Late 2019 Portland Real Estate Market Update

It’s been an interesting year so far in real estate, as I guess all of them are! What would a boring year in real estate look like, I wonder?

During the latter half of 2018 into early 2019, everyone from seasoned agents to people that have lived in the same home for 30+ years were wondering, “Are we in another real estate bubble and is it about to burst?”

It’s natural to begin worrying about that when you clock so many years of steep home value increases, seemingly endless anecdotes of homes selling in a day with 10+ offers, and rising interest rates.

Housing inventory began rising during winter of 2018-19 (which is typical, but we had more to look at than in the previous several years). Condos, particularly in downtown Portland, sometimes the harbinger of real estate doom, began to experience steep price drops. So, naturally people began to get worried.

Discourse about a housing affordability crisis deepened very early this year. While many long-time Realtors saw nothing nefarious and liked to point out that no market can sustain 10%+ value increases for very long, and mild correction is really nothing to worry about, others felt that the beginning of another recession was near.

Then spring sprung, the market turned the burners on once again, rates began falling, and inventory also started falling (again).

I haven’t seen or heard many worries lately about the possibility of a housing bubble burst. People seem to have, for the most part, calmed down and begun accepting that the sky isn’t falling and real estate continues to sell, albeit at a slower pace than the insanity of 2012-2017.

*Inventory in Months is calculated by dividing the Active Residential Listings at the end of the month in question by the number of closed sales for that month. This includes proposed and under construction homes. Source: RMLS

Not that multiple-offer situations aren’t happening! And, many homes still sell in a couple of days. Others, though, languish on the market with sellers clinging to their high list prices, refusing to acknowledge that they didn’t gain 20% in value over the past 3 years, or that putting in new carpet and painting the interior isn’t going to land a huge return. (I’m looking at you, Opendoor. My buyers aren’t falling for that.)

We’re now sitting with LESS inventory than we had at the same time in 2018.

So, the bubble doesn’t seem to be bursting, it’s just lost some steam.

With only 2.8 months of inventory in the Portland metro area, it SHOULD still be a sellers market. But the big story right now isn’t whether or not this is a buyers or sellers market… The BIG story is about volume.

Overall closed sales are down by 2.5% over 2018. New listings are down by 1.3% over 2018. Home values have edged up but not much… something around 1-3% depending on lots of things like housing type, neighborhood, and how you look at the numbers.

Home values that rise very modestly, or even fall a little bit, is very good news for home buyers. But, there’s still just not much to choose from out there, so patience has become a very important virtue when looking for a home. Fortunately, most buyers seem to be okay with taking their time and aren’t feeling as pressured.

Trends

The trend of current homeowners choosing to stay in place rather than trade up/down continues to be a big factor in the Portland area. There are still plenty of buyers and sellers out there, there are just less of both of them, and because of that, buyers are taking longer to find the right home and sellers as a whole are taking a little longer to sell (especially if the home isn’t fully prepared for the market).

Portland isn’t a cheap place to buy a home… unless you compare it to the other major markets on the west coast. Becoming a first time homebuyer is still very much a possibility in our area, as long as some concessions are made. There are plenty of great entry level condos to be had, but if a detached home is what you’re looking for, then you’ll need a larger budget or to look further out to the west suburbs or outer east side.

For Portland area detached homes and close in townhomes/condos, $400-450K seems to continue to be a target for many home buyers. For those looking further out, 350K is a solid budget for a small, detached home or really nice attached property. 300K and under is still very achievable for a cottage property (1-2 bedrooms and a bath), in certain areas around Portland.

Home values in these price ranges are doing pretty well as buyers still fight over listings that are really dialed in, and snap up the properly-priced homes that need a little work. That trend will likely continue into 2020 and value gains will still be seen, probably around 1-3% or so depending on location.

Luxury

The high-end and “luxury” market has picked up pace to a certain extent, IF the home is in good condition.

Let’s take Lake Oswego, for instance. There was about 3 months of inventory of detached homes in September, with average sold prices over $800,000 and 95 sold listings (source: RMLS). This is about the same, if not better, than 2018 and only a little less sold units than 2017 (but prices are still higher now).

The homes that seem to have a tough time selling currently are what I would call “luxury fixers”. These are big homes with square footage from 3500 - 5000 that just haven’t had any real updates done. Homes of this size built anywhere from the 60’s to the late 90’s are languishing all over the west side, especially.

The prospect of needing to remodel that much space is daunting no matter WHAT your budget is, and sellers are feeling the pain… but not enough to reduce their list prices down to a level that attracts a home flipper or investor.

Home buyers for this type of home are savvy and know how difficult remodeling is right now… we have a serious labor shortage in the trades along with rising material costs. So, just putting in new floors in a 4000 square foot house becomes a huge challenge, let alone replacing all the dated brass fixtures, old oak cabinets, ripping out those huge 90’s style bathrooms covered in forest green marble, re-doing large decks, and so much more. And, of course, most of these homes probably need at least one or two (if not more) major component replacements: roof, furnace, A/C unit, plumbing, windows, siding, etc.

There are also plenty of high-end new construction homes scattered around town to choose from. People would rather get a little less space and pay a little more than get a lot more space and pay a little less if a boatload of remodeling is needed.

You can see why these types of homes are so hard to sell right now! Plus, the trend in homes is moving towards living more modestly.

In the 90’s and early 00’s, in particular, there was a building boom where these huge houses in various neighborhoods were going up faster than seemed possible. Bigger was better! But now, bigger just means more maintenance and cleaning, and doesn’t work well for aging in place. (Check out my blog about Accessory Dwelling Units and my other blog about Finding a Forever Home.)

Because of the quantity of high priced homes that need updates on the market, and a decrease in people moving into Portland from out of state, I expect the high end and “luxury” market will continue to suffer moving into 2020 and may easily lose as much as 5% or more in value.

Condo Market

Condos continue to be an interesting story. There are definitely deals to be had for those savvy enough to snap them up. The problem is that condos come with HOA dues that don’t change at all just because condo inventory has risen.

HOA dues tend to rise over time to account for rising costs of maintenance. So, even if a condo sells for 350K that might have commanded even 400K or more a year or two ago… it doesn’t necessarily make it affordable.

Let’s look at the numbers:
This is for example purposes only. Be aware that I am not a mortgage broker so please contact a mortgage specialist for help with payment and loan options. I highly recommend Carol Flanagan.)

Scenario:
A condo purchased for $350,000. Let’s assume:

• 20% down payment ($70,000)

• Interest rate of 4.25%

• Property taxes of about $364/month

• Home insurance of about $51/month

• HOA fee of $400/month

• 30 year loan

This all breaks out to a monthly payment of about $2193/month, including principal, interest, taxes, insurance, and HOA fee.

Or, you could find a detached house or townhome for $425,000 with no HOA. Taxes and home insurance will be a little higher, let’s assume:

• 20% down payment ($85,000)

• Interest rate of 4.25%

• Property taxes of about $442/month

• Home insurance of about $63/month

• 30 year loan

• No HOA

This all breaks out to a monthly payment of about $2178/month

Wow, almost identical, and you’re paying $75,000 more for the house! You can see why many people that think about buying a condo decide to switch to looking at detached homes.

(Granted, you would need an extra $15,000 to hit that 20% down payment on the 425K home, or go with a loan program with a lower down payment option. To give you an idea, if you stuck with the same $70,000 down payment, that would increase the mortgage payment on the detached home by a little over $100/month if PMI, private mortgage insurance, wasn’t required. Consult a mortgage specialist to discuss options.)

Of course, on a condo, that HOA fee is there for a reason: you’re paying monthly into a reserve fund that will be used to maintain the exterior of the property. Since the vast majority of HOAs are managed by a property management company, a chunk of that goes towards management fees, so you’re also paying extra for the convenience of not having to handle all that maintenance for yourself.

For many buyers, this convenience is absolutely worth it. Also, condos are often located in urban centers like the Pearl District, or nice, walkable suburban areas like Orenco Station or Progress Ridge.

All of the above has always been the case, though, so why have condos suffered so much recently? Well, I’ve written about this before. There are a few factors.

There’s been a construction boom downtown. Most of this is apartment buildings and other structures, but an influx of rentable units has caused rents to stabilize or even go down. And when renting becomes much more affordable than buying, this will impact condo prices. (Not that renting is more affordable everywhere! Rents in general all over Portland and the United States have risen this year.)

Not all condo buyers come from previous renters in the area, though. Many people that purchase condos move in from out of town, and the influx of people moving here has definitely slowed in 2019.

Continuing disruption in our urban centers, due to everything from a rising homeless population to political strife to transportation problems has, I believe, caused many people to shy away from purchasing a condo in many of the more urban areas or Portland, and instead are opting to buy or rent a little further away.

But, there are signs this might be improving. Active condo listings haven’t risen as precipitously this summer and fall and median sale prices seem to be improving. This means that more higher priced condos are selling and the huge flush of inventory we’ve had over the past year might be stabilizing and slowly beginning to sell off (very slowly… but it’s happening). Values will likely continue to experience small to moderate drops going into 2020, but it will be interesting to see if this stabilizes next year.

Summary

All in all this has been a pretty good year for real estate, given that the vast majority of sales happen at 550K and below. Things aren’t crazy like they were in 2017 and earlier, but the consensus is that’s a good thing. We really don’t want home prices to grow at 10-20% every year! Before you know it, we’d be nearly as expensive as San Francisco.

First mortgage rates are still incredibly low, and that’s helping home buyers realize their dreams. This won’t last forever, but at least for now, it’s good news for the market.

We’re also making changes in Portland. Recently the state legislature passed HB 2001, the only “upzoning” bill in the nation to pass statewide. All cities in Oregon of 10,000 people are more will be required to implement it within 2 years.

HB 2001 basically eliminated single family zoning. Where before a lot might have been zoned for single family, now duplexes, triplexes, fourplexes, and other accessory dwelling units will be allowed, within certain restrictions.

Fortunately, Portland has been working on the Residential Infill Project (RIP) for years, which should be approved soon. This infill development plan already meets most of the requirements of HB 2001, so Portland will be ready to move forward much faster than other cities.

Since we don’t want to end up with a ridiculous amount of city sprawl, the only real option to meet housing needs is infill development. Portland is sorely low on multi-family housing outside of narrow corridors along busy roads. Hopefully this bill combined with RIP will result in more housing and will continue to help us keep home prices from running amok. It won’t solve all our problems, but it will help.