Rising interest rates will exacerbate housing affordability problems for the middle class

In thinking about issues like the affordability of housing as a major challenge for middle class families and those even farther down on the income scale I did some quick and dirty research and found these telling numbers, from an organization called 24/7 Wall Street.  In 2016, for example, I looked at the median listing price of houses in the states with the highest listing prices--Hawaii, California, Massachusetts and Colorado--and the four states with the lowest listing prices--West Virginia, Ohio, Oklahoma and Michigan. The average of the top four was $385,000 and just the top two, $404,000.  The bottom four averaged $130,000 and the two lowest averaged $126,300.

Taking just the top two versus bottom two, median listing prices were 3.2 times higher in Hawaii and California than in West Virginia and Ohio combined.  Comparing the groups of four, the Hawaii group was 3.0 times higher than the West Virginia group.  Until we also look at incomes, however, we can't say one group versus another has a greater "housing affordability" issue than another.  Moreover, these numbers only look at ownership housing not rental, so I also looked at homeownership rates for those groups.

The median household income for Hawaii and California combined was $69,000, just 1.5 times median household income at the other end of the spectrum, where it was $46,500 for West Virginia and Ohio.  But median listing prices were 3.2 times higher in the high price housing states.  What this suggests is that either families in the East and Midwest were overpaid relative to housing prices or those in Hawaii and California are not earning enough considering what they being asked to pay for ownership housing.  That is, the affordability of housing is more of an issue in Hawaii and California than in West Virginia and Ohio, which I think is true. Even using the groups of four states the ratio held at just 1.4 times.

Given the high median listing prices of ownership housing versus the median household incomes of the state groupings, with an apparent affordability of housing issue for the states grouped with Hawaii, it was useful to look at the homeownership rates in those states.  High housing cost states, relative to incomes, should show more rental housing and less ownership housing, and it turned out to be true.  Hawaii's homeownership rate was 56.6 percent (43.4 percent rentals) and California's 53.6 percent (46.4 percent rentals), so just over half of housing in those states was homeownership housing, and it could even be less in that some families renting directly from single family homeowners were not counted as renters because there were no records to show them as renters. 

In the lower housing cost states the homeownership rate was 72.3 percent (27.7 percent rentals) in West Virginia and 65.4 percent (34.6 percent rentals) in Ohio, well above those in California and Hawaii.  There are, of course, many many reasons why families might choose to live in any of the four highest median listing price housing markets rather than in the four lowest listing price markets.  At the same time, in a free country families choose where to live and clearly a lot of families choose to live in high housing cost states where earning enough income to afford ownership housing is a huge challenge. Large numbers of people consciously choose to face a housing affordability problem in Hawaii, California, Massachusetts and Colorado rather than live in West Virginia, Ohio, Oklahoma or Michigan. 

I wanted to show these numbers and their implications before writing future issues, where I will examine housing affordability both as a political issue and as another "cause" the middle class not only lives with as a issue for themselves but also as an issue the middle class continually is asked to help address for other struggling families.  Also, recent and prospective increases in interest rates have many implications for middle class America, including but not limited to the impact of rising mortgage interest rates on new borrowers and on borrowers who do not have fixed interest rate mortgages but rather loans on which interest rates can adjust (up or down) as market rates change.  Looks like rate changes for the foreseeable future are all in one direction, upward, so how will that impact the middle class?

I will be unavailable to publish additional issues until late October.