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.

Will Trickle of Foreclosures Become a Flood?

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

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

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.

April 2011 – The Spring Market is Here!

We’re proud to say both of us were recently ranked among Portland’s Top Seven Percent real estate agents in a poll conducted for Portland Monthly Magazine by Minnesota-based Crescendo Business Services.  Pollsters surveyed all Portland area residents who purchased a home in Portland during the 36-month period (June 2007 to June 2010).  Respondents were asked to evaluate their agents’ performance based on nine criteria: customer service, communication, finding the right home, integrity, negotiation, marketing the home, market knowledge, closing preparation and overall satisfaction.  Look for complete findings of the Five Star Survey–and a flattering photo of us!–in the April edition of Portland Monthly, on newsstands now.  To those among our readers who responded, a very sincere “thank you!”

Metro Area Real Estate Trends – the Spring Market is Shaping Up

Here’s some hopeful news: preliminary reporting numbers suggest that March residential sales figures are nearly par with March 2010 figures.  If the “official” March RMLS report, due out mid-April, supports the preliminary data, it will lend credibility to the notion that we may see greater price stabilization and increased sales volume in the upcoming two or three months of the “Spring Market.”  The stock market–up 7% this first quarter of the year–and news that those pesky unemployment figures are in check should add a measure of confidence to buyers who’ve been sitting the market out since last July.

And what new landscape will greet this spring’s intrepid buyers?  They’ll note prices are down considerably from the ’06 – ’07 highs:

This graph, courtesy WFG National Title, gives a close up view of price decline Metro-wide since the 2006-07 peaks.  The most recent period of decline, between July 2010 and February 2011, coincides with the end of the federal government’s first-time buyer stimulus package, which ended in June 2010.  Prices are off roughly 31% from the July 2007 high.

Our spring home buyers will discover that inventories of homes have declined since the halcyon days of the last decade.  The majority of folks who bought in the go-go years of the last decade are sidelined, saddled with mortgages greater than their homes’ current value, and wholly cut out of the market unless forced to as short sale and foreclosure casualties.  We’ve written about these folks, the membership of the Shadow Inventory, on other occasions, and several years will pass before we see them able to participate in great numbers in the market again.

Graph courtesy WFG National Title

The current inventory consists of relatively large numbers of bank owned, foreclosure and short sale properties.  In some areas and some price sectors distressed properties make up more than 65% of the inventory.  Someone throw Hillsboro a life buoy.  No area and no price range are immune: Metro-wide 31% of all listed homes are either bank owned or short sales.  In general these homes are coming to market a little tired out, a little sad, a little short on love.  Depending on the bank and the sellers’ circumstances there is some leeway for repairs, but agents are finding greater success in asking price concessions and closing credits in lieu of actual repairs to these properties.  As ever, well priced homes in good condition continue to sell rapidly.  Indeed, bidding battles over desirable homes are not uncommon.

Houses are affordable at this time; in fact they’re more affordable than they’ve been any time since the beginning of the century.

Graph courtesy WFG National Title

A reading of 100 means a family earning the national median family income (reported by the Census Bureau) can qualify for a mortgage on a typical median-priced existing single family home. An index above 100 signifies that a family earning the median income more than qualifies for a mortgage loan on a median-priced home, assuming a 20% down payment. Therefore, an increase in the Affordability Index shows that a family is more able to afford the median priced home.

In a nutshell, our spring buyers are going to find decent inventories of affordable homes, although a goodly number of them are not in tip-top shape.  Closing escrow on a bank-owned home is quite easy but it takes patience to close on one of those short sale properties.  Happily, interest rates appear to be holding quite steady below 5.0%.

As ever, the best way for buyers to prepare to come into the market is to get pre-approved and to start to learn about the inventory.  LookingGlass home finder, sign up available on our web site, is the second-best tool in a home buyer’s kit, use it and remember to cross reference properties with www.portlandmaps.com and www.walkscore.com.  And you ask what’s the best tool in a home buyer’s kit?  Shannon and Jeanne’s phone numbers!

Happy Spring!

January 2011 – Economic Recovery Gains Traction

The US economy ended the year on a sweet note, with evidence that last fall’s rise in consumer confidence lead to increased spending and consequently a spurt in business growth.  Factories across the country increased production in response to growing demand for technology and automobiles.  Jobs hiring began firming up, and businesses report they plan to increase hiring at the same rate, or faster, this coming year.  Business managers uniformly agree that fears of a double-dip recession are behind us now.  All signs point to a stronger national economy in 2011.  Regionally the news is just as good:  just this past week Intel reported a surprisingly great 4th quarter (2010), and predictions for 12% growth this first quarter of 2011.  We could say the economic recovery has gained some traction.

Still, there are risks to saying full recovery is just around the corner.  Rising commodity costs will inhibit corporate growth and raise the threat of inflationary pressure on the economy, and Oregon unemployment remains stubbornly around the 10% level.  And the Big Engine, the nation’s housing industry, is still stalled.  Housing prices are still stuck near the bottom and the prospect of more foreclosures over the course of the next couple of years looms over the market like a dark hammer.

But there’s light, and hope, mixed in with the gloomy housing outlook.  For example, The Oregon Legal Journal (Dec. 30, 2010) reported that with one in every 658 properties in the state in foreclosure, Oregon ranked 15th in the nation for foreclosures actions this last month.  That’s the bad news.  The good news is that figure represents a 33.9 percent dip in foreclosure actions for the state, and a sign that the housing sector here in Oregon may begin to stabilize this coming year.  Yes, there are more foreclosures ahead, but the outlook is for fewer than in the past.

We’ve written in the past that record low interest rates and depressed prices have given home buyers a great opportunity to buy low, and lock in on a low monthly payment.   That’s still the case – at the date of this writing the rate for a 30-year fixed conventional or FHA mortgage is just 4.625%.  The missing component has been consumer confidence, and in spite of mixed signals, we feel that consumer confidence will transmit itself into good prospects for a nice spring real estate market.  With limited inventories on hand (see our January Market Update) and a reasonable likelihood there’ll be more buyers coming into the market, the stage could be set for rising prices and the first real opportunity for the market to turn around in the last three years.

There’s a cross current of undetermined strength that could keep the reins on the housing recovery for another year, and that’s bank-held inventories.  If the banks start selling off their properties to take advantage of a rise in buyer activity that’s going to dilute inventories and suppress prices.  There’s no question that the sell-off of bank owned properties will inhibit the housing recovery.  The real question is whether the banks can contain themselves from dumping their holdings en masse or hold themselves instead to trickling homes into the market to keep prices up.  Remember it’s to their benefit to get high prices too, but their backlog of boarded up, vacant houses are a tremendous weight on their bottom line.  Right now bank owned properties account for 11.8% of homes for sale in the Metro region.  If we see that number start to rise dramatically, look out below!

December 2010 – How Low Will It Go?

These are the two most frequent questions we’re asking now. “How Low Will It Go?”  “When Will It Hit the Bottom?”  No one believes we’re at the bottom — but in a moment we’ll share with you why we believe this may be the best time to buy — and there are compelling reasons to argue for at least another year of weakness.  But don’t stop reading until you know why this may be the best time to buy, and until we’ve shared with you reason to think we’re going to see a bump in activity — and prices — after the New Year.

Housing prices have crept up out of their spring 2009 lows but without any further federal tax incentives in sight, and the prospect of two or three more years of short sale and foreclosures ahead of us, there’s little evidence a recovery is just around the corner.  In fact, while the overall economic recovery has good traction now, some analysts say there’s still the possibility of a double-dip housing recession.

Whether a true second bottom is forming under us or not, we agree we’ve got a ways to go before we are safely out of the woods.  Reports that fully one-quarter of all single family mortgages in the Portland area are underwater — meaning there’s more debt attached to these homes than they are worth — betray any optimism that we should plan to move out of the housing recession swiftly.  This, the “Shadow Inventory” of folks who are trapped in their homes and prevented from selling and buying a new home, is the sea anchor on the market which is preventing it from moving forward toward a speedy recovery.  [See our May 2010 commentary, Baby Stepping with the Housing Market. . . .” for a longer discussion of the Shadow Inventory.]

Why buy now if prices are going to keep dropping? There is widespread concern among market watchers who see no positive signs that a price recovery is anywhere in sight.  Sure, but is this a good time to buy?  We think so and here’s why:  I (Shannon) did an analytical study of the effect of mortgage rates on housing affordability and concluded that a one-half percent reduction of the 30-year fixed conventional interest rate is equivalent to a 5% reduction of the price of a home to the buyer. For example: A home selling at $650,000 with 20% down and an interest rate of 4.5% has a monthly mortgage of $2,635.  If rates fall half a percent to 4.0% the mortgage falls to $2,482, equivalent to a near 5% reduction in monthly payment.  The new rate, $2,482, is equivalent to the mortgage obligation of a house priced at $617,000 under the burden of a 4.5% interest rate.   Too much math?  Here’s the point:  interest rates have fallen half a percent in the last couple of months, equivalent to a 5% drop in prices, from the mortgage payer’s viewpoint.  So interest rates have given buyers a 5% price break in the last two or three months, without sellers having to do a single price reduction!  (Thanks Andy Johnson, accountant and math whiz, for reviewing this study with us!)

Will interest rates stay low?  No.  We’re concerned that the federal government will begin to ratchet up rates once it feels the economic recovery is well underway.  That could happen as soon as the first quarter of the New Year.  The stock market has moved up significantly since September.

DJIA  Dow Jones Industrial Average, 2010

The DJIA

Black Friday retail figures showed a big improvement over last year’s event, and, importantly, retailers reported lot of people were buying for themselves this year.  That’s a certain sign of rising consumer confidence.   If holiday retail sales remain strong through the end of the month we’ll see a synergistic effect on the stock market.  The boost in holiday retail sales will boost the market, which will boost consumer confidence .  By spring we could see the boost communicate itself to the housing market, and a rise in buyer enthusiasm, sales activity, and prices.  Sorry, we can’t predict the extent of the coming spring market, and candidly, we’re not confident it’ll buoy us right on over the snarl of foreclosures and short sales that certainly lie before us, but still, we’re saying . . . .

Look for a bump in the market this coming spring. Home sellers, if you’ve been on the fence, there may be a window here before interest rates clamp buyer’s spending limits.  Home buyers, these are the good old days.  If our predictions about interest rates hold, the sooner you get into the market, the better.

Finally, Happy Holidays from Jeanne and Shannon!!  We hope you’re all able to spend a part of this month surrounded by the company of your family and friends.  And have a very Happy New Year!!!  (We’ll stay in touch!)

September 2010 – Notes from Shannon & Jeanne

A sneak peek at August sales activity. Since RMLS data for August sales isn’t available until mid-month we have to rely on a smaller data set to get an idea of how August sales panned out.  Reports from our REMAX office, which is the single-most productive real estate office of any company on the east side of the river, suggest that August sales activity was keeping the same slow pace as reported for July.  During the August 1 – 15 reporting period last year our office reported 53 houses sold (new sales contracts); this year we only did 26 sales as of mid-month.  But it was August . . . lots of agents were on vacation, and many of our buyers were out of town too.  And don’t let the 2009 vs. 2010 numbers alarm you too much; last year in August the big run up in prices and sales began as buyers began to scramble to meet the October 30 first-time home buyer deadline.  Last August was the anomaly, not this past month.  In spite of the alarming comparison between this August and last year’s August, it was a fairly typical August.   (Personally, August is often the least productive month of the year for us.)

Showing activity is also flat.  The RMLS of Oregon has begun to report agent showing activity on a semi-weekly basis.  You know we use electronic “keys” to open the Realtor’s lockboxes, and every time we use our key to open a door the event is logged with the keybox vendor in Chicago.  The graph of showing activity is revealing:

Lock Box Activity July 2010

The big lull in showings was between mid-November and the end of December; once we turned the page on the New Year showings leaped up, and remained strong until . . .  late April.  Wasn’t April 30 the deadline for the first-time homebuyers’ credit?  Coincidence?  I think not.  Showings fell off dramatically in May, and the trend has persisted. . . .

That’s a trend that may be with us for awhile. Concern we’re going to suffer a double dip recession made the national news two weeks ago, and in the past two weeks unemployment reports puts Oregon firmly near the top.  But there are bright signs too: two weeks ago Flir Corp bought a company that makes sensors that detect explosives, chemicals, and what-not, which solidifies the Wilsonville-based manufacturer’s position as a leading supplier of military detection devices, and last Saturday wind-power giant Vestas announced it had picked Portland as its North American headquarters.   It’s a mixed news picture and in a low-confidence atmosphere the media and the minds of consumers are more like to spin toward a negative interpretation of unfolding events.

The Big Picture. We need jobs and consumer confidence to get traction in the housing market.  It seems unlikely that a single event will precipitate a boost in confidence and a commensurate hiring spree, but if ever there was going to be a single event to boost confidence it would be a big election, and that’s too far in the future.  We’re inching back from the edge and in just a few months we’ll be able to see if in fact the worst is behind us or if there’s another rough patch ahead.

Coming Right Up. Low interest rates and the likelihood of some pent-up buyer demand could stimulate stronger sales activity this month.  The growing threat of interest rates turning north will goad folks sitting on the fence to buy before rates rise out of sight.  Stay tuned!