Low rates, shortage of homes fuel seller's market

July 11, 2004
DYLAN RIVERA
The Oregonian

Despite rising interest rates, it's becoming easier and easier to sell a house in the Portland area.

The supply of homes for sale has reached a record low, according to the Regional Multiple Listing Service, which tracks home sales in the area. As of May, the most recent month available, the 8,054 active residential listings would sustain the market for only 2.8 months -- a record low, according to RMLS calculations.

For several years, the most charming historic houses in the central eastside's older neighborhoods drew the fiercest competition among buyers. In recent months, bidding wars for a limited supply of homes have spread to a broader range of neighborhoods, mainly because the number of buyers is increasing more quickly than the number of houses for sale.

"It was a fairly well-balanced market from my perspective last year," said Peggy Hoag, an agent with Prudential Northwest Properties. "I think the (low) inventory is what's making it such a strong seller's market this year."

Buyers are surveying subdivisions for a mix of reasons related to the improving economy.

Although interest rates have increased in the past year, they remain low by historical standards, and potential buyers are acting before the rates jump higher. Recent employment growth is boosting the confidence of some families who were hesitant to buy. And the improved job market, along with the Portland area's quality of life, is drawing new families to the area.

The supply of homes hasn't kept pace.

Sellers brought 19,838 homes onto the market in the first five months of the year, 0.3 percent fewer than the 19,900 new listings in the same period of 2003. At the same time, pending sales increased 12.5 percent, and closed sales jumped 8.9 percent.

The urban growth boundary and local land planning make it harder to build new homes here than in many markets, builders said. And some owners of existing houses have retreated from listing their property after discovering how expensive a replacement would be.

High prices move west

The intense seller's market that has characterized much of inner east Portland in recent years has spread westward, agents said. In the close-in west side, buyers are struggling to find listings within their price range -- particularly those seeking homes that cost less than $300,000. Homes priced between $500,000 and $700,000 also are in short supply.

Several buyers are making offers on properties in Hillsdale, Portland Heights and other westside neighborhoods that did not see such interest a year ago, agents said.

"There's definitely a tight market on the west side, close-in, and there will be multiple offers," said Kathy MacNaughton, an agent with Realty Trust. "You just better write a full-price offer."

James Lane and Sheila Keane discovered how much the Portland market favors sellers this spring as they began relocating from Irvington to the inner west side, in part to move within another middle school's boundaries.

Their three-bedroom Colonial-style Irvington house sold before it could even reach the market. In early May, agent Billy Grippo was unsure of how much to ask, Lane said. So the couple agreed to set a price at the high end of the range they were comfortable with and show it privately to Grippo's colleagues in Windermere/Cronin & Caplan Realty Group Inc. to obtain more brokers' impressions of the price.

Even with a contingency that allowed Lane and Keane to rent the house while they looked for a replacement, one of the Windermere agents thought it was so well-priced, she made a full-price offer for a client two days later.

Buying was a different experience altogether, Lane said. The first offer the couple made fell apart when the seller wouldn't agree to pay for repairs Lane and his wife considered necessary. Their second offer was rejected by a seller who decided to take his house off the market, Lane said.

On Friday, the couple agreed to terms for a house that is costing $80,000 more than they sold their Irvington house for.

MacNaughton said several of her clients who intended to sell houses decided against selling when they realized how much it would cost to find an acceptable new house.

"The house they can buy, compared with the one they live in now, is not $100,000 better," she said.

Rates historically low

The strength of the market is mostly good news for those who own a home, increasing their net worth and borrowing ability. But it could lock out some would-be first-time buyers or force them to buy less-expensive homes -- particularly if interest rates continue to increase as expected.

Rates for a 30-year fixed-rate mortgage were 6.27 percent on average in May, up from record lows of 5.23 percent in June 2003, according to a weekly survey by home lending giant Freddie Mac.

A monthly payment on a $100,000, 30-year mortgage is $537 at 5 percent interest or $665 at 7 percent. To look at it another way, $665 a month buys almost a $125,000 house at 5 percent interest, but only a $100,000 house at 7 percent.

The continued strength of the housing market is important for the economy. Construction jobs and housing-related spending help recover from the recent economic downturn.

Mortgage rates are still at historically low levels, said Frank Nothaft, chief economist for Freddie Mac. Mortgage rates also do not move in lock step with the interest rates set by the Federal Reserve Board, and usually move before the Fed acts.

Even before the Fed adjusted rates June 30, mortgage rates had increased from a monthly average 5.45 percent in March to 6.17 percent in May. In the company's weekly survey, 30-year mortgages fell to 6.01 percent Thursday from 6.21 percent the week before.

"Any time you're near 6 percent, that's a great rate for taking out a mortgage," Nothaft said last week.

If other factors stayed constant, higher mortgage rates would tend to reduce demand for housing, reduce the number of home sales and curb home prices.

"But everything else is never constant," Nothaft said. "The economy is growing at a very good clip, and between last May and this May we had another tax cut implemented by Congress. That puts more disposable income in the pockets of families."

The Portland dynamic

Homes in the Portland area have appreciated consistently in the past decade, from a median sale price of $107,000 in 1993 to $195,000 in the first five months of this year.

Buyers closed 2,883 sales in May, up 17.2 percent from May 2003. Pending sales jumped 19.7 percent, to 3,591 in the same period.

Houses sold in an average of 57 days in May, down from 60 days in May 2003 in the Portland area, which RMLS defines as Multnomah, Washington, Clackamas, Yamhill and Columbia counties.

Some national experts thought the local market was ripe for a downturn in the past year, placing it on lists of vulnerable markets. But those concerns so far have been unwarranted.

The Portland home market doesn't always follow national trends, in part because it has some distinctive characteristics. Even when the state was hemorrhaging jobs in 2001 and 2002, more people moved to the metro area than left.

The urban growth boundary adds a unique element to the market. The Home Builders Association of Metropolitan Portland and many real estate agents contend that the boundary restricts the supply of new houses by limiting land available for housing.

A 2002 addition of about 15,000 acres for housing included little land in the most desirable western suburbs, said Kelly Ross, vice president of government affairs for the association.

Instead, Metro, the regional government that administers the boundary, added residential land in less popular eastside areas such as Damascus, where local governments may not have utilities or zoning for homes for years.

"It's very, very difficult to find land," Ross said. "Builders are getting a little more cautious since the forecast is for interest rates to tick up a little bit."

Metro says there's no shortage of available land. Home builders have consistently drawn building permits for about 6,000 single-family houses a year in Multnomah, Clackamas and Washington counties, said Andy Cotugno, Metro planning director.

The mostly small builders in this market can't ratchet up quickly enough to meet a spike in demand, he said.

"The supply is a fairly static supply," Cotugno said. "It takes a year to produce a house -- you can't flood the market overnight. You can flood the market with overnight demand, and that's what interest rates have done."

The Portland area's quality of life -- which most agree is tied to some extent to the boundary -- has drawn new home buyers and prompted current ones to stay.

Homeowners are more reluctant to move out of state, MacNaughton said. Even when a corporate transfer forces a Portlander to relocate, it's not uncommon for a family to retain its existing home as an investment.

"More than ever in the 25 years I've lived in this city, there's a sense that people are very excited about it," she said. "They like living here."

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