Core Logic’s Chief Economist Dr. Mark Flemming’s “Welcome to the New Housing Normal” in the latest Market Pulse gives great explanatory structure to the market that seems to be emerging in the Portland Real Estate market. Many cities are now showing more acute signs of a faltering recovery. These trends eventually show up in Portland. Housing activity in July was noticeably softer than the preceding months; perhaps we’re already seeing signs of the emerging “normal” market in Portland.
Fleming credits pent up supply and demand constraints for the recovery slow-down. There are three underlying conditions impacting the new normal supply of homes for sale:
- The shadow inventory that accumulated after the financial crisis has been sold off, primarily to investors and first time home-buyers.
- The vast majority of homeowners with equity have refinanced at rates below 4.5%. When rates increase, there will be a significant dis-incentive for homeowners with low cost mortgage debt to sell. Fleming calls this the interest rate lockout effect.
- There are still a significant share of homes that are “under-equitied.” From a national perspective, the concentration of these homes are typically largest in the fastest-growing markets.
On the demand-side of this economic equation, expect new normal demand to be moderated by:
- Most home-buyers are first sellers, so the three supply factors already mentioned will keep a portion of “would-be” buyers on the side-lines.
- The high rates of appreciation we have recently seen in the real estate market were largely anticipated by investors. Current return expectations are much more modest, and investor demand should also be much more modest in the new normal market.
- One quarter of the traditional “credit eligible” population is having difficulty qualifying for mortgage loans.
- “Generation R” is an emerging housing economist term for the millennial generation. R stands for “Renter.” The high rental rates are largely the product of high levels of student debt and the poor or lagging job market. Compared with previous generations, the home ownership rate for younger professionals lags that of previous generations.
Here in Portland we are likely to have above normal shadow inventory given the legal battles over the foreclosure process in the Oregon Supreme Ct. As the case was being argued, many banks delayed the foreclosure proceeding as they were waiting to determine whether or not they needed to follow a judicial process. The percent of homes in Oregon in foreclosure is 2% which is in the highest quartile of US states.
Portland is likely over-represented by “Generation R.” The recent price surge in the preferred inner east-side neighborhoods compounds the high rental rates among Millennials. It will be interesting to track which neighborhoods emerge as the preferred locations as young people enter the housing market at rates approaching the historical norms.
We are always happy to discuss the impact that these trends might have on your plans. Please don’t hesitate to contact us to set up a private, complimentary consultation.