Portland’s Rent Growth and How It’s Changing Home Buying

Last night I had the chance to attend a quarterly real estate presentation hosted by Perkins & Co., a local accounting firm. The topic was Multi-family housing development featuring Clyde Holland with Holland Partner Group.   First off I have to say that Clyde Holland is a very engaging and authentic speaker. He gave a presentation of number based facts that didn’t bore anyone in the room for over an hour. I would say that the room was filled with mostly real estate developers, both large and small. One of the most interesting ideas that Clyde presented is that the millennial generation (people born between 1980 and 2004 approximately) will on average do things 5 years later than their parents did. I can say that I am right on track to be 5 years behind my parents on the whole shebang, marriage, children and most notably home ownership.   I bought my home in 2014 when I was 30 years old while my parents were quite a few years younger.

Looking to more numbers, Clyde noted that the highest rent growth in Portland was in 2015. Normally there is a trend of rental rate increases during the year from January through to October. The last quarter of the year there is normally a reduction in rental rates as less people are moving and vacancies are not likely to change much. Something very notable happened in Portland rental rates in 2014 and 2015, there was not a reduction in rates in the last quarter of either year. The demand was so strong that rates did not need to change. We looked at research that showed a strong correlation between wage growth and rent growth. Then we looked to tech wage growth. In some of the strongest tech cities, Portland, Seattle, Denver and San Francisco the wage growth far surpassed the rent growth. Tech workers are able to pay a lot more in rent and multi-family developers are spending a lot of money to market to them. Clyde stated that in his opinion 2015 to 2020 will have the strongest rent growth in history in Portland and the west coast. He did share his idea that there will be a decline right after the Presidential election in November and an opportunity for better purchasing power for those looking to buy multi-family housing.

Holland Partner group is looking actively around Portland for new areas primed for multi-family development. They are concentrating on new transit stops where there is opportunity to create energy and density. Holland is behind the hugely successful Orenco Station development in Hillsboro. They have found that the number one amenity renters are looking for is social interaction. The developments they work on focus on high density, community gathering areas and retail.

How does this relate to home purchases in Portland? There are a number of ways the rental and multi-family markets effect home purchases. If you aren’t a tech worker or a higher wage earner saving can be an issue when your rental rates are so high and continue to climb. This limits savings for down payments and may make building or repairing credit difficult. There is also a shortage of inventory for single family homes in Portland. Multi-family developers are purchasing detached homes on normal sized lots and building rental buildings with up to 70 units. This practice uses up lots that may have had single family homes built on and lowers single family home inventory.   The catch 22 is that there is a shortage of both single family homes and mulit-family homes in Portland right now. During the recession building all but stopped in both arenas. This has left a huge shortage and builders have not been able to catch up to the demand.  At the end of the evening Clyde left us with a quote that I think is spot on and our local government needs to take note, “Unless you have adequate housing you won’t have affordable housing.”

Why Is My House Worth $500,000?

This past week I had a client email me with a really interesting concern. She said she was looking at one of the websites like Zillow or Redfin and her house was valued at $500,000. She seems shocked at the high value and a little bit concerned about this discovery. Most people would be happy to see their home value rising so much. I will say that her home is in a very popular south east neighborhood, has nice updates and is a very typical 3 bedroom, 1 bathroom, Portland bungalow.

I responded to her email with a conversation that I seem have nonstop with both clients and other Realtors. One of the main factors driving prices is inventory.  Portland has the lowest inventory in months (1.2 months when 6 months is a healthy market) that we have had in the past 20 years.  Our density is increasing, but not at a rate to sustain the number of people moving to Portland.  Builders are having trouble finding areas to build single family homes and all of these issues are pushing prices up.  The past two contracts I wrote with a client had 25 competing offers and 5 competing offers.

On her end, or with any seller, it doesn’t make sense to sell your home even with the high value if you plan to stay in Portland (without downsizing or trading up) because you will have to find your new home in this very difficult inventory situation.  On the other hand, if you are a seller right now you can pull a lot of appreciation out of your home to trade up or downsize and do something else with the value. I do not see the inventory increasing substantially in Portland anytime soon, so the competition will continue to be strong with buyers and home values will continue to push upwards. Interestingly, I just looked at her home value on Zillow and it is $592,000 now. That may not be market value, but it is another indicator of the direction we are headed in Portland prices.

The Importance of Home Inspections

Once a buyer is under contract to purchase a home we begin the process of inspecting the home for any necessary repairs. This can range from small items such as an outlet that doesn’t work to a full roof replacement. It is so very important for buyers to have inspections done on their potential home to avoid any large, unexpected repairs after closing. With detached homes there are a number of inspections that I recommend to get a full look at the home.

The first is a general inspection. This is done by a local home inspector. He or she will come to the home and take a look at all of the large systems in the home such as the furnace, water heater and roof. They will also visually inspect the plumbing and electrical work in the home. This inspector will check for any evidence of leaks in the home and things such as dry rot and mold. After this inspector has completed their report we will know if any further inspections are needed from a specialized technician.   For example, if the inspector notices a leak or crack in the furnace we might have a licensed HVAC technician come out to assess the issue and if any repairs are needed.

The second inspection I recommend is a sewer scope. This is a very common inspection to check the entire sewer line from the house to the street for any cracks or leaks. Most of the time, if there is an issue it will be a root from a nearby tree growing into the line or a small crack from age. During this inspection a small camera will be run from the sewer line at the house to the street to check for any problems with the line.

The third inspection I recommend is a radon level test. Radon is a naturally occurring gas that can cause cancer. There are areas in Portland, especially the north east, that have historically high levels. (See the Portland radon map here https://public.health.oregon.gov/HealthyEnvironments/HealthyNeighborhoods/RadonGas/Documents/2015%20Maps%20and%20Zipcode%20Data/Radon_Map_2014_PortlandMetro.pdf) This inspection is done over a 48 hour period. The home must have closed conditions for 12 hours prior to starting the test through the full 48 hours. A device is placed in the home to track radon levels over this period of time and find the average level of radon pCi/liter. The EPA suggests an average level under 4 pCi/liter does not need radon mitigation and any average over 4 should be mitigated. New construction code now requires a passive radon mitigation system be in place upon completion and in older homes with high levels a mitigation system is usually easy to install.

The fourth inspection I recommend if the home was built before 1965 is an oil tank scan. Homes built before 1965 were likely to have used oil heating at some point and checking for an underground tank is recommended. Many homes that did use oil heating have since been converted to gas heating, but the underground tank may not have been decommissioned properly. A leaking underground oil tank could cause soil contamination and be a health risk. An inspector will come out to scan the entire property for evidence of an underground tank. If one is found the next step is to check soil samples to find out of leaking has occurred. Decommissioning an oil tank will require a bit more investigation to find the extent of any contamination and decide on the best way to remove or fill the tank.

These are the main inspections recommended for a detached home in Portland. There may be other inspections required after the initial ones, but this is a good start to protect yourself when purchasing a home.