How Expensive Is NYC Housing?

The U.S. Census Bureau released the second set of 2006 American Community Survey (ACS) data last week, and thus far I have had time to look over some of the housing data (see attached spreadsheet). There are plenty of interesting tidbits there, but one statistic jumped out at me. The median gross rent as a share of household income, meaning half of the households paid more of their income in rent and half less, was 30.5% in New York City, 30.5% in the New York metro area as a whole, and an almost identical 29.9% for the entire United States. The median gross rent (rent, plus the estimated average monthly cost of fuel and utilities) is 23.9% higher than the U.S. average in New York City, 29.1% higher in the New York Metro as a whole; the median contract rent is 35.2% and 40.6% higher than average respectively. Yet it appears that the higher median rents in the New York area are offset almost entirely by the higher median incomes, even for renters. Looking the larger metro areas around the country one finds little variation, with percentages above 33% and below 28% virtually absent (South Florida and the Inland Empire of California are slightly more expensive than that). From a public policy perspective, 30% of income is the share recipients of housing benefits under Section 8 and Public Housing must pay, and that appears to be the national average. Looking at the total rent/income ratio, one wonders how expensive is New York City?

But of course, this is not the whole story.

The quality of housing varies greatly around the country. Doing research and writing reports for my current employer, I know that in many markets landlords are unlikely to get their buildings rented without providing amenities such as pools, children’s playgrounds, clubrooms, and off street parking, even in non-luxury buildings. In New York City the roaches are typically provided free, while rats cost extra.

In New York City, moreover, two-thirds of the households are renters, compared with one-third in the rest of the country. That means renters go much farther up the income distribution in New York City than elsewhere, where virtually all better-off people own once out of their 20s. Sometimes, New Yorkers have to increase income per housing unit by adding roommates, whereas those in other places can have their own apartment. Data by income group makes this apparent. A large share of renters earning less than $20,000 per year pay more than 30% of their income in rent, both in the New York area and in the U.S. as a whole. But only 28.1% of U.S. households earning $35,000 to $49,000 per year paid more than 30% of their income in rent, compared with 41.5% of New York City households and 45.6% of households in the NY metro area. And just 12.6% of U.S. households earning $50,000 to $75,000 paid 30% or more of their income for housing, compared with 20.9% in New York City.

The biggest difference, however, is that in New York City those with deals (public housing, Section 8, Mitchell Lama, rent stabilization) face a radically different housing market that those without. Since Mitchell Lama and rent stabilization are not means-tested, whose with quite high incomes my be blessed, by public policy, with quite low rents as a share of that income. Low, moderate and even middle-income people in NYC and outside the charmed circle, on the other hand, face the housing market from hell. Although the sample size is smaller, the ACS does provide micro-data sample, and if a reader has the dataset and the program to run it, I would be interested in seeing the New York City rent-income ratios for those who have resided at their current address for different periods of time. My guess is newcomers to their apartment, unlikely to have a great deal, are paying vastly more as a share of their income for housing. And before insider locals sneer that the newbies ought to pay for the privilege of joining them here, just remember that the housing market faced by newbies is the same housing market faced by young locals who grow up here, when they seek their own place. Except that the young locals, due in part to public policy as well, are less likely to have received an education.

While the picture is mixed for renters, it is clear for homeowners with mortgages -- the New York area is very expensive. While only 37.1% of these in the U.S. paid 30% of their income or more for “selected monthly owner costs” (the sum of payment for mortgages, real estate taxes, various insurances, utilities, fuels, mobile home costs, and condominium fees), the figure was 49.8% for New York City and 47.9% for the NY metro area as a whole. It is amazing that the figures are this high, given that mortgage lenders one had strict limits on these percentages (28% of income for the mortgage, 36% for the mortgage and other debts, etc.) But as we now know, during the housing bubble these standards were thrown out the window. According to a time-sequence analysis of ACS data released by the Associated Press owner-occupied housing is not only more expensive in New York and other “bubble” markets than elsewhere, it is more expensive than it used to be just about everywhere, a condition the AP rightly described as “not sustainable.” Sooner or later, housing prices will have to get back into line with incomes, and with rents.

The homeowner market thus replicates the renter market. New York City may be cheap for retired people who bought years ago at lower prices, particularly given the city’s low property taxes balanced by a virtually unique income tax the retired do not pay (and the self-employed pay twice). For those arriving (or seeking to form independent households) today, however, New York City is brutally expensive. And while some of this is inevitable for families who want to buy homes -- only one-third of NYC housing units have three or more bedrooms, compared with two-thirds nationally -- note that the New York Metro area as a whole was also relatively expensive in 2006.

The same was true in the late 1980s bubble, after which the Population Division of the New York City Department of City Planning did a micro-data analysis at my request of who was moving in and moving out based on 1990 census data. I found that college-educated young people and immigrants were moving in, but college-educated families with children were moving out in two waves -- when their kids reached school age, and when their kids reached middle school age. Clearly the state’s decision to shift educational resources from the city to the rest of the state caused children whose parents had resources and more qualified to follow, a cruel victory by the winners over those children who remained here. But I also found lots of even affluent ($75K-plus was worth more at the time) families packed into studio- and one-bedroom apartments (which they presumably could not sell after the 1980s bubble burst). Based on people I know, those folks headed for the suburbs as soon as they could. The Department of City Planning declined to released the report I prepared based on this data, fearing that a report that showed the housing problems of young families might cause political problems for the Mayor by igniting an angry response from others interested in housing benefits, such as senior citizens, the homeless, those with AIDS, etc. Especially senior citizens, who have many of the deals. Then again, few are worse off than seniors who can only live here only because they have a deal, and then lose it.

Now, with the whole metro area expensive, families of parenting age are moving out of the region entirely, according to a report released last week by Comptroller Thompson (I guess he has pandered to the seniors enough already and felt he could dare to release such data). And looking metro area by metro area, it is easy to see why. One might assert that homeowners with mortgages are willing to pay a larger share of their income for housing in New York City (49.8% paying more than 30% of income for housing) than in Philadelphia (35.8%), because New York is a more exciting and dynamic place. But is that also true of Atlanta (35.5%), Charlotte (31.3%), Raleigh-Durham (27.3%) and Austin (35.3%)? Those are the sort of places New Yorkers, and many others are moving to, and they are aggressively courting our residents and businesses based on their lower cost of living and higher quality of life.

Across the country, in fact, states, cities and metro areas are desperately trying to lure young workers, thinking of them as the keys to their economic futures. New York basically exploits those workers to the benefit those deemed more important -- those cashing in and moving out -- in public policy. And among households, some have celebrated sky-high housing prices here, seeing them as an opportunity to live high on the hog by “liberating the equity” through mortgage re-financings, as if the money would not have to be paid back. I on the other hand am not pleased and wonder, given what has happened to prices in my neighborhood, if my kids will be able to stay in the area when they reach their 20s.

The answer is likely yes. Housing prices will have to adjust to incomes. Responding to the report by Comptroller Thompson, Errol Louis of the Daily News worried that “teachers, cops, firefighters, bus drivers, security guards, transit workers, barbers and administrators” were being driven out of New York City by the housing bubble. But many people like that, including myself, bought houses in the early 1990s after the last housing bubble burst. This may be a self-correcting problem. Once the upside panic ends -- “buy now or be priced out forever” -- home buyers may go on strike, unwilling to consign themselves to a life of debt slavery to buy a depreciating asset. Either that or investors, stung by losses, will be unwilling to buy mortgage bonds backed by loans too high for people to pay back. Some time soon, a verifiable income with savings for a downpayment will be very valuable to lenders, and sellers will be forced to sell their houses and condos for prices people with these can afford.

Another interesting ACS tidbit is the vacancy rate of 3.7% in New York City in 2006, up from a year earlier. In order to legally justify the continuation of rent regulations the vacancy rate, as measured by the tri-annual Housing and Vacancy Survey which will be taken again by the Census Bureau again in 2008, must be 5.0% or more. Well, both the economy and the housing market were strong in New York in 2006, and are less strong today. Readers of the reports sold by my current employer might have read two years ago my scenario in which a supply boom corresponded with a recession in 2008 to push the vacancy rate in New York temporarily over 5.0%. At the time I said it was conceivable, but very unlikely. But now, it might actually happen.

Let’s say the financial industry layoffs and cutbacks next year convince the young that there isn’t a pot of gold at the end of the rainbow in New York. Some might conclude that sharing a room with four roommates and an apartment with four other such rooms in order to live in poverty here isn’t worth it, whether they are from here or elsewhere, and may choose to go elsewhere. And some landlords, having gotten used the rents that only such extreme measures could support, might hold out for a while before settling for lower rents. The result would be more vacancy. Imagine, further, that all those condos now coming on line cannot be sold for a price that would allow the developers to make money, and that those developers, rather than take a big loss all at once, decide to rent the units out for a while before selling. And that they would hold out, at least at first, for a high rent that would cover their debt service. The result would be more vacancy. Lots of stars would have to align for the NYC vacancy rate to exceed 5.0%. But if it happened in 2008, rent regulations would theoretically go “poof” because the housing emergency would be over, and all hell would break out in 2010 when the data was released.

In 2006 80,000 units were vacancy for rent according to the Census Bureau (vacant for-rent units being the only ones that matter for purposes of calculating a vacancy rate). If that number had been 40,000 higher, the rate would have been over 5.0%. The economy has been slipping, and more new units have been delivered, since then. I’ll concede that this scenario is more likely to occur in 2009, given the slow pace of adjustment in the housing market, and that by 2011 (the subsequent Housing and Vacancy Survey) housing prices will have fallen, the economy will have recovered, and the vacancy rate would have fallen back to normal. Still, something is now possible that was previously impossible. If I can see it, others can too, so if it happens it shouldn’t be a shock.

ACS Housing Data 2006 All Metros.xls1.55 MB