Entry level house prices in US cities

A few days ago an email turned up from the US think tank, the American Enterprise Institute, touting a new set of data.

Housing markets are inherently local, making them notoriously difficult to analyze due to the lack of reliable data at the local level. A new dataset from the AEI Housing Center, the first in a series of quarterly reports, aims to fill this void by analyzing housing market data for the 60 largest US metropolitan areas, as well as for the nation as a whole. The current dataset looks at housing data from 2018:Q4.

And so I clicked the link.  This was the summary national data

US national housing

US$197000 for an “average entry-level sale price” caught my eye (that is about NZ$292000 at the current market exchange rate, and of course Americans are –  on average – earning more than New Zealanders).  And of course that is a nationwide number, including the fruit of such dreadful housing markets as those in and around San Francisco.

So I started checking out some of the data for some of the cities (metropolitan statistical areas).

Here were the most expensive ones (in USD terms)

San Jose 511000
San Francisco 485000
Los Angeles 427000
San Diego 419000

At current market exchange rates, I guess those might be roughly comparable to prices in Auckland and Wellington.

But here is a chart of a group of cities (non-exhaustive) I found with prices of $NZ300000 or under.

US housing 2

Remember that these aren’t tiny places.  The whole dataset is for the 60 largest metropolitan areas.   Some of these places are smaller than Auckland, but I couldn’t see any smaller than about a million people.   A couple of the places on the chart are among the largest ten US cities.

Now perhaps, like me, you think New Zealand’s exchange rate is materially overvalued.   But even if you thought that a long-term structural fair value exchange rate was more like 0.5 (as distinct from the current market rate of .67) the median of the cities in the chart would still have average entry-level homes (new and existing) selling for not much over NZ$300000.

How do the AEI researchers derive their numbers?

The study tracks housing activity both for the entire market and for entry-level and move-up buyer segments. We only focus on institutionally financed sales (meaning we exclude cash sales or sales with seller financing.) We define entry-level as all sales below the Federal Housing Administration (FHA) 80th percentile price in a metro and quarter. The rational for a dynamic price cut-off at the metro level is that the share of entry-level buyers varies across the country. According to FHA’s Production Report, around 80% of FHA’s purchase loans go to first-time buyers, who mostly compete with other first-time buyers from other agencies for entry-level housing. The 80th percentile price cut-off, therefore, captures this market segment reasonably well. This is confirmed by the data. Across the nation, the entry-level segment consists largely of first-time buyers, while the move-up segment consists mostly of repeat buyers.

That looks plausible.  Perhaps people who know the data better will be able to pick holes in what they’ve done but –  especially given the pervasive role of federal agencies in the US housing finance market – the numbers are unlikely to be off by enough to materially affect the contrast between the government-induced scandal that is the New Zealand housing market.

7 thoughts on “Entry level house prices in US cities

  1. Even in my most contrary mood I can’t defend Auckland’s housing market. Well other than to say it has made me wealthier than I deserve and put a great obstacle in front of my kids.

    There is another way of looking at this data and comparing it to New Zealand. Throughout the world people are moving to cities and specifically a subset of cities where they expect better career options and more interesting lifestyle. A few years ago when Auckland prices were peaking out of curiosity I looked for the cheapest property I could find advertised for sale in NZ. I found a full section with a habitable small property adjacent to a decent fishing river 7km north of Oamaru. It was for sale under $70k. Your data for the US should be re-evaluated removing all cities with declining population; there is no rational market when supply exceeds demand. You will come to much the same conclusion but I expect the differences will not be so dramatic.

    If Auckland house prices continue to decline and end up at some rational level (~40% of peak) there will still be great variation between outlying suburbs of modern but occasionally leaky homes and inner suburbs with minimal transport congestion and high status colleges (parents have learned that college is more about making useful contacts than quality teaching).


    • Yes, I could make the population growth adjustment, but most of these places are growing – some have very strong population growth rates.

      Auckland house prices won’t fall 40% and stay down without serious structural reform of the urban land market. Twyford talks a good talk, but time will tell whether they really make a difference.

      Liked by 1 person

      • I meant 40% of the peak or a 60% drop. So an average 3-bed that used to sell for $1m two years ago would be 400k.
        Given a rational price for land, factory assembly, large scale builders and govt commitment for future building then a new 2 bed terrace house could be under $200k.

        Recently a particular brand of chocolate milk was in high demand – it left supermarket shelves within minutes of being stocked. The market responded with ever growing quantities of that brand and new competitive brands. Housing is not like that. Auckland has plenty of land and with no expertise I suspect there is plenty that is zoned for housing. The problems occur with delays in consenting and building of infrastructure; then those delays impact financing. It shouldn’t be that difficult to fix and the first step is to resolve the urban land market where clearly something is seriously wrong. But there are other problems.

        When I was last in the USA my American cousin pointed to some attractive new houses in a suburb of Las Vegas and told me one of his colleagues had just purchased one marked down by more than 50% so even the USA doesn’t always get it right.


      • What surprises me is that my Huntly rental income on a 4 bedroom has risen from $300 a week to $450 a week just a couple of weeks ago. Rather than house prices falling it looks like rents are rising fast. I would attribute this to landlords getting out of the rental market as this communist Labour/Greens/NZFirst government is treating landlords very badly.


    • If you pick Detroit as an example, the reason is quite clear. A large wealthy city nice upon a time now in decline due to the loss of the US motoring industries. Looks cheap but without sustainable jobs, population is in decline and as a result a poverty stricken city with too many houses that no one wants.


      • Note that the numbers are for entire metropolitan areas not just the original , often small, local authority area at the centre. The difference is very important in Detroit (which has substantial, perfectly respectable, tracts of suburbia in the wider metropolitan area.


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