(Graphs courtesy of Washington Trust Bank)
As 2025 gets underway, the national economy is on firm footing. Oregon’s economy is weaker than the US, but still positive: 2.7 percent year-over-year growth for U.S. in Q3 2024 vs. 1.2 percent year-over-year growth for Oregon. Similarly, the Bend area lags behind the state in job and labor force growth but is seeing healthy gains in wages. At a macro level the economy is strong, but as a retirement and tourist destination, central Oregon has some headwinds when it comes to workforce affordability and finding workers to meet business growth demands.
Short- and long-term interest rates diverge
As 2024 wound down, the consensus was that the Fed would continue to make rate cuts in 2025. While that’s still the case, recent data such as the jobs report and inflation remaining above target is likely to reduce the number of rate cuts this year. Back in early Q4, it seemed likely that four cuts could occur in 2025. Now, two cuts totaling 50 basis points is probably more realistic.
For long-term debt, this means stable rates without much movement; hovering in the high-six to low-seven range. Long-term rates aren’t directly controlled by the Fed, but rather by the open markets. Investor confidence that inflation is indeed under control is still mixed. Continued borrowing by the federal government and deficit spending has resulted in open markets “baking in” inflation and risk premiums.
Unlike long-term debt, the action of the Fed impacts short-term rates (such as variable-rate business loans) directly. Consequently, more movement downward can be expected here. As a result, our startup and small business community should see some reprieve with operating lines of credit at more favorable rates. In the bond market, expect the 10-year Treasury to be volatile and fluctuate in a range between 3.5 percent and 5 percent.
Small business confidence
The reprieve in short-term borrowing rates may be one reason for shifting sentiment amongst small businesses, along with the conclusion of the national elections in November. The National Federation of Independent Business (NFIB) Research Center has collected small business economic trends data with quarterly surveys since 1973 and monthly surveys since 1986. The sample is drawn from the membership files of the NFIB. Their Small Businesses Optimism Index oscillated between 89.5 and 88.5 from the summer of 2022 to the spring of 2024. But in August, it went on the rise and has accelerated in recent months.
Softening demand in multi-family, mortgage rates sticking
Multi-family inventory is growing, largely in the high-end space, as projects that were started over the past three years are now coming online for renting. This, coupled with a slower pace of population growth, is softening demand. Rents are off their highs and with new product skewing upscale, high-end multi-family is the best candidate for continued rate reduction. We’ll have to wait and see how this impacts the entry-level market.
Mortgage rates are tied to long-term rates, and as previously mentioned, are driven by the open market, which is skittish due to federal debt concerns. Even with the Fed rate cut in September (which dropped short-term rates), mortgage rates rose. Expect 30-year mortgage rates to fluctuate between 6 percent and 7.5 percent.
Inventory will remain a challenge given the cost for building a home, but the availability of land in areas such as Prineville, Maras, La Pine and Redmond will hopefully help with housing starts.
At the end of the year, Zillow had Bend’s average home price at just shy of $730,000. Even though home prices have declined, rising mortgage rates have essentially offset any potential benefits from the price drop.
The risk for any community where housing becomes unaffordable is that businesses and workers start to seek more affordable locations to relocate. Our labor force grew (0.7 percent) at half the rate of Medford (1.4 percent) and is far behind the I-5 corridor communities of Corvallis (2 percent), Salem (1.9 percent) and Eugene (1.8 percent). It’s also possible that out-migration resulting from the recent Los Angeles fires could only exacerbate demand for local housing. Proactively finding solutions to housing affordability will remain key to central Oregon’s economic growth prospects.
Uncertainty but optimistic
New administrations at the federal level rarely shift the economy at the levels anticipated during the election season. That being said, policy approaches such as tariffs and changes in immigration enforcement have the potential to shake things up. Central Oregon’s strong local economy, with a vibrant small business community and entrepreneurial ecosystem, tends to isolate us from seismic macro shifts. While we don’t see some of the peaks of similar Oregon markets, we also don’t see the valleys. I’m thus optimistic that regardless of major progress on inflation or possible supply chain disruptions due to tariffs, that the region will maintain its steady growth, even if not at the level we desire.
Cory J. Allen is senior vice president and team leader for Washington Trust Bank in Central Oregon. He can be reached at cjallen@watrust.com.
