Thursday, April 12, 2007

Had an acquaintance who used to own a downtown business in the store, yesterday. What's he doing now? You guessed it, real estate.

How's the real estate market? I ask, innocently.

Oh, he says, we'll never again have the kind of run up we've had the last two years. We're just back to normal. Back to 2003. Anyone who didn't buy a how before then, is just out of luck... "permanently left out of the market."

After he left, I thought of a couple of responses to that.

1.) We aren't the same town we were in 2003. How many houses have been built or are being built? How many more agents, and construction workers and lawn care guys do we have?

2.) If you are someone who has just been told that you are "permanently" priced out of the market, why would you stick around?

It's not the actual number of houses that sell that matter, it's the number of houses relative to the infrastructure. A bubble doesn't just peak out at some realistically maximum number, it goes flying right over the top and just keeps going. If we were selling extraordinary numbers of houses, that just encourages everyone to keep building. We don't have a building czar who says, "Well, we sold 2000 houses at the peak, so realistically, we shouldn't build more than 2500 houses." Every builder will ramp up his own levels of building and it will jump to 2500 then 3000 then 3500. (These are made up figures.....) We'll have a huge bulge of housing coming on the market, just as sales are beginning to slow down.

On the other hand, there seem to be a lot of bubble believers that seem to think that houses prices are going to plummet. Does that really happen? Isn't it more likely prices will stagnate or go down slightly?

Thing is, it isn't necessary for housing prices to plummet for us to have a disaster. Prices falling even a little bit will be disastrous enough, thank you.

The real problem, as I see it, is that houses will stop selling at any price. Or to be more precises, houses will be cherry picked.

If you are a financially solvent, savvy buyer, and you want to come to Bend, you may still pay fairly high for a nice house -- but you are going to have a wide range of choice.

If you are a greedy, short-sighted developer, who has built a huge house on a tiny lot, without much flare (put in a porch and call it a bungelow) or quality (sure it looks like every other house on the street but those haves have been selling, so why not?) , but with the requisite number of square feet and marble counter tops, and you are competing against a builder who had built an appropriate sized house with a view and nicely landscaped and designed, and it costs slightly more, the nicer house will probably sell.

Even today, with the sport card market all but extinct, new sports cards prices haven't come down. In fact, they're more expensive than ever . They hardly ever sell, but when they do, they sell to a serious collector who is willing to pay a higher price for quality. The sports cards the serious collectors don't want -- it doesn't matter How Cheap They Get, they never sell.

We'll be lucky if prices actually go down, and the market responds to that. I think it's more likely that housing prices won't go down, but that houses will simply sit empty. Yes, there will be foreclosures, and yes there will be desperate sellers, but mostly there will be some real estate developers who if they didn't sell their houses in 2004-2007 are "permanently left out of the market."

I have about as much sympathy for them, as they seem to have for all the buyers who were left out.

9 comments:

jessefelder said...

Don't forget about all the potential buyers that didn't take advantage of the crazy loan programs offered over the past couple of years. They were the only reason many people could "afford" to buy the houses they bought. Now that those loan programs are gone and never coming back, there is a whole other class of buyer that has been "permanently left out of the market."

What's silly is that people in RE like your friend see this drop in demand as a positive rather than a negative. Removing demand from the market (because of price or credit availability) is a distinct negative for the local real estate market - no two ways about it!

Duncan McGeary said...

Don't you think prices will be somewhat stabilized by the amount of money invested in the actual house?

I can see people losing the house completely, because they waited too long, but I can't see them trying to sell the house for less than they paid to build it.

BendBust said...

Ned Flanders { aka duncan },

I just bought a house near Drake Park in February for $200K, they were asking $450K this house had been on the market for over a year, the seller had paid $85k back in the mid 90's and as I figured was quite excited to almost triple his money, it was the REALTOR's that had told him to price at $450k, he just had wanted to sell,

Now this had been the sixth low ball offer I had made in January, but the fact is there are lots of folks that want to sell, and if you offer CASH deals, you can buy stuff cheap right now in Bend all day long. If you don't have +20% down forgadda-about-it, the MTG biz is over, no more easy money, no more zero down, no more loans to folks with bad credit, but someone with cash, can buy anything they want in Bend right now.

Note I only buy stuff that I myself would live in, that is on the westside, so you can walk to the brewpubs and newport, the stuff that easy to rent.

I don' know how old you are but I'll assume your a child back in 1983 I saw stuff in Oregon go from $75k to $30K in less than a year, and the same new house I had bought for $75k was trading for $120k by 1985, and last I looked in the 90's for almost $300k.

My rule of thumb is that prices in Oregon collapse about every 10-20 years, so what I have done the last forty is pick up houses on every cycle. I dont' call it a bubble or a crash, as this is normal economic stuff. Boom and Bust, bend has just gone through a continious unheard boom, and now it will go through a continious un-heard of bust. I'm assuming -50% across the board compared to 2005 pricing, and that is just for listings.

The REALTORS have kept the price lists artificial for too long, which is only going to make things worse. By keeping the prices high last year folks didn't get out when money was still easy for losers to borrow. Now NOBODY can buy real estate except folks with lots of cash.

Regarding your biz owner and his building, those types of investments are always long term I'm talking 40+ years, you simply MUST buy this stuff when its cheap, and lease out as much as you don't use, and get others to pay your MTG, note I said CHEAP. Problem now is that Bend is all boutique, the restaurants, the realtor offices, all the art, this is all going to be gone, in 2-3 years there is going to be some real commercial deals in Bend.

Right now folks needs a place to live, and little houses will sell, and rent. If I buy a little house near drake park for $200K, and pay $40K down, and carry a $160K loan at 5% for 30 years, and rent the house for about $1200 I can just about get the renters to pay all the costs, this is all I care about,

I don't mind paying $200k today for a house near drake park, as that fits my model of -50% down from 2005 prices, I firmly believe that homes MUST be affordable to make the SCAM work, if Bend household income is $60k, that means that little homes should sell for $240k, thus from my point of view as long as I pay under $240k for little nice houses near drake park, I can always sell if I had to because the house is affordable.

The problem in Bend today is most homes are out in MONGOLIA, and 4,000 sq-ft, and they're second homes, which means empty, and crime, squatters .. This kind of housing is going to get hit real bad, add to that the fact that interest-only deadbeat loans are NOW over politically, there is simply NOT going to be any folk coming to bend to buy this crap, which means that ALL the downtown business, is in a world of hurt.


Ned you really should buy a building for your bookstore, that way in 10-20 years you have something to show for your effort, don't pay high, just wait, in the next 1-2 years 1/2 of downtown bend will look like the mid 1980's all over again,

Duncan McGeary said...

Bendbust, (Krusty the Clown),

I've lived in Bend over 50 years. I don't see what happened in 1980 happening again. I could be wrong. I agree, cash will be king in the next few years. Cash, or a large downpayment, will buy alot of house.

Buying a building to put my store in is something I've thought about. I just doubt prices will come down far enough, soon enough, for the next lease cycle.

I'm not saying that houses shouldn't come down, just that I suspect that they won't come down soon. There will be alot of overlap; people hanging on for their price, others actually lowering prices a bit, a slower trickle of people coming into town, a slowdown on new building, and so on. More of a muddle, which will only become clear in hindsight.

Just for laughs, I'll peg a complete meltdown like you're envisioning at 10 or 15%. Pretty scary. I wouldn't get in my car if someone told me there was a 10% chance of a crash.

But I also think there is a 10 to 15% chance that things will go merrily along at something like the current pace.

I think there is a much large 70 to 80% chance of something in between; more likely on the low side than the high side.

Bend Economy Man said...

Duncan was an adult in the mid-80s. I used to buy baseball cards at Pegasus 'bout that time.

IHateToBurstYourBubble said...

Bend household income is $60k...

I see THAT as a temporary effect of the Bubble. There have been thousands of Realtors printing their own paychecks for 3 years. That's over, so I actually see incomes going DOWN.

I think a lot of people (including myself at times) look at the economics of CO right now, and say "We should go to $X medians based on $Y level of family income". I think that misses the fact that the Bubble itself has skewed things like incomes higher, and the bubble unwinding will lead to a contagion where fundamental economic stats start falling. From there its a vicious cycle of prices & incomes down...

I was in the store yesterday Dunc... you were packed! And they were buying. Don't worry about B&N... they have shlubs like me who go there once a week, sit on a sofa, read for 2 hours, drink the samples... and leave. I haven't bought anything there in 2 years. You actually have buyers walking in, not library patrons. Truthfully, I thought you ran an old dusty store, and had the occasional window shopper walk in 1-2X/day. It was packed yesterday when I was there. You've got a good niche... better than what I thought. Much better.

IHateToBurstYourBubble said...

And you clearly haven't committed Competitive Me-Too Suicide. So many people see something successful, and just say "I'll duplicate that." That many times just splits the market in two (or three, or four, or...), and everyone does worse.

I saw very little overlap w/ B&N stock in your store. Both are "bookstores", but there's very little overlap.

Duncan McGeary said...

Shhhhhh,

don't tell my landlord.....

Duncan McGeary said...

Sales have been pretty good lately. But, I think I've mentioned how much I've invested in inventory over the last year or two, so sales have to stay good for a few years before I'll start seeing a real return on my investment.