Runaway home valuation increases in Portland (and why it’s going to get worse)

Can it be? Portland is one of the five hottest real estate markets in the nation.  What does this mean for homeowners as they–or their financial advisors— try to manage the increasingly valuable asset their home represents?

But first, you ask, why assume house prices in Portland will continue to climb? Aren’t current high prices just part of the ebb and flow of real estate values? Won’t they go back down in a year or  two?

Well, no.  Here’s  why.

True, an epic event, such as  a national economic catastrophe, or local floods, volcanic eruptions and earthquakes would (when and if they happen) have a devastating effect on home prices.  But the probability of such events is low. More importantly, lets look at the dynamic that is driving current home prices and will continue to do so until that epic event arrives.

The first is our Urban Growth Boundary.  Originally established in 1973 to promote population density and mitigate urban sprawl, Portland’s Urban Growth Boundary has done its job well. Some think, too well. Virtually all of the large blocks of land available for new construction have been long since taken.  And expansion of the boundary has been slowed or stopped by increasing resistance to the urbanization of Portland’s periphery.

As a result, building lots are scarce and cost considerably more, as a percentage of the total cost of a new dwelling– sometimes 35% or more of construction cost as compared with conventional percentages that run between 20 and 25%.  This results in fewer houses being built, and higher purchase prices for those that are.

Then there’s the population question.  Oregon’s population is roughly 4 million, and growing at the rate of just under 2% annually. That doesn’t seem like much until you do the math: 80,000 people are arriving in Oregon every year.  The greater Portland population is roughly 2.4 million so, doing the math again, we discover that the Portland area has about  48,000 newcomers annually.

Now that still doesn’t seem like a lot of people.  But for the past 10 years the average number of housing starts in the Portland metropolitan area has been less than half the increase in population.  This brings us to the iron law of economics: when the demand for a commodity goes up faster than the supply, the price of that commodity increases.

The shortfall in new units since 2005 has led to a chronic shortage of rental housing in the most desirable parts of Portland.   A growing number of residents are competing for the largely unchanging number of homes in the central city. That’s led to rocketing home prices and rents, forcing many to live in less likable and less bikeable areas further from the urban core.

The shortfall in new housing construction that began in 2006 — for example, Multnomah County added an estimated 10,709 residents in 2011 but just 534 net new homes — has left a deep backlog in the housing market that would require construction far faster than today’s to erase.  The population of Multnomah County grew 1.4 percent, the latest Census figures show, while the housing supply grew 0.9 percent.

So, house prices coming down? Not likely……

In this rising market, your home, and your client’s home and local rental properties, represent a sometimes ignored asset.  For those who are thinking of buying a home, it’s an apparent certainty that while interest rates may remain stable, prices will continue  to rise.  Steeply.

Plenty of buyers, once again, are heading to places like Portland, Oregon. That happened several years ago, and once again appears to be a trend that those in Portlandia aren’t wild about.   In the words of Governor Tom McCall “Come visit but then go home.”

But hey, forget about a house in Oregon! You can buy an entire town in Nevada, near Las Vegas, for $8 million.