A Forecast for Portland’s Cloudy Real Estate Market

November 27th, 2006

It’s only fitting that with our rainfall of near-Biblical proportions earlier this November, that we touch on prophetic matters concerning Portland’s real estate market.

Local economist Jerry Johnson began his end-of-year prognosticating tour, recently addressing a roomful of furrow-browed real estate brokers. Johnson is a principal at Johnson Gardner LLC, a Northwest-based consulting firm specializing in real estate development and land use economics. Johnson Gardner’s clients include developers, municipalities, and investment groups.

Johnson’s analysis includes broad trends of GDP growth, employment and wages, and population trends as well as local economic, land use, and development results.

So, should we be building an ark for a long, wet trip in the Portland real estate market, or are the clouds parting?

1. National economy is doing remarkably well — Despite being at war, and experiencing out-of-sight oil prices and political uncertainty, the nation’s economy continues to show slow, but solid growth. Interest rates continue to range historically low. The big threat facing the housing market is inflation, and for now appears to be under control.
2. Portland’s fundamentals are strong — Portland continues to be the most affordable West Coast city for home prices. Unemployment rates continue to shrink. Job growth is steady and broad-based. Portland continues to grow through in-migration, and many move to Portland for lifestyle reasons. Johnson commented that people “want to live in Portland, but don’t have to live in Portland.”
3. Portland’s homeownership rate is at the top — Due to ‘exotic’ financing options that enabled many to qualify for first-time buyer loans, according to Johnson, the Portland market is at historical heights of homeownership. Around 68% of area residents own their homes, the highest rate since 1991. Johnson is mildly concerned with the amount of leverage (debt) and the corresponding threat of foreclosures.
4. Metro land costs create ‘exurban’ communities — Johnson states that land costs inside the metro area force new construction homes to be priced above $300,000 for non-attached (i.e. not condo or townhome) properties. Developing much of the new land brought into the Urban Growth Boundary (UGB) is proving to be financially nonviable, therefore, areas such as Molalla, Newberg, Lafayette, and other peripheral communities have become the new, affordable suburbs, despite the fact they are 45+ minutes away from downtown.
5. Rents in Portland could rise as much as 20% — For the first time in 10 years, the rental market is getting an uplift in pricing. New inventory is not likely to be built until rents rise to the point of supporting new construction on increasingly expensive land. In the meantime, inventory will shrink and create upward pressure on pricing.
6. Condo market has turned to buyer’s market — The increased supply of units is reducing pricing power and cooling the condo craze. Johnson says this is probably a short term issue. He warns that we’re looking at $600-650 per square foot for future Pearl condo projects to provide return on investment.
7. The market could undergo a 6-to-9 month breather — Based on media reports of national housing bubbles and new construction slowdowns, Johnson says local home buyers and sellers are deferring their decisions in the short-term. But with continued economic growth and livability factors, the Portland market has the fundamentals (unlike many other areas nationwide) to overcome its slowdown over the next several months.

You can view the slides from his presentation here: http://johnson-gardner.com/file/Ticor_2006.pdf

Photo by mharrsch. Used under Creative Commons license.

Technorati Tags: Portland, Oregon, real estate, market, trends, forecast, prognostication, results, economist, Johnson Gardner, Jerry Johnson

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