Portland Metro Housing Prices – The Last Five Years [Part Two]

This is the second installment of my article looking back over the past five years at Portland housing statistics.  Part One examined the real reason for the housing crisis which officially commenced in 3Q 2007, and looked at the historic numbers for average and median (i.e. “mean”) sale prices according to the RMLS™. The link to Part One is here. 

 The Rest of the Story. Besides pricing over the past five years, what about time on the market?  Available inventory?  Number of listings? Closed sales? Let’s look at each one:

1.     Time on the Market.  Until 3Q 2007, an overheated real estate market was still burning through inventory.  In August 2007, the average time on the market was 56 days – less than two months from listing to “pending sale.”[1]  The following month, September, 2007, banks began realizing that the drumbeat of subprime defaults was not going away.  They tightened their underwriting requirements almost immediately.  Over time, they began to even restrict borrowers from tapping their HELOCs based upon ZIP code.  As short sales and REOs began to fill the real estate marketplace, buyers and appraisers began viewing the sales figures as legitimate comps by which to gauge present value.  All the while, many potential buyers remained on the sidelines, waiting for prices to hit bottom.[2]  Many sellers who were fortunate enough to have equity during the following five years had to decide whether to wait until the market turned, or sell their home and recover far less equity than they had earlier.[3]By August 2008, time on the market had doubled to 121 days.  It got worse in 2009: 135 days.  2010 was not much better at 126 days – which may have only been due to the rush to close purchases by the June 30, 2010 deadline for the First Time Buyer Tax Credit program.[4]  2011 went back up to 134 days.[5]

As 2012 rounded the corner into the third quarter, we have begun to see some encouraging numbers:

• August time on the market was 97 days;
• September time on the market was 102 days;
• October time on the market was 102 days.

By contrast, between 1992 and 3Q 2007, days on the market generally hovered between the 50s and 70s.[6]  The 97-102 day range of August-October 2012 marks a 20% improvement over 2011 year to date.  However, time on the market is still 30%-50% longer today than the historical averages of the last twenty years.  This disparity will likely diminish if current trends continue their path of improvement.

2.     Inventory.  According to the RMLS™, “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. This includes proposed and under construction homes.”  This number generally reflects how healthy the market is; i.e. a lower number [to a point] suggest that housing demand is high with more absorption, and a larger number suggests that demand is slow, i.e. inventory is not being depleted fast enough.

There is an inverse relationship between these numbers when defining a “sellers’ market” versus a “buyers’ market.”  When inventory is low, buyers are clamoring for fewer available homes.  There are more buyers than sellers. Thus, sellers set the price and terms; it is therefore a “seller’s market.” [7]  This can cause multiple competing offers, oftentimes above the listing price. In a sellers’ market, prices are driven up by those setting them.  During the boom times of 2004 to 3Q 2007, there was no question it was a sellers’ market.  Prices were appreciating in some areas 18% or more.[8]

When inventory is high, there are more sellers than qualified buyers. It is the buyers who dictate price and terms.  Prices get driven down; it is a “buyers’ market.” When the National Association of REALTORS® says that a marketplace inventory of six to eight months is considered “healthy,” what it is really saying is that in this range, seller pricing and buyer demand are in general equilibrium, i.e. bargaining power is balanced between seller and buyer – all other things being equal.

The RMLS™ inventory per month for August 2010 and 2011 shows a marked reduction of inventory:

• 11 months – August 2010;
• 6.8 months – August 2011;

For the first ten months[9] of 2012, there has been a continuing decline in available inventory:

• 7.0 months – January
• 6.5 months – February
• 5.0 months – March
• 4.7 months – April
• 4.2 months – May
• 3.9 months – June
• 4.6 months – July
• 3.9 months – August
• 4.6 months – September
• 3.9 months – October

Today, Oregon Realtors® do have not had to read statistics to know that housing stock is in short supply; much of what is available is being gobbled up – sometimes within days of when the listing appears on the RMLS™.

These numbers bring two questions to mind: (a) What do they say about the “health” of the Portland-Metro real estate market? And (b) Does today’s low inventory mean we are in a “sellers’ market”?

Is This a Healthy Market Today?  This is not a “healthy” market; not only because inventory is too low, but also because this is not a “normal” market.

• Much of the inventory consists of REOs and short sales. In the case of REOs, the bank or servicer is not driven by the same considerations as a “normal” seller who has equity in their home, various time constraints, and other human factors.  Banks and servicers – if their decision-making processes can be divined at all – are driven by “investor” requirements,[10] and internal protocols, both of which are not openly shared with buyers and their agents.  Additionally, some banks and servicers do not have good procedures in place to efficiently dispose of their REO inventory, thus resulting in a slower and more frustrating experience for buyers.[11]
• In the case of short sales, seller requirements take a back seat to their banks’/servicers’ demands. Again, the latter’s motivations are driven by non-standard criteria, such as “investor” demands and company policy.
• One thing is for sure:  When it comes to banks and servicers, time does not seem to play a dominant role. Banks and servicers march to a different drummer. The true decision maker is metaphorically “behind the curtain” much like the Wizard of Oz.  It is impossible to communicate directly, except through a “negotiator,” who may or may not, know what they are doing.
• The inventory is not “diverse”; i.e. it contains “clumps” of homes in various price ranges, but the selection in any one group is limited.  Just ask any buyer.
• The market is not open to as many potential buyers as there used to be, due to more conservative appraisals and more restrictive lending policies.
• It appears – though this is rank speculation on my part – that some potential sellers today are seeing the signs of improvement, and may be simply keeping their homes off the market until they see if the trend continues into next Spring.
•  When it comes to “equity sales,” i.e. those involving sellers who will actually receive some proceeds at closing, they too face different dynamics than before; the primary one being buyer financing.  Since banks have so severely tightened their lending and underwriting requirements, owners are still constrained in setting prices. This is because under the terms of the OREF Residential Real Estate Sale Agreement, a major buyer contingency is that the property must appraise for at least the selling price; otherwise, the buyer can withdraw and recover their earnest money back.  Over the past five years, appraisers, chastened for their free-wheeling valuations of the past, have become much more cautious in determining fair market value.  Sellers and their listing agents know this, so pricing is still relatively conservative, at least for the present time.

Accordingly, it is very hard to say that the Portland-Metro housing market is “healthy” today [even though it is “active” at various price points] since much of the product is controlled by non-standard players who are driven by purely business decisions and not human emotions. The residential real estate market can only become “healthy” after short sales and REO sales disappear so sellers and buyers can resume entering into truly arms-length transactions.

Are We In a Sellers’ Market Today?  Given the very low inventory numbers, one would assume there are more buyers than sellers, which should translate into a sellers’ market.  But again, this is not a “normal” market. It is certainly likely that after the past five years of a moribund market, there are likely more potential buyers and that there is pent-up demand. And, thanks to historically low interest rates, affordability[12] is at an all- time high.  Among lower priced homes, one might say it is a “sellers’ market” except that many of the homes in this category are REOs and short sales, where pricing is controlled by banks and servicers.  Their timing, needs and motivations are never entirely clear.  Anecdotally, however, there are many reports of lower priced properties, e.g. $250,000 and under, selling within days of listing. But in this segment, cash is king, and it is the investors, not families, that are winning the bidding wars.

Other factors suggest that despite the lower inventory, we are not in a true seller’s market. To a point, buyers, especially in equity sales, can still dictate pricing. This is due to uncertain and anxious sellers who have waited on the sidelines for the past five years, and simply want to sell the home – even if it means leaving some money on the table.  Additionally, appraisers have become very conservative in their valuations.  Lastly, lender underwriting is far more cautious.  All of these factors combine to make sellers uneasy, and fearful that driving too hard a bargain could result in a sale-fail.  It is also likely that in helping sellers determine prices, listing agents are more cautious than in 2004-2007, and less willing to push the envelope.

Thus, while it appears that we may be seeing statistical improvement in the 2012 real estate numbers, until we exhaust existing short sale and REO inventory, standard assumptions of what drives prices do not necessarily apply.  How long will it take?  Good question.  Certainly, conclusions can be drawn based on the numbers we know.  However, there is another set of numbers we do not know: This is “shadow inventory,” that mysterious amalgam of homes that are:

• Queuing up for foreclosure, but not officially there yet;
• Going through the legal process of a judicial or non-judicial foreclosure;
• Lingering in the purgatory of a six month, post-foreclosure sale “redemption period”[13];
• Being held strategically off the market by the banks and servicers, fearful of diluting prices with a deluge of foreclosed homes.

Additionally, lenders and servicers in Oregon and elsewhere, have been stymied by the courts and legislatures that have begun extending greater protections to distressed homeowners during the pre-foreclosure and foreclosure processes.  The Oregon legislature passed a mandatory mediation law for all non-judicial foreclosures effective July 11, 2012.  A week later, on July 18, the Oregon Court of Appeals in Niday v. GMAC, held that MERS could not act on behalf of the lender in the non-judicial foreclosure process. The result was that most lenders and servicers immediately ceased, or cancelled, all non-judicial foreclosures in Oregon, opting to start all over again by filing their foreclosures in court.  This decision has resulted in dramatically slowing down the number of residential foreclosures.  This means that the number of REO sales at the other end of the process are also being slowed.

3.  New Listings and Closed Sales.  The number of new listings normally reflect seller confidence – i.e. a willingness to step into the marketplace in the expectation of realizing one’s equity gain.  During the real estate boom, there were additional forces at work, however.  As we know all too well, during that period, circa 2004 – 2007, lenders threw their underwriting manuals out the window. Everyone, it seemed, could get a loan.  Debt to income ratios, credit scores, and verifiable income – standard tools for measuring credit-worthiness – were ignored.  As prices appreciated, sellers were confident that they could not only maximize their gain, but that buyer financing would be easy to come by.  Many sellers bought new homes before selling their existing one, comfortable in the belief that they would be able to quickly sell to a qualified buyer.

When closed transaction numbers improve, it normally reflects “buyer confidence,” i.e. a belief that financing will be available and that there will be equity appreciation going forward.  However, during the boom times, the volume of closed transactions reflected other, more risky activities:

(a)  Nonexistent Underwriting.  Anyone could get a loan – and they did – thus ushering in the “subprime” crisis that helped collapse the credit markets and ultimately the housing market. The prevailing view at the time was that price was no object, since real estate values would continue to rise.  This mindset encouraged borrowers to make poor financing decisions, frequently obtaining “piggy-back” loans consisting of an 80% first mortgage and a 20% second – not using any of their own money.[14]

Many buyers were first timers, and many were homeowners who simply wanted to buy “up,” acquire a second home, or even a rental. The mantra of mortgage brokers and lenders at the time was that with the rampant increase in prices, if a borrower could no longer afford the loan, they could easily (i) resell it and pocket their equity appreciation, or (ii) refinance it into a more affordable loan.

(b) Flipping. This phenomenon developed where buyers would tie up a home with a Purchase and Sale Agreement for $X, and then find a buyer to purchase it at $Y – a higher price – in a manic form of arbitrage[15] that ultimately ran amuck.

(c) Loan Fraud.  This was where buyers [sometimes with the assistance of crooked appraisers and/or real estate agents and mortgage brokers] would apply for purchase money loans with little or no documentation, or they would secure refinancing money, all based upon inflated appraisals and false information.  They took the cash, with no intent of ever repaying the debt.

Here are a few of the RMLS™ new listing and closed sale stats for the Portland Metro area during this period:

• August 2004 – 4,354 new listings[16]    Closed Sales – 3,062
• August 2005 – 4,779 new listings             Closed Sales – 3,690
• August 2006 – 5,529 new listings             Closed Sales – 2,939
• August 2007 – 6,031 new listings             Closed Sales – 2,554

Note that there is an interesting disconnect in the above statistics: While the number of new listings continued to increase every year through August 2007, the closed sales declined in 2006 and 2007. This means that for two years, 2006 and 2007, sellers were still queuing up to sell their homes and condos, while the number of confident and qualified buyers was diminishing. Although this is a topic best left for another day, I suspect much of the increase in listings during 2006-2007 was attributable to new construction development, both single family detached homes and large condo projects. In both instances, builders and developers had committed to projects that just coming out of the ground in 2006, especially condo developments such as the South Waterfront.  The problem, of course, was that in almost all instances, construction could not simply be halted.[17]   For economists who tracked such things, it was clear that as we went into 2007, there would be far more inventory than could be absorbed based upon historic numbers.

Conclusion.  There were many people and industries that contributed to the credit boom and the housing bust.  There was also a factor I will refer to as the “lemming effect,” where almost everyone willingly went over the cliff together. [If it didn’t worry the Fed Chairman, Alan Greenspan in 2005, why should we be concerned?!]

Now, after five years, the 2012 statistics seem to be moving in the right direction. Unfortunately, there is no single event, program, or person who can take credit for the improvement. Our government threw taxpayer money into ill-conceived programs such as HASP, HAMP, HARP 1.0, HARP 2.0, AND HAFA that have been unmitigated failures[18]  Why were they “failures”?  Because they came nowhere close to helping the number of families they were touted to help.  Not even close. [According to a recent DSNews online article: “In a recent survey of YouWalkAway.com customers, 47 percent said they believe the Obama administration had no effect on the foreclosure crisis. About 31 percent believe the administration had a negative effect, and 22 percent of respondents said they think the Obama administration had a positive effect on the foreclosure crisis, the agency reported.”]

If these programs had been designed by private industry, the CEOs responsible would have all been fired.  Why were they “ill-conceived”? Largely because bank participation was voluntary.  Instead, the Big Banks created their own “proprietary” modification programs.  Doing a HAMP mod, for instance, carried published rules, timelines and tests. Not so for proprietary mods. So when homeowners queued up for a modification program that was “proprietary”, they never quite knew what the rules were.  This gave Big Banks the ability to make their own rules along the way. There was no way to know where the goal posts were – and from many, many, anecdotal reports, those posts had a habit of moving as one approached the goal line.

According to a July 2012 Bloomberg article, of the $46 billion in federal TARP[19] funds allocated to help distressed homeowners, only ten percent has been used – 90% remains unspent. A plethora of lawsuits, including the National Mortgage Settlement, have put little money toward actually helping homeowners stay in their homes or transition out with dignity.  As demonstrated by Oregon’s mandatory mediation law, SB 1552, the banks have simply skirted the issue by taking their foreclosures into court – thus slowing down an already devastating process, when counted in human terms.

The most insidious result of these programs, government and proprietary, was that they gave distressed homeowners false hope.  Statistically, the vast majority of folks seeking loan mods were denied.  Of those accepted, the recidivism rate has been estimated to be 30% and up.  The real numbers are likely over 80%.  So, for those homeowners who spent 12 or more months trying and failing to secure a loan mod, they wasted a year of their life, and accomplished nothing in dealing with a mortgage they could no longer afford.  They could have done a short sale or deeded it back in lieu of foreclosure, and moved on with their lives.  The homes would have gotten back into the marketplace where they belonged. Instead, thanks to the selling false promises and false hope, the foreclosure crisis has lingered twice as long as necessary.[20]

So as we round the corner into 2013, what can we expect to see in the Portland-Metro housing market?  Assuming that our national fiscal policy does not implode, causing a contraction in employment, my take is that the housing numbers will continue to improve, albeit in low gear –and  no thanks to any of those whose responsibility it was to help. The simple truth is that as buyers gain confidence, dipping one foot at a time into the waters, we will likely see a slow, gradual, improvement.  Confidence, among all other things, is what will be necessary to prime the pump.  We are seeing it in the 2012 RMLS™ numbers, and we are seeing it in new home construction.  But the way we will know we are truly out of the woods is when the known and unknown inventory of actual and potential foreclosures, REOs and short sales disappear.  That, I believe, is another two years away.  – Finis