Did Oregon’s Residential Real Estate Market Become More Affordable in the Pandemic?March 2, 2021 Even before the onset of COVID-19 the fast growth in home prices over the past five years had many across the state concerned about housing affordability. In an unexpected turn we have seen a large increase in the demand for housing during this pandemic recession. The high demand has led to historically low inventories of residential real estate for many communities across the state. High demand and low inventory is leading to dramatic home price appreciation, further increasing concerns around housing affordability.
According to the National Association of Realtors, housing inventory fell to a record low of 1.04 million units at the end of January 2021, down more than 25% from January 2020. Here in Oregon the situation isn’t any better. In fact, in many markets across the state we are now seeing inventory measured in days of supply rather than months. For instance, in the Bend market supply measured roughly 12 days in December compared with roughly three months for most of 2019.
There are a variety of reasons behind this low supply state we are facing including demographics, lack of geographic mobility, years of underbuilding, and historically low interest rates. Regardless of the reasons for the lack of supply it is important to know that when supply is tight prices rise. According to the Zillow All-Home index, Oregon home prices for first quarter 2020 were only up around 0.3% compared with the same period in 2019. However, over-the-year gains in home prices jumped to 3.9% by third quarter 2020, then jumped further to 7.0% in fourth quarter 2020. This growth in home prices doesn’t seem as dramatic when looking at the long-term trend of home valuation across the state, particularly when those prices are smoothed and adjusted for inflation. Yet, the accelerated growth of home prices stands out the last few quarters.
Incomes, Interest Rates, and the Cost of Homes
Obviously the cost of housing is a critical, if not the most important, component of housing affordability, but it isn’t the only factor that impacts the affordability of housing. In order to better understand affordability trends across the state we need to take into account how much income Oregonians are bringing home and the cost of borrowing. Outside of home prices themselves, the largest factor affecting affordability is wage growth. How much money you have in your pocket (or bank account) is going to impact how much home you can buy. The good news is that wages were on the rise before the onset of the pandemic. The average quarterly wage (smoothed and adjusted for inflation) rose more than 5% by the end of 2019 compared with five years previous in Oregon. To put it another way, after accounting for the changing costs of goods and services, Oregonians were making more money on average than they were over the past several years.
The pandemic dramatically impacted wages, but not in the way you might think. The job losses in spring 2020 resulted in a large increase in the average quarterly wage. The job losses tied to the pandemic were concentrated among lower wage workers. When you drop these low wage workers out of the calculation it pushes the average up despite the fact that most workers are not seeing real wage gains. The average quarterly wage in first quarter 2020 (before the impacts of the pandemic) was up 1.2% across the state compared with the same quarter in 2019. By the second quarter the over-the-year change in the average wage jumped to 9% due to the loss of low-wage jobs. When looking at housing affordability we will address this artificial “rise” in the average wage. But the big picture trend had been for real and substantive wage increases before the onset of the pandemic. And, those rising wages helped to blunt the impact of the rising housing costs.
Finally, the last major variable that impacts housing affordability is the cost of borrowing, or interest rates. Most of us do not have enough cash on hand to buy a home, particularly those of us concerned about affordability. In order to buy a home we need someone to loan us money and the cost of a loan is a significant factor in housing affordability. During the past few years, 30-year fixed mortgage interest rates have been very low from a long-term perspective, but those rates moved to historic lows since the onset of the pandemic. Many home buyers (and those refinancing) have been able to lock in rates below 3% during the second half of 2020. Back in the mid-2000s rates were roughly 3 to 4 percentage points higher than they are today. Similar to wages, the low interest rate helped slow the trend towards housing becoming less affordable.
What do we see when these three variables are put together? I developed a housing affordability index that looks at the monthly mortgage of the average house as a share of the average wage in a particular geography. Across the state, the average monthly mortgage at the end of 2020 was roughly 26% of the average monthly wage, a considerable decline from 29% the same time last year.
Affordability varies quite dramatically across the state. The least affordable of the communities highlighted was Hood River, where the average monthly mortgage accounted for 44% of the average monthly wage. The lack of affordability in places like Hood River or Bend are twofold. First, the average monthly wage of workers employed locally is lower than the statewide average, in Hood River’s case by more than $1,300 a month. Second, the average monthly mortgage was around $320 higher than the state. Bend also ranked poorly in housing affordability; the average monthly mortgage was around 35% of the average monthly wage. Surprisingly, the Portland Metro Area (Washington Co.) was generally more affordable than the state as a whole due to higher wages that helped to balance the relatively high housing costs. The Salem metro area also ranked relatively high on affordability, where the average mortgage was only around 24% of the average monthly wage.
A time-series of this housing affordability measure shows that concerns about affordability may be overstated. The low cost of borrowing alongside strong wage gains the past several years helped to counter, but not completely overcome, the growth in housing prices. Despite the fact that home prices are near or exceeding the peak from the last expansion, affordability remains notably higher than back in the mid-2000s for every community highlighted. In fact, the last year showed a trend towards the real estate market becoming more affordable, which is likely surprising to anyone who may be looking for a house today.
Low Interest Rates Drive Improvement in Affordability
As was mentioned earlier the dramatic increase in the average wage over the past nine months is misleading as the average is rising due to the loss of low-wage jobs rather than real substantive wage gains. The reported 2020 wages were thrown out and wages were modeled using a three-year trend to check whether housing affordability was being held in check by the artificially high wage increases during the pandemic or by historically low interest rates. Did housing affordability change when modeling a lower average wage? Not much. In fact, housing still moved towards being more affordable even when dropping the average wage to something more consistent with what we likely would have seen had COVID not happened. The real driver in affordability today is interest rates. These historic low interest rates have held the dramatic increase in house prices largely in check. The average worker who buys the average house with today’s interest rates will spend a slightly smaller share of their income on that mortgage than they would have this time last year.
We all live in the real world and housing affordability is more complex than this simplified index. More expensive housing means buyers need a larger down payment. If you were saving to get a 20% down payment on your first house and you were looking at a $350,000 house you would need $70,000 saved. If you lived in someplace like the Bend metro area where home prices have risen more than 10% in the past year that $350,000 house would now likely cost around $390,000. That means your down payment now needs to be $78,000 to get to 20% and avoid mortgage insurance. Most people are not seeing wages increase fast enough to keep pace with these housing prices, which means they are falling behind on their savings goals. However, federal stimulus likely helped many prospective first-time buyers boost their savings.
Finally, this pandemic recession has not been an equal opportunity offender. Job losses have disproportionally impacted lower-wage workers. Due to high demand and low supply the more affordable homes in most markets have seen the largest price increases over the past year. The barrier to entry for first-time buyers is high and remains a distinct challenge for many Oregonians. The good news is that the combination of an increasing pace of new housing construction and a return to a more normal level of geographic mobility should lead to an increased supply of housing as we move further into 2021.