Mainsail Capital Housing Affordability and Ownership 2016
10 years from the Housing Peak
One statistic that we like at Mainsail Capital is the Wells Fargo Housing Opportunity Index (HOI), also known as the “affordability” index. This index is published by the National Association of Home Builders (NAHB) and shows the percentage of homes that are affordable to a metro region’s median income. I observed it very keenly during the housing crash of 2007 to 2010, compiling monthly data and watching affordability rise. But the HOI only tells part of the story. The US Census puts out a quarterly home Ownership report, which simply states the percent of homes that are owned vs. rented both nationally and in major metro areas.
Comparing these two percentages gives a more interesting story. For example, say, 60% households in a metro area own a home while 65% can afford to own a home, then we can clearly see that ownership and “affordability” or the “ability to own” are somewhat in line. We at Mainsail Capital have taken this further, by combining the two into one index that shows the percentage differential between Affordability and Ownership. We call it the “Affordability and Ownership Ratio” or “A/O Ratio”. The table below shows in the A/O column: <1 mean less people can afford homes then own homes and >1, more people can afford homes than actually own. This combined data gives a great history lesson:
Historically, the HOI index is usually lower than the percentage of home ownership, meaning that the number of people who can afford a home is less than the percent of people who actually own a home. For example, in 2000 the HOI was 59.7% while home ownership was 64.2%. The reason for this tolerance is because current homeowners can “rest” on their investment at a relatively fixed cost to income while their home value rises. Even so, the HOI levels in 2005, 2006 and 2007 were clearly out of sync with up to 31% negative A&O ratio. In 2005, only 41% of households were able to afford a home while 69% owned a home (an all time high in home ownership). During the correction from 2008 to 2012 this trend reversed itself with affordability at an all time high.
So where are we today? The national HOI average at the end of Q2 2016 was at 62% and home ownership is also at 62%, so we are at parity-‐ Not too hot and not too cold. With so many people locked in at historically low rates, an even wider spread between HOI and Home ownership might be tolerable, but any rise in mortgage rates would clearly affect the HOI and thus slow new home sales. The following chart shows the A&O Ratio for the same 20 Metro Areas as the Case Shiller Index and compares 2005 against 2016.
Drilling down further, the following table shows selected Florida markets. Note that we could not get data on all the metro areas we wanted, because of limited data on the Ownership.
Notice Miami has a HOI 39% today compared to 11.6% with a huge -‐82% A&O Ratio in 2006. Miami tends to have low affordability because a lot of the housing market there is supported by imported capital from South America or second homeowners, as opposed to local wage earners. Still 39% in 2016 (Q2) is 7.4% lower than 46.41% for 2015 and so seems a little over bought, while the rest of Florida is more or less in line, if not affordable.
You will notice from the data that home ownership has been declining in recent years. In fact, it was pre 1990 when the country last saw a 63% level of ownership. There has been a lot written about changing attitudes in home ownership and the new “rental” economy, resulting in a long-‐term decline in ownership. We think that as the economy continues to recover and Millennials age and form families, this hypothesis will prove a false-‐positive and ownership will stabilize around 64%, which is the long term average.
We will post the A&O quarterly, but you can easily create your own by getting the HOI index from NAHB (National Association on Home Builders) and the Ownership from the US Census site.
Mainsail Capital ‐ October 2016