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There has been a lot of attention paid to the rising culture of renting rather than owning real estate over the last five years, but the darker side of that story is the financial restrictions preventing many renters from buying.

In 15 of the 25 largest cities in America, the local median income is not enough to afford the local median home, according to Interest.com’s annual study of home affordability.  To reach that conclusion, they compiled data not just on incomes and home prices but also on property tax rates, homeowners insurance rates, average consumer debts and mortgage rates.

The implications of low real estate affordability are far-reaching.  To begin with, many average-income workers are pushed out to rural or outer suburban areas and then commute into the city, rather than living in the city's neighborhoods.  Distance commuting introduces a variety of personal and societal problems: additional transportation costs, additional environmental impact, reduced time spent with family, reduced time spent in the community of residence, additional childcare costs. 

The implications don’t end there however.  Many urban workers with mid-range incomes, such as teachers, police officers, firefighters, entry-level professionals, musicians and artists are foundations in the community, adding stability and culture to the neighborhoods they inhabit.  Losing them to bland suburban developments would erode the foundations that made historic urban neighborhoods strong in the first place.

Another problem with unaffordable housing in large metropolitan areas is the risk of greater wealth disparities.  When a handful of cosmopolitan cities become the exclusive domains of the rich, and middle- and lower-income people are shunted aside to the outskirts, it creates a closed-circuit hive of economic activity and opportunity for those on the inside, but what happens to everyone else?  If the rich live, work and play in the same sexy city-center neighborhoods, and push everyone else out, then firmer geographical boundaries take root between the rich and middle/poorer classes.

Further problems crop up from there.  Families struggling to afford to stay in their neighborhoods will often take on sacrifices or risks to do so, ranging from second jobs, debt, deferring savings for retirement or education, inadequate health care, even crime.  In fact, a three-year study completed earlier this year by the John D. and Catherine T. McArthur Foundation found that over half of Americans have made such sacrifices in order to cover their housing payments.

Real Estate Affordability Grades by CityThe major cities with the lowest housing costs were Pittsburgh, Detroit, St. Louis, Tampa and Atlanta, with Pittsburgh’s median home price a modest $143,690. On the income side, the cities with the highest median incomes were Washington D.C., San Francisco, Boston, Baltimore and Seattle, with top-ranked Washington D.C. boasting a whopping $90,149 median income from all those federal tax dollars flooding the city.

At the right are the 25 largest metro areas in the country, graded by real estate affordability, with “C” meaning that someone earning the median income can afford to buy the median home.  Note that none of them received a grade of A in 2014.

The Paycheck Power Rating is the percentage difference between the actual median income and the income required to afford a median home.  A rating of -5% means the actual median income is 5% less than the required income to buy an average home in that city.

Still, there is another side to the story of rising real estate values in American cities.  As prices rise, millions of Americans who were previously underwater on their mortgage are breaking the surface.  Further, the economic revitalization of America’s major cities is a cause for celebration, after the second half of the 20th Century saw a flight to the suburbs of America’s middle and upper classes.  Higher real estate values mean higher city government revenues from property taxes, which (if managed well) can mean better local services.  Americans are increasingly placing a value on “walkability”, and trying to live near where they work.  

Perhaps the U.S. will see a shift towards a more European model of cities, where the city is the cultural and economic hub, and the less affluent live in outlying concentric circles and commute in by strong public transportation, while rural towns and villages are bucolic and economically stable.  Or perhaps small cities will see a renaissance as employers, artists and professionals opt out of the San Franciscos and Manhattans of the country and move elsewhere, recalibrating home values in major cities to reintroduce affordable yet safe neighborhoods.

Related Reading:

Rent Affordability: How Do Incomes Stack up to Rents, Since 2000?

The Great American Rent Divide: Why & How Rents Are Diverging Nationwide

Are Micro-Apartments the Next Big Rental Trend in Pricey Cities?


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