There is some speculation locally that real estate market conditions are changing and that the market may be “slowing down.” One of the truest dynamics of the market, however, is that it’s constantly changing.
There were four changes to the prime interest rate in 2018, ultimately moving from 4.75 percent to 5.5 percent. Some people believe that when interest rates increase, home values tend to fall somewhat, all other things being equal. This assumption is based on the fact that the majority of real estate transactions use a mortgage to handle a large percentage of the purchase price; however, a percentage of the purchase price is almost always allocated to an equity position.
In the past, the rates of return on equity positions have been very good. Borrowers have to live with the recent interest rate increases, but the returns on their equity can be lowered, and in essence the prices paid for income properties can remain stable or continue to increase.
At the start of the Great Recession in 2008, many areas in Oregon were hit hard. In general, housing prices plummeted because of an oversupply of properties and a lack of purchasing power and demand.
Locally, housing supply and demand were more in balance, fortunately, and we did not see the substantial decreases in property values as experienced in other geographic areas of Oregon.
Lane County continues to have a very limited supply of available properties for purchase, and as such, many investors will continue to pay reasonable prices for the opportunity to own an income property and perhaps take less of a return on their equity. Our metro area will continue to attract people who want to live and invest in our community.
Certain sectors of investment property are lagging behind others due to factors mostly outside our immediate area. Retail has slowed and continues to be challenging in certain market segments. Industrial construction is underway because demand for industrial buildings continues to outstrip supply. Offices may be finding it difficult to cost-out new construction, but the continued increases in rent are narrowing the gap between that cost and the economic sense of building new.
We may continue to see construction costs rise because there are hundreds of millions of dollars for projects on the horizon, such as, The University of Oregon’s Knight science center; the renovation of Hayward Field; and the renovation of Eugene schools, thanks to the school-bond measure that passed in 2018. These projects don’t require financial feasibility. Cost is the driver for all these projects, not whether they can command enough rent to justify construction. As such, the pressure will remain on construction costs, complicated by a limited supply of skilled workers and a strong demand for certain material supplies.