First Time Buyer Expectations

We hear the lament all the time: “I’ve been priced out of the Portland market.” First, it is only fair that I let you know that we own four homes in Portland so I come from the “other” side. Second, the grass is always greener over the septic tank.

Correct me if I am wrong, but I think what is really being said most of the time is that, “I’ve been priced out of living in my dream neighborhood in my dream house so woe is me.” When I bought my first house, I was fortunate to have down payment help but I also had three roommates paying towards the mortgage. Dream situation? No.

Every home purchase has trade offs. When prices started to skyrocket in the Bay Area, Petaluma, an hour to the north on a good day to San Francisco, was an acceptable commute in order to own a home for some. Many of those homes are now worth seven figures themselves. Think of that in Portland terms: you could live 10 minutes south of Salem and still have what those folk viewed as an acceptable daily commute.

You can still spend less than $200,000 and have a Portland address. It may not be where you want to live but you would own it. It is absolutely true that you can rent more house for your dollar than you can buy in Portland. That is a lifestyle choice for many. Homeownership is not for everyone. We can banter about the tax benefits, that prices are going to drop drastically (they are not in my opinion) or what have you, but my point is that if you want the privilege (it is not a given right) of owning a home and you have planned accordingly it should be possible in this market. If it is not possible today, you have to assess your situation and see what you need to do to make it possible in the future under what are reasonable assumptions of lending requirements in the future. Of course there is an income component and I won’t discount it.

26 Comments on “First Time Buyer Expectations

  1. Your link says that apprication has dropped to 5.9%. I don’t have a problem with that. Where are the sharp declines? These are indicators of a healthier overall market, not the sky falling.

    You can’t say that the Bay Area analogies are way off without saying why. People were willing to adjust their homeownership dreams, bought, and are a lot better off for it.

  2. Ralph: Thanks for posting that link, I hadn’t seen any local numbers lately.

    The number of closed sales fell 6.8 percent in February, compared with a year ago,

    Wow, that’s very different from what we heard about the national picture.

    The overall number of houses for sale jumped by 80 percent, to 9,901 on March 1, from 5,503 a year ago, according to figures from the Regional Multiple Listing Service.

    Again, wow. That’s a huge jump in inventory yoy. I suspected it as I was driving around and seeing lots of forsale signs, but now we have data. How many months of inventory are we up to now?

    Though demand is falling, prices have yet to drop as they have in other parts of the country. The median price was $279,000 in February, 5.9 percent higher than in February 2006.

    Charles, I’ll have to differ with your analysis. Median prices rising 5.9% in a period of slow sales and rising inventory points to trouble at the low end of the market, just as we would expect given the tightening lending requirements. It means that the first time buyers are being thinned out. A rising median in this environment means that on the high end people are still able to do deals either based on earlier sales or the fact that they just have the cash. However on the low end the deals are drying up.

    If sales were up, inventories were down and median price was up I would have to concede that we’re not going to see drops, however with sales down, inventories up and median up I tend to think we’ll see problems spread up the chain in the next few months. Better measures of prices at this point would be price/square foot, or tracking specific neighborhoods YoY.

  3. First on inventories. The news story I linked to said inventories are up 80% from March 1st of last year: 9,901 now 5,503 last year. As well as the story of closing down 6.8%. I never said prices were dropping off. I personally think it will take 3-5 months before it sets in that supply is way out pacing demand. The supply glut is somewhat recent.

    Now, the Bay Area analogy is way off for the following reasons:

    1. This is not the Bay Area for numerous reasons (jobs, culture, tourism, ocean, etc). San Francisco will ALWAYS have a higher demand for homes than Portland.

    2. There is plenty of affordable cities closer to San Francisco than Petaluma (Oakland, Richmond, Hercules). You’d be closer in saying the first-time home buyer should move to Sacramento to get a similar home. Petaluma is desirable because it is North Bay not East Bay. North Bay homes will always out pace the rest of the Bay Area.

    3. Urban Growth Boundry.

    4. Gasoline is $3 a gallon.

    You are seemingly making this argument, correct me if I am wrong. You need to move 10 minutes south of Salem or move to “Felony Flats” if you make the median income for Portland. I don’t find it unreasonable to want to live in a neighborhood where the median income is similar to mine. Why is that unrealistic?

    Do you use this argument with your first-time home buyers? I’d be curious as to their response.

  4. I own one home in the Portland area so I may not be as biased as Charles. I think prices are too high and have gotten out of line with incomes. When I bought my current Beaverton home back in the early 90’s the price to my income ratio was 1.75. Now if I were to buy the same home that ratio is about 3 (I am fortunate in that I make well above the median income for the area). So what happened between the early 90’s and now? My income went up some, but the “value” of my house went up a whole lot more. I put “value” in quotes because it’s all just funny money till you actually sell and don’t have to buy another one in the same market.

    As Ralph points out, your comparison of Portland to the Bay Area has flaws. What is Portland’s “Petaluma”? Maybe it is felony flats of even Salem as suggested by Ralph. Or more accurately what is Portland’s “Sacramento”? Given the high cost of gas (which will only go up from here) the exurbs are dead (good riddance). If you expect people to commute an hour or more just so they can afford to own a house, well, that’s just not going to be an affordable option going forward either (nor is it ecologically sustainable).

  5. The analogy is not buying in the desired place in lieu of somewhere more affordable. Living in Stockton and working the South Bay would be another example. Did people flock to Tacoma because they thought sitting on I-5 would be fun? Live at the end of the Max line in Forest Grove and that takes the $3 gas out of the equation.

    Not long ago, you couldn’t get a pizza delivered to Boise Elliot in NE Portland. Now it is a booming area with room to improve even more. The UBG, in part, can be thanked for that. The “early adopters” in Felony Flats are the ones that are going to make out.

    The point of my post was expectations, not a discussion on the market (we can disagree about that all day).

    So yes, that is the conversation we have with first time buyers. Real estate is about trade-offs.

  6. One more thought: buy a plex. We never could have afforded the house we bought in NW if we didn’t have renters. Being a landlord with your neighbor isn’t great but you can afford more when you have people contributing. Lenders won’t let you count 100% of the rental income as income but it helps.

  7. Amen and kudos to TIP and Ralph. San Francisco Bay Area is NOT Portland. For most, Portland is not a destination; it is an interesting city that is featured occasionally in Sunset Magazine.

    Homebuyers bought in Petaluma or Livermore (about equal distance from San Francisco) back when gasoline was much much cheaper. The mass transit (BART) also runs throughout the Bay Area, which Portland has not (TRIMET MAXX is very minor compared to Bay Area Rapid Transit). The Bay Area freeway system, excluding the Bay Bridge, is superior to Portland and Salem’s Metropolitan area (which depends on I-5 pretty exclusively).

    Additionally, as I stated before, the condo market alone is in a huge glut. Why else would a big condo builder in downtown switch to building apartments?? (As reported in The Oregonian “The demand has changed to luxury apartments downtown” HO HO HO) The inventory for houses has also skyrocketed. And many less people can afford because the 80/20 mortgage scheme has backfired.

    I will agree that home ownership is not for everyone, and I certainly don’t subscribe to giving homeless people free houses. But insinuating that people would be able to afford an overpriced home if they had just planned accordingly is a rather elitist and snarky thing to say. Or, at least, that’s how I read it.

  8. I thought that we were over the San Francisco comparison. The point is that the further you are from the prime locations, the cheaper the real estate is.

    Snarky and elitist by suggesting that a willing and able buyer can by an appropriately priced house? An overpriced house is overpriced in ANY MARKET!

    BTW: BART doesn’t come in within 50 miles of Petaluma.

  9. JJ: I saw that Oregonian article about how some condos downtown are now going towards being apartments due to slow sales. There was also an article about a week ago about how there are 3500 condos in the pipeline for the Central Portland area (downtown, Pearl, South Waterfront, inner SE – just look at all of those cranes in those areas) The reporter actually asked the Wells Fargo housing economist (I think that was her title) if there would be bankruptcies arising from this (good question) and she said she didn’t think so (what else is she going to say? “yes, of course and we’re heavily exposed…”?

    At any rate, in Portland it may be that 1st time buyers are going to be going to have to go into condos if they don’t want a long commute, etc. The slowdown seemed to start in the condo market so we’re probably already seeing some price erosion there.

    but my point is that if you want the privilege (it is not a given right) of owning a home and you have planned accordingly it should be possible in this market.

    I can agree to some extent with this statement. Planning accordingly in today’s credit enviroment now includes saving up a nice 10 to 20% downpayment (a very retro idea that’s now back again). However, most people haven’t been conditioned to save up a downpayment anymore. They’ve been led to believe that they can buy with 0 down because that’s the way things were for the last five years or so. Now 0 down is pretty much gone and people need to save up again. That is reducing demand as people need time to save up. And that has a dampening effect on prices.

    Here’s a thought experiment: how much would houses cost now if 20% down was and had been the norm for the last 10 years?

  10. Charles has a point in that most 1st time homebuyers have expectations out of line with their ability. This might be based on income or debt

    …or lack of savings. A lot of unrealistic expectations have been built up in the last few years. Another is the expectation that after buying this first house it’ll appreciate at 10 to 20% per year so you’ve got to get on the gravy train now or “you’ll be priced out forever” ( see:
    http://pricedoutforever.com/ )

    The move to apartment buildings … is a cyclical thing. Right, my point was that all these investors were going out and trying to convert every apartment in sight into a condo and now they aren’t selling so it’s going back the other way.

    As far as people living in the burbs or farther out, hop on I-5 in N Vancouver or Wilsonville and watch the traffic.

    No disputing it; there’s lots of traffic coming in from those exurbs. However, my point is that given the current trajectory of gas prices, [considering worldwide consumption patterns (think India and China demand growing) and peak oil (I do tend to buy into the peak oil thing)] I really wonder if those long commutes will be affordable in 10 years. I suppose they could be if we get cars that get in the 60MPG range, perhaps. Lots of cars like that available in places like Europe and Japan. We’re already seeing the beginning of the death of the exurbs in CA (where gas is already over $3/gallon). I think that’s why we’re seeing big declines in the CA central valley – people realized that it just wasn’t worth it to live 1.5 hours from work and burn several gallons of gas/day.

  11. Charles has a point in that most 1st time homebuyers have expectations out of line with their ability. This might be based on income or debt, either way it affects their ability to afford the payment. But this has been going on for years.

    My 1st home was on 15th and Killingsworth about 10 years ago and I had 4 roommates who paid my mortgage. It was not a neighborhood that I felt real comfprtable in. It was not filled with people with an income like mine. But it did give me the ability to own a home and build equity.

    The move to apartment buildings is not a Portland thing. http://www.mortgagenewsdaily.com/3202007_Apartment_Rentals.asp . This is a cyclical thing. As homes get overpriced it makes more sense to build apartments. This happened in the early to mid 90’s as well.

    As far as people living in the burbs or farther out, hop on I-5 in N Vancouver or Wilsonville and watch the traffic.

    80/20 mortgages are no more of a scheme then lenders requireing mortgage insurance on the portion of a loan over 80% and doing everything they can to not take it off.

  12. Charles,

    It’s true that Bay Area Rapid Transit doesn’t run to Petaluma or Marin County. But North Bay Area (Marin and southern Petaluma counties) maintain their prices. BART runs through Alameda, Contra Costa, San Francisco and San Mateo Counties. These are more the “more affordable” places that buyers went to when San Francisco proper became too expensive, rather than the North Bay Area (whose prices were equal or greater than San Francisco as a rule).

    My point was that you could live in Livermore or San Jose areas and still commute to San Francisco using BART. You cannot do this with Maxx. A person chosing to live in Salem (or any other areas south of Portland) and commute to work in Portland has about 1 viable choice – driving. You can get to Gresham, Hillsboro or Beaverton areas using MAXX and Trimet, but Hillsboro and Gresham are only about 15 miles from Portland (v.s. 50-60 miles from Salem area).

    In these prices, a college graduate schoolteacher does not have a chance of homeownership. Since when was a 1/2 million dollar house ($499,999 by any other name) considered essential for a decent home?

    New condominium complexes are disappearing in favor of luxury apartments – please give me the reasoning to think that this isn’t because the condo market is glutted.

    And sorry, the 80/20 with no money down adjustable mortgages was a scheme, not unlike the S&L breakdown in the early 1990s. It worked for some, and backfired for others. A recent article talked about how the mortgage industry, once highly respected, is now viewed as little better than used car salespeople. The trust is gone. Mortgages should have always been done at 10% or higher of price down payment as a contigent for buying a property.

  13. “Since when was a 1/2 million dollar house ($499,999 by any other name) considered essential for a decent home?”

    Exactly the point of this post. That is price range of the second or third time buyer in this market.

    The pride of ownership and the American dream come with sacrifices that I don’t see many first time buyers willing to make.

    February’s RMLS Market Action puts the median home price at $279,000 (average $326,700).

  14. I recently financed a home for a recent college graduate in Tigard for $325,000. He had 5% down, partly as a gift from a family member.

    Ummm… OK, recent college grad. Lawyer perhaps? Or maybe a Doctor? Even so, most RCGs with those degrees have a huge amount of student loan debt (often $50K+). I’d be curious to know what kind of profession would allow someone just out of college to buy a house that expensive – maybe I should switch professions. I couldn’t afford to buy a house that expensive and I think I make pretty good money (well, I did have mortgage folks tell me that I could EASILY afford a house that expensive on my income, but when it came down to it the loans were “exotic” and even then I wasn’t at all comfortable with the monthly payment).

    And part of the 5% down was a gift from a family member?! So how do you know this person has both the income stream and the long term “capacity” ( I think that’s what it’s called in the Mortgage biz). If a good chunk of that down came from family it doesn’t prove anything about their payment capacity. But nowadays, loans are sold so it’s not really your concern, is it?

    I’m working with a school teacher in Vancouver who has access to a loan for school teachers, medical professionals and public saftey employees. She’s looking at a home around $275,000.

    Most school teachers are making $50K and under. This means the ratio of house price to income for this person is something at best something like 5.5(!)… I hate to see that kind of debt load foisted on anyone. I hope they like rice & beans for dinner.

    Here’s something I noticed eating out twice this week: On Saturday evening it was at McCormick and Schmick’s. We noticed that we 40-somethings were among the youngest people there on that moderately busy evening – it was really very stark. I chalked it up to the type of restaurant; perhaps it mostly appealed to the older set. Then on Sunday afternoon we ate at a restaurant in SE and a friend of ours made the comment that there seemed to be a lot of senior citizens there and that this seemed very unusual for SE. And sure enough, looking around the picture was very much the same as it had been on Saturday night, but this time in a much more ‘trendy’ restaurant in a much more ‘trendy’ area. My theory? The younger folk who have bought homes recently in some of these areas can’t afford to eat out. The older folks who bought years ago can. (of course, I don’t want to over extrapolate the data so I should probably eat out a lot more to gather more data, but still… 😉

  15. U.S. Foreclosure Filings Rise 12 Percent in February (Bloomberg)

    “The rise in foreclosures over the past year probably only marks the beginning of the problem,” Jan Hatzius, a Goldman, Sachs & Co. economist, wrote in a March 23 report. “The main reason to expect further deterioration is that house prices are likely to fall significantly in 2007, with further declines possible in subsequent years.”

    (Larry, you might want to show this to that School Teacher, maybe even the new college grad. )

    Oh, and CalculatedRisk has an excellent analysis of the apparent disconnect between the new home and existing home sales numbers that have come out in the last week or so:


    CR is usually very careful with his words compared to a lot of the other bubble bloggers, so it’s interesting that he says:

    The shorter answer: new home sales have been crushed, existing home sales are about to be crushed.

  16. I recently financed a home for a recent college graduate in Tigard for $325,000. He had 5% down, partly as a gift from a family member.

    I’m working with a school teacher in Vancouver who has access to a loan for school teachers, medical professionals and public saftey employees. She’s looking at a home around $275,000.

  17. TIP- Recent college grad is a cpa. He wasn’t a liberal arts student. He knew what he wanted to do and did it. He deserves to own a home. Most reent college graduates for the last 30+ years didn’t buy a home right after graduation. Get real!! His school loans are under control.

    School Teacher qualifiesf for a reduced rate and lower MI.

    I’m not saying that there aren’t problems. What do you wnat people to do crawl under a rock?

    I can find just as many quandites that say that the worst has passed as that the worst hasn’t arrived. If you want real facts, a study was just completed with facts.

    I’m done posting here as it has no longer become productive. I like dialog, but this site has gone way past that.

  18. Recent college grad is a cpa. He wasn’t a liberal arts student. He knew what he wanted to do and did it. He deserves to own a home.

    He deserves to own a home?

    Most recent college graduates for the last 30+ years didn’t buy a home right after graduation.

    Yes, and for good reason: Most lenders wanted to see some track record established. Lenders wanted to see if they could save up that down payment without family contributions (used to be pretty strict about that). Larry, I’m not trying to be antagonistic, I’m trying to point out that the mortgage industry hasn’t always been this way and we’re starting to see the fruits of all of this lax lending.

    I’m done posting here as it has no longer become productive. I like dialog, but this site has gone way past that.

    Larry: What’s not productive about dialog? I’m merely bringing up another point of view. I think I’ve kept it pretty tame actually, especially compared to what I see on a lot of the bubble blogs. I’m basically saying that going back to more conservative lending standards will be a good thing overall. We’ve become this debt-drenched, “gotta have it now”, “we deserve it” culture. People from my grandparents generation would be shocked, were they alive today, to see that Americans now spend so easily, borrow so readily and aren’t able to save… but then again they lived through the Great Depression so they were actually acquainted with hard times that, hopefully, we will never know.

    Anyway, Larry, please do stick around and dialog. Expressing and listening to diverse opinions is how we all learn. I’m way off on the bearish side and you’re probably much more bullish – you hear things where you hang out, I hear different things where I hang out. The truth will be somewhere in the wide middle, no doubt.

  19. TIP- Recent college grad is a cpa. He wasn’t a liberal arts student.

    Actually, no, I won’t change professions:

    Average starting salaries for entry-level accounting professionals at small companies are projected to climb 6.5%, to between $35,500 and $42,500 (info for 2006)

    I wouldn’t want to take that pay cut and I’d be bored to tears, but that’s beside the point.

    So let’s say our NCG CPA is exceptionally bright and he’s going to make $60K/year right out of school (way above the average highend starting salary of $42.5K; maybe he can do amortization schedules in his head or something like that). That’s still a price/income ratio of 5.4… almost as bad as for the teacher. (BTW: over the long haul that ratio has generally been under 4). Personally, I don’t think I can consider a house “affordable” unless that ratio (using price-downpayment ) is less than 3. I’d want to see the monthly payment come in at 25% of gross salary or less (preferably less). And I have 0 debt.

    What do you wnat people to do crawl under a rock?

    No, but I do think that given the current environment, it pays to wait and save.

  20. ok… I just had to come back and check… I’ve never disagreed with the lax standards, but it’s seemed that anything Charles or I had to say was torn apart. With dialog comes understanding not always criticism.

    You’ve mentioned that a college grad should be able to buy a house and now that they’ve never been able to due to stricter standards.

    The college student in question has a Masters of Finance, has completed his CPA cert and works for a very prestigious firm. He is a professional and has placed himself to be able to afford a home. He has been very responsible with his life. I wish that I was as mature as he is at that age.

    The mortgage and real estate industries are a part of the problem, but a bigger problem exists. If people weren’t so willing to take on new credit instead of saving, or paying cash there would be less of a problem.

    We have finance books being written by finance companies and debt accumulation is taught in our schools. But that’s another post…

  21. I agree, for most it makes sense. My cpa has a 740 fico, he and his wife make over $6000 per month with minimal debt (34% dti) and we fully documented their income. The gift was 5% and the rest was cash that they had saved (partially an inheritace if I remember right). Oh, and their home ws $324,000. That’s what they wanted, that’s what they could afford and that’s what they bought. They sought me out, I referred them to a realtor that I work with, we even used the ellers Title company and we closed in 3 weeks.

    Not quite the typical recent college grad, but still a recent college grad.

  22. whoops, the gift was $4000 and the rest was cash.approx $25,000

  23. My cpa has a 740 fico, he and his wife make over $6000 per month with minimal debt (34% dti)

    OK, so there are two incomes. Initially I thought it was just the NCG.

    Larry, I read this again and it got me to wondering:
    Is that 34% dti after buying the home or before buying the home? I suspect it must be 34% after they buy the house, putting their monthly debt payments at $2040.

    Oh, and it looks like they put closer to 10% down since you note the $25K in savings + $4K in gifts ($29K down).

  24. Seeing that we have completely got away from the original point of this post, thought you might find this interesting. It came from a Washington Mutual broker that I have never met or heard of:

    While many non-prime companies are getting out of the market, WaMu’s adding more non-prime programs . . .

    • No need for perfect credit—clients with FICO® scores as low as 500 can
    qualify for financing (no scores required for co-borrowers!)
    • With expanded qualifying guidelines and debt ratios up to 55%, more
    buyers can get into the house they want
    • Plus special programs for clients with past defaults, foreclosures or
    • Cash reserves are not required
    • Loan amounts up to $1.3M
    • Seller’s contribution allowed up to 6%
    • NOT “high-cost” loans
    • Faster processing with flexible documentation guidelines

  25. Charles: thanks for the info. Sounds like a good time to short WaMu. FICOs as low as 500, dti’s of 55% – sounds like pure folly. They haven’t learned at thing. Actually, I wonder if this info is accurate: WaMu being a bank and all. The FDIC has recently gotten very interested in these sorts of issues (see details on Fremont and DSL). I’m sure this would attract their attention.

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