Oregon Office of Economic Analysis

This morning I am presenting at the Home Builders Association of Metropolitan Portland’s annual forecast breakfast. It’s been a few years since I’ve been able to attend again, so we have lots of topics to catch up on! The National Association of Home Builders’ chief economist, Robert Dietz, will also be presenting. I am looking forward to hearing his thoughts on the market and what is happening elsewhere around the country. A few of my remarks and a copy of my slides are below.

It’s a bit of a strange time right now as the housing market rebalances. The near-term data shows new construction activity and home sales flattening out both nationwide and in the Portland area. Households budgets for those looking to buy are getting maxed out now that interest rates are rising, and the carrying cost of a mortgage is increasing more than just due to rising prices. So what is the outlook?

From a fundamentals perspective, the housing outlook remains bright. The demographics already baked into the cake, plus ongoing migration means a growing and thriving region like Portland needs to continue to add new housing supply of all types. Yes, the top end of the apartment market is saturated. This has some spillover impacts on homeowners or at least those on the cusp or buying or renting given rents are softening. But this is a near-term, or temporary imbalance. If the population forecasts are reasonably correct, the region needs to continue to build approximately the same number of units each year in the coming decade.

As I discussed earlier this year at the Multifamily NW breakfast, there are at least three main channels in which this underlying forecast will be wrong. I have fleshed those out a bit more for this morning’s presentation. What has been somewhat surprising to me is that even in a moderate recession scenario — THIS IS NOT A RECESSION CALL, JUST A HYPOTHETICAL SCENARIO — the demand for housing in the Portland area will remain pretty strong. This is due to the demographics, where Millennials will fully age into their root-setting, and home-buying years. Household formation should be stronger than underlying population growth for this reason. Additionally, the baseline outlook from today moving forward is relatively weak. The business cycle has matured and population growth rates have peaked. Given the slower baseline, a recession scenario is not quite as big of a deviation compared to if the baseline forecast continued these strong gains every year into the future.

The bottom line here is that our office does not think housing will be the same issue next recession, whenever it comes, as it was last time. Most importantly from an economic perspective is we are not seeing the big run-up in household debt. The high prices are primarily about a relative lack of supply in the face of stronger demand. Furthermore, those strong housing demographics also mean the downside to housing next recession is a bit more limited than before. Now, this does not mean housing starts won’t fall — they will — or that home prices won’t decline — they probably will some. It just means we are highly unlikely to have an exact repeat of the housing collapse and Great Recession.