By Dr. Patrick Jones
Is home ownership slipping out of reach in the Tri Cities? By the look of the graph in Benton Franklin Trends 7.3.2, that might be the call, if not now, then in the near future. This trend tracks the housing affordability index (HAI) of all buyers in the greater Tri Cities as well as in Washington state.
Since the beginning of last year, affordability has been on a steep decline. The HAI value for the most recent quarter, Q2 of this year, came in at 90. At the start of the pandemic, Q1 2020, it stood at 131. That’s huge drop in the space of a little more than two years.
Housing affordability indices are essentially a comparison of household income to household mortgage costs. Benton Franklin Trends adopts the measure developed by the Runstad Center for Real Estate Research at the University of Washington. It aims to mirror market conditions for the average buyer. Specifically, it calculates the income needed to afford a 30-year fixed mortgage, based on a 20% down payment of a home priced at the area median. This is the denominator.
The numerator of the ratio is the area median of household income. A number 100 or above indicates that the market currently supports this “middle” buyer to purchase a “middle” kind of a home. Any number below 100 implies that a purchase might be a stretch; the distance to 100 connotes how big a stretch.
How did the Tri Cities arrive at its new status of unaffordability? Up till now, it hasn’t been necessarily been due to mortgage rates. While interest rates have recently shot up, the period between 2020 and the mid-point of this year was still characterized by historically low rates. That hasn’t been the case for prices. As Trends indicator 7.3.1 reveals in stark detail, home resale prices have experienced unprecedented growth over the past two years. In mid-2019, the median resale price in the two counties was $304,000; three years later, $446,000. That represents 47% increase in three years!
What factors have pumped up prices so quickly? The answers lie in both demand and supply. Housing demand is usually driven by population and income. Both have experienced rapid growth in the past three years. Population has grown by over 15,000, as seen in Trends 0.1.1. That rate of growth has been far faster than that of the state, not to mention the U.S.
In addition, the greater Tri Cities have enjoyed robust income growth. Its median household income, as seen in Trends 3.1.2, has consistently been the highest in Eastern Washington in recent years. Its growth has also outstripped all of eastern Washington over the period 2019 through the most recent year reported, 2021. As of 2021, Census estimated that median household income in the two counties was over $78,000. That represents a gain of $10,000 in two years, a leap that is unprecedented in the economic history of the region.
Supply, to no one’s surprise, has not matched strides with the demand factors. While not on the Trends site, homes listed for sale are tallied by the Runstad Center. (Via the links in the “More Info” page, one can easily see that listings have actually declined over the pandemic.) In mid-year 2019, listings for each county was over 750; They have not grown since then; in fact, they have declined. The most current count put the numbers at around 700 for each county.
Another way of expressing supply is how many months’ offerings the current listings represent, based on current monthly sales rates. As Trends indicator 7.3.4 show, the most recent value is a very low number – 1.7. Most housing economists think a supply of 4-6 months signals a market in “balance.” If it’s any consolation, the Washington average for the second quarter was a bit lower, at 1.5 months. Three years ago, the local number was also low, but not critically low, at 2.9 months.
What might future supply hold for the Tri Cities? Some insight can be gained by examining building permits. For 2021, the annual count amounted to slightly over 2,100 between the two counties. This level represents little change to pre-pandemic 2019. Supply hasn’t expanded in the past three years. Of note: the Runstad Center further reports that single family permits actually fell between 2019 and 2021. Logically, then, permitted multi-family units climbed.
What about this year? The Vitals from the Association of Washington Business Foundation tracks building permits on a quarterly basis. For the first half of this year, there has been little change from the first half of 2021. Permits are down by 10 in Benton County and by 43 in Franklin County. For the Tri Cities to increase affordability, for the All-buyer HAI to climb above 100 again, permitted units will obviously need to rise, not fall.
If they do not, a possible consequence is that the rapid spurt in population that the Tri Cities has enjoyed over the past two decades will abate. We have no statistical analysis to buttress the claim, but it makes sense that lower housing prices, relative to income, are an attraction of many mid-sized communities such as the greater Tri Cities. Remove housing affordability from the mix, and the welcome packet to the area will not be nearly as generous.