The more things change, the more they stay the same. The median sale price of a home on Portland’s west side this June was $625,000, up .8% over last June. For the first half of the year combined, the median was 2.6% lower than it was for 2022’s first half. In other words, despite a year of rapid change to the world of mortgage lending- changes that essentially doubled the cost of financing- the price of the home itself has stuck more or less in place.
To illustrate that last point more clearly, the monthly payment on a median-priced home bought at 20% down would run you about $3500 today (not including taxes and insurance). Back when rates were at their lowest- about two years ago- that payment was $2000. Put another way, if your household income two years ago was around $85k, you could afford this house. Now you need $125k. I don’t know many non-CEO’s whose salary has increased fifty percent in two years.
So one would think that with such a massive hit to affordability that nobody would be able to buy homes, and sellers would have to lower prices. That hasn’t happened. Why is this? There are plenty of reasons, with two worth discussing in more detail right now.
Inventory. The big one. Let’s make up some numbers and say that the buyer pool is 100 people and that there are 75 homes for sale. The demand is there to keep prices higher, since there aren’t enough homes for every buyer. Now something occurs (say, a big hike in interest rates) that reduces the buyer pool to 50 people, so there should be houses for all of them. However! Of those 50 people that left the market some were buyers who would also be sellers, so they’re taking some of those 75 houses off the market. In other words, you can’t affect demand without also impacting supply and as I’ve discussed before, plenty of “move-up” buyers are deciding to keep their sub-3% interest rates and stay in their houses.
Year-to-date, 2023 is running 27% behind 2022 on new listings on Portland’s west side. Something I know that I can’t prove: the missing portion of the market are move-up buyers deciding not to move up.
The bigger part of the inventory problem is that new home builders still haven’t caught up to demand since the housing meltdown in 2008, when their industry was pretty well wrecked. Blame zoning laws, blame NIMBYism, blame the cost of land, materials, and labor- doesn’t really matter, the result is the same. Oregon alone is estimated to need a half million new housing units over the next two decades to meet demand, and building a bunch of new houses isn’t as easy as just building a bunch of new houses.
Equity. People have a lot of it. Home values have risen about 380% in the last thirty years (almost double the rate of inflation), so if you’re just paying off that mortgage right about now and want to sell: cha-ching! Home equity has a way of ending up back in the housing market- after all, everyone needs a place to live, and so do their kids- and with rapid gains to equity (50% in the last five years) there’s an outsized amount of money pouring back in from this source. Homes purchased with cash represent about a third of the national market (it’s 20-25% in Portland, since home prices are higher here). There are different types of cash buyers, but one big group are those cashing out on their house in a high cost of living area and buying in a lower cost one (hello, Californians). There are others who cash out to help their kids buy their first houses, giving them a leg up in the marketplace. Yay, generational wealth! Bottom line: there’s still a lot of money out there to prop up home prices.
Those are two big reasons why prices have stayed sticky despite a big drop in affordability. Left out of the discussion for now are the “how we got here in the first place” reasons, since I don’t have the energy or economics degree to get into the effects of quantitative easing, pandemic stimulus spending, and other monetary policy that definitely may have boosted home values to outsized levels.
What happens next? The latest inflation news is good, and that means the Fed might stop hiking their rates sooner than initially thought. It doesn’t necessarily mean that mortgage interest rates will follow (that’s a whole other nut to crack), but let’s pretend that in 6-12 months we’re seeing rates in the 5% range instead of 7%. My prediction is that if rates start showing a five in front of them we’ll see a lot of buyers jump back in the pool, and a handful more sellers too. More inventory, more buyers, prices stay sticky.
