Home Price Trends are Local and Medians may be Misleading

Home prices in the United States are rising faster than incomes. It now requires 22.4% of the median household income to purchase an average home with 20% down and a 30-year mortgage – up from 18.1% at the beginning of 2021.

While that is less than the roughly 25% generally accepted as a benchmark for affordability – and far lower than the 34% peak reached in 2006 – an interest rate increase of even 50 basis points could put many first-time buyers on the bubble.

The good news is that home prices are local, not national. Most markets are still affordable – at least for now – and medians can be misleading.

Median distortion is especially prevalent in fast-growing coastal markets with severely restricted housing supplies where prices have soared. The result has pushed the national median upward, overshadowing prices in slower growing markets and even some hot markets with more elastic housing inventories. Many of these remain affordable, especially at the lower end where most first-time home purchases are concentrated.

Exhibit 1 below is pulled from Black Knight’s Collateral Analytics HomePriceTrends daily sales tracking dataset and shows the distribution of overall U.S. existing single family home values for year-to-date sales, divided into $50,000 increments.

Note that while the median price is approximately $350,000, the highest concentration of sales is actually in the lower and more affordable $250,000 to $300,000 range. Indeed, there are a substantial number of opportunities at prices well below that level. The degree to which the median is skewed depends on the concentration of high-end sales; in this case, homes valued at $2 million and up. This spike, shown below, is known as a “fat tail.”

Exhibit 1: The US Distribution of Home Prices is Wide with a Long High-End Tail

Home prices are local

Although the national median home price is a useful benchmark, the most meaningful price trends are those measured at the individual market level.

It may seem counterintuitive, but most Americans can afford to buy a home. High demand is one reason home prices have been going up so much. This idea, that housing remains affordable, flies in the face of claims that we are in a perpetual housing affordability crisis. The real question is whether housing is affordable where people need it.

Many markets are affordable, either because of slow growth economies or because of elastic supply.  Among these are metros like Cincinnati or St. Louis where the mode (most frequent price) and median single family home prices are in the $150,000 to $200,000 range. Some housing markets even have fat tails on the low end.  If affordability was based on attaining housing in lower-priced tiers, then Miami Beach, Seattle, Ocean City, NJ, and Santa Fe, NM look more reasonable.

In markets such as Charlotte, NC, and San Antonio, Texas, (Exhibit 2) where no fat tail is present, median home prices tend to be much closer to the “mode” or highest frequency home price. These markets tend to be more affordable because of slower economic growth and/or a more plentiful housing supply – as illustrated by the wider bell-shaped distributions, especially in Charlotte.

Exhibit 2: Two Markets with SF Home Prices Equal to or Less Than the US Median in $50K Increments

Fat tails are more likely to show up in fast-growing markets such as Denver (Exhibit 3), where there are supply constraints and prices are higher than the national average. Also note that supply-constrained markets tend to have a higher ratio of land prices to total housing value.

Exhibit 3: Denver, Appreciating but still with some relatively affordable prices

Fat tails are most obvious in markets with significant barriers to new supply, including limited open land, high development fees and regulatory hurdles such as density restrictions. Take San Diego, for example. San Diego has barriers to new supply, limited open land with access to transit and water, extremely high development fees, regulatory barriers including several regulatory agencies that overlap in jurisdiction and residents that tend to resist increases in density based on smaller-scale housing.

The result of all these supply barriers – and strong demand in a market with near perfect climate – is home prices that far exceed what the average home buyer can pay. The distribution of home prices is skewed heavily to the right, with very few homes under $650,000 and a very fat tail of homes priced at $2 million, or more (Exhibit 4).

Exhibit 4: San Diego, a Prototype Unaffordable Housing Market

The most frequent price range in San Diego is $700,000 to $750,000 while the median for single family housing is more than $100,000 higher. One might ask if the median is really the most typical home, as many more people own within the range shown by the mode. At the same time, the steepness of the curve reaching toward the mode on the left suggests a very high land value and high fixed charges for the provision of new housing.

Exhibit 5 (Seattle) shows a market that looks similar to San Diego, but with a somewhat lower median price range. Here we find a slightly less steep distribution left of the mode. Seattle has seen strong economic and income growth over the past two decades that has fueled housing price increases. Again, notice a fairly fat tail at the high end of the market, suggesting a skewed median price of nearly $800,000, compared to the range that is most typical, $600,000 to $649,000.

Exhibit 5: Seattle, a Prototype Unaffordable Housing Market

Oakland Bay Area (Exhibit 6), is a good example of a market with very high median prices, but with a much wider set of choices in terms of housing. Note the wider distributions of home prices. The mode is just a touch higher than San Diego, but there is a far greater range of housing choices to the left of the mode, indicating the presence of affordable housing options, even with a median well over $1 million.

At the same time, we do observe a large distribution of more expensive homes as well. Here those above $2 million are shown to be quite frequent, suggesting a huge discrepancy between typical homes (mode buckets) and median homes. The median for this metro is well over one million dollars but, because of the fat tail, median prices may not be reflective of the most typical homes in the Oakland metro.

Exhibit 6: Oakland Metro with a wide flat distribution of home values

Even Los Angeles (Exhibit 7) has several lower-priced housing tiers available. The mode price is higher than in San Diego or Seattle, but there are some lower priced tiers available.

Exhibit 7: Los Angeles Metro, Expensive but with lower price tiers available

The point is that instead of using median prices for affordability analysis, a lower-priced tier more indicative of starter homes, or the mode bucket – the most typical price range owned – may be far  more telling in terms of actual local market conditions.

Conclusions on Affordability

In general, housing in the US remains affordable, for now, especially compared to 2006. While median home prices in some cities may elude all but the highest earners, there are still lower-priced options available, even in major metros such as Seattle, Denver, Phoenix, Oakland and even Los Angeles.

In fact, one of the reasons that prices have been rising so much in Austin, Texas – from $337,000 in the fourth quarter of 2019 to $502,000 as of mid-fourth quarter of 2021 – is that homes there were so affordable to begin with.

Fat tails in a few hot coastal markets are distorting the national median, exaggerating the severity of housing affordability challenge. And while there is a lot of emphasis on the median as an indicator of home prices, most markets still have affordable housing options in lower “starter home” pricing tiers, which tend to be significantly lower than the median.