Tuesday, December 22, 2020

Can the people who build homes in Nashville afford to buy them?

by Rod Williams - Most could not. The income of the average carpenter household would support purchase of only 39.9% of the Nashville homes considered starter home. This standard for determining  affordability is based on something developed by American Enterprise Institute called "the carpenter index." Here the index is explained: 
The Carpenter Index starts with average carpenter wages at the metro level, which is around $48,000. It then assumes a household income that totals 150% of the carpenter’s wage, which is roughly the national average. This yields a typical total carpenter household income of $72,000. A common rule of thumb is that, to be considered affordable, a household should purchase a house no more than three times household income. The typical carpenter household could then afford a home of up to $216,000.  To complete the index, it is determined what percentage of starter homes would $216,000 purchase.
If you plug in the average carpenter wage for the Metro Nashville area and the range of prices of a starter home in Nashville area and do the calculation you come up with the carpenter index for Nashville which is currently 39.9%

Starter homes may be a new homes or an existing home. It is considered a starter home if it would typically be the first home one buys. This excludes those homes generally sold to people who are selling an existing home and taking the equity to purchase a more expensive home. A Carpenter Index of 50% or greater is considered affordable since the average carpenter household is able to purchase the median entry-level home. The lower the index is, the more unaffordable a metro area becomes. 

This of course is a rough calculation but provides insight as to the affordability of Nashville area homes. This does not tell you what that home may be like. If two metro areas both had a Carpenter Index of 50, in one metro area the home could be twice the size of what is a starter home in another metro area. This only looks at affordability not how much house you can get for your money. 

Also, the metro area is usually a multi-county area so for the 13-county metro Nashville area the carpenter may have to consider a home in Burns or Watertown or Bethpage. That is not unrealistic.  Housing near the center of a popular metro area is expected to be more expensive than those in the suburbs. To expect that everyone can afford a house within the city limits or even the largest county of the area is not realistic. Many working people are willing to move to a suburb of Nashville to buy their first home and some prefer it.  Also, not all work is centered in downtown Nashville.  

Of course, the assumptions may not hold for everyone either. This assumes the carpenters income is 66% of the household income. That is based on an average but if the carpenters spouse makes more than the carpenter then that household could afford more house. Also, in a metro area like Nashville, there are a lot of service workers who often make less than the wage of a carpenter. They would have fewer options. And, this does not address the lack of affordability of housing for low-income people. Despite these caveats, I think this is a useful way to look at affordability. 

How does Nashville stack up to other cities?
In San Diego the index is only 6% meaning a carpenter household could only afford to buy 6% of the starter homes.
In Pittsburg the index is 100% meaning a carpenter household could afford to buy 100% of the starter homes.
Austin Texas, 17%
Knoxville, 75.6%
Atlanta, 80.1%

How has Nashville fared over time? We have become less affordable.  Here is the index calculations for Nashville since 2012 when the index was created:
2012, 76.5%; 20013, 72.3%; 2014, 68.6%; 2015, 68.8%; 2016, 58.8%; 2017, 50.2%; 2018, 43.7% and 2019, 39.9%.

What causes lack of affordability? The report examines the causes of the loss of affordability which is essentially supply and demand but factors that impact those factors are policies that reduce supply such as single-family zoning and other land use restrictions and easy credit which inflates prices. 

To see the full report follow this link

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