IS ANYBODY SURPRISED?

City Observatory's Joe Cortright notes that "affordable housing" is meaningless in isolation.

There are lots of reasons to believe that a single, fixed percentage of income standard [like the 30% of income that is most often used as a benchmark for “affordable” housing costs] does a poor job of reflecting whether housing is priced appropriately, and whether households are being asked to spend too much. We’ve explored some of these issues before, but today we want to focus on one key issue: the tradeoff between cheap rents and costly transportation.

Some apologists for expansive suburban growth tout the low housing prices of cities like Houston, but invariably they leave out the fact that sprawling cities necessarily imply higher transportation costs. If you have to drive everywhere, and drive further for every trip, what you save in rent or mortgage payments, can be more than eaten up in car payments, gasoline purchases, and time wasted traveling.

Well, yes, at the margin the equilibrium resident is indifferent between a cheaper house and a more costly commute, or a more expensive house and little or no commute.

Lo and behold, observed living patterns are not inconsistent with those equilibrating tendencies.

The Consumer Expenditure Survey divides households into four quartiles according to household spending.  The lowest quartile spends the least (about $1,370 per month); the highest quartile spends about $9,300.  Within each quartile, the report divides households into three groups based on how much they spend on housing. Less than 30 percent is the group that is considered not-cost burdened by housing, 30 to 50 percent is cost-burdened by housing, and households spending more than 50 percent are severely cost burdened, according to this rubric.

What’s interesting to note here, is how, within each quartile, households that spend less on housing end up spending a great deal more on transportation.  Conversely, households that spend a larger fraction of their income on housing spend, on average much less on transportation. For example, households in the second quartile who spend less than 30 percent of their income on housing spend 12.6 percent of their income on transportation. That falls to less than 10 percent for those who are somewhat cost burdened, and less than 5 percent for those who are severely cost burdened. This pattern across income groups is consistent with the idea of a tradeoff between cheaper rents and higher transportation costs.

Its especially instructive to look at households in the highest spending quartile.  These are the 25 percent or so of most affluent households (as judged by their spending patterns), with monthly spending of about $9,300.  Households that spend less than 30 percent of their income on housing in this group spend $2,300 per month on transportation. Meanwhile, their peers with higher housing costs spend dramatically less on transportation ($400 to $600 per month).

Yes, before the 2008 housing bubble collapsed, those executive boxes in DeKalb and Rochelle were good value for money, as long as gasoline was cheap enough.

Mr Cortright concludes with a different policy conundrum.  "If your rent is low, but you have to spend a disproportionately large share of your income on transportation, then your living situation isn’t affordable."  That's a different sort of out-of-equilibrium behavior, the one that sometimes manifests itself under the rubric of "gentrification," better understood as higher value-added activities adding so much value that people participating in lower value-added activities get priced out.