MReport October 2018

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TH E M R EP O RT | 45 FEATURE current median DTI varies by state. Hawaii and California have always been known for being terribly expensive, and they remain in a class of their own. Unfortunately, many other states are also a concern. These include the Pacific Northwest, parts of the Northeast, Florida, and the Mountain West. On the other extreme, the most affordable state is West Virginia, which has been in recession for several years due to a decade-long slide in demand for coal. Figure 3 shows that Hawaii, Oregon, Washington, California, and Colorado are extremely expensive relative to their historic norms. For example, the median DTI in Oregon is now 9.8 percent higher than its historical average during 1987–2004. How much that has to with the booming tech sector is unclear, but it is worth noting that Facebook's median salary is $240,000 a year (which still barely qualifies someone for buying a median-priced home in San Jose, California, which is now $1.3 million). Other theories for why housing is so expensive include restrictive building codes Figure 4: Range of Historic Median DTIs and Current Values Source: Arch MI Figure 2: State Map of the Percentage of Median Household Income Needed to Cover Mortgage Payments on a Median Home. Source: Arch MI, 2018Q2 Figure 3: Difference of Median DTI Now From Historic Norms Source: Arch MI, 2018Q2 and limited space at distances commutable to central business districts. The most undervalued state compared to its past is Connecticut, by a wide margin, followed by West Virginia, New York, and Illinois. Each of these states is currently experiencing slower eco- nomic and population growth than the nation as a whole. Where We Were, Where We Are A nother way of putting to- day's affordability issue into perspective is to see the range of median DTIs over time compared to where we are now. For our final chart, we show the current value of our median DTIs for each state (as a red dot), along with the range of values since 1990. For instance, for the U.S. overall, the current value is 32 per- cent and it has ranged from a low of 23 percent (in 2012) to a high of 41 percent (in 2005). Notice that some states are currently relatively high in their range, while others are relatively low. A few states jump out: Connecticut, Delaware, New Jersey, Rhode Island, and Wyoming are unusually cheap now compared to their pasts, while Colorado, and to a lesser extent Montana, are unusually expensive. Note that Oregon and Washington are somewhat concerning because they are both above their own historic averages and high in absolute terms (with median DTI values above 40). Besides California and Hawaii, the only other regions where affordability is that poor are Colorado and the District of Columbia. This type of analy - sis also suggests that properties in Oklahoma, West Virginia, Iowa, or Indiana could be good investments if home prices there eventually recover to be more in line with their historic norms. If housing affordability is still decent in many places, why do so many people think otherwise? Perhaps it is because it is easy to compare prices now to prices just a few years ago, when they were substantially cheaper in most areas. Perhaps it is because many booming areas, such as the Pacific Northwest and the Mountain West, are now more expensive than during the more "normal" years of 1987–2004. By enabling us to step back and see the long view, the charts and maps above suggest that it is still an excellent time to buy in some areas, but a far harder call in the most expensive areas. RALPH DEFRANCO is the Global Chief Economist for Arch Capital Services Inc. DeFranco is the author of The Housing and Mortgage Market Review, Arch MI's quarterly newsletter that discusses the state of the nation's housing sector and the economic issues that affect it. He also leads Arch Capital's forecasting of regional housing prices and overall regional housing market risk. DeFranco has both a Ph.D. in Economics and a B.A. from the University of California at Berkeley.

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