Friday, October 5, 2007

Real estate folk are nothing if not persistent. Housing prices collapse? It's a buying opportunity!

The latest thing I'm hearing is that we need to create more buildable land, thus should extend the UBG boundaries. More land would lower housing prices.

I just can't see this.

If the price of the land was the main component of housing prices, then all those houses that were built before land prices went up should be cheaper still. Hell, any houses built with cheaper materials, with cheaper financial services. That isn't happening, because the main component to housing prices is.....the going rate. I don't believe that when I had my house appraised last time, they asked either the original land price....or for that matter, the price I paid for the house.

Ask yourself this. If supply and demand were strictly functional, wouldn't the huge supply already be bringing down prices? I think they are, but the prices are sticky, and people don't want to sell for less if they can help it. More land wouldn't change that psychology in the slightest.

Only if the government absolutely mandated the prices be held artificially low. They'd have to create a lottery system for buyers, because who wouldn't buy a house that was 1/3 lower?

Well, lots of people. Because again, the psychology of the buyers and sellers. I've heard complaints for years that sports cards were too expensive, yet every single time a cheaper brand has been created, it has been rejected by the consumer. "That's junk," the customer will say. "But why do prices have to be so high on these other brands I want?" Hey, I got news for you, buddy. All cards are made of paper, and all have pictures of players on them. The 'value' is created by the marketplace, not by the frakken material.

What would happen if another 500 houses were suddenly created on lower cost land? What's more likely, that those houses would sell significantly below the going rate, and that would force the other 2000 or 3000 houses to lower their prices? Or that the 500 houses would be near the median price, pricing themselves at the going rate? I'd be willing to bet that prices would be dictated by comparable prices, and not the other way around.

So you have to admire the real estate people for trying to create an even bigger glut of housing. Takes real hubris.


IHateToBurstYourBubble said...

If the price of the land was the main component of housing prices, then all those houses that where built before land prices went up should be cheaper still... That isn't happening, because the main component to housing prices is.....the going rate.

But see, "the going rate" is determined by supply, which is in turn determined by land prices, which is dictated by land supply. Have no illusions, the RE Bubble in Bend is almost 100% land-shortage driven. It's being mitigated recently because supply is being "goosed" by the ever smaller division of land within the UGB... there's a hell of a lot more buildable lots in Bend than there was 5-6 years ago.

More land wouldn't change that psychology in the slightest.

oh... I disagree. I think if 5,000ac were subdivided into 40,000 buildable plots tomorrow, there would be a LOT of conversations about lowering price "Before The Flood".

I think I know what you're saying, but "Market Psychology" is in some ways ultimately driven by reality. I think we're in a "Vicious Cycle" downward now, where fundamental realities drive psychology ever lower, just as the Bubble drove it higher. But ultimately a supply glutted market will go lower, no matter the psychology; mathematics takes over and there are simply fewer dollars per item.

I read there are "only" 995 bare acres left in Bend, and back in the day, this would have built maybe 2-3,000 houses. Now, they're talking about putting 40-50 units/ac on acreage! That's insane. The Land Rush is starting to create these abominations that will ultimately have few buyers... but all these builders can remember is making $100K/unit, so they fire up the backhoe.

This town will ultimately by full of some stupid-weird RE projects that no one in their right mind would ever buy. It's already starting... The Plaza... The Shire... we'll start seeing ultra-high-density crap soon.

Duncan McGeary said...

Then it seems to me that you can't have both sides of the argument.

If more houses lowers prices, then we already have a glut. Prices are going to drop already. If you're right about supply and demand, we don't need more land.

I think the glut was created by speculation and greed. Land prices had nothing to do with it.

Both you and Timmy buy into the shortage of land notion, so it's interesting to me that we see it so differently.

I don't think that more land will do anything but create even more over-priced unsaleable houses. They would just join the glut.

It's a ploy by the real estate people to keep the ponzi scheme going.

Duncan McGeary said...

Ponzi schemes need new blood all the time. It doesn't matter in the slightest if there is a demand; if, for instance, you can sell one membership in the overpriced widgets club for 10k, and you are keeping your plan afloat by using that money to pay 15% dividends to original investors of the widget club it doesn't matter if there is an oversupply of widgets.

The more widgets the better. In fact, if the odds are that you can only sell one widget per 100 made, but you need to sell 2 widgets, then making 200 widgets works for you. (Doesn't matter that 398 widgets don't get sold...)

More land, more houses, more real estate agents, more builders and suppliers, more everything.

And an even bigger crash in the end.

I just can't see us selling the current glut of houses in Bend over the next few years -- even with much lower prices! That's probably the difference between our viewpoints.

There is an ugly dynamic of slower sales creating slower sales. Pushing the wet noodle, so to speak.

Duncan McGeary said...

As harsh as some of you bubble bloggers have been, you still seem to have faith that there is a rational underpinning to the bubble -- that supply is connected to demand, that prices are dictated by land and materials.

I think we've had the 'illusion' of growth. We've had people moving to Bend to help fuel that growth. If the growth stops, that all crashes.

Who buys the new houses? Oh, that's right, the rich and the baby boomer retirees.

Who do I talk to in my store? People involved in the industry of growth. My customers are the bricklayers and the drywallers and the framers, the clerks at all the home furnishing stores, the real estate agents, and so on.

They are being laid off, their hours reduced, projects delayed. They are going to leave town unless more building goes on. Thus the ponzi scheme. Keep the illusion going....but it can't end well, and the more houses we build, the worst it will get.

Unless there is a line of rich people and baby boomers itching to come to Bend. Say, 3000 of them. 5 overpriced houses selling a day for 2 years straight.

But, instead, they'll wait 6 months and see prices drop 20,000 on the type of house they wanted. Then they'll buy? No, they'll wait another six months to see if it drops another 20k, and so on.

It's difficult for me to believe that you guys think more buildable land is going to create more buyers.

We just aren't going to have that many buyers....whether prices drop or not.

We are going to see hundreds, if not thousands of houses sitting empty for years.

Building more houses won't move those houses quicker, even with lower prices. Or lower prices will happen anyway.

Duncan McGeary said...

You'll notice, too, I've never even argued the point that baby boomers and the rich want to move to Bend.

Of course they do.

Lots of them are.

What's that got to do with the glut?

If I'm a meat and potatoes restaurant and the average restaurant of my type sells 50 roast beef dinners a night, and I sell 100 roast beef dinners a night, then I'm a busy place. But if I prepare 200 roast beef dinners a night, I have a glut of roast beef.

I keep going back to that 2000 to 3000 houses figure, with more coming on line every day, with more in the works, with subdivisions platted and financed.

If we sell 100 houses a month, and 50 more houses come on line per month, it would take 25 months to sell 2500 houses, in which time another 1250 houses would come on line, and so on.

If those 50 houses a month don't get built, then there are hundreds if not thousands of people without work, putting their houses up for sale, and so on.

The dynamic isn't in our favor anymore.

That just seems like a high mountain to climb, even if Bend is the most desirable place in the world.

The falling prices, the credit crunch, the reputation for being overpriced, will only make it more difficult.

Duncan McGeary said...
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Anonymous said...

I agree with you Duncan. The RE bubble has much more to do with greed and an "it's easy money and everyone else is doing it" mentality than any perceived or actual shortage of buildable land. And, unlike a "standard" Ponzi scheme, the Central Oregon RE house of cards was fueled by high-octane financial leveraging that has only magnified the problem. The pain in C.O. has only begun.

Anonymous said...

I agree with your points in this thread, but wish to play devil's advocate for a moment. One does not need to be a builder/developer to wonder about the (historical) role of the buildable land issue. It's an academic question, but consider:

If there had never been any urban growth boundaries in the state of Oregon:

(1) Do you think the bubble would have been as severe as it is today? That is, would prices have gone as high?

(2) Would there be all the tiny residential lots that we see? For example, would there have been a NWXC? (a concept that seems more appropriate for an urban area)

Obviously we cannot go back and change history. And maybe the land use laws are indeed for the best.

However, a case can be made that restrictive land use laws played some role in the creation of the bubble.

This is not the same thing as saying that the growth boundary should be expanded right now. It almost certainly shouldn't. It's just pointing out that all these things are connected.

Duncan McGeary said...

Yes and yes.

But I tend to believe that bubbles entail things like gas stations selling pogs and beanie babies.

No rhyme or reason.

Duncan McGeary said...


Geez, listen to yourself. "But see, 'the going rate' is determined by supply, which..." blah, blah, blah.

The going rate is based on a bubble! Remember the title to your blog. The going rate is a bubble rate! It's illogical, and has nothing to do with underlying factors.


We are the most overpriced town in America. So is that because of land supply, because everyone wants to move to Bend, because rich people and baby boomers pick Bend above all others, because houses always go up, because, because....?

Or is it a crazy bubble?

So which is it?

Duncan McGeary said...

So am I saying there are no reasons or causes to a bubble?

The original reasons are quickly detached. The bubble becomes it's own reason.

Who knows why a mass of humanity suddenly has to own something they hadn't even heard of the day before?

Who knows why they pick a Japanese card game like Pokemon to suddenly congregate around -- but once they do, once that tipping point is reached, it becomes totally unexplainable.

"Irrational exuberance...." is a great phrase.

I've probably told this before. Supposedly, the Emperor of China wanted to reward the creator of Chess and told him that he could have anything in the kingdom. The man thought for a bit, and said, all he wanted was one grain of rice on the first square of the chessboard, two grains on the second, and doubled to the end.
Is that all? the Emperor asked.

The councilors came back and told the emperor that all the rice of China, all the rice in the world, couldn't fulfill the wish.

I've always loved the postscript. He summoned the chessmaster back and had him beheaded.

Exponential growth is simply unsustainable. Anything that is sustainable, has reasons, anything that isn't doesn't.

Duncan McGeary said...

By the way, I completely botched my 'widget' example when I said that demand didn't matter.

It's all that matters in a ponzi scheme.

It's supply that doesn't matter.

Duncan McGeary said...
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