The Big Long? A Deep Dive on U.S. Housing (Part 5) — Part 5 – Affordability

Theme and Background

This chapter focuses on the root causes of supply-demand imbalance in the U.S. housing market and its impact on affordability. The report argues that rapid home price growth since 2020 is not speculation-driven, but rather the result of persistently low housing starts after 2009 combined with accumulated demand from household formation. The author emphasizes that using nationwide median income versus median home price to measure affordability has serious flaws, and analyzes how affordability changes across metropolitan areas under different mortgage rate levels.

Core Thesis

The author's central argument is that current home price increases are the product of basic economic principles (supply-demand imbalance) rather than a speculative bubble, thus making the market resilient. Counterintuitive conclusions include:

• Comparing the national median income (approximately $67,500) to the median home price is a misleading metric because the median homebuyer earns over $100,000, far above the national median household income.
• Even if mortgage rates rise to 5.5%, most popular cities (e.g., Atlanta, Charlotte, Phoenix) remain at healthy affordability levels (monthly payment as a share of income ranging from 20% to 26%), and this will not trigger a market collapse.
• The cost difference between buying and renting is not extreme in most cities. Spending an additional 2% to 6% of income can yield non-monetary benefits such as more space, a yard, and better school districts.

Key Arguments and Data

1. Historical Roots of Supply-Demand Imbalance:

• The housing vacancy rate peaked at nearly 3% (approximately 4.2 million units) in 2009 and has now fallen to a historic low of 0.8%.
• After 2009, new home starts remained persistently low, but household formation (marriage, childbirth, moving) never stopped, leading to inventory absorption and then a shortage.

2. Revised Affordability Metrics:

• The national median household income is about $67,500, but in 2021 the median homebuyer income exceeded $100,000, and 76% of homebuyers earned over $65,000.
• Measuring homebuying costs (monthly payment + taxes + insurance as a share of income) at the 75th percentile income at the MSA level explains approximately 45% of the variation in homeownership rates (R² = 0.45).

3. Buying vs. Renting Cost Comparison (selected cities):

City	Additional Income Share Spent on Buying vs. Renting
Austin, San Jose, Salt Lake City	12%-15% (buying is more expensive)

Cleveland, Memphis, Miami, Pittsburgh	Buying is cheaper
Atlanta, Richmond, Charlotte, Phoenix, Raleigh	2%-6% (buying is slightly more expensive)

4. Interest Rate Sensitivity Analysis (measured at the 75th percentile income, with 30% as the "unaffordable" threshold):

Mortgage Rate	Number of Affected Cities (out of the top 56 largest cities)	Average Monthly Payment-to-Income Ratio in Popular Cities

5.5%	8 cities (5 in California, New York, Miami, Honolulu)	22%
6.5%	Add Sacramento, Salt Lake City, Austin, Denver, Boston, Las Vegas	25%
7.5%	Nearly 40% (22 cities), including Phoenix, Portland, Seattle, San Antonio, Nashville	27%

• The author believes a 5.5% rate will not shake the market, while a 7.5% rate could push some cities above 35% (e.g., San Diego, Riverside, Honolulu, New York, San Jose), but this may accelerate population outflow to lower-cost areas rather than trigger a full-blown collapse.

Companies/Assets Involved

This chapter does not mention specific listed companies or assets; it primarily analyzes the macro housing market. However, implied investment directions include:

• Bullish: Housing-related assets in popular cities with net population inflows (e.g., Atlanta, Charlotte, Phoenix, Raleigh, Tampa), given their relatively healthy affordability.
• Bearish: Housing markets in high-cost cities (e.g., Los Angeles, San Francisco, New York), though the author notes that even in Los Angeles, where monthly payments exceed 40% of income, home prices have not collapsed, suggesting limited downside risk.

Investment Implications

• Avoid using a simple nationwide comparison of median income to median home price; instead, focus on the relationship between the 75th percentile income at the MSA level and local home prices to assess affordability more accurately.
• Monitor population migration trends: Higher interest rates may accelerate outflows from high-cost cities (e.g., California, New York) toward lower-cost cities (e.g., Texas, Florida, Arizona), where demand resilience is stronger.
• Interest rate sensitivity varies: At a 5.5% rate, most markets are healthy; a 7.5% rate may trigger localized adjustments rather than a systemic crisis. Investors should focus on specific cities rather than national indicators.
• Buying vs. renting costs: In most popular cities, buying costs 2% to 6% more income than renting. Considering the benefits of locking in fixed costs (insulation from rent increases) and improved living quality, this premium is reasonable and supports homebuying demand.

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Theme and Background

This chapter focuses on how differences in housing affordability across US cities drive population migration and how the housing supply side responds to demand. The report argues that the current housing affordability problem stems from a supply-demand imbalance, not speculative activity, and that builders are increasing supply in cities with strong population inflows and job growth, which is expected to ease the pace of home price increases.

Core Argument

The author’s central thesis is: The housing affordability problem can only be solved by increasing supply, and builders are prioritizing new home construction in cities with net population inflows, job growth, and a concentrated demographic of home-buying age. The report emphasizes that cross-city migration is key to understanding housing market dynamics—many buyers moving from high-cost to low-cost cities save more than 10% of their income. A counterintuitive observation: despite affordability concerns, the most popular cities (e.g., Phoenix, Dallas, San Antonio) are precisely the areas with the fastest supply growth, which will ease price pressures in the coming years.

Key Arguments and Data

1. Savings from Cross-City Migration: The report compares the top 10 population-inflow cities and their primary source cities from June 2020 to July 2021. The average housing cost (median home price as a percentage of 75th percentile income) in out-migration cities was 33%, compared to only 22% in in-migration cities, with migrants saving more than 10% of income on average. Specific examples:

• Moving from Los Angeles to Dallas, Las Vegas, or Phoenix saves more than 20% of income.
• Moving from San Francisco to Sacramento, or from Austin to San Antonio (both short-distance intrastate moves), yields significant savings: Austin’s income-to-median-price ratio is 29%, while San Antonio’s is only 17%.

2. Cross-City Search Data: According to Redfin data, 37% of people searching for homes in Phoenix do not live in the city, with 23% from Los Angeles; 50% of searches in Tampa come from outside; 45% in Charleston; 44% in Las Vegas; and over 66% of searches in Asheville, North Port, and Cape Coral come from elsewhere.

3. Determinants of Builder Location Choices: Through regression analysis, the report finds that labor force growth and domestic migration together explain 70% of the variation in new home permits across MSAs. The share of population aged 35–49 is also a significant factor. Combining these four factors (net migration, job growth, population age, and affordability) explains 80% of the permit variation.

4. Affordability Range: The affordability metric (median home price as a percentage of 75th percentile income) for MSAs preferred by builders must fall between 17% and 30% (i.e., within one standard deviation). Cities outside this range see diminished appeal.

5. Current Supply Conditions: Despite ongoing supply chain issues, there are currently over 800,000 single-family homes under construction (source: FRED), providing a visible pipeline of new supply to help alleviate the supply-demand imbalance.

Comparison Data Table:

City Pair	Out-migration City Cost (% of 75th income)	In-migration City Cost (% of 75th income)	Savings
Los Angeles → Dallas	33%	22%	>20%
Los Angeles → Las Vegas	33%	22%	>20%
Los Angeles → Phoenix	33%	22%	>20%
Austin → San Antonio	29%	17%	12%

Companies/Assets Involved

The report does not directly name specific listed companies but indirectly points to US public home builders. It notes that builders generally cite Phoenix, Dallas, San Antonio, Raleigh, and Las Vegas as key markets. These cities rank highly in the “most desirable” quadrant for builder location choices.

Investment Implications

• Bullish on builder supply growth in population-inflow cities: The report suggests that the most popular cities (e.g., Phoenix, Dallas, San Antonio) will see the largest increases in new home supply, which should help moderate home price appreciation. Investors should focus on builders with significant land holdings and projects under construction in these markets.
• Beware of sustained outflows from high-cost cities: Cities like Los Angeles and San Francisco continue to lose population due to poor affordability, potentially dampening local housing demand. Investors need to assess the potential negative impact of these markets on builders and REITs.
• Monitor mortgage rate thresholds: The report notes that as long as mortgage rates remain below 7.5%, these popular cities can maintain affordability. If rates breach this level, demand may be suppressed, affecting builder orders.