Housing affordability in limbo

by Derek Farr

It’s hard to find a silver lining in the dark clouds of this current economic tempest, but believe it or not there are rays of hope peaking through.

One ray is the expectation that the nation’s housing will become more affordable and that, some believe, will provide reasonably priced housing for a new generation of homeowners.

Of course, those “reasonably priced” homes come at the expense of current homeowners who have seen the value of their nest eggs plummet.

And there are very few markets that have an equilibrium: a drop in home prices making housing more affordable, paired with a soft landing that preserves home equity.

What’s more, many markets with falling home prices are also experiencing a decrease in jobs that nullifies the benefits of less expensive homes.

These forces are shaping up in Sublette County – but how they will play out is a matter of speculation.

According to a study of large housing markets between 2007 and 2008 by the Center of Housing Policy (CHP), the income needed to purchase a home has dropped nationwide as housing prices have tanked.

Some places faired better than others. In Salinas, Calif., for instance, the average home price dropped from $520,000 in 2007 to $245,000 in 2008 – a 52-percent drop.

In Sublette County, the market has fared much better although there are still equity clouds on the horizon.

The CHP study looked at 207 housing markets – of which Youngstown, Ohio, was the least expensive with an average home price of $73,000. By contrast, Sublette County’s 2007 average home price was just over $300,000, according to the county assessor’s office Web page. With county home prices dropping slightly in 2008, the county ranks somewhere near the 20th most expensive housing market, alongside the Cape Cod town of Barnstable, Mass.

Waning wages

Except for certain ABC News reporters, it’s obvious that jobs in Sublette County are becoming harder to find. In last year’s May 22 Sublette Examiner there were 15 help-wanted ads for full-time jobs. This week’s paper – one year later – there are three.

Even existing jobs are being slimmed down. As activity in the gas fields slows, companies are cutting wages and hours on once high-paying jobs.

In an environment of inflated housing costs and slumping wages the question is: Where is the line of housing affordability?

According to the U.S. Department of Housing and Urban Development (HUD), “The generally accepted definition of affordability is for a household to pay no more than 30 percent of its annual income on housing (and) families who pay more … are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care.”

In Sublette County, for a $300,000 home with 20 percent down financed with a 30-year loan at a 4.875 interest rate (a rate calculated by Quicken Loans), a homeowner’s monthly payments would be $1,281 a month (all things being both perfect and equal).

If that homeowner wanted to achieve the HUD threshold of affordability, he/she must make $4,270 a month or $51,240 a year – or about $25.62 an hour.

And according to a 2006 study by the Sublette Community Partnership, there were 19 job categories that provided an income at or above $51,240. The problem is that 10 of those jobs were gas-field jobs.

Of the nine non-gas-field job categories, two were in county government (patrol officer and detective), one was a schoolteacher and the rest were professional (scientist, doctor, nurse and administrator).

But those relatively stable jobs were out numbered by erratic gas-field jobs.

The vast majority of job categories, 39 of them, fell below that threshold. Of those jobs, the service industry (e.g. waitress, stocking clerk, maid, checker, cook) were paid the least (around $24,000 per year) and therefore had the least opportunity for affordable-home ownership.

With so many wages below the county’s affordability threshold and gas-field jobs employing fewer and paying less, the market is ripe for an adjustment – and Bill Collins, owner of Collins Planning Associates in Jackson, believes he knows what it will be.

Out of alignment

“Housing markets are very localized,” Collins, a 23-year local government-planning director, said. “And what the oil and gas workers represent is an external demand.”

He explained that as an influx of gas-field workers entered the county during the gas boom’s escalation, the increased demand surged housing prices above the price range of the average long-term resident’s income. And because most gas workers earned higher wages than the average long-term resident, housing prices soared even higher.

As the energy industry ramps up and slows down its operations, one may believe that housing prices would quickly reflect long-term resident wages, but that’s not necessarily the case.

“These rapid fluctuations … can result in housing prices getting out of alignment,” Collins said. “And it may take years for those prices to get realigned.”

Collins says the market will eventually “readjust to what the locals can afford,” but he warns that for some, the process may be painful.

“The unfortunate thing is a lot of long-term residents buy houses on the upswing so when the houses come down to the long-term average, a lot of people can get hurt,” he said. “What we are seeing is that unfortunate circumstance is now materializing.”

The downturn

In February 2008, Collins released a prophetic study that warned of the current market conditions – a reduction of demand against a plethora of supply. At the time, Collins wasn’t predicting a full-scale worldwide economic implosion. Rather, the housing market’s contraction was expected to follow the completion of gas-drilling activities.

But that hasn’t happened yet.

Instead, reduced natural gas prices – caused by a huge inventory – have spurred an across-the-board drilling slowdown. And it isn’t forecast to get better anytime soon.

Last week, the U.S. Energy Information Administration predicted a further decrease in U.S. industrial gas consumption – forecasting a decline of 8 percent this year. While that postulation seems dire, the slowdown could prolong the completion of the energy companies’ exploration operations. And that may help subdue tumultuous local economic conditions.

It could be worse

For Sublette County homeowners and homebuyers, the least harmful scenario would be a slight reduction in home prices. In that situation, homeowners could avoid the financial disaster of owing more than their house is worth and homebuyers – especially those with lower paying jobs – might be able to afford a home.

And while other parts of the country are experiencing double-digit unemployment, Sublette County is chugging along with a relatively healthy job market.

It may not be the economic conditions that nightly newscasts are made of, but those conditions could conspire to produce the perfect soft landing.

It shouldn’t go unnoticed that a year ago many Sublette County residents, seeking a soft landing, were asking the gas companies to slow down a little bit. Ironically, that’s exactly what happened.

While there will certainly be winners and losers, this slowdown may help housing prices align themselves at a manageable rate, therefore protecting homeowners and providing opportunities for prospective homebuyers.

If that happens, this slowdown – no matter how improbable – may become the local housing market’s silver lining.