Here’s the headline: Real estate prices just passed the line for affordability. This is news. When a market passes the point where average consumers can buy, the market is headed into a bubble. Yet RIS, the source of the info, does not conclude that the market is about to correct, yet.
First, a definition: affordability — as measured here — means that someone earning median income could buy a median priced property by spending no more than 36.5 percent of their monthly wage on housing.
Next, a reality check. This study says that median income is $74,494 and median property cost is $490,321 for Cambridge and the surrounding area. What’s wrong with this picture? First, the area is not defined in this bulletin. I am suspecting that it is the Boston MSA (metropolitan statistical area). That area goes all the way to Quincy.
And last, defining the chart terms: The vertical axis is the percentage of median income needed to purchase a median single family property. The horizontal axis is time.
Things to note:
The headline: “Home Affordability in Cambridge & Surrounding Area Hits 36.5% This Week” does not entirely match the chart, since affordability has been bouncing around this point for about a year.
- The chart predicts that prices are set to jump significantly over this threshold in the next few years, yet no information is given about why this may be so.
- At the bottom of the linked page there is a “risk-o-meter” set at moderate. Why is that? No information.
- Look at the bubble that started in the late 1990s and popped in 2008. When people speak of bubbles, they are talking about periods of time when housing prices are remain not affordable.
Here’s the chart I am talking about: Chart
I am a real estate broker, not an economist. I don’t study these numbers for a living. Therefore, I do not have a basis for knowing what information informs their prediction. I cannot say if it is true of untrue.
What I know to be untrue:
Housing prices in the immediate Cambridge area have been unaffordable, by this definition, long before this year. The median price for a house in Cambridge — for closed sales 2017– is $1,570,000. For a condo, median price was $750,000. Median income in Cambridge is $79,416. (source)
Because of this, our clients are buying in Cambridge, but they are also moving beyond The Republic for more affordable properties.
I wrote about affordability, in terms of rentals, on my personal blog. To me, housing affordability is an economic justice issue.