Top Ten Most Affordable U.S. Real Estate Markets

Wells Fargo Bank and the National Association of Home Builders recently released an updated list of the most (and least) affordable places in the United States to buy real estate. The list (which runs almost two years behind in order to run all the statistics correctly) was created  by looking at the price of real estate sold in 2007 and comparing that with the median income in the  areas where the homes were located in that same year.

Using criteria on median family income, statistical analysis showed that 44% of the homes sold in 2007 were affordable compared to only 41.6% of the homes sold in 2006. Median income is the exact midpoint of all income levels in a given area; the point at which half the people earn less and half earn more.

Nationally the median household income is currently about $50,000, but this amount can vary substantially by region. Comparing the cost of homes actually sold in an area against the median income specific to that same area (as opposed to the national average or national median) should give a truer picture of which areas of the U.S. are most affordable to Americans.

The standard on a conforming conventional loan is 31% debt to income, which would put an affordable house payment at about 31% of gross annual pay (assuming housing was the only debt, which it usually is not), or an affordable house at about three times annual salary.

This 1,840 square foot house at 706 Vaile St in Kokomo IN is listed at $6,500. Kokomo was recently named the #1 most affordable place in the U.S to buy a home.

The top 10 most affordable markets by this measure were all located in the Midwest. Those cities (in descending order) were 1) Kokomo IN, 2) Lansing MI, 3) Lima OH, 4) Saginaw MI, 5) Bay City MI, 6) Mansfield OH, 7) Indianapolis IN, Springfield OH, 9) Youngstown OH, and 10) Dayton OH.

The ten least affordable were all located in the state of California, except for the sixth least affordable which was located in the New York City/White Plains area of New York state.

From the perspective of a foreign investor trying to get a grip on trends in U.S. real estate, this data can be a bit misleading. While it is true that prices in the midwest are the lowest in the country, it is also true that the midwest is by and large the most depressed area of the country economically.

The states of Indiana, Michigan, and Ohio, all of which are heavily represented on the affordable markets list, are also industrial centers for U.S. automakers and auto parts manufacturers. Unemployment in this part of the United States is higher than anywhere else and growing rapidly, and the statistics for affordable housing are from 2007, a good year before the economic downturn.

The 31% debt to income ratio is also likely to come into question as a decent underwriting  standard. As economic conditions worsen, the amount of money needed to cover necessary expenses other than mortgage payments keeps going up. The costs of food and energy (both for home heating and transportation) have risen dramatically since this basic underwriting standard was first put in place.

While 31% is almost certainly is a safe standard at incomes levels of $75,000 or more; at the median income level (which can be as low as the high 40s in some depressed areas), the amount of money left in available take home pay after committing 31% of it to a mortgage payment will not be sufficient to cover basic monthly expenses at current prices.

In other words, 69% of $49,000 is a lot less than 69% of $75,000 or $100,000. Food, heat, and gasoline are fixed expenses. They cost what they cost. When they go up faster than income, the 31% standard breaks down at median and sub-median levels.

That  being the case, foreign investors looking at property in the midwestern parts of the U.S. will still want to carefully think through the cost of both obtaining and holding the property, keeping in mind local trends and signs of recovery. After all, Wells Fargo and the Home Builders Association are not exactly disinterested parties. They want to move homes. These homes are sitting on a stagnant market for a reason.

Caveat emptor is still a good rule of thumb: Buyer beware.

Sometimes buying property in a depressed area can a smart move. But simply lunging at the best number on 24-month-old table in a rapidly changing market is probably not.