WINDERMERE HERITAGE
REAL ESTATE
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2022 Real Estate Market Review
GOOD THINGS AHEAD FOR REAL ESTATE
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Hello there,
Welcome to 2023!
I wanted to take an opportunity to provide you with a summary of my experience in the local Real Estate market over the past couple of years. I also want to shed some light on my predictions for the future of our local Real Estate market here in Salem, Oregon and the greater Willamette Valley for the years to come.
To say that we have experienced a tumultuous Real Estate market over the past couple of years would be an understatement! The presence of COVID-19 threw the world into a tailspin, but led the Real Estate market and many other segments of the economy into the greatest 2-year uptick we have ever seen as a nation. As COVID-19 seemingly dissipates, the world and its economies are now attempting to find a “new normal”. So, what does that mean for the local Real Estate market in Salem?
To find out, I first need to provide some context for the past 2 years:
THE REAL ESTATE MARKET IN 2020-2022
Local Residential Property Market Overview
Unless you’ve been living under a rock since 2020, you’ll have noticed that the local Real Estate market surged to a level that we REALTORS® had never seen before. We experienced all-time mortgage rate lows of close to 2% for 30-year fixed rate mortgages, and some 15-year fixed rate mortgages actually bottomed out under 2%! We also experienced some of the greatest property appreciation ever seen! If you purchased a home in 2018, it was very likely that you could have sold it 2-4 years later for almost double what you paid for it – and trust me when I say, people were doing just that. In the history of our business, REALTORS® have never been as busy as we were from 2020-2022. Even the amazing market preceding the Great Recession in 2008 did not compare to the market we just left. Every property received multiple offers within days of hitting the market, most sellers received offers well above asking price, and buyers paid well over asking price just to make their next housing purchase a reality. It was not uncommon to see a home priced in the $300k–$500k range receive more than 10–20 offers. This was mostly the norm for homes priced in the median range, but even properties priced well over $1,000,000 saw multiple offers which were also well above asking price. Properties in Salem, Portland, Eugene, Bend, Hood River, Lincoln City . . . you name it: all received multiple offers for what could be hundreds or thousands of dollars over asking.As we all know, the main factor driving these insane price increases were the all-time low interest rates. Buyers and sellers both knew this was a potentially once-in-a-lifetime opportunity to spend the least amount of interest possible on a mortgage, and everybody tried to take advantage.Fast forward to today, those who successfully took advantage of these ultra-low interest rates are now in their “dream home” for probably the most affordable price ever, finally able to settle down and breathe a sigh of relief because that crazy price war was finally over. Oh, and by the way: just because you could get the lowest interest rates ever, doesn’t mean you could get an offer accepted. Many of our clients in the lower-priced home bracket put in offer after offer after offer, and never got one accepted. This was probably the most difficult time to purchase a home if you didn’t have tons of cash. Making an offer contingent upon the sale of another home was not possible, and frankly not necessary. Buyers would need to qualify for a new loan while still in their existing home and then close and sell it. Just to get their offers accepted, buyers had to make their offers non-contingent and roll the dice that their home would sell in time, or else get creative with financing. As REALTORS®, we saw many first- and second-time home buyers receive gift funds from close relatives because they didn’t have enough cash on hand to make a good enough offer.The introduction of COVID-19 to the world changed a lot. Businesses were forced to shut down (or at least, shut their doors and require employees to work from home). And the new telecommuting standard not only added an entirely different layer to the Real Estate world, but likely changed the landscape of the working world for the future. Businesses realized they can be as (or more) productive while employees work from home. These same businesses now don’t have the overhead of owning large office buildings and as such, will likely continue to allow employees to work from home several days per week.As a result, the Real Estate market in the Willamette Valley, and nationwide, has seen the biggest influx from urban to suburban living in quite some time. There is now very high demand for rural property, which allows telecommuting employees to enjoy the benefits of more space for their families. Now, these employees are willing to commute much larger distances – or even work across the country – in order to find more affordable housing for themselves, since they travel to work less often. The Willamette Valley saw a massive influx of homeownership in rural areas of Salem and the surrounding areas. Commensurately, prices of rural and acreage properties have increased substantially over the past 2 years.
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30-Year Fixed Mortgage Rate Trend from 2019-2023
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Investment Property Overview
Local Real Estate markets experiencing the most outrageous price growth and appreciation were the destination cities for investors. Properties in markets that typically relied on tourists and travel (such as Lincoln City, Bend, Hood River, Mt. Hood, and any other area of Oregon you would consider traveling to) have probably doubled in value over the past two years. These cities experienced appreciation booms mainly because of the Short-Term Rental market. People felt pent-up during COVID, so they began to travel a lot! Our nation saw some of the largest number of travelers and vacationers during the pandemic. AirBnB and other travel sites allowed property owners in destination cities to experience massive returns on their investment. Hood River has become one of the most expensive places to live in Oregon over the past two years because investors realized they could rent their homes for hundreds – if not thousands – of dollars per night. Consequently, the ROI on these rental properties created a feeding frenzy for investors to purchase the region’s limited home supply. From 2020 – 2022, the median-priced home in Hood River surged from $371k to $850k at its peak in May 2022.
Local Rental Market Overview
Rental markets in Salem and the surrounding areas experienced unprecedented growth over the past few years. From 2019-2022, the average rent for a 2-bedroom unit in Marion County increased from $972 to $1,245. Rents for 3-bedroom units increased from $1,405 to $1,769. These represent a roughly 25% rent increase since 2019. So, landlords can now have much higher returns on their existing investments than they ever could before. And local rental properties have higher demand than ever because of the recent rise in interest rates. The 2022 interest rate hikes pushed a large percentage of buyers out of the housing market, forcing them into renting for the foreseeable future. This also means many potential buyers in the 20–35-year-old age bracket must now live with their parents for longer than expected or rent properties with large groups of friends to make ends meet.
Local Commercial Market Overview
Believe it or not, Salem’s Commercial sector experienced unprecedented growth over the past few years. I attended the Commercial Economic Form in late 2022, hosted by Curt Arthur, an accredited Commercial Broker in Salem. Here is some information I found extremely interesting regarding some of the new businesses coming to Salem:
- New construction starts are well below levels from previous years (meaning there is far less construction happening than we need to accommodate our population growth
- Market rents per SQFT increased roughly 18% over the past 4 years
- 4–5-star office buildings have a vacancy rate slightly higher than 0%
- The addition of new buildings to the Salem area, including Scannell Logistics, the Home Depot and Raw Advantage Distribution Centers, the Amazon Fulfillment Center in Woodburn, and the Dollar General Distribution Center.
- Construction of over 1,639 units in the multi-family sector
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If you’re interested in more of this information, I’d be happy to share the presentation from the Commercial Economic Forum with you if you would like to see it. Just email me at ryanfordham@windermere.com and I’ll send you a copy.
The Market Shift of 2022
The first few months of 2022 began just as most of us expected it would: charging full force into what was anticipated to be another stellar year. However, come April the landscape of our Real Estate market throughout the country was about to change drastically. The Federal Reserve decided to start curbing the economy it inadvertently sent into overdrive in 2020-2022. The Fed Rate reduction during the pandemic, coupled with pumping of trillions of dollars into the economy, had led to record breaking years for businesses all over the world. It also led to the lowest mortgage interest rates we’ve ever seen. And excess consumer spending by the middle of 2021 led to rising inflation. By January 2022, inflation had risen to over 7%, and by mid-April, inflation peaked around 9%. These conditions could not last forever, and as such, the Fed decided to do something to correct it.
The Fed curbs periods of high inflation by increasing the rate at which we all borrow money (i.e., the Fed Funds Rate). Rate hikes are measured in basis points: a basis point increase of 50 equals a 0.50% increase in interest rates. During 2022, there were 7 Fed Funds Rate hikes, all at unprecedented amounts (ranging from 25-75 basis points per increase). The effect these Fed Fund Rate hikes had on mortgage interest rates was exactly what we all anticipated, but nobody was prepared for. From their lowest in 2021, mortgage rates steadily increased from 2.75% to over 7% by November 2022. Rates increased by 127% between January 2022 and November 2022, making housing affordability very difficult for first-time home buyers and buyers who wanted to upsize but lacked enough equity in their current home to do so.
May – November of 2022 presented the first downward shift in real estate pricing that we’ve seen since 2008. For the first time in over 12 years, we began to see many price reductions, seller closing cost credits, terminated contracts, and just very few sales. If you were a seller in the last half of 2022, you probably just missed the high point in the crazy market. Buyers also struggled at this time though, because their ability to qualify for a loan was a real hardship at the nearly doubled interest rates. Mortgage interest rate hikes over the past year substantially reduced buyers’ ability to afford new homes. Potential buyers now need a qualifying income of roughly $100,000 as a family unit or individually to be able to purchase a home.
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National Association of Realtors, Housing Affordability Index 2019-2023
(qualifying income is very telling of the current market)
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Fed Rate Hikes from Early March 2022 – December 2022
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Foreclosures and Distressed Home Sales
During the Pandemic, nationwide foreclosure moratoriums led to an extended timeframe in which there were almost no distressed or foreclosure properties for sale. Everyone is now talking about the upcoming wave of foreclosures which will send us spiraling into another 2008. But while the market has seen more foreclosures hit, it’s mainly because of the backlog of foreclosures that should have occurred during the pandemic. Nationally, current foreclosure rates are sitting well below 2%, and are unlikely to spike precipitously. Once courts process the backlogged foreclosures on the books, I believe there won’t be an excess number of foreclosures in our market. Even with the drastic economic changes over the past year, I don’t believe there will be more foreclosures than normal because homeowners have accrued exceptionally high amounts of equity in the past 10 years.
MY 2023 MARKET FORECAST
2023 is going to present itself as a year of opportunity for those willing to take some risks. There is a fast-closing window to purchase foreclosure properties, properties which are currently overpriced, or properties which will allow for significant negotiation. Even though I don’t believe we are going to be flooded with a wave of foreclosures, I do know that there are going to be opportunities to purchase properties that have been sitting stagnant for 3 or more months. There will also be properties listed on MLS that are overpriced and need some TLC, giving an opportunity to buyers with some vision and some cash.
Current interest rates are hovering around 6–6.125%, depending on the day, which is the historical average for our country. Rates will very likely continue to trend downward over the next 12–24 months, not only because the United States is beginning to get a handle on inflation, but because the 10-year treasury bond currently hovers around 3.39%, and typically, mortgage rates float around 1.5%–1.75% higher than the treasury yield.
As the treasury yield continues to decline, it’s likely mortgage rates will continue to do the same. If mortgage interest rates decline, we’ll see greater housing affordability as a nation, and we’ll continue to see more buyers enter the market and compete for housing once again. This will present an opportunity for sellers, as the feeding frenzy for property will likely continue. The bottom line is that there is too little housing supply to meet the pent-up demand in our country. There is going to continue to be high demand for housing for years to come, because of the fact that our country is so underbuilt in the Single-Family housing sector.
So, with all that, how can you make this market work for you?
How this Market Can Work for You as a Buyer
- DON'T WAIT! If you can qualify now, you should try to do so. Waiting will only cost you in the future when there will be more bidding wars and offers over asking price. You can always refinance to lower interest rates in the future. Take this with a grain of salt . . . if you can't afford the monthly payment, don't purchase a home with the hope that rate will go down. Hopefully, in 12–24 months you can refinance at a rate closer to 5%.
- NEGOTIATE. You can now ask for closing costs, negotiate repairs on homes, and even ask sellers to buy down your interest rates.
- SHOP SMART. You can now get large price reductions on homes which have been on the market for 2-3 weeks or more.
- NOW'S THE TIME. You’ll maintain the upper hand in this market when it comes to negotiation, at least for the time being.
- NO FOMO. And on that point: just because you may have the upper hand right now, doesn’t mean you should wait forever. There are many sellers willing and able to wait patiently for the market to change in their favor, because they have so much equity in their homes and a low mortgage rate. Don't be so afraid of missing out on better prices or better rates in the future that you wait so long you end up priced out entirely.
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How this Market Can Work for You as a Seller
- PATIENCE. Sellers are in a unique position right now because they have a lot of equity and low interest rates. Meaning that sellers can be patient . . . to a point!
- PRICING. Pricing your home correctly is key! The prices of 6 months ago are not the prices of today. The prices of 3 months ago are not the prices of today. The market is playing catch-up, so we REALTORS® are doing our best to adjust to pricing changes, but the days of overpricing your home “just to see what happens” are over. Overpricing your home now can drastically affect how quickly you sell. The longer your home is on the market, the more likely the offer you end up with will be lower than it could have been if priced appropriately at the start.
- PRESENTATION. Staging, Professional Presentation, and using a REALTOR® are the key to your success! And I’m not just saying that because I’m a REALTOR®. In today’s market, we need to be the most competitive we've been in a long time. This means that you need to be on as many public sites as possible, you need a great agent to assist you in the sale of your home and to negotiate hard on your behalf. First impressions matter, so how your home appears when it’s first listed is key. Make sure it’s done right from the start.
- PAYOFFS. Sellers are in a unique position to use their homes as rental properties! If you purchased your home and you have an interest rate around or below 4%, you very likely can rent your house for an amount significantly higher than your mortgage. This means that you may well be able to get enough cash flow to move onto your next home and keep your existing home as a rental.
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Real Estate in 2023 will likely yield slightly lower or flat appreciation in comparison to years prior. We all knew the gravy train couldn’t keep chugging along forever, so this shouldn’t come as a shock to any of you. However, myself and many other pundits believe that 2024 and onward could yield steady growth and a much more normalized Real Estate market (3-5% appreciation). If this is the case, buying a home now could be a great bet! This could be the year to get a deal and wait. You may pay more interest right now, but that’s ok. If rates go down, you will be able to refinance. If prices go up, you’re making money. If prices drop, rates will likely shoot through the roof again. So, it all works out in the end. At the end of the day, as most of you who own a home know . . . it is always a good time to buy Real Estate!
Purchasing Real Estate as an Investment
Typically, Real Estate is a great hedge against inflation, and in the current economy, we’re definitely experiencing high inflation. As an example: at current inflation levels, if you placed $1,000,000 in the bank to sit for just one year, you would effectively lose $70,000. After 2 years, you would lose $135,100. I am not a financial advisor, and I won’t claim to tell you how to invest your money, but if I were a betting man, I would bet on owning Real Estate. Putting that $1,000,000 to work for me by purchasing an apartment complex worth $3,000,000 would be a much better way for me to spend my money, and for more reasons than just the cash flow. If you’re interested in learning more about how to invest in Residential or Commercial Real Estate, I would be happy to chat with you further about putting your money to work for you, and how I’ve been able to use my own money to generate income from cash flowing properties.
Economic Outlook for the Willamette Valley and Salem
There is a lot of growth coming to the Willamette Valley within the next 5–10 years. Salem is conveniently located within a 1-day drive of Vancouver BC, Idaho, Seattle, and San Francisco, and provides easy access to I-5. Why is this important? Because companies that use trucks as a method of shipping use Salem as a main hub. Some of the businesses moving to the Willamette Valley present opportunities for hundreds of jobs. These jobs will mean more housing being constructed and the continued demand for housing in local markets.
Additionally, Portland is quickly becoming too expensive for many employees, and we’re now seeing the likes of Salem and Keizer absorb a lot of the homeownership base from those markets.
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Current 10-Year US Treasury Bond Yield
(mortgage interest rates typically track this metric within 1.5%-2%)
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Consumer Pricing Index from 2018-2023
(early 2020 was the onset of the pandemic)
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IN SUMMARY
Is Salem a great place to live, work, and own property for the foreseeable future? I believe it is. I think we have some amazing opportunities to invest and grow our Real Estate portfolios and create generational wealth for ourselves and our families in the years to come.
If you would like to discuss any of these thoughts in greater detail, I would be happy to do so! And as always, you can reach out to me for any reason . . . even if you just want to play a round of golf!
Best,
Ryan
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Ryan Fordham
Windermere Heritage
Broker / Owner
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