PORTLAND, Ore. (KOIN) — Home prices in Oregon have risen steadily over the last five years, but an economist says the state’s residential real estate market actually became more affordable amid the pandemic.
In early March, Damon Runberg, an economist with the Oregon Employment Department, released a housing affordability index he developed looking at the monthly mortgage of the average house as a share of the average wage in certain locations. What the index shows is that homeownership was more affordable in 2020 compared to 2019.
“I really wanted to sort of develop more of a housing affordability index that was a little more holistic than that and taking into account sort of the other variables that impact affordability in a particular place in time,” Runberg explained.
He said a lot of people can look at the cost of a home and assume they can’t afford it. However, when they actually consider how much they’ll save with a low interest rate and if they can make mortgage payments with their current wage, they might be able to afford something at a much higher cost than they initially thought.
What really made 2020 an incredible time to buy a home for some people were the historically low interest rates. Runberg said that a 1% drop in interest rate equates to saving about 10% on the cost of a home.
With this in mind, many people were willing to pay higher prices for homes in competitive markets and felt they could still afford their monthly payments.
Another factor driving real estate affordability during the pandemic was the average wage.
When the pandemic began, the Oregon Employment Department was shocked to see the average wage going up. Soon, they realized that the occupations most impacted by layoffs were low-wage jobs.
“When you cut low-wage workers out of the calculation for the average wage, it actually artificially boosted the average wage,” Runberg said.
Despite this, the Oregon Employment Department modeled what the average wage in 2020 would have been had the massive layoffs not happened and it still increased about 2% annually. In the second quarter of 2020, Oregon’s average wage was up 9% year-over-year. While this 2% wage increase is much lower than the average wage increases during the pandemic, Runberg’s research shows it doesn’t have much impact when it comes to real estate affordability.
Runberg also pointed out that a lot of people received government financial assistance during the pandemic, whether through increased unemployment benefits or stimulus payments, and said that may have allowed people to still be able to afford to buy a home.
According to the latest numbers released from the Oregon Employment Department released on March 16, the unemployment rate dropped from 6.2% in January to 6.1% in February. During the pandemic, the unemployment rate peaked in April 2020 when it reached 13.2%.
“Housing still moved towards being more affordable even when dropping the average wage to something more consistent with what we likely would have seen had COVID not happened,” Runberg wrote in his report.
His report showed that across the state, the average monthly mortgage at the end of 2020 was roughly 26% of the average monthly wage, a decline from 29% the same time in 2019.
Tim Pitts, owner of Think Real Estate in Portland, said it’s not always easy getting his potential buyers to keep in mind how much money they’re saving with a low interest rate, especially in a competitive market where the low housing inventory is driving up prices.
“I always explain to buyers that it’s all about the price that you’re going to pay for the house, of course, but if you think you’re going to live somewhere for years and years, then equally relevant or maybe even more relevant to me is the monthly payment,” he said.
Although it wasn’t mentioned in Runberg’s report, Pitts said a lot of his clients were able to afford a home during the pandemic because they were saving more. Without paying to travel places or to do as many activities, many families were able to stash more away for a down payment.
While 2020 may have been a great year for affordable real estate, both Runberg and Pitts say they wouldn’t be surprised if the situation changes soon.
Already, interest rates have increased in 2021. In December 2020, the 30-year fixed mortgage rate dropped below 2.7%. Now, as of March 15, 2021, Bankrate says the benchmark 30-year fixed mortgage rate is up to 3.23%.
“It makes me concerned for a few years from now because it wouldn’t be outside of the historic norms for us to get back to 5%, 6%, 7% interest on a mortgage and when you do the math on a $500,000 home and if you were to buy it with 3% financing right now versus 6% or 7%, it’s a huge difference,” Pitts said.
Runberg wouldn’t say if he thought buying a house in March 2021 was a good idea, but he did say it’s important for potential homebuyers to pay attention to the market where they live. He expects the housing cost appreciation will slow throughout the year as more supply becomes available and as more people decide to move as the pandemic eases as life returns to normal.