Housing prices may ease up next year

Real estate - Two economists don't foresee a bursting bubble in the Portland area's hot market

Saturday, December 03, 2005
DYLAN RIVERA
The Oregonian

The Portland area's red-hot housing market will cool in 2006 but not freeze, two economists told the local Home Builders Association on Friday.

Jerry Johnson, of the Johnson Gardner firm in Portland, predicted a slow decrease in housing price growth rather than the quick drop in sales prices of a bubble bursting, which some analysts fear.

"There isn't a bubble, at least locally," Johnson said. Some "little bubbles" in other cities may burst in the next year or so, he said, but nationwide housing prices will resemble "a latte when it settles a bit."

State Economist Tom Potiowsky told the builders group that housing starts -- a key measure of builder activity and confidence in the market -- will decline 5.4 percent in Oregon in 2006, coming down off a record high this year.

"That is not a major decline when you're up in the stratosphere," Potiowsky said.

The ramifications of a potential housing downturn go far beyond home construction businesses because housing and related activities have accounted for 30 percent of economic growth since 2001.

The economists presented precise figures on the recent housing boom, and broad outlines of predictions for next year to the breakfast gathering at the Oregon Convention Center. The predictions generally were in line with recent national indications of cooling of home prices and home construction. However, the persistently robust housing market has baffled economists in recent years, so it's hard to tell whether the housing run-up has ended.

According to the state Office of Economic Analysis, which Potiowsky heads, Oregon home prices are likely to rise 5.5 percent next year, down from the 12.5 percent in 2005.

Recent history suggests it's far from certain the prediction will come to pass.

A year ago, the department predicted a 6.0 percent rise in Oregon home prices for 2005 and a 5.3 percent increase in U.S. sales prices for existing homes. Oregon home prices grew at more than twice the predicted pace, and the national figure is likely to reach 8.8 percent.

What happened?

"Economic growth has been better than we expected and mortgage rates have been stubborn," Potiowsky said after the meeting.

For the most part, investments in housing have been rational in recent years, Potiowsky said. Mortgage rates hovered at record lows, making housing more affordable. And the poor-performing stock market delivered weak returns, making housing a logical place to invest.

More recently, home owners and housing speculators have taken on high debt loads to get into houses at high prices, he said.

"It's the speculators and the people financing that activity that will be hurt the most," Potiowsky said.

The apartment market is headed for a recovery in 2006, further undercutting the demand for houses next year, Johnson said.

In the past decade, 50,000 households in the Portland area moved from rental housing to home ownership.

"For the rental market, this has been disastrous, but for ownership housing, it's been strong," Johnson said.

Next year, he said, the apartment market should work through excess units built in the 1990s heyday. Then, apartment developers thought they observed a fundamental shift toward rental housing, and they overbuilt with that in mind.

"It was a good story at the time, and the banks bought it," Johnson said. "But it's not true."