Oregon Office of Economic Analysis

With Professor Emerson, of The Oregon Economics Blog, being in Brazil for 6 months you thought you weren’t going to get your regular updates on home prices. Well, you were wrong, although the follow strays into a broader discussion of prices, property taxes and rents.

The November Case-Shiller Home Price Indices were released yesterday and provided more good news on the housing market. The 10 City Composite Index rose 4.5% from November 2011 to November 2012. The 20 City Composite rose 5.5% and the Portland index rose an even stronger 6.7% over the past year. Portland’s index has been positive on a year-over-year basis since May and the composite indexes since June. As Calculated Risk notes, the 10 City Composite is now 5.3% above the post bubble lows after recent months of appreciation and the 20 City Composite is 6.0% above the lowest point. Portland has seen even stronger appreciation since hitting bottom in January, with gains of 7.2%.

Overall the good news emanating from the housing market continues to come in. Rising home prices have numerous positive economic benefits, predominantly improving household balance sheets (increasing asset values, lowering the relative debt burden) that allows consumers to spend more on other products or save more. As prices rise, more and more households will no longer be underwater on their mortgage and able to sell and/or relocate, if needed. The level of migration across the country has been low in recent years, partially the result of the devastating recession with sub-par labor markets in nearly all parts of the country but partially the result of households being locked into their homes, unable to sell at a price similar to their mortgage value. As inventories dwindle, and prices rise, it also makes new construction more affordable from a development/financing perspective. Even with the negative headline GDP in Q4, residential investment (basically new home construction) grew over 15% at an annualized rate, and full year 2012 numbers increased nearly 12% over 2011. These strong growth rates are expected to continue for the next few years and even accelerate somewhat as housing starts and construction employment improve.

Rising home prices are also good news for state and local governments who rely upon property taxes to fund the services they provide. As seen in the latest property tax annual statistics report from the Department of Revenue, the majority of property taxes come from residential properties.

Here in Oregon our system is a bit different than the average state with Measures 5 capping the tax rate ($5 per $1,000 for Education, $10 per $1,000 for other items) and Measure 50 capping the annual growth rate (3%). During the bubble years, home values were increasing double digits each year but assessed values were only increasing 3% per year, leading to a large discrepancy between real market values and assessed values. This was good for home owners as the annual property tax increases were steady, predictable and less than their appreciation. However during the housing bust, home prices have plummeted and depending upon the relative size of appreciation and depreciation over the bubble, it may or may not lead to lower property taxes. The graph below shows the Federal Housing Finance Agency’s home price index for Bend and also what we call the “naive compression” line. This line increases by 3% per year and is a back of the envelope estimate of assessed values, while the FHFA index represents the real market values.

Even with the massive swings in the Bend housing market, which had the 27th largest appreciation of any metro and the 30th largest decrease, prices today are roughly in line with this naive 3% growth rate line, albeit slightly under. In a broad sense, this indicates that real market values are now down to a point where they are much closer to their assessed values. This index is for the Bend MSA overall and in some portions of each city and county, prices have fallen below their assessed values, leading to property tax declines and compression across the taxes that are subject to limitation. The same is roughly true across all Oregon MSAs for which the FHFA has data, with the exception being Salem. All other MSAs’ values in 2012 are within a couple percent of the naive 3% trend line. Salem prices have fallen to such a degree they are substantially below this trend, at least according to this data. What these values generally represent is that the housing bust wiped out nearly all the gains from the boom and property taxes are back in line with values. If home prices were to continue to decline moving forward, we would expect to see further declines in property taxes and more compression. However, prices are on the upswing, at least in the large MSAs as reported by the Case-Shiller indices, which will lead to higher property tax revenues.

Finally, one item you hear a lot about in recent years is the increase in rents alongside the continued decline in home prices. We know home prices went through a bubble, however rents increased at a much slower rate during the middle of last decade. This lead to home prices not only being overvalued in nominal terms (high prices) but also in relative terms (to rental properties). After all, at the basic level there is no real difference between living in your own home or in a rental as both provide shelter and a place to live. There are obvious pros and cons to each type from a financial perspective, but that is a separate question. So now, given the massive home price declines in recent years but stabilizing today, couple with rising rents, where do the relative prices stand? The graph below shows the price to rent ratio for both Portland and Salem. I am using the FHFA home price indices for each city and the BLS reported Owners’ Equivalent Rent (OER) for the Portland-Salem CMSA. (This is the same method used by the Federal Reserve Bank of San Francisco.)

As seen in the graph the ratio has come down substantially from the housing bubble peak. In Salem the ratio is back down to levels seen in the mid to late 1990s, while Portland’s remains somewhat above these levels. This is likely due to the fact Portland home prices have begun growing again, keeping upward pressure on the ratio, while the declines in Salem prices have been more pronounced in recent years. Another contributing factor may be that I am using the same rent (OER) series for both Portland and Salem. BLS provides CPI data for the consolidated MSA region and not for the cities individually (also, BLS only provides Portland-Salem data and no other Oregon locations). This ratio simply compares the relative changes in the series and over time one would expect them to move in tandem. If any of our realtor or financial industry readers out there have good rental data for Oregon markets that can be used to examine the actual prices and are willing to share, please contact me!