Reaching the affordability ceiling

By Elon Glucklich

Posted Jan 27, 2019 at 5:01 AMUpdated Jan 27, 2019 at 2:24 PM

No end in sight for the cost battle entry-level home buyers face in Eugene-Springfield

While sales have been swift in a Spring Capital Group subdivision project — on one of the largest developable tracts of lane in or immediately near the Eugene-Springfield urban area — it doesn’t show any signs of easing the growing affordability crunch facing local entry-level home buyers.

Since getting its subdivision plat recorded, the local developer has finalized contracts to sell 122 of its 192 home lots at the far northern edge of the city limits since the lots became available in early December, firm principal Tom Connor Jr. said.

Seven miles south, just outside Eugene’s southern boundary, prominent Creswell developers Norman and Melvin McDougal have been busy clearcutting and building a network of gravel roads through their 500-acre ridgeline property above Lane Community College, with secretive plans for what is believed to be dozens of large, high-end homes, each on multiple acres.

The two development groups bought their properties and entered the land-use process in 2016 and 2017, as Lane County’s housing market was accelerating at record pace.

But storm clouds have been growing over Lane County’s housing market. The city of Eugene last year issued 111 fewer permits for new single-family houses than in 2017. It marked the first time in four years that the number of issued permits declined from the previous year.

Meanwhile, prices continued their torrid rise. The average price of a single-family home sold in the county last year was a record $309,000, according to the Portland-based Regional Multiple Listing Service, up 7.3 percent from 2017. And that year’s average sale price was 9.2 percent higher than 2016.

It adds up to what many real estate agents, homebuilding advocates and economists are calling an imbalance in the local market — an unevenness that’s crowding out many local and first-time buyers and depressing sales activity, with no end in sight.

“Supply is a huge problem, especially in the lower end of the market,” said Kip Lohr, owner and principal broker of Eugene-based Lohr Real Estate. “The difference between 2018 to ’19 and, say, 2017 to ’18 is that we’re seeing the price point for the entry-level homes rise.”

A tightening market hasn’t deterred Spring Capital Group. Construction on the first homes, on the former RiverRidge Golf Complex east of North Delta Highway, could start as soon as next month. But with the very cheapest houses in its north Eugene development expected to run in the mid-$400,000 range, the project is targeting buyers above the typical homebuyer’s means.

“We chose the project and the location because we feel very good about that market in town,” Connor said. “We haven’t seen any slowdown.”

But would-be buyers looking for a house around the county’s $309,000 average price are encountering a completely different market.

“There’s a total structural imbalance, and it’s not easily fixable,” said Kim Heddinger, co-owner and principal broker of Eugene-based Golden Realty.

Lane County has averaged less than two months of housing inventory over the last three years, RMLS data show. That means it would have only taken that long to sell all of the houses for sale in the local market, based on the current sales pace. Most real estate agents consider a healthy market as offering four to six months of inventory, with anything less tilting the scale in favor of sellers and against buyers.

But the inventory varies widely by price point, further highlighting the challenges facing entry-level buyers, Heddinger said.

The county has about six months of housing inventory priced between $500,000 and $800,000, according to data she’s compiled. There’s 16 months of inventory above $800,000.

But for houses between $350,000 and $500,000, there’s just 2.7 months of inventory. Below that, inventory is even less than the 1.9-month average since early 2016.

“There just isn’t enough supply. Everything has gotten so expensive, from the land, to city charges and all of that,” Heddinger said. “It’s still a really good time to buy or sell in certain price ranges. I just don’t know when this is going to change.”

The extended price gains and supply crunch appear to have affected overall sales activity last year. According to RMLS data, 5,203 home sales closed in Lane County last year, excluding the Florence area. That is one fewer than closed in 2017.

By contrast, closed sales rose by 41 more from 2016 to 2017, and by 299 from 2015 to 2016.

The leveling off locally matches a nationwide trend. Home sales in November dropped to a more than seven-year low as rising mortgage interest rates sapped buyers’ purchasing power, according to the National Association of Realtors.

Interest rates have since dipped, sparking some hopes of an upswing in the first half of this year. But urban areas, especially in the western United States, are struggling to control rising home prices as more people migrate there from other parts of the country, said Matthew Gardner, chief economist for Windermere Real Estate.

“I honestly believe we have reached an affordability ceiling,” Gardner said. “That’s not to say there aren’t dirty houses anyone could afford in, say, Ohio, or parts of Michigan. But I expect we’re absolutely going to see across the western United States a slowing down of price growth to allow incomes to start catching up.”

While sales have slowed down locally, the area’s population has continued to rise. Lane County added more than 13,000 residents between mid-2015 and 2017, according to U.S. Census Bureau estimates. That two-year gain was higher than the county’s population growth in the five years prior.

And the University of Oregon’s Phil and Penny Knight Campus for Accelerating Scientific Impact only stands to bring more high-wage jobs to the Eugene area — good for the overall economy, but another possible strain on prices as new residents move to the area for the high-paying jobs, pushing lower-income earners out of the market.

The county’s $309,000 average sale price last year was up from $200,900 in 2012.

“Ultimately, where we have seen prices rise fairly precipitously since 2012, we have to start seeing a softening,” Gardner said. “There must be a relationship between home prices and incomes.”

But many local housing market experts have trouble imagining a leveling off without more of one thing: land for cheap housing.

“There’s not an area where a big subdivision can be built anymore,” said Ed McMahon, executive vice president of the Home Builders Association of Lane County.

The Spring Capital and McDougal projects are developing some of the largest developable tracts in or immediately near the Eugene-Springfield urban area. With those projects targeting affluent buyers, McMahon and others aren’t sure how the region can reverse its growing affordability crunch, without pushing out its urban growth boundary.

That’s a proposal Eugene city officials have largely rejected over years-long discussions about a boundary expansion, arguing the city has enough residential land and should more densely develop what’s already available.

McMahon worries the land crunch — combined with rising labor costs, increasing city charges for infrastructure work and City Council-led talks of a tax on residential construction projects to fund affordable housing units — could sap demand for new construction in Eugene at a time he said it’s sorely needed.

“All the (building) costs are increasing. All the regulation is increasing, and it’s getting to the point where that profit margin isn’t going to be there,” McMahon said. “Builders aren’t going to build if everything keeps going in the same direction.”

Easing the crunch likely will take some government intervention, according to real estate agents like Lohr with Lohr Real Estate. Local and state policymakers could take steps to encourage a greater mixture of low-cost single-family housing, apartments and accessory dwelling units — second, smaller houses built on single-family lots where a home already exists, he said.

But any action figures to help only in the long term, Lohr said. He projects sales and price activity this year will largely mirror 2018, but likely with lower price growth.

“It’s not like you can create land out of thin air,” Lohr said.

As a result, “In the $200,000 to $250,000 price range, what you’re getting for that between 2017 and 2019 are completely different homes,” Lohr explained.

“If you don’t have cash do to a fixer-upper, or don’t want to live in northwest Eugene, you’re going to have a hard time finding a house. Whereas in 2017, there were still a lot of homes where a young couple, somebody who doesn’t know how to swing a hammer, can buy and not spend a bunch of money after purchasing the house. By the end of 2018 there were almost no homes that didn’t need something.”

Source: https://www.registerguard.com/news/20190127/reaching-affordability-ceiling