Portland home prices rose 11.80% over the past Year-Over-Year (YOY) period from January 2015 to January 2016, which is starting to put a lot of pressure on buyers who are seeing the bidding wars escalate on starter homes all the way up into the higher-end market.  Below is a chart of the top twenty metropolitan markets and the home price appreciation figures with Portland leading the way nationally:

YOY January 2016 - Home Price Appreciation

Why is Portland leading the United States in home price appreciation over the past year?

There are several reasons which aren’t especially unique to Portland, but part of the bigger recovery process from the great credit bubble crash of 2008, which took local and national housing markets down in the process.

Here’s what I see anecdotally as the reasons for Portland’s double digit-home price appreciation:

  • Housing is relatively inexpensive in Portland compared to other major west coast markets like Seattle, San Francisco, San Jose, Los Angeles, Orange County, and San Diego. There’s room for upward pressure on home prices in Portland in comparison to other cities.
  • Highly educated and well compensated people are moving to the city from elsewhere, bringing their larger down payments with them, snapping up $800,000 homes in close-in neighborhoods like Alameda, Irvington, Sellwood, etc.
  • Metro’s Urban Growth Boundary confines new building and new construction to a certain limited area within the three counties.
  • Infill construction has been a focus over the past decade or two to preserve open space on the outskirts of the UGB. Check out all the passive aggressive “Stop The Demolition Of Portland Homes” signs in the older neighborhoods whenever a new American Foursquare has sprouted up in the foundation of a former 100-year-old oil heated Portland “charmer” that had character and $400/mo heating and electricity bills during the winter.
  • Speaking of infill, have you driven down N. Williams and N. Vancouver? That’s infill. Large apartment and condos are filling up entire city blocks being funded by institutional money like mutual funds, pension plans, and Real Estate Investment Trusts (REITs)  seeking yield in a low-interest rate environment (see ZIRP a little bit further down).
  • Portlanders are enamored by inefficient 100-year-old homes in newly fashionable close-in neighborhoods. Having grown up in the Portland area, then moved away in 2002, returning in 2010 during the housing recession, I’m perplexed by the “coolness” of these old neighborhoods. I still see the houses as smelling like a musty basement. Yes, I acknowledge that I’m biased against old musty homes and have little appreciation for the coolness of gentrification.
  • HARP – Home Affordable Refinance Program – keeping all those underwater borrowers who bought at Housing Bubble 1.0 peak prices in 2006-2007 in their houses, taking their interest rates from 6.00% to 3.50% on a 30 year fixed rate loan. These homeowners may be getting close to above water but they still cannot sell since they don’t have enough equity for a down payment on a new home. The natural move-up buyer in a HARP loan is stuck and not participating like they normally would be in a regularly functioning housing market.
  • HAMP – Home Affordable Modification Program – Some people were lucky to refinance into a new HARP loan. Others had to settle for a HAMP loan modification, which when the lender or servicer actually modified the loan, the homeowner was able to get a 2.00% to 3.00% five-year loan modification or even a 30 or 40-year loan modification at those interest rates. HAMP loans have also kept people in their homes, which has further restricted housing inventory.
  • ZIRP – Zero Interest Rate PolicyThe Federal Reserve lowered interest rates down to nearly 0% in early 2009 and for those creditworthy consumers, it’s been a great benefit as interest rates on mortgages have gone right down with it. We’re seven years into ZIRP and it’s starting to gain compounding momentum in the leveraged asset market (ie. home (asset) with a mortgage (leverage)).
  • Banks and especially the GSEs  (Government Sponsored Entities known as Fannie Mae and Freddie Mac) have been strategically holding homes off the market for many, many, many years. I have three friends in Portland who filed Chapter 7 Bankruptcy in 2008, have not made a house payment since then, and still live in their house nearly eight years later. Yes, that’s eight years without making a mortgage payment! All three friends had Fannie Mae first mortgages and have had minimal pressure by the loan servicer to leave their house. One was just approached about applying for a HAMP loan modification after all this time.  Keeping these zombie homeowners in their houses keeps more homes off the market, which limits supply, and drives up prices further. Besides, Fannie and Freddie are taxpayer owned, so what do they really care about expediting their distressed inventory? Phasing out the release of distressed homes over a 10-12 year period (2008-2020) keeps supply low and prices high.
  • FASB 166 & 167 – Suspension of Mark To Market Accounting – this took effect on April 1, 2009. It was an accounting rule change that allowed banks and other financial institutions, like Fannie and Freddie, along with the recently bailed out banks, from having to write down their mortgage assets to market prices. Instead, they could carry these assets on their books at “Mark To Model”, or something that was reasonably defensible. Do you recall how banks went from being bailed out with trillions of dollars in 2008-2009 to recording record profits in 2010? Thank The Fed for ZIRP and FASB for 166 & 167, which are still in effect today.

I think the booming Portland housing market is a distortion of all the measures that were put into place as a response to the credit bubble bursting in 2008. We’re probably approaching the final phase(s) of this real estate cycle, which is seeing double-digit appreciation caused by tight inventory and ultra-low priced mortgage credit for the most creditworthy of borrowers whereas the last cycle we saw easy credit driving prices upward before the eventual crash in values during 2008-2010.

My guess is that we see more Housing Bubble 1.0 distressed inventory, like my three friends who filed BK in 2008, trickle out onto the market ever so slowly from now until 2020. This strategy is working well for the banking system but it’s getting to the point where there cannot always be a greater fool to buy a house at unsustainable prices. At some point, the market maxes out and prices start to decline as potential buyers simply stop looking for a home. They drop out of the market and wait for things to cool off. When that will happen, I have no idea. But I think at some point in the next few years, people will just quit looking and wait to buy during the next market correction when The Fed, Treasury, US Government, and financial system implement new measures in response to the excesses caused by their programs and measures during the crisis of 2008-2009.

Until then, enjoy this period of relative housing market “health” and have a nice day.