Why the Pacific Northwest housing market will continue to inflate

What is causing the housing bubble in the pacific northwest, namely Portland Oregon and Vancouver wa? The short answer is that there is no bubble. However, as is true in most of life’s circumstances, there are different forces at work which could lend themselves to a collapse.  Or as the finance “experts” call it, a market adjustment.

Firstly, it is worth noting that the practice of mark to market accounting that brought the housing market down, like a poorly constructed house of cards in 2008, is no longer allowed in the mortgage backed securities industry.  Nor is it allowed in the energy, or oil industries where it originated.  The flight of capital in to the energy industry started in the mid 1980’s.  It was brought about as deregulation, under the Bush administration, allowed energy giants most notably Enron, to claim profits on 10-20 year energy contracts on date of promise.  That is to say, I promise to sell you $10 million of oil over a 20 year period.  So I claim it on my balance sheet for today.  Of course I do not have the ten million, and you may go bankrupt.  I also do NOT count inflation, after all ten million in twenty years may not be what it is today! So the market distortion amplifies as time goes on. This is why Enron posted the most reliable, and impressive gains of any company in modern history.

This was not lost on the mortgage industry experts.  They saw an opportunity, so they too lobbied for a change in accounting practices.  Their prayers were answered, and in the 2000’s up went the housing market! It roared! Lending practices relaxed, and few people, if any noticed that the contracts for mortgage revenue streams forecast over thirty years were being put on present day balance sheets! How could profits be claimed on the date of sale? After all, couldn’t that stream default? The mortgage industry disagreed.  The interest revenue was NOT guaranteed……. To be clear Mark to Market Accounting is a great thing, for the stock market, and most fluctuant assets.  However, housing, is NOT a fluctuant asset….at least it probably shouldn’t be.

As the mortgages began to default in the recession of 2008, the bubble popped………..the profits had been tallied, and put in the companies’ portfolios….but the problem was, just like Enron, the accounts were empty! POP went the bubble.

Mark to market accounting was, thankfully removed from use in the mortgage industry in 2008, right after the worst of the collapse when the market hit rock bottom. Lending practices, for loans given out by Uncle Sam through the FHA and Fannie may and Freddie Mack were tightened up, and several other practices were changed. The market floundered for about 7 years, and then started to revive.

What does that mean to the PNW? As noted, the practices that lead to the last collapse have been vanquished. Why then, are the prices in the Portland metro area over 100% what they were in 2008? The answer, is a collar placed on development. The zoning regulations, and urban growth boundary GMA’s put in place have created an artificial inflation in the price of dirt. Dirt is expensive, and impact fees are high. In some areas in rural Clark County Washington fees before the start of development are over $69,000.  This leaves a slim margin after the lot has been purchased for $120-200.  For that reason development is slow, the inventory is small, and prices are high.

While all of the restriction has created unprecedented pressure on the market, there has also been an influx of immigration from areas, like san Francisco where a nice three bedroom two bath home is 1 to 2 million dollars. To these people, many of whom can cyber commute, the livable communities of the PNW and low cost of housing, for only $500K they can get a nice home in Portland, is irresistible. Portland Oregon welcomes more than 5K people per month, while at the same time it opens only 3,500 units per month for housing. The discrepancy is obvious, and the influx has created a market where overbidding for a home is the norm, in most cases by 20%!

Unless GMA’s and GMB change, or are expanded, it is very unlikely that this trend will slow, or abate. From political news, it is clear that neither side of the Columbia River is in any way interested in changing growth boundaries, and so it is this author’s opinion that the unprecedented spike in housing prices will continue until market supply meets demand.  At the present rate of permit issuance vs population influx, it is unlikely that that balance will be reached any time soon.