Introduction. The numbers continue to be good – to a point. However, there are some anomalies in the Portland-Metro marketplace, specifically, housing inventory. According to the monthly RMLS™ Market Action letter, Oregon’s largest multiple listing service, “(a)ctive inventory continues at historic lows—unsold inventory remains low at 4.5 months.” As a reminder, the “inventory” as measured by 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.” In the vernacular, the inventory calculation is the “burn rate” – i.e., the rate at which it would take to sell all homes listed for sale in a specified month, based upon the number of closings in that same month.
Although it is merely a rule of thumb – or was before short sales and REO sales entered the marketplace – the thinking was that a “healthy market” was considered to be between six and eight months’ of inventory. Remember, this “rule of thumb” evolved during a time when all sales were “equity sales,” i.e. sellers were receiving sale proceeds, i.e. “equity” – that now elusive figure represented by the excess of the net sale proceeds [after deducting commissions and closing costs], over the remaining balance due on all underlying loan(s).
The term “healthy” really refers to marketplace dynamics between sellers and buyers; i.e. are there enough listed homes– though not too many – such that buyer demand is rationale, as opposed to frenzied? The general principles work as follows:
- When inventory is too low, more buyers are competing for the same properties, thus driving up prices. This is a “sellers’ market,” meaning that sellers are benefited and often find multiple bidders for their homes.
- When inventory is too high, buyers can pick and choose among several similar properties. This is a “buyers’ market,” and sellers find themselves forced to accept lower offers in order to move homes.
However, in today’s marketplace, the fact that inventory is at “historic lows” may be the result of other factors than the more simplistic “sellers’ market” vs. “buyers’ market” dichotomy. Today, we are seeing some anomalies in the Portland-Metro marketplace that need to be factored into the analysis. Here is what I see at play:
Buyer demand is high at certain price points – i.e. those at the lower price end that are attractive to cash-carrying investors. Most Realtors® will confirm this. However, I suspect that good available investment housing is diminishing. The unfortunate corollary to this situation is that it is precisely this kind of housing that is also most attractive to first-time buyers or moderate income families. Yet they frequently cannot compete with cash investors because (a) they normally need to finance their purchase and (b) are limited in available funds, should they find themselves in a bidding war.
Buyer demand is still generally low, though improving. The main ingredient needed to improve buyer demand is employment. For January, 2013, the Bureau of Labor Statistics shows the Portland-Metro area (including Vancouver WA) unemployment figure at 8.5%, only .2% better than January 2012, and up markedly from the prior three months of 2012.[1] Until employment reaches normalcy – if there can be such a thing today – I suspect demand will be tepid.
Seller confidence in the marketplace is still low, though improving. When I say “confidence,” I mean “confidence in the direction of the market.” Although prices appear to have started increasing since 3Q 2012, will it continue? We now know that contrary to what we used to believe, real estate prices can fall. Although the press has been reporting these increases, there is a real difference between the fact of an increase and the reason for the increase. I suspect – or at least hope – that most people do not treat all news stories about the real estate marketplace as if they were written on stone tablets.[2] Remember, some stories, like Hamburger Helper®, are used for filler instead of meat.[3]
I am a bit of a cynic; while I agree that the trend-lines are good, I can’t help but think that just like the vagaries in the stock market, it seems we’re only one disaster away from disappointment in the real estate market. [Think: Fiscal Cliff, Debt Ceiling, Sequester, and now Cyprus threatening the stability of the EU – and we’re not even through the first quarter of 2013! Can it get any more exciting than this?!] While that may be a bit of hyperbole – and I do hope I’m wrong – I’m certain about one thing: Until our dysfunctional, dyspeptic, and divided government gets its act together, I believe many Americans are disinclined to venture into the real estate marketplace – even if they could – since they are unsure what’s in store for their future.
New Construction is still slow, though improving. Life did not come to a standstill in 2008. People grew older, married, started families, and (hopefully) became gainfully employed. However, one thing that did stop was new construction. Between the dearth of new homes, either for first time buyers or move-up buyers, and the 30%+ of the marketplace suffering from negative equity, this demographic today would seem poised to buy new or existing homes. So while the new construction permits are far better than before, they are not enough to sufficiently absorb potential demand – which, as noted above, will likely not occur until the unemployment numbers drop significantly.
The Rest of the Story. Let’s look at the rest of the RMLS® report to see if we can divine what else is happening, and whether it bodes ill or well for the overall Portland-Metro real estate marketplace.
According to the RMLS™ Market Action letter for February 2013:
- “February’s closed sales were strong—at 1,376, closed sales represented the best February since 2008.”
- “Pending sales increased this month by 11.8% from January 2013, to 2,130. This represents the best February since 2007, when there were 2,834 pending sales recorded.” [4]
- “There were also 2,453 new listings in February. This is virtually the same as January’s 2,438 listings, and only a 1.6% decrease from February 2012.”
- “Market time also remains low. At 116 days, February’s total market time is about the same as it was in January 2012.”[5]
- The average sale price in February was $282,000; the median sale price was $242,000.
- Comparing the average price of homes in the twelve months ending February 28, 2013 ($278,600) with the average price of homes sold in the twelve months ending February 28, 2012 ($263,300) there was an increase of 5.8%.
- In the same comparison using median sale prices, the numbers increased 8.5% to $238,500 over $219,900 for the same period last year.
Conclusion. All of this is very good news. In short, the improving trend commencing in September 2012 has continued unabated. And assuming we don’t stall out because of a self-inflicted wound, compliments of our dysfunctional government, this summer looks like a good time for sellers and buyers to dip their collective toes into much calmer waters.
However, in evaluating today’s marketplace, we still should factor in the legacy of the past five years which still has lingering effects:
- Many distressed sellers it appears, still have not tried to complete a short sale, which may be the only way – if not the fastest, for them to extricate themselves from a home awash in negative equity, and avoid any negative tax consequences for doing so[6];
- Many builders have not yet re-entered the new construction market – or at least have not done so in a big way. This means that but for the sale of existing homes, inventory will likely take time to build up, until strong home construction resumes.[7]
- Lender financing is very tight, and many buyers are incapable of qualifying for an affordable loan today, either because of employment-related problems, or prior credit issues from a recent distressed housing event, such as a short sale or foreclosure. This puts a real constraint on potential homebuyers who want to buy, but cannot get financed. As long as FHA remains in business, this is the federal program of choice for many.
- The price point of homes currently on the market as “equity sales” must still compete with REOs and short sales. Until this downward pressure on pricing is relieved, some sellers, especially at the lower price points, Next: What is the cause of our “historically” low housing inventory numbers?
[1] I’m not an economist and have no training in that vocation. I quit my Econ class at college after a week, since I concluded that counting classroom ceiling tiles was more exciting than watching the professor drone on over a black and white, fuzzy, closed-circuit television with 100 other bored and sleep-deprived students. However, admittedly, 45 years later, I now appreciate economists and follow their prognostications with interest – though with an ample grain of salt.
[2] Obviously, local reporting is important to follow, but remember that it may come with a bent;, i.e. the gist of the story is guided by the sources the reporter selects. To their credit, the Oregonian does make a good effort to vet their real estate information through multiple sources, and provide balanced reporting on local real estate issues. However, for a broad perspective – even on local issues – readers are encouraged to follow national and international news such as The Wall Street Journal, Bloomberg News, The Economist, and Financial Times. Plus, there are many good online real estate sources, some more balanced than others. [www.Q-Law.com, though not unbiased, is my personal favorite “For All Things Real Estate.” The House Keeping Report, authored by Kelly Harpster, is the best source of up-to-date news on the Oregon mortgage and foreclosure front.]
[3] For example, a recent KGW post titled “Housing Starts Rising in Portland Area” contains not one sourced fact or figure, and gives a quote about higher “demand” from the owner of a formerly bankrupt building company, that is now back in the construction business. Hmmm, now that’s an unbiased source. This piece doesn’t even rise to the level of Hamburger Helper – I’ve seen more substance in whipping cream.
[4] When I see comparisons to 2007 and 2008, it makes me sit up. It’s one thing to say things were better than last month, or even last year, but as good at five years ago before we tipped into the Abyss, that’s worth noting!
[5] 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.” 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 market value. All the while, many potential buyers remained on the sidelines, waiting for prices to hit bottom. Many sellers who were fortunate enough to have equity during the following five years, had to decide whether to wait until the market fully turned, or sell their home and recover far less equity than they had earlier. 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.[5] 2011 went back up to 134 days. [See my 2-part post here.]
[6] Cancellation of debt is a taxable event. The shortfall to the lender when consenting to a short sale is generally “cancelled debt.” The Mortgage Forgiveness Debt Relief Act permits borrowers, under limited conditions to avoid the imposition of that income tax. It was set to expire in 2012. It was extended at the last minute. There is no way to know today whether it will be continued through 2014.
[7] For some unknown reason, I am unable to provide a source link to this statement. It is based upon my research, but I cannot find any reliable historical numbers for building permits issued in the Portland-Metro area. So I decided to go to press without it for the time being.
