Housing and rental markets in Oregon are very tight

If you’re looking to buy or rent a home in Oregon and feeling extremely frustrated, you’re not alone. Housing prices have gone up considerably in recent years and high mortgage rates aren’t helping. We hear from Josh Lehner, an economist with the state of Oregon, about where things stand now and what to expect in the future.

The following transcript was created by a computer and edited by a volunteer:

Dave Miller: From the Gert Boyle Studio at OPB, this is Think Out Loud, I’m Dave Miller. If you are looking to buy or rent a home in Oregon right now, and it’s been proving impossible, you are not alone. Housing prices have gone up a huge amount in recent years, and now, the increase in mortgage rates is not helping. Josh Lehner is an Economist with the State of Oregon. He has been digging into the numbers and he joins us to talk about it. Josh, welcome back.

Josh Lehner: Thanks Dave, great to be here.

Dave Miller: Good to have you on again. I want to start with mortgage rates because that’s been the biggest recent change, the big increase following the Fed’s actions because of their fears of inflation.  But mortgage rates have been really volatile recently. As of today, they’ve dropped for the second week in a row. What has been happening just in the last couple of weeks?

Lehner: Yes. So there was this kind of nice orderly change going on in the financial markets as the Federal Reserve started to ratchet up interest rates or communicate that they were going to do that. But really in the last month we saw a surge in mortgage rates kind of going from 5% to 6% and now they’re starting to drop again maybe on some recession fears in Europe and all these sort of other things going on in financial markets, well, they’re having a huge impact on mortgage rates of people looking to buy or sell a home today.

Miller: Can you give us a ballpark sense for just how much the mortgage rate increase- and you can pick whatever version of it, since it does seem to fluctuate a little bit, but how much this mortgage rate increase, could increase the overall cost of buying a home?

Lehner: The changes we’ve seen in the last six months are huge, a larger increase in the cost of buying a new home or purchasing a home than we’ve seen, certainly in the last 40 or 50 years; it’s a really large increase. The typical payment on a home purchase today versus the typical payment on a home purchased at the end of last year, so six months ago, it’s up 40%. And that’s about $1,000 a month. So that’s a large, large change.

Miller: So just to be clear, even though the rates are still well below what they were, say, in the 70s or parts of the 80s, you’re saying the rate of increase recently that has led to the biggest short term increase in the cost as opposed to the absolute rate of borrowing.

Lehner: Exactly right. The pace at which the market has changed is certainly the fastest change we’ve seen in the housing market in generations.

Miller: Has that increase, has it led to a decrease in home prices, or at least, a slowing down of a frenzied increase in home prices?

Lehner: It is starting to lead to the slowdown in the price increases. There’s not price declines. We’re starting to see listings on the market today [that] are starting to cut their prices a little bit, at a faster rate than they were, certainly, earlier in the pandemic. But it’s important to keep in mind we’re moving from such an extreme seller’s market, where we had a record few number of homes available for purchase, to something that’s a little bit more balanced. It’s not like we’re going to an oversupply or glut in the housing industry, so it’s going to be a little bit hard pressed to see price declines, outright in the overall market, but we’re just getting away from the frenzied pace we’ve experienced in the last two years.

Miller: You’re not likely to see such a decrease in prices simply because there’s not enough supply and in other words, even if the price has gone up so much, there’s still enough demand that the hope for a kind of a broader correction hope on the part of of buyers, it’s just not gonna materialize?

Lehner: That’s not our baseline outlook. Our baseline outlook is for the prices to slow, you know, from these 15 to 20% range, they’re now down to 12%, in the latest data for Portland on a year over year basis, to more like 4%. So not all the way to zero, our forecast is still for price increases, but at a much, much slower rate. But of course, if we see this frenzy continue even longer than expected, that would raise the possibility to some outright declines on a year over year basis, come next year. That’s not our forecast. But it’s in the realm of possibility.

Miller: A few weeks ago, you crunched the numbers to figure out the extent to which the mortgage rate increase could affect Oregonians’ abilities to buy homes. Can you walk us through what you found?

Lehner: Yes. The big increase in mortgage costs, those price increases continuing, we basically priced out or shrunk the potential buyer pool by about half in the state of Oregon. So if you back up to the end of last year, mortgage rates were still 3% or sub 3%. About one in three Oregon households could buy a house, could afford that. Their income was high enough that if they wanted to, they could afford that monthly mortgage payment to the bank. Today, that has basically been cut roughly in half. So it’s more like one in five households in Oregon can afford the typical mortgage payment on a home, if you went out and purchased one this week.

Miller: Let’s listen to a voicemail that came in from one of our listeners:

Caller: Hi, this is Tyler from the Happy Valley area. My wife and I, we’ve lived in Oregon for a number of years. We’re actually from Michigan, originally. And in the last few years we’ve started to think more and more about buying a house; every time that we consider a home to purchase, the houses are being toured by 100 people, or the prices are just being driven up by the amount of people that are willing to overpay and not have an inspection or anything ridiculous like that. And so we, at this point, are frustrated. We’re renting a house. We had to compete to even rent the house. We toured probably 15 homes. We looked at about 50 homes. We actually beat out some people from California by 15 minutes to rent our house. So it’s been a frustrating experience for us and we feel very defeated and we feel like we’re never going to be able to buy a house. We make good money and we have a decent nest egg for a down payment. Realistically we don’t know how we would ever be able to compete in this market.

Miller:  Josh. how typical is Tyler’s story?

Lehner: Certainly in the last two years, I think it’s pretty typical,  because we’ve seen an increase in demand. The number of people looking to buy a home or could afford to buy a home with incomes being up, with strong demographics as the Millennials age into their home buying years, the ability to purchase has been higher than it has been, and then, the ‘For Sale’ inventory has been even lower; declined by more than half. So there was just a lot fewer properties available, and so you have those hundreds of people touring a home. And that creates that frenzied bidding war. And you know, Federal Reserve Chairman Jerome Powell, at a press conference last month, said the housing market needed a reset to try and bring demand closer to supply. And so if we don’t have a lot of supply on the market, that means that demand has to be ratcheted down a little bit, to create some semblance of balance, which has clearly been lacking the last two years.

Miller: You’re noting that there are, in the last couple of years, there’s been an increase in demand for housing. If you were to graph that demand, and then also graph population increases in Portland, in Oregon, I should say, are they the same? Are we talking about a population increase or are we talking about two different things?

Lehner: There’s a combination of factors and certainly, in the years leading up to the pandemic, it was a combination of both strong, underlying demographics- of the millennials aging into their twenties and their thirties and now this decade into their thirties and their forties, that will increase homeownership demand, just given the typical life cycle of a household or person, and then the population growth. Well, during the pandemic, the population growth stopped. Certainly in the Portland region, it was very, very slow, if not, an outright decline, depending upon which data set you look at. But at the same time, we’ve seen the strong increase in ownership demand and rental demand in the rental market. And so it’s really about local residents forming households, striking out on their own in greater numbers, because of that income, because of the demographics. And then, of course, with COVID, which is an airborne virus that is contagious, that maybe you want a little bit more space and fewer roommates if you can afford it. That’s really led to an increase in overall demand for both renter, rental housing and ownership.

People in the Portland metro area talk a lot about the lack of affordable housing, but Portland was not the worst Oregon city in the recent ranking you did, showing the effects of the cost of home ownership as a result of the mortgage rate increase. Salem and Medford were just as bad as Portland, and Eugene and Bend were significantly worse, in terms of the percentage of households who could afford the median home that had been purchased. Are the dynamics at play essentially the same, at this point in cities all across the state?

Lehner: They are, I think the underlying dynamics are the same. They vary a little bit and that’s something that can be lost in the discussion is that none of the changes that have happened in the Portland market in terms of affordability are good. They’re all bad. It’s just, they’re worse in a lot of these other places as well, where like home prices have increased at a much faster rate in some of these other metros in Oregon and metros throughout the Western United States than they have in the Portland market. So Portland’s seen a lot of increases in home prices, affordability is worse. But those patterns are more extreme, or more pronounced in some of those other metro areas across the state.

Miller: Let’s listen to another voicemail:

Caller:  This is Barbara Bullard from Milwaukee. I am a senior looking for another house to move into and unfortunately the rents are all the same amount of money as I get with my Social Security and my small retirement fund. The answer is a tent on the side of the road. I don’t know what the answer is, but I don’t think I’m going to be able to ever pay as much as I actually get in Social Security. Thank you.

Miller: Both Barbara there and Tyler, earlier, talked about renting, which we haven’t focused on so far, but I want to just turn briefly to that at least. What does everything we’ve been talking about in the housing market mean for renters?

Lehner: It means the rental market will just get even tighter, if people are being priced out of the ownership market. It means you have to have a roof over your head as she was alluding to, or not. Unfortunately too many of us, too many of our neighbors, don’t. That, at a base level, owning a home is a choice. It’s a choice for the privilege to have the ability to have the down payment and finance and things like that. But the same people could take their strong finances and choose to rent as well. So that’s going to just increase the demand in the rental market and vacancy rates and the amount of time on the market for apartments or just all rental units in the Portland area is back to where it was pre-COVID. So it’s just gonna continue to see increases in rents statewide and in the Portland market in the years ahead.

Miller: I want to play you one more call, this is David from Seaside.

Caller:  I sold the house in Hood River, and last August and kind of regret it because I wish I had found another house before I sold mine. I had difficulty finding another house to live in. And these times are difficult to find a place to rent as well. So hopefully things will turn around, but not too hopeful, with the price of construction materials. It doesn’t seem to me too advantageous for builders to build small houses for people who are making a low income and a low wage. So it’s difficult and in every angle you look, when it comes to housing.

Miller: Josh, obviously, we could have spent this entire segment talking about construction instead of the housing market, so I’m not sure how much you can fit into one answer here. But what do you see in terms of the construction outlook and specifically the possibility for new homes, new single family homes or new multi-family apartments to be some kind of savior?

Lehner: Well, they have to be… some base level. New supply has to be the key linchpin to the solution here. There’s a number of things you can do, one would be to actively work on lowering the cost of housing, Oregon cannot influence the cost of lumber, that is a global commodity. But we could work on some other policies when it comes to the cost of planning and developing new construction. That could be a little portion of what’s mentioned in the caller’s comments. But overall, even though we’re under supplied in Oregon and we need more housing, there’s ebbs and flows to the market. There’s ebbs and flows to those dynamics. And so we can have a downturn in housing, we have a slight decline, it’s basically steady, but we have a 3% decline in new home starts this year in Oregon in our forecast, because of this mortgage rate shock. We think builders will pull back just a little bit, not a lot, but a little, and that will make things worse, you know, come 2023, 2024, so you can see these ebbs and flows, even within a market that’s under supplied, and so we definitely need to see more new construction tomorrow and in the years ahead. I just think there’s such a large swing in the mortgage rates is going to have a temporary impact on that. That’s not good in the long run.

Miller: Josh, thanks for your time.

Lehner: Thank you.

Miller: Josh Lehner is an Economist with the State of Oregon.

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