Did 'Smart Growth' make Portland unaffordable?

Date: Sat, 12 Mar 2005 20:06:40 -0800
From: Randal O'Toole <rot@ti.org>
The Thoreau Institute
Subject: Vanishing Automobile update #52

 

SUMMARY

New Urbanist Philip Langdon says that new data show that housing in
Portland is not as unaffordable as once believed. This proves, he
says, that Portland's urban-growth boundary did not decrease the
region's affordability.

Langdon should have dug a little deeper. Using the best available
data -- the 1990 and 2000 U.S. censuses, which estimated both
median-family incomes and median home prices by urban areas,
Portland's affordability declined by more than any other urban are in
the U.S.

LANGDON SAYS THE GROWTH BOUNDARY DID NOT REDUCE HOUSING AFFORDABILITY

In the March 2005 issue of "New Urban News"
(http://www.newurbannews.com/PortlandMar05.html), New Urbanist Philip
Langdon argues that the "urban growth boundary did not make Portland
unaffordable." Langdon's claim shows how important it is to get the
best possible data before reaching your conclusions.

Langdon is the author of "A Better Place to Live," which argues that
suburbs should be redesigned to look like his home city of New Haven,
Connecticut: in other words, with the dense, mixed-use neighborhoods
so beloved of the New Urbanists. In his latest article, he reveals
that the National Association of Home Builders had used erroneous
data in its housing affordability index. Since smart-growth skeptics
such as Wendell Cox and me relied on that faulty index to conclude
that Portland experienced the fastest decline in affordability of any
U.S. housing market in the 1990s, Langdon triumphantly announces we
must be wrong.

I always prefer data over personal experiences, which can be
selective and biased. But, unlike Langdon, I lived in Portland
through the 1990s, and it was obvious to almost anyone who lived
there during that time that the region's housing affordability
dramatically declined as housing prices increased far faster than
personal incomes.

The data we had available said that, between 1988 and 1998, the
region's real (i.e., inflation-adjusted) median family incomes
remained flat or even declined slightly, while housing prices more
than doubled (see http://ti.org/pdxprices.jpg). Using the National
Association of Home Builders' Housing Opportunity Index, which
estimates the percentage of homes affordable to a median-income
family, Portland's affordability declined from about 67 percent to a
low of 26 percent. No other region experienced such a decline in this
time period.

To calculate its index, the National Association of Home Builders
relied on median-income data published by the Department of Housing
and Urban Development (HUD). HUD uses these data (downloadable from
http://www.huduser.org/datasets/il.html) to determine which families
in different metropolitan areas have incomes low enough to be
eligible for federal housing assistance.

AN ERROR IN THE DATA

Apparently, as Langdon discovered, HUD estimates of median-family
income aren't particularly accurate. For the most accurate
information, HUD relies on the decennial census, which gathers income
data and calculates median-family incomes. In between the censuses,
HUD bases its estimates on more limited sources of data.

In 2003, HUD "recalibrated" its income estimates using information
from the 2000 census. This revealed that Portland's median-family
income was $8,600 higher than HUD had thought. This shows, says
Langdon, that Portland's affordability didn't decline as much as
everyone thought. Of course, this doesn't prove that Portland's
affordability didn't decline or that the decline wasn't due to the
urban-growth boundary.

RECALCULATING THE CHANGE IN AFFORDABILITY

Since the most reliable data come from the decennial census, and the
census also estimates the value of owner-occupied homes, I downloaded
1990 and 2000 median-family incomes and median-home values for every
urbanized area (the numbers actually apply to 1989 and 1999). An
urbanized area is a city and its suburbs that together add up to
50,000 or more people.

The U.S. had about 400 urbanized areas in 1990, and about 50 more in
2000, partly because the Census Bureau split a few urbanized areas
up. It also merged a few other urbanized areas, notably Miami and Ft.
Lauderdale. Without going to the trouble of merging and splitting
data -- which would not have significantly changed the rankings -- I
was able to find more than 350 urbanized areas in common between the
two censuses.

For each urbanized area in each census I made a simple calculation of
affordability: median-home value divided by median-family income. The
most affordable regions have a home-price-to-income ratio of less
than 2, meaning that a median family could buy a median home by
devoting 100 percent of their income to the house cost for two or
fewer years. More realistically, 25 percent of their income could pay
off a 6-percent mortgage in under 12 years. Nearly 200 regions met
this affordability test in 2000, including Dallas-Ft. Worth, Houston,
and San Antonio.

The table below shows how many years a median-income family would
need to buy a median-priced home by dedicating 25 percent or 33
percent of their incomes to a 6-percent mortgage. Blanks in the
bottom two categories mean that the house could not ever be paid off,
so these are ranked "very" to "extremely unaffordable." Since lenders
are reluctant to give mortgages to people who would have to spend
more than 30 percent of their incomes on the mortgage plus property
taxes and insurance, regions with price-to-income ratios of 3 or more
are considered marginal to unaffordable.

PtoI Typical Mortgage (years) # of Affordable?
Ratio Region 25% 33% Regions
1.5 Topeka 7.7 5.5 14 Extremely affordable
1.75 Dallas 9.4 6.6 65 Very affordable
2.0 Cincinnati 11.2 7.8 126 Affordable
3.0 Portland 21.9 13.5 210 Marginally affordable
4.0 San Diego 55.2 22.3 25 Unaffordable
5.0 San Jose - 41.2 8 Very unaffordable
6.0 Santa Barbara - - 7 Extremely
unaffordable

The number of regions in each group is the number below that
price-to-income ratio down to the next one. In other words, 14
regions have price-to-income ratios of less than 1.5 and some 210
regions have ratios of between 2.0 and 3.0. The exception is the last
category, which includes 5 regions whose ratios are between 5.0 and
6.0 and 2 regions whose ratios are above 6.0. The table also lists
regions typical of each ratio; for example, Portland is approximately
3.0 (actually 2.96).

To calculate the change in affordability between 1990 and 2000, I
simply divided the 2000 price-to-income ratios by the 1990 ratios.
Nationally, the ratios remained at almost exactly 2.23 between 1990
and 2000, indicating that incomes rose at the same rate as home
prices. In just the urbanized areas, ratios declined -- that is,
affordability increased -- from an average of 2.32 to 2.25.
Affordability improved in about half of all urbanized areas and
decreased in the other half.

AND THE WINNER IS . . .

My complete spreadsheet can be downloaded from
http://ti.org/pricetoincome.xls. In an nutshell, the fifteen regions
with the greatest increases in price-to-income ratios -- that is, the
greatest declines in affordability -- are:

Increase in Income-
Urbanized Area to-Price Ratio
Portland, Vancouver, OR-WA 53%
Salem, OR 44%
Longview, WA-OR 44%
Eugene, OR 42%
Salt Lake City, UT 38%
Boulder, CO 38%
Bay City, MI 38%
Yakima, WA 37%
Flint, MI 36%
Jackson, MI 35%
Medford, OR 34%
Missoula, MT 33%
Longmont, CO 33%
Ogden, UT 33%
Provo-Orem, UT 33%

The actual price-to-income ratios for Portland, Salem, Eugene, and
Medford grew from around 2 to nearly 3, meaning these communities
went from very affordable to marginally affordable. While Portland is
not as unaffordable as San Francisco, its affordability declined more
than any other urbanized area in the nation.

All Oregon cities, including Portland, Salem, Eugene, Medford, and
Rainier (which is in the Longview urbanized area) have urban-growth
boundaries. Boulder and Longmont, Colorado, also have urban
boundaries in the form of a regional urban-service boundary
supplemented by greenbelts. Missoula has had an urban-service
boundary for more than a decade, Washington passed a
growth-management act in 1991, and Ogden and other Utah cities face
natural boundaries in the form of lakes and national forests. The
Michigan cities went from an extremely affordable 1.3 to a very
affordable 1.75, which no doubt has more to do with cycles in the
auto industry than land supply.

Most of the remaining areas with large increases in price-to-income
ratios fall into two categories. Many, like the Michigan cities, were
extremely affordable to very affordable in 1989 and remained very
affordable to affordable in 1999. But a number of others grew to be
only marginally affordable in 1999, including Denver, Santa Fe, Ft.
Collins, and Bellingham. These latter regions all use some form of
growth-management planning.

This does not prove that urban-growth boundaries caused the decline
in affordability in Oregon cities. In fact, I have never said that
the urban-growth boundary alone caused that decline. Also
contributing to the decline were:
* An onerous permit process that can delay new home construction for
years;
* Design codes passed by Portland and other Oregon cities that
impose higher construction costs on new homes;
* Impact fees that have grown to well over $10,000 per home in some
Oregon communities;
* Pressures on home builders from local and regional governments to
build money-losing transit-oriented developments in exchange for
permits to build marketable single-family homes.

Yet the urban-growth boundary played a significant role in the
decline of affordability. In 1990, home builders could buy vacant
residential land within the Portland boundary for around $20,000 an
acre. By 2000, prices had soared to as much as $300,000 an acre. The
region had plenty of land suitable for housing, but nearly all of it
was outside the boundary. Thus, an artificial land shortage helped
drive up home prices.

According to the numbers Langdon cites in his article, Portland's
price-to-income ratio increased even further from 2.96 percent in
1999 to 3.05 percent in 2003. This was based on a HUD-estimated
median-family income of $65,800, which was $10,000 more than the
Census Bureau had estimated for 1999. This may be optimistic:
Portland's unemployment grew from less than 4 percent at the end of
1999 to nearly 9 percent in 2003, making it the highest in the nation
(http://data.bls.gov/cgi-bin/surveymost?la) . This suggests that
HUD's recalibrated income might have been too high. Despite high
unemployment, Portland housing prices increased by 16 percent over
the same time period (see http://www.ofheo.gov/HPIMSA.asp),
suggesting that affordability continued to decline.

FURTHER DOUBT?

Langdon adds other information that he says "casts further doubt" on
the claim that the urban-growth boundary drove up housing prices. He
notes that many Portland neighborhoods were "transformed" as people
invested 45 percent more than the national average in home
remodeling. This "made their homes more valuable and enhanced the
desirability of their neighborhoods."

There is a dark side to this urban revival story. Because the
urban-growth boundary and other smart-growth policies priced many
young urban professionals out of the suburban home market, they
instead gentrified low-income, often minority, neighborhoods that had
previously been largely occupied by renters. As documented by a
smart-growth group called Coalition for a Livable Future in a report
called "Displacement: The Dismantling of a Community," the low-income
renters were dispersed to other parts of the region (email
teresa@clfuture.org to get a copy of this report). Many can now be
found in high-density apartments that had been built as
"transit-oriented developments" but in reality are little better than
tenements.

Gentrification has its benefits, but low-income families hate it
because it destabilizes their lives and can reduce the quality of
their housing. Good or bad, Portland's gentrification was largely a
result of housing shortages caused by the urban-growth boundary, so
it hardly supports Langdon's claim that the boundary did not reduce
affordability.

CONCLUSIONS

The National Association of Home Builders relied on the best data
available to estimate housing affordability for various regions, but
the best was none too good. The 2000 census revealed that incomes in
some regions rose faster than assumed by the Department of Housing
and Urban Development.

But Philip Langdon prematurely jumped on this error to make
conclusions without closely examining the source data. The best data
available clearly show that Portland suffered the greatest decline in
housing affordability of any urban area in the 1990s.

Yes, Portland's urban-growth boundary, along with other smart-growth
policies, did reduce Portland's housing affordability. Yes,
Portland's affordability declined in the 1990s by more than any other
urban area. Yes, urban-growth boundaries or other smart-growth
policies appear strongly correlated with reductions in affordability
in other urban areas as well.

Lots of things influence affordability, but the data show that on
average the home-price-to-income ratio has been and remains about 2.2
to 2.3 throughout the nation. This means that home builders are
generally able to keep up with the demand for housing even in
fast-growing communities. Housing shortages occur in growing regions
mainly when government intervention such as growth boundaries,
building limits, lengthy permitting processes, or other regulation
prevents home builders with keeping up with demand.
_________________________________________________________

Randal O'Toole The Thoreau Institute
rot@ti.org http://ti.org

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Learn more about the effects of smart-growth planning on housing
affordability and traffic congestion at the third annual Preserving
the American Dream conference in Bloomington, Minnesota on June
24-26, 2005. For more information see
http://americandreamcoalition.org/pad05.html .

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analyses of urban issues.