One of the darker, underlying currents to the housing discussion is something along the lines that it’s the builders and developers who benefit the most, often described as exploiting or eroding our livability and quality of life. Usually this is couched in, shall we say, more colorful language. But it is a fairly pervasive element and ties in with neighborhood character and how we’d like folks to build housing over there, not here, or at this price point, not that price point, and so on.
With this in mind, let’s take a quick look in this edition of the Graph of the Week of who benefits the most from the housing market. Long story short, local homeowners gain significantly more than builders and developers earn on their projects. In the past handful of years this ratio is about 40 to 1, depending upon how you want to talk about builder earnings. In short, builders and developers across Oregon are earning hundreds of millions of dollars a year, and homeowners are gaining tens of billions of dollars in equity a year.
Of course this is a bit of an apples to oranges comparison. Builder earnings are a flow based on new construction, which is equal to about 1% growth in the housing stock a year in recent years. Home equity is a stock that accrues to the million plus homeowners statewide as prices have risen by 7-8% on average over the same time period. However the figures are interwoven when new housing supply does not keep pace with demand. Even as developers may benefit from building more units at higher prices, the gains still accrue much more to our neighbors who happen to already own their home.
Housing wealth isn’t bad in and of itself. It’s used by families to build savings, to support spending, including remodels and start-up capital for new businesses. See our previous look at housing wealth for more. The issues arise when these dynamics worsen affordability, and price out our friends, family, and neighbors. Our office’s longstanding concern has been twofold. First there is the direct household budgetary impact on existing residents struggling to make ends meet. Second is the possibility that affordability may slow migration in the years ahead. Some would say, that’s good news, but if demand remains strong in the face of low supply and rising prices, we know who loses: those least able to afford it. Plus slower population growth means slower increases in the workforce that local businesses rely on to hire and expand.
Overall, we’re seeing the pandemic reshape the housing market a bit in that rents have fallen in city centers around the country at the same time home prices have skyrocketed, and rents in the suburbs have risen. Last summer our office wrote about the three primary reasons for the strong home sales: most of the layoffs have been in the lower-wage service industries, the decline in mortgage rates, and the strong demographic tailwind from the Millennials aging into their homebuying years. Those points still stand but I would expect the rental and ownership markets to begin to converge, or at least move in unison a bit more moving forward. Mortgage rates are no longer declining, and have risen a little bit which will keep a lid on price appreciation in the near future. (Last year’s 1% drop in rates offsets ~10% price appreciation in terms of monthly payments for buyers.) Plus as the economy reopens more and people return to city centers to work, shop, and play, demand to live downtown will increase as well. Rents will follow suit as the vacancy rates begin to decline. The question isn’t whether this will happen or not, but rather just how much do people return to work, shop, and play versus working from home a day or two etc.
Finally, we previous wrote about housing wealth and its impact on the economy across a few different metros in Oregon. If you do the same type of calculation in terms of home equity gains compared to builder earnings, you find similar type numbers across Oregon, as expected. However what is interesting to note is that Bend — a faster-growing Zoom Town, with incredible amounts of housing wealth — has the lowest ratio because Deschutes County builds noticeably more than some other areas. Conversely, Eugene has the highest ratio in part due to the lower levels of new construction, and in percentage terms the largest increases in home prices last year (13% vs 7-8% statewide). Portland and Medford fall somewhere in between and closer to the statewide figures.
Click below to download the spreadsheet for the Oregon calculations, including links to the underlying data sources. Note that in the chart above I am excluding 2011-12 when home equity declined in the fallout from the housing bubble. If we extend the analysis back further, we will see that home equity gains over the past couple of decades have been even larger. Today we are seeing record levels of housing wealth even adjusting for inflation, or the size of the economy etc.