This article originally appeared in the July 22, 2022 edition of the Daily Journal of Commerce Oregon.
Across the nation and in Oregon, the housing crisis remains a top concern. Construction of new housing over the past 20 years has fallen 5.5 million units short of long-term historical levels, according to a 2021 report by the National Association of Realtors. From 2010 to 2020, new-home construction fell 6.8 million units short of the minimum projected units necessary to meet household formation growth and replace units in the nation’s aging housing inventory.
Limited supply has been a recent driver of rising housing prices for renters and homebuyers, alongside robust demand. Nationally, the median existing-home price rose 19 percent from a year earlier to $341,600 in April, a record high. Oregon’s median home value rose to $509,539 in May 2022; that was an increase of 19.7 percent from the same time a year earlier. And the average cost of buying a home across the state is projected to continue to rise. In Portland, the median sale price for a single-family home in June was $575,000.
As median home prices continue to rise, homebuilders are struggling to keep up. Builders looking to expand to meet booming demand for new homes are constrained by the number of lots ready for construction. Acquiring and preparing land for new-home construction can be a lengthy process, especially within the Portland metropolitan area, where development is constrained by the urban growth boundary.
Developers often acquire land long before homes are built, and regularly spend years in the entitlement process working to obtain permits and install infrastructure such as water, sewer, and roads prior to preparing the lots for sale and construction. The scarcity of developed land in urban areas across the state means builders are unable to meet the ongoing demand for new housing.
The housing supply shortage has become especially acute in the past year. Due to the COVID-19 pandemic, developers have delayed certain land purchases and development projects. In addition, low mortgage rates and an increase in remote work led to a surge in demand for single-family housing. Even with interest rates on the rise, July’s 30-year fixed mortgage rate of 5.82 percent remains well below historic averages.
Builders in recent years have also been forced to deal with wildly fluctuating prices of lumber and other building materials. More than 90 percent of homebuilders surveyed by the National Association of Home Builders in May 2021 reported shortages of appliances and framing lumber. Undeveloped land prices have also increased in and around urban centers, where demand is highest. And labor shortages continue to present challenges for builders trying to bring new housing to the market.
Recognizing the inherent volatility of market conditions affecting developers and homebuilders, many jurisdictions have turned their attention to restrictive zoning codes that have historically limited new construction and impeded densification, suppressing housing supply even as demand rises. Whether by limiting the heights of new buildings or prohibiting infill and densification in the single-family zoning districts, zoning restrictions often make construction more difficult and expensive. Ultimately, advocates across the political spectrum feel that state and federal governments should promote more policies that create affordable/attainable housing.
In 2019, the Oregon Legislature passed House Bill 2001, which was aimed at providing Oregonians with more diverse and affordable housing choices. HB 2001 made it easier to achieve greater density in residential zones by requiring Oregon’s “medium-size” cities to allow duplexes on each lot or parcel zoned for residential use that allows single-family homes by June 30, 2021. Additionally, by June 30, 2022, Oregon’s “large” cities (those with populations exceeding 25,000) and cities in the Portland-metro region must plan for middle housing by allowing development of duplexes, triplexes, quadplexes, cottage clusters and townhouses in residentially zoned areas.
Under HB 2001, cities will continue to set reasonable siting and design requirements for all housing built in residential zones, and will be able to ensure that new housing is built with adequate infrastructure. As of July 2022, most jurisdictions across Oregon have amended their development codes to comply with HB 2001’s mandate to allow for middle housing and increased densification in residential zones.
Although HB 2001 has the potential to dramatically alter Oregon’s development landscape, the transformation of housing choices will be gradual. While many cities in Oregon have allowed some types of middle housing in certain areas for decades, there has often been little interest from developers. New construction of middle housing will remain dependent on local housing markets, with smaller-scale local builders and contractors taking the lead.
While HB 2001 paves the way for greater density in urban areas, development of middle housing will remain constrained by lack of adequate infrastructure in certain areas. Some observers also fear that HB 2001 does not address potential land use conflicts – including the elimination of off-street parking requirements and variable property values – as a result of middle housing projects coming online in traditionally single-family neighborhoods. And affordable housing advocates have voiced concern that HB 2001 may not address the need for true affordable housing, instead creating an environment for institutional buyers to develop middle housing in high-end neighborhoods and rent out units at high price points.
Ultimately, HB 2001 represents a concerted effort from the Oregon Legislature to address the affordable housing crisis. Still, Oregon has underbuilt housing by 111,000 units in recent decades. Nationwide, projections indicate that builders will need to exceed the long-term historical average pace of 1.5 million units a year to catch up to demand. Even building at 2.1 million units a year, near the level reached in the housing boom of 2005, it would take a decade to close a gap of 5.5 million units.
In Oregon, the effects of HB 2001 are yet to be fully understood as the deadline for large cities to update their development codes recently passed. The development industry must continue to adopt innovative strategies to address the ongoing demand for new housing, and HB 2001 provides one tool for doing so.
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