A
real estate reckoning
The southwest suburbs' framework of a housing
slowdown lays a foundation for a more normal market
Thursday, November 16, 2006
DANA TIMS
The Oregonian
A year ago, local and national real estate markets were roaring off the charts.
Anything with doors, windows and a roof sturdy enough to ward off rain sold within minutes of hitting the market, driven by low interest rates, steady in-migration and the money-making magnetism of Portland-area real estate to outside investors.
For a variety of reasons, much has changed in the past few months, both in the southwest suburbs and across the country. Compared with some cities where markets collapsed almost overnight, however, it's becoming clear that the slowdown creeping through the southwest suburbs portends, at worst, a return to more sane and sustainable market conditions.
"Our markets have always been very cyclical in this area," said Laurie Egan, a 20-year veteran of the business who owns Team Appraisals in Tigard. "But there's no reason to be alarmist about this slowdown. All the key indicators are still healthy and in line with what constitutes a solid real estate market."
In June 2005, for instance, the Portland area's housing inventory dipped to a record low of 1.5 months. In other words, if no new listings came on the market, the number of houses for sale at that time would sell out in 45 days.
The same figure in January 2004, by contrast, stood at a relatively fat 6.1 months, about what industry analysts say represents a point of equilibrium between buyers and sellers.
But from that point on, the housing inventory dropped every month for the next five months before beginning to edge up slightly, increasing to 2.9 months in November 2004. It dropped to 1.8 months in March and didn't top 2 months until October 2005.
In real estate, where the balance of supply and demand dictates all other market realities, that anemic supply of houses clashed head-on with soaring, almost over-the-top demand from buyers. Even seasoned real estate agents were taken aback by the intensity of the bidding wars.
Through 2005 and into the early part of this year, successful buyers often paid tens of thousands of dollars more than the asking price to outbid half a dozen or more competing offers on the day of listing.
In recent weeks, the air has been hissing out of the balloon. Housing inventories grew to 4.5 months in September, and signs of the slowing -- or, as some agents prefer to call it, the "adjustment" -- are showing up everywhere.
Some large residential builders, for instance, are offering incentive programs to coax hesitant prospective buyers off the fence. These "buyer-assistance programs" can include full landscaping, free air-conditioning systems, architectural upgrades and $5,000 toward a buyer's closing costs.
In the existing-homes market, many buyers are reducing their asking prices, often dramatically.
Larry Hilton, a broker and residential land specialist with John L. Scott Real Estate in Tigard, recently saw firsthand an example of the new sluggishness: While preparing a market analysis for a house in northern Marion County, he had trouble finding comparable examples needed to set a price.
The reason? "Because there are no recent sales in that area," Hilton said. "None. We're seeing more and more of these things across the board these days."
Yet just as wine grape growers know that mere meters can separate great grapes from mediocre ones, the local housing market appears to have microclimates of its own, agents and builders say.
In Wilsonville, for example, Randy Sebastian's Renaissance Development has sold all but nine of the 62 houses available at its Canyon Creek subdivision. Prices average about $600,000.
In West Linn, at Sebastian's Rosemont Pointe development, about 400 potential buyers on a waiting list are jockeying for 85 lots. The houses will sell for $600,000 to $1 million.
"Our company hasn't noticed a slowdown at all when it comes to areas southwest of Portland," Sebastian said. "The entire west side remains very strong, due largely to its reputation for good schools, a limited supply of developable land and easy freeway access."
By comparison, the housing market in Clark County has slowed considerably in recent months, Sebastian said, as has Portland's east side, where a glut of houses remains.
"Right now, it's all a matter of having quality product in the right spot and building the right thing," said Drew Prell, who with his business partner, Jim Morton, recently completed a retail and commercial project near downtown Lake Oswego. "But if I'm glad I'm not out in Hillsboro trying to sell houses, I'm certainly glad I'm not in Las Vegas, New York and Southern California."
Analysts widely agree that real estate "bubbles" in all three of those locations, as well as once-incandescent pockets elsewhere, have burst in recent months. The National Association of Realtors recently reported the sharpest year-over-year drop on record in the median price of existing homes. The same report indicated that the median price of new houses absorbed its biggest drop in 35 years.
But those same analysts also agree that no such bubble formed in Portland, which should help soften the effect of slowing sales and increasing housing inventories.
Oregon, and especially Portland, will have a milder cycle than the rest of the nation, said Bill Conerly, a regional economist whose business, Conerly Consulting, is based in Lake Oswego. The key factors driving that are the continued strong migration to the state and the fact that Portland, largely because of its growth-limiting urban growth boundary, did not overbuild.
"Everyone in the residential food chain, from contractors to mortgage originators to materials suppliers, is going to feel the slowdown," Conerly said. "And while it may take two to three years to work off the excess of housing we now have in the works, we should be just fine in the long run."
That's not to say that everyone will escape the real estate dip unscathed.
People who bought their houses as prices peaked may sustain the most economic damage, particularly if they financed the purchase with adjustable-rate mortgages, said GaSandra Carlton, owner of Arrowhead Mortgage in Lake Oswego.
Many of those buyers chose zero-principal loans, meaning they pay only the interest due each month, she said. The resulting deficit gets added to the balance of the loan, which is recast every five years. The result is a loan with a rate of 3 percent to 4 percent now that will zoom to 9 percent or more in a few years. With housing valuations slowing, the amount of equity available to these buyers also will be reduced.
"What all of that means is that foreclosure rates are going to be high next year and for a few years into the future," Carlton said. "At the very least, 2007 will be an interesting year."
She predicted that a cooling real estate market will result in a significant thinning of her colleagues, particularly newcomers who feasted off a loan-refinancing business that boomed as interest rates dropped. Although interest rates remain near all-time lows, most of the people who could have taken advantage of a "re-fi" have done so, Carlton said.
"As long as you concentrate on purchase business, you'll stay around," she said. "If you are chasing re-fis, your days are numbered."
There's one other sign that some sense of normalcy is returning to local real estate markets, said Hilton, of John L. Scott Real Estate.
Historically, sales activity tails off around October, coinciding with worsening weather and people's desire to stay put, he said. Business invariably picks up again in the spring.
But the feeding frenzy that characterized the real estate picture the past three years rolled right over that seasonal slump. The fact that the slowdown is returning now, Hilton said, is a good indicator that balance is being restored to a market segment too often buffeted by booms and busts.
Dana Tims: 503-294-5973; danatims@news.oregonian.com
©2006 The Oregonian