Distressed Properties Prop up Market in 2009

An irony of Central Oregon real estate in early 2010 is that arguably the most positive trend has emerged from the most negative one. That is, most recent sales activity throughout the region has resulted from short sale and foreclosed/bank-owned (REO) properties.

The MLS of Central Oregon database shows that by year-end 2009 more than 56% of single family home sales in Bend only were either short sales or foreclosures. And also in that category were 65% of all pending/contingent sales in the transaction pipeline.  Of all active listings, nearly 36% were short sales or foreclosures.

Total sales in Bend increased by more than 37% in 2009 and in Redmond by more than 40%. Only Sisters in the region reported a decline in single family sales, down 9.10%. Although Bend median prices continued to slide, another 26.47% from 2008, the unit sales increase stimulated a  rise in total dollar  volume to $411,841,650, a 3.79% increase over 2008.

Some observers see the increasing transaction activity involving distressed properties to be a sign that troubled inventory is being absorbed. But another interpretation is that there may be many more to flush through the  system.

By year-end 2009 Deschutes County’s tally for default notices, often a precursor of the slide into foreclosure, had surpassed 3,500, or 82% more than in all of 2008.

One method of predicting residential market momentum is to gauge inventory absorption rates by averaging monthly sales over the previous 12 months, then extrapolating this to predict how many months of “supply” remain. By this calculation the Bend single family home market has recovered substantially to only a 5.19 month supply after exceeding 12 months supply earlier in the year. An obvious shortcoming in this method is the inability to forecast how many more distressed properties may yet be forced onto the market in an economy experiencing what is widely dubbed a jobless recovery.

Banks and builders leave much “on table”

As residential prices continued to slide many homeowners and builders faced with either hanging onto a severely depleted asset or walking away decided on the latter course. This only served to put additional pressure on banks which were already facing FDIC orders to raise capital levels and lending standards.

Several smaller banks with significant exposure to real estate were either forced into the hands of stronger institutions by the FDIC, or put on notice to raise their capital ratios.

Cascade Bancorp, Bend-based parent of Bank of the Cascades with a large regional market share has faced substantial problems as a major lender to developers, including once high-flying Pahlisch Homes.  Of particular note was the 81-lot Sisters subdivision, Saddlestone, a 17-acre project for which Pahlisch paid more than $5.6 million for  bare ground in 2006. Bank of the Cascades held recorded debt of about $6.9 million on Saddlestone, after all permitting and infrastructure costs, when it took over the project in 2008.

After initially listing the property for $6 million, then lowering the price to $3.6 million, the bank sold Saddlestone to a Salem investor for $2.4 million.

Renaissance Homes of Portland entered the Bend market as it began to peak in 2005 and was forced into Chapter 11 bankruptcy in 2008 after building higher-end homes in several west side locations. The company announced in late 2009  it would emerge from bankruptcy much leaner and concentrate more on custom building than developing planned communities.          I

In mid-year, an investment group reportedly paid Umpqua Bank $2.75 million for  the 45-lot Tuscany Pines, an 11-acre subdivision off

OB Riley Road

which the bank had taken over after the original developers paid $11.4 million for the property in 2007. The same Hood River investors also paid Umpqua $750,000 earlier in 2009 for the quirky 15-lot development with a “Lord of the Rings” theme. The original owners paid $3.4 million for the property in 2004 according to public records.

 Compounding bank problems from a slumping Central Oregon market, there was another ugly side to 2009—alleged fraud by builder-borrowers. Prosecutors charged several persons with taking bogus  loan draws totaling $9 million from several local and regional banks. Along  with other alleged lending irregularities  involving the same builder-investor group, the total value of questionable transactions increased to $19 million.

One of the banks involved has since been escorted by the FDIC into an acquisition by an Idaho bank.

It’s not only the Oregon-based banks that have their problems. Countrywide Financial, now a unit of Bank of America, made many loans in Central Oregon. Take a look at many default notices and BofA will be on the paperwork—along with Fannie Mae, Deutsche Bank and Wells Fargo to mention a few.

In some cases the banks appear to be rushing to erase  bad loans from their books, and this has continued to drive median prices down during 2009.