I am presenting a mid-year forecast for the Home Builders Association of Metropolitan Portland. A summary of my thoughts and a copy of my slides are below.
Due to the severe recession and pandemic, our office’s initial expectations were for housing and construction to see significant declines. Normally in a recession household formation weakens and incomes sag. However to date that has not happened. Housing has been stronger than most sectors overall. I think there are three main reasons for this strength in housing demand.
First is the nature of the cycle. If we’re being honest, it is clear that low-wage workers have borne the brunt of the pandemic and recession to date. High-wage and higher income households have fared better, and are predominantly homeowners.
Second are interest rates. Mortgage rates remain at or near historic lows. This keeps affordability issues at bay, and allows buyers’ budgets to expand. The outlook calls for low interest rates for years to come. The Federal Reserve is signalling they will not raise interest rates until the the economy is strong and actual inflation picks up.
Third is the big demographic tailwind for housing. In the decade ahead, Millennials will fully age into their 30s and 40s which are prime home-buying years. By one’s mid-30s in Oregon today we see a 50-50 split between owners and renters. Early 30s are a key cohort for first-time buyers, while early 40s are a key cohort for overall spending on housing (move-up buyers, young families furnishing homes, etc).
Now, while these strengths may be more structural in nature, uncertainty and risks remain.
The biggest risk remains the pandemic itself. There is no trade off between public health and the economy. It is not either/or. It is neither or both. And right now the worsening health situation increases the possibility of more permanent economic damage, a slower recovery, or even a double-dip recession.
As the recovery drags on — it may feel like years already, but we are actually only a few months into this cycle — it will likely weigh on household incomes and confidence. Some of the normal recessionary dynamics are likely to emerge. This will push back on those reasons for strength and optimism a bit.
Finally a wild card is working from home. There is a lot of speculation about how we will permanently alter our lives due to the pandemic. However it is much too soon to tell how it will shake out. It is possible that Oregon does see COVID-related migration, although unlikely to fully neutralize the cyclical swings this year or next. And household preferences may increase for single family homes, or larger homes, or ones with offices so they are better able to telecommute. To the extent any of that occurs, it would increase industry demand.
All told housing and construction are likely to be economic strengths in the years ahead. Housing is historically a leading economic indicator. Now, that doesn’t meant the industry isn’t impacted. Expectations should be for a couple soft years instead of large declines. The reason is those structural factors should be strong enough to offset some of the cyclical weaknesses.