Friday, December 29, 2006

Bubble Media

The US Housing Bubble has spawned a large number of articles, and ongoing commentary, mainly via bloggers. Here are some of the better ones:

Wikipedia: Always an excellent source of information, Wikipedia has several sections of interest, first a general article about Real Estate Bubbles in general, and another on the US Housing Bubble in particular. Both are just excellent, with oustanding commentary & relevant graphs. The graphs alone are worth the trip, and give a broad view of just how high this thing has gone and how it pervades the whole World. There are additional pieces on the Japanese Real Estate Bubble, the commodities bust starting in the early 80's, the Dutch tulip bubble, the NASDAQ bust of 2002, and probably more I didn't find. This site has been a top rated site for housing info for quite awhile. A single long page of facts (and fictions?), this is an opinion piece that is fairly compelling on the downside.

The Housing Bubble Blog: By Ben Jones, and mentioned in this blogs predecessor, Bend actually gets some play in this blog. This guy does a great job of hunting down newspaper articles & putting info in his blog about a large number of markets all over the US.

The Housing Bubble Fact Sheet: This is an interesting article with an economic "doomsday" edge to it. It is also available in PDF format.

Housing Bubble: A blogspot blog, "This blog is devoted to further discussion on residential and commercial real estate prices. Is there room to grow? Have we reached the peak? Are real estate prices already on the way down? Post your insights, findings and decide for yourself. Read what other 'experts' have to say?".

David Lereah Watch: The top "paid schill" in pumping the housing bubble, Lereah is the National Association of Realtors chief "economist". Type "David Lereah blog" into google, and you'll find that in the blogosphere, Lereah has gone so far over the top in pumping home ownership, that he has lost all credibility. He denies the US housing bubble on a regular basis, and his "projections" for prices and such are so regularly far too high, that you get the feeling his only function is kidding himself & his associations members.

Buffett says "Bubble": A CNN-Money piece where Warren Buffett warns about a residential real estate bubble: Excerpt: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre."

There's quite a bit more, just type "housing bubble" into google, and you'll get over a million hits. If you want blogs, go to googles blog search, and type "housing bubble", and you'll get over 125,000 hits. Type in "housing bubble Bend", and you'll see this frisky young blog already coming in 4th! Not bad!

Thursday, December 28, 2006

Bends Laffer Curve - Not Very Funny

The Laffer Curve is a theoretical construct that states generally that there exists some optimal revenue-maximizing tax rate for our government, somewhere between 0% and 100%. At 0%, obviously they collect nothing, and at 100% there is no "theoretical" incentive to work (or one hell of an incentive to hide your income) and there is also $0 in revenue. So the Laffer Curve is an inverted "U" shape, with $0 in revenue (plotted on the Y-axis) at 0% and 100% tax rates (plotted on the X-axis), and some local maximum somewhere in the middle that maximizes income.

There's been quite a bit on this blog, it's predecessor, as well as The Bulletin about businesses (mainly downtown) being closed down, ostensibly due to large increases in rent. Duncan McGeary talks about the lease rates diconnecting from reality on his blog, The Best Minimum Wage Job A Guy Ever Had.

Finally, it can probably be stated with little risk that Bend has experienced one of the largest population growth & wealth bubbles in its history, with a flood of people & money coming to this area in just the past 5 years.

So, what does the Laffer Curve, high lease rates, and big growth recently for Bend have to do with each other? It's my opinion that Bend commercial lease rates launched on a steep trajectory higher originating from a number of factors, a primary one being eyepopping growth, that may well have pushed per sq/ft rates past the point of profit maximization for commercial property owners.

Think of it like this: There exists some theoretical lease rate that maximizes the entirety of commercial properties downtown revenue, what it is, is debatable. But cumulatively (assume) there is some blended rate that maximizes the income for these properties. And it exhibits Laffer curve-type behavior; it is maximized somewhere between 0% of the "surplus" (profit) of these businesses and 100%. Charge nothing, and you get nothing, but charge 100% of a business owners surplus, and you eradicate any incentive to stay open.

As an aside: I do realize that there are "lifestyle" businesses, where the owner derives some sort of "psychic benefits" from operating their business, and the economics are of little importance, and some persons like this will operate their business at a loss for extended periods. There are also owners (maybe including Duncan), who take far smaller than economically maximized paychecks for the pleasure of doing "what they want". And then there are simply people who are ignorant of their economic gains over the relevant planning period. All these factors can push lease rates beyond an economically determined profit maximization point, and keep it there. And there is probably evidence that this is happening in some measure in downtown Bend.

I think that the large increases in lease rates currently in Bend are the simple projecting forward of large past rate increases. Demand for the space has certainly gone up with population booming in Deschutes County, while supply has stayed largely contained (until recently, when building height restrictions were lifted). This has resulted in a boom-led increase in lease rates, and with that, a boom in commercial property prices.

But I think the boom is slowing, if not busting. This makes current lease rates "optimistic", and probably to the right of the concave downward "Laffer Curve" for Bend downtown property. In fact, if a "bust" of Bends hyperboom really happens with full force, the natural slowing of economic activity, a dramatic slowing in lifestyle subsidies, and a dramatic decrease in economic incentives to continue working marginally profitable stores (a spouse unwilling to continue subsidizing a money loser, for example) could combine to lead to an explosion in vacancy rates downtown, and a commensurate plunge in lease rates.

I don't think the hyper-optimistic rates of $2.50/ft (+ net lease charges) are sustainable downtown. Of course leases rollover over years, so the effect may be delayed, but there seems to be strong evidence that commercial property owners are confiscating a share of the surplus created by downtown business that is far to the right of optimal, and will lead to a drastic reduction in total revenue. Businesses in Bend simply do not make enough to support current lease rates.

Once this sinks in, there will be a sharp adjustment in Bend commercial property values, downward exacerbating the bust. As I've written before, commercial property exists for no other reason than to make their owners money, and when the money stops these properties fall hard. And once the manifestations of a bust are clearly visible ("For Lease" signs all over), it's even harder to convince new lessees to sign up. Busts are hard to... well, bust.

I am not a bleeding heart liberal, left-wing nut socialist, or anything of the sort. I am a profit maximizer to the core, and think these building owners should maximize their income. But it is my firm belief that they have gone too far in lease rate increases, and they are far past the point of profit maximizing on the "Laffer Curve" for Bend commercial property. I think owners who are not grasping all they believe they can possibly charge in an economic environment gone soft are pursuing an enlightened path. Lessors charging $2.50/ft or more will find their space empty, as there just aren't that many businesses here that can absorb that sort of lease rate and survive.

Sunday, December 24, 2006

Lies, Damn Lies, and Bend Real Estate Stats

On the previous Bend Bubble Blog, BEM & other commenters waited monthly for one of the only level-headed commentaries from the Realtor trenches, David Fosters RE commentary. Then there surfaced other sources of RE stats, from Doug Farmer on Realty Times. While Davids stats had a calming, monotonic ever rising quality that many times seemed impossible given anecdotal evidence to the contrary, Doug Farmer published stats that fluctuated wildly month-to-month, with prices rising & dropping in huge percentage terms every month.

For Nov 2006, David Foster quotes:
"in November it [Avg Sale Price] increased again from $406,241 [in Oct 2006] to $406,889 [Nov 2006]..."

While Doug Farmer states an avg Oct 2006 sale price of $469,592, dropping to $422,980 for November. What's the deal here?

While impossible to state categorically, it seems David Fosters data is smoothed significantly by looking at long-term averages, probably 12 months. There are good reasons for this: RE fluctuates wildly month-to-month, and is seasonal throughout the year. But using moving averages also makes trend spotting difficult. 11/12ths of the data points are unchanged each month. A dropping 12 month moving average only tells you one thing: That this months data point is lower than the data point of 13 months ago that dropped off.

I wanted to give people a more "instantaneous" view of the data points, and have published a spreadsheet. It's here:

Some explanation: The data is from Doug Farmer, and (hopefully) is raw MLS data, and that raw data is highlighted in yellow. Doug states these stats are all Bend residences & residential subtypes, whatever that means. Cumulative Value is a 3 month moving avg of Sold Prices X ("times") the number of active listings ("Actives"). "Total $ Sold" is simply the total dollar volume sold, and "Commissions" is just 6% of this. Then there is a 3-month moving avg of commissions, and the final column is the (Cumulative Value/3 mo. MA commissions). That last column is just a general indication of what Realtors are pulling out of the cumulative value of all residential listings. In Nov 2006, Realtors made $.15 for every $100 listed on MLS (per these possibly erroneous calculations). Think of a retailer, they want to turn their inventory as quickly as possible: Realtor inventory turn has fallen quite substantially just from this Summer (although this could be seasonal).

I've highlighted what I think is the most interesting stat, the total dollar volume sold from Nov of last year, till this year has almost dropped in half, as have commissions, obviously. This cannot bode well for Realtor and other RE-related professionals income. Per capita incomes have to be even worse, since Realtor numbers are swelling.

The True Bubble Peak seems to have been in June 2006, with $131 million in total sold volume at a nosebleed average of almost $500,000! July and August fell off dramatically, but were still historically strong. Sept - Nov were the 3 worst months of this sample, $ volume-wise, with very poor YoY comparisons (for Nov, at least). Realtors don't spend the Average Sale Price, they spend commissions, and commissions are down near 50% from last year, again with per-capita number almost certainly far lower. Realtors are in the throes of the Bend Bubble Bursting. It is only a matter of time when their plummeting incomes pertebate throughout the Central Oregon Economy. You'd be hard pressed to argue that reducing the total incomes of the most lucrative economic sector of our economy from $7 million/mo. to half that is "healthy". I would have some words for my Boss if he wanted to cut my pay in half, becasue he thought it would be "healthy" for me.

One Day Does Not A Christmas Season Make. But...

Duncan starts his blog, "A record sales day at the store, and a big sigh of relief." He posted it yesterday, but I'm guessing it was in the morning. Because I tried to get downtown yesterday, and due to the rain & flooded underpasses, it was almost impossible. Franklin underpass by Les Schwab: flooded. Underpass on 3rd under the railroad tracks: flooded. Even East-bound Greenwood was flooded. Westbound was fine though, and I (eventually) got in that way.

Besides being very hard to get to ("What? Just go down 1st from Franklin to Greenwood!" Yeah, me & about 40 others trying to execute a left turn onto Greenwood. Almost impossible. I had to turn around, find 3rd flooded, then take 3rd clear back to Greenwood.), it was miderable weather yesterday, cold with a rain/snow mix. Not a real "shoppers paradise". Whoever planned this city, didn't think about drainage. I ran across so many flooded areas, it was comical after awhile. Even little areas of Fred Meyers parking lot were flooded. Not much to do about it now, but it came at a bad time in the Christmas shopping cycle this year.

On what was to be the busiest shopping day of the year, I'm anxious to hear how the downtown season ended. Unfortunately for some, it will be their last. Ponderfusion, we bid you Good Luck! Gambit Games, we hardly knew ye (Hopefully the encircling trifecta does not take down Mondo Pizza, that would be an unspeakable travesty. Far and away the best pizza in town, I take my kids their when I want to give them a Real Reward for being good). Apricot Lane, well, goodbye. Maybe even the Italian Ice place, too. And SuperBurrito, and Double Happiness, perhaps you will make it through. Progress marches on.

On another note, someone mentioned having a spreadsheet with home price changes. If you can/want to upload it to Google spreadsheets, I will post a link. Just put the URL in a comment. Also, any comments/suggestions for links/posts are appreciated. Of course, if you're like me, you read the Comments more than anything, and this blog is unmoderated, so just post a Comment!

Finally to satisfy your real estate fix: Drove by The Shire yesterday. Perhaps it is unfair to comment on this place in a heavy rain, as it is simply a mudhole, but precious little progress has been made there in the last 45 days. There appear to be no new structures of any kind, and it's hard to say if the 2 already there are any farther along. There is plently of mud-covered heavy machinery, though. To see The Goal at this place, you have to have an active and forgiving minds-eye. It is a disaster.

And I still have yet to see a single person there. Or even a hint that anyone has ever been there in the days preceeding my drive bys. It just looks abandoned, sort of. The machinery moves, true, but there is no discernable progress. Aside from the idea that The Shire is a questionable concept, the developer is project management neophyte. He/she is expending huge amounts for little if any visible progress. Selling the units will be extremely difficult at this juncture, as the entire site is a mudpit, and very visually unattractive. Not "Shire"-ish at all. And this is going to be a visual sell-job. Too bad.

Friday, December 22, 2006

"High Desert jobless rate rises with tourism shift"

Central Oregon's three counties saw their unemployment rates increase more than expected from October to November and lost jobs overall last month, according to a report Thursday from the state Employment Department.

All 3 Central Oregon counties experienced unexpectedly high jumps in their unemployment rates. The Bulletin reports that most of the losses were in the "tourism, professional and business services and construction industries".

This number flies in the face of Bulletin reports that "Approximately 5,200 unfilled jobs exist in Central Oregon." From the Bulletin piece, "Survey: Central Oregon housing prices putting strain on business":

Housing prices in much of the region have climbed beyond a typical middle-income family's ability to afford them. In Crook and Deschutes counties, 92 percent of residential real estate listings are priced above what is considered affordable for households earning 120 percent of the area's median income.

The Bulletin goes on to say that lowly minimum wage types are not the only ones having troubles affording homes here. Real People with Real Jobs are too:

Bakers, gas station attendants and other low-paid workers aren't the only people who are being challenged by Central Oregon's rapidly rising housing prices this year.

Try bankers. And accountants.

At some point the extreme situation in Central Oregon housing will come home to roost. Professionals that bring high-value work to the area cannot afford homes here, much less blue collar workers. That 92% statistic is startling. If 80% of Central Oregonians workers are represented by that "120%" of median wage rate, we should expect our workforce to be gutted. Central Oregon workers will look for a place where their wages are inline with costs. Americans want to own their own home, it is an innate drive & desire and it's what makes this country great. But precious few people here can achieve it. And when people feel they cannot achieve their lifes dream somewhere, they leave.

I don't believe any one person or organization is responsible for the housing bubble. But the unfortunate truth is that Central Oregon participated to an extreme degree in the runup. And while it seemed like nothing bad could possibly come of it while it was happening, inflation in any form always kills prosperity. Businesses are closing downtown due to excessive rent increases. People with "real" jobs cannot afford to live here. New businesses have stopped coming to Bend because there is an extreme labor shortage and extremely high prices, and they cannot compete here. The lowest unemployent rate ever recorded in Deschutes County was in October, at 3.5%. The Bulletin put it bluntly:

"It's getting to the point, in other words, where housing costs are affecting business at all levels."

What will happen? A return to normalcy. That's what always happens. That's the problem though. "Normalcy" in Central Oregon is median home prices around $170,000. That's more than a 50% plunge from the current median of $352,000. Normalcy here will equate to something along the lines of a depression unlike anything this area has ever experienced, including the timber bust.

And it'll all get started with "unexpected" jumps in unemployment and the loss of jobs...

Thursday, December 21, 2006

Hello, Bend Inc.

Rising rents in Bends downtown core have been a reality for the last few years. The Bend Bulletin chronicled the demise of Ponderfusion in it's article, Changing face of downtown.

This article points out that no fewer than 4 businesses in downtown Bend are closing (or contemplating it) or moving, primarily due to high rent rates: Ponderfusion, Super Burrito, Kuinshinbo Kitchen, and Double Happiness restaurant. Pegasus bookstore owner, Duncan McGeary states, "I just hope the perception (of how valuable downtown real estate is) doesn't outstrip reality." In his excellent blog, The Best Minimum Wage Job A Guy Ever Had, he chronicles the trials & tribulations of running a downtown Bend business. From the title, you can quickly surmise that he's not in it for the money! Another Bulletin article tells how Apricot Lane is also closing. And business closings are like icebergs: Only 10-20% are really visible. For every Bend business that undergoes a public closing, there are probably several more on the precipice. Today, there comes more proof: From Hack Bend, comes the news Gambit Games is indeed closing. Expect this trend to not just continue, but accelerate.

Craig Glazier, president of DesertScapes, owner of several downtown buildings states:

The rate increases come from a combination of factors, including the rising costs of land downtown, the cost of renovating buildings and competition for a spot in the city center.

"A lot of tenants are struggling to pay new rents," Glazier said. "It's frustrating for tenants, but the landlord has to balance the cost of buildings with rates you can receive and still keep good tenants."

"Balancing" the cost of buildings, really means making money on huge investments. Commercial buildings have no other function than to make their owners money. And with property values doubling & tripling, rents have moved in lock step higher. They seem to be reaching a breaking point. Subpar retailers are dying in droves. That is inevitable, it's just a matter of time for places like that. But many stores that have been here forever are being plowed under. Duncan states it best in his blog:

"Rents look to be getting way too high. I will stake 26 years of experience in downtown Bend to say this: if you rent any space in downtown Bend for 2.50 a foot, (plus triple net, which is the equivelent of another .25 to .75 a foot) it will be extremely difficult for you to make money. Period."

This is the arrival of what I call Bend, Inc. Say goodbye to the little quirky hole-in-the-wall places that could survive on sub $1.00/sf rental rates. For better or worse, Bends downtown is going to go corporate at an increasing rate. Economics demand it. And businesses that are the livelihood of many lifetime Bendites will go away. How this makes people feel about living here is a matter of taste. But it seems that as many people that are attracted by Bend, Inc, an equal or larger number will want nothing to do with it. I count myself among the latter.

"Weak housing slows GDP growth"

The U.S. economy grew at a tepid 2 percent annual rate in the third quarter, slowed by the sharpest slump in housing activity in more than 15 years, the
Commerce Department said on Thursday.
It's always been a matter of When not If the housing slump would flow through to the Real Economy. Anyone who owns a house has almost certainly engaged in the practice of using their Home As ATM, periodically visiting their mortgage broker, getting a home equity line of credit (HELOC), and spending the money like ordinary income. This practice works wonders when housing prices are forever going up. Spending seems to magically increase, and the only hint something is wrong is that we are spending more than we make; negative savings rate.

Well, now that housing isn't forever rising, this ATM has vanished, and with it the engine for US growth for the past 10 years. In Bend the effect is magnified many times. Real estate transactions generate income for a huge contingent of our population, and that income pertebates throughout the Central Oregon economy. This same multiplier effect becomes a divisor on the way down, and economic activity in Bend will most likely fall in dramatic fashion once the RE bust gets rolling.

The party is over, and the hangover is about to begin. Like any good party, this one will have hangers-on who want the party to never end, but have no doubt, it will end. It's ending now. We will have short respites as bargain hunters are pulled in at their various price points. The same happens in all bursting bubbles... the first 5% down draws the eager... the next 5% draws still more... until there comes a realization that Things Are Worse Than We Thought, and everyone bails out. That Is The Time To Buy. Unfortunately, it's a long way from here.

Monday, December 18, 2006

Home builders' confidence falls in December

Home builders' confidence falls in December
Builders' outlook brightens, but buyer traffic drops

A familiar refrain:

U.S. home builders were a bit more pessimistic about the housing market in December, but they're growing more hopeful that home sales could perk up in six months, the National Association of Home Builders reported Monday.

This same sentiment seems to be echoed with each new "prediction" about the US housing market: Things are bad now, worse than we thought they'd be, but they are just about to get better." I have not seen a single construction/RE thinktank that didn't append that type of opinion onto the end of a disasterous report.

In Bend, the Annie-themed press seems to be even more adamant that "The Sun Will Come Up Tomorrow". Almost no real estate reporting is done without a large contingent of RE interested persons or groups who state categorically that real estate is going to rebound "imminently and higher than ever before". And this opinion has proved so consistently wrong, that much media coverage of the single most important economic event in Bend in the last 20 years, is being covered with a rose-colored glasses perspective that is almost without parallel.

Talking Up The Market will not work. It's foolish to think otherwise. This blog, and its predecessor are not about trying to hurt Bend or the RE market here, as that is equally impossible. It is about getting a variety of opinion, not a single biased opinion. Say what you will here: it's an unmoderated discussion meant to provoke thinking and analysis. Bend needs a media outlet, even one as modest as this blog, to help people understand what is really being talked about "out there" with respect to Bend real estate.

Sunday, December 17, 2006

"Home price trends tend to lag 9 to 12 months behind sales trends..."

This quote is from a Business Week article, "How Bad Will the 2007 Property Market Be?"

Predictions are for the hottest markets (Vegas, Florida, Arizona) to sink the farthest.

"Since trends in housing starts echo price movement, it goes without saying that new home construction is headed for a major slump in 2007. Nationally, total housing starts will slide 13.2% to 1.576 million, according to the National Association of Home Builders (NAHB) in Washington. The last time the nation saw a downturn of this magnitude was in 1991, when starts dropped 15% year-over-year."

If prices really do lag sales trends by 6-9 months, Bend is headed for near term trouble, as sales topped here in June 2006. Months-of-inventory has gone from around 1.5 months in Jan 2006 to over a year of inventory now. Absolute inventory numbers are falling, be demand has falling far more, so months-inventory is near all-time highs. There is much evidence that many Bend builders are cutting prices to sell, putting many homeowners who bought at frenzied peaks far underwater and unable to sell at anything close to their purchase price.

The bubble in Bend real estate has clearly stopped growing. Has it burst, or will it burst? Time will tell, but sales trends seem to indicate that Bend, like other hot US housing markets, is headed for a steep fall.

Bend Bubble Blog - 2

I was a loyal follower of the now defunct Bend Housing Bubble, moderated by Bend Economy Man. A great forum moderated by a great guy, he seemed to lose his gusto for the blog, and ultimately shut it down. A few substitutes have cropped up, one being a Bulletin Board style site. While I think it is a good idea, I long for the single thread format of the previous blog, which seemed easier to understand.

So, I am creating this blog as a (hopefully) drop-in replacement for BEM's great blog, with the same format, and hopefully many of the same posters. I hope to run it in much the same way BEM ran his blog, with a few exceptions: Posts won't be moderated, but will be posted immediately without any intervention. This has pluses & minuses, namely content can be just about anything, including objectionable, off-topic, and so on. So be it. And also to preclude machine-driven submissions there will have to be a Captcha box.

I'm not sure I am up to the task of filling BEM's thoughtful shoes, and maybe with unmoderated discussions I won't have to be, but hopefully this blog will provide an interesting alternative to mainstream Bend media, which seemed to be less-than-forthright in the eyes of many BEM-blog commenters.

And to explictly state what this blog is about: Bend Oregon Real Estate, whether it is or has been in a bubble or not, whether this bubble is/has burst, implications for residents, businesses and others, and just about any topic relevant to the Bend Oregon economy and the surrounding region, and housing in general. With unmoderated discussion, I suppose anything goes though. Hopefully, people will realize the value of staying on topic, and will minimize personal "flame-wars".