Bubble Talk

Portland is growing and we all feel it. The Pacific Northwest is no longer a secret to the rest of the world. From being parodied on Portlandia, to Instagram pics of our mountains, waterfalls, rivers, oceans, cliffs, lakes, sunsets and sunrises, how we live is celebrated. Even the New York Times features Portland regularly, as if it were a sister city.

The price of all this adds up. If you like to hike, you know you have to rise in the wee hours to reach the trailhead before everyone else, avoiding the crowds. Surrounding attractions, from Hood River to the Coast, draw attention, traffic, and lines. I’ve personally experienced this along with the rest of you. 

"Is this another Bubble?" This is the question I'm most frequently asked now that growth has been impacting our region for a few years and home buyers are anxious to understand what they’re experiencing in the market. I’ll answer that by going back to the boom years and explain what I’m seeing.


Back in the Day

I've been in the mortgage business since in 2004. I worked at my brother’s firm, a reputable mortgage brokerage. He knew how easy it was to falsify a loan application. Knowing I was fresh out of the military, and that I understood nothing about mortgages other than what I needed to buy my first home, he cautioned, “don’t you ever fudge anything on a loan application, Jen. Don’t use income if it isn’t accurate. Don’t use assets if the borrowers don’t truly have the assets. Don’t do anything to get them approved unless it is accurate.” 
He knew I had integrity, but he also wanted to make sure nobody influenced me. Because I followed his advice I could sleep at night, something that would have been tough to manage if I had been getting creative on loan applications.
But through the Boom Years there were far too many people getting qualified for homes. Homes they could not afford. Homes they did not qualify for. If you haven’t watched The Big Short, a film regarding what truly happened in the mortgage market, or read the book by Michael Lewis, I highly recommend it.  
In the aftermath of the housing collapse, lending policies were immediately reformed. For a while the standards became very restrictive—maybe more so than necessary in a response to the shortcuts and fraud that created so much economic devastation.
Since then, qualification requirements have leveled out. Every document we request from a prospective buyer are written in the guidelines by Fannie Mae, Freddie Mac, FHA, VA and USDA, depending on the loan program. We make sure people can afford the property right here, right now, as a snapshot in time. We have to show a buyer’s history of consistent income in order to avoid situations such as working a second job just long enough to qualify for the loan and then quitting once the purchase is complete. Tactics like this, designed to inflate income, are caught in either the pre-approval or underwriting process, and those applications are denied.


Current Market Conditions

Though lending practices have been reformed, the Portland market faces a new set of pressures that appear to mimic what we saw just before the housing crash. But rather than loose lending practices, market conditions now include other factors. (click images for detailed view)


Data Table courtesy of RMLS Market Action Report, Sept 2016

Low Inventory

To achieve a balance of buyers and sellers generally requires 6 months of available inventory. That means that if homes continue to sell at the current rate, the available supply of listings would last for 6 months.

As this table shows, it's been 3 years or more since the Portland market has met the definition of "balanced."




Low interest rates

Source:   http://www.hsh.com/mortgage_rate_trends/  

Interest rates remain low, though the Fed has signaled they will continue to raise rates slowly as employment gains and other indicators remain steady. 


Higher percentage of Cash Buyers and Investors:

Graph courtesy of “How Cash Sent the Portland Home Market Spinning,” Investigate West, April, 2015

As the foreclosure market dries up, "private and institutional investors are shifting onto the MlS, where they compete directly with traditionally financed homebuyers." Read More...




Rising Prices: 

(Source: Market Action, a monthly publication of the RMLS)

Even though home prices have recovered since the Recession, many sellers are now concerned that if they put their home on the market, they won't find a home to buy because of low inventory. This further restricts housing inventory and puts pressure on home values.



The Fear Factor

Many out-of-state buyers are purchasing here, even if they don’t plan to move here for another couple of years. Lifestyle, as I mentioned, is a big factor in those decisions. Many more already have family and friends in the area and move to be near them. And, as crazy as prices look to long-time residents, compared to the Bay Area and other West Coast cities, Portland prices still look like a bargain.
Buyers and investors with cash are spending it, beating out those who need to finance their purchase. 

A new finance instrument, called Delayed Financing, allows a well-funded buyer to purchase with cash and immediately after close put a mortgage on the home, recouping up to 80% of the purchase price of the property. They can turn around and use their funds for the next cash purchase, anxious to expand their real estate portfolio before interest rates rise.
Families are also gifting large amounts of cash or co-signing loans for adult children to make home-ownership possible, fearful their kids will be priced out of the market.
Fear is also driving many of the bidding wars we see. With low inventory and rising prices, buyers are willing to overpay now rather than wait out the market. This tends to drive short-term thinking, in which buyers may compromise so much they purchase a home that doesn’t suit their long-term needs. That said, there are many strategies for purchasing in a seller’s market, and it only underscores the need to work with professionals who help buyers make knowledgeable decisions.
What I tell my clients is that fear should not be the main motivation behind their home purchase. I do see some leveling out in the market, which is one reason I don’t think buyers should panic. We have seen a bit of a slowdown this summer, and when this happens it causes the market to shift from multiple offer situations to just a few buyers. Escalation clauses and offers far above asking price are tapering off, and we increasingly see reductions on overpriced homes. 
Fearful thinking promotes a vicious cycle resulting in self-fulfilling prophecy. There are certainly factors at work accelerating market activity, but buyer panic exaggerates the effect making those fears come true. What we focus on will indeed happen. 
Buyers who continually over-bid the asking price of a home actually contribute to rising prices. Bidding wars establish the price point for the next house that comes on the market—which is based on recent comparable sales. Buyers who write multiple offers on various homes over a season are actually pricing themselves out of the market by continually bidding up the seller’s asking price. It's human nature to react this way in the face of perceived scarcity, but it’s important to take this into consideration every time an offer is written. The market reflects the decisions made by thousands of individual buyers.


Then vs. Now

Prices continue to rise in the Portland metro area. Comparing 2016 to 2015 through September, the average sale price rose 11.4% from $352,500 to $392,600.
— Data courtesy of RMLS Market Action Report, Sept, 2016.

I do feel the Portland market is very strong and that home prices will continue to increase as Portland continues to grow. We may experience a roller coaster effect from month to month or even year to year. Importantly, our market remains seasonal, and this is a factor from which savvy buyers may still benefit.
Interest rates will eventually rise, affecting mortgage rates with it. If mortgage rates increase along with home prices, it may create a difficult hurdle for buyers. But the effect may be tempered if recent increases in household income become a trend and workforce participation expands.
In my view, Portland has a very tight market driven by population growth, low inventory, competition from institutional buyers, and an increase in cash purchases. No one can guess what the future holds; some economists are expecting another downturn given turmoil in world markets and low energy prices. But none of the fundamentals today suggest that we are in a housing bubble like the one we experienced in 2008.
My advice is to move with purpose in the real estate market, be financially prepared for your purchase, and manage your debt load carefully. Living within your means in a home you can truly afford will make the future look a lot brighter.

Jen Bell, Loan Officer
NMLS: 291215
Premier Mortgage Resources
NMLS: 1169

D. Larson, editor