Housing outlook in 2007? Weaker

Real estate - Two experts predict there will be a shift to a buyer's market with a slowing in the rise of prices

Friday, December 08, 2006
DYLAN RIVERA
The Oregonian

The Portland area housing market will further weaken in 2007, two economists told a gathering of the Home Builders Association of Metropolitan Portland on Thursday.

Prices will still rise, they predicted, but at a lower rate. Some areas, such as the condo market, could see even more downward pressure on prices because of oversupply. Sellers who think they have the upper hand now -- despite buyers who argue the other way -- could be in another world next year.

"It's going to be a shift to a buyer's market," predicted Jerry Johnson, of the Johnson Gardner economic consulting firm in Portland.

Johnson discussed the local housing market and Dae Baek, acting chief economist for the state, analyzed the state and national economies during the association's annual housing forecast breakfast. Much is at stake next year, which may explain the larger-than-usual crowd of about 600 people at the Oregon Convention Center.

The recent housing boom has drawn thousands of people to the real estate industry, helped propel the state's economic growth and generated billions of dollars in wealth that spurred the national economy. But recent signals of a weakening market, locally and nationally, have created new worries inside and outside the industry.

For several years, forecasters warned of a cooling market, and only this year did reality appear to follow expectations, at least in the Portland area. Inventories rose gradually through the spring and summer. The region's median sales price began a seasonal decline in late summer, earlier than the typical fall slowdown.

What to expect next year? A little unclear, but definitely a weaker market. The economists shirked away from presenting specific appreciation rates, though Johnson said Portland-area home prices will rise about 5 percent to 8 percent next year, compared with the recent high teens of 2005 and early this year.

Housing permits and starts are "in the throes of a sharp correction," Baek said. Housing permits in Oregon were down 14 percent this year through October, compared with the same period last year. Permits declined 23 percent to 36 percent in the Bend and Medford areas; 6.3 percent in the Portland area and 6.4 percent in Salem.

The cooling housing market will continue to drag the state's economy, Baek predicted. Jobs will be lost in housing-related industries, he said, and rising inventories and pressure on prices could make consumer feel less eager to spend money at retailers.

The problem of high inventory may be "darker than it shows in statistics," Baek said, because sale cancellations might not be fully reported in those figures.

Yet, inventory levels in the Portland area are still lower than those nationwide. And mortgage interest rates remain relatively low, which helps make housing affordable, Baek said.

Baek said he expects many sectors of the state's economy to contribute to job growth. Population growth would also help, he said.

"That will surely help moderate the pain coming from the housing sector," he said. "2007 is a slower year, but the economy will not tank and if you hang in there, the second half of 2007 will be better."

Both Baek and Johnson said population, job and wage growth are helping mitigate the housing downturn in the region.

"It's not a demand problem, it's a supply problem," Johnson said.

The supply of homes for sale may be rising, Johnson said, but only because builders haven't pulled back enough. Building permits should have fallen 10 percent this year, but they fell 6 percent, he said, "so we still have some more to go."

Johnson was particularly concerned about the condo market. Although there are about 4,000 urban condos in the works, there are about 16,000 planned throughout the region, including many small projects that are not easily tracked, he said.

All that inventory could increase the number of buyers withdrawing from sales contracts and lead to falling prices, he said.

This seems to be at odds with the view of many real estate agents in the urban market, who consider their market distinct from the suburbs.

"If you bought a spec condo last week it was probably a bad buy," Johnson said. "But if you bought it two years ago it's probably OK, but will be giving some (value) up."