Oregon Office of Economic Analysis

Underlying demand for housing will remain strong in the decade ahead. Even so, there can be shorter, or cyclical swings around this trend. The run-up in mortgage rates has priced out some households from the ownership market, keeping rental demand high. Overall, our office made two noteworthy changes to the housing outlook, as part of our overall economic and revenue forecast last week.

First, our office now forecasts Oregon home prices to decline by 4 percent. Higher interest rates are here to stay, meaning the larger monthly mortgage payments are too. A modest price correction, combined with continued income growth brings affordability back to the historical range by mid-2024. After that time, forecasted home prices largely increase with income growth and steady mortgage rates.

The risks here are that the price correction could be larger and happen faster than anticipated. Since we developed the forecast, mortgage rates have risen even further and yesterday stood at 6.25 percent. That means the potential buyer pool is even smaller today. The challenge is that larger price declines typically require a glut of inventory and/or distressed sales. Today neither is occurring. Also, home prices usually take longer than you’d think to adjust. Following the housing bubble bursting 15 years ago, it was a 4 year decline in prices, and then another year bottom fishing with no increases. So while it is clear prices today are too high given current incomes and mortgage rates, a quick, sharp correction seems unlikely. The forecast calls for modest declines in the year ahead, followed by a flat year. This multiyear adjustment brings high level affordability measures back down by mid-2024. Of course this time could be different.

Inventory has risen from its record lows but remains at or below pre-pandemic levels in most markets. Even as inventory rises further, as it is expected to do, it is unlikely it will suddenly return to the levels seen 10-15 years ago for a couple of reasons. One is that fewer homeowners will list their homes in a soft market, aka the sellers strike, especially if it means they will have to buy a home at these higher interest rates once they sell their current one. Two is the lack of distressed sales, discussed further below. But overall, higher inventory, and weaker demand will soften prices at a minimum as the market shifts way from the extreme seller’s market of earlier in the pandemic.

Regarding distressed sales, they are expected to be minimal in the years ahead. Credit standards are higher today and the market lacks the exotic loans of the bubble era. Absent significant job losses, households have the ability to pay their debt. And given home equity is at record levels, households who do need to sell will not take a loss, just a smaller gain. These key factors frankly point toward ongoing home price appreciation. However, given how out of line affordability is today, a modest price correction seems likely.

This price correction will likely vary by product type and location. It’s more likely that the places with the fastest increases during the pandemic — think exurbs and somewhere like Bend (26th largest increase nationwide among all metro areas) — will see somewhat larger declines than places with the slowest increase during the pandemic — think Medford and Portland which are just above the median metro gains. The pendulum is just swinging back a bit, but will not fully reverse the pandemic-related patterns.

Second, our office now forecasts Oregon housing starts to also decline by 4 percent in 2023, which is a bit larger than the 2.5 percent decline built into the previous forecast. Given the 30 percent decline in overall home sales in recent months, builders are likely to slow their pace of new construction until the market fully adjusts. New housing units will continue to be built, it’s just that slightly fewer will be until demand picks back up.

Factors preventing an even larger decline in new construction activity include ongoing population and income growth, Oregon’s historical underproduction of housing, and an increase in rental demand that keeps multifamily construction strong even if ownership product declines.

The risks to the outlook are balanced. On one hand, the declines in new ownership product could be even larger. On the other hand, multifamily permits across the state remain quite strong and so far have more than offset any single family weakness. As a result, Oregon housing starts overall have yet to drop as of July. And should the single family ownership market begin to stabilize, there may not be an outright decline in new construction activity in Oregon moving forward. Our office forecasts there to be a slight decline, but to date that is not seen in the data.

The increased demand in the rental market is a key issue to watch. Vacancy rates are already low, and if more households find themselves renting due to being priced out of the ownership market, competition for rentals will intensify. This is likely to keep rent increases high, contributing to overall inflation, and impacting household budgets. It is even possible that household formation could decline, with fewer new households being formed, and an increase in living at home, or with more roommates.

Three housing-related notes. 1. Next week BLS releases the August CPI. Our office will finalize the 2023 maximum allowable rent increase for Oregon. 2. Also next week, Census will release the 2021 American Community Survey data, or at least the standard tables. Not only we will get our first look at household income and poverty last year, but also household formation and ownership rates during the pandemic. Remember, the 2020 ACS data were “experimental estimates” and not official Census data. 3. Stay tuned, our office has been researching the workforce needs if the state were to actually increase housing production. We will likely post the housing-related ACS data, and the workforce needs in 2 weeks time.