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?"