Since late Spring of 2006, the Bend Oregon real estate market has been going through a period of adjustment and correction, from a "seller's market" with record high sales and appreciation rates to a "buyer's market" with low sales and decreasing prices. This market correction intensified in 2008, especially in the last quarter.Crystal Ball
Since September there has been lots of news of the far reaching ripple effect of the slow real estate market and the mortgage crisis. We have seen a credit freeze and the biggest financial crisis this Country has seen since the Great Depression, which has impacted the global economy. We saw the biggest financial "bailout" in history to the tune of almost a trillion dollars. The stock market dropped and unemployment jumped across almost every industry. Locally as the real estate market slowed, we have watched foreclosures and short sales increase, the City and County has had to cut budgets and lay off staff, unemployment is up in general and all real estate related and other businesses have been impacted in some way. Even my company, RE/MAX Equity Group did not escape impact, and closed the Bend office in November. 2008 statistics for Bend reflected this turmoil.
The market shift that began in 2006 saw inventory levels begin to climb and demand decrease as measured by the number of homes sold. The number of homes on lots sold increased by almost 100% from 2003 through 2005, and has dropped by 61% through 2008. The total 1,119 sales in 2008 were 27% less than 2007, and is the lowest number of sales since 1997. The 96 sales of homes on acreage were 30% less than 2007 and reflected the lowest demand since before 1990, when I first started compiling statistics. While it is historically normal for sales to drop off in the winter months, the last quarter of the year was far from normal. The low number of closed sales reflect the lack of demand since the credit freeze and crisis that came to a head in September. With both the national and local economy and unemployment getting progressively worse, it was not too surprising that many consumers stopped most discretionary spending, including buying real estate. Nationally and locally consumer confidence reached the lowest point of 2008.
One of the keys to the market becoming more "normal" is to absorb the excess inventory and bring supply back into balance with demand. While the supply, the total number of active listings of homes on lots did drop 5% by the end of 2008, the inventory absorption rate jumped 30% from 9.8 months of inventory to 12.7 months, based on the sales rate for the previous 12 months. The inventory of homes on acreage faired even worse with a jump of 83% to 36.4 months of inventory. Remember that historically around 6 months of inventory is considered "normal".
Though the Bend market is somewhat unique and has shown some resistance to national trends in the past, it is not immune. While much of the rest of the Country saw prices dropping, Bend's average and median prices remained somewhat stable through much of 2007. After more than two years of high supply and low demand, the continuing downward pressure on prices became more measurable in 2008. The median and average sales prices of homes on lots dropped 16% and 17% respectively. List prices also dropped with the average list price down 8% and the median down 20%.
Besides the downward pressure on prices because of excess supply, much of the drop in the computed sales and list prices since last year is because of the big jump in the number of low priced short sale listings and bank owned properties on the market. Once again, the Bend market had largely escaped the wave of foreclosures across the Country until this year, but these distressed properties now represent a significant portion of both sales and active listings and is having a major impact on the rest of the market. Distressed properties made up ~39% of the sales of homes on lots for December, and ~23% of the 1,186 active listings at years end.
While the statistics and most of the news for 2008 was not good, there was some positive news and trends. For example, the make up of the current inventory is substantially different than last year, and could indicate that there we are closer to absorbing the excess inventory than the total number of listings indicate.
Last year there was a higher number of newly constructed houses on the market. Since then builders have largely stopped building new spec homes, and many of the remaining new homes in the current inventory are being blown out by the builders at prices below cost. By the end of this year many of the new construction active listings were "pre-sales", which means the builder will only build the houses if a buyer contracts for them. In the past, builders did not list new construction unless they were actually built, or under construction, and many times sold them in-house and never did list them. The increasing number of "pre-sales" listings inflate and distort the actual inventory of homes on the market, and thus the statistics.
Last year there were many sellers who did not have to sell, but still had the dream of flipping their houses for a huge profit as others had done in the "seller's market" years. Many of those sellers have dropped out of the market this year, and more of the current listings are homes that the sellers must sell.
The average seller that must sell will generally lower their list price to their breakeven price. If they can't sell at that breakeven price, then they can try to negotiate a short sale with their lender or failing that the next step is foreclosure. While an investor or homeowner loosing their home is never a good thing, there is a flip side. Though these homes still need to be absorbed, this is part of a relatively short term purging process. Furthermore, It is one of the last stages of the market adjusting and balancing supply with demand, and as such suggests that the market may be getting closer to bottoming out. There also seems to be an increasing number of investors and first time home buyers coming back into the market to take advantage of the low prices of the distressed properties. Once the short sale and bank-owned properties, and "blow-out" new homes are absorbed, then the market and the inventory levels will approach more "normal" levels in relation to demand.
Even the news that Bend is the most "overvalued" market in the nation can be seen in a positive light. First of all prices have come down to the point that the Bend market is now considered as 43% "overvalued", but this is less than half of what it was in 2006 (89.3%). The downward trending is more important than the % overvalued number, especially since that number is probably overstated anyway. The study does not account for other income streams and the equity many people bring to Bend when it computes the "household income" for the area. If it did then the 43% number would be considerably lower. Furthermore, though prices have dropped, the Bend metro area is one of just three housing markets that were determined to still be "extremely overvalued". This can be viewed as a bad thing, or that people actually still "value" living in Bend more than almost anywhere else in the Country, and have been willing to earn less and pay more, to live here.
Both the Office of Federal Housing Enterprise Oversight housing price index report and the Global Insight and National City Housing valuation analysis survey indicate that the national market is getting better. In fact, in the second the authors concluded "In short, the "bubble" is gone and house prices reflect a healthy balance in relation to long-term fundamentals". As other markets around the Country improve, more people will be able to sell, and in-migration to Bend will increase.
In fact, population growth was some of the most positive news in 2008. People are still moving to Bend at a higher rate than anywhere else in the State. The population increased by almost 5% from July 2007 to July 2008. This was actually an increase in both total numbers and rate over the previous year. In-migration is one of the most important keys to the local real estate market recovery. Eventually this increase in population will be reflected in increased demand and sales and lower inventory levels as consumer confidence improves.
With all that said, many buyers are still finding it hard to qualify for financing with the tight lending standards and the "credit freeze". Other potential buyers are waiting and hoping for even lower prices. Perhaps most important, with the national and local economy so shaky, many buyers are simply afraid to buy until things improve or stabilize and their confidence is restored.
Will prices go down more? Should you wait? As long as supply exceeds demand there will continue to be downward pressure on prices, but many of the lower priced properties will be for short sale and bank-owned properties, and builder blow-out priced homes. Some sellers cannot reduce their prices any lower as they are already priced at breakeven prices, which partially explains why average and median list prices have not dropped more. The seller that does not have to sell, will often hold their price or withdraw from the market. Certainly, prices of some properties and some neighborhoods will go down some more, but even in a downward price trending market such as Bend has been experiencing, there will be properties, and perhaps neighborhoods that will not decrease in price.
So the answer to the question about waiting until prices bottom out is, it depends on the property and the circumstances and goals of the buyer. Some "best value" or the "best for you" properties may not go down in price, and if you want to buy those properties, you may find today's prices as low as they will be. And even if they do go down a bit more, you might not come out ahead by waiting.
Rising interest rates could negate any advantage of waiting. If interest rates go up 1%, while the sales price goes down 10%, then the price paid would be the same whether you waited for the price to drop, or bought today at the lower interest rate.
How much longer will it take before the excess supply is absorbed? Will demand and sales increase and when will the market bottom out? I have attempted to show how if you look below the surface of the statistics, we could be in the latter stages of absorbing the excess supply. While it is impossible to predict when the market will bottom out, it is important to remember that most of the reasons for the rapid growth of Bend still exist, the most important being - people want to live here. As other markets around the country improve, more people will be able to sell, and in-migration to Bend and demand will increase. This will certainly help in absorbing the excess inventory and helping the Bend market normalize
The United States is now in an official recession. Nationally and internationally we are in a financial crisis that is unprecedented and that has even the experts of the world unsure of what will happen, and how to fix things. It is unclear how the efforts by our Government will impact the national financial crisis, let alone the Bend economy and real estate market. Consumer confidence is at an all time low, and most every economic expert predicts that things are going to get worse before they get better. I expect the Bend economy and real estate market to also get a bit worse, but also get better, faster than most.Buying and Selling in 2009
The crystal ball questions remain - what is in store for 2009? Will prices fall? If so, how far will they go? When will the market bottom out? Though it is hard to predict what to expect in 2009, there are some variables to watch that will impact and steer the market.
In the short term, I expect the number of sales to continue to be low or drop as compared to years past. The winter months are traditionally slow, and will be slower this year. It is too early to predict what will happen this spring and summer, but I do expect more buyers coming back into the market, especially investors buying distressed properties. However, many buyers are likely to continue to hold back for more signs of the economy improving, prices bottoming out or generally until their confidence in the future is restored. Never the less there is a build-up of buyers that will eventually move back into the market, and when that happens the market could adjust more quickly. Furthermore I expect there to be an increase in the incentives and actions by the Government that will help in tempting more buyers back into the market. The success of these Government interventions will be key to a recovery.
Population growth is one of the key variables. Contrary to most expectations, people continued to move to Bend in 2008, and at a higher rate than 2007. Though the rate of in-migration may slow, my guess is that growth will continue in 2009. If the markets around the Country improve, more people will be able to sell, and in-migration should increase, which of course will increase demand. It is also important to remember that it takes far fewer people in number to move to Bend to impact the demand for homes, than a large city such as Detroit. However, with unemployment high and the National recession, there is a possibility that we may actually see a net loss in population as people move else where for jobs, which of course would have a negative impact on the recovery.
Another key variable will be interest rates and credit availability. If interest rates go down further, then more people will qualify for higher loan amounts, assuming that they can get loans. Right now even though there are a lot of good loan programs available, we are seeing very restrictive underwriting guidelines, and the relative credit freeze is making it hard to obtain loans even for the most qualified applicant. The need to work with a very experienced and professional loan broker will be critical if you want to obtain financing in 2009. I do expect interest rates will remain low and most likely go even lower. I also expect lenders to loosen up lending guidelines and financing availability to improve in general. Hopefully the Government efforts will help facilitate this.
Short sales and foreclosures are likely to increase as a percent of sales and active listings. The low prices of these properties will lower the computed average and median prices, but also entice more buyers to return to the market. However, until these distressed properties are absorbed, it will be difficult for the average seller to compete. How effectively the new administration addresses the "foreclosure and credit crisis" will be key.
Local unemployment rates reached levels higher than the national average in the last quarter of 2008. As I mentioned, if people can't find jobs, they may have to move elsewhere and that would slow the recovery. The good news is that the Bend economy is much more diversified than it used to be when it was primarily dependent upon the timber industry, and thus is more likely to rebound more quickly than in the past. Bringing in more employment land in the Juniper Ridge area may be key to spurring increased employment.
Many housing forecasters believe that we are approaching the bottom of the market and that 2009 will be better than 2008. Others are more pessimistic and think it will take several more years for the national real estate market to rebound. What is not clear is what the ripple effects from the national economy and trends will be on the Bend market.
Though the Bend market has shown some resistance to national trends in the past, it is not immune. Again, the market is likely to get worse before it gets better. However, I believe that most all the major reasons why people want to live in Bend for the quality of life and lifestyle still exist, and that as Bend led and outperformed most areas on the way up, that it will also rebound more quickly than most, and has a better long term future. Whether that will happen in 2009 is yet to be seen. It all depends...
In 2009 buyers and sellers must take care to not make real estate decisions based solely on what happened in 2008, any particular study, set of statistics, general national trends or what they might hear on television. As I have tried to describe, there are a lot of variables that will affect the dynamic Bend and Central Oregon's real estate market, which makes it hard to make general recommendations. Therefore my advice for 2009...it all depends on your particular situation.
If your economic and job situation is fairly stable, 2009 could be a good time to buy given the low prices, low interest rates, large selection of houses to pick from, and the most negotiation leverage you are likely to ever have. There are many opportunities for the first time home buyer, long term investors, or someone who will live in a new home for 3 to 5 years. There are some exceptional values on the market and an increasing number of properties that come closer to penciling-out as rentals and good long term investments. Last year there were 13 listings of homes on lots for less than $200,000 on the market, but 2008 ended the year with 166. And even though they are more difficult to obtain, there are good conventional loans available for buyers with good credit; FHA loans available at 96.5% LTV with FICO scores as low as 530; construction loans; and investor loans with as little as 20% down payments. Once again, it all depends on your particular situation, but if you do plan on eventually buying, you should be getting your ducks lined up and ready to act. Among other things, this means getting pre-approved for your financing with a good experienced loan officer, and keeping yourself educated about the market so when the right house comes along at the right price, you will be ready to act. I can help with the education.
If you are waiting for prices to bottom out, remember that the bottom can only be viewed in hindsight, and that eventually the excess inventory will be purged and prices will start back up, as will interest rates. Buying while the market is adjusting can be wiser than sitting on the fence and guessing when prices will bottom out, and risk loosing out on the "perfect" home or the low interest rates. Once again, remember that if interest rates go up just 1%, then you are effectively paying 10% more for any property, and it might not be in your best interests to wait. There may never be a better time to negotiate a "best buy" than in 2009.
Sellers will continue to be very challenged to compete in this buyer's market for the relatively few buyers against the increasing number of below cost, blow-out builder prices, and the low priced short sale and bank owned properties. If you don't have to sell, it might be wise to wait. If you need to sell, then to use a phrase I have used often this year, "sellers are facing a price war and a beauty contest, and they need to win both". If you need to sell then you will need to price and position the property very aggressively from the start. While the market adjusts, those properties that have the best location, the best "curb appeal", the best condition, and the best value for the price range and neighborhood are the ones that are most likely to sell. Buyers will be cherry picking. Good planning, marketing and positioning will be critical. In some cases there will be only two solutions for sellers - time or price.
As I have said, Its almost impossible to predict how long it will take for the market to adjust and shake out. The market may become more "normal" in 2009, or it could take much longer. In my view, Bend will continue to grow, the market will rebound, and smart, educated, long term investments in real estate will be safe. Should you buy or sell? As I tried to say above, be careful about believing everything you read or hear. What is happening nationwide, isn't necessarily applicable to Bend. What is happening across town in one neighborhood, isn't necessarily what is happening in your neighborhood. Be careful about making decisions without getting all the facts and a full perspective. Every property and personal situation is unique. Buying or selling depends on the particular property, your circumstances and goals. With so many variables in play in today's real estate market, the need to educate yourself has never been higher. There is both danger and opportunity in today's market.
Come back each month to see if the prices are going to drop or increase and what happens in this dynamic market. In the meantime, please contact me if you have questions or want to discuss these trends and your particular circumstances in more detail, and whether you should buy or sell. It all depends...