Oregon Office of Economic Analysis

Yesterday we talked about the number of Oregonians struggling with housing costs. There are two parts to housing affordability: the actual cost of housing (rent or mortgage payment) and household income. You can achieve better affordability via either, but ideally both ways. We would like to see incomes rising faster than housing costs, and also for housing costs to increase at a slower rate in general. It’s this last bit where there is better news on the horizon for renters nationwide and here in Oregon.

We know that the combination of strong underlying demographics, rising incomes, and the desire to drop roommates during a pandemic led to a household formation boom in recent years. This drove vacancy rates and for sale inventory down and prices up. Builders and developers responded to the tight housing market by trying to increase construction.

First, single family permits rose considerably, but have now fallen off as higher interest rates sapped the market in 2022. Here in Oregon single family starts are down 22% percent from spring 2021 to the end of 2022 (using quarterly data not individual month peak to trough). But notice how they’re kind of just back to pre-pandemic levels and not plunging further, or at least not yet. Our last forecast assumed another step down in single family starts in early 2023, but that was before interest rates dropped closer to 6 percent. There will likely still be some weakness, but today expectations are probably more for stability rather than further declines moving forward. That’s a silver lining.

Second, multifamily initially slowed in the pandemic but once the vacancies dropped and rents rose, there has been a rebound in activity. The timing of these increases have mostly offset the declines in single family starts, leaving total new construction activity in Oregon relatively flat. It’s down, about 12 percent peak to trough on a quarterly basis, but fundamentally it’s kind of flat relative to the years leading up to the pandemic. The real question at the moment is what happens with multifamily starts this year and next.

The reason I ask is the following chart. While housing starts are one thing, it’s another to finish construction and have a habitable unit for people to live in. Right now, due to the supply chain issues during the pandemic there are a lot more housing units nationwide under construction that not yet been finished. The pipeline of supply is full. The backlog of single family is starting to correct, both as supply chains get better and the higher rates sapped new demand allowing for some catch up. But to date the backlog of multifamily activity hasn’t slowed down in any meaningful sense. The last couple of months of multifamily permits nationwide are weaker, but that doesn’t really appear to be the case in Oregon, although month-to-month is very noisy locally.

As you can see in the chart this has been a building dynamic for quite some time. I have been a little hesitant to discuss just because we don’t have good local data on how this may or may not be the same or different in Oregon. There are some third party estimates out there for some markets/submarkets and Census estimates show a growing backlog in all regions of the country.

One way I’ve been trying to think about it is to look at Oregon apartment construction relative to the U.S. Here you can see that while Oregon multifamily permits are strong, as a share of the U.S. they’re lower now than in the years leading up to the pandemic (dark blue line). So the open question is does that mean the backlog of construction is less in Oregon relative to the national or regional numbers? Is our backlog simply proportional? Or does the relative slowing in the share reflect slower population growth? Or is it more than some other locations started building apartments and our local trends are what you would expect? We don’t have answers to those questions exactly, but they are worth thinking about.

The bottom line of all of this is better affordability on the housing cost piece of it, especially for apartments. The household formation boom slowed as affordability worsened. Combining a slower market with a record backlog of units under construction means slower rent increases and/or declines. The fears of the 2023 maximum allowable rent increase being 14.6 percent due to last year’s inflation are misplaced from a marketwide view. However that doesn’t mean there won’t be neighbors who see their rents go up by the maximum, or that different segments of the market will experience different trends. It’s that from a high level, macro view of housing, costs will get better, and affordability will improve via both components as incomes are increasing as well. The challenge is these improvements are coming off such a bad starting point for affordability.

Three final thoughts. One, the question for the outlook is how much do new multifamily starts slow in 2023 and 2024 due to the softening rental market? Single family appears to be at or near a likely bottom, but multifamily hasn’t really weakened yet. Two, we have seen no construction layoffs to date, despite the sharp drop in new single family activity. Yes, the backlog has kept workers busy as new orders slow, but if that market is bottoming, and nonresidential is good, and public works will acceleration as infrastructure work gets under way, it’s getting hard to see where actual construction layoffs will occur overall. Third, the risk there is a recession but the softening rents will feed into slower inflation which better supports growth as the Fed can ease off the brakes a little bit for that reason, even if they need to keep on the brakes due to the fundamentally better growth. Lots of moving parts, and feedback loops here to ponder as we meet with our advisors in the weeks ahead. Our next forecast is due out Wednesday, February 22nd.