Posted by: Josh Lehner | October 29, 2014

Portland Housing Pt 2: Construction and Demographics

The Portland housing market is tight. Increased demand, with higher household formation and population growth, coupled with limited supply currently on the market are driving prices higher for both ownership and rental units. The median price of homes sold in the metropolitan area is effectively back to housing boom peak numbers, per RMLS. The rental vacancy rate is among the lowest in the country and prices are at an all-time high. The housing bubble, obviously, had a tremendous impact on the market and the bust has been disproportionate to the boom. While new construction has picked up in recent years, it has yet to fully regain the lost ground during the downturn, relative to underlying population growth. The good news is as housing supply continues to increase, eventually it should put downward pressure on prices, raising affordability.

In a 4 part series focusing on the Portland Metro, our office’s new housing work covered the bubble’s impact on ownership by year and by neighborhood in Part 1. Today, Part 2 covers underlying trends in housing supply and demand. Part 3 will go over housing affordability in Portland, while Park 4 will provide an outlook.


Beyond the housing bubble’s impact on prices and ownership in the past decade, it has tremendous impact on the level of new construction. However, unlike the U.S. as a whole, the Portland MSA actually did not overbuild very much during the boom, relative to underlying population gains. The graph below shows the number of housing permits per population change. The average over the 1980-2004 period was one housing permit for every 2.3 person increase in population. This is somewhat lower than the number of people per household as reported in the 2000 Census (2.51 statewide, 2.56 in Portland). Even so the ratio did not increase much during the housing boom. This indicates that the level of new construction in the region was not far out of line with historical patterns, relative to the fact that more and more individuals continued to move to the region.

HousingPermitsPop

While there was not much overbuilding during the bubble in Portland, the housing bust has clearly been disproportionate to the boom. Relative to the population gains to the metro area, a rough accounting from 2000 through 2013 finds that the number of new housing units built is about 2/3 to 1 year behind historical patterns. 2014 is so far on pace to be similar to 2013. While this under building relative to population growth is certainly manageable with a few years of stronger housing starts, it does indicate the housing market today is likely supply constrained, helping to drive prices higher for both ownership and rental units.

Furthermore, indications of housing demand, if anything, are accelerating. Even as household formation has slowed nationally, it appears to be picking up in Oregon. As the economy continues to improve — even faster than the typical state — the old, strong flows of in-migration to Oregon, and Portland in particular, are beginning to reappear.

HousingHHFormationNow, the types of housing needed to meet this new influx of demand may be different. The Portland MSA continues to be a magnet for young, and mostly educated migrants. See here and here for more. As such, the region has a very large Millennial cohort, relative to the rest of Oregon and the nation. Ages 25-34 are very important in terms of setting down roots as this range is when most individuals, get married, buy a house, start a family, begin their careers in earnest and the like. However, at first, many are renters and not owners. As such, about half of all housing units built in Portland in recent years have been multifamily and even with high rents in these new buildings, vacancies are low. Economists and housing experts are in agreement that moving forward, a relatively larger share of new construction will be multifamily instead of single family, however, as will be discussed in the outlook section next week, the exact details are unknown.

HousingPopAge

It is important to point out that Millennials (and Generation Xers) in Portland and Oregon are just as likely to be employed as elsewhere in the country. Portland is not (just) a place where young people go to retire. As these cohorts age, and the economy continues to improve, it should be expected that many transition into ownership over the coming decade, although it may be a higher share of condos and not purely detached, single family as in the 1990s and 2000s.

Part 1 covered the housing bubble’s impact on ownership. Part 3 goes over housing affordability and Part 4 provides an outlook.

Below are the full set of slides from our office’s housing work, including both upcoming material and many additional graphs and figures.

Posted by: Josh Lehner | October 29, 2014

Portland Housing Pt 1: The Bubble Impact on Ownership

The Portland housing market is tight. Increased demand, with higher household formation and population growth, coupled with limited supply currently on the market are driving prices higher for both ownership and rental units. The median price of homes sold in the metropolitan area is effectively back to housing boom peak numbers, per RMLS. The rental vacancy rate is among the lowest in the country and prices are at an all-time high. The housing bubble, obviously, had a tremendous impact on the market and the bust has been disproportionate to the boom. While new construction has picked up in recent years, it has yet to fully regain the lost ground during the downturn, relative to underlying population growth. The good news is as housing supply continues to increase, eventually it should put downward pressure on prices, raising affordability.

In a 4 post series focusing primarily on the Portland Metro, our office’s new housing work covers the bubble’s impact on ownership by year and by neighborhood today. On Friday, Part 2 covers underlying trends in construction and demographics. Part 3 will go over housing affordability in Portland, while Park 4 will provide an outlook.


Some economists point to the swings in home prices as the defining feature of the housing bubble era, and with good reason. However I would argue that it’s more than just the price swings, but how they actually impacted the pattern of homeownership is more important and I don’t mean the overall homeownership rate.

As shown below, the share of homes in Multnomah County last sold during the boom is disproportionately high relative to what one would have expected ahead of time, if sales had been relatively steady each year. Some owners sell their homes after 5 years, or 8 years, with the median homeowner being in the same home 15 years. Using these ownership duration figures, based on work from the National Home Builders Association, one is able to construct what a typical ownership pattern would or should look like. That’s the dashed, dark blue line below. In actuality, ownership patterns in Multnomah County are in the solid, light blue line. The differences here are immense. It works out to 1/3 more homes last sold during 2003-2007 and still owner-occupied, or at least not resold, then if the sales pattern had been more stable. So it is not just the price swings themselves, but the fact that more households bought during the boom and have yet to resell or move. Some by choice, some by necessity or being underwater. In fact, while most areas within the Portland MSA have seen strong price appreciation in recent years, nearly back to peak levels, only about 20 percent of individual zip codes are actually all the way back, per data from Zillow. The price swings have a big impact on the incentive on when/if current homeowners sell. This overall pattern has big implications for the housing market in terms of existing homes for sale, neighborhood effects and remodel work, among others.

HousingMultOwn

In terms of the existing stock of homes, which types are most impacted by the housing bubble? Examining the current value of each home in Multnomah County reveals that those homes last sold during the boom and have yet to be sold again, are disproportionately in the starter home ($150,000 – $250,000) and McMansion ($450,000 – $600,000) price range. This makes intuitive sense as well. During the boom, there was strong competition for each type of home, with many households trying (and succeeding, at least at first, based on the lack of underwriting standards) to obtain their own piece of the American Dream. Homes in the lower price tier experienced the largest boom and bust pattern based on S&P/Case-Shiller home price data, which reflects the strong demand and competition for entry level homes, even by those who traditionally may have been unable to afford or meet underwriting standards. McMansions also experienced strong demand as middle income families sought to move up into a higher priced home, and many higher-end subdivisions or communities were built throughout the region in these price ranges.

Besides prices and types of homes, the bubble’s impact on ownership has had disproportionate impacts on neighborhoods and geographic regions within the Portland Metro. As discussed previously, the graph below shows the share of homes in each neighborhood that last sold during the boom on the vertical axis and the pace of home sales on the horizontal axis. Here one can see which neighborhoods have a relatively large share of these bubble era home sales, and also which ones are currently seeing sales either above or below average pace. Many of Portland’s close-in neighborhoods, where recent demand has been strongest, have seen strong sales in the past year or two and/or have a lower share of homes last sold during the bubble. Many of the outlying regions are seeing the opposite pattern. As demand continues to be strong in both the central city and in town centers across the region, the pattern makes sense. The hardest hit suburbs and exurbs are generally the last to share in the housing recovery, if at all yet.MultnomahTurnover0314

Another way the bubble’s impact on ownership works through the housing market is remodeling. If an owner remains in the home for a longer period of time than they may have expected when they bought, they turn to making the best of the situation. If one cannot move, maybe by choice (the owners do not see another/better option in their desired neighborhood) or by necessity (underwater), they concentrate on improving the existing home the best they can, or afford. In other words, instead of upgrading their homes via moving up into a better one (see: expensive), owners upgrade the quality of the existing housing stock.

Examining housing permit data from the City of Portland reveals that projects that can broadly be considered remodel work, are nearly all the way back to peak levels, at least in nominal dollar terms. New home construction is about half-way back, but remodeling has been much stronger. At the national level, the NAHB Remodel Index is at an all-time high and in terms of U.S. GDP, home improvements have been larger than actual new construction for much of the economic expansion.

HousingPDXRemodel

On Friday, Part 2 will cover underlying trends in construction and demographics. Part 3 goes over housing affordability and Part 4 provides an outlook.

Below are the full set of slides from our office’s housing work, including both upcoming material and many additional graphs and figures.

Posted by: Josh Lehner | October 24, 2014

That 80’s Feeling, Housing Edition

I have been asked to speak at the Home Builders Association 2015 Housing Forecast in two weeks at the Oregon Convention Center. I have lots of new and hopefully interesting housing analysis that I will be publishing on the blog over the next two weeks, however I am updating some of our standard housing graphs and thought I would share.

As discussed before, Oregon’s economy today is very similar to where it was back in the mid-1980s. Namely, we are digging out from a severe recession and while activity and growth has returned — even at above average rates relative to the nation — we’re still not back to where we once were. The same applies to housing starts. Both the late 1970s and the mid-2000s were housing booms (and bubbles) in Oregon, followed by sharp corrections. Back then, it took nearly 9 years before starts returned to their long-run average. Today we are in year 7 of a similar bust.

Housing80s

As hard as it may be to believe, Oregon today is actually in a relatively better position in terms of construction jobs than back in the 1980s.

Housing80sEmp

Stay tuned in the coming weeks for some of the new research ahead of the presentation.

Posted by: Josh Lehner | October 21, 2014

Jobs, Population and Unemployment

There are a lot of half-truths out there when it comes to the economy and our office tries to provide the full picture when available. For example, our work on job polarization showed that the economy was not just adding low-wage jobs, but also lots of high-wage ones as well. Another half-truth is that the unemployment rate is declining for bad reasons. Undoubtedly some of the improvement has been for bad reasons (fewer Oregonians looking for work) but it really has improved for good reasons as well (more jobs). Which brings us to the Graph of the Week and the question of whether or not job growth in the state is not only strong enough to bring down the unemployment rate but whether or not it keeps up with population growth.

It turns out that even with the relative slowdown in hiring in recent months, job growth is strong enough to keep up with population growth [1]. Today, the state needs to add approximately 1,000 jobs per month to meet population increases. Furthermore, these job gains should be putting downward pressure on the unemployment rate.

JobsPopulationUnemp

After a period of strong job growth coming out of recession then comes the population and labor force response. Our office has been discussing this dynamic quite a bit over the past year. Even as jobs have returned in greater numbers, the unemployment rate is not falling due to more Oregonians looking for work. Another way to say this is that earlier in the recovery the improvement in the unemployment rate overstated the economic strength as individuals left the labor force. However just indicating that the unemployment rate today is unchanged for much of 2014 similarly understates the economic strength as more Oregonians are looking for work.

Moving forward, there are two important factors to the outlook. The first is that our employment forecast calls for job growth to continue to outstrip population demand for the next 5-6 years. (Or until the next recession hits) This means that the progress being made on measures like the employment-population ratio for prime working age adults will continue. Much of the gains in recent years and in the near future are just trying to make up the lost ground due to the Great Recession.

Secondly, the blue line in the graph does not exhibit the same surge in population/labor force in the coming years as in past expansions. For one, this is partly by design (see footnote below). Additionally, much like our overall economic and revenue forecast, our population growth outlook over the coming decade is lower than in past expansions. As the Baby Boomers age into their retirement years, this will place downward pressure on net growth rates. As such, while today Oregon needs to add about 1,000 jobs per month to keep up with population growth, by 2020 this will increase to only about 2,000 jobs per month. This is largely due to that fact that about 60% of the employment change in the coming decade is to be generational churn rather than net job creation.

____________________________________________________

[1] Given the decline in the labor force participation rate during and after the Great Recession, I actually fix the participation rates by age cohort at their 2007 levels for all years since. The exception is the 65+ cohort where rates have risen with the aging Baby Boomers. I allow for the 65+ cohort participation rates to continue to rise gradually over the next decade, following the BLS and OED labor force projections. Doing so means the numbers are not pulled down by the Oregonians dropping out of the labor force, even if they truly would like a job. (This is a common critique of the headline unemployment rate.) As such, from 2007 through the forecast period, the job gains needed to keep pace with population growth represent more of an upward bound. This means the cyclical bounce in participation and the labor force response is, by definition here, removed. I would argue this is important to due, and it shows that even if you leave to the side the issue of structural or cyclical issues in the participation rates, job growth today is more than population growth.

Posted by: Josh Lehner | October 16, 2014

Destination Oregon

Today Mark is delivering a speech at the Oregon Economic Forum on one of the state’s greatest advantages: migration. In both good times and bad, people want to live here. While there are pros and cons, on net this is fundamentally fantastic for the state and local economy. Migration trends are not just a Portland, or metro Oregon phenomenon either. Much of rural Oregon, including the hard hit timber counties, continues to see an influx of migrants from out of state or from abroad. Mark’s speech, along with the great underlying data work from state demographer Kanhaiya Vaidya, will be the foundation for a larger report in the near future. Below are a copy of Mark’s slides and click here to download.

 

For more on the demographic outlook in the state, see our main website. Stay tuned for the report in the coming month(s).

 

Posted by: Josh Lehner | October 9, 2014

Betting the Minimum. Gaming in the U.S. and State Revenues.

Our office is releasing a new report today on gaming in the U.S. and state revenues. Below is the executive summary.

Download:   Report   |   Slides   |   Data

Atlantic City, New Jersey has been in the headlines for their troubled casinos, with 4 closures and a bankruptcy over the past year. The gaming industry’s troubles are not isolated to Atlantic City alone. Across the country, gaming firms are under pressure from increased competition and weak sales growth following the Great Recession.

What sales growth firms have seen has largely come at the expense of other gaming venues. New casinos or games in previously untapped cities and states are driving overall growth, masking the underlying industry trends. This is particularly pronounced in the Northeast. Mature gaming destinations, of which Atlantic City is an extreme example, continue to suffer declines or exhibit no growth. Regional sales have shifted to newer venues in Maryland, Pennsylvania and New York. Even in locations with minimal competition, sales have increased more along the lines of population growth than economic measures like jobs or income.

GamingRevenue

These trends are not only issues for the casinos and businesses that operate gaming facilities, but also for the state and local governments that reply upon tax revenues from such operations. Unlike gaming revenues, most government tax instruments, including personal income and sales taxes, have rebounded along with the economy. Without sales growth, programs and agencies tied to gaming revenues have faced continued budgetary pressures.

The outlook for the gaming industry and associated tax collections in established markets is not exactly robust, barring a major change to consumer behavior or a significant improvement in economic conditions. As in the recent past, new gaming establishments are likely to fare well in the near term. However, as the novelty wears off and competition continues to increase, sales will slow.

Three broad factors influence the outlook for spending on gaming: real income growth, population growth and consumer tastes. Even if tastes remain unchanged, and younger generations gamble to the same extent as did the Baby Boomers before them, demographics will weigh on sales going forward. Most Baby Boomers are currently in their peak gaming years, and will spend less going forward. This decline in sales will be offset to some degree, but not entirely, by additional spending on the part of the Millennial population cohort. To the extent that Millennials choose to pursue other entertainment or recreational activities as they enter their peak earning years, demand for gaming will erode further.GamingDemographicsMany of the challenges facing the industry will occur over the extended time horizon. Near-term trends are more positive. Demographics remain in the industry’s favor for at least the next few years. Also, a stronger economy bodes well for consumer spending more broadly, including discretionary items.

The good news for the industry is that entertainment spending, and gaming expenditures, have stabilized as a share of household budgets, albeit at lower levels than in the past. While fundamental demand for gaming appears to be more in line with population gains than broader economic indicators, such an outlook brings with it sizable upside risks. A pickup in near-term sales growth is not out of the question, with the driver likely to be a stronger economy with more broad-based income gains or a shift in consumer preferences in gaming’s favor.

Download:   Report   |   Slides   |   Data

Posted by: Josh Lehner | October 8, 2014

Special Request for Website Testing

We have a special request for testing a new website about the state’s 10-Year Plan. Below is a brief message from DAS, the Office of the Chief Operating Officer and the Chief Financial Office.

Oregonians should know what their state government is up to and how it affects them. That’s why we’re developing a new website that brings together the 10-Year Plan for Oregon – describing what state government is doing – with key data in a variety of areas – measuring how we are doing. Our goal is to make the information as accessible as possible and we need your help.

We’re looking for volunteers to test the usability of the new website. Testing should only take about 30 minutes and could be done from your own computer. We would simply send you a link to the website, ask you to find different pieces of information, then gather your feedback regarding how easy, or difficult, things were to find. Testing will occur any time on October 27 or 28, at the convenience of the volunteers.

Once the new site goes live, I know a lot of you will use it either for your job or for finding information about the state budget and outcome areas. As an early tester you can let DAS know about the usability of the site. If you are interested, please email us by clicking here or copying and pasting OEA.info@oregon.gov into an email.

Posted by: Josh Lehner | October 7, 2014

Graph of the Week: Oregon Business Size

Our friends at the Oregon Employment Department recently released the latest overview of firm size in 2014 on their blog. This edition of the Graph of the Week takes advantage of their work.

I think there are some misconceptions about firm size, job growth and the like. I hope to address a few more of these issues in the coming months, particularly around start-ups. In the mean time, the latest firm data shows that businesses with 100 or more employees account for just 2 percent of firms statewide, however they employ half of working Oregonians and pay nearly 60 percent of the wages. It’s important to keep in mind that large and relatively large businesses play an integral role in the economy. Yes, start-ups are important and entrepreneurship is vital for innovation. However their biggest impact is when one (or hopefully more) of these start-ups is successful and grows quickly, adding employees as sales take off. Thus they become a (relatively) large business. Part of this creative destruction process, as highlighted previously, is that young firms have both a high job creation rate and a high job destruction rate, as many new firms do fail. The successful ones — those able to grow into a large business — end up employing a majority, or a plurality, of Oregonians.

FirmSize2014

For a more in-depth look at firm size in Oregon, see this informative OED article by Phoebe Colman.

Posted by: Josh Lehner | October 2, 2014

Leading Indicators & Help Wanted Ads

Two key economic aspects most individuals focus on our jobs and wages. So far we’ve seen job growth accelerate in Oregon but wages have typically advanced only at the rate of inflation. So a lot more Oregonians have jobs, but their wages have not really gone up much. In terms of leading indicators, one of the best ones is the initial claims for unemployment insurance. This is a great indicator of the firing rate, or layoff rate. However, layoffs have not been an economic issue in a few years now. The issue has been the hiring rate, or the pace at which firms add employees. Even with the acceleration in Oregon, job growth is still below the typical expansion the state is accustomed to.

In terms of leading indicators for hiring, one measure our office uses is the number of help wanted ads. Theoretically (and usually in practice) businesses advertise that they are hiring before they actually hire. So, how many help wanted ads are there? Using a relatively new methodology (documented here) that combines historical newspaper data with modern online ads data, here is an update.

HelpWanted0914

This likely bodes well for future economic and employment growth. Much of the recessionary losses have been regained. However, one potential issue economists have debated at the national level, is that job openings have increased substantially faster than actual hires. See Calculated Risk for the most recent graph. Some argue this is a sign of structural unemployment and a skill mismatch between available workers and what businesses want or need. It sounds reasonable and there is always some level of structural unemployment in the economy. However if you dig into the job vacancy survey data, as our office did recently, it really indicates that structural unemployment is not the major issue today.

Lastly, I forgot to post an update here on the blog for the leading indicators with our most recent quarterly forecast. A more complete write-up is available in our forecast document, as it always is, but here is an updated graph showing both our office’s Oregon Index of Leading Indicators (OILI) and the University of Oregon one as well.

LeadingIndicators0714

Posted by: Josh Lehner | October 1, 2014

How Do You Like Them Apples?

Last weekend, my family and I went to a local orchard and picked apples. Besides being fun and delicious, it turns out that October is national apple month, which I did not know. Anyway, it got be thinking more about apples, how much the northwest produces (Washington mostly, but Oregon as well) , exports and also about the huge variety of apples out there. Plus all of this gives a nice excuse to blog some data outside our office’s core functions. I have managed to combine USDA data from a few different sources (historical data here, more recent years here).

The first graph shows the amount of apples used for fresh produce or processed (dried fruit, juice, etc) along with the price farmers receive for the crop. Fresh apples are now at an all-time high while processed apples have stabilized in recent years, albeit down from their 1990s levels. Overall, if you add the two green lines together, it shows that apple production has basically remained unchanged in recent decades, even as the composition has shifted. Prices have risen in the past decade, partly due to the mix of type of apples and their use, but also due to harvest levels, acres planted, demand for apples, and the like.

AppleUtilization2013

In terms of where apples are produced, it’s no surprise that Washington dominates (about 60 percent of the utilized production). Oregon, however, ranks in the Top 10 and accounts for about 1.2-1.4% of the national total. According to the 2007 Census of Agriculture (see map), the largest concentrations of orchards in Oregon are in Umatilla County, a little in the Gorge, in the Willamette Valley and on the Idaho-Oregon border near Ontario.

Fresh apple exports totaled over $1.2 billion in 2013, while so far in 2014 they’re slightly behind that pace. Here, Washington accounts for about 75 percent of the exports and Oregon just 0.4 percent in 2013. Fresh apple exports have increased substantially in the past decade, at least in dollar value, however it is hard to tell how much of the increase is due to higher apple prices versus more pounds actually being exported.

Overall apple produciton has actually been pretty stable in recent decades, however the varieties or types of apples grown has shifted. Long-standing leaders such as Red Delicious and Golden Delicious have seen declines of 30-40 percent, while Granny Smith apples have held steady. Gains are seen in most other varieties with Fuji and Gala in particular increasing market share, so to speak.

AppleVariety2011

Another key feature of agricultural sector more broadly is it’s impact on local and regional economies. Way back when we first examined Portland, Seattle and the Rest, one of our working hypothesis was that strong apple harvests and higher prices helped rural Washington counties during the Great Recession. We still think this is likely one reason (plus they didn’t have a housing bubble), and it shows the importance and influence the sector has. Similarly, good agricultural harvests have helped the Columbia Gorge here in Oregon and higher wheat prices in recent years have helped Eastern Oregon as well.

Lastly, one the greatest benefits of apples is that you can do this.

ApplePie2014

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