Housing market will slow, but stay strong

By Joe Harwood
The Register-Guard
Published: Sunday, February 5, 2006

Economists predict the red-hot pace of new home construction in Lane County will cool a bit in 2006 as mortgage rates inch upward. But demand for single-family homes is still expected to remain strong by historical standards.

Builders in Lane County last year took out permits for 1,526 new single-family homes, up 13 percent from the heady levels of 2004.

The Register-Guard's Board of Economists forecasts a 4.9 percent dip in Lane County housing starts this year compared with 2005. The estimated 1,451 new home permits that builders are predicted to apply for in 2006 suggest a healthy market leveling off after a series of record years.

"I think we'll see a leveling out in prices and slower appreciation," said John Mitchell, a regional economist with US Bank in Portland. "Oregon and Lane County are going to continue to grow, but a little more slowly."

Population growth and mortgage interest rates are two big factors governing home construction volumes and home price appreciation.

"The big question is when and how much long-term interest rates are going to rise, because that affects development projects at all levels," said Brian Rooney, regional economist for the state Employment Department in Eugene.

"My guess is interest rates are going to rise," Rooney said. "And both residential and commercial development will slow because of that."

Among the more important indicators for economists is the yield curve of interest rates. A flattening or inversion of the curve means short-term rates on instruments such as three-month Treasury bills exceed longer-term rates on, say, 10-year Treasury bonds. Flattening or inversion of the curve signals inflation in interest rates.

The yield curve started softening in mid-2005. If the trend continues into this year to the point of an inverted curve - signaling a tight money supply - the corresponding hike in the cost of borrowing will impact all aspects of development, economists said.

"Look what happened (in 2005) and how the flattening of the curve took away some of the things people were doing with adjustable (rate mortgages)," Mitchell said.

"That takes away some of the affordability," he said. With rates increasing on adjustable rate mortgages, buyers who are on the cusp when it comes to qualifying lose that flexibility, Mitchell said.

Price appreciation on new and existing homes combined with higher interest rates reduces the pool of potential buyers who can qualify for home loans. On the brighter side for buyers, however, home appreciation rates are expected to moderate in Lane County and throughout the nation.

The Register-Guard Board of Economists expects the average home price to increase only 3.2 percent in 2006 to $230,445, well below the double-digit increases in 2005 (17 percent) and 2004 (13 percent).

And Mitchell is more optimistic in his 2006 outlook for Lane County specifically, and Oregon in general, than many of his peers.

"I believe we are going to get slightly higher (mortgage) rates," he said. "But Oregon might be the exception (to the predicted national housing slowdown) and Lane County may hold up better than the state."

David Seiders, chief economist for the National Association of Home Builders, said 2006 will feature "a simmering down process" toward more sustainable levels of home sales, home building and price apprecia- tion.

"In terms of single-family sales and starts, we'll basically be retracing the increases we saw in 2005 (and) heading back to 2004's very healthy levels," Seiders said.

If the Federal Reserve raises short-term rates slightly - as expected - to keep inflation in check, Seiders said he sees the average rate on a 30-year fixed mortgage inching up to about a 6.6 percent average for 2006.

The Mortgage Bankers Association reported Jan. 25 that the average rate on a 30-year fixed mortgage was 6.04 percent, the third consecutive weekly decrease.

Doug Duncan, the association's chief economist, said long-term rates will increase a bit, but will remain relatively low. "Housing will decline modestly from the fifth consecutive record year in 2005," Duncan said. "But will remain robust historically."

Bill Conerly, an economics consultant based in Lake Oswego, said 2006 isn't likely to be the year the housing bubble bursts, but there could be a fizzle. "I do not expect prices to fall on average," he said. "But some people who paid too much for their house might find they can't sell it for as much as they bought it for."

If Lane County builders and developers are sensing a slowdown during the next 11 months, they certainly aren't showing it, given the number of new subdivisions in the pipeline.

Here are some of the larger developments expected for 2006:

• MountainGate in the Thurston area of Springfield, which could someday hold as many as 700 homes and apartment units. The first two phases, totalling 71 lots, already sport homes under construction. About 45 lots of the third phase will come online this month, with another 65 ready by mid-summer. The 130 lots for the fourth phase are expected to be completed by the end of the year.

• Timberline Hills, the final phase of the Breeden family's massive housing development in Eugene's southwest hills. The 255-lot Timberline Hills will cap the roughly 1,100 homes built thus far.

• The 99-home first-phase of the Oaklea Meadows subdivision in Junction City is expected to begin this year. The developer of another proposed Junction City subdivision, Prairies Meadows, is seeking approval for 130 residential lots.

• The developer of the proposed 112-lot Westwind estates subdivision in Springfield is seeking approval to build the lots on 23 acres south of Daisy Street, north of the Union Pacific Railroad line.

• Work on the 101-lot Filbert Meadows subdivision south of Jasper Road in Springfield is expected to begin in April.

• With the 42-lot first phase of Hawthorne Estates sold out, the developer of the subdivision off Crescent Avenue in north Eugene already has started on the 47-lot first addition. Another 31 lots are planned if the market stays healthy.

• Developers in Veneta, Lane County's fastest-growing city for the past two years, have filed proposals for 672 new homes since 2000. A Redmond-based developer in late 2005 submitted a proposal for up to 629 homes on 128 acres west of Territorial Road.