Real Estate Enthusiasts and Friends,
This has been an exciting month as the real estate market has been gradually starting to recover. Back in January, I forecasted that the data indicated a mild recession, which would cause the real estate market to remain relatively flat through summer of 2008. But, through the autumn months of 2008 and spring of 2009, the market would begin to move ahead into positive territory. Not surprisingly, recent statistical data is beginning to run the course that I forecasted over 4 months ago in spite of the pessimistic outlook that most pundits predicted. This does not suggest that everything is fine and that market difficulties are a thing of the past. Keep in mind that the market has just endured one of the most serious collapses of financial credit since the great depression and we have been very fortunate that circumstances helped to prevent a total free fall. In this edition, I will address the areas of strength in this recovery as well as some issues that must not be ignored.
MARKET OUTLOOK
Inflation Concerns
In the April 2008 edition, I spent a considerable amount of time discussing the nature of the Fed's activity to increase liquidity at the cost of the dollar. I used an analogy that compares the course the Fed is on with a doctor's prescription of Chemo therapy. Basically, the doctor poisons the patient hoping that the poison will kill the disease before it kills the patient. Too much or too little and the patient dies. Similarly the Fed is poisoning the economy in hopes of killing the credit crunch. If there is too much or too little the dollar will collapse and the economy will find itself in serious trouble. I will keep a careful eye on the Fed.
The Federal Reserve has cut the Fed Funds Rate 7 times since September, which has brought the Fed Funds rate down to 2%; and as a result, the dollar has suffered. On April 22, 2008, the dollar fell to a record low of $1.6019 against the 15 nation currency index that comprises the Euro (Bloomberg, May 7, 2008). What this means is that if you traded one Euro for U.S. dollars at a bank, your one Euro would purchase 1.6019 dollars. If the Fed is increasing inflation by making the dollar more available (i.e. lowering the Fed Funds rate), the value of the dollar against other currencies declines. This has significant impacts on international trade as well as investment in U.S. goods and services. One good thing about a falling dollar is that it makes goods and services that we sell abroad cheaper for those who are buying them abroad. This has actually helped our exports and it may be a major contributing factor to the fact that manufacturing is up.
However, inflation is a major concern to the Federal Reserve. To fight it, the Fed will have to reign in the monetary policy by increasing rates and increasing the reserve requirements. In the same article, Bo Nielson reports that, "Kansas City Fed President Thomas Hoenig said in a speech in Denver yesterday that "serious" U.S. inflation may compel the central bank to increase interest rates." Do not take this news idly. In this course of action, any of you who have mortgage rates tied to an index (usually an Adjustable Rate Mortgage - ARMs), will likely see increases in your payments. Even though they will be increasing rates, I would not expect those increases to be severe because the market is in recovery mode and not in red hot growth mode. Therefore, the Fed will have to be gentle with their rate changes or they could easily erase the gains that the market will post in the next 6 months.
Hooray for Portland!
In the midst of the subprime meltdown and the worst housing market in the past two decades, Portland has fared remarkably well. In the February edition of the Economist, it was reported that Portland was one of only three U.S. metropolitan markets that saw positive housing appreciation in 2007! The other two cities were Seattle and Charlotte, North Carolina. In the April 2008 edition of Portland Monthly, Camela Raymond wrote, "So far this year our home prices have held steady. And with a projected 17,000 new jobs coming to Oregon, unemployment should stay at 5 percent, according to the state employment economist, Art Ayre" (Portland Monthly, 71). She also stated the logical conclusion that, "...A healthy economy, of course, stimulates a healthy housing market" (Portland Monthly, 70). This is very true. I reported back in my January 2008 edition that Portland State Economists were forecasting strong and steady growth in employment.
Fortunately, Portland's business growth tends to be mild and steady, which is better for stability than markets that heat up a lot and then cool down a lot. If you think of business cycles as a sinusoidal curve (a wave), then like a wave we expect that there will be highs and lows. However, if the higher that peaks rise above our base line then the business lows tend to be equally as deep. Camela made an interesting point in her article. She wrote that, "...We won't have nearly as far to fall as a place like California, where double-digit annual price increases have been replaced by similar decreases" (Portland Monthly, 70). Since Portland's business cycles are not as extreme, declining cycles will not be as severe.
If we combine a good economic forecast with the cheapest housing prices of all west coast cities and a gentle growth in real estate values, we can expect that for the moment, things are going to be alright in Oregon. Anyone who says that short term gains in the real estate market will last forever is either ignorant or extremely dishonest. There will be economic downturns here, but for the moment, things are moving onward and upward.
Real Estate Statistics for the 1st Quarter of 2008
I would like to give you some good news that is not seeing the light of day from our trustworthy media sources. According to RMLS statistics, average sales price appreciation increased by 4.9% from March 2007 to March of 2008 ($344,700 v. $328,700). RMLS also indicates that by this same formula, "The median sales price appreciated 5.1% ($290,000 v. $276,000)."
To me, the most important statistic is the Housing Inventory Data because I believe it really tells what is happening in the real estate market. I inputted the data into Excel and produced this graph. As an economist, I view the Housing Inventory purely in terms of supply and demand. The statistic measures the houses that are currently on the market and it estimates the time it would take for consumers to purchase those houses at the current rate of consumption. For instance, the current housing inventory is listed at 9.1 months. This means that at the rate of sales, it would take the market 9.1 months to sell every house that is listed on the market today. To give you a frame of reference, most realtors consider that a 6 month inventory is a normal and healthy real estate market. If the inventory moves above 6 months, we are in a buyer's market. If it falls below 6 months, we are in a seller's market.
How can one see the supply and demand curves in this graph? The supply is represented by the height of each month's inventory. Those are the houses on the market that will sit at the current rate of consumption. The demand for those houses is a little more subtly depicted in this graph. The demand is inferred by the trend line. When the trend is going up, you are witnessing a decreasing demand for those houses, which constitutes a greater inventory. When the trend line is going down, demand is increasing as the inventory is being depleted. What should really grab your attention is how sharply demand has increased over the past few months relative to the two preceding cycles.
The News That's Not Being Reported
To really drive this point home, there's one more piece to the statistic that should really blow you away. Housing inventories have declined from 12.8 months in January, 10.4 months in February, and 9.1 months in March, but at the same time Active Listings have increased by 45.99% (15,412 v. 10,557). So, the inventory is really falling sharply even though there are 46 percent more houses being added to the inventory as opposed to the year before. What is the inference? It proves to me that demand for houses is up a lot more sharply than most people have realized yet and while the media is still running doom and gloom pieces aimed at selling news, some buyers are succumbing to fear and they are missing this opportunity. Once the mainstream awareness clues into this fact, the window will close and the market will return to normal trading. The good deals will be bought or re-listed at higher prices to match the market.
Trending
Back at the University of California at Riverside, I took an advanced course in finance and investment. The professor was discussing financial inertia. Just like in physics, a financial asset or index that is in motion will tend to stay in motion, unless acted upon by another force. In the graph above on Housing Inventories, you can see two trends very clearly and the beginning of a third trend. The first trend begins close to April of 2006 and it peaked in February 2007. The next trend begins shortly thereafter and it peaked in January of 2008, where the housing inventory reached 12.8 months. You'll also notice that housing inventories showed declines in the 3 months following each peak for the past 2 years. This is clearly the spring boost. Even though we see this trend repeated 3 times, what is different this time is the significant decrease in inventories over the previous two.
What this tells me is that our market is returning to equilibrium, which is somewhere around 6 months of inventory. The market wants to be there. This past fall and winter the inventory increased far too high as a result of the fear in the market. Many people believed incorrectly that we were due for a major correction. This major correction has yet to materialize and the possibility of such a correction is looking more remote each day. Remember that markets tend to move with the majority emotion of either greed or fear.
I was at an open house yesterday, and I was talking about this with another realtor. He told me that he had a client tell him that he would not purchase a home below market price. I was stunned! Can you imagine anyone saying that they would never buy anything on sale? I was astounded that someone would actually say this, but the psychology behind the client's statement was very profound. There's no way that he truly believes or follows that philosophy. Everyone likes to buy things at reduced prices. However, his statement revealed what was really going on; he was afraid. He was afraid that a below market price was a sign of worse things like a market collapsing or a substantial flaw with the house. My Jeremy Siegel quote from last month applies perfectly to this situation. Most people buy when the consensus is positive and they sell when it's pessimistic. Those of you who use this information wisely will earn substantial rewards as we implement strategies that balance the risks with the opportunities.
REAL ESTATE OUTLOOK
As I discussed earlier, the trend appears to be moving back in par with a normal 6 month rate. We can see that new demand for housing is consuming our excess housing inventories and if the trend continues, we may see some solid growth in the housing market by the end of this summer. Since the market moves on tidal emotions of greed and fear, trending helps the wise investor see how those emotions are impacting the macro-economy. The wise investor also knows that even though a trend is identified, it can change at any time and often it changes just after the prevailing sentiment fully believes that the trend is unstoppable. So, we are due for a market upswing and just when everyone is confident that growth will continue into the indefinite future, that's when I'll start advising you to hold off and wait.
I expect that appreciation will increase gently through the summer months but it should remain close to 5% throughout the next year. To give you up-to-date information on various sub-markets within the Portland Metropolitan Area, I will include statistics of the 3 best markets and the 3 worst markets from this time forward.
| Area Report | ||||
| Rank | Area | Appreciation
Over the past 12 months |
Pending Sales
2008 v. 2007 |
Average Sales Price |
| Top 3 | ||||
| 1 | Lake Oswego/West Linn | 8.7% | 44.3% | 557,600 |
| 2 | North Portland | 8.2% | -19.4% | 274,300 |
| 3 | Northeast Portland | 6.9% | -36.0% | 321,200 |
| Worst 3 | ||||
| 1 | Oregon City/Camby | 0.6% | -34.4% | 309,200 |
| 2 | Mt. Hood/Gvt Camp | -4.0% | 0.0% | 253,200 |
| 3 | Milwaukie/Clackamas | -6.4% | -34.9% | 356,000 |
Lesson from Mac
My Grandfather Mac was a pilot for the Navy in World War II and he flew the Douglas SBD Dive Bomber. He was stationed at Guadalcanal and his squadron was responsible for bombing enemy positions and naval traffic in that area. He told me that on one particular night while he was asleep in the barracks, the sirens went off and the anti-aircraft batteries started firing at enemy airplanes attacking the base. He ran out of the barracks and as fast as he could, he got into the bomb shelter. In the midst of the guns firing and bombs falling, the anti-aircraft guns hit one of the Japanese airplanes and it crashed in the jungle not far from the base. The next morning, Mac was very curious about the downed airplane and hiked out to see it. What he saw shocked and bothered him greatly.
Upon approaching the airplane, he noticed that the propeller looked rather familiar. As he got closer, he saw in writing as clear as day, "Made in the U.S.A." Just prior to the commencement of the war, we were still selling war supplies to a potential enemy that ended up using those supplies on us. He told me that what really bothered him was that the greed of the war profiteers to earn greater financial rewards was more important than the lives of the service men that were lost as a result. The lesson that this taught me is one of honor. It was not honorable to value money more than human life.
I understand that businesses are in the business of making money. That's what they were created for. I, too, have to make money or my family will not eat. However, honor should always be present to override certain decisions and guide us in making right ones. YourDictionary.com has several definitions of honor. The one I like best is, "A keen sense of right and wrong; adherence to action or principles considered right; integrity to conduct oneself with honor."
The reason I shared this story is that I have seen a tremendous lack of honor with the loans that have been sold by other professionals in this business. In the past month alone, I have worked with 4 clients who needed major repair work on loans that only enriched the mortgage brokers at the cost of their clients. In one such instance, a loan was sold at a ridiculously high interest rate and the closing costs were atrocious. What made it even worse was that their current loan made it impossible to get the loan that would have put them in a great financial position. The point in all of this is that if you are working with someone who will forgo a paycheck to do the right thing; that is only kind of professional that you should ever, ever work with. Honor is important and it is something that I value highly.
SERAINA AGUAYO
WHAT, may I ask, were you thinking?!
What type of a reaction do you hope to elicit from someone viewing your listings?
This has been a topic I have wanted to write about for 3 years. What are people thinking when they post pictures of properties with cars all over the driveway, debris inside or outside of the house, laundry on the floor, etc..?
What type of a reaction are you hoping to inspire from potential buyers when posting a listing? Should we not do everything we can to get buyers in the front door?
Residential Buyers are Visual Creatures
Specifically "residential home buyers" tend to be visually motivated. I am not referring to the advertising of investment properties where the buyers are looking at the purchase from a logistical standpoint. If you have watched any of these TV shows like "Curb Appeal" or "Sweat Equity" on DIY Network, it becomes apparent that what you can "see" makes all the difference. According to a source from MarketingCharts, "Internet display advertising continued its growth leadership, increasing 15.9% in 2007 to $11.31 billion in expenditures." If visual appeal isn't important, why are Americans spending so much money on it?
People Tend to Buy Emotionally & Visually
People tend to purchase emotionally and visually. We are no longer in the day when realtors sold homes on text and static image advertisements. People want to be wooed and impressed and this almost always requires the use of graphics. It is amazing how emotionally moved a client can be based on how the property looks in the MLS.
I have literally watched clients toss listings aside when they looked at the images. Are you going to let that happen to your listing? You don't have to be a marketing major to attract buyers to your home. Show the properties off in the best light possible. I can't help but chuckle at some of the photos posted by other agents. My favorite so far was a new property flyer that had a great big image of the front of the house with a quaint little "Port-O-Potty" just off to the right of the image. It might have taken just a few minutes to apply a cropping tool to the photo. Ha! That just cracks me up! The realtor could have inadvertently turned off buyers when in reality the port-o-potty may not have been a real problem. There may have been a logical explanation for it being there, but the buyers never came because it was so unsightly in the picture.
Technology Is Better Than Ever!
As a real estate consumer, you should work with agents who are professional and can use technology effectively to give you a real advantage in the market. With Photoshop, virtual tours, streaming videos and various photo enhancement technologies, a good realtor can without a doubt market your property listings to create a stronger appeal.
It Takes Some Cooperation!
Unfortunately, there are far too many realtors who will poorly advertise their clients' homes. It is unacceptable, in my opinion, to sign documents and start snapping photos without that property being completely prepped first. As one of my standard practices, I will make suggestions that my clients should do in order to effectively create a listing that will attract the attention of buyers, which will result in a faster sale at a higher price. Did I mention the time my client spotted diapers and baby wipes in a property photo? The beauty of this is that your prospective buyer will be far more interested if the presentation is professional!
So there you have it. Let's set the stage for our listings and market them with confidence.
Seraina Aguayo, Broker, Realtor, GRI
John L. Scott/Sandy
(971) 322-9878
If you would like more market data on your specific market area or would like a FREE comparable market analysis, please contact me at greshamagent@johnlscott.com or Dave Smith. *Data gathered from the National Association of Realtors® and the Regional Multiple Listing ServiceTM of Oregon.
STRATEGIES
May's strategy is really simple. Take action. You know what things you need to do and what things you ought to be doing. Too often, we simply procrastinate. I have written a great newsletter that should really help you see the opportunities that are out there and they could be yours if you act. I hope that you are also working on your budget. My wife and I finished ours and it is working beautifully. We meet about bi-monthly depending on our schedules to go through the bills and how we can increase savings. The main thing is that I know what needs to come in and what needs to stay in the pot.
You may get sick of hearing about it, but savings or a lack of it is one of the worst problems that I continue to run into on a daily basis. People are not saving anymore. What's going to happen if they become injured or they lose their job? I happened to be very fortunate that a new company recruited me just prior to the demise of my old company. Otherwise, I would have been looking for a job as well. Had I been out on the street looking for work, at least I would have had some savings to carry me through. From a lending perspective, savings can mean the difference between a rejection and an acceptance. Build up your savings; it's the wisest thing you can do. On top of that, the more you can save now will only improve the life that you will live when you retire. It's too important to procrastinate.
Some of you may have noticed that I changed my title to Excellence in Mortgage Planning. I chose this new title because the newsletter is not really independent and the old title was inadequate. The information that I pass along to you in this newsletter sometimes assists you in your decisions, which results in you bringing your loans to me. I wanted my title to reflect the excellent counsel and strategies that I freely offer you so that you can work towards achieving your goals. My business philosophy is Excellence in Mortgage Planning!
MAY ACTION STEPS
All the best,
Dave Smith
I am a Mortgage Consultant with Mortgage Express. You can contact me at my office number, (503) 517-8763 or at my e-mail address, which is dsmith@mtgxps. If you are interested in purchasing, selling, or refinancing a home, I would love to work with you to find the best strategy that will fit into your short and long term personal and financial goals.
I recognize that the financial situations of each of my clients and anyone who reads this newsletter do vary widely. Therefore, the strategies stated herein should be explored further with your financial advisor or advisors to be sure that these strategies are beneficial. The opinions expressed in this newsletter are not intended as specific investment advice or as a proposal for providing mortgage lending services.
I am a full service Mortgage Planner who will work to make certain that the home loan you choose will be properly integrated into your short and long term goals as well as your monthly budget!
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