FF:The Condo Bubble

Jenson Hagen

Several months ago, I stepped into Pearl District Properties to meet a chipper real estate agent.  I tried to inquire into how many people were getting into adjustable rate mortgages.  She could only refer me to a flyer with a sleek looking mortgage broker advertising several interest only mortgage plans.  Love those things!

The next thing I knew the agent blurted out the one thing I didn’t want to hear: “it’s been so weird.  We only had 10 condos for sale and now we have like 70.”  Well, now they have 253.

Let’s look at Pearl District Properties’ total outstanding condo inventory:

                                                               
< $350K$350-450K$450-600K> $600KTotal
Condos65336590253
Est. Average$300,000   $400,000   $525,000   $800,000  
Subtotal$19,500,000   $13,200,000   $34,125,000   $72,000,000   $138,825,000  

In July, I started tracking the condos that Buying Pearl Real Estate had for sale on their website:

                                                                                                                   
TotalNumberPercentLess ThanLess ThanLess Than
MonthCondosIncreaseIncrease$100,000   $200,000   $300,000  
July26611374
August3225621%11675
September3795718%117103
October4224311%022107
November4805814%041127

If we assume that the average condo sells for $500,000 (conservative estimate if you can believe it), then Buying Pearl Real Estate has around $240 million in inventory at a time when inventories are rising like CO2 levels.

They are still building these things like mad.  The John Ross by the new tram.  The Wyatt will add another 245 units to the Pearl.  The Strand is going up where I-5 crosses the Willamette.  Their website claims an additional 1,335 condos are going up along the Willamette.  Local 296 has been out protesting because the developer is using low-wage workers on overpriced condos.

This dollar amount of inventory sitting around can cause big problems for our regional economy.  Bear in mind that construction costs have increased significantly over the last couple of years.  Nearly all commodities like copper, aluminum and steel have doubled and tripled over the last 5 years thanks to easy Fed money.  Bubble #3!

There’s a lot of money sitting on the table with these condos at a time when inventories are rising rapidly, multiple projects are too far along to stop and the developers need hefty prices to compensate for higher construction costs.

Will all these condos sell?  Or will developers, real estate agents and lenders take it in the asphalt?

Comments

  • (Show?)

    If there is a God, they'll all lose their shirts.

  • gl (unverified)
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    holy crap a Jenson Hagen article I actually agree with, nice job.

  • Karl (unverified)
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    It means good pickin's when the market takes a nose dive. Everyone knows that we're in a housing bubble for a while now. Why state the obvious again?

  • Jerk Bog (unverified)
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    I don't like new buildings!

    Please God, let those evil people who built that evil five story building on Broadway burn in hell. Please please please.

    I mean, the insanity. People actually choosing to live without a yard. They're soulless. Unlike me. My soul is beautiful. I moved here in the 1970s.

    Plus, it's so much harder to find parking now. It takes an extra twenty seconds.

  • frank carper (unverified)
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    It's not really hard to understand why jack's parental basement-dwelling acolytes want everything to fail. But is the tram really the reason their lives are unfulfilling? Is the streetcar really the reason they can't get a date?

  • curt (unverified)
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    I always thought those were overpriced anyway. $350k and upwards to live in a condo by the Ross Island Bridge? Sheesh.

  • MCT (unverified)
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    Well....this is what happens when we keep an urban growth boundary in place for nearly 30 years. It was a good idea, just an ill-managed one. Infilling alone has ruined some neighborhoods... triplexes and the like wedged into the big back lots of charming vintage bungalows. Up-scale condos in trendy neighborhoods. Of what value is a UGB if we've ruined the look of our city? Everyone is for progress, just not in their back yard.

    Developers are building and converting to condo units like mad because there isn't any affordable land to build affordable housing, and theoretically, as Boomers age they want less maintenance, more security, and the ability to travel without having to worry about their home & yard.

    Local governments take forever to issue building permits, an expensive and lengthy process....6 months or more, which is a long time for a builder to be chewing on his expenses monthly payments and interest. Some go into foreclosure. But usually not the huge out-of-state mega-developers. Liability insurance premiums on building projects have gone through the roof, due to years of shoddy building practices, (How did they get that past the inspectors?,) and hundreds of claims filed and paid out on. (For $300 one can attend seminars on this subject, hosted by teams of gleeful real estate atty's.) Once construction starts, permit and inspection fees on an average single family dwelling run in the tens of thousands.

    As for a high inventory of condos or any housing for that matter, it makes no sense. It is a product of the media that the housing market is "tanking". Asking prices are coming down, anyone in their home more than 3 or 4 years on a 30-yr fixed loan will still see a substantial profit, and they will have plenty to choose from when they buy replacement property, without having to compete with several other bidders for a home. And interest rates are still low. It seems buyers and sellers have bought into the idea that since the housing market is no longer red-hot inflated, it is a terrible time to make a move. This is a strange trend....in the past families have bought and sold homes according to needs and wants, not based on sensationalized stories on the nightly news.

    Yes adjustable rate mortgages are and will continue to be risky. As are many other credit opportunities, which are also advertised by slick brochures and Madison Avenue myths. New homeowners are bombarded with offers of easy credit and instant gratification; far too many take advantage of what quickly turns into a disadvantage. Hopefully, the Dems will bring forward some much-needed reforms to the banking industry. I'm probably dreaming.

    And the Pearl, et al? Simply overpriced status symbols that many found they can't really afford, isn't all that comfortable and convenient, or simpy outgrew. It is not a great place to raise children. There IS a slowly growing market for condos, just not at Mc-Mansion prices.

  • Jerk Bog (unverified)
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    Hell yes the tram is the source of all unhappiness. We should name the cars Sin and Death. People are going to die on the tram you know, and I'll be there to say I told you so. Who can be happy knowing there's a tram out there in this town?

    The streetcar is pretty scary too, as the AAA Doubleplus Badass John Birch Society will tell you. All my friends would back me up on this one, but they're all over at the Milton Friedman wake. Let me just say this: Don't pay the streetcar operator until he gets you to the other side of the river.

    But the tram and the streetcar are merely meat for my libertarian minions. The true source of evil, as I may have mentioned, is the condo. I have seen rivers of fire, and flesh rendered by devil dogs, in those stacks upon stacks of conveniently located unwordly one bedrooms with a view.

  • Kent (unverified)
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    This dollar amount of inventory sitting around can cause big problems for our regional economy.

    And why is that?

    Because it might help pop the real estate bubble that has priced pretty much all middle class folk out of Portland real estate?

    Because housing prices and rents might come down?

    Because some real estate speculators might not make as much money as they were expecting?

    Because the inevitable drop in prices will hose some of the idiots who bought more than they could afford in an over-inflated real estate market using risky financing schemes like interest-only adjustable mortgages?

    Some folks might take it in the pants. But the PDX economy is enormous. Personally I fail to see how this sort of thing is going to have any measurable effect on the total economy.

  • george (unverified)
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    what neighborhoods have been ruined in the last 30 years? i don't get this?

    was hawthorne ruined when you could no longer buy drugs on the street there and the porno movie place got turned into a great brewpub?

    was belmont ruined by the grocery store and an occupancy rate greater than 30%?

    was mississippi ruined by the bars coming off the windows, the gunshots no longer being heard in the night?

    alberta?

    i dont get it?

  • Anthony (unverified)
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    George:

    The outer neighborhoods are the ones hit hardest. The modest 2br house I grew up in is now surrounded by 3-story row houses, townhouses, and an apartment building. While my house has a large front and back yard none of the new houses have any property, any yards, any lawns, any trees, etc. Traffic? No one rides the bus or their bike (like the CoP expects them to) so each of these "units" built have at least two if not three cars.

    Similar situations can be seen anywhere east of 82nd.

  • urban planinng overlord (unverified)
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    The Urban Planning Overlord says:

    I wouldn't be surprised if there is a shakeout in the Portland Condo market. Unlike some others, I think there is a more-than-slowly rising demand for condos instead of the standard suburban single family dwelling, but not at these prices. When the prices come down, these condos will sell.

    Believe it or not, I have to agree with Jack Bog that those who bought these condos in the past two or three years were making the same mistake that buyers of high tech stocks made in 1998-2000, and their net worths will take almost as big a hit, thanks to the wonders of leverage.

    But of course Bog and his followers will take the next step and condemn the entire new neighborhoods that have been created (Pearl District, South Waterfront, etc.) as abominations. Just ignore tham - these neighborhoods are well-designed and will stand the test of time.

  • jim karlock (unverified)
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    george: what neighborhoods have been ruined in the last 30 years? i don't get this? was hawthorne ruined when you could no longer buy drugs on the street there and the porno movie place got turned into a great brewpub? .. was mississippi ruined by the bars coming off the windows, the gunshots no longer being heard in the night? .. alberta? JK: You don’t need five story condo farms to clean out the drug dealers, just a police dept. that is not strapped for cash because of all of the tax abatements given to encourage building this garbage.

    Thanks JK

  • frank carper (unverified)
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    Jim Karlock--

    Please point me to the five story condos of Mississippi or Alberta neighborhoods.

    Thanks FC

  • Lynn S. (unverified)
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    My family's been in the mortgage business for a long time. One of the last signs of an over-hot market is a condo explosion, just like the one we're seeing here, followed by a condo bust. What's disturbing about the overheated housing market, for me, isn't the huge inventory of condos--though banks are going to find themselves suddenly with self-same huge inventory on their hands Real Soon Now. It's the proliferation of those interest-only mortgages. People are going to find themselves upside-down right quick; they didn't put any money down, they weren't paying off principal, and then the value of their property drops. Hey presto! upside-down. Add in the folks who squeezed into their properties with adjustable-rate mortgages and we could have a real crisis on our hands. It could start looking a lot like the mid-80s around here.

    All I can say to folks out there is that if you have to get an adjustable or an interest-only to get into a house or condo, wait. Wait until the market cools down, or you'll be really, really sorry.

  • jim karlock (unverified)
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    frank carper: Please point me to the five story condos of Mississippi or Alberta neighborhoods. JK: I was speaking in generalities, however, I believe one is in the planning stage on Killingsworth and there is a recently built giant on Alberta, but it might only be 4 stories. Either way, far out of the character of the neighborhood.

    Of course the city is in the process of expanding the areas where TODs can get property tax exemptions, so this soulless garbage will be spreading even more widely. The additions include: 1/4 mile circle around all Interstate ave. toy train stations. All I-205 station areas, existing and planned. Hillsdale town center. Sandy Boulevard main street MLK (Schuyler to Lombard) Foster road (Holgate to 79th) * Barbur and Terwillger intersection commercial area.

    Hope all the people in those areas like BIG apartments/condo farms and the traffic congestion that they cause.

    Thanks JK

  • Ross Williams (unverified)
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    1) Portland housing prices apparently have been holding up better than the rest of the country;

    2) All those condos will sell eventually, the question is at what price;

    3) The impact on the economy will really start to be felt if the builders stop building; When people no longer have home equity to pay for home improvements and to buy all that stuff at Home Depot and Lowes; When people find themselves stretched by increasing house payments from adjustable rate mortgages; I don't think that will kill the Portland economy, but Clark County may be in a world of pain;

    4) Everyone wants someone else's house to be affordable. I would be skeptical that the condo market is going to cause housing prices to crash in Portland. The job market remains strong and Portland continues to be an attractive place for people to move. While some folks may find themselves upside down for a while, their long term chances of prices recovering are still pretty good if they aren't forced to sell.

  • lin qiao (unverified)
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    Would appreciate if JK or anyone else would define exactly what makes a condo "soulless garbage", and would also tell us who gets to make the definition.

    I have plenty of concerns about tax abatements for condo developers, but I fail to see why I, or JK, or anyone else gets to dictate someone else's lifestyle.

  • jim karlock (unverified)
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    lin qiao: Would appreciate if JK or anyone else would define exactly what makes a condo "soulless garbage", and would also tell us who gets to make the definition. JK: I don’t know, I was just doing a parody on the anti sprawl books that called suburbs soulless.

    lin qiao: I have plenty of concerns about tax abatements for condo developers, but I fail to see why I, or JK, or anyone else gets to dictate someone else's lifestyle. JK: It is the smart growth crowd that is dictating life styles. I just want people to be free. But there is a place for restrictions on building - especially when done through voluntary covenants.

    And there is no place, in a free country, for city planners dictating that one must BUILD A MINIMUM DENSITY like happens in Portland. Like wise for declaring that you can’t build an ordinary house on your own land (Dorothy English cones to mind).

    Thanks JK

  • Tired (unverified)
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    JK is too busy tilting at windmills. He bends facts to his biases and fails to see the reality on the ground. Hello, you really think Portland was better twenty years ago? Give me a break...and the crime and crappy living conditions that went with that.

    When that doesn't work he resorts to name calling and just being a bully. See http://www.bizjournals.com/portland/stories/2002/05/13/story6.html from that radical left publication to see how his ideas confront reality. JK, we don't want to live in Vancouver, WA. Maybe you do?

    Thanks, Tired of Windbags

  • insideouter (unverified)
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    Jim is a good guy, not a bully. He knows I disagree with him on many things regarding land use, but I don't like the personal tone of this last message. It's too bad you have to resort to name calling and insinuating, "get out of town if you don't like it here." There are many people who feel like him. Though I don't like EITHER the knee jerk smart growthers or the ORTEM and "free marketer" anti-land use folks, I like even less ad hominem attacks like the above.

  • george (unverified)
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    Anthony,

    outer neighborhoods, good point.

    i've seen lots of changes out by 82nd. although personally, i find lots of those changes to be positive (lots of great new great asian markets and restaurants!). i can also see some negative changes (more traffic without much of an increase of trans alternatives, longer commutes).

    while as an inner portlander my neighborhood has changed for the better since i moved here in 1995 (new interstate max line, expansion of fareless square to lloyd, expansion of services into unoccupied spaces, WAY lower crime) i can see how that is different for outer neighborhoods.

    on the other hand, your example of negative impact on the neighborhood seemed to be focused on other people living choices (no lawn, attached neighbors, smaller living spaces). not sure how these are negative changes... although man, a lot of those building are pretty ugly.

  • les (unverified)
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    Low Fed interest rates do not cause copper, aluminum and steel prices to go up. Demand from China, India and other developing countries is the primary cause.

  • Mop Squad (unverified)
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    Within a few blocks of my SE Portland hood, there are several good sized condo buildings going up as well. One on Clinton st. at about SE 20th. Another on the corner of Division St. at 21st.

  • Frank Carper (unverified)
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    Jim is a good guy, not a bully

    "Insideouter"--

    Look no further than the neighboring post on Kathryn Harrington to get a sense of why JK remains one of blueoregon's more annoying trolls:

    Oregonian/Kathryn: Certainly, people mention transportation as part of the concerns for growth as well. JK: Well, duh!!

    Duh? Really? Is this the type of high-minded dialogue you're defending? Jim Karlock is a global warming denier who thinks that any effort to thoughtfully plan Portland's neighborhoods is tantamount to a socialist plot. That's his world view -- and vive la difference! But it doesn't make his constant attempts to hijack threads here any less irritating. Or misinformed on points of objective fact.

    Thanks, FC

  • MCT (unverified)
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    Let's keep in mind that Portland is not just the enclaves of gentrified neighborhoods west of 82nd, and east of Sylvan.

    Regardless of where you live in the metro area you may be impacted by some new ideas in land use planning....what I see as knee-jerk reactions to Measure 37. Measure 37 claims are already being settled by allowing long-time owners to start partitioning their land for denser residential use.

    Remember, Damascus/Boring, Gresham Springwater, and Pleasant Valley, as parts of the UGB are about to rezone thousands of acres in East Multnomah Co., and Clackamas Co. Damascus HAS to approve a Concept Plan by 2008, and the proposed Concept Plan promises to be a model community, which places conservation areas and wildlife corridors first on a list of considerations. The Springwater Plan has a goal of creating local jobs by rezoning a large section of East Gresham as light industrial...."green style". Will all this occur fast enough to create enough new homes to ease Portland's burden? The city is falling behind on it's own obligation to expand western UGB's.

    Meanwhile the Oregon Task Force on Land Use Planning is re-evaluating how agricultural land is defined, by use and viability, among other changes to be considered. They must complete and deliver their reports and recommendations in a just over 2 years. The outcome of this will most likely be a loosening up of restrictions on dividing acreage, and allowing more residential zoning. Since taxpayers cannot afford to pay monetary settlements on these hundreds of claims.

    METRO, as a sequel to their lumbering 20/40 Growth Concept...is now offering us 'New Look'. New Look will work to find ways to absorb the million new residents' anticipated arrival in the Portland Metro area, in the next 25 years. They say "potentially" they may recommend changes to state and local policies. Think they will?

    And LCDC is still standing....with their 19 Land Use Policy goals. Local Officials Advisory Committee, (LOAC) and the Citizen Involvement Advisory Committee, (CIAC) are also bringing their unique ideas, input, and special interest agendas to the mix.

    Seems like a lot of cooks are about to bring us a menu of varied dishes we may not find palatable, and they could all land on the table at the same time. No matter how it pans out, we will all be effected. I look at it this way, if you procreated, and would like your grown children to have their own roof over their heads, you cannot complain too much. The world population has doubled since 1950, and the U.S. just passed the 300 million mark. The not-in-my-back-yard argument just won't pass the sniff test anymore.

  • pornojack (unverified)
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    I loved that porno movie place!

    That place brings back great memories!!

  • Don Smith (unverified)
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    All I can say to folks out there is that if you have to get an adjustable or an interest-only to get into a house or condo, wait. Wait until the market cools down, or you'll be really, really sorry.

    To Lynn,

    I'm sorry to disagree with you, Lynn, but for most people, getting into a house today is the best thing they can do, provided they aren't getting into a negative-amortization pay-option ARM. An interest-only loan is not that much different in the first 5 years than a fully amortizing loan and in 5 years, our market will not be down. Even with the heating up of our market of late (especially now, with the massive inventory), it's wise to get into a house. Period. You're only upside down if you have to sell, and you're not likely to be upside down in a single-family residence. If you're buying a $500K condo, you're probably in tune with the risks, and that's your call.

    I am in the mortgage business, too, and I counsel virutally all my first-timers to get an interest-only mortgage and just plunk their tax return down against the principal every year. Works great, gives them a little better cash flow, and I'm using 30-year fixed or ten-year ARMs with all.

    Portland's condo market will drop, but the SFR market will absolutely not, Jenson's learned opinion to the contrary. There are still too many people moving here and the demand for yards is still strong, be they tiny or otherwise.

  • Karl (unverified)
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    Don,

    Isn't your advice a bit self-interested as you, being a mortgage broker, have a vested interest in writing up more mortgages.

    The smartest thing to do now is rent. Wait for the meltdown. And then buy. You know that old adage, buy low-sell high? You seem to be advocating the opposite.

    Getting an 5 year ARM makes most sense for people who are not planning to live in the house for longer than 5 years and who may be able to absorb the cost of higher monthly payments if they decided to stay or the cost of 2 mortgages if they cannot sell the first house and need to purchase a second or rent a second home. How many of your clients are able to say that?

    Check out this site:

    The Housing Bubble Blog

  • sinclair (unverified)
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    Karl:

    but the rental market has been going up and up in Oregon, too. Unless you want to rent a bedroom in a house with a bunch of roommate, it may be cheaper (depending, of course) to buy. Factors such as location, location, and of course, location (plus credit history, etc) can impact this to an even greater extent.

    By the way, the Civic condos and the new G/E housing project over by PSU are both much more reasonably priced for first-time owners. ~$250k, above and below. It would be nice, of course, if the large developers would put more effort and money into actively producing units that are priced for people in the middle class, instead of the upper class. It is their own decision to pursue the luxury market to the virtual exclusion of all else.

  • Leo (unverified)
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    Who will take it in the shorts?

    Not the lenders; they’ve already sold the loans. Not the developers; they form LIMITED liability companies for a reason. The people who will take it in the shorts are the buyers who’ve signed up for a 30-year debt on a deflating asset. Just another step in redistributing wealth to the very rich.

    This is not just a condo bubble; it is a housing bubble. You find it strange that people delay moving based on sensationalist news in the media? That’s because it’s a bubble. That’s how bubbles work; there’s nothing strange here at all.

    And if anything, the UGB has helped to slow the growth of the bubble in Portland. If you want to see what a housing bubble does without growth restrictions, check out San Diego or anyplace in Florida. Portland’s bubble is relatively mild compared to those places.

  • gobytrain (unverified)
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    Condo's down town will continue to stay high and stable. Why? Location, location, location.

    By the way, some of us prefer parks over yards, in fact much of the world feels that way (see Paris, full of "evil" yard-free apartment and condo dwellers).

    I actually do hope that more condos are built to in-fill so that prices do go down and more environmentally minded people can afford them (and I'm a Pearl District condo owner).

    Think of how wasteful free-standing homes are!

    They're basically a projection of men's desire to be king of their own castle (all be it a miniature version). Yards are incredibly expensive to keep green (the wasted water!), homes are amazingly expensive to heat and cool and then you get to drive just to buy some groceries. Not to mention the amount of land required for everyone to have their own little castle. How selfish!

    Anyone who's taken a trip to Home Depot can't delude themselves that houses are more socially minded or economical than condo dwellings.

    I hope that the product starts meeting demand so not only the (seemingly) wealthy can afford the economy, society and convenience of living in neighborhoods like mine.

  • (Show?)

    Jim rails against condos in TODs, as if that's not the entire POINT of a TOD--high density living, primarily for urban professionals who want a quick public transit route into the city.

    Two floors bad, four floors good, in this case...!

  • gobytrain (unverified)
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    PS: Don Smith does his industry a disservice by advocating interest only loans. These loans are never good, always bad, and down right evil.

    It's also not true that "for most people, getting into a house today is the best thing they can do"

    Let's remember the true definition of Mortgage - "Death Pledge":

    [Origin: 1350–1400; earlier morgage, ME < OF mortgage, equiv. to mort dead (< L mortuus) + gage pledge, gage1]

  • MCT (unverified)
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    Yes, the UGB has kept our area's housing market at levels above other parts of the country. It is a good thing that hasn't been managed well, because it has also contributed to appreciation of existing housing, squeezing many first time home buyers out of the market, making them easy prey for interest only and ARM merchants.

    And it is NEVER better to rent than to own. The money is in the land, so to speak, and they are (HE is?) not making any more of it. Real estate is always a good investment, but you shouldn't go into it expecting to make an overnight killing. Or with an edgy debt to income ratio. Just because you can get a risky loan, doesn't mean you should. Save for what you need to get into a 30-year fixed mortgage.

    When you rent you are buying someone else's real estate holdings for them; growing their portfolio. Your money, NOT working for you. And landlords tend to sell properties. Communities function best when everyone can expect to have a sense of place, and the security of their own home.

    This bubble is more of a burp in our area. Wait and see.

  • San Diego Lasik Doctor (unverified)
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    Interesting post, the San Diego real estate markets decline may actually cause an induced real estate recession not only in San Diego but in other hot markets of the recent past.

    For an interesting "inside" perspective on this phenomenon I found a great blog located at http://www.brokerforyou.com/brokerforyou

  • gobytrain (unverified)
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    While I feel home ownership can be very important to a feeling of security (until your furnace blows), I can give you plenty of examples of times when renting can be wiser than buying. Buying is not always the best option. It's important that people don't feel that they should by at all cost.

    The "American Dream" (or farce, depending how realistic one is) is very unusual with its golden grail of home ownership. You don't see that in other parts of the world, for good and bad reasons.

    Sadly, while more Americans are "buying" their own homes, "ownership" is much lower than in previous decades. That's an issue that needs to be acknoledged and discussed.

  • Karl (unverified)
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    MCT,

    Hmm. Let's see.

    Long term average gains of housing. Approximately 5%/yr.

    Long term average gains of equities, 10-11%/year

    Housing: pay maintenance, property taxes, repairs, upgrades

    A home is a home. You have to live somewhere. Building equity is OK, if the prices go up. There are regions in the country that got hit with price corrections that didn't recover for over 10 years. And of course, a house is a not a very liquid asset.

    There are occasions where it is much better to rent than to purchase. In an era where you may be upside down for an extended perious of time, that may be the time.

  • Don Smith (unverified)
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    I take humbrage at the notion that I do my industry a disservice by advocating interest-only loans. I might agree if you were talking about monthly-adjustable negative amortization loans, but you aren't.

    If you believe Portland's housing market will tank a la San Diego, you are absolutely deluded. Job growth and population influx virtually assure continued (though far more modest) growth into the future. IF job growth goes negative and IF population growth goes negative, we might see such a downturn. However, in the face of the current trends, no bubble exists in Portland. We are NOT California. We aren't Florida. Speculators are a miniscule portion of our marketplace.

    Gobytrain - you are clearly not in the mainstream on this one. SFR's are the standard for housing, your French dreams aside. I'm sure you'd be perfectly happy in a 500 SF studio with a nearby park. Many people are. That's why they build them. But the reality is that when you have a family, a single-family(!)-residence is the most preferred option. Those usually have yards for a reason.

    Equities are great investments. I'd love to know, though, where I can get a 95% LTV loan for 6% on a 10%-yielding stock. Last time I checked, you can't. That's called arbitrage, and it doesn't exist systemically. I can put $10,000 down on a $200,000 asset that appreciates $10,000 in the first year. 100% profit on my downpayment, assuming the death-pledge (see above posts) is equal to rent+tax bennies.

    I'll go toe-to-toe with anyone on the economics of buying a home and interest only. Bring it on.

  • anonymous (unverified)
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    If you believe Portland's housing market will tank a la San Diego, you are absolutely deluded.

    And if you are certain it won't, you are equally deluded. No one really knows whats going to happen to the local housing market. Buying a house with the assumption that it is going to appreciate is a huge mistake. So is renting with the notion prices will drop.

    The only way a house is a positive investment is if it appreciates relative to other housing, either in its own market or the market the seller moves to. Otherwise you will have to spend whatever appreciation there is to buy a similar house.In other words, a house is usually worth exactly the same amount to you on the day you sell it as it was the day you bought it since you will replace it with another house at the same new market price.

    I can put $10,000 down on a $200,000 asset that appreciates $10,000 in the first year. 100% profit on my downpayment,

    The flip side of that highly leveraged investment is a 5% decline in price wipes out your entire investment and you are still at risk. Speculative bubbles are driven by the belief that the former is more likely than the latter.

    Job growth and population influx virtually assure continued (though far more modest) growth into the future.

    That is just not true. People are paying a larger portion of their income for housing right now than they historically have been willing to pay. If they revert to the old percentage, housing costs will have to fall quite dramatically even as population increases.

    As for income, it has been falling or stagnant relative to inflation for a large part of the population. So there is little reason to expect rising incomes to drive the housing market either.

  • Peter Bray (unverified)
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    This talk of "bubbles" is vastly overstated and quite simplistic. One could assume, after all, that the real estate market is fairly efficient: the equilibrium between supply and demand results in the price both sellers and buyers agree on. Presumably, the possibility of housing collapse is priced into the market.

    The media has overblown the "real estate boom" so-called frenzy. The price for a condo at this exact moment is the perfect price.

  • Peter Bray (unverified)
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    Don Smith said: "Equities are great investments. I'd love to know, though, where I can get a 95% LTV loan for 6% on a 10%-yielding stock."

    Well, look at Fidelity. You can get a 6% margin loan for 70% of the value of your portfolio. I.e., if you have a portfolio of $1 million, you can borrow $700,000 at 6 percent. Money is nowadays cheap, and increasingly will be so... its cheap not just when buying houses, but when buying stock, or anything. Soon, we will be like Japan where interest rates are, what, .005%?

  • Peter Bray (unverified)
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    Karl: Long term average gains of equities, 10-11%/year

    Peter: Of US equities, of course. Japan looks horrendous long-term, as do many other foreign countries. Think the US can buck the trend?

    Karl: Housing: pay maintenance, property taxes, repairs, upgrades

    Peter: Mostly deductible. And no tax is usually paid when you sell the house, while tax is paid when you sell an appreciated stock.

    Karl: A home is a home. You have to live somewhere. Building equity is OK, if the prices go up. There are regions in the country that got hit with price corrections that didn't recover for over 10 years. And of course, a house is a not a very liquid asset.

    Peter: A home is not very liquid? What are you talking about? Oh, and there are DEVELOPED countries where equity markets are at a 30 year low. You think that the "long term" will correct that trend? Doubtful.

  • gobytrain (unverified)
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    Mr. Smith - I'm sorry, but I have yet to hear any respectable finance authority advocate interest only loans. In fact, they're looked at with as much respect as a a pyramid scam.

    "I can put $10,000 down on a $200,000 asset that appreciates $10,000 in the first year. 100% profit on my down payment"

    I'm hardly an investment guru, but your statement is so obviously fraught with problems that even I can ascertain.

    You're not taking into consideration the cost of interest, which is going to be quite high on such a small (5%) down payment. Without further creative financing, you'll also be paying a mortgage insurance with such a low down payment.

    If, as you say, you're planing on renting out this investment you will have additional expenses, as others have already pointed out.

    You better hope and pray that your "investment" increases in value by 5%, or you're suddenly in deep. If it goes down by even 2% you're out $4k and stuck because if you want to sell it you're going to have to shell out another 6%+ in real estate agent expenses! This is how the "main stream" investor gets sucked in by a brash talking mortgage broker and finds herself/himself facing bankruptcy.

    I know plenty of people in both Portland and other cities across the USA whose homes have not appreciated, and perhaps even depreciated. Primarily because they have bought in developments where new homes are still being built.

    The savvy real estate investors I know tend to put down far more than required down payments (50% or more) for a variety of reasons I no longer have time to go in to (low/no interest rates=larger return on investment).

    Gobytrain - you are clearly not in the mainstream

    I totally agree with you! That's why I did buy in the Pearl in the early days with a 15 year mortgage and a 4.6% interest rate and saw my investment double in two years. However, that was not my financial astuteness, I just recognized that it was a desirable way of life for me and my family. Viva la France!

  • Urban Planning Overlord (unverified)
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    Back to the very first poster, go back to Jack Bog's post on this topic and look at the comments - Jack seems to have completely lost it. It's almost as if Jerk Bog actually has taken over the site!

    http://urbanplanningoverlord.blogspot.com

  • Leo (unverified)
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    “One could assume, after all, that the real estate market is fairly efficient: the equilibrium between supply and demand results in the price both sellers and buyers agree on. Presumably, the possibility of housing collapse is priced into the market.”

    Real estate is probably one of the LEAST efficient markets, certainly less efficient than the stock market. And we all know how accurately the stock market anticipates crashes ... :-) Any argument against speculative bubbles in RE better not rest on efficient market theory.

    Anyone who is seduced by the argument of doubling their 5% downpayment after just 5% appreciation would do well to think twice about it. That has nothing to do with real estate; it’s just simple leverage. But leverage works both ways; when the RE cycle turns and the house depreciates by 5%, you lose 100% of your investment. If it depreciates by 10%, you lose 200% of your investment. And even if it stays flat, but you are forced to sell using a standard 6% commision, you are still out more money than you put in.

    There are good times to buy real estate, but not when rent costs only 50% of the equivalent mortgage.

  • Adron (unverified)
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    That's funny. City Planning isn't socialist? You gotta be kidding me, it's the freaking definition for all practical purposes.

    Many City Planners and other such minded people oft cite the Soviet Union as a City Planners heaven.

    Removing the association is like trying to take the sweet outta ice cream. Not cool, not cool at all.

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