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Real estate is all about “location, location, location” as the saying goes and lately, Portland is the place to be. One of the strongest markets nationally, prices have risen 10.3% over the last year compared to 5.1% nationally, as measured by the Case-Shiller Home Price 20-city composite index. In fact, among the metro areas measured by the 20-city index over the last 12 months, Portland was only topped by our neighbors to the north in Seattle which saw prices rise by 10.7%. Portland had led the way nationally for the previous eleven months.
Whether you’re actively in the market to buy or sell or simply watching the listings in your neighborhood, most people have noticed how hot the Portland market is right now. Seemingly everyone has heard a story from their sister/neighbor/colleague of multiple offers, above listing price, in the first weekend their house hits the market. I’ve heard of realtors lining up weekend showings on four of five houses only to have a couple of them go pending before they can reach the property with their clients.
Consequently, clients often ask for our take on the real estate market. How much longer can prices continue to climb at this rate? Are things about to crash? So, let’s take a look and check in on the Portland real estate market. (And for those outside of Portland, stick around. There are some national trends reviewed as well.)
Like any other market, the fundamentals of housing are determined by supply and demand. So, we’ll check-in on the supply side first, followed by demand, then look at affordability and where we go from here.
Supply
Part of the reason for the strong real estate market in Portland is a lack of supply driven by the slow bounce back in new residential construction since the great recession. Housing data are often lagged (the data below are about nine months old) but still useful. As can be seen, except for Multnomah county, building permits have yet to reach their pre-crisis peak. 
This mirrors a slow rebound in construction activity nationally, as seen in the next chart.
This lack of new residential construction activity serves to keep the inventory of homes for sale low. According to a recent report from the Oregon Office of Economic Analysis, “Inventory remains near historic lows.” But, it does show signs of turning due to some big projects in the area. From the report:
Inventory remains near historic lows. There is simply not enough houses for sale and thus a sellers’ market. That said, inventory has risen just a hair in recent months which is a positive indicator. This increase is not nearly enough, and prices (based on buyer and seller expectations) do not adjust immediately. However should inventory continue to increase — and it likely will with big projects like South Cooper Mountain, South Hillsboro and new construction in Clark County coming online — then better market balance is to be expected.
And again, regarding inventory, the story in Portland is similar to the housing market nationally. Nationwide the current inventory of homes for sale is around five months vs. a long-term average a little more than six months.
And while inventory is picking up somewhat, changes in supply take time—especially in areas, like Portland, with restrictive land use laws. The City Observatory, in an article titled In Some Cities, The Housing Construction Boom Is Starting To Pay Off, puts it as follows:
But supply changes slowly, because it takes time for developers to recognize that demand has changed—and then it takes time to design, permit, and build new capacity. This is especially true in places with restrictive land use laws. But when supply eventually responds—as it has in several of these markets—rent increases moderate, and in some cases rents even decline.
Demand
What about on the demand side? Here we have two considerations: population changes and income changes.
In terms of population growth, this is where Portland varies from the national trend. Portland Metro is one of the faster-growing regions nationally adding from mid-year 2014 to mid-year 2015, 111 people per day. And the growth is expected to continue with “More than 400,000 people…expected to move to the Portland metro area over the next 20 years, increasing the region’s population to 2.7 million.”
On the income side, wages are rising which should continue to support the housing market. 
Affordability and where we go from here
So, where do the supply and demand dynamics of the Portland market leave us? Given the slight pick-up in inventories, new projects coming online, and steady wage growth, the Oregon Office of Economic Analysis expects affordability to flat line from here—don’t expect housing to get cheaper but don’t expect big price increases either. They write:
What I really mean is that affordability will stop getting worse. This goes for both ownership and rentals. Now, it may not improve considerably for some or even most households. And I do not expect affordability to suddenly return to previous levels, but it does mark a step in the right direction. A necessary but insufficient condition, if you will.
And as can be seen in our last chart, which shows home prices in Portland (using the Case Shiller indexed prices not sales prices; e.g., index value of 100 may equal a sales price of $250k) divided by median household income in Multnomah country, home prices have climbed as a percentage of income but are nowhere near the peak reached in 2006.
So, should you expect the hot Portland real estate market to continue? Given the strong dynamics on the demand side (income increases and population growth) and the fact that prices aren’t massively stretched compared to incomes, it doesn’t look like we should expect a crash anytime soon. But, with inventories starting to pick up and new projects in the works, maybe we don’t see prices increasing as fast as they have over the last few years and we let another city take the mantle as the hottest market nationally.
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