We wonder how we’ll look back on 2015 a few years from now

Remember?  Everybody was talking about the Really Big One.  Drought affected every county in the state.  There were big fires in Eastern Oregon.  Cannabis was legalized.  Apartment buildings were springing up everywhere.  Traffic, the traffic got bad.   Lots of people were moving up from California and other parts of the nation.  The Force Awakens was going to come out in December.

It was the year that real estate got really tight in Portland.  The Oregonian, Willamette Week and the Mercury headlined the story every week with eye-catching headlines like, “Metro Area Sees 10-Year Housing High Again,” and “Laid Low By High Rents (A wave of rent hikes and evictions grips Portland as investors swoop in to profit from a tight market),” and “A Summer of Evictions,” and  “Rental Prices Skyrocketing.”  While much of the focus was on a very tough rental market, and the City’s ongoing struggle to provide adequate affordable housing to its low-income citizens, the pinch on houses for sale attracted lots of notice as well.

A good illustration of the tight real estate market can be seen in the chart from this month’s Portland Market Update, reproduced here:

1-151117 Notes from Shannon and Jeanne for JPG_Page_2_Page_1

As a reminder to long-time readers of our Notes. . . and as an explanation for the benefit of recent arrivals to this page, Inventory in Months is a common measurement of market demand.  It’s a hypothetical model that measures housing supply vs housing demand by calculating the rate that inventories of homes are being absorbed by buyers.  Based on the rate homes were taken out of the inventory in October 2015, we only have 1.8 months’ supply of homes left to meet buyer demand.  A market is considered to be in balance between supply and demand, or sellers and buyers if you will, when there is something in the range of 5-to-8 months’ housing supply.  Remember the winters of 2009, 2010, and 2011, when the market was flooded with houses for sale, and there were hardly any buyers?  Back then there were times we had more than a year of inventory languishing on the market.

Time’s change, and we have plenty of buyers who’d like to buy a home now.  The market – and prices – are soaring past the old market highs from the 2006 / 2007 boom years.   New housing starts can’t keep pace with demand, and demand is unabated.

And Portland’s growing.  Metro’s August 2015 “Comprehensive Plan Recommended Draft” says it expects Portland’s population to increase by 260,000 residents by 2035.  (The introductory sections report are quite readable, and worth the read: http://www.portlandoregon.gov/bps/article/541677.) The Census Bureau’s most recent (2014) estimate for the Portland Metro area was 619,360 inhabitants.  Adding 260,000 more people to the region will increase our population by 42%.  It’ll be a long time before housing can catch up.

Where are all those people going to come from?  While everyone has California in the cross hairs, the truth is a little more nuanced.  About 137,000 people moved to Oregon from outside the state in 2014.  Of those, just 57,000 came from Washington State and California.   Another 23,000 came from overseas.  The rest came from all over the country.  A couple of months ago we wrote, “In-migration is the principal reason prices have kept moving up, and it’s not likely to slow.”  That trend [in-migration] is becoming better established now and, again, according to Metro, it’ll persist for many years to come.

Bringing the light to shine on California though, can we ask if there’s any similarity between the California drought and the 1997 transfer of sovereignty of Hong Kong from Great Britain to China?   Back in 1997, in the face of distressing economic uncertainty, a tsunami of Hong Kong immigrants (and wealth) flooded Vancouver BC; the resulting prosperity made Vancouver the most expensive city in North America.  Will Californians, in the face of distressing climatic uncertainty, make an exodus from their state on par with Hong Kong’s?

Is in-migration bad for Oregon?  Just 51% of people who live in Oregon were born here. The rest have come from somewhere else – so consider that in the light of the remarkable quality of life we have here.  From coffee giants like Stumptown’s Duane Sorensen, a Tacoma-born transplant, to James Beard Award-Winning master chef Andy Ricker (Pok Pok, Pok Pok NY, Sen Yai, et al.) (North Carolina), Oregon owes a lot of “What’s Oregon” to out-of-state transplantees.

And in a September 2015 post titled “Migration (In Defense of Californians)” by Josh Lehner, a senior economist with the Oregon Office of Economic Analysis, Lehner writes that “Americans have been moving to Oregon in droves since Lewis and Clark and are likely to continue to do so.”  Lehner says migration is vital to Oregon’s economic health, stating, “It [migration] brings both skilled, young households who will set down roots . . . and a strong influx of retirees with a lifetime of experience and some wealth. . .  Our state’s ability to attract skilled, young working-age households is a huge economic benefit.”

Happy Thanksgiving Everyone, here come the Holidays!

The 2015 Housing Outlook 

Staying on Top: Nine Trends that Will Shape the 2015 Housing Market. Regular readers of our “Notes. . .” can recite the current market dynamic like a catechism: “Low mortgage interest rates and low housing inventories will push the cost of housing higher as opportunity-seeking buyers bid up prices for limited quantities of available homes.”  Amen.  We, your daring prognosticators, believe that this dynamic will persist for another 18 months, at least. Join us here for a look at the top influences that will affect the dynamic in our 2015 Portland market.

Let’s begin with a recap.  We finished 2014 on a high note – the RMLS of Oregon reported that housing prices rose another 7.2% last year, that is, we added 7.2% appreciation to 2013’s stellar 12.9% rise, moving total appreciation up 20.1% in 24 months.  And the 2015 real estate market holds the promise of sustaining the past two years’ performances.  (For last year’s market stats, including a breakdown of Portland metro appreciation by area, check out our most recent “Portland Market Update.”)

 Looking ahead Here then is a look at the strongest trends we’ll see in the 2015 Portland metro market:

  1. Appreciation will slow in 2015.  The 2015 market should bring the market into better balance, with modest appreciation – say 3% – to – 4% this year – and a return of more negotiating power to buyers.
  2. Investors are getting pushed out of the market. Starting in 2012 and 2013, ultra-fast price appreciation and the lure of foreclosures created a feeding frenzy for real estate investors willing to pay cash for bargain properties. Traditional buyers found it hard to compete against cash and many were sidelined.  2015 will be the year investors back off and we see more opportunities for buyers with regular jobs and, ideally, 20% down.  But this year there’s more room for buyers with limited cash to close too, read on.
  3. Developers will continue to compete with first-time buyers for inexpensive close-in properties. For the past two years developers have been tromping all over first-time buyers in the stampede for affordable buildable lots.  The developers’ cash wins every time, the cute rag-tag fixer-upper is “scraped,” and one or two big new homes go up in its place.  In some instances the act is justifiable: some tear-downs are simply beyond their functional lives and should be replaced.  The merits of replacing those small affordable homes with expensive McMansions are debatable however, and worth a whole issue of our “Notes. . .” that’s devoted to that question.  Let’s leave it for now with this: we applaud the efforts of some architects and developers to replace obsolete housing with affordable and architecturally pleasing alternatives.
  4. Oregon is where it’s at. Katie Lobosco, writing for the Jan. 8, 2015 issue of CNN Money, reports that “Everybody is Moving to Oregon.” Citing data from United Van Lines’ 38th annual National Movers Study, which tracks customers’ migration patterns state-to-state during the course of the past year, it found that Oregon is the top moving destination of 2014, with 66 percent of moves to and from the state being inbound.  Oh, we almost forgot:  Oregon was United Van Line’s top moving destination in 2013 as well.
  5. Baby boomers and Gen-Yers will continue to push growth in Portland. The principal destination for people moving into the state is Portland, and boomers and Gen-Yers make up a good proportion of those who plan to make Portland “home.”  Both demographics are competing for the same kind of housing now: smaller units near the urban core.  (An unanswered question: as the Gen Yers start to form families, will they follow the decades-old path back into the suburbs to raise them?)
  6. Portland’s still relatively inexpensive. Compared to its big sister Seattle to the north (which had a median sales price of $485,000 versus Portland’s $333,000 average), and the California behemoth to the south, Portland remains an affordable destination, by West Coast standards at least.
  7. Rents are sky-high. Ask anyone who’s renting around here: rentals are hard to find, and expensive.  The rent-vs-buy proposition seems easier to answer when rents rival mortgage payments.  And in December major lenders Fannie Mae and Freddie Mac announced programs that will allow first-time buyers to get a mortgage with a low, three percent down payment instead of the previously stated five percent down.  That’ll open more doors for lots of young buyers with high debt and low savings.  Welcome Home, Gen-Xers and Gen-Yers!
  8. New Frontiers. We’re putting our bets on a few up-and-coming neighborhoods.  Montavilla, Lents, Woodstock all the way east as far as 82nd, and the Foster Blvd. alignment ripe for pioneering. There are great transportation alternatives in those neighborhoods and the grocery / dining / entertainment amenities are filling in nicely.  And it’s still not too late to be part of the “St. John’s Renaissance!”
  9. Nothing last forever. Rising consumer confidence, low interest rates, low unemployment rates, and less-restrictive mortgage requirements are among the principal reasons the housing recovery has been so successful.  A change in these factors could inhibit the market’s recovery, and, frankly, it won’t be long before we’ll need to see stronger wage growth just to keep up with rising house prices.   Stand by!

Untold Secrets –A Look Inside a Real Estate Agent’s Computer!

We’re taking a break from our ordinary commentary to share the best real estate web resources that we and our Realtor colleagues have on our desktops.  Put these powerful tools to use when you’re dreaming about your next home, when you’re advising a friend who’s thinking about moving, when you’re planning a vacation (really!), or if you’re just a real estate nut and want to know more about how the pros do it. There’s no particular order to our list (but it’s no coincidence portlandmaps.com comes first)!

  • portlandmaps.com. (Web only)  A Gem!  No city in the nation has a resource like portlandmap.com.  Fundamentally it’s an aggregator of information from a dozen City and Metro databases, a one-stop web site where you can get everything from crime statistics, tax information, building permit history, sewer and water connections, demographic data – you can find out if there ever was an oil tank in a property’s front yard, and how many gallons it held!  Simply said, portlandmaps.com is the most data-rich source of information for a specific property you can find on the web.  It’s nearly always the first resource we turn to when we’re studying a new property.
  • Google Earth (Web, Android, iOS)  Meet the dynamic duo: portlandmaps.com and Google Earth.  Why hop in the car to see what that great new listing on NE 24th looks like when you can “drive” on over on Google Earth and see it, and its neighbors, from right out in the street.  The biggest fuel saver in our business.
  • HomeQuest  (Web)  HomeQuest functions as a robust, easy-to-use interface between you and the Realtors Multiple Listing Service (RMLS).  Every day you’re delivered an email link to all homes currently on the market in the Metro area that meet your tailored search specifications.  You set the price criteria, you pick the neighborhoods you’re interested in, you can even specify things like number of bedrooms, baths, schools, and tons more.  The software is map-based and easy – even fun – to use.   Importantly, HomeQuest updates its site every few minutes so the data feed from the RMLS to you is super-fast and accurate.   You can set up searches, change your criteria, save properties to a “favorites” folder, and share notes between you and your real estate agent about properties that catch your fancy.  If you’re in the market to buy a home or you want to study housing trends in your own neighborhood, HomeQuest has to be in your tool kit.  HomeQuest delivers quality listing information because it can afford to: agents pay a monthly subscription fee for the service, which we pass along to our clients for free.  Sign up here from our website.
  • Zillow and Trulia. (Web, Android, iOS) are full-featured, powerful house hunting tools.  We’ve lumped them together, and actually, they’re in the process of lumping themselves together:  in July the two announced plans to merge into one online real estate resource. Zillow is the more powerful tool in our opinion, but both are good “one-stop” resources, with “pretty good” search filters and lots of extra features like mortgage calculators, school information, transportation maps, access to “hidden” inventory, property estimates, etc.  The sites are notorious for outdated / incomplete data; we’ll frequently find homes still posted on these sites which sold days, even weeks ago.  Use HomeQuest for dependable, up-to-date data.   And please, don’t depend on the “Zestimate®” for an accurate determination of property value!   Zillow’s price projections can be off as much as 40% from a home’s actual value.  Zestimates® work well in homogeneous neighborhoods – for example, newer subdivisions – but they’re woefully inaccurate at hitting the right mark in mature neighborhoods with a strong mix of housing styles, sizes, and vintages.
  • Redfin (Web , iOS, Android)  Redfin’s doing a good job, it’s doing a great job, and that’s saying something: fundamentally RedFin is a real estate sales company, and in that sense it’s one of our competitors.  It’s in 25 domestic markets now, including Portland, and many of our buyer clients favor it over Zillow and Trulia.  You can use their app to save searches, add notes to property listings, tag favorites, have new listings automatically delivered to you, and so forth.  Pretty good for a Seattle-based real estate company, if we don’t mind saying so ourselves.
  • Karl’s Mortgage Calculator (Android only)  This is the best free mortgage calculator we know about.  Do it all: Calculate mortgage payments given principal, interest and term. Reverse calculate any one variable given the other three. Enter a down payment amount or percentage and let the calculator show how large a mortgage you require.  See how the monthly payment changes when you factor in additional monthly or annual loan costs such as PMI, HOA, taxes and insurance.  Information can be represented numerically or graphically – Karl’s is a great place to visit when you want to run your “what-if” scenarios.  If you don’t have an Android device the calculators on our website are just as good, they just take a few more keystrokes.
  • greatschools.org  (Web) Find reviews, test scores and directions for schools across the street or across the country including public, public charter, and private schools.  Filter schools by district info, public or private, grade level, distance, enrollment size and the site’s “GreatSchools” rating.  Browse parent reviews, recent test scores, and save schools to your personal list of favorites for quick retrieval later.  This is the best initial go-to resource for schools information on the Web.
  • WalkScore/BikeScore  (Web) Use WalkScore / BikeScore to find the walk-ablity / bike-ablity of any location in the US.   While a number of sites offer WalkScore data, the WalkScore site is the only place that allows you to use their excellent Travel Time Map  to calculate how far you can travel by car, bus, bike and foot from your location.  WalkScore’s really handy for getting to know a city, and while the Travel Time Map alone is worth visiting the site, the heat map feature is very cool indeed.  Check out WalkScore, and think to use it the next time you’re making travel plans.

Do you want even more information about specific properties, market trends, mortgage resources, schools, parks, or the best place to fly a kite / get a decent bagel / buy a used bike?  Turn to us, your dependable one-stop source for “candid, informed advice!”  And have a wonderful holiday season; it’s just around the corner!

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

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)  “Rent.com, 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?

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.

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?

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?

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

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

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 RISMedia.com)

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.