Does Hawai'i's Housing Ladder Work?

Among the twisted threads of our local housing discourse is the idea of the housing ladder. Basically the story goes you just need to get your foot in the door on a condo; and then that will allow you to build the equity to get into your dream home. One big enough for your family.

Then later on, after a family has built equity in a condominium, maybe they trade up to a bigger condo or a single-family home. “That’s the whole concept of the housing ladder,” Pakkala says. - Hawaii Business

Making the Case for Increased Urban Density - Hawaii Business Magazine

Building up can be a lot cheaper than constructing single-family homes in new developments.

Now, this makes some sense. And it conveniently justifies building the sort of housing developers want to build: higher margin condos.

But in Hawai'i, things are broken in two ways. First, it doesn't work.

We pulled some numbers on incomes, median home prices, and mortgage rates, and played around with what it looks like to actually climb the housing ladder assuming a 30year mortgage.

The good news: someone who buys a condo earlier in life will nominally have an easier time buying a single family home later. That's because you have in fact built equity. But that's ignoring costs like HOA's; the realtors cut when you sell; and assumes it costs the same to rent as it does to own (it doesn't).

The bad news: If the end goal is getting into a single-family home (or even just a three-bedroom condo which costs very nearly the same these days), the ladder has been broken for 30 years. If you bought a home in the 1990's it works. That's because the 1990's were affordable at lower AMI generally because as the Japanese left our housing market prices plummeted.

Any year after 1996 however, the accrued equity in a condo just isn't enough. 1996 was the bottom of the market and as prices rose again, so did any hope of getting on the housing ladder.

A person who's income growth tracks the median income growth, is highly unlikely to be able to afford a home because of the housing ladder. It will always require big jumps in income. Depending on the start year, you might need to earn 200% of AMI to move up the next rung.

You can play around with this yourself below.

CB Whitepaper

As mentioned, generally, accruing equity in a condo does lead to a lower income required to enter the single-family housing market than a new entrant just making a 20% down payment.Equity increases at a faster rate then home prices do.

But it's still just not possible to use the housing ladder to move up a rung. That equity must be accompanied by an income rising faster than median incomes.

Essentially if a condo is affordable to say a firefighter (and a 1-bedroom condo generally is) a single family home will probably never be affordable to this firefighter because his or her income likely tracks median income changes. The only way for that firefighter to afford a better home (assuming no inheritance) is going to be to get a better paying job.

One last issue:

The last issue with our housing ladder is this. The ladder is a pyramid. We are not building larger units (particularly in dense areas) at a fast enough rate to sustain a housing ladder. I've written about this before.

Hawaii Doesn’t Build The Housing Units Locals Need

“Affordable” projects supply too many units with two bedrooms or less. But most residents want at least three bedrooms.

The ladder is pyramid shaped, there are a lot of small units being built at the bottom level, but not enough larger units at the top. Now obviously; single people don't need three bedrooms. But the ratio of 1-bedrooms being built to 3-bedrooms isn't 2:1. It's like 9:1.

That pretty much dooms the housing ladder from the start. When we talk about filtering-as any YIMBY will tell you-there has to be enough at the top to filter down to begin with. Much the same here, we build to many smaller units relative to the demand for larger units; making it all but impossible to move up.

This is actually a problem for filtering more broadly; a point I'll take up at a later date.