Making Money in any Market

Sent in by a reader:

"Heh, here's a good one. I went and looked at this place - huge foursquare type, not terrible neighborhood, too bad it's a 100% total ruin (foundation half gone, porch sinking off the front of the house, broken windows, eaves totally shot etc etc). Great big house asking 116K - the punchline is from PortlandMaps, somebody named "Fast Cash House Buyer LLC" bought it in December 08 for 106k. Don't click the link too hard or the place will collapse!"

These guys are proving there's an angle in any market. It looks like they bought the house at a foreclosure auction and are turning around and putting it on the market with no work. No so much as a flip as a wholesaler.

It looks like a great house with lots of original "charm" intact, and a little lot of charm that has been "added" over the years.

Proving once again that he who has cash in a crisis is king. Course you gotta sell it first.

Portland Home Prices Drop 11.5% in November

The November Case Shiller data was released this morning and November's median price for an existing home in Portland was down 11.5% year over year. (click on any chart to expand it to readable size)

The monthly change was even worse, down 2.3% from October, the largest drop we've seen to date. Or ever.

While the other markets seem to be stabilizing Portland prices seems to be accelerating in the wrong direction. Recent news of layoffs at OHSU, Intel and others certainly won't help the picture either, adding another layer to the cake of misery which includes increasing foreclosures, lack or credit, and ARM mortgages resetting.


The chart above shows the price index for the past three years. You can clearly see that prices have now dropped to 2005 levels and continue to fall. Pop.

The above chart shows Portland, Seattle, the San Francisco bay area (the other areas I consider as closest to Portland) as well as the 20-city composite index. Portland and Seattle are tracking each other very closely, still about a year behind the rest of the market. The 20 city index started to flatten out a few months ago and it looks like the San Francisco Bay area has also started to slow down. We'll need a few more months of data before calling it a trend, but maybe prices have dropped enough for the scavengers to snap up foreclosures and prop up prices.

For comparison, the San Francisco market is down 30.8% in November, but was down 31.1.% in October. It looks like things might be stabilizing a bit down there.

Seattle also saw a massive drop in November, dropping 2.5% from October, and down 11.2% from last year.

This chart shows the price index for the past 8 years. I also added a line (the light grey line) that represents 5% growth starting in September 2000. You can see that the current price index is still above the 5% growth line, indicating that we have a ways to go before prices fall back in line with historic averages.

Proving once again that the only constant with forecasts is the ability to be wrong, just 2 months ago I predicted that prices wouldn't be back to historic norms until late 2009. It now looks like we'll be back at the historic trend line by April 2009. I doubt things will stabilize there however, as the recession just seems to be picking up steam at this point. If we assume Portland will react like the rest of the market we're looking at price declines throughout 2009. However as the NAR likes to remind us all real estate is local, so if our economy is doing worse than the rest of the nation look for prices to continue to fall into 2010.



This chart is more for historical curiosity than anything. It shows the previous bubble in the early 90's, and also shows that Portland prices had never dropped over the past 20 years, until 2008. But as they say, past performance is no guarantee of future performance!

ABOUT CASE SHILLER:
The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.

235 NE 94TH AVE - 44% off in 2 years

This poor little house (RMLS# 9000296) lost 44% of its value in under 2 years. Bought for $232k in March 2007 (a few months before the peak) by an investor, it's not on the market for about what it sold for in 1999.

"Bought in 2007 for $232k and priced to sell fast! Mins to I-205 & I-84, max line & Mall 205shops. Updated kitchen, fenced private yard. Great first time home or investment."

The reader who send this in commented: "given its location and condition, it's probably still overpriced".

Given that it's in the shadows of I-205, he might just be right. I can't imagine what has caused the owner to lose that much value in that short a time.

Brilliant Marketing Du Jour

Boy, this photos leaves me speechless. As it must for the Realtor, who didn't enter any information about the house at all beyond the address. RMLS #9004068.

Apartment troubles coming

A reader sent me a tip to check out the recent post about the apartment market Ryan Frank's Front Porch:

"Last year, the Portland apartment market was buoyed by troubles in the condo and single-family market. People who couldn't buy or lost their home to foreclosure turned back to apartments. But as the economy sinks deeper into recession, even the apartment market is showing signs of strain. Mark Barry, a Portland-area apartment appraiser, says people are losing jobs or worrying about losing their jobs and moving in with family or doubling up with friends. Read Barry's 2009 forecast. The DJC also covered Barry's take as part of Hagerman Frick O'Brien's investors round table from last week. "

Said reader sent in these comments:

"There are a lot of small time "developers" and "investors" that are relying on pulling in large rents for the projects that stalled out. It will take time, but when this wave hits, it will be devastating. If the housing market stunned those with wealth, this will be the blow that knocks them out.

In the end, it will be a good thing for those who struggle to pay rent monthly (as rents will go down), but this will have a serious adverse impact upon the wealthy."

The newsletter is an interesting read. Here are a couple of points that jumped out and smacked me in the face.

"the biggest reason for a healthy apartment market in both Portland and across the nation is due to the decline in the rate of home ownership. Home ownership rates in Oregon hovered around 63% to 65% since the mid 1980’s until the recent housing bubble, when it peaked at 69%. The most recent data shows that 65% of Oregon households are now home owners. Thus, around 6% of the people who owned homes a few years ago are now renters."

That's a huge change, almost 10% of previous home owners are now renters.

"Single Family Market: There is not a lot of optimism for the single family market in the US or Portland for 2009. Wells Fargo’s economist has identified Portland as the seventh most overvalued metro area in the country, and is forecasting a decline of 11.9% in 2009. Fortune Magazine recently forecast a 14.8% decline for 2009, and another 4.8% decline in 2010."

We're already down 8-9% for the year. The additional 11.9% decline in 2009 will hurt. A lot. And proves again that we're not in better shape than the rest of the country, just further behind.

"Apartment Vacancies and Rental Income: Continuation of a tough single family market in 2009 will help the apartment market. Offsetting this trend is the fact that around 3,000 units from the “shadow inventory” of homes, condos, and rowhouses are now rentals, with more expected
to come in 2009."

This is something I've been investigating recently, stay tuned for more on it.

Overall 2009 looks to be just as bad if not worse than 2008, with no real recovery until 2010.

Debt to Income Ratios or "What do you mean we can't afford peanut butter?!?"

Happy New Year everyone!

Yes, I'm way behind. If you've noticed that things have been quiet around here it's because I took a much needed 2 week vacation in December, away from work, and trying to stay away from the PC and spend more time with my wife and daughter, and catching up on some projects around the house. Last week was spent trying to remember what I do for a living (oh yeah, high tech marketing, check) and getting work projects back on track. This week I'm settling back into a more normal routine. So on to the post!

This morning I came across two great blog posts on ratios including:

1. Debt to income ratio
2. Mortgage to rent ratios.

These articles were an important reminder of what drives home prices values at the end of the day.

This first article talks about why mortgage payments should be less than rent payments for a comparable home given the inherent risks in "investing" in a house these days:

"It is not the job of government to prop up house prices to the point at which mortgages cost more than prevailing rents. In fact, right now, it is entirely rational that a new mortgage should cost less than prevailing rents. Here's a few reasons why:

1. Mortgage rates are extremely low -- which means that when you come to sell the house, they'll probably be higher. Since resale value is an enormous part of the price you're willing to pay for the house, this is a very important consideration."

The second article is from the Irvine Housing BLog and talks about how debt-to-income (DTI) ratios have driven up the price of housing, especially in California with STI ratios of 50% are common. As a side note, I have lived in the SF Bay Area off and on for 9 years and never owned a home there. The fact that you needed to allocate 50% of your income to your mortgage always seemed stupid to me, but I was in the minority. It now looks like I might have been right, not a common occurance in my investing portfolio.

"Typically debt-to-income ratios track interest rates. As interest rates decline, it becomes less expensive to borrow money so borrowers have to put less of their income toward debt service. The inverse is also true. On a national level from 1997 to 2006 interest rates trended lower due to low inflation and a low federal funds rate. During this same period people were increasing the amount of money they were putting toward home mortgage debt service. If the cost of money is declining and the amount of money people are putting toward debt service is increasing, the total amount borrowed increases dramatically. Since most residential real estate is financed, this increased borrowing drove prices up and helped inflate the Great Housing Bubble."

It's a bit of a long article, but well worth the read. Good insights there.

Update - 5421 NE 25th down from $319k to $289k

This little bungalow was just re-listed with new photos (see the post here). The price is now down to $289k.

Dante asked if anyone wanted to make a prediction as to where it would sell, I'll jump in and say $249k, in April.

Anybody else?