Monday, April 30, 2007

Econo-Whore Lereah to leave NAR

In what could have been a move to restore some semblance of credibility, the National Association of Realtors chief economist David Lereah is stepping down. He will become chairman & parter of a new division being started by Move, Inc.

Lereah is probably one of the most vilified individuals in blogosphere history.

Lereah is fairly infamous for his uncanny ability to NEVER be correct about the US housing market. Even a broken clock is right twice a day, but Lereah demonstrated NAR subscribed to the May West theory of Optimistic Forecasting: Too much of a good thing is wonderful! NAR clearly never really wanted an economist, as much as they wanted a perma-optimist who would ALWAYS be wrong on the upside. "Realism" it seems, doesn't quite sell as many houses as a "pump-N-dump" cheerleader.

One thing I have no doubt about: Lereah is going to make more money at Move, Inc. than he ever did at NAR. This man's ability to turn persistent delusions of grandeur into money says volumes about human nature. We only want to hear what we want to hear, and organizations will pay dearly for someone who can persistently and voluminously delude the masses into swallowing their bullshit.

Before you head down to the nearest watering hole to celebrate this victory for the American homebuying public, know that Move, Inc. is the owner of This website is something of a nationwide clearinghouse for listings. Clive's inventory counter uses this website to compute outstanding inventory in the Bend area. Hopefully Lereah and his penchant for borderline fraudulent representations are kept as far away from the database as possible.

Monday, April 23, 2007

CACB & Columbia Air

Today marks the 1 month anniversary of the massive "lay offs" at Columbia Air (well, maybe yesterday marked the 1 month anniversary, but today marked the day it got space in the Bulletin...).

The workers are expected to get their jobs back in four to six weeks, once the company refines production and improves its manufacturing process, said Randy Bolinger, vice president of marketing and business development.

The furloughed employees — primarily workers who built the planes — will continue to receive medical benefits and training in new manufacturing techniques, and will be eligible for return-to-work cash incentives.

I, for one, will be very curious if the company keeps these promises. Continuing medical benefits suggests they will, or at least were making financial expenditures that make it seem reasonable that they "want" to hire these people back. I hope they do.

But I also have the feeling that what is now a "temporary" lay off may start to feel like getting fired to these people. First there may be an extension of the lay offs. Then benefits are cut or eliminated. Finally the company will declare the "laid off" as deserters, because they aren't available. They had the temerity to go get new jobs!

Well, I hope this does NOT happen. But let us all revisit the promises of Columbia Air in two weeks...

Ah yes, and what would Bend be without a daily dose of Kool-Aid, and in the form of a report on Cascade Bancorp, no less! The Bulletin actually put out an article on the fall of Community bank share prices:

Community bank share prices drop -Analysts attribute dip to high investor expectations


Bend's Cascade Bancorp, holding company of Bank of the Cascades, which saw prices rise to almost $32 per share in late December. Cascade shares closed at $23.14 Friday, down 27.7 percent from their December peak.

"Cascade still has one of the best management teams (among the banks) I cover," he said. "I think sometimes, expectations can get out of whack. (Cascade) wasn't as profitable this quarter, but it doesn't mean it can't happen again."

"So, what's the matter with that?", you ask. I simply ask that you read between the lines. CACB has fallen off a cliff, so what's the problem? Oh right, right, right, right, right, right.... it's INVESTOR EXPECTATIONS. It's evil New Yorkers! Their expectations are UNREASONABLE! Cascade was the perfect little jewel until those maniacal scumbags in New York beat it for NO REASON. Oh right...

"For a bank that usually knocks the ball out of the park, all of a sudden, the balls are falling short," Feldman said. "And the possibility that the company is actually mortal is scary (to investors)."

So they actually do acknowledge that CACB growth has slowed, and lo and behold:

Share prices for some community banks in Central Oregon have slipped by double-digit percentage points this year, as the slower housing and construction markets catch up to financial institutions regionwide, analysts say.

So there we have it. A roundabout way of saying that housing is ACTUALLY CONNECTED to the performance of local banks... funny how that works. And the slowing has beat up CACB, BUT to thoroughly MIX OUR SIGNALS, let us say NOT that housing is the primary cause, BUT HIDEOUS EAST COAST types are the real problem.

I tell you folks, the Bulletin must believe that the Bend populous' appetite for Kool-Aid is never ending. I sincerely wonder if the Bulletin will FLAT OUT acknowledge:

A) That there was a BUBBLE (no, not a "hot market" or some such) in Bend real estate.
B) The BUBBLE has burst, NEVER TO RETURN. Nope, not a "temporary cool down" based on "expert" testimony (2,000 Realtors).
C) That the RE BUBBLE (and by extension, the Bend RE industry juggernaut) bursting is NEGATIVELY impacting the entire regional economy.

I doubt it. Just like CACB falling is NOT tied to Bend housing, it's East Coast investors.

Thursday, April 19, 2007

Crook County CRAPFEST

An article about more development in Prineville: "Prineville subdivision gets initial approval". Just another of your basic Developers Gone Wild piece, some guy is going to plotz out 877 houses on about 232 acres in Prineville. Yahoo, Big Deal, Been There Done That. This sort of thing seems to happen about 3X/week around here.

But read the stats in this piece and do a little math, and you see these developers are still following the mirage of Never Ending Growth In Central Oregon Will Last Forever.

First they rattle off several Crook County developments:
Anglers Canyon: 877 houses
Rivergate: 300 units
Iron Horse: 2,900 homes
Brasada Ranch, Hidden Canyon and Remington Ranch: 6,000 homes

TOTAL: Just Over 10,000 homes

Wow! Man, Prineville is rockin'! What a smokin' hot RE market they must have! Over 10,000 homes! Dang!

Well, until you read farther down:

"Meanwhile, residential housing has slowed year-to-date from 95 homes sold in 2006 to 40 homes sold in Prineville through Wednesday, according to Southworth, citing data from the Multiple Listings Service."

Huh. 40 homes in the 1st quarter plus 18 days. Well, that's 133/year. So... to absorb 10,000 homes we'll need... well, that doesn't seem right.


Just try to put this in perspective: 75 years ago was 1932. We were in the Great Depression. WWII was still a decade off for us.

Granted, Brasada Ranch ain't exactly downtown Prineville (thank God). But still, there are over 4,000 homes going up in Prineville not counting any of the named destination resorts, and that's 30 YEARS of supply.

I'm not sure what to think about that. Most companies don't last 30 years, much less 75 years. Most companies have a hell of a time projecting forward a year. Do they honestly think they can project forward almost 3 or 4 decades for sleepy little Prineville? If I were a betting man, I'd bet against it. I'm betting that some of these builders get their financial asses handed to them. But I'll give 'em this, they are an optimistic bunch:

"Curry, the Anglers Canyon partner, isn't concerned by the current housing market."I can't say what's going to happen the next year or two, but we're confident about the next 15 years," Curry said."

Sweet! The guy CANNOT predict a year out, but by gum he's got a handle on 15 years out! Drink it down folks! That Central Oregon Kool-Aid don't get much better than this.

Wednesday, April 18, 2007

FORECLOSURE: Bends' next growth industry

I saw a piece on Marketwatch, "Foreclosures reported up 47% in past year", that gave some individual state stats on foreclosure rates. Excerpts:

Foreclosure filings -- including default notices, auction sale notices and bank repossessions -- increased about 7% from February's levels, to 149,150, and were up 47% compared with March 2006...

There was one foreclosure filing for every 775 households in America during March.

...half of the March filings were in just five states -- California, Florida, Texas, Michigan and Ohio

In California, last month's foreclosures were up by 36% from February and by 184% compared with March 2006. The foreclosure rate in California was one in 389 households. Of the 10 cities with the highest foreclosure rates in March, six were in California: Stockton, Vallejo, Modesto, Sacramento, Riverside and Bakersfield.

Nevada scored the highest foreclosure rate at one in every 183 households, with almost all the foreclosures in Las Vegas, the heart of speculative buying.

The states with the highest foreclosure rates were Nevada, Colorado, California, Georgia, Arizona, Michigan, Florida, Ohio, Indiana and Illinois. Among the other cities with the highest foreclosure rates were Greeley, Colo., as well as Detroit and Denver.

And I remembered seeing a foreclosure rate for Deschutes County, and found it in a Feb 18, 2007 Bulletin article, "Deschutes bucks foreclosure spike". Excerpts:

the county's annual default rate stands at about 7.9 for every 1,000 mortgages, less than a third of the typical national rate.

It costs the typical bank $40,000 to $50,000 to take a mortgage through full foreclosure to the sale of the house, said Daren Blomquist

On Friday, 33 bank-owned homes were for sale in Deschutes County, according to RealtyTrac.

The main point of interest is the rates themselves. The Deschutes stats are for ALL of 2006. The Marketwatch story seems to be quoting monthly figures. But that doesn't seem to make sense, as NV's rate of 1:183 monthly foreclosures, would make for about 1 in 15 homes in foreclosure in Nevada per year at that rate. That seems impossible. But then the Bulletin piece says we are 7.9 foreclosures per 1,000, "1/3rd" the national average (which is 23.7 per 1,000, or 2.3% nationally). So you look at 1/183, and that NV foreclosure rate is .546%, which MUST be a monthly number, because that would be one of the lowest rates in the US, and NV is THE HIGHEST foreclosure rate state. So it seems that 1 in 15 homes in NV (virtually all in Vegas) are going to get foreclosed on this year. Wow.

And Bend's biggest feeder market, CA has seen an almost TRIPLING in it's YoY foreclosure rate. That is not good. In fact that is a disaster. The earthquake has happened, but the tsunami has not yet killed anyone.

I wrote on an earlier post that "real revenue" will win the day when it comes to RE prices. The Vegas "balance sheet" will probably be OK (in the long run) because the Income Statement seems impenetrable. Conversely, Detroit is getting pounded, even though it never really participated in the US housing bubble. It's simply in a degrading economic situation, what I call The Ghost Town Effect. In the macro sense, the balance sheet is falling apart, because the income statement stinks. This is what will happen to Bend.

Everyone feels great now, because we've had the run-up of a lifetime on the Asset side of our balance sheet. Didn't have to worry about Liabilities, because when assets are running up 25-30% year, it actually makes sense to borrow as much as humanly possible, and buy, Buy, BUY. We never had to worry about the Deschutes County income statement, because the Asset side of the balance sheet was ballooning, and as luck would have it, lenders would loan like crazy on asset values, to hell with income (and Liabilities). And this formula is GOLD, as long as it works. When it stops working... well, then you got problems.

Bend has squandered the bubble. We never made serious attempts to lure big-wage, anchor tenant employers to hold up our Ponzi scheme. As a matter of fact, Boss Hog grabbed our local media by their hairy beanbags, and told 'em to run pump-N-dump stories 24/7, so that prices would run-up even more, which actually has had the effect of scaring away anchor tenant employers. It is extremely cost inefficient to run an industrial enterprise in Bend nowdays (barring advantageous decade old cost structures).

So here we are. I feel like we are one of those dirt bike riders that can pull a full 360 flip in mid-air, except the bike has got away from us and we are at the zenith of the jump. We are hanging suspended, with the virtually positive foreknowledge that we are about crushed into the dust. We have absolutely no way to keep Bend RE from crashing, even though it seems just seconds ago we launched perfectly, and even now, nothing of ill consequence has happened to anyone.

In fact, when asked, Bends RE experts look backwards and say, "Man! Did you see that takeoff! I must have got 50 feet of air on that baby!". I, for one, also look back: "Holy Crap, we got 50 feet of air on that badboy. Too bad the bike is wayyy over there, and we're going to hit right in that hard-packed section. Could someone kiss my ass goodbye?". Mark my words: Bend will soon have one of the highest foreclosure rates in the US.

We are about to be crushed. You can defy gravity for a second or two, but unless you've made plenty of plans, gravity has a way of extracting revenge that is multiples of whatever short-lived benefit you may have received. We didn't plan ahead, so there's no airbag or netting. Just hard dirt, and we are about to get pounded into it.

"That, Mr Anderson, is the sound of inevitability."

Sunday, April 15, 2007

Bend Inventory: A Brief History

For all my whaling on the Bulletin, they actually do some pretty good fact gathering. A recent graph of inventory in each Bend school district being a good example. So, while looking for other stories, I found a similar graph from way... back... when. August 2006 to be exact, right around when inventory was topping.

So, I'll just put up these graphs, abstain from whomping on the Bulletin, and let you bask in the data-rich goodness :-)

From the Aug 11, 2006 story, "More homes on market in region"
[I removed these images per Blogger request, but here are links to the stories & charts]

Aug 11, 2006 article & charts

Now from the more recent Apr 11, 2006 story, "Messages mixed in housing numbers"

Apr 11, 2007 article & charts

I've put a google spreadsheet here:
(I sorted by most expensive to least expensive...)

I should note that last Augusts chart is wrong. If you look closely, there really is no way that that those "% below the median" figures are right. Ensworth goes from 51.5% below to 94.6% below? Don't think so. Also note the "color coding" is different, so you can't do real fast comparisons based on color. Don Imus would not be happy...

The big increases in inventory came from Pine Ridge (+28) and Elk Meadow (+14), while the largest decline was the East side in Buckingham (-54). That's 1/3rd of Buckingham inventory gone. High Lakes continues with the lions share of homes for sale (33%), but inventory levels have moved little there.

Also of interest, despite constant reassurance that we've moved on from the Bad Old Days of record-high inventory last Summer, the current inventory is 98% of where it was back then. Given the rate at which inventory comes online in the Spring, we can look forward to easily eclipsing the old mark soon.

Thursday, April 12, 2007

Cascade Bancorp Misses Earnings

Cascade Bancorp earnings are out, and they were $.33 vs $.35 estimates.

What's strange is the news at CACB seems pretty good overall. The dip in deposits last quarter was temporary, as deposits roared ahead 32% on a "linked-quarter basis" (don't ask, I don't know what "linked-quarter" means). Excerpts:

- Net Income: up 60.6% year-over-year at $9.5 million compared to $10.2 million for the immediately preceding linked-quarter

- Loan Growth: loans up 70.6% year-over-year and 9.5% on linked-quarter basis (annualized)

- Deposit Growth: deposits up 60.8% year-over-year and 32.0% on a linked-quarter basis (annualized)

- Net Interest Margin: decreased to 5.34% vs. 5.85% year-over-year and 5.54% for the linked-quarter

- Credit Quality: delinquent loans at .05% of total loans; net charge-offs at .12% (annualized)

Then you see the notes, and you see why things "look" so rosy:

The year-over-year increase was largely due to Cascade's inclusion of Farmers & Merchants State Bank (F&M) of Idaho which was acquired on April 20, 2006.

Non-performing assets (NPA's) were at $7.7 million or 0.33% of total assets, compared to $3.0 million at year-end 2006. The increase in NPA's is concentrated in three real estate development loans in the Southern Oregon region where real estate has softened more than in other markets within Cascade's footprint.

"Loan and deposit volumes turned upward towards the end of the first quarter of 2007, indicating we may be emerging from our seasonal slow period that has been exacerbated by the nationwide downturn in real estate," said Patricia L. Moss, President and CEO. "It is a great advantage that Cascade's markets are expected to have sustained population in-migration underpinning the economic vitality of the regions into the next decade."

"Credit quality in our loan portfolio is performing relatively well despite the real estate downturn," said Frank R. Weis, EVP and Chief Credit Officer. "We expect that the nationwide correction in real estate will ultimately benefit our markets by virtue of a more sustainable rate of economic growth in the months and years ahead."

"Can someone hand a napkin to the President and Chief Credit Officers, PLEASE!"

Oh crap! Now we see the problem. It seems the Kool-Aid stains around the mouth and dribbling down the suits of the CACB President and Chief Credit Officer are rather of a permanent nature. And all the Shout in the World ain't going to get those stains out.

"the nationwide correction in real estate will ultimately benefit our markets"
"Cascade's markets are expected to have sustained population in-migration underpinning the economic vitality of the regions into the next decade"

Whoa, did they get the freakin memo? The "correction" in RE is going to BENEFIT them? "In-bound migration" will take care of their problems? What the hell are they talking about? That sounds suspiciously close to the river of bullshit put out by area Realtors. CACB, here's what it sounds like to the OUTSIDE WORLD:

Wall St Analyst: "You got loan quality problems creeping up. How you going to solve that?"
Patricia Moss: "We expect population in-migration over the next decade to take care of that. We'll GROW our way out of our problems!"
Frank Weis: "Right, we expect the imploding real estate market to HELP us!"
Wall St. Analyst: "sell, Sell, SELL, SELL!!"

See Frank & Patricia, bullshit like predicting population growth a full decade ahead only flies in Kool-Aid comafied places like Bend. That sort of soft-headed bullshit don't fly elsewhere. Homes, those pesky little things underpinning their loan portfolio, have started heading DOWN in their biggest market. Wow, these people must be True Believers (did they work at the Bulletin?). And the reaction of Wall Street types (NYC, not Bend), who could give a crap about the divine nature of Central Oregon, is they don't like to hear delusional BULLSHIT.

Maybe CACB Short shouldn't cover...

Wednesday, April 11, 2007

Q1 2007 Numbers

Well, I've often said that the best proof a town is in a bubble is when any real-estate related numbers released are swarmed by the media. Q1 in Bend is certainly some highly-awaited news here, and the swarming began on cue.

First, the Bulletin began coverage:

Messages mixed in housing numbers
Median home price and inventory vary by district, city

The bland, non-committal adjectives describing this towns only "real" industry reached new lows. I mean, "Wow"... medians vary by district and city. Woof, they're really willing to go out on the edge with that. I smell All The Presidents Men II, with titles like that.

There's also the acknowledgment that Bend is 75% overvalued... BUT, there's also floated the idea that What Applies To The Rest Of The Country Does Not Apply To Bend. This is my Gods Chosen People thesis, an attitude reflected in Jonestown before they all killed themselves by pounding down a little Kool-Aid with an arsenic chaser.

But aside from fairly obligatory watered-down reporting, there's good stuff. First the graph of homes for sale by school district:

This is a great graph just for outlining the school districts. But it also shows you where inventory is piling up (the West), and where you can still get a relatively good deal (Ensworth, 95% of homes are below the median).

This report was destined to be a yawner: Due to the price action of 2006, we pretty much knew that Q1 2007 and Q1 2006 prices would be similar. This will not happen in Q2 and Q3. Prices will be down Year over Year. Q2 & Q3 of last year were the stratospheric blow off top that characterizes many bubble tops. Average sale prices in Bend almost hit $500,000 last Summer. Medians were over $380,000.

I for one won't drink the Kool-Aid. I don't think We Are Exempt From Economics Because We Are Gods Chosen People. I think the 75% overvaluation WILL BE CORRECTED over time. That means down 43%. Some are wondering whether that means down from $380K (the absolute top), or from $350K (the years overall median), and I really have to ask: Does It Matter? One takes medians to $216K, the other to $199K. Suffice to say both are WAY down from here.

One thing I want to address is the fairly strange and seemingly contradictory idea that prices are much unchanged, but volumes have imploded from last year. This and much of the past few years are best analyzed by fundamental supply and demand.

I think it's safe to say that in the years leading up to last Summers mega-top, that prices and unit volumes climbed consistently. On a Supply-Demand graph, this is the result of demand moving outward. As a refresher, on this graph, prices are along the X-axis, units on the Y-axis, the demand curve slopes down to the right (as prices go up, demand goes down), and supply slopes up (as prices go up, supply goes up). For units sold and prices to go up, the demand curve simply moves to the right. That means at every price, more units are demanded.

In the past year though, prices have largely remained unchanged, while volumes are down. Just imagine that the upward supply curve, and the downward demand curve need to move in such a way as to intersect at a point halfway below where they are now. How? Just move the demand curve leftward until it hits that new dot, and also move supply rightward until it hits that dot.

Demand has fallen, and supply has fallen also. At any given price level, there is less demand and supply. It seems builders may be keeping their word. But it also seems there are fewer people interested in the Bend Dream. The Bend Growth Story is BS. But so is the overbuilding story. For now, for this YoY quarter.

Next quarter will bring the lower volume, lower price scenario. At that point there can be made the argument that demand is falling and supply is increasing. There is much to be desired in the consistency of Bends reporting of monthly medians and averages, so "we" are many times constrained to these sorts of analyses where the time periods are chosen for us.

If things remain relatively steady-state, volumes will stay low YoY and prices will go down. This is pretty much a given. The larger question is How Does This Affect the general perception that Bend Is Immune from the RE Plague? I'm not sure. My sense is that there is a large number who buy the Gods Chosen People thesis, and will not lower their price come hell or high water. That's one component of supply, the other is builders. They, I think, are in the business of selling homes and will do what it takes to stay in business. I think new homes will sell because builders need to get $ in the bank, but people clinging to the dreams of yesteryear will not.

The bad news is demand, which I think has peaked and will continue to decline. The NASDAQ peak was swarmed with neophyte, "Big Mo" investors: Momentum was their only indicator. And I think when Bend loses Big Mo next quarter, we'll lose that demand component. And I should say Big Mo buyers aren't just flippers, it's people who value a certain "hustle and bustle" lifestyle. It's Blackberry toting soccer moms, and the like. It's mobile types who feel best "on the run", and moving from hotspot to hotspot. Bend will be "so 2005" to these people, and they just won't come here.

David Foster says Bend is "normalizing", and I agree. But "normal" in my book is a return to "nominal, historical, income-sustainable" levels, and that's DOWN over 40% from here. I doubt that's what David means by "normal". I think we'll lurch lower over many years. We'll see empty white elephants such as Franklin Crossing, and rows of vacant subdiv homes whose For Sale signs actually take root and grow into trees. Supply will continue to blow higher by way of the Destination Resort Shuffle and the Prop 37 Blighting of Central OR farmland. We'll look back on "Bend 2007 RE" the same way we look at big combs in our back pockets, tube-tops, gigantic moosed bangs, and cockle shelled belts.

"What The Hell Were We Thinking?"

Tuesday, April 10, 2007

The WEIRDEST THING EVER! is out with their quarterly PDF data sheet on the Central Oregon property stats. Some points of interest:

Bend residential volume, while down 18%, is a drop in the bucket compared to near 50% volume drops in Redmond, Sisters, and LaPine!

Prices though, are little changed throughout the area, for the most part.
(Mark my words though, this will NOT be true in the 2nd and 3rd quarter.)

Except for LaPine where averages and medians are up an astounding 74% and 71% respectively! This has led to a stat that almost boggles my mind, and is possibly the strangest thing that HAS EVER happened in the Central Oregon property market:

Redmond costs LESS than LaPine

OK, just calm down Bucky. Quiet your screams of "LIAR!", "CHARLATAN!"

I kid you not. Redmond's average home was $275,168 and LaPines was ~ wait for it~ $287,648!

"Hey now, that could be some sort of outlying data point. You can skew the averages with one big sale!", you say.

Redmonds median was $255,950 and LaPines was $264,000!

I understand that LaPine is incorporating, and "Yeah, and Yahoo!", and all, but LaPine is also 40 miles from Bend, separated by a stretch of highway I lovingly call "The Death Zone". I mean it seems more people die on this stretch of road than do climbing Everest.

OK, LaPine is STILL LAPINE. If you've been here for a year, you know what that means. OK, LaPine is not so much a town as it is a band of shotgun-toting maniacs meant to Californians OUT of Bend. OK, they're more just a loosely-joined band of vigilantes. OK, their Bend's answer to the freaking Minutemen. OK, it's LaPine! LaPine having expensive homes is like the freakin City of Joy having expensive homes.




Redmond costs less than LaPine. If I said a year ago that would happen, I would have been probably lost every visitor to this blog. Redmond COSTS LESS than LaPine. I still can't believe those words can be truthfully stated.

Monday, April 9, 2007

Real Estate: NEVER the BEST Investment

I've been mulling the idea for this post over for a long time. It's very much a back-to-basics, fundamental clarification of what I think real estate "really is". I've decided to write about it, because I've seen a few posts by Jesse F, and some comments that have made me want to write about it. At it's heart is this:

Real Estate should NEVER be the "Best Investment" idea in almost any location.

OK, think about it: Commercial property is the consequence, or result of economic activity NOT The Cause. Does Duncans facility exist for it's own purposes, or to house his store? Real estate exists to house economic activity, NOT for some sort of weird existential reason. This applies to homes. It is fairly difficult to construct a home in the absence of commerce. This is why Ghost Towns are so... ghostly.

Real Estate is an Effect of Commerce, NOT the Cause.

Saying that real estate is The Best Investment in a town is an indication that either it is an exceptional situation (a vacation town where money is largely imported), there is a shortage that cannot be satisfied, or that there is something strange going on (a bubble).

This isn't to say There Can't Be Bubbles, there can. Bend is in one, or was. Jackson Hole and Aspen are proof that local economics can totally disconnect from home prices permanently. There is a conveyor belt income effect that supplies the needed levitation in these towns, and they are small enough to make it work. Bend is not. We are too big (even though we're not very big) to sustain a bubble without the help of a healthy commercial base.

A real estate bubble is a relatively long-lasting increase in prices (and usually supply) of commercial or/and residential real estate in excess of the local (or relevant) economies ability to support it. You will find bubbles happen many times in areas of high growth at the tail end of a growth spurt.

Look at Vegas. It's grown by incredible amounts over the past 50 years, and there are periods of overbuilding. But Vegas' rapid growth has always seemed to take care of this problem, and building begins anew. But Vegas has a Real Live Economic Engine: gaming. If it didn't, the Vegas RE market would have died decades ago.

There's another kind of bubble: It's when a town or area is dominated by a single enterprise (or industry) that is suddenly given a negative economic shock. This is happening to SE Michigan right now. It happened to Peoria, IL in the mid 1980's when Catepillar hit hard times and homes went down 17% from 1984 to 1989. Also the Texas oil patch for most of the past 25 years. These aren't really bubbles insofar as they have inflated, as much as they are fundamental business conditions that are deflating and taking everything with them.

It sounds obvious but so many people have forgotten: Real estate exists for commerce, real estate itself IS NOT commerce. In Vegas, the enormous RE market exists as a consequence of the growth of gaming, not in spite of it. The function of commercial RE is to house commerce; without commerce, you've got an empty edifice with almost no usable function. It's why I was slightly amused at reading this on Jesses' blog:

One question we asked people was, "what is your favorite investment idea for 2007?"

I was astounded at the number of people who answered, "real estate," to this question - people young and old from every economic background.

This is a clear indication that people are investing via the rear-view mirror. In any "industrial" city, with a real commercial base, there should be an engine "powering" real estate. If there's not, your in an unsustainable situation. I understand that you can't really "buy" a piece of the hundreds of little companies that populate a city like Bend, so maybe RE is a "good investment" given the limited choices. But people seem to think that Bend RE has "taken on a life of its own", and doesn't really need a successful economic base to power higher. This is a very flawed investment thesis. It has brought me to this analogy, when I think about RE:

If a town is "like" a public company, area homes and commercial property numbers acts much like "shares of stock". Prosperous and growing economic bases in cities will lead to a gradual increase in the number of shares, but fairly steady prices. But contracting economics will not lead to fewer shares, it will lead to lower prices.

Think about it: When a company is doing well, it splits its shares, keeps them "affordable", and the number of shares goes up. But when things are going South, companies are very hesitant to do reverse-splits, so shares go down. In Peoria, when Catepillar fell on hard times, homes were sold, not "destroyed". So you can take as a general rule, that increasing commerce leads to increasing home numbers. Home building CAN do well, but SOMETHING ELSE has to be doing well before this. Towns that increase home counts beyond all economic indicators that it can absorb them, is like a company that issues shares, banks the money and calls it "prosperity". It's not.

Here's an exercise that might help you: Imagine real estate and "everything else" as the 2 wealth creation centers for a town. Try to imagine wiping away the RE component, and think "What's the growth of the "everything else" and how much RE is required to run this place?". If the growth of RE has exceeded the growth of the "Everything Else" for a sustained period, you are almost certainly in a bubble situation that will bust if real growth doesn't catch up and save it.

This is what Bend RE Bulls are saying. Bend RE will be saved by growth. I think they all know full well that Bend RE growth has exceeded the fundamental ability of the local economy to absorb it. But the growth HAS been high. It's just RE growth has been higher. RE has been the highest growth industry in Bend for years now. My question to the Bulls is: What, exactly is this long latent industry that will save RE? Medical? That'll save some commercial stuff on the East side, but not the row upon row of residential that are all over Bend. Leisure? Again, this seems too little too late. California? They're having their own RE problems. I can't think of anything else.

THIS is why I've been on the bear side of things. Building RE in excess of any other industries ability to absorb it, is like a company issuing shares and calling the proceeds "revenue". It's not. Commercial revenue should "build" RE, all else is a phantom. Bend is just like the "concept" companies of the NASDAQ bubble: No real business model, no real revenue, but by God they're issuing shares like there's no tomorrow! And strangely, the shares are going up! Things MUST be going great! Everyone thinks, "Man, this place must be full of geniuses!". Sadly, this sort of situation NEVER lasts, unless the proceeds from the shares issued is actually put into a real, and durable enterprise. Regular readers may recall my occasional comments that we have "squandered this bubble"; this is what I'm talking about. Bend "issued" shares, but instead of investing it, we bought our own BS, and issued MORE shares. It's a Ponzi Scheme mentality: Build some, that seemed to work, build more, which also seems to work, and finally spend everything we have building like crazy. It's a house of cards that has no destiny but to collapse.

I was in Alaska a few years ago, and there are almost as many ghost towns as "real" towns. Would you go to a ghost town and "buy" a house? There seems to exist a certain bias against it, as ghost towns often remain so. All ghost towns share these 2 traits:
1) An extremely depressed economy
2) A fairly depressed RE market

A ghost town is the ultimate illustration that commerce is linked directly and unequivocally to RE. But RE is a LAGGING consequence, not a LEADING cause. This may well explain why Bends RE market was almost the last to bust in the nationwide housing bust. On a very fundamental basis, real estate is the ultimate lagging indicator. The last structure abandoned in a ghost town IS NOT the mill... it's the individual homes. Conversely, we can probably expect Bend to turn up last when the housing cycle turns in this country.

Remember the earlier illustration of the Peoria bust of the mid 1980's? I see Bend in the same situation, except the dominate industry is real estate itself. Real estate has grown faster here than anything else. Its a black hole of sorts, sucking energy and resources from everything else. There's been less to go into the "Everything Else" because plowing money into the RE machine was a FAR better investment. But the good times are over, and we're going to have get back to reality. And I think Bend will experience something akin to the Ghost Town Effect: In time, there won't be low bids for homes, there'll be NO bids. Not saying homes will go to $0, but people will slowly but surely will be put into an intractable financial situation: they will list their homes for $X, they MUST get $X to pay the mortgage, but no one will come close to giving them $X. Ultimately a financial institution will own them, and they are faced with the same problem. And we've all seen them: towns with rows and blocks of empty abandoned homes. No one wants them, even though they are damn near free. There's literally no demand at any price, no matter how low.

Think of a (tiny) town with the economic capacity to support 3 families, but it has 12 homes. What are the 9 empty homes worth? Well, each family might pay a little for one extra home, but not much. By the time each family has 2 homes, the marginal demand for the 3rd is virtually nothing. On the margin (where comp prices are determined) the market price is $0.

It should surprise no one then, that the long-term returns from owning a home are TERRIBLE. Long term home price appreciation hover around 1% over inflation, while stocks are close to 6% over inflation. In buying a house, you are historically JUST BARELY better off than putting your money in a savings account. You are enormously better off investing in stocks. Investing in "Everything Else" beats investing in RE by huge margins. This is common sense when you realize that RE SERVES NO PURPOSE in the absence of commerce.

So finally we come to my dominate Bend investment thesis:


Nope, not "Buy A New Explorer" with the difference. Invest it. THIS is probably the single best investment idea for this town, with the lowest possible risk. I feel like this will beat buying a home with almost 95+% certainty over the long haul. I don't really have a crystal ball w/ respect to stocks, but I do know that the difference between renting and owning is HUGE in Bend, and investing such a large amount each month will almost certainly exceed the returns from home prices here, which I think will return less than inflation for what could be decades.

When to buy? When you can do cash-flow positive rental deals. Period. That's down about 50% from here in some cases, so it'll pay to be very patient. This town has some awful big White Elephants (Franklin Crossing) and closing the gap between buying cost per square foot, and rent per square foot is many years off. We'll even get the Ghost Town Effect in some of these places where obtainable rents are so far below what is required that they just stay empty for years. And as Duncan points out, Empty begets Empty after awhile.

Some might find this type of post a little too "academic", not enough "data and facts". But Jesses' and Duncan's posts and comments recently has reminded me that many, MANY people have really lost sight of what the purpose of real estate is, and where it stands in the "delivery chain" of commerce. Real estate CANNOT exist in a vacuum. Without commerce (or an extraordinary situation) real estate has no purpose. The historical returns on real estate are TERRIBLE. If you ever think RE is a great investment in an area, you should immediately be able to rattle off at least one BIG economic engine that will power RE higher. For many in Bend, they simply think the engine is RE itself. This is at the root of what I think will be a catastrophic implosion here that will last decades.

Sunday, April 8, 2007

Sisters, Duncan, Inventory, and David

A short post on a few topics of interest:

First, I read a very interesting article in the Nugget News, the Sisters newspaper. It's interesting in that it is not the usual egregious fluff piece, basically saying that Mrs X did task Y and hence should receive 6 Nobel Peace Prizes. It's a fairly introspective piece, "Sisters at an economic crossroads". Here is an excerpt:

A few are thinking toward the future and trying to attract the kind of business that will provide a sustainable economy.

"I would like to attract businesses to the area that will be low impact, businesses like software engineers or other high tech businesses that will bring young families and build a financial base for the city that is not driven only by the tourist season," said Shane Lundgren, area resident and property developer.

The Sisters Area Chamber of Commerce is on the same page, if not in the same paragraph.

"We would like to get a person to help the chamber that understands economic development: someone who could find a way to attract business and investment in Sisters that would lead toward a sustainable economy; someone that could help find ways to attract the kind of businesses we would like to have," said Mills.

Aspen Lakes Golf Course has come to grips with the idea of building a sustainable economy.

"We have a good tourist base, but we want to expand our base in Sisters," said Grant Cyrus, general manager. "We would like our new clubhouse to be a magnet for Sisters."

Software engineers? High-tech businesses? Building a sustainable economy?

Sounds like someone may have been listening to old Paul-doh! I have whaled fairly consistently on Sisters for being an insular, in-bred, oldboy, Boss Hogdom town. And I think they are starting to realize what happens when you do this: You end up with a withered, non-diversified and lethargic economic base. Sisters has 3 industries: Real estate, tee-shirts, and real estate. When the cycle is on the upswing, all is well. But we're entering the downswing, and I think this town is beginning to do a little soul-searching.

Personally, I think it's too late. It's too late for most of Central Oregon. We had our shot, and we blew it. Boss Hog said Throw Every Cent BACK Into RE, and we complied. After all, the news in the local papers made it sound like a fantasic idea! But, at least Sisters may be facing the music, and will start taking the right steps.

Duncan put up a post a few days ago that I just got to. First sentence:

"I'm beginning to wonder if BendBubble2 blog hasn't been right in ---what I have felt up to now was his over the top criticisms of the Bend City Council."

Over the top? Me? Perish the thought! Possibly he was referring to my conservatively titled March 1 post:


Excerpt from Duncan:

"if you have suspicions, it certainly could appear that some of the councilors are there for personal gain."

Duncan then lists a litany of self-dealing, shady practices that have transpired in this town, some of which don't reflect too highly on the ethical standards of our beloved Bend City Councilors. I recommend this post for an extremely well-written and informative read.

Clive Holloways Inventory Counter just busted through the 2,000 mark this week. (I'm not really sure what the cause of that weird plunge is, although murmurs at BendBB suggest it is a data error.) Anyway, homes for sale in the Bend area are at 2,055. Bend media will say "Nothing to see here, move along", but this is an historically unprecedented number that DOES NOT bode well for the much anticipated Spring selling season.

Speaking of which, I am much looking forward to the release of David Fosters March RE market summary. It will almost certainly be the subject of my next post. I'm not really predicting much change in the price area, but I do think absolute dollar and unit volumes will be down YoY. March is the first month to give a little glimpse of how Spring will go. If it's in the doldrums, and a lot of the pie-in-the-sky $650K and up crowd doesn't get flooded with offers 40% higher than their ask at their Open House, we could see the next 6 months get UGLY.

And that's what I think will happen. There are way too many people here in a Kool-Aid coma who have been led to believe that because Bend is populated by Gods Chosen People, that their house is worth 25% more than comps. And in heaven, you don't mark down your house when it doesn't sell, you keep it up and just wait for the Biggest Idiot In the 35 State Area to arrive with their Bucket-O-Money, ready to buy YOUR HOUSE. And they will. After all, there are only 7,450,123,892 more exactly like it within a stones throw, and they could be snapped up just like that.

I think buyers are going to see prices (and the monster glut of inventory) this Spring in Bend, and pull a George Bush Sr:




Monday, April 2, 2007

Best Third World Town Ever? Bend!

I get a few comments that this blog complains too much about Bend, and it's fundamental deficiencies in areas such as affordable homes and decent paying jobs. So I'm going to mix it up a bit, and say right now, without qualification, that if you enjoy the diversity, hustle & bustle and general interpersonal mixups that come from living with 4 or 5 or more other grown adults (and 7 kids), you can't get much better than Bend Oregon!

"How come you say that?" Well, let's do the math:

The median home price in Bend is around $360,000. Payments for PITI on that will be around $2,500/mo., or $30,000/yr. A good general rule about being able to service your home debt is that it should be no more than 37% of your income. That gives us about $81,000 as a floor for what our income should be. But that's a floor, to be safe in this era of Bend area layoffs, we'll bake in a cushion, and bring it up to $100,000 even.

The median income in Bend, according to Wikipedia (,_Oregon), is $21,624. That means you need 4.6 adults per working household to afford the MEDIAN home here. And that's not the pie-in-the-sky asking prices, that's what actually sold.

So the MEDIAN is going to give us what MOST people should expect, and leaves out the very high wage earners, and looks at what you should expect to realistically make here. And it shows that you'll need 4-5 grown adults working full-time to live in the typical Bend home. You'll probably need that 5th person for daycare, or at least to have a F/T job so that you can afford daycare for the other 4, and with 5 adults, that probably means 6-7 kids. So that's about 12 people total in the typical Bend home, just to get by in comfort.

Comfort? I don't know about you, but 12 people in a 3 bed 2.5 bath home just seems a little Third World to me. I mean, I can get that in Mexico. BUT, you cannot beat Bend for great outdoor activities! Plus pretty good schools too. That's the free stuff, and it's nice. But to eat at the restuarants, we'd probably have to take in another boarder and her kid, bringing the total to 14.

But at 14, we're definitely feeling a slight decrease in quality of life, cuz now we have people sleeping in the tub, hallways, and the giant shared 1981 Malibu station wagon. So we need to upgrade, but that costs money, and that means more boarders, and with prices what they are here, it seems that for every upgrade in space, we are required to take in more and more income, which means more people who immediately take up the space.

Maybe it's best to simply lower our expectations. Living with 12 people to a home, 3-4 in each bedroom isn't so bad. And maybe Becky Breeze is right: THIS is what affordable housing really means in Bend.

So all you Californians who can "Change The World", and all others looking for a real UPGRADE in your life, well, Come One Come All! Bend is absolutely beautiful, and when you're not selling slurpies, tee-shirts, and triple mochas, you have some World-class recreation. And anyone saying you CAN'T make it here is full of crap. YOU CAN! And just because it feels like Tijuana in your living room, doesn't mean you can't go climb a mountain or ride your bike and forget the troubles at home.

So I for one am going to cast my ballot for Bend as The Best Third World Town ON EARTH! Bend DOES have a real quality of life that you can't get in Panama, Guatemala, or even Costa Rica.