Much of the talk about inflation being under control is wishful thinking, and with an increase in CPI and a jump in consumer spending, I expect the Fed to raise rates 25 basis points in the September meeting later this month. I may be getting ahead of the curve on this prediction. Still, Jerome Powell has been consistent in his messaging, and it is common knowledge that Fed Board Presidents advocated for another hike before year-end. Lately, there has been much chatter from real estate "experts" talking about "what must happen" to reign in affordability issues for buyers. Unfortunately for those wishing for lower rates, those wishes directly conflict with the Fed's current mandate of slowing the economy and housing and increasing unemployment. It sounds contradictory that the Fed would want higher unemployment and a slower economy. Still, the goal has been evident with every public message from Jerome Powell, and backing off now could potentially erase the minor gains made. I expect rates to remain high for the foreseeable future and do not expect a pivot soon.
Housing in Central Oregon has started to show cracks in the armor of an unprecedented price run-up over the last few years. This morning in Deschutes County, 907 homes are listed, up fourteen from the previous year's week and eleven from last week. In all three counties of Central Oregon, 50% of the sold single-family homes took a price cut. At this point, those price cuts sit on top of price reductions of active listings and are beginning to compound. Homes priced correctly may be less susceptible to significant reductions, but many properties still on the market at this time of year are "shopworn," and sellers are looking to make a deal. Also, many buyers see the writing on the wall and, as a result, are more likely to make offers below the asking price. While I have received some direct feedback from offended sellers, the market drives buyer behavior, and market shifts happen quickly. Nobody wants to overpay heading into a slowing market, and consumer sentiment is an intangible reality sellers must face.
The good news for sellers is that the short window before winter weather and the holiday season is a highly active time of year, as many buyers are just as motivated as sellers to get deals done before year-end. With that short window, there will naturally be fewer new listings, and even with rising inventory, it isn't likely enough to make massive price changes in 2023. Year-to-date sales reflect a -26.3% decrease from last year and a -5.34% price decrease, with the median sale in 2023 at 655k. For perspective, in 2007, there were 2703 sales of single-family homes in Deschutes County, 2,043 in 2008, and 2,844 in 2009, the peak years of decline during the last housing crash. It seems increasingly unlikely that sales will break 3000 units this year.
Strong buyer demand from new residents remains relative to the low inventory of homes listed, but as days on the market increase, expect buyers to be shrewd in what they are willing to offer.
Prices and price reductions at this time of year are a future predictor of pricing for the coming season. If rates stay high heading into spring (they will!), expect home prices to soften further as sellers confront a smaller pool of potential buyers. The wild card will be how many sellers sit on the sidelines with locked-in lower mortgage rates. Another factor will be investors and the short-term vacation rental pool. If investment properties underperform and home prices continue to decline, it could create additional inventory that further depresses prices. Increased inventory and lower prices may be shocking to experience for the "it's different this time" crowd, but the market makes the rules. I may be on the leading edge of this type of prediction, but there isn't a quick turnaround or a soft landing from my perspective.
During the pandemic craziness, visitors lingered in Bend and the surrounding areas long past the end of Labor Day and, in many cases, through winter. The rapid decrease in traffic this Monday was palatable. I heard the Sunriver Resort went from 100% capacity on Sunday to 30% on Monday, a decline that did not occur in recent years. I do not have direct access to the resort numbers, but word travels quickly amongst employees in small resort towns, and the local traffic backs the numbers up.
For investors, this time requires extra caution and a long-term view. Most rental pro formas only provide a couple of years of data, especially for properties recently converted to short-term rentals. The last couple of years were the hottest short-term rental market in history with the flight from cities, work-from-home (or work-from-vacation-rental), and a bustling Central Oregon. Do not expect the future to provide the same rental income as the recent past. In 2008, I witnessed many, many people lose property after property, relying on rents and investment incomes that were not sustainable. With investor lending rates well past 8% in most cases, real estate investing is not the slam dunk many portray. If you use leverage to invest in real estate in a market of declining prices, potentially declining rents, and higher vacancy rates, feeding that property from your income every month can quickly become a burden. The investment side of real estate may be moving towards more typical scenarios, with terms like "cash flow" falling by the wayside.
Take my musings however you like; I speak to people with a different view of the market daily. However, a conservative, well-thought-out approach never hurts. Less leverage and a longer view will always benefit real estate investors. Here's an interesting statistic for anyone speculating on real estate investments. New construction accounts for Eighteen of the ninety-three homes in La Pine, built-in 2022 or later, with a median cumulative days on the market of 189, three of those homes listed over 400 days, and three more over 300 days. Sixty-seven of the 208 homes in Redmond have a construction completion date of 2022 or later, with a median of fifty-eight days on the market. Real estate downturns always start in the outlying areas, and La Pine is more at risk than Redmond. Keep this in mind when you are home shopping!
For those looking to purchase this year, I encourage you to make offers below the asking price. Especially at the high end, there is a strong chance that sellers will pull many properties available today from the market if we head into a prolonged downturn. Today could be one of the best opportunities to get a great price before the economy turns around and prices climb again. While many will read this report as doom and gloom, buyers across Central Oregon are salivating at the thought of lower prices. Please reach out if you have a different perspective or need my help with your real estate strategy.
