Thursday, May 3, 2007

Worst Investment Ever? Bend Housing.

On an earlier post, I stated that I thought probably the best investment idea for Bend residents is to Rent And Invest The Difference. I mainly used data from Robert Schillers long term analysis of the US housing market, which show that contrary to popular opinion, homes are TERRIBLE investments, yielding real returns very close to 0%.

I ran across an article on MSN today, "Why rent? To get richer" which reiterates this point from the perspective of a financial journalist who actually is enacting this investment thesis. I'll say right now, this article is EXCELLENT! If you own a home, or are renting, it underlines what I have hammered away at on this blog: US housing in general is a BAD WAY TO INCREASE WEALTH, Stocks are a GREAT WAY TO INCREASE WEALTH. Here are a few excerpts, but I suggest a FULL READ of this great article.

  • The average real return for houses over long periods might surprise you: It's virtually zero.
  • Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents, while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year.
  • House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase over long periods at the rate of inflation, for a real return of zero.
  • Robert Shiller, a Yale economist and the author of "Irrational Exuberance," which predicted the stock-price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004, he says, real house returns would've been zero if not for two brief periods: one immediately after World War II and another since about 2000.
  • Even if we include these periods, houses returned just 0.4% a year, he says.
  • I suspect real returns will turn negative over most of the next two decades...

There's more, and the entire article is quotable, and stuffed full of great stats. The author points out traditionally high-priced locales like Manhattan, and says"the ratio of condo prices per square foot to apartment rents per square foot is 22", one of the highs in this country. I can tell you that the brand spanking new home I live in right here in Bend is at 26.5X, with a nationwide average of 19-20X.

I will say, yet again, that buying a home is a bad investment idea. Take out 2 very brief periods; right after WWII and the past 5 years, and homes are like owning T-bills, they will essentially maintain purchasing power, NOT build it. Stocks build wealth, homes DO NOT.

I would further state that Bend and Central Oregon housing markets are in the midst of a wealth-crushing "decline". Real returns will probably be subpar for the entire US over the next 20 years, but the Bend area almost certainly will bode far, far worse. It would not surprise me in the least if Bend home owners suffer a 50% decline in purchasing power of the capital invested in their homes. Does that mean homes will be cut in half? No, just that inflation will climb along while Bend homes do not keep up.

I think this will start to dawn on people over the years. And when it does, it will "rub people the wrong way". Despite the poor returns from buying a home, I and many others WANT TO OWN ONE. Many people will be torn between this fundamental desire, and the financial realities that Bend housing is wildly overpriced given local economic fundamentals.

"I want Bend, but I can't afford Bend" will become the mantra of our population, and people will leave. This is one of those statements that some people probably find more incredulous than the idea of Bend housing dropping 20-30%. Bend actually shrinking seems beyond belief.

Read the recent Bulletin article, "Job growth or tough times ahead?". You see the "meteoric" rise in population from 69K now to 119K in 2030. Sounds great right? Well, back out the yearly growth and you see it's a pathetic 2.2%/year. This is WELL BELOW recent growth rates. Read the article, and you see they even baked in a 40% growth premium for Bend over Oregon as a whole. All it's going to take is some heavy duty employers to go bust, and we'll lose enough critical mass that new immigrants & companies will STOP COMING HERE. And believe me, this conveyor belt income is what keeps this place alive. We could easily do the average of 1.7%, which would essentially amount to a depression. I would assert that long-term growth below 4% in Bend is akin to a severe local recession.

Even EDCO chief, Roger "I want to have my cake and eat it too" Lee acknowledges that high prices are killing future growth:

Bend already has waited so long to create new, usable industrial land that soaring land prices - fueled by the shortage - and physical constraints are putting a crimp on growth, Roger Lee, executive director of Economic Development for Central Oregon, said Thursday.

The problem has reached the point where a significant number of existing industrial businesses - everything from cabinetmakers to tarp manufacturers - either are looking to other cities in Central Oregon for expansion or they are moving out of the area altogether, Lee said.

Surprise, surprise, I and others made such heretical claims in the heat of the RE boom. Inflation is like water, it seeps through everything. Inflation also KILLS DEMAND. Kills housing demand, kills product demand, kills everything. Look at Mexico for the past 30 years, or Brazil. Periods of inflation coincide almost exactly with these countries bleakest economic times.

I could go on and on (and scroll down and you'll see I have), but the fundamental question is, "What do I do?". I can't state strongly enough: RENT AND INVEST THE DIFFERENCE. Bend homes are like the hollowed out dot-com shells being hocked to idiots at the NASDAQ top.

"But a house is something of tangible value, right?"
Yes, but you can get that same utility for less than half by renting.

"But they're not expanding the UGB! There's a land shortage in Bend!"
Listen to EDCO chief Lee: That shortage is probably a reason NOT TO BUY. Bend planners basically are suffocating one Siamese twin and thinking the other will be fine. Restrict UGB growth and you restrict business growth. Companies are NOT coming, and many are leaving because of it. A restricted UGB is a BAD REASON to buy a home here, probably the worst.

Again, I have often said, the best cure for what will ail Bend is plunging prices. Expand the UGB beyond the CRAPTACULAR 1,000 acres you're thinking of Bend City Planners. We need 10X that much. If you look at the report I cite earlier, you see that the consultants start with a low Oregon overall average, and bake in the 40% "Bend premium", and this yields a mere 1,000 acres that need be added to the UGB in the next few decades.

"...the city will need at least 510 new acres of commercially zoned space and nearly all of the projected 494 acres of industrial land on the city-owned Juniper Ridge site to make room for its potential job growth over the next 20 years."

This is a square about 1.5 miles on a side. Do you think the 20 year industrial growth of this town can be accompanied in a space that size? Of course not. Yet another study fueled by Boss Hog, and his desire to be a giant life-sucking fish in an oxygen deprived puddle full of dead and dying lemmings.

Bottom Line: Bend is killing itself economically. We'll be the Tijuana of Oregon soon, no growth, buttloads of alcohol & meth, and brain-dead industries, and row upon row of empty homes. Rent, and invest the difference -- while you can. It's easier to pick up & leave when you've lost your job as a renter, than it is if you own.

P.S. Exactly 6 weeks ago tomorrow marks the "temporary layoffs" at Columbia Air, "Columbia Aircraft replaces four managers, temporarily lays off 185". I stated I thought there would be a little fudging on this, and that there would ultimately be a large number of these people blown out. Prime example of how businesses use the Bulletin as their personal BS PR source. Look for what happens: Will Columbia hire everyone back tomorrow? Maybe. If not, do you think you'll see a hard-nosed, full length follow-up story about Columbia Air managers bullshitting about the "temporary" nature of the layoffs? You be the judge.

If the layoffs become slightly permanent and the Bulletin says nothing, just realize that 6 weeks ago you were, YET AGAIN, given a little taste of Kool-Aid coma-fication. Companies in Bend don't FIRE people... they're just given relaxing time off, while managers work diligently to upgrade the facilities for ever higher growth and happiness! Uh huh. Ask these 185 people what they think of these "temporary layoffs". Will the Bulletin give them equal time? Again, you be the judge.


Anonymous said...

Good commentary Paul. I would do exactly that "rent and invest" but you know already in a home. I believe your right about bleak times ahead for utopia opps I mean Bend. Think about this for a minute the housing bubble soon to be crash is one symptom of an economic castrophy on the horizon. Economically this country is in uncharted waters and not the good kind. We have an incredibly weak dollar right now, fuel prices are soaring and will continue not to mention all other forms of energy that we require (electric, natural gas, propane etc.) Food contiunes to astound me with inflated prices Bend can't have a Winco foods soon enough as far as I'm concerned. If ever there was a time to mention the boiling frog syndrome man are we in the middle of it or what.

Just a side note my spouse works for one of the larger employers in the area and tells me all the time about people leaving the company because they can no longer afford to be sucked dry in this as was quoted by someone else " Financial Death Zone" we have come to know as Bend. I think the numbers would be scarey if the Bulletin or the great investigative reporting that KTVZ does actually did a piece on all the people that leave because they can not afford to put up with Bend anymore financially speaking. I love it, you have me laughing every time I see z21 for 30 years. I now add cheerleading on the end of that little tag line.

Keep up the good work on this blog.

Anonymous said...

How does Roger Lee want his cake & eat it too?

IHateToBurstYourBubble said...

How does Roger Lee want his cake & eat it too?

This is just a reference to 2 articles in the Bulletin, "EDCO chief shares rosy outlook for area growth", and "Job growth or tough times ahead?".

In the first article, he states that he thinks Bend home prices will not decline in any meaningful way. In the second, he says that land shortages and the HIGH PRICES that come with it, are killing economic expansion in Bend, and that he wants to attract "high tech, clean" industry to Bend.

I just want to know: Which is it Roger Lee? You admit high RE prices are killing businesses in Bend, yet when you're in front of a group of Realtors, you state you think prices will remain high. These 2 things are just plain incompatible.

Can't have your cake & eat it too.

Adhor said...

Now is a PERFECT time for the Bulletin or KTVZ to redeem themselves as viable, independent news organizations, and actually GO TO COLUMBIA AIR, and do some hard-nosed, tough question reporting.

That "4-6 week temporary layoff" officially becomes total bullshit at 5PM today, and I've seen nothing that indicates they've even hired a single person back.

Bend Bear said...

Don't hold your breath on that Bulletin, KTVZ opportunity. If they publish anything at all, it will be along the lines of...these people found jobs in our booming economy already and were not available for rehire.

IHateToBurstYourBubble said...

I published this re Doug Farmer data over on Bend Bulletin Board:

Doug Farmers monthly data is out. The google spreadsheet is here:

Things actually seem like they're going great, avg prices at $424K, up about 7.6% over this time last year.


There were only 152 solds in April vs 218 last year (-30%), so total $ volume is down 24%. Months of Inventory, what I think is THE most important stat, is over 13 months. And "Actives" are at 1,986, an all-time high, within Dougs data series.

May will probably look "OK", but June comparisons will be heinous. June 2006 Avg was $491K, which is just unachievable unless there is a miracle. Comparisons will just get worse from there on out as 2007 YoY comparisons cannot possibly keep up with last year. We'll see minus double digits over the next few months. maybe a wake-up call to the remaining deluded sellers.

On the spreadsheet, way off to the right, I compute "New Listings/Solds". For every 1 Sold in Apr, there are 3.76 new listings. Starting at 1.63 in Dec 2006, this figure is also at a high.

Anonymous said...

Got my copy of Oregon Business yesterday. It appears a bit late in proclaiming the end of the party.
Also got INC. Magazine. Bend made #10 in the nation for entrepreneurs - due to job growth and a bunch of other stuff. I'm sorry, but I think this is a case of statistics incorrectly applied to the local situation (no ground-truthing)... much the same way that a monkey, chained to a keyboard, will eventually write a novel.

IHateToBurstYourBubble said...

It appears a bit late in proclaiming the end of the party.

Right... I think that as the Summer progresses, the comparisons become worse and worse, and all of a sudden a lot of publications will "discover" Bend... but it won't be the kind of discovery we want. They'll "discover" minus double digit YoY home price declines, rising unemployment, and other goodies. This place will become a bursting bubble poster child.

Anonymous said...

Looks like that CACB dead cat bounce finally came. Up about 4-5% from lows a few days ago. I'd expect it to just tread water here for what could be months, then continue down. And that's barring another subprime scare.

Anonymous said...

When you consider all the costs -- mortgage payments, property taxes, maintenance, etc. -- it's easy to see how the net ROI for a house could be zero or close to it. But a house is not just an investment; it's a home, and as such it offers a number of advantages over renting an apartment -- more privacy, no noisy obnoxious neighbors, being able to remodel and decorate it the way you like, being able to keep pets, not having to nag the landlord whenever there's a problem with the plumbing, etc.

I cashed in my equity from California 21 years ago and bought a house in Bend for $85,000 cash (no, I didn't omit a zero) and have not made any mortgage payments, so my ROI will be substantial even when the bubble deflates. But I admit this is an unusual case. The poor schmucks who bought at inflated prices two years ago are indeed screwed.

Anonymous said...

Response to anonymouse on "not having to nag the landlord whenever there's a problem with the plumbing,"

um... I always have to nag the landlord (aka: husband) when there are plumbing problems. Sometimes I wish we HAD a landlord.

Anonymous said...

UPDATE - on the SoCal hit-n-runners:

George Goodson isn't in DCJ anymore - must've made bail or got matrixed.

Chris Goodson is still in there! You can check it on the online DCJ inmate list.

Anonymous said...

The imputed rent of living in a house that you own is not taxed because it is not received in cash. It is a tax-free dividend. That is an advantage but it doesn't always make buying worth it. It has to be factored in though.

IHateToBurstYourBubble said...

I always have to nag the landlord (aka: husband) when there are plumbing problems. Sometimes I wish we HAD a landlord.

Better clean this up. There's a woman around... and apparently, she's pissed.

The imputed rent of living in a house that you own is not taxed because it is not received in cash. It is a tax-free dividend.

Not sure I understand this. The way to compare renting vs owning is to simply compare the after-tax cash flows. You may NOT pay rent, but that doesn't mean there are not costs associated with receiving it.

Finance 101: Compare after tax cash flows, all else is meaningless.

IHateToBurstYourBubble said...

Compare after tax cash flows, all else is meaningless.

Hmmm... scratch that. I HATE moving. I would give my left nut to never move again.

Anonymous said...

Imputed rent is not taxed: You are receiving a dividend from your investment if you live in a house that you own. That dividend is the right to live there. The right to live there is worth whatever it would rent for. That is income, but is not cash income. That income is not taxed. It is a tax-free dividend. This gives an after-tax advantage to buying a house (and living in it) vs. investing the money in something else that may pay dividends that are subject to tax (because they are in cash).

IHateToBurstYourBubble said...

5 PM came & went, and the "4-6 week temporary layoffs" deadline at Columbia Air seem to have gone long. Anyone want to give them old boys a call, remind them of what "temporary" means? I can only imagine that Bend Media is mobilizing all kinds of resources to follow-up on this story.


I AM NOT one of those Man of the People wanks, but this sort of crap pisses me off. Grow a backbone, Bend Media. Columbia Air used you like the Whore Rag you are, they're not the first (by a long shot) and they certainly won't be the last. My God, get some editorial standards. Any other decent sized town, the local media would be on those lying scumbags like stink on Grama.

Geez, you even swallowed the absolute bullshit about Bing Lantis stepping down as President cuz he had to clean his garage, or some shit. Good Job. We can put our trust in you.

Here's a short excerpt from my March 23 post, "Bend: TOWN IN CRISIS"

OK, first of all, virtually everything about this story smells thickly of BULLSHIT. They are saying Bing Lantis, long-time CEO & President, has "left the company" for personal reasons. OK, 100% BULLSHIT.

You might think I'm about to say, "I TOLD YOU SO!", but really nothing more is required than to have read more than just a few of the Kool-Aid laced stories put out by the Bulletin. Virtually all are written soley from the Boss Hog perspective of Selling Bend To Anyone With $5 As A Utopia, So You Better Come Here Quick & Buy A House, Or Better Yet, 2 or 3.

Bend Media. When are they going to grow a backbone and run a newspaper and not a whorehouse?

Anonymous said...

You guys trash the media as being so brainlessly pro-Bend real estate. But as a regular surfer of, I notice that they love to show nothing but creepy mugshots of various low-lifes that have recently been arrested for all kinds of stupid crimes.
If ever there was a "turn-off" to the potential entrepreuner/family man considering a move to Bend, its all those mug shots. Look at those 3 people arrested for mugging the guy on Franklin Ave, etc. etc.
Fine upstanding citizens.
Man, I'm staying outta Central Oregon.

Anonymous said...

"I HATE moving. I would give my left nut to never move again."

I hate moving too, but as soon as we retire my wife and I are moving the hell out of Central Oregon, aka The Frozen Wasteland. Sick and tired of the cold and wet nine months of the year and the traffic mess 12 months of the year.

I wonder if the deflation of the Bend Bubble has anything to do with word getting around that this is a crappy place to live, climate-wise.

Anonymous said...

"Bend Media. When are they going to grow a backbone and run a newspaper and not a whorehouse?"

Not in your lifetime or mine. The Bend Bullshittin believes its job is to be a cheerleader for growth. Always has, always will -- at least until there's a radical change in management, which will happen only if the Chandler Kids all die off or decide to sell out.

Anonymous said...

I just got a call from the home depot credit department. I was a little perplexed as to why they would be calling me since I don't have a credit account with them. The lady I talked to was from the local home depot, and was calling me because I had a contractors license and she was just wondering if I wanted to open an account with them. My first thought is,could they be that desperate that they have their local people now doing phone solicitations. Any thoughts?

Anonymous said...

Don't complain about Bend's climate until you have lived year after merciless year in Eugene.

Sean said...

" as we retire my wife and I are moving the hell out of Central Oregon, aka The Frozen Wasteland. Sick and tired of the cold and wet nine months of the year and the traffic mess 12 months of the year."

I think you're describing LaPine pal.

Bill said...

That guys who talks about all the cold and wet nine months out of the year obviously has never lived above 3,000 feet before. Pretty much any mountain town is going to be this way. However, I think you're exagerating the 9 months part.

Anonymous said...

You bitches always just talk-talk about your pee-pee's, when are you going to talk about real estate?