Posted by: Josh Lehner | January 4, 2017

The Housing Inflection Point

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.

rmls1116

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.

pdxrentcosts0515

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.


Responses

  1. […] Source: The Housing Inflection Point | Oregon Office of Economic Analysis […]

  2. Over the past year I’ve seen numerous articles and charts going back 50 or more years showing that housing has steadily required an increasingly higher proportion of income relative to other expenditures such as food, clothing ect… wondered if you disagree?

    Doug Burris Springfield

    • Thanks Doug. Hmm, not sure about steady increases for 50 years. The link below has a chart going back to the 1980 Census. That shows rental housing costs steady from 1980-2000, when measured as a share of income. Then increases since then (with a business cycle thrown in). We do know that housing costs have increased faster than overall inflation for a few decades now (since the 1970s?), and incomes overall that have essentially matched inflation since around 1980 or so. So you would think that housing would be an increasing share of income from roughly 1980-today. However that relatively flat/unchanged period until the last decade is interesting in this regard. I don’t know how to reconcile that at the moment.

      https://oregoneconomicanalysis.com/2014/11/04/portland-housing-pt-3-affordability/

  3. […] Overall the worst of the affordability crunch may be behind us, housing is at or near an inflection …. Supply is beginning to catch up a little bit and income gains are now seen among middle- and lower-income households as the economy improves and full(ish) employment raises wages. […]

  4. […] lasts for ever and Josh Lehner of the Oregon Office of Economic Analysis (@OR_EconAnalysis) wrote THIS PIECE last week in which he is arguing that affordability has reached an “inflection […]

  5. […] work in recent years — things like The Housing Trilemma, Peak Renter, Rural Affordability and The Housing Inflection Point — but haven’t published much of the basic nuts and bolts numbers. What follows is a […]

  6. […] moderate. First, the improving regional economy is starting to drive up incomes. State economist Josh Lehner has an analysis showing that renter incomes are rising, and predicts that rental affordability (as […]

  7. […] surge is beginning to hold down rents and single family construction continues to increase. We are at or near the housing inflection point. Due to stronger household income gains, affordability has largely stopped getting worse. A larger […]

  8. […] of the Oregon Office of Economic Analysis (@OR_EconAnalysis) wrote an article recently entitled The Housing Inflection Point, in which he is arguing that affordability has reached an “inflection point”. He is […]

  9. […] part of the income distribution is picking up. While affordability has yet to improve, it has stopped getting worse for many […]

  10. […] Note: While I was wrong in my 2014 housing prediction — and I felt confident in it — I was right in my 2015 housing prediction (Peak Renter), which I was much less confident in. There was no real 2016 housing prediction unless we can count the Housing Inflection Point. […]


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