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Is Portland Real Estate Overpriced?

According to Forbes, Portland is the third most overpriced market in the country. Seattle and San Francisco rank 1 and 2.

Portland comes in on the northern end of the list once again. Like Seattle, it took some hard knocks during the dot-com bust. “Oregon’s economy has not yet recovered from the recession of 2001,” according to the state’s official fact book, the Oregon Blue Book. At the end of 2004, the state’s unemployment rate was lingering around 7% (it was 5% nationally in June). The quality of life is good, but real estate comes at a price. From the end of 2003 to the end of 2004, the median home-cost price increased by nearly $20,000 to $201,500, according to the U.S. Department of Housing and Urban Development

The median home cost in Portland is now $239,000.

Then Money (June O5) says that Portland has a low “past price risk” and a 9.6% “forecast growth to June 2006.” In the article, a graphic of the top 100 markets shows Portland as a green light. This means that the home prices are less than 3.3x the local median income level.

Who do you believe? Money rates San Diego as the “scariest” housing market. It doesn’t get mention in Forbes’s top ten. I have to lean in the direction of Money. Prices continue to climb in Portland; driven largely by low inventory levels and well qualified buyers that are jumping on low interest rates. Home prices are market driven. An overpriced house is still an overpriced house and will sit on the market. The seller may determine the listing price but the market will determine the selling price.

We can’t have this conversation without mentioning Californians (yeah, I was one of them 10 years ago). The Californiazaition of our market certainly exists. Fifteen out of our 38 transactions so far this year are either Californians relocating themselves or their money to the area. They have spent years in hot real estate markets and have a different psyche when looking at property here. The listing price is often considered the minimum starting point. It just becomes a question of how much over asking are we going to offer? Don’t forget that an overpriced property is just that, overpriced. Are people paying more than market value? I’d say yes since some appraisals are coming in low and some buyers are too embarrassed to tell their friends what they paid. Somehow real estate

Regardless of where you fall in the argument, the Forbes article sums it up best:

If you’re unfortunate enough to live in an overpriced city, stop your whining. After all, there must be something keeping you there, whether it’s the museums or the easy commute. And if you’re lucky enough to live outside of the top ten, count your blessings–and your dollars.

If you’re still not convinced, pack your bags for San Francisco. Median home price: $750,000.

18 Comments on “Is Portland Real Estate Overpriced?

  1. Is Portland Real Estate Overpriced?

    Much is being written about the article in Forbes magazine that suggests that Portland real estate is so overpriced that only Seattle and San Francisco are worse. That’s right – Portland is worse than New York, Los Angeles, Chicago, Atlanta,

  2. In San Francisco, though, you might get a decent job.

    The stories about overpricing compare housing prices with income levels. On that score, Portland is clearly one of the worst anywhere.

  3. “The stories about overpricing compare housing prices with income levels. On that score, Portland is clearly one of the worst anywhere”

    I agree with Jack, on that point. But it means that Portland is only overpriced for someone moving to the city without a job. So, it seem the criteria only applies to a specific group of people.

    If you have a job, and you bought your house five years ago, then Portland is probably great… …these lists are so subjective, I never take them seriously.

    Everyone values something different in a city, and that’s why you live there. Most people value family, and that’s why they live where they live. However, family is never a criteria in determining the best place to live.

    Portland has its problems, but its still one of the best cities in the US. …or at least that’s my opinion.

  4. Echoing some thoughts I think I see in Justin’s post, I have a hard time taking those magazine surveys seriously too. It always seems as though they’ve been done by someone who either has an axe to grind or an agenda to justify-they leave things out or intepret things in a sort of self-serving way.

    That’s not to say that Forbes or Money are *completely* incorrect: Portland real estate *is* hideously expensive. As a recent buyer of a $165,000 home in a neighborhood where other comparable houses are selling north of $180-190,000 now (it was a bitter divorce, and they were anxious to sell) I have a new perspective on this.

    One thing I’d like to see someone comment on, if you accept the interpetation that the current high housing price as a ‘bubble’, is what’s to happen to the holders of fixed 30-years who have no plans to move. We hear a great deal about what’s might happen to those who hold ARMs or those “Interest-only” loans (and that’s quite alarming), but I’d like to know what the old-fashioned, buy-it-and-stay-there sort might expect.

  5. I thought there was something fishy about the Forbes thing because median incomes are not much higher in NYC than they are in Portland, according to the US census, while the cost of living is something like 50% higher, and yet Portland was ranked as more overpriced than NYC. So I looked into how Forbes developed their list.

    Here is their description of the factors they used in their calculations:

    “To determine the ten most overpriced places in the country, we started with the 150 cities examined in Forbes’ 2005 list of the Best Places for Business and Careers. They were ranked from 1 to 150, with 150 being the worst. Weextracted the rankings for job growth, income growth and cost of living (which includes the cost of housing, utilities, transportation and other expenditures), then added to the mix a housing affordability index from research firm Economy.com. The index measures how much of a local median-priced home (the price at which 50% of homes are more expensive and 50% are less expensive) you can buy if you earn the local median income, given current interest rates. We totaled everything to see which cities come out on top–or on the bottom–depending on your perspective.”

    Housing affordability and a cost-of-living index seem reasonable choices for the cost side of things. (Except that housing prices appear to be counted in both places, which seems a little slapdash.)

    However, on the other side of things they didn’t use either wealth or income (except as income is reflected in the housing affordability measure) they used income *growth* and job *growth*. Huh?

    When we go to pay our mortgage or buy groceries it matters a lot more to us what our income is than it does how it compares to what we made last year. Job and income growth obviously have a bearing on income but it seems to me that it’s screwy to use growth as a factor directly.

    I would think a straight comparison between median income and a cost of living measure that includes housing would be a lot more illuminating than the Forbes thing. And if what you use it for is to decide whether or not where you live is overpriced your actual income is a lot more important than the median income.

    As to the question about what a housing bubble might mean to people who bought a house so their families would have a place to live and not as an investment, the issue for a person with a fixed-rate mortgage who expects never to sell their house or to borrow against the equity is more what a bursting housing bubble might do to the economy in general. A bursting housing bubble could endanger the incomes of a lot of people. For most of us, even a nice low fixed-rate mortgage is tough to pay without a job. There is also the issue that you may not plan to sell your house or borrow against the equity, but something else unexpected could come up and make you change your mind. If house prices drop sharply, a fixed-rate mortgage is no guarantee that you won’t end up “upside-down” on a home loan for years. That means no possibility of borrowing against equity and a loss if you do have to sell.

  6. I have no hope of buying a home as it is, and a moderate “correction” in home prices won’t change that.

    I did notice earlier this week (Oregonian) that rents have bottomed out and have begun to rise. This is something I have been expecting and predicting since our employment picture started to improve. (Prediction: if the economy really picks up steam, expect increases in homelessness and demand on food banks as low earners will be squeezed tightly by rent increases.)

    If buying is not an option for me, is there anything I can do to protect myself from a rising rent structure?

  7. Terry,

    Is your “no hope on buying a home” based on your personal feeling or talking with a bank or mortgage broker about your situation? Knowing nothing of your situation, you might find that there is a loan program that will allow you to purchase. Coupled with tax advantages (talk to an accountant) it might work out.

    Portland doesn’t have rent control and I expect that rents will increase as property taxes, property values and interest rates increase. A lease versus month to month is usually your best bet against rent increases. A lot of landlords forgo raising rents on exisiting, good, tenants because it is cheaper to lose $50-$75 a month on market rent over a year than it is to have a $1300/month unit vacant for a month (plus cleaning and time costs of placing a new tenant).

    Charles

  8. 1) The value of my house to me is exactly what it was the day I bought it. The tax assessor tells me its worth more than twice as much. But if I sell it, it will also cost me twice as much to replace it. The only way around that is to move to a cheaper market or die. Houses are great ways to create an inheritance for your children.

    “if you accept the interpetation that the current high housing price as a ‘bubble’, is what’s to happen to the holders of fixed 30-years who have no plans to move. We hear a great deal about what’s might happen to those who hold ARMs or those “Interest-only” loans (and that’s quite alarming), but I’d like to know what the old-fashioned, buy-it-and-stay-there sort might expect.”

    Assuming interest rates go up, you are stuck where you are unless you are prepared to pay far more for the same housing or to extend your loan period.

    Just as lower interest rates allowed a lot of people to buy more expensive homes without increasing their mortgage payment, higher rates have the opposite effect. If you sell your house and buy another one at the same price you sold at, you will have to pay the higher interest rates and will have higher payments.

    For instance for a monthly payment of $1000 at 5.5% you could borrow $176,000. If interest rates shoot to 10% then you can only afford to borrow $113,000 for that same payment.

    You would have to come up with the additional $63,000 from somewhere. The increased cost of housing will eat whatever equity you built from the market. That somewhere could be the equity you have paid off on your existing loan. But unless you have nearly paid off your house, chances are you have mostly been paying interest.

    2) I think it is important to remember that the people who are in the market for housing and the average person who owns a house are not necessarily the same thing. So if the cost of the median house sold is high for a person with a median family income you may be simply noticing the difference.

    It is pure speculation. But I would expect that a lot of the people in Portland whose incomes were stagnant or falling during the 90’s have used lower interest rates to lower their housing costs or pay off other debts rather than to buy a new house.

    On the other hand those who have prospered over the last 15 years have found themselves able to afford increased payments. Those people have stayed in the housing market, using the lower interest rates to buy up in the market.

    So its possible – again this is jsut speculation – that the typical house on the market and sold in Portland does not reflect the typical house in Portland. And the typical purchaser does not reflect the typical home owner either.

  9. One thing is for sure. If you are buying a a spendy Pearl condo with a 10 year property tax exempition it is much easier making your payments when you can use what otherwise would be going towards your property taxes.
    In many cases condo’s valued at $600,000, or more pay only a few hundred per year in property taxes.
    Their yearly tax bill would be $12,000 if not exempted.
    Must be nice having an extra $1000 a month to pay your mortgage.
    Not so nice for the rest of the taxpayers who are told it’s for for our own public good.

  10. I don’t have hard evidence but I think sellers have become very aware of the benefit of the tax abatement and the benefit is built into the sales price.

    If you can market it and it has value, you can be sure it isn’t a freebee.

    It’s impossible to measure because you can’t compare two identical units with and without the benefit.

  11. I don’t know exactly what you are suggesting but the tax abatement is without question a freebee. For 10 years, or more in some cases. Sure it helps sales and maybe the sales price was elevated because of the abatement. Either way it is still free money to whoever gets it. Right?
    IMO there is little or no justification for thousands of units to be exempt from property taxes.
    Yes thousands. http://www.saveportland.com

    On the “bubble”?
    We haven’t peaked.
    Developers are now paying upwards of $600,000 per acre for residential land. Along with the heavy costs of our land use process and rising fees, at build out our housing prices will continue their upward treck.
    The UGB is reaching it peak dysfunction as
    infill devours most of the remaining land in our cities, they fail to annex large unicorporated areas of existing development and newly expanded UGB areas sit unavailable for developement due to process.
    This mix of poor planning, high land prices and excessive regulation, process and fees will worsen our housing affordability. Especially in the Metro region.
    The endless excuse making by those keeping Oregon’s “planning” faith will usher along this mushrooming housing calamity, forever declaring “planning” had nothing to do with it.
    Only when we are the worst in every conceavable category in every magazine will there be enough shift in direction and hope of recovery.
    Untill then we’ll see more mistakes, higher prices and all of the detriment one would expect.
    It will be viewed by some as “special” for some time longer.
    Sorry but I call it incredibly stupid.

  12. While I love the PDX/Vanc area and recognize that homes here are lower in price than in some other parts of the country it seems to me that housing prices are being artificial driven up by creating a sense of panic in the minds of those who hope to own a home and loans being made so easy to obtain that people who have no business committing to a mortgage are being handed loans with variable interest rates or “interest free” terms.

    This has created a sort of “land rush” and is causing prices to jump at such a fast pace that there could very well be disaster down the road.

    A similar thing happened in the San Diego area about ten years ago and the end result was that home prices suddenly dropped and many of those who purchased homes found themselves owing far more than what the houses were worth and hundreds of people simply walked away from their mortgages.

    Is Portland an area which is desirable and deserves to see a steady increase in appreciation as well as home ownership?

    You bet!

    But when people who make little more than minimum wage are being given loans for close to $200K to purchase a home which was valued at only $160K a year or two ago I know that something is wrong.

  13. I make minimum wage and I haven’t been able to get a mortgage. Am I missing something here?

  14. The reason I moved to Portland was because I believe it is the best planned city on the west coast. The Urban Growth Boundary (UGB) theoretically keeps Portland from becoming LA or the Bay Area or Dallas/Fort Worth. Endless sprawl may be convenient for the Automobile-Bound Suburbanite, but for those who want a livable, walkable downtown with transit alternatives, and parks and trails nearby, Portland is hard to beat.

    If you don’t like the UGB you are one of the lucky ones really, there are more cities in the US without them than with.

    I want to buy my first house here, and the prices right now are painful. I’m sure regulations limiting sprawl are causing some of this, but I’m willing to pay the price. Versus California and the Puget Sound, Portland looks like a better deal.

    Now if we can get some Tech. jobs downtown…

  15. I own a condo in both Portland and Manhattan, NY. There is no way that Portland even comes close to the prices of NY. Prices may have gone up quite a bit over the past couple of years, but it is all relevant – supply and demand. If real estate is overpriced, then supply will surpass demand and prices will eventually come down.

  16. “If real estate is overpriced, then supply will surpass demand and prices will eventually come down.”

    You’re kidding, really?

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