There is no question that housing affordability has been a key, maybe the key economic story in recent years. However it does not mean affordability will continue to erode always and forever. In fact, the housing market is somewhere near an inflection point today. I would argue we’re already past the true inflection point, however if not, I suspect it’s close.
What I really mean is that affordability will stop getting worse. This goes for both ownership and rentals. Now, it may not improve considerably for some or even most households. And I do not expect affordability to suddenly return to previous levels, but it does mark a step in the right direction. A necessary but insufficient condition, if you will.
The reason for this is two-fold. First, while the lack of new construction and overall supply have been the issue in recent years, supply appears to be starting to catch-up to demand. This is particularly the case for multi-family rentals. Even as the vast 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 saturation for luxury apartments, and with another 25,000 units in the pipeline per the Barry Apartment Construction report, price pressures will subside overall. Similarly, City Observatory has pointed out repeatedly about the slowing price trends in Denver and Seattle to name two.
Where price pressures seem to be more entrenched is on the ownership side. Inventory remains near historic lows. There is simply not enough houses for sale and thus a sellers’ market. That said, inventory has risen just a hair in recent months which is a positive indicator. This increase is not nearly enough and prices (based on buyer and seller expectations) do not adjust immediately. However should inventory continue to increase — and it likely will with big projects like South Cooper Mountain, South Hillsboro and new construction in Clark County coming online — then better market balance is to be expected. And better balance means slower price increases and improving affordability. Similarly, rising interest rates should slow price appreciation as well, however given higher financing costs, this should have no real impact on affordability itself, just the sticker price.
The second reason for the inflection point is that household incomes are rising across the spectrum. Our office has talked quite a bit in recent months about the importance of full employment and the impact a tighter labor market has on households in the middle and bottom part of the income distribution. All these households have are wages and the safety net. As bargaining power shifts more toward workers and wages rise, incomes for these households rise as well. Higher incomes result in better affordability. This does not mean that housing will necessarily be affordable, rather that the erosion of affordability is likely over when looking across the market. The chart below shows the median rent for households in the Portland MSA with incomes less than $50,000 per year. Rents have gone up nearly $200 per month and the share of income spent on rent has jumped from 32% to nearly 38%. No question that affordability is worse today than prior to the Great Recession. However notice that even as rents are rising, when measured as a share of income, we are seeing costs plateau. Again, this does not mean housing is necessarily affordable. Rather that affordability is no longer worsening. That is a big distinction and marks an important milestone, but hopefully not the destination.
Bottom line: Housing affordability is worse today than a decade ago. This is particularly true for lower-income rental households who have seen costs rise significantly with income gains only coming in the past couple of years. That said, affordability is showing signs of stabilization overall and some segments will see improvements in the near future. This is a result of housing supply continuing to increase (although it does not appear to be enough to drive prices down in a meaningful way, at least not yet based on the data) and income gains finally seen among middle and lower-income households. The baseline outlook should be for these these trends to continue. However to see significantly better affordability there needs to be a sizable increase in supply above current trends or a decline in demand. As the business cycle matures, an increasingly likely scenario is that the market won’t return to better balance, or dare we say an oversupply, until the next recession when we know demand will drop. That means market balance would not be achieved via a significant increase in supply, but rather a decrease in demand.