Bend BulletinA few years ago, Krishan Tinney was stuck in traffic — again — on her grinding commute from Los Angeles to Ventura County. So she called a friend in Bend to kill some time.
“What are you doing?” Tinney asked.
“Oh, I just got off work,” her friend said. “Thought I’d walk down to the river and float for a while.”
It was 4 o’clock on a Thursday afternoon.
A few months later, Tinney and her husband, an engineer, ditched Southern California, moved to Bend and bought a house — something that was way beyond their means in SoCal’s heady housing market. Since then, he has recruited friends to join him at Columbia Aircraft Manufacturing Corp. Her parents have moved here, too.
The Tinneys sold their first house a few months ago and moved into a bigger, brand-new one in south Bend’s Renaissance Ridge subdivision.
“We could never have done this in Ventura County,” Tinney said, plucking a few weeds from her tiny new lawn last week as she got ready to take her young daughter swimming. “We feel very fortunate. We love it here.”
Drawn by the lure of relatively affordable housing through the years, the low-key, small-city atmosphere and the stunning natural beauty of Central Oregon, Tinney and thousands of newcomers like her have rained a remarkable streak of good fortune on Bend’s housing market.
Since 1988 — the year the city pulled out of its last major real estate slump — the average price of a Bend home has shot up an average of 11.3 percent per year, according to Central Oregon Multiple Listing Service numbers, dwarfing the 4.8 percent average annual gain in the nation’s average home price during that period and rivaling the
12 percent average annual return of the S&P 500 stock index.
Even ignoring the unsustainable growth rates of the boom years of 2004-06, the city’s real estate gains have been impressive.
The average price of Bend houses gained an average of
10 percent per year from 1988 to 2003, according MLS numbers, while prices nationally climbed only about 4.2 percent per year.
Of course, the numbers are rough. Some of Bend’s average price gains have come more from increases in the construction of super-expensive homes than from the price appreciation of individual houses. Still, it’s clear that the local housing economy hasn’t experienced anything like a drawdown in nearly a generation.
Until, possibly, this year.
The inventory of unsold homes in the Bend market has swelled to record numbers this year, while sales levels for the first six month of the year have fallen back to levels not seen since 2003.
The traditional underlying drivers of the local housing market are likely still there, University of Oregon economist Tim Duy said Thursday. Newcomers are still attracted to Central Oregon’s natural beauty and, even at today’s prices, average housing prices here remain lower than they are in neighboring California and in other high-priced regions along the nation’s gold coasts.
But working off all of those unsold houses might bring some pain, Duy said. The only question is how much and for how long.
“I’ve got to think that the world is not falling apart here,” Duy said. “But prices are going to have to come down to get rid of whatever excess inventory has built up.”
Rough past
Bend’s prices have appreciated so much during the past 20 years, Duy noted, partly because they started so low.
The real estate economy here was in rough shape as the 1970s faded into the ’80s, Brooks Resources Corp. CEO Mike Hollern recalled recently.
A housing boom in the late 1970s attracted a stream of new contractors to town and filled neighborhoods with new housing, Hollern said, but the optimism didn’t last long. Interest rates spiked in the early 1980s as the Federal Reserve Board launched an aggressive battle against inflation, sending average mortgage rates soaring from the 9.25 percent average of 1978 to a peak of nearly 15 percent in 1982.
That, combined with an employment crunch in the wood products industry, hit Bend’s economy hard, Hollern said. Downtown shops closed and boarded their windows. Contractors pulled up stakes and left town.
Don Kelleher, now a longtime real estate agent, was in a retail business at the time, trying to make ends meet while paying 19 percent interest on inventory loans. His wife, a real estate agent at the time, closed deals that required the sellers to bring money to the table because the sales prices of their homes could no longer pay off their mortgages.
From the exuberance of the 1970s, confidence plunged to an all-time low.
“There was a time when we would hear about a housing start — just one house, not a subdivision — and everybody would drive by to see who the hell was building a house,” Hollern said. “Whoever it is must be crazy.”
It took the local housing market years to recover.
From 1983 — the earliest year for which the Central Oregon Multiple Listing Service has reliable numbers — through 1985, the average price of a Bend home fell more than 8 percent, from $54,521 to $50,144. Prices staged a brief rally in 1986 as mortgage interest rates dropped back below the 10 percent mark again. But 1987 brought another 2.8 percent slide, and the average price of a Bend house — which amounted to only about $54,000 that year — was less than half the national average.
Weakness in the housing market was mirrored by sluggishness in other market sectors, Hollern said.
Brooks Resources — formed in 1968 as the real estate arm of the old Brooks-Scanlon lumber company — started Shevlin Center, which today is a thriving hub of office buildings and industrial plants on the west side of the Deschutes River along Colorado Avenue, in the early 1980s. But nothing happened for years, even though Brooks and the city poured thousands of dollars into the Colorado Avenue bridge and other improvements.
Awbrey Butte also stood virtually empty through the first half of the ’80s, Hollern said, even though Brooks bought it in 1970 and master planned it a few years later.
Still, the city was beginning to sprout some of the seeds of its future growth. Developments like the High Desert Museum, along with a trickle of new concert series, new restaurants and new shops increased the city’s attractiveness while the Sunriver Resort, founded by investor John Gray in the mid-1960s, and Black Butte Ranch, founded by Brooks Resources in 1970, exposed the area to a steady stream of tourists from the cities of California and the Pacific Northwest.
Developments like the new St. Charles Medical Center, meanwhile, increased the city’s service level and formed the nexus for a growing employment base, Hollern noted. But the key to the city’s growth through the 1990s and beyond proved to be its attractiveness to retirees and young, skilled urban workers who brought pre-existing wealth or, in some cases, their own jobs with them when they moved to the High Desert.
“We have become,” Hollern said, “a poster child for the non-placebound economy.”
From close to the bottom of Oregon’s 36 counties in terms of household income in the early years of the 1990s, Deschutes County has climbed to among the highest in the state, Hollern noted. Still, storm clouds have gathered again around its housing market.
Speculative bubble
From 2004 through 2006, the smooth, upward-trending curve that maps Bend’s historical housing prices takes a sudden jump upward.
Fueled by cheap mortgage rates and intense investor interest, the average price of Bend’s housing shot up 24 percent per year in that span, giving the city a prominent spot on national rankings of overpriced housing markets.
Whether that’s fair or not is debatable. Most relative price rankings — including a quarterly report generated by Global Insight and National City Mortgage that pegged Bend at or near the top of its list for more than a year — attempt to measure the degree of an area’s “overpriced” condition by comparing home prices to prevailing local wages, leaving investment income, self-employed income and other common sources of Bend household wealth out of the equation.
Still, there’s no doubt that home prices have broken beyond the city’s established trend line, said Duy, who tracks a collection of local economic data to produce a quarterly Central Oregon economic index for The Bulletin. The question now is, where does it go from here?
Some factors, like the city’s continuing attractiveness to wealthy newcomers, are likely to continue to drive growth for years to come, Duy said. But other shorter-term factors, like the oversupply of houses for sale, a growing credit crunch in the mortgage lending industry and the deflation of investor interest in the housing market here and nationwide, all foreshadow some tough months, or years, to come for local residential real estate.
Sellers in any real estate market are psychologically resistant to lowering home prices, Duy said, but the market’s current angst could work itself out through one of a couple of scenarios: prices could come down, which could drain the area’s excess inventory quickly if they come down far enough, or prices will remain stuck somewhere around their current levels or even rise while the region relies on population growth to work off the excess — a process that could take much longer.
Bend money manager Bill Valentine, who warned his radio talk show listeners about inflation in the local housing market as early as 2005, likened the choice to the difference between ripping a Band-Aid off quickly to take the pain all at once, or peeling it off hair by painful hair.
“It has to return to the trend line, and it’s going to happen in one of two ways: fast and ugly or slow and painful,” Valentine said Thursday. “We are gonna end up in the same place, regardless, with a healthy real estate market. We’re probably gonna end up with a thinned-out real estate force, but we still have a great place to live, and people will still be able to make a decent living building houses here and selling real estate.”
A couple of wildcards — recession or rapidly rising interest rates — could make recovery longer and tougher, Valentine said, although an out-and-out recession seems unlikely at this point, and 10-year Treasury bond rates, which tend to foreshadow mortgage rates, have actually dipped in recent weeks.
Hollern, who has led Brooks Resources, the region’s largest development company, since its founding, said he also sees a bright future for real estate here over the next 20 years, although he also sees pain coming in the short term.
“We are overbuilt at the moment,” Hollern said. “But as long as our growth rate — in terms of real people, real jobs and real kids — continues, we’ll work through this in a couple of years and things will pick up again.”
That couple of years, though, could feel like a long stretch for some.
Justin Peterson, a 30-year-old Bend mortgage broker, grew up in Redmond. Up until this year, he hadn’t experienced a local real estate downturn in his lifetime. Now, he’s living through one.
Peterson and his wife bought three investment houses during the boom years of 2005 and 2006. He’s trying to sell one now to generate cash, so far without much luck. Two are rented.
The experience so far hasn’t soured him on real estate investing, Peterson said, but lessons have been learned. Going forward, he said he’ll be more conservative, maybe buying a property every few years rather than buying them in a lump, reducing the chances of buying at the peak of a cycle. He’ll stay more liquid, too — cash is king in a downturn, and it can take a lot of cash to hang onto houses to wait one out.
But for now, like a lot of other recent investors, he’s a seller.
“We definitely haven’t lost faith in real estate, for sure,” Peterson said Thursday. “We’ll just get past this correction and make our adjustments and move on.”
News TribuneKnown for having some of the biggest houses and miles of shoreline, the Gig Harbor area holds another, less desirable distinction: Pierce County’s largest supply of for-sale homes.
Gig Harbor’s inventory of such houses and condominiums stood at 9.7 months in July, according to statistics compiled by Northwest Multiple Listing Service director Dick Beeson. The number measures how long it would take to sell every home that’s listed, putting Gig Harbor deep into a buyer’s market.
And hundreds more homes are planned.
Developers and real estate agents point to several factors that contribute to today’s depth of supply beyond a general market malaise, including prior buyer hesitation over construction of the second Narrows bridge and a tucked-away location that makes it difficult to commute beyond Tacoma.
Also, the area’s pricey homes take far longer to sell than their more economical counterparts. Homes listed for more than $1 million in the first half of 2007 were projected to sell in 25.6 months, compared with an average 6.8 months for those listed at $500,000 or less, according to Beeson. The area examined includes Fox Island and the Key Peninsula.
Although the abundance of choices favors buyers, agents say Gig Harbor’s hefty inventory means buyers can’t expect to make a quick profit. Sellers, on the other hand, need to be on their A-game and price right, they say.
Meanwhile, sales have started at Harbor Crossing, a collection of more than 100 urban-styled houses. And plans are taking shape for Harbor Hill in north Gig Harbor, where 800 to 1,200 homes are expected.
NOT MUCH INTEREST IN CONDO PROJECT
Developer Dave Devin is more than half finished converting 62 apartments to condos at Harbor Glen within earshot of Highway 16, where he’s installing granite counters, hardwood floors, new showers and new kitchen appliances.
Devin said he studied in-demand condo projects in Seattle and Bellevue when designing the retrofit.
“I thought once I got this thing done, the public would be coming to my door. I still haven’t generated much traffic,” he said.
After listing the first ones in April, he’s sold two, with offers on two more.
Prices on the three-bedroom units have been cut from $289,950 to $259,950. Two bedrooms were reduced from $259,950 to $229,950.
Real estate agent Minh Chau Trinh, who’s selling the condos and is also a partner in the project, attributes slow sales at Harbor Glen and supply issues elsewhere in Gig Harbor to the area’s lack of home-grown jobs. The opening of the 80-bed St. Anthony Hospital in 2009 should help, she said.
“I would say probably in another year, things will really start selling,” she said.
Ed Aro, a John L. Scott agent and consultant to home builders, said newly built homes still sell in Gig Harbor. But they have to be meticulously designed and on the right piece of property, he said.
“You can’t throw up a house and have it sell, which is what was happening the past four years,” he said.
Bennett Homes is building almost half of the houses at Harbor Crossing, within walking distance from the planned hospital and a new YMCA and Costco in North Gig Harbor.
The subdivision’s location and the kind of homes being put up, with tiny yards, shared driveways and master bedrooms on the first floors, will overcome any supply issues, said Linda Kepler, a real estate agent for Bennett.
“I just think there’s a real need for this type of housing, because it’s so different,” she said.
‘NOT A SHORT-TERM BUY’
If buyers are looking for equity, they should be purchasing for at least five rather than three years, said Beeson, also a broker at Windermere.
“This is definitely not a short-term buy,” he said. “But the market out there is similar to what it was in the early 2000s.”
In July, a Gig Harbor home sat on the market an average of 95 days, he said. In 2003, the average was 98 days.
Real estate agents in Gig Harbor, like elsewhere, say buyers know they have time to make decisions so they’re taking it.
“There are buyers. They keep coming back. There’s no urgency,” said Premier Northwest Properties agent Paul Redal, who’s selling new houses in the Artondale area for $795,000 to $1.3 million. “Buyers are waiting to see how far prices will go down.”
Preliminary numbers show July’s median price in Gig Harbor declined by 2.7 percent from the previous year – from $392,500 to $382,450.
On 1 to 3 acres, the houses include outdoor fireplaces, master suites and two garages. Two of the eight have sold.
“If I had had these homes done last year, every one of them would be sold, no question,” Redal said.
Transactions also get drawn out by offers made contingent on the sale of another house – a slow sale on one means a slow sale on the other, Redal said. Such a situation led the builder of the Artondale houses to offer to purchase a buyer’s home for about $500,000 on Fox Island to sell one in the subdivision for $1.1 million.
Much like the way investors time the stock market, home owners are trying to time the real estate market, said RE/MAX agent Mary Souza. And, in Gig Harbor, they tend to be well-educated owners with a high net worth who, therefore, watch real estate more closely than most.
“The feeling is, ‘the market has tapped out, the market has peaked. We should put our house on the market now before we see a loss of value,’” she said.
Souza expects median home prices in Gig Harbor to depreciate some through the end of the year, level off in 2008 and begin to increase again by the end of next year.
‘THEY SEE THE GOLDEN GOOSE’
Some sellers haven’t yet locked into the reality of today’s market, said Windermere agent Andrew Welch.
“There was such a demand, and they see the golden goose, and they think their house is worth way more than the market will bear,” he said.
Allison Skibbs Welch, also a Windermere agent and married to Andrew, said with so much competition, houses need to be in pristine condition and priced right.
Rather than list a home today by adding 10 percent to a nearby comparable sale, Skibbs Welch said now she tends to deduct 10 percent.
Kyle Lawson, who wants to sell his 3,248-square-foot house and buy something smaller, said he’s a bit discouraged. His house, which sits on nearly 8 acres near Kopachuck Park, was listed seven months ago for more than $850,000.
He and his wife, Danielle, bought the house four years ago for $360,000 and did a $150,000 remodel, including new windows, doors, moulding and carpet.
They got a new agent in July and dropped the price to $749,700, where Lawson said he thought it should be in the first place.
Lawson, who owns a hair-cutting franchise in Federal Way, is optimistic the house will sell before summer ends.
“It’s a matter of whether we drop the price so it’s a fantastic deal, or do we hold out knowing the market will pick up?” said Lawson. “On the other hand, I’m not worried about buying in Gig Harbor. It’s a buyer’s market.”
A look at the Gig Harbor-area housing market, including the Key Peninsula and Fox Island
July 2002
Median price: $222,250
Average days on market: 80
July 2003
Median price: $264,450
Average days on market: 98
July 2004
Median price: $273,000
Average days on market: 65
July 2005
Median price: $340,750
Average days on market: 73
July 2006
Median price: $392,500
Average days on market: 77
July 2007 (as of 7/24)
Median price: $382,450
Average days on market: 95 RE/MAX agent
