Friday, June 9, 2017

The Millennial Question

One question we often get asked is: "What is going on with the millennials?". Since the preferences of Portland's largest generation exerts a strong influence on future housing demand , it is important for planners, utilities, banks, and even everyday housing market participants to know if this generation is an anomaly or will eventually eat up all remaining single family homes. This article attempts to answer that question, and appeared in NERC's biannual forecast release:

Millennials, the largest generation in the Portland MSA, appear to defy the life trajectory observed in previous generations, making their behavior notoriously difficult to predict. While loosely defined as being born between 1977 and 1995 (according to Nielsen Media Research), they are more directly defined as the first generation to be engulfed from childhood in the age of the internet, cell phones, and social media. There is a growing belief that millennials would prefer to spend their resources on experiences – e.g., eating exotic foods in strange places – rather than on the large durable good purchases enjoyed by previous generations – e.g. a house and two cars. Perhaps this is due to instantaneous access to unprecedented information, or maybe the experience of a massive, debt-induced, financial crisis during their formative years, but if this change in spending proves persistent, then the growth seen in cities will continue and the suburban revival will be postponed at least another generation.

 However, surveys indicate that millennials aren’t all that different from previous generations. A 2014 Zillow survey found that almost two thirds of young adults think that owning a home is necessary to live “The Good Life”, and 80% of renters are at least “somewhat confident” that they will eventually be able to afford a home . A 2016 National Association of Home Builders survey found that 68% of millennials want a detached single family home (compared to 65% for all buyers) . Furthermore, a 2015 Urban Land Institute survey found that 70% of millennials expect to own a home by 2020, even though only 26% currently own one . So the question is, if owning a single family detached home is what millennials want, then what is stopping them?

The answer is affordability, or rather, the lack thereof. Assuming that the average millennial household in Portland spends 30% on mortgage payments, puts 20% down, and gets a 30-year fixed mortgage at 4.25%, then the house they can afford costs approximately $393,600 (assuming earnings equivalent to the median 2015 household income for the 25-44 age group [$64,635]) . According to Zillow, the median home value for the Portland MSA in February was $358,700, so right now owning a home is well within reason. However, 42% of millennials carry student debt , and the average student loan repayment is $351 a month for those in the 20-30 age bracket . This is an expense not borne to the same degree by previous generations, and it leaves millennials financially impeded in relative terms. A recent Federal Reserve of New York study found that a 33 year-old with some level of student debt was 5% less likely to own a home than one with no student debt . Finally, increasingly strict lending standards – the average FICO score on closed conventional new purchase loans was 752 in February – mean that the pool of potential home buyers shrinks even more significantly.

Coming out of the Great Recession, a millennial household needs greater than average financial resources in order to be able to afford a home at the median price in the Portland MSA. However, this doesn’t mean millennials will never be able to afford buying in the Portland MSA--incomes have risen significantly in the past few years, and an increasing inventory should moderate the growth in house prices. It is probable that demand for single family homes will continue to rise as more millennials form families, increase earnings, and age into prime homeownership years; the factors discussed above have merely delayed life events that happened at an earlier age in prior generations.

1. Harris Poll. (2014). “Millennials: Fueling the Experience Economy.” Conducted for and released by 
2. Terrazas, Aaron. (2014). “Zillow’s Housing Confidence Index: Will Youthful Exuberance Today Mean More Sales Tomorrow?” 
3. National Association of Home Builders. (January 21, 2016). “Millennials to Shape Housing Preferences—Once They Start Buying.” 
4. Brett, Deborah L and Lachman, Leanne M. (2015). “Gen Y and Housing.” Urban Land Institute. 
5. United States Census Bureau. “2011-2015 American Community Survey 5-Year Estimates for Portland-Vancouver-Hillsboro OR-WA Metro Area.” 
6. Institute of Politics at Harvard University. (2013). “Fall 2013 Survey.” 
7. Elvery, Joel. (May 16, 2016). “Is There a Student Loan Crisis? Not in Payments.” Forefront. 
8. Chakrabarti, Rajashri, Gorton, Nicole, and van der Klaauw, Wilbert. (April 3, 2017). “Diplomas to Doorsteps: Education, Student Debt, and Homeownership.” Liberty Street Economics. 
 9.EllieMae®. (February 2017). “Origination Insight Report.”

Monday, November 21, 2016

2015 Personal Income and Forecast Evaluation

Last week, the BEA released its estimates for 2015 local area personal income. Personal income is an aggregate measure of all earnings from wages, investments, etc., and is somewhat comparable to a local area GDP. Good news for the Portland MSA, year over year growth was a strong 6.3%– which surpassed NERC’s already high expectations. There was also an egalitarian flavor to this release, as the growth was basically even among all of the counties.

Table 1: 2015 Total personal income (in thousands)

2015 Total Personal Income
Actual Data
NERC Forecast

Actual YoY Growth
NERC Forecast
Portland MSA, OR

Clackamas, OR

Columbia, OR

Multnomah, OR

Washington, OR

Yamhill, OR

Clark, WA

Skamania, WA

(Note: To calculate the NERC YoY Forecast we used the unrevised estimate for 2014.)

Despite forecasting strong growth, NERC undershot Personal Income by about 1.4%. Considering the significant revisions to nonfarm proprietors’ income - see the bottom of this page for more information – this is an acceptable error. The BEA and other agencies often revise their data as new surveys/measures/methods become available, which improves the precision of the estimates while simultaneously making forecast evaluation much more complicated.

Since our 2014 numbers were lower than the revised 2014 number, and NERC takes this 2014 number as a given base level, the forecast understandably misses low. However, if you simply look at the year-over-year growth – a measure that subdues the influence of base levels and revisions - NERC is much closer (see the right side of Table 1). The figure below shows the amount of revisions to nonfarm proprietors’ income in Washington County.

Tuesday, October 25, 2016

Housing Affordability in the Portland MSA

With Portland’s high-end coffee shops and renowned restaurants and breweries, it is easy for long-time residents to forget that theirs is the least expensive of the large West Coast metropolises. Part of the reason Portland may not feel like a “cheap” place to live is that incomes here have historically been lower than those in comparable counterparts. However, this is all beginning to change. Migration into Oregon, and specifically the Portland MSA, is relatively strong compared to other parts of the country. This migration is partially the result of a strong economy – the Portland MSA’s employment growth has surpassed the nation’s since June of 2010 – and also because of Portland’s relative lower housing costs compared to other desirable West Coast metros. While the level of personal income remains lower, growth is surpassing many other metros. Generally, these are very positive signs, but there can be a downside. Income and population growth, paired with a limited supply of housing, drives up home prices. Furthermore, since incomes and the cost of land are rising, developers are incentivized to increase their margins by selling to the highest income households. All in all, this means that house prices have risen quickly, and many longtime residents are being priced out.
Figure 1– Affordability and Price Health for large MSAs, Zillow

The West Coast Problem

This affordability crisis is not unique to Portland. Seattle, San Francisco, Los Angeles, San Diego and to a lesser extent Denver all have their own variation of this gentrifying theme. Figure 1 has two measures that put Portland’s crisis in a national perspective. The vertical axis gives a measure of affordability. The higher an MSA is on that axis, the greater that area’s house prices are relative to incomes. The horizontal axis gives a measure of house prices ‘health’. The further to the right a MSA is located on the chart, the more expensive buying a house is relative to renting. Common sense says that rent prices and house prices should generally be in balance; if one becomes relatively expensive people will switch to the other (and vice-versa). It is when this relationship breaks down that a market is deemed ‘unhealthy’. The housing market becomes more bifurcated along income brackets when the ability to move from rental to home ownership is made more difficult.  With Portland positioned towards the northwest quadrant in Figure 1, this may be the prevalent affordability issue.

Are Homes too Expensive?

Another factor to take into account when discussing affordability problems is the question of whether or not housing in the Portland MSA is fundamentally overpriced. After the housing bubble burst, houses largely sold for under their ‘fundamental value’ (explained below). With housing prices once again rising rapidly, at what point would we know that prices have surpassed their underlying support measures and entered into a bubble scenario?
Figure 2 – Real Case Shiller Index, fundamental Home Price Index, Portland MSA    

Figure 2 shows both the real Case-Shiller House Price Index (HPI) and an estimate for a fundamentally driven index (fluctuations in the index that can be attributed to income and population growth). It shows both a period of heavy overvaluation (the housing bubble) and a period of undervaluation (after the bubble burst). As of July the real Case-Shiller HPI finally surpassed the fundamental HPI. If we are not entering a speculative bubble, then the rapid rise in housing prices should be leveling off.  This means that the ‘recovery effect’ is over, and, if rising home prices have been causing the greatest strain on affordability, the worst may be behind us.  

What Now?

In October 2015, Portland City Council declared a “housing emergency”. Since then there has been a wave of proposals and measures aimed at increasing the number of affordable units available. The statewide ban on inclusionary zoning (a law that requires a certain percentage of affordable units or incentivizes affordable housing) was lifted during the 2016 state legislative session. ECONorthwest and the Urban Land Institute (ULI) produced a study examining this subject in detail[1]. This study concludes that given “the right market conditions and with optimal availability of new incentives”, inclusionary zoning policies can generate affordable housing that otherwise would not be built. However, the authors also go into detail suggesting that even in perfect conditions, the result is not a complete solution to a dearth of affordable housing. These incentives will be partially funded by a 1% excise tax on the permit value of all new construction (SB 1533).
Measure 26-179, the affordable housing bond measure, authorizes 258.4 million in bonds to “build new housing, purchase, [and] rehabilitate existing housing to maintain affordability”[2]. Should it pass, property taxes are expected to increase an estimated $0.4208 per $1,000 of assessed value, or $75 a year using Portland’s median assessed value for a home[3]. Lastly, there are discussions of lifting the statewide ban on rent control, a policy change that economists generally oppose[4]. Evidence to the efficacy of this rent control is sparse, and there are a plethora of unintended consequences that could arise should Portland adopt rent control.
There are also solutions that don’t rely on additional tax revenue, but are still controversial in their own right. Expanding the Urban Growth Boundary and rezoning residential neighborhoods are two actions that would increase supply and therefore decrease prices. Oregon’s long history of land-use activism and the natural incentives of NIMBY[5]ism make these particular policies difficult to implement.  It is likely that some combination of these measures will come to fruition.

[4] Whaples, Robert. "The policy views of American Economic Association members: The results of a new survey." Econ Journal Watch 6.3 (2009): 337-348.
[5] “Not in my back yard,” a term to describe the unwillingness of neighborhoods to accept local changes that they might support elsewhere.