Corporate Professional Local

A new approach to assessing housing affordability

FiBRE Findings in Built and Rural Environments

January 2008

Sixty second summary

For an area of a town or city to be regarded as affordable, it needs to be more than just relatively cheap. An area might be cheap compared to other areas because it is in a deprived neighborhood, with no local amenities and few job opportunities. To label such areas affordable may be a mistaken approach and lead to sub-optimal policy decisions. This seemingly simple statement forms the basis of work by researchers at the Housing Affordability Initiative at the Center for Real Estate at MIT to explore alternative and richer approaches to developing measures of housing affordability. The index that they have developed is based on a new concept of area affordability. Rather than viewing affordability as some ratio of income to housing cost, it recognises that the price of a house is affected by its location, since this price includes the value of the services provided by the local amenities. Housing policy should be about more than just providing basic living accommodation, but should also be about ensuring that people have access to jobs, are in safe areas, and have decent schools. Based on the Greater Boston area in the USA, the key innovation of this work is to account for locational amenities when comparing house prices across towns in a metropolitan area, and to come up with a measure of affordability that more accurately and usefully reflects the quality of an area. A key implication of this work is the possibility of developing a menu of policy options to increase affordability depending on the nature of the affordability problem. For example towns that are not affordable because of inadequate schools may not be the best candidates for additional housing but for alternate forms of investment. Such investment would aim to improve the overall desirability of the area for firms and households, which may in turn improve school performance. Also, towns that are categorized as unaffordable by the index because they are located far from jobs may not be good candidates for affordable housing investment. Building new units far from jobs may also raise the cost of labour, thereby reducing the competitiveness of the region in attracting and retaining firms. This ability to produce multiple options for dealing with the lack of affordable housing should make the index particularly useful to policymakers who are looking for a more flexible approach for dealing with affordability problems, especially in high-cost areas such as Boston.

Research

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A new approach to assessing housing affordability

Introduction
For an area of a town or city to be regarded as affordable, it needs to be more than just relatively cheap. An area might be cheap compared to other areas because it is in a deprived neighborhood, with no local amenities and few job opportunities. To label such areas affordable may be a mistaken approach and lead to sub-optimal policy decisions. This seemingly simple statement forms the basis of work by Lynn Fisher, Henry Pollakowski and Jeffrey Zabel of the Housing Affordability Initiative of Massachusetts Institute of Technology, USA, to explore alternative and richer approaches to developing measures of housing affordability. As Lynn Fisher says, We were concerned that focusing on price would lead us to the wrong conclusions about the affordability of an area. The new approach that their work proposes is to look at a bundle of attributes that an area possesses, such as school quality, access to jobs and environmental quality, and to assess whether taking these into account makes a difference to whether an area can be regarded as affordable. Their initial results, based on the Greater Boston area, suggest that this may be the case.

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A new approach to assessing housing affordability

Background
The recent increase in house prices in many parts of the USA has highlighted housing affordability issues, especially in high-cost coastal cities such as Boston.
During the period 1998-2005, house prices in the Boston metropolitan area nearly doubled. A check of the Boston Globe, the main local newspaper, shows that there has been, on average, about one article a week that has mentioned high housing costs or high housing prices. Why is this issue important? Firstly, its important to note that housing policy is an important part of the activities of state and local governments. The concerns about the ability of metropolitan areas to compete for firms, jobs and human capital that will continue to fuel economic growth have made housing a priority of other public and private organizations not traditionally concerned with housing. Access to housing is also a central element of a growing disparity between the haves and have-nots in society with respect to various opportunities, including education and safety. In some places, judicial and legislative demands require developers to provide housing plans and/or a measure of an areas housing affordability. For instance, in Massachusetts, New Jersey, California and other states in the USA, residential housing developers may sometimes be able to override local land use regulations if they agree to provide affordable housing when local areas fail to meet some measure of affordability. Thus, an affordability index can be a useful tool for state and local governments and other housing-related organizations. But it also means that it is important that it comes up with the right answer. Encouraging the provision of seemingly affordable housing in the wrong location does no-one any favours in the long run.

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A new approach to assessing housing affordability

What do we mean by affordability?

The most usual way of thinking about affordability is in terms of house prices and incomes, normally at the metropolitan area level.
Typical measures relate the income of a hypothetical median household and a hypothetical median cost dwelling. Some commentators use the ratio of an areas median income to median house price to judge if an area is affordable. However, this ratio contains little information and is potentially misleading. By disguising the variations in both house prices and incomes in an area, it does not really allow us to assess the degree to which it caters for a range of households. A high income area may well on the surface appear to be affordable to those who have chosen to live there, but tells us little about the overall distribution of affordable housing. All it tells us is that some towns are affordable to certain parts of population but not to others. Some people can choose to live in certain areas, and use their income to buy amenity. But not everyone is in a position to make that choice. What then does it mean for a town or other small geographic area to be affordable? Lynn Fisher suggests that we need to consider what proportion of both owner-occupied and rental housing in an area is affordable to a particular type of household, defined by income and household size. She also suggests that, for whichever group of the population we are looking at, the benchmark figure that is affordable is no more than 30% of income spent on housing. So, the new element of the work by Lynn Fisher and her colleagues is to go beyond simply thinking about affordability in terms of housing expenditure as a ratio of income. As they say, Inexpensive housing that is located a long way from job opportunities may not be particularly affordable, as it provides few job opportunities and long commutes, making it difficult to pay the mortgage. In considering what the key location issues to focus on were, they decided on job opportunity, school quality and safety provision.

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A new approach to assessing housing affordability

The case study

Using Greater Boston as the case study area, what insights does this new approach provide?
The technique that the researchers used is to develop an area affordability index for all the 140 towns in the Greater Boston area. This measures the proportion of units in a town that are affordable by a particular income group. The researchers focus on housing for moderate income working households those making just below the median household income for the region (the examples below focus on households making 80% of area median income). This provides us with a ranking of towns according to the proportion of houses that are of a certain proportion of income of our target population. In its raw state, this does not take into account any locational amenities, so the next step is then to adjust this initial distribution to take into account the job opportunities, school quality and safety provision in the town. The model that they have developed enables them to price these amenities and then use the use these prices to adjust housing expenditures. Using data provided by the Warren Group, they calculated the adjustment values that would be needed for job accessibility, school quality and safety quality of an area. The results are shown in Table 1 (see page 06).

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A new approach to assessing housing affordability

How was the affordability index created?

The researchers adjusted the actual house prices to take account of both building-specific factors of the houses in an area and the external factors.
The three that they identified as being most significant were accessibility to jobs in the area, the quality of local schools as measured by the number of students achieving a sufficient or advanced score in the Massachusetts mathematics and English exams, and a measure of local safety. The researchers measured a towns safety by conducting a principal components analysis on the following variables: violent crime, property crime, contaminated sites per square mile, and the percentage units within half a block of buildings with bars on the windows. The full set of coefficients used to construct the housing affordability index is listed right.

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A new approach to assessing housing affordability

Table 1 Greater Boston House Price Hedonic Statistics (Dependent Variable: Ln(Imputed Rent))

Condominium Variable Age 10 to 30 Age 30 to 50 Age Greater Than 50 Bathrooms 2 Condo Bathrooms 3 Plus Condo Bedrooms Living Area Living Area Sq. Town House Density PCT Open Space Ln (Accessibility) Ln (School) Safety Year Dummies Constant Observations Number of town ID R-squared Robust standard errors in brackets *** significant at 1%; ** significant at 5%; * significant at 10% Parameter Estimate -0.0899*** -0.185*** -0.113*** 0.0676*** 0.0785*** 0.0164*** 0.000800*** -0.0000109*** -0.00262 0.0000342*** 0.0000368*** 0.104*** 0.477*** -0.0241** 0.0447** 6.463*** 22525 266 0.657 [0.0056] [0.0067] [0.0071] [0.0051] [0.0064] [0.0032] [0.000021] [0.00000062] [0.0088] [0.0000055] [0.0000098] [0.031] [0.062] [0.010] [0.018] [0.31] Standard Error

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A new approach to assessing housing affordability

Based on this, they were then able to re-calibrate the unadjusted area affordability index, to take account of these factors, and to work out the financial cost or benefit of these factors. This then alters the amount of stock in a town that can truly be regarded as affordable. What did they find? If we take some examples of towns that moved significantly between the initial unadjusted and the final index, it will make the point clear. Adjusting for amenities can make a substantial difference in the affordability rankings of towns. For example, Haverhill is ranked 5th by the unadjusted index but only 21st when adjustments are made, particularly for school quality and safety. Lowell (school quality and safety) falls from 1st (unadjusted) to 19th (adjusted). On the other hand, Watertown rises from 51st (unadjusted) to 17th (adjusted) and Waltham from 33rd (unadjusted) to 5th (adjusted) on the strength of their accessibility to jobs. The top five affordable towns are, in order, Marlborough, Milford, Hudson, Dracut, and Waltham. Only one of these - - Dracut - - is even in the top ten in the unadjusted indices. Overall, once we account for job accessibility, school quality and safety provision, the adjusted total stock represents 85% of the unadjusted affordable stock in other words, while some housing was adjusted to appear more affordable and other units were adjusted to be less affordable on the basis of their location in the metro area, on net these adjustments result in a 15% decrease in units that should be considered affordable to the household type studied. In part, this is due to the fact that the adjustments are not uniform across space. In fact, the 15 most accessible towns show a small increase of about 2% in the provision of affordable housing, while the remaining 126 towns contribute

Figure 1 Unadjusted Affordable Housing Units as Share of Total Town Stock For All Household earning 80% of Boston Area Median Income. Weighted by Size.

a 16.5% decrease to the total affordable stock. To illustrate the effect of adjusting the affordability index for accessibility, school quality, and safety provision, the maps in Figure 1 shows the unadjusted index and Figure 2 is the adjusted index. What stands out in particular is the dramatic decline in affordability that some of the southernmost towns experience once adjustments are made. As an additional example of how the index can be used, consider two types of workers that are quite important to a metropolitan area: nurses and firefighters. In Massachusetts the

median income for a two person household with at least one member working as a nurse is $52,000. Similarly the median four person household with at least one firefighter earns $103,000. These incomes compare to median incomes of $72,000 and $94,000 for all two and four person households in the Boston Metro Area, respectively. According to this new index, the two households described above face very different realities. With a total available stock of approximately 1,200,000 housing units in the Greater Boston Metropolitan Area, only about 80,000 units would be affordable to the two person nursing

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A new approach to assessing housing affordability

Figure 2 Adjusted Affordable Housing Units as Share of Total Town Stock For All Household earning 80% of Boston Area Median Income. Weighted by Size.

Figure 3 Key Worker - Most Affordable Towns

Based upon the MIT/CRE Amenity-Based Affordability Index for 2 person Nursing Households and 4 person Firefighting Households. Median incomes for each family calculated from the 2000 Census 5% PUMS data for the State of Massachusetts and inflated using the percent change in per capita personal income from BEA table AMSA04.

household. In contrast, over 400,000 units would be affordable to the four person firefighter household. The top affordable towns for the two person nursing household include: Waltham, Amesbury, Marlborough, Watertown and Arlington among others. The four person firefighter household will find the highest concentration of affordable options in towns such as Carver, Tewksbury, Holbrook, Billerica and Wilmington. These differences reflect the effects of greater rental stocks and better accessibility to employment that create more affordable options to households with lower incomes. This is shown in Figure 3.

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A new approach to assessing housing affordability

Policy implications
There are a number of potentially valuable policy implications from this work.
First, the index provides an improved methodology for assessing the inventory of housing that is affordable to different households at a certain level of quality, allowing policymakers to better understand the affordability of towns relative to their peers in a more comprehensive manner. Leading on from this, one implication of this is that policies that set a single rent or price as affordable to a household earning a certain level of income fail to account for the opportunity costs and benefits of residing in any given location. For example, in the density override program in place in Massachusetts, developers must offer an affordable unit of newly developed housing at a rent of approximately $1100 per month for a 4 person household. This rent is set regardless of location. Therefore, applying these adjustments to monthly rent based on employment and school opportunity and open space, a unit in Wilmington would be worth approximately $100 more than a unit in Everett (which, although it has good access to jobs, has low school quality) but approximately $200 less than the same unit in Belmont (which has above-average schools and good access to jobs). If $1100 was a firm cut-off for the expenditure that a household should make on housing, then the affordable unit provided in Everett for a sticker price of $1100 a month is, in fact, not affordable to the targeted household. A household incurs an additional $100 in costs per month from living in Everett despite the amount they write in their rent check each month. The cost incurred at that particular location is the net effect of poor schools and open space amenities less the gains from being located near many job opportunities. Likewise with respect to the town rankings, it is not sufficient simply to point to the least affordable places. If, for example, a non-profit or public entity wants to direct housing investment to some of these least affordable places, where should investment go? If a household has a fixed amount to spend, then accounting for job accessibility, school quality and safety makes a difference to how much the house is actually worth to the targeted households. This suggests that there needs to be different policy responses in different areas of low affordability within a region. For example, towns that are not affordable because of inadequate schools may not be the best candidates for expenditure on additional housing but for alternate forms of investment that would seek to improve the overall desirability of the area for firms and households which may in turn improve school performance. As an extreme case, consider the town of Lawrence. The cost of having the lowest quality schools contributes to a drop in the rankings from 46th on the unadjusted index to 119th on the adjusted index a huge drop. Economic development may be as important as additional housing investment in this place because, as it stands, there is an extraordinarily high opportunity cost for households who locate in Lawrence. Therefore, the affordability of the area might be improved not by building additional housing but instead by improving the school system and other public amenities and other economic development efforts. Equally, some towns are categorized as unaffordable by the index because they are located far away from jobs. Such places with high job accessibility costs are not good candidates for affordable housing investment, either. From a regional perspective, spreading out households far away from jobs may also raise the cost of labour thereby reducing the competitiveness of the region.

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A new approach to assessing housing affordability

Alternatively, the high amenity but unaffordable towns should be seriously considered as places that are worthy of additional affordable housing investment. In fact, these are exactly the places where high market rate unit prices or rents are most likely to be able to subsidize the affordable units in mixed-income developments. This can occur under programs such as Chapter 40 B in Massachusetts when existing zoning is sufficiently restrictive.

This program provides density overrides to developers who agree to set aside 25% of a projects units for moderate income households. While the affordable units are only 25% of the total, the legislation also works to augment the supply of new multifamily housing units. Given the strong townlevel regulation over zoning, most new multifamily rental housing in the Boston area gets built in this manner.

One final comment from Lynn Fisher, What this affordability index suggests is that not all places are equal. While policies that require towns to bear their fair share of a regions affordable housing may be politically popular, the implications for households, the regional economy and society generally are less favourable than a policy which better accounts for the implications of location. It should be of no surprise to anyone that location matters, and that location is thus an important feature in understanding the linkages between housing, opportunity and regional economic success.

About the study

This work was carried out by Lynn Fisher and Henry Pollakowski of the Department of Urban Studies and Planning, Massachusetts Institute of Technology, USA, and Jeffrey Zabel of the Economics Department, Tufts University, USA, supported by a excellent team of research assistants. The Warren Group and the Central Transportation Planning Staff (CTPS) of Boston assisted with data contributions. It was awarded the RICS best paper prize at the 2006 Asian Real Estate Society conference held in Vancouver, British Columbia, Canada, on June 30 to July 3, 2006. The full working paper on which this FiBRE is based is available at: http://web.mit.edu/cre/research/ hai/aff-index.html

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Research

January 2008/400/Research/41673/Sterling