Housing Price Appreciation Has Slowed – A Reset in the Local Market?

By Dr. Patrick Jones

Over the past seven years, housing prices in the greater Tri Cities have doubled. Recently released data from the University of Washington’s Center for Real Estate Research (Center) put the median price of resale (not new) homes for the 2nd quarter of this year at $429,000. As Trends indicator 7.3.1 reveals, the median stood at about $209,000 in the 2nd quarter of 2016.

It comes as no surprise that local incomes have not enjoyed that same growth. Estimated local median household income in 2022 was approximately $83,000; in 2016, $58,500, as Trends indicator 3.1.2 reveals. This translates into a cumulative growth rate of 42% -- healthy but hardly matching strides with housing price acceleration here.

After a decline of nearly $28,000 in the median from the end of last year, continued decline in housing prices seemed possible. Yet, housing prices in the greater Tri Cities have resumed their upward climb in 2023. These latest quarterly data represent an increase from the prior quarter of $3,500. It’s worth noting, however, that this median shows a decline of over $17,000 from the same quarter a year ago.

Since price and quantity are highly linked, an immediate explanation for the deceleration in prices is the decline in units sold. According to the Center, the annualized rate of sales slipped in both counties in the 2nd quarter by -7.7% in Benton County and -8.1% in Franklin County.

This recent quantity decline and price deceleration, however, are likely a short-lived respite in the local housing market, given the strength of their underlying determinants. How we explain the doubling of prices over the past seven years  should give hints about the future.

Local Demand Forces

Prices and quantities sold of most goods reflect the intersection of demand and supply. Housing demand, in turn, for both single-family and multi-family units, rests on several forces. The first is population. As robust as population growth in the two counties has been, it certainly hasn’t doubled since 2016.  The cumulative growth rate in 2022 from 2016 was, as Trends indicator 0.1.1 shows, about 12%.

A second key determinant of demand is income. Yet, this increase has been far less than 100%, as noted above.

A third shaper of demand is the cost of a loan. The average 30-year fixed mortgage reported by Freddie Mac in the recent quarter was 6.5%. That’s up from 5.3% a year ago and 3.6% from the average in 2016. The market-dampening effect of this dramatic increase is likely showing up in data for the three most recent quarters.

Yet another demand factor lies with preferences of housing type. While relative prices between single- and multi-family units play a large role in the decision to buy or rent, one cannot ignore tastes, even if they aren’t quantifiable. Trends indicator 7.1.1 clearly shows that owner-occupied units enjoy a greater share of the housing market in the two counties than nation-wide or in the state.

Supply Factors

What about supply? According to the American Community Survey, single-family units in the greater Tri Cities increased by 15%, a gain greater than the population growth rate. If supply “kept up” with population, how have the determinants of supply contributed to a doubling of the median resale price of single-family residences?

Housing inventory consists of two parts:  existing and new construction. Of the two, existing inventory is far more important and is the component directly measured by indicator 3.1.2. Supply of existing homes arises as households need or want to move. In most cases, this transaction involves a mortgage. It is here that mortgage rates affect supply as well as demand. Faced with a change from a low or no mortgage to one that for a 30-year conventional loan brings it to nearly 7%, would-be listers certainly have reason to hit the pause button. As a result, inventory is lower than it would have been, helping to bump up prices.

While a smaller portion, new housing still affects overall housing prices, if economics teaches us anything about markets. Consider briefly the determinants of new construction.

This portion of supply depends, in a simplified view, on prices of labor, land, and lumber (or materials more broadly). If labor is abundant, construction wages should not show much increase. Locally, the numbers of construction workers have expanded much faster than the growth of the overall labor force in the two counties. Between 2022 and 2016, the average annual count climbed 49%, versus 8% of overall growth rate of area workforce. Not surprisingly, wages climbed modestly. Between 2022 and 2016, average annual construction earnings inched up 16%. (Inflation, as measured by the Consumer Price Index, actually outstripped this gain, 22% to 16%.)

Lumber price increases tell a different story. The segment of the U.S. producer price index covering wood products jumped 52% over the same period.

The third key factor behind a supply response concerns land. Unfortunately, we have no data to assess how rapidly raw land prices climbed between 2022 and 2016. Even less available are the fully developed prices of land, that is, with the cost of utilities and other municipal services folded in. It’s this writer’s guess, however, that buildable land costs in the greater Tri Cities have risen faster than those of labor but more slowly than lumber and other materials.

Another supply factor, with no readily available data, lies in the size of new constructed single-family homes. If the average footprint has increased between 2022 and 2016, then some portion of the doubling of prices is understandable. We also don’t know about a related explanation:  whether the level of amenities of an average 2022 house is the same as one in 2016.  Equivalently, has the quality of a new house increased?

If the overall supply of single-family units in the greater Tri Cities increased faster than population, why did prices rise so much? Without statistical analysis and a bit more data, forensic accounting of local housing price movements is simply suggestive. It is our strong hunch, however, that rising incomes, a doubling of interest rates, escalating prices of some inputs, a larger and higher quality building footprint and a willingness by households to invest a higher share of their income in a mortgage have all contributed.

The “higher for longer” opinion of analysts following short-term interest rates set by the Federal Reserve applies to local housing prices, in our opinion. Outside of interest rates, none of the factors setting prices are likely to change their recent trajectory over the next year.