Akron on the scatterplot, but perhaps a little further from the regression line.