Oregon Office of Economic Analysis

The Portland housing market is tight. Increased demand, with higher household formation and population growth, coupled with limited supply currently on the market are driving prices higher for both ownership and rental units. The median price of homes sold in the metropolitan area is effectively back to housing boom peak numbers, per RMLS. The rental vacancy rate is among the lowest in the country and prices are at an all-time high. The housing bubble, obviously, had a tremendous impact on the market and the bust has been disproportionate to the boom. While new construction has picked up in recent years, it has yet to fully regain the lost ground during the downturn, relative to underlying population growth. The good news is as housing supply continues to increase, eventually it should put downward pressure on prices, raising affordability.

In a multi-post series focusing primarily on the Portland Metro, our office’s new housing work covered the bubble’s impact on ownership by year and neighborhood in Part 1. Part 2 covered underlying trends in construction and demographics. Today, Part 3 will go over housing affordability in Portland, while Part 4 provides an outlook.

In terms of home ownership affordability, our office’s metric shows that affordability is back to the relatively stable levels seen in the 1990s for the typical family in Portland. The strong rebound in home prices, even with relatively low interest rates, clearly show that the record level of affordability is gone and unlikely to return.

One other important aspect when it comes to affordability is the size of the down payment. If one is able to afford to put 20 percent down, by and large, the costs of owning a home are generally below the standard affordability thresholds. Ownership costs rise approximately 25 percent if one moves from 20 percent down to 5 percent down. The increased size of the loan balance, plus mortgage insurance, raises costs considerably. By our office’s rough metric, those only able to put down 5 percent are typically right on the cusp of affordability. This is one reason why the old home ownership pattern typically saw households buy starter homes, then move up to a more expensive, usually larger, home when their income increased and family needs changed as well. While this pattern of ownership very well may return again moving forward, it certainly came undone during and after the housing bubble.

One other issue with affordability at today’s prices are the types of households that can afford the median home sold today or, conversely, the price each type of household can afford. Here there is both good and less good news. If one looks at the distribution of homes currently for sale, via our friends over at RMLS, the current inventory closely matches the income distribution of families in Portland. This was actually a bit of a surprise to me because it indicates that there is not a large mismatch between the supply of homes for sale and the ability of local households to afford those homes. See slide 15 below for more. The less good news is that the 20 percent down versus 5 percent down affordability issues rear their head again. This indicates at least a bit of a mismatch in the market of would-be sellers and would-be buyers. Add on top of this tighter underwriting standards (largely a good thing), plus large transactions costs, plus the fact that homes in most zip codes in Portland are not all the way back to peak, and the like, and it is not hard to tell a convincing story for why the ownership side of the housing market has not fully healed.

On the rental side of the market, demand and prices are at all-time highs, and housing costs as a share of income are back to pre-recession levels. More and more individuals are renting today than ever before. The outright number of Oregonians in owner-occupied housing is actually down from their housing bubble peaks, while the rental population has surged. Some of this switch is by choice — consumer preferences, Millennials living downtown or in town centers, etc — but some is by necessity — foreclosures, tighter underwriting standards, etc.

Given the low levels of new construction in recent years, this increased demand has resulted in a very low vacancy rate that is among the lowest in the country. As such, rents are rising quickly.

With these trends and market shifts, it is no surprise to see new multifamily construction really accelerate in recent years. Slightly less than half of all new construction permits in the Portland Metro over the past three years have been multifamily. This is the largest share since the late 1980s.

One interesting and possibly troubling issue is that almost all of the new construction is coming at the top end of the market. Examining rents across the MSA from Multifamily NW reveals that average rents for all types of apartments are in-line with the median incomes for nonfamily households (usually roommates). That’s good news and furthermore, the graph above shows rents in the 25-30 percent of income range, which is not exceptionally high for most households. Of course these are region wide averages and some locations are much higher than others.

However, the new apartments, which are largely located in close-in and sought-after neighborhoods, are coming in at twice the average price per square foot. Overall these units require incomes that are 2-3 times the median nonfamily income to keep at an affordable share of income. Such incomes are in the $60,000 to $90,000 range. See slide 16 below. Even so, these new developments are filling up.

One key question moving forward is how, exactly, these new units will impact the broader market. The academic literature is somewhat mixed in terms of how new construction filters through the existing housing stock (or doesn’t as the case may be). However many of these papers assume new construction is built at the price point needed in the market. In today’s environment, these high rents are needed to obtain financing for building the apartments in the first place. It will be important to continue to monitor these trends to see how rents, and the various sub-markets (by price or by location) respond in terms of overall affordability.

Part 1 discussed the housing bubble’s impact on ownership. Part 2 covered underlying trends in construction and demographics. Part 4 provides an outlook.

Below are the full set of slides from our office’s housing work, including both upcoming material and many additional graphs and figures.