Home affordability index

By: J. David Chapman/February 1, 2018

We live in one of the most affordable housing markets in the U.S., and because this is a strategic advantage to our city and state, it is worth tracking and monitoring.

At the University of Central Oklahoma Risk Management, Resilience, and Built Environment Policy Institute, we do just that. We have found that comparing housing prices to population changes, local wages, mortgage interest rates, rental rates, and building material prices gives us the best indication of the health of the housing market. When housing prices escalate without significant pressures from these key indicators, we start thinking about bubbles, or a non-sustainable increase in pricing. We want an explanation for increases or decreases in prices.

The first indicator is population. To justify housing price increases, we need population growth. The Oklahoma City metropolitan area has approximately 1.4 million residents. While seeing slight increases, it’s not enough to sustain any meaningful increase in housing prices.

Local wage increases are obviously important to enabling any price increases in residential real estate as well. The metro area has certainly not seen any meaningful increase in wages over the last few years. Changes in salary tend to be a catalyst for moving up the residential real estate ladder in size and quality.

Fluctuations in interest rates are another cause for increasing home prices. The feds have played that card, and we see little movement pertaining to interest rates. Another interesting indicator is comparing home prices to rental rates. As discussed a few weeks ago, the rental rates in the metro area are some of the lowest of any large city, so this is certainly not a driving factor in home prices.

The last factor that we consider is the price of materials. To measure this, we monitor what we call “inputs to residential construction.” We get this data from the Producer Price Index created by the Bureau of Labor Statistics. Since January 2017, the price paid for every major input to construction has increased significantly. The largest increase is seen in lumber, with OSB up 30.2 percent, softwood up 14.6 percent, and gypsum products up 7.7 percent. If you are looking for a reason for concern that home prices in the metro might escalate and harm our competitive edge in affordability, this is the key indicator to watch.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).