Posted by: Josh Lehner | November 14, 2013

Update on Housing and Affordability

New 3 year estimates for 2010-2012 from the American Community Survey were just released today. Our office will have much more on these new data in the future, however I wanted to touch briefly on housing, prices and affordability.

The Census Bureau is out with a new report on median home values and ownership rates pre- and post-recession. Download the report here (PDF). Overall across the U.S. ownership declined from 66.4 percent in 2007-09 to 64.7 percent in 2010-12, for a total decline 1.7 percentage points. In Oregon the ownership rate fell a bit further at 2.3 percentage points from 63.9 percent to 61.7 percent. Home values over the same time period fell 9 percent across the country from $191,900 to $176,400 and in Oregon the declines were 11.1 percent from $263,900 to $233,900. Our office does not expect the ownership rate to decline forever, given an improving economy with more jobs and eventually easier credit conditions, however as a society we are also not returning to the ownership rates seen during the peak of the housing boom.

While this new data and analysis is great at detailing where we have been in recent years, we know that home prices are rising fast and coupled with higher interest rates, housing affordability is lower today than even just a few months ago. With a declining share of distressed properties on the market, investor activity is lessening, meaning that the market is becoming more reliant upon regular buyers (first-time and move-up), many of which experienced some sticker shock at the new financing costs due to rising prices and interest rates.

In the Portland Metro, today about 48 percent of households can afford the median home sold in October ($270,000 at 4.19 percent interest rate). This is a sharp drop from the estimated 55 percent of households who could afford the median home back at the end of 2012 ($247,900 at 3.35 percent interest rate). The rise in interest rates across the entire price spectrum are pricing out a couple percent of households in the region as shown below.


While those numbers refer to Portland households based on our own affordability calculations, the National Association of Home Builders has their Housing Opportunity Index available for other Oregon MSAs as well. The HOI measures what share of homes sold would be affordable to a family earning the median income. In the third quarter, 64.5 percent of all U.S. homes were affordable to the median income family, which is a drop of over 10 percentage points from the fourth quarter of 2012, and the lowest overall level since 2008. The relative declines in the local HOI are larger for most of Oregon’s metropolitan areas. Just like the Portland affordability numbers, these declines are due to both rising prices and higher interest rates. It is important to point out that both of these affordability measures are based on current income and do not take into account wealth which is an important factor, particularly for retirees.


Now, these trends are more of a cause for potential concern than anything truly substantial today. It is true that these changes have taken the wind out of the sails of the housing recovery these past few months — at least temporarily — however the fundamentals do remain strong. The strong price gains are mostly driven by lack of supply and increasing demand, however new supply is certainly in the pipeline based on the permit data. Interest rates, which have come down some in the past two months, are still low from a historical point of view but will rise along with an improving economy over the next few years. Expectations are for continued strong home price appreciation for the next year or so, however more supply and moderately higher interest rates will hold down price appreciation moving forward to something closer to the rate of inflation over the longer term.

This is good news for both homeowners as their balance sheets continue to improve with rising values and for the economy as the housing and related industries have turned from a drag to a driver, particularly in our hardest hit metros. Our office’s housing outlook remains largely unchanged in recent years with the level of new housing starts returning to and surpassing their long-run average by the end of 2015. Given the severity of the housing downturn, we are actually underbuilding new homes today and based on our outlook, will not make up this lost ground for many years to come — likely in the 2018-22 period depending upon exact household formation rates and demand. All this to say that barring another recession in the near future, the housing recovery has strong legs for at least another 2-3 years before stabilizing at higher levels of activity.

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