By Dr. Patrick Jones
It used to be that small-town living meant a good shot for a young couple to purchase a home with a decent-size yard. That home might not be one with many bedrooms, granite-clade kitchen counters and a deck meant for entertaining. But it allowed some room to grow a family at a reasonable price and enabled the creation of equity.
Walla Walla has generally lived up to this image of small-town America. As Walla Walla Trends indicator 5.1.5 reveals, the share of homeownership in the metro area, Walla Walla and Columbia Counties, has generally rested a bit above state and U.S. averages. The most recent estimate from the U.S. Census American Community Survey put the 2019 rate at 67%.
But over the next decade will two thirds of area residents continue to live in owner-occupied homes? That is doubtful, if the most recent path of homeownership for first-time buyers continues.
Walla Walla Trends indicator 5.1.3 shows a rather large drop over the most recent six months. This indicator measures affordability for a typical first-time homebuyer. It is ratio, with income in the numerator and housing costs in the denominator. A value of 100 indicates that a first-time home buyer has just enough income to afford a typical starter house.
As can be observed, since 2018, this ratio has registered values below 100. But, since life so much in economic life is relative, it’s worthwhile pointing out that this ratio has been below its counterpart for Washington State. Until now.
The value over the past 6 months has averaged about 75, considerably below the average for the entire state. Does this augur a future a declining affordability for first-time buyers? If the trends continue, the answer must, unfortunately, be “probably, yes.” If so, then overall home ownership in the Walla Walla area will slip.
To gain insights into the changes in the measure, let’s consider its calculation in a little more detail. Specifically, the First-Time Housing Affordability Index (HAI) estimates uses household income at 70% of the median. In turn, the home price is assumed to be 85% of the area's median price. Other assumptions of the First-Time Buyers HAI are: a 10% down payment, a 30-year fixed mortgage, and mortgage costs that are less than 25% of household income.
In most communities, household income rises steadily in the low-to-mid single digits year-to-year. How has the Walla Walla metro area fared? Actually, quite well. While median household income, as shown in Trends indicator 1.1.2 has been lower than its counterparts in the state and the nation, it has grown at a faster rate. For the years 2013 through 2019, the rate has been 4.8%, compounded annually. Contrast this to growth rates of Washington and the U.S., 4.4% and 3.3%, respectively.
So far, so good. But what about housing prices? For the period 2013-2019, they rose cumulatively at 43%, as one can decipher from Trends indicator 5.1.1, which tracks the median resale value of single residence homes. This is faster, but only slightly, than the cumulative growth in median household income. Until recently.
In pandemic year 2020, prices of homes, as defined by this indicator, climbed 21% over 2019 levels. In the first quarter of this year, the median resale value rose again, to $346,000, implying a 22% jump. Rest assured, our incomes, in aggregate, never experience jumps of this magnitude.
What might be behind such leaps in price? On the demand side, the usual suspects are population and income growth. We’ve already seen that income growth here has been relatively strong, but not that strong. Any contribution from population growth is doubtful, since Walla Walla has experienced slow growth for years, and the pandemic likely didn’t boost the numbers. (The 2021 estimate will be out shortly.)
One dimension of demand that is hard to measure but has certainly been the source of real estate conversation is the 2nd home market. It could well be that some part of demand currently rests on transactions by non-residents looking for getaways. This has been a factor in high amenity markets such as Coeur d’Alene. Perhaps Walla Walla is edging into that kind of a market.
The supply side reveals some compelling evidence behind price increases. In a nutshell, few homes are being built. In all of 2020, permits for single family residences amount to 132. (Data come from the source of many Trends measures, the Washington State Center for Real Estate Research.) That’s down from 160 in 2019 and 221 in 2018. A drop of more than a third over three years will have consequences. To this observer, accelerating prices in Walla Walla stem more from constraints on supply than unleashed demand.
Many forces are now contributing to limit the supply of homes: slow-to-no growth of the building trades workforce, escalating cost of materials, enhanced building codes for energy conservation and the price of land. Some of these constraints will abate, but likely not very quickly. Even when supply opens up, it remains to be seen whether new homes will be in range of first-time buyers.
The consequences seem clear. It will be increasing difficult for residents to get a foothold in the owner-occupied market in Walla Walla. Perhaps those with lower-than-average wages will experience faster wage appreciation than the “average” Walla Walla resident. The evidence in the pandemic recovery points to this. But, it is highly unlikely that wages, and therefore incomes, will track the rise of home prices.
In the next five years, then, it is likely that home ownership rates in the greater Walla Walla area will fall. Not by big steps, but likely enough for young, would-be buyers to feel.