How Cash Sent the Portland Home Market Spinning

http://www.invw.org/cash

by gammarator • 11 years ago

30 42 11 years ago

What does "all cash" mean? Surely the buyers never start paying loan payments to the former owners... At least where I live all transactions for houses etc are always "all cash", even when the buyers have gotten a loan from the bank... Ie. it doesn't matter to the seller where the money comes from, they get their money as "all cash" either way. Maybe this is some US terminology thing.

* Ok, read a little further:

"When sellers have a choice, they prefer the sure thing. Unlike cash, financing can fall through, especially in a market with tighter credit. Buyers who turn up with a check rather than a pre-approved loan are more likely to complete the transaction –and sellers know it.

To compete, some buyers are simply borrowing cash from friends and family and financing their houses after closing — bout 14 percent of cash buyers in the greater Portland area between 2011 and the end of 2014, in fact, according to RealtyTrac."

Well, here if you make a binding offer for a property, you pay 10% upfront to the seller. If you don't complete the transaction you lose that money. And all buyers always have a "pre approved loan" (which is binding from the bank, they can't reneg it).

tsotha• 11 years ago

And all buyers always have a "pre approved loan" (which is binding from the bank, they can't reneg it).

Yes they can. I've never seen one of those "pre-approved" loans that was actually contractual. All they really mean is, based on the numbers you've provided, the bank thinks you can afford a house that costs X. That's to keep people who don't have enough income from wasting everyone's time. But it doesn't put them on the hook for actually providing the loan.

imroot• 11 years ago

To combat that, some banks are offering "Guaranteed pre-approval," but that's the bank underwriting the loan during your pre-approval paperwork, so that you can close in 72 hours as long as the titles clear.

zaroth• 11 years ago

When you make an offer, it comes with "earnest money" which is a deposit on the purchase. There are usually some "contingency clauses" which allow the buyer to back out and get their deposit back. Backing out for any other reason means the seller is entitled to keep the deposit. Typically 1 - 3% of the purchase price is included with the initial offer which increases to about 5% by the time you get to "Purchase & Sale". The money is kept in escrow until the deal closes, but it does prove the buyer at least has some cash on hand they are willing to park in a separate account while the deal goes through or falls apart, so the amount of the deposit and the number of contingencies is a signal to the seller of the buyer's seriousness and also gives some assurances that the buyer will make it to closing.

Typical contingency clauses include a home inspection revealing substantial unknown issues, an appraisal coming in below the sales price, and a mortgage contingency saying the buyer will make reasonable effort to obtain a mortgage but can back out (and get their deposit back) if they are unable to obtain a mortgage.

What the term "all cash offer" means is simply that there is no mortgage contingency in the offer. So if the buyer does need a mortgage to complete the purchase, but they cannot get one, then the seller is entitled to keep the deposit.

It is poor terminology because cash has nothing to do with it. The seller gets cash either way, and the buyer may be obtaining financing before closing either way. It simply has to do with the seller's legal right to keep the deposit under the specific case of a buyer failing to obtain financing.

Buying without a mortgage contingency isn't really a big deal if you actually know how much money you can afford to borrow, and give yourself enough time to actually close on some financing. Buying without an appraisal is a slightly bigger deal, because the LTV (loan-to-value) ratio of the mortgage is calculated based on the appraised or purchase price, whichever is lower. If it appraises low and you are at the maximum LTV already, you will need to increase the down payment to cover the difference in order to close.

Finally, the inspection contingency: Sellers don't want the buyer coming back and saying, "hey I inspected the property and it needs new paint in the 2nd bedrooms closet, we need to reduce the price by $1,000..." so the clause typically says something about "significant undisclosed structural, mechanical, electrical, blah blah". When you see buyers dropping this clause it definitely raises an eyebrow, because, what exactly are you buying if you don't get the chance to even properly have some-one look it over? On the other hand, the typical inspection is made to look "comprehensive" with big long checklists but most of the items are complete nonsense, and no real invasive inspection of the property is typically taking place, so I can see why some people just dispose with the ritual.

klochner• 11 years ago

Investment is not a bad thing. The underlying problem is artificially constrained supply. In a healthy market, increased investment leads to construction and lower costs for both renters and buyers. (/cc san francisco)

venomsnake2• 11 years ago

Investment is not. Flipping and speculation - I can live without.

tadfisher2• 11 years ago

SF snark aside, there are some parallels. Portland Metro's urban growth boundary[1] has both reined in sprawl and reduced the availability of cheap land for development. Combine this with horrendous traffic on the major suburban arterials (I-5, I-84, OR-26, I-205) and you have a sustained demand for close-in residential properties.

You could call this an "artificial constraint", but it's also part of what makes the Portland metro region a desirable place to live.

[1] http://www.oregonmetro.gov/urban-growth-boundary

steveax• 11 years ago

As a long time PDX resident (not "native" but Portland has been my home for 25 years) the current housing market alarms me. It's like 2006 all over again. The usual NAR "go go go!" cheerleaders, bidding up way above asking prices and as usual no one is asking "who in Portland can afford a $600k house?" I do not think good will come of this.

santaclaus• 11 years ago

At least there seems to be more housing stock going in. North East Portland is a giant construction zone, at the moment. Stand on any corner of Mississippi or Williams and you see mega apartment complexes going up. Hell, they are even building new housing in the wasteland that is Lloyd center!

limaoscarjuliet• 11 years ago

Which really means that when it crashes again (and it will one day), it will be deeper than before.

I own a house in Atl that I bought while it was still in a slump. It's value went up, so I should be happy, right? I guess I'm stupid, but something tells me this is not good. Affordable houses are a good thing. High prices mean kids will not be able to afford anything.

davidw2• 11 years ago

I recall visiting eastern Oregon just before the crash, and there were places in Prineville selling for more than that. Sure, they were big, and fancy, but... Prineville. It was mind boggling.

forrestthewoods• 11 years ago

It could be worse. The Chinese could be buying everything like they do in Vancouver and are starting to in Seattle. I believe the number I heard was 1/3 of Seattle 1 million plus dollar homes in the east side was Chinese. I have more than a few friends renting condos which are owned by Chinese buyers who bought sight unseen.

It'll get worse before it gets better, unfortunately.

iaw• 11 years ago

Citizenship requirements to own property, like Mexico has, would be fantastically appropriate.

wyclif2• 11 years ago

The Philippines, too, and probably a lot of other countries I can't remember at the moment.

dba7dba2• 11 years ago

Unlikely to be allowed, as the cash coming from China to buy up property is considered trade surplus.

What is really galling is that from what I hear, a lot of the cash leaving China to buy property are often illicit fund. In a way, US housing is being used as a money laundering scheme. Not just from China but Russia and other places.

This is not going to get any better for awhile.

stretchwithme• 11 years ago

Taking away citizens' right to sell to whomever they wish is not a moral solution.

pjc503• 11 years ago

Capital controls used to be a thing back in the Bretton Woods era. They were abolished as everyone likes the sound of foreign money coming in, without realising it can be as dangerous as massive cash outflows.

Running the property market as an export market is not a long term sustainable solution.

wyclif2• 11 years ago

The growth of remote work could ease some of this effect. If your employer's offices are located in SF or Portland but you don't have to live there, it seems counterintuitive for many types of people (esp. families) to pay to play in those markets.

MichaelCrawford5• 11 years ago

Ironically, many San Francisco companies are opening offices in Portland, as they can't find enough local staff.

But most don't permit remote work - otherwise one could remote into SFO.

venomsnake2• 11 years ago

Sometimes QE land where they don't belong ... The global economy is having a glut of cash right now.

throwaway1979• 11 years ago

As a datapoint .. we're from the Toronto area ... we looked for renting a home in a remote community - a few hours away from Toronto. I am shocked to see how urban prices have creeped into the area. 450K for a nice house in the boonies? Also, rents are through the roof. All the landlords we spoke to who weren't professionals seemed to have 1 main home in the community and two or three others that they bought and renovated.

As someone who doesn't own land and was hoping to do so later in my career, I am scared. I knew I was priced out of major cities where the good jobs are (e.g. for my spouse). Since I can theoretically work remote for the most part, I thought .. it'll be okay. Now, I am getting a feeling of dread that I have been priced out of a huge chunk of the market.

I am beginning to think that a rise in interest rates won't dampen property prices where there has been significant foreign investment. It'll hurt the mom and pop landlords but not the foreigners putting up all cash.

Here is the frustrating part .. this chain of logic says I need to buy something right now ... buy into the bubble! (Housing in Toronto and Vancouver is widely considered to be a bubble). I've essentially held out for 7 years and it is getting to the breaking point. If I had bought into the same (but at that time smaller) bubble, my "investment" would have doubled.

Am I screwed?

GFischer2• 11 years ago

The same is happening in many other countries (housing in my country is similarly overpriced related to income), and I have the same problem - I'm renting, and housing is getting more expensive every year (as well as rent).

I believe prices are cyclical and we should expect a "down" period, but when it will happen is always the question :) .

Most economists believe cycles are almost inevitable, but "On average, upturns last more than downturns" and "the amplitude of upturns is also larger"

Some googling found for example this paper, which includes Canada:

http://www.imf.org/external/pubs/ft/wp/2011/wp11231.pdf

It warns of "slow nominal price adjustment" during downturns, which is my experience as well (prices trail reality by 1-2 years during a downturn).

So, you have to understand your reality, if you need a house in the next few years, they're not going to get any cheaper. If, OTOH, you can wait out the cycle and save money, you can probably make a good deal later. That is, unfortunately, not a choice for most of us.

FiatLuxDave• 11 years ago

I was in a similar situation a few years ago, before the 2008 housing bubble crash. I grew up in a beachside Florida town, where the prices had literally never gone down since the founding of the town. I was worried that I would never be able to buy here. I was really worried that what looked like a bubble in 2003-2007 was going to turn out to be permanent, and lock me out of owning in my hometown forever. I felt stupid for not buying into the rapidly rising prices as early as possible. But I worried and waited, and rented and saved.

It turned out I was correct to do so. The housing market crashed and I was able to pick up a large house in a great neighborhood for $200k. The two things that really convinced me that the real estate bubble was indeed a bubble were these: a) I had friends who were able to make a better living flipping houses than I did as an industrial physicist, and b) the rental rates were not growing nearly as fast as the housing prices were, which indicated that all those houses bought as investments were unlikely to pan-out as good investments long-term.

I don't know much about the Toronto market. But I'd recommend keeping an eye on the difference between growth in rental prices and growth in property prices. They are rarely the same. Yes, foreigners are willing to take some losses to keep their money safely out of their home country, so the situation isn't the same as in 2007. However, the purpose of their investment is to keep their money safe, and so like all bubbles, when the prices start to fall there will be a rush to another safer asset class.

So, you probably aren't screwed long term, just short term. If you see the bubble, so does (almost) everyone else. You can buy and try to time the market if you want risky returns. Or you can rent a house for now and then buy a nicer one after the crash if you want to just get a good deal on housing for your money.

GFischer2• 11 years ago

This article purports to have some tools to predict the bubble:

http://www.dce.harvard.edu/professional/blog/how-use-real-es...

kyledrake2• 11 years ago

I've lived in Portland for several years, and I know the business landscape here pretty well. I've helped build a few companies, back when Portland was a place investors wrote off as a joke. I've been watching in amazement over the last few years as this has really gotten out of control.

The Portland metro region is a great place, and there's a lot of potential. But frankly, it doesn't have the economic infrastructure to justify $600k 1200sqft houses in the neighborhoods, triple-increased in price within the span of 5 years with appraisal rights waived. It's definitely gone up in value, but that's a ridiculous increase that's really hard to justify when contrasted with the fundamentals.

You can try to blame some specific group, but really I see this ultimately as an unintended consequence of QE, ultra-low interest rates, and the subsequent global currency war it appears to have triggered. When there's a pile of cash floating around and nothing returning interest to put it into, it moves into other devices. The stock market is an obvious example (with plenty of bad consequences), but real estate is far scarier, and far more insidious. It has a tendency to rip up cities.

pjc503• 11 years ago

Global inequality has a part to play here as well. But yes, it seems to be an almost deliberate plan to reinflate asset prices. And raising housing cost while wages are flat just exacerbates inequality.

kyledrake2• 11 years ago

Yes, exactly this, thank you for bringing this up.

Wages are flat across most sectors, and Portland's job market for supporting higher wages has not improved much. There's been some growth in tech (Disclaimer: I'm very much in Portland tech), but the jury is very much out on how stable this is going to be long-term, as much of this growth is investment-driven and not profitable. Beyond a few small IPOs, there's been unusually large growth of what I could try to describe as artisinal restaurants, food carts and other craftswork type businesses. It's not a bad thing at all, but it simply isn't going to justify these outlandish prices. The skyrocketing cost of living is a serious threat to the businesses and people that made Portland unique and interesting in the first place.

To give a contrast, I have friends in Minneapolis/St. Paul who were able to find very good 2k+ sqft homes for around $200k, in good neighborhoods within Minneapolis proper. This region ranks first among the 30 largest metropolitan areas in the number of Fortune 500 companies per capita, across highly diversified sectors. Within that stable jobs infrastructure, housing has not tripled, and they still use appraisals. Something is definitely not right here.

themartorana• 11 years ago

I have a great job with great pay, and even I'm getting priced out of the market. My wife often wonders where all of the millionaires come from (and living in Philadelphia, surrounded by rich towns in NJ and PA, I wonder the same thing, too) because that's the base-line to afford a decent apartment in the city or detached house with a bit of land in the burbs that can hold a family of four.

All that, and Philly has actually remained somewhat flat in housing prices when compared to the likes of NY, DC, and in this case, Portland.

It's crazy to me how much you have to make to put a decent roof over your family's head anymore (in a decent school district to boot).

MichaelCrawford5• 11 years ago

There are 4,000 homeless people in Portland.

tadfisher2• 11 years ago

There are. However, I doubt they were in a position to purchase a home even before the market started bubbling, so what is the relevance to this article?

intrasight• 11 years ago

Interesting article, but they could have said what they wanted to say in 1/3 the number of words. When we visited Portland a couple years ago, my wife's comment was "gritty city with low-quality housing stock and no obvious economic base". I said "everyone is in the business of selling food and beer to everyone else". I vote bubble.

davidw2• 11 years ago

Reining in sprawl is probably a good thing, but US cities are very much 'not dense'. Increasing density would help with supply. It also makes a place more friendly to walking, cycling and public transportation if done in the right way. Compare and contrast the average European city with someplace like Portland.

Not everyone wants dense, but I don't think someplace like Portland is going to turn into Hong Kong over night, or ever, really.

I'm currently in Boulder, interviewing and looking to relocate here, and this place has the same problem in spades.

It's really an "iron triangle" situation:

* A. Cheap housing.

* B. A desirable place to live.

* C. No growth (be it outward or upwards).

Pick two. Places like Boulder seem to be opting for B and C, but then wring their hands about the lack of diversity. They've also created a situation where a lot more people are driving into town from further out where it's still affordable, rather than living closer and riding bicycles or taking public transportation.

How Cash Sent the Portland Home Market Spinning

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