Katie's Posts February 10, 2023

February 2023: The Year Behind and the Year Ahead

My word for 2022: “barrage”. A barrage of business. A barrage of news and headlines. A barrage of information. I know some of this sentiment is likely just due to my age. I remember when my kids (who are now 22, 20 and 17 years old) were babies and toddlers, my mom and those of her generation would tell me to cherish every moment because they go by so quickly. At the time, that comment made me feel a little guilty. Juggling three young kids, two dogs and a fledgling real estate career, I often felt overwhelmed; each day felt like an eternity.  Now, twenty years into my real estate career and the kids all very self-sufficient (my youngest, Freddy, is a Senior in high school this year, Sophie will be graduating college a year early this coming Spring and my oldest, Quinn, who graduated from college last June, is gainfully employed and enjoying his first real paychecks), I finally understand and appreciate my mom’s sentiment about the fleetingness of time. I hear myself gasping about the fact that it’s already Fall again?! Winter again?! A New Year?! I am floored when I see the kids of my clients and friends after some time has passed. How quickly they seem to grow!  So perhaps it is not surprising that I should experience the pace of life these days as a barrage.  But I do think there’s more to it than just age.  The amount of information (and misinformation) that is out there about literally every subject and the pace at which it gets disseminated has undeniably escalated. New technology and devices allow us to get infinitely more stuff done at an infinitely faster pace. Multi-tasking is not only the norm, it’s expected. Lucky us! We can now check and respond to emails, review and sign documents, and attend meetings from literally anywhere…and all at the same time! But are we better off for all of these advances? Are we wiser? Happier?  I would argue both yes and no.

The amount of information out there at our fingertips is no less than astounding. Thanks to YouTube, you can pretty much figure out how to learn or do anything yourself! I mostly use it for yoga classes (Yoga with Adrienne is the best!) and knitting tutorials (Yes, I knit. I started when I was in middle school and do it just enough to call myself a knitter and just infrequently enough to consult YouTube on every project.)  The flip side to having so much information out there, though, is that literally anyone and everyone can render it, as well as their interpretation, opinion and advice regardless of its validity, completeness or veracity.  And even supposing all of the information out there is valid, accurate and complete, which I think we can all agree is not the case, just having access to information does not necessarily make us smarter or wiser. Information is not the same as knowledge. Information just makes most of us armchair experts, at best.

This, of course, is very much the case with real estate.  When real estate listings went from being posted in weekly print publications, which were the exclusive property of licensed Realtors, to on-line websites freely accessible by anyone at any hour of the day, the role and value of Realtors was undeniably changed, but it was not diminished.  Today, with so much information at their fingertips, my clients are often every bit as informed about the details and history of a home before touring it as I am, if not more. With a few clicks they can find out when a property last sold, how long it’s been on the market, who the owners are, and how many price adjustments or sale fails the listing has had. They know what the property taxes are, have seen the floor plan, compared current photos to previous listing photos, and taken a virtual tour.  But because they may only buy and sell real estate once every 7-10 years, because they aren’t writing and reviewing offers on a regular basis, because they aren’t sitting down with other Buyers and Sellers, hearing their priorities, concerns and interpretations, because they don’t attend dozens and dozens of home inspections every year, and because they aren’t thinking, talking, working in real estate on a daily basis, they can only compare this current home to a handful of others and they can only compare this current experience to one or two other previous experiences under different market circumstances. That limited experience does not offer the history or context needed for insightful, knowledgeable evaluations and decisions….no matter how much information can be found on-line.  And the emotion, stress and personal circumstances that come into play with any home buying or selling process often makes it difficult for the parties involved to remain objective and to interpret facts and information without significant bias.

Information is valuable. No doubt. But too much information can be overwhelming and sometimes misleading without the benefit of specialized knowledge and experience and a balanced, objective and trustworthy lens with which to interpret it.

The fast and furious pace of the real estate market at the beginning of 2022, on the heels of the equally epic 2020 and 2021, gave few of us any time for reflection. It was surreal. It certainly wasn’t realistic.  Artificially low interest rates created the equivalent of funny money in buyers’ hands. Without any increase in income or savings, a Buyer who could once afford a $350,000 home loan 5-10 years ago when rates were between 4-4.25%, could all of the sudden afford a $410,000 loan in 2020 and 2021 with interest rates at or below 3%. Someone looking at an $850,000 home could now afford a home close to $1,000,000.  It shouldn’t have been surprising then, with supply levels so low, that buyers could and would offer to pay significantly more for a home. Higher purchase prices just didn’t have an equivalent impact on buyers’ pocket books.  Sure, the intrinsic value of real estate was appreciating as it normally does with time, but certainly not at the same pace as prices were rising. That extra spike in prices was due to historically low interest rates and years of record low inventory.

The abrupt reality check of steeply rising interest rates beginning in 2022 gave most of us working in real estate (or just trying to buy or sell a home) a good case of whip lash.  We went from a low of 3.11% in January of 20222 to a high of 7.08 % in November.  Though interest rates today are still nowhere near the highest they’ve ever been (the highest was 18.63% in October of 1981 and the average for the past 40 years is 7.75%) and though the increase thus far is not the greatest increase we’ve seen in any rate hike cycle….it is the fastest and steepest increase on record. Thus the whiplash.

The abrupt rate increase was immediately felt by both Buyers and Sellers alike, but the shift in Buyer and Seller behavior and the change in market dynamics was (and remains) more complicated due to persistently low levels of inventory, an abundance of cash and equity sitting in buyers’ hands, and once again, an overabundance of information, misinformation, or just weeks-and-months-old information.

In real estate, unlike the stock market, reporting on market shifts is often very delayed.  A typical sale takes 30-40 days to close. The vast amount of housing data is collected on a monthly basis and takes weeks to analyze and additional time to be reported on. That means reporting on shifts in the real estate market is often delayed by a good 2-3 months.  And, it has to be said, most media outlets prefer dramatic headlines over boring ones …. which means data is often cherry-picked and skewed to grab more readers’ attention. Active, full-time Realtors with their ear to the ground can feel the pulse of the market and sense changes, but lagging headlines confuse matters and complicate client decisions.

What makes real estate markets even trickier to interpret and navigate is that, unlike stocks, residential real estate sales are laden with memories and emotions, homes are purchased with very personal expectations and sold or purchased, most often, for emotionally-charged reasons (job changes, births and deaths, marriage or divorce).  Home prices are affected by the timing, emotion and stress of these very personal influences, creating new ceilings and floors in the market.

Residential real estate is also, of course, highly localized and nuanced.  The supply and demand in one of Portland’s 94 different neighborhoods today is often quite different than what is depicted in the months-old reporting on the Portland-metro area at large. And demand and appreciation does not apply equally to all homes across the board.  Floor plan, natural light, view, paint colors, landscaping, privacy, road noise, system improvements, finish updates, and even those things that don’t normally convey with a sale (furniture, artwork, decor) – all of those factors that are not calculated by Zillow and Redfin valuation algorithms – have a significant impact on how quickly and how much a particular property will sell for.

Ironically, I think the more information that is out there for our consumption, the greater the need we have for experience and expertise to parse through it all.  Not everyone is meant to be a day-trader of stocks or crypto currencies. I thought I could replace the electrical outlets in my own home (and most people are quite capable) but as it turns out, I needed a professional. And don’t get me started on the medical diagnoses we have come up with in our house after on-line research of various ailments.

So what about the Year Ahead?

If you’ve known or worked with me for long enough, you’ve heard me say countless times that there is no crystal ball. You’ve also likely been reminded that real estate is a long term investment. As such, perfectly timing the market to buy low and sell high is not only extremely difficult to do (and within the same market, impossible, unless you plan on renting in the interim) but counter-productive.  Renting and waiting for prices to go down, you deprive yourself of valuable equity building.  Waiting for interest rates to improve, you can miss out on attractive homes prices, which are being reduced to off-set higher interest rates.  Similarly rushing to get into a home in order just to take advantage of low rates or low home prices can be foolish.  The fees associated with buying and selling take time to re-coup. Buying a home that can or will work for a longer amount of time, even if it costs you a little bit more in terms of interest rate or price, is the usually the smartest move – financially and logistically.

The timing of buying or selling a home should come down to availability (does a home that suits your needs and wants now, or that has the potential to do so, exist) and affordability (can you afford it).  Home prices and borrowing rates may become more affordable in the future, but will the house that best suits your needs be available and, if so, attainable at that time? Will you be competing with more people for it? Similarly, just because something is a bargain (whether because of its price or the cost to finance it), doesn’t mean you should buy it.  We’ve all fallen into the trap of buying something we don’t need or want simply because it was being offered at some incredible discount.

The notion of timing the real estate market aside, it is, of course, still valuable and important to understand current market dynamics and how they might be expected to change moving forward.

The one thing most economists seem to agree on is that economics, in general, is complicated, and that our current economy is especially so.  The labor market remains tight despite threats of a recession. The stock market is low despite strong company earnings. Consumers are continuing to spend (though more so on services than goods at this point) despite increases in costs.  There continues to be a lot of cash on the sidelines – in individual savings accounts and company ledgers – despite inflation.

An article in the Harvard Business Review summed it up well by saying: “The current constellation of macroeconomic signals is unique, with many signs of strength coexisting with weaknesses. That limits the usefulness of models and predictions…”

Everyone seems to agree that the economy is and rightfully should be slowing down. Some think there will be a soft landing, and some think a recession is inevitable (though hopefully mild and limited to only certain sectors of the economy).  No one is expecting a crash of the economy or the real estate market like we experienced in 2008-2010.  There is too much equity in homes and too much savings in company and individual accounts. And there are too many areas of strength in the overall economy.

Real estate values here in Portland have been falling since their height in May (as of the end of January, values are down by between 12% to 18% since their peak in May) and many believe that they will continue to decline for a while longer, albeit modestly, and then level out toward the latter half of 2023.  I’m going to put myself out on a limb and say that we have already seen the bottom and have begun to level out and in certain sectors of the market, perhaps even creep back up. Next month’s numbers should prove whether I’m right or wrong!  Regardless of our current trajectory, it should be noted that real estate prices in Portland almost always peak in May and bottom out in January, though typically with a slight bump up and down again in the fall (which we did not see this year). So at least part of the 12%-18% decline in Portland’s real estate values since May is typical and should have been expected, though this time the difference was double what it typically is –  12% to 18% versus a more typical 7% to 10% – and is expected to have a longer duration.  Again, with interest rates more than doubling in that short time period, the drop in pricing was inevitable.  The huge run-up in prices from 2020 – 2022 wasn’t because individuals’ budgets had suddenly exploded or homes were suddenly intrinsically worth more, it was just that the higher prices fit more easily into individuals’ budgets because of the incredibly low interest rates…and there was a shortage of supply, so what was the harm in paying more to get a home? Home buyers tend to think and make decisions in terms of monthly payment rather than purchase price. Similarly, just because prices have dropped and may continue to drop doesn’t mean that real estate has lost its intrinsic value or that individual budgets have shrunk. Most homebuyers can still afford and are still willing to make the same monthly payment for a home as they did last spring, some can even afford a higher payment due to increases in salaries.  It’s just that the same monthly payment now equates to a lower purchase price due to higher rates.

I think most economists would also agree that not all areas will see real estate prices drop at the same rate.  Markets with the steepest recent price gains and/or the highest prices will likely see the biggest adjustments.  Portland’s most expensive neighboring markets (San Francisco and San Jose) saw some of the biggest price declines from Q2 to Q3 of 2022 (16% and 11% respectively – this does not include Q4 numbers which are not out yet).  The Boise real estate market, which saw values shoot up a whopping 32% from 2020 to 2021, began to moderate earlier than neighboring markets in 2022, resulting in one of the lowest annual rates of appreciation in 2022 in the region.  Portland, which falls right in the middle of the pack in terms of average sale prices in the region, and which, though still steep, did not have the highest percentage price increases in the region in 2020, 2021 or 2022, seemed to fair better in the latter part of 2022 than most neighboring markets (including Seattle, Boise, San Francisco, Denver, Phoenix and Las Vegas).

As mentioned, I suspect Portland’s real estate market has already started to level out and that it will begin to once again follow the typical seasonal cycles (increasing through the spring, declining a bit in the summer, increasing briefly again in the fall, and declining again in the winter).  My moderately rosy outlook is based on the fact that we still have very low housing inventory and that that is unlikely to change anytime soon. At 2.7 months, inventory levels in the Portland metro area this January were the highest they’ve been since September of 2019, but that is still extremely low historically speaking. And inventory levels are expected to stay low for quite a while due to a variety of factors: lack of sufficient new construction, slower permitting and construction processes, greater personal savings and home equity which protects households from foreclosure or unwanted moves, longer lifespans enabling people to stay in their homes for longer periods of time, a trove of new buyers (finally) entering the market place (think Millenials) and an understandably low motivation by homeowners who purchased or refinanced a home in the last few years to go from a 3% or lower interest rate to 6% or higher.

When interest rates more than double like they did in 2022, we expect prices to drop in order to maintain affordability, and this is exactly what happened. But the secondary effect to such dramatic rate increases is a tightening of inventory which has the opposite effect on prices.  As a result, though I think we will see fewer sales because of the combination of higher rates and lower inventories, I don’t think we will see hugely significant additional or protracted price declines.  Already this January, we are seeing multiple offers again in Portland. These are multiple offers after significant time on market or significant price adjustments, but there is competition nonetheless.  And now there may be 2-3 offers on a property instead of 10-20 and prices may end up 1%-2% over the last list price rather than 5% – 15% over the initial list price. Buyers are also not having to waive quite as many contingencies to compete. They are able to take a little more time and even, sometimes, negotiate a bit on repairs. But seeing multiple offers again, albeit at a different scale, indicates that Buyers have adjusted to the reality of higher rates. The shock is over and their reasons or motivation for moving and/or buying a home are still there, so they are ready once again to take action.

As is always the case, I think any recession and changes in our real estate market will impact sectors of the population differently. People who are fortunate enough to not need a mortgage aren’t affected by higher interest rates and will be motivated by lower price points (though their diminished investment portfolios may dampen those motivations somewhat). People retiring will be more nervous about making big changes, such as buying or selling real estate, because of the stock market’s impact on their nest egg.  First-time homebuyers who were just on the cusp of being able to purchase a home last year will now have to wait… for a while….because of the impact of rates on purchasing power.  As such, I worry about an ever-growing disparity between the haves and have-nots, a widening gap between rich and poor. Those with greater assets before an economic slow-down or recession will be able take advantage of market conditions and increase their holdings, making it ultimately harder for those without to ever attain the same goals, such as that of homeownership.

I’ll close by repeating that these are just my predictions and interpretations of what I see and hear. I am not an economist nor do I have anything close to an economic degree (my major in college was Spanish, of all things). Regardless of actual economic dynamics at play, perceptions of the market (whether real estate or other) have just as great an impact on outcomes as the fundamental contributing factors.  And perceptions are greatly influenced by media headlines and armchair experts, which often cherry-pick data or stories to make for a more exaggerated and dramatic conclusion.  Perceptions of a recession or market crash can be self-fulfilling prophecies.