Monday, January 3, 2011

Wait a Minute: Some BIG Caveats on High "Housing" Cost of Living Index Values Reported for City of Portland.

Recent news stories (like Portland Tribune story HERE) have reported that a recent study for the Portland Business Alliance concluded that Portland had a high cost of living compared to other cities.  

I went back and read the study HERE. About housing, the report states that:
Portland has a high in cost of living...According to C2ER data for the first quarter of 2010, the cost of living in Portland (the city, not the metro area) ranked higher than 84 percent of the cities surveyed... Housing was 31.6 percent more expensive [than the national average for all cities surveyed]. Housing is the main cause of the high ranking...
After reading the report I went to one of the key resources used to draw these conclusions, the ACCRA Cost of Living Index from the Council for Community and Economic Research. 

Problems with Reported Portland HIGH Housing Costs in ACCRA Cost of Living Reports:
Even though the cost of housing may have been measured in a uniform way across cities, the measurement used may be distorting the accuracy of housing costs by focusing on income groups and housing types that are NOT representative of median income/"middle class" households.

1.ACCRA Cost of Living Housing Costs Are Defined as Housing Costs for HIGH INCOME households, and NOT Median Income/"Middle Class" Households: ACCRA methodology states clearly that their COL index " reflects cost differentials for professional and executive households in the top income quintile. Operationally, this standard of living is set by the weighting structure. Home ownership costs, for example, are more heavily weighted than they would be if the Index reflected a clerical worker standard of living or average costs for all urban consumers."
 
2. Housing Costs Are Focused on NEW construction, Large Homes on Large Lots that Clearly are NOT Typical in the Overall Marketplace; Portland Stated Purchase Price of $393,000 is 64% Higher than RMLS Metro Area Median Sales Price YTD.
The ACCRA COL definition for a home ownership unit is: Total purchase price for a 2,400 sq. ft. living area new house, 8,000 sq. ft. lot, 4 bedrooms,2 baths."  According to latest HUD Housing Scorecard new construction home sales represent 6% of all home sales nationally, so the subset of 4 BR 2,400 sq. ft new construction homes on 8,000 sq. ft. lots would represent an even TINIER share of the overall home sales market and even more so in Portland where smaller lot sizes are typical in the marketplace.

For Portland the 1st Qt 2010 ACCRA purchase price is given as $392,967, however the October 2010 RMLS report shows the YTD median sales price of a home in the Portland metro area as $240,000. This means that the stated 1st Quarter 2010 ACCRA given home purchase price for the City of Portland is 64% ABOVE the RMLS median sales price for the Portland Metro area though October of 2010.
 
3. It is Not Clear How Rental Costs are Factored Into Housing Cost Component of Index; Portland Stated Rent of $1,096 May be Overstated by 25%.
Although data for 2 BR, 2 Bath , 950 Sq. Ft apartments are stated for each city in the ACCRA Cost of Living Index it is not clear how those costs are factored into the housing component of the index. (The index data only shows that "housing" accounts for 28.99% of the total Index). Also, Portland's stated rent of $1,026 for the 1st quarter of 2010 is high; a Marcus and Millsap report I had previously linked to HERE indicated asked for Class A apartment rents in Portland during the first quarter, 2010 were $810 per month. If that rent is accurate, the ACCRA 1st Qtr 2010 given rent for Portland of $1,026 would be overstated by 25%.

My Bottom Line: While comparing the cost of living between areas IS important, the housing components of the ACCRA Cost of Living Index have serious flaws that have not surfaced in press accounts, nor are these flaws/limits described in published reports by trade groups and government agencies who use this Housing Cost of Living Index. Because housing costs make up nearly 30% of the total ACCRA Cost of Living Index these flaws call into question the accuracy of the index AND its applicability to middle class /median income households.

P.S. I clearly don't have anything against "professional and executive households" since I once was one of them. I also don't have a problem in comparing the relative costs for those households for different cities. I just think it is very IMPORTANT to note that these stated "Housing Costs" represent a very small share of the market and in NO way represent the "Housing" cost of living for median income /"middle class" households in any of the areas surveyed, including Portland.  

Originally created and posted on the Oregon Housing Blog.

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