Are Portland Home Values too High?

Reading some of the real estate market news out there, one might be tempted to say yes. But it’s really a matter of perspective.
There are many ways of assessing and discussing how one housing market compares to another, which is why it’s really hard to give a yes-or-no answer to the question of affordability.

However, recently I found a very helpful blog post from the Oregon Office of Economic Analysis. It’s a bit dense, so let’s break it down bit by bit.

The writer, economist John Lehner, starts by pointing out that the most common way to assess a city’s affordability is to compare it to other cities:
“For example, according to Census figures, Portland home values are 17% below Seattle, 39% below San Diego and 58% below San Francisco… So while many admit Portland’s prices are high, they’re still a bargain compared to these other locales.”

But, Lehner goes on to say, home values alone don’t tell the whole story. There’s a better way to measure and compare affordability, and it’s known as the “price-to-income ratio”.

In layman’s terms, the price-to-income ratio simply weighs how much a home costs against what people are earning. In economist terms, it’s the ratio of median home value to median household income. (Median is similar to average, but instead of adding all the numbers together and dividing by how many you have, you simply line up all the numbers in a column and find the one on the middle. It’s considered a more accurate when it comes to things like home values and incomes).

According to Lehner, the “rule of thumb” for affordability is a 3 to 1 price-to-income ratio. In other words, you should pay no more three times your annual income for your home.

Say the median income for an area is $100,000 a year. Using a price-to-income ratio of 3 to 1, that would mean a $300,000 home is what most people in that area can afford.

In major metro areas across the nation, Lehner says the price-to-income ratio has been hovering around 3.3. If you were to list all of these metros starting with the highest price-to-income ratio first, Portland would land 15th on the list. The Portland price-to-income ratio is currently at 4.6.
In other words, Portland home prices are high because income is low.

According to US Census figures, there are 13 metro areas with higher home values than Portland. But, says Lehner, 12 of those 13 also have higher household incomes.

It’s a different way to look at the issue, and it makes more sense to me as a real estate agent. It is not simply about high prices for the Portland real estate market. It doesn’t make sense to worry about high property values alone – in fact, it can be a healthy sign of growth for a city like Portland. Our income problem, however, is one that can and should improve as employers begin to understand that in order to attract the kind of quality workers that come here, or to keep the ones they have, they are going to have to start paying a little bit more.