The average home price in the Portland Metro rose 5% in April, with prices rising 2% on a $/sq ft basis in the Tri-County. This indicates more larger sized homes were closing in April compared to previous months. Home prices are now up double digits and I don’t think this is over yet. Inventory remains low at 2.4 months which indicates we are in a seller’s market. While this is a normal amount of inventory for Portland, there are not many properties that meet many buyer’s criteria at present. More buyers are looking for a longer period of time to find the “one” than I have traditionally seen. When properties become available that meet a long term shopper’s criteria, typically it results in bidding wars as these long term shoppers come into direct competition with each other. At the same time, the more cosmetic and repair work is left to buyers in this higher rate environment, the less attractive a property is to them. The idea of having to do substantial additional remodeling or repairs after closing isn’t very appealing to buyers if their mortgage already represents 30-40% of their household income. That being said, properties with good bones that are appropriately priced are also moving.
Home prices appear to have decoupled from fluctuations in mortgage rates for the time being. Traditionally, when mortgage rates are higher, this would be associated with home prices not running as far based on the last 10 years of data. However, this theory wouldn’t apply in the 1970’s, 1980’s or 1990’s. In the 1970’s, the 30 year fixed rate averaged 8.89% and home prices in Portland increased a whopping 214% from 1970 to 1980. In the 80’s, the 30 year fixed rate averaged 12.82% and Portland home prices still increased 37% over the course of the decade. In the 1990’s, the 30 year fixed rate averaged 7.88% and housing again saw stellar returns with a 107% increase in the average sale price in Portland over that decade. As we have seen in the first half of 2023 and now so far into the first half of 2024, home prices can still aggressively increase whether mortgage rates are elevated or not. History supports the idea that houses will appreciate in value even with normalized rates. Mortgage rates are more normal now than they were a few years ago; the mortgage rates we saw from 2013-2022 were the outlier historically.
Mortgage rates spiked in April after the US jobs report and inflation report both came in hotter than expected. The 30 year fixed rate subsequently peaked at 7.22% on May 2nd. More friendly economic data came in this month which thankfully removed upward pressure on rates. On May 3rd, it was reported the US economy added only 175,000 jobs in April, well below the consensus expectation of 235,000 jobs. The rate of inflation is also decelerating again. On Wednesday, it was reported the Consumer Price Index (CPI) came in 3.4% year over year in April. This was down from 3.5% year over year in March. As a result, the 30 year fixed rate fell to 7.02% on average across the United States last week. The narrative has always been for US economic growth to weaken in 2024 under the pressure of the higher benchmark lending rate set by the Federal Reserve. In the first quarter, the US economy was incredibly resilient even under the pressure of higher rates. I believe the Fed will eventually be able to cut rates at some point as we see slightly weaker economic data come in over the course of the year. In some instances, I would argue bad economic news would actually be good news. At the peak of the investment cycle, higher rates are supposed to cool the overheating economy. It would be both expected and a normal occurrence within the investment cycle for the economy to cool here. At present, there is still a long way to go. The US economy grew by 1.6% on an annually adjusted basis in the first quarter so while main street is talking about a recession, the reality is far from it.
I believe the reason average people who don’t pay attention to economic data perceive we are in a recession is because of inflation. All kinds of people are being squeezed from entrenched price increases that have occurred over the last few years. To them it doesn’t really matter that the rate of inflation, that is the rate of ongoing price increases from present price levels, has dropped 63% from its peak. They care about their credit card balances and how much they can afford in groceries to feed their families each week; how much their salaries have risen relative to the new prices they have to pay to survive. At the same time, stocks, gold, crypto and housing have all spiked in value. The only way to “win” in an inflationary environment is to have exposure to assets that will rise along with your grocery budget. That’s why housing should be attractive. You can only buy one of those assets with 95% of the cost financed by another party. For example, if you had bought a house for the average home price in January, $564,600, with 5% down, the down payment would have been $28,230. With closing costs, let’s say your total cash to close would have been $38,000. The average sale price in the Portland Metro was $635,700 in April, a $71,100 increase from January. Meaning your initial $38,000 investment would now be worth just under $100,000 only 3 months later.
How the housing market is functioning kind of reminds me of how acquisitions of large assets in the public and private equity markets occur. If an asset is rare in the sense it is strategic, buyers will pay a premium for it. If not, the asset needs to be appropriately priced or it will not sell. In real estate terms, things that could make a property “strategic” would be being in a great location next to permanent greenspace, Fanno Creek, a lake or something of that nature. Also, the nicest kept properties in neighborhoods with limited inventory such as First Addition and Mountain Park in Lake Oswego and Garden Home-Whitford in SW Portland are getting multiple offers as several buyers patiently waiting for the same property compete. I know this because I have buyers and sellers in those specific areas and have seen it occur repeatedly. Cookie-cutter homes in regular suburban neighborhoods will sell if they are dialed in cosmetically and priced correctly. If they are not, they tend to sit. Whether a listing will sell is more hit and miss right now than at any other time in my career. However, that does leave opportunities open to buyers who need to get a foothold before home prices run further. As long as sellers are realistic, there should be a price their property will move at.
