Portland Housing Market Update

The median home price in the Portland Metro jumped 5% in February. We are seeing a much more active market with homes selling in as little as 4 days with multiple offers if they are in move-in ready condition and correctly priced. One key aspect of this is properties need to be completely finished for this to occur. Buyers are discounting additional cosmetic work heavily in their offer price and homes that are not finished are still taking 30-60 days to get an accepted offer. The percentage of sales falling out of escrow is increasing which resulted in average total market time spiking to 90 days in February. Repair negotiations have been a major sticking point with some sellers expecting to do hardly any repairs and some buyers expecting extensive repairs. Which side is actually correct depends on the condition of each individual property. I believe there are three main drivers behind the increase in home prices. The fear of missing out “FOMO” is definitely playing a role given home prices will likely rise further when the Federal Reserve initiates rate cuts. Given the bubble-like valuations of companies such as Nvidia along with Bitcoin also hitting all-time highs, I think we will see money continue to move into other asset classes, such as real estate, as long as stocks and cryptocurrency remain at current levels. Semiconductor stocks, such as Lam Research, are at extremely high valuations. Many Lam employees live in our area and their stock options were recently valued at over $1000/share. Selling stock at that kind of a valuation to buy real estate will probably look like a brilliant move in a few years. Also, the big seasonal increase in housing market activity we witnessed in the first half of 2021, 2022, and 2023 seems to be occurring again in 2024.

The 30 year fixed rate averaged 6.74% across the United States this week. The Consumer Price Index (CPI) came in at 3.1% in January and followed it up with a 3.2% reading in February. Core CPI, which excludes price changes in food and energy, was up 3.8% year over year in February. So far in 2024, the rate of inflation is staying stubbornly over 3% and not falling back to the Fed’s 2% target. This is not in line with the narrative stock market analysts had been pushing of the Federal Reserve following through with six rate cuts in 2024. The projection of six rate cuts had pushed mortgage rates towards 6% in early January. While mortgage rates rose and retested 7% in February as the narrative changed, rates subsequently fell last week after the most recent job report showed unemployment rose to 3.9%. The US economy added 275,000 jobs in February which again exceeded economists expectations. However, the unemployment rate ticked up to 3.9% due to downward revisions to previous months of job growth. December was revised down 43,000 jobs while January was revised down 124,000 jobs.

Which direction the US economy is headed depends upon who you ask. Recently the highly respected CEO of Chase, Jamie Dimon, admitted his prediction of a “hurricane” about to hit the US economy in September 2022 was wrong. At the same time, he said “remember in 1972 you felt great too. Before any crash, you felt great, and then things changed.” Ray Dalio who founded Bridgewater Associates, the world’s largest hedge fund, also admitted he was wrong to predict a recession in 2022 or 2023. The “debt crisis” he predicted has yet to materialize. Notable figures are still bearish. Goldman Sachs CEO David Solomon recently discussed his concern that the wars in Ukraine and Israel will “be a headwind to global growth.” Personally, I think sky high levels of government spending to support foreign military conflicts and the economy are a major reason for persistently high inflation. High levels of fiscal spending are actively working against the monetary policy set by the Federal Reserve to bring down inflation. One area I see risk to the US economy is in the commercial real estate market. The vacancy rate in office buildings in the United States averaged 19.6% in the fourth quarter of 2023. There is $2.2 trillion of debt backing commercial real estate coming due by 2028. Debt in the commercial real estate space is structured differently than typical mortgages with the entire principal balance needing to be repaid or refinanced when the loan comes due. As these “balloon loans” become due with much higher rates being offered this time around, we could see a lot of commercial properties being foreclosed upon in the coming years. This will likely lead to more consolidation in the banking sector as more regional banks fail.

For what it’s worth, my experiences so far this year seem to indicate we are coming out of the housing market winter we experienced from mid-2022 through the end of 2023. Public perception about housing appears to have improved since home prices have remained relatively stable during a period of persistently high mortgage rates. I believe we are in the early stages of a flight to safety from stocks and crypto as investors capitalize on investment returns and diversify before we see an inevitable drop in these more volatile asset classes. Housing will be a direct beneficiary given the perception home prices are much more stable than a stock that could drop 10% from the time I started writing this report to publishing it (Lam Research). I would keep in mind houses are not office buildings. We could see a very different narrative in the commercial real estate space than in residential real estate over the next few years. Houses will likely continue to show year over year appreciation over the next couple years while at the same time, many types of commercial properties will continue to drop in value.