When a Cheap House Isn’t a Bargain

For most American households, wealth is perceived as the value of the family home. But it turns out that a relatively inexpensive home with a three-car garage in a remote suburban subdivision is not the same “deal” as a similarly priced home in a more urban area when one factors in transportation costs. Many people moving to distant suburbs for cheap housing may not in the end save money or build as much wealth.

For example, take a family earning 80 per-cent of the median income in a given region. The family might choose a home 25 miles from the Central Business District (CBD) of the region with inexpensive housing costs of $800 a month. Since each adult is likely to need a vehicle, a family’s total transportation costs quickly add up to $1,000 per month, including over $400 a month per vehicle.

Another family at the same income living within ten miles of the CBD might get by with one auto, assuming that at least one adult can easily access transit and the family can walk or bike to many of their other destinations, such as school and grocery shopping. Their actual cost may be significantly less than the cost of one vehicle used in the remote suburb because driving distance and frequency may be much lower for the urban family, thereby slowing depreciation on the car as well as reducing fuel, repair, and other costs that rise with mileage. Half or more of the total transportation cost expended by the first household could be put away in savings—or, in theory, used to invest in a more expensive house in a neighborhood with sidewalks, shops, schools, and transit.

Until recently there was no seamless way for developers, home seekers, banks, or municipalities to factor in these major transportation costs (or savings) into their decisions on where to build, where to buy, or where and how to invest—surprising given that transportation consumes nineteen percent of household budgets nationally. In January 2006, the Center for Neighborhood Technology (CNT) and the Center for Transit Oriented Development (CTOD) released the Housing & Transportation Affordability Index (H+T Affordability Index). The Index was created through the Brookings Institution Urban Markets Initiative with additional support from the McKnight and Surdna Foundations. Through the project’s pilot phase, the new index is already being applied to the Minneapolis-St. Paul region to inform the policy debate about new transit investment, job growth, and housing affordability. The organizations involved plan to release indexes for at least 40 additional metropolitan areas in late 2006 or early 2007.

“The affordability index opens a new way of looking at the impact of housing and transportation costs on families in the regional context,” Dan Bartholomay, Senior Program Officer at the Minneapolis-based McKnight Foundation, said. “It’s helped open people’s eyes in our region to the importance of making this connection when thinking about housing choices and affordable housing policy.”

The H+T Affordability Index builds on research CNT began in the mid-1990s to formally quantify the cost of housing and transportation in locational decisions. The early research, in which CNT partnered with the Natural Resources Defense Council and the Surface Transportation Policy Project, revealed that people living in high-density, “location efficient” neighborhoods, with multiple transportation options, often drive fewer miles and own fewer cars than residents of spread-out or rural areas—and the city-dwellers save money as a result. CNT found that, in general, while housing costs may decrease further and further from the urban core, household transportation costs rise. This difference was quantified into a formula that was approved by Fannie Mae to underwrite the Location Efficient MortgageSM (LEM), which allowed homebuyers in areas with better public transportation to put the savings in transportation costs towards taking out a larger mortgage. However, because the model underlying LEMs was complex and required extremely large proprietary datasets, LEMs were available in just a few regions, and even in those regions were not well understood by the general public, mortgage brokers, or policy-makers. 

The new H+T Affordability Index is a continuation of the location efficiency analysis, verifying the previous research but drawing upon more readily available geographic, demographic, and transit information than was used in the LEM, to model the household transportation costs. The H+T Affordability Index results (from the Minneapolis region) reported in Table 1 show how straightforward the analysis has become.

Over time, additional benefits may accrue to families choosing to spend more money on housing and less on transportation. Vehicles are depreciating assets. The more investment a household makes in vehicles, the less it can make in assets that appreciate, such as housing or education. Thus, a relatively inexpensive home with a two- or three-car garage in a remote subdivision is not the “deal” it appears to be in the short-term. Filling that garage may not deplete the family nest egg—but if the money spent for that extra car went instead to a more expensive house, the family would build more wealth.

Additionally, there are a multitude of other, less easily quantifiable, benefits to location efficient neighborhoods. Many urban homeowners might cite the choice and flexibility they have to attend cultural and sports events, walk to a restaurant or ice cream shop, and efficiently pick up groceries or dry cleaning on the way home from work. Children can travel independently at a level appropriate to their age, progressing from a bicycle trip around the block to a walk to school to a bus ride outside the neighborhood. Sixteen-year-olds don’t need to rely on good judgment and concentration to survive driving trips. Routine daily activity enhances personal health, for adults and children. An active street, with a healthy mix of pedestrian, transit, and auto traffic, promotes social interaction and enhances the attractiveness of the community.

Judging from the results of a recent national survey conducted by Smart Growth America, a broader market for location efficient lifestyles may exist. The survey showed that 79 percent of the American public strongly favor commutes of 45 minutes or less and 51 percent prefer homes within walking distance to stores and restaurants. A majority of Americans (51 percent) would still prefer a single-family home situated on a one-acre lot, but just over a quarter of the sample expressed a preference for “living in a place that’s at the center of it all.” And over the coming years, more people will likely have the opportunity to exercise these choices. As public transportation systems expand in many cities - in 2004, 79 percent of all public transportation ballot initiatives in the U.S. were approved, according to the Center for Transportation Excellence - transportation choice increases.

We have only begun to look at housing affordability as a function of place, rather than simply as a mortgage or rental cost. As tools like the H+T Affordability Index enable us to more precisely quantify these benefits, we may yet disprove Will Rogers’s early-20th-century prophecy, “We [are] the only nation that is goin’ to the poorhouse in an automobile.”

Berstein, Scott, Carrie Makarewicz, and McCarty, Kevin. Driven to
Spend: Pumping Dollars out of Our Households and Communities. Washington, D.C.: Surface Transportation Policy Project, 2005. Online at www.transact.org

Center for Transit-Oriented Development and Center for Neighborhood Technology. “The Affordability Index: A New Tool for Measuring the True Affordability of a Housing Choice.” Washington, D.C.: The Brookings Institution, 2006.

Dittmar, Hank, and Gloria Ohland.
The New Transit Town: Best Practices in Transit-Oriented Development. Washington, D.C.: Island Press, 2004.

Peirce, Neal. “Voting on How We Grow: Big Election Day Deal.” Nation’s Cities Weekly 14 Nov. 2004: 2-2.

Reconnecting America’s Center for Transit-Oriented Development. Hidden in Plain Sight: Capturing the Demand for Housing Near Transit. Oakland,CA: Center for Transit-Oriented Development, 2005. Online at www.reconnectingamerica.org

Smart Growth America and National Association of Realtors. 2004 American Community Survey. Washington, D.C.: Belden Russonello & Stewart Research and Communications, 2004. Online at www.smartgrowthamerica.com/NAR-SGAsurvey.pdf