Portland Market Update: May 2023
We’re officially in the heat of the spring market, which is traditionally and historically when both inventory and competition is at its peak for the year. While it’s been a relatively hot sellers market over the past few months, it’s nothing compared to what it felt like this time last year. Rates are still high, which has been the primary driver of buyer and seller behavior over the past 6 months. I could spout off a bunch of boring numbers and stats, but instead I’d like to take a closer look at how the higher rates are affecting the market on the human scale.
But first, the HARD FACTS:
› There are many many people who are currently renting who want to buy homes.
› Inventory is LOW—there are two reasons for this:
1) Builders are not able to keep up with the demand. This has been the case ever since the market recovered after the 2008 housing crash, so it’s nothing new. Compounding the problem is that most new builds for single family homes tend to fall in higher price points that yield higher profits for builders. As the cost of basic building materials rise, it’s becoming increasingly less profitable to build small single family starter homes. Unfortunately, developers generally do not prioritize solving the country’s socioeconomic and housing woes if it means taking on higher risks and less rewards.
2) Sellers not wanting to sell unless they HAVE to (why trade in their current interest rate for something much higher with their next home?)
› Inflation is slowing and a recession is likely around the corner. However, recessions do NOT inherently mean home prices will drop. In fact, home prices have actually increased during four of our past six recessions. 2008 was an exception, not the rule, and today’s circumstances are very different.
› Once a recession hits, interest rates will drop. Nobody knows when that will happen and by how much rates will come down, but we can confidently assume that they won’t get anywhere close to the historically low rates we saw during the pandemic.
› When interest rates drop, buyer demand (and subsequently sales prices) increase.
So let’s consider the current market activity through the lens of my [fictional] friend Ivana…Ivana Biggerhouse. While Ivana and this story are entirely fabricated for the purposes of this article, her story is a very common one for would-be sellers.
OK…let’s pretend that Ivana bought a 3 BR house in 2014 for $400K at a 4.5% interest rate and 10% down. In 2021, she refinanced and now has a 3% interest rate which brought down her payments by hundreds per month. She’s now paying around $1,700 for her 3BR home that could sell today for $650,000—representing roughly $250K in equity. Not too shabby of an investment, right?! After living in her house for 9 years, Ivana’s life has changed quite a bit. She now works from home and has 2 children, so she decides she “vants” a bigger house with more bedrooms in a more desirable area. The houses that check these boxes are around $800K. If she applies the entire $250K that she earned in equity to her down payment, her monthly payment with 6.5% rate would be around $3,700. So Ivana asks herself “Is having a WFH office space in a better neighborhood worth $2,000 extra a month to me?”. Many would-be sellers in Ivana’s situation would say no.
NOW, if Ivana knows that she will most definitely want to move into a 4BR house in that neighborhood at some point, the reality is that she might be better off biting the bullet before home prices continue to increase, knowing that she can refinance into a lower rate at a later date. OR she might decide to take out a home equity loan to fund a down payment on a new home but rent out her 3BR as an investment property, since she could rent it out for more than what she pays for the mortgage. If you can imagine a world where LOTS of homeowners start doing this, can you see how that would compound our inventory shortage and make things harder for buyers?
Here’s another totally made up story about my [fictional] friend Ben…Ben Waitingtobuy.
Ben pays $2,400 a month for a 2BR rental. He wants to buy a house, but he’s heard all the news stories about high interest rates and wants to wait until they get better. Avery has two coworkers who are also waiting to buy: Avery Frugalman and Sharon Aslumhouse (if you haven’t noticed, my roller derby days have made me very good at coming up with punny names!). What a coincidence! When the average conventional loan rate comes down to 5.5%, Ben decides it’s time to start househunting. That $450,000 starter home that he saw a year prior is now worth $480,000. The monthly payment is the same as it would have been had he bought a year prior, even with the higher rate! On top of that, he spent $28,800 in rent last year that could have gone towards his equity over the course of the past year. And as it turns out, Avery and Sharon also decided to hit the ground running after hearing about rates decreasing and they’re all competing for the same houses. <<Sigh>>
I tell these (entirely made up) stories (with totally realistic but also made up numbers) not to cause panic, but to help paint the picture of what we’re seeing in the market right now. The lack of inventory is keeping things competitive and the higher rates are keeping many would-be-buyers at bay. So we’re experiencing a competitive spring market, but with a lot less overall activity.
“But Chrystal”, you ask, “The stats say that the average price point is down from where it was last year? How can the market be so poppin’ if prices are falling?”. To that, I’d say: EXCELLENT QUESTION! While sales data (like average sales price) does provide helpful information, it doesn’t tell the whole story. With so many sellers waiting to sell and buyers waiting to buy, the market players mostly fall into these categories.
1) First time buyers who don’t have a historically low rate to give up (buying only)
2) Downsizing seniors who need a home where they can age in place (selling a larger home and buying a smaller, less expensive home)
4) Buyers who have recently relocated to the city, oftentimes from higher cost of living areas in search of an affordable house to buy (buying only)
3) Sellers who need to sell for logistical reasons like relocation (selling only)
Bullet points #1-2 typically involve, by and large, STARTER HOMES. #3 could be anything from start homes to higher end properties, depending on the buyers situation. In Portland proper, start homes usually fall into the under $500K segment. While the homeowners wanting to upgrade are staying out of the rat race for now, we are seeing a lot more activity and competition at the lower price points. So when you take all of the sales in an area and combine them, the average DOES come out lower than it did last year when there was more activity at higher price points. All of this is to say, if the median sales price in Portland has decreased by 3% since last May, it does NOT necessarily mean that a house bought for $500K last spring is worth $485K today. It just means that today’s market is an entirely different beast.
My advice to buyers:
The best time to buy is when you find a house you love at a price you can afford. There might be a good reason for you to hold off on buying, but you should prepare for lower interest rates to come along with increased competition and higher prices. We just don’t know for sure when that’ll happen. If you have a very large down payment or are paying cash—high interest rates don’t affect you: now is the time to buy before prices increase!
My advice to sellers:
If you want to sell and do NOT plan on buying, you might consider holding off until the rates calm down and prices rise. If you are needing to sell AND buy, it’s a wash. If you are downsizing to a less expensive house, you’ll be less vulnerable to the impacts of higher rates as your actual loan amount that’s subject to interest will be low (assuming you have some nice equity gains from your sale to put into the next purchase): so I’d advise to buy before the market gets flooded with competition.
As always, if you have any questions for me or want to talk shop, I’d love to be a resource for you! Let’s get coffee, a drink, or ice cream and chat about your real estate goals!
Chrystal Roggenkamp
Licensed OR REALTOR® + Architectural Designer
The Portland Hearthbeat / brokered by eXp Realty
chrystal@theportlandhearthbeat.com
503.310.9056
