David Flynn: Housing "Affordability" Not Necessarily a Sign of a Housing Problem

Housing remains a frequent topic of discussion for people in North Dakota. Most of the discussion falls under the heading of “affordability”, a suitably vague term essentially guaranteeing little to no progress on the issue, if it is a problem at all. What is the affordability issue? My suspicion is that people are thinking of something similar to the following graph (click to enlarge):

Median List Price for North Dakota Homes

Median List Price for North Dakota Homes

The upward slope is really quite impressive with the median price going from $150,000 in January of 2012 to over $220,000 in May of 2014. Where people usually get mad at me is when I ask the following: why is this a sign of problems in the market? Do we suggest increases in other asset markets are a sign of problems? Usually not. In fact, normally this is celebrated as a good thing. Back to the first question though. Price changes such as these are not necessarily indicative of market failure. If we believe in markets reaching equilibrium each price point here is an intersection of supply and demand. One, or both, of the curves could be changing and move us to a new price level. For example, demand could increase. Why would it increase? Maybe because income is increasing? (click to enlarge)

North Dakota Real Household Income

North Dakota Real Household Income

There is a significant increase in real household income as well. When income rises individuals typically buy more goods, including houses. So demand could be rising. I am not going to show a graph, but we know the population in North Dakota is increasing as well, bringing in more buyers and likely raising demand too. With this demand increase there has not been an offsetting increase in supply. In part this is due to the fact construction resources are in significant demand and somewhat short supply due to the needs of the oil patch. Here is another graph about the housing market in North Dakota (click to enlarge):

Percent of homes cutting price before sale, ND

Percent of homes cutting price before sale, ND

Recently very few homes needed to cut price in order to make a sale. That is pretty good evidence that, while expensive, the market is not necessarily failing. The market is forcing changes on people. Sorry, but that is one of the consequences of markets. People seem to want only the upsides to market transactions and look to rush in and change the results when anyone experiences a downside to the market. Certainly there are circumstances and outcomes that make intervention something to consider. I have not heard those arguments yet though.

Rob Port is the editor of SayAnythingBlog.com, a columnist for the Forum News Service, and host of the Plain Talk Podcast which you can subscribe to by clicking here.

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