Housing affordability continues to decline, macro economist says at 2022 Economic Housing Summit
Many moving pieces such as interest rates, inflation, the birth rate, the supply chain, the shortage of skilled trade workers and more all affect the affordability of the housing market nationally and in Oregon, and will need to be met with policy changes that support additional housing supply.
That was one takeaway from the 2022 Housing Economic Summit held virtually on Thursday, Jan. 13. The summit featured nationally recognized speakers as well as local experts in the areas of housing, regulation and economics, speaking on a variety of issues that will impact housing in Oregon in 2022 and beyond.
At the summit, keynote speaker Robert Dietz, chief economist for the National Association of Home Builders, said the economy can expect to see slow but ongoing growth in 2022 and 2023, with the record-low interest rates in the housing market coming to an end.
"A fundamental difference here in the housing market is people using their homes for more purposes, … whether it's for work, study, exercise, all of these things," Dietz said. "Some are going to ease as we move into the endemic, but demand for housing has gone up more than demographics have indicated."
Dietz said that home prices have gone up so much, and interest rates are expected to increase over the next year or two, that housing affordability is expected to continue to decline.
"Oregon over the next two decades needs to add about 580,000 units a year," Dietz said. "Current levels of construction are only producing half that level."
According to his research, the Oregon housing market has lower affordability than the country's average, although it is still decent for the West Coast. Dietz said 29% of the units needed, are needed by households making less than 50% of the area median income.
"Providing affordable rentals and affordable entry-level single-family housing and building increased density like townhouse construction are key areas where we're going to be able to address some of those issues," Dietz said. "We need a more reliable source of materials, we need to address labor shortages and we need leadership to address costs."
Altogether, Dietz said current policies combined with material delays and labor shortages influencing the housing market's affordability easily add up to more than $90,000 per new construction single-family home — and for every $1,000 that figure rises, 1,578 Oregonian households are priced out of the market.
"Housing affordability continues to decline. It has been declining for about a decade, and I do think it will continue to decline because of higher interest rates and higher home prices," Dietz said.
Dietz said for the housing industry the average 3% interest rate means that buyers and borrowers will face higher interest rates to buy and develop land. Dietz said his forecast has that reaching 4% by the end of this year, but said others show an even faster acceleration than that.
"We're looking at a 4% rate certainly by 2023. Why is that 4% critical?" Dietz said. "Go back to 2018, you can see the red line peaking. A lot of housing measures went sideways in the second half of 2018 — the policy rate was too aggressive."
Dietz said as the interest rate comes back up and hits that 4%, housing prices should start to come down.
According to Dietz, building costs are up 21% year over year. That is slightly down from the previous month, which showed a 24% year over year increase.
"It does look like we are seeing a little bit of easing, but it's hard to call it easing when it's over 10% gains in pricing," Dietz said.
He said the increase in lumber prices alone easily add $40,000 to the cost of a newly-built home compared to this time last year.
"They did come down as the building market cooled a little at the start of this year," Dietz said. "It's still growing, but not as fast."
Dietz said the job openings rate in the construction industry went down in 2020, but that was only because builders had an easier time finding workers compared to other industries when the overall unemployment rate was higher in 2020.
"We don't have enough workers to fill those positions, and residential construction wages are now up 8% year over year," Dietz said. "I think those wages will still go up, contrary to the higher cost of single- and multi-family units."
Dietz said the construction industry needs to be recruiting 740,000 workers per year to replace those who are retiring, since the average age of a construction worker is now 41 years old.
Much of the housing crunch right now can be attributed to low inventory coupled with high numbers of genuine buyers — generally, Millennials who are finally ready to buy homes after starting careers during the Great Recession clashing with Baby Boomers who are ready to downsize, or aging in place, in the same market range.
In the middle class bracket of households making $50,000 to $70,000 a year, 30% of Oregonian homeowners spend more than 30% of their income on housing, compared to 22% of homeowners nationally, Dietz said.
"Rents are growing 10% to 20% depending on the market. We are not yet there with rent inflation showing up in that data," Dietz said. "Unfortunately, the housing market is going to be a major contributor. One way to tame this is additional housing inventory."
For those who haven't been able to buy, more and more are stuck in the middle renting instead of starter homes or middle homes, creating a bottleneck all the way down the supply chain of housing inventory, including rentals.
"Looking at inflation expectations five to 10 years down the road, (it's) somewhere between 2% and 2.5%," Dietz said. "The expectation is that the Federal Reserve has tools to bring inflation down, which means we don't have a repeat of the early '80s — which is really good news for housing."
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