When Are House Prices in Portland Going to Go Down???

Or: How I learned to stop worrying about prices and love the market

Update: Don't miss my more recent follow up blog: When Are House Prices in Portland Going to Go Down?: Part Two - Electric Boogaloo!

I get asked all kinds of questions by prospective buyers, sellers, friends, acquaintances, and random people I meet at open houses. The one question that I've been asked more often than any other lately is:

When are house prices in Portland going to go down?

I'll totally admit that the first time I heard this question I immediately thought, erroneously, that it was a joke. I still remember the days when the prevailing point of view was that the only guarantees in life were death, taxes, and that housing prices always go up, never down.

Then, of course, 2006/2007 happened. Then banks started failing and the stock market crashed in 2008. Then more banks failed. Then we all watched as the nation slowly tried to dig itself out of a hole that, for awhile, seemed to have no bottom.

Here we are, 10 years later, and sometimes I forget that there are plenty of people out there that didn't grow up learning the "house prices always go up" wisdom, which turned out to be not so wise.

So, let's dump any past (failed) prevailing wisdom and any assumptions we might have and instead take a look at... the data!

The 80's and 90's can teach us a lot (other than not to overpluck our eyebrows).

We'll start our journey forward by looking backward. The first thing we can take a look at is whether or not we were correct, prior to 2006, in thinking that housing prices always go up, never down. I mean, that's a crazy assumption, right? Didn't we have that whole Savings and Loan Crisis back in the 80's and 90's? How could prices have risen through THAT???

Well, if we look at median prices year-by-year, we'll see that, indeed, housing prices went up, never down, from 1968-2004 (it was in 2006 that prices peaked). So the old, failed wisdom was true until the Mortgage Crisis and Great Recession. Right?

Well, this is raw data, not adjusted for inflation. If you take a look at the early 80's to early 90's, you'll notice a few years in there where prices didn't go up so much. Inflation was very high in the late 70's and early 80's, so those big percentage increases aren't as impressive as you might think. After inflation is taken into account, in reality, prices fell during some of those years. 

I could pull other graphs that show the severe plummet of sales volume during the S&L crisis, but you get the idea. The market took a dive during that time due to several factors, not the least of which was insanely high interest rates. The cost of the S&L Crisis to taxpayers was enormous, estimated at around 124 billion dollars. It was not a good time for real estate, despite the rosy picture this raw data seems to show.

If you'd like to learn more about the S&L Crisis, I recommend this article (or a general Google search for more concise summaries).

So why, even in the 90s, were we still thinking that the housing market would forever rise?

I honestly don't know. But my guess is that most people thought of the S&L Crisis as a blip on the radar. A mistake caused by greed, lack of regulation, and poor monetary policy. That kind of thing could never happen again... until it did.

I'm a Xennial, which means I was busy with Super important stuff during the S&L Crisis. Will Millennials say the same thing about the Recession?

 Collecting those money bags was the entirety of my 80's financial education. 

Collecting those money bags was the entirety of my 80's financial education. 

I'm one of those people they're now calling Xennials: born too late to grow up with social media, but early enough to be a kid during the amazing time period that launched video games, word processors, computers, and the magic that is the internet.

That means that I was busy playing Mario Brothers on Nintendo and it's sort-of Sega equivalent, Alex Kidd in Miracle World, while all this savings and loan stuff was going on. I don't recall any of my history or economics teachers talking much about the S&L Crisis (probably because the country was still dealing with it at the time). So it wasn't until I started working in home mortgages in the early 00's that I began reading about it. You know, for fun.

I mention all this because I wonder if we've fallen back into the same cycle of forgetfulness. Are we teaching kids everything they need to know about the mortgage crisis and recession? Could it all-too-easily happen again? If we haven't learned anything (again) and we go into another recession, then more than just house prices are going to be impacted.

But I digress. We now know that housing prices don't always go up. But when are housing prices in Portland going to go down?

This low inventory problem just isn't going away.

 Inventory in months in the Portland metro area. Source: RMLS  Note: RMLS considers Yamhill and Columbia counties as part of the metro area. This throws the data off a little. The actual Portland metro area has *slightly* higher inventory than this.

Inventory in months in the Portland metro area. Source: RMLS
Note: RMLS considers Yamhill and Columbia counties as part of the metro area. This throws the data off a little. The actual Portland metro area has *slightly* higher inventory than this.

Right now, we have an inventory problem. This problem is shared by a decent portion of the country but it's particularly bad in Portland. A lack of inventory nearly always equals rapid price increases. We call this a seller's market. 

The question we have to ask is, when inventory evens out and we return to a buyer's market (whenever that might be), will housing prices go down?

The answer is that, historically, buyer's markets (defined as having over 6 months of inventory) don't necessarily equal price drops. What they do usually signal is a "flattening" of the market, where the median home price increases aren't much higher or lower than inflation.

Also historically, housing prices don't fall unless there is a major national financial crisis. Those are pretty hard to predict, even for the smartest economists in the country. Unless you're that guy played by Christian Bale in "The Big Short". Don't we all wish we could be that guy?

So when will inventory go up and when will we have a major national financial crisis? The answer to those questions will, potentially, tell us when prices might fall again. 

Zillow seems to think that we will switch to a buyer's market by 2019, at least as a country. Unfortunately, predicting home values is not exactly Zillow's strong suit so I don't know how much credence we should give this. They're also predicting that the growth rate to housing prices will drop to 3%, nationally, by the end of 2017. A 3% growth rate in house prices is in line with average inflation so if that actually happens then the nation as a whole would likely be in a "balanced" market.

They might be right on a national level (although I think the growth rate will still be higher than that), but I think it's safe to say that the growth rate in Portland will remain well above 3% this year.

  Average and Median home sales price in Portland, Oregon. Source: RMLS  Housing prices to average 3% or less by the end of 2017? That's about as unlikely as my Zestimate.  Source: RMLS

Average and Median home sales price in Portland, Oregon. Source: RMLS
Housing prices to average 3% or less by the end of 2017? That's about as unlikely as my Zestimate. Source: RMLS

New home construction is still entirely too low to keep up with our growing population, and that's true nationally, not just in Portland. There are several reasons for the tepid growth in new construction. Unfortunately, there aren't many signs that this will change anytime in the foreseeable future.

If inventory isn't going up anytime soon, then what about a major financial crisis? Well, there are some indicators that a recession may be in our mid-term future. I wrote a blog that touched on this topic that is worth reading. Basically, more bad lending practices combined with poor monetary policy and a potential automobile bubble may slowly coalesce into another recession. Or maybe not if our economy keeps going steady. If a recession does happen, which is no guarantee, it won't be tomorrow. But could it happen in a few years? Yes, it's possible.

In summary...

I have no idea when Portland home prices will go down but it's highly unlikely to be anytime soon. Based on our current inventory problem, which shows no major signs of improving, we can't expect the market to switch to a buyer's market in the foreseeable future. Therefore, don't expect prices to flatten (let alone fall).

It is possible that we could slowly be building to another financial crisis. In which case, inventory-shminventory, prices will be negatively impacted by another recession (especially since we haven't really fully recovered from the last one).

What this all means for buyers and sellers.

It's a good idea to pay attention to the market, be cautious with your money, and invest for your future. But it's also time to embrace the opportunities that abound in the market that we're in.

So this is when Dr. Strangelove teaches us to stop worrying about prices and love the market.

If you are thinking about selling a home, this is an incredible time to have the power of a low-inventory market on your side. Contact me for a consultation and we can discuss what is the right option for you and your family.

If you are thinking about buying, sooner is better than later to find a home before prices and interest rates rise beyond your comfort level. Mid to late summer is one of the best times of the year to have the most inventory to choose from with less competition than Spring and early Summer. Contact me to talk about your wants and needs and we'll work to find something you love!

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