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Portland Real Estate in 2008

Will 2008 real estate be great? Will Portland’s real estate market deflate in 2008? It’s the crystal ball question. What if we head back to business school for a few minutes and try a SWOT Analysis; (Strengths, Weaknesses, Opportunities, and Threats) to the market? Let’s develop this together. I’ll start but make no claim to having all the answers (or that you’ll agree with me). I’ll compile the list and we’ll have the first Portland Real Estate Blog Market SWOT Analysis. The strengths and weaknesses are internal to market. The Opportunities and Threats are external). We’ll probably find that in some cases we think an item belongs in more than one category (UGB as an example)

STRENGTHS:

  1. People want to live in Portland. The city and therefore housing needs are expanding. (CJT)
  2. Urban Growth Boundary helps reduce sprawl (CJT)
  3. Inventory has increased. Good for buyers. (CJT)
  4. S&P/Case Shiller stat still favorable (though not great and maybe not sustainable). (CJT)
  5. Low appreciation numbers are probably sustainable over the long-haul. Rapid run-up lead to where we are now. (CJT)
  6. In any market, an accurately priced house will sell and people will always be buying and selling real estate (CJT)

WEAKNESSES:

  1. High inventory of new construction and recently built condos (CJT)
  2. Urban Growth Boundary limits close-in development and inflates prices (CJT)
  3. Affordability is getting tighter (CJT)
  4. You can probably rent the same house for less monthly out of pocket than own (CJT)
  5. Inventory has increased. Bad for sellers. (CJT)

OPPORTUNITIES:

  1. Interest rates still around historic lows (CJT)
  2. Different segments of the market (Condos/Single Family/Multifamily (up to 4 units)) are counted together but perform differently. Condos had the fastest run up and will probably take a bigger hit. (CJT)
  3. Real estate is local. The national market does not dictate the local market but does have an effect. (CJT)

THREATS:

  1. ARM resets force people to sell(CJT)
  2. Chance of national recession (CJT)
  3. Media coverage focuses disaster. (CJT)
  4. Meaningful stats are hard to come by in a changing market (CJT)

So that’s my start.

23 Comments on “Portland Real Estate in 2008

  1. good start, although i take issue with the UGB causing inflated prices.

    i tend to side with “jury still not out” on that one, and lean to the brookings institute conclusion that prices are higher then metro area’s with no zoning, but lower then area’s that focus on conformity zoning.

  2. Good start, but a few things could be clarified, starting with the opening sentence: “Will 2008 real estate be great?” For whom? Realtors? Owners? Prospective buyers? Seller? It can’t be “great” for everyone. Real estate is a zero sum game, not a win win game. The categories would be more useful if the players were defined up front, rather than factored into the variables.

    Two points abut first category: Under strengths: 1] Where is the evidence for “Housing needs are expanding”? 2] Number 6 is tautalogical. i.e., any house that does sell is by definition priced “accurately.”

  3. under “Threats”, also add the possibility of a local recession. My experience is that Oregon historicly lags the nation in housing boom/bust cyles and leads the nation in entering recession and leaving recession. These two forces may be positive for our economy in 2008, but if we tip to the negative, these forces could create a neagtive that may last through the end of 2009.

  4. 1. People want to live in Portland. The city and therefore housing needs are expanding. (CJT)

    But apparently people want to live in Phoenix as well as it has between 2 and 3X the rate of in-migration as Portland and yet look what’s happening to prices in Phoenix. A lot of folks want to live in San Diego and Florida as well and those places are ground-zero for the decline.

    4. S&P/Case Schiller stat still favorable (though not great and maybe not sustainable). (CJT)

    C-S showed a slight increase YoY (I think it was 1.9% which is lower than the inflation rate), but didn’t it show month-to-month declines in the last few months?

    Good start, but a few things could be clarified, starting with the opening sentence: “Will 2008 real estate be great?” For whom? Realtors? Owners? Prospective buyers? Seller?

    Tiffany: This is a good point. I would like to see some kind of analysis of who benefits from falling prices. We know that potential buyers benefit. Even renters likely benefit because it means their rents will likely not increase as much or as fast in the future. Who loses? BabyBoomers looking to cash out to buy the big RV, Banks who made bad loans. Who doesn’t notice: those of us who bought more than 7 or 8 years ago (actually, maybe we’ll get a slight benefit if property taxes go down). Actually, I would even go so far as to say that Real Estate agents can be in the neutral category in that if they price their client’s properties aggressively they can still sell. Commissions go down some, but it’s better to get a commission on a $200K sale than to get no commissions on a languishing $300K listing. Ultimately it can be good for agents because the market can return to sustainable health (it’ll take a few years to get there, though).

  5. I think it will be tough for those holding properties in over built categories. Buyers will have a lot to choose from. Condition and location will be critical.

    Mortgage terms will force sales of properties that otherwise wouldn’t be on the market as payments become un-afordable, see above.

    Mortgages will be made available only to well qualified purchasers who put substantial personal skin on the line. Cash is king.

    Few market segments will increase, most will decrease. How far? Who knows, but a 10% annual decline wouldn’t surprise me in the least.

  6. Who is the underlying group, person or entity that this SWOT is prepared for? I am trying to figure out how you separated internal from external factors.

    For example, to whom are S2 and S3 internal?

    I have the same issue with the weaknesses.

    For example, W4: “You can probably rent the same house for less monthly out of pocket than own.” Because of the stability of the rental market, and further because rental contracts are generally one year, this is something that you can control, so it does seem appropriate to put in as a internal factor, but is it a strength or weakness? I guess this depends on the group, but I am not sure what person would find the choice to rent or buy to be a weakness. Possibly those seeking to sell would see cheap rental rates as a threat, as more people will just rent?

  7. S4 is about to go negative in a month or two – it’s also a lagging indicator – so take it with a grain of salt.

    Portland is a great city to live in – but it’s not going to escape the price falls that are a result of the credit contraction – just as it benefited from the gains have been a result of the credit expansion.

    How low and how fast are the only two real questions IMHO.

  8. Inventory has increased. Good for buyers

    Buyers are reluctant to buy an asset that is likley to experience sub-par appreciation. I think this belongs in the weaknesses category.

  9. I’m loving this conversation and think that definitely buyers do benefit (if they’re not scared by the constant “sky is falling” blitz) (what ever happened to “buy low, sell high and wait for the “stock”/investment to bounce back”??). I’m personally seeing rents rising (great for investors, not so good for renters), so I don’t see renters as the necessary winners. Yes, the renter can generally rent for less than a mortgage would cost him, but he/she does not get the benefit of whatever (however small) appreciation does exist nor any tax write-offs. Real estate is not a short-term investment…jj

  10. >Buyers are reluctant to buy an asset that is likley to experience sub-par appreciation. I think this belongs in the weaknesses category.

    Your comment dont capture the fundamental reasons most home buyers buy houses.

    1. The better quality of life it usually brings — very important for many families.

    2. Safety of living in a neighborhood and with neighbours you can associate with in the long run

    3. Realestate is still the safest investment after gold. May not give you highest returns year after year but value doesnt go down the drain drastically (as in stocks and mutual funds in a recession)

    4. Sense of pride, ownership and the ability to customize your surroundings

    5. Tax savings associated with realestate tax and mortgage payments

    6. Small investment needed to purchase a house as opposed to buying other investments that require upfront payment (gold, stocks etc).

    7. Many people stay in the same house for more than 5 years and can sustain downtrends without hitting a loss.

    8. Security that your monthly housing payments will stay the same next 30 years! The payments can go down as interest rates fall.

    So? Its not all about money and greed you see..

  11. Forgot one of the reasons I bought my house 5 years ago:

    9. I wanted my kids to stay in the same school zone and grade school as long as they could. Difficult to get that peace of mind as a renter.

  12. austinrelo-

    Let’s discuss a few of the “ownership” advantages:

    “5. Tax savings associated with realestate tax and mortgage payments”

    Do you know when renters get tax advantages? Yes, that’s right: every month. Also what’s deductible under the IRS code as a landlord is so much better than as a homeowner that it’s not really worthy of further discussion. In any event, the tax advantages to rent are much better than that so-called mortgage deduction. Renters also get the standard deduction, which home owners must give up. As a landlord, I think Charles can attest to the far better tax advantages on rental property as opposed to owner occupied property.

    “6. Small investment needed to purchase a house as opposed to buying other investments that require upfront payment (gold, stocks etc).”

    The last stock purchase I made was a capital investment of about $2,500. The last house I purchased cost far more than that, and the transaction costs were also greater. I trade financial instruments online for very low cost with some large transactions, but some small–try doing that with a home.

    “7. Many people stay in the same house for more than 5 years and can sustain downtrends without hitting a loss.”

    Why should I sustain a downtrend? If I really think housing is going down, then I am going to rent. By the way, I have a friend who finally sold his gold after about 27 years–He sustained the “downtrend” of the last few decades. In my opinion, he lost 30 years, but you may say he was able to sustain the lower prices. He never thought it would take 30 years, and now he’s back to ground zero, but instead of being about 35, he’s 62. Again, let me remind you that it’s one of your safe investments: gold.

    “8. Security that your monthly housing payments will stay the same next 30 years! The payments can go down as interest rates fall.”

    Are you kidding? I have a hard time taking you serious when you come up with garbage like this. First of all, maybe you have not noticed the hundreds of news articles, but many so-called “homeowners” are being foreclosed on because their payments adjusted upward, and not by a small amount. Even those who have fixed rate loans amortized over a 30 year period, as you might suggest, often have escrow issues, such as special assessments and tax increases. I had a friend who purchased a new construction condo, and while his loan was fixed for the 30 year period, the taxes were initially based on the vacant land. Guess what happened when the assessor caught up with his situation–yup, that’s right, his monthly payments went up. Finally, if you want to play the game that the loan is amortized on equal monthly payments, I will suggest that the loan payments are far from fully loaded, and do not represent the true cost of ownership. The payments do not include new furnaces, water heaters, roof repairs, flood damage, and so on.

    By the way, I have a friend who has rented the same place for 10 years, and just recently moved. She wanted to stay in the same neighborhood and so on. You might find this hard to believe, but there was plenty of rental capacity in the area she wanted to live. I suppose, however, that this might be a problem in areas without much capacity, such as some rural area.

  13. Lots of good comments.

    SE Renter,
    Number 4 under Weakness: Inventory has increased— I think it fits under both catagories for different reasons.

    Tiffany,
    Real estate is zero sum— Actually, I agree on a dollar basis. Apparently Keller Williams doesn’t; their website: “win win or no deal.” There is a what is good for me is good for you aspect (you want to sell, I want to buy (vice versa)) but ultimately that is why dual agency should not be allowed.

    TiP and Tiffany, and to some extent, JP,
    Great in 2008? Hmmm. Grass is usally greener on the other side (or over the spetic tank). If it is totally zero sum somebody is screwed…

    My intention on “who is this prepared for” was: the market (at least as the media covers it). We could SWOT sellers and buyers seperately and that would be interesting but ultimately it looks like I may have been successful in getting some good discussion here. This isn’t an exact science.

    Nell,
    Cash has always been king. Yes, lending will get tougher.

    Keep in mind that I cannot be the 100% neutral third party. I am a Realtor, but if you don’t think I have my client’s best interest in mind you have to meet me first. I own four rentals and my own home. Our LLC owns and is flipping a home. I’m 34, married with an almost 1yr old (Monday).

    JP just commented but it is going to have wait- I haven’t read it.

  14. “I’m 34, married with an almost 1yr old (Monday).”

    I didn’t realize you had a child less than a year old. I have been reading this blog for almost a year. I hope both mom and child are doing great!

  15. JP (and all other aliases) –

    I have never heard that renters get tax credit. I did not claim it once when I rented for about 4 years after college. Bad for me good for you. FYI last year I got more than $4k back from IRS for my mortage interest and realestate taxes on a 320K house. Is this worth mentioning for you 🙂

    >The last stock purchase I made was a capital investment of about $2,500.

    🙂

    >>Are you kidding? I have a hard time taking you serious when you come up with garbage like this.

    Thanks for letting us know this side of your personality. You look upset and angry 🙂 chill out.

    If you read my post I was referring to 30 year loans which people who can really afford a house can qualify for and usually opt for. I am against ARMs specially ones for less than 5 years. Knock knock..

    >>I suppose, however, that this might be a problem in areas without much capacity, such as some rural area.

    Are you serious? I have a friend in Beaverton (not a rural area last time I checked) who had to send her kid to 3 different schools in 5 years!!. Although she was renting in the same school district but her kid had to go to Rock Creek Elementary once, Beaverton Elementary once and Findley Elementary while she changed apartments. She had to change apartments becuase of bad neighbors, trashy management and rent increases.

    Your comments about your friend who invested in gold for 30 years do not make any sense to me. sorry i cant follow it.

    peace!

  16. One final comment for the night, and I am sorry for posting so many times in such a short period of time, but I have been pondering whether or not real estate is a zero sum game.

    I have not been able to answer this question: If real estate is a zero sum game, who loses in a market that is going up?

  17. austin relo,
    By not buying a jouse I am able to take advantage of $35,000 in tax deferments for a total savings of around $8000. These assets have been doing very well, in part dur to the imploding housing market.

    I also get to live in the neighborhood of my choice for a pittance. My rent has not increased for years and given inflation my real housing cost is decreasing every year. (BTW, the median cost of a house in my zipcode is around 560K.)

    Almost all of the reasons you gave for buying a home were emotional or subjective. Although I am not denigrating these motivations, they do not enter into a business SWOT analysis. If home buyers took into account inflation, the cost of repairs, property taxes, points and fees they would realize that housing is a poor financial investment. So are kids, BTW. 😉

  18. austinrelo-

    You must be young, or you don’t remember the situation with gold of the late 1970s. Many people bought gold and held at prices of about $800. Thereafter the price of “safe investment gold” fell. Many held thinking that the price would go back up to about $800. Well it took about 27 years (I have not looked up the specific dates, but let’s just call it “about 30 years”).

    Like you, my friend had the opinion that:

    1. Gold was a safe investment. You suggested that gold was the safest possible investment, “Realestate is still the safest investment after gold.”

    2. He felt that he could sustain a down trend and sell at a profit. You suggested, “Many people stay in the same house for more than 5 years and can sustain downtrends without hitting a loss.”

    Both of these assumptions are just plain wrong. First of all, the price of gold took about 30 years to recover, which is far more than 5 years. Second of all, it was far from a “safe investment.” The same problem exists in housing, as illustrated by the next case.

    By the way, would you like to purchase some property in NOLA? I was up in Seattle for the New Year, and I meet a waiter who suggested that “he would never recover from Katrina.” He lost thousands of dollars financially, and the emotional pain lingers on and on and on. He was a “homeowner” that now owes thousands of dollars on a property that has little value. Oh, and about insurance? He had one company for the flood insurance and another for his homeowners policy. One denies the claim because the damage is flood related, and the other denies his claim because it is “wind driven rain” related.

    I guess it should be noted that he was unable to stay in his “owned” property.

    He has lost hope and considers it a loss of biblical proportions; when do you think he will recover?

    “FYI last year I got more than $4k back from IRS for my mortage interest and realestate taxes on a 320K house. Is this worth mentioning for you :)”

    That yearly “tax advantage” is about 1.25% of the value of the house, or about $335 per month. As a landlord, I can say that I passed far more than $335 in tax savings on to my tenants in the form of reduced monthly rent. I can also say that rental units have far greater tax advantages. In the end, what tenants do with their money every month is their business, but if they put the cash in the bank, at the end of the calendar year, they would have more than you and have it sooner, but like I said, that’s their business. My guess is that most spend it every month, but this is a whole different topic.

    By the way, trashy management and poor neighbors can often be found out ahead of time by checking out the area and the management. In general the neighbors are a reflection on each other, but beyond that I request statistics from the local police as well as insurance companies. A high crime rate often has high insurance rates, which is an indication of a poor area. News reports, while not a good sample, might give an indication of crime areas. I wonder if that rent increase was a reflection of the management’s opinion of her. It’s been my own observation that good tenants get better treatment. Once I had a landlord trying to keep me by offering to discount my rent. I still have found memories of my housing situation at that time.

  19. Regarding the income tax deduction for property taxes and interest on mortgage one might want to realize that a) your interest on mortgage is stacked up front and b) I will not name the party but there are some politicians working to eliminate this deduction.

    Just on a personal note…in 2006 I paid 12K in interest and property taxes to get a 4k tax break. And this will only decrease as time goes on unless I refi.

  20. Having read all 19 of the posts, I am glad that I do not work for or with most of you. The comments posted, while helpful to me as a fledgling R.E. Investor, seem to be argumentative, rather than a discussion. Maybe we would all benefit from being nicer to each other as well as sharing information here. Some of you could work on your Blog Etiquette. It’s so easy to be rude while hiding behind your window, wielding your sharpened keyboard.

  21. Sorry CKH, but I thought I was sharing info. I guess I am tired of folks beating the drum about what a great time to buy it is and how home ownership is the save-all for folks. A lot of folks do not know what they are getting into when they purchase a home, ie, the cost of repairs, ie roof, water heater, broken pipes, paint, etc, taxes, utilities, etc. I took some bad advice from a relative about 9 years ago…buy a little more house than you can afford because you will always make more money. I catagorize that advice w/ home prices will never go down.

    Well, three layoffs later, the choice to change careers, and having a family pretty much threw home ownership out the door. We thought we might have to relocate for school and we speculated that home prices would drop so why not sell high. We did last spring in 07.

    Why are prices going to drop? Think about what elevated the prices…cheap money (still cheap), easy financing (not so easy and for a good reason) and creative financing (hopefully this stopped, too), and a gazillion folks from California and East Coast bringing in lots of equity. Last I heard, folks in California were having a hard time selling. So w/ no more sub-prime loans how many potential buyers have been knocked out of the market? And giving the buying frenzy of the last 5 years, how many potential buyers are out there or not already stuck in a home (most likely upside down)

    So you folks that seem to know better, please tell me why prices wont drop.

    I make twice the median income but with the cost of childcare there is no way I can afford current prices unless I want more than 50% of my income going toward housing. I guess if I ate top ramen and scratched the 401K contributions…I still could not comfortably pull it off.

    So how do you guys expect the average folks to buy now. Average meaning…no help from mom and dad for school thus a pile of student loans, no inheritance from the grandparents, no help from Mom and Dad because they are too worried about paying for health care in their senior years…

    I know of one option but I aint taking it…I know numerous folks moving back to the Midwest so they can buy homes. I will take higher cost of living instead of those hot and humid summer days and freezing, bone chilling winter days. Besides, its a long way to the beach and mountains from there.

    Yes, Portland is a desirable place to live but there will be breaking point for me and my family.

  22. I hope I do not come off as sounding bitter. I just think some folks need a reality check. Dont get me wrong, I get all giddy when I hear someone is restoring one of our old Portland beauties. And yes, they deserve the big property tax break due to the expense of restoration. $1500 a year is a great deal when your neighbor is paying 10K/year, though. But what one might forget is that every time the average homeowner sells he/she loses 5-7% in realtor fees. I paid out over 20K last spring after my home sold and that was at a discount. That is 20K less to reinvest. Realtors have a big advantage here. I am going to guess that Charles did not pay these hefty fees since he is a realtor and most likely represented himself for his previous properties. Not losing all those fees makes buying a $650K a lot easier.

    My big worry, though, is that many realtors have only been in business that last 10 or so years. They have had it pretty darn good w/ houses practically selling themselves at times. So what happens during the slow down. I worry about the Turners since both are in real estate. I have been through rough times and I do not wish it upon others. I hope they are diversified enough (rental properties) to ride out this slow down.

    My brother is a home inspector here in town. He has gone from 10-12 inspections a week to zero in the past month. Granted it is the traditional slow period but not THIS slow.

  23. I want to add my final thoughts to this interesting thread. I regret some of my comments on why people still buy realestate stirred up expected but very irritable responses. I respect the diversity of views and prefer healthy debates over conformity.

    I see four camps:

    1.Folks who are expecting a major drop in home prices so “they can buy”.

    2. Folks who are willing to live with fluctuations in house values and for whom the pride/comfort/lifestyle of home ownership outweighs street perception of the value of their house.

    3. Folks who are banking on realestate to return them significant profits as has been the case until the run up to today’s soft market.

    4. Folks who dont want to buy realestate at all based on their preferences and circumstances.

    I can clearly see the pros/cons of being in any of these camps. I happen to be in #2.

    For the record, I am not a realtor and am opposed to the 6% realtor fee/penalty. I understand the cost of doing business but 6% IMO is way too much to come out of the seller.

    What I find annoying is that many folks seems to completely discourage other camps with reasons that are either emotional, jealous in nature or outright illogical.

    Sorry my writing skills are not as sharp as others here and excuse me for my bad grammar as I am not a native english speaker.

    Cheers.

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