Lake Oswego

LO is to Portland as Bellevue is to Seattle, Beverly Hills to LA, Scottsdale to Phoenix.  It’s gorgeous, has fabulous schools, surrounds, as you might guess, a 415 acre lake, and is home of Oregon’s most expensive real estate.

Five or six years ago the area went nuts.  With very little available undeveloped land within the city limits, builders were buying older homes for teardowns and rebuilds, or buying odd shaped lots and subdividing them into flag lots.  With the cost of land already high and getting higher - LO had one of the highest appreciations in the state during the runup - added to which was the cost of site prep, it seemed impractical to put a $350k home on a lot that had cost $300k.  So we had a steady increase of new million dollar homes, an increase that slowed only recently.

The consequence now is 4500 sf homes on 6000 sf lots; new million dollar homes built between two 1950 teardowns;  $1.2 million homes crammed so tightly on flag lots that a Suburban can’t maneuver into the garage.  Lake Oswego has some, well, issues:

Total active inventory:  497.
Median price (active):  $749,000.
Months’ Supply of Inventory:  11.7 (Terradatum)
New construction active:  97, 19.5% of total.
Median price new construction:  $1,249,000.
MSI $749,000 + :  23.5
MSI $749,000 -  :   7.9

I think it’s safe to say we’re somewhat over built in the million dollar range; over $1 million new construction accounts for 42% of the inventory.  The prices are going to have to come down to move, but builders, at least so far, have been anchored to their costs. 

A strong buyers’ market. It’s going to be a relatively slow recovery.

[Although, JP, we’ve had four consecutive months of increased pending sales.  Isn’t that, by your definition, an upward trend?]

Southeast Portland: Eastmoreland, Sellwood, Woodstock

Much older established neighborhoods, much of it early to mid twentieth century.  Much more affordable price points.

Total active inventory:  438.
Median price (active):  $277,000.
Months’ Supply of Inventory:  3.9
New construction active:  37, 8.4% of total.
Median price, new construction:  $269,000 (!)
MSI $277,000 + :  4.2
MSI $277,000 -  :  3.7

So we have a strong buyers’ market and a moderate sellers’ market within eight miles of each other.  This can be repeated in neighborhoods and at price points throughout the area.  Broad based indices are not adequate, in this market or any other, to base vital buying and selling decisions; you need to go deeper.

AREIL.

One of the things I love about Lake Grove Presbyterian Church is the amount of time, talent and giving that goes to worldwide mission outreach programs.  One of those is a now ten year partnership, through Worldvision, with a federation of sixteen Wolof villages in Senegal.  Not mission in the sense of “here, let me give you some money, now convert”, but a real relationship. We send typically one team a year - sometimes two - to work with the village elders, and have had villagers visit us.  Wonderful people: Colorful, quiet, understated (until they dance to 12/8 rhythm beat on a djembe) and enormously gracious.  We’ve helped them dig bore holes so they have immediate access to clean water, built two schools, and helped fund a hospital.

The picture above was one I took when there in 2004.  Several months earlier we’d sent $10,000 in rice - their diet staple is rice and millet - because drought had caused massive crop failure.  The adorable little girl sitting in my lap was at the very least healthy because of it.  In every village we were greeted with waving rice bags, and their gratitude - genuine and immense - was one of the most humbling experiences of my life.

They’ve just been through another serious drought.  And this time the effect is worldwide; there have been food riots in nearby Dakar.  The price of rice has tripled.

So we’re holding a benefit concert this Saturday, May 10, 7:00 pm (map), free and open to all. There will be a free-will offering, all of which will go to the food relief effort.

The very good news is the music - mostly African, gospel and spiritual - will be terrific.  With all due humility our choir is superb, but with us will be professionals on piano, bass, drums and percussion.  Dorcas Smith - who’s sung with us often and has sung with the Oregon Symphony for the Gospel Christmas - is one of the premier gospel talents in the region and will be featured.  Even if you don’t come for the relief effort, you’ll be thoroughly entertained.

I know it’s tough, but forget about real estate for a couple hours!  Promise, you’ll be glad you did.

 Thank you!

UPDATE:  Yes, thank you!  In the final tally, the concert raised $19,262.83.  Half of that will go to direct food relief, the other half split between seeds for this year’s crop and the tools necessary to expand into a diverse venture - forestry - so there’s less chance of devastation during drought.  4000 people now have real hope.

Nationally the DOW just went over 13,000 - up 13.5% since January - unemployment went down when it was expected to go up, and fresh $600 checks are taking some of the mental agony out of $3.60 gas prices.  As headlined on Drudge, traders are betting on the dollar’s gain against the euro for the first time since December, 2005.  The Fed rate is now at 2%, Prime at 5% and a 30 yr fixed mortgage still under 6%.

Locally - and I fully admit it’s anecdotal - buyers who’ve been tire kicking for six months are writing offers, some very low but being looked at seriously by sellers.  Our office processed seven new sales last Monday, and the pace has kept up.  I’ve had more activity on my listings than any time in the last four months (about two months later than the usual spring pickup), and we have an accepted offer on one from young first time buyers, exactly the people who drive the rest of the market.

That’s notto say we’re at the end of anything; it may be a blip, but this is how trends start. The April numbers for the most part are tough.  Closed sales will end up down over 40%, continuing a not-very-pleasant trend.  But closed sales reflect the market as it existed in February and March; more timely pending sales, though down YoY 24%, are at a number higher than any month since August.  The bestnews is the YoY median is down about 3.5%, and down 8.3% from the peak last August (Wait!  Is it possible that has something to do with the uptick in activity??).  It’s at best a general indicator - all real estate is local - but my very best guess (for you, Git) is that it’s going to drop another 5% before we’re done.

Here are the numbers; note they’ll adjust somewhat for the next week or so.  As always, click on the image for a two page pdf:

Median Price (sold):

Pending Sales:

Total Homes For Sale:

As prices are trending down, so is supply.

Month’s Supply of Inventory:

7.3 months, based on pending sales; RMLS calculates based on closed sales, and will be likely be over 10 months.

All.  Real.  Estate.  Is.  Local.

I’ve said I’ve been through all this before, and I have.  Dowding quotes is old hat, cheap and lazy, but it’s also transparent;  once links are established readers can and will make up their own minds, and repetitive explanations are unnecessary and a waste of time.  Pertinent to the deleted post:  Back in the days of 4800 baud modems, commenters used to cut and paste dictionary definitions - notably irrelevant to the conversation at hand - hoping to cleverly insult their target without the burden of having to actually think.  Now, the super clever link to Wikipedia entries instead, but the intent is exactly the same: go after the person, not the argument; ad hominem.  And I know, again from experience, once ad hominem arguments start, they escalate.

So they won’t start.

It’s simple, really.  Please:  Attack ideas, not people.  “That’s a stupid idea!” is legit - though you might want to follow up with why - “You’re an idiot!” is not, and will be deleted no matter who the target.

HT Bob McCarty via Hugh Hewitt

There are many who blame the media for much of the downturn, and think it’s the media that can pull us out.  Emphasizing the negative froze buying; perhaps emphasizing the positive can inspire the thaw.  Wrong on at least two counts:

1. People are infinitely smarter than that.  They hate spin, and know it when they see it.  Puff pieces - see NAR - not only don’t have a positive effect, they infect the credibility of those in the business who do try to tell the truth.
2. The mainstream media - especially, say, The Oregonian - do have a vested interest in the proper spin, but it’s directly in favor of the real estate industry.  Builders and brokers are among the last consistent revenue streams, and keeping them (us) happy is critical.

[The biggest problem in the mainstream media, at least locally, is they have no one writing or speaking about real estate who knows anything about real estate.]

Keeping the shoe analogy alive, here’s Git:

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.

When retail inventory languishes, retail has a: sale. The entire run is marked down. It’s a psychological (think: inertia) factor almost as much as economic: when people see ’sale’, they’re more likely to buy.

In housing it manifests as auctions, REOs and short sales.  As I’ve said before, the human condition insists that if someone else is on the losing end, I must be winning.  (Warning: it’s not true in all cases.  Short sales especially are dicey.)  I don’t think we’ll ever hit what’s happening in California, where a third of all new resales are foreclosures, but when a significant percentage here are REOs, prices will drop accordingly, investors will reap reward, and all sales will tick up…

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.

I’m not an economist.  If you want one, NAR’s Lawrence Yun was named by USA Today as one of the top five in the United States.  His tables are elaborate, his analyses detailed and nuanced, his vocabulary what one would expect of a PhD, and his predictions right nearly half the time.

All I do is observe people.  Numbers and their interpretation are important, but only as a reflection of how people behave.  If you know people but not numbers, you’re going to be right much more often than if you know numbers but not people. 

Broadly, economic behavior is based on these observable truths:  on the consumption side, people want the most for the least.  On the production side, people want to be compensated in proportion to what they produce.

Simple, no?

No.  Forecasters get sidetracked by thinking too much and observing too little:

Presumption.  This is the function whereas predictions are made based on the theory of how people behave as opposed to how they actually do.  Marx, Engels and their generational acolytes were (are) famous for thinking wise suggestions from their intellectual superiors would be enough to encourage the masses to utopian bliss, the problem being given the choice of producing or living off the dole, without commensurate reward people will always gravitate to the latter.  And without production, there’s nothing to consume.  (See: Korea, North).  That’s still not sufficient to keep the anointed from trying, because they know:  “If only people would behave as I instruct, the world would be a better place!” 

Note presumption creates fallacious inference as well.  If people don’t think or behave as the elite predict, there’s necessarily something wrong with the people, not the theory.  They must be, say, bitter, so sink into opiates to compensate: Religion.  Hunting.  Xenophobia.  Racism.  To the elitists, it makes perfect sense, and the real danger is that when in power they craft policy on those same false presumptions.

What that means to real estate in the present tense is this:  We have elites everywhere designing laws to correct errant behavior in the buying and selling of homes, behavior it should be noted was the result of laws designed to manipulate behavior.  Bad borrowers and bad lenders are looking to be validated, so instead of the market going through a painful but relatively quick adjustment, if implemented it will be longer, ultimately deeper and much more likely to reoccur. 

Projection occurs when forecasters are so wrapped in their own circumstance that they create, consciously or unconsciously, their own wished for result and dismiss all contradictory evidence.  As I’ve said before, both the NAR and bubble bloggers are supremely guilty, but we all are to a greater or lesser extent.  Being right is something we need to be, and admitting we were wrong is one of the most difficult things we do.

All of which is to say:  In the buying and selling of real estate, collect as much information as you can from sources you trust, then use your own powers of observation. Whether a good market or bad, no one - not Lawrence Yun, certainly not bubbleheads - can tell you with any degree of certainty what a specific home today is going to be worth in six months or a year. 

No one knows your situation as well as you. 

The good news is Oregon is still 44th in the country at an overall rate of 2.45% (national 4.35%); the bad news is that’s up from 1.70% in Q1, 2007.

[For the record:  As of today, 3.6% of the active listings have any kind of ‘green’ designation.  3.5% of the sold properties in the last six months had the same designation.  And I’ve still never had either a seller or buyer list ‘green’ as a priority.]

So when I found Peter Robinson of National Review Online had interviewed T. J. Rogers, CEO of Cypress Semiconductor and Chairman of SunPower, and was introduced with this blurb…

T.J. Rogers, ardent libertarian…preaching green? … I ask[ed] the capitalist’s capitalist if he has finally chosen to devote himself to the higher good.  “The higher good?”  T.J. replies.  “That’s bunk”

The [real] higher good is serving our customers…That kind of service is a higher service than the way our government looks at it, which is, ‘You elect me, I take over, I go to the big house, I get the driver and the big airplane, and then I tell you what’s good and if you don’t like it then I force it on you.’

 To everyone who worries that executives have all become bland bureaucrats, Watch-and set your mind at ease.

…I was fascinated. 

The man is brilliant.

Click the picture - or here - for part one,  part two here.  Parts three, four and five to come on NRO.

UPDATE: For those wondering the connection to housing, it can be found in part three.  SunPower is within a few percentage points of the peak theoretical efficiency of solar panels, but is working on cutting the cost of manufacture in half.  “Within five years it will be more expensive to buy a home without solar panels than with, because the return on investment will be under a year and a half.”