The Beach Boys closed out our annual convention last night. The two days included the obligatory rah rah and way too many awards honoring our success (we are President’s Circle winners) but also there was some great information and ideas that will help improve our business even more. Our son, Ryan, made the trip with us.
David Lehear is the National Association of Realtors chief economist. He spoke about the real estate market is healthy at 3-8% annual appreciation. Many markets got way beyond that and it couldn’t be supported continually as buyers moved away from the fundamentals. The rapid appreciation did not look good on paper and eventually some of the local markets “balloons” deflated (there were no bubbles to burst in his view). Eighteen months of recession hurt the market but now he believes that the fundamentals of the economy look good and we should see normalcy in the overall market. He does have concern about how the subprime “monkey wrench” will play out in the recovery.
One of his other concepts is that real estate is local (also the title of his latest book which comes out next month). He simply said that real estate occurs locally. Some areas didn’t participate in the boom years at all. They’re healthy markets now. If we consider Portland, we had good appreciation, not great and our market has taken a hit but not tanked. A lot of buyers have sat on the sidelines but as sellers begin to lower prices a little (Realtors are partially to blame for not being more forceful about lowering prices sooner to react to the market), they are now ready to buy. Seller’s ask for a price but the market determines it. It only takes one ready and willing buyer to sell a house.
I just wanted to offer my perspective as a buyer in the Portland market for what it is worth.
The price to income ratio here in Portland scares me away from buying considering the job market here in Portland. The price to rent ratio tells me to keep renting. There seems to be very little reality left in the market here where a bungalow in my neighborhood (Hollywood) just went on the market priced at $830,000. I’m a renter (where rent on such a bungalow is around $1600/mo) and it is becoming clearer to me that it is time to sit on the sidelines and invest my money elsewhere in the short term. I wish as a buyer I could see this clarity that is coming to the market in your eyes as sellers lower their prices, but from all the houses I have seen, sellers are still expecting 13-18% a year appreciation.
Did Lereah call another market bottom? He’s been doing that on a monthly basis for, what, over a year now? You’ve got to take anything David Lereah says with a huge grain of salt at this point.
For some fun tracking Leareah’s comments, check out:
http://davidlereahwatch.blogspot.com/
Ralph: You’re correct on the price to income ratio being scary. I think this is really the most important factor that leads me to believe that we either have a rapid correction or a prolonged stagnation in house prices so that incomes can catch up. Just imagine the debt we’re saddling the next generation with if home prices were to stay at the levels they are now. Think of the children: falling home prices will help them. (OK, I’m being purposely melodramatic with the “think of the children”, but my point still stands)
I just love realtors “experts” like David Lehear. Ralph is very smart to be concerned – jobs are leaving, rather than coming to, the Portland area. The “subprime monkey wrench” is going to be more than a small inconvenience as more people can’t afford their changing mortgage payments. And federal money for the logging industry in Oregon (and other Western states) has dried up in favor of continually funding the Iraq war.
I do disagree with a point – many realtors have absolutely no control over the price that a buyer wants to sell their property. My former realtor lost a listing because he was honest and told the seller what the market would bear; the seller went to another agent, and lo and behold, had to swallow his pride when the property wouldn’t sell. And some buyers have maxed out their credit and can no longer afford the payments, but want to sell for the highest possible price to save face.
TiP is right that Lehear is derided by many pundits. His reign spanned a boom and then a decline and he is loathed by many. I’m not going to comment either way because I have not tracked his wild national media ride. What I can tell you is that he is right, in my mind, about real estate being local. I’ve tried to focus on our market because that is what matters to us. Lehear talked about many markets still being in trouble but not as an overall picture from what I heard.
Between us, let’s see if we can come up with the pros and cons of the Portland real estate market at this point. I’ll start with these:
Pro:
-Still the lowest cost major west coast market.
-Local economy seems strong.
-Current owners should have significant equity in their current homes.
-Portland’s population is increasing meaning that more potential buyers are moving.
-The Urban Growth Boundary limits the amount of available housing in the Metro area.
Con:
-Nobody knows how the subprime collapse will affect our market but it can’t be good.
-Current prices are and tightening lending requirements are cutting down on the number of qualified buyers.
-The market has clearly slowed and current prices may not entirely reflect that.
Ralph is right. There is, for the most part, a disconnect between what sellers are hoping for and reality. In any market, an over-priced house won’t sell and an under-priced house will sell instantly. Even as Realtors, it is hard to come down off the high of a great market but it is our job to manage that expectation. Sellers are taking the same wait and see attitude that buyers are taking. They don’t want to lower their prices because it only takes one buyer to sell a specific home. I still don’t see a significant decline in prices that is suddenly going to open the market to those that are currently excluded. I don’t see a problem with a stagnation as the market corrects.
There is an emotional and an analytical side to our market. It sucks that people that want to buy cannot afford to. Once that is stated, you have to look at whether that is caused by a true inability to buy or a lifestyle that has caused that inability? We once had a renter that couldn’t make her rent payment in part because she had, from the day she moved in, a DirectTV subscription and the heat set on 75. The choice for luxuries negated the ability to pay for the necessities so there can be no real sympathy. Home ownership is at an all time high. Is home ownership a necessity or a luxury? Do you enter the market in your dream neighborhood or further out in a less desirable area?
Ryan, our son, needs to clarify TiP’s melodramatic child comment: a drop in real estate prices is not good him.
I wrote the above on the plane home so had not seen JJ’s comment. I’ll comment on that after I find some food.
A listing agent has control of whether or not they take a listing. None of us earn a living by collecting listings, we earn a living by selling listings. We’ve lost listings based on the price we suggested but such is life. You can lead a horse to water but you can’t make them drink.
Yesterday I linked an article to my blog from a report referencing Christopher Cagan, director of research at the real-estate-information concern based in Santa Ana, Calif. Dr Cagan indicated that the total foreclosures resulting from ARM adjustments will be less than 1% of all loans funded and spread out over 6-7 years. He feels that the impact to our economy will be minimal and that the greatest problem will be with loans that had “teaser rates”. This would be mostly an Alt A mess.
I agree with him in theory. The subprime risk will mostly be over in 2-3 years as that’s the limit of most subprime ARM’s. Many of those have already or soon will be adjusting. If borrowers took some initiative upon themselves to improve their credit then they will be ok. They will be able to refinance. If not, then that’s partially their fault.
I also feel sorry for the 1st time homebuyer in Portland. Our Urban Growth boundary is unique and it does drive prices up, especially in our city core. In most areas of the country people flee to the burbs for better living. Portland has been able to creat a very vibrant city due in part to the ability for people to rehab their homes and sell them at a higher price.
side note: I was watching Foodology last night and they were biographing Tyler Florence. In his early days he worked in NY and had to live in the Bronx. His daily commute was 1 hr each way on the subway. In perspective, we don’t have it to bad. That said, for many, rent still makes the most financial sense.
For me, the bottom line is taht what is happening is healthy. Loan officers and realtors are leaving an over crowded market, (as are real estate investors). Prices are stablizing, rates are holding.
Another link on my blog references the fact that mortgage companies going out of business is commonplace and has been happening for years. We just haven’t heard about it. The market is going through another adjustment and will come out healthier.
I’m already seeing changes for the positive and I can still get a good loan for a solid borrower. I’ve seen approvals on fully documented loans with debt to income ratios up to 65%. (yes, I know, who can afford for 65% of their income going to a home… How about the 700 credit score borrower with a 600 score spouse with 2 incomes. In the “good old days” we would just call it stated income.)Borrowers who can document their income with fair credit will still be able to qualify for a loan. Investors are another story…
Lenders are shifting their philosophy. It appears that they would rather extend more credit to a known risk (fully documented income and assets) then to an unknown risk (stated and no ratio.) Basically, they are willing to make a judgement decision based on the truth rather then a lie…
Good reasoning about the subprime!