Well it’s one down and one to go as a Portland builder aims to clear inventory.

Home builder Roger Pollock got a little too excited with Portland’s frothy housing market. Now, he’s cashing out — for whatever his homes will fetch.

Pollock’s Lake Oswego company, Buena Vista Custom Homes, built too many houses during the boom in towns from Scappoose to Happy Valley to Bend. Next month, Pollock will put all 230 of his unsold homes and condos up for a two-day auction. The asking prices have ranged from $300,000 to $650,000. The bids will start as low as $69,000.

Pollock’s move is the first clear public signal that a Portland-area homebuilder is feeling serious pain from the housing slowdown — and doing something drastic about it.

Portland’s housing market remains relatively stable compared to the busted markets in Florida, Ohio and California. But home builders here also sit on a growing backlog of finished but unsold homes. In September, the region had 8.6 months’ worth of homes to sell, nearly double the figure from a year earlier.

Home builders, conditioned to be optimists, typically don’t like to talk about bad news. It will only discourage consumers, they say, creating more bad news. But Pollock was unusually frank in dissecting his troubles.

“We were over-aggressive and too slow to react to the changes in the market and that has created an over-supply of finished homes,” he said in a statement.

My Comment: Pollock has seen the light and will survive. His strategy is in stark contrast to that of Lennar whose Mothball Housing Strategy Doomed To Fail. Lennar has the biggest case of homebuilder denial ever.

Pollock, 46, of Lake Oswego said life was good during the boom.

He sold as many as 50 homes a month as late as spring 2006. Each sale netted Pollock’s company an average of $150,000 in profit. “We made more money than I could ever dream in the last few years,” Pollock said in an interview.

But the boom went bust this summer.

My Comment: All bubbles eventually pop. The bubbles in Seattle, Vancouver, and Toronto will eventually pop as well.

When the mortgage market took an August nose dive, Pollock said, sales went with it. In October, he sold eight homes. Five previous sales fell through. So his net sales came to three. “That doesn’t pay the bills,” Pollock said.

Pollock said he’s current on all his construction loans and isn’t in danger of bankruptcy. But he decided he’d be better off taking a direct hit now with an auction than suffering a slow bleed with interest payments on construction loans as he struggles to sell off inventory.

Homes at auctions elsewhere have sold for about 40 percent of the original asking price. Pollock said the same figure would be realistic here. He wants to clear all his inventory by the end of the year even if it’s “very possible” the company will lose money in the process. “We’ll pretty much do whatever it takes,” Pollock said.

Despite the auction, Pollock plans to start new subdivisions early next year in Tigard, Oregon City, Southwest Portland and Happy Valley.

Only this time, Pollock said, he’ll build only after he has a buyer on the hook.

My Comment: This is a winning strategy. Pollock will live to fight again.

Rain City Madness

Denial is a mile thick on the Rain City Guide.

This might sound strange coming from a real estate blogger, but I just don’t find all the hype about a real estate bubble all that interesting. None the less, it seems that about once a week a new blog starts up with the mission to highlight all the “evidence” that there is a nationwide real estate bubble that is about to pop. The most popular site is the Housing Bubble 2, although there are many others.

My Comment: Of course you do not find it interesting. You are a Real Estate agent with a vested interest to deny there is a real estate bubble.

What I would like to hear is a “pro-bubble” argument which takes into account two secular, local Seattle conditions which both tend to limit the supply of urban land:
1. A firm political consensus for “growth management” which will not change & hence unleash a lot of land for at least the next generation or so. (Even if there is land to be found.)
2. Total inability to deal with traffic congestion which is having a centralizing force, making “in city” properties (where one can minimize travel) more and more valuable.

When you take into account these trends — both firmly rooted in our local culture — do you still get a bubble?

The same arguments were made about Florida, San Diego, and the entire nation of Japan. Prices in Japan fell for 18 consecutive years and there are less places to build in Japan than there are in Seattle.

The San Diego Bubble

Professor Piggington has a nice recap of The San Diego Housing Bubble and he easily shoots down such arguments that we might be hearing about the Rain City such as:

  • “Everybody wants to live here.”
  • “The strong economy.”
  • “Low interest rates.”

Here is the heart of the matter:

Further theories are offered up by home price apologists. They speak of an implausibly sudden shift in demographics, a new era of endlessly looser mortgage lending, and any number of other rationalizations that all, in the end, translate to “it’s different this time.”

The key to understanding the housing boom really lies in the difference between growth rates of home prices and rents. While one might expect that homes would be more expensive to own than to rent, there is no fundamental reason why the cost difference between renting and owning should have expanded as much as it did since 2001.

The tremendous growth in the premium paid to own a home was driven not by economics or demographics, but by psychology. Over the course of the boom, home ownership became viewed less as a way to simply secure a place to live and more as a means of personal enrichment.

People expected home prices to continue rising, for all the misguided reasons outlined above, and were accordingly willing to pay that much more to get on the real estate gravy train. The increase in demand actually drove up prices, which made buyers even more confident that real estate was the place to be. More optimism led to further price gains, which only reinforced the idea that the original optimism was well placed.

This self-reinforcing cycle — higher prices leading to increased buyer and lender confidence leading to even higher prices — ran unchecked until San Diego home prices finally reached a level of unaffordability from which they simply could not be propelled further. And here we sit, with the cycle just having started to shift into reverse.

What happens next is unknown, but what’s happened up until now is crystal clear. San Diego’s stunning home price increases were owed not to fundamentals but to euphoric optimism, excessive risk taking, and increasingly unreasonable expectations of future price gains. This is the very definition of a speculative bubble.

San Diego Home Prices, Rents, Income

The above chart shows how out of line home prices got with both rents and income in San Diego. The same happened throughout California and foreclosures are soaring statewide.

Apparently the Rain City Guide must think that wages and rental prices are irrelevant and no price in Seattle can be too high because of traffic congestion and growth management.

Of course that is complete nonsense. Yes you can have zoning restrictions, lack of land, and heaven forbid traffic congestion and still have a housing bubble. When housing prices rise several standard deviations above wages and rental prices you have a bubble no matter how bad traffic congestion is. The traffic argument is funny really.

The next chart shows what eventually happens when home prices soar above wages and rents.

San Diego Defaults & Foreclosures

The above chart is from October Foreclosure Data courtesy of Professor Piggington.

City by city by city the arguments as to “why it’s different here” have all failed.

  • We heard demographic arguments about Florida, Phoenix, and Las Vegas
  • We heard lack of land arguments about Boston
  • We heard climate and everyone wants to live here arguments about San Diego and the entire state of California.
  • We heard that Portland is not California or Florida.
  • We heard everyone wants a second home in Las Vegas.
  • We heard Phoenix is cheap compared to California so all of California supposedly would move to Phoenix.

Now we are hearing an argument about Seattle that boils down to this: No price is too high to pay in Seattle and traffic congestion proves it. Professor Piggington, be sure to add traffic congestion to your list of theories offered up by home price apologists.

In every instance above, home prices headed south the moment the pool of greater fools dried up. Seattle’s pool of greater fools is not endless either. In that regard, it’s not different in Seattle.

Mike Shedlock / Mish
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