Response to Evan Manvel,
Planning Advocate for 1000 Friends of Oregon

By David A. Crowe, Ph.D., Staff Vice President for Housing Policy, NAHB

Criticism #1. NAHB’s Calculation Answers the Wrong Question
NAHB’s Housing Opportunity Index is designed to measure the relative affordability of homes. Manvel criticizes the NAHB index for not measuring the cost of living. He is right, if he expects the index to measure something more than it’ s designed to do. The HOI was never intended to measure the entire cost of living and has never been used that way by NAHB.

However, housing is one of the few items whose price is heavily determined by location, so that the cost of housing does have a great deal to do with the relative cost of living in one place as opposed to another. Housing is also a very large share of most families’ expenditures. According to the U.S. Bureau of Labor Statistics, the average American and the average Portland resident both devote one-third of their total spending to housing. Similarly, BLS finds no difference in the proportion of spending devoted to public transportation in Portland and the whole country—the average resident devotes 1.2 percent of their spending to public transportation. These "average" statistics camouflage what the recent buyer faces as Portland home prices have risen faster than incomes.

Fannie Mae and other mortgage institutions have come up with products that allow families and individuals to purchase a home with lower downpayments, with higher debt burden ratios, by substituting one debt (a car payment) for another (public transit cost) or other flexible financing methods. The index cannot account for all these possibilities. It is a single measure of relative affordability. The innovative products can be used by any person that qualifies regardless of location, and therefore don’t change the underlying comparison of incomes and house prices.

Criticism # 2. Low Affordability Could Mean Low Salaries, Not High Housing Costs
This criticism ignores the author’s own introduction to the subject where he describes the calculation of the HOI: "…compares recent single-family home sales with local median salaries." The index compares the median family income, as estimated by the U.S. Department of Housing and Urban Development, to the distribution of recent home sales. The fact that Portland incomes are insufficient to afford most homes on the market may be due to the "worst paying" market in the nation, as Manvel states, or one of the highest priced housing markets. The index does not identify the cause but simply identifies when one is out of line with the other.

On an absolute scale, incomes are higher in Portland than many other places in the West and in the rest of the US. The 1999 Portland median income is 10 percent higher than the US median and greater than nearly two-thirds of the western metropolitan areas measured by the NAHB HOI.

But, the cause is not the issue. The index measures relative housing affordability, and if a large percentage of people cannot afford to buy a home, it’s a problem. Obviously, someone is purchasing homes because the sales information that the HOI is based upon are real home sales. But, only the relatively higher income households in the area are able to purchase homes if the index is low, and that does not bode well for the majority of families.

Criticism # 3. Places Where Poor People Can’t and Don’t Live are More "Affordable"
Again, the author does not acknowledge his own words. The index is the percentage of homes that a household with a median income can afford to purchase. A few super-rich or super-poor households in a jurisdiction do not affect the value of the median income, which is one reason why NAHB uses a median rather than a more volatile average income figure. The reason that two places with substantial different incomes and house prices can have similar indexes is precisely the reason why the index is so useful. Rather than a simple ratio of house prices to incomes (as the author shows in the table after point four, even though a correct definition is contained in his opening paragraph), the index compares the whole distribution of home sales prices. Consequently, making comparisons of median sales prices to median incomes is not a valid criticism of the index.

Manvel is correct in stating that as prices rise, lower-income families will be discouraged from moving to Portland or encouraged to move away. In either case, aggregate income measures will increase and the index may improve. However, this dynamic is hardly a desired outcome.

The history of the Portland index suggests that the house price movements in the mid-1990s have pushed the index down, i.e. made the area less affordable. In 1991, Portland’s HOI was 68 and it was in the top 10 most affordable areas in the west. The index remained high until 1994, when house prices began to rise rapidly. The index improved slightly in late 1998 and 1999 as house prices fell back.

Criticism # 4. Numbers Don’t Add Up
The ratios calculated by the author have no relationship to anything in the NAHB index or to any concept that should be considered here. Consequently, it is no surprise that they do not relate to the HOI. The author complains of lack of information on the methodology but then ignores the basic definition he writes in the opening paragraph. NAHB has made the derivation of the HOI public since the beginning. Press releases, publications and NAHB’s Internet site describe the methodology and the source of data. Attacking the concept because of failure to comprehend a relatively simple concept is hardly reasonable or credible. Once again, the HOI is a quarterly measure of the percentage of homes sold that a family earning the median income can afford to buy. Ability to purchase is based on standard mortgage underwriting rules and assumes a 10 percent downpayment. A current interest rate is used (which can change the index but not the relative comparison to other cities), and property taxes and hazard insurance rates for each metropolitan area come from the 1990 Census.

NAHB has been publishing the HOI since 1991 for nearly 200 metropolitan areas. It would be ludicrous to even consider that NAHB would risk its reputation for credible research and analysis in order to construct a poor affordability picture for one locality. It would be reasonable to question how much of the decline in housing affordability is due to the UGB and how much is due to a strong employment market, but questioning a straightforward and well regarded index is a very poor defense.

David A. Crowe, Ph.D., Staff Vice President for Housing Policy, NAHB - Dr. Crowe has written extensively on home ownership trends, tax issues and government mortgage insurance analysis. In his current position, he heads the Housing Policy Department of the National Association of Home Builders. The office is responsible for policy analysis of housing issues, especially with regard to taxes, housing costs, environmental regulations and home ownership. Under Dr. Crowe’s direction, the Department developed a local economic impact model of home building that has been utilized in over 100 metropolitan areas.
Dr. Crowe serves on federal advisory committees to the Census Bureau and to the U.S. Department of Housing and Urban Development. Before joining NAHB, Dr. Crowe was Deputy Director of the Division of Housing and Demographic Analysis at the U.S. Department of Housing and Urban Development. He is a native of Louisville, KY and holds a Ph.D. from the University of Kentucky.

Our Response to Dr. Crowe