State of The Market Fall 2022

REAL ESTATE ANALYSIS

STATE OF THE MARKET Fall 2022 | 6th Edition

A LETTER FROM THE TEAM FALL 2022 UPDATE AND OUTLOOK

In reflecting over the past few years, I think it is safe to say that one of the most accurate quotes would be that “change is the only constant in life.” For so many people, things like how we live, where we live, and what we do for a living have shifted. Many people have been fortunate enough to be able to work remotely and many others have reevaluated their situation and had the courage to pick up and embark on something new. This has led to a massive migration in and out of cities as people sought out the future promise of a new start. Demand (and subsequently prices) reached record levels and the term “frenzy” was synonymous with real estate. However, things have begun to shift and a market that was squarely in the sellers’ favor now contains a more patient buyer who is willing to wait for the right opportunity. Let us take a few minutes to dive into the dynamics that have led to this and share some of our insights in hopes of painting a picture of where things could head in the coming months.

INFLATION

Without a doubt, one of the biggest headlines we see is about rising inflation and how costs have spiked. There have been political factors that have caused things like gas and energy to increase as well as supply chain issues that have caused consumer goods to rise. Economic stimulus packages have allowed more cash to be infused into the market and this has led to an increase in buyer purchases and demand, both of which lead to higher prices. To be clear, we are not taking a stand on whether stimulus efforts are a positive or negative, we are just stating that they have been a contributing factor to increased prices.

All of this being said, the question really becomes, what does someone do to protect themselves from rising prices? While we will leave the full investment planning to the financial advisors, we would like to point out that home ownership has historically been a great hedge against inflation (Chart 1). Looking over the past 50 years, the general trend has been that home prices either come very close to matching the overall rise in costs (inflation rate) or drastically outpace it. How will this play out in 2022? Although we don’t know exactly where it will be at the end of the calendar year, nationally the inflation rate stands at 9.1%, while the local median price in Bend has gone up by 12% over that same period (Chart 2).

SUPPLY (HOMES FOR SALE)

As we have pointed out in previous editions, property values fluctuate based on supply and demand. Many of the factors that we will talk about in the pages of this report (interest rates, stock market gains, inflation, etc) simply serve to adjust the supply of homes or demand for them which in turn affects prices. In our webinars, monthly market reports, and conversations with clients, we have talked at length about the lack of homes on the market (please see the QR codes on page 3 for access to these reports). There are yearly fluctuations that are apparent when looking at the data with inventory being at its lowest levels in the winter and highest levels in the summer. However, after a period of gradually decreasing inventory levels, we have now seen the supply of non-acreage, single family homes increase to levels not seen since before the onset of the pandemic (Chart 3). If history is an indication, we will see the amount of homes on the market start to fall throughout the end of the year and see them start to pick back up again as we head into Spring. We would like to point out two big factors that could impact the number of available homes moving forward. For the past few years, homebuilders have been rushing to get homes built to take advantage of record setting price appreciation. However, as prices stabilize, there is the very real possibility that some of these builders could slow their production to hedge against possible changes in the

market. Another factor relates to resale homes and sellers’ desire to make a change. Most estimates have about 65% of homeowners with a mortgage, and many of these owners refinanced over the last two years to take advantage of historically low interest rates. With rates now up more than double where they were a year ago, the question becomes how many of these sellers are going to be willing to move from their current low rate in exchange for a new rate at a much higher level.

Our take is that most sellers sell based on a need to sell (need for more/ less space, desire for a new location, job, etc) and not strictly on the dollars associated with it, but there is no doubt it will keep some sellers staying put.

DEMAND (AND MORTGAGE RATES)

The other half of the equation is demand. Although there are also a number of factors that affect demand, likely the biggest factor at play involves finances and buying power. Since the beginning of the year, the SP 500 is down approximately 16%. This has left many potential cash buyers unwilling to liquidate their holdings at losses to facilitate a home purchase. Also, in that same time, interest rates have gone from around 3% to the mid 5% range (Chart 4). A year earlier, if someone didn’t want to use cash to purchase, they could borrow money so cheaply that it didn’t keep them on the sidelines. However, this has changed and not only are some of those cash buyers on the sidelines, but many of the buyers who had planned on using financing are also being more patient, and rightfully so. In June when rates peaked at 6%, and when you take into account home appreciation over the preceding 12 months, in some areas, the cost to buy a home was 50% more expensive than just a year earlier. Given this, buyers are waiting for the perfect house and no longer willing to jump at any opportunity.

All of this being said, there is no clear cut answer as to what happens next. Some points and questions to consider as we all assess what the new normal will look like are the following:

· · ·

How many millennials will be purchasing homes for the first time in the next couple of years? (Chart 5) Will companies be changing their work requirements and require employees to be back in person, allow them to remain remote, or adjust their salaries based on cost of living where they reside?

Mortgage rates have stabilized, but with more fed rate hikes planned, how will this affect lending demand? (hint: the two are not directly related)

FINAL THOUGHTS

This data just scratches the surface of what factors are at play in the real estate market. However, what is often the biggest motivation is the “why” behind someone’s desire to buy or sell. Are there grandkids that you are looking forward to being closer to? Did your job relocate you to a new market? Have you spent your whole life in a city and now it’s time for the mountains? When buying or selling, it is easy to get caught up on the headlines about potential recessions, interest rates, and prices, or be focused on countertops, updates, and flooring. However, it is our job to make sure you have a plan, are focused on what matters, and are able to buy or sell in a manner that allows you to be where you want to be (financially and emotionally). The shifts in the market have brought back the opportunity for us to be an advisor in your home buying and selling. It is what gets us up in the morning and what makes us feel good when we go to bed at night. It would be an honor to have the opportunity to be that for you as well.

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STATISTICS HOUSING PRICE BEND SINGLE FAMILY MEDIAN

HOME PRICE APPRECIATION VS INFLATION RATE Inflation Rate

Home Price Appreciation

18%

$900K $800K

9.9%

$700K

9.2%

7.1%

6.8%

5.6% 5.5% 4%

3%

1970s

1980s

$600K

4.9% 2.6% 2.3%

1990s

$500K

1.6%

2000s

1.4%

2010s

2020

$400K

2021

2019

2020

CHART 1

2021

2022

CHART 2

BEND INVENTORY

MORTGAGE RATE 20%

10 9 8 7 6 5 4 3 2 1 0

17.5% 15% 12.5% 10% 7.5% 22

‘22

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N JU

AP

21

‘22 B

FE

21

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‘21 N

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21

‘21

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AP

20

‘21 B

FE

20

C‘

DE

‘20

AU G

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20

‘20 N

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19

‘20 B

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3%

‘19

Months of Supply

30-Year Fixed Rate Mortgage Average in the United States

2.5%

1975

1980

1985

CHART 3

1990

1995

2000

2005

2010

2015

2020

CHART 4

AGE DEMOGRAPHICS OF HOME OWNERS Millennials: 72.2 million 5

First Home Purchase (33)

Population in Millions

4

3

2

1

18

20

22

24

26

28

30

32

34

36

38

Years Old CHART 5

40

42

44

46

48

50

52

54

56

BUYER’S CORNER In our last installment of this State of the Market, we discussed where the buyers were coming from. Continuing with this idea, we think it is valuable to peek behind the curtains a little more and discuss who these buyers are and how they are feeling about the market.

50%

CASH VS FINANCING

40%

There is no doubt you have seen the headlines talking about spiking interest rates during the first half of the year. In some cases, rates are now twice as high as they were just a year ago. In the same period, the stock market retreated a bit from its highs, making some cash buyers unable (or not wanting) to liquidate their assets to pay in cash. How has this affected the number of people paying in cash vs financing? Despite some fluctuations in the data, the number of cash transactions has stayed consistently between 23-28% of the total sales over the course of the last few years.

30% 20%

Conventional

20

21

20

20

18

19

20

20

16

17 20

20

14

15 20

13 20

20

11

12 20

20

09

08

10 20

20

07

20

20

05

BUYER CONFIDENCE

Cash

The discussed shifts in purchasing power, added inventory, and overall economic fears, have all played a part in decreasing buyer demand. We have seen this result in fewer offers, added days on market, and more price negotiations on purchase contracts. For months, we had seen buyers becoming more patient to get into contract, but in June 2022, we saw the largest number of cancellations since the first month of the pandemic. We will be watching closely to see if this is the start of a trend, or just an anomaly like it was in Spring 2020.

150 100

1509 ‘22

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21

‘21

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‘20 OC T‘ 20 DE C‘ 20 FE B ‘21

HOME BUILDER CANCELLATION RATE: NATIONAL

18% 16%

CHART A

14.5%

14% 12% 10% 8% 6% 4% 2%

N JU

‘22 N JA

NE JU

‘21 N JA

NE JU

JA

N

‘20

NE JU

N

‘19

0% JA

Affordability has been a big talking point as prices have risen at an historic pace. There is no doubt that the rise in prices, combined with the recent rises in interest rates has affected the buying power of many buyers. Some estimates showed that when rates peaked in late June, that nationwide the average home was 27% more expensive than it was at the start of the year.

The category that one would think would be affected most would be first time home buyers.

Although buyers in this group have seen their purchasing power diminish, and in many cases have had to adjust their search parameters to find something more affordable, the data does not indicate that they have been bumped out of the market. In fact, first time home buyers make up a larger percentage of the market than at any time since 2017. This is great news for those looking to make home ownership a part of their financial plan for the first time.

‘18

FIRST TIME HOME BUYERS

AU G

‘20

AU G

20 R‘

NE

AP

JU

19

‘20

FE B

19

C‘ DE

OC T‘

‘19

AU G

‘19

0 NE

06

20

03

CHART B

200

JU

20

20

20

0%

04

10%

BEND AREA SFR - CONVENTIONAL AND CASH TRANSACTIONS

250 Transactions

SHARE OF FIRST TIME HOME BUYERS

60%

CHART C

SELLER’S CORNER In our last installment of the State of the Market in the first quarter of 2022, we indicated to sellers to expect a shift. At the time, the metrics had not yet caught up with our “feet on the street” experience in the Central Oregon market, and headlines were still implying the market remained “red hot.” The truth of the matter is an age-old tale: lagging data delivers headlines, but leading indicators are hard to quantify.

Sellers must adapt to 30 minute to 1 hour showing windows once again, as the age of 10 minute showings (while another buyer waits in the driveway) is no longer satisfactory.

All this said, the ensuing shift has not upended things quite as acutely as some had feared.

Median sale price, though leveling off, has reached a $700,000 zenith. A seller anywhere in Deschutes County can expect an average of 29 days on market - though understandably longer for luxury homes (84 days average), acreage property (86 days average), or bare land (74 days average)(Chart D). As well, the current inventory during the tail end of this peak summer selling season in Deschutes County has increased from one month of inventory to three months of inventory - but remains firmly a sellers’ market. Six months (or more) is typically the threshold of transition to a “buyers market” as we understand it.

100.5%

$800K $700K $600K $500K $400K $300K $200K 2012

AVERAGE SALES PRICE: DESCHUTES COUNTY

June 2022 $696,678

AVERAGE PERCENT OF LAST LIST PRICE RECEIVED: DESCHUTES COUNTY 101% June 2022 100.4%

100% 99.5% 99% 98.5% 98% 2019

2020

CHART E

2021

2022

Even still, inspection contingencies are back on the table, as are reasonable lists of repairs for a seller to tackle prior to closing.

Finally, the increase in interest rates means that a seller might consider offering a buyer credit toward closing costs, which can be dedicated to an interest rate “buy down” of 1% or more.

The overall value of this to a buyer over time has much more substantive impact than the same amount of money conceded off the purchase price.

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

CHART D

Perhaps one of the most prime examples is the graph found in Chart E, which upon first glance appears to show a drastic downward trend for the metric of: Listing Price versus Final Sale Price. This is often used as a touchstone of price reductions and thus is a useful “leading indicator” tool for sellers. However, the “downturn” shown here is from 101%, down to 100.4%. For context, the general average for the few years preceding the pandemic had hovered around 98% from 2016-2019 fairly consistently.

ADAPT AND OVERCOME The sellers who are finding success in this market are those who are willing to recognize the value of accurate pricing, and who are able to set themselves apart from the growing body of inventory by taking the time and care to ensure the home shows well.

BEST PRACTICE The core best practices for a healthy sellers’ market remain: a well priced, well prepared home that is delivered to the market with a strategic, cohesive plan will sell within the first 30 days.

But not all plans are strategic, and not many brokers launch them cohesively.

Here are five key questions to ask of any broker you may be interviewing for the sale of your home in today’s market: 1.

How do you plan to market my home?

2.

In what ways will you make my home visible to buyers outside of Central Oregon?

3.

What is the timeline, and the specific steps, prior to going “active” on the market?

4.

What should I do to prepare my home for the market?

5.

At what price do you think my home will successfully sell in approximately 30 days?

RESOURCES Visit our digital resources for more information on trending real estate topics and up-to-date market statistics and data.

Webinars

YouTube Videos

Stats and Data

Whether you’re buying or selling, we’re here to help explain how this data applies to your unique situation. A one-on-one consultation with one of our brokers can help guide your next steps.

Text LADD35 to 88000 REFERENCES: https://www.statista.com/statistics/208072/share-of-first-time-home-buyers-usa/#:~:text=Share%20of%20first%2Dtime%20home,in%20the%20U.S.%202003%2D2021&text=Among%20all%20home%20buyers%20in%20the%20United%20States%20in%202021,34%20percent%20of%20the%20total.

https://www.cnbc.com/2022/06/28/rising-interest-rates-cost-typical-homebuyers-16-percent-of-purchasing-power.html https://fred.stlouisfed.org/series/MORTGAGE30US https://www.marketwatch.com/investing/index/spx/charts

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CASCADE HASSON SOTHEBY’S MARKET SHARE VS COMPETITORS

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TEXT LADD35 TO 88000 OFFICE 541.633.4569 | CELL 541.213.9480 BENDPROPERTYSOURCE.COM

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“ Jaclyn Oakland was very conscientious showing us homes coming on the market which met the criteria we had previously established. This made the process very efficient and effective. She was a pleasure to work with, very professional and someone we would be comfortable introducing to our friends and family.

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Erik Chapin is an excellent realtor! He is super nice, honest, and knowledgeable. He understood our needs and desires and worked hard to find the right properties. He was always accessible for questions and setting up tours of homes. When we did make an offer on our home, Erik was a strong advocate for us throughout the whole process. We highly recommend Erik

“

We had the chance to work with Bryan H. from the Ladd Group on our recent home purchase. Working with Bryan and team was a fantastic experience; their professionalism, knowledge, and experience stood out through every step. It’s a great feeling to have a trusted partner by your side and we had that with Bryan and the Ladd Group.

“ The Ladd Group is grateful to once again be ranked as Oregon’s #1 mid-size team by RealTrends.

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Stephanie was very easy to work with. She stuck to the criteria I requested, sent me many listings, and was patient. When I had questions about a property, she was very responsive, and gathered the information I needed in a timely manner. I am happy with the home we found, and would not hesitate to contact her in the future.

Thanks again Stephanie!

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Our closest friends highly recommended Erin from the Ladd Group and we want to pass on that same recommendation to anyone buying or selling property in the area. Erin went above and beyond to help us sell our house and buy another in a short period of time. We felt confident that she knew what she was doing because she has a lot of experience. Thank you for making the process of moving a positive one. We love our new home!

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Ladd real estate group is THE BEST in Bend! Steve Lacrosse and his awesome team at the Ladd group sold our house. His professionalism and expert touch were outstanding. The video he made of our home was better than anything I’ve seen in real estate. By far, this was the easiest and most enjoyable real estate transaction that we’ve ever experienced.

If you are selling or buying a home in Bend, this is the group to go with.

Brokers licensed in the State of Oregon. Each office is individually owned & operated.

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