How Affordable are Memphis Home Prices?

Welcome to our new series ECON: 901.  These publications will delve into economic subjects close to home where we live, work, and play.  Please feel free to provide feedback or suggestions for any local topics that could be worthwhile to explore (IMG@dwassetmgmt.com).  After all, these pieces are for you, written by one of you.  

Home ownership, the American dream.  Where the heart is.  We really do love homes.  Talking about them, thinking about them, constantly surveying the residential real estate landscape even though we have no plans of moving.  For anyone who follows the Memphis or rather most any real estate market, it is undeniable that home prices have been on the rise.  Recent anecdotes range from bidding wars ending in above listing price sales to homes that never even make it on the market. But do the facts fit the narrative?  Or more directly, how affordable are homes in the 901?  The answer, of course, is all relative.

When discussing the affordability of homes, everyone of voting age knows the barometer for overvaluation occurred in the financial crisis of 2007-2008. So what exactly did valuations look like in Memphis during the Great Recession?  According to the St. Louis Fed, home prices in the metropolitan Memphis area peaked at $157,640 in the second quarter of 2007, effectively doubling in 30 years.[1]  

Yet, the price paid does not tell the whole story.  Whereas some people can drop $157,000 and not think twice, others dare not dream of spending that much.  Thus, it makes sense to look at what people in the Memphis area were earning during these peak housing years.  We are talking about affordability and not nominal prices.  According to the University of

[1]https://fred.stlouisfed.org/series/ATNHPIUS32820Q

Michigan’s Population Studies Center, the average household income for the Memphis metropolitan area was $65,349 during 2006-2010. [1]  By combining these two data points we can

conclude that, on average, Memphians were spending2.42 times their annual income during the housing industry’s most speculative phase.  For ease, we will refer to this ratio as the ‘Affordability Index.’  

And what does this metric look like today? Well, housing prices have eclipsed the 2007 high water mark with the latest available FRED data showing $165,960, a 5.3% increase from the 2007 top.[2]

According to the Census Bureaus’ most recent data (2016), average household income for the same zip codes is estimated to be $69,951 representing a rise of 7.0% from 2007.  Using this new information, the Affordability index dips to 2.38 and leaves the impression that, on average, houses are indeed more affordable than right before the ’07-08 meltdown.[3]

But, as always, there is more to the story than the averages.  Because we live in Memphis we know that some communities are more expensive than others.  We therefore examine the Affordability Index at the zip code level (using Zillow data) to determine where a Memphian’s dollar goes the farthest and where there might be signs of potential overheating.

[1]https://www.psc.isr.umich.edu/dis/census/Features/tract2zip/

[2]https://fred.stlouisfed.org/series/ATNHPIUS32820Q

[3]Source: U.S. Census Bureau, 2012-2016 American Community Survey 5-Year Estimates

Being Memphis, neighborhoods in the same zip code vary greatly but the findings present a general sense of where your dollar will go the farthest.  (Note: for zip codes not listed home price information was not available).

Being Memphis, neighborhoods in the same zip code vary greatly but the findings present a general sense of where your dollar will go the farthest.  (Note: for zip codes not listed home price information was not available).

This piece is being made available for educational purposes only and should not be used for any other purpose.  Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.  Duncan Williams Asset Management believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  Opinions expresses in these materials are current only as of the date appearing herein and are subject to change without notice.  The information herein is presented for illustration and discussion purposes only and is not intended to be, nor should it be construed as, investment advice or an offer to sell, or solicitation of an offer to buy securities of any type of description.  Nothing in these materials is intended to be tax or legal advice, and clients are urged to consult with their own legal advisors in this regard.

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