Is the Oregon way fueling higher housing costs?

The second-quarter Central Oregon Business Index “points toward sustained economic growth in Central Oregon,” according to Tim Duy, professor of economics at the University of Oregon.

“There’s no reason to think this economy is going to turn against us anytime soon,” Duy said in an interview Wednesday. “The region has really rocketed out of the recession in a very dynamic way.”

The index, which Duy calculates from nine variables, rose by 1.6 percent in the second quarter to 142.6, measured against a benchmark of 100 in 1998.

Compared to the second quarter of 2016, the index is up 5.2 percent.

If the recovery has any downsides, one is the inability of developers to keep pace with the demand for new housing. Housing sales, one component of the index, were relatively brisk in the second quarter at 453, seasonally adjusted. The number of building permits issued in Deschutes County, also seasonally adjusted, stood at 147, down from 212 in the first quarter, according to the index.

Higher home prices are one result of supply falling short of demand for housing. The median sales price for a single-family home in Bend reached $413,000 in July, according to the Beacon Appraisal Group in Redmond. That same month, the median for a home in Redmond reached $306,000, a 17 percent increase over July 2016. During the run-up in housing prices prior to the Great Recession, home prices in Redmond peaked in November 2006 at $289,000.

Demand is one function of rising home costs; the increasing costs of labor and materials, such as lumber, are another. The cost of land is also rising in Bend. Duy attributes that, in part, to a scarcity of land caused by a glacially slow process for approving development — for example, it took years for Bend to expand its urban growth boundary.

“If there’s a gray cloud above, I would say it’s not even clear to me that Oregon land-use laws and planning structures and processes are really capable of dealing with really fast growth,” Duy said. “Are you really able to provide services quickly enough for the population, to provide traffic accommodations? And there’s the housing question.”

The state Land Conservation and Development Commission, established in 1973, created a state-level system of land-use planning and goals for counties and municipalities across Oregon. Duy asked whether the system — under which Bend in January received permission, after years of wrangling, to expand its urban growth boundary by 2,380 acres — is designed to cope effectively with rapid growth. The next step involves city-level land-use planning for building and paying for waterlines, sewers and roads in those areas and eventually annexing them into the city.

“The (urban growth boundary) gets to the point of this,” Duy said. “It’s great to make those moves eventually, but the time scale is often out of whack. The time frame is often inconsistent with the ability of people to move into the region.”

Bend Mayor Casey Roats agreed. The framers of Oregon’s land-use policies 44 years ago did not anticipate the “tremendous amount of growth cities like Bend would face,” he wrote in an email Wednesday.

Beyond the legal framework, today’s economic realities outstrip those of the 1970s. A mill worker then raised a family on a wage considered entry-level today, Roats said in an interview Wednesday. Bend’s popularity contributes to rising home values, which, coupled with slow growth in wages despite a booming economy, puts homeownership beyond the grasp of many working people in Bend.

Oregon land-use planning, Roats said, complicates progress by affording opponents of change an easy, low-cost ability to contest land-use decisions.

“It has the practical effect of adding delay and cost to projects when housing is already far too expensive for the majority of people who work in our community,” he wrote.

Luke Pickerill, a developer, owner of MonteVista Homes and incoming president of the Central Oregon Builders Association, said much the same. A “constrained land supply” in Bend, along with a slow-moving planning process, creates prohibitive costs for builders, he said. Consequently, homes priced at a level young families or workers making the median income in Deschutes County can afford have become scarce.

“The middle-market in Bend is nonexistent these days,” Pickerill said Thursday, “and a good portion of it has to do with the regulatory environment.”

A family with an annual household income of $64,000, the median household income in the Bend-Redmond Metropolitan Statistical Area, should be able to afford a home worth 4.5 times that income, or $288,000, he said.

In Bend over the year ending in July, 426 homes sold for between $250,000 and $300,000, according to the Beacon Report, the second-most active sales category the report describes. More homes sold, 456, for between $300,000 and $350,000 than in any other Beacon price category.

But Pickerill said that building a $300,000 home is becoming increasingly difficult unless the developer can scale up and leverage costs.

The price of land along with system development charges imposed by the city, which pay for sewers, streets and lighting, for example, and rising costs of material and labor are pushing home costs higher, he said. He said most newly built MonteVista homes are going to new arrivals to Bend, including retirees and downsizing couples.

“We’re still going to build 30 or 40 units in Bend” this year, Pickerill said. “But our margins are slipping because we’re paying an increased price for land.”

Jon Skidmore, assistant Bend city manager, said Oregon’s land-use policies came into being at a time when the federal government picked up more of the cost to build water and sewer systems than it does today. As a result, infrastructure costs, which are mostly paid by system development charges , are a “conundrum,” he said.

But rising development costs can be reduced somewhat by infill development — by building up rather than out, in places in the city where water, streets and sewers already exist. That’s why the city created nine “opportunity areas,” including the former KorPine site along SW Industrial Way, and the Central District bordered by Fourth Street, Franklin Avenue, the Bend Parkway and Revere Avenue, two areas where infill would not impact neighborhoods, he said.

“This is new territory, in some instances, for the city as well as our development community,” Skidmore said Thursday. “Developers have been good at building greenfield residential developments. Now the transition to the built product will be different, the cost of getting infrastructure to these sites will be different. To fill the gaps, we’ll have to be creative.”

Paul Dewey, executive director of Central Oregon LandWatch, an organization that both challenges and participates in Bend’s conversation about growth, said Oregon’s unique land-use planning process has done what its authors intended.

“I have to really disagree with Casey that the system isn’t working,” Dewey said Friday. “It seems the land-use system anticipated exactly what we’re dealing with here. The big obstacle is lack of infrastructure, particularly sewer infrastructure. The beauty of the system is that it requires planning for that in advance.”

Even if state and civic authorities solved the question of financing public improvements without driving up building costs, if builders found a sudden supply of subcontractors and the cost of building materials quickly dropped, Bend’s proximity to an attractive natural environment will continue to bring newcomers, he said. The goal of containing the cost of living will not disappear, but can only be managed in response to underlying economic factors, said those sources interviewed for this report.

“If you’re going along at 2 percent growth year after year, many locales in Oregon are able to deal with that, as long as they’re growing slow enough to mask the planning process. For the most part, we’ve been able to manage over time,” Duy said. “It’s when you have that pace of growth that’s above average that you can see a problem.”

— Reporter: 541-617-7815, jditzler@bendbulletin.com

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