Franklin D. Roosevelt said, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”But the president could not have known what the recent mortgage and credit crisis would do to property owners who had huge mortgages with payments they couldn’t make when the economy crashed.
Nor would the financier, railroad executive and Whig politician from New York in the 1800s, Russell Sage, understand the risks that the housing bubble would put us in when he claimed: “Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”
To our chagrin the 2008 mortgage and credit crisis, a set of events and conditions that were significant aspects of a financial crisis and subsequent recession exasperated by the inability of a large number of property owners to pay their mortgages, delivered a triple threat to both individuals and companies when the economy crashed, incomes were reduced and jobs lost.
Home prices appeared overvalued and economists predicted that the correction could last years, with trillions of dollars of home value being lost. Former chair of the Federal Reserve Alan Greenspan warned of large double digit declines in home values “larger than most people expect.”
Many entities were blamed for the crisis (though no individuals actually paid a price for their role in it) with politicians, talking heads and economists assigning different levels of blame from financial institutions, regulators, credit agencies, congressional economic and housing policies and even consumers.
Government bailouts were the answer of the day. In 2008 alone, the U.S. government allocated over $900 billion to special loans and rescues related to the housing bubble, with over half going to Fannie Mae and Freddie Mac as well as the Federal Housing Administration.
As recently as 2012 it appeared that the housing market had hit new lows. Foreclosures were still rampant. Many people had lost their homes, jobs and basically had to start over. The housing bubble impacted everyone from home builders, the entire real estate industry, home supply retail outlets, newspaper that depended on real estate ads, Wall Street hedge funds held by large institutional investors…creating the recession.
As of early 2013, the U.S. stock market had recovered to its pre-crisis peak but housing prices remained near their low point and unemployment remained elevated although improving.
Circa 2014. Recovery. The housing recovery has pushed up home prices nearly everywhere. In the past year, home prices rose in 225 of the 276 cities tracked by Clear Capital, a provider of real estate data and analysis.
Almost half of the cities tracked by Clear Capital experienced double-digit increases in home prices, led by Las Vegas, with a gain of 32 percent. Such spikes reflected a continuing ‘correction to the overcorrection,’ says Alex Villacorta, vice-president of research and analytics for Clear Capital.
Economists are saying that home prices will continue to rise in 2014 but at a slower, more steady pace compared with historical trends. Is Central Oregon seeing a ‘correction to the overcorrection?’ Are home prices going to rise again to astonishing levels and then drop when we reach another housing correction?
A recovery shouldn’t mean getting home prices back to pre-recession peaks. Those peaks were relics of an unsustainable boom. A housing recovery should mean when we ‘no longer have historically high rates of foreclosures and mortgage distress, and are experiencing a healthy and sustainable pace of home sales and construction.’
Optimism is clearly the sentiment in the Central Oregon real estate marketplace — realtors see it as stabilized with few short sales and foreclosures. Bend home values have gone up over 20 percent over the past year.
Bend was listed as one of the top ten markets in the future by both Bloomberg Business and MSN Real Estate last month. “Bend is a leading growth market where prices are expected to jump 33.6 percent by 2014.”
People are beginning to sell their own homes in other markets for a normal price and then move here. In addition, low interest rates are helping first time buyers and homeowners looking to upgrade.
For those investors looking for rental properties, the competition is fierce as demand is outpacing supply. The need for multi-family properties in Central Oregon is raising the rental rates and there is a shortage of land available for builders of multi-family residences.
As the real estate market goes through many cycles, a true successful investor should understand many diverse conditions. Some people consider themselves a real estate investor but are under the false premise that putting money into investing automatically makes you an savvy investor. Let’s hope real estate investors learned a lot of lessons from the recent housing crisis.
Things are definitely looking up but it’s still a market with challenges. Household incomes aren’t rising as fast as home prices and potential first-time buyers aren’t finding it easy to save money for down payments.
If you are looking to break into the market, make sure you have a goal in mind for your investments, a desired rate of return, amount of leverage, tax avoidance or specific cash on cash return.