by Dr. Patrick Jones
Already overheated, the local housing market took an affordability body blow during the first half of the year. As Trend indicator 6.3.2 portrays, the plunge of the Housing Affordability Index (HAI) descended to a value of 58 in the quarter ending in June.
There is no metro area in eastern Washington with this level of affordability, or better, unaffordability. The metro with the closest score is Spokane, which registered a ratio of 65 for the most recent quarter. The most affordable – the Tri Cities. It is notable, however, that all of the population centers east of the Cascades sported HAI values greater than 100 a few quarters ago. Now none.
The HAI is compiled by the Runstad Center for Real Estate Research at the University of Washington. The data come from the Center’s work with local multiple listing services around the state. The Center’s data are always very current.
Nation-wide, there a few versions of an affordability index. The Center’s HAI calculates the income needed to purchase a home priced at the median in the local market. It assumes that a household puts 20% down on the home and secures a 30-year fixed mortgage. It then compares the area median income to the derived mortgage costs under these conditions. A value of 100 or above implies that a household can afford a home. Values less than 100 indicate a level of un-affordability, whether minor in the 90 range or very unaffordable, as we now observe at 58.
Analysts like the HAI because it captures many market forces in one number. Among these is the interest rate on the 30-year mortgage, which as we’ve seen in the past weeks, has risen dramatically to 6.7%. It reflects the ability to pay via the likely best measure of the “middle” value in area income, the median. And it captures the supply and demand effects.
Price is the result of supply and demand factors in any market. The Trends also track the closing price of sales of existing homes via median values. (In a market with enough homes valued at the very upper-end, the median will also be a better measure of the middle value than the average.) Indicator 6.3.1 presents a graph of housing prices: it is a mirror image of the HAI indicator. The startling number: median home resale prices for the second quarter in the counties was nearly $570,000. A year prior it was nearly $100,000 less. And two years ago, it was almost $200,000 less!
These are unprecedented increases. What’s at work?
When one dives into the supply of homes in Chelan and Douglas Counties, it is quickly apparent that a large part of the decline in the HAI (and the rise of price) can be laid at its feet. The Trends doesn’t track the offering of homes for sale, but one can easily access it via the link to the data on the “More Info” tab of indicator 6.3.2. There one finds that the overall months’ supply of housing, based on current selling rates, was 2.7 in Chelan and 2.1 in Douglas at the end of June. A number that reflects a balance between supply and demand is typically between 4 and 6 months.
It’s worthwhile noting that this “balance” number is nowhere to be found in the state this summer. The statewide average of month’s supply on the market of homes was a mere 1.5. Relatively speaking, then, the area is doing a bit better than elsewhere in Washington.
And what about the near-term future supply for the area? That report is mixed, according to Runstad Center data. Compared to the prior year, single family building permits in 2021 inched up 1.5% in Chelan County but leaped nearly 40% in Douglas County in 2021. For the current year, there appears to be a somewhat stronger pulse in permitting. The Center reported a 61% year-over-year increase in Chelan County. The picture, unfortunately, is a bit murky for the second quarter permitting data in Douglas County.
Traditional demand-side factors do not seem to be as acute as on the supply side for the two counties. Yes, population is growing, as seen in Trends indicator 0.1.1. But at 0.9%, this year’s increase versus last year is not setting a scorching pace. Similarly, income, seen in Trends indicator 2.1.2 and examined in an accompanying article in this issue, has recently experienced warm but not hot, increases. Median household income went up a modest total of 7% over a two-year period.
A caveat is that these two traditional demand factors don’t fully capture local demand, if a significant portion of that demand is driven by out-of-area buyers wanting to get a piece of north central Washington’s beauty. We have, however, little way of determining the importance of these buyers without a detailed look at sales transactions.
For now, supply has been the driving force behind (un)affordability in the greater Wenatchee area. In the future, mortgage rates will loom larger, if not much larger, in the HAI. Yet, there might be some relief. If the local housing market follows economic theory, demand will soften, leading to lower HAI values, or at least less rapid decline in housing affordability. Higher prices generally solve higher prices. But don’t count on a decline, just a stabilization of prices.