Portland Metro Area Home Market Report For June 2014 http://www.movingtoportland.net Voice 503.497.2984 [email protected] In This Issue Portland Home Market: June 2014 Cost of Residential Homes by Community: June 2014 Mortgages Weather Summary for Portland Metro Area Portland Property Taxes: Who Gets the Money Portland Mavericks: The Battered Bastards of Baseball Portland Home Market for June 2014 June 2014 Highlights: Strongest June Closings since 2007 Closed sales enjoyed a solid month this June in the Portland metro area. The 2,617 closings showed a 4.2% increase over the 2,511 closings from last June. In fact, this was the strongest June for closed sales in the region since 2007 when there were 2,731! Pending sales, at 2,965, rose 5.7% compared to last June’s 2,804, but fell slightly (-0.8%) compared to the 2,989 offers accepted just last month. New listings (4,078) were 8.7% stronger than June 2013 (3,751) but fell 2.7% from May’s 4,192. There are currently 7,250 active residential listings in the Portland metro area. Total market time fell again in June to 59 days. Inventory remained stable for the third consecutive month, and sits at 2.8 months. Page 2 Portland Metro Area Home Prices for June 2014 Average and Median Sales Price: Median Price Up 8.7% During First Half of Year The average price the first half of the year was $328,900, up 8.7% from the same time frame in 2013 when the average was $302,700. In the same comparison, the median also rose 8.7% from $257,500 in the first half of 2013 to $280,000 in the same period of 2014. Year-to-Date Summary Portland numbers are very similar this year compared to last. New listings (20,248) are up 4.4% compared to the first half of 2013. Pending sales (14,705) and closed sales (12,518) are down 0.9% and 0.1% in the same comparison. Sales Price Percent Changes for Portland Metro Area The Average Sale Price Percent Change is based on a comparison of the rolling average sale price for the last 12 months (7/1/2013 - 6/30/2014) with 12 months before (7/1/2012 - 6/30/2013). Average Sale Price Percent Change: 10.2% ($322,600 v. $292,800) Median Sale Price Percent Change: 11.3% ($276,000 v. $248,000) Sales Price Change in June 2014 From Peak in 2007 Here are the sales price percent changes in June 2014 from their peak prices in 2007: Average Sale Price Percent Change from peak in August 2007: -9% ($334,800 v. $366,900). Median Sale Price Percent Change from peak in July 2007: -4% ($290,000 v. $302,000). Average and Median Sale Price Chart for June 2005 - June 2014 Below is the Average and Median Sale Price chart for the periods 2005 - 2014 showing the home sales by six-month intervals. The chart is for the five county Portland metro areas. It does not include homes in southwestern Washington (Vancouver to include Clark County). Home sales in the Portland area reached their lowest price since 2005 in December 2011 and have since begin the slow climb back to the summer of 2007 prices but they still a few percentage points from a full rebound. If the chart above covered a long period of time, say beginning in June 2003, you would find the Page 3 Portland Metro Area Home Prices for June 2014 same curve, rising over the four years and peaking in 2007. Then there was a drop for almost four years until it started to climb in 2012. Above data based on information from the RMLS™ Market Action report for June 2014. Another Bubble? It’s not uncommon for many Realtors in the Portland area to have multiple offers on a listing over the last few months, just like 2007. Rising prices along with a shortage of homes for sale brings up the question. Are we in for another bubble in the housing market? Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don't ever think that the value of their home might decrease. Traditionally, the housing market has not been as subject to pricing bubbles as other asset markets have been because the large transaction costs of purchasing a home and the carrying costs of owning and maintaining a home discourage speculative behavior. However, housing markets do go through periods of "irrational exuberance" (a term used by former Fed Chairman Greenspan). What causes housing price bubbles? What are the triggers that cause housing bubbles to burst? Home buyers should look to long-term averages when making critical housing decisions. The main reason for buying a home to live in should not be to gain an immediate financial gain. A home should be something to enjoy and add comfort to your life. Mean Reversion The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion. Prices in the housing market follow this law of mean reversion too - after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. Home prices might fall (or rise) quickly to a point that puts them back in line with the long-term average, or they might stay constant until the long-term average catches up with them. The price of housing, like the price of any good or service in a free market, is driven by supply and demand. When demand increases and/or supply decreases, prices go up. In the absence of a natural disaster that might decrease the supply of housing, prices rise because demand trends outpace current supply trends. Just as important is that the supply of housing is slow to react to increases in demand because it takes a long time to build a house and, in highly developed areas there simply isn't any more land to build on. So, if there is a sudden or prolonged increase in demand, prices are sure to rise. Once you've established that an above-average rise in housing prices is primarily driven by an increase in demand, what are the causes of that increase in demand. There are several: 1. An upturn in general economic activity and prosperity that puts more disposable income in consumers' pockets and encourages home ownership. 2. An increase in the population or the demographic segment of the population entering the housing market. 3. A low general level of interest rates, particularly short-term interest rates, that makes homes more affordable. 4. Innovative mortgage products with low initial monthly payments that make homes more affordable. 5. Easy access to credit (a lowering of underwriting standards) that brings more buyers to market. Page 4 Portland Metro Area Home Prices for June 2014 6. High-yielding structured mortgage bonds, as demanded by investors, that make more mortgage credit available to borrowers. 7. A potential mispricing of risk by mortgage lenders and mortgage bond investors that expands the availability of credit to borrowers. 8. The short-term relationship between a mortgage broker and a borrower under which borrowers are sometime encouraged to take excessive risks. 9. A lack of financial literacy and excessive risk-taking by mortgage borrowers. 10. Speculative and risky behavior by home buyers and property investors fueled by unrealistic and unsustainable home price appreciation estimates. All of these variables can combine to cause a housing market bubble. They tend to feed off each other. Like all bubbles, an uptick in activity and prices precedes excessive risk-taking and speculative behavior by all market participants: buyers, borrowers, lenders, builders and investors. The Forces that Cause the Bubble to Burst The bubble bursts when excessive risk-taking becomes pervasive throughout the housing system. This happens while the supply of housing is still increasing. In other words, demand decreases while supply increases, resulting in a fall in prices. This pervasiveness of risk throughout the system is triggered by losses suffered by homeowners, mortgage lenders, mortgage investors and property investors. Those losses could be triggered by a number of things, including: 1. An increase in interest rates that puts homeownership out of reach for some buyers and, in some instances, makes the home a person currently owns unaffordable, leading to default and foreclosure, which eventually adds to supply. 2. A downturn in general economic activity that leads to less disposable income, job loss and/or fewer available jobs, which decreases the demand for housing. 3. Demand is exhausted, bringing supply and demand into equilibrium and slowing the rapid pace of home price appreciation that some homeowners, particularly speculators, count on to make their purchases affordable or profitable. When rapid price appreciation stagnates, those who count on it to afford their homes long term might lose their homes, bringing more supply to the market. The bottom line is that when losses mount, credit standards are tightened, easy mortgage borrowing is no longer available, demand decreases, supply increases, speculators leave the market and prices fall. Making Price Appreciation Estimates When Buying a Home Too many home buyers use recent price performance as a benchmark for what they expect over the next several years.