I don’t mean for this to become a real estate blog - there’s plenty enough already, but if there’s one thing that bugs me, it’s the incorrect use of statistics.
Recently I received a well intention e-mail that was a forward from Joe Brown, President of Coldwell Banker Residential Brokerage, Silicon Valley~Monterey Bay. A full version of the e-mail can be found here and other real estate websites, but here’s the part that really bugged me:
We are part of an area where jobs are very strong and the ability to buy a house is high. The housing affordability index is now at 25% for California (up from 14% no so long ago). This is greatly due to prices decreasing in outlying, less desirable areas of the state. More particular to our local areas would be folks who are deciding that it is time to invest their fortunes in real estate. When one gets a roof over his/her head, stability, and a tax write-off, sooner or later one realizes the excellent investment that real estate is.
I’ve bolded the part that I want to discuss. For those of you who aren’t familiar with why housing affordability for first time buyers is important, think of housing like a pyramid: first time buyers have to enter the market, so that people who own can sell their properties, and use that money to buy (presumably upgrade) to a bigger/better property. If the housing affordability index too low, it means that there aren’t enough potential first time buyers, which means the pyramid is endanger. Think of first time buyers as plankton (the graphic at the top btw.)
Ok, so now that we know why this index is important, let’s look at the numbers. It is claimed that affordability in California has gone up from 14% “no [sic] so long ago” to 25% now. Pretty dramatic, huh? This is excellent news right?
Well, let’s take a look at the press releases from where this data is derived:
| |
C.A.R. 2/9/2006 |
C.A.R. 5/17/2007 |
| Calculated: Affordability Index |
14% |
25% |
| Assumption: Downpayment % |
20% |
10% |
| Assumption: Purchase price |
Median Price |
85% of Median |
| Assumption: Interest rate |
6.33% |
6.3% |
That’s right - in the two time periods, the assumed downpayments went down, the purchase price went down, and interest rates went down as well. Hence, affordability went up dramatically.
To explain why that is, here’s the verbatim text from the press release for 2006:
The minimum household income needed to purchase a median-priced home at $548,430 in California in December was $134,200, based on an average effective mortgage interest rate of 6.33 percent and assuming a 20 percent downpayment.
…and for 2007:
The minimum household income needed to purchase an entry-level home at $480,670 in California in the first quarter of 2007 was $96,910, based on an adjustable interest rate of 6.3 percent and assuming a 10 percent down payment.
Ah hah. You see, in 2006, it was about purchasing a “median-priced home”, but in 2007, it is now about a “entry-level home”.
Technically there’s nothing wrong with changing the assumptions. That’s fine.
But is it really right to make this comparison?
The housing affordability index is now at 25% for California (up from 14% no so long ago).