Wednesday, December 15, 2010

Portland Makes Forbes List of Top 8 Cities "Where Home Prices Are Falling Dangerously"

Last week Forbes released it's list of top metro areas where "home prices are falling dangerously". Portland ranks at #4 on the list:

"In Portland, Ore., where the economy has performed poorly and private-sector job growth has been tepid, housing prices fell by 1.9% in September and are down 3.6% in the last year. In September home prices fell in 18 of the 20 metro areas tracked by Standard & Poor's Case-Shiller composite home price index.

That was worse than August, when 15 of the top 20 cities were down month-over-month.
"There is a large supply of houses on the market," says David Blitzer, chair of the index committee at Standard & Poor's. "And further, hidden supply due to delinquent mortgages, pending foreclosures or vacant homes." "

(hat tip to YetAnotherGuest for the Forbes article)

Although the Federal Reserve is monetizing US treasury debt at breakneck speeds, bond yields and mortgage rates are climbing. Keep in mind that a good rule of thumb is that for every 1% increase in mortgage interest rates, housing prices decline by roughly 10%.

Prices are nowhere near the bottom in Portland, and the supply of greater fools is shrinking rapidly in my opinion. If you are a buyer, keep your powder dry and continue to save cash to buy ~ 2012-2014. If you're a seller, hanging on to bubble era prices is a recipe for disaster.

Interest Rates vs Prices (must read from

The Truth About Real Estate Pros

RE Pro Typical Responses to the Truth and Basic Math

"They aren't making any more land. TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren't making any more buyers, either. Japan has a severe land shortage, but that hasn't stopped prices from falling for 15 years straight. Prices in Japan are now at the same level they were 23 years ago."

"Because it's a terrible time to buy when interest rates are low, like now. House prices rose as interest rates fell, and house prices will fall if interest rates rise without a strong increase in jobs, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down.

The way to win the game is to have cash on hand to buy outright at a
low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines. To buy an expensive house at a time of low interest rates and high prices like now is a mistake.

It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way."

Neither buyer nor seller will find meaningful home price appreciation returning anytime soon. Keep that prediction in mind if you are pursuing either end of a home sale transaction. It's obvious that interest rates are being kept low by the Fed's purchase of treasuries to support asset prices. When mathematical reality takes hold and bond/mortgage rates are set by the free market -hang on to your hat.

If the Fed is successful, expect a slow steady grind downward in home prices ala Japan since the late 90s. I'm not convinced that interest rates have found a bottom yet, and fully expect to see 30 yr taxpayer/gov. backed mortgages with a 3.xx% handle on a 30 yr home loan before it's all over and the Fed prints money to buy/bailout everything in sight.

If rates do continue to march upward from here, prices will plummet even faster and farther than most can even begin to imagine today. Keep in mind that the Fed is limited in its ability to print money and prevent the inevitable as the purchasing power of the US dollar erodes. Higher food and energy prices due to excessive printing/monetization by the Fed will choke off anything resembling a sustainable recovery.

There is no such thing as a free lunch, and bubble era debts which cannot be repaid - quite simply won't be. Leveraged asset values/prices will have no option but to fall further as a result.