As I mentioned, the price of oil has just about doubled over the past two years. Typically, the markets view oil price jumps as temporary. But this time around, far-dated oil futures prices also have increased sharply, suggesting that the high prices may be here to stay. This is a highly unusual development. Most likely, it reflects the perception that there is little excess supply of oil available in the world and that global demand is likely to remain strong. The perception that the oil price shock is more permanent tends to intensify its negative effect on spending. Estimates suggest that the oil price shock has noticeably restrained real GDP growth—by about three quarters of a percentage point in 2005. This impact is certainly nontrivial. However, it is worth emphasizing that the recent price change and spending impacts are far smaller than those of the oil shocks in the 1970s. The U.S. trade deficit, as we all know very well, has been growing rapidly for years. By the end of last year, it topped five and three-quarters percent of GDP, a new record. Two of the major factors contributing to the sizable imbalance between our imports and our exports are the strength of the U.S. economy relative to our major trading partners and the relative strength of the dollar. In 2004, the increase in the trade deficit—by itself—subtracted almost one percentage point from real GDP growth, representing a significant drag on overall activity.
This  means that there’s not a stable long-run average ratio to use as a comparison for today’s ratio, so the analysis we did for the other cities wouldn’t be that meaningful for Portland. What we do know is that the pace of home price appreciation in Portland has been close to the national pace over the past few years, lagging behind somewhat in 2003 as the state struggled to recover from the 2001 recession, but mostly catching up in 2004 and early 2005 as economic growth picked up noticeably in the state. As of early this year, home prices in the Portland area were up 12 percent over a year earlier, only a bit below the national pace of 12½ percent. More recently, I’ve heard reports that upscale homes in the Portland area are increasingly being sold at above-asking price—a phenomenon we’re all too familiar with in the Bay Area! So it’s clear that Portland’s housing market has been hot, but I’m sure that’s no surprise to you. In any event, as I said before, the fact that the ratios for the nation and many areas of the country are higher than normal doesn’t necessarily prove that there’s a bubble. House prices could be high for some good reasons that affect their fundamental value. The most obvious reason is the low level of mortgage rates. This stems both from very stimulative monetary policy and from the conundrum I discussed earlier.