Should We be Worried about the Pace of Construction in Central Oregon?April 10, 2019 For those of you long-time locals who may have been living in Central Oregon back in the mid-2000s, there is no doubt you remember the housing bubble and subsequent collapse. It is our most recent economic shock and although it occurred more than a decade ago the collective memory of that housing collapse have many calling our current housing market a bubble ripe for bursting. There is one major similarity between today’s housing market and back in 2007. Home prices are high and prices have been rising for years. That is where the similarities end. The differences are extensive. Central Oregon is not in a housing bubble. Instead, we should be worried that we are not building fast enough to meet the housing needs of new residents moving to town.
The pace of home price appreciation in this current economic cycle is not unprecedented in Central Oregon’s history. The fastest three-year rate of home price growth in this current cycle was from summer 2012 to 2015. During that three-year period home prices rose around 55 percent. The most recent three years (2015-2018) revealed continued home price growth, but at a slower pace (+31%). The surge in home prices looks similar to what we saw back in the mid-2000s, albeit it at a slower rate. Thefastest three-year rate of home price growth in the last cycle was between 2003 and 2006 when home prices rose more than 78 percent. It is due to these rapid rates of home price appreciation in a short period that many are beginning to call today’s housing market a “bubble.”
A bubble is a rapid surge in asset prices, but the increase in those prices are driven by exuberant market behavior and unwarranted by the fundamentals of the asset. The mid-2000s housing bubble perfectly reflected this definition. Initially home price appreciation during the mid-2000s was based on market forces. There was pent up demand for housing, particularly in fast growing communities, such as Bend. Limited supply led to price increases. The construction industry responded to the housing demand and ramped up production. However, the increase in production did not lead to a moderation in home prices. Home price appreciation accelerated, fueled by speculation and consumer’s viewing their home purchase, in particular their home equity, as a tool for producing cash.
Today’s housing market looks much different. Historically, housing permits were a pretty good leading indicator for home prices. Increased permitting activity usually translates into home price growth. This makes sense as you expect to see builders increasing their pace of building if housing prices were on the rise, which would be a sign that the demand for housing remains healthy. However, there has been a decoupling or separation of these two trend lines in this current cycle. Home prices continue to rise, but permitting activity flattened out. Our demand for housing remains high due to continued strong in-migration. Supply is low due to the slow pace of building. High demand and low supply is driving up home price growth, not speculation or exuberant market behavior.
Josh Lehner with the Oregon Office of Economic Analysis recently published some interesting work looking at building activity relative to population growth. We know that new construction remains low across Oregon, but as Josh put it, “What truly matters is the balance between supply and demand. Taking into account population increases, and household formation is the correct way to gauge whether or not an imbalance exists.” To do this his office looked at the number of new housing permits issued per 100 new residents.
In 2018, there were 32.8 new housing units permitted per 100 new residents in Deschutes County. This is a very low pace of building from a historic perspective. In the 1990s (a non-boom period) Deschutes County averaged around 42 building permits per 100 new residents. If the average household of new residents moving to Central Oregon is around 2.5 people, then we would need to produce around 40 permits per 100 new residents to meet the housing need of these new residents. The ratio has fallen below 40 permits per 100 new residents four of the past five years. In other words, we aren’t building fast enough in Deschutes County to meet the need of new in-migrants, let alone dig ourselves out of the housing supply hole we are already in.
By 2025, Portland State University projects that Deschutes County will add 33,000 new residents, nearly an 18 percent increase from 2018. To account for this future population increase Deschutes County would need to average 2,200 new housing permits each year from now to 2025. In the past 12 years the county has only reached 2,200 new housing permits in a single year twice (2015 and 2016). To build enough housing for these new residents over the next six years we need to see the level of building activity 18 percent higher than what was posted the past six years.
Is this possible? Sure, there is a precedent for the region building a lot of housing, but many industry experts are skeptical that they will be able to meet the demand based on several major challenges they face. I recently emceed an event for the Central Oregon Builders Association (COBA) where we heard from a handful of prominent builders on their perspective on these trends. All the builders on the panel identified labor and land as their two largest hurdles. The construction industry lost a generation of skilled workers during the recession and many young people overlooked the industry in the past decade as it was perceived as a risky industry to start a career. Buildable land is expensive and relatively rare in Central Oregon. The recent expansion of the urban growth boundary in Bend will not immediately help provide more housing as these lots do not have utilities or other infrastructure. Do not expect to see the housing crunch loosen anytime soon. But, if you were debating about starting a career in construction, now would be as good a time as any. You can find job postings here.