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.