Hidden Factors Driving Central Oregon’s Home Prices
It is a common concern for most Central Oregonians that housing is far too expensive. Unfortunately, there are dynamics at work that many folks do not completely understand. Let’s take a look at a few specifics around new homes and then how it impacts the broader housing market.
There is a common refrain that new development should “pay their fair share” through System Development Charges (SDCs). The problem with this thinking is that the law that created SDCs was passed in 1989. Any home built prior to that date literally paid zero. According to the Oregon Office of Economic Analysis, roughly 70% of our housing stock was built prior to 1990. So, 30% is paying for 100% of the cost.
Oftentimes, funds collected through SDCs are used to update old and outdated infrastructure, such as clay sewer pipes. Thus, compelling new development to pay to fix problems that predate their use.
The City of Bend is currently considering a 55% increase in SDCs. It will be spread out over six years. Which would be helpful, but for the fact that it is compounding interest. 10% for each of the first five years, then 5% in the final year. So, the actual SDC increase will be 69.1%. A reasonable observer is left to wonder “What organizations other than government entities or monopolies can increase their charges by 69.1% in that short of a timeframe?” A free market would refuse to pay and find less expensive alternatives.
Building codes are far more restrictive than 30 years ago. Homes are far more efficient, which is a really great thing for the environment and our planet. However, it has drastically increased the cost of building a new home. 2×6 exterior walls, vinyl windows, thicker insulation, moving furnaces within the home instead of in the garage, etc. All have improved efficiency but it comes at a price. Other code changes have increased the cost of homes, without directly helping with the efficiency of the home, such as requiring electric vehicle plugs in every new home.
The 1% Corporate Activity Tax (CAT) passed in 2019 is probably the single biggest driver in the cost of housing. It was written to exclude the cost of a home but it did not exclude any of the components that go into a new home. Again, compounding interest raises its ugly head. The best example is lumber. When a landowner sells off their trees, they pay 1% to the state, the logger pays 1%, the trucking company pays 1%, the mill pays 1%, the trucking company again pays 1%, and the lumber yard pays 1%. From the forest to the jobsite the end product is taxed 1%, six times.
Builders cannot absorb all of these costs; they would go bankrupt. Generally speaking, a builder must project at least a 10% profit to get a bank to loan them money for the project. All costs for the project must bear the 10%, including cost inputs from government fees and regulations.
Which brings us to the most commonly overlooked issue.
The housing market and Appraisers specifically, do not value new homes higher than the existing housing stock. Equal-sized homes in the same area are comparable values. So, a home built in 1989, that paid zero SDCs, has no environmental code updates, and paid zero in CAT taxes is valued the same as a home that paid for all of these things. A rising tide takes all boats, so to speak. If anything, the older home is valued higher because it likely has a larger home site because government has tightened density requirements.
All of these government related cost components are charged to builders (and buyers) of new homes while being gifted to the sellers of existing homes as unearned equity. When it comes to the cost of housing, “paying their fair share” may not mean what many folks think it does.
