Posted by: Josh Lehner | December 14, 2017

Why Housing Supply Matters

Last week, I was a panel member for the YIMBY (Yes In My Back Yard) breakout discussion at the Oregon Leadership Summit. The group overall discussed the lack of supply, the importance of affordability, some regulations, market conditions, public policies and the like. It was a wide-ranging and informative session, if I may say so myself. Today I want to recap a few things, and take another stab at visualizing the importance of housing supply and the role of filtering.

First, I discussed a few of the bigger picture things our office has done, including the significance of affordability for Oregon’s long-run economic growth, the fact that affordability truly is a statewide challenge, the main housing supply constraints holding back construction in recent years, and the importance of household income gains for affordability.

Second, the basis for the whole YIMBY panel is some forthcoming research by ECONorthwest, led by Mike Wilkerson. While our office has done some back-of-the-envelope calculations trying to quantify the underbuilding of housing, Mike and ECONorthwest bring a full-fledged model looking not just at Oregon, but across all states. The upshot of the research is Oregon has probably underbuilt housing even more than we think we have. One result of this work is that for the first time the Oregon Business Plan is incorporating a housing supply/new construction goal. In essence, the newly stated goal is for Oregon to build 30,000 new housing units per year. This calculation is based on our office’s forecast for housing starts (~24,000 per year) plus an additional amount of new construction to make-up the lost ground over time.

Third, just as we know affordability is a statewide challenge, we know the lack of new supply is too. Every region in Oregon is adding jobs and new residents, however we continue to see very low levels of construction – not just relative to the bubble, but prior to that even. This is particularly the case once you get outside of the Portland area.

Fourth, as we discussed previously, housing does filter. New construction is always expensive and always aimed at the upper third or so of the market. That said, over time as housing depreciates, it does become more affordable. This filtering does not happen overnight. It is a long-run process. Filtering is also the major way to provide reasonably priced workforce housing for those making in and around the median family income. There is not nearly enough public money to fund the affordability gap, given the demand is too large, and the costs are too high. Now, there is a role for the public sector to play, particularly for the lowest income households. Don’t get me wrong. Every single unit counts. However, the solution has to mostly be a private market solution. And the linchpin to this process is to continuously add new supply. If you build more housing, you get more filtering.

Finally, what follows is another effort to show how filtering works in the real world. What the charts below show is the current housing stock in the Portland metro based on the recently released 2016 American Community Survey data. The first chart shows the housing stock divided into thirds based on home values or monthly rents*. Then we look at when these units were built by decade. Remember, we segmented by price first, then by decade of construction, not the other way around.

From a big picture perspective, you will see that we have some expensive and some more affordable units from each decade, even if the exact breakdown varies based upon the unit type, geographic location, quality of construction and the like. That said, for today I want to focus just on the least expensive third of the current housing market, or the red portion. Basically, these are apartments that rent for less than $890 per month, and homes valued below $290,000.

The biggest takeaway you see is that the total or absolute number of these more affordable units is pretty evenly distributed across the decades. Yes, there are more of these units from the 1970s and 1990s because Portland built more overall during those decades. However, there are also as many relatively affordable units built in the 2000s as there are from the 1980s and 1960s. This, too, is because the Portland region built more housing in the 2000s. If you look back at the chart above, in the 2000s Portland built nearly a third more housing than in the 1980s, and nearly double what was built in the 1960s. Again, if you build more housing, you get more filtering.

All of that said, the really unsatisfactory part of this work is noticing how little the 2010s production has been to date. Yes, of course, we have yet to see the full decade. However, even with a few more decent years like we have seen lately, the 2010s is on pace to build as many units as we did in the 1980s. And that’s in the Portland area. Across the rest of the state we will surely build fewer units.

While the current lack of supply is a problem today, it will also last a generation, if not longer. The wounds of the Great Recession and housing shortage may heal, but they will remain visible. The reason is that the units that are currently filtering from more expensive to less expensive today are those largely built in the 1990s and 2000s. Fast forward to the 2030s and the small number of units built in the 2010s means there are fewer units to go around, and fewer units to filter then. All of this ties back to the ECONorthwest research and the new business plan goal of not only building enough housing today to meet current demand and population growth, but also trying to build more than that to make up for the shortfall.

* To arrive at the overall housing market thirds, I did segment the market further into single family detached, single family attached, and multifamily for both ownership and rentals. I then added these segments together to get the total.

UPDATE: In a follow-up post, we take a similar look at the North Central Oregon region, Southwest Oregon, and SE Portland.

Addendum: In the comments, I was asked if I could show the single family broken out from the multifamily. Here are the charts for each big segment of the market I looked at. Same general story applies, although the exact specifics of which decade is the largest and which has filtered the most is a bit different. The biggest difference would be the 2000s, where we didn’t build as much multifamily, but we did a good amount of single family (it was the housing boom/bubble, after all).

 


Responses

  1. Would you be able to post the breakdowns for single-family, single family attached and multifam? Would be very interesting to see those figures over the decades.

    • Hi Robert,

      Thanks for the comment. Yes, I updated the post to show the same chart where I break the current housing stock into thirds, but left it separated out for detached SF, attached SF, and multifamily. As I tried to note, the biggest difference would probably be the 2000s when we built a decent amount of SF but not as much MF.

      Best,
      Josh

  2. “New construction is always expensive and always aimed at the upper third or so of the market.” Really? I’m old enough to remember subdivisions of new “starter homes” priced for first-time homebuyers. In Eugene-Springfield we have many neighborhoods with 0.14-acre lots with manufactured homes (subdivisions not trailer parks). Were these developed for the upper third of the market at that time? The idea that new housing is always expensive and for the upper third of the market helps perpetuate the myth that only the public sector can build affordable new housing.

    • Thanks David. You’re right in the extent that new construction doesn’t have to always be at the luxury price point. However the private market generally has trouble delivering new construction below, say, 80% of median family income. See the chart from ECONorthwest in the previous filtering post (linked again below as well.) That’s what a lot of the research ends up showing. Today, 80% of MFI in Lane County can get you to a $230-275,000 house depending upon the size of the down payment. In the Portland area, 80% MFI gets you more like $290-$350,000 or so. I’m not aware of much construction today at those price points. Much less below them. Not that it doesn’t exist. But they’re not being built en masse. Getting to that point would certainly help with affordability.
      https://oregoneconomicanalysis.com/2016/05/25/housing-does-filter/

      • The market has trouble delivering new construction at an affordable price point? Why is that? In 2011 a small infill subdivision was created in the Eugene neighborhood I was living in at the time. Lots were offered to individual builders. I just pulled up a Street View photo showing a brand-new home built by HiLine Homes for sale at that time. $199,000 for 1,535 sq. ft. 3 bedrooms, 2 bathrooms, 2 car garage, stainless steel appliances, granite countertops. This example suggests that the problem with housing prices is not the cost of supplies or labor. So then why is the market having trouble delivering new housing at an affordable price point? Hmmm…

        The point of my earlier post is that there was a time when affordable new housing was built en masse. In the context of your analysis, it would be interesting to see the segment of the market that housing was built for at its time of its construction. I suspect you would see higher shares of new housing built for the Least Expensive Third in previous decades. I agree that getting back to conditions where more affordable new housing is built en masse would help with affordability.

      • Thanks. I bet you’re right about that. In the earlier filtering post, it showed that the typical apartment built in the 1970s was more expensive than 2/3 of the market in 1980. I think apartments built in the 2000s were higher up the scale than that in 2010, and the 2010s apartments will be higher up than that in 2020 when the data is released. You can see this gap between brand new construction and the rest of the market a bit better if you look at the American Housing Survey data as opposed to the American Community Survey or decennial Census. In looking at the Portland AHS data over time, you see that premium or the gap between new construction and the rest of the market widen. (I haven’t posted anything about the local AHS data yet because I was waiting for the new data release, but I think it’s out now.)

      • I just saw some condos being sold around that price point. First time in a long time! $329K for a 2 bed, 770 sq ft condo at 5321 NE Irving St which is relatively close-in Portland

        https://www.zillow.com/homes/for_sale/Portland-OR/B7nMKv_bldg/45.52836,-122.608535_ll/13373_rid/globalrelevanceex_sort/45.531068,-122.603421,45.525866,-122.614117_rect/16_zm/

      • Thanks Holly! Good to see real world examples. Appreciate it.

  3. Thanks, Josh.  I really appreciate how this is presented.

    • Thanks Eric; appreciate it!

  4. […] Source: Why Housing Supply Matters | Oregon Office of Economic Analysis […]

  5. A vital question is whether the land use system has unbalanced housing production. One would expect that when real land supply constraints are encountered higher-end housing would outbid middle market construction projects.

    • Yes, this too, absolutely. The more the UGB binds (running out of room) the more this will occur. In some regions/cities this is a problem today, in others, less so.

  6. […] Oregon’s statewide housing challenge | Josh […]

  7. […] Oregon’s statewide housing challenge | Josh […]

  8. System Development Charges are terrible, somebody or something needs to limit these. Available land to develop into residential is almost nonexistent. Springfield for example is taking residential zoned land and changing the zoning to multi family. Their are no lots available in the Hayden Bridge area of Springfield and the city council is taking residential land and changing it into multi family . I think we need to take the city council and fire them.

    • Thanks Ken. I know Springfield is in a tough spot in terms of where the latest population numbers have been in recent years and how to get the UGB expanded and the like. I don’t know all the local details of course. As for SDCs, that’s something that comes up quite a bit. I don’t have it figured out. It seems to me that historically SDCs were lower and the overall cost of new construction, getting the utilities/roads/infrastructure to new construction was put back on the overall tax base. We subsidized new construction in this way. In recent years there has been a clear shift toward the belief that new construction should pay for itself. So you see big SDCs in some of the newer builds up in the Portland area. SDCs in the $40-50,000 range per single family home. There has to be some middle ground, one would think. Lower SDCs would make the purchase price more affordable. However subsidizing new construction to the point where you cannot even pay for ongoing maintenance of roads and the like is also a problem.

  9. […] week’s post, Why Housing Supply Matters, generated quite a bit of interest. I have fielded a number of requests from folks asking for […]

  10. Consider the “soft costs” of new development in Portland. The gov’t’s permit fees plus water, sewer, storm water, transportation, and park SDC fees can add up to nearly $18,000 per apartment unit. Park fees alone are $6,500/unit. Land costs $20,000 to $40,000/unit, and higher. Building hard costs are at least $125,000 to $150,000/unit. The UGB boundary has finally run into the Supply and Demand curve with regards to land prices. And if you want to see really high building costs, audit an “affordable housing” budget that has any gov’t participation. Third parties get paid a lot of excess fees for studies, advice, etc., all added costs that do not generate any value. Affordable housing is the least affordable to build!

    • Thanks Mary for the comments, insights, and feedback. The SDC issue is one that comes up quite a bit and I haven’t quite figured that out. Some locations have very low SDCs, others have high. However the costs of providing the services to get utilities and infrastructure to new housing remain regardless. To me it’s about who pays and how do they pay. Historically it seemed that SDCs were lower, and the true/overall costs were put onto the overall tax base via somewhat higher property taxes for everyone. But more recently there has clearly been a shift to where new construction is supposed to pay its own way. That’s where the $40-50,000 in SDCs come from. At least that’s my interpretation of what happened in South Cooper Mountain and South Hillsboro. From that end, I don’t know what the best solution is. Lower SDCs would make new construction less expensive and more affordable. However subsidizing new construction to the point where ongoing maintenance is an issue, also doesn’t work. And existing taxpayers aren’t happy about subsidizing new neighors either. It’s complicated, and it’s a mess.

  11. […] week’s post, Why Housing Supply Matters, generated quite a bit of interest. I have fielded a number of requests from folks asking for […]

  12. About Filtering: Actually it does happen very rapidly, but not through the depreciation of newer properties as you describe. I’m a landlord and my rents in an area with a lot of new construction (NW Portland) have dropped more than 10% in many cases in just the last 6 months. This is specifically because my older (Class B, Class C) buildings are now competing with thousands of brand new units, which themselves are offering discounts because they are competing with each other.

    Simple Supply and Demand works very fast to create lower rents, without waiting for the newer construction to depreciate. In fact, right now, it is the principal mechanism creating affordable housing. In Portland, the effects of this construction concentrated in relatively small areas is far more profound than any of the rent stabilization regulations or public housing expenditures.
    (sorry for the late comment, but I someone just posted your article in an economics blog…)

  13. […] Finally, let’s take a quick look at new construction activity relative to population growth. Here too you see that the Seattle region’s activity is significantly larger than the Portland region’s. Over the past few decades, relative to population growth, the Seattle MSA has built about 12% more housing than the Portland MSA. That works out to about 45,000 fewer housing units in Portland, once you adjust for population size and population growth. That is 3 entire years’ worth of new construction activity in the Portland region. This is one reason why our office places Portland housing affordability as worse than Seattle’s in our Housing Trilemma research. Portland and Seattle home prices relative to household incomes are nearly identical. However Seattle has a slightly higher vacancy rate – meaning it is easier to find a home to buy or an apartment to rent – and it has significantly fewer rental households that are classically cost-burdened – spending 30% or more of their income on rent. Again, housing supply matters. […]

  14. […] Finally, let’s take a quick look at new construction activity relative to population growth. Here too you see that the Seattle region’s activity is significantly larger than the Portland region’s. Over the past few decades, relative to population growth, the Seattle MSA has built about 12% more housing than the Portland MSA. That works out to about 45,000 fewer housing units in Portland, once you adjust for population size and population growth. That is 3 entire years’ worth of new construction activity in the Portland region. This is one reason why our office places Portland housing affordability as worse than Seattle’s in our Housing Trilemma research. Portland and Seattle home prices relative to household incomes are nearly identical. However Seattle has a slightly higher vacancy rate – meaning it is easier to find a home to buy or an apartment to rent – and it has significantly fewer rental households that are classically cost-burdened – spending 30% or more of their income on rent. Again, housing supply matters. […]

  15. […] Housing [Slide 8] […]


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