Bend June 2007 -- Prelude To Disaster

By my mark, June 2007 will mark The Beginning of The End for Bend real estate.

Well, not really. It will actually mark the middle of the end. The true beginning of the end began in September 2006 with medians at $380,500. I don't believe we will hit this figure again in the lifetime of many Bendites.

But like most cults, the cult of Bend RE has various gradations of true believers. Hearken back to early 2006, and you would have found "real fringe nutjobs" like BEM & I raging against the machine on his original kickbutt blog. There were a few fence-sitters who listened to our ramblings about how "this cannot stand". But the VAST MAJORITY were of the Kool-Aid consuming ilk, and professed the idea that 30+% yearly gains were not only possible, but really the only realistic outcome in a Paradise like Bend. Through much of 2006, BEM and I were statistically challenged, and could show little validation for our thesis. Sure, inventory was going up, but that led to reassurance of "choice" and many other buyer friendly chants. The Bulls were well and truly in charge.

Then, round about October 2006, there was a distinct and rather surprising cool-down. Inventory came off the Summer highs, but sales fell off more so. Prices even fell off. There seemed to be rumblings of a crack in the market, which converted some of the true believers, but not many. The signals were still too "mixed".

From October until May of this year, there has been an almost Epic Waiting For Godot. "Have we bottomed out, and absorbed enough for a run at new highs?". "How will Spring go, should I list & will buyers show?". "How will rates, and easy financing affect sales, and is Bend immune?"

To be honest, there has been no clear cut trend. Inventory went ballistic, but the commensurate drop in prices never materialized. There was a huge drop in overall dollar volume -- near 50% -- but if you could sell, you weren't taking a beating on price. And so it's been with the Bend RE market for the past 3 quarters. To paraphrase Vivian Merciers' characterization of Waiting For Godot, Bend RE has been a play where “nothing happens, twice."

I think the confusion ends now. David Foster offers this as his first line in his June 2007 "Crystal Ball" section:

The June statistics offer few surprises, as the Bend market is continuing to adjust much as expected.

In some measure, he is right. Things seem to be just continuing a long trend of lessening the boil. There have been ups and downs, but the one thing that's stayed constant for 3 quarters has been the slowdown. No real catastrophe, no real booms to the old tops.

But there's the rub. Now, RIGHT NOW, was supposed to mark Our Ascendence To All Time Highs And 30%+ Gains For Life, was it not? June 2007, from the perspective of last November, was supposed to be characterized by dancing in the streets and all manner of Utopian real estate fueled splendor. But that is NOT the case. Sales volume has fallen off almost 50%. The Dream Is Over. We waited, and it is NOT HERE.

Here's a graph that roughly demonstrates where I think we are, using the NASDAQ as a parallel.


The True, mega, all-time top, I believe happened last September, with medians hitting $380,500. Since that time, there have been a series of peaks and valley's, with nothing really conclusive up or down. I think May gave a truly strange anomalous performance that just served to confuse many. The culprit was a small number of extremely expensive homes getting sold, in a particularly slow month. So May had this paradoxical nature of lousy volume, but seemingly firm prices. Not conclusive, at all.

But I think we are seeing something akin to the "right shoulder" that ushered in the catastrophic decline of the NASDAQ that started in the 2nd half of 2000. In less than 3 quarters the NASDAQ began a breathtaking plummet from the mid 4,000's, down to 1,600, an unparalleled drop never seen before by any major market in modern history. This is where I believe Bend real estate is today.

Obviously I do not think Bend RE will suffer a drop of similar proportions. That said, I didn't think the NASDAQ would get clocked from 5,050 down to almost 1,000. I don't think anyone did. But I do think we are entering a New Phase: The Next year or two will eradicate COMPLETELY the True Believers, and The Fence Sitters as having any hope whatsoever, that we will see prices that eclipse the old highs substantially & forever. I think we'll see price and volume action that clearly telegraph the message, IT IS OVER to all involved, much like it was telegraphed by the NASDAQ when it plunged towards 80% declines.

Why?

Look at June 2007 data. And remember this period in time is supposed to be The Savior of the temporary softness that started last Fall. From David Foster:

The average sales price dropped from $426,655 YTD in May to $418,229 YTD in June. The median YTD sale price also decreased from $351,900 to $349,250 in June and is now 1% less than at the first of the year. As compared to June 2006 (YOY), the average sales price has increased 5% and the median increased just 1%.

If you look at David's May summary, you see there were 691 sales at an average of $426,655 (median $351,900). From June, you see 850 sales at $418,229. These are both YTD figures, so backing out June only shows 159 sales at an average of $381,610. Here's a progression of David's YTD figures:

March: AVG $408,208 MEDIAN: $349,500
April: AVG $408,162 MEDIAN: $349,250
May: AVG $426,655 MEDIAN: $351,900
June: AVG $418,229 MEDIAN $349,250

Now, it may seem reasonable to say, "Hey, June is just correcting the weirdness of May. Look, we're still above April!". Hmmmm. True, but the start of the year was chugging along with averages and medians that were pretty darn stable in the $400's, and June has slumped to the low $380's. Now, I wouldn't think that's so big a deal, but there is no "Oomph" left in Bend RE. Nobody is buying ANYTHING! Dollar volume DOWN almost 50%? Talk to Realtors: These people eat dollar volume, NOT MEDIANS, and there is no volume in this market.

The Eastside sucks. But the Eastside is on fire compared to the Mega-Suckiness of the Westside! From mstucker on BendBB:

YTD June 30 2007 Median sales price, Bend Residential only, By quad.

NW $450,000
SW $395,000
NE $293,550
SE $325,000

Then from "The Wizard" (Realtor):

Paul-doh! said
I don't know what the monthly medians for Bend residential are
329,500...

Now, look at that quadrant data, and the June medians below $330K. That tells me the West has died. That's a right shoulder, right there.

If there was to be a Happy Face on the RE market here, it was supposed to happen now. Big volume, new SUV's, busy closing's, and all that good stuff. We do not have that. We have a financial sector that is increasingly becoming terrified of exactly the instruments that got us here, subprime, CMO's, and the like. Now it's OK when Grama loses money on this stuff, but we got Big Boys getting their asses fired over billion dollar bets gone bad in the mortgage backed department. It's not as bad as BendBust (or whoever) says, in that we are about to lose 40X Global GDP... but it is not good.

CMO (Collateralized Mortgage Obligations) are basically mutual funds, backed by mortgages, but there's a twist: The payout of interest is chopped, sliced, and diced, so that that there can be "manufactured" obligations from very high quality/low yield, to high risk/reward investments. Like all things, risk has it's price, and the prospect of making 12% by buying the high risk tranche is pretty attractive. But what they're finding is the default rate on the lowest grade tranches has been underestimated: Yup, when you lend money to people with nothing in the pot themselves, they don't really give a rat's ass about defaulting. And they did.

This is all well & good, but that Cletus tranche sort of acted like an insurance policy against upper tranches getting their ratings beaten down. Cuz once Cletus defaults, they start taking interest payments away from us "normals", then all of a sudden Alt-A that was supposed to be insulated from EVER losing money, looks like BBB. Woof, and BBB is worth WAY LESS than the AA we thought we were getting.

And when Merrill tried to liqudate their "collateral", they got what many Bendite homeowners are now getting: Few bids they would even consider, but what's worse they got ZERO bids on some of their mortgage pools. NADA.

Now, I'm not sure where they are, but the Big Boys are essentially saying there are homes out there with ZERO capacity to produce ANY INCOME. They do not want them at any price. That is scary. And I don't think it'll happen overnight, or even in a straight line, but Bend is the Quintessential Mega Bubble Town Of All Time. We're like many of the craptacular NASDAQ bubble stocks: We have not nearly the income to substantiate our current asset prices (homes, and RE). We are MASSIVELY overbuilding on all fronts. The access to capital is being turned off, at least for a generation of buyers. And we are building just laughable, idiotic projects. Every possible avenue to waste our resources is being explored to the fullest. Water parks, Frodo-village, condos piled up in every corner, and lately, even developers threatening to purposefully build UNWANTED projects if they don't get their way! Thanks Mountain Gate...

So here we are. Doesn't seem like catastrophe is imminent. But look back in 3-4 years. You will be awed by the complacency, even your own. This IS IT. This is the right shoulder of a breathtaking plunge that will carry us into the $200's. There will be a MASSIVE asset liquidation tsunami coming. At first it'll be garage sales and big SUV's. That'll be the signal, the receding waters that perplex & confuse people. Then will come wave upon wave of forced liquidation. There is no escaping the singular fact that we are a real live town (not Aspen, not Jackson Hole) with the economics to support home prices far closer to $199K, than $399K.

MARK MY WORDS: Let the devastation begin. The 4 Horseman of the Bend RE Apocalypse are coming. There is NO OTHER OPTION. We have already witnessed medians fall from $380K to $330K, and few are even mildly worried. Complacency is always in tremendous abundance before The Plunge. It actually makes the plunge possible. The complacent Discretionary Seller, becomes the Panicked Sell-At-All-Costs seller we'll see at the bottom, after they lose their job. We will see medians in the $200's before year end.