Amazon's HQ2 Search Should Inform Millennial Housing Search
The much hyped Amazon search is over and the winners announced. New York City and Arlington each won half of HQ2. Millennials need to take a page from Amazon’s playbook and conduct their own search for their best place to work and live. Many of the cities overlooked by Amazon deserve a close look by prospective first-time homebuyers (FTBs). These cities offer something that coastal markets currently can’t: affordable entry level homes.
A new study from the AEI Center on Housing Markets and Finance ranked the affordability of 50 large metropolitan areas in the U.S. for FTBs. Specifically, the study calculates the median home price to income ratio by using over 2.7 million FTB loan transactions to obtain actual 2017 home prices and incomes of borrowers.
Across the 50 areas, the affordability ratio was 3.3 in 2017. But this belies important regional differences. The ten most affordable cities for FTBs had an average ratio of 2.6 and were largely in the Midwest and Southwest, while the ten most expensive ones had an average ratio of 4.3 and were all in the West.
Topping the list of most affordable metros for FTBs was Pittsburgh with a ratio of 2.3, followed by Cleveland (2.4), Cincinnati (2.6), St. Louis (2.6), and Columbus (2.7). Rounding out the top 10 were Detroit, Milwaukee, Oklahoma City, Houston, and Indianapolis. At the bottom of the list was San Jose, with a whopping 5.0 FTB affordability ratio, followed by Los Angeles (4.6), San Francisco (4.6), San Diego (4.5), and Denver (4.1). New York and Washington, DC, which received Amazon’s nod, ranked 34th and 37th respectively on FTB affordability.
The primary factor that makes some metros affordable and others not is the cost of land and not the cost to build. According to data from BuildZoom, land costs nearly 8 times more in the least affordable metros than in the most affordable ones, while the average building cost was only 25 percent more expensive in the least affordable metros than in the most affordable ones.
What largely drives this difference in the cost of land is the relative restrictiveness of land use regulations. In its 2018 Housing Affordability Survey, Demographia ranked metro areas as having less or more restrictive land use regulation. Of the most affordable metros, all were ranked “less restrictive.” Of the least affordable metros, all were ranked “more restrictive.”
Millennials aspiring to homeownership have long been told that it is increasingly out of reach. Instead, they should consider the facts:
There is nothing inevitable about high housing costs, they are rather largely self-inflicted. The Southwest has been keeping affordability in check through less restrictive land use controls, which allow for new construction activity to keep pace with population growth. On the other hand, unaffordable places in the West are proving unwilling to change. Earlier this year, California’s SB 827, which would have modestly loosened zoning laws around transit hubs, was voted down in its Senate. It is little wonder that over the last 5 years affordability has remained relatively constant in the most affordable metropolitan areas, while it has worsened in the least affordable ones.
Economic vibrancy does not need to come with high housing cost. Job prospects have been emerging in the most affordable metros. Consider that Pittsburgh is anemerging hub for artificial intelligence, robotics, and biomedical companies, that Cleveland is becoming a leading biomedical, health-care, and technology region, that Columbus is becoming the nation’s startup capital, or that the future of mobilitywith self-driving ride-hailing cars is being made in Detroit. Or that six of the ten most affordable metros also made Glassdoor’s top 10 cities for jobs in 2018 list.
When it comes to the ease of buying your first home, it’s not how much you make, but where you buy. While FTBs in both Houston and Portland had similar median incomes in 2017, buyers in Portland paid 52 percent more than in Houston. On a price-per-square-foot basis, the median FTB in Portland paid twice as much ($207 per square foot) as the median FTB in Houston ($100).
Millennials, just like Amazon, should consider the facts and then weigh their options. Many, may find the answer to purchasing an affordable home may simply lie in long-standing American virtues: opportunity and mobility.