Housing Affordability for Local 1st-Time Buyers Continue to Slip

By Dr. Patrick Jones

By the end of last year, housing in the greater Tri Cities crossed a threshold:  the median price homes for resale breached the $400,000 mark. To be precise, the quarterly price landed at $407,600. Should we celebrate?

If you’re an existing homeowner with no plan to sell, perhaps. Your net worth just got a bump. If you’re a buyer, it’s no time to bring out the confetti. Acquiring a piece of the American dream just got harder.

In the last decade, housing price appreciation in the greater Tri Cities has accelerated. For home prices to move from $200,000 to $300,000, it took 17 quarters. It took a mere 11 quarters for the median resale price to hit $400,000 from $300,000. These trends are viewable on Benton Franklin Trends indicator 7.3.1.

Over the past 12 months, median resale value of homes in the two counties climbed by about 18%. If personal income rose by a similar percentage, we would have less concern. But of course, it didn’t. Incomes simply don’t rise by double digits in one year. We will not have 2021 household income estimates until this September. But rest assured, any increase over 2020 will hardly approach double digits.

The comparison of income to costs generally defines a measure commonly used in housing analyses:  the affordability index. The Trends offers two versions, thanks to the source, the Washington State Center for Real Estate Research at the University of Washington. The first compares median income of all households in the two counties to annual costs associated with the median resale price featured in indicator 7.3.1. This is known as the “All Buyers Housing Affordability Index (HAI)” and is found here.

The second is the focus of this column. It re-imagines the affordability index for first time home buyers. To arrive at a ratio that likely fits buyers in this category, researchers make the following assumptions:

  • The house price is 85% of the area median
  • The household income is 70% of the area median
  • The down payment amounts to 10% of the total
  • The mortgage runs 30 years

Varying from quarter to quarter are mortgage rates, and of course, home prices.

The result is an index, with the value of 100 set at where (median) mortgage costs equal 25% of median income. If the index sits above 100, then less than 25% is spent by the area’s “lower income” households on mortgage costs. These conditions are deemed affordable. If the index lands below 100, then more than 25% by the area’s “lower income” households is spent on mortgage costs. The conditions are seen as unaffordable.

As one can view on the accompanying graph, the first-time buyers HAI for the greater Tri Cities has been less than 100 since 2017. In the last quarter of 2021, it stood at nearly 84. This downward trend will probably not surprise any follower of the local real estate market. In the past year, the HAI for first-time buyers slid by over 10 points, marking the steepest decline since early 2018.

What might surprise viewers is that, relatively speaking, the HAI for Tri Citian first-time buyers is still higher than the ratio for the entire state (green line). The most recent reading for the state was 66.7. This represents a decline from 71.4 in early 2017. It’s also worth noting that, as challenging as the decline has been for Tri Cities would-be buyers, the conditions here are the best in Eastern Washington – with one exception. That is Grant County, which has consistently shown HAI values for first-time buyers above 100 until very recently.

Will the housing affordability index for first-time buyers here ever re-attain a value of 100 or higher? It seems unlikely unless new forms of single-family residential housing are developed. Median income is likely to continue to increase at a solid rate, say, mid-single digits. Let’s assume that the local income distribution doesn’t shift too much, implying that household incomes at 70% of the median move up at the same pace.

But housing prices, specifically those at 85% of median, will need to return to the increases observed 7-10 years ago, that is, in the low-single digits. At this point, this prescription seems like a tall order. Residential construction costs dance to the tango of three prices:  land, labor and lumber. At the moment, markets for these core inputs are hardly showing modest moves in the 3-5% increase per year. If we wish for a restoration of access by first time buyers to housing, we will need to pay close attention to these cost drivers.