Urban Growth and Housing Affordability: The Conflict

Susan M. WachterRichard B. Worley Professor of Financial Management

The Wharton SchoolCo-Director, Penn Institute for Urban Research

University of Pennsylvania

Shape of the New American City

Penn Institute for Urban Research

October 24-25, 2008

Introduction: Context• Metropolitan spatial structure in the next

half century: population growth and potential large scale policy shifts

• Advantage of cities: clusters that give rise

to economies of scope and scale drive city growth

• Challenge: Tension– THE REINVENTED/NEW AMERICAN CITY – WHO WILL BE ABLE TO AFFORD TO LIVE

IN THE GROWING CITY?

Urban Growth and Housing: Historical Trends• Urban growth trends with focus on

turnaround cities – illustrative of the potential for city

growth – illustrative of the challenge for

affordability

• Urban growth and social inclusion: the tension

• Looking forward: Current crisis impact and future prospects

http://www.census.gov/geo/www/mapGallery/images/2k_night.jpg

Urban Growth and Decline, 1980 & 2000

Growing Declining

ColumbusDallas

HoustonJacksonvilleLos Angeles

MemphisNashvillePhoenix

San AntonioSan Diego

AtlantaBaltimore

BostonBuffaloChicago

CincinnatiCleveland

DenverDetroit

IndianapolisKansas CityMilwaukee

New OrleansNew York

PhiladelphiaPittsburgh

San FranciscoSeattle

St. LouisWash D.C.

Growing Declining

AtlantaBostonChicago

ColumbusDallasDenver

HoustonIndianapolisJacksonvilleKansas CityLos Angeles

MemphisNashvilleNew YorkPhoenix

San AntonioSan Diego

San FranciscoSeattle

Wash D.C.

BaltimoreBuffalo

CincinnatiCleveland

DetroitMilwaukee

New OrleansPhiladelphiaPittsburghSt. Louis

View From 1980 View From 2000s

Turnaround Cities: Why and How?• Reinventing their economic base• Public governance: crime• Push effects: environmental

containment

National Data• Growth of rents and house prices moderate:

1970-2000: Rent growth .7% and home prices 1.2%

annually• Urban rents most recently have grown faster Rent growth .5% in cities and .4% in

suburbs• Urban population increased by 7 million from

1990-2000Population (M) Rent Home Value Cap Rate

1970 72 $ 540 $ 83,000 0.0781980 73 $ 560 $ 105,000 0.0641990 78 $ 660 $ 105,000 0.0752000 85 $ 680 $ 119,000 0.069

All US Cities 1970 - 2000

Note: All dollar values are in 2005 dollars.

Turnaround cities: affordable no more• While prices and rents were relatively

clustered in 1970, by 2000, prices reflected wide disparities in growth outcomes

• Home prices relatively flat in no growth cities

• With growth and anticipation of growth, prices rise

• Prices rise far more than rents• In high priced regions, city prices may

exceed prices in suburbs

1970 rent $400-680, price $53-142k

2006 rent $520-1140, price $93-783k

Capitalization Rates: rents/prices• Cap rates averaged across cities ranged

from .06 to .08, but across cities range from .02 to .10

• Cap rates in 1970 ranged from .05 to .13, in 2000 from .04 to .11

• Low cap rates indicate investors and homeowners expect home prices to appreciate

• High cap rates indicate investors and homeowners expect slowing growth or declines in home prices

• Affordability similarly diverges

1970 1980 1990 2000 2006670,000

694,000

718,000

742,000

766,000

790,000San Francisco Population

Year

Popu

latio

n

1970 1980 1990 2000 20060.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07San Francisco Cap Rate

Year

Cap

Rate

1970 1980 1990 2000 2006550,000

570,000

590,000

610,000

630,000

650,000Boston Population

Year

Popu

latio

n

1970 1980 1990 2000 20060.000.010.020.030.040.050.060.070.080.09

Boston Cap Rate

Year

Cap

Rate

1970 1980 1990 2000 20067,000,000

7,280,000

7,560,000

7,840,000

8,120,000

8,400,000New York Population

Year

Popu

latio

n

1970 1980 1990 2000 20060.00

0.01

0.02

0.03

0.04

0.05

0.06New York Cap Rate

Year

Cap

Rate

Boston

New York

Rent Home Price

Percent Income

$ 1,140

$ 783,000 58.2

Rent Home Price

Percent Income

$ 1,050

$ 420,000 32.9

Rent Home Price

Percent Income

$ 920 $ 482,0000 56.5

San Francisco

San Antonio

1970 1980 1990 2000 2006600,000

740,000

880,000

1,020,000

1,160,000

1,300,000San Antonio Population

Year

Popu

latio

n

1970 1980 1990 2000 20060.000.010.020.030.040.050.060.070.080.090.10

San Antonio Cap Rate

Year

Cap

Rate

Rent Home Price

Percent Income

$ 660 $ 93,000 17.6

1970 1980 1990 2000 2006 2006 2006390,000

412,000

434,000

456,000

478,000

500,000Atlanta Population

Year

Popu

latio

n

1970 1980 1990 2000 2006 2006 20060.000.010.020.030.040.050.060.070.08

Atlanta Cap Rate

Year

Cap

Rate

Rent Home Price

Percent Income

$ 640 $ 154,000 15.9

Atlanta

1970 1980 1990 2000 20061,400,000

1,520,000

1,640,000

1,760,000

1,880,000

2,000,000

Philadelphia Population

Year

Popu

latio

n

1970 1980 1990 2000 20060.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14Philadelphia Cap Rate

Year

Cap

Rate

Rent Home Price

Percent Income

$ 720 $ 112,000 21.4

Philadelphia

1980 Bottoming Turnaround Cities• Boston, Indianapolis, New York, San

Francisco, Seattle

Note: Indexed population calculated by averaging each city’s population relative to it’s 1970 population for each time period.

1970 1980 1990 2000 200675

80

85

90

95

100

105

1980 Turnaround Indexed Population

Year

Inde

xed

Popu

latio

n (%

)

1970 1980 1990 2000 20060.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

1980 Bottoming Turnaround Cap Rate

Year

Cap

Rate

Housing price/urban growth nexus• Consequences of urban growth (and

lack) for housing prices• Reverse causation: Consequences of

high housing prices for slowing growth

• The great separation: constrained v. un-constrained urban areas– e.g. Texas, based on amount of

developable land available– Where population growth does not drive

prices up

States with Growth Management/Land Use Laws

http://www.wsdot.wa.gov/environment/compliance/gma_resource.htm

Projected peak-to-trough house-price decline, %

-20<-10%

No correction

<-20%

-10%<0%

Sources: Fiserv Lending Solutions, Moody's Economy.com, OFHEO

Housing Price Effects on Growth• Housing prices and

affordability increasingly a factor in where people live

• High price cities losing population due to non-affordability

• Affordability important for growth and for social inclusivity

City Population Growth 2000 to 2006

Boston -2.37%

Chicago -5.07%

Kansas City -1.99%

San Francisco -4.21%

Seattle -0.23%

Incomes in Select CitiesCity Per Capita Income Relative to Suburban Per Capita Income

City City Income as a Percentage of Suburban Income (1960)

City Income as Percent of Suburban Income

(2000)

Difference

Detroit 92% 55% -37%Milwaukee 85% 37% -48%Buffalo 89% 69% -48%Cleveland 69% 59% -10%Cincinnati 101% 84% -8%St. Louis 76% 68% -8%Philadelphia 83% 62% -21%Pittsburgh 102% 88% -14%

Chicago 82% 75% -7%Atlanta 114% 103% -11%San Francisco 95% 116% 21%Seattle 118% 124% 6%

• Prices falling more in outlying areas, not result of oil prices rather of credit withdrawal crisis

• After the crisis, prices will return to trajectory, in growing constrained cities

January, 2008 September, 2008March, 2007

Future Outlook

Long View• 100 million more Americans in 30

years: Where will they live?• Recovering, growing, flourishing

cities with potentially stagnant wages

• Housing affordability challenges in America