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Smart Money Thrashes Portland

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Nobody around here has been saying the market is rosy and that all is well but even the worst comments and predictions have matched this. We haven’t seen this month’s RMLS Action yet but Smart Money puts Portland as the #7th most over inflated of the 150 markets surveyed (the print verison is slightly different than the online version). Well now. They say we’re 47% overpriced. What do we make of that (no fair saying “I told you so” because no one has put a number that high out there in the past)? It was only three weeks ago that CNN/Money Magazine rated Portland as the best place to retire… I have to ask myself if I don’t buy Smart Money’s stats because I am biased and vested by being a property owner and Realtor, whether it is media hype selling magazines and anybody can manipulate numbers to make the numbers do what they want them to do or are we all toast (numbers like that will hit renters too as owners can’t absorb the hit)???

Not to worry, the report also snags our neighbor to the north:

Some of these markets are newcomers where home prices have been strong recently, among them Seattle; Portland, Ore.; and Provo, Utah. But 15 of the 25 are in California and Florida…

According to the report, we should all be buying in Dalas.

31 Comments on “Smart Money Thrashes Portland

  1. Charles,

    “(no fair saying “I told you so” because no one has put a number that high out there in the past)”

    Untrue. Global Insight’s quarterly study of housing prices in America (Cited in the article) has had Portland overvalued by 44% or better since 2Q06 and by 25% or better since 2Q05.

    Just be glad you’re not in Bend, which was found to be 68% over-valued!

  2. Almost fair. 44% is not 47% and what I meant was that no one had broght those numbers to the table in this forum. Question is what does that mean to all of us?

  3. This from a colleague of mine on the issue.

    I see that their methodology takes into account historical premiums or discounts over the years. It’s possible that their baseline for Portland shows it being a discounted market, which it has been for most of its history. But now that it’s “arrived” as a place to live/retire that
    baseline might be a little low. Then again, all the new arrivals may realize that we don’t have major employers, so we can always go back to being a discount market.

  4. I still believe that real estate is a demand driven market. When people think supply is low prices will rise. IMHO Portland metro is not one market, it is segmented by community (even neighborhood) and type (sf, condo, townhouse).

    The areas where price will be the softest next year, IMHO, will be those where speculators went bonkers. They need to sell and will be caught in the falling knife pricing situation.

  5. Yeah, even I haven’t called for a 47% haircut. A 33% haircut over the next 3 to 5 years; maybe if the economy tanks. A 20 to 25% inflation adjusted haircut over the next 3 to 5 years – most likely.

    …but a 47% haircut would be indicative of a depression I would think.

    Still, 20% off of a $300K home is $60K which is real money in my book.

  6. While I will allow that a small subset of retirees might do well in Portland, I don’t think most old folks would acclimate to the damp, cold climate (bad for arthritis, joints, and so on) not to mention all the junkies, meth-heads, panhandlers, and tatooed and peirced gen-xers and millenials.

    In short, I think Portland is too cold damp and scary for old people…sorry

  7. PDX_Renter: and I would add that generally you want to retire to a cheaper area so your money goes further. People from CA have higher home prices than here, but then again they’re probably used to that warmer, dryer climate.

  8. The idea that a town has finally “arrived” happens to be a fairly common delusion, historically speaking, so you really need to take it with a grain of salt. (See Schiller’s article on this: http://www.project-syndicate.org/commentary/shiller49)

    You also need to realize that cities that have already “arrived” (for example, NYC) don’t appear on the sharply overvalued list, probably for the same reason that the rent/price ratio is not that far out of whack in NYC (compared to Portland). So essentially, to justify prices for a city like Portland, you’re really proposing that Portland should be even *more* expensive than NYC, which I find difficult to swallow.

    One more point: Just because Portland is listed as 47% overpriced does not automatically imply that prices will drop by 47%. Historically, the correlation is this: “Since 1985 there have been 79 metro areas that endured periods of price declines that lasted two years or more. Statistically, those markets had one important thing in common: When their slumps began, homes there were sharply overvalued — by 33%, on average. “ The article does not suggest that the historical price declines were equal to the amount of overvaluation. They could be less or more.

  9. Well, then, if we consider Portland not to be one market but many markets, which neighborhoods will see the greatest price declines in the next few years? The Pearl? NoPo?

  10. “are we all toast (numbers like that will hit renters too as owners can’t absorb the hit)???”

    What do you mean by this? Do you mean that landlords won’t be able to lower rents to where they need to be and still make their mortgage payments? First of all, I’m not sure rents will need to fall; they’ve been stagnant since 2000 and only recently begun to catch up with inflation. And if the market dictates that rents do need to fall, then market rent will fall whether landlords can make their mortgage payments or not.

    If a particular landlord cannot lower his rent enough, then his place will just sit empty. When rents are falling, a renter can easily find a substitute rental – after all, not EVERY landlord bought at the top of the bubble; there will be some who can move down with the market and still turn a profit. So I don’t see how renters would get hit, although they might need to move to an equivalent but different apartment in order to lower their rent. There are very few housing problems that cannot be solved simply by moving, and as a renter, you can do that fairly easily.

    Possibly, there could be a short-term rental crunch because some landlords go bankrupt, temporarily restricting housing supply during the foreclosure process. This could happen, for example, in many of the recent, low-cost condo conversions near NW23rd. But it will be short-term (1 year or so) because the banks will eventually resell those units, thus replenishing the supply.

  11. I went to a class put on by a title company which had Gardner-Johnson talking about how most economists don’t get Portland.

    The many market idea was put forth as far as the industries here and that most economists have always had Portland as overpriced. Look at back issues of Money magazine for the last 7 years. We have often been in the top 10 overpriced list.

    Since we aren’t tied to one industry, we don’t feel the impact of the layoffs in that industry. Yes Intel has hurt but we have lots of different employers now.

    So I don’t hold those magazines in high regard for the future of Portland. But it does play to perception which can be as important as reality.

  12. Leo,
    I was surprised that it took ten comments before that was brought up. What I was thinking that if Mr. Landlord had put down 25% in the last few years and the market dives the equity is swallowed up. The furnace dies and since it no longer makes sense to sell the property an 80% furnace is installed instead of a 96%. Mr. Renter has a new furnace but pays higher utility bills than they would have if Mr. Landlord had felt flush (or been able to take a credit line on equity).

  13. Leo,
    One more thing to add to your comment: I think you’d be surprised at how many landlords have a minimal amount of equity in their properties. The long held rule of “divide and conquer” of selling one property and buying two with the equity to maximize leverage says that may well be the case.

    There also needs to be some distinction between apartments and single family rentals. The focus and posts here largely reflect single family and up to four-plexes which are considered residential, not commercial property.

    When I refer to renters, I am referring to non-apartment renters. When I refer to landlords, I am referring to owners of up to four units that are usually self-managed. Apartments aren’t my specialty or the focus of this blog.

  14. Charles – I think you are making an assumption that Mr Renter is prepared to pay the higher rents vs similar properties for the property with a new furnace. As a renter I frankly don’t care what my landlords outgoings are – it’s about what I get for my dollar.

    With inventory high, sales falling and so many vacant properties on the market, sooner or later those “Investors” who bought properties to flip are going to start to feel the pain of holding costs and have to start facing pretty ugly cash burn.

    From there they jump to the “I’ll rent it till the market recovers” plan – of course they’ll try to rent it at a rate that’ll cover their cash burn – which is far in excess of current rental rates – even on an IO/ARM – so you may see some temporary distortion as people who don’t do their research rent at stupid prices.

    The rental market is like any other – it’s supply and demand and with more units coming on for rent it’ll drive prices down if the flippers want to be able to find tenants to minimize cash burn. (I’ll rent it at a rate that’s costing me $300 a month rather than the full hit on the mortgage – it’s only until next year)

    Basic truth about the housing market – Prices got ahead of themselves due to sloppy credit, it enables people to borrow WAY beyond their means to repay – that’s vanishing now and Portland today isn’t that much different salary wise than it was 5 years ago.

    With the credit market returning to sane – that means a return to roughly historical salary/price ratios.

    Funny how people can accept a 100% increase in prices in 3 years yet a fall of 40% over 5 years is “Un-possible” 🙂

  15. FWIW Money’s analysis was done on price vs salary and historical norms.

    A combination of the immigration of Californians and the credit bubble has distorted that on a temporary basis.

    The one thing the .com bubble taught me – go with the numbers not the hype.

    I think 47% is a bit high – but 30% wouldn’t surprise me in the least – especially after inflation is taken into account.

  16. Uncle,

    Speaking from experience. Our rental’s furnace was close to failing with tenants in place. We replaced it with a 95% efficient furnace. The old converted burner was estimated to be running at sub 50%. Renters pay utilities.

    The single pane windows weren’t great but we replaced them with new double pane windows over 24hrs while the tenant lived there.

    Neither were required but benefit the tenant. You may not care about the landlord’s outgoings but it does affect you as I doubt single pane windows and an 80% furnace would have caused you to move; you’d never recover the transaction costs moving to a new place.

  17. Charles – I don’t disagree they benefit the tenant nor that it can and does effect us.

    What I am saying is you’ll have a hard sell asking a chunk more change for rent than equivalent properties because of better windows or a new heater – it’s just generally not that high on the renter “Must have” list and not something the typical renter thinks a lot about.

    I just don’t see a spike in rents coming, which is what some people seem to be expecting to close the rent Vs buy gap.

    What they fail to realize that both rental and housing prices are relative to income – that’s certainly not going up any time soon with a recession looming.

    Rents may rise in line with inflation – but that’s about it.

  18. “The furnace dies and since it no longer makes sense to sell the property an 80% furnace is installed instead of a 96%. Mr. Renter has a new furnace but pays higher utility bills than they would have if Mr. Landlord had felt flush (or been able to take a credit line on equity).”

    I agree that landlords who are cash-strapped may try something like this. However, what they are essentially doing is downgrading the value of their rental. And if they’re cash-strapped enough to try something like this, they will probably have skimped on other things as well. For example, they may hire a repairman who is less prompt or less competent in order to save a few bucks, or they may even try to do the repairs themselves instead of having them done by a professional. A series of stunts like these will eventually prompt the renter to leave.

    “You may not care about the landlord’s outgoings but it does affect you as I doubt single pane windows and an 80% furnace would have caused you to move; you’d never recover the transaction costs moving to a new place.”

    I think you are overestimating transaction costs. My last move cost me $600; I hired movers and they did the job in four hours. On top of that, I had to make some address changes over the web, which took about an hour. Like I said above, a landlord who skimps on repairs will likely skimp on other basic job expectations also. The hassle of putting up with lower-quality service can tip the balance in favor of moving very easily.

    “One more thing to add to your comment: I think you’d be surprised at how many landlords have a minimal amount of equity in their properties. The long held rule of “divide and conquer” of selling one property and buying two with the equity to maximize leverage says that may well be the case.”

    The principle of “divide and conquer” applies to dividing and conquering your enemies. By maximizing leverage you are dividing your own assets, not your enemy’s. This is a complete misapplication of the principle of “divide and conquer.” Maximizing leverage is a high-risk, high-payoff strategy, and the coming years will demonstrate (again) why it’s high-risk.

    Frankly, I don’t expect many overleveraged landlords to remain landlords by the end of this cycle. The down part of the business cycle in every industry provides a benefit for the market: it weeds out poorly run businesses. Businesses which do not have enough assets in order to invest during downturns usually do not survive them. What happens to them is exactly your case scenario of the overleveraged landlord: they will skimp on basic operations because they are short of money, and they devalue their assets (in your example, the house) in the process. Even if they happen to survive the downturn, they will not be competitive when the market turns. In your example, they will be left with lower-quality rentals than landlords who were not overleveraged, who were able to maintain or even improve the quality of their rentals during the downturn.

    In the end, market prices move without consideration of whether some individual market players lose money. Even giants like GM cannot move market prices up simply because their costs are high. Do you really think that landlords who rent a few houses have more influence over market prices than giants like GM and Ford?

  19. 90+ furnaces and double pane windows might pay for themselves when selling a home, but fo you feel like you get more rent or better tennants with those features Charles? I don’t think renters generally rank utility costs high on their list when choosing a home. The big apartments (owned by professionals that understand return on investment) charge for water, tack on a fee for garbage and use electric heat and water heaters.

  20. It reads like we are all agreeing on this rental thing: renters won’t pay more for effiency so there is no benefit for a landlord to install them if looking at a longterm hold. Over time, a heated rental market might but may not damage the property’s rentability. That changes if there is a sale on the horizon where a buyer does care.

    We could start a thread arguing the application of “divide and conquer” but…

  21. “We could start a thread arguing the application of “divide and conquer” but…”

    but?

  22. but… this is not an English Lit blog. Everything, even Realtors, evolve. “Divide and Conquer” may have a military past. Try Googling “‘Divide and Conquer’ real estate.” Tons of hits and stories. Clearly my meaning was understood.

    How does ‘divide your assets and conquer the real estate market’ differ from ‘divide their forces and conquer the enemy’? Is the meaning of each not clear?

  23. Oh, I was thinking about the internal, rather than the external forces. Specifically I was thinking in terms of division of equity (using leverage to maximize Return on Equity (ROE)), rather than division of the market. I would have never thought about English Literature being an issue here…

    I guess the discussion could be divided between internal strategy and external forces.

    Then there is the who risk issue… Higher leverage usually suggests greater risk.

  24. “How does ‘divide your assets and conquer the real estate market’ differ from ‘divide their forces and conquer the enemy’?”

    By dividing your own assets, you are increasing your leverage. That carries an inherent risk that the market is re-discovering now. The military equivalent is dividing your own forces to fight the enemy on two fronts, like Hitler tried at the end of WWII. Like I said, it’s a high-risk, high-payoff strategy.

    Dividing your enemy’s forces is a LOW risk, high-payoff strategy. It couldn’t be any more different.

    It’s the difference between a financial strategy based on millenia of military history versus a strategy based on a marketing jingle. It’s not English Lit; it’s real life.

  25. There are several reasons why real estate is a good deal in Dallas and the midwest — I think I’ll stick with my over-valued Portland house.

  26. Staci, I’m w/ you on that one. Back in my hometown of Sioux City, Iowa I could easily take my equity and buy a new decent 3/2 and have no house payment. But as I always tell my Portland friends, my money then would go toward good drugs to get me through the crappy winters and blistering hot summers. One can only play so much rec softball!

    bearlee

  27. As much as I wish it were so, I don’t think 47% overvalued means 47% will come off the market price.

    If the median is $300K, that implies median will retreat to $300 * .53 = $159K.

    What they mean by 47% overvalued is, the median grew 47% over what was fair value.

    In other words, fair median would be $300 / 1.47 = $204K. (32% decline to get to fair median)

    They’re saying the fair median should be $204K but instead grew 47% higher, to get us to $300K.

    I’d absolutely love 47% off, but would be completely content with 32%!

  28. PDX_Mike.

    You are thinking nominally.
    Inflation is running rampant despite what the FED and Dr. Boom Boom say.

  29. SE_Renter:

    True and I agree. I was merely pointing out that Smart Money’s definition of overvalued isn’t 47% off current median.

  30. SE Renter:

    After re-reading, I think your reply had to do with my last sentence.

    I’ve been predicting inflation of food, energy, etc., but deflation in housing.

    Inflation implies that either wages or access to money are increasing. If lenders are tightening up and wages are fairly stagnant, even nominal prices won’t hold, IMO.

  31. If the dollar continues to tank we might continue to see nominal price increases in real estate in PDX!

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