The most dangerous words in economics, “This time is different,” are a stark reminder to be very careful predicting the future based on history. That said, here is our forecast for the Portland housing market for the remainder of 2020, based on what we have seen before.
Nobody will escape the effects of the current recession. Closed businesses and job losses affect everyone. Many worry that the recession will result in falling home prices. We don’t think that will happen in Portland.
In three of the last five recessions U.S. home prices actually rose. The last, the Great Recession of 2007-2009, saw a steep price drop, and that forms most people’s memories.
The Great Recession was an outlier, fueled by a fragile housing bubble that does not exist now. This time housing is not the cause of the economic crisis; the Portland housing market started 2020 in great shape. There are several key differences that suggest the housing market today will follow a much different path than in the Great Recession:
1. The Portland housing market is not over-valued.
Portland home prices are less than 9% above the U.S. national trend line that goes back 130 years. Contrast that to mid-2007, when Portland was more than 38% above the trend line. And the twenty largest US cities were 59% above the line at the national peak mid-2006; they are now 1.5% below the line.
2. Portland homes are still affordable.
Homes are considered affordable when less than 25% of homebuyers’ income is needed to pay the mortgage, not including taxes and insurance. In March Portland’s affordability index was at 19.9%. By comparison it was 28.4% in mid-2007. The national market is even more affordable.
3. Mortgage quality is much higher now than in 2007.
Lending criteria are much tighter now. Minimum credit scores, income stability and verification, and other requirements to get loans are strict. Consequently, mortgage delinquency rates are far lower than in the months before the Great Recession, and the number of subprime and adjustable rate loans are a small fraction of what they were in 2007. Additionally, bank balance sheets are sound, and the Federal Reserve has shown a commitment to keeping the financial markets stable.
4. Homeowners have a lot of equity.
42% of U.S. homes are free and clear of a mortgage, and 29% have more than 40% equity. Importantly, higher down payment requirements and years of steady appreciation have resulted in less than 14% of all U.S homes having less than 20% equity. Even in tough times few people walk away from homes with equity.
5. Portland continues to have a shortage of homes.
Local and national housing enter this recession under-built, not over-built as it was in 2007. Based on demographics and current vacancy rates, Portlanders’ demand for homes will exceed supply for quite some time.
But what about unemployment?
Oregon’s unemployment rate went from a historic low of 3.5% in March to a record high of 14.2% through the first two weeks of April, the Oregon Employment Department reported Tuesday. Those numbers will get worse before they get better.
Here’s the twist: High unemployment has been followed by increased home sales more often than not in past recessions. Many people assume that high unemployment results in fewer home sales, but the data does not back that up. It is hard to find a direct correlation. So while a shrinking economy and expanding unemployment hurt, home sales may well keep chugging along. The housing sector, after all, has led the rest of the economy out of each recession since World War II, with the exception of the last one.
So what should we expect in the Portland housing market?
2020 2nd Quarter: We expect a surge in activity by buyers and sellers with current moving plans as COVID restrictions ease. The supply of listed homes is tight relative to the number of active buyers in the market, so either more homes will come on the market, or sale prices will surge until they do. The Portland real estate market will soon look like a typical spring and summer, but with masks on.
2020 3rd and 4th Quarters:
The number of home sales will drop, as usual, and the carryover from a suppressed spring selling season will result in total sales for 2020 being 10% to 20% less than 2019.
Home prices will rise then fall slightly, as usual, finishing the year slightly up from 2019.
Mortgage rates and affordability will remain roughly where they are today.
Because of the lower number of sales and the seasonal drop in prices of the sold homes, media reports will be negative.