So how is the real estate market as of late...the numbers tell you things have cooled a bit. Will we see an uptick with the freshly lowered interest rates. Only time will tell. ;
Bubble Talk Why Portland Metros Hot Housing Market Is Not Going To Collapse
I am convinced there is a professional hand-wringer class that gains some perverse comfort in predicting the inevitable crash in real estate prices. They point to our indisputably red hot real estate market, and conclude that since it cannot last, it will “collapse”, “burst”, or otherwise come crashing down on our shoulders.
I believe this conclusion is wrong-headed, although it may garner hits to one’s blog. Just because the market today is, to use Alan Greenspan’s term – which was the understatement of the year in 2005 – “frothy” does not mean it’s a “bubble” in the cataclysmic sense. Ironically, however, the “froth” witnessed by the entire country in 2005, did become a soon-to-collapse bubble of epic proportions in 2008.
However, the “bubble” that burst was not caused by increasing prices, but increasing credit availability. As most reasonably informed observers remember, the Wall Street Brainiacs and Big Banks devised a way to give home loans to anyone who could fog a mirror, then immediately securitized the paper and sold the bonds to large pension funds and municipalities, who were chasing higher returns. And the riskier the paper (read “subprime mortgages”), the better the returns.
Since the lenders did not continue holding their own loans, they retained no risk of their failure, thus turning the securitization process into a perpetual motion machine: Lending billions, selling the paper, and then recycling the money into more loans for more investors, and so on, and so forth. The large institutional buyers of these securities made up what became known as the “Private Label Market”, and they held much riskier paper than the “conventional loans” sold by Fannie and Freddie into the secondary mortgage market. But since the Private Label Market was “private”, its investments did not have the implicit guarantee of the federal government that was given to investors who bought financial paper from the two government sponsored enterprises (“GSEs”), Fannie and Freddie. Enter the rating agencies, such as S&P and Moody’s, who served as the shills in the crowd, telling the private label investors, that these junk bonds were as good as spun gold.
This was the lead-up to the Great Recession. But housing prices increased first and foremost not because of some abstract valuation phenomenon; it was because easy money created easy access to credit. Once buyers figured out they could qualify for just about any size loan they wanted, the feeding frenzy began. And home sellers were quick to oblige; as were home builders. And then there were the inevitable flippers, who bought land and homes for no purpose except to increase their prices and turn a quick profit.
However, none of this could have occurred without unlimited credit availability. “Frothy” prices were the singular result of buyer demand who, with little or no vetting, qualified for almost any loan they wanted, regardless of credit scores, employment, or income. It was a sellers’ market, and they dictated price and terms.
In 3Q 2007, investors began to see cracks in the easy money model, and started to pull in their horns. Over the next twelve months, Wall Street continued feeding the securitization beast, but by 3Q 2008, as the massive subprime defaults became more evident, the game was up. Investors dried up, leaving banks unable to sell their loans. Bear Sterns had a near-death experience, Lehman Bros., went bankrupt, and almost every other overleveraged or overextended bank and brokerage house was either absorbed by a larger competitor, or simply disappeared.
Of course, there were the few survivors, who, like hedge fund manager John Paulson, had Goldman Sachs create an investment deal laden with subprime bonds, that he, unbeknownst to other investors, intended to short. Goldman was paid to package the deal, giving it an air of respectability. When the bonds failed, investors lost millions, and Paulson took home approximately billion dollars.
The result of the 2008 crash in 3Q 2008 was immediate and devastating; lenders pulled up the credit ladder. Profligate lending disappeared almost overnight. Chastened, underwriters suddenly began to actually read home loan and refinance applications. Now, only the most qualified borrowers could get loans. But since most folks needed to first sell their homes before they could buy another one, the equation required an equal number of buyers. With home loans drying up, so did potential buyers. Sales stagnated.
The market swiftly reversed itself, and no longer could sellers dictate price and terms. It was now a buyer’s market, which meant that prices were driven down (a) because buyers dictated the price and terms, and (b) by frantic equity sellers letting go of their homes at bargain basement prices. When short sales began to appear, it was the death-knell; buyers no longer needed to negotiate with equity sellers, since they could find perfectly acceptable, and less expensive, negative-equity homes available for purchase.
In short, the collapse in home prices was due to the collapse in credit availability. The pricing bubble did not happen in a vacuum. It could not have occurred without complicit lenders making easy money loans.
Although we are clearly seeing “frothy” prices in the Portland-Metro housing market today, the credit markets bear no resemblance to 2004 – 2008. Back then, over half of all home loans were being sold into the Private Label Market, rather than to the two GSEs, Fannie and Freddie. The Private Label Market is essentially nonexistent today. The only players in the conventional secondary mortgage market are Fannie and Freddie, and new mortgage laws mandate rigorous underwriting standards. The FHA, VA, and USDA have become the “new subprime” market to take up the slack for those whose credit credentials do not qualify them for conventional financing. And most importantly, interest rates over the last 12 months continue to hover below 4.00% for a conventional 30-year fixed rate loan, with FHA also at historic lows.
Related to these low interest rates are other economic factors, such as the Federal Reserve’s view of inflation. As long as inflation remains below 2.00%, which it has done for the last four years, and the mercurial economic numbers in this country and the rest of the world continue, there is every reason to believe that Janet Yellen and the voting members of the Fed will not be increasing interest rates dramatically or frequently. Although rates went up a quarter of a point once in December, 2015 – the first time since the onslaught of the financial crisis – the pace of the increases is not set in stone (as was previously implied at a rate of .25% four times in 2016), and we can expect them to occur only incrementally for the rest of the year, and into 2017. Unemployment is generally stable, albeit slightly unpredictable from period-to-period. All of this translates into a sanguine forecast for housing in 2016-2017, even as housing prices continue to increase.
So, what could cause a “collapse” in housing prices today? Not much. Certainly not an overnight increase in rates or a disappearance of available financing. The worst that could happen is that fewer properties will appraise out, and buyers will have to either come to the closing table with more cash, or lower their expectations.
Absent some non-economic disaster, such as a September 11 event – with its unpredictable consequences – I do not see a cataclysmic collapse in home prices, despite today’s froth.
What is more likely to occur is a slowing in price appreciation from the incremental effect of (a) affordability issues (i.e. home prices rising faster than wage growth) and (b) minor interest rate increases over time. And, of course, it is possible that collateral and unrelated events, such as large downturns in the stock market, such that we experienced in late 2015 into this year, could psychologically impact the “wealth effect” of the last several years. This could indirectly dampen buyers’ appetites for larger mortgages. But none of these events will occur overnight as they did in 2008.
Undoubtedly, these gradual events, and perhaps others, will converge to slow our steaming real estate market. For those paying attention, most will see it coming, and most will adjust; sellers, buyers, and Realtors®. At worst, there will be more housing inventory to select from, more sanity in the negotiation process, fewer multiple offers, and more deliberative home buying decisions. Now, that isn’t necessarily a bad thing, is it? ~PCQ
 According to the New York Times, May 21, 2005 article (“Greenspan is Concerned About “Froth” in Housing”): “ʻWithout calling the overall national issue a bubble, it’s pretty clear that it’s an unsustainable underlying patternʼ, Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown. Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over “froth” in the market and pointed to a big increase in speculation in homes — particularly in second homes. As a result, he said, there are “a lot of local bubbles” around the country.”
 Thus, the infamous “NINJA” loans: No income, No job? No problem!
 By “shorting” I mean they began hedging, i.e. actually making bets that these same investments would fail. These bets yielded huge returns. And who better to recognize their investments as junk, than the companies who created and sold them? This was the infamous ABACUS deal, and it makes used car salesmen look like saints.
 The 3-Ds, debt, death and divorce played a large role. Also, the Great Recession brought job losses, which forced families to relocate. Home values plummeted 40% – 50%. When values fell below a homeowner’s total mortgage debt, they could neither sell nor refinance. The only option, which took a year or two for lenders to fully embrace, was to short sell a home.
 Despite the mantra that the banks would not approve short sales for less than “market price”, as long as home values continued to fall, lender consent was rarely difficult to obtain, since they knew if they rejected a short sale, the next offer would continue to mirror the falling market, and be less than the prior one. It was not until 3Q 2012 that Portland-Metro prices began to improve, and for the remaining several years, lender consent to short sales has been more difficult to obtain, since they know that if they reject an offer, the next one would likely be higher.
Courtesy of Phil Querin, Querin Law, April 3, 2016
Josh is a proud graduate of the University of Oregon where he earned his BS degree. Upon graduation he followed his entrepreneur spirit and opened his first business. Josh started Burgess Services, wh....