You have
probably heard of the quarterly study that ranks housing affordability. The
National Association of Home Builders calculates the ratio of median family
income to median home price for 191 metropolitan areas across the country.
According to their last study, which was compiled for the first quarter of
2002, the Seacoast was ranked as the 8th most unaffordable region in the
country. Only seven regions, all in California, are less affordable.
By
comparison, the most affordable market for the quarter was the Elkhart-Goshen
area of Indiana. Their median income is just a little higher than ours, but
their median home price is $111,000. That’s less than half of our median price
of $240,000! Before you assume that $111,000 is an aberration, I should tell
you that 50 of the 191 regions ranked have an even lower median home price. In
fact, only seventeen have a higher median home price than the Seacoast.
Therefore, not only are we in one of the least affordable areas, this is also
one of the most expensive.
So what
happened?
First,
let’s go back a decade or so … I have conducted a study of the market for
typical three bedroom ranches since 1989. I chose this housing type because for
the most part, all of the sales are reasonably similar. Neighborhoods like Elwyn
Park, Maple Haven, Leslie Drive and Coakley Road have rows and rows of three
bedroom, one bath houses with a single garage. All were built in the 1950s or
60s and have lots that are typically ¼ acres. You don’t find that kind of
homogeneity with any other style. Also, there are so many; I cataloged 272
sales for this study.
From
1989 to 1997, there was very little movement: the price skipped along between
$109,000 and $127,000 and averaged about $115,000. But the median price in 1998
took nearly an 18% jump to $133,500. In 2001, that number was $182,000! Also,
the average marketing time dropped from 104 days to 46 days and homes now sell
at 99% of the asking price rather than 96%. Something happened in 1997 didn’t
it?
The
answer lies in employment. Two years ago there
were over 28,000 people working in Portsmouth. I don’t mean to slight the other
Seacoast communities, but the fact is that Portsmouth is the employment center
of the region. More people are employed in Portsmouth than in any other
community in Rockingham and Strafford Counties. By comparison, whether measured
by number of employees, total wages paid or number of establishments,
employment in Portsmouth exceeds the combined total of Rochester and Dover.
Therefore, we are not just talking about Portsmouth – employment in Portsmouth
impacts the whole region.
The government classifies employment in a few large categories. More
than half of all people working in Portsmouth fall into two categories:
finance, insurance & real estate (which is abbreviated as “FIRE”) and
services. Regionally and statewide, only about one-third of all people work in
these categories. Therefore, fluctuations in these categories have a greater
impact here, than in other areas. Before I continue, I should clarify the term
services: There is actually quite a number of sub-classes of service
employment, but by far, the largest groups in Portsmouth are business services,
health services, social services, engineering, accounting, research and
management services.
More importantly, nearly three quarters [73% or 2,844] of the jobs
created in Portsmouth from 1997 to 2000 were in these two categories. These are
office workers, or so called, “white collar” jobs. Therefore, it should come as
no surprise when I tell you that out of over 3.3 million SF of office space in
Portsmouth ... nearly half has been added since the mid 1990s. In fact, there
is over 1.1 million SF of office space at Pease ... only five years ago, most
of that space didn’t exist!
Out of the eight employment sectors, FIRE enjoyed the greatest
increase in the average weekly wage, and services essentially tied for second.
In fact, the average weekly wage for an employee in the “FIRE” category is 46%
higher than the citywide average [$1,048 vs $717]. As a result, the average
weekly wage paid in Portsmouth increased by over 22% from 1997 to 2000 [$586 in
1997 to $717 in 2000].
So there was an increase [15.9%] in the total number of people
working in Portsmouth and all workers were being paid more [22.4%]. As a
result, the total payroll in Portsmouth rose by nearly 42% from 1997 to 2000!
That’s 42% more money to spend on goods and services throughout the region. The
vendors who provide those goods and services take some of that money and go buy
more goods and services for themselves, and so on and so on. The added wealth
just gets spread around. This is called a multiplier effect; each additional
dollar spent has more than one dollar of impact on the economy. A lot of that
wealth goes towards housing. Put simply, there was too much money chasing too
few homes! It was classic inflation! In 1997 record numbers of new jobs begin
pumping millions and millions more dollars into our region and by the end of
the following year a modest three bedroom ranch has shot up in price 18%. By 2001,
that price was 60% higher than it was in 1997!
An article in Wednesday’s [July 31, 2002] Foster’s Daily Democrat
addressed the rental market. There is one quote that is particularly relevant
to this topic. It was made by Dawn Curtis, who manages over 70 apartments owned
by Peter Floros. She said, “The last couple of years saw all those high paying
jobs coming into Pease … those people coming into the area could afford these
high priced apartments. Those jobs are no longer and there is nothing to replace
them" [edited]
I realize I am leaving out a lot of relevant facts: interest rates
dropped to record lows, the economy was booming and so on. But these are
national trends; the topic here are the factors that are unique to our region;
the forces that have made us one of the most unaffordable places to live in the
country. Bottomline: there has been an explosion in the number of office
workers.
Before I move on, I want to
address the demographics of our area. In Portsmouth there are more individuals,
as opposed to families, occupying housing units. This lowers the average number
of residents per household. Therefore, the same number of people demand a
higher number of housing units. This not only increases the quantity of demand,
but don’t forget how much extra money these people have to spend on housing as
a result of their great new jobs. For you armchair economists, this means there
was both a shift in and a shift of, the demand curve. I also suspect that the
number of smaller households looking for suitable housing played the greatest
role in the fact that modest properties experienced the sharpest price
increase.
Now let’s talk about what prices have done on a broader scale.
First, I need to explain a little about how professional appraisers analyze the
market. The most reliable method for determining the rate of appreciation is to
find homes that sold more than once in the past few years. All other things
being equal, the difference in price from the first sale to the second is the
result of market conditions. So to be able to tell you what is happening, I
looked for houses and condos that sold twice in the past three or so years. In
Portsmouth I found 25 pairs of sales of the same houses. These sales increased
an average of 14.3% annually. I also found 36 pairs of condominiums that
indicate an average annual rate of appreciation of 18.2%. In total, these 61
sales increased an average 16.5% per year. Because there are an unusual number
of positive factors impacting Portsmouth, I was afraid these numbers would be
skewed. Therefore, to try to get a better cross section, I also looked at
Stratham. There, I found 29 resales of condos, at an average annual increase of
16.9%, and ten houses, at an average annual increase of 11%. Overall, these 39
sales averaged 15.2% per year. Overall, I am comfortable saying that values in
the Seacoast have risen between 11% and 18%, averaging somewhere around 15% or
16%.
I need to stress that these rates are an average. If a house sold
for 24% more two years after its first sale, I would tell you it appreciated
12% per year “on average”. But its also possible that prices rose 36% the first
year but dropped 12% in the second, so be very careful when somebody throws
around the word “average”. This also means that it is real tough to answer the
question, “what are values doing now?” Using this same method, I’d have to
locate a bunch of properties that sold twice this year. That’s not likely. But,
what I can do is try to determine if the pairs whose second sale occurred more
recently indicate a lower average rate of increase. That would suggest that
somewhere in there, things slowed down. The Portsmouth sales data does not
suggest that this is happening. The condos in Stratham do not suggest a
slowdown either. The Stratham houses might, but I have too few sales to make me
feel comfortable drawing any conclusion, so let’s just be vigilant and not
worry yet. Just for additional support, I looked at days on market. Marketing
times don’t appear to have increased. So I am comfortable saying that values
are still rising and they appear to be doing so at the same rate. Just to keep
yourselves current, whenever a house sells that you know sold a few years
earlier, make a note of it and calculate the change. You can also compare two
different condominiums as long as they are identical. This would be very good
information to keep on hand or to share with an appraiser appraising one of
your listings.
Speaking of appraisers, how many of you have been told by a real
estate appraiser that values have leveled off? Or, that they don’t make time
adjustments any more? Based on all that I have discussed here, we know they
must be wrong. All of the studies I talk about here can be downloaded from my
web site. The next time you hear an appraiser say that values are stable, hand
them some data that proves you right! Actually, I would encourage you to cancel
the appointment and call the bank to ask for another appraiser, but that’s your
choice.
I now have talked about what values have done, what they are doing,
and why. Now let’s look into the crystal ball: Where are we going? We need to
go back to the job market. Remember the discussion of the connection between
jobs in the Service sector and in the sector called, “finance, insurance and
real estate”? In January of last year, NH Employment Security released a study
that projected statewide employment trends. Based upon their projections, we
can infer that Portsmouth will continue to see an increase in office workers.
Many will also be looking for houses, or, at the very least, pumping more money
into the local economy.
Right now, the economy in general is softening. This may slow things
down; no one can say for sure. Nationally, economists are amazed at how strong
the housing market has remained during this downturn. People who are a lot
smarter than I am can’t explain this trend, so I can’t be real certain about
the future either. I can however share with you my “gut feeling” – my hunch is
that our downturn has not occurred yet. Watch the office market. Remember that
service and FIRE workers are the occupants of office space. If you watch the
availability of office space, you can get a reasonable read on what the near
future for the housing market holds. Right now, there is an awful lot of empty
space, available space and space for sublet. This should slow things down in
the near term.
I am also a little worried about how much pressure home prices can
stand. Is there a point where people just put their cards on the table and
fold? What about the number of communities undergoing revaluations; maybe that
may slow things down a little? I just don’t see this pace of price inflation
being sustainable.
My greatest concern is not that buyers will be driven out of the
market, it’s that buyers are employees; if they move away, or if they stop
coming, so too will the businesses. This would be the beginning of a very bad
cycle. It is all about supply and demand. Supply is virtually constant; the
political tide in Portsmouth and many surrounding towns is very opposed to
residential development. Housing isn’t a problem we can pass off to our
neighbors because the highway system isn’t ready for it yet and it won’t be for
another ten years. That’s when the bridge into Dover will be widened. And yet,
demand just seems to keep growing. Employment growth is a symptom of employers
and employees wanting to be here! But where do the people moving here live? We
have to encourage affordable housing to be built.
Let me stress that I am not talking about high paid executives
looking for housing; I mean the typical working family. Maybe a young couple
just had their second child and need a bigger house. They have to be able to
compete with everyone else out there. Last quarter the median sale price of a
single family home in Portsmouth was $278,000! A buyer putting down 10% would
need to have an annual income of $75,000 to qualify for a mortgage. How many
families do you really think make that kind of money? I don’t just mean new
people moving here, this impacts the people who are already here. Where will
our children’s teachers live? Or, the nurses in the hospitals? Or, our police
and firefighters? These aren’t rhetorical questions. This is reality! According
to the census, the median household income here in the Seacoast was $48,600 in
the year 2000; that’s a far cry from $75,000.
Herein lies the threat to your
livelihoods. If families can’t afford to buy their first home, or can’t afford
to move up or can’t afford to move to the Seacoast to take that great new job,
the housing market could turn the other way. The job market was instrumental in
pushing us to where we are, it can just as easily pull us back. Two months ago,
an article about Lonza Biologics appeared in the New Hampshire Sunday News.
Lonza is one of the largest employers in the region and is now in the middle of
a major expansion. That newspaper article contained this quote: “What Pease and
the Seacoast Region in general do not have going for them, when it comes to
future Lonza expansion and the ability to attract other biotechnology
companies, is affordable housing, an absence that makes it increasingly
difficult to attract qualified personnel”. We should be far more concerned
about employers getting up and leaving than any cyclical fluctuations of the
housing market. Yes, it is a very real possibility for it all to come crashing
down!
We need to build “workforce” housing to keep this engine running.
Don’t confuse this with subsidized housing, I am referring to housing that
costs no more than 30% of a family’s income. If the creation of workforce
housing does not become the single highest priority of all of the region’s
planning and development entities, we risk the loss of employers who just can’t
attract workers. If there are no affordable alternatives to $300,000
“fixer-uppers” we risk the migration of young families out of the area.
I urge you to get involved … As real estate professionals we are in
a unique position to encourage smart growth and influence both municipal
officials and developers. Don’t think the housing market bubble can’t burst,
and, if something doesn’t change, it will!
Steven H. Berg, MAI, SRA lives in Portsmouth and is the owner of Sargent Consulting, Ltd. He is a graduate of Connecticut College, where he earned a Bachelor of Arts degree, cum laude, majoring in economics and sociology. Steven has been appraising a variety of property types in New Hampshire’s Seacoast area since 1987. He specializes in providing consulting services and litigation support and has amassed considerable classroom education on a wide range of related topics. Steven is both a residential and general member of the Appraisal Institute. In addition, he is a member of the Portsmouth Housing Endowment Fund Advisory Committee, is on the board of The Portsmouth Economic Development Loan Program and serves on an advisory panel to the City’s Assessing Office.