Posted by: Josh Lehner | April 23, 2015

Job Growth Quality, Oregon Edition

Just a quick update on the quality of Oregon’s job growth in recent years. This continues our office’s work on job polarization — the fact that much of the job growth is concentrated in both the high- and low-end of the wage spectrum. As discussed before, the best way to examine job polarization is looking at occupational data. Recently we examined national trends and the following is an Oregon analog.

So far in recovery Oregon has seen polarized job growth, just like the nation however our growth differs in the fact that a) it is stronger overall b) our middle- and low-wage growth is actually a bit slower than the nation and c) our high-wage growth is substantially stronger than the average state. The high-wage gains are largest in management occupations (likely influenced by headquarter operations) but also strong in computer and math, business and finance, and architecture and engineering. Oregon’s “good polarization” growth — the combination of high- and middle-wage jobs — is the 12th strongest across all states. See the map in the national post for more.

ORpolarization14While occupational data is best for examining job polarization, it can be useful to look at individual industry trends as well to see the breadth and scope of the jobs being created. The following shows job growth in Oregon by major industry from January 2010 through March 2015. The industries are ordered from left to right based on their average wage according to the 2014 QCEW data. Here, one can see that across industries, Oregon has seen some broad-based gains but growth is stronger in industries with both above- and below-average pay.

ORJobsRecovery0315

While focusing on gains in recovery is more important for understanding the economy and trends today, it is also helpful to take a step back and look at the bigger picture over the business cycle. Below is the same style of graph by industry, however we start from the onset of the Great Recession.

ORJobsGreatRec0315

One of the interesting items in this last graph is the fact that your eyes can be deceiving. Today Oregon has about 20,000 more jobs than back in late 2007, however, visually it’s hard to tell that given only 4 of the 13 industries are currently at an all-time high. The bigger picture trends — winners and losers over the business cycle(s) — have long-lasting and far-reaching impacts on the economy and labor market. These are easiest to see in the manufacturing and goods producing industries (timber/forest sector) of course as the economy has and is transitioning more and more to services. Additionally, see here for our office’s outlook for middle-wage jobs more broadly.

Posted by: Josh Lehner | April 21, 2015

As Good as it Gets?

There is no question that Oregon’s labor market has accelerated considerably in the past couple of years. The million dollar question is — or in this case potentially hundreds of millions of dollars in General Fund revenue — “Is this as good as it gets for the Oregon economy?” At least in terms of growth rates? Followed quickly by “How long does it last?” These are the questions we will be discussing with our advisors this week in our meetings, ahead of our next forecast (May 14th release.)

OREmpWageGrowth15q1

Clearly the pace of growth has picked up and is as good as, if not better than, what Oregon experienced during them mid-2000s. However that does not mean all is well with the economy, even if the trajectory has improved considerably. It takes time to dig out from something as severe as the Great Recession. That’s why our office has worked on additional measures like the Economic Recovery Scorecard, the Total Employment Gap, and job polarization (e.g. HERE, HERE, HERE.)

With that being said, our office’s primary focus is the economic and revenue forecast for the state which focuses on the aggregate figures (total jobs, total wages, overall cigarette and tobacco sales, etc.) From this top-line vantage point, Oregon’s growth is doing well. While we expect strong growth to continue in the near-term, such growth is already built into our baseline forecast. The key question is whether or not we and our advisors think growth will be a bit stronger, or potentially a bit weaker, that what we already have built into the outlook.

We cannot discount the real possibility that in a few years’ time, we will look back on today as the peak of the business cycle in terms of growth rates. So this may really be as good as it gets, even as the recovery still has legs to run before the next recession.

Posted by: Josh Lehner | April 15, 2015

Graph of the Week: Tax Day 2015

Happy tax tax everyone. While we realize it’s not most people’s favorite time of year in this regard, it is a very important part of our office’s work and for revenues that provide public services in general. Personal income taxes account for 87 percent of the 2013-15 biennium’s General Fund, according to our latest forecast.

Even though it is tax day, it does take our friends over at the Department of Revenue a few additional weeks to process the flood of returns, estimated at about 1.6 million this year. As of this week, DOR has received and processed about 63 percent of these returns. However, as seen below in this edition of the Graph of the Week, we have seen just about 26 percent the final payments for this tax season. Higher income folks generally have more complicated returns, that take longer to first obtain all the required financial documents and then to complete and file the return. As such there is still a tremendous amount of uncertainty regarding the actual amount of revenue this year.

ORPayments041315

As you can see by the forecast line, our office is expecting a big April — growth on the magnitude of 26% year-over-year for the quarter in these final payments. So far both the flows of payments coming in and refunds going out the door suggest our office’s forecast is still largely on track. We will be meeting with our advisory groups over the next two weeks to discuss the economic and revenue outlook. Our next quarterly forecast, which effectively sets the 2015-17 biennium’s revenue amount and the kicker threshold, is set for release on Thursday, May 14th.

 

Posted by: Josh Lehner | April 13, 2015

Economic Drags and the Outlook

So far in early 2015, the U.S. economic data flow has been relatively lackluster, including the disappointing March jobs report. As such, now is a good time to take a step back and mark one’s economic beliefs to market, to borrow a phrase from Brad DeLong. As detailed below, there are clear reasons for both near-term economic optimism over the next year or two and longer-term pessimism over the extended horizon.

First the good news. The biggest weights on the recovery were household debt and the nature of the cycle with housing and government being the largest drags. While these issues were holding back the recovery in recent years, these weights have clearly lifted. Household debt, relative to personal income, has declined considerably since 2007 and is effectively flat the past 2+ years. These trends are widespread across states, with few still deleveraging in 2013 according to the latest NY Fed data. One can argue whether or not this is the appropriate amount of household debt, but progress has clearly been made and the deleveraging cycle appears to be over, at least in aggregate. This bodes well for near-term growth.USHHDeleveragingSecondly, housing and government have turned from drags to moderate drivers. While public sector employment (and expenditures) remains on lower trajectories than in past cycles, housing related employment (using Jed Kolko’s definition) is now growing at its typical expansionary rate. The good news here is that while housing has not and may not provide an extra boost to growth rates, the housing recovery still has long legs to run. With housing starts still hovering around 1 million per year, there is considerable room for improvement. It will take some time to reach typical levels of housing starts, regardless of whether one argues that average should be 1.3 or 1.7 million units. The U.S. is still far below those levels.USHousingGov0315While the above points toward a return to normal economic and labor market dynamics, there is still reason for longer-term pessimism. This takes the form of demographics with an aging and slow growing population overall. Even as the number of working-age adults continues to grow outright, this represents a declining share overall. As Bill McBride says over at Calculated Risk, “2 % is the new 4%.” I think that is largely right.

The back and forth between Ben Bernanke and Larry Summers on secular stagnation is interesting and insightful. While global financial markets, real vs nominal interest rates, productivity and the like may help the U.S. avoid true secular stagnation, they still don’t fix our demographics. Below I show the Oregon working age population as a share of the total population. The U.S. follows very similar trends. These trends are hard to impact over a short time horizon.ORWorkingPopOur office is more pessimistic about longer-term growth rates due to these demographic trends. From our perspective it has big implications for tax revenues and public services. Grandma not only has lower income than during her working years, she spends less and what she does purchase is largely not taxed (food, housing and healthcare.) Of course this is not just a public sector story, but affects potential economic growth rates more broadly.CEX2012_ExpThis combined with the nature of economic growth and the need for the U.S. consumer to save more over time, is likely to weigh on growth rates moving forward. The savings rate today is higher than in the mid-2000s. Partly a response to household budgets and most recently it appears that a large amount of energy cost savings is, well, being saved. As the consumer may be more cautious than in the past decade or two, business investment and exports will play a larger role in economic growth. This pattern is more a return to previous cycles, than anything abnormal from a historical perspective. In a lot of ways, the 2000s are looking more and more like the historical outlier. Be it consumer-led and debt-fueled growth, single-family homes or manufacturing jobs.GDPGrowthPatternsAll told, even with these longer-term concerns, which have not gone away, it does not rule out a year or three of good growth today. Already U.S. employment has picked up considerably and wages should/hopefully/probably follow in the near future for the typical worker. Such gains will translate into a broader and deeper labor market recovery and continued improvement in household finances. We have already seen early signs of these trends here in Oregon and our office expects us to be more of a reverse canary in the coal mine along these lines.

Posted by: Josh Lehner | April 9, 2015

The Oil Math

The plummeting price of oil was one of the biggest economic stories to end 2014 and for the 2015 outlook. Conventional wisdom was/is that the sharp fall in energy prices would act as the equivalent to a large tax cut, helping to stimulate the economy through increased consumer spending. Yes, some states would be net losers as they rely on energy producers, however, on net the U.S. would certainly benefit. So how is all of that going these days?

First, the number of drilling rigs has fallen by nearly half in the past six months. Employment in oil-dependent metros is now growing slower than in the rest of the nation. Industrial capacity utilization for drilling activities and crude oil processing are declining, albeit from very high levels. All of this was/is to be expected and concentrated among a few regions of the country.

However, on the flip side, it’s still a bit hard to tell where exactly these oil and energy savings are showing up in household budgets. However a few trends are emerging, even if we only have a few months worth of data to really work with. Over the past six months or so, households are saving nearly 40 percent of their disposable income gains and energy savings. They’re also spending more on necessities like health care and housing (as home prices and rents rise.) Another increase is seen in food services and accommodations. These early data readings suggest that households are largely saving more of their improved finances or spending on temporary items like going out to eat more or on vacation.OilMathPCE

Another way to try and decompose where the energy savings are going is to look at the monthly retail sales figures. Overall these have been disappointing in recent months, with consumers only spending about half of their savings at the pump on other products. This means that the other half is being saved or spent on non-retail sales goods and services which are outside the scope of the data series. Here, however, one can clearly see the pick up in food services spending.

OilMathRetail

All told much of the improvement in household finances is being saved, or spent on temporary splurges like going out to eat. Other data from the Fed also shows that household debt is increasing (auto and student loans, not credit cards) however not out of line with income gains, so the debt to income ratio is holding steady. It’s still relatively early in the data flow to see exactly how the energy savings are impacting the U.S. economy and of course we’ll have an even better idea with a few more months of data and revisions.

Posted by: Josh Lehner | April 8, 2015

Oregon Exports, Trade and Growth

Quite a few requests coming in these days to talk about trade, its economic impact and the outlook for both the nation (new trade agreements) and local (Port of Portland marine operations) economies. There are lots of numbers flying around and it can be hard to tell which ones are accurate and which ones mislead, even for our office.

First, one common way to discuss the size or impact of trade at the local level is to express the total dollar amount of exports as a share of GDP. Below I plot both the annual growth rates for exports and GDP and also Oregon’s relative ranking among all states. While Oregon’s GDP growth has been stronger than the nation’s in recent decades, so too has our export growth, by and large. As such, Oregon’ tends to rank among the top 10 states in terms of this measure of trade dependence[1]. However since the onset of the Great Recession, Oregon’s relative ranking has eroded from top 10 to nearly 20th in the nation. This is due to both the numerator of the ratio (exports) growing slowly in 2011-13 and the denominator (GDP) growing quickly. Mathematically this quickly erodes the measure/ratio and Oregon’s ranking falls. However, with the strong rebound in export growth in 2014 and plugging in IHS’ state GDP forecasts for the year, Oregon’s ranking improves.OregonTradeDependence

The economic impact of trade is important. How big is a harder question to answer, although business or trade group estimates do exist. Brookings’ has ranked Portland the second most trade-dependent metro (using the same methodology) and the Portland Business Alliance has a roundup of reports. Additionally, Jason Furman, Chairman of the Council of Economic Advisors for the Obama administration, today delivered a speech on trade at Brookings that provides a good overview of the impacts of trade.

The broader discussion, to me, takes two different paths. First is the matter of traded-sector businesses. Being able to sell your products or services outside of the region and bringing back those revenues (for wages, investment, profits, etc.) has become increasingly important. At the national level, exports as a share of the economy has nearly tripled in the past 40 years or so. Finding new markets, particularly for some of Oregon’s niche industries or products (ag is a good example) is vital for business growth. Of course this is much easier said than done and all levels of government and business groups have efforts to increase trade, to various degrees of success. One potential data challenge and economic opportunity is the continued increase in service exports. Being able to grow service exports — energy consultants, engineering firms, advertising, and the like — and also being able to properly measure this growth is important moving forward.

Second is the impact on jobs. Oregon’s labor market is polarizing at the same rate as the nation. Our transportation jobs have seen more negative trends, however our manufacturing sector has clearly outperformed the typical state.

It’s these transportation, and related, jobs that have been impacted the most and will continue to be given the recent losses at the Port of Portland. I would argue these trends are not directly attributable to globalization and trade, or not nearly as much as they are to increased efficiencies in distribution networks, as Joe Cortright wrote in a recent Oregon Business column. Full disclosure: Joe is the chair of the Governor’s Council of Economic Advisors, our office’s main advisory group.

With that being said, an ECONorthwest report on trade highlights the above average pay for many of the trade-related, Portland Harbor jobs. According to media reports, the Port of Portland jobs that will be lost pay considerably higher than this. While I am less concerned about the broader economic impact of these losses, given the size and growth of the Portland MSA or the state economy, I am much more concerned at the individual level. Given the experiences of the RV workers in Lane County, and the fact that the Port jobs pay considerably higher than industry averages, it unfortunately suggests a very rough adjustment period for these workers who lose their job.

[1] Don’t worry, while I graph real GDP growth since that’s what we care about, I do use nominal GDP to base the state comparison calculations.

Posted by: Josh Lehner | April 2, 2015

Job Growth Across Oregon

What follows is a mostly graphical update on the landscape of jobs across Oregon. As mentioned in the previous post on the state more broadly, Oregon is near full-throttle rates of growth. This acceleration has largely come from the pick-up in the state’s second tier metros — Bend, Corvallis, Eugene, Medford and Salem — all of which are growing at good to excellent rates today.

Of course Portland, and the Columbia Gorge, turned the corner first and regained their recessionary lost jobs ahead of other areas. But these second tier metros are now not far behind. Nonmetro, or rural, Oregon has likewise seen big improvements. While rural Oregon is now growing about as fast as it did during the housing boom, effectively 2 percent, it is still digging out from the Great Recession.

ORMetroNonmetro215On an individual county basis, the share adding jobs at all and at various strengths of growth is looking more and more like past Oregon expansions. The recovery is no longer just one or two areas of the state. Nearly 9 out of every 10 Oregon counties are adding jobs over the past year and half of all counties are growing at 2 percent or more.ORCountyGrowth0215With that being said, not all counties or regional economies are in the same place today. While growth has returned, and is picking up, the median county has regained just half of its recessionary losses (in this case that’s Lane County.) Many of the state’s smaller and generally Southern and/or Eastern counties have regained one-third or less of their losses.

The other areas of the state are seeing big improvements. The hardest hit housing regions of the state are rebounding well and growing relatively strong today. Over one-third of Oregon counties have either regained all of their recessionary losses and are currently at an all-time high in terms of employment, or are close. These 14 counties hold nearly two-thirds of the state’s jobs, including the large metro areas of Bend, Corvallis, Portland and Salem, in addition to the smaller, generally Northern counties.

ORCounty0215

This last graph, from our most recent forecast, compares current job growth to each of the past three expansions in Oregon.

The metro areas of the state are growing as fast, or faster than they did during the housing boom. Bend and Salem are currently adding jobs today about as fast as they ever have. Rural Oregon is more of a mixed bag, but there are some encouraging signs. While growth rates in the Gorge are low today, the region has clearly outperformed over the whole business cycle and is in a strong position today. The North Coast has fared ok in recent years and is growing near its typical expansionary rates, even if the region has yet to regain all of its lost jobs.

EmpGrowthCompEastern and Southern Oregon are the most concerning when taking this look at the current state of the economy. Rural Southern Oregon, like Eugene, has that stair-step downward trend in growth rates over recent economic cycles, in large part due to the decline of the timber industry. The 1980s recovery saw a cyclical manufacturing rebound in which growth rates were strong for a few years, even if not all the jobs were fully regained in the mills (see here for a longer historical perspective on the wood products industry.) Given that the U.S. economy more broadly has not exhibited the strong, cyclical rebound in each of the past three recoveries, the 1980s growth is not likely to reappear. As such, job growth of 1-2 percent in these areas is likely the typical expansionary rate. Rural Southern Oregon is in this range, while Eastern Oregon is currently adding jobs at a slower pace and has regained 1 in 3 recessionary losses so far in recovery. Its important to keep in mind that demographics, migration and population growth plan a big role in the longer term drivers of regional economies.

All told, Oregon’s economy is clearly accelerating and the growth is spreading across the state. All counties and regions have seen some job growth, even as that growth is uneven across the state. The recovery has turned into an expansion for the metro areas and generally northern counties. The state’s mostly southern and eastern rural counties are expected to see the recovery continue, particularly as the economic drags of housing and government lift and some population flows return. Our office expects the job gains to continue to spread across Oregon in the coming biennium, however at a slightly faster rate than in recent years.

Posted by: Josh Lehner | March 31, 2015

Strong Job Growth and Forecaster Bias

The good economic news continues to roll in. “[Oregon is] getting close to full-throttle economic growth,” as I recently told the Seattle Times. The reasons are the strong job gains and accompanying decline in the unemployment rate in the past few months. Furthermore, wage growth is stronger locally as well and migration trends have returned. As these economic gains continue to spread out across the state and across industries, Oregon’s recovery has turned into a nearly full-blown expansion. Ahead of our forecast advisory meetings, I just wanted to highlight a few thoughts on the recent numbers and one big issue our office is wrestling with.

First, these graphs help put the recent job numbers in comparison to past cycles. In absolute terms, 55,000 jobs over the past year is just about as strong has Oregon has ever added jobs in expansion. It has taken a few years of steady acceleration to reach this point, however job growth today is quite strong. Of course in percentage terms, growth rates are lower today because the economy and overall population is larger. However, given demographic trends, job growth of just over 3 percent is not only on par with the housing boom, but effectively full-throttle growth.

JobGrowthFeb2015

This is all good news for the Oregon economy. However, the data flow — to the extent that it’s accurate — is better than our office’s forecast. This is important, not just for selfish reasons that we want to be right, but because the upcoming forecast sets the revenue number for the 2015-17 biennium (and the kicker.) We need to get a handle on the underlying economy, so we can produce the best forecast possible.

There is also a fine line for forecasters between “sticking to your guns” and “rooting for your forecast.” Our office needs to make sure we come down on the right side of that line. In recent years, our office has not fundamentally altered the outlook and luckily we has also largely been accurate. As we approach the May forecast, with job numbers better than expected, what do we do with the outlook? It may or may not be too simplistic to simply answer “raise the forecast.” What if the stronger job growth is just a blip — notice the up and down cycle in growth rates even at the top of the housing boom — or worse yet, what if they are revised away? At the industry level, when does the manufacturing cycle end? These are the questions we will try to answer in our advisory meetings and have big implications.

JobGrowthVForecast

Which brings me to the last point. There usually are a few funky aspects to the job reports in real time. This is certainly not the Employment Department’s fault, and it is not even BLS’ fault really (they’re the ones doing the survey and crunching the numbers.) It is just the nature of survey data and trying to weight it properly to reflect the whole economy. Doing this on a monthly basis, in real time is challenging. That’s why our office relies much more on the larger but less timely QCEW data, along with the monthly withholdings out of Oregonian paychecks, and we wait for the revisions to the monthly employment data. Case in point being the goofy seasonal factors last year — see June and December in particular. After revisions, those data make a lot more sense today. However one can identify these issues in real time. Our office has not put the latest job numbers through its paces just yet, but can spot a potential issue with the latest unemployment rate figures.JobGrowthURDropFeb15Over the past two months, Oregon’s unemployment rate has dropped 0.9 percentage points. Never before in Oregon’s recorded history has the unemployment rate declined by this large of a degree. Also, the latest, annual revisions to this data series went through Dec ’14. Most likely it is not a coincidence that the outlier data points also happen to be the ones that have not been benchmarked or revised. This, like the seasonal factors before, speak to underlying data issues, not the underlying economy.

To bring this full circle, it is possible that Oregon did experience record job growth a couple months ago and now record declines in the unemployment rate. That is a possibility and has a non-zero probability. However, it is also possible that the underlying data is very good, as it has been in the past year or so, but maybe not quite record good. It serves no one well for our office to not change the forecast because we are rooting for our current outlook. And, we are certainly not opposed to raising the forecast — again, our job is to be right, whatever the outlook — but we want to make sure it is for sustainable, economic reasons. Not purely because the last couple of months of data is above forecast. To be sure, there are clear signs for both near-term optimism and longer-term pessimism for the economy. I will post some thoughts on these issues as our advisory meetings get closer.

Posted by: Josh Lehner | March 25, 2015

Update on Job Polarization

This is an update on job polarization in the U.S. and across states, based on the new occupational data BLS just released on Wednesday. It is important to point out that the process of job polarization is best seen through the occupational lens, not via industries as some other studies use. The reason being is that technological change impacts specific job types and responsibilities, which cut across all industries. Possibly the best example is office and administrative support workers. No office today resembles Mad Men. The ratio of workers to admin support staff has never been larger than it is today. Of course this is not to say that today’s admin workers are not valuable, it’s just that with technological change they’ve never been more efficient and productive. They are able to carry out the workload of multiple employees a generation ago. Nearly all firms hire admin workers, so examining trends by industry would miss such a fundamental shift in employment and job polarization.

By and large, 2014 continued the same general trends with growth disproportionately concentrated among the high- and low-wage occupations. As I wrote previously, “this, by definition, is job polarization.” USPolarization1014

The good news is that middle-wage jobs are starting to make a comeback. 2014 was the best year for these jobs since 2005, both in the absolute number of gains and in terms of growth rates. Much of the improvement can be tied to construction workers, however 8 of the 11 broad occupational groups within middle-wage jobs picked up in 2014, including teachers and admin support, while production and transportation remained strong. While economists debate the semantics of the manufacturing renaissance, production employment is clearly on the mend.

That being said, middle-wage jobs still trail the top and bottom. Specifically, while high- and low-wage jobs have fully regained their recessionary losses and never been more plentiful, middle-wage jobs have regained just 43 percent of their losses and remain 4.6 percent below their peak levels. A majority of Americans are still employed in these occupations (62 percent), and while middle-wage jobs will continue to increase in aggregate, their share of the labor market is shrinking. See here for more on the middle-wage job outlook.

GrowthbyWageUS0514It can be important to point out that education, at least in the form of a 4 year degree or higher, is not the be-all and end-all of a good paying job. Yes, a college degree is one’s best or clearest path to a high-wage occupation, however there is substantial variation within these groups when it comes to both educational attainment and wages. Construction workers and installation, maintenance and repair workers earn the same amount as community service workers and teachers, even as formal education requirements or norms could not be more different. The reason is that both types are skilled workers, however in one set, the training takes place on the job while in the other, the training takes place in the classroom. See the addendum for further educational attainment breakouts.

OccEduc1

Lastly, the map below compares states in terms of “good polarization,” which I define to be high- and middle-wage job growth. This leaves to the side low-wage jobs, which most analysts and policymakers do not focus on in terms of broader economic development. The top two quintiles are above the U.S. average while the bottom three quintiles are below the U.S. average.

GoodPolarizationMap1014I will have more on state-by-state job polarization in the near future. See the Federal Reserve Bank of New York and/or our office’s previous report on job polarization in Oregon for a good start on state level analysis, for those interested.

Addendum: Educational Attainment by Occupation

OccEduc2

Posted by: Josh Lehner | March 23, 2015

Portland Housing Update. Are things OK?

The Portland Business Journal ran a special edition on residential real estate in last week’s print edition. I was asked for my thoughts on the market, which are similar to our previous work, and reproduced below. If you can get a copy, there are additional comments and insights from local economists and housing industry experts.

First, prices are booming and and the median sale price, as reported by RMLS, is effectively back to an all-time high. Rents have never been higher. However these gains are driven by the fact that housing demand and household formation have returned to normal but the number of homes for sale or rent, both existing and new, have not. From this high level perspective it’s simple supply and demand. Demand is up considerably from the depths of the Great Recession while housing inventory is not. That’s a clear recipe for rising prices.

HousingRMLS

While new construction today is substantially higher than a few years ago, the actual number of housing permits issued in 2013 and 2014 is only roughly in-line with population gains to the region. Portland is not currently overbuilding relative to demand. In fact, even with decent numbers in the past two years, the region still likely has a housing shortfall due to many years of underbuilding with the Great Recession, bad economy and tight credit conditions for both buyers and developers.

HousingPermits

To me, housing affordability is the biggest issue today. We need to ensure that we have enough homes, townhomes, apartments and the like to meet the demands and needs of our growing population. And we need these housing units to be relatively affordable, so that households do not have to squeeze their budgets to such a degree that it impacts their ability to meet their non-housing needs. Worst case scenario would be that housing costs become too high, pushing residents out of the region to more affordable areas. Housing affordability issues apply across the income spectrum, not just to those at the lowest levels.

In particular, it is interesting to see how low interest rates impact housing affordability. Right now home prices relative to incomes are about two-thirds of the way back to the bubble era and considerably higher than in decades past. However, due to low interest rates the financing costs of carrying a mortgage and property taxes remains low and in-line with the 1990s or early 2000s. It’s this bottom line look of actual monthly (or annual) ownership costs that buyers ultimately care about, both relative to income and relative to their expectations of home price appreciation. I am interested to see how home prices react, or don’t, to higher interest rates should the Federal Reserve start to raise them later this year, as expected.

HousingAffordabilityAs the housing market continues its slow march toward normalization, I expect to see the same patterns as in recent years but a little less pronounced. Population growth and housing demand should remain strong, along with a much stronger economy. While the combination of new rental apartments and more new home listings have yet to put a noticeable dent in price growth, I expect that to change in the next year or two. Prices will moderate.

 

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