Higher wages: A great idea, but not key to housing affordability

June 26, 2005|by Tom Firey

Are homes in Washington County overpriced or are local workers underpaid? In his well-researched May 1 op-ed "Dirt Pay," Hagerstown resident John Colson argues for the latter, claiming the county's affordable housing woes should be blamed on slowly rising local incomes, not house costs.

Colson grounds his argument in the observation that, between 2000 and 2004, local home prices increased much faster than household income. My own calculations show the median price for homes sold in Washington County rose 56.0 percent over that time while estimated median income rose only 9.0 percent. In 2000, the median house price was 2.6 times median income; in 2004, it was 3.7 times median income.

Given those trends, Colson concludes that "Washington County's household income is too low" for county housing. He blames that problem on local political leadership, charging the county's commissioners and economic development officials with being "responsible for the crisis in affordable housing."


But if this criticism is just, then local officials aren't the only ones who deserve blame. Colson's argument would also apply to Baltimore City and all other Maryland counties except Allegany, because those political subdivisions are also experiencing house price increases that are much higher than income increases. Statewide, estimated median household income grew 9.1 percent from 2000 to 2004, yet the median house price increased 68.2 percent. In 2000, the median price for a home sold in Maryland was 2.3 times the median income; in 2004, it was 3.6 times income.

Given that Washington County's trends are basically the same as the rest of the state (and the larger Washington, D.C. region for that matter), it is likely the factors responsible for inflating home prices faster than income are regional in nature, not local. Hence, Colson's criticism of county officials appears misplaced.

The main reason that regional house prices are outpacing income is the D.C. area's white-hot job market, fueled by the Bush administration's rapid expansion of the federal government. The heavy regional demand for high-skilled workers has not (yet) translated into a sharp climb in incomes because many of those jobs are being filled by workers who are relocating or commuting to the D.C. area (including many commuters from Washington County). But that inflow of people has placed heavy demand-side pressure on house prices.

People's willingness to move to good job markets suggests that increasing current workers' income will not solve Washington County's affordable housing problem. Higher wages, after all, attract workers, and their demand for housing will further inflate home prices.

Besides demand-side pressure, the D.C. area's housing market is also experiencing strong supply-side constraints from traffic congestion and growth controls (including Washington County's current building moratorium). Add in the high level of regional real estate investment and speculation, easy access to credit provided by risky mortgage instruments like adjustable-rate mortgages and interest-only loans, low long-term interest rates and the questionable but widespread belief that homeownership is socially and individually preferable to renting, and the result is a regional market in which house prices outpace income.

Aside from relieving some of the supply-side constraints, there is little that local officials can do to slow the regional housing market. No matter how much money the county pumps into the economic development commission or what wunderkinds are hired to staff it, local wages will reflect the supply, skill level and market value of available labor. But, fortunately, there are two things that Washington County residents can do to overcome the affordable housing woes: improve their jobs skills and make smart short-term housing decisions while waiting out the housing bubble.

Thomas A. Firey, a Washington County native, is managing editor of the Cato Institute's Regulation magazine and senior fellow for the Maryland Public Policy Institute.

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