Vacation-second (3rd etc.) homes still drive Bend economy: snapshots from other similar mountain town areas

      It's difficult to dispute that Bend's fortunes have largely been tied to appeal of the region's recreation abundance and the resorts that initially attract visitors who may end up buying a vacation retreat which may even become a retirement home. As such a comparison with trends in areas like Colorado's ski country is useful.

 Richard Seymour, CEO and founder of a leading Colorado resort investment and nightly lodging company, observes vacation real estate in Summit County, Colorado--home to Breckendrige, Keystone and Copper Mountain--continued to struggle in 2010. Seymour predicts it could be several years before pricing returns to mid-2000s levels. However he says skier days have rebounded from such events as 9-11 and the 2008 implosion of the financial markets.

Colorado ski country:

"It looks like the economic dam may be breaking," Seymour believes.  The only thing that's happened recently is that crazy tax deal compromise, which didn't seem like much at the time.  But Christmas spending took off in December and now the economy continues to hum along in January.  2.5 years is quite a run for a recession--hope it's ending.

"October was the first month in over 2 years which had more bookings than the preceding year (month-to-month).  December was also up a bit and January has been way up (at least the first week). Not convinced we're out of the woods yet, but these are the first encouraging signs in years.

"The Keystone brokers are saying we're 'back to 2006 prices,' but the market has stabilized.  My guess is that things are leveling out, but I don't see any impetus for improved values anytime soon (still no buyers in sight and those that do show up are bottom-feeding)."

Elsewhere in Colorado, an Aspen title company reports that through November the value of real estate sales in the country’s most expensive ski town  had increased by 15%, to $1.14 billion over 2009.

The town’s finance department also reported a 5% jump in sales tax receipts, indicating a recovering commercial economy.

Jackson Hole:
The Wyoming ski area also reports vacation bookings are up for the winter holidays. An abundance of snow enabled Jackson Hole Mountain Resort to open all its lifts in November.

One report says it appears the mid to luxury market in the pricey area may be stabilizing. There was particular strength in areas considered primarily second homes, which accounted for nearly half of all sales in 2010.

"At the close of 2010, there appears a chance that the mid-to upper-level market segments are stabilizing," according to a principal in RMAppraisals of Jackson. "However, entry-level housing appears poised for more devaluation until the inventory of distressed properties can be worked through."

The dollar volume of all transactions--single family, condo and commercial--in Jackson Hole peaked in 2007 at more than $1,570,000,000. Total dollar volume in 2010 was $509,000,000, off 66% from the record high but up 53% from the $333,000,000 in 2009, according to The Hole Report by veteran broker Dave Viehmans.
However, Teton County records show foreclosures also jumped dramatically--60%--with the opening bids for properties sent to auction rising by more than 90% to $181,000,000 from $95,000,000 from 2009 through 2010.

The broader impact on the Central Oregon economy

Although median prices for single family homes in Central Oregon peaked in 2006 the market’s momentum had shifted to the downside much earlier. And the tremendous loss of home sales revenue in the ensuing years has rippled throught the regional economy.

The effects have spread to builders, brokers, lenders, title and escrow companies and others more directly involved in real estate transactions to retailers in such areas as building products and home furnishings. Cities and counties saw declining revenue from fees and taxes while charities and other nonprofit groups suffered from a contraction in giving.

For the five years from 2005 through 2010 more than $888 million in single family home sales was subtracted from the economy. Considering that most real estate commissions are at least  5%, the loss to brokers alone could be nearly $45 million.

In the boom of mid-decade, total sales in the seven combined key regional sub-markets--with Bend leading the group--rose to 5,119 single family sales by the end of 2005 on a total volume $1,515, 887,504 according to the regional MLS data.

The following year unit sales dropped 22.52% to 3,966 on a volume decline of 6.67% to $1,415,032,725 while the median price trend continued upward by 25.87%, from $246,000 to $309,000 by the close of 2006.

A major shift in market momentum was underway but pricing had not yet reflected the trend.

Median prices continued to ignore the prevailing market direction by notching another high in 2007 at  $316,663 as the number of single family sales again slipped, by 34% to 2,614 from 2006. Volume was off another 28.89% in 2007 to $1,006,211,366.

But from 2007 to 2008 the controlling forces behind home pricing appear to have “gotten the memo.”  Median prices took a 17.89% dive -- the first yearly decline in a decade – to $260,000. The pricing trend has dropped each year since then, to a median of $180,000 in 2009 and $160,000 in the most recent year.

Although unit sales and dollar volume were also down from 2007 to 2008, by 25.44% to 1,949 homes sold and 37.58% to $628,116,463 in total dollars, there was a notable change in the trend starting in 2009 and continuing into 2010. The number of homes sold rose a dramatic 38.38% to 2,697 in 2009 and another 11.16% in 2010. In the same period sales volume held up in a narrow range for $630,451,463 in 2009 and $627,518,751 in 2010.

Recession likely to influence type of new housing

The roller-coaster trajectory of Central Oregon real estate thus far this century is marked by a growth spurt at mid-decade and the ensuing decline  throughout the region. But the epicenter was the City of Bend, which in 2009 accounted for 56% of market activity in sales of lots and single family homes.

As high demand shrank inventory and drove up prices toward a market peak, other areas such as Redmond, Sisters, Prineville and Madras absorbed some of the excess.  And as Bend goes so likely will follow the rest of Central Oregon in the struggle toward recovery.

The  statistics gleaned from the database of the MLS of Central Oregon show  the ascent of Bend single family median home prices  to a peak of $352,500 in 2006— more than double, 116%, the $162,950 reported for 2000. And this included a flat year in the wake of the 9-11 attacks. In the same period the price of a typical single family lot on less than an acre rose from $76,410 in 2000 to $215,000 in 2006, a 181% leap.

Even as median prices of Bend lots and completed homes reached their 2006 peak, unit sales had begun to signal market weakness.  In 2005 there were 2,897 single family home sales in Bend reported by the regional MLS. At the end of 2006 sales had dropped by 27.82% to 2,091. Lot sales in Bend plummeted from 520 in 2005 to 219 in 2009, a precipitous 57.88%.

But the Bend housing market momentum at mid-decade illustrated how prices may lag the larger trend.  From year end 2005 through 2006 Bend’s median single family home price rose another 26.16% and lot prices by 16.22%—running counter to the downward trend in unit sales.

One view at the time was that demand had gobbled up inventory so rapidly that prices continued to rise while supply was scarce. In retrospect it was probably the beginning of a widespread market adjustment reflecting deteriorating conditions elsewhere in the country, especially California which provided substantial impetus for Bend sales at the market peak. The national financial crisis and ensuing recession have continued to slam the Bend housing market.

From  2000 Bend lot prices  made a round trip to the summit and back. By year end 2009 Bend median lot prices had dropped below 2000 prices, at $73,750 or 3.48% below the 2000 median of $76,410.  But median home prices rose 30.49% from year end 2000 through 2009.

One scenario as the market tried to find sustainable balance is that with land/lot prices in greater supply at lower prices, new homes may be built at prices equal to or below existing homes with comparable features and locations. 

Consumers and builders sometimes have short memories as markets improve. But the depth of the recent national recession and the impact on home prices will likely have a substantial influence on  the type of housing built.

So-called “mega-mansions” will continue to attract the thin slice of luxury buyers. But housing economists are predicting less demand for out-sized housing in favor of more practical products that reflect the new reality of a country coming out of a historic  downturn.

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.

Welcome to 2010

THE REAR VIEW MIRROR……FROM PAST ISSUES

 

 “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 a 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.”

An uncertain 2009...for real estate and the overall economy.
Let’s be realistic. Anyone who dares to predict the future of real estate in early 2009 is either foolish or clairvoyant…. Now the old axiom that all real estate is local may still hold true. But nearly everything local is having a tough time.”

Welcome to 2010—a year we can hope will only improve over 2009 in many business sectors.  After all, the recession is over according to some economists and White House advisors. Didn’t you get the memo?Although “technically” the recession may be winding down, it will likely be some time before the message gets through to Central Oregon’s real estate market.

As elsewhere in the nation, some measures such as the $8,000 tax credit for new home buyers and $6,500 (with more restrictions)  for existing homeowners have had some positive effects on the market. However, the region continues to grapple with the steady stream of distressed properties that continue to bring down prices.

And unemployment in Deschutes County, Central Oregon’s largest, continues to be an economic drag.  The county has been at or near the top of  Oregon’s jobless charts for much of 2009.

             The Central Oregon home appreciation bubble:

From No. 1 in the nation to nearly the bottom in three years

National economic models  assemble the various Central Oregon real estate segments—Bend, Redmond, Sisters, Prineville, LaPine and Madras—into a single metropolitan statistical area (MSA) designated simply as Bend. 

In mid-2006 the Federal Housing Finance Administration ranked the Bend (MSA)  No. 1 in residential home appreciation. By the third quarter of 2009, Bend housing appreciation  had slipped to 295 out of 297 MSAs in the federal charts after declining through the third quarter of 2009 (the latest statistics available) by 19.45% .

The FHFA statistics track homes qualifying for conforming loan limits of Fannie Mae and Freddie Mac, the federal housing financing agencies.  For higher cost areas the financing agency limits are $729,500 in early 2010.

Although individually Bend is only one of the cities in the MSA, it accounts for the lion’s share (more than 56% in 2009) of single family sales throughout Central Oregon and is therefore the region’s bellwether.  Along with Redmond the two market areas comprise for nearly 80% of the regional single family market.

A look at the price trends of median single family homes in Bend shows the rapidly rising appreciation curve beginning in 2003 and the slide down the other side.            

    

BEND	2003	2004	2005	2006	2007	2008	2009
Median  price	$192,250	$226,900	$279,009	$352,500	$345,000	$289,000	$212,500
% : +/-	————	+17.87%	+22.97%	+26.34%	-2.13%	-16.23%	-26.47%