Leading Indicators

Philadelphia’s Looming Housing Affordability Crisis – Part 1

As Diana Lind argues in her recent book Brave New Home, traditional housing in the United States is becoming increasingly inaccessible and unaffordable. Young people—such as Millennials—and historically excluded populations—such as communities of color and recent immigrants—are finding it more difficult to buy homes or pay rent [1]. Although Philadelphia has been touted as a relatively affordable East Coast city, the evidence suggests that it is becoming increasingly unaffordable for average residents. In this Leading Indicator, we take a closer look at the increasing gap between income, home prices, and rents in the city.

 

Key Takeaways

  • While median income in Philadelphia grew faster than the national rate between 2005 and 2019, median home values in the city rose at a far faster rate than the national average during this period, resulting in additional pressure on area homebuyers.
  • The proportion of rent-burdened Philadelphia households also exceeded the national average.
  • As of 2019, Philadelphia’s median home value is 39.3 percent greater than its value in 2005; the median home value in the U.S. is only 9.4 percent greater than its value in 2005
  • As of 2019, Philadelphia’s median household income was 11.1 percent greater than its value in 2005; median household income in the U.S. was 8.3 percent greater than its value in 2005.
  • Between 2005 and 2019, the average Philadelphian had to spend between 3 to 4 times annual household income to afford to buy a home in the city.
  • As of 2019, the city’s median gross rent was 13.4 percent greater than in 2005; the 2019 median gross rent in the U.S. was 14.8 percent above its 2005 value.
  • Since at least 2005, about half of all renting households in Philadelphia have been rent burdened; in 2019, 52 percent of rental households were rent burdened, 7 percent higher than the national average.

 

Home Values and Stagnant Incomes

Home values in Philadelphia have been on the rise for some time. Yet, as figure 1 illustrates, while the city’s median home value has seen steady and rapid growth in the past 15 years, the median household income has not nearly increased proportionately. The city’s median home value increased by 39.3 percent between 2005 and 2019—a 2.6 percent average increase per year—dramatically outpacing the 0.7 percent average annual increase at the national level. In comparison, the city’s median household income has increased by just 11.1 percent since 2005; about 0.9 percent per year – slightly faster than the U.S. average of 0.7 percent per year. The rate of increase of home values is increasing much faster than incomes; indexed home values far exceed household wages with an average annual gap of 25 percent between 2005 and 2019. This illustrates an affordability crisis.

 

Table instructions

FIGURE 1 

SOURCE: Data were obtained from one-year estimates of the U.S. Census Bureau’s 2005 through 2019 American Community Survey. 

NOTE: Sampling errors occurred in the 2017 American Community Survey in Philadelphia. All estimates made in 2017 should be interpreted with caution. 

 

In previous Leading Indicators, we have noted Philadelphia’s relatively slow income growth. While the city saw rapid employment increases since at least 2013, most of these jobs were foundational-skill, low-wage opportunities that did little to increase overall median income in the city. With a limited number of high-paying employment opportunities, increasing debt from higher education and medical bills, and a legacy of financial redlining and other exclusionary tactics, the barriers to homeownership are formidable for many Philadelphians. Yet homeownership remains a primary pathway toward building equity and generational wealth among low-income households – when the market remains stable for longer periods of time and protective policies favoring low-income homeowners are in place [2]. With the deepening gap between home prices and income, many Philadelphians are either currently or soon will be unable to take advantage of the opportunity for homeownership.

 

To further illustrate the increasing unaffordability of Philadelphia’s housing, we consider the price-to-income ratio per year. This figure estimates how many years it would take to save for a down payment [3]. The standard notion in the real estate industry is a 2.6 price-to-income ratio (i.e. that a household can afford a home equal to approximately 2.6 years of their household income) [3;4]. Following this guideline, a household at Philadelphia’s median income ($47,500 in 2019) could afford a $123,000 home; however, the median 2019 home value in Philadelphia was $183,200 [5]. The national price-to-income ratio was 3.7 in 2019, while in Philadelphia it was 3.9. As Figure 2 shows, Philadelphia’s price-to-income ratio between 2005 and 2019 was well above the 2.6 standard; thus, for most of the past 15 years the average Philadelphia household had to spend close to 4 times their household income to afford a home.

 

FIGURE 2

SOURCE: Data were obtained from one-year estimates of the U.S. Census Bureau’s 2005 through 2019 American Community Survey. 

NOTE: Sampling errors occurred in the 2017 American Community Survey in Philadelphia. All estimates made in 2017 should be interpreted with caution. 

 

The Rent Gap

Philadelphia’s rent gap is less pronounced than that of home values. Figure 3 shows the indexed growth of the city’s median gross rent and median household income from 2005 to 2019 in real dollars. Like the city’s median home value, Philadelphia’s median gross rent saw relatively higher growth rates than the median household income, but the difference is much less dramatic. There was a larger rent gap in the years following the Great Recession, but this gap has diminished in recent years. As of 2019, the city’s median gross rent was 13.4 percent higher than in 2005; for comparison, the 2019 median gross rent in the U.S. was 14.8 percent higher than its 2005 value.

 

FIGURE 3

SOURCE: Data were obtained from one-year estimates of the U.S. Census Bureau’s 2005 through 2019 American Community Survey. 

NOTE: Sampling errors occurred in the 2017 American Community Survey in Philadelphia. All estimates made in 2017 should be interpreted with caution. 

 

While the average rent gap is much smaller than its home value counterpart, a large proportion of Philadelphians are living rent-burdened (i.e., spending 30 percent or more of household income on rent) [6]. While this measure has attracted criticism as a blunt instrument–since a household earning $150,000 a year can afford to spend more than 30 percent on rent and still have disposable income for other necessities, while a $20,000 a year household cannot–it is still a useful benchmark [7]. Figure 4 illustrates the proportion of rent-burdened households in Philadelphia from 2005 to 2019; during this period roughly half of all rental households were rent-burdened. During the same period about 45 percent of U.S. households were rent-burdened, meaning that Philadelphia outpaced the U.S. average by about 4 percent annually.

 

FIGURE 4

SOURCE: Data were obtained from one-year estimates of the U.S. Census Bureau’s 2005 through 2019 American Community Survey. 

NOTE: Sampling errors occurred in the 2017 American Community Survey in Philadelphia. All estimates made in 2017 should be interpreted with caution. 

 

Just Scratching the Surface

Mitigating housing insecurity is a key strategy to alleviating poverty. Safe, secure, healthy, and affordable housing allows residents to build wealth and spend their disposable income at local businesses in their communities.

 

Housing security and affordability is a multidimensional issue that impacts Philadelphia. In our next Leading Indicator, we will explore how Philadelphia’s housing affordability compares with peer cities.

 

Works Cited

[1] Lowrey, Anne. 2020. “The Great Affordability Crisis Breaking America.” The Atlantic, 7 February. Retrieved from: (https://www.theatlantic.com/ideas/archive/2020/02/great-affordability-crisis-breaking-america/606046/).

 

[2] Wainer, Allison and Jeffrey Zabel. 2019. “Do Low-Income Families Build Wealth Through Homeownership?” EconoFact, 9 April. Retrieved from: (https://econofact.org/do-low-income-families-build-wealth-through-homeownership).

 

[3] Tekin, Eylul. 2021. “A Timeline of Affordability: How Have Home Prices and Household Incomes Changed Since 1960?” Clever, 1 March. Retrieved from: (https://listwithclever.com/research/home-price-v-income-historical-study/).

 

[4] Florida, Richard. 2018. “Where the House-Price-to-Income Ratio Is Most Out of Whack.” CityLab, 29 May. Retrieved from: (https://www.bloomberg.com/news/articles/2018-05-29/how-many-years-of-income-does-a-home-in-your-city-cost).

 

[5] U.S. Census Bureau. 2020. 2019 American Community Survey, Five Year Estimates. Washington D.C: U.S. Department of Commerce.

 

[6] The Pew Charitable Trusts. 2018. American Families Face a Growing Rent Burden. Retrieved from: (https://www.pewtrusts.org/en/research-and-analysis/reports/2018/04/american-families-face-a-growing-rent-burden).

 

[7] PD&R. 2014. “Rental Burdens: Rethinking Affordability Measures.” HUD USER. Retrieved from: (https://www.huduser.gov/portal/pdredge/pdr_edge_featd_article_092214.html).