Midwest Housing Markets
In the first four months of 2007, U.S. home prices declined slowly but steadily, dropping 1.4 percent according to the Case-Shiller Index of Home Prices. Cleveland, the only Fourth District city included in the index, fell slightly more than the composite index over the same period (1.8 percent). The index measures the change in single-family house prices in 20 large U.S. cities, holding the quality of homes constant.
Between 2000 and 2006, the composite index doubled in value, though Midwest housing markets experienced considerably less price appreciation than those on the coasts. Cleveland’s and Detroit’s index rose only about 20 percent; and although price appreciation in Chicago was considerably stronger, it still lagged the growth of the composite index by a substantial margin. The index’s top gainers over this period were Los Angeles and Miami, where price appreciation exceeded 170 percent. Moreover, Midwestern cities like Cleveland and Detroit started with relatively low house prices, making the difference in absolute price appreciation between coastal and Midwestern markets even greater.
That said, there is a positive side to a more modestly priced housing market: Homeownership rates in Fourth District cities are generally high. In Pittsburgh and Cleveland, home ownership rates exceed 70 percent. In contrast, the rate of home ownership in expensive cities such as New York, Los Angeles, and San Francisco has reached only 54 percent, 54 percent, and 59 percent, respectively—well below the rates observed in the Fourth District and other Midwestern markets.
An alternative view of housing affordability across cities is provided by the Housing Opportunity Index of the National Association of Home Builders (NAHB). The index measures the percentage of homes sold in an area that a family earning the median income could afford using traditional mortgage application requirements. To arrive at their estimates of affordability, the NAHB assumes that a family can spend up to 28 percent of its income to finance a 30-year mortgage at market interest rates (adjustments for property taxes and property insurance are included). In Cleveland, the index averaged 78.0 for 2006, indicating that a family earning the median income ($60,700) could afford to buy 78.0 percent of the homes that had been sold in the area. Alternatively, in San Diego—an example of a high-price, high-appreciation coastal city—the index is 4.9, so that a family with that city’s median income ($69,400) could only afford to buy 4.9 percent of the homes that had been sold in the area. The indices have also been moving in opposite directions over the past 6 years. Cleveland’s market has become somewhat more affordable for homebuyers, while San Diego’s has clearly become less so.