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Home ownership has long been central to the American dream. But when a city’s housing prices curve upward while the income of its residents doesn’t come close to that trajectory, a phenomenon called “outflow” occurs. It’s defined by the number of people leaving an area exceeding the number arriving.
In September 2019, The New York Times reported on Denver’s hot housing market cooling due to a mismatch between growth of home prices and income. The Times cited a report by national real estate broker Redfin, which stated that among viewers of their site, more people were looking to leave than to relocate to Denver, similar to Seattle and San Francisco.
Flowing with the Outflow
Outflow is a problem that can lead to employee shortages, particularly among lower and middle income workers who staff construction sites, restaurants, medical clinics, schools and a broad array of service industries.
The Times offered the example of a Denver teacher who earns $50,000 but shares an apartment with two other professionals because she can’t afford to buy a home. So, she is considering moving to Texas for a higher paying job and a less expensive home.
Calculating Affordability
Real estate agents sometimes say to multiply annual income times 2.6 years to learn the home price you can afford. But they are basing this figure on an old estimate of the home price-to-income ratio, a formula in which the national median home price is divided by the national median income.
At 2.6 years of income, the teacher in the Times example would qualify for a home costing $130,000. However, Denver’s price-to-income ratio far exceeds both 2.6 and the new national estimate of 3.6 cited by Clever, an online real estate resource.
Dividing Denver’s current median home price of $409,900 by its median income of $65,244, you get a price-to-income multiplier of 6.28 years. Multiply a salary of $50,000 by that number, and you see that a mortgage company might be willing to make a loan for a house costing $314,000. But that’s far below Denver’s median home price.
Analyzing the American Dream
In July 2019, Clever published a report titled “A Timeline of Affordability: How Have Home Prices and Household Incomes Changed Since 1960?” The report is packed with graphs and statistics demonstrating the flatness of income nationwide relative to growth of home prices. It notes that median home prices nationwide have quadrupled in contrast with household income in the past five decades.
However, optimism is a powerful aspect of the American Dream. Historical data from the U.S. Census Bureau shows that the nation’s homeownership rate — the percentage of homes lived in by owners — has gone up almost steadily since 1900 when it was 46.5%. As of the end of September 2019, the figure was 64.8%. The housing economy continues rising from its slide, which began a few years before the Great Recession (2007-2009) — an event that lingered far beyond its official end date for the construction industry.
Despite about a 4% slide from 2004 to 2016, the homeownership rate generally doesn't have huge ups and downs. Eventually, it keeps on keeping upward. But to keep it rising, America needs to improve the home price-to-income ratio, increase construction and help hard workers like teachers find places to call home sweet home. Maybe Denver can lead the way and put a lid on the outflow.
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