“We Got Lucky”
Oregon Well Positioned After Housing Bubble Bust
It’s mid-spring in 2008. Bear Stearns has just collapsed, Citigroup has written off assets valued roughly at the GDP of Ghana and Michael Kennedy, senior economist for the State of Oregon, sits at a table, eating lunch and talking excitedly.
“Oregon fared worse in the last bubble than the nation because we were more exposed,” he said. “But in this one, Oregon’s going to be fine.”
He’s talking, of course, about the latest economic slowdown. The housing market bubble has burst, triggering a meltdown in the financial industry as institutions exposed to sub-prime mortgage-backed securities shed value.
“It’s important to contextualize this bubble in terms of the last one,” Kennedy said. He said Oregon’s economy was slammed following the 2001 stock market collapse due, in part, to its dependence on the tech industry and a 25 percent drop in state income tax revenues.
That drop in income tax revenues was near fatal to the state, which is Oregon’s largest employer with about 51,000 jobs. The lost funding resulted in massive cuts to state programs, compounding the economic hit for Oregon. The state had a period of unemployment rates in excess of 6.5% from July 2001 to February 2005, according to the Bureau of Labor Statistics.
While people still had money, they were reluctant to invest it in the market, Kennedy said. To kick start the economy, the Federal Reserve lowered interest rates. That action, in turn, sparked lower mortgage rates. Then came a creative way to package that mortgage debt. Suddenly, the people at the margin – the ones who fell short of being able to afford purchasing a home – now started buying homes. “Demand goes up, supply is fixed, so prices go up,” Kennedy said.
Those investors who were still holding on to their money saw the housing market taking off, with impressive investment returns, so money started to flow there – further driving up house prices.
Developers around the country rushed to develop land into new housing. Oregon, however, has a strong history of land use planning and state law limited the rate of housing development during the recent housing boom. Kennedy summarized the results, “We were less exposed.”
Kennedy’s explanation of Oregon’s position revolves around two key facts. The first is that, with Oregon hit so hard by the 2001 economic recession, the state’s economy hadn’t bubbled with the rest of the country. In fact, he said, Oregon had just about caught up (both economically and in terms of housing) when this latest bubble burst. Secondly, Oregon’s tax structure wasn’t set up to take advantage of a housing boom, which meant a sudden slowdown, or drop, in building and sales wouldn’t affect the state’s budget.
While Oregon had unsustainable growth in some housing markets, Kennedy said the state wasn’t exactly “ground zero” for the housing collapse. “Bend and Medford? Yeah, but they’re not our primary housing markets,” he said. “They’re not L.A. or Las Vegas.”
“Were we brilliant,” he asked, rhetorically. “No. We got lucky.”