Charleston Economic Report: Income and Housing Price Correlation

"We know the multifamily market faces significant headwinds, which makes Freddie Mac’s countercyclical role critically important to lenders and borrowers. We continue to maintain a laser focus on providing liquidity, stability, and affordability to the market, and FHFA has again set strong requirements that create the conditions for us to deliver on our priorities."

- Kevin Palmer, Head of Multifamily at Freddie Mac

Hi Nuvo Community,

_{We begin with a look at a couple of Charleston's economic figures, comparing personal income and relative housing prices over time. This data comes from the Federal Reserve of St. Louis (FRED). To examine housing affordability, we used the Regional Price Parity of housing for the region. Regional price parities (RPPs) are regional price levels expressed as a percentage of the overall national price level for a given year. The price levels are determined by the average prices paid by consumers for the mix of goods and services consumed in each region. Basically, RPP tracks how housing/renting costs in a specific market compare to the national average. Below, you can see the percent change of these 2 data points in Charleston since 2009.}

_{Year-over-Year Changes: A Clearer Picture}

_{This initial look is helpful but doesn't give us the full story. Moving to YoY changes, we see the percentage change in each variable compared to one year earlier. This method is better for spotting trends because it levels out unusual spikes or drops in the data. It turns out, that when you look at the changes this way, income and housing affordability in Charleston don't clearly move together or apart, though they do tend to move in opposite directions, suggesting there may be a negative correlation (see below).}

_{In data science, a correlation greater than 0.50 (or -.50) is considered to be noteworthy, implying that there's a consistent relationship between the two sets of numbers we're looking at. Now we’ll see if we can find a strong correlation if we lag one of the variables, meaning we think changes in income may have a delayed effect on relative housing costs.}

_{Education as a Leading Indicator of Housing Affordability}

_{When we delay the housing price data by four years and compare it again to income changes, an inverse pattern emerges. In fact, we see a negative correlation of -.0674. This suggests that as income goes up, housing tends to become, comparatively, more affordable in that market four years later. This kind of insight can be useful for predicting future housing affordability and rent growth. The lagged data is shown below.}

_{What This Means for Real Estate Investments}

_{For those investing in multifamily real estate, understanding this relationship can be a useful tool when evaluating which markets to invest in. It suggests that if you keep an eye on how income is changing in a specific market today, you can get a sense of where housing costs will be in 3–4 years relative to the national average. It may also impact underwriting assumptions with regard to how much higher rents can realistically be increased over your hold period.}

_Conclusion

_{To sum up, Charleston's personal income figures and relative housing costs appear to be linked, but the impact of changes in income takes 3 to 4 years before it significantly translates into relative housing affordability. This makes intuitive sense. As residents earn higher incomes, the proportionate share of their incomes that they spend on housing tends to decline. I.e., housing becomes more affordable relative to markets where incomes are not rising as fast. A key consideration for projecting strong rent growth is to determine whether incomes are rising faster than relative housing costs.}

Happy Real Estate!

All the best,

Yuri - Your Real Estate Investigator

Credit: Brian Underdahl, Chief Analytics Officer & Jackson Burks, Economic Analyst Intern

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