The Portland Business Journal recently came out with an article that speaks to the condition of the current housing market. Windermere’s chief economist discusses the main factors that effect Portland’s real estate market.
Earlier this month I had the pleasure of presenting my economic update and housing forecast to 400 real estate agents that gathered from six states across the U.S. for Windermere Real Estate’s annual Symposium, held at the Sentinel Hotel in Portland. Even though they all represented different housing markets and micro-economies, the questions that resonated from agents during the networking and professional development opportunities were uncanny in their similarities.
First, I’ll explain by addressing the rampant rumors at the forefront of everyone’s mind. No, we will not be facing an economic recession next year, nor are we in a housing bubble right now. All signs are pointing otherwise: the unemployment rate is dropping, U.S. growth continues (albeit anemically), the amount of available funding for mortgages is rising, and the Case Shiller Index has appreciation stable at a relatively modest five percent.
Right now, the first-time home buyer is key. Since they don’t need to sell before purchasing, their reemergence into the market ensures that sales will continue to increase, even while inventory is limited. Thirty-one percent of buyers currently in the real estate market are first-time home buyers — but it would be more ideal if 40 percent of them were.
Why don’t we have enough first-time home buyers in the market? With Baby Boomers working and living longer, we aren’t making much room for Millennials to start their careers. Plus, the major debt that the younger generation owes on student loans ($1.3 trillion today) hugely impacts the housing market. But the bigger issue is lack of down payments. Before the recession, many Millennials could call “1-800-MOM-HELP.” However, it would seem that Mom changed her phone number a few years ago!
The notion that Millennials are the renter generation is nonsense. In a National Association of Realtors survey, 75 percent of them said that buying a home would be the most astute financial decision they’d ever make; however, 80 percent said they don’t think they could qualify for a mortgage. I do believe that Millennials will eventually buy, but they’re delaying their purchasing decisions by about three years when compared to previous generations, which is about the same amount of time they’re waiting to start families as well.
While mortgage rates will rise in the coming year, they will remain remarkably cheap as I expect to see the average rate for a 30-year mortgage rise to around 4.3 percent by the end of 2017. For those who have grown accustomed to interest rates being at historic lows, this might seem high, but it’s all relative. That being said, it is important to remember that for every one percent increase in the mortgage rates, your buying power decreases by about 10 percent.
This modest increase in mortgage rates will likely slow down home price growth to 6.5 – 7 percent in Oregon in 2017, which does not scare me because we simply aren’t making enough money to service debts at a higher appreciation rate. In short, inventory levels will rise next year but it will remain a seller’s market.
If I were to gaze all the way into 2018, my crystal ball takes me to the dreaded “R” word. Like taxes and death, recessions are another one of those unwanted realities that inevitably comes to visit every so often. Prepare to see a business cycle recession by the end of 2018 but, rest assured, it will not be driven by real estate, nor will it resemble The Great Recession in any way. This really does not cause me concern because, as I like to say, “Recessions Happen.” They used to cycle through every 10 years, but are now occurring about every 8 years. We are due!
Although recessions are far from trivial, what keeps me up at night more than the likelihood of a recession is housing affordability. Companies that want to move to Oregon must consider how the state’s cost of living impacts its workforce. If an area becomes too expensive, businesses will go elsewhere.
Not only is Oregon attracting the most people moving from out-of-state, it remains popular among Millennials. While this coveted group may have initially been attracted by Portland’s hip factor, they are staying for quality of life. Let’s hope that affordability doesn’t get too out of control so that current and future Oregon employers can offer the opportunities these potential first-time buyers so desperately need in order to build lives and thrive here. Their success will remain the driving factor of home sales, despite the market’s slim pickings.
-Matthew Gardner Windermere’s chief economist
Portland Business Journal