My apologies to Mark Twain. There has been a lot of comment today about the dreadful numbers that come out with each affordability index report and I would like to take the opportunity to play devil's advocate. Sometimes, when I look at a new report or statistical anylysis, I run the report's conclusion through my "common sense meter" before I even begin to read the data. The same way they used to teach us in math class: guestimate the answer so you can readily see if your calculations are severly flawed when you are finished. In the case of housing affordability here in Southern California, the reality seems to differ from the reports. We can't build enough homes to satisfy the demand. The CAR leadership council recently released these projections: by 2008-2010 California is expected to be 15,000,000 homes short of demand! In an earlier post I reported that The US Census bureau projects massive influxes of people to the sun belt and California will remain the most populous state by a landslide. It is difficult to see how this continues to happen when only 1% - 24% (depending on the report you read) can afford to live here.
More probable, the reports themselves are flawed. Most of these studies are done using very outdated lender paradigms (e.g. housing can not exceed 28% of gross income) which will certainly skew the results as well as the free market. After all, if a buyer is willing to pass up a new car or eating out in order to pay 50% of their gross income to live in San Diego, should we be judging that? Many people would make sacrifices to live someplace they find especially appealing, whether it be the weather of San Diego or the historic roots of Boston. How about the amazing arts & culture of New York City? Many people give up their cars altogether to live in Manhattan - another area with a terrible affordability index.
I am not, by the way, advocating the use of the many exotic loans out there that allow people on wieners and beans income to buy champange and caviar homes. I have never in over twenty years put a client into a "neg-am" for ethical reasons alone. And I am not discounting the fact that an affordability gap exists in many major cities as a whole; I am only discounting the severity of the problem. A fluid and open market place will hurt some of the people some of the time. But in the end it provides the most good to the most people by virtue of its self-correcting mechanism. If specific areas were truly unaffordable, people would stop buying homes there and prices would stablize or come down. On the other hand, if the demand far outstrips the supply... you may incur many problems, but a lack of affordability, by definition, is not one of them.