What does it mean to have affordable housing?

I want to buy a house. Which means I am all of a sudden very interested in how affordable houses are in Madison, Wisconsin.

Madison is growing. In 2010, the city hosted 229,000 people. The 2016 estimate by the Census Bureau was 246,000, an increase of 7 percent. Madison is also geographically constrained, situated on the isthmus between Lake Mendota and Lake Monona.

Those two facts alone tell you that home prices are likely increasing in the city. And indeed they are. Zillow claims that the median home price across the city is $246,000, an increase of 10 percent from one year prior. The 2016 census median home value is $217,000, which tracks with Zillow for that year as well. Zillow predicts an increase of more than 4 percent in the coming year. The housing market bottomed out in 2012 at a median home price of $174,000 and home values have increased, on average, 42 percent since then.

So are these prices affordable? How do you measure affordability anyway?

Demographia uses the ratio between the median household income and the median home price. Freddie Mac uses the same metric for investigating housing bubbles, and they call it the price-to-income ratio, or PTI. According to Freddie Mac, a "healthy" PTI is around 3.5, while many real estate sites will suggest that you can afford a house worth roughly 2 to 2.5 times your gross income, assuming a 20 percent down payment. Presumably the difference between an affordable PTI and a healthy PTI is made up for in home-price appreciation following the home purchase. Though it seems just as likely that the real estate industry's distorted thinking about home prices (what other product do we celebrate increasing in price?) could contribute to that gap as well.

The great thing about a ratio like this is you can easily compare the PTI across different metro areas, and it doesn't rely on variables like mortgage interest rates. 

Demographia's 2018 report with 2017 data puts Madison's PTI at a "moderately unaffordable" 3.9. This must be for the city of Madison, rather than the larger Metropolitan Statistical Area, based on census numbers. While the MSA home princes are greater than the city's, their incomes are, proportionally, even larger. The 2016 median household income in the city of Madison was $56,000; in the MSA it was $63,000. 

But if Zillow is right, that PTI is already out of date. At a median home price of $246,000 and a median income of $56,000, the PTI would actually be 4.4, considerably less affordable. The problem is that Zillow's data on home prices is much more up-to-date that data on wages. But wage growth has been incredibly low over the last few years, only now starting to pick up a tick.

If Madison's wages grew at an annual rate of 2.5% since 2016, the median wage could be around $59,000 now, giving a PTI of 4.2. Most likely, homes are growing increasingly unaffordable in the city.

So does that mean everyone should buy now, home prices can only go up, you'll lose out if you don't jump in now? That sounds familiar.


Eric Hamilton

I am a science writer in Madison, Wisconsin. I share the research stories of the University of Wisconsin–Madison and keep my eyes peeled for great science stories of all kinds.