Note: this three-part answer is excerpted from our 2017 market report.
To answer the question of why the inventory of homes is so low in Portland we have to go back to the supply and demand basics of economics. We had our last peak market in the summer of 2007 and after that we went into decline for five years straight. During that decline, new home construction came to almost a complete standstill with the units built not being close to satisfying the number of units needed for the increasing population and in-migration. I remember being at an economic luncheon forum and someone on stage, a very well-known economist, said that we were going to have a housing shortage crisis in Portland over the next coming years. Everyone at my table was shaking their head because we had lots of homes to sell, and nothing was selling with prices continuing to decline, and we were thinking how could there possibly be a housing crisis on the horizon when we had so many vacant homes to sell standing around in Portland? But the statement made that day at that lunch couldn’t have been more true. For years there were not enough apartments or homes being built in Portland yet people kept moving here. People kept getting married, having kids, families kept growing, kids kept leaving their homes to go to college and get jobs, and all of those people created a need for more housing. In short, the main cause of the housing shortage now is that there are not enough homes being built to meet the current demand.
Take into account the fact that we were not creating enough supply of housing in Portland and prices continue to increase. In 2012 affordability in Portland hit an all-time high with almost everyone with a median income able to afford a median-priced home. At the same time rents were increasing rapidly in Portland and this caused an exodus of people using credit they built from being renters to purchase homes. Throw even more fuel on the fire for demand with interest rates going from over 6% in 2007 down to 3.5% in 2012. I believe these factors would have caused a housing shortage even if we didn’t have all the in-migration that Oregon has been experiencing over the last couple years. Almost three years running now Oregon has been the most moved-to state in the U.S., further leading to our housing crisis woes.
If during a recession housing and apartment building slows down, then condo building comes to a complete halt. With many properties selling for below replacement value there was no economic motivation to build new condos in Portland during the recession. To compound the cost of building condos almost all of the newer condos in the Portland area experienced litigation over building defect issues of some sort usually related to water penetration in windows, doors, and siding. This costly litigation over building defects increases the cost to insure a new condo building for a builder. This increase in insurance cost made an already difficult process is almost impossible. It is only recently where we’re starting to see new condo buildings come to the market, most notably the Cosmopolitan building downtown in the pearl. Around town you can find other examples of small condo projects. The update for 2017 is that condo development is on the upswing again with many projects underway and many more to be delivered in 2018.
For more about the forces currently impacting the Portland real estate market, check out our full 2017 report.