Posted by: Josh Lehner | May 25, 2016

Housing Does Filter

Most new construction in recent years has been at the top end of the market. This is partially due to that’s where the numbers pencil out best for developers but also because that’s where the strongest growth in households has been, in the $100,000 per year and over groups. The majority of the population cannot afford new construction today, but this has largely been the case historically as well.

However, over time housing does become more affordable as it depreciates. This is called filtering and has been a surprisingly contentious topic within the housing discussion lately. The key is that filtering does not happen overnight. It is very much a longer run process. Filtering is also one of the major ways to provide reasonably priced workforce housing for those making in or around the median family income.

To show how filtering works and put some local numbers to it, I have pulled together a couple graphs below, along with borrowing some work from ECONorthwest as well. In recent weeks I have had the opportunity to co-present with both Lorelei Juntunen and Mike Wilkerson from ECO on housing at a planners conference at Metro and the state’s House Committee on Human Services and Housing, respectively.

First, a simple graph showing median rents in the City of Portland and the overall MSA by year of construction. Clearly newer construction is more expensive and housing built in the 1960s and 1970s is the least expensive. Ownership patterns are very similar. Note that the oldest homes are also more expensive. This is largely due to the fact that only a fraction of the homes built 100 years ago remain. Those that do are generally of the best quality, have been remodeled and taken good care of.

PDXRent14

Next is a very useful graphic from ECONorthwest that shows how filtering works. It is important to keep in mind that filtering is a market rate housing process and that the supported environment operates differently. Lorelei also noted that it is not to be expected that new luxury construction filters all the way down to purely affordable housing over time. Luxury housing starts at such a high price point that filtering over a few decades can only lower costs so far. Building at a wider range of price points is also needed.

 

ECOFiltering

So you’re asking yourself, “OK, but can we actually see this in the data?” I’m glad you asked. Yes, yes you can. What I have done is look at apartments built in the 1970s in Clackamas, Multnomah and Washington counties, or the heart of the Portland MSA.

According to the 1980 Census data, these 1970s-built apartments rented at prices about 11% above the overall market. That means the newer construction in 1980 was more expensive than 2/3rds of all rentals, which makes sense because new construction is almost always more expensive. Fast forward to 2014 (the latest available ACS data). Those same 1970s-built apartments now rent at prices 6% below the overall market. That means they are priced higher than about 40% of the market today. Clearly the 1970s-built apartments have filtered down within the housing market over the past 30+ years.

FilteringBar

A key question is whether or not filtering is enough to achieve better affordability overall. The answer is no, or at least not when we are facing a supply shortage of housing. Filtering does certainly work and it does help. However, to the extent that housing is under-built relative to population growth and demand, filtering will be slower and take longer because there are not enough units to go around. That is why one linchpin to the filtering process is to continuously add housing supply, particularly in popular and growing cities and regions.

Lastly, I would like to highlight some research being done right now at the University of Oregon. Two economic students are working in a community issues capstone class to put a number to the filtering process in Eugene (Lane County) where there has been a big increase in new multifamily construction in recent years, mostly for students. How are all these new, more expensive units going to impact the overall market in the coming years and decades? When that work is finished, I will share the results because it is very interesting and timely research.


Responses

  1. Reblogged this on Talking Southern Auckland and commented:
    Interesting when it comes to apartment building, the apartments themselves and their life cycle.

  2. Interesting work. Appears from graph median rent for 1970’s construction is about $900 which would require $36k income to be affordable (WO cost burden). Guessing big share of PDX renters have incomes below $36k, and most severely cost burdened are at lower end of income scale, so as diagram shows filtering impacts are lessened for those lower income HH’s.

    • Hi Tom,

      That’s right provided the overall housing supply does not keep pace with demand. That has been the case. Portland has the 5th lowest vacancy rate among the largest metros, for example. But to your point about affordability and cost-burdened households, we spend considerably more on housing today than we did a generation or two ago. The 3rd graph here is a little old but shows these bigger/longer trends. So overall we have a smaller share of all housing units today that are affordable using the 30% rule, even as the older housing filters down within the market. These make for somewhat competing or cross-current forces I suppose. One putting pressure upward and one downward.
      https://oregoneconomicanalysis.com/2014/11/04/portland-housing-pt-3-affordability/

  3. […] a blog post the Oregon Office of Economic Analysis explained that “housing does filter”. New […]

  4. New CA research suggests subsidized housing production has double the impact than housing production alone has in reducing displacement at the regional level:
    http://www.urbandisplacement.org/sites/default/files/images/udp_research_brief_052316.pdf

  5. […] majority of new units are at luxury price points, this will have an impact on the overall market. Housing does filter, although there is a multi-decade time lag for the actual units. However the (coming) market […]

  6. […] construction is always expensive and targeted to the upper-middle or upper portions of the market. Housing does filter over time. The key component is to ensure that supply continues to be added to the […]


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