Our office talks a lot about migration and population growth. It is one of the key reasons Oregon outperforms during economic expansions. However, the changing composition of the economy and households underneath the topline has a big impact. This is particularly true when it comes to the housing market in recent years. A year ago, in work I was doing ahead of a presentation for Multifamily Northwest, I detailed how job polarization was also impacting household growth by income in Portland. At what incomes levels were we seeing the growth? However this not just a Portland story, it is seen throughout much of the state.
Yesterday, Mark and I gave a housing overview presentation to the House Revenue Committee. We tried to hit all the high notes and the big picture supply and demand trends we are seeing. However on the household growth by income level chart there was a bit of confusion and I want to clarify what I was trying to say. This is because I think this growth is one of the key aspects underlying the current housing market. This is important and I failed to properly communicate what I wanted to yesterday.
First I should have started with a graph that looks at the number of households by income level. The three largest groups of households in Portland are the three income groups below $75,000. This, of course, make sense given median household income is $64,850 per the latest ACS data. As such, 58% of households in Portland earn $75,000 or less per year.
However, the story is different when you look at the net change in the number of households by income level in the past decade. On net, when you compare the composition of households in 2015 to the composition of households in 2007, all of the growth has been at the top end of the income spectrum. So even as these higher income households represent a minority of the overall population, they represent the majority of the growth.
This has big implications for housing. These higher income folks can afford higher housing costs. The rough affordability numbers listed below use the ballpark rule of thumb that housing should not exceed 30% of income, even as that is an imperfect measure. A household earning $100,000 per year can afford $2-3,000 per month in rent or to purchase a $500,000 home. Most Portlanders and Oregonians cannot of course. So when the conversation turns to the fact that we are only seeing new construction as these luxury price points, it is not just because margins for developers are better at higher prices. They are of course. However they are also responding to a fundamental shift in where the demand for housing is coming from, namely, from the higher income households. That does not mean we do not need more housing at lower price points; we desperately due. And a large part of our office’s focus yesterday was trying to look at the broken supply side of the housing market. We are also working on drafting up some of our comments along those lines.
Below is a similar chart but looking at the Eugene MSA (Lane County). The same general pattern is seen and this is actually what we showed yesterday, not the Portland data. Notice that the housing affordability numbers do not change. That is because it is based on the 30% rule of thumb.
Like Mark said yesterday, housing affordability is not just an urban problem today and it certainly is not just a Bend, Hood River and Portland story. Rural affordability has many challenges as well. Representative Bentz asked us to follow-up on some of our rural comments and charts and we will do so in the near future.