One of the biggest concerns and barriers to homeownership right now is affordability, a problem that has only been exacerbated by rapidly rising home prices and interest rates. As someone who has lived in Portland, OR for most of the last 25 years, I wanted to better understand why this is such an issue right now and what I can do to help. Cities such as San Francisco, LA, and Seattle have long been unaffordable to the average household, but the dream of home ownership was always achievable in Portland, OR. We were the smaller, more affordable, sister city to these other West Coast markets and affordability is really a somewhat recent problem.
I will start with how Affordability is measured. The National Association of REALTORS® publishes a Housing Affordability Index, which measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data. That is a mouthful, but what it is gauging is can a household earning the average income afford the mortgage on an average home. A value rating of 100 means that a family with a median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, and a number below 100 means it’s unaffordable.
According to NAR’s Index, as of Q4 2022, Portland’s affordability index rating is 90. This means that a family earning the median income ($106,550 in 2022, per HUD) can afford 90% of the monthly mortgage payment on a median-priced home ($494,000 in December 2022). The formula assumes that the buyer has a 20% down payment and a 30-year fixed rate of 6.36% (per Freddie Mac). Note that these statistics are for the greater Portland metro area, inclusive of Vancouver, WA.
Here is another part of this assumption that is challenging. This equation assumes that you can afford 90% of your mortgage if you make the median income of $106,550 a year, but it also assumes you put 20% down when you purchased the home. In order to put 20% down, you will need to have saved $100,000 for the down payment, not including closing costs or fees, which means you need to have saved a year's worth of salary in order to afford 90% of a monthly mortgage payment on a median-priced home.
And oh, by the way, the median salary for Millennials in Portland, OR is $58,000.
What makes this even more challenging is that the person who has saved 20% for a down payment and is ready to start looking for a home under $500,000, they are going to have very limited options.
Take out your phone right now, and do a quick Zillow, Redfin, or realtor.com search of single-family homes (excluding condos) under $500,000. Today, there are about 300 homes on the market. That might sound like a lot, but more than 300 homes in this price range also sell every month, which means this is a highly competitive price range and you are most likely competing with multiple offers and have to pay over the list price.
So yes, Portland has an affordability problem and some of the only Metropolitan areas with worse affordability are San Francisco, LA, Seattle, Miami, and Honolulu. However, this isn’t just an issue for Portland, it is a problem Nationally. It is why we have the lowest share of first-time home buyers ever at 26%, it’s why the average age of First time home buyers is 36 vs 30 historically, and it's why 22% of first-time home buyers last year had money transfers from family.
If affordability is a concern, know that you are not alone, and you have options that don’t involve moving to Wichita, Kansas, or Fort Wayne, Indiana.
First, let’s talk strategy. If you are willing to make adjustments to the size, location, and condition of the home, this will help. Start by considering a smaller home or a different neighborhood. Sometimes going just a few miles further out of town or compromising on one less bedroom or bathroom can make a huge difference in the price of a home. After all, this doesn’t need to be your forever home. This is your starter home, and once you build up some equity, you can move up. Next, try considering homes that need a little bit of work. The house with the ugly paint, 70’s wallpaper, but good bones, is a great opportunity to put in some sweat equity and avoid a multiple-offer situation. The homes that are perfectly staged, freshly renovated, and picture perfect, are going to be highly competitive and likely sell for over list price. And if you are lucky enough to have family that is willing and able to help you out with a down payment, take advantage of that! There is no shame in accepting gift funds if it can help you buy a home and gain the emotional and financial stability that comes with it. It is a fact that rent prices continue to go up. By buying a home, you have taken the largest line item in your budget and made it fixed, which is a great hedge against inflation and an investment in your future.
If coming up with a down payment or closing costs is your primary concern, the good news is there are still options! The Oregon Housing and Community Services, the OHCS, offers programs to help first-time home-buyers, such as below-market interest rates and grants to help cover closing costs. The Portland Housing Center also offers programs for individuals with income at or below 80% of the metro median income. The African American Alliance for Homeownership AAAH also has programs that provide down payment and closing cost assistance in addition to homebuyer education classes.
There are many financial and emotional benefits to home ownership, which is why this is such a critical part of the “American Dream”. In spite of an overwhelming amount of headwinds affecting affordability, there is a path to homeownership for almost everyone who wants it. If you’d like help or would like to learn more, give me a call.
