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.

[2] https://www.portlandoregon.gov/auditor/article/581552
[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.

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