Riding the Housing Bubble

BlueOregon's own Jeff Alworth appears in the newsprint pages of the Oregonian today with a column entitled "Taking a spin on the housing carousel".

A brief excerpt:

What we have is a game of musical homes, and the intervals of house-hopping are getting shorter and shorter. People have eyeballed the ballooning deficit, the shrinking dollar, the arms and legs it costs to buy a tank of gas, and the ever-creeping mortgage rates, and they've all come to the same conclusion: The music is going to stop soon. Meantime, prices continue to go up, up, up. ...

We love that our house has appreciated so much in value since we bought it in 1999. We're less excited that everyone else's homes have gone up so quickly with it. The rise is dizzying, as is the calculation of whether we'll be able to sell our home and afford another. Could we be the ones left standing with no home when the market crashes? Or worse, what happens if we take on an inflated mortgage, only to see a market correction in the next year?

Read the rest and then discuss here.

Comments

  • dispossessed (unverified)
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    Not a bad piece. Very gentle. It is not clear whether most of the percentages you use in it are national averages or regional numbers. National averages don't work too well for personal analysis.

    Consumer Reports rates Portland as overvalued.

    http://www.consumerreports.org/main/detailv4.jsp?CONTENT%3C%3Ecnt_id=579825

    This is not "news," as similar reports in the last couple of years have shown Portland to be increasingly "unaffordable" comparing incomes to housing prices.

    But the California market still spirals on in craziness, and the California market, more than regional reality, drives the Portland-area RE market.

    You are at no risk, Jeff. You've been in long enough. The barriers to entry are what has also driven the financing changes, such as 40-year loans, IO loans, and increasing use of ARMs, for anyone trying to get in. It seems like "getting in" is almost certain to keep getting harder -- and riskier.

  • Steve Bucknum (unverified)
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    Good issue Jeff. Your perspective is a little off, and thus this comment.

    First the required (by law) disclosure: I am a real estate appraiser, and any comments made herein do not represent any indication of present or future value of Mr. Alworth's house or any other real property.

    In your article you site three points to measure whether a bubble is present or not: Housing costs versus inflation; the ratio of rental income on houses versus housing costs; and the percentage of income that houses cost. While these are valid points, they rest in a broader context.

    The broad context is one of supply and demand. In Oregon we have an artificially created limitation upon supply via our land use laws. This is not the place to debate those laws, but to note that compared to other parts of our country, the protection of farm and rural lands and the limitation of urban growth has the effect of raising land values in urban areas as population grows at rates less affected by monetary inflation.

    Points one and two: Housing cost vs. inflation and rent vs. housing costs; are in part explained by this broader look at supply/demand. With land values going up related to governmental limitations of urban space for growth, it is natural for housing costs to exceed inflation.

    Rental income is a direct reflection of prevaling wages, a different economic influence. When an individual is limited in what they can afford in rental housing, then they have further options such as renting apartments versus houses, such as sharing homes with others, such as living with relatives, etc. So, the dynamics of rental income are only partly affected by housing prices but are also affected by wages and the alternatives available to renters. To make that a more practical statement, the rental market has a quicker feedback to price, is more dynamic, and therefore rental prices are more closely tied to wages than to land value.

    It has been shown in past historic studies of the relationship between rental income, vacancy rates and housing prices that rental income/vacancy rates are an indication of future building trends. To make sense of the relationship between housing prices and rental income levels, you have to consider the vacancy rates. If vacancy rates are high, and rental income is low; then that will tend to pull housing prices lower (the assumption being that renters are not motivated to buy homes). If vacancy rates are low, and rental income is high; then that will foreshadow increasing housing prices (the assumption being that renters will be motivated to buy homes). Jeff, you didn't cover vacancy rates in your article - they would be a key point to watch in terms of your second indicator of whether there is a "housing bubble" or not.

    The last point is that the percentage of income being paid for houses in on the rise. True, but ... If you look back in time, buyers were willing to pay even higher percentages of income for houses in the 1970's and earlier. I don't have the current and historic data in front of me, but my impression is that in the 1950's it was common to pay up to 40 to 50% of annual income for housing. I believe that even in the Portland and Bend markets, that percentage is still generally lower.

    So, the "housing bubble" fears are unfortunately a little more complicated than just the three factors Jeff looked at. Personally, I would watch the mortgage interest rates as a more key indicator of this. If they shoot up quickly, then we will likely have a downturn in value. I doubt that we will have a sharp decline in housing values given the dynamics at work - but I could be wrong.

  • Sid Leader (unverified)
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    Been here almost 20 years now, or about three recessions and recoveries. So, when's the last time Portland housing prices went down, Jeff?

    Nice column, but the housing prices in Portland are where they should be because of our low, low taxes which (honest) business people love, low crime, clean water and air, good (though not improving) schools and a great transportation system and a cool vibe south of the Columbia.

    Does San Diego have all that? Sacramento? Las Vegas?

    Nope. And they never will.

  • Kent (unverified)
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    A couple more points to add to a very interesting discussion.

    First, banks and and other lending institutions seem to be more willing than ever to invent creative ways to put people into houses who probably don't really have any business buying the house they are buying. They do this through all sorts of variable rate mortgages, no money down loans, and the newest California invention, the interest only loan. Why do they do this? Although I'm no real expert in this industry, it seems to me that most banks make their money up front in the points and other fees, and then fast as they can, sell off the mortgages so they don't have to service them. As rates slide up and the economy softens, I expect we'll see banks come up with even more creative ways to put people into houses that they have no business buying. That sort of thing never used to happen before. Wasn't that long ago that the average family saved for their down payment and then bought the house they could afford under a conventional 30 year 80% mortgage.

    Second point. I have to wonder whether the alternative minimum tax is going to start taking a big bite out of high-end real estate sales as more and more upper income families find that the AMT is taking away their mortgage interest deduction and they are better off investing their money in tax sheltered accounts rather than real estate. I've never seen anything written about this.

    Third point. Housing cost inflation isn't necessarily the same as the regular inflation rate. Building materials tend to be heavy regionally manufactured products that don't lend themselves to import substitution. Everthing in your house might be made in China, but the lumber, cement, brick, stone, and paper that goes into it is probably still manufactured in North America. Shortages in building materials can cause fairly rapid increases in the cost of building a house that far exceed the overall inflation rate.

  • Daniel Miglavs (unverified)
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    High housing prices? Three words: Urban Growth Boundry. The Left's precious "high density" urban living has limited home building opportunities thus limited the supply of homes. Anytime you have a shortage, or potential shortage, of something the price always goes up.

    Three more words: System developement charges. (and all related fees) A good portion of the cost to build a new home are various fees/charges from the city/county. Over regulation has driven up the price of homes enormously.

    There is a solution: We can all live in Bum Camps. "Dignity" Village has no permits/inspections, they don't worry about any boundries, and best of all: the taxpayers foot the bill!

    Daniel's Political Musings

  • Kent (unverified)
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    Regarding the relationship between housing prices, rents, and inflation, take a look at this very interesting post on The big picture blog

    Tony Crescenzi had an interesting article on RealMoney this week. In it, he notes that as the housing market soars, it ends up knocking rents lower. After all, why rent if ultra low real interest rates allow you to buy for the same price, and with nearly no money down?

    So what's the problem with that? It turns out that rental prices account for 30% of the core CPI. As we saw last month, this was zero flat.

    That's right...the hot housing market is responsible for the low apparent inflation rate. How's that for counter intuitive?

  • Steve Bucknum (unverified)
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    Why is it that the "Righties" if they don't lie about something distort the heck out of it?

    Daniel Miglavs writes (part one),

    "High housing prices? Three words: Urban Growth Boundry. The Left's precious "high density" urban living has limited home building opportunities thus limited the supply of homes. Anytime you have a shortage, or potential shortage, of something the price always goes up."

    Urban Growth Boundaries do increase the cost of land, due to limiting supply. This is not a "Leftie" conspiracy. Oregon's land use laws were a bi-partisan effort, passed while a Republican was governor. Re-writing history, distorting history, and putting a new spin on it are favorite "Rightie" methods. Do I assume from Daniel's comments that protecting the land of farmers is also a "Leftie" conspiracy?

    Daniel goes on (part two), "Three more words: System developement charges. (and all related fees) A good portion of the cost to build a new home are various fees/charges from the city/county. Over regulation has driven up the price of homes enormously."

    System development fees do affect the cost of NEW homes, and indirectly lift the entire real estate market. Are they "over-regulation" as alleged? Not hardly. If the new home builders didn't pay for water/sewer system development, transportation, new parks, etc., then the rest of the people who already own homes and pay taxes would pay for these services. So, Daniel are you saying that the public should subsidize developers increasing their profits? Should widows and single moms pay for the water and sewer charges for a new home for some third party? Come on.

    Spin it all you like, what you imply is a lie.

  • (Show?)

    "Could we be the ones left standing with no home when the market crashes?"

    Jeff, you write that as though it's a bad thing but that's the best of all possible worlds for you.

    You sell your house at today's high prices, the bubble bursts, prices drop 30%, and you can then afford a lot more house than you would have been able to buy before (or you have a pile of money left over).

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    No doubt it has some effect but I'd definitely argue that prices now in Portland are not mostly being driven by the urban growth boundary. There is a ton of building going on. People who want to live in the suburbs in the Portland area don't lack for options. We have Vancouver,too, where there don't seem to be a lot of restrictions on where you build.

    There is only so much land close to the center of the city whether or not you have an urban growth boundary. As more people want to live in an area, close-in housing becomes more valuable.

  • ron ledbury (unverified)
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    For those of you who would like to read the thoughts from the persepctive of a developmental economist, you can click here Glorified Renter . . . And The Mortgage Bubble.

    Then agin, it might be far too critical of the status quo (or at least in opposition to monetarists and statists alike) for the blue folks here. My conclusion is as follows:

    The price of a home is that which will enable the banker to extract one third of income, from owner and renter alike. All other variations are just secondary concerns.
  • Johnny Redman (unverified)
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    Posted by: Sid Leader | May 21, 2005 11:56 AM

    Been here almost 20 years now, or about three recessions and recoveries. So, when's the last time Portland housing prices went down, Jeff?

    Nice column, but the housing prices in Portland are where they should be because of our low, low taxes which (honest) business people love, low crime, clean water and air, good (though not improving) schools and a great transportation system and a cool vibe south of the Columbia.

    Does San Diego have all that? Sacramento? Las Vegas?

    Nope. And they never will.

    bold Exactly what the hell have you been smoking? Last time I checked Randy Leonard was proposing a cell phone tax, businesses were fleeing because of a socialist takeover at city hall, the schools were a joke, and convicted criminals were being released from jail because the county couldn't fund the jails properly.

    My advice...flee to suburbia.

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    Jeff,

    One thing wasn't clear to me from your article -- are you caught in the neighborhood trap? Many in my (Eastmoreland) neighborhood are. When we first contemplated moving in the neighborhood (we were renting a "Reed House" at the time), I envied many of my childrens' schoolmates who lived in $400,000+ houses that I knew I could never afford.

    Only when I got to know them better did I find out that many of them bought when the market was much lower (usually, 1991 or earlier), and that they were trapped in their current house.

    Their budgets had adjusted to those nice low mortgage payments. And yes, their houses had doubled in value, but they couldn't upsize because everything else had climbed along with their property!

    We squeezed our family of 6 into a 1300 sq ft house 18 months ago ($285k), recently got it reappraised ($330k!), and we're as stuck as anyone. No way to cash out the equity gain without moving out of town.

    Of course, as my other postings have made clear, if my kids weren't in high school and middle school, I'd probably high tail it to Clark County.

  • DA (unverified)
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    I learned everything I need to know in kindergarten (and mine didn't include a class in either economics or real estate).

    "History repeats itself." "Everything is cyclical." "What goes up must come down." "What comes around, goes around." "When you least expect it, expect it." "Time will tell". "You can't take it with you" "For every action there is an equal but opposite reaction."

    And a couple more, especially for my misguided and misinformed fellow commenter, Daniel Miglav:

    "The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness." --John Kenneth Galbraith

    "A liberal is a man or a woman or a child who looks forward to a better day, a more tranquil night, and a bright, infinite future." --Leonard Bernstein

    I've been in the Portland area since May of 1978. Perhaps my presence is singlehandedly responsible for the decline, but whatever the cause, the Portland area ain't what it used to be. Of course, neither are most of us. Take heed Mr. "Sid Leader".

    And, I'd like to respond to "Steve Buckman"'s question to spin-ster-artist, Daniel Miglav that went sumptin' like this:

    "So, Daniel are you saying that the public should subsidize developers increasing their profits? Should widows and single moms pay for the water and sewer charges for a new home for some third party?"

    I'm betting that Daniel's favorite party would, indeed, prefer that low and middle income pick up the tab for any and all municipal fees related to new home construction; or if they could swing it, for any and all government expenses related to all things, everywhere, not just new home construction. As long as a billionaire/millionaire, or a giant corporation can be made even more profitable, at the expense of the middle and low income, righties ... even those who don't know when they, themselves, are being HAD, are fat-dumb-&-happy. Heck, they'd not only prefer it, it would completely evade them why some folks might not think it's a good idea. They'd love it. Ya can't get frustrated with 'em coz they simply DON'T-GET-IT, is all.

    One thing is for certain, it won't be the Wal-Mart(s) & Intel(s) that'll be "subsidizing" anything. Just like those two, it's the middle-class taxpayer who subsidizes them.

    Cheers & Beers! DA BloggerRadio.com

  • Gregor (unverified)
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    Since we have some researchers here, two questions I would like to know are: How many homes are being bought by people from out of state, and how many homes are being bought for investment/rental, as opposed to primary dwellings? When last I wandered into the maze of developments, my host reported to me that more then half the homes on his street were rentals. These were in Beaverton and all built within the last ten years.

    What we may be seeing are Californians cashing in their homes there to buy two or three homes here. I've heard a rumor to that effect and wonder what someone who enjoys research and numbers might be able to develop along those lines. I also would like to know how the rental of homes, as opposed to apartments, compares to historical numbers, if any of those numbers are available.

  • Jud (unverified)
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    Paul G, You wouldn't be the only one hightailing it to Clark Co. The Columbian had a graphic this weekend noting that 36% of the new Clark Co. residents are from Portland metro.

    Jud

  • (Show?)

    This piece was originally going to be a BlueOregon post, framed mainly as a question to Blue readers. Naturally, I'm outta town the weekend the O runs it.

    Anyway, thanks for the reassurance many of you express. I actually wrote this three weeks or more ago, and now my new fear is more about making the musical-chairs transition from our current home to another. Seems like houses are so expensive right now. The market has a wild west feel about it.

    Doretta, what you write about buying and selling is true--sort of. The other factor is mortgage rates, which inflate the mortgage payment on a home. We were able to buy this house in '99 with 3% down plus closing costs. Later, when the rates went lower, we refinanced and have used the money on the bathroom and kitchen. Those are the real costs we've put into the house. When you start talking about whether the place is worth 175k or 225k or 250k, though--all of that just seems like funny money. The actual cost to us is the monthly payment, and if we sell only to see rates go up, that correction may not save us any money where it counts.

    Paul, on the neighborhood trap. That's really the only way to finesse the system, it seems like. We are in (what looks like to me to be) a particularly overheated neighborhood. I'm hoping that appreciation here has been a little greater than adjacent neighborhoods--we may loose the County Cork but gain a few hundred square feet. The neighborhood trap is especially brutal for first-time homeowners who have the same 3% that we had in '99, but now can't begin to afford moving into this neighborhood.

    Gregor, good questions, no idea. I'm not sure that data is collected, either. You're probably talking about different databases. But what you suggest by the questions is true: although Portland's housing market is hot, it's nowhere near as hot as some other west coast cities, where median prices are 50% or more higher than ours.

  • (Show?)

    Oh, on the urban growth boundary. This is a great example of false logic. The urban growth boundary has had many effects on Portland housing. One it has clearly not had is to make housing prices rise more steeply than in towns with no UGB. If that were true, Portland's market would consistently rank among the most expensive. To the contrary, although Portland's market is hot, it's nowhere near as hot as many other west coast cities. And that, perhaps, is the biggest reason for me not to panic.

  • (Show?)

    Jud,

    People are "hightailing it to Clark county" because Clark county is in the "Portland metro". The right talks about the growth in Clark county and the rest of the outlying metro area as though Portland is emptying as people leave in droves as happened with some big cities east of here that suffered "white flight" decades ago.

    News flash, folks. Portland is also growing, not shrinking. Portland is the engine that is driving growth in Clark, Washington and Clackamas counties. Every person who leaves a house in Portland is replaced by someone moving in, and then some. Portland proper is not gaining population at the rate of the suburbs because the supply of cheaply developable land isn't as great not because the demand isn't there. High demand, which has led to high prices, has chased people to the suburbs looking for more house and more land for less money.

    It's causing some serious demographic dislocation as young families overtax the school systems in the 'burbs and loss of students defunds Portland schools but the problem isn't that Portland isn't attractive enough, it's that it is too attractive.

  • (Show?)

    Jeff, mortgage rates this week are lower than they were at this time last year.

    If the cost of housing is a bubble and bursts in the way you describe, there's no way interest rates are going to go up enough in the short term to keep you from coming out way ahead. If the bubble bursts make an offer, lock in your interest rate and throw a party.

    Of course, I'm of the opinion the precipitious drop in housing costs you describe is not likely to happen unless the economy seriously tanks and people start defaulting on their mortgages in large numbers--in which case the drop in housing prices will be just a symptom of a much larger problem. Barring the next Great Depression, much more likely is that housing prices go sideways for several years, i.e. they don't drop significantly, they just stop appreciating. If interest rates go up people are much less interested in buying, if housing stops appreciating and the economy is uncertain, people are less inclined to sell. That's what was going on when I bought my first house in the early 80's. We were in a recession, interest rates were high, Oregon was losing population and prices were going nowhere. Little new housing was getting built. If a house went on the market it was because someone died or needed to move out of the area for a job. I owned that house for about 8 years before the value started appreciating significantly.

  • Gregor (unverified)
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    Doretta- There are examples of housing prices tanking. I know in Upstate New York when IBM, and several other major employers left the area, home values dropped to nearly half. It was a regional Depresion of sorts. Is Portland vulnerable to this? If a few of the big employers go, we can see the values drop for lack of demand, i.e. people leave when the jobs are not here. But at this point, I believe our growth is on an incline. What worries me is outsourcing. If the tech firms go overseas, Greater Portland will lose the draw of the Silcon Forest.

  • Sid Leader (unverified)
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    Hey DA!

    If our schools "suck" so much, why do Oregon kids score tops in ACT and SAT every dang year?

    Always curious, Leader

  • Sid Leader (unverified)
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    Post above was for "Johnny Redman", a very cute handle. Apologies to DA.

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    Sid, That's an easy one:

    1) The states that routinely rank highest in SAT and ACT have the fewest percentage of kids taking them.

    2) Portland is still a middle and upper income town, and those folks do better on SAT/ACT independent of schools.

    SAT/ACT does not measure the value added of the schools (by a long shot).

    Jeff, Just wondering ... what neighborhood are you moving out of and into? I feel far more trapped because we're rooted in Eastmoreland for schools, schools, and schools. It helps that I live 1/4 mile from the office.

    The only Portland neighborhoods I'd even consider moving into (Lincoln, Grant, or Wilson neighborhoods) are all just as overheated. (That's strictly not true -- some of the inner SW side, outer Vermont Hills area, are still less expensive on a cost / sqft basis).

  • Bill Reid (unverified)
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    Jeff Alworth wrote:

    Oh, on the urban growth boundary. This is a great example of false logic. The urban growth boundary has had many effects on Portland housing. One it has clearly not had is to make housing prices rise more steeply than in towns with no UGB. If that were true, Portland's market would consistently rank among the most expensive. To the contrary, although Portland's market is hot, it's nowhere near as hot as many other west coast cities. And that, perhaps, is the biggest reason for me not to panic.

    Unfortunately, this is bad logic as well. The verdict on the effect of the urban growth boundary and home prices, either new or resales, is still out. The problem is that most other West Coast metro areas do a FAR better job of adding higher-income jobs than does the Portland metro area. If you look at historical income growth for metro areas on the West Coast, Portland PMSA lags: Seattle, Bay Area, even Sacramento on a percentage basis. Not only that, but those areas have a better speculative reputation for higher-income job creation - thus the justification for future higher earnings-driven residential purchases.

    So, we have the urban growth boundary restricting supply but we also have lower income levels and income growth in PDX. The result has been rising home prices, though not at the rates seen elsewhere on the West Coast.

    One thing the Urban Growth Boundary has done - positive so far, but negative in short order - has been to limit the power of VERY large home builders from buying large swaths of land for massive residential development. Think Del Webb in the Desert Southwest or in California. They buy hundreds of acres at a time. On the other hand, they carefully control how much they build in any year to make sure there isn't too much supply and negative pressure on pricing.

    But that is going to be changing soon as remaining residential land in the UGB is nearly depleted. As Metro works with jurisdictions to add residential land in various places, the proportion of bigger builders will grow as they will be the only ones with the wherewithal to buy the big parcels brought in - publicly traded D.R. Horton comes to mind.

    Anyway, one of the better bodies of work about growth control and home prices is actually out of Harvard. Here's a link to a .pdf for a Harvard study about the effects of planning and building restrictions on the supply of housing and home prices.

    Happy reading.

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    Gregor, I never said housing prices have never tanked, just that I think it is unlikely to happen here unless the national economy tanks.

    If we don't fix the school situation in the state we could be looking at a long downward trend, but probably not a precipitous drop.

    We aren't a company town the way Seattle used to be with Boeing. Neither Intel nor Nike is likely to just pick up and leave all at once and who else is big enough to cause a big drop over a short period of time? There are a lot of ways we could end up in the tank over time, but bursting bubbles are not about long slow declines but about abrupt drops.

    Bubbles are, by definition, based on speculation. People start buying houses not because they want to own a house but to realize short term financial gains. I think we are starting to see some of that here, but it appears to me that most of the run up in housing prices in the Portland area in the last few years has been based on fundamentals driving supply and demand. The biggest ones being that this is a nice place to live and there have been enough jobs available to sustain growth.

    My belief--and it is just a belief based on observation, I don't claim any special expertise--is that small drops and/or extended periods of nonappreciation are more likely than a precipitous drop as long as the economy as a whole is fundamentally sound. If the Bushie spending spree causes a serious depression that's a different story.

  • (Show?)

    Jeff's logic re the UGB seems sound to me.

    We have a moderately poorer record of job and income growth which tends to depress the appreciation of housing prices. The UGB tends to increase the appreciation of housing prices. Housing prices are appreciating moderately more slowly here than in other places on the West Coast. That's exactly what you would expect if our poorer income growth was inhibiting relative appreciation, as expected, and the effect of the UGB was a significantly smaller effect. If the UGB was a relatively big effect, it would swamp the income effect, and, as Jeff pointed out, we would be leading the pack in appreciation, not trailing it.

  • Steve Bucknum (unverified)
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    Since you are still "talking" about this -

    Values have gone down in Portland area, more recently than some think. In 1986/87 values went down sharply. I had a house I tried to sell that year in the Oregon City area, and I couldn't get what I paid for it in 1978. I ended up renting it out, and then in 1994 sold it for three times what I paid for it.

    I think Doretta is correct in her overall analysis. (Doretta - did you ever think I'd say that!) The fundamentals of value appear either balanced or upwardly trending. There appears to be little but some speculation buying in the Portland area, which is generally one of the pieces for a "Bubble". (Income levels and interest rates being two others.)

    Just guessing, but an informed guess. In the future few years I doubt that any short term drop is more than 5% of value, and I would think the the underlying dynamic would mean an upwards pressure on value over the midterm range of no less than 4% and probably a lot more. Real Estate ultimately is just like any other commodity - it goes up, it goes down, it is affected by supply/demand, and it has value even at its low end of the cycle.

  • Robert Mullin (unverified)
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    The potential economic crisis could be drifting out there on the horizon, just waiting to crash onto our shores - or, more appropriately, speed away. In his Sunday column, Paul Krugman wrote about something that many US economists have been concerned with for the past couple years: the US debt economy is increasingly being propped up by an inflow of foreign money, particularly from Asian central banks. The most recent figures I've seen indicate that, in 2004, nearly 35 percent of American credit was financed by foreign funds. That's up from 14 percent in 2000. That same source showed that those numbers are subject to fluctuation over time - for instance, 28 percent in 1996. But I seem to remember another bubble getting under way about that time.

    It seems that a crisis could be precipitated by any number of things (economists keep saying that they've never seen global economic conditions like these), but the most plausible scenarios deal with the value of the dollar relative to other currencies, which might reduce foreign appetites for dollar-denominated assets, such as the Treasury notes that our mortgage rates are fixed against. In one scenario, Asian central banks, wary of continued real losses in their massive dollar holdings due to devaluation, move into assets denominated in other currencies such as the euro, but slowly enough not to spook the markets, so as to minimize any other losses. Officials at both China's and South Korea's central banks have hinted at this in the past few months, but have been forced to "clarify" their posistions after the markets panicked and punished the dollar.

    The second and related scenario has to do with a revaluation of the Chinese yuan, which Congress and the Bush administration is heavily pressuring the Chinese to do. How has China managed to boost the dollar against its own currency? It recycles the dollars we send them back into the United States by buying US Treasuries. This is the primary reason interest rates have been so low for so long. To revalue the yuan by 10 percent, China will have to dump a lot of those Treasuries on the open market, pushing bond prices down and interest rates up. You've got to think that'll have some impact on the national housing market.

    Americans are buying houses for $500 down, or with interest-only loans, or short-term ARMS, just to get into the market. We're all awash in cheap money, and we don't even know where it comes from. The question is, what will happen to the housing market when the spigots are turned off? A flattening seems like a best-case scenario.

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    Aw, Steve, you know you and I agree a lot. It's just more fun to poke at the things we differ a bit on.

    Neither the data nor my experience buying and refinancing in Canby supports your contention that Portland area housing prices dropped sharply in '86-'87.

    This Fannie Mae paper on the effect of Portland's Urban Growth Boundary has a graph in it of Portland, Western and National median home prices from 1984 to 2001. It shows median prices in Portland essentially flat from 84-89 after which the trend is up. It's interesting for it's take on the effect of the UGB on housing prices also.

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    Robert,

    I'm not arguing a major economic crisis isn't possible, only that housing is unlikely to drop sharply in value in the absence of that crisis.

    The current administration has been undermining the American economy on more fronts than any other I've seen in my lifetime. I'm not a historian but I suspect they are likely the worst ever in terms of the stakes of the games they are playing and the risks they are taking. Unfortunately, I don't think there is a whole lot us average American wage slaves can do that will leave us significantly better off than anything else we might do. If that happens, most of us are screwed, no matter what. If you have a pile of extra money to invest, that's possibly a different story.

  • Gregor (unverified)
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    What we can do, what we must do, we wage slaves, is ensure we have a legitimate election and then, elect someone who represents all the people.

  • Robert Mullin (unverified)
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    Doretta,

    I understood the qualification in your remarks. I didn't mean to counter your argument so much as add something to it.

    No doubt, the housing bubble issue is vexing, seemingly affected by so many qualitative variables. But sometimes I think we're all being a bit coy about this thing, just like stock market investors during the tech boom of the late 90s. Back then I think some people had an inkling that the valuations just didn't make any sense, but they couldn't or wouldn't say why. And then there were those who just didn't believe that stock values really should reflect any kind of business fundamentals, or at least "old economy" ones. Think about the stock analysts who argued that P/E ratios of 100 or 500 were perfectly acceptable in the new economy. And for those companies that had no P/E ratios because they had "negative earnings" (otherwise known as losses), there was the infamous Price-to-Sales ratio, which was perfect for companies burning through all their cash in order to sell goods and services at less than cost.

    Whatever the case, there was a lot of paper wealth being generated, and nobody really wanted to think it could ever end, or that they could be the one stuck holding the bag when it did.

    It seems like now we've upset the fundamentals of house buying, and we're all complicit in the task - or have no other choice. Whereas once you had to scrounge up 20%, then 10%, then 5%, now - in many cases - you only have to produce a nominal fee. And even that can be borrowed. Sort of like buying stocks on margin with the hopes that an immediate increase in value will quickly produce enough equity to put you above water. Then you can take out a line of credt to start putting that equity to work for you.

    The real crisis might come after the bubble bursts, or even merely deflates. Without access to their home equity, how will consumers fuel the economy?

    As for the Bush administration's management of the economy, it seems at times as if they're intent on destroying the economy that most of us have to exist in. Maybe they're seeking a Year Zero for a crony-capitalist utopia. For some reason I keep thinking about Grover Norquist's desire to shrink government to point where you can drown it in a bathtub.

  • Gregor (unverified)
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    At the end of the day, what kind of Americans can these mega-wealthy really be? They invest in the US and any other country in which they might make a profit. If the US economy tanks, will their investments still be here when it does? If our economy begins to be a reflection of Mexico, or China, will their lifestyle change at all? I don't think so.

  • dispossessed (unverified)
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    Nice post, Mr. Mullin. Very nicely done analogy of this housing market to the last hyperinflated stock market. It would be easy enough to draw out the analogy slightly further, involving not only home financing, but also the ratio of home prices to rents they can draw and to incomes it takes to support them. I think everyone does know we are an interest point or two away from significant price drops if not a burst or crash.

    There's an understandable but almost sad psychology here at work also, where no one wants to think they could be seriously hurt. Which, come to think of it, is where Mr. Alworth's piece began.

    You can stop worrying about Grover Norquist. The Bush Administration has increased the size of government substantially. The fight now is just over the kind of big government socialism we will be having. Anyone who tells you or themselves differently is blind or lying.

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    I don't agree that a drop in prices is inevitable, but we can all probably agree that housing prices will not continue to appreciate at higher than established norms and much higher than overall inflation indefinitely. There's an exponential growth thing there that clearly isn't sustainable. The rapid appreication in housing prices has to cool off sometime. We already have 40 year loans, interest only loans etc. I don't think there's that much room left for ever more creative financing to provide new fuel for that fire. At some point, prices will get too high and the market will cool down. Interest rates going up significantly is one way to get there sooner rather than later.

    I assume it's also clear to everyone that when that happens, consumers will no longer be able to draw on rapidly rising equity as a source of ready cash. This will happen. No belief in bubbles or sharp downturns in housing prices is required to forecast it. Equity growth is bound to slow to the point that it can no longer be a major engine for consumer spending even if housing prices never drop.

    If the rest of the economy is not able to grow enough to pick up that slack, that will be a serious problem.

  • Suzii (unverified)
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    Into this comes Paul Krugman's take on the theory that the housing bubble not only exists but was manufactured by the Fed (by it's bottomless string of interest-rate cuts) after 2000 to replace the stock market bubble.

    "The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble.

    "So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?"

    As far as Jeff's situation goes, I'm thinking about the advice I got when remodeling my house: Remodel to live in, not as an investment, because except in extraordinary cases it's a bad bet. That was 10 years ago ... does it no longer hold?

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