How Does the National Housing Bubble Impact Me?
March 2007. Dave Pautsch, REALTOR®, MBA, CSP Friends and neighbors, I thought I would take just a few minutes to address the current national preoccupation with the housing bubble, and how it affects us here in the Willamette Valley.
Is there a bubble?
Lots of news articles, both in print and on the TV, are talking about a general softening in the national housing market. Yep, you can be pretty sure that the bubble is at least leaking, if not busting in some specific markets, and on a national scale that is a big story. There is however, a "but."
All housing markets are ultimately LOCAL, not national. When you look at the statistics, you have to first of all keep in mind that the Willamette Valley is lumped in with the entire west coast. There are not many (actually none in the research that I did) statistical models that even break the Pacific Northwest out from the west coast housing market as a whole.
That skews the statistics somewhat, doesn't it? I mean, do we fall into the same category as San Francisco? San Diego? Los Angeles? Seattle? Even Portland? I think even those taking the most narrow view of these models would agree that the Willamette Valley could have a different state of being than these other markets.
Ok, that said, is there a local bubble? You have to look at a broad number of indicators to get the answer.
Job growth: Oregon 2006 Economic Executive Summary* notes job growth of 1.4% in the past quarter; this represents 12 consecutive quarters of growth. The past 8 quarters have shown growth in excess of 2%.
Unemployment: Linn County 2005 - 7.4% (lowest since 2001). Down from a high of 10.1%
Median wage: Linn County - $38,372; Albany - $51,000
Interest rates: Mortgage rates remain in the low 6% range. Federal Reserve actions in the future are unclear, but keeping in mind that their actions do not directly correlate with mortgage interest rates, and that rates in the 6 and 7% range are still near recent historic lows, this bodes well overall.
Average residential home sales / price: 1,028 homes sold last 12 months / $181,984 Compared to 1 year ago: 855 homes sold previous 12 months / $156,953
From these facts, I would argue that calls of a "bubble" here are somewhat pre-mature? For the next six months, we should continue to see some appreciation or at least a stabilization of local housing prices.
For the past few years we have seen an average of 11% per year appreciation in housing prices. While I would expect this to recede a bit I do not believe, nor do any of the experts that I have spoken with even remotely believe that there will be any dramatic fall in housing values.
What is the impact on our local prices?
I think it is fair to say that there will be a ripple effect of the national market on us, at least eventually. Some of this is a direct result of the tightening in those other markets and that impact on our local buyer pool. Additionally, and probably more influential in the short term, is the EMOTIONAL impact on local buyers and sellers.
Think about it this way, we take action today (with the information we have on hand today) to try and put ourselves in the best position both today and in the future. If you believe that the market is going to nose-dive (whether you are right or wrong), are you going to invest in real estate? No, you are going to wait a little while and buy when the housing prices are more advantageous for YOU. If you need to sell your home ("need" here being the operative term), and you think the market is shifting, are you going to set your price at or below the current market? Sure, because you can't afford to be greedy (remember, the word NEED was key), because you have to move. Both these factors could lead to a depression of housing prices, or at least the rate of appreciation.
Another more quantifiable factor has to do with the number of buyers coming to Oregon with the cash they got out of their homes in those inflated markets. As the Southern California market tightens, both the amount and free-flow of cash will tighten here also. As an example, if 2 years ago you could have sold a house in Los Angeles for $500K in a week or two, and today you can only get $400K, and it is going to take 3 or more months to sell, how does that impact what you will be shopping for in Oregon?
The second impact comes from the rules for appraisals. Remember that appraisers must rely only on SOLD comparables (not active listings) to price homes. If a buyer comes in with cash, no appraisal is required by the lender. Hence, cash sales by California-buyers can accelerate the appreciation of homes in the area, and provide a broader base of comparables for future appraisals. Reduce this source of cash flow, and the appraisal values could also flatten.
One other factor to consider
There is also the question of how high can they (housing prices) go? With interest rates having been at historic lows, there were also record numbers of first-time home buyers coming into the market. Think of the housing market as a pyramid, with the broad base at the bottom being built upon those first time home buyers. As they enter the market, the move-up buyers can sell their homes for a profit, and purchase a home one step closer to their "dream."
These move-up buyers provide the impetus for the next tier to move up...and the next from there. This is the phenomenon that spurs the ever asked question as to "how the heck can people afford all these $300K homes?" They have made money on the sale(s) of their homes and climbed the property ladder. The low interest rates have allowed them to increase their buying power, and the cash allowed them to keep their overall payments nearly the same, but invested in a larger, nicer home.
Now, if that first-time home buyer can't translate their monthly rent payment (plus a bit) into a home that is AT LEAST AS NICE as where they are living, are they going to be motivated to move forward? As the entry-level home increases in price, and we get to the point where these buyers begin staying in their rental home, the pyramid model begins to fall apart, and the upward trend flattens. Monitoring of the median housing price in relation to median income rates may give us an indicator or trend worth watching.
Summary
National media hysteria of a general softening in the housing market does not specifically address the current situation in the Willamette Valley. While there are ripple effects which will continue to impact our local market, we are still experiencing a general appreciation in home values, and a steady and increasing pool of buyers.
None of us have a completely accurate crystal ball to tell us the future, and the statistics only give us a picture of what has happened, not what is going to happen. There are still good values to be found, and now is still a good time to buy a home in the Willamette Valley. To keep yourself in the best position to understand how this all affects you, I recommend that you have a trusted agent. May I suggest working with a REALTOR® who you can count on to give you the facts, help you understand them, and give you counsel on how to position yourself to have the greatest chance of achieving your goals.
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