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Housing market is a year behind

PORTLAND TRIBUNE: JAMIE VALDEZ - Renaissance Homes is once again building new family family homes, like these in Milwaukie.State Treasurer Ted Wheeler and Portland State University Associate Professor Gerard Mildner questioned the City Council’s recent strategy for increasing affordable housing spending during a large gathering of homebuilders on Friday.

Wheeler and Mildner both said much more affordable housing is needed in Portland area because incomes are not keeping up with skyrocketing housing costs. But Wheeler said buildings constructed with city funds are much more expensive than those built without them. Mildner challenged the entire concept of building subsidized housing in urban centers, saying governments should encourage the construction of low-cost apartments in suburban areas.

Wheeler and Mildner were among the speakers at the 2016 Housing Forecast presented at the Oregon Convention Center by the Home Builders Association of Metropolitan Portland. It attracted around 500 participants, including developers and others in the residential construction field, such as suppliers, bankers and real estate lawyers.

Affordable housing was not the main topic of discussion, but almost every speaker mentioned it because housing costs are increasing twice as fast as incomes in the Portland area, prompting the council to recently declare a “housing emergency” and authorize hundreds of millions of dollars for additional affordable housing cost over the next 10 years.

Wheeler, who is running for Portland mayor, said government should work with the private sector to build affordable housing in a “less costly and quicker manner.” He said affordable housing projects built without city subsidies can be completed for half the cost in one-third of the time.

Developer Rob Justus, who has a social service background, has proven this by recently constructing an apartment building for a little under $65,000 per unit. Built for the nonprofit Portland Habilitation Center at Southeast 171st Avenue and Division Street, its 78 one- and two-bedroom units rent for $395 to $775 a month.

In contrast, most publicly-funded low-rent apartment buildings cost $200,000 or more per unit. Part of the difference is, publicly-funded projects require developers to pay so-called prevailing wages to workers, which are traditionally close to union wages. Also, Portland and some other governments require them to be built to LEED energy-conservation standards.

The new D. Street Salal Apartments are also smaller than some of the newest affordable housing buildings in the most urbanized parts of Portland. Mildner told the crowd that size matters when it comes to construction cost, with one- and two-story “garden apartments” being the least expensive type of housing that can be built. They can cost 25 percent less per square foot than four- or five-story wood frame mid-rise buildings, Mildner said, and half as much as taller high-rise buildings, which require steel frames.

But garden apartments can’t be built in city centers, Mildner said, because the land is too valuable and development fees are too high for them to pencil out. Instead, Mildner said governments should encourage them to be built in less expensive suburban settings, even if some agricultural land must be sacrificed.

“Most families under the poverty line don’t live in subsidized housing, they live in market rate housing,” said Mildner, who is the director of the Center for Real Estate at PSU. “If we want affordability in our communities, we need more suburban land.”

Commissioner Steve Novick, who attended the forecast, agreed that building anything downtown is expensive. He expressed interest in the construction of more duplexes, triplexes and other forms of lower-cost compact multifamily housing types in existing neighborhoods — some of which are discouraged by existing building codes.

Mildner is considered a contrarian within local government planning circles, and his ideas do not carry much weight with most elected officials in the Portland area. Metro, the elected regional government, is widely expected to vote Nov. 12 against expanding the urban growth boundary where new development can occur. And the council is preparing to consider the recommended Comprehensive Plan update that calls for greater density in downtown, in designated urban centers, and along major transportation corridors.

Other speakers at the forecast included Dr. David Crowe, chief economist and senior vice president for the National Association of Home Builders, and Josh Lehner, an economist with the Oregon Office of Economic Analysis.

Lack of supply meets high demand

Despite the housing affordability problem facing many people in the Portland area, the regional economy has recovered enough since the Great Recession that the news was mostly good for those at the 2015 Housing Forecast. According to Lehner, Oregon has now recovered more than all of the jobs lost during the economic downturn, and the state is now outperforming the nation economically. This is especially true in the Portland area, Lehner said, which is now the second hottest job market in the country.

“It’s a brighter outlook than last year,” Lehner said.

In fact, the economy is so good that many people are moving here for work, Lehner said, which is pushing up housing costs because the supply is not keeping up with the demand.

“We’re about a year behind where we should be, because building stopped during the Great Recession,” Lehner said.

Multifamily housing has recovered the most, as evidenced by all the apartment buildings that are under construction or recently completed in Portland. But permits for single-family houses are also increasing in the region, primarily in Washington and Clackamas counties, where some large tracts of land are still available.

Crowe predicted the Portland area will return to 60 to 80 percent of normal single-family home construction levels by 2017, when the availability of buildable land could become a problem. If that can be overcome, he predicted steady growth in the future because millennials — the large demographic block between 18 and 34 — are forming households and starting families.

“Household formation has been higher in recent quarters. The building block of a household is a house,” Crowe said.

A number of factors are likely to temper new home sales for years to come, however.

Lehner and Crowe both agreed that millennials are renting longer and starting families later than previous generations, which should support increased multifamily construction for many years, too. Also, many millennials have high levels of student loan debt, which makes it hard to qualify for a mortgage. And few new middle-class jobs are being created. Most are either low-wage service sector jobs or professional jobs paying $75,000 or more.

“I call it job polarization. There’s a lot of growth at the high end and the low end, and not much in the middle,” Lehner said.