Special Studies, June 29, 2007

By Paul Emrath and Helen Fei Liu.

 

Table of Contents
Please note: The data below is available only to HousingEconomics.com subscribers.
Tables 1-3
Appendix
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New home prices vary substantially from place to place but there is no national systematic measurement of new home prices. The research presented here provides an innovative and unique method for estimating newly-built home prices for state and metropolitan areas. This article uses recently released data from the Census Bureau’s American Community Survey (ACS), which is designed to replicate the long form decennial Census questionnaire on an annual basis.

 

At NAHB’s request, the Census Bureau has begun to tabulate the ACS question on house value by age of the structure. Because the ACS is one of few data sources that covers the U.S. in a comprehensive fashion down to a fine level of geography, this means it now provides information about the value of homes that have been built recently down to the level of individual states and metropolitan areas. The ACS data are a couple of years old when finally processed and released, and the margins of error are high in some of the smaller metropolitan areas, so NAHB uses data from other sources (permit value, values of homes that are slightly older in the ACS, NAHB’s housing forecast) to see if the ACS-derived estimates appear reasonable and bring them forward to 2007.

 

The results are estimated median prices of owner-occupied homes built in 2007 that range from $135,000 in Mississippi to $544,000 in Hawaii; and from $86,000 in Charleston West Virginia to $849,000 in San Jose-Sunnyvale-Santa Clara California.

 

Before the collection and availability of the ACS data, NAHB’s Housing Policy Department estimated median new home prices from a combination of existing home prices from the National Association of REALTORS®, existing home values from the 2000 Census adjusted for inflation using Office of Federal Housing Enterprise Oversight (OFHEO) repeat sales indices, and regional ratios of new to existing home prices, where the regional new home prices were taken from the Census Bureau’s Survey of Construction. [1]

 

With this new data, it’s time to revisit estimating new home prices. Although it was possible to calculate some median and average new home prices from previous years of ACS and Census data, the level of geographic detail available was limited. The new summary files generated by the Census Bureau from the 2005 ACS provide median and aggregate new home values for all geographic areas with populations of 65,000 or more. The aggregate numbers can be used to compute average new home values. The median and averages computed from the ACS are based on all recently built owner-occupied homes, including any multifamily condominiums. The values recorded in the ACS are owners’ estimates of the values of their homes. Although not perfectly accurate, several studies suggest that owners’ estimates provide reasonably good approximations. [2]

 

To bring these numbers forward from 2005 to 2006, changes in value per single family building permit are used.  In general, permit value is quite different from the final sale price of a home, but if the relationship doesn’t change drastically over a short period of time, the change in value per permit will capture not only general inflation but also changes in the nature of the homes being built. The numbers are brought forward to 2007 using a combination of previous history and NAHB’s forecast for the national OFHEO price index.

 

There are several checks imposed at each stage of the process to screen out implausible results. The details are shown in the attached appendix. Median and average price estimates by metro area and state are presented in the tables. In the following sections, however, we discuss only median price estimates because averages are often affected by extreme values. For example, homes at the top end are very expensive compared to the majority of new homes, which will pull the average above the median. Readers should also keep in mind that the new home prices reported here are estimates and subject to possible error from several different sources.

 

The median new home price estimates for 2007 vary by as much as 300 percent difference from the highest to lowest across states, as shown in Figure 1. Hawaii has the highest median new home price ($543,512), followed by California ($518,836). It is not surprising to see high median new home prices for these two states, which have been quite well-known for having expensive housing. The states along the east coast still show quite high estimated median new home prices, such as New Jersey ($469,293), Virginia ($463,566) and Maryland ($435,528). In fact, these five states have the highest median price estimates.

 

 

 

States in the South region have relatively low estimated median new home prices. Louisiana, Arkansas and Mississippi fall into the lowest median price bracket (Figure 1). Actually, the five states with lowest median new home prices are West Virginia ($164,661), Alabama ($154,433), Louisiana ($147,310), Arkansas ($137,516) and Mississippi ($135,260).

 

The estimated median new home prices shown by state in Figure 1 are also contained in Table 1. In addition to the estimated median prices, the table shows where each state (including the District of Columbia) ranks from 1 (highest median price) to 51 (lowest). The table shows averages as well as medians.  In contexts like this, medians are often cited because they are less sensitive to extremely high values and possible error in some of the observations.

 

Estimated median new home prices for 2007 vary by a factor of 10 across metro areas—from $849,022 in San Jose-Sunnyvale-Santa Clara, CA MSA to $85,804 in Charleston, WV MSA (See Table 2). Such wide variation even exists within the boundary of a single state. For example, the Hartford-West Hartford-East Hartford, CT MSA has a median new home price estimate of $268,682, ranking 105th among the 354 metro areas studied; while the median new home price estimate equals $837,559 for Bridgeport-Stamford-Norwalk, CT MSA (ranking 2nd out of 354 metro areas). In contrast, the median price variation in Ohio is mild—ranging from $272,700 in Akron, OH MSA to $174,103 in Springfield, OH MSA.

 

More metro areas in California have high median new home price estimates than in other states. For example, San Jose-Sunnyvale-Santa Clara MSA, Salinas MSA, and San Francisco-Oakland-Fremont MSA have median new home price estimates over $667,000; while San Luis Obispo-Paso Robles MSA, Los Angeles-Long Beach-Santa Ana MSA, and San Diego-Carlsbad-San Marcos MSA have median new home price estimates over $568,000.

 

Metro areas, by definition, have relatively high population density. A large share of the population, approximately 83 percent out of the total U.S. population, lives in the 354 metro areas analyzed in this article (Table 3). Among the categories shown in the table, the largest share (33 percent) lives in the metro areas with median new home price between $200,000 and $300,000, followed by the metro areas with median price between $400,000 and $500,000 (16 percent). About 11 percent of the population lives in metro areas where the median new home price is over $500,000.

 

The estimated new home prices presented in this article are important indication of the way housing markets differ across states and metro areas. By themselves, however, they don’t indicate differences in housing affordability. Affordability in a particular market depends on a number of factors, such as household income, in addition to house prices.

 

Consider the metro areas of Indianapolis in Indiana and Lakeland in Florida. Table 1 shows that the average new house price is close to $220,000 in both areas. Yet HUD’s 2007 estimate of median family income is $63,800 for Indianapolis and only $46,900 in Lakeland [3]. Clearly, the ability of the median family to afford the average house is quite different in these two cases.

 

One measure that takes both house prices and income into account is NAHB’s Wells Fargo Housing Opportunity Index (HOI). The HOI, defined as the share of homes sold in that area that would have been affordable to a family earning the local median income based on standard mortgage underwriting criteria, is produced for roughly 200 metro areas and posted on NAHB’s website every quarter.

 

The HOI is based on a single, representative income and the entire distribution of house prices in an area. In general, higher HOI represents more affordable housing. Continuing the above example, we find that Indianapolis has an HOI of 89, ranking the 5th most affordable metro area among the 202 areas; while the HOI of Lakeland is only 38.6 with a rank of 121.

 

Another way to examine housing affordability is through a “priced-out” analysis, which shows how many households in an area can afford a particular home (again based on standard underwriting criteria) both before and after its price increases. In contrast to the HOI, a priced-out analysis is based on a representative house price and the entire distribution of incomes in an area. Priced out analyses based on all of the median new home prices presented here will be the subject of next month’s special study in Housing Economics.