Can housing costs get so high that they repel new migrants, and stunt a metropolitan area’s economic growth?
For potential migrants looking for a job, metropolitan areas—and in particular large metropolitan areas—are the places to be. People move in because that's where the jobs are. More than 93% of non-farm jobs in the U.S. are in the 100 largest metropolitan areas. The biggest 15 metro areas account for 34% of the nation’s jobs. Big places also have the benefits of cultural amenities, educational institutions, and impressive retail and restaurant environments.
The combination of population growth, a constrained supply of land, and local land use policies, however, work together to put upward pressure on housing costs. Wages in big cities are typically higher than in other places. In theory, this compensates for higher housing costs. But is this notion a thing of the past?
One measure of housing affordability in metropolitan areas is the Housing Opportunity Index (HOI), produced quarterly by the National Association of Home Builders, and defined as the share of homes sold in a metropolitan area affordable to a household earning the local area median income, using standard mortgage underwriting criteria. The nation’s largest metropolitan areas—the so-called Mega metropolitan areas—are the least affordable places to live as measured by the HOI. They also experienced the biggest drop in affordability over the 2000-2007 period: The average HOI for the Mega metropolitan areas dipped from 54.3 to 34.5 between 2000 and 2007 (Table 1). In other words, 54.3% of homes in the nation’s largest metropolitan areas were affordable to the median income household in 2000, but only 34.5% were in 2007.
|Metropolitan Area Hierarchy|
|Mega metro||greater than 2.5 million|
|Major metro||1 to 2.5 million|
|AAA metro||500,000 to 999,999|
|AA metro||250,000 to 499,999|
|A metro||less than 250,000|
|Source: D. A. Plane, C. J. Henrie, and M. J. Perry. 2005. Migration up and down the urban hierarchy and across the life course. PNAS 102(43).|
Given the run-up in home prices, household migration to the Mega metropolitan areas should have slowed between 2000 and 2007, while migration to smaller, more affordable places should have been relatively higher.
|Table 1. Housing Opportunity Index by Metropolitan Area Type: 2000 and 2007|
|Percent of Homes Affordable to Median Income Household|
|Metropolitan Area Type||2000||2007||Pct. Change|
|All metropolitan areas||68.7||58.3||-10.4|
|Source: National Association of Home Builders and author’s calculations|
In-migration rates (Table 2) fell between 2000 and 2007 for all sizes of metropolitan areas, with somewhat larger drops in the Mega metros.
|Table 2. Household In-Migration Rates (per 10,000 housing units) by Metropolitan Area Type: 2000 and 2007|
|Metropolitan Area||2000||2007||Pct. Change|
|All metropolitan areas||527||492||-6.6|
|Source: IRS County-to-county migration files and author’s calculations|
Is there a statistical relationship between a metropolitan area’s housing affordability and household in-migration rates in a given year? The short answer is no. A simple correlation between metropolitan area HOI and in-migration rate for both 2000 and 2007 show a weak negative relationship between housing affordability and household in-migration rates.
What does seem to matter is the change in housing affordability over time. There is a positive and large correlation between the change in HOI between 2000 and 2007 and in-migration rates in 2007. That is, places where affordability dropped between 2000 and 2007 generally had lower rates of household in-migration in 2007. Places that became more affordable between 2000 and 2007 had higher in-migration rates in 2007.
Why would the change in housing affordability be related to in-migration when a metro area’s current affordability is not? It may be that changes in housing affordability are actually signals for a multitude of economic changes. Generally, we think of home prices as being influenced by changes in the local economy. When a region loses jobs, as some metro areas in the mid-West have, home prices fall and the region becomes more affordable.
But it is also possible that the relationship can work differently. Can home prices influence job growth, particularly when prices rise quickly and wages cannot keep up? Perhaps the phenomenon is a result of employers not being able to expand their businesses and add jobs because they could not find workers that could afford to re-locate. Perhaps new firms did not locate in places with rapidly escalating housing costs because the wage premium got too high. Perhaps the disadvantages of large metropolitan areas started to outweigh the advantages, at least on the margins.
Job data from the Bureau of Labor Statistics provides some preliminary indications on the economic effects of housing unaffordability in large metro areas. In metropolitan Miami, for example, the HOI dropped 49 points, from 58.8 in 2000 to 10.0 in 2007. The job growth rate in Miami slowed considerably in 2007. The number of jobs in the Miami metro area grew by about 3% annually in 2004, 2005 and 2006; however, in 2007, jobs grew by only 0.6%. In the Washington DC metro area, where the HOI dropped 39 points between 2000 and 2007, job growth proceeded at a stable 2.0 to 2.5% annual growth rate in 2004, 2005 and 2006. In 2007, however, job growth was at 0.8%.
In many places where housing affordability improved—or at least did not decline too much—job growth held steady or increased in 2007. Many of these were Major metro areas (with populations between one and 2.5 million). For example, the HOI for Denver increased six points, from 58.5 in 2000 to 64.5 in 2007. The job growth rate in Denver in 2007 was 2.2%, up from 2.1% in 2006, 2.0% in 2005 and 0.8% in 2004. In Pittsburgh, the HOI was up 8.6 points and annual job growth rates were steady between 2004 and 2007. In Rochester, NY, the HOI was up five points and job growth in 2007 was stronger than in 2006.
So—big drops in housing affordability may be a problem for a metropolitan area’s economic health. High housing costs make it more difficult to attract labor. The wage premium needed to offset the high housing costs becomes untenable at some point. As a result, new firms stop locating in high cost areas and existing firms are unable to add jobs.
Eventually, of course, job losses would put downward pressure on housing costs and the metropolitan area’s economy would stabilize. Large metropolitan areas will end up with a smaller share of the nation’s jobs after this stabilization process. If large places are good for economic activity because of the agglomeration benefits they provide, the dispersion of economic activity may not be a good thing for them.
How can the biggest cities best prosper? Large, high cost metropolitan areas can stem economic slowdowns through policy changes that increase the supply of housing, thereby reducing housing costs. These policy initiatives would include changes to local land use and building regulations to encourage the construction of more housing. A regional approach to increasing the housing supply would focus on promoting housing near transit and employment centers.
In the last two years, home prices have declined across many high cost metropolitan areas; however, job growth has already slowed disproportionately in many of these regions. This trend will likely continue in the near future. If the nation’s largest places are to be the dominate location for job growth in the future, regional and local policymakers need to develop comprehensive housing strategies that treat housing as an integral part of a regional economic development policy.
Lisa Sturtevant is an Assistant Research Professor at George Mason University School of Public Policy, Center for Regional Analysis.