Real estates silver lining

Ken Perry observes the situation is better locally than nationally

It could be worse.

With the real estate market crashing nationally, credit in short supply and investment firms, banks and insurers crumbling under bad debt, there's a silver lining in the Portland metro area.

That's according to Ken Perry, president and CEO of Broker Knowledge Group and a national expert in lending and real estate sales, who spoke in Lake Oswego last Thursday to a gathering hosted by Olson Mortgage Group.

Over cocktails and finger food at the Oswego Lake Country Club, Perry offered a daily mantra for these tough financial times: 'I'm so glad that I set up my business in the Pacific Northwest.'

Pointing to the Case-Shiller Home Price Indices, which show a 5.8 percent drop in real estate values in the Portland area over the last year, Perry described the local real estate slump in favorable terms compared with other cities across the nation.

Where realtors, lenders and local builders see hardship - Perry's talk came just one day before Lake Oswego-based Renaissance Homes announced it would file for bankruptcy to slough off millions in debts - Perry gave reason for optimism.

Portland is unlike other similarly sized cities in America, Perry said, where real estate markets launched too fast on phony value projections and a sudden availability of credit.

While creative lenders offered bad-term loans to a class of buyers previously unqualified to borrow, the recipe 'dumped borrowers into the market, soaking up the volume, bringing up the values' in other places.

In some cities, real estate values soared far higher than the comparatively stable Portland area. In cities where values exploded, Perry said, price corrections will gouge markets much deeper than they will here.

In Las Vegas, Nev., for example home values have fallen 28.6 percent over last year's values. In Phoenix, Ariz., home values dipped 27.9 percent over the same time period. Meanwhile, in San Diego, Calif., home prices fell 24.2 percent.

As real estate prices across the nation continue to drop, real estate values in these cities will fall the farthest. They are the same cities that saw prices climb the highest during a real estate boom that began in 2003. As they give up what they gained, recovery will be slower, Perry said, and properties will sit on the market longer, with prices falling until they become affordable for average buyers.

Portland, by comparison, has had relatively stable growth while the real estate market peaked nationally between 2003 and 2007, with few dips and spikes in its history.

'Portland, Oregon has been a great place,' he said. 'Absent crazy, massive economic changes, I don't see it dipping too low.'

To put it in perspective, Perry offered a scenario.

At the height of the real estate bubble in Las Vegas, Nev., for example, Perry said buyers bought and flipped houses 10 at a time, committing fraud to secure loans with open encouragement from lenders. The properties net profits of $200,000 or more in time spans of less than a month.

In the city and others like it, borrowers unfit for the loans either rolled credit until they couldn't pay or paid until they were bankrupt. Instead of mass foreclosures needed to fix the problems, Perry said, more lending products came to market and most were insecure.

The products were rated high by bond agencies because the borrowers who used them rarely pay late, Perry said, instead continually refinancing. Banks who offered the loans, like now-struggling Washington Mutual, and the companies that invested in them, like insurance giant American International Group, Inc., now stand on wobbly legs.

Though regulations to prevent bad investments exist, Perry said they weren't enforced while banks depended on bond ratings agencies to point them to secure products.

As price corrections now cut deep, Perry was positive about Portland, pointing to the market's 5.8 percent value dip.

'Though it sounds sad, we needed to come down about that much, maybe a little more,' he said.

The region may still see more loss in real estate values as it trends behind the rest of the nation, said Perry. And while Oregon is in the lower 50 percent of states with high foreclosure rates, it still has high delinquency rates on loans, which means more foreclosures.

But Perry said Portland's real estate market is unlikely to see the dramatic price corrections seen in America's hardest-hit cities.

At its peak, home prices in Portland jumped only 22 percent over the previous year's earnings in 2005. That's moderate growth compared with Las Vegas, which jumped 55 percent over the previous year in 2004 and Phoenix, which jumped 49 percent in 2005. Other cities followed similar patterns.

So when do Portland's falling prices end?

'As soon as a police officer married to a teacher can buy a home ... we can recover,' Perry said. 'We drop until people can afford houses and until investors can jump in.'

With building permits slowing across the state, the signs for recovery are good, said Perry. Buyers' ability to soak up properties for sale is key, he said. Slower building will help the volumes of available real estate - and prices - lower.

Though he cautioned against projecting when the market could stabilize, Perry said Portland could see a kick in lending and sales as early as February 2009 or as late as April 2009.

Lake Oswego and Bend will face the toughest recoveries in Oregon, Perry said. Because their housing values already outstrip the values in surrounding markets, both towns are heavily dependent on California buyers. That pool of buyers is unlikely to free up soon, with many waiting for market recovery in to make a sale pencil out.