Friday, October 28, 2022

Market Sliding Down Gentle Slope, Is there a Cliff Ahead?

The real estate market locally is slipping with prices falling gently for now. Like any other industry, housing has a supply and demand scale that directly affects pricing. For the last several years our market has had extremely tight inventory. For a couple of those years we saw super low interest rates that created an intense demand for real estate which drove prices up at a feverish pace. Low mortgage rates create demand by offering access to loans for people with less income. During this time however few people wanted to sell their homes. Washington State has been the top rated place to live by several surveys since 2018. Look no further than Downtown Vancouver which has five new tower cranes operating on large scale urban development. Money is pouring into the local economy, so that is good.

But alas, the economic conditions began deteriorating last year, and interest rates have risen dramatically. This has eliminated a large portion of the demand for housing. People have been 'priced out' of the market due to the higher cost of borrowing. However the market has only slid a little bit. Often during economic turmoil people sell the house adding inventory and further reducing price pressure. That isn't happening right now. Homeowners are for the most part staying put. So even though demand has fallen due to the  expensive cost of money, inventory which was super tight remains fairly low although it is softening up.

The real killer is inflation. If inflationary pressures continue to outpace earnings, some people will be compelled to sell and as inventory builds and demand fades, prices can plummet. We have the advantage locally of being one of the best places to live in the metro area, we have external demand coming from other states seeking the jobs, lifestyle, etc offered here. We also have additional external sales pressure coming from Seattle area residents fleeing high living costs in that area. These factors are helping to stabilize prices that otherwise may have fallen much more than we have seen thus far.

Governments at state, local, and federal levels have policies that can have serious effects on real estate markets for better or worse. Government spending the federal level creates inflationary pressures, state and local legislation can cause ripples in the industry as well.

I have noticed that election turnout for the Presidential elections is almost always higher than the midterm elections and off year elections in odd years is even lower yet. Furthering the evidence is special elections not held on the official Election Day of first Tuesday in November have the lowest turnout of all. What this means is that crafty politicians tend to slip sneaky legislation through during elections with lower turnout. Washington state has imposed a huge increase in the gasoline tax and that will eventually come before the voters. But the timing means it will likely appear on the ballot during next year's off year election. This gives the state a free year of this tax before the voters have the opportunity to vote it out. Fewer voters will vote not he issue at all in an odd year. Voters whether right or left or straight down the center, should vote in every election. 

Elections for your local leaders are also often on the odd years like the Vancouver City Council and Mayor which are elected in odd numbered years when turnout tends to be lower. We the people should vote in every election every November. Regardless of how you feel about politics and what your personal ideology is, you get to exercise your will once a year, and it does matter. Some of these off year elections literally come down to a handful of votes.

What does all this election talk have to do with real estate? Everything; politicians create policy and legislation that has tremendous effects on our markets in general, our lifestyle, and so on. The decisions made by these elected officials have both benefits and consequences to our daily lives and the real estate market is included. 

Portland was once the darling city of America, and in just a few short years it has digressed into a third world cess-pool. This was mostly due to policies and legislation passed by elected officials there. The sensitive issues on homelessness, crime, traffic, taxes, jobs, and other local issues translates into how desirable it is to live somewhere. Undesirable locations tend to suffer in real estate values. Desirable places tends to be expensive.

So, are prices headed for the cliff? Maybe. The federal government needs to reign in spending and focus on economic development. Local officials need to work on cleaning up crime, homelessness, fix traffic issues, and bring good high paying jobs to the area. I do not know what will happen next year on inflation and economy front. That will largely depend on how things turn out in the next election. If this economy turns into a prolonged inflationary period like we saw from 1977-1983 we could be in for a serious crisis, and if Vancouver starts making the same mistakes as Portland, we could suffer their fate as well. Let's not do that, OK?


Friday, October 21, 2022

Classic Rules Still Apply

Here is a classic, it's even got "classic" in the title.

Originally posted November 9th, 2018, by Rod Sager

Yes the classic rules of location, location, location, and 'curb appeal' are back. Those rules never really went away, but when the inventory was so tight that buyers had to take what they could get, those rules were temporarily ignored.

Inventory levels are starting to return to a more healthy level and that means buyers have choices again. Classic issues like, facing a busy street, outdated, functionally obsolescent design, or bad location are now affecting the price in a more traditional fashion. Some sellers and even some agents, have yet to realize this.

Getting top dollar for a house requires several things to happen. The house must have broad appeal in the market. Great location, quiet street, well maintained, excellent curb appeal, fresh and updated feel, clean and tidy appearance, etc. This brings the most possible buyers to look at the house and then of those one will like it the most and reach a little deeper to buy it. When some of these appeal factors are missing, fewer buyers will look at it, of those that do many will pass on it, leaving a small demand left. That leads to a lower price.

The items I mentioned above are not the only factors, but most of those are controllable. The home owner can't control the location, nor the street, but the others are well within the sellers reach. This market will not tolerate a sloppy house, buyers have choices and they will either pick the nicer house or low-ball the ugly one. Sellers are well advised to spend some effort making their property look as warm and inviting, positive curb appeal, and as fresh as possible.

We are in the transition to a neutral market and neutrality is healthy and sustainable.

Friday, October 14, 2022

Local MLS Shows Softening Conditions

The Regional Multiple Listing Service is the primary MLS for the Portland-Vancouver Metro Area. The September data is complete and the MLS released is compilation report for members a few days ago. The report shows a strong decline in both new listings and closed sales versus the same month last year. 

The numbers can be a bit deceiving as it makes it look like the market had a crash. It did not. New listings were down 25.3% over last year and pending sales in the same period were off by 36.6%. Marketing time remains a very healthy 35 days and the median price is stable for the moment. The report stated that current inventory levels are still below two months and that indicates a seller's market remains, for now. 

Looking at the prior month shows two things. One is the normal season slow down entering the fall and the other shows that inventory levels are high enough that buyers are less likely to fight over listings like they were a few months ago. I believe that appraisers are also tightening up as well and that can lead to reduced prices at close. The median sales price dipped from August to September by 1.1% and if that becomes a trend we may see a slide in overall pricing. It should be noted that the interest rates rose substantially right as September approached and that likely played a role in slowing down the pending sales. Many buyers were eliminated from qualifying as mortgage rates jumped from 5% to 8% in the span of a week or two. So long as new listings decline at similar rates to pending sales the pricing in the area should remain stable. If we suddenly get a surge of new sellers and buyers remain flat, then of course that places downward pressure on pricing. 

Six months ago I was bullish on the notion of a flat or soft landing with mild pricing drops. Today I am more split. This report shows that both supply and demand are falling but demand is falling a little bit faster. The rates are probably the biggest culprit on the demand side. Although I still feel like a soft landing is possible, it seems that we have a higher chance now of a medium to hard landing than we did earlier this year. I still remain optimistically cautious about the market over the next twelve months. Seller's thinking about moving, and who need to protect their equity might want to list now. 

Friday, October 7, 2022

Should I sell or should I stay?

Sounds like a song from the Clash in the 1980s... it is however a valid question for would be sellers in this current real estate market we find ourselves in. It genuinely depends on what your current situation is and what your new purchase would be when you move. In general local markets move closely together. Sometimes there can be certain sectors of real estate that take a bigger hit than others or out perform the broader market. Key neighborhoods can also over or under perform relative to the regional trends, but broad trends tend to effect to region equally. 

Sellers that have a large equity position should be motivated to sell prior to a negative value adjustment as lower prices erode their equity. This is especially important if the home has a mortgage balance. As home values decline they tend to drop faster than the mortgage balance and that create inequity for the seller when they go to repurchase. If the seller is downsizing locally or moving to a more affordable area, then selling now is prudent. 

Sellers thinking about moving up may want to rethink that position in this market. This runs counter to my own best interests, but it is sound advice. Most homeowners sitting on a house with a mortgage are at a much lower rate. Many refinanced including myself, when rates were in the 2's and 3's. With rates now in the 7's and 8s the cost to move up will be substantial. That being said, if prices start falling the opportunity to make that move up could collapse and then the seller is likely stuck for a few years.

A seller that is free and clear or has a very small mortgage balance (less than 30% LTV) looking to move laterally or downsize is in a good position either way. Selling now allows them to capture maximum equity and they could benefit from softening prices when they close and repurchase 30 to 45 days later. If they wait and the market erodes, the price they get is lower but the price they pay on the next smaller house will also be proportionately more reasonable. 

Sellers that should be wary in these current market trends are those with a higher LTV in excess of 80% as they could lose their equity position if they wait too long. Every seller is unique and potential sellers are wise to contact their trusted agent and loan officer to get the facts of their specific situation before deciding on a course of action.