Early 2009: A review of 2008

 

2008:  Looking back to 2008 and the preceding years

“2005: What a year!

Is this market pace sustainable?

Scarcity squeezes sales numbers in some categories

The numbers are in, and 2005 was another boom year in Central

Oregon real estate. For 2006 there are no obvious signals

that the region will experience a slump, much less a bursting

bubble, but there are subtle changes taking place.”

“What a change.. .2007 turns 2004-05 into fading

memory

Is this market pace sustainable?

Such was the observation in early 2006. Now we have the

answer—the pace was NOT sustainable. And those

changes over two years have become much less subtle.

Median prices have gone flat for 2007 and early 2008 ..

And there here has been a dramatic drop in total unit sales

and dollar volume across the region.”

    Anyone who dares to predict the future of real estate in early 2009 is either foolish or clairvoyant. I hope I'm not the former and unequivocally confident not the latter.

confident not the latter. Until the waves of defaulted credit default swaps

(CDSs) based on under-collateralized collateralized debt obligations (CDOs)

swamped the markets 2008 looked salvageable. Now the old axiom that all

real estate is local may still hold true. But nearly everything local is having a

tough time.

   What some optimists had thought might be a simple “correction” in 2007 has

expanded into 2008 as the worst real estate market in decades throughout

much of the country. But with a change in national leadership and stimulus

(stimuli) on tongue tips and federal bountiful bailouts being pondered everywhere,

the optimists are emerging. Priming that pump is the Federal Reserve’s

continuing charge to beat down interest rates through monetary policy. Has

anyone in several generations heard of mortgage rates at 5 percent or lower?

    The nation’s leading television business channel’s “Mad Money,” guru — just

call him Cramer — keeps bantering that June is the turning point for housing,

but with apparent false sincerity. The National Association of Homebuilders are

going out on a limb with hopeful predictions that “...we do expect “09 will be

the bottom..” But in a post script caveat, the NAHB’s chief economist says new

housing starts may drop another 30 percent while sales decline 14 percent.

Trying to time a market bottom is more art than science. In volatile markets,

who can determine with certainty that the light at the end of the tunnel is not

another train on the way? And who wants to catch a falling knife?

    What we might conclude is that the tanker is slowing but it may take a while

to turn around and head in the direction we’d rather be going.

Rather than venture into shaky prognostications, it may be more useful to look

back at the steep ascent to the top of the curve and ensuing downward

plunge of the past two years.

Bend is Central Oregon bellwether

   Central Oregon real estate segments--Bend, Redmond, Sisters, Prineville, LaPine and Madras-- form a statistical area designated simply as Bend.

The numbers as reported by two widely followed national agencies that track

housing provide a snapshot of the region’s rise as a housing appreciation hotspot,

and its reluctance to loosen its grip while other areas succumbed in the

national slump.

    In mid-2006 the Federal Housing Finance Administration ranked the Bend

metropolitan statistical area (MSA) No. 1 in residential home appreciation

among 292 MSAs. By the end 2008, Bend housing appreciation had slipped to

250 in the federal charts, and was dropping at a rate of –15.14 percent through

December. The FHFA statistics track homes qualifying for conforming loan limits

of Fannie Mae and Freddie Mac, the federal housing financing agencies.

But even with the plummet in appreciation, a third quarter 2008 report by

Global Insight — a private tracking service — placed Bend at the top of the list

of “extremely overvalued” housing markets. Global Insight’s 4th quarter 2008

report will be issued some time in March.

    The report released in December noted that housing prices in most areas of

the country by late September had adjusted to weak demand and “...the incidence

of extreme overvaluation has become negligible.”

But Bend, Atlantic City, NJ and St. George, UT in that order remained as the

lone three extremely overvalued markets, according to Global Insight.

REOs and “shorts” force market changes

    With the end of 2008 and beginning weeks of 2009, however, there are signs

that Bend’s dubious honor in the overvaluation ranking could be in danger as

more short sales and foreclosures further depress housing prices.

Bank owned (REOS, or real estate owned) foreclosed properties and short

sales (in which debt may exceed housing equity) accounted for a significant

portion of residential sales by early 2009. And many of these were newer

homes bought in the heady days of 2004-2006 when credit was easy and Central

Oregon was a magnet for excess equity pouring out of California and other

sizzling housing markets. 
   The boom or bubble—take your pick—was driven by a

smorgasbord of creative financing often dubbed as NINJA loans— “no income,

no job or assets”….no problem. Just sign here, skip your principal payment,

pay what you’d like. Now what was wrong with that picture?

    The Central Oregon MLS database for sales from December 1, 2008 through

February 12, 2009 reveals the expanding influence of distressed properties on

the regional housing market. In that period of a little more than two months,

there were 529 sales of single family homes on lots of 1 acre or less in Bend, Redmond,

Sisters, Sunriver and Three Rivers (south of Sunriver). Of those, 239 properties--nearly 45%--were either short sales or foreclosures.