By Robert McCullough

A question that comes up frequently in neighborhood discussions concerns the rapid run up of prices in Portland.  Why are prices so high?  Why are they changing?

The surprising answer is that federal monetary policy has kept home interest rates low since the Great Recession.  The cost of buying a home has fallen dramatically in response to the low interest rates.

This is different than most people expect, so it takes explaining why the average family is more likely to want a larger home and in an advantageous location nearer to the city’s urban core.

Although the list prices of homes in the Portland area are at an all-time high, home prices adjusted for inflation are significantly less than they were in 2008 – lower by a bit over 7%.  However, this does not tell the whole story.

Few of us buy homes for cash. Most of us purchase homes using a home mortgage.  The interest rate we pay on the mortgage is as important part of affordability as the house price.  The home mortgage interest rate was considerably higher in past years.

In 2008, for example, the interest rate was twice what it is today. The result is that while the Case-Shiller index today is only 93% of its highest level in 2008, the real cost of buying a house has declined 53% from levels thirty years ago.

(See chart below.)

Average prices and mortgages across the Portland metropolitan area do not describe very much of the housing market.  The old adage that real estate is location, location, location is truer now more than ever.

The Federal Housing Finance Agency’s Office of Policy Analysis & Research recently issued a very significant study concluding that property values across the United States increasingly reflect distance from the city’s urban core.

They found, overall, that estimates suggest proximity to the center-city is a major factor explaining house price movements in the United States over the sample period, with house price gradients steepening in large cities between 1990 and 2015.

Translated into English, location is increasingly important as a determinant of housing prices – specifically the distance to the city center.

This is true for Portland as well.

The most recent Zillow data (July 2016) shows the relationship between distance from the urban core and neighborhood housing prices is very significant.

Interestingly, travel time during the morning commute is not significant – only distance.  Distance alone explains a little over 25% of the variances in property values among Portland neighborhoods.

Of course, many other factors are involved in housing prices such as lot sizes, housing quality, urban tree canopy, pollution, and crime.

The significance of the relationship and the value of proximity to the urban core has climbed sharply over the past twenty years.  In 1996, we would have rejected the hypothesis that they were related.

The value of proximity has also climbed sharply. In 2002, the increase in housing prices of moving one mile closer to downtown was only $7,200.  Today the value has risen to $26,400.

Zillow also has data on rentals. Sadly, their data set is more limited – 2010 to the present – and far more diverse since rentals can range from individual homes to high rise rental buildings.

The basic relationship described above appears to apply to rentals as well.

The rental data indicates a strong revealed preference for areas close to Portland’s urban core and also indicates the preference is increasing.

The policy implications of the data are: first, it shows that Portland’s residents show little revealed preference for one of the central themes of the new Comprehensive Plan.

They are not “voting with their dollars” for walkable urban spaces with local shops. Instead, they are increasingly willing to spend more to move closer and closer to downtown.

Second, although renters and homeowners share the same preferences, the benefits are skewed towards homeowners.  Renters are paying more and since they cannot finance their rents, are being disproportionately injured by increasing rents.

Third, low interest rates have – so far – offset rising home prices on average.  The average cost may be low by historical standards, but the spatial distribution is not. This means that first time homeowners are being displaced away from the urban core.

Finally, the remarkable lack of diversity in Portland is likely to increase as minorities with lower income are outbid for favored downtown locations.