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REAL ESTATE ANALYSIS

STATE OF THE MARKET 2019


A LETTER FROM BRIAN LADD 2018 State of the Housing Market Real Estate and Housing in Central Oregon by Brian Ladd, Principal Broker As 2019 starts anew, I wish to reflect on the incredibly dynamic market that we have been through in Bend in the last 10 years and where we stand from a historical perspective. Understanding the housing market from this position allows for a better measure of the importance of shorter term cycles, news updates, and pressures; allowing us to help guide our clients from a position of knowledge that should stand above the whipsaw nature of our current news cycle and “punditry” expertise. I hope you find this report of use. ~ Brian

U.S. HOUSING MARKET Before discussing what is happening in Bend, I find it useful to first discuss the macro factors affecting the U.S. housing market. Overall, the market has recovered from the national financial crisis ten years ago and stands on solid ground. The American financial and lending system has greatly changed as safer and more regulated lending policies have supported more secure housing investing, low interest rates and properly leveraged buyers. (see chart 7) That said, we are currently experiencing a slight market adjustment that leaves many confused on the causation and outlook. After 6+ years of sustained housing appreciation well above historical norms, appreciation outlook for next year is much more tempered. Why? Well, many factors play into this: Affordability: Despite the strong appreciation we have experienced over the last 6+ years, homes remained relatively affordable from a historical perspective. This was primarily due to the incredibly low interest rates (see chart 7) which bottomed out in the low 3% range for a 30-year fixed mortgage. While we currently sit just below 5%, which is still extremely low from a historical perspective, this has greatly increased the monthly mortgage interest cost for buyers. Another important factor is the high cost of construction which is largely due to the increase in labor and building materials and changing government policies, such as lumber tariffs, that have exacerbated the problem. Supply: During the economic recession of 2008-2012, very few homes were built in Central Oregon. Builders have not been able to make up for this lost supply and thus, current housing construction is still well below the peak levels of 2006. Nationwide, housing inventory (number of months it would take to sell all homes on the market if no new homes were made available for sale) peaked at a 12-month supply in 2009. Increased regulation and demands on new development by governments has also created roadblocks to new supply. This combination of a lack of housing supply, combined with increased home ownership costs, has caused a slowdown in purchasing activity. Lawrence Yun, the chief economist at the National Association of Realtors, predicts a modest 3.5% increase in housing prices and a 2% increase in sales. I see these numbers as a welcome respite that should allow for a more sustainable, methodical and measured approach to investing in real estate.

HISTORICAL PERSPECTIVE - HOUSING CYCLES VS. RECESSIONS Lately we’ve seen headlines and economists predicting a recession in the next 1-3 years. Many may assume that an economic recession also means a correction in housing prices. It is important take a moment to discuss this misleading linkage. It is interesting to note that in 4 of the last 5 recessions, housing prices actually increased (see chart 1). A primary point of the current confusion are the memories from the most recent recession (known as the “Great Recession”), as it was a historical anomaly in many ways, including the unusual scenario where housing prices fell along with the economy. This is still fresh in many of our minds, causing unnecessary worry. This “Great Recession” was driven by a meltdown of our country’s financial systems and the use of unregulated, poorly packaged and used derivatives and primarily mortgage backed securities. Thankfully, the purpose of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was to resolve this. However, this is a discussion worthy of a report in its own right.

BEND HOUSING MARKET Bend housing is a more magnified version of the US housing market, in that our housing affordability issues and our lack of inventory are even more magnified. While the US has 7.5 months of housing inventory, Bend has just 3.1 months of inventory (see chart 4). Housing starts are still below peak volume in 2007 and future constraints are prevalent, evidenced by the lack of readily developable land within the Urban Growth boundary. Both supply issues would suggest upward pricing pressure. Bend job growth is also both incredibly robust and diverse and was rated #1 in the US for job creation in small metro areas by the Milken Institute. This should increase the demands on housing inventory as well. Despite the upward pricing pressures as noted above, I still believe we are flattening the appreciation curve as evidenced by the slight increase in inventory (up 10% year over year) and the slowdown in appreciation. I believe these to be a symptom of an affordability issue that is even noteworthy among those moving in from our primary in-migration markets such as San Francisco and Seattle. Pricing appreciation has slowed recently in these “feeder” markets, which will have a direct impact on Central Oregon.

OUTLOOK FOR 2019 It would be easy to take sides on either end of a housing forecast. One could easily conjecture that the Bend market is either: #1) Overpriced and headed toward correction with a future recession, -OR- #2) Bend’s lack of inventory and migration inflow from highly valued markets will cause a continuation of rapid appreciation. I think the data points to a more nuanced, measured and normal housing market that will be sandwiched between affordability-driven downward pressures and upward-driven inventory constraints. I hope you find this report of use and we would love to discuss with you in more detail how it affects your plans with real estate in Central Oregon. Now, more than ever, it is crucial to work with experts. Sincerely, Brian Ladd, Principal Broker, Ladd Group at Cascade Sotheby’s International Realty

CONNECT WITH A LADD GROUP EXPERT - TEXT LADD35 TO 88000 | BENDPROPERTYSOURCE.COM | OFFICE 541-633-4569, CELL 541-408-3912


STATISTICS HOME PRICES AND RECESSIONS In the last 40 years, recessions have always accompanied an increase in the real estate price index. The exception is the most recent recession, which was partially driven by sub-prime lending and overrun speculation on mortgage-backed securities, both of which are not prevalent today. 440 400

Index 1980: Q1=100

360 320 280 240 200 160 120 80 40

1980

1985

1990

1995

2000

2005

2010

2015

CHART 1 Recessions

Home prices

AVERAGE SALES PRICE $999K AND UP - DESCHUTES COUNTY

AVERAGE SALES PRICE - DESCHUTES COUNTY $450K

$1.54M $1.52M

$420K

$1.50M

$400K

$1.48M $1.46M

$380K

$1.44M

$360K

$1.42M

$340K

2017

$1.40M

2018

CHART 2

2017

2018

CHART 3

BEND INVENTORY - MONTHS OF SUPPLY 20 17.5 15 12.5 10 7.5 5 2.5

2008

CHART 4

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

A balanced market has at least a 6 month supply of inventory

REFERENCES: https://www.thebalance.com/role-of-derivatives-in-creating-mortgage-crisis-3970477 https://www.forbes.com/sites/alyyale/2018/12/06/2019-real-estate-forecast-what-home-buyers-sellers-and-investors-can-expect/#3749dfdd70d9 https://www.prnewswire.com/news-releases/realtors-chief-economist-reflects-on-past-recession-whats-ahead-for-housing-300702632.html


LENDERS CORNER Over the last year, lending discussions and newsfeeds have been dominated by rising mortgage rates and how they can affect the affordability of a home. The result has been a growing fear among clients that interest rates may hinder their ability to qualify for a home purchase. In response, I would like to offer some background, perspective, and my prediction on where 2019 will take us. In 2018, the year was defined by increasing mortgage rates. On average, mortgage rates rose approximately .50% over the course of the year. The one bright spot to this fact, was that in late 2018 to present, mortgage rates decreased by approximately the same amount, providing us much lower interest rates to start 2019.

How do these changes affect the cost of your loan? For every .25% change in rate, it affects the monthly payment by $288.35/ month per $100,000 in loan amount. Significant by anyone’s perspective. So, where will 2019 take us? It is predicted that mortgage rates will make similar moves as 2018, increasing by .375% to .50% over the course of the year (MBS Highway)*, giving back any improvements that we have seen recently. Are you looking to make a move in 2019? I would suggest that if the cost of your loan is important to you, then making plans to do so sooner in the year to take advantage of the more affordable interest rates is a wise strategy.

30-YEAR FIXED RATE MORTGAGE AVERAGE IN THE U.S.

CLINT EDWARDS

Vice President / Sr. Mortgage Advisor NMLS - 308049

541.848.7472Direct clint@elev8mortgage.com

Shaded areas indicate US recessions

SOURCE: FRED

CHART 7

Among the many perspectives that encircle a failed listing, all parties can usually agree that it is a miserable experience. As the homeowner, you have devoted time, money and precious energy preparing your home, and endured an emotional cycle of excitement, apathy, and cynicism for showings, only to find yourself doubting the value of your asset and questioning your original motivation for moving. But where homeowners feel disappointment and frustration, we know that the outcome was likely due to one of two problems: failure to plan or to failure to execute. A failure to plan is most often a misstep of timing, pricing or positioning. A failure to execute is generally a dropped ball on delivery, engagement, promotion, or, often, all three. Even more predictably, many clients suffer the consequences of a broker who simply doesn’t have the marketing expertise to deliver out-of-area buyer visibility, which leads to many quiet months languishing on the market. At the Ladd Group, we have held seats on all sides of the listing table - as developer, investor, homeowner, and broker - which is how we learned the hard way how to strategically position our listings to deliver a faster sale at a higher price. We never go live with a listing unless we have finalized our strategy - through a document we have aptly named the Strategic Selling Initiative - and we constantly fine tune the implementation while listed if we aren’t seeing the results we want. Most popular with clients is our detailed list of tactics for engagement

within nine primary pillars of marketing. Here, clients can see exactly what we are doing, will do, and have done to promote their home to a wide array of audiences. In this shifting Central Oregon market, no longer can sellers trust that a few photos and a sign in the yard will be sufficient enough to get a home sold. Now more than ever, sellers can avoid the disappointment of a failed listing by ensuring that they properly perform both the planning and the execution of their selling strategy. And for those who may be overwhelmed by it all, call on us at any time to lend our support.

FINAL SALES PRICE VS DAYS ON MARKET Sale Price (%diff. from list price)

WHEN HOUSES DON’T SELL: WHERE MANY SEE DISAPPOINTMENT, WE SEE OPPORTUNITY

Sale price is higher than list price

+0%

Sale price is lower than list price

-10% United States

Days on Market


CURRENT TRENDS BUYER’S CORNER As stated in the primary report, I feel that the market is finding balance and slowly shifting back in the favor of Buyers. Appreciation is slowing and inventory is growing, albeit at a slow level. That said, the headwinds of interest rates and the lack of future housing inventory should keep Bend housing prices at or above their current levels. However, the market is demonstrating a segmented market, in that not all price levels are performing the same. As you can see (see chart 2), pricing has consistently climbed over the last year for Deschutes County with annualized appreciation of 7.8% for all inventory. When looking at market segments however, a different picture starts to appear. For the Inventory above $1,000,000 (see chart 3), prices have fallen since their peak in early 2018. It is not unusual for higher end homes to have annualized pricing peaks in the Spring, but this trend is obviously very different from the market as a whole.

SELLER’S CORNER For sellers, the picture is a little different. Values have been climbing for over 7 years, but the rate of appreciation is slowing at all price levels, especially the upper-end of the market. Inventory is slowly starting to grow and total control of the negotiation has slipped away from the Sellers which has created a more balanced process between Buyers and Sellers.

TAKEAWAYS: • Inventory is increasing, allowing for more choices and more time to make a methodical decision when p urchasing. • Affordability issues are creating a downward pressure on price appreciation, especially at the upper-end of the price index. • Interest rates are still a challenge and Buyers should be ready to take advantage if we experience seasonal dips in mortgage rates. • The long-term factors affecting Bend home prices (e.g. desirability, limited land through Urban Growth Boundary, and job growth) have not changed and housing is still a sound investment with proper leverage and time outlook.

TAKEAWAYS: • After years of value growth, it is a great time to divest. • Greed is a poor bedmate for decision making, and now is not the time for Sellers to be greedy and wait for that “one Buyer.” • Pricing matters: One can no longer extrapolate values upwards from the most recent sale in a neighborhood. • Nuanced Market: Price segments and market areas are performing differently and individual sales strategies must be carefully crafted.

CONNECT WITH A LADD GROUP EXPERT - TEXT LADD35 TO 88000 | BENDPROPERTYSOURCE.COM | OFFICE 541-633-4569, CELL 541-408-3912


Now more than ever, it’s vital to use a professional

The Ladd Group 650 SW Bond Street Bend, Oregon 97702

CONNECT WITH A LADD GROUP EXPERT TEXT LADD35 TO 88000 BENDPROPERTYSOURCE.COM OFFICE 541-633-4569, CELL 541-408-3912 Brokers licensed in the State of Oregon. Each office is individually owned & operated.

LADD GROUP 2018 VS OTHER AGENTS CENTRAL OREGON

2018 - CASCADE SOTHEBY’S MARKET SHARE VS COMPETITORS

$64,132,621

$51,308,000

$49,676,971

$36,267,405

$1,637,073

CHART 5

Comp 3

$109,683,559

Comp 2

$178,394,747

$215,468,031

Comp 1

$194,174,549

$329,062,678

CSIR

$209,304,553

$651,576,971

12 MONTH SALES VOLUME

Comp 4

Comp 5

Ladd Group

Agent 1

Agent 2

Agent 3

Agent 4

Average Agent

CHART 6

State of the Market - Central OR Housing Report  

2018 State of the Housing Market Real Estate and Housing in Central Oregon by Brian Ladd, Principal Broker A Letter from Brian Ladd of The...

State of the Market - Central OR Housing Report  

2018 State of the Housing Market Real Estate and Housing in Central Oregon by Brian Ladd, Principal Broker A Letter from Brian Ladd of The...

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