Notes from Shannon & Jeanne

Growing Pains: One Housing Trend that is Reshaping Our City.

Friday, June 20th, 2014

New apartment construction promises to change Portland, for better or for worse.   Here’s a story, reduced to a few snappy talking points you can share with your friends and colleagues the next time you feel a compulsion to “be the expert.”

But first, a little background.

Few sectors of the past years’ economic recession were harder hit than new home construction.   While new home formation grew (marriages, families, immigration), housing starts dropped dramatically.  Now that we’re climbing out of the recession, housing starts are moving up, but the nation has a long way to go to meet demand.

Building Starts

Source: US Census Bureau

The chart shows new single family home starts.  The nation was averaging 1.3 million home starts in the years leading up to the recession.  Starts fell to 27% of pre-recession levels between ’07 and ’09, and today they’re only near 45% of the pre-recession levels.  It will take years for new home construction to catch up with demand.

Meanwhile, here in Portland:

(June 2014)  “, one of the largest apartment listing services on the internet, announced Portland was No. 8 on its list of best cities for singles to live.  Twenty-four percent of Portland’s adults are single.”

“2013: Portland voted Number One City in America: the nerdiest, smartest, hardest working, most exciting, and downright best city in the country.” (Movoto blog)

“Oregon was the number one destination among people who moved from one state to another last year according to United Van Lines’ annual migration study, which tracked 129,000 moves in the United States in 2013.”

In Portland there’s more demand for housing than there are housing units to meet it.  The laws of supply and demand are grinding away at renters:  limited supply has brought the vacancy rate down among the lowest rates in the US and rent rates have soared.  Building out into the countryside is not an option.  The Urban Growth Boundary (UGB) was designed to contain urban sprawl, and it has done a good job of protecting agricultural and forest lands from unregulated growth.  But at a price: the lid is on the pressure cooker.  There’s tremendous demand for buildable land inside the UGB because the current inventory of housing stock is insufficient to meet the demands of a growing population.  We need more housing.

At first glance, new apartment construction would seem a good solution for meeting Portland’s dual aspirations to remain livable while increasing density.  And therein lies a story.

A decade ago, the City Council approved rules allowing developers to forgo onsite parking for new housing close to transit lines. The idea was to encourage more density and help developers keep costs down.  The rules didn’t meet much opposition at the time; in fact, the rules were congruent with the ethos of the bike culture which then, as now, was viewed as a key element in the makeup of Portland’s distinctive, environmentally-responsible character.   Fewer cars, more bikes.

In 2012 applications and apartment building starts began to spring up all around Portland’s close-in-‘n-cozy traditional neighborhoods.  With zoning rules that didn’t require developers to add parking places – but provide for bike parking – neighbors began to protest.  The focus of their ire was concern about increased traffic and an inability to find parking in front of their homes. And though the new apartments were designed to attract those with a bike-first mentality, not all of the new tenants had chosen a car-free existence.

Nowhere then, as now, was the effect of the apartment boom more apparent than along SE Division, where a 13-block strip was becoming home to as many as eleven new 3-and-4 story apartment buildings. That’s 224 new rental units in 13 blocks.  Seven of the 11 new buildings didn’t have provisions for on-site parking, owing to the rule that exempted developers from having to provide it.  Pressure on Division’s adjacent neighborhoods buckled tempers as more and more residents (and patrons of the streets’ booming restaurant trade) fought for a handful of parking spots.  (A Willamette Week article quoted a neighborhood resident who called the new strip of apartments “a dormitory without a college.”)  Last March a late-night fire was started in a partially completed apartment, to date no one has been held accountable.  Old-time Portland residents however were reminded of the arson fires that burned Lake Oswego developer’s Phil Morford’s Nob Hill townhouses back in the early 1980’s.

The Portland City Council responded to neighbors’ concerns last April.  They changed the rules to require that new apartment construction with more than 30 units must provide parking on a tiered basis:  buildings with 31 to 40 units will have to provide one parking stall for every five units. Buildings with 41 to 50 units will need one stall for every four units, and buildings with more than 50 units will need one stall for every three units. (Source, Elliot Njus, The Oregonian, April 10, 2013)  Applications awarded permits prior to the adoption of the new rules were exempt; as a consequence, parking remains a stubborn problem along Division.

Portland’s growing up, and with growth comes growing pains. But the long-term prospect of higher density housing looks favorable: car sharing, peer-to-peer car sharing, trollies, mass transit, biking, micro-groceries, neighborhood bakeries, wine shops, and host of other innovations and life-style choices are beneficial fallout from increasing urbanization.  We say, bring it on Portland!

That’s a little history, but the tale’s not yet told.  Meanwhile, let’s get outside and enjoy all the bounty that a Portland summer has to offer us!

The 2014 Housing Outlook – Like Déjà Vu all over again?

Tuesday, February 11th, 2014

In many respects the 2014 real estate market holds the promise of repeating last year’s stellar performance.  Low inventories and low interest rates propelled the 2013 market recovery, and while we’ve seen a modest rise in interest rates, inventories of homes for sale are still at very low levels.  Veteran market watchers are saying – praying? – we’ll see moderate growth this year, a welcome contrast to 2013’s ballistic recovery.

Here’s the background. . . . Home prices grew at the fastest pace in seven years in 2013, pushing up home prices nearly everywhere in the US.  And the recovery was fairly uniform: home prices rose in 225 of the 276 cities tracked by Clear Capital, a provider of real estate data and analysis. Prices nationwide increased by 10.9 percent (Portland saw a 12.9% increase).  In 2013, a sense of urgency drove traditional buyers hoping to take advantage of still-affordable home prices and historically low mortgage rates, while investors were drawn into the market by the scent of opportunity.  Buyers found selection limited and were often forced into bidding wars with investors and other buyers who paid cash. Sellers reaped the rewards in terms of quick sales, often above the asking price.

Almost half of the cities tracked by Clear Capital experienced double-digit increases in home prices, led by Las Vegas, with a gain of 32 percent. Such spikes reflected a continuing “correction to the overcorrection,” says Alex Villacorta, vice-president of research and analytics for Clear Capital. Buyers and investors rushed in to snap up homes with prices that had fallen too far.

It’s early 2014 and the story hasn’t played itself all the way out:  in spite of the big 2013 run up, homes continue to be affordable.  Nationwide, prices are still 31.5 percent below their 2006 peak; Portland, while making greater strides towards recovery than many parts of the US, is still 15% below its 2007 highs.  And while buyers may be
inclined to voice their complaint, “There just aren’t any bargains out there now!” we’re as likely to respond, “No, everything’s a bargain!  That’s why we have all this competition!”

While 2014 appears poised to repeat 2013, a number of trends – some present since last year, some new – are going to influence the market.  First we’ll give you a quick look at the trends that are going to influence the market positively.  Then we’ll tabulate the trends that will affect the market negatively, and summarize with our “best bet” for the market’s direction this year.

Positive Trends:

  • The Rise of the Millennial Generation.  The Urban Land Institute issued a forecast last month drawing attention to the growing economic influence of millennial buyers, particularly in Austin, Seattle, Portland and the Twin Cities.  This generation of young people, born between the 80’s and 2000, is in a home-buying mood, and they’ve set their eyes on metropolitan areas that favor innovation, a healthy start-up culture, and relatively low housing prices.  Hello Portland.  Add millennial buyers to “new household formation,” a trend we brought to your attention last fall, and we predict strong demand for Portland’s real estate market well into the foreseeable future.
  • Getting a mortgage is going to get easier.  Banking standards have been loosening incrementally the past year, making it easier for first-time buyers – and buyers who got stung with bad credit scores during the Recession – to qualify for a loan nowadays.  And a new financing path, dubbed “Shadow Banking” has opened up recently for underqualified bank borrowers.  In ways similar to traditional bank lending, the money sources – the Shadow Banking’s hodge-podge of private funds, wealthy individuals, investor consortiums, and so forth – are not traditional banks and can therefore get around onerous banking regulations.
  • More homes will flow into the market from the Shadow Inventory.  As a corollary to news that inventories of distressed homes are shrinking (see below), this year we’ll read more news that rising home prices will bring more and more home owners out from under the shadow of overburdening debt and back into the market.  At the bottom of the recession there were 12 – 15 million homeowners underwater; now, that figure has been sliced nearly in half.
  • New housing starts are not keeping up with demand.    Reporting in RISMedia news, Lawrence Yun, chief economist of the National Association of Realtors, notes that while we’ve seen a 30% increase in new housing starts this past year, the pace is still insufficient. Yun reports for all of 2013 housing starts look to finish at 930,000 units.  Existing home inventory is at a 13-year low while newly constructed home inventory is at a 50-year low. And the long-term, 50-year annual average is 1.5 million housing starts each year.  It will take years for the new construction industry to keep up with demands from a growing American population.  Demand for new housing is going to outstrip supply for several more years.

Negative Trends (that will inhibit home sales and price appreciation):

  • Mortgage Rates will continue to rise.  Many mortgage watchers predict rates will hit 5% by the end of 2014 – well up from the 3.25% bottom of the market last winter, but still well within normal levels. New Fed Reserve chief Janet Yellen is expected to continue Ben Bernanke’s policy of keeping mortgage rates low by buying blocks of mortgage-backed securities, but the Fed began to taper back bond-buying in the fall and all signs point to a continuation of this policy.  (See our October 2013 “Notes. . . .” for a discussion of the Fed’s move.)
  • Job growth is tightly linked to housing growth.  Really, this is news?  Not really, but job creation and job growth are going to be critical elements in the market again this year.  (Tidbit: job growth will have more effect on the lower ranks of the housing market; growth in the $750,000 to $1,000,000 housing market last year was attributed more to a healthy stock market than our local jobs economy.
  • Multi-family housing development will wane.  The 2013 apartment building boom may have peaked, and in some areas (Southeast Portland anyone?) there’s concern that there’ll be a bust.  In any regard, greater apartment availability may take some buying pressure off the market as units start to come on line as early as the second quarter of the year.
  • Inventories of distressed properties will continue to shrink.  The RMLS of Oregon reported February 10 that comparing 2012 to 2013, distressed sales as a percentage of closed sales decreased from 28.2% to 13.2%.  Bank owned/REO properties comprised 3.3% of new listings and 5.2% of sales in 2013, decreasing from 10.4% and 15.9% respectively in 2012.  A reduction in distressed properties is a welcome sign of a sustainable recovery, but diminished number of distressed properties will limit opportunities for first-time buyers and investors and put more pressure on our entry-category housing stock.

What’s in store for 2014?  Let’s look back in September to February and how the interplay of all these trends has built the 2014 market.  From our perspective we believe that strong buyer demand, weak inventories and relaxed lending standards is going to outweigh the threat of higher mortgage rates and weak job growth.  We’ll report!

With one foot on the gas and the other on the brake, housing sales are slowing, and maybe that’s a good thing.

Tuesday, October 29th, 2013

The 2013 Portland housing market has given us the most spectacular ride in nearly a decade.  We’ve seen double-digit gains across the whole spectrum, and while we’re still enjoying nice price appreciation and steady sales, there’s relief in the voices and words of experts who have become worried that unabated growth could cause another bubble to start forming under the market.   Now, moving into the fall, we see persistent demand for low inventories (the gas) being dampened by a moderate rise in interest rates (the brake).  The rise in interest rates, coupled with what a Realtor-friend called “buyer fatigue” has helped slow the pace.  The effect has been a modest decline in sales prices over the past two months – we hit the 2013 market high in July – and a very modest increase in housing inventory.    Mind you, rates are not high: we closed last week with the benchmark 30-year rate stuck between 4.125 and 4.25 percent, a figure that’s only a point higher than last winter’s record lows.  It’s just that, well, an uptick in the rate has helped moderate the market’s meteoric rise.

Where will interest rates go?  At the moment low interest rates are the beneficiary of the Fed’s quantitate easing program, which is in turn coupled to the economic recovery.  While debate rages in Washington and on Wall Street, it appears to your correspondents that quantative easing will remain in place until the Fed sees signs the protracted recovery is (finally) fully underway.  In our view, interest rates will remain attractive as long as unemployment levels remain relatively high, wages show few signs of growth, and consumers remain wary about over-extending themselves.

Two emerging trends will affect the real estate picture in 2014.  The first, a happy trend, is coupled to economic recovery: “new household formation.”  Over the five-year period during and after the 2007–09 recession, the number of households established in America plummeted by about 800,000 a year from the annual average of 1.35 million household formations from 2000 to 2006, said Andrew Paciorek, an economist at the Federal Reserve Board of Governors.   When a person establishes a residence, whether it’s an apartment or a house or another dwelling, that person is forming a household. Mainly because of high unemployment and a weak labor market that held down income, the rate of household formation collapsed nearly 60 percent during the recession and subsequent recovery.   Unemployed college graduates and families who lost their homes to foreclosure moved back in with their parents or siblings or formed co-op living arrangements with other folks forced out of the housing market.  Along with population growth, a healthier employment situation should push household formations up to about 1.5 to 1.6 million a year over the next several years, according to Paciorek’s forecast model. The numbers of formations could exceed the pre-recession trend because of pent-up demand for households from those who did not set up homes during the recessionary dip.   The impact of growing numbers of new households will put pressure on inventories, which will further stimulate price growth.

Strong demand from investors and builders in the first time home buyer market is a second, more troubling trend.  Institutional investors –defined as investors who buy more than 10 properties a year – have been buying up properties for the past two years at an impressive and growing rate.  According to RealtyTrac, which has been following the trend since 2011, intuitional investors accounted for a record-high 14 percent of all sales nationwide in September.  Lured by the promise of strong rents they’ve been out-competing first-time buyers and after minor repair are renting them, or fixing them up nicely and re-selling (flipping) them for profit.

And you’ve probably seen the new housing boom in your own neighborhood: from north Portland all the way into Lake Oswego and as far as you can see to the east and the west, builders are putting in new homes on the site of former, smaller homes and vacant lots.  With the surge in prices, and unmet demand, builders have been in direct completion with buyers all year, and most of them, like the institutional investors, are armed with cash.  The first-time-buyer housing stock has been affected to the greatest degree: builders and developers see as much potential in the smallest / least-maintained house on the street as first-time buyers, but the potential they see is conversion: turning the house into a rental, or flipping it, or tearing it down and replacing it with one or two or even three expensive new homes.  The investor / builder trend will persist through 2014 and well beyond, and while its effect on the first-time buyer market may be troublesome, we need to keep in mind that new home starts and adequate housing are important building blocks in the overall economic recovery.

The gas, the brake, and the road ahead.  Our housing hot rod works like this: it has just one pedal operating both the gas and the brake.  The harder we shove on the gas, the more we bear on the brake.  Low inventories are the gas for the housing market, and high interest rates are the brake.   New household formation and builder / investor demand – signs of economic recovery – add octane to the gas, so go ahead and let’s put the pedal to the metal.  Whoops!  Signs of economic recovery will cause the fed to pull back on quantative easing and cause interest rates to rise.  Rising interest rates will put the brakes on buyer demand and slow runaway growth, hopefully without putting our car in the ditch.  The desirable outcome of this cycle of demand – rate hike – easing – growth – demand – rate hike – easing – growth will be a gradual increase in home prices and inventories over the course of the next two or three or four years until we have full economic – and housing – recovery.

Will Rising Interest Rates Bring the Curtain Down on the Housing Recovery?

Tuesday, July 2nd, 2013

Home mortgage interest rates hit a two-year high last week, soaring from 3.93% during the week of June 17 to 4.46% last week – the biggest one-week jump in rates in 26 years.  And the rise in rates since the winter lows of 3.25% – 3.375% has had a striking effect on monthly mortgage payments: a $250,000 mortgage at 3.37% back in April would have had a payment of just $1,102/month.  The same $250,000 mortgage at 4.46% would be $1,256/month, a $154 difference.  And now, after months of exuberance, Realtors, mortgage brokers, market analysts, and housing economists are debating the question whether the rate rise is going to weaken the housing recovery, or kill it outright.

Here’s the back story, in brief.  Interest rates took a hit – and the stock market did too – when Fed Reserve Chairman Ben Bernanke said that the Fed, in light of continuing signs of the economic recovery, may begin scaling back on its bond-buying stimulus program later this year.  Mortgage rates trend along the same track as the yield on the 10-year Treasury bond, so a cut in the Fed’s buy-back will cause the yield on bonds – and mortgage interest rates – to rise.  If the Fed cuts buying, interest rates will rise.  And the consensus among bond dealers and Wall Street is that’s what the Fed’s going to do.

Here’s a look at the housing market, in brief.   Since last fall buyers seeking to take advantage of low rates have been competing among themselves for a very tight inventory of listings. Prices have been driven up by the competitive pressure and fueling the strongest housing market since 2006.  House prices in 20 U.S. cities rose 12 percent in April, the biggest year-over-year gain since March 2006, according to S&P/Case-Shiller data released this past week.  In the Portland area, Case-Schiller reported prices rose 2.1 percent in April and 12.9 percent compared with a year ago.  That trend has persisted through May and into June.  With news of the Feds’ proposal a number of market watchers switched last week from a sunny sanguine view of the housing recovery to grim predictions of the demise of the market and the end of the housing recovery.

While prospects for any drop in interest rates are dimming, there are a number of factors which will help moderate the increasing cost of buying a home, and sustain the market recovery.

Buyers have faced rising interest rates in the past and they – and the market – have survived.  From the financing view, two important trends are developing which will help support buyers’ buying power, and moderate the effect of rising interest rates:

  • Adjustable rate mortgages, long out of favor, will bounce back and give buyers a low-cost alternative to the higher rates that fixed rates impose on them.
  • Bank credit standards have been loosening for more than two years, allowing more and more buyers sidelined by low credit scores, limited income, and even bankruptcy to have a chance to qualify for a mortgage now and come into the market.

Rising inventories of homes will partially dilute buyer demand. While low interest rates have been partially responsible for the price climb, low inventories have been the rates’ accomplice.  But there are trends developing that suggest inventories will begin to accumulate in the coming months, and with that accumulation buyer demand – and prices – may move to sustainable growth levels.

  • Bank foreclosures came to a near standstill this year while the State Supreme Court debated whether the big banks’ uniform foreclosure practices were legal.  In Oregon the Mortgage Electronic Registration System (MERS) litigation was partially settled in June, and in favor of the big lenders.  The rulings will open the way for banks to resume their so-called “non-judicial” foreclosures and the effect will be an increasing number of bank-owned properties coming to the market.
  • Rising housing prices have helped home-owners who’ve been underwater for years reach the point they can finally sell.  These home owners, members of the “Shadow Inventory” that we’ve written about in the past, are ready, willing, and finally, able to sell.  There is a 5-year backlog of homeowners who have been waiting for the opportunity to sell, and as the weeks and months pass we’ll see more of their homes come into the inventory.
  • The once-moribund home-building industry has taken off for the first time since 2006 – 2007.  Look in practically any neighborhood in Portland to see new homes coming out of the ground. And while these homes typically have higher price points than re-sale homes – people will pay a premium for “new” – the overall effect of more new homes will dilute inventories.

Earlier this year we wrote that the market’s course in 2013 would be set by interest rates and inventories.  We think that a rise in interest rates will not suppress buyers’ appetites for buying a home.  For one, interest rates, we remind ourselves, are still so very very low.  And for another, as we remark here, looser credit standards and adjustable rate alternatives will help maintain buyers’ ability to buy into the market.

It’s our opinion that the markets’ direction through the end of the year will be governed by inventories, and not interest rates.  While we’ve pointed to evidence that inventories will begin to rise from their recent near-historic lows, we believe that the rise will not satisfy buyer demand for many months ahead of us.  We’re not concerned that rising interest rates will “kill” the market.  In fact we welcome both emerging moderating trends – rising interest rates, increasing inventories – in the hope they’ll bring the market back into a sustainable balance between buyers and sellers in the coming months.  Just as much as we welcome sunny summer weather, we – and the housing market – also need a little respite from the heat.


A Return to Halcyon Days?

Wednesday, January 30th, 2013

Greetings and Happy New Year!   We’re pleased to preface our Annual Market Forecast with good news:  propelled by steady, strong buyer demand; limited inventories; and the lowest interest rates on record, industry experts are calling for 2013 to easily rival – and even surpass – last year’s high marks.   The turnaround in the real estate market that began in late 2011 gathered steam during last year’s spring market and has been running hot and fast since then.  As we enter the New Year market activity appears unabated with industry experts calling for gains in 2013 in all regions and across all sectors of the market.

In keeping with last year’s Forecast, we’d like to share Dave Liniger’s “Ten Key Factors” that will affect the US real estate market in 2013.  Here’s Liniger, Chairman and co-founder of RE/MAX International and one of the industry’s most respected leaders (in italics) and our thoughts as well:

1. More Homebuyers and Sellers will come back to the market.  Buyers began to return to the market in greater numbers last April.  Liniger’s prediction that we’ll start to see more sellers coming into the market is welcome news (see below).

2. Homes sales will rise by 6-7% and prices rise by 3-4%.  Liniger’s outlook is congruent with last year’s metro statistics: homes sales rose 19.1% and the average sales price in 2012 was up 4.4% and the median was 6.3% higher than the 2011 median.  (See our Portland Market Update for the all latest stats.)

3. The inventory of homes for sale will hit bottom.  Our inventories of homes for sale reached record lows in December.  As prices rise, more homeowners will recover enough equity in their homes that they can “afford” to sell.  And foreclosure / short sale processes are being handled more and more efficiently by the banks, meaning distressed homes can come to market and sell in a time frame that’s competitive with “regular” (non-distressed) property sales.

4. Higher-priced homes begin to sell.  First signs that high-end sales were picking up reached our Portland market this past fall.

5. Distressed property numbers continue to fall.  According to the latest new release from CoreLogic, “a leading provider of consumer, financial and property information, analytics and services,” distressed properties fell 12.3% during the October 2011 – October 2012 reporting period.  That’s a trend industry forecasters say will persist all through this year.

6. The shadow inventory continues to fall.  The shadow inventory, that accumulation of properties that folks would love to sell if they weren’t sidelined by mortgages bigger than the market value of their homes, is diminishing as prices rise.  A decline in the shadow inventory is inevitable if Liniger’s predictions #1 and #2 hold.  A counterpoint:  dismayingly low inventories will keep some would-be sellers out of the market for fear that they may have nowhere to go if they sell their current home.  Home owners who are thinking they’d like to sell but are unsure of their ability to find replacement housing should consult with a real estate professional first. A good agent will have the analytical tools and experience necessary to make an accurate determination of the risk (and reward) involved making such an important decision.

7. The number of short-sale closings will rise to a peak.  Short sales, those work-out negotiations between upside-down homeowners and their banks, have frustrated the market recovery for the past seven years.  Rising home prices; slow-but-steady improvements in the short sale process; and continuing success with alternative work-outs will help shrink the short sale sector of the market.  Welcome news indeed.

8. Record-low mortgage rates rise slightly by year-end.  The housing recovery comes with a catch: the housing sector’s tied so closely to the economic recovery that a recovery in prices will help foster the overall growth of the economy, which will further stimulate the stock market, depress the bond market, and lead to a rise in interest rates.  As of the date of this forecast the benchmark 30-year fixed rate conventional loan is hovering between 3.25 and 3.375%.  Look for rates to rise to the 3.75-to-4.0% level by year’s end.  And for reference, look at this chart of 30-year mortgage rates, from the turn of the last century to 2011 (more recent graph unavailable):

30 Year Mortgage Rates

9. Lending remains tight.  Complicated provisions that stem from the 2010 Dodd-Frank Act, meant to prevent a repeat of the lax lending practices that led to the 2007 – 2007 subprime mortgage crisis, have lead to concerns among politicians, consumer advocates and lenders that tight lending standards are preventing a broader housing recovery.  Federal Reserve Chairman Ben Bernanke even acknowledged it in a November speech, saying that “overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

10. Home affordability remains the best in years.  The National Association of Realtors projects that the 2012 housing affordability index will reach record high of 194, up from the previous record  of 186 set in 2011.   The NAR forecasts that the housing affordability index will average 160 during 2013, which means on a national basis that a median-income family would have 160 percent of the income needed to purchase a median-priced existing single-family home.  Two factors will press the affordability index down: rising home prices and the prospect of rising interest rates.

As we enter the 2013 housing market we’re struck by a confounding fact:  this year is going to be great for buyers and sellers.  Sellers sidelined by low-equity positions will start to see daylight, and the opportunity to sell; buyers are going to bask in the affordable luxury of low interest rates and the promise of more choices among homes on the market.

It looks like another rewarding and challenging year ahead for the Spence Tobey team. We look forward to helping you and your friends with all your real estate needs.  Wishing all of you a happy and prosperous 2013!


The Dew Is on the Bloom Again in Real Estate

Wednesday, October 24th, 2012

As we settle into the fall of 2012 there is a strong consensus that the housing market is on the way to recovery.  From the Kiplinger Letter—“Hallelujah, Housing is firmly on the Upswing” (Sept. 28) to Money Magazine—“Home Building Surges to 4-Year High”  (Oct. 17) and “A New Housing Boom” (Oct. 12) there overriding sentiment is that housing—and prices—are on the upswing.  Even the RMLS’ “Market Action Report,” that most unsentimental of publications, allowed this past week that “the market recovery is solidifying.”

While metrics vary among different sources, all report that Portland housing appreciation is doing well, quite well.  The RMLS reported Oct 15 that based on September sales the average sales price year-to-date of $272,200 is 2.9% higher than the average price in the same period last year, while the 2012 year-to-date median of $230,400 is 3.8% higher than the median last year.  Zillow reports that prices in Portland have “rebounded” 4.8% since they hit bottom a year ago—marking the biggest year-over-year gain since April 2007.  (Zillow says that the current median home value is $224,300, on par with the same pre-crash level as April 2005.)

Is all this sustainable? Zillow “Real Estate Market Reports” is making a place for itself alongside Standard and Poor’s Case-Schiller Index and is becoming a reliable data source for metropolitan and national housing trends.  Zillow’s most recent “Home Value Forecast” shows more growth, albeit slower growth, on the horizon with values increasing 1.7 percent nationwide over the next year.  It notes that the pace of the housing recovery has been uneven from market to market, with home values increasing rapidly in some areas and faltering in others. In the Phoenix metro area, for example, values are up 20.4 percent year-over-year. But in other areas—such as the Atlanta metro, where home values declined 4.8 percent year-over-year—values continue to fall.  That said, Zillow opines that the recovery is not in jeopardy.

“We’re likely seeing home values fall back into the negative range in some markets due to the close of the traditional home-buying season,” said Zillow Chief Economist Dr. Stan Humphries. “While that doesn’t mean the recovery has come off the rails—in fact, most markets have hit bottom—it does present a confusing environment for consumers. Looking forward, we expect to see home values bump along the bottom for some time, before increasing at a slow and steady pace.”

For the Portland Metro area the two factors that are most likely to goad—or inhibit—the continuing housing recovery are—you guessed them—interest rates and inventories.

In September the Federal Reserve launched its third quantitative easing program (QE3) and set it to run . . . indefinitely.  Quantitative easing is a tool used by central banks as part of their monetary policy to stimulate the economy.  Basically the government pumps money into the economy by buying bonds, treasury bills, etc.  QE3 will most certainly keep the lid on interest rates well into the foreseeable future.

And inventories will remain at low levels as far and long into the future as your correspondents can see—no true “glut” of homes is likely to reach the market for several months, going into years.  We predict it will take at least two years for the housing market to recover enough to bring inventories into line with demand.

One of the reasons inventories are low is that the stream of foreclosure properties back into the market has slowed to a trickle.  Many state attorneys general—Oregon’s among them—have put the banks’ foreclosure processes under close scrutiny.  The attorneys general have alleged that bad banking practices—think the robo-signing and MERS scandals—may have lead to a wave of illegitimate foreclosures across the country.  Banks have reacted by slowing the foreclosure rate, and slowing the reinfusion of REO properties back into the market.

Sure and steady, it looks like the housing recovery is going to hold the course it set for itself back in April of this year.

Interest Rates Fall Again, Home Affordability Soars

Monday, June 18th, 2012

A major new study released in May by The Demand Institute concludes that home valuations will start to climb again in 2012 as the U.S. housing market finally turns the corner.  But persistent concerns surrounding consumer confidence, low inventories, and tight credit standards suggest we may not be out of the woods yet.  Let’s first focus on the facts:

Fixed-rate mortgages have reached new all-time lows. The 15-year fixed-rate mortgage dipped below 3 percent, to 2.97%, for the first time since Freddie began publishing 15-year mortgage rate data in 1991.  The record high according to Freddie Mac’s weekly Primary Mortgage Market Survey came in March 1994, when rates peaked at 8.54%.  At present, thirty-year fixed-rate mortgages have also reached record lows, continuing to stay under 4 percent and pushing home buyer affordability even higher.  The record high for the benchmark 30-year note was 18.45% in October 1981.  On Friday June 15, 2012, Portland area mortgage brokers were posting rates between 3.625% and 3.75% for the 30-year product.

The combination of low interest rates and low housing prices has pushed the National Association of Realtor’s Home Affordability Index above the 200 level for the first time since the NAR began to tabulate housing affordability 42 years ago.  The Index, based on the relationship between median home price, median family income and average mortgage interest rate, reached 205.9 the first quarter of this year.  The higher the index, the greater the household purchasing power. A composite index of 100 is defined as the point where a median-income family household has exactly enough income to qualify for the purchase of a median-priced existing single-family home, assuming a 20 percent down payment and 25 percent of gross income devoted to mortgage principal and interest payments.  The current index, at 200-plus, suggests that the median income family has twice the income to afford a median priced home.

Finally, in a move designed to quicken the pulse of the housing market’s recovery, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, will require both agencies to give short-sale buyers a final decision within 60 days.  The rule will become effective June 15.  In a short sale, a lender agrees to accept less than the balance on a mortgage.  But lenders have been notoriously slow about deciding whether to allow or not allow the short sale to proceed.  In the past, a potential buyer could wait months before the lender would accept or reject a short sale offer.  The potential for rejection after a long wait kept many buyers from entertaining the purchase of a short sale home.  Expedited sales as a result of the new directive will benefit the entire housing market as prospects open up for more buyers – folks who need to have their kids in school, or whose jobs require they be settled by a specific date, and so forth –to participate in short sale transactions.  Currently short sales make up about 10.5% of the Portland Metro inventory.

While low rates, affordability, and streamlined asset redistribution measures are important components in ensuring continuing market growth, there are other factors that must be taken into consideration.  Weak consumer confidence, low housing inventories, a brooding stockpile of distressed properties, and strict bank lending standards are among those factors which are still weighing down a robust housing recovery.

Does the housing recovery have traction? Market observers have split into two camps: those whose assurances are that the worst is behind us, and those who fear for another dip in the housing recovery.  Shannon predicted in June of 2011 that “we’ll look back someday and say that the market reached the bottom back in April 2011.”  Jeanne, the more practical minded of your correspondents, has yet to allow an opinion.  To date, Shannon has been “mostly right.”  We saw prices take a modest seasonal dip late last year, but before January was even half over activity began to climb, and by March price gains and strong buyer demand were visible across the whole of the Metro area.  See our latest Portland Market Update for the stats you love.

In the meanwhile, other market watchers at looking with dismay at the vast reserves of distressed properties which have not yet even reached the market. As we remarked in our April Notes if the banks flood the market with REO properties we’ll see prices stall out. And since April the rising threat of Europe’s financial crisis taking us back into recession has drawn nearer.  If the global economy stumbles, or the banks turn a trickle of REO properties into a flood, then all bets are going to be off on a “sure but steady” housing recovery.

Favorable Outlook. “Home valuations will start to climb again while adjacent consumer industries will capture significant new growth opportunities in 2012 and beyond as the U.S. housing market finally turns the corner, concludes a major new study released in May by The Demand Institute.”1 (Long sentence courtesy of

The new report, The Shifting Nature of U.S. Housing Demand, predicts that average home prices will increase by up to 1 percent in the second half of 2012. By 2014, home prices will increase by as much as 2.5 percent.  From 2015 to 2017, the study projects annual increases between 3 and 4 percent.  This recovery will not be uniform across the country, and the strongest markets could capture average gains of 5 percent or more in the coming years.

The report notes that between 2006 and 2011, some $7 trillion in American wealth was wiped out when home prices dropped 30 percent after that dramatic climb in valuations during the housing bubble.  Looking forward, the report predicts that moderate growth expectations for coming years suggest “a return to normalcy.”  As home prices continue to drop and interest rates fall further, first-time buyers and others who remained relatively cautious will be drawn back into the housing market.  And, as the market recovers, the report concludes, so too will consumer spending.

That’s the kind of news to take to heart, and a great way to say “Happy Summer!” to all of you.

1 Launched in February 2012 and jointly operated by The Conference Board, a worldwide business analytics and consulting association, and Nielsen (the media and ratings corporation), The Demand Institute describes itself as a non-profit, non-advocacy organization with a mission to illuminate where consumer demand is headed around the world.

Will Trickle of Foreclosures Become a Flood?

Monday, April 2nd, 2012

A new wave of foreclosure properties is expected to hit the market this year, carrying with it a double-edged blade of optimism and concern.  While fresh inventories of homes will be welcomed in a market that’s starving for new listings (see this month’s Portland Market Update), there’s concern that prices will be destabilized if the trickle becomes a flood.

In the last year, banks, hobbled by pending litigation over MERS and robo-signing practices, restricted the inflow of bank-owned properties to the market while they struggled to prove to Federal and state attorneys general that they had legal standing to foreclose.  A $25 billion settlement was announced February 9 between Federal and state attorneys general and the largest mortgage lenders in the country.  With resolution of charges that the banks exercised abusive home lending and fraudulent foreclosure practices the gates have opened to bring many more bank-owned properties to market.

Nationwide, more than a million foreclosures that were supposed to have been completed in 2011 were pushed into the future, according to RealtyTrac, publisher of the largest database of foreclosure, auction, and bank owned properties in the US.  But the delay has allowed listing inventories shrink, and prices to stabilize accordingly.

There is little consensus among market watchers how great the effect of the rise in bank-owned listings will be.  Some observers believe that the banks will structure the introduction of new properties into the housing market in an orderly manner–it will be in their best interests to avoid diluting the pool of available inventory too.  And there is grudging recognition that the economy is in better shape this year than it has been in the last several years–optimists are hoping that there’s enough elasticity in the economy to absorb the effects of price dilution.

Bank lenders have implemented control mechanisms on the stream of properties still coming into foreclosure. Nearly 2 million homeowners who haven’t paid their mortgages in three months or more haven’t received foreclosure notices from their lender.  About 800,000 of those haven’t made payments in more than a year, according to Lender Processing Services, a leading provider of mortgage and consumer loan processing services and mortgage settlement services. The point is that lenders are waiting longer before taking action against millions of homeowners who have stopped paying their mortgages.  While some of the holdup can be attributed to foreclosure prevention efforts–mortgage modifications, for example–several banks are using delay as a financial strategy, said Daren Blomquist, a spokesman for RealtyTrac.

Lenders basically are letting delinquent homeowners stay in their homes as a lesser-of-two-evils option. Foreclosing more quickly would mean more empty homes and additional maintenance costs for banks to shoulder.  Lenders, already dealing with mountains of paperwork for homes in foreclosure, would only be adding to their documentation woes by speeding up new filings.

2012 Real Estate Forecast

Thursday, February 2nd, 2012

Sun Breaks in the Housing Forecast? Propelled by last fall’s surprising increase in sales volume and a persistent low interest rate climate, industry experts are calling for 2012 to be a better year for real estate sales than any we’ve seen since the mid 2000’s.  Dave Liniger, Chairman and co-founder of RE/MAX International, the nation’s largest real estate franchise, has identified 10 key factors that will affect the US real estate market this year.  We thought you’d enjoy getting an industry leader’s viewpoint (in italics) and our thoughts as well:

1. Continuing low interest rates.

We’ve seen rates in the Metro area hover in the 3.75 – 4.5% range for several months, and we anticipate they will remain steady at least through the second quarter of this year.

2. Home prices stabilizing and starting to rise.

We began seeing evidence that prices were firming up during the last quarter of 2011, particularly in our close-in neighborhoods.  Look for this trend to expand across the Metro area in 2012.

3. Increasing numbers of home sales.

See our Portland Market Update for the latest stats.  Fourth quarter activity was among the strongest we have seen in several years.

4. Rising inventories, mostly due to increased foreclosures.

The banking industry, hobbled by MERS litigation in the last three years, is expected to bring a new wave of distressed properties into foreclosure this year.  More than anything, the flow of distressed properties into the market will dilute strong price appreciation for the next two or three years.

5. Distressed properties will make up about half of all sales.

On January 31, 2012 32.4% of the 7,422 properties listed in the Metro area were bank owned / distressed homes.

6. An improved Short Sale process to help avoid foreclosure.

Many industry observers believe that streamlining the short sale process may be the single most effective way to bring the housing crisis to an end.

7. Homeownership rates continue to fall.

While the days of the single family residence are hardly behind us, there are growing numbers of alternatives to the preponderance of SFR properties.  Witness the popularity of condos in recent years and the rising numbers of new apartment starts in recent months.  And multi-generational housing alternatives have become a norm among American families, not an exception.

8. Foreign and domestic investors will buy 25% of homes.

Stand by for news about this intriguing new housing trend.  We haven’t seen this much interest from foreign investors since the late 1980’s.

9. Increasing reliance on real estate agents.

The old model of real estate agency, based on Realtors’ exclusive knowledge of real estate listings and sales, was overturned by the advent of information technology in the late 1990’s.  The new model of agency, based on solid analytics and high levels of training / competency / experience, puts today’s agents into the multiple roles of information manager, negotiator, and market analyst.

10. Increased use of Mobile and Social technologies

An apparently obvious concession to the fact that mobile and social technologies are omnipresent in today’s hyper-connected world.

While Mr. Liniger’s “Top Ten” makes good sense, we predict there are three more factors that will affect our housing market this year as well:

11. Increased consumer confidence.

The Conference Board Consumer Confidence Index®, which had improved in November, increased further in December.  According to the Board, “While consumers [ended year 2011] on a somewhat more upbeat mood, it is too soon to tell if this is a rebound from earlier declines or a sustainable shift in attitudes.” Our bet’s on shifting attitudes, as the unemployment rate begins to stabilize and expectations rise in advance of the fall election.

12.  Bank credit standards are loosening.

Mortgage lending standards stabilized in 2011 after three years of turmoil. Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings.  Banks are also loosening loan-to-value ratios (LTV); in contrast to a low of 74 percent reached in mid-2010, banks are now lending at 82 percent LTV.

And, finally, our wild-card thirteenth key factor that will affect the US real estate market this year:

13. The November presidential election race will propel expectations through the first half of the year and dampen market activity during parts of the third and fourth quarters.

As we get closer to the election we’ll see consumer enthusiasm begin to falter as it’s replaced by reasonable doubt about the outcome of the nationwide political races.  Interestingly, we frequently see a noticeable bump in real estate activity right after the presidential election.  Look for a strong December finish to this year’s real estate market.

Long-time readers of our “Notes. . .” will be reminded again of what 1960’s psychic Jean Dixon said:  “If you must predict, predict often.”

We’re wishing all of you a happy and prosperous 2012!

Shannon and Jeanne

October 2011 – Choppy Market Swings Between Minor Ups and Unsettling Downs

Friday, October 7th, 2011

The real estate market has been swinging back and forth between minor improvements and unsettling downturns for the past dozen or 15 months. Our May 2010 Notes from Shannon and Jeanne, Baby Stepping with the Housing Market, asked how the market would fare without Federal assistance–you’ll recall that Federal government’s last buyer-incentive tax credit expired last April. In the months since then we’ve seen the market conditioned by:

  • Historically low interest rates
  • Extremely tough bank credit standards
  • Weak consumer confidence
  • Intractable high unemployment figures and stalled out wages
  • Bulging inventories of distressed (short sale, foreclosure, bank-owned) properties
  • Limited inventories of “clean,” unencumbered residential properties for sale
  • New housing starts bouncing along a very depressed bottom, with no sign of relief until excess supply of existing homes clears

The balance of these conditions has resulted in continuing price weakness, and while there are few signs that improvement is just around the corner, there’s a trickle of evidence to suggest there’s a foreseeable end to the bear market.

CoreLogic, a leading provider of real estate analysis and metrics, published data last month that reported the pending inventory of foreclosure (FC), bank owned (REO), and Serious Delinquency (short sale) properties has begun to diminish, from 1.9 million units (nationally) in July 2010 to 1.6 million units in July 2011. You’ve gotta love a fat sentence, so to quote CoreLogic’s David Bard, “This moderate decline in [the pending delinquent] inventory is being driven by a pace of new delinquencies that is slower than the disposition pace of distressed assets.”  By “pending inventory” we’re speaking of homes that have not yet come to the open market; these are homes that will be coming to market in the future. The trend has not persisted long enough to allow us to draw strict conclusions, but CoreLogic’s data suggest that the wave of distressed properties that has swept through the real estate market may have crested. The chart below expresses the absorption rate of pending delinquent homes in terms of months’ inventory. The lower the figure, the greater the absorption rate.

Market recovery will be further inhibited by the influence of the Shadow Inventory on supply, and prices. At the first sign of price stability, we’ll see waves of homes coming to market by all the home owners who’ve been waiting to move up, move down, or move out from under their punishing mortgages. The additional supply will put downward pressure on prices and threaten price recovery once again.

The market’s caught in a persistent choppy cycle of price advances being met by oversupply, which depresses prices. As the oversupply is slowly absorbed–resulting in slight price advances–new inventory is introduced, which depresses prices, and so the cycle repeats itself.

With time, a trend will emerge that will arrest the cycle. (1) With time, pending delinquencies and the Shadow Inventory will deplete themselves. (2) With time, new construction starts will kick in to meet demand (as the inventories of existing homes are absorbed). (3) With time, employment in the construction sector will foster increases in consumer spending, and production increases in the manufacturing and services industries. With time, a new cycle of growth and expansion will replace the current cycle of contraction and stagnation. And, yes, with time, a new cycle will emerge to replace growth trend, and so around and around it goes.