Richard Florida and the Creative Class Group have an interesting series of studies on housing and the crisis in the United States. The latest examines house prices vs. income levels for various American cities.
Now we’re going to get a little academic (see graph below). The correlation coefficient between housing prices and incomes is 0.68, which means they’re closely associated with each other.
The line in the graph is the national (U.S.) average. So if the city is located above the line, house values are higher than what the income levels in that city would suggest (based on the national average). If the city is located below the line, it means that the house prices are below the national average based on the income levels.
Clearly, Honolulu is expensive. House prices are quite high relative to the income levels in the city.
Now, the first thing that struck me when I saw this study was: How do you factor in foreign investment levels? Honolulu is a resort destination, meaning people typically buy second homes there. The locals aren’t the ones bidding up home prices.
The difficulty, then, is determining the fundamental value of those homes. At what point do you reach bubble territory? The income levels of the locals are almost secondary to the income levels in Tokyo, Hong Kong and the other Asian markets that are highly attracted to Honolulu.
By contrast, Akran, Ohio’s real estate market is likely more dependent on local factors. It’s less international.
The other factor is “amenity value.”
“Almost half of the top 10 regions are in California.” [Creative Class]
People are paying more because of locational amenities (weather, beaches, etc…) — beyond what could be argued is the intrinsic value. Emotion plays a role.
Housing and the Crisis, Part III [Creative Class]
Image from Flickr by Christopher Dale
