Commercial Real Estate Mastery: Episode 41
Understanding The Housing Affordability Map
The national affordable housing crisis is not as universal as people think. In this Commercial Real Estate Mastery podcast we’re going to review what can be learned from the U.S. housing affordability map and the opportunities it suggests.
Episode 41: Understanding The Housing Affordability Map Transcript
The US government is notorious for gaslighting information. You can take stats and you can turn those to try and eliminate whatever it is you're trying to support, whatever concept it may be. And in the United States right now, we have an affordable housing shortage, or at least we do so on a macro scale. But the big question is what happens when you distill it down, when you drill down to more of a micro? Well, the underlying things to be learned from that affordable housing map are important. This is Frank Rolfe with the Commercial Real Estate Mastery podcast. We're gonna talk all about unpacking the US affordable housing map, looking at what it really means and where the opportunities are. Let's first start off by saying, yes, it is true in most of America, on average, we do have a shortage of affordable housing. That is a fact. We need more affordable housing. But then you start looking at the states as far as what percentage of their housing is in fact unaffordable. And you derive what is unaffordable in America based on what percent of income is required to buy or rent there.
And when you look at the map, you'll see that there are a certain congregation of states where it requires at least 35% of your income to pay for housing. And these are the states that obviously have the clearest need for affordable housing. Those states are California, Nevada, Oregon, New York, Massachusetts, Connecticut, and Florida. If you live in those states, on average, you are having to spend about 35% of your income on housing. And that's higher than what the US government says a healthy number would be. US government has always said the healthy number is about a third of your income. So in those states, it's running more than that. And then you have another group of states which is running right at what the US claims is the correct percentage of income towards housing. And those states are Washington, Arizona, Colorado, Texas, Louisiana, Illinois, Vermont, Hawaii, and Georgia.
So if you live in those states, then you are spending right at what the government says you should be spending on your housing, which is about 30% of your income. But then you have the list of states that are down to 25%. 25% is far lower than what the US government says you should be spending on housing. And yet that list is enormous. Those states include Montana, Idaho, Wyoming, Utah, South Dakota, Nebraska, Kansas, Oklahoma, Minnesota, Michigan, Wisconsin, Missouri, Arkansas, Mississippi, Alabama, South Carolina, North Carolina, Virginia, Pennsylvania, Ohio, Indiana, and Maryland. That's a lot of states where it's actually not an affordability crisis because you're spending less on average on housing than even the government says you're supposed to. And then you have another grouping of states, not many of them, where it's way low. On average, only 20% of income goes to housing. Those states are North Dakota, Iowa, and West Virginia. And you look at the map of those states and who's spending what on housing, you see that by far the majority of America, as far as states go, are cheap. They're running between 20 and 25% of income.
So the first question you'd have is, alright, then why do we think we've got this big affordable housing problem? It's because from a population perspective, when you throw California and Florida into those numbers at 35% of income, it skews them hugely, not even including New York. So part of the problem is it's certain states that have huge affordable housing issues. But when we add them all together and divide through, it makes our US average look out of sorts, but not based on the reality of how many states don't have the affordable housing crisis that we all think they do, because we always talk on a macro level.
So then, what else can we learn from looking at that map? Well, number one, the blue states, the Democratic states, those areas have the highest percent of rent. If you look just on the first list, California is blue and New York is blue, Massachusetts is blue, Connecticut is blue. But it's not all the way across. Right? Florida is a red state for sure. Nevada is mostly a red state. So you can't just say, well, it's only the blue states that have the affordable housing crisis. That's not necessarily true. It also may be, if you flip it around, those are the states where you'd have greater Democratic support because those people are the most worried about their housing. But it's not just a blue versus red phenomenon. In all of those lists I just gave you, it's about an equal spread between blue and red.
Now, when you look over in Europe, what do they spend on housing? Well, England averages between 36 and 63% of income spent on housing. So then you must wonder for a moment, now wait a minute, is it the formula that's wrong? When we talk about affordable housing in the US, we're talking about issues where the average cost of your income for your housing exceeds that third, that 33% the government set. But is the number the government set even accurate? Because across the ocean, they're spending twice that amount on housing. I don't know the answer to that. People have written lots of articles saying eventually one day housing will be running 50% of income. But is that even supportable? If you ran 50% of income on housing, would you have money left over for things like health insurance and automobiles? I don't really know that either.
So when you look at the map and you start pondering life, looking at the stats that the government produces, you always just end up with more questions than you have answers. But there are some observations from that. If you look at the three states that are only at 20% housing cost, North Dakota, Iowa, and West Virginia, those would probably be good states to invest in housing because we know that they have more potential to raise the rents and yet have people afford them. You could virtually double the rents and still be nearly within the confines of what America views as being reasonably affordable housing. It also tends to reinforce the concept that in those highest states, California, Nevada, Oregon, New York, Massachusetts, Connecticut, and Florida, you may be seeing people migrate out of them in search of more affordable housing, which is in fact true. So the housing map on the high end probably will lead to more population movement. The states on the low end will probably lead to more population and housing investment. Things typically try and equalize themselves, right? They try to come out to a norm. But to get our nation in a norm in housing requires some states to go down and some states to go up. This is Frank Rolfe with the Commercial Real Estate Mastery podcast. Hope you enjoyed this. Talk to you again soon.
