Housing in the Washington, DC area is undoubtedly expensive, but just how far out of reach is home ownership for current renters? A new measurement from the Urban Institute looks at the portion of renters who can afford mortgages, and found that despite high housing costs, many renters have enough income to buy.
Affordability depends on how we measure it
Many analyses of affordability compare the median amount that renters pay versus the median income in a region. This measurement can miss a big part of the picture however, since the median only shows how the 50th percentile of people are doing.
This can be problematic in cities, since the range of rents and incomes varies widely. Accordingly, Urban Institute researchers Laurie Goodman and Jun Zhu tried to look at rent and income in a different way to describe the situation better.
In their new analysis, the Urban Institute compares house payments and incomes across metropolitan areas, and measures the likelihood that current renters could afford to pay for a house.
That likelihood is based off of the chance that a renter falls within a specific income range, and the probability that there are house listings in their metropolitan area within their spending range. The Urban Institute then uses a formula to find the probability that the renter’s income and house mortgages fall within the same range. This metric is called the House Affordability Renters Index, or HARI.
In other words, the goal of the HARI is to see how many current renters could afford to own instead.
More Washington-area renters can afford mortgages than you’d think
The study results paint a brighter picture than many other analyses of housing affordability in our region. Among the 20 metropolitan areas that the Urban Institute examines, the Washington region has the third-highest portion of local renters that can enter the housing market. Phoenix and Atlanta respectively rank first and second on the list, while San Diego, Los Angeles, and New York rank as the worst for renters entering the housing market.
This certainly isn't because housing is less expensive in the Washington region. It's obviously not. More likely, renters in this region have considerably higher than usual incomes, giving many the opportunity to buy even despite high costs.
In the case of the Washington region, nearly one in three current residents can afford to enter the housing market. This is about twice the local HARI rate of the other metropolitan areas studied.
Interestingly enough, more renters can afford mortgages now than ten years ago. In the Washington region, the local HARI index increased steadily up until 2009, and then remained stable through 2016. HARI trends in a number of other major metropolitan areas was similar.
The Urban Institute also looks at a ‘national’ HARI to measure how affordable the housing market for an individual metropolitan area is for average renters around the country. In this measurement, expensive areas like Washington do worse — although local renters are relatively likely to be able to afford to buy a house, renters from other areas probably could not if they moved here.
The HARI is certainly not a perfect measure of affordability. The first drawback is that focusing on existing renters in a region screens out people who currently don't live there due to high rents. Secondly, HARI does not account for down payments, which are often the largest hurdle for first-time home buyers. Lastly, the analysis does not take location within a metropolitan area into account, meaning a renter in DC may have to go to a distant suburb to buy.
What do you think of this measurement?