The Fever in Housing Market Breaks, but Perhaps for Only a Quarter

by Dr. Patrick Jones

Has the housing fever in Chelan and Douglas Counties broken? A quarter ago, we might have hazarded a yes. With the latest results, from the 2nd quarter of this year, it’s good we didn’t. Over the April through June period, the median resale price for existing home climbed from $469,000 to $529,000.  That’s a 13% jump from the prior quarter.

The current median price still represents a decline from the second quarter of 2022, when the area median reached an all-time high of $569,000. But consider the median price in the same quarter three years ago:  $384,000. Or five years ago (Q2 of 2018):  $332,000.

The rise in housing prices in the area has been breathtaking. It took 11 years for the area median resale home price to move from $200,000 to $300,000. It took about three years (13 quarters) for a similar rise – from $300,000 to over $400,000 to occur. It took a mere five quarters for the housing market to push the median resale price from $400,000 to over $500,000.

Area housing prices are now the highest of all eastern Washington metros. Spokane County’s prices are the closest, as its second quarter median was $441,000. The lowest have been registered in the neighboring county to the east, Grant, which posted a second quarter median of $331,000.

Why the warp speed local housing price acceleration? Undoubtedly, several factors, both demand- and supply-related, are at work. Conventional explanations for housing demand usually rest on population and income growth. But demand forces don’t point to outsized gains. From 2017 to 2022, population in the two counties climbed by 6.6%. Washington state outpaced this percentage, as did the two largest metros in eastern Washington - Spokane County and the greater Tri Cities. 

We are two weeks ago from learning the 2022 estimate of median household income (MHI) provided by the U.S. Census. From 2017 through 2021, MHI in the two counties climbed by a cumulative 10%. (View local MHI here.) This percentage increase was considerably less than in Washington (18%), in Spokane County (23%), and the greater Tri Cities (23%). The upcoming release of 2022 data shouldn’t change this ranking.

Local demand, then, doesn’t appear overheated, at least on a relative basis. A missing factor, however, is out-of-county demand. Parts of Chelan County have become magnets for second homes. Short of an effort to examine every sale, we simply don’t know the number of buyers in this category. But it doesn’t appear to be trivial, and the category is a factor not seen in other eastern Washington metros, with the possible exception of Walla Walla County.

The Trends doesn’t contain a housing supply measure. But Census tracks the number of housing units in its annual survey. (That survey can be accessed via the “More Info” tab on indicator 6.1.1, “Share of Owner-occupied Housing Units.”) The American Community Survey estimates for 2017 and 2021 show an increase of 8.8%. Single-family units increased a little faster than this, multi-family units a little more slowly.

This increase in housing supply reported by Census outpaced the gain in population over the five years. Everything else equal, an inventory expansion of this size should have moderated price. So the puzzle remains why the recent rapid run-up in median home prices has occurred.

Undoubtedly, building materials have played a role. But their prices aren’t different from one part of eastern Washington to another.

Labor might be an issue. Relative to Washington state, however, the two counties fared better in expanding its construction workforce. Here, it climbed by 37% between 2017 and 2022; in Washington 17%. While the average annual wage of local construction workers rose 24% over this period, that increase was lower than the increase of all workers:  32%.

Buildable land appears to be an issue for Chelan County, as so much is claimed by governmental agencies. But there isn’t a data series on the average price of platted lots over the past few years, so any evidence about extraordinarily high land prices remains anecdotal.

In the end, signals for future residential supply do not shade to green. While we don’t (yet) enjoy 2022 data on income and housing units, we have access to the latter’s precursor, building permits. And 2022 did not bring a bounty of permits. As Trends indicator depicts, residential housing permits in the two counties for 2022 fell to pre-pandemic levels:  848. Clearly, higher numbers, even higher than those experienced in 2020 and 2021, are needed to bring supply closer to demand.

A final demand component requires a mention:  mortgage rates. As has been widely acknowledged, the rapid rise in mortgage rates has kept would-be sellers sitting on their hands, as they are reluctant to move from a low-rate mortgage (or perhaps no mortgage) to one of a conventional, 30-year fixed of approximately 7%. This has kept inventory off the market, putting all the more pressure on new construction to contribute to supply.

All in all, it seems unlikely that the median home price in the area will fall back appreciably anytime soon.