Thursday, August 12, 2010

The Hangover: Pacific Northwest Housing Markets Catching Up With the Rest of the Country

Now that there are more Portland area loan owners underwater on their mortgages than the rest of the country as a whole (see post below), perhaps folks around the Northwest will start to realize just exactly what is about to happen here. Yes. Here. Cash flow reality is truly staring us coldly in the face in a rather unapologetic manner.

From Bloomberg:

"“The housing downturn started late in the Northwest and now it’s ending late,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania. Idaho, Oregon and Washington lagged behind the national cycle and will suffer declines after other areas stabilize, he said.

Nan Holmes, a senior escrow officer at a title insurer, says her insider’s view of the local market gave her the confidence three years ago to pay $370,000 for a new home in Boise, Idaho. She got a price she liked from the builder and 100 percent bank financing.

That was before the bottom fell out of the housing market in California, Nevada and Florida as borrowers with bad credit began defaulting in record numbers, setting off a recession. Holmes, who had earned $150,000 a year when real estate was booming, saw her compensation shrink by half when business cooled, forcing her to dip into savings and sell jewelry. She stopped paying the mortgage in April and has put the house on the market for $145,000 less than she owes the bank."

Meanwhile, job prospects in Oregon are among the most constrained in the nation as unemployment and new job creation show that we are easily in the top 10 problem states:

Across the Northwest, wage based reality is beginning to take its toll on leveraged assets that once upon a time attracted a greater fool. Those days are long gone. Asking prices are being slashed now that the taxpayer funded buyer credits have expired, and the Spring sales rush has long since passed. Mortgage rates are continuing to set record lows, yet nobody in their right mind is taking on new debt to acquire real estate. New loan demand has evaporated.

If folks in Portland really want a preview of what's to come, you don't have to look very far or wide to find real world examples of the demise that approaches. Based on the research data from the BLS in the chart above, Arizona has lower unemployment and better job creation than Oregon. Our
real estate market showed up late to the party, but it will not avoid the hangover. There were plenty of Alt-A/Opt ARM loans and HELOCs originated here to fuel the fire.

Mark my words, the housing bust is just beginning to hit home in the NW. It will not be pretty, and it will not be radically different here than it was for the rest of the country. If anything, it may very well play out as bad or worse when it comes to "the bottom" for real estate valuations:

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

Do most folks in Oregon really think it can't get THAT bad here?

Think again...