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Bend, Oregon Housing Bubble

April 25, 2008
10:31
Dana Bratton Day
» ‎ Bend, Oregon Housing Bubble

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Well, according to the prediction of Bratton Appraisal Group principal Dana Bratton, today's the day the Bend real estate market will turn around.
March 22, 2008
8:51
5 Things Bendites Should Do Now
» ‎ Bend, Oregon Housing Bubble

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As they say in Alcoholics Anonymous,
"God grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference."

The whole town of Bend needs to say the Serenity Prayer right now, because the real estate market and local economy are tanking, and are going to keep tanking for some time to come, and there's nothing anyone in Bend can do to stop it.
People like "Mr. April 25" Dana Bratton and the coalition of local real estate forces behind the "Best Buyers' Market in 20 Years" media intimidation campaign think that with The Power of Positive Thinking, the local real estate market (real estate being the only industry in Deschutes County history ever to achieve $1,000,000,000 in one-year sales) can recover.
As has been said a million times, the housing bubble is way bigger than Bend and actually even bigger than the United States. There's nothing Bend can do to stop housing prices from tanking and tanking big.
What can Bend do now? Well, maybe we should put the question a little differently: what should people do when they're stuck in the middle of nowhere with no money? The answer is to protect their own interests, make their little corner of the world the best possible place to live, and band together to prevent outsiders from coming and taking their stuff. Because life's not going to get easier around here for a while.
1. RAISE TAXES. That's right. Bend needs money. For deferred infrastructure and maintenance, for police and other essential services, for schools, for public transit. Revenues are already down, but the big whammy's yet to come: reduced property tax assessments due to falling property values. Bend needs to resist the urge to cut taxes, and actually needs to increase revenue this year and going forward.
2. INCREASE FUNDING FOR ESSENTIAL SERVICES AND PARKS. Especially police. Bend needs to regain its reputation as a safe, relatively drug-free, violent crime-free town if it's going to keep residents and attract new ones. What's the point of living in a small town if you can get carjacked in the Costco parking lot, same as Compton? And parks too. There's no point in living in small-town Oregon if there's no place to push a stroller or walk a dog.
3. SUSPEND MASTER-PLANNED PROJECTS. Forget about Juniper Ridge. Forget about the Third Street Corridor. Pay off whoever's owed, terminate the consultants' contracts, stop buying new land, stop land grants, stop all city-funded development activity. No more Lava Court or whatever it's called. Keep the land for the future (a university, for example) or sell it to the private sector at market prices, with restrictions if necessary. Maybe in other cities, the local authorities have the vision and competence to carry out big-concept projects. Not in Bend.
4. CUT THE DESTINATION RESORTS LOOSE. No matter what they say in public, not one of these destination resort subdivisions around here is "penciling out" the way its sponsors thought it would. Soon the destination resorts will come calling to city and/or county and/or state governments asking for property tax breaks, regulatory exemptions and other goodies, and they should be told "NO." I'm not an anti-destination resort activist. Some say that their drain on services and infrastructure exceeds their economic benefit. But let's assume for sake of argument that they create jobs and are generally a net benefit to neighboring communities. It doesn't matter - they don't deserve a handout. They should be treated like any other business. Either destination resorts make economic sense or they don't. In a county where almost every business besides Trader Joe's is hunkering down for tough times, 5,000 homeless people are living in the woods, the desert, motels, vacant homes and the streets, and 19% of the population (including kids) has no health insurance, luxury golf course developments don't deserve any subsidies or breaks. And making them nicer does almost nothing to make Bend or other Central Oregon communities nicer.
5. LOBBY FOR A FOUR-YEAR UNIVERSITY. And don't let up! The best way to secure Bend's future is to get a 4-year university here. Natural resources is gone. Real estate is gone. But Bend is an excellent candidate for a 4-year school. OK, so far it hasn't worked out. But that's because these fool good-old-boy local business interests have been put front-and-center. Bad idea. Those guys' money should be welcome in the effort, but all these fat, white local artifacts should be kept safely out of sight when we're selling this area as a site for a new 4-year university. It might take another 5 or 10 years. It might take longer. But it makes sense. Bend would be a great college town. We just need the right people to plan our approach and the whole community needs to be on board, like what happened in Merced.
8:05
Some Big Problems
» ‎ Bend, Oregon Housing Bubble

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Summing up recent developments:
- Moving companies in Bend say that the number of outbound moves has exceeded inbound moves since the start of the year by as much as 2:1
- 25% of the kids at Summit High School, the "rich snob" high school, are on the subsidized school lunch program for low-income families
- 19% of the population in Deschutes County are uninsured, a number so high it made national news
- Bend's budget is running a $20,000,000 deficit and the city has cut fire services and is looking at cutting transit and road maintenance
- Knife River, Pahlisch Homes and other local construction-industry businesses announced layoffs
- Downtown vanity businesses have been going under at the rate of about 1 a month
- The Canadian-owned mill in Gilchrist, which basically represents the whole town's economy, has been mothballed
- Foreclosure proceedings have begun on Randy Sebastian's Renaissance Ridge subdivision in Bend (that's right - the entire subdivision)
- Lenders seem to have taken over ownership at Becky Breeze's "The Plaza" development
- National City Corporation named Bend the town with the most overpriced residential real estate in the country
- Wells Fargo declared the Bend metropolitan area (Deschutes Co.) a "soft" real estate market where increased down payments apply
- Deschutes County has been included on mortgage insurance industry "blacklists" for increased down payments and documentation requirements
- The local real estate industry publicly announced a plan to extort positive stories from local media with threats to withhold advertising dollars
- When confronted by Oregon Public Broadcasting about whether his newspaper gets pressure from the real estate industry, The Bulletin's editor-in-chief said that he is "perfectly happy to take calls" from advertisers
- A Bulletin reporter was fired after complaining about the "hack job" (removing negative quotes) editors did on his article about a pep rally for the Bend real estate industry
And of course there's all the grim national news about the near-collapse of the financial system, all traceable back to the housing bubble.
And now look for Bend to be portrayed in the national news as a backward, intolerant part of the country for the latest scandal, where Bend High student achievers were handed teddy bears with fundamentalist Christian prayers on them at an in-school assembly.
So there are some problems. Everyone should know by now that there's nothing Bend can do to make the economic boom come back. The Central Oregon housing market? Not coming back. Vanity businesses? Going under. Commercial real estate? Huge glut in office and retail. City finances? Don't even ask.
March 12, 2008
13:11
Reporter fired after criticizing Bend Bulletin's RE coverage
» ‎ Bend, Oregon Housing Bubble

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Read about it on BB2, The Source and On The Bright Side. The story's already been picked up by Patrick.net via BB2 and it deserves to go national.
Listen, The Bulletin, Bend RE industry: if history has taught us nothing, it's that taking increasingly desperate measures to prevent the inevitable always backfires!
February 25, 2008
8:11
The Bulletin and the $498 million
» ‎ Bend, Oregon Housing Bubble

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Yesterday The Bulletin had yet another article where they referred to Central Oregon's "$498 million-a-year" tourism industry. Not "estimated" $498 million or "about" $498 million or "approximately half a billion" or "around $500 million," just $498 million.

On the BendBubble2 blog we've been noticing that this a-bit-too-precise unsourced figure has shown up in The Bulletin a bit too often. As you'll see below, I've found that The Bulletin has been using the $498 million number at least since last July.

My Google research has shown that the first time the $498 million figure was used was in the article "More praise heaped on Bend" from last July. It's an article about the DVA advertising firm and its success in placing articles about Bend in national publications.

What's interesting about this first article is that in it, where The Number first appeared 230 days ago, The Bulletin said that the Central Oregon tourism economy is "estimated at" $498 million per year. Doesn't say estimated by whom (probably DVA). But in later uses of the $498M number The Bulletin dropped the "estimated at." Why? Don't ask me. It's a totally inexplicable, irresponsible editorial decision.

Why does this matter? As a Bulletin reader, I'm insulted and you should be too, if this is representative of the standards that The Bulletin uses to inform us of events in our community. No conspiracy theories at work here though. I don't think that The Bulletin meant any harm by dropping the "estimated" qualifier and using the number over and over again for 7 1/2 months without mentioning the date or source of the figure. It may or may not be inflated; for all I know, the real number is closer to $800 million or a billion dollars. I just think that The Bulletin's editors figured their readers weren't the type to notice the pattern and figured it wasn't worth the effort to use better-researched figures.

Or, if you really want a conspiracy theory, especially given that The Number first appeared in an article about how under a Central Oregon Visitors Association contract, DVA Advertising & Public Relations has "worked with" the writers and editors of Outside magazine and other publications to get favorable articles about Bend placed, how about this? Maybe DVA has been "working with" the writers and editors of The Bulletin too.

Since the number was an estimate in the first place (probably by DVA, which is a marketing firm, not a reliable source of statistics), it should not have been so ludicrously precise. And even if it was spot-on 230 days ago, it is without a doubt inaccurate now. So why does The Bulletin still use it? Why did it stop referring to it as an estimate? The New York Times would never have referred to a number as "estimated at" in its first appearance and then dropped the qualifier in later appearances. The Washington Post would never use the same ridiculously precise unsourced number for 7 1/2 months straight. The Oregonian would probably never use an unsourced figure in the first place.

Try running the Google search site:bendbulletin.com "$498 million" and you get results going back to the July 2007 article on DVA (some of them are subscription-only, but try the Google cache in the search results).
- More praise heaped on Bend - July 10, 2007
- Hotel planned in north Redmond - July 29, 2007
- A history in Bend, a future at Bachelor - August 28, 2007
- Tackling Bend transportation - September 5, 2007
- Old West, new brand - September 13, 2007
- Economic concerns won't deter travelers - October 25, 2007
- Marketing inspiration - October 31, 2007
- Lights, camera, financial action - November 7, 2007
- Hotelier takes it up a notch - November 11, 2007
- All area has to offer, in movie-trailer form - November 25, 2007
- Ski areas waiting for a blast of winter - December 14, 2007
- Selling Sisters - January 1, 2008
- At Mt. Bachelor, mixed reviews - February 6, 2008
- Area tourism feeling a pinch - February 21, 2008
- No quick recovery seen through 2008 - February 24, 2008
December 17, 2006
6:53
A transitional period
» ‎ Bend, Oregon Housing Bubble

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As you've noticed, the site now redirects you to the Bend Economy Bulletin Board. I think it's a better forum type, but I will say that its format doesn't lend itself to the kind of long-winded essays you became accustomed to seeing here.

Soon enough this blog will be shut off. Not because I'm less interested in Bend's economy, but because the level of attention I was paying to it was unsustainable.

So what do we have today? We have a couple of economy articles in The Bulletin:

Area Economy Cools After Run-Up

Recession Risk Is Low, Experts Say

The second article has some comments by Bill Valentine on Bend's "high-beta" characteristics. Yes, Paul, we know that's your theory. Valentine says:

"If anything, I think we may be the complete opposite in that we react faster (to national markets)," he said, noting the region's heavy reliance on the tourism and real estate sectors.

"We'll do really well when things are good, and we'll feel it very quickly when things dip," Valentine added. "That's because our industries aren't too diversified. If consumption spending from other markets dries up, we may feel it more than other places because we depend on it."

He's right. There is precious little in Bend or made in Bend that people need. A lot that people want - vacation homes, recreational opportunities, cute boutique wares, casually elegant cuisine. But not so much that they need.

The president of Prineville Bank is quoted as saying: "You can't tell the people that are retiring to not age ... and many of them will continue to move here. The housing market just needed to stabilize, and we feel the current inventory can be absorbed through the region's normal growth. It'll just take a little time."

It will take a while before people stop with the "Baby Boomers Will Save the Day" stuff. They may yet save the day. But our local economy, the way it's dependent on real estate, needs people to move here every single day. If they eventually move here, that's great, but we've already seen a 60% drop in sales. People's finances are withering on the vine like a grape in a Terrebonne frost. My prediction? The collective decision to move to Central Oregon to retire has been put off for a year or two. The theory that retirees will preserve the market peak is flawed - what kind of idiot wants to purchase a retirement home at a market peak? The whole thing about retirement is that you're on a fixed income the rest of your life. The reason why, in the past few years, so many people bought the houses in Bend that they'll eventually retire to is because they thought prices would just go up and up and up. Not too many people think that any more.

Except one of the local Realtors quoted in the article "Area Economy Cools After Run-Up." "He expects most of the housing inventory will be absorbed by the first half of 2007 and as Central Oregon's population increases, more housing demand will result. 'We'll see a dramatic upspike in the (beginning) of 2008 in terms of (the average sale price of homes),' he said." OK, can't blame him for trying to bring back a little of the urgency that drove the market over the last couple years, but predicting a "dramatic upspike" in 2008 is just a wish, pure and simple. There's no basis to predict that. None whatsoever. Although I think it's safe to predict that if the housing inventory gets absorbed in the first six months of 2007, it'll be at "dramatically reduced" prices.
December 10, 2006
14:52
Why I Blog Less Lately
» ‎ Bend, Oregon Housing Bubble

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Since my most recent blog-wipe, I've realized that a lot of people have come to count on this forum as a source of, well, not unbiased commentary, but at least differently-biased commentary on our local economy. There seems to be genuine concern that this won't continue forever. The concern is well-founded.

The reason I started the blog, as those who've read it from the beginning (prominent representatives of the local media included) know, is because growth-mania and, more specifically, real estate-mania had reached such a level that in the backyard barbequest of 2005, when my previously pregnant suspicion that the local housing boom was precariously dependent on a predicate housing boom in California and other places gave birth to a full-blown conviction that our entire local economy was becoming so oriented towards building and selling houses and creating amenities for a population that hadn't even moved here yet that as a community, we were risking a serious economic day of reckoning if the particular economic conditions that drove people to move here, flush with equity, ever changed.

I kept hearing the drumbeat of "this is a desirable community" over and over again. Friends and relatives put all their cash, and borrowed more money, to invest in local real estate. And people made money. Many put that money right back into the game. It reached a level, at least in my circle, that if you brought up, ever-so-subtly or gently, that the party might end someday (not even soon - just someday), people just didn't want to hear it. And I'm not talking about newcomer carpetbagger-types chasing a growth opportunity. I'm talking about people who've lived here 20-30 years. People who were born here. People who went to school here. They didn't have a "big picture" view of what was happening. They thought, quite honestly, that the outside world had finally figured out that this is the best place in the world to live, and that now that the word is out, it'll be a perma-boom forever.

And it's interesting that if you look at the people who are trying to stop development and change, like the Broken Top people trying to stop a development between them and the mountains, or the Overturf Butte people trying to stop cellphone towers from being built, or people downtown who are trying to find a "permanent solution" to the Mirror Pond siltation problem, or the people trying to stop canals from being piped, it's the people who moved here recently. They bought a product - Bend 2003, or 2004, or 2005, and that's where they want to stop the clock. People who've been here most or all of their lives have stopped caring about "preserving" Bend because if you've been here that long, Bend looks nothing like the Bend of their youth. If you're, say, 30 years old, and you grew up in Bend, the one constant has been drastic change. Let the Deschutes run its natural course through downtown? Sure. Chain stores instead of "unique," "whimsical" shops? Whatever.

Anyway, I digress. A big reason why I wiped the blog is because many of the things that have been predicted here are coming to pass, and will come to pass. I don't want the attention that comes with being right. And I don't think that talking about an end to the boom is taboo anymore. It's the talk of the town. Sure, there are some folks around here who have their convoluted theories about generational demographics, telecommuters, Bend becoming the "bargain Aspen" and so on, that justify the Perma-Boom idea. But in any town with as many Realtors and builders as we have, and with a 60% year-over-year drop in sales of homes, there are plenty of people who know exactly what's going on. And they may have not known what was going to happen, but they know what's HAPPENING, and they aren't idiots.

I don't want to be the chronicler of the downturn. Am I immune to Schadenfreude? No, sure, a part of me likes to see those who were SO sure that taking out home equity loans to buy bare lots and multiple homes in subdivisions, as well as cars, snowmobiles and overseas vacations, now somewhat humbled by the downturn. But if you're in way over your head in debt and poorly-timed investments, the hassle of dealing with that is punishment enough.

And as far as being a foil to the local media is concerned, I think that they themselves are figuring out what they want to be. Are they serious news organizations serving a metropolitan area of over 150,000 people with an obligation to serve the news straight, or are they resort-town mouthpieces for the Chamber of Commerce with an obligation to keep up the appearance of a prosperous, safe, growing community in case a tourist picking up the paper or flipping on the TV in his hotel room might be thinking of buying property here?
December 07, 2006
14:14
We're Becoming Redundant
» ‎ Bend, Oregon Housing Bubble

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One post that resonated with me, and perhaps best expresses one of the reasons why I wiped the blog, was one by "P", where s/he said "When you're a bear in a collapsing market, you're redundant."

After we beat up on KTVZ for its sunny-side-up piece on the local residential RE market, I thought to myself, "why?" The story won't have any real effect. It's a local broadcast. We have something above a 70% homeownership rate locally. Pretty much everyone locally who can buy a house here has one. KTVZ was just trying to make people feel good during the holiday season, not pump the market. Not even the most bullish bulls think that we can unload our inventory buildup on locals and maintain prices (because, umm, that means people would have to be able to afford their homes on local incomes).

It used to be that the bubble blogs, be it national or local, scoured the Web for juicy quotes about trends in RE, looking for cracks in what was perceived as a media whitewash. Sometimes there would be a telling quote buried deep in a story with an innocuous headline. Now the L.A. Times and N.Y. Times have stories right on their homepages every 10 days or so with headlines as bullish as it gets. "Median Prices Mean Little." "Nationwide Home Prices Fall." BusinessWeek put an illustration on its cover a couple months ago with a snake constricting a house. You don't have to go looking for bearish RE stories anymore - they're right there in the supermarket checkout or the coffeeshop.

So what are we trying to do here? The public-service aspect of bubble blogs has more-or-less fallen away. You'd almost have to isolate yourself deliberately from all media outlets but KTVZ and The Bulletin, or from anyone else who doesn't get their news just from these two outlets, to think the boom is going to continue. By the looks of the inventory and sales figures, the target markets of Bend real estate don't need any extra convincing not to buy - they're NOT buying in droves.

So what about our local media? Frustrating, right? I think we just have to accept that Western Boosterism isn't just some temporary approach that KTVZ and The Bulletin have put in place to try to keep the party going. It's just the way they always have, and always will, report on local economic developments. Even if Bend median home prices fall back to 2000 levels and half of downtown is boarded up, they'll find a silver lining. Guaranteed. How do I know this? Because this is how they reported on the local economy back in the '80s when half of downtown really was boarded up.

So forgive me if I don't have the fire in my belly that I had before - it's just that I don't think there's much of a point now, and even more so in the very near future, to beating this dead horse.
December 06, 2006
14:11
Bets and Occurrences
» ‎ Bend, Oregon Housing Bubble

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First of all I'd like to welcome back one of our much-beloved resident bulls, Life Is Good (LIG). Now I'd like to quote from one of LIG's recent posts, addressed to the ahead-of-his-time frequent poster CACB Shorter:

CABC Shorter; I wish you the best with your investments, but had to speak up after hearing many times that CABC hadn't collapsed "yet", as if it was inevitably headed down. It's at least as likely that the stock will double (which it has several times) as that it will drop 50% (which it never has). You are a hero to many on this blog for having the balls to bet against Bend real estate. I admire your courage as well, but have to note that your bet is not working.

You are a hero to many on this blog for having the balls to bet against Bend real estate.

I agree with LIG that CACB Shorter is ballsy for putting his money where his bear is. But is CACB Shorter in the minority in betting against Bend real estate? I would argue that CACB Shorter, sure, has made a positive bet on a negative occurrence, but there are many others who've bet against Bend real estate, albeit in different ways.

Let me define my terms:

"positive bet" = buying or selling

"negative bet" = not buying or selling

"positive occurrence" = market prices rising

"negative occurrence" = market prices falling

I think most of us agree that a boom real estate market would be characterized by a lot of Positive Bets on a Positive Occurrence, i.e., people buying property in anticipation of prices rising further.

Our current market in Bend is characterized the other three types of bets:

Negative Bets on a Negative Occurrence - the simplest way to make this bet is just not to buy real estate in Bend. In other words, you have the financial ability to buy, but you're waiting or you just have no desire to buy any.

Negative Bets on a Positive Occurrence - the people making this bet are the ones who own Bend property but who aren't selling. By holding the property, they're betting that things will get better.

Positive Bets on a Negative Occurrence - these are the non-forced sellers. By selling now, they're showing that at this point, they'd rather have the money than the property. The forced sellers aren't making a bet because they have no choice (bet = choice).

Of course, all of these bets are "in effect." What I mean by that is that by their actions, the bettors are effectively making this bet in an economic sense. It doesn't mean that everyone who's living in Bend and paying the mortgage is debating every month whether to hold or sell. And it definitely doesn't mean that everyone who's not buying Bend real estate is biting their fingernails waiting for prices to fall. Most of the people who could buy Bend real estate but aren't have never heard of Bend. And I guess that's the point of the constant roadshows our local economic development people are constantly going on.
December 04, 2006
14:08
On Bearishness
» ‎ Bend, Oregon Housing Bubble

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I'd characterize myself, and most people posting to this blog, as bears.

What is an economic bear?

I think the common misconception is that all bears are pessimists. Bears can definitely be pessimists, the type that see the glass half-empty. But I think that non-pessimist bears are realists: they see that the glass has half the amount of water that the glass can hold. They prefer a full glass, of course, but they prefer the half-glass to one that is empty. And they're more likely to find a way to live with that half-glass, and preserve it, then to take a chance that might fill the glass all the way, or might empty it.

OK, enough with that analogy. What are bears' shortcomings? They might lack imagination. They might focus on the facts and figures and cash-flow models and not pay enough attention to "soft" factors like trends, tastes, human desires and other things that move an economy just as much as the hard realities of incomes, expenditures and productivity.

What's clear is that, in a boom, bears miss opportunities. They typically dislike borrowing and leverage, as they are not risk-takers. They like to buy assets at bottoms, and tend to unload and distrust any asset that's already had a big runup.

In this most recent economic boom, it's been especially tough to be a bear because most of the traditional bear investments have performed poorly: interest-bearing deposits, Treasury securities, safe corporate bonds. Precious metals are a bear investment too for those who think that the dollar is overvalued, but even gold, until recently, was headed down. Easy borrowing and low interest rates have wiped out the economic benefit of saving, driving investments into vehicles that are supported more and more by "you gotta have faith" and "it's a new paradigm" ideas and less and less by economic fundamentals. Due to the greater ease in raising funds, investments that would have never gotten off the ground in a down-cycle have been able to realize decent returns as long as the money keeps coming in. Kind of like a pyramid.

Bears tend to scoff the minute they hear "it's a new paradigm!" They tend to believe that the future will look a lot like the past. However, from time to time there are true paradigm shifts, and bears typically miss these.

So yes, there are a lot of bears sitting on their bank accounts and blue-chip stocks, and renting houses and waiting for a down-cycle. Because that's when their investment philosophy bears fruit. The idea is, when the bulls are trying to extricate themselves from mountains of debt and unload leveraged assets purchased at market peaks, they will come along with cash and scoop up deals.

To a certain extent, sure, you can say that an aversion to debt is a kind of pessimism. In a certain sense, when you're borrowing money you're saying "I don't have the money today, but I will later. Tomorrow will be better than today." At worst, a refusal to borrow means that you think that tomorrow will be worse than today, so the best thing to do is spend (at most) the money you already have. But if you have a more charitable view of bears as realists, the fear of borrowing is based more on uncertainty - how do I know that tomorrow will be better than today? They value what they have more than they value the chance of having more.

Obviously our economy needs bulls more than bears. Wanting more, and taking risks to get more, is the American way. Imagination, risk-taking and a dream of a better future are what have made our country great. But a lot of times people are glad that their father or mother was a bear, or their spouse, when it turns out they can maintain their lifestyle during a recession because they aren't in debt to the gills. To everything, there is a season, I suppose.
November 30, 2006
20:23
Refreshing the Blog
» ‎ Bend, Oregon Housing Bubble

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Long- time followers of this blog know that from time to time, I clear it out and start anew. I think that time has come again, as recently the tone have become more strident and angry (myself included). I'll start with some new economy posts in a few days when I have some time.
November 26, 2006
14:41
The Lifestyle Businesses
» ‎ Bend, Oregon Housing Bubble

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So posters have pointed out this Bulletin article about a "consultant for the specialty coffee industry" who helps people set up new "independent" coffeeshops in Bend, cheerfully going about his business even though he thinks most new coffee businesses will last no more than a few years.

Frequent poster Timmytoes calls businesses like these -- coffee shops, novelty stores, clothing boutiques, wine shops -- "vanity businesses." I would call many of them "lifestyle businesses."

OK, so you've decided to check out of the rat race in the Bay Area, L.A., Seattle or somewhere else. You're coming to Bend. This is gonna be great: you'll snowboard in the winter, golf in the summer, be fit, feel better, enjoy the fresh air, meet some cool people. When you're not kayaking or snowshoeing, you'll have a few cold microbrews at the pub, maybe have a shot of handcrafted vodka, then sample some unpretentiously elegant cuisine. Appreciate quality food and spirits. A total change in lifestyle, from doing what others want you to do, to doing what you want to do.

It sounds mouth-watering. But what to do for work? It has to be something cool. This is one reason why we see so many often-empty cute cafes, home-furnishing, whimsy and art shops and coffeeshops. You don't see many folks falling in love with Bend and saying "I'm going to open a machine shop" or "I'm going open a grocery distribution warehouse" even if those are exactly the businesses we need around here.

Because the plethora of "do these guys make a profit?" businesses around here were opened not because of a perceived need, but because that's the kind of business the owners dreamed of running. I repeat: businesses opened for the needs of the owner's soul, not to fill an economic niche.

When I hear vanity business, I think of some rich guy's wife who sits in her antique shop or art gallery sipping coffee heavily laced with Bailey's. The "business" is really more of a place to occupy her time and put her in a position to meet people now that she's been moved here in midlife away from her friends and favorite activities. Profits are irrelevant; the lease is a throwaway.

But I think that the lifestyle businesses are really aimed at making a profit - the business itself represents the "new life" that the owners are developing for themselves. As in - "honey, I am tired of my Blackberry, tired of these suits, tired of the stress and responsibility. Remember when we said how great it would be to just own a little coffee shop in Bend? Let's do it." As in - WAS: financial analyst in San Francisco. NOW: roasts coffee in Bend. WAS: mid-level manager in Boston tech company. NOW: opening an upscale bakery. Many of these businesses, like the coffee-roasting business described in the linked article whose owners plan to "educate" the locals on coffee with organized "coffee tastings," operate on the premise that you can't lose if you just stay one yuppie step ahead of gentrification, and come up with something even more sophisticated and refined than is here now. The idea, I guess, is to be "ahead of the curve" so that when people in Bend become so debauched and jaded that they're ready to pay $8 for a slice of mint meringue and $4 for a cup of specially-blended white tea, you'll already be there to sell it to them.

I personally think that gentrification peaked along with the housing boom, sometime in late 2005-early 2006, and right about now (and even more into next year and the year after) you'd have more luck selling people an all-you-can-eat spaghetti dinner than braised trout with pine nuts.

The people who find our area to be "paradise" not only mean that they like the trees, the mountains, the desert and the climate. They mean they like the idea of working less, playing more, and appreciating food and drink without the hassles and stress (but without sacrificing culture and sophistication). They liked that idea before they moved to Bend, but they decided this is the magical place where all that is actually possible, having seen others who appear to be living this life here. Who doesn't like that idea? My feeling, though, is a lot of the out-of-area dreams that we've been seeing brought to life before our eyes in our community are funded with home equity loans and the proceeds of the sales of out-of-state property sold before moving here. Or they're funded with people's life savings and 401(k)s.

However they're funded, they've turned what normally is an economically productive activity (starting and operating a business) into a consumptive activity, which, economically speaking, benefits the coffee consultants, the downtown landlords, the used restaurant-equipment brokers, but not (most of) the owners or, really, consumers. Which is why an economic slowdown can be a very positive thing. It reduces waste and concentrates resources where they're most useful. In a downturn, businesses survive if they serve a need. But the businesses that serve mainly their owners' egos and lifestyle ambitions, well, they'll survive as long as their owners are willing to continue to pay for the privilege.
November 25, 2006
10:30
A local crash has already happened.
» ‎ Bend, Oregon Housing Bubble

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To recap: Bend home sales in October are down 60% below last October's and are like almost 50% below October 2003's, which was a pretty bubbly year but not too bad. Inventory is up >250% since the beginning of the year. And at the beginning of the year we were already seeing inventory shoot up from the fall on (I think I started blogging in October or November 2005, and the posters and I were already remarking by January how inventory had shot up).

BUT, as a number of remaining optimists say, median prices still show price gains.

Whatever. That's what I say. I think that the median price means next to nothing when sales are at a crawl and there's so much inventory on the market. Who knows what the mix of houses sold was like? How does the median price of the 109 houses that did sell affect the value of the 2000 that didn't? I mean, houses are (more or less) unique. If anything, that means that maybe the cream of the crop sold, and 2000 dogs didn't. If you look at it this way, it means the houses that didn't sell are probably worth less.

The important thing is that, as reported in The Bulletin a little while ago (it's linked somewhere in this blog), real estate construction and sales make up about 20% of the local economy.

20%. So when sales fall 60%, then we have, ballpark, about a 10% recession in the local economy. Ten percent less money flowing around. At least. I mean, that's a crash.

There are Realtors who haven't had a sale since spring. There might be some who haven't had a sale all year. And these are folks who probably, if they were any good, pulled down a high 5-figure or even 6-figure income in 2004 and 2005. They have homes of their own, nice cars, kids in school wearing nice clothes, the whole shebang. There are plenty of husband-and-wife teams in real estate sales around here. Heck, there's apparently even at least one husband, wife and son team. Obviously with 60% less turnover out there, some of these Realtors are hurting bad. Plenty of them were (and some still are) honest-to-goodness as optimistic as a person can be about the short-, medium- and long-term prospects of the Central Oregon economy, and have been spending accordingly, as if tomorrow will be (just has to be!) better.

There are plenty of small builders like the guy profiled in The Bulletin not long ago, who had no idea that any of this was coming and kept plowing every cent they could earn or borrow into local real estate construction and investment even up through this summer, when anyone with a wet finger in the national or even West Coast economic wind knew that a "wait-and-see" attitude might be called for in the real estate game.

And then of course, totally separate from real estate, some workers in Culver (Seaswirl) got their pink slips last week and some workers in Bend (Columbia Aircraft) got their hours cut.

To those of you who think this is too doom-and-gloom: don't read it. There's a time and place for economic pessimism, and the time is now and the place is Bend. Why is economic pessimism a good thing? Well, for one thing, the Realtor mom and dad who are just SURE that things will pick up in spring might refrain from buying a Playstation 3 on Ebay for their kid for $1500 if they learn the news that the Big Spring Turnaround will occur just about the same date as the blue moon that's scheduled to occur. People might save. People might insist on less risky mortgages. People might have money left over for health insurance. People might slow down the HELOCing of their homes.

All of us who are smug around here for not being leveraged to the gills in Central Oregon real estate with the exit door nowhere in sight have to remember: we live here too. The ant will end up having to help the grasshopper. The more that informed people make smart, self-interested economic choices, the less the rest of us have to pick up the pieces and deal with the aftermath.
10:08
Prediction: "The Shire" will not be completed
» ‎ Bend, Oregon Housing Bubble

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Some posters on recent threads have talked about the Lord of the Rings-themed housing development The Shire, with some mentioning that it will serve as a standing reminder of the excesses wrought by this housing bubble.

I don't think it will serve as a standing reminder of anything, because I don't think it will be completed. I think frequent poster Paul has come to the same conclusion. I have no inside info, just some deduction:

The developer, I think, is out of money. One reason I think that is because every developer with financing has been working triple-time this summer and fall trying to get their projects completed and on the market, apparently in anticipation of falling prices. Another reason is that he's had free, quite-positive publicity this whole summer on blogs and in the news. (Say what you will, the concept is pretty unique.) I'm sure he's had many inquiries. If he had financing he would be racing to finish and sell some homes to capitalize on the buzz. Finally, not only do I not think he has funding, I don't think he'll get more funds to finish the project. Not unless the houses are pre-ordered with big deposits and ironclad purchase contracts, in which case he'll have the deposits to work with, plus the contracts to reassure the bank with.

The thing is, I think The Shire is a pretty cool idea. But then again, 20 years ago I thought Michael Jackson was really cool. Ten years ago I thought Seinfeld catchphrases were really cool. My tastes changed. It's one thing to think "that's neat" and another to take out a 30-year, $700K mortgage to buy one. I think banks won't finance the construction of an experimental project like this on spec in this economic climate.

I bet what the developer's been trying to do all summer is line up pre-construction buyers. I'm sure this isn't easy: the project is really only cool if the whole thing gets done, and no one wants to pay top dollar for a huge fake-thatched-roof house and then 18 months later, when the developer can't sell out, the CCRs are abolished and you end up with a Hobbit house in the middle of an everyday housing development. Probably everyone who's interested in buying is like "call me back when you have commitments to fill the place up 75-80%."
November 20, 2006
22:22
Measure 37 will be worse on the way down
» ‎ Bend, Oregon Housing Bubble

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It just occurred to me - what happens when the most profitable use of land stops being construction of single-family residences, which, while sprawly, are fairly unoffensive, and starts being used-car lots, flea markets, motorcycle dirt tracks, etc.? I think the effects of Measure 37 in a downturn will be much different than in a boom.
15:17
Bend residential RE sales down 60%
» ‎ Bend, Oregon Housing Bubble

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From KTVZ.com, Nov. 19:

"October home sales were off about 60 percent from the peak of Bend's real estate boom a year ago ... [o]nly 39 west Bend homes sold last month, compared to 112 in October 2005, a 65 percent plunge, while the 62 homes sold on the Eastside were off 54 percent from the 95 sales seen last year. Overall, there's more than a year of housing inventory on the market, with the biggest run-up on the Westside, at 17 months of inventory[.]"

What does this mean?

Given that rents have not been going up, this means that most likely, population inflow has stalled and the area is overbuilt. If people were still moving here at the pace they were in the past few years, either the houses would be selling or there would be a big uptick in demand for rentals, which would force rents up.

60%. I am surprised. Given a typical 60-day closing, this means that sales really dropped off in the late summer.

Anyone want to try to put a positive spin on this? I don't know that even the 300-sunny-days-a-year sunniest optimist can paint a 60% dropoff in sales as a "return to normal."
November 08, 2006
12:33
The downside of being discretionary
» ‎ Bend, Oregon Housing Bubble

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Just recently had another local blogger say that she's "addicted" to my blog. Me too! I keep thinking I'll shut it down, because the purpose for which it was created (to provide people with an outlet to discuss the housing bubble in a real-estate-obsessed town where such talk was frowned upon) is now just about gone - it's become more socially acceptable around here to say "hey, the party's
November 06, 2006
12:43
Big downward movement in CACB stock
» ‎ Bend, Oregon Housing Bubble

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Trading is just about over, today. It appears that in after-hours trading over the weekend, CACB stock went from over $36 Friday afternoon to less than $28 this morning, and now is creeping towards $29 towards the end of the day.
October 29, 2006
21:08
Local economy "unscathed so far" by big construction dip
» ‎ Bend, Oregon Housing Bubble

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Interesting article in the Sunday Bulletin. Highlights: - big builders pulling millions of dollars in projects and money off the table quickly; - smaller builders not slowing down so much; - investors' presence "greatly reduced or gone"; - construction permit activity way off last year's peak; - construction employment up over last year; - commercial construction not affected by downturn as
October 26, 2006
13:17
The prospect of degentrification
» ‎ Bend, Oregon Housing Bubble

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One thing we haven't really touched upon in this blog, and I can't recall being touched upon too much in our local media and discussion forums, is the possibility that the gentrification this town has undergone in the past 10 years or so is reversible at all. If anything, it's been the opposite: gentrification is treated as a permanent phenomenon, a solid paradigm shift. As in, "well, we'd
October 25, 2006
9:30
The lawsuit phase begins in Bend RE
» ‎ Bend, Oregon Housing Bubble

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The header above is clickable and links to a Bulletin story about a buyer suing to pull out of a deal to purchase land for a Bend single-family home development. Can you imagine that? Pulling out of a deal to buy land in Bend? Yeah, it's happening. The next phase: builders skipping town with unpaid bills to subs and suppliers. (Belated hat tip to Paul - we posted our posts almost
October 18, 2006
13:35
Markets from an economics view and from a salesperson's view
» ‎ Bend, Oregon Housing Bubble

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One of the most fascinating things about economics is that it is a kind of combination of mob psychology and mathematics. These seem like dueling opposites, but they come together in economics. The combination of the two is, surprisingly, constant enough over a long period of time that people are able to speak of "economic laws." Of course, these laws are often broken over the short period as the
October 15, 2006
7:02
I had an anonymous post recently that ...
» ‎ Bend, Oregon Housing Bubble

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I had an anonymous post recently that asked: Economy Man, I've seen many comments on your blog that paint developers, builders, and investors as evil, greedy, money grubbers, who price their product too high, and overproduce. I believe these people are neither saints nor sinners,they are businessmen who have obligations to shareholders to maximize margins and capture market share, the same as in
6:31
Scary "thugs" in Downtown and Drake Park
» ‎ Bend, Oregon Housing Bubble

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If there's anything that doesn't go well with the image of a lovely, family-friendly, affluent town in a resort-like setting, it's young people with tattoos, piercings, skateboards and bikes cursing and smoking in charming downtown Bend and beautiful Drake Park. Are they selling drugs? Are they robbing people? Opinions differ. First of all, for you newcomers, there's been disgruntled youth
October 07, 2006
5:31
Disgruntled poster
» ‎ Bend, Oregon Housing Bubble

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A few days ago and a couple threads ago I had this anonymous post: It is strange to see so many people actively working to create a housing price drop that they all swear will be catastrophic for this town. I have read all of the posts currently on this blog, and like every other housing-related blog, it is full of viscious vitriolic crap aimed not at EDUCATING, but at ACHIEVING a desired end.
5:30
Central Oregon Builders Sponsor City Council Candidate
» ‎ Bend, Oregon Housing Bubble

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The Central Oregon Builders Association has sponsored one of its directors as a City Council candidate. The Bulletin did a story about it that made the whole thing sound a bit sinister. The only sinister thing that I see about it is that, according to The Bulletin's deep-digging reporters, the political action organization Central Oregonians for Affordable Housing is actually a front for the
September 27, 2006
19:54
Bend plows ahead with "affordable housing" boondoggle/hornswaggle; local interests want city to lend into bubble
» ‎ Bend, Oregon Housing Bubble

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About a month ago, I said "Mark my words... this whole 'affordable housing' nonissue is building up to a corrupt, back-scratching giveaway of city-/county-owned land or taxpayer money to some builders to construct a ghetto of 9,500 crappy apartments that will turn into a new slum in a town going through a painful post-boom recession." I assumed, like many of you may have assumed, that the utter
September 23, 2006
7:08
Who's a contrarian now?
» ‎ Bend, Oregon Housing Bubble

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Not so long ago (six months), but seemingly in a different century in terms of the prospects of our local residential real estate market, The Bulletin published an article in March 2006 calling local radio talk show host and money manager Bill Valentine of Valentine Ventures the "Real Estate Contrarian" for wanting to do a sale-leaseback arrangement where he and his family would get the benefit of
September 19, 2006
21:02
The Blameless
» ‎ Bend, Oregon Housing Bubble

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Speaking regarding the national (or even worldwide, according to some) property bubble... It is generally acknowledged now, even by the National Association of Realtors, CEOs of major homebuilders, economic analysts and even politicians that real estate in the US is looking at, best case, a flattening of residential real estate values for a considerable period of time, or, worst case, a
6:43
U.S. Senate Hearings on Housing Bubble Continue Tomorrow Morning - Watch Live on C-SPAN 2, Channel 19, 7 a.m.
» ‎ Bend, Oregon Housing Bubble

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Committee: US Senate Committee on Banking, Housing, and Urban Affairs Title: Calculated Risk: Assessing Non-Traditional Mortgage Products Date: 9/20/06 Time: 10:00 AM Washington, D.C. time (7:00 AM Bend time) Witnesses Panel 1 Ms. Orice Williams, Director, Government Accountability Office Ms. Kathryn E. Dick, Deputy Comptroller for Credit and Market Risk, Office of the Comptroller of the
September 12, 2006
16:14
Jackson County, OR median home price falls year-over-year for first time since 1984
» ‎ Bend, Oregon Housing Bubble

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Hat tip to anonymous poster.
16:10
U.S. Senate Hearings on Housing Bubble Begin Tomorrow Morning - Watch Live on C-SPAN 2, Channel 19, 7 a.m.
» ‎ Bend, Oregon Housing Bubble

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Hat tip to anonymous poster. Committee: US Senate Committee on Banking, Housing, and Urban Affairs Title: The Housing Bubble and Its Implications for the Economy Date: 9/13/06 Time: 10:00 AM Eastern time (7:00 AM Bend time) It will be available live on C-SPAN 2, Bend Cable Channel 19. I note, with surprise actually, that the hearing isn't called "Is There a Housing Bubble? Possible
September 08, 2006
15:36
The Bend City Planning Department
» ‎ Bend, Oregon Housing Bubble

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It's been reported that Bend has issued around 6,000 building permits a year over the last few years. The City of Bend Building Division's website says the same thing. (It also says, helpfully, "We now take Visa/MasterCard!" So now, from the permitting stage on, the entire homebuilding cycle is credit-based.) It's like an assembly line. Official Building Division forms refer to the
14:58
Juniper Ridge
» ‎ Bend, Oregon Housing Bubble

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So first, under pressure from the Chamber of Commerce, Stockbridge Capital, a fund that manages pension-fund money, pulled out of Juniper Ridge. As The Bulletin reported last Thursday, "[t]he city's negotiations with [the master developer] have drawn a storm of criticism from the Bend Chamber of Commerce and the development community. The chamber said the city was offering [the master developer]
September 04, 2006
8:03
A critique of media coverage of real estate
» ‎ Bend, Oregon Housing Bubble

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If you spend way too much time surfing the bubble-blogosphere and reading mass-media stories on the economy and real estate, as I do, you've noticed a sea change in the last couple months. In July 2005, TIME magazine had a cover story with a drawing of a man hugging his house. It talked about the nationwide real estate boom and how millions of Americans had experienced huge wealth gains by doing
September 03, 2006
8:30
From The Bulletin: In Oregon, only Portland has a higher cost of living than Bend
» ‎ Bend, Oregon Housing Bubble

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Click here for article Nothing surprising about the information, except for some people the revelation that Bend's housing cost index is "one of the lowest in the state" might be something of a surprise given the constant "affordable housing problem" drumbeat by The Bulletin and The Source last month. Frequent readers, however, will know that this blogger has always maintained that housing in
September 02, 2006
12:00
Post YOUR predictions here!
» ‎ Bend, Oregon Housing Bubble

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I was just looking over my blog and noticed that it was the week of May 7 that Bend's inventory (per Realtor.com) went over 1,000. Now it's at over 2,200, with a big jump in listings right before the Labor Day weekend. I've made a lot of predictions on this site, but I never came right out and solicited the predictions of you, my readers. I have a few questions for you. 1. When will Bend
August 31, 2006
23:25
Links for those following the Bend RE soap opera
» ‎ Bend, Oregon Housing Bubble

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Draining the Money Bin: Homeowners start sweating as the boom loses steam, by H. Bruce Miller After the Boom, by the Source Editorial Board And for those of you following the Juniper Ridge situation, read The Source's "Boot" of the Bend Chamber of Commerce for their pull-out-the-stops (and successful) campaign to queer the deal with the Juniper Ridge investors, and the reply by the Chamber
August 30, 2006
19:59
September 1, 2016
» ‎ Bend, Oregon Housing Bubble

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Bend population reaches 100,000 University paved the way for economic resurgence By John Doe September 1, 2016 5:00AM PST U.S. Census interim figures confirmed a long-expected milestone as the population within the Bend city limits reached an estimated 100,950 this year. Countywide, the population hit an estimated 218,700, making Deschutes County the fifth most-populous county in the
August 29, 2006
6:28
Developer: 40% of NW Crossing purchasers were flippers, "longer-term investors" or second-home buyers
» ‎ Bend, Oregon Housing Bubble

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From today's Bulletin. "Speculators snapped up 'probably more than 10 percent' of [Northwest Crossing]'s homes, while longer-term investors and second-home buyers snapped up possibly 30 percent more," says president of Brooks Resources, NW Crossing's main developer.
6:10
Irony Journal: residents of one gated golf course resort protest construction of another gated golf course resort
» ‎ Bend, Oregon Housing Bubble

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From today's Bulletin. The reason: too many trees would be cut down! I guess most of the folks at Broken Top didn't see what was at the current Broken Top site before their houses and golf course were built, but I did, so I'll tell you: trees. Naturally, the real reason for the conflict is that the folks at B.T. don't want to look West and see a hillside of homes with better views messing up
August 26, 2006
2:33
About the weather...
» ‎ Bend, Oregon Housing Bubble

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I had a poster last night say "I moved here for the weather and recreation opportunities...thus far, the weather has not been nearly as nice as I was led to believe by friends who lived here" I've said this before and I'll say it again. The weather in Bend is absolutely spectacular... FOR OREGON. They call this area "Oregon's Sunbelt," not The Sunbelt period. Quite honestly, as a native
August 25, 2006
21:52
How to short Bend's bubble.
» ‎ Bend, Oregon Housing Bubble

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A while back, one of my posters said something to the effect that he wished he could short Bend's real estate bubble.

You can - by shorting CACB (Cascade Bancorp), the parent company of Bank of the Cascades, which I think is a pretty close proxy for the bubble. Its stock price peaked in mid-August, and my guess is that it will be headed down further. It flew high for the last couple years lending into the Central Oregon building boom. It recently had a fairly smooth acquisition of an Idaho bank, a move seen as diversifying its geographic exposure, but as you can see from this article, it may have diversified itself right out of the frying pan into the fire. While its lending base gets riskier, it's also facing an onslaught of competition by out-of-area banks that have moved into Bend and gone on a branch-building spree and have begun to offer private banking services to wealthy depositors. CACB, on the other hand, hasn't pursued the branch-on-every-corner strategy and has as of yet shied away from offering private banking. It also has paid out dividends the last couple years. It might end up wishing it had retained those earnings as the lucrative construction lending it has done of late dries up and becomes riskier.
21:36
Advice for Central Oregon Homesellers
» ‎ Bend, Oregon Housing Bubble

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To those who are "testing the market" and don't need to sell: If you are independently wealthy or have at least one income-earner in your household with a job not dependent on real estate (preferably a state or federal job), do yourself and your neighbors a favor and take your house off the market and stay put. You'll be OK. If both income-earners are one of the following professions,
August 22, 2006
23:39
Real Estate as a Bubble Asset: Part 2 in an analytical series (next: the Permanently High Plateau)
» ‎ Bend, Oregon Housing Bubble

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Why has a real estate bubble formed? It's a combination of the financial and psychological factors discussed in the next post, touching on the argument for a Permanently High Plateau, plus fear. Fear of missing out on a great financial opportunity, fear of not being able to realize long-held dreams of big family gatherings and vacations in a place all one's own, fear of not keeping up with the
August 16, 2006
22:22
The Philosophy and Ethics of Bubble-Blogging: First in a Series
» ‎ Bend, Oregon Housing Bubble

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I haven't posted in a few days, not because I've been preoccupied with non-blogging activities, but because I've been considering what I want to do with this forum. Lately the mainstream media have picked up and run with the real estate bubble story. Newsweek published an article; so did Time; so did USA Today. The national bubble blog Housing Bubble 2 has now focused its powerful bubble rays on
August 11, 2006
5:43
The Bulletin: regionwide average home sale price drops 5.6% in one month, sellers seeking buyers "with a bucket of money and a box of stupid"
» ‎ Bend, Oregon Housing Bubble

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Click here for today's story in The Bulletin: "More homes on market in region" "The number of homes for sale in Bend has risen 249 percent since the first of the year, overwhelming the flow of buyers that has remained strong through most of the year, but not strong enough to keep 'For Sale' signs from cropping up like summer dandelions." "[T]he regionwide average sale price dipped from $393,000
August 10, 2006
3:06
Thread for posting C.O. real estate market observations
» ‎ Bend, Oregon Housing Bubble

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Please continue to post your observations on the Central Oregon real estate market. Let's try to continue to anonymize references to individual properties and owners (masking numbers in addresses, not posting owners' names). The following information is of special interest: - builder incentives and discounts: where? How much? - instances of builders undercutting owner-occupants' selling
August 06, 2006
2:23
Mark my words...
» ‎ Bend, Oregon Housing Bubble

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... this whole "affordable housing" nonissue is building up to a corrupt, back-scratching giveaway of city-/county-owned land or taxpayer money to some builders to construct a ghetto of 9,500 crappy apartments that will turn into a new slum in a town going through a painful post-boom recession.
August 05, 2006
13:23
The 2000 Realtor.com listings for Bend DO cover just Bend
» ‎ Bend, Oregon Housing Bubble

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There was a bubble-denier poster to this blog a while ago who claimed, when I posted the statistic that Bend had 1,885 listings for its 75,000 denizens, giving a listing-to-human ratio of 1:39, that "Realtor.com includes Sunriver, LaPine, Tumalo, Deschutes River Woods, and other surrounding areas" and that "[i]t is necessary to either change the population figure used to 200,000 people (Deschutes
11:44
The Bend Bubble Blame Game and the Symbolism of "Affordable Housing"
» ‎ Bend, Oregon Housing Bubble

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A couple of editorials came out in the last couple days... The Bulletin says "[t]here's no doubt the Central Oregon housing market has changed in recent years, with prices rising more quickly than incomes have. What's less sure is what's causing the increase, and, just as important, what can or should be done about it." The editors of The Bulletin, with no mention of speculative investment
11:37
People with MLS access: can anyone confirm that local inventory is at an all-time high?
» ‎ Bend, Oregon Housing Bubble

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Today I checked Realtor.com. 2,030 listings for Bend. Somehow I don't think this is the "Vision 2030" that the town's economic fathers had in mind! Can someone with access to historical MLS statistics confirm that we are at an all-time high for inventory in Bend / Deschutes County?
August 03, 2006
8:55
Federal Reserve Bank sends letter to banks warning of ARM risk; Central Oregon banks say "no worries"
» ‎ Bend, Oregon Housing Bubble

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Some of the calmest, most confident banks in the country are apparently in Bend, according to this Bulletin article available online and headlined "Area banks not worried about ARMs." When asked to their reaction to a July 28 Economic Letter from the Federal Reserve Bank of San Francisco reporting that there "is great uncertainty over how the future distribution of debt burdens will look. As
August 02, 2006
19:53
Central Oregon real estate market-watchers empowering themselves with online data resources
» ‎ Bend, Oregon Housing Bubble

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Posters on this blog are sharing tools and information to help each other learn about specific properties' assessed value and transaction history. An informed consumer is an empowered consumer. A couple of online resources that they're using: The Deschutes County Assessor's Office property records system - "DIAL" Realtor.com's "What's your home worth?" recent sales search function. I would
19:42
Prediction: housing bubble to be featured on next season of The Sopranos
» ‎ Bend, Oregon Housing Bubble

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For you Sopranos fans - I bet that the storyline next season has something to do with Carmela ending up losing a bunch of money on the spec house she's building because she didn't finish it before the Northern New Jersey Real Estate Bubble burst.
August 01, 2006
15:17
The people speak out: it's an underemployment problem, not a worker shortage
» ‎ Bend, Oregon Housing Bubble

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Regular readers know I don't think that we have an affordable housing problem or a worker shortage problem in Bend - we have an artificially, unsustainably and temporarily inflated cost of homeownership (while rents remain low) and we have a shortage of jobs that offer pay (and, well, a future) at a level that intelligent, educated, talented, ambitious Bendites can/will accept. There's also a
July 30, 2006
18:16
Redmond real estate agent quoted in The Bulletin: "investors are not buying here anymore and they’re also bailing out of their investments"
» ‎ Bend, Oregon Housing Bubble

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I think I said a long time ago, maybe back in the spring, that once even The Bulletin starts delivering negative reports about the local real estate market, it's time to RUN, not walk, away from putting money into the local real estate market. In addition to the quote from the Redmond real estate agent who spoke of investors "bailing out" of the local market (she also said "there’s a price
July 29, 2006
22:32
The fires
» ‎ Bend, Oregon Housing Bubble

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I remember the Awbrey Hall Fire in 1990. I grew up on the Westside, and in 1990 Mt. Washington Drive hadn't been punched through to Skyliner Drive. Our neighborhood was on evacuation warning because the fire was blowing through less than a mile west. The wind was blowing towards Sunrise Village and we didn't get evacuated, but everyone in the neighborhood was spraying down the bushes surrounding their houses. Our neighborhood was full of trees, but the houses didn't have the shaker roofs that caused problems in a lot of the houses that burned down. At night a girl I knew and I walked to the top of Overturf Butte (no houses up there at that point) and watched - the fire was glowing across the horizon from Shevlin Park all the way to the Deschutes - it even began to leap the river. The wind was blowing south so it wasn't very smoky in the downtown area - but you could smell it.

The next morning seemed like the morning after a nuclear war. The wind had stopped and the smoke was thick, moist and not going anywhere. It filled the house. Opening the windows did nothing, because it was even smokier outside. The water in the tap ran black. The smoke was so thick you couldn't see the end of the street. I don't remember what I did the rest of that day, but the whole neighborhood was walking around stunned - some people were wearing bandannas around their faces. The carpet, the furniture and all our clothes smelled like a campfire.

This post doesn't have anything to do with the economy. I think that the risk of forest fire is just what we deal with here. It's better than earthquakes or tsunamis.

One thing I will mention regarding fire danger and urban planning - if you look at the map of the fires in relation to the subdivisions that have been evacuated you can see that the subdivisions have a large number of homes on a large number of internal streets and cul-de-sacs, but only one or two outlets to a public road. I think this is one of the reasons why they evacuated these subdivisions so early. Back in 1990 they didn't evacuate my Westside neighborhood even though the fires were closer, probably because we were on the city street grid near the then-western edge of town and there wouldn't have been a big traffic jam even if people had to leave on 10 minutes' notice.
12:19
A poster asks: "What's a house worth if no one is buying?"
» ‎ Bend, Oregon Housing Bubble

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A very astute anonymous poster to this blog, who appears to have done his/her research on the Bend residential real estate market (attending open houses, tracking MLS prices and inventory, hiring a kid to count "for sale" signs, making detailed breakdowns of data by neighborhood) made some very interesting observations about the difficulty of pricing in a "transitioning" market, especially with
July 27, 2006
8:30
The Bulletin prints two articles about the nonexistent "affordable housing" and "worker shortage" problems
» ‎ Bend, Oregon Housing Bubble

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Two articles in The Bulletin today about the report that some local banks commissioned that indicated a "worker shortage" and lack of "affordable housing" in Bend, "Home prices deter workers" and "Economic leader says worker shortage could halt growth." As an explanation for new readers, I put those terms in quotation marks because there is no affordable housing problem in Bend and no worker
July 26, 2006
5:35
"The areas with declines have some things in common: swelling numbers of houses for sale, slowing sales and lots of new houses on the market."
» ‎ Bend, Oregon Housing Bubble

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The Washington Post reports today that as of June, year-over-year house prices have dropped in D.C. and other parts of the Washington area. The common factors of the areas losing value? "The areas with declines have some things in common: swelling numbers of houses for sale, slowing sales and lots of new houses on the market." We're different, you say? Yes, we are. As opposed to D.C., Bend
July 25, 2006
12:54
Local banks commission report that says "build more housing"
» ‎ Bend, Oregon Housing Bubble

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Readers of this blog know that I think that local builders are overbuilding this area, and that the number of people moving into Central Oregon is probably going to slow down this year and the next few years to the extent that the inflow was attributable to people cashing out out-of-area home equity and moving or buying here. That's not what a report commissioned by some local banks said,
6:21
From today's Bulletin: "The thing is that a lot of the new homes around Bend don't have air conditioning"
» ‎ Bend, Oregon Housing Bubble

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For those of you who are in the market for a house in Bend and are willing to pay just about any price, just make sure you get what you pay for. Apparently some people are finding out in this triple-digit heat that their premium-priced Bend homes don't have A/C. A local HVAC contractor, talking about a big uptick in business (as quoted in today's Bulletin), says "[t]he thing is that a lot of the
July 24, 2006
6:40
Community Blogging Volunteers?
» ‎ Bend, Oregon Housing Bubble

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Anyone out there with some time on his/her hands? It would be really great if someone here in Central Oregon would create a site similar to this one in Sacramento, called "Sacramento Area Flippers in Trouble." The site shows investor-held (or at least they're presumed to be investor-held) houses being sold at break-even or loss-generating prices, including pictures, addresses, and MLS info
July 23, 2006
15:40
The Oregonian 07/23/06: "if anywhere is going to lose a significant amount of value in Oregon, it would be the resort and hot markets of late"
» ‎ Bend, Oregon Housing Bubble

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Today's Oregonian reports that "[m]arkets with high concentrations of loans for second homes are spreading. In 2001, second homes accounted for at least 20 percent all mortgages for home purchases in six of the state's 32 counties. By 2004, that had more than doubled to 13 counties." And how about now? It would be interesting to know. "Second homes," by the way, includes both vacation homes
15:01
Bend named "Up & Comer" by WSJ, a "surprising hub of innovation"
» ‎ Bend, Oregon Housing Bubble

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Noting that "Bend was the sixth fastest-growing metropolitan area in the country from 2000-2003, according to the U.S. Census," The Wall Street Journal (Saturday/Sunday July 22-23, 2006, page P6) called Bend one of its "places where a high percentage of patents were given to individuals or small businesses," based on WSJ research on a pool of 12,000 cities. Some 29 patents were issued to Bendites
12:53
Downtown Bend; Condo Conversions; SoCal Real Estate
» ‎ Bend, Oregon Housing Bubble

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A few news items and updates: STRUGGLE OVER DOWNTOWN BUSINESS HOURS One of my posters said yesterday at 2:51 p.m.: I've talked to a few Bend business owners. A lot of businesses are already losing money. Paying more in wages means they go under faster. There are many "vanity" shops (my wife wants to run a dress shop, or a decorating shop) or misjudgments of how many art galleries or coffee
July 21, 2006
10:35
Why doesn't this town's business community realize that intra- and intercity public transportation would solve the low-paid worker "shortage"?
» ‎ Bend, Oregon Housing Bubble

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Article in today's Bulletin: "Understaffed businesses in Bend getting desperate." The spotlight in the article is on a local bakery that can't find any workers to fill positions starting at minimum wage during training and "full benefits," whatever that means at a job that starts at minimum wage. The question is this: where are the undocumented/illegal immigrants who would take these jobs
July 19, 2006
13:16
Realtor.com: Bend has more listings than Ashland, Astoria, Corvallis, Eugene, Hood River and Pendleton put together
» ‎ Bend, Oregon Housing Bubble

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From Realtor.com - number of properties listed: Ashland (pop. 20,000) - 316 Astoria (pop. 10,000) - 182 Corvallis (pop. 50,000) - 246 Eugene (pop. 140,000) - 780 Hood River (pop. 6,000) - 149 Pendleton (pop. 17,000) - 129 Total population - 243,000 Total listings on Realtor.com - 1,802 Listings per capita - 1 for every 134 people Bend: Population - 75,000 Listings on Realtor.com -
July 18, 2006
13:51
What's with all the weird crime this year in Central Oregon?
» ‎ Bend, Oregon Housing Bubble

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A sampling (all accused are innocent until proven guilty): 07/18 - Bend - Woman stabbed inside Lutheran church by skinny robber with sore on his nose 07/13 - Redmond - Young couple hold up bank and use Ford Escort as getaway car 07/13 - Bend - Burglar hits several houses in one night; finally caught by resident and police 06/27 - Bend - Westside clothing store owner robbed at gunpoint at
12:29
Redmond: Envyville, U.S.A.?
» ‎ Bend, Oregon Housing Bubble

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I noticed something very interesting: when you look up "Bend Oregon" on Google Trends, the resulting data indicate that the vast majority of the people performing this search are in Bend and Redmond. No surprise there. But what is surprising is that the hits from Redmond exceed those from Bend by quite a bit. I think this is telling - Redmond, a town less than half Bend's size, originates more
12:21
Informal Poll of Californians...
» ‎ Bend, Oregon Housing Bubble

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...and others in Bend's target markets for newcomers: Seattle, Portland, the Boston-D.C. corridor. We're well aware that many of you are either planning to move to Bend or would like to if only your personal circumstances would allow (but job, spouse, spouse's job, etc. are holding you back). There might be a few of you who don't want to move to Bend, but we expect that the percentage is quite
July 17, 2006
10:15
Money magazine names Bend 86th-best place to live...
» ‎ Bend, Oregon Housing Bubble

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...right between Oshkosh, Wisconsin at 85 and Nashua, New Hampshire at 87. Only Bend, Beaverton and Hillsboro made the list. The top-rated Oregon place to live? Hillsboro, at number 63. Most people's reaction is probably "86? Why so low?" I looked at the breakdown of stats and the comparision to the top 10 best places and saw that Bend was probably hurt by lacking educational opportunities (no
July 16, 2006
13:48
Central Oregon Builders: "There Must Be a Pony in Here Somewhere"
» ‎ Bend, Oregon Housing Bubble

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Ronald Reagan used to tell a joke about twins: one, a total pessimist, and another, with an unbeatable positive attitude. One day a psychiatrist decided to do an experiment to try to cheer up the pessimist and lower the mood of the optimist. They put the pessimist kid in a room full of toys and games, and they put the great-attitude kid in a room full of horse manure. Then they left them there for
July 13, 2006
19:39
From The Source's archives: "Everybody is out to make a killing as fast as possible, while the good times still roll"
» ‎ Bend, Oregon Housing Bubble

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Anyone who mistakenly thinks that I'm some kind of bubble-forecasting pioneer should read this brave Op-Ed piece by H. Bruce Miller written long, long ago in June 2005, when talking about the possibility of a real estate bubble in Bend was about as socially acceptable as passing gas in a crowded elevator. "This town seems to be in the grip of much the same sort of hysteria that produced the
July 12, 2006
17:41
L.A. Times - SoCal Housing Market Tanking
» ‎ Bend, Oregon Housing Bubble

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They say that Southern California is Bend's biggest "feeder" market for new arrivals with dreams in their hearts, cash in their pockets and a hand ready to sign on the dotted mortgage-line for a new place in Bend... Year-over-year price declines in San Diego for the first time in 10 years. http://www.latimes.com/business/la-071206homes,0,3220478,print.story?coll=la-home-headlines
12:42
Real estate statistics published - looks like at least a year of inventory currently on market in Bend
» ‎ Bend, Oregon Housing Bubble

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Central Oregon real estate statistics for the first half of the year were released. In Bend, 1,146 homes sold - only 8% less than last year. OK great. But at this time last year, what I want to know is (and what isn't published, apparently): how many houses were on the market? Because right now, there's over 1,800 Bend property listings on Realtor.com and John L. Scott Realty's website. There are
12:05
Oregon (Bend and Medford) spotlighted on national housing bubble blog
» ‎ Bend, Oregon Housing Bubble

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http://thehousingbubbleblog.com/?p=1039 And some stories it links to: about Bend - http://www.kvnews.com/articles/2006/07/11/news/news02.txt about Medford - http://www.mailtribune.com/archive/2006/0711/local/stories/biz-housing7-11-06.htm
July 05, 2006
6:24
Bend banks become more bearish on home-price appreciation
» ‎ Bend, Oregon Housing Bubble

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According to this article in The Bulletin, a number of Bend-area banks (Bank of the Cascades, Wells Fargo, Umpqua Bank, LibertyBank, US Bank) have decided to cap home equity lines of credit to varying levels between 80% and 90% of assessed value. One banker remarked that this "allows our bank to have a level of comfort if, in fact, we do get a level adjustment to home values in Central Oregon."
June 16, 2006
20:27
They Can't Stop Talking About It
» ‎ Bend, Oregon Housing Bubble

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Just when I decided to "move on" to topics other than the housing bubble, the masses have spoken - the most comments ever, all on the housing bubble. It's interesting to read the back-and-forth, but I continue to maintain that the topic itself interests me less and less, not because I've stopped thinking there's a local bubble, but because in my mind, it's really not subject to serious debate.
June 04, 2006
21:06
Some Thoughts
» ‎ Bend, Oregon Housing Bubble

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BEARISHNESS IN BEND. Is there room for bearishness in Bend? All we seem to see and hear is talk about growth: its good effects, its bad effects, whether/how to control it - town planners have predicted that the town's growth will result in a population of something like 120,000 people by 2020... Growth, growth, growth. Bend is a town of optimists. Bend is bullish on its own prospects. Not many
May 20, 2006
19:15
Our local infrastructure
» ‎ Bend, Oregon Housing Bubble

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On my last post I decided to break away from my focus on the local property bubble, in keeping with the name of the blog (Bend, Oregon Economy Blog) and zero in on an issue that I think is important in our next (positive) step of development: public transit. I encourage folks to check out the research I did on other Western resort areas' public transportation solutions in the comments to the post
9:06
The Working Poor Ride the Bus
» ‎ Bend, Oregon Housing Bubble

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News items from our local TV and newspaper yesterday talked about the tight labor market in Bend and provided a platform for local business owners to voice complaints about how difficult it is to find willing workers in Bend, especially in service-industry jobs (something tells me there's less of a problem with a shortage of white-collar workers). Bendites are great people - newcomers,
May 17, 2006
6:04
Medford-area building permits, housing starts down
» ‎ Bend, Oregon Housing Bubble

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From yesterday's Southern Oregon Mail-Tribune: **a Medford-area builder says that houses priced in the $450,000-$600,000 band have "taken a big hit"**another local builder "expecting a leveling off or a slight dip"**building permits in local area down 27% from first quarter of 2005
May 16, 2006
19:26
Affordable Housing is Not a Problem in Bend; Job-Creation Is
» ‎ Bend, Oregon Housing Bubble

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There's been a lot of talk, meetings, proposals, etc. about the problem of "affordable housing" in Bend. There is no problem with affordable housing in Bend. Look in the newspaper: you can rent a 2-bedroom house for $700. You can rent a 3-bedroom place for less than $900. Get a couple roommates and you can pay less than $300/mo. each. That's less than $10 a day. Anyone can come up with $10 a day,
May 13, 2006
17:13
Google Trends: "Bend Oregon" and "Moving Companies"
» ‎ Bend, Oregon Housing Bubble

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This one is for those who think that Bend's real estate market is separate from the national market. The graph for worldwide searches for "Bend Oregon" almost exactly tracks the graph of worldwide searches for "Moving Companies." Not a graph of searches for Bend Oregon and Moving Companies at the same time, but a graph of searches overall. I interpret this to mean that interest in Bend rises when
16:41
Google Searches for "bend oregon" parallel searches for "housing bubble"
» ‎ Bend, Oregon Housing Bubble

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Have you played with Google Trends yet? It's great. I found something weird - as it turns out, searches for "Bend Oregon" spike and ebb eerily at almost exactly the same time as searches for "Housing Bubble." See screenshot below.
May 10, 2006
20:29
Southern Oregon Real Estate; Bend property listings about to crest 1,000
» ‎ Bend, Oregon Housing Bubble

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Latest news from Oregon's southland (May 9 Medford Mail Tribune): sales slow, inventory up sharply. Number of "Bend, OR" properties listed on Realtor.com: 995.
May 07, 2006
14:08
"In Central Oregon, the slowdown in sales has not led to a slowdown in the pace of building"
» ‎ Bend, Oregon Housing Bubble

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As if that's a good thing? Click here for story link
May 04, 2006
22:28
Speak your mind about Bend property values
» ‎ Bend, Oregon Housing Bubble

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You may notice I haven't posted much lately... yes, Realtor.com indicates 922 properties for sale in Bend now, 139 of which are priced over $1,000,000, but I haven't been in the blogging mood lately. What I'd like to do now is to open this post to comments from anyone - buyers, sellers, real estate agents, developers - and see if we can get some posts about whether the market's still going
April 26, 2006
17:52
The race to sell in 2006: Developers vs. Owner-Occupants
» ‎ Bend, Oregon Housing Bubble

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The first round goes to the developers.

Today some economic data was reported by the Commerce Department: sales of existing homes up in March 2006 0.3% over February 2006 but still below March 2005 levels. Not exactly a huge spring boost, but not as bad as some had feared. But the prices of existing homes were still higher than March 2005, which made a lot of people say "soft landing."

However, the story is different with sales of new homes in March 2006: up an amazing 13.8% over the month before!

Why the discrepancy? A home is a home, right?

Because the developers selling the new homes dropped their prices. For the first time in a long time, folks, we have year-over-year price decreases on new homes. 2.2%. In other words, it's cheaper now to buy a brand-new house than it was last year at this time. But what does that mean for houses that were bought new last year at this time? Have they risen or fallen in value? Well, think about it. Would you rather buy a brand-new home that costs less this year than last year or a year-old home that the owner won't sell for anything less than he paid for it in 2005 (plus closing costs)? For example, there's a year-old house for sale that someone has a $500,000 mortgage on sitting right next to a brand-new home just completed by the developer. Until he becomes desperate, the mortgageholder won't sell you his house for any price less than what he paid plus closing costs. He'll hold onto it for years if he has to, especially if he doesn't need to move and he has a good job. The developer will sell the house next door for as much as he can get for it, but he's not just going to let the house sit there if no one will pay the asking price within a pretty short period of time, say a couple of months. So the price of the year-old house is higher than the brand-new house, but its value?

The prices of existing homes have not yet dropped because owner-occupants are just refusing to lower their prices. A typical owner-occupant trying to sell doesn't care how many other houses sell - he only cares about one: his own. A developer, on the other hand, is in it for the volume. He can't have finished houses sitting there. He's got a production pipeline to think about. He has to keep money coming in one end and finished houses coming out the other end. A disruption at either end is worse for business than a lowering in prices on individual houses.

While an owner-occupant can wait months and months to sell (because he's also enjoying the benefit of living in the house, and he has to have somewhere to live), a developer doesn't have that luxury: an unoccupied new home typically attracts vandals and squatters. And an unoccupied new development (a.k.a "ghost town") is really bad news in the real estate developers' world. You need to get families in there fast to mow the lawns, repair the fences, keep vagrants away, etc., and make it look like a community people would want to live in.

Can we think of a town where hundreds of brand-new houses are coming onto a market where most of the owner-occupants' houses for sale are still pretty new themselves? I wouldn't want to be trying to sell a two-year-old home with a 2004-level mortgage at the same time that, #1, industrial producers of housing are bringing hundreds of brand-new units onto the local market in 2006, and #2, nationally, brand-new homes are cheaper this year than they were in 2005.
17:41
House Flipper Garb
» ‎ Bend, Oregon Housing Bubble

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Bend blogger and t-shirt designer Slider has a new design just for those of us who love to buy low and sell high. I'm talking about you house-flippers out there. Sure, if you're a house-flipper you can bore people every once in a while at parties and barbeques talking about how much money you've made buying and selling houses, but how do you let people know all the time just how equity-rich you are? Easy: "House Flipper" signature logo wear! Click here to buy!
April 23, 2006
16:18
Real Estate Bubble - the National View
» ‎ Bend, Oregon Housing Bubble

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1. Local Governments Riskily Banking on the Bubble for Their Budgets. The editors of the L.A. Times said that the L.A. County budget is "precariously" dependent on increasing home value assessments and property tax revenue, and that "the county's exposure to real estate risk is huge and untenable." Deschutes County and Bend city decision-makers should read this editorial. However, they've already been warned not to count on ever-rising revenues: the President of the Bend Chamber of Commerce said last May that he told the Bend City Manager, "I hope you guys are banking a good bit of this money as reserves, because sooner or later the bubble’s gonna pop and you’re gonna hit the proverbial brick wall, or you’re gonna see a major slowdown. Sooner or later it’s gonna happen—it’s GOT to happen."

2. People Beginning to "Call" the Popping of the Bubble. An MSN Money columnist who's been bearish on the bubble says it's already popped. A Baltimore CBS affiliate predicted problems in Baltimore's real estate market (which has had an "echo" boom from the D.C. market). UCLA economists said that "with another three to four months of sales volume drops, it will be absolutely clear that the housing bubble has peaked." By this definition, the bubble has almost certainly popped. I think there are maybe a few people, optimistic about real estate to the point of delusion, that think that the number of houses sold this spring and summer will be as high as the number sold last spring and summer. The inventory is piling up on the market (in Bend, 879 listings on Realtor.com, 130 of which have an asking price over $1 million - these numbers were 772 and 104 on April 8, meaning that there's been an average of 7 new Bend listings hitting the market every day since then).

3. Investors, Developers and Owner-Occupants All Trying Not to Be the Ones Left Holding the Bag. I've mentioned in previous posts the conflict of interests among developers, investors and homeowners (they all are sellers of housing) that becomes apparent in a down market. This is from yesterday's Washington Post : "The prevalence of investors -- and now their disappearance -- is causing real problems for owner-occupants who want to sell, sometimes against competitors willing to cut prices substantially because of profits they made in 2003 or 2004." The investors are competing with both developers and homeowners in a crowded market: "some developers are struggling to sell units in the face of competition from the investor-buyers who want to dump the properties. Many had sought to protect themselves against an invasion of investors for just this reason."

How do developers protect themselves from investors? By only selling to people who intend to live in the houses. But in a market like Bend that is positioning itself as a place for Baby Boomers to buy second homes and homes for eventual retirement, how do you tell what people plan to do with the houses? If you restrict sales only to people who intend to use the place as a primary residence, you're shutting out a significant part of the market. And there's also the greed factor: investors, unlike normal people, will flock on the opening date of a housing development and buy whatever they can, sight unseen. No need even for a walk-through. Yesterday's Washington Post : a "survey of builders last year found that about 52 percent of builders tried to sell only to owner-occupants, 33 percent prohibited renting the unit out during the first year after settlement, 29 percent declined to make multiple sales to people with the same last name and about 28 percent kept the right to buy back the unit at the same price if the owner sold in the first year. But many failed to ferret out investors or could not resist the buzz of a fast sell-out when speculators flocked to purchase. A quick sales pace allowed the builders to ratchet up prices more quickly for those who got to their doors behind the early birds."

4. Bubble So Far Following the Trajectory of Other Bubbles (dot-coms in the late '90s, oil in the late '70s). Forbes published a column in February that I think gave a very astute description of the path that asset bubbles typically take: "After the initial popping, there is a reflex rally that reignites the hopes and expectations of participants. Then (only after the break through key support levels) investors start to realize the boom is over. Fundamentals start to change, too. The media headlines start to recognize surprises, downside surprises. And while it’s a long time before the headlines turn downright gloomy, investors start looking for any rally opportunity to get out even. Eventually those hopes turn to any rally to minimize losses."

"Initial popping": I put this at late summer 2005.

"Reflex rally that reignites the hopes and expectations of participants": in February 2006 there was a small uptick in activity. People who had been concerned about falling sales volume said that this proved that there was no bubble.

"Break through key support levels": this occurred sometime in the last couple of months - steadily dropping sales volume and rising inventory, along with lessened general enthusiasm for loading up on real estate, has made all concerned parties realize that it would just about take a miracle for prices to keep rising (however, a small, but determined group of stakeholders think that just such a miracle will happen).

"Investors start to realize the boom is over": this has been going on for a while, but only recently reported in the media. Even the chief economist for the National Association of Realtors said a few weeks ago that "what's going to be leaving the market right now are the speculative investors".

"Media headlines start to recognize surprises, downside surprises": this is happening now. Yesterday's Washington Post article tells the story of an agent in the D.C. are who is "trying to sell a condo ... for a woman he says bought it for her retirement home, then became ill and went to live with family ... his client, who he believes was one of the few purely owner-occupants in the complex, is likely to lose money she had saved over a lifetime." That's the first kind of "downside surprise" - that people who had purchased real estate they planned to use later, thinking that they were being smart because they thought that they wouldn't be able to afford it in the future, end up as bagholders. The Washington Post also reported on another kind of downside surprise: people are pulling out of prior commitments to purchase real estate because now they can afford more. This time last year, people were rushing to buy, especially first-time buyers, because they thought that if they didn't buy something now, they'd never be able to afford to buy. People who wanted to retire to a nice area bought second homes years before they really needed them for fear of being priced-out later. Now there's no urgency - if anything, people are fairly confident that if they wait to buy, they'll be able to afford more house, not less.

5. Mobile Homes in Bend. There have been a lot of community meetings and media stories about the selloff of many of Bend's mobile home parks. I know a lot of people see this as a necessary and inevitable part of Bend's transformation into an elite mountain resort area - too bad for the trailer people, sure it's tragic, but what're you gonna do? The presence of large numbers of mobile home dwellers within the Bend city limits was always a bit of an embarrassment to those who promoted Bend as an up-and-coming alternative to Vail, Aspen, Jackson Hole and Sun Valley. Other bubble-bloggers have noted that the good side of the housing bubble is that rising house prices have induced builders to build more housing than the country will need for a while. Some of the trailer-park folks will get to upgrade.
April 21, 2006
9:45
Bend takes its show on the road
» ‎ Bend, Oregon Housing Bubble

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The Bulletin reported yesterday that some Bend "tourism-promotion" officials went down to SoCal to talk to some newspaper editors to try to get them to cover Bend.

I put "tourism-promotion" in quotes because I think there might be a little more to it than promoting tourism, namely keeping the influx of out-of-staters into Bend going strong. Selling property to outsiders is the basis of the local economy. Read the story linked in this post. Why do they mention that the median price of property in Bend is lower than in California? When have you ever seen that in tourism promotion? "Come visit Bend, where the homes are only $400,000." That and the timing make me think that there's more than meets the eye about the promotion campaign.

Like I mentioned in my earlier post about the Wall Street Journal article that predicted falling high-end home prices in Bend this summer, trying to get nationwide media coverage can be a "careful what you wish for" thing. The Bend delegation can go down there with Powerpoint presentations and brochures, but journalists can pretty much write what they want: what if they report that Bend's boom is busting? I guess the alternative to proactively seeking media coverage is waiting for people to "discover" Bend on their own, but apparently that's too slow of a process to sustain Bend's economy nowadays.
April 18, 2006
8:15
HELOCs in Bend
» ‎ Bend, Oregon Housing Bubble

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One of the reasons some economists and economy-watchers are worried about a drop in home prices (or even a flattening-out) is because people have been taking out HELOCs (home equity lines of credit) to fund discretionary purchases like cars, boats, guns, vacations, etc., and even using the money to pay for children's college tuition.

I've seen some of this in my circle, but my circle is mostly Bend lifers and not newcomers. Only a couple people I know have taken a serious amount of home equity out (to the point where if my prediction of a 30-40% price drop pans out, they'll be upside-down).

I want to ask readers: what's your take on the prevalence of HELOCs in Central Oregon? Are people using them responsibly? What are people spending the money on?

The worst-case scenario, I think, is if people are moving from California where incomes are higher, using cashed-out home equity to purchase a house here and finance initial expenses upon moving to Bend, blowing through that nest egg, and then using HELOCs to continue to finance California-level consumption on a Bend-level income. In other words, using home equity as a "supplemental income" to fund a standard of living that our wages around here otherwise wouldn't allow.
April 16, 2006
0:00
Is the "housing bubble" a media creation?
» ‎ Bend, Oregon Housing Bubble

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Since The Wall Street Journal on Friday singled Bend out in an article called "Where the Buyers Aren't," I've been in a sort of strange mood about my blog. Now it's gotten pretty real. Too real. Where before I was a sort of lone voice in the wilderness, talking about the 100-something million-dollar homes for sale in Bend and asking where the millionaires are supposed to come from, now the millionaires' favorite newspaper is saying that the "Summer Outlook" for Bend is for the high end to come down in price. This can't be good.

This WSJ article has been the talk of the Easter weekend in town, at least in my circle. Some people are pretty angry about it.

Was The Wall Street Journal too pessimistic? Do they have the facts? Maybe it's a situation of "be careful what you wish for": if you want your town to be a target for nationwide real estate investment, be ready for nationwide real estate analysis.

The media lead the public - they identify issues that affect people. The nationwide housing boom is one of the biggest issues affecting Americans today, and in boomtowns like Bend the effects are only magnified. But are the media ahead of the story? I mean, as pointed out before, the latest figures are subject to differing interpretations: on the one hand, volume isn't rising as it once was, but it is rising, and so are prices.

Should The Wall Street Journal have held back on their story? To them Bend is somewhere far away, where some people have invested. For us it's where we live. Clearly our town's target market is more likely to read the WSJ than it is to read our local media, which haven't yet announced any negative predictions (on the contrary).

I sort of imagined that the wealthy people who'd be thinking of buying in Bend would either buy or not buy based on their own research rather than have a "bubble forecast" fed to them by a national publication, so while I might be Bend's leading bubble-forecaster, I'm a little bit upset that now, anyone who reads The Wall Street Journal will be looking for discounts on the high end in Bend. No need for an intrepid out-of-towner to come across my blog. Not that I'm offended that the WSJ is treading on my turf, but like a lot of Bendites I'm used to only positive coverage in the national press. I can't recall when a paper of the stature of The Wall Street Journal had anything negative to say about Bend.

But again, we've been looking for national attention, and we got it.

Am I getting soft? Now that the WSJ has weighed in, my partisan Oregonian nature makes me want to turn this into an anti-bubble blog.
April 14, 2006
19:33
The Bulletin: Boosterism or Blinders?
» ‎ Bend, Oregon Housing Bubble

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In direct contradiction to the theory that resort areas will outperform the national real estate market, on Friday, Apr. 14, pages W1 and W8, The Wall Street Journal, in an article entitled "Where the Buyers Aren't," pointed to "skittishness in vacation communities," specifically citing Bend as an example of a place where "real-estate agents have started cutting prices on their own homes." The WSJ said that "a recent quarterly survey of 299 housing markets found that many of the country's most popular vacation-home communities are also among the most overvalued," and that "this is a seismic shift from just last year, when some consumers were raiding their home equity to grab a beach or mountain place." It said that in Bend specifically, "the number of single-family homes sold last month fell 28% from a year earlier" and "sellers are getting the message" and lowering prices.
April 13, 2006
9:29
Bend's "Real Estate Contrarian" is a blogger too!
» ‎ Bend, Oregon Housing Bubble

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Remember the "Real Estate Contrarian" from The Bulletin last month? Well, it turns out that he has his own blog. www.valentineventures.com/hedgehog.htm.

The Real Estate Contrarian was the guy who wanted to cash in his 150% home-price appreciation in a sale-leaseback arrangement. In other words, he would find an investor to buy his house for its market value who would then lease it right back to the Contrarian so that he and his family could keep living in it, but as cash-rich renters, not owners sitting on paper "gains." The Bulletin described him as one of the "contrarians ... swimming upstream against a surging local housing market," and used a leading local Realtor as a source for the info that "out-of-state and out-of-area buyers ... are providing plenty of demand to chase the area's limited supply of salable real estate." That's right, only 808 listings on Realtor.com - only 113 of which have an asking price over $1 million. Better hurry!

The Contrarian seems to be just about as big a pessimist as your own Bubble Boy, if not more. On his March 28 post he says "Here's my 2006-2008 scenario. Global rate and bond markets, not the Fed, put pressure on intermediate US rates. The intermediate part of the US curve rises, restoring a 'normal' shape to the curve. In the process, the US real estate market suffers and this is the start of the next US recession as home buyers and real estate investors buckle under the pressure, putting us into a housing-led recession."

But in his March 27 post, just a day before that, the Contrarian said "Who would actually buy our house and let us live there? A smart investor! Some folks seem to miss the point that 1/3rd of the houses in a nearby development (Northwest Crossing) are bought by out-of-towners, on spec, empty--and then they try to rent it out. Our house comes with a guaranteed income--it's safer than buying on spec."

So Contrarian, which is it? Would an investor be "smart" to invest in your house or will he "buckle under the pressure" in 2006-2008? Or maybe you mean that the person who buys your house would be a smarter investor than those foolish "out-of-towners" who are buying houses "on spec, empty," without renters. (Also, I thought it was "building on spec," not "buying on spec" - once you've found a buyer, people don't say "on spec" any more, right?)

And also, if Contrarian is right and 1/3 of the houses in Northwest Crossing are owned by out-of-town investors, that's not good for anyone. Not the investors, not the other people who bought houses in Northwest Crossing, not the town of Bend. What that is is a ghost town in the making if the inflow of people slows down. I highly suggest that no one buying in Bend buy in a subdivision that sells more than a small percentage of the homes (5-10 percent max) to investors or second-home owners.

So Contrarian, how's the plan going? Any bites? Is The Bulletin going to do a follow-up on you?
April 12, 2006
9:37
The Bulletin: What, me worry?
» ‎ Bend, Oregon Housing Bubble

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"Central Oregon homeowners cashing in." "Still rising." "Red-hot." "Home-sellers have plenty of reason to smile this spring." "Sales volumes, in fact, are up." "Madras is undergoing something of a renaissance." "Prices for all housing types are expected to rise." "The pace of the increases has barely slowed." "The ever-rising price of local property."

No, these aren't quotes from a pamphlet advertising local real estate. They're quotes from today's Bulletin article headlined "Area home values still rising."

Yes, the article touches on the fact that California home values are "dipping," but they are still "sky-high."

Interestingly, the figures for local sales quoted in this article seem to be exactly those quoted for Barney Lerten's article of Sunday, but while Barney's tone was cautionary, The Bulletin's is celebratory. Is The Bulletin the glass-half-full media outlet, while KTVZ sees the glass half empty?
April 10, 2006
9:15
The Experts Say: More Good Times to Come
» ‎ Bend, Oregon Housing Bubble

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I can't resist putting in my two cents about this article in today's Bulletin with the headline
"High Desert economy staged for more growth, experts say" and the subheadline "Draw to resortlike living keeps Central Oregon booming."

The article is about a meeting for a mutual fund called the Tax Free Trust of Oregon. You can read about this mutual fund here, including its prospectus, where it says on page 9 that one of the "major risks now facing the Oregon economy" is the "possible collapse of the housing market." The tone of the Tax Free Trust's meeting was very different from page 9 of its prospectus, however.

First of all, the headline. "High Desert economy staged for more growth, experts say." The article quotes two bankers (one the CEO of a bank based in Bend), a retired credit-card company executive and a real estate developer. You would think from the headline that some kind of economic think-tank was presenting a report, but just one of the people quoted is referred to as an economist. According to the article, this economist expressed the thought that "while there are signs of weakening housing markets around the country, areas with resortlike living standards should continue to do well as newcomers move in." I understand a resortlike setting, with natural beauty and recreational opportunities all around, but what are resortlike living standards? In-home room service? A concierge on call? Free use of the pool and fitness center? This statement doesn't make sense to me.

The article says that the rosy predictions "came as the U.S. Department of Commerce said in March that new home sales nationally declined in February by 13.4 percent versus the same month in 2005." They might also have added that, according to KTVZ.com, in the month after February's national decline, sales volume in the Bend area dropped about 25% - "about 300 properties sold in March, compared to nearly 400 a year ago, a larger decline than the one seen in February." This doesn't look like a market bucking national trends.

One sentiment attributed to one of the people featured in the article is that "Central Oregon's physical attributes should buffer it against many external economic influences." Umm... the Cascades block the rain, not the bill collectors. Or does this mean that South Sister is going to tap me on the shoulder at the service station and pay for my gas if prices get too high? Will Elk Lake buy my house if I can't sell it for more than the mortgage on it? There used to be a saying: "you can't eat the scenery." Are the experts now telling us that we can?
April 09, 2006
19:56
Tale of Three Cities - Bend, Ashland, Hood River
» ‎ Bend, Oregon Housing Bubble

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In some recent posts I suggested that if the boom cycle turns into a bust cycle, there are things the county and city governments could have done to prevent it. This drew some criticism to the effect that there's little the city and county can do to stop people from doing what they want with their land. I started thinking, how can we tell?

Are there places in Oregon in similar situations as Bend, operating under the same state land-use laws, that have taken a different path that might not carry with it a risk of a bust?

I think there are: Ashland and Hood River, but the "different path" was probably just dumb luck based on factors beyond the control of local government.

Along with Bend, all three are picturesque cities in spectacular natural surroundings. All three have close access to ski resorts (Bachelor for Bend, Mt. Hood for Hood River, Mt. Ashland for Ashland) and all three are close to recreational opportunities galore. All three have an upmarket cachet, and all three have attracted "rat-race dropouts" from California and other places. All three have cute, historic downtowns with attractive shops and restaurants. All three (especially Ashland) are known for having weather better than the rainy Oregon stereotype. All three have received national media attention for being cool places to live - Hood River was even named No. 5 in Skiing Magazine's 2004 "Top 10 Ski Towns in America" ahead of Park City, Breckenridge and Aspen.

There's one big difference I note: I might be wrong, but I haven't seen Ashland or Hood River make anyone's lists of overpriced markets, and haven't had the "boomtown" label hung on them like Bend has. Is this because Ashland and Hood River aren't big enough to make the cut for the big companies that do the analyses? Maybe/probably. Last population figures I found for Ashland put it at about 20,000, and for Hood River about 6,500. But still, Bend's Deschutes County made the list of the top counties in the nation for population growth, while Jackson County (where Ashland is located) and Hood River County (Hood River, natch) did not. So in any case, not as big of a boom. This even though (because?) both Hood River and Ashland, unlike Bend, have interstates running through them.

For anyone who's been to Ashland and Hood River recently, you can tell there's something very similar to Bend in the lifestyle, but something different in the approach to development. What are these?

Supply of buildable land. I've read the figures cited for Bend's boom - "less than two years' supply of developable land left in the UGB." But the UGB can and will be expanded when it comes up for review (2007, I think), and if the land is rezoned and annexed there's nothing, geographically-speaking, to keep Bend from growing out into the privately-owned desert plots past the current developments behind Pilot Butte and into the hay and alfalfa farms between Bend and Prineville Reservoir and into the remaining privately-owned plots in the foothills of the Cascades, and of course there's nothing to stop the Bend-Redmond corridor from converging into one larger metropolitan area.

On the other hand, Hood River hugs the Columbia River and backs up against a quick rise to a high plateau to the south and southwest and to roadless government-owned land to the southeast. I suppose it could expand into the farmland between it and Odell, but maybe that land is protected somehow.

Ashland has a the most physically restricted space - it's in a hollow between the Siskiyou National Forest to the south and southwest and I-5 to the north and west, and a steep rise into the mountains towards Crater Lake.

You might ask - wouldn't a smaller supply of buildable land mean a greater tendency for housing to be overpriced? No, the opposite, in my opinion. Housing prices have greater "staying power" in an area where land really is in limited supply (San Francisco, Manhattan). In a city built out to its geographical limits with expanding population, you can be confident that any development going up near you will be "infill" which will be of higher value than what was there before. On the other hand, in Bend if you live out near the edge of the UGB, you can be just as confident that in a couple years, there will be more developments built past your house that will be competing with yours when it comes time to sell. The question in determining whether there is a housing bubble isn't whether houses are expensive, but whether they are too expensive, meaning that they are vulnerable to a drop in value.

Less need for big retail development. Hood River is about an hour from Portland and an even shorter drive to Gresham, Troutdale and the other eastern suburbs of Portland where you can find all the big-box stores you need. Ashland is a 20-minute drive from Medford. We all know where Bend is: over two hours and a mountain pass from any town with over 100,000 population.

Admittedly, Bend needs more retail development than its size might indicate. It's a regional "inland empire" center for Redmond, Madras, Prineville, Sisters, LaPine, Sunriver, and the little towns out in the desert. When you go to Costco you can see people from way out in the sticks loading up their SUVs with provisions for a couple of months.

Local attitude towards commercial development. Ashland has always had strict development rules and building codes, even for Oregon. One thing you notice when you go there is that the commercial signs are all only a few feet high - no big signs on poles announcing the McDonald's, Safeway, and so on. This is a building code restriction, and it looks nice, but it also announces "we care more about how the town looks than how easy it is for businesses to announce their presence from a couple blocks away."

I don't know as much about Hood River's attitude to commercial development, but it's very pretty and you don't see a lot of eyesores.

Bend, as we know, has a sort of two-sided development picture: big-box retail, chain restaurants, lots of parking lots and California-style tract home sprawl on the east side and specialty retail, upscale eateries and Craftsman houses in "mixed-use developments" with sidewalks and bike paths on the west side.

Local economic drivers that support the town with less reliance on housing-related economic expansion.

Ashland has Southern Oregon University, a four-year college with over 5,000 students. Pretty decent economic base for a town of 20,000.

Hood River has the Port of Hood River, and within a short commute the infrastructure of Bonneville Dam at Cascade Locks and Northwest Aluminum in The Dalles, although the aluminum industry along the Columbia River has been hit hard in recent years by rising electricity prices and environmental challenges, but Oregon's aluminum industry provided thousands of jobs in the recent past and as recent as 2005 provided 750 jobs and over $7.4 million in quarterly payroll (about a $40,000/yr average, not too shabby). But in any case, Hood River's economy is less construction- and real estate-based: taking a look at Oregon Labor Market Information System data, Hood River County in the first quarter of 2005 (near the peak of the housing boom) had 337 people working in the "Construction" sector and 1,155 working in "Manufacturing." Deschutes County, on the other hand, had 5,786 people working in "Construction" (including 3,618 "specialty trade contractors") and 5,743 people working in "Manufacturing" during that same period. That presumably doesn't count people working under the table. Deschutes County also had 1,028 people indicated as working in "Real Estate" versus Hood River County's 61.

Public Transportation. I'm not sure what Bend's current justification is for not having a public transportation system other than Dial-a-Ride. On Wikipedia it says that Bend is the "only metropolitan area west of the Mississippi with no public bus system." Not a proud distinction. Hood River has Dial-a-Ride too, but it's a town of 6,500 people. At least its website posts fare information and its buses have ads on the side like in many big cities. Ashland, a town of 20,000, is served by a regular bus system, the Rogue Valley Transportation District. I don't know what this has to do with housing booms but I thought I would toss this in here: Bend needs public transportation! If Ashland can do it, so can we.

Conclusion: I was wrong, there's probably nothing the city and county could have done to prevent Bend from booming the way it did. Having written what I wrote, I realized that the city and county were dealt the hand they were dealt. Bend is where it is, it has the economic base it has, and it was the voters who rejected the public bus system, not the city or county. The only thing the city and county could have done to slow the boom would have been to run around warning of possible bad times to come, but if they would have done that, they probably would've been replaced with people who had a more optimistic outlook. They've been trying to get some other economic activity going with their Juniper Ridge development, but of course this hasn't been framed as "we better get something else - pronto - to prop up this economy other than housing," which is how they probably should have framed it, in my opinion. The Bend City Manager recently talked about the unsustainability of the growth rates of the past few years at a recent Chamber of Commerce event, but at this point he's not shocking anybody.
8:19
Realtor.com: Over 800 Homes for Sale in Bend
» ‎ Bend, Oregon Housing Bubble

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In a post yesterday I noted that the number of Bend listings on Realtor.com was 772 and I asked when it would hit 800. The answer: today! Just checked and there are 801 listings for Bend, and "1,106 properties in the Bend, OR area." The big springtime push to sell has begun, I think.
April 08, 2006
7:51
The Land of 104 Million-Dollar Homes (For Sale)
» ‎ Bend, Oregon Housing Bubble

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I check Realtor.com sometimes and plug in "Bend, OR" to see how many homes are for sale. it accesses the local MLS. It's at 772 now. Will it reach 800? 1000?

But today I did something I hadn't done before: I put $1,000,000 as the minimum price for my search. And guess what: 104 million-dollar homes for sale right now in Bend. For perspective, type in Seattle and you get 187 homes for over $1M. Type in Portland and you get 135. Each of these cities is several times larger than Bend, yet Bend has more than half the number of million-dollar homes of these cities with skyscrapers, high-paying jobs, public transportation...

And type in Eugene (a town about twice Bend's size) and you get 19!

Just 5 years ago I think you probably would have had a hard time even finding more than a handful of houses in Bend that someone would try to sell for a million dollars. I've been watching the real estate market here and I think it's totally out of whack, and even I am surprised that there are 104 houses that might be worth $1M in Bend, let alone 104 million-dollar houses for sale at one time in Bend. And it's only the beginning of spring!

So who are the buyers for these houses supposed to be? Should we put an ad out in the national press saying: WANTED: HUNDREDS OF MILLIONAIRES TO MOVE TO BEND? If we're so attractive to all these millionaires, I'm surprised some smart businessman hasn't begun putting in a Gucci store downtown in anticipation of a wave of rich millionaire wives strolling through, or maybe a Louis Vuitton shop, instead of Local Joe and the Painted Pony.

It blows me away that in a town with much fewer than 100,000 people in the middle of Oregon, with no big successful companies spawning millionaires, and no gold or oil under the ground, you could walk into a real-estate office and say "I'm looking for something in the million-dollar-plus range" and they could tell you "good news! I have over a hundred listings I could show you!" And all this when there are temperatures in the 30s outside in April.

I think this means one (or more) of four things:

1. The trophy home market in Bend is overbuilt.

2. The people who have "realized" the most in house price gains on paper are trying to cash out while they can.

3. Investors and/or second-home owners are pulling out.

4. Developers have begun to believe their own hype about Bend's never-ending real estate party and have overpriced these homes, believing that "if you build it, the millionaires will come."

So you see I just don't get it when the bubble-deniers say "I know houses have become unaffordable, but it's just supply and demand. There's just not that much supply out there." Sure, there's not any supply of houses that people who work in Bend can actually afford, but if you are willing to take on a $5000/mo. mortgage or you happen to have a million dollars lying around, there is a surprising abundance!
April 06, 2006
17:05
Future Finger-Pointing
» ‎ Bend, Oregon Housing Bubble

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Prediction #7: Over the next few years there'll be a lot of finger-pointing and blaming going around about the housing bubble in Bend.

Was it the town promoters who projected a straight-upward population growth curve and advertised "300 days of sunshine!" instead of "expect snow any time from October through May"?

Was it the real estate developers and real estate agents who encouraged people to buy quick while you can before Bend is discovered by even more people? Who told them to hurry and get in on the "ground floor" in Bend, and let the future take care of itself?

Was it the city and county governments who decided to "capitalize on growth" without bothering to worry about what all these new people would do for work once the number of people moving in slows down or stops?

On this last point, I do think there's some blame there. There were plenty of articles in the local media about how Bend / Deschutes County had issued more building permits over the year than San Francisco, Miami, Chicago, [pick big city]. The tone of the articles was that this was an excellent thing and showed how great our economy was. Did they ever stop for a second and think that perhaps there's a reason why well-governed cities try to pace their growth, and not issue 1000 building permits in one year and 25 the next? Maybe something about avoiding painful boom-bust cycles?

The first rule of economics is "there's no free lunch." The town pigged out at the economic buffet, and now the pickings are getting slim. The solution? PLAN FOR THE FUTURE. Bend, have the foresight not to let every Jack and Jill build when they apply for a permit. Let them wait a few years, keep them hungry.
April 05, 2006
19:24
Out of retirement to make a few predictions
» ‎ Bend, Oregon Housing Bubble

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First, an introduction: for those of you who read my blog before I shut it off, I had a far-ranging series of posts touching on the history of Bend, links to articles, critique of local media, advice for Bend local government, and economic theories.

I think this is a perfect time to make one post because I think that Bend is at a turning point, especially as to its main economic engine -- population growth and housing-related industries. I want to make a few predictions and see if they pan out.

A lot of housing inventory has built up over the winter (762 listings on Realtor.com today, "for sale" signs wherever you look), but if you talk to people bullish on the local real estate market they have one main reason why the market is "taking a breather": the weather. We've had a long winter. Bend's time to shine is in the late spring and summer, when the weather is glorious and it's hard to resist all of the concerts, festivals and other fun activities that make the town such a great place to be in the warm months. People in the real estate business will tell you: wait until the summer when the buyers come.

My blog in its previous form invited a wide-ranging discussion. This time, I'm going to be selective about what posts I allow to keep the discussion on the economy. If you disagree with me, please post, but uncivilized posts will not make the cut.

Prediction #1: Bend housing prices will free-fall through the late spring and summer of 2006, dropping about 30-40% before leveling off for years. This is even though I predict that in places like the Bay Area and L.A., prices will do what they have in previous Californian housing bubble busts - drop but only slightly, but level off for a few years (while losing value in inflation-adjusted dollars).

Some have argued that since housing in the big California markets will probably always be X% pricier than in Bend, the real estate here will always seem like a bargain to people living in the Bay Area and Southern California. The problem with that argument is that Californians will do what they did when the last housing booms there ended - they will sit in their homes, pay the mortgage and wait it out. People in the Bay Area and L.A. can do this because:
- - While housing has been responsible for a lot of job creation in California, the Californian economy (especially the Bay Area and L.A.) is diverse. There's technology, entertainment, finance, agriculture, shipping, biotech, defense, a world-class university system, and a healthy international tourism industry to name several.
- - Much of the labor that has built the houses in California has been foreign migrant labor. In a housing downturn, many of these workers will go back to their home countries or seek other (probably lower-paying) work on farms and in factories, or leave for other parts of the United States to find work. This will soften the job-loss impact on the average Californian, because there won't be as many people with roots in the area competing for family-wage jobs.
In Bend, though, I don't think that anyone is denying that a disproportionate number of jobs are housing-related. We've been talking about building a four-year college and an industrial park, and there are a few small industrial companies that are based here, but there are no major (more than 1000 employees) employers in high-tech, manufacturing, research, or even wood products in Bend. And just as important, there are no such employers within commuting distance of Bend. For example, people are saying that Sacramento's housing is in a bubble, but if someone loses a job in Sacramento he or she can commute to San Francisco (people do it every day). Even Merced, which was recently the subject of an L.A. Times article about its housing crash, is within 2 1/2 hours of San Jose. In an area where it hardly ever snows, a commute like that isn't fun, but it's doable. Someone in Bend could conceivably do the 3-hour commute to Portland 7 months out of the year, but the fact that it's over the mountains would make that a long, dangerous drive the rest of the time. If any reader knows someone who commutes daily to Portland from Bend, please post.

Also, most of the people who do construction in Bend are American citizens who are from the area or have permanently settled in the area. Many of them own homes themselves. In a housing downturn they face some tough choices.

In order for Bend to benefit from the difference in house prices between California and Bend, Californians either have to sell their homes and move here or borrow against their home equity to buy here. People won't do this if housing prices aren't rising. This is why, even if prices in the Bay Area and L.A. only drop 5-10% or just stay the same, Bend's prices will quickly fall as the speculative component of the prices disappears, and stabilize at a level supported by economic fundamentals (what people living in the area can afford to pay based on their salaries).

Prediction #2: although Bend's builders and remodelers will take a quick hit this summer, established real estate agents with good reputations will continue to do OK. This is because what people say about Bend is right: it's a desirable place to live or own a second home. There are plenty of rich outsiders who've been eyeing the possibility of buying in Bend, and who can afford it, but they didn't get rich by buying things at the top of the market. They'll catch bargains on the way down. Same goes for highly-paid professionals in Bend like doctors. Some of them have had an eye on moving up to a nicer place, but if they sell their current homes they'll find themselves as buyers in an overpriced market. Their jobs aren't connected to real estate, so they'll have money to spend while others who've found themselves in a tight spot are trying to sell.

Prediction #3: the demographics will change. If the housing market in Bend turns, Bend will have the toughest time keeping young working families around. If you have kids, you're going to go where you can make a living to support them, even if it means you can no longer live in a place where you're surrounded by natural beauty and skiing, fishing, camping and so on. On the other hand, even if the local economy sours and house prices fall, retired people and rich empty-nesters will see post-boom Bend as a place with a large inventory of high-end housing (and few people who can afford it), clean air, natural beauty, good medical care, and lots of golf and recreation. They'll buy here if it's a bargain (and for now it's not).

Prediction #4: local services depending on property tax revenues will take a hit. Most troublesome, this includes schools. This isn't just because property tax assessments will drop - it's because, if Bend ends up as a place with a large number of out-of-area second home owners and retirees, the proportion of people who'll support the school budget will fall.

Prediction #5: Bend local government will put the accent on tourism. This has already started. Tourism can provide jobs and room-tax revenue. The jobs aren't high-paying ones, but they're jobs. This has been Bend's fallback position for 50 years.

Prediction #6: the future of Bend is in young local entrepreneurs. The hope of Bend is that there's a critical mass of young, smart people who want to raise a family in Bend and aren't scared of weathering a few rough years, and who are creative enough to develop a new base for the local economy. It could be technology, it could be anything. If there's a depression in the housing-related sector, times will be tough and there'll be a temptation to cut losses and move on, especially for those who just arrived. Hopefully the long-timers who know the area and aren't going anywhere, and the newcomers who bring their educations, experiences and enthusiasm to the mix, can move past a housing-based economy and fulfill Bend's promise as a near-perfect town in the High Desert.
March 26, 2006
21:43
"The Contrarian" sells his home
» ‎ Bend, Oregon Housing Bubble

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This is my reaction to the article in today's Bulletin about a "contrarian" who's selling his house to cash out on his 150% gain in equity in 6 years: I think The Bulletin wanted to do an article about all the bubble talk because otherwise they'd be ignoring the biggest single issue confronting Bend today, but the only way The Bulletin could do this without angering its advertiser base (a large part of which is housing-related) and the Bend business community (housing-related) was to do an article about a "contrarian" who everyone is calling crazy for selling his home, "swimming upstream against a surging local real estate market."

Note that those wacky sources used for the story who say the housing market is overvalued are groups like National City Mortgage (out of area, probably disinterested) and Global Insight (disinterested, respected research firm) and the Levy Economics Institute of New York's Bard College (academic, disinterested), and the stock market (as the free-market-advocates say, markets know best). The quotes and data saying how great the Bend and national real estate markets come from local Realtors, a real estate marketing manager in the process of selling high-end condos in Bend, the Central Oregon Realtors Association and National Association of Realtors. Hmm.

So make that 738 listings for sale in Bend, rather than 737 as indicated early this morning. Seems there's a fairly large number of "contrarians" out there.
10:11
Inventory-tracking on Realtor.com: Bend/Eugene
» ‎ Bend, Oregon Housing Bubble

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One way that I track the inventory in Bend is to compare the numbers I get for Bend in searches on Realtor.com (accesses the MLS) to the numbers for Eugene. In the language of the scientific method, Eugene is my "control."

Why Eugene? (1) Because the Eugene population is about the same as Deschutes County as a whole, and I suspect that some of the people who list their houses as being in "Bend" are really in other parts of Deschutes County. I think we can consider Deschutes County the "Greater Bend Metropolitan Area." So population numbers are about the same. If anything, there are way more people with a Eugene address than a Bend address. (2) I don't think there's a housing bubble in Eugene. It has the University of Oregon, which forms a solid foundation for the local economy. So I think that Eugene would have a "normal" number of listings for the same amount of population, not a number of listings that you'd find in a town where people are desperate to unload inventory.

Today Bend has 737 listings. Eugene has 454. OK, that's worrisome. But it gets worse when you limit the search to houses selling for over $500,000. Bend has 366 listings, while Eugene has 74. Uh-oh. It looks as if there might be a bit of a dump of high-end inventory on the Bend housing market.
9:41
The Reflex Rally
» ‎ Bend, Oregon Housing Bubble

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February 13, 2006: Forbes magazine analyst, speaking of the trajectory of asset bubbles, says "[a]fter the initial popping, there is a reflex rally that reignites the hopes and expectations of participants. Then (only after the break through key support levels) investors start to realize the boom is over. Fundamentals start to change, too. The media headlines start to recognize surprises, downside surprises. And while it’s a long time before the headlines turn downright gloomy, investors start looking for any rally opportunity to get out even. Eventually those hopes turn to any rally to minimize losses." (Emphasis added.)

March 23, 2006: National Association of Realtors reports that "existing-home [sales] rose in February following five months of decline, indicating a stabilization is taking place in the market."

If the Forbes analyst is right, that means the "initial popping" may have been late summer 2005, and February's uptick in existing house sale volumes might be the "reflex rally" that makes market participants think that, whew, maybe everything's really going to be OK. What do readers think?
9:31
T-Shirt Censorship - Funny Farm 2?
» ‎ Bend, Oregon Housing Bubble

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There's a graphic designer here in Bend who sells t-shirts on his blog. The t-shirt designs touch on Bend social issues such as unaffordable housing, drug testing and Californian in-migration. In one of his posts, he described how he'd written to ask about selling his t-shirts at the various Bend festivals.

According to the t-shirt seller's blog post, the event promoter sent him a letter saying NO, explaining that "[w]hile we can appreciate the humor in your artwork, the purpose of the festivals is to promote Bend in a positive manner and introduce artists [sic] artwork to the community."

Clearly, allowing the graphic designer to sell his shirts would be introducing an artist's work to the community, so the concern must have been that these t-shirts do not "promote Bend in a positive manner."

This is starting to get annoying. The economic pressure to keep people flowing into Bend has started to result in people not being able to talk openly about their community. Even the weather becomes a hot potato. I saw on KTVZ.com how yesterday's snowstorm was described as a "surprise." [UPDATE - the author of the KTVZ.com story says that my reference to this story's headline is taken out of context. See the comments on this posting.] The only people who are surprised at snow in March (or April, or May) in Bend haven't been here too long. The story went on to describe how Bend averages over 3 inches in March and over an inch in April.

I always find it a bit hilarious when Bend is promoted on the basis of its fabulous sunny weather. "Almost 300 days a year of sunshine." Notice they never say "almost 300 days a year of warmth." This "sunshine" reference is aimed at people from California - in the highly populated areas of California, when it's sunny, it's warm. When it's sunny, you can lay outside and get a tan. It's hard for Californians to imagine a day when it's sunny but 10 degrees out, or sunny with a whipping wind, or a day that starts out sunny but then there's a big hailstorm - in May. So "almost 300 days a year of sunshine" sounds perfect. Bend does have nice weather - compared to Portland and the Willamette Valley. For Oregon, Bend has nice weather, "nice" meaning "less rain," although there are actually some people who prefer Western Oregon weather because it snows very rarely there (and I think it never snows on the Coast). I disagree with these people because in Western Oregon the sky is overcast with no break at all for 6 months straight, which would drive me nuts.

But Oregon is generally not blessed with great weather. Move here for the people, for the beauty, for the recreation, for the lifestyle - but if you grew up in California, you're probably going to be a bit disappointed by the weather.

Anyway, I was talking about censorship. When old-timers in Bend start talking at, say, the coffee shop about the weather and saying that, no, this snow is not unusual and you can probably expect more next month, you can see real-estate types tense up. I have seriously seen this happen. Chill out! You guys get to write all the promotional materials, say what you want there, but the townspeople are allowed to discuss the weather!!

It reminds me of an '80s movie called Funny Farm with Chevy Chase. A writer and his wife move from the big city to Vermont so that the husband can write his novel. After moving in, they discover that the house is crappy and the townspeople are weird. The writer and his wife decide to leave, but they can't afford to sell the house for less than they paid for it, so they make a deal with the town: if the townspeople act like perfect Vermonters and help to cover up the town's defects so the house can be sold, the writer and his wife will cut them in on the proceeds of the sale. I feel like something like that is going on in Bend - there's some sort of unspoken rule that we're supposed to censor ourselves from discussing anything negative in the open in order to keep property values up and keep attracting newcomers.
March 24, 2006
18:51
Don't shun the bubble Cassandras
» ‎ Bend, Oregon Housing Bubble

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I think some people suspect that all of the anonymous blogs on the Internet about the housing bubble must be some kind of conspiracy by renters to make houses affordable again, or by stockbrokers to get people to invest their money in stocks again... They think it's shady that people won't come out and say "hey, I'm John Jones, and I think there's a housing bubble."

Why would people care about convincing people that prices are going to fall unless they have some stake in it?

Have you heard the Greek myth of Cassandra? The god Apollo lusted after Cassandra, and so he gave her the power of prophesy to win her affection. Then she wouldn't sleep with him, so he added a curse: no one would believe her. When she told the people of Troy that the Spartans' gift horse would result in their defeat, they all scoffed. She went nuts.

Bubble Cassandras feel the same way. They need to tell someone! For example, I see that prices are unsustainably too high in Bend like I see the stars in the sky. I'm as sure as I am about the sun rising tomorrow morning. Something has to give - no contingent of fabulously wealthy outsiders is going to descend on Bend and pay top dollar to buy up all those houses no local can afford. At the end of the day, the vast majority of houses in Bend are (and will always be) owned by the working people who live in them. No Arab sheiks are going to start buying up houses on the cul-de-sacs of Northwest Crossing and Newport Hills. Northwest Crossing and Newport Hills will be populated by people who make their livings right around here.

But could I mention this, at parties and barbeques last summer when everyone in Bend was patting himself on the back at how rich he's become from his house? Could I say, "don't count those chickens, it won't last"? When my friends were talking about how smart it is to pay cash for a new car and take out a home-equity loan to pay for it? Could I say, "hey, man, you might want to hang on to that equity"? How about when I heard an acquaintance, who's not known for being a financial or any other kind of genius, say that he'd taken out a home equity loan to put a down payment on ANOTHER house (an "investment property"), and even though he can't rent it out for as much as he paid for it and has a -$400/month "negative cashflow," he's not worried because he'll make his money back off the appreciation? Should I say, "worry, my friend, worry," not least because he put on the mortgage application for the second place that he didn't borrow the down payment, possibly exposing himself to a mortgage-fraud charge when the s--t hits the fan? No! No one wants to hear it, of course.

So here I am, telling everyone "there's soldiers in that wooden horse!" But no one wants to believe.

I'm a homeowner, but I didn't bet on the boom. I bought my three-bedroom Bend house 11 years ago for less than $100,000, and now it's worth about $350,000, or so they tell me. My mortgage payment is far less than what it would cost to rent the house, even if the rental market were quite a bit worse. I refinanced when rates were low, but didn't take money out. My friends thought I was crazy not to take out some "fun money." I do my own repairs. I have a savings account, CDs and some low-risk stocks and bonds.

Thing is, there was a time when a head of household thought of his house as a savings account, not a high-performance investment. Mortgages were 30 years long because just when you're ready to retire, you have no more mortgage payment. Taking out a second mortgage was considered shameful, like raiding the kids' college funds. This is the way it should be.

You might say I'm too timid, not enough of a risk-taker. But even if prices fall by half, I'll still be able to afford to pay my mortgage and I'll still have home equity. And in 18 years I'll own my house free and clear (and I like my house!).

People I know and love, and people I don't know and love but still care about on some human level, are making some risky financial decisions that will affect their family's future in a bad way. And I think they should know about it, but if I talk about this stuff in mixed company I'll be shunned, and that's why I started blogging.

Sometimes you hear bubble-deniers say, "if you have a steady job and you plan to live in the same place for a long time, it's always a good time to buy a house." I'm here to tell you: bulls--t. It's not a good idea to buy ANYTHING at the top of a speculative market. Imagine you buy an $800,000 Awbrey Butte house today. You think, "good thing I cashed in my 401(k) for the down payment, now I'll live in my retirement investment and by the time I retire 20 years from now, I'll be sitting pretty!" Imagine the feeling in your heart as you watch prices stay the same all summer long and then go down month after month, in 2006, 2007, 2008, then flatten a bit, rise slowly in 2009... when will it bottom out?, you'll ask. Three years and still zero equity?, you'll think. Sure, things will eventually come around. But do you think the regulators will ever let anything like 2000-2005 happen again? "This can't happen in Bend," you think, "it's special here, and one of the most desirable places to live." Sure it is - it's beautiful. But prices have gone down in Hawaii before, in Southern California, Florida - all really, really special places. Five years ago, if you would have asked the Bend real-estate community how high prices can go, they would have said something like "as high as people can afford." If you would have said, "how about if prices go so high that only, say, 10% of the people who work in Bend can afford to buy?" They would have said, "no way." But now that it's happened, not only do they tell you it's no problem, they tell you it's "poised for growth." Don't believe it folks.
March 23, 2006
5:09
Drink-mixing surcharge - total B.S.
» ‎ Bend, Oregon Housing Bubble

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This post has nothing to do with the housing bubble. This week's The Source has a column about a Bend restaurant that charges a $2 surcharge for the labor involved in mixing each martini. I assume that if you order a Maker's on the rocks, no extra charge. But there's a tack-on charge for a martini.

What restaurant is this? Why not just price the drink $2 more? I have never heard of this anywhere else in the country. And this is in Oregon, where servers get the highest minimum wage in the country PLUS tips. In places like Florida, tipped employees make $3.13 an hour. And isn't mixing drinks what bartenders do? They get a labor surcharge for doing their own job?

I have nothing against expensive drinks - if you don't like it, go somewhere else. But it's complete B.S. to have the "price" of the drink be one thing and then to get a little "surprise" when the check arrives.

What restaurant is this?
March 20, 2006
17:29
Report on Existing Home Sales due Thursday, Mar. 23
» ‎ Bend, Oregon Housing Bubble

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What are people's predictions on what this report will say? The last report said that sales volume had declined for a fifth straight month. Will the sales volume continue to decline?

What do you think? Any local real estate agents want to weigh in on which way the wind is blowing?

So far, thankfully for us property owners, prices have stayed steady. But Thomas Stevens, president of the National Association of Realtors, says that this is because of a "standoff" between buyers and sellers: sellers don't want to lower their asking prices and buyers refuse to pay the price asked. The common wisdom is that if sales volume stays low, prices have to fall eventually: as the number of sales falls, a backlog of inventory builds up, and the law of supply and demand kicks in.

“Some sellers in markets that have had rapid appreciation are listing the price of their home too high, but those homes are just languishing on the market,” the Realtors' president said. “At the same time, some buyers who have believed hype about a housing bubble are hoping prices will drop, but that’s not happening either."

If there is a standoff, who will cave? Is anyone out there shopping for a house right now who's in "wait-and-see" mode? Are any real estate agents getting frustrated by buyers thinking they're going to get a better deal if they just wait a couple of months? One thing I can see is that even the most optimistic are predicting only single-digit appreciation, so among buyers there's less of that "I-better-buy-property-now-or-I'll-never-be-able-to-afford-it" anxiety. I guess it's one thing for a family to get together and decide that they'll give up meals out, vacations, etc. for a couple of years when they think that they're going to get 25%-50% returns, and another thing entirely when market-backers are talking about making 6%-10% a year - nice, but nothing worth jumping out into traffic for.

My optimistic prediction is that prices will start to fall a bit, and at that moment, a lot of the people who were trying to cash out at the top of the market will stop trying to sell their properties and just hang onto them. That will decrease the number of properties for sale and reinforce prices.
March 16, 2006
4:07
CNN Money: Deschutes Co in top 100 for growth
» ‎ Bend, Oregon Housing Bubble

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CNN Money reports that Deschutes County grew at a rate of 5% between July 2004 and July 2005, putting it in the top 100 fastest-growing counties in the United States. The county's population increased by 6,764 during that period, to 141,382, according to the report.

Deschutes County was the only Oregon county in the top 100.

So the area is growing fast. No one denies that. The question is: is constant, rapid population growth desirable, sustainable, a good thing to base a town's economy on?
March 15, 2006
16:43
KTVZ.com reports on The Boy in the Bubble's concerns
» ‎ Bend, Oregon Housing Bubble

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Must be a slow news week, because KTVZ.com reported on this blog.

But then again, real estate is a big, big deal in Bend.

A local Realtor is quoted as saying "[p]rices in Bend are a factor of simple supply and demand." "We have an enormous amount of demand for people moving into this area, and a very limited supply, and I don't see that changing for several years to come," he says.

Well then it's a good thing that every other Bendite is a contractor, and the ones who aren't are real estate agents! However will they keep up with that demand for several years to come?

I did an experiment. I went to the Realtor.com website and did a search for "Bend, OR." There are currently 701 properties listed on Realtor.com for Bend. Then I did a search for Eugene, OR (a town about twice as big, home of the University of Oregon). Just 445 properties.

Somehow I think that the supply side of the equation is in decent shape for now.
March 14, 2006
7:57
Whither real estate agents?
» ‎ Bend, Oregon Housing Bubble

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Chuggnutt.com gave me a lead on the number of Realtors (the trademarked trade name of most real estate agents) in Bend, saying that The Bulletin had put the ratio at 1 out of 200 people.

I'm actually surprised at how low that number is. In Oregon overall, the National Association of Realtors put its membership at the end of 2004 at 14,345, out of a total 2004 Oregon population of 3,594,586. That means that 0.4% of Oregonians were Realtors in 2004. There's no reason to think that number has fallen since then.

Meanwhile, if 1 in every 200 people is a Realtor, that means that 0.5% are Realtors. In Oregon overall, 0.4% of the population are Realtors, meaning that 1 in every 250 men, women and children in the state is a Realtor. Given that Bend (after Medford) is the "boomiest" of Oregon's real estate boomtowns, I would guess that in Bend that number would be higher than 1 in 200.

Where do all the real estate agents go?

There has been a lot of Internet talk about whether there are too many real estate agents, whether their commission structure is fair, and whether the situation has reached a "tipping point."

I personally have nothing against real estate agents and the way they make money. In an up market, it's easy. Houses sell themselves, and as prices rise, commissions get bigger. Buying and selling is furious, increasing transaction volume, and real estate agents make easy money. In a down market, real estate agents have to work their asses off to sell homes.

Also, real estate agent is a good job for people who are "sharp cookies," but weren't able to go to college, or for other reasons are chronically underemployed. Young single mothers, divorced women going into the workforce after many years of not working outside the home, immigrants, retirees and others have traditionally become real estate agents. It's a "self-starter" profession that you can work at a few hours a week or 18 hours a day. Some people make millions as real estate agents, and others can barely pay for the gas they use driving from house to house.

The problem is that this has been a sustained boom. There are real estate agents, particularly in Bend, who started 10 or 15 years ago and have never seen a down market. Real estate agents have done well, and whereas in a small town like Bend it's usually tough for outsiders to break in as a successful real estate agent, Bend has been growing so fast that there's been room for everyone. Plus, people arriving from California are more likely to trust a smiling recent-arrival Californian real estate agent, who speaks with the same accent as them, than a taciturn native Oregonian with a slight hick accent.

OK, it's a sustained boom. What's the problem? The problem is that if it were a "normal" market, the marginal real estate agents would quit sooner and find something else to do with their lives. The sustained boom has meant that way more real estate agents have been able to make a living, and many of them have been doing it so long they don't know any other trade, and many of them don't have a backup plan.

After a real estate bust in Bend, there would be too many real estate agents, too many contractors, too many mortgage brokers, too many appraisers, too many building supply stores - you get the picture.

The smart post-boom entrepreneur in Bend will come up with a business that takes advantage of people with skillsets arising from the real estate boom. How about telephone sales? How about prefab housing modules and manufactured homes?
March 13, 2006
17:55
CNN Money says Bend real estate 68.4% overvalued
» ‎ Bend, Oregon Housing Bubble

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CNN Money reports that Bend is rated as one of the top 20 overvalued real estate markets in the country, at 68.4%. That's right - just shy of 70% overvalued. People think I'm a pessimist about Bend real estate values. I thought that at most, prices were, say, 20-25% too high. And I thought if prices drop 20-25%, it will be a disaster.

But 68.4% overvalued? This is far worse than I imagined. I think in this case "overvalued" means that the houses in the market are trading at a price representing a very high level of speculation, not on the healthy fundamentals of the economy. Bend is indicated as being almost 70% overvalued at a median price of $256,200, but Portland is rated less than 40% overvalued at a median price of $258,600. Then again, Portland has a more diversified economy.

The article says "California and Florida account for 18 of the 20 most overvalued markets." Guess which state has the other two in the top twenty? Oregon, of course: Bend (68.4%) and Medford (69.7%).

So not only is Bend ripe for a housing bubble, it has been rated one of the top 20 overvalued markets in the country .

So how do Bend real estate promoters answer this article and the survey it reports on? Is it just 100% wrong?
March 11, 2006
16:11
The Boy in the Bubble: An Interview
» ‎ Bend, Oregon Housing Bubble

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Do you think that in general, buying a home is a stupid idea? Thanks for asking. I think that normally, buying a home is a great idea and is really smart if you have a steady job and you think you’re going to be in one place for a while and you get a fixed-rate loan. And this is true even if house prices only keep up with inflation (in other words, gain no real value at all). Historically, mortgage payments have been cheaper than rent, because when you rent you’re paying for the freedom of leaving when you want, having someone else maintain and repair the place, not needing to come up with a down payment, not needing to pay property taxes or insurance on the building, and so on.

And of course, when you buy, unless the market price of the house drops below the principal of your loan, you build equity in your home as you pay down your mortgage.

Is there a housing bubble right now? Technically, no. You can only call a price increase a “bubble” once it’s popped. In the context of a speculative bubble, “popping” means a rapid decrease in value due to the elimination of the speculative component of the price.

Every house has a real, more-or-less certain economic value. It sits on land, which is of limited supply and costs money. It is made of materials that cost money and was built by labor that cost money. And it provides you and your family with housing services. Because you own a house, you don’t need to rent to live in a building owned by someone else: a hotel, a house, an apartment, etc. But part of the price of the house is made up of speculation. People see prices going up and they want in on it. They’re willing to pay more in the expectation of realizing a bigger gain. They pay more now to get more later. When it becomes clear to everyone that prices are either going to drop or stay the same, the speculative component of the price shrinks and the price of the house comes closer to the cost of land, labor, materials and housing services. So the expectation of a price drop causes an actual price drop: a self-fulfilling prophecy. This is why people want to talk up the market - to a certain extent, as long as people think prices will go up, they do go up.

At some point in every bubble cycle, however, prices "hit a wall" where people simply can't or won't pay any more for the asset. Price appreciation slows. And this is why it's more unlikely that prices will simply stay where they are, or keep rising slowly. Right now lots of people are stretching to make their mortgage payment, and they knew they would be when they bought their houses, but they thought that was acceptable because they predicted that their house would be worth so much more in a short period of time. When it becomes clear that the price-appreciation party is over, the speculative money leaves the game.

I'll believe you when I see clear evidence of a bubble. No one I've talked to sees any bubble coming. Why should I be worried about a bubble no one has any clear evidence of? Well, if you think about it, if there were clear evidence of the bubble coming there wouldn't be a bubble. You only know it was a bubble when it's too late, and it already popped. And actually, being worried about a bubble is the best way to prevent one. People who are worried about a bubble coming don't make risky investments that destabilize the market.

Why can’t real estate prices keep going up the way they have? If it ain't broke, don't fix it, I say. I’ve heard people say a lot of things―that seem superficially logical―to support their belief that the housing boom has just begun. You’ve probably heard them too. “Land is always a good investment - they’re not making any more of it.” “Everyone needs a place to live.” “It’s the law of supply and demand - there just aren’t enough houses.” “The demographics are changing - there are so many more immigrants nowadays.” “Housing prices have never gone down.” “As long as the unemployment rate is as low as it’s been, housing prices will continue to rise.”

Sometimes you hear a really scientific-sounding justification, like “there is no way there can be a bubble burst as long as interest rates stay below 7% and the unemployment rate stays below 6%.”

Then you have other people who say sure, there will be a bubble burst―somewhere else, but not here. These people give you a Bend-specific or Oregon-specific theory. “Bend has one of the strongest economies in Oregon and is growing very quickly―there’s more demand for housing here.” “Even if price appreciation in California stops, the median price there is $600,000 while the median price here is half that. People can still sell their homes in California and afford to move here.” “Baby boomers are about to retire and they’re one of the largest, wealthiest generations in history. They’ll retire here or buy second homes here. They’re an active generation that likes outdoor sports and will want an active retirement.” “Bend is a geographically isolated place. We’re cut off from the effects of things that happen in the rest of the country.” “Sure, there might be a bubble burst in California, but Oregon cities have an Urban Growth Boundary that limits the supply of land. The UGB means prices here will never go down.” “Bend is surrounded by National Forest and BLM land, and you can’t build on that.”

Then you have people who say that, sure, there’ll be a bubble burst, but it will affect condos, not single family homes.

All of these statements are bulls--t in one way or another. I’ll take them on one by one.

#1 “Land is always a good investment - they’re not making any more of it.” The idea that the United States in general, or Oregon to be more specific, or Central Oregon to be even more specific, is running out of land is totally preposterous. China is smaller than the United States and has 400% more people, and they just had a housing/condo bubble burst. What happens when the supply of buildable land runs out? People rip down the single-family homes and build townhomes, high-rises, etc.

How anyone could say that Bend is running out of land is laughable. You only have to drive 15 minutes from downtown before you’re in howling desert or wild forest. Bend is surrounded on four sides by hundreds of miles of more-or-less undeveloped land.

# 2 “Everyone needs a place to live.” This one is insulting to human ingenuity. People in San Francisco and hundreds of other cities around the world have managed to have families and raise children living in apartments and rowhouses for 100 years. Their kids play in parks rather than yards. Engineering has progressed to the point where we can build skyscrapers 2000 feet high. The idea that human beings can only live in a single-family home with a front and back yard is ignorant - a very small minority of the world’s people live like that.

This is happening in Bend too. They’re building townhouses and condominiums downtown and in the Old Mill District. When I was a kid in Bend, not even the poorest kids’ parents lived in an apartment. Everyone could afford to live in a house. Even if the apartment was “luxury,” no one would think of living there because, well, people in Bend just didn’t live in apartments unless they were seriously down on their luck.

#3 “It’s the law of supply and demand - there just aren’t enough homes for all the people who want to buy them.” This might be true on a particular day in a particular location, but the situation is always temporary because, throughout human history from the dawn of time, every time the demand for housing increases, people build more of it. The fact of the matter is, thanks to human ingenuity, not only is there no shortage of housing over the long run, but there is an unlimited supply of housing and there always will be. If we run out of residentially-zoned land, we’ll open new land for development. If we build on every single acre of land, such as in Manhattan, we’ll expand upwards and build high-rises, or dump garbage into the sea, cover it with dirt and build on that (Manhattan again), or raise dikes like they did in Holland and build on the seafloor, or drain swamps and live there like they did in Florida. If we run out of bricks, we’ll use wood. If we run out of wood, we’ll use metal. If we run out of metal we’ll use straw. If we run out of straw we’ll use mud. There will never be a long-term housing shortage, but there definitely will be lifestyle changes based on changing conditions. There won't be as many cul-de-sacs and backyards in the future if population growth continues the way it has. But people will deal with it, as they always have. People will get in spaceships and colonize Mars before the people who build houses say “sorry, we just can’t build enough places to live for all these people.”

#4 “The demographics are changing - there are so many more immigrants nowadays.” The United States is growing at a pace of less than 1% a year. During the Baby Boom, the country grew twice as fast. Immigration is at about the same level as it was at the turn of the century - about a million people a year. Between about 1915 and the late 1960s, there was much less immigration.

Plenty of homes are being built to house the new immigrants. In addition, if there is a housing sector crash, immigration will fall. The economy won’t be as attractive, and there won’t be as much work. Construction has been a big draw for immigrants because it’s a decent-paying job (often in cash, under the table) and you don’t need an education or knowledge of English to do it.

#5 “Housing prices have never gone down.” They have a few times. But that doesn’t matter - just because something hasn’t happened or is rare doesn’t mean it won’t happen. If you ever read an investment prospectus or have someone pitch you an investment and they tell you how great their performance has been they’ll always have a disclaimer something like “past performance may not be indicative of future results.” That’s because, unless something is of limited supply, prices will always rise until they fall, then fall until they rise. Even where the supply is limited (gold, oil), the price goes up and down. Only where you have something that’s absolutely unique and prized throughout the generations, like the Mona Lisa, will the price usually go up and stay up forever.

#6 “As long as the unemployment rate is as low as it’s been, housing prices will continue to rise, or at least they won’t fall.” Let’s assume this is true. But it’s a closed circle: a lot of employment comes from housing construction. So as the housing boom slows, there’s less incentive to build new houses, fewer people are needed to work construction, and the unemployment rate rises.

Construction is a great boon for the economy - it provides good-paying jobs to a lot of people who might not be qualified to do much else, and it helps money stay in communities rather than be sent outside to somewhere else.

#7 “There is no way there can be a bubble burst as long as interest rates stay below 7% and the unemployment rate stays below 6%.” The people who say this usually know better - they know that this is a technically true statement, but they also know that if the bubble does burst, due to a chain of processes related to the bust, interest rates will rise, along with unemployment. Interest rates will rise even if prices stay flat, because of changes in the market for mortgage-backed securities that are issued against mortgages as collateral.

This #7 is right, but it's bulls--t because the intent is to make it sound like a bubble burst can only happen under super-unlikely conditions, even though the USA has had interest rates above 7% and unemployment above 6% plenty of times. But then afterwards, when someone comes up and says “hey, you said the bubble wouldn’t bust,” these guys can look like geniuses who predicted the future - they’ll say “no, I said that as long as interest rates are X% and unemployment is X%, there would be no bust.”

When people say this they make it sound like these things are the conditions that can cause a bubble bust, which is true, but they leave out that they could also be the result of a bubble bust. If they happen, no one will be able to say for sure which caused which. But I don’t understand why people think this is such a strong argument anyway - who’s willing to bet their family fortune that there’ll never be higher interest rates or unemployment?

#8 “Bend has one of the strongest economies in Oregon and is growing very quickly―there’s more demand for housing here.” Bend’s economy is that of a boomtown―an inflow of people bringing money with them causes an increased demand for housing, goods and services, which causes economic growth, which creates demand for workers, which attracts more people, and round-and-round-she-goes.

However, the main engine feeding this cycle is Californian home equity: for the past 15 years or so, a real estate boom in California has meant that Californian housing prices have shot up, and Californians have been able to sell their houses and reinvest the proceeds in much cheaper real estate in Oregon, creating an “echo boom” here. To the extent a bubble bust deprives Californians of home equity, it makes moving to Oregon a riskier proposition.

There is also a great desire of people in other places to move here for “lifestyle” reasons. However, the desire for lifestyle change, without the economic stimulus to cash out of California and move, may not influence enough people to move to Bend in enough numbers to sustain Bend’s growth.

#9 “Even if price appreciation in California stops, the median price there is $600,000 while the median price here is half that. People can still sell their homes in California and afford to move here.” Let’s assume that housing prices in California will always be higher than in Oregon. California has a very diverse, broad-based economy and people there simply have more money. But the issue isn’t the dollar value of California’s houses - it’s how much equity Californians have. If they don’t have equity in their homes, whether it’s because they already took it out as a home-equity loan or property values have fallen, they’ll have a harder time moving to Oregon.

The problem is that nowadays, on average people don’t “naturally” build as much equity over time as they did 15 years ago. The equity has come through a capital gain rather than by paying down the principal. This is because people have taken out interest-only loans. I recently saw an ad for a 10-year interest-only fixed-rate loan. This loan only makes sense, though, if the appreciation rate is insane. In other words, say you get a $500,000 10-year interest-only fixed-rate loan at 6%. You are essentially making a bet that your house will appreciate 60% over those 10 years.

The math works like this: with that 10-year mortgage of $500,000 at 6%, you’ll be paying $30,000 in interest per year for 10 years, for a total of $300,000. This means that, when the interest-only period is over, you’ll have paid $800,000 for that house - $500,000 to the previous owner and $300,000 to the bank. And since you didn’t pay down any of the principal, any equity you have will be solely due to appreciation, and you still owe the bank $500,000. If appreciation is sustained and high, that’s a safe bet: for example, if appreciation is 10% per year, the house will be worth over $800,000 ($805,255) in the sixth year. After six years, you’ll have paid $680,000 for the house ($500,000 to the previous owner; $180,000 to the bank), so selling it at that point would net you $125,255, not a bad return on an investment of zero out-of-pocket funds. Plus, you’d reduce your taxable income by $30,000 each year. If you were in the 25% tax bracket for all of those years, you’d save $45,000 in income taxes over the 6 years, bringing your take to $170,255.

But 10% per year is a pretty fast appreciation rate. Other than by speculation, how is a house going to pile on that much value in such a short time?

#10 “Baby boomers are about to retire and they’re one of the largest, wealthiest generations in history. They’ll retire here or buy second homes here. They’re an active generation that likes outdoor sports and will want an active retirement.” The Baby Boomers are indeed a wealthy, large generation. Whenever their tastes change, it affects the national economy in a big way. When Baby Boomers had a midlife crisis and wanted to ride motorcycles, Harley-Davidson, which hadn’t been doing so well, experienced a resurgence.

Baby Boomers have a lot of their wealth tied up in home equity, though, and if that goes most of them won’t be buying second homes anywhere. As for attracting retirees, Bend probably can and will attract a lot of them, but attracting retirees is a double-edged sword. They tend to vote down school budgets and, because they’re on a fixed income, they aren’t generally big spenders.

#11 “Bend is a geographically isolated place. We’re cut off from the effects of things that happen in the rest of the country.” Totally false and ridiculous if you think about it for 2 seconds. Take a poll of your friends - how many of them came from somewhere else? How many of them sold a house somewhere else and used the money to move here? Bend’s economy is highly dependent on that inflow of people. Where it is geographically has absolutely nothing to do with it. As a matter of fact, I think Bend would be much better off if it were within commuting distance of Portland.

#12 “Sure, there might be a bubble burst in California, but Oregon cities have an Urban Growth Boundary that limits the supply of land. The UGB means prices here will never go down.” The UGB is designed to increase density inside cities. Although it may not occur to a lot of people who are newcomers, the UGB is an economic measure, not an aesthetic one. Some people think that Oregon has a UGB because Oregonians don’t like the “look and feel” of sprawl. It’s true that a lot of Oregonians don’t like sprawl, but that’s not why Oregon has a UGB. Oregon has a UGB because Oregon’s biggest cities are all surrounded by productive farmland, and once you build a housing development on farmland, that farmland is essentially gone forever. The “tripod” holding up Oregon’s economy has historically been agriculture, forest products and commercial fishing. Really, agriculture is the only leg of that tripod still standing (although Oregon is making efforts to diversify into high-tech and other sectors).

Oregon has a UGB because as long as agriculture remains a big part of the state’s economy, it has to protect its stock of farmland over the long term, even during real estate booms when farmers would otherwise be sorely tempted to sell their land for subdivisions. As long as agriculture is a big deal in Oregon, it’s better economically for Oregon to be a state with densely-developed city cores surrounded by “empty” productive farmland.

Sometimes people say that sprawling towns like Phoenix or Las Vegas could use a UGB. But there wouldn't be the same economic rationale, because the land surrounding those cities isn't economically productive. It's desert. On the other hand, the land surrounding Salem, Eugene, Portland, etc. is some of the best farmland in America.

But dense development doesn’t mean no development. Most people who move here move from housing developments in California and they’re used to having a yard, a garage, space between houses, and so on: low-density development. Rich people in California live on big lots in places like Palos Verdes, Santa Barbara, Marin County and Malibu. But that’s not how Oregonians have lived, historically. And even though Bend is now surrounded by these big estates arranged for maximum mountain views, that’s more of a reflection of the preferences of the Californians who’ve come in recent years. The people who settled Bend came from back East. They were used to living in dense developments. Take a look at the houses on Congress Street, down by Drake Park. That’s where the richest people in Bend lived at the turn of the century. They built those houses when there were no restrictions on development and there was no shortage of developable land. And yet, they built on small lots with small yards, close to each other and close to downtown.

For almost 150 years, Oregonian cities developed naturally as relatively small urban cores surrounded by farmland, because that’s how Oregonians preferred to live. The UGB wasn’t made necessary just because Oregon was experiencing a major population growth; it was because the people who were coming to the state wanted to live the way they were used to living: in suburban-type developments, and they were going out to the farmers surrounding the cities and offering them temptingly large amounts of money for their land, thereby taking away the basis for Oregon’s economy. So if you think about it, the UGB is Oregonians’ attempt to protect their state’s economy and way of life from an influx of people who didn’t share their values.

#13 “Bend is surrounded by National Forest and BLM land, and you can’t build on that.” The Bush Administration just proposed a big sale of National Forest land, some of it in and around Bend.

#14 “Sure, maybe there’ll be a bubble burst, but it will affect condos, not single family homes.” This would be true if you add the words “as much.” A change in the price of one type of shelter will affect others.

Why do you care so much about whether Bend is in a housing bubble? Are you trying to talk down the market? Because I grew up here and, on the one hand, I think Bend has become a much better place to live. It doesn’t feel as isolated any more, and it’s become less gritty and better-looking. But on the other hand, the town has failed to provide itself with a real economic base other than a continued boom. And I’m tired of listening to everyone talk about the same thing - real estate, and how expensive the town is getting. It seems like everyone in Bend is a real estate agent or contractor or works at a mortgage broker. I don’t think that it creates a good environment for children’s aspirations. For example, I have nothing against real estate agents, but what are all of them going to do if the number of sales goes down?

I’m not trying to talk down the market - I’m trying to get people to think their decisions through, because when I talk to people about their house plans there seem to be a lot of “faith-based” purchases going on, and people aren’t really crunching the numbers as they should for a decision as important as purchasing a half-million dollar home. I’ve done my research and this is what I think. If you come to a different conclusion, by all means, load up on real estate.

I live in Bend. I’m a 35-year-old contractor and my wife is a real estate agent. We have two young kids. We moved here in 2004 from Petaluma and bought a house for $350,000 using an interest-only loan (our first house); since then it’s appreciated to about $500,000. We took out a $50,000 home equity loan last year and used the money to remodel our house and put a down payment on a condo in Bend for which we paid $225,000; since then we think it’s appreciated 15 or 20 percent. We rent the condo out for $700 a month and, even though we have a negative cash flow on it of about $350 a month, it’s more of an investment property that we plan to keep for a few years and then sell for quite a bit more. Right now I have a net worth of a couple hundred thousand dollars, which I think is pretty good for someone my age who has no college degree and who had net worth at all just a couple years ago. My business has been going great and everyone I talk to says 2006 will be just as good as 2005 once the weather warms up. What’s the problem? I think you’ve got every single one of your eggs in the real estate basket, and more specifically, in Bend’s boom. Both you and your wife’s jobs, all of your investments, are in real estate. Bend real estate. You could find yourself in the same position a lot of Enron employees did when their company disappeared and their 401(k) plans were heavily invested in Enron stock. And I don’t think you’re well-positioned to get through a downturn in Bend's real estate market, and you should do something about it. I think you should encourage your wife to get a government job if she’s qualified - something that will pay the bills and provide health insurance for your family if the real estate market slows down.
10:39
Earthquake Science and the "Greater Fool" Theory
» ‎ Bend, Oregon Housing Bubble

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The Voice of America reports that there is an earthquake scientist who says he can predict when the housing bubble will burst by using an approach called complexity theory. He published an article about it in the December 2005 issue of Discover magazine (unfortunately, you need to have a subscription to read it online).

Another scientist says, however, that this scientist's approach is wrong because it doesn't take account of the "greater fool" theory. The greater fool theory is "buying something for no other reason than the belief that you will be able to sell it to someone else for a higher price." It basically means that every time something is bought or sold, someone has made a mistake. Either the seller sold it for too little, or the buyer bought it for too much.

The greater fool theory is the essence of speculation. Free-market theory, tested over time, holds this: that everything has a value, and markets are the mechanism for determining that value, provided that markets have full information. Every publicly available piece of information is built into the price of a thing. Within minutes after Enron restated its financial information and reported that it hadn't made the billions of dollars it said it did, the price of its stock went down. That's why insider trading can be so profitable - you know something before the market can incorporate it into the price of the stock you're buying or selling. Once all the information is out there, the market quickly gives "full value" to the thing in question.

People who abide by the greater fool theory, however, say that there's always room for some hype -- you can always get a few more people to buy in. It's just a matter of saying the right thing. As long as there's always a greater fool to be found, the price of a speculatively-inflated thing only stops rising when everyone is bought into the scheme as much as he can afford.
March 09, 2006
22:37
Should Central Oregon banks be concerned about their real estate development loan exposure?
» ‎ Bend, Oregon Housing Bubble

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On Wednesday, the new Fed chairman Ben Bernanke said that community banks should be wary of how exposed they are to commercial real estate loans. The Bulletin did as story on this issue as well, providing a platform for local bankers to say everything is OK. A Bank of the Cascades official said to The Bulletin that "his company has seen Central Oregon's real estate boom from the start, and has fine-tuned its underwriting process long before Bernanke's comments." Of course.

Bernanke pointed to an easing in standards, saying "[t]he rapid growth in commercial real estate exposures relative to capital and assets raises the possibility that risk-management practices in community banks may not have kept pace with growing concentrations and may be due for upgrades."

In other words: local banks have lent too much to real estate developers in comparison to other types of borrowers, possibly creating a dangerous vulnerability in their portfolios to a downturn in the sector.

Why is this important? Contrary to what some might think, a housing bubble bust would not have a direct impact on local banks beyond a downturn in the fees that they get for mortgage origination. This is because, as mentioned earlier in this blog, Fannie Mae and Freddie Mac purchase most residential housing mortgages from loan originators and use the payment streams on the mortgages as collateral to issue mortgage-backed debt securities. This frees up money in the local banks to make more loans.

Freddie Mac's and Fannie Mae's activity creates greater consistency in mortgage lending because it spreads mortgage default risk over the whole country rather than concentrating it in local banks. Before this system, a local factory closing or natural disaster would result in a locally-concentrated uptick in mortgage foreclosures, which might bring down the local banks that sold the loans (like Jimmy Stewart's banker character said to a mob of angry customers in the pre-Freddie Mac (but post-Fannie Mae) movie It's a Wonderful Life: "Your money's in Joe's house, and in the Kennedy house, and Mrs. Macklin's house, and a hundred others"). Meanwhile, thousands of miles away in another place in our great nation, far from Bedford Falls, everything is fine. That's the idea behind Fannie Mae and Freddie Mac: across the country, historically mortgage default rates have been very low, making mortgage-backed securities a safe investment.

However, the same is not true for business loans - like the loans real estate developers take out to buy land, labor and materials for housing developments. Unless sold to another bank on an individualized basis, these stay in community banks' loan portfolios. In a land rush, these are very safe (and very common) loans to make. In a downturn, developers (and the banks that lend to them) can lose their shirts. How exposed are Central Oregon banks to that kind of risk?

Everything the Fed Chairman says is carefully measured. Market-watchers the world over parse his every word looking for clues to economic movements. Bernanke wouldn't have said anything if there wasn't a real vulnerability. In most places, commercial real estate development is just one piece of the overall economic picture. Can the same be said for Bend?
20:54
How do you spot a bubble? A metaphysical exercise
» ‎ Bend, Oregon Housing Bubble

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One question is: how do you spot whether there's a housing bubble? Pessimists have been saying for the past couple years that the bubble's ready to burst - the idiots! Had those naysayers bought a home, or two, or three... say, back in 2003, they'd be sitting on a massive capital gain right now like the rest of us geniuses who had the foresight to walk into a bank and borrow money! Besides, ask just about anyone - the bubble talk is just that: all talk! If there were a bubble, we'd see it coming, right?

The chairman of the St. Louis Federal Reserve Bank spoke to a group of St. Louis businessmen yesterday and voiced a note of confidence in the housing market. "My hunch," he said, "is that housing activity will stabilize and remain at a high level this year."

If you read other parts of his speech, though, he says that the hallmark of a bubble is that not enough people can see it coming. He says, sounding like a character in Alice in Wonderland, that "given that bubbles always burst―if there is no burst, then there was no bubble―clear advance evidence of a bubble can never exist. If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place."

In other words, the only evidence of a bubble forming is that there is no clear evidence of a bubble forming. Forbes on March 2 quoted home-building company CEO Ara Hovnanian as saying "we see no evidence of a 'bubble bursting.' " Thinking that through, that's the best evidence of a bubble. If everyone saw it coming, the bubble would be avoided.

On February 13, Forbes published its "Housing Bubble Belwether Index" to try and see whether housing prices, when charted on a graph, resemble other bubbles that we know were bubbles (because they burst): the oil industry bubble of the late '70s-early '80s and the Internet bubble of the '90s. Forbes' conclusion? "The path so far exactly replicates that of a popped bubble, whether you look at the Internet Index of the late 1990s or oil service sector of the early 1980s."

Forbes (not typically an alarmist publication) goes on to describe the typical scenario: "After the initial popping, there is a reflex rally that reignites the hopes and expectations of participants. Then (only after the break through key support levels) investors start to realize the boom is over. Fundamentals start to change, too. The media headlines start to recognize surprises, downside surprises. And while it’s a long time before the headlines turn downright gloomy, investors start looking for any rally opportunity to get out even. Eventually those hopes turn to any rally to minimize losses."
20:16
Making Money on a Second Home in a "Normal" Real Estate Market
» ‎ Bend, Oregon Housing Bubble

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Promoters of the real-estate business have been saying lately that there's no crash, no bubble, just a return to a "normal" market, where real estate is merely a profitable investment rather than a ultra-profitable one. "We’re slowing and we’re returning more to a normal pattern," says an Arizona real estate agent. "Even when home sales slow, they still supply solid returns," says the president of the National Association of Realtors. "The longer you own, the bigger the gain."

That's great. Why not own two or three then, since each is a sure-fire moneymaker, creating bigger and bigger gains the longer you own? Many people do - it's a growing trend.

The Philadelphia Inquirer ran a really interesting story last Thursday about the financials of owning a second home in a market where there is "normal" single-digit appreciation, assuming an appreciation rate of 6% per year. You hear lots of people say "that beats the stock market," although analysts who go back farther than the past few crazy years say that that's not true.

At 6% appreciation, it seems, you'd be lucky to break even on a second home.
8:15
Percentage of Central Oregonians With No Health Insurance Higher than Oregon's, Same as California's
» ‎ Bend, Oregon Housing Bubble

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The Bulletin reported on March 9 that "[i]n Central Oregon, 32,000 people - 18.4 percent of the tri-county population - are uninsured." According to 2005 statistics, California had 6,600,000 people without health insurance, which is slightly less than 18.4% of California's overall population of 35,893,799. The Bulletin's report also said that the State of Oregon has about 600,000 uninsureds overall, which would be 16.7% of Oregon's 2004 population of 3,594,586.

The census statistics suggest also that Central Oregon has a higher number of working people with no insurance than in California. While the most recent figure for California's poverty rate is 14.2%, Crook County's is 11.3%, Deschutes County's is just 9.2% and, while Jefferson County's is 14.6%, it also has less than 20,000 people vs. Deschutes County's 135,000. That means that, while people in Central Oregon are better able than Californians to stay out of poverty, California's economy is doing a better job of keeping people insured than Central Oregon's.
March 08, 2006
15:17
Central Oregon Homelessness Rate Slightly Higher than East Bay's, comparable to S.F.'s, lower than Boston's
» ‎ Bend, Oregon Housing Bubble

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On Mar. 8, KTVZ reported that a census of homeless people in Central Oregon found 1,344 people living in shelters, motels, the street, the woods and the desert. According to the U.S. Census, the combined 2004 population of Deschutes County (134,479), Jefferson County (19,868) and Crook County (21,424) is 175,771. This means that, assuming the census found all of the homeless people, 0.76% of tri-county residents are homeless.

Contra Costa County, California, in the East Bay, held a homeless census in 2005 that found 6,927 homeless people. The county's 2004 population, according to the US Census, was 1,009,144, for a homelessness rate of about .69%.

Central Oregon's homelessness rate is closer to that of an urban area like San Francisco - San Francisco's 2005 homeless census found 5,642 homeless people. San Francisco's population in 2003 was 751,682. This means that (even assuming that SF's population didn't grow between 2003 and 2005), 0.75% of San Francisco's population was homeless in 2002, a rate 0.01 percentage points below Central Oregon's, well within the bounds of statistical insignificance but alarming nonetheless.

Boston's 2004 homeless census reported 5,819 homeless people in Boston. Boston's 2003 population was 581,616. No calculator is necessary to see that this will be very slightly above 1% of total population

So it appears that Central Oregon has a homelessness rate higher than the suburban East Bay, comparable to San Francisco, and somewhat less than Boston. One would assume, as well, that since San Francisco occupies an area of 7 square miles, while Deschutes County alone has an area of 3,018 square miles, Central Oregon's census may be more inaccurate (read: lower).
13:36
Local business leaders see no end in sight for Bend's economic good times
» ‎ Bend, Oregon Housing Bubble

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The Bend Bulletin reports today:
1. Central Oregon factory orders up, bucking national trends;
2. Central Oregon CEOs are more confident than other CEOs around the country and are are "no longer as worried about the external effects on their businesses" (although the president of Mid-Oregon Federal Credit Union says "people move here and find it's expensive to live here or their spouse can't find a job, so they move on");
3. Central Oregon Regional Housing Authority is going to find out whether Central Oregon has a problem with affordable housing with the help of Bank of the Cascades, US Bank, Umpqua Bank, South Valley Bank & Trust, the cities of Madras and Prineville, Central Oregon Partnership, and Economic Development for Central Oregon. (I bet their report will paint a very optimistic picture!)
So in short, it's just as Bend's promoters have been saying:
1. no matter what happens anywhere else, things here are going well;
2. the future here is bright, no matter what people say;
3. when we hear there's a problem, we're going to address it.
I have these unwelcome comments to make:
1. The Bulletin's article saying how well things are going refers to one construction-related company, two airplane manufacturers and a machinery shop -- construction is obviously a vulnerable industry in a housing downturn, and economists generally like to exclude the aviation sector from manufacturing when doing short-term (quarterly) manufacturing assessments because of the volatility of the sector (large orders are booked, then it takes weeks or months to manufacture the planes);
2. confidence is great, but you can't pay your bills with confidence or run your car on it. Who's to say that the CEOs in the other parts of the country aren't just better-informed? One of the executives contacted for The Bulletin's story says that "Northwest housing prices make him optimistic for the future." Sounds like these guys might be dancing on the Titanic;
3. this survey is a great concept, but I don't like the idea of having only the local banks, city administrations and business-promotion agencies helping out on the project - that means too much pressure to issue a report that says the problem, if there is one, is under control. I would prefer to see at least one more skeptical organization or person in there as well (like some academics from COCC or OSU) who doesn't have such a vested interest in painting a rosy picture of Bend's economy.
6:14
L.A. Times, March 8, reports "Homeowners Expect Pr...
» ‎ Bend, Oregon Housing Bubble

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L.A. Times, March 8, reports "Homeowners Expect Prices to Keep Rising."

It seems there's a psychological answer for why people are so optimistic about housing as an investment and why so many have invested so much -- and not just because they want to enjoy a larger home, or a second home, or a beachhouse or lakehouse, but as an "investment." The President of the San Diego Association of Realtors predicts that even with a slowdown, houses will provide "a better return than the stock market."

People in today's confusing, competitive, high-speed, information-saturated world desperately want to believe that smart investment is as simple as buying land and buildings. They want to think that they are geniuses for walking into a bank and signing some papers. Because while very few people understand derivatives, convertible arbitrage, futures, purchase-options and other tools the hedge-fund guys use to make billions, everyone understands real estate, on some level. And sure enough, plenty of people have cashed in their 401(k) plans and IRAs and put the money into rental homes and condos - it makes sense for a retirement plan... if you can't make money selling it, you can always rent it out or live in it. Everyone knows that some houses are worth more than others, some towns and neighborhoods more desirable than others. They know that even 100 years from now, people will prefer to live on the beach or near the mountains, so they expect those properties to appreciate more. As every day there are more and more people in the city, the state, the country and the world, why shouldn't housing get more and more expensive? And in the last few years, just about anyone with a pulse could walk into a bank and borrow $500,000 to buy a house with no cash down, whereas with other forms of investment you have to use savings or raise money some other way. Only a select few (like hedge funds) can borrow money to leverage with other types of speculative investments.

A lot of baby boomers got burned during the Internet bubble bust. With their retirement looming, they want to make sure their wealth is invested in a "sure thing": real estate. Some people, especially in Bend, get really emotional when you suggest that real estate prices might fall. These are usually the same people who gloated at barbeques last summer about how much equity they had in their houses and how owning in Bend is the best investment out there.

But at the same time, people who look at trends of real estate over the years (for a 400-year analysis from Amsterdam, read this March 5 NY Times Magazine article) say that, speculative ups and disastrous downs aside, over the long term the real value of comparable housing hasn't really gone up. Which when you think about it isn't surprising: for thousands of years, rich people have lived in big houses in the best areas, middle-class people in medium houses in OK areas, poorer people in smaller places in bad areas, and the poorest have felt lucky to have a shack. Houses today serve the same function they did in biblical times. Why would the comparative price of housing change suddenly and people suddenly want to devote, say, 40% of income to housing rather than 20%? People say "the demographics are changing" even though 2005 national population growth was less than 1% (for an official government report Google "united states population growth rate 2005" and hit "I'm Feeling Lucky"). Are demographics changing more than they did in the late 1940s up to 1950, when the U.S. population was growing twice as fast? Drive out to Eastern Oregon. Are we running out of land? Somehow the easy money people are making / spending / getting for housing seems a bit too easy to be true, or at least too easy to last.

You'll hear people all over Oregon say - "things are different here in Oregon - property prices can never go down because of the Urban Growth Boundary." The UGB is like a ring around every Oregon city that is aimed at preventing low-density development inside the ring and high-density development outside the ring. People say that this restricts development and limits supply. OK, how about San Francisco, which is surrounded by water on 3 sides? How about Honolulu, on an island? How about Manhattan, which is on an island PLUS has built out every inch of that island? Property prices have gone up and down in all of those places over the years. And they'll go up and down everywhere as a matter of the normal course of events - and Bend should be prepared for it so that it remains a viable community.

Another thing - does anyone find the way that house prices are reported to be a bit misleading? For example, check out this article about housing price in Seattle. It says that even though pending sales are down, rising inventory is up and other indicators aren't that great, Seattle housing is becoming more expensive - almost 15% from February 2005 to February 2006. OK, but why don't they say where prices are trending NOW? Why don't they say what prices have done in the last 3 months instead of just comparing one February to another? A lot can happen in a year. Why don't they show a month-to-month curve showing what prices have done over that year? If someone was trying to get you to invest in, say, Microsoft stock, and they said "Microsoft stock is performing solidly. It's up 15%," and then you found out that what they meant was that it's up 15% compared to this time last year but that it's actually been going down in price for the last few months, you'd be skeptical. If they're going to treat housing as an investment, people want to know where it's trending over the short term, because the price of everything increases over the long term.

For further reading - media reports from around the country: Austin, TX, Atlanta, GA, Denver, CO, Richmond, VA, South Florida, Utah, Pittsburgh, PA, and Coeur d'Alene, ID.

Maybe it's time to stop debating whether prices are going up, going down or staying put, and start planning for a sustainable future without the housing boom? This is especially important in Bend, since we've been so dependent on it.
March 07, 2006
11:39
Interest Rate Cycle
» ‎ Bend, Oregon Housing Bubble

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The Wall Street Journal, CNN and other financial publications report that interest rates are likely on their way up, at least over the near term.

It works like this: high consumer-confidence levels caused by increasing home values make people feel more comfortable about taking on higher levels of debt. The debt goes partially to consumer spending. Consumer spending drives increases in activity in the services, retail and manufacturing sectors. These sectors expand and hire new employees. Unemployment falls and the labor market tightens. Employers find that their labor costs rise (Bend Bulletin, March 1). In turn, employers have to sell their products and services for higher prices, which puts further pressure on wages (the "wage-price spiral"). This results in inflation. Inflation means that each dollar has less and less purchasing power. During times of inflation, investors (whether foreign or domestic) in the US economy demand higher and higher yields / rates of return on their investment, so interest rates rise.

As reported by the Wall Street Journal on March 7 (pages C1 and C6), there's a separate self-feeding upward spiral that occurs with mortgage rates once interest rates start rising. When interest rates rise, most homeowners have less reason to refinance (and homeowners with fixed-rate mortgages have no reason to do so). This means that the average time that a homeowner holds a mortgage increases. Freddie Mac and Fannie Mae, the government-created companies that purchase mortgages from loan originators and then use the payment streams on the mortgages as collateral for issuing mortgage-backed debt securities, counteract the changed risk contour in their mortgage portfolios caused by homeowners refinancing less often by unloading long-term Treasury notes. This increase in supply of long-dated Treasurys means that the government has to raise interest rates further in order to keep attracting bond investors.

However, the cycle is expected to play itself out fairly quickly, with a fairly quick return to lower interest rates. Higher interest rates, of course, mean higher monthly mortgage payments and slower housing appreciation rates, possibly even a drop in real-estate prices. Higher interest rates also mean higher borrowing costs across-the-board, for both consumers and businesses. This acts as a drag on both business and consumer spending, slowing or even reversing economic growth. Unemployment increases; marginal and growth-based businesses go under; consumers and businesses with high debt loads default and declare bankruptcy. But the idea is, before that happens, in order to re-stimulate economic growth the Federal Reserve will cut interest rates and make it cheaper to borrow again, which will increase spending and revive the economy. It would be painful for many (especially those with a lot of debt) but it would be temporary.

As applicable to Bend, the problem is fourfold:
1. many of its homeowning citizens are carrying a very heavy debt load in the form of mortgages and home-equity loans, and compared to other communities, their earnings are fairly low;
2. its economy is heavily dependent on the economies in the areas from which newcomers to Bend have historically arrived, and more specifically, on the ability of Californians to cash out their home equity and purchase a lower-priced home in Bend;
3. a disproportionate number of jobs and businesses in Bend are in growth-based fields: construction, real-estate development, real-estate sales, mortgage brokerage, building supply sales, etc.; and
4. last but not least, Bend is too isolated for its residents to commute anywhere if the local economy goes sour. If a breadwinner loses his/her job and can't find another within a reasonable commute, the family will typically move. There are only four cities with more than 100,000 people within a 3-hour drive of Bend (Medford, Salem, Eugene and the Portland metropolitan area), and none within a two-hour drive of Bend. An outflow of people would be devastating to Bend's growth-based economy.
Why is this all a problem? Because in order to ensure a healthy community, a local economy must be based on more than one thing. Bend's is based on real-estate development and growth. It needs to diversify immediately. Instead of focusing on ensuring that people keep moving to Bend (selling Bend as a "livability destination"), Bend's civic leaders should work on ensuring that the people who are already here can weather an economic downturn.
2:51
Threatening to Pull Out
» ‎ Bend, Oregon Housing Bubble

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March 5, The Oregonian: LINK

In this article ("Middle class losing faith in schools, city"), a young couple from San Diego threatens to leave Portland because even though they'd heard that the schools in Portland are great, they aren't. They live in North Portland, and the poverty rate among the students in the local schools they've found ranges from 50 to 86 percent. However, they can't afford to live anywhere else.

The husband is quoted as saying he thought, "Let's just find another city where it's cheaper and better." Is anyone concerned that this is the same attitude a lot of newcomers have, that when the going gets tough, they'll get going? Are those of us who are committed to our communities supposed to say "no, please don't move, what can we do to make you stay"?

And where did people out-of-state get the idea that Oregon schools are so great? Have people been noticing an exceptionally large number of geniuses coming out of Oregon? When people visit Oregon, are they bowled over by Oregonians' musical ability and foreign-language skills?

In the article in The Oregonian, it says that the couple from San Diego "thought that in an arts and ecologically minded city, every school would offer dynamite environmental, music and drawing classes, but they've found those programs are sparse or wedged in alongside lessons in math and reading." You really have to be from out-of-state to expect that schools in North Portland would somehow be amazing. And it seems like you really almost have to be from another planet to think that in a city as large as Portland, in a neighborhood as poor as NoPo, "every school would offer" anything but a building for kids to go to during the day.

It seems that this is one of the downsides of selling a city or a state as a "livability destination." If the place doesn't perform as advertised, people are ready to leave. In Bend's recent cold snap, I heard some people reassuring newcomers that "it's never this cold" and this is some kind of freak occurrence. Anyplace in Central and Eastern Oregon can become bitterly cold at any time! Mirror Pond in the 1980s became jammed by arctic-style ice floes and flooded the Drake Park area. In the winter of 1991-1992, snow fell in Bend in October and stayed on the ground until April. There's been at least a few times when snow has fallen in Bend on the day of the Pole Pedal Paddle (third weekend in May).
March 06, 2006
19:40
Economic Development for Central Oregon
» ‎ Bend, Oregon Housing Bubble

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[www.edforco.org]

In October 2005, the civic organization Economic Development for Central Oregon gave a presentation to the Prineville Rotary Club. A link to the report is above.

Page 12 is particularly interesting. Answering the the question "Is there a real estate 'bubble' in Central Oregon?", it gives the factors forming the "Anatomy of a Real Estate Bubble":

- significant speculative buying (as a % of sales)

- mortgage market composition

- overbuilding

- overconfidence

- price increases not due to supply-side issues

- "froth”

Has anyone seen any of these factors? Economic Development for Central Oregon concluded that even though Bend was rated 25th out of the 299 most overpriced markets by a survey by National City Corp., and there is a "correction likely in hot markets in the West," there will be "continued strong demand in Central Oregon through at least 2007" because "Central Oregon will be more insulated due to continued strong demand, constrained supply and vibrant economy."
19:17
Tapping into the rush
» ‎ Bend, Oregon Housing Bubble

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The Bulletin reports (Feb. 14, 2006) - [www.bendbulletin.com]

According to the article, in 2006 Bend real estate developers plan to add 155,000 sq. ft. of commercial office space to Bend's current stock of 1.7 million sq. ft. This is a more than 9% increase in one year - to 1,855,000 sq. ft.

Meanwhile, Compass Commercial Real Estate is quoted as saying that at the end of 2005, there was a 10.3% commercial vacancy rate in Bend, meaning that of Bend's current stock of 1.7 million sq. ft., 175,100 sq. ft. are vacant. However, Compass forecasted for The Bulletin that by the end of 2006, the vacancy rate will shrink to 9%. When you run the numbers, a 9% vacancy rate from 1,855,000 sq. ft. (assuming all of the planned construction is carried out) is 166,950 sq. ft. at the end of 2006 - LESS VACANT SQUARE FOOTAGE THAN RIGHT NOW. As quoted by The Bulletin, Compass essentially predicted that every single square foot of new 2006 construction will be leased, plus some of the existing vacant space.

The article mentions that "the demand for space is driven both by local businesses expanding and by new businesses moving to town to tap into the real estate and development rush."

It seems that Bend's real estate developers are betting that 2006 will be an even bigger year for development than 2005, which was a boom year almost everywhere on the West Coast. What makes Bend immune to the slowdown happening everywhere else?

Are people basing these business decisions on a cold look at the numbers, or on a "gut feeling" about the town's prospects?
15:25
Bend, Oregon Real? Estate Market
» ‎ Bend, Oregon Housing Bubble

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A local is making T-shirts parodying the out-of-control real estate prices in Bend. He writes, however, that "hopefully soon" he will own Bend real estate as well. Let's hope there's more true believers like him!
13:25
Bend's Pyramid-Scam Economy
» ‎ Bend, Oregon Housing Bubble

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A Deschutes County Planning Commission member says that Bend's "main commodity sold here is livability" and that "Central Oregon's major industry is growth. If you have no growth, the industry will collapse and there will be a huge loss of family-wage jobs. ... Fortunes are being made by the growth industry providing livability for people who want to be in Central Oregon."

[www.bendbulletin.com]

Remember when Pres. Bush said that the country is "addicted to oil" in his State of the Union speech? Bend is "addicted to housing developments." At some point in the past (really taking shape around the mid-80s), as the wood-products industry was dying down in Bend, regional leaders (including Mt. Bachelor) decided that future of Central Oregon was in upscale resort-style development. This took the form of actual destination resorts, California-style named housing developments, and a re-orientation of what was a mainly blue-collar, industrial / resource-based economy where goods and materials were exported from the area in exchange for dollars (with a significant but smaller tourist base) into a service-and-retail-based economy with more tourist-oriented facilities.

For most of the 20th Century, Bend was well-known around Oregon, and less so around the Pacific Northwest, as a place for skiing, camping, hunting, fishing and other outdoor activities. As part of expanding its appeal, in the 1980s Bend's civic leaders began promoting Mt. Bachelor/Bend as a national-scale destination ski resort, and even went after Japan's economic boom (the Japanese were fascinated with Central Oregon because of the popular FUJI-TV program From Oregon With Love). Flights were opened from Redmond to Denver and glossy ads were placed in national magazines.

This didn't work so well, because Bend could not compete as a destination tourism resort with places like Aspen, Vail, Sun Valley, Mammoth Mountain and the Utah resorts. Mt. Bachelor's slopes were flatter, and bad weather often closed parts of the mountain. The snow was not as good as in the Rockies or in Utah. There was (and is) no night skiing. The biggest liability was its location. The closest airport wasn't in Bend, located 20-some miles from Mt. Bachelor, but in Redmond, located about another 20 miles from Bend. Last but certainly not least, there were (and are) no slopeside accommodations and no ski village. Tourists simply could not leave their hometowns and be on the slopes in a matter of hours as they could at the more-established destination ski resorts. And once skiiers got to the slopes, there would always be an annoying back-and-forth commute to off-mountain accommodations along an icy road lined with fender-benders and motorists applying snow chains. And then, those accommodations were typically not located within walking distance of Bend's best restaurants and nightlife.

Some people did come, though. Word spread about Bend as a kind of "best-kept secret" - an outdoorsy, mountain town with both summer and winter recreation, a laid-back but family-friendly vibe with costs lower than in most places.

Steadily Bend grew. The sign outside town said 17,800, then 20-something thousand, then 30-something thousand. Folks who moved in, even those with college educations, found that while high-paying, white-collar jobs were hard to come by, you could always make a buck remodeling houses or selling real estate. Teachers, who had the summers off, would buy backhoes with their savings and run construction crews as a cash sideline while keeping their teaching jobs for the insurance and retirement benefits. At some point, outfits who were already involved in the building trade and real-estate development in California and other states--but were looking for new stomping grounds where startup costs were lower and the competition less cutthroat--moved to Bend with the economic opportunities first in mind and the recreational opportunities second.

Sometime in the mid-1990s, there was a tipping point: Bend was officially a "boomtown" with a boomtown economy, which this blog defines to mean an economy based on a constant flow of newcomers.

This is an important distinction. Non-boomtowns, which have something other than growth at their base, keep their essential character through good and bad times. Portland's population has ebbed and flowed, but if there was a net outflow of people from there, it would retain its essential character. Same with New York, San Francisco, Seattle, Eugene, and so on. For example, if the U of O moved out of Eugene it would become an essentially different town, but if it has a net outflow of 10% of its population over the next 5 years it would still be the liberal college town we all know and love. But Bend is different. Do people think that if Bend's population dropped 10% over the next 5 years, it would still be essentially the same?

If Bend stopped attracting newcomers, what would it look like? No one knows. Would it become a ghost town, without enough residents to fill its houses? It wouldn't be Oregon's first. Would its increasingly yuppie residents turn to ancient redneck survival techniques, time-tested in Oregon over generations, such as hunting for food, cutting wood to heat homes, wearing homemade clothes? They would if they were intent on staying in Bend through thick and thin. Would the town, with lots of new housing stock but few jobs, become a retirement community, populated mainly by old folks and healthcare personnel? Doesn't sound like much fun.

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