For the Benefit of Mr. Git, Pt 2; the demand side of housing, inertia
Posted on April 23, 2008
Filed Under bubbles, Portland, Real Estate, General |
Demand = the number of buyers willing and able to buy a home.
Willing: Local factors
[Downtown Lake Oswego]
Before we can find willing buyers, there must first, of course, be potential buyers. I admit fully to provincial bias when I say I’d rather live in the Pacific Northwest than anywhere else in the world - an hour east to ski, an hour and a half west to surf, a half hour in any direction to fish for salmon or trout - but there are lots of people who apparently agree. In-migration remains high, which helps deliver a relatively strong economy, which in turn helps in-migration. Quality of life matters.
What’s changed lately, though, is, where two years ago people were buying immediately, now many are taking their time, and renting first.
Willing: Market inertia
I hope this doesn’t come as a surprise: There are many more followers than leaders. Most don’t want to be the first at anything, so wait until they can be reinforced by a tide for the sake of confirmation. Polls, politics, movie reviews and the ad populum logical fallacy all rely on that for sustenance: if everyone else says so, it must be right. Part of the enduring charm of bubble blogs and political blogs of both the far left and the far right is the gatherers can echo, “Yea! Me, too!” without ever having to offer anything so niggling as evidence to back up their positions.
In the buying and selling of what is usually one’s most valuable asset it’s especially true. When money was there for the stating, the headlines everywhere screamed “White hot housing market!” and Portland had double digit median increases for twenty-two straight months, people climbed over each other to move up or become part of the American Dream, where before it had seemed impossible. And why not? With appreciation the downside risk was minimal - plus 15% increase on $600k was a lot more than 15% on $300k - and politicians everywhere had decided low income home ownership was the only fair way to run a country. For agents selling a listing wasn’t a problem, it was the sellers not being able to find something they wanted before their own home sold. The entry level buyers enabled buyers in the mid-price, the mid-price buyers enabled the high-price, and at each level the buyers had to outbid each other, often not to get what they wanted, but what they almost wanted. Places like Bend fed off California sales, and kept building more and more expensive homes to accommodate. It was, frankly, nuts.
Then. I remember in July, 2006 calling another agent and telling him things didn’t look nearly as good as people were being told in the press. As is my habit I was looking at volume, and the Portland area had YoY decreases in seven of the last nine months, with new listings rising simultaneously. He - in the business much longer than I - pointed out the continued double digit increase in median price, and correctly said sales at the pace they’d been going couldn’t last forever. It was a blip.
Two months later I represented buyers who closed on a $650k home, a flip that had started listing life at $800k. In reality, prices have been dropping at least since then, and those two YoY sales increases remain the only two we’ve had since November, 2005. When “Subprime Crisis!” began to dominate the headlines last July, and lenders began restrictive qualifications, sales really went down, and inertia now is about the direct inverse of what it was in mid-2005. Buyers are in a psychological freeze, and are reluctant to buy…because the perception is no one else is.
The irony is that, just as things weren’t nearly as good as everyone thought in July, 2006, now they aren’t quite as bad as everyone thinks. Savvy buyers are buying. I just saw a home listed in Woodstock - beautifully prepared, perfectly priced - that had three offers within twenty-four hours, and is now pending with a backup offer at considerably more than listing price. (Woodstock in that price range has a MSI of 2.1 months.)
Note that’s not to say it’s good - it decidedly isn’t: April sales will be down in the 40% range again and median +/-1%. We’re in for another six or more tough months.
But, as much as some would wish it, we’re not going to go through anything nearly as severe as parts of California, Nevada and Florida.
More on that, next installment: Able: Availability of capital.
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8 Responses to “For the Benefit of Mr. Git, Pt 2; the demand side of housing, inertia”
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Jeff - I reread part one this morning and I’m not sure the shoe example carries over well to the housing market.
The housing market has been in the situation were everyone wanted shoes - lines out the door and people were bidding on shoes to get a pair before prices increased - heck people were buying 6 pairs and selling them to people outside the store at 25% markup.
Now we’ve a store stocked to the rafters with shoes and demand just went through the floor (falling sales, increasing inventory).
With housing there are *some* motivated sellers in every market and the number of motivated sellers starts to climb as inventory does.
With “motivated sellers” it’s like having to sell at least one pair of shoes a day - when there are few buyers you may have to drop the price to sell a pair - that resets the market price for all inventory.
That’s what I think we are staring to see with the housing market.
“where two years ago people were buying immediately, now many are taking their time, and renting first.”
That’s ironic - I moved to PDX 2 years ago May 1st from California and rented
This comment is coming from a potential condo/townhome buyer who had been a home owner for 8 years. We are in a poor buying position right now due to spouse in school and childcare expenses though in a few years not only will our income most likely double but childcare expenses will drop, if not go away completely. Having said that, even if we were in a position to buy I feel the condo market is way overpriced for what you get, keeping in mind HOA fees and higher taxes for new construction. Granted the condo/townhome market should, IMHO, be viewed somewhat separate from SFD, it cannot be ignored.
Though I somewhat agree with your supply and demand thoughts I am a strong believer in the theory that Portland incomes cannot afford Portland homes. Take away the easy credit and the funny loans, and add to it the difficult time our neighbors to the south are having in trying to sell their homes to move up north and I think we have legitimate concerns that our market will see a significant slow down, though not like NV,CA, AZ, and FL.
I was in Phoenix for spring break visiting relatives and, of course, RE was the hot topic. Though there are other factors the Phoenix metro area deals with, ie, NO UGB, what shocked me is that they have 10,000 people A MONTH moving to the area, 10K A MONTH! I theorize the lack of UGB, compiled with the huge inflx of folks with money (retirees from the midwest vs Portland’s young, broke creative types) added to the cheap and easy credit and you got a much higher rate of appreciation which made them so vulnerable to a much steeper rate of depreciation.
As time passes the Portland developers will be much more flexible with prices, some are already lowering prices and adding upgrades. So yes, one can still get good deals, relatively speaking. But those home owners that must sell due to buying at the peak and with IO or option payment type loans and thus being upside down are going to be in a static position and will be forced into short sales or foreclosure thus prolonging this decline.
I think at this time next year we will see the market stabilize, IMHO, given the time it takes to wade through the foreclosure mess. As a potential buyer, why buy now when the bank will be trying to unload all these properties at potentially great discounts. I have a wonderful roof over my head for little money compared to a mortgage. The mania of being priced out forever has subsided, IMHO.
May we return to normalacy, until the next bubble! Bearlee
Git, stay tuned; I’m going to post an addendum. You’ve reminded me of what I missed.
Bearlee, don’t keel over: I agree with nearly everything you wrote. The next post - availability of capital - will deal with a lot of it…
Didn’t mean for it to sound like I was about to keel over:O)
A thought just occurred to me, though. How does one define a housing bubble? I see a few realtor blogs admit to a coming (and some say already here) price correction but I have yet to hear a realtor admit to a ‘bubble’. Which begs the question, what is a bubble?
>How does one define a housing bubble?
I don’t. I try to analyze the market and market trends as they exist day to day, not just in the abstract but especially as they apply to individual needs in individual circumstances. Anything else is esoteric breast beating.
“I don’t. I try to analyze the market and market trends as they exist day to day, not just in the abstract but especially as they apply to individual needs in individual circumstances.”
You should read Atlas Shrugged…its your kind of novel.
>You should read Atlas Shrugged…its your kind of novel.
Now this is fascinating; I may turn it into a post.
Reading between the lines - and I have to read between the lines because otherwise it’s apropos of pretty much nothing - you seem to be saying that I should counsel clients based on what’s best for the collective - i.e. what’s best for you - as opposed to what’s best for my clients.
Is that about right?