The Portland Housing Market: Is the Glass Half Full or Half Empty?

As we enter the New Year, everyone, it seems, has an opinion or prediction.  However, one rule should always be applied: Be careful how you interpret the numbers!

A recent Oregonian article is a case in point. It carried the following headline: “Portland home sale volume improves in November.” The article, which was based upon a review of the November 2011 RMLS™ statistics appearing in its Market Action publication, opened with the following statement:

“Portland-area home sales improved again in November, bringing the inventory of active listings to its lowest point in three years.”

Later in the article the author made the following statements:

“Some 1,521 homes were sold in November across the Portland area, up 18.1 percent from a year ago and 3.2 percent from October. Another 1,685 sales were pending at the end of the month. At that rate, the three-year low 9,451 homes for sale would sell in 6.2 months. *** That’s close to the six months of inventory market analysts would expect to see in a healthy market.”

But these numbers, standing alone, are misleading, and unfortunately do not suggest a “healthy market” anytime soon.  In reality, these statistics underscore the unusual dynamics at play in our local marketplace.  The Oregonian article touched only on the numbers, but missed the bigger story, which paints a much different picture about what’s going on.  I will attempt to explain below.

First, let’s define our terms.  What is “Inventory in Months”?  Here is RMLS’s™ definition:  “Inventory in Months is calculated by dividing the Active Listings at the end of the month in question by the number of closed sales for that month.”

Next, let’s look at the last 11 months’ inventory for 2011:

January-11.3                     July-7.0

February-10.9                   August-6.2

March-7.1                          September-6.7

April-7.2                             October-6.8

May-6.8                              November-6.2

June-6.0                            December [will be published in mid-January, 2012]

What actually accounts for the low inventory numbers for March – November 2011?    The answer was alluded to in the Oregon article, though without any explanation: “November saw 18.1 percent fewer newly listed properties than the same month a year ago, and listings year-to-date are lagging 26 percent behind the same period in 2010. ‘People are not choosing to get into the market….’”

But why are people not choosing to “get into the market”?  The reasons are fundamental and systemic:

Our federal, state and local economies are still fragile.  Both houses of Congress cannot agree upon whether the sun rises in the East or West; the government is still printing money to meet its debt obligations; our debt ceiling is being pushed to stratospheric levels; and people are still waiting to see if a possible collapse of the Euro will push us into a double-dip recession.

• Furthermore, as we enter into election season, gridlock overtakes the legislative process, guaranteeing that no tough economic or political decisions will be made.  Events such as these make the future impossible to predict.  People do not make major financial commitments during periods of uncertainty or anxiety. And businesses do not expand or hire more workers.
• The unemployment numbers for Oregon (9.1%) are higher than the national average (8.6%). Unemployment in general, has a huge negative impact on confidence – even for the gainfully employed.
• Housing prices have continued to fall month over month and year over year since the third quarter of 2007.[1] To anyone wanting to sell, these numbers serve as a warning that we may not have hit bottom yet.  While it may be true that the some isolated numbers may have improved, the overall picture remained much the same for most of 2011. Depending upon location, many, many homes have lost overall value of 30% to 50% or more, since 2007 levels. Replacing one depreciating asset with another does not motivate folks to buy homes.  The status quo becomes the default decision of choice.

For these reasons, many people remain on the sidelines, despite historically low interest rates. They may be motivated to buy, but they do not yet feel that the stars are aligned.  So if in doubt, they do nothing – which is not an altogether unreasonable reaction.

While it is true [as mentioned in the Oregonian article] that “…six months of inventory [is what] market analysts would expect to see in a healthy market“, the six months of inventory reported for November, 2011, is not indicative of a healthy market.  In actuality, a deeper analysis reflects several unpleasant realities:

• A significant percentage [30% – 40% or more] of the homes now in the marketplace are either short sales or bank sales that followed foreclosure.  In both instances, many of these homes are now in the $100,000 and $200,000 range [although worth far more during the boom years of 2005 – 2007 – PCQ].  Many of these homes are bought by investors, often for cash.  In some instances, the competition results in these properties receiving multiple offers.[2]
• As for those homes not purchased by investors, but by prospective owner-occupants, the lower pricing translates into easier-to-qualify-for financing, compared to higher priced homes.  So while the lower priced homes eventually move, the higher priced ones stagnate and/or see even more discounts.
• More expensive homes can be divided into those with equity and those without.  Those folks without equity, but current on their loans, have limited choices if they want to relocate: (a) They can bring money to closing, bridging the gap between the net sale proceeds and the amount due their lender(s); (b) They can stay put; or they can try to do a short sale, taking the accompanying hit to their credit score, and therefore likely dooming any future loan for one to two years (depending on conventional versus non-conventional financing, such as VA or FHA).  In today’s world, many buyers have opted to just stay put, and simply wait for the market to improve.
• Thus, many sellers of higher end homes are still on the sidelines, refusing to take the equity loss they expect, should they list their homes for sale today.
• Available and qualified potential buyers of more expensive homes are similarly frustrated, unable to find anything that suits their needs and their pocketbooks.
• Compared to the first five years of the decade, when homes of all price ranges were listed, what is now on the market is a far less “healthy” mix of homes. Many of the sellers are clustered at the lower price range and many of the buyers are investors – not owner occupants. In other words, there is not a normal bell-curve in prices and buyer demographics.

Lastly, it is impossible to predict what might occur in 2012 without also factoring in the phenomenon of “shadow inventory” which is, in my opinion, the second most important factor depressing the Oregon housing market, next to our stubbornly high unemployment numbers.

“Shadow inventory” generally refers to the number of homes – some of which we can count, such as listings for sale – and much of which we can only estimate, such as families on the cusp of default, but current for the moment.  This shadow inventory will eventually contribute to the glut of discount priced homes, once they hit the market.  Add to this number: (a) Homeowners already 60 – 90 days delinquent [i.e. “pre-foreclosure”]; (b) Those already in some stage of actual foreclosure; and (c) Those post-foreclosure homes held as bank REOs (“Real Estate Owned”), but not yet on the market.  All of a sudden, shadow inventory starts to look like it could be a pretty big number.  By some estimates, nationally, it may take nearly four years to burn through it all.

Shadow inventory consists of homes that will be substantially discounted; they will have to be purged from the pipeline before values can increase.  I say this because banks and short sellers do not operate with the same motivations as equity sellers who negotiate arms-length transactions with ready, willing and able buyers.  In today’s real estate marketplace, buyers hold the power – particularly cash buyers.  Conversely, short sellers really don’t care about the ultimate sale price, so long as they don’t have deficiency exposure.  And while banks put on a game face, they are realists, and an REO property that is carried for an inordinate amount of time will ultimately be discounted and sold to get it off the books.  These closed sales then become statistics as the new comparables [aka “comps”] that Realtors® use when advising their buyer-clients on pricing their offers going forward.

The result is that Portland home prices will remain depressed until the competing short sales and bank repos are substantially exhausted.  Only when a seller with equity has the willingness and ability to say “No,” and wait for a better offer, will there start to be equal bargaining power.  Right now, as long as prices continue to fall, sellers do not have the luxury of time.  They can only compete with the latest short sale or REO statistics, and saying “No” will not necessarily garner better offers anytime soon – contrary to the marketplace in 2005 – 2007.

When (a) negotiating equilibrium is achieved between sellers and buyers; (b) the RMLS™ begins reporting monthly inventory in the 6 to 8 month range, and (c) there is a continuing replenishment of new listings up and down the pricing scale, then the Oregon housing market can be said to be truly “healthy.”

So right now it is an open question whether the glass is half full or half empty – and I don’t believe we will have an answer until after next year’s election.  Until then, I expect more of the same in our local housing market.