Market Action Report December 2008

January 1, 2009

I want to add my voice to the chorus who are glad to say good-bye to 2008. It was a very tough year for us, for our clients, and for many friends we have inside and outside the housing industry. In order to craft a more optimistic New Year’s message for the coming year I want to summarize what we have all been through recently. It will answer some of the ‘why?’ questions which are inevitable when times are tough. It will be negative but I believe it deals with reality. Trust me to help wash your minds clean with a follow-up message of hope for our new year in a day or two.

The Sub-prime Mortgage Mess:

It has taken me a year to get my mind around the complexity of what has happened over the last couple of years. I owe a great deal of thanks to clients, industry professionals and experts for the education. Here is my year end summary about the most significant issue to hit us in real estate…

We began 2008 deep into the effects of the subprime mortgage debacle. At the heart of this was a relatively new financial technology known as “mortgage-backed securities”. Since the mid-90’s the financial industry pooled mortgages, packaged them, sliced and diced these packages into complex financial securities to sell to the world markets as a highly desirable, highly rated, and presumably safe investments. Mortgages have traditionally been a safe and profitable investment. When mortgages were securitized in this way, it became impossible to actually know where any particular mortgage might be in the mix. In what financial products? In fact, in what area of the world were these problem loans (China, Europe, etc)? When an over abundance of sub-prime mortgages were found to be in the mix, with an unusually high percentage of these going into default, the entire investment vehicle became ‘radio-active’. Soon no one would buy these and no one could sell them. The secondary mortgage market, where loan originators sold mortgages, virtually shut down.

Coinciding with this financial technology was the liberal availability of money, both from the government money supply and from investors. This fueled a buying frenzy, an amazing new housing market expansion, and inflated the now famous housing bubble. This occurred unevenly; in many areas of the country speculation was more extreme than in other areas. Most notably, metro Las Vegas, metro Phoenix, the California markets, and many Florida markets were the most inflated and overbuilt. In Oregon, Bend, Happy Valley (Clackamas), and some markets in southern Oregon were the most affected. The demand for these financial products, and in my opinion, greed to fill the supply, meant that traditional standards of care were cast aside to make money fast. It was common to offer buyers 100% financing (even up to 125%), interest only loans, and there was a proliferation of ‘no-documentation loans’, Adjustable Rate Loans (ARMs) and introductory Rate Loans (which would adjust upward). This resulted in massive risk to investors unaware, and a kind of “land grab” by people as they bought homes they could not afford under the irrational delusion that ever-increasing equity growth would allow them later to re-finance their Adjustable Rate Mortgages (ARMs) and introductory rate loans.

This bubble burst, just like the technology bubble of the late 90’s, which was also fueled by a new technology (the internet come of age) and liberal money. For us in Yamhill County, we did not begin to feel the effects of this tsunami until late July of 2007. The continuing problem continues to be the effects of these toxic, sub-prime, mortgages. The mortgage process has been decimated as many lenders are now out of business, there has been no market to sell mortgages (especially for jumbo mortgages ($417k and up), and investors and buyers are leery of doing anything until a measure of certainty returns to the market. There will also be another wave of mortgage adjustments this next year.

As defaults mounted, high inventory and increasing number of foreclosures caused prices to decline. As the process continued, many people walked away from houses they were making payments on which were no longer worth what they owed. In some markets, the ‘usual suspects’, prices have declined 30-50%!

Although our area of the country has fared better than most, and we held out longer than most, time is taking a toll on us. Prices are now slipping (about 5% in YC and 10% in Portland) and understandably sellers are thoroughly frustrated.

The Oil Crisis:

Spring did not bring us any better news. The cost of oil caused each of us, and almost every business, to suffer more loss. Although the cost of fuel has come down to a very attractive price, it took its toll on personal budgets, business profits and the general economy for a good part of the year.

The financial meltdown:

Beyond the ‘one-two punch’ noted above, who could have ever imagined that such a melt-down could take place? The unsinkable Titanic was not so unsinkable as we all thought. The financial sector has been decimated and propped up by an explosion of government spending. Banks have been infused with cash to prevent a run on banks, major companies have been rescued with billions of dollars, and there is a long line for handouts in the corporate world. Is it any wonder that what few buyers were in the market before September, they are no longer willing to buy until we see if the sky is falling? Most of you know all too well that the housing market froze over for the remainder of the year.

The Election:

We just completed an election where the campaign was essentially two years. It was a very negative process where advantage was gained by floodlighting the bad news and exploiting the negative. The psychological impact on markets and mindsets cannot be overstated. We see this in the trenches as buyers are affected by media messages.

Corruption:

We ended the year with an eruption of corruption in both the financial and political spheres. Can anyone really comprehend fraud perpetrated by the likes of Bernard Madoff? 50 billion dollars!!! So individual retirement accounts, charities, businesses, and the economy suffered another blow of mind-boggling proportions. To add insult to injury the President-elect’s Senate seat is auctioned off by the governor of Illinois and we are reminded that the Chicago political machine is alive and well.

White-out for Christmas:

Retailers often make 50% of their sales income during the Christmas season. In an already short season (late Thanksgiving), the final 12 days were greatly impacted by snow over most of the nation.

On a positive note, it was a gorgeous white Christmas with little freezing rain and ice (normally what we get with cold temperatures). I hope your holiday season was beautiful and refreshing on a personal level!

The Buyer's Advantage Team