Release: New Carpenter Index Developed by AEI Housing Center
December 11, 2019
FOR IMMEDIATE RELEASE
THEY CAN BUILD IT, BUT CAN THEY AFFORD IT? NEW “CARPENTER INDEX” CALCULATES AFFORDABILITY FOR ENTRY-LEVEL BUYERS
San Diego, L.A., Denver among least affordable areas; Chicago, Detroit among most affordable
Washington, D.C. (December 11, 2019) — A new tool created by American Enterprise Institute (AEI) scholars helps users with blue collar wages to compare the affordability of entry-level homes in U.S. metropolitan areas.
The AEI Carpenter Index, developed by the AEI Housing Center, uses a carpenter’s household income to compare relative affordability for entry-level housing across the nation’s 100 largest metro areas. It estimates the share of entry-level homes that average carpenter households – a proxy for the blue-collar workforce – can afford to purchase. This share ranges from seven percent in the least affordable metro to 100 percent in 22 metro areas.
AEI Resident Fellow and Housing Center Director Edward Pinto and Housing Center Director of Research Tobias Peter say the Carpenter Index can answer the question: “Can the person who builds homes actually afford to buy one?”
The scholars say the strength of the Carpenter Index is its simplicity, beginning with average carpenter wages at the metro level (nationally this is around $47,000). It then assumes a household income that totals 150 percent of the carpenter’s wage, which is roughly the national average. This yields a typical total carpenter household income of $71,000.
Pinto, a former executive vice president and chief credit officer for Fannie Mae, says a rule of thumb is that a household should purchase a home no more than three times the household’s income in order for that home to be considered affordable. Based on this equation, the typical carpenter household could afford a home valued at no more than $213,000.
Using the Carpenter Index and the Internet to search for home prices across a variety of U.S. metro areas, the report finds:
- In San Diego, the most unaffordable metro area in 2018, the carpenter household with $250,000 in purchasing power would have to settle for a 500 square feet, one-bedroom “doll house.” In Pittsburgh, one of the most affordable metros, the household with roughly the same amount to spend could buy a 3,600 square feet, six-bedroom home.
- In two-thirds of the 100 largest metros, entry-level or starter homes are still affordable for the average carpenter household (2018 data). However, housing has become increasingly unaffordable as home prices have generally risen faster than wages.
- San Diego, Los Angeles, San Francisco, Denver, and Portland ranked as the least affordable metros, while Chicago, Detroit, Indianapolis, Philadelphia, and St. Louis ranked as the most affordable metros. Las Vegas, Houston, Minneapolis, Atlanta, and Tampa ranked in the middle of the index.
While home prices have far outpaced wage gains, Pinto and Peter say is the result of a regulatory failure, not the market. In any regular market, the price signal – which prevent massive shortages and ensure that consumer wants are largely satisfied – would alert suppliers to ramp up production, capping price increases until supply and demand return to equilibrium. In the housing market, however, land use and building regulations constrain builders from providing additional entry-level supply, even at the higher marginal price. This is particularly evident on the West Coast, where builders are so constrained there is little new housing supply of any type.
Based on analysis of the Carpenter Index, Pinto and Peter conclude that the policy prescription is clear: Reduce burdensome local regulations so that builders can respond to price signals, while keeping prices more in line with wage growth.
AEI is collaborating with Lending Tree to promote the Carpenter Index to a broad audience of homebuyers, particularly those seeking entry-level homes.
To arrange an interview, please contact Brendan Rascius at [email protected]
Additional housing affordability resources:
From AEI scholars:
Best and Worst Metro Areas to Be a First-time Homebuyer
Home Price Appreciation Index and Months’ Remaining Inventory
The State of the Housing Market
From Lending Tree:
https://www.lendingtree.com/home/mortgage/homeownership-for-the-middle-class/
https://www.lendingtree.com/home/mortgage/most-expensive-towns-in-america/
https://www.lendingtree.com/home/mortgage/can-teachers-afford-home-in-nations-largest-metros/
https://www.lendingtree.com/spiderman-new-york-cost-of-living-study/
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