Real estate contrarian

Bend man ready to cash out on housing market

By David Fisher / The Bulletin

Rob Kerr / The Bulletin

Investment adviser Bill Valentine, seen with his wife, Jessica, is putting the couple's west Bend home, background, up for sale to cash out on what he believes is an overheated real estate market that is set to cool. Valentine is a contrarian in a market many real estate professionals say shows no signs of a slowdown.

Bill Valentine is not planning to move anytime soon, but he's not leaving his money parked in Bend real estate, either.

Valentine, a professional money manager and local radio talk show host, says he will join a band of real estate contrarians this year when he pursues the "radical strategy" of putting his family's west Bend house up for sale.

His objective: To cash out the 150 percent gains he has made on his equity over the past five years.

Most of the money will go into stocks and bonds while Valentine waits for what he believes is an imminent housing recession to knock down prices in a Central Oregon market that is, in his estimation, "drunk on real estate."

Will he be right?

Hard to say. But in Valentine's view of his own situation, it's an investment move that is only prudent.

"Even if my neighbors in three years say, 'Gee, Bill, you're an idiot. Real estate prices have doubled again.' I'll say yeah, 'You're right - I missed it,'" Valentine said. "But I won't feel bad about banking a 150 percent gain."

Valentine is not alone - others have cashed out of local housing in recent months for similar reasons - but the contrarians are still swimming upstream against a surging local housing market.

The median price of a single-family Bend home rose 4.5 percent from the fourth quarter of last year to $322,000 through February this year on sales of 286 houses - a strong volume for the traditionally slow midwinter months. Other Central Oregon markets were just as strong, or stronger.

* Redmond's median home price jumped 4.33 percent to $231,615, according to the Central Oregon Multiple Listing Service.

* Crook County houses rose 6.26 percent to $179,900.

* Jefferson County's median rose 6.3 percent to $154,900.

La Pine's median price saw a pullback from the fourth quarter of last year, dropping 2.4 percent to $160,000 on only 15 sales through February - not enough volume to form much of a trend.

Based largely on its lack of affordability to local wage earners, the Bend market showed up again this month on financial information provider Global Insight's list of the most overpriced housing markets in the country. Bend ranked No. 11 behind perennial "most overpriced" leader Naples, Fla., and a pack of California cities.

But local wages are not driving real estate prices up, Coldwell Banker Morris Real Estate agent Shelly Hummel noted.

Out-of-state and out-of-area buyers are fueling the rise, she said. And they are still providing plenty of demand to chase the area's limited supply of salable real estate.

At The Bluffs at the Old Mill - a $400,000 to $1 million townhome development overlooking the Deschutes River along Reed Market Road - eight of the 10 homes sold so far have gone to out-of-area investors, mostly from California and Portland, said Dirk Fearing, Mountain Crest Homes marketing manager.

Despite signs of flattening or declining real estate markets in cities like San Diego, Phoenix and Las Vegas, local Realtors continue to see a stream of buyers from higher-priced regions who are either looking to move to quiet Central Oregon or to invest, said Nancy Melrose, owner of Melrose Realty and this year's president of the Central Oregon Realtors Association.

Neighboring California's median housing price remained at $535,470 through February, up 13.7 percent from the same month last year, despite some softening in its highest priced markets and a 15.5 percent drop in sales from February 2005, according to the California Association of Realtors.

As long as Central Oregon real estate prices remain significantly below the prices that sellers in such sky-high markets can command for similar properties, Melrose expects local prices to rise.

"What I see in my practice is a great disparity between our prices and a lot of the markets these people are coming from," Melrose said. "So I don't think we're there yet. I don't think we've reached the top."

That may be true, Valentine and other real estate bears say, but they contend that the national real estate market has been overheated by cheap loans and destabilized by overextended, overly optimistic consumers.

The result, in their view, is a national housing market that has priced itself beyond the range of a key underpinning - the ability of average wage earners to afford a home.

The Global Insight study, done in conjunction with Ohio-based National City Mortgage, found that 71 U.S. metro areas, accounting for 42 percent of the nation's total single-family housing value, were "extremely overvalued" by the end of 2005. That means that families who earned median incomes in those areas were unable to afford median-priced homes.

Using the affordability measure along with other economic metrics, the report concluded that all 71 markets, including Bend's, were at least 30 percent overvalued.

That's up from only seven extremely overvalued markets in late 2003, according to the report.

Matt Davio, a money manager with Bend-based hedge fund Red Rock Partners, sold his family's Bend home last summer and moved with his wife and four children into a NorthWest Crossing rental to wait for a real estate downturn.

"There is no wage growth in this country, and that is the factor that ultimately drives real estate growth," Davio said.

Without first-time buyers coming into the market, the price of housing is ultimately doomed for a fall, he said.

Cheap loans and weakening credit standards may have pumped too much air into housing markets that have priced themselves beyond traditional affordability, Valentine said.

A case in point: California, where a market report produced by the Levy Economics Institute of New York's Bard College found that more than 38 percent of buyers who bought homes in the first half of 2005 made downpayments of 5 percent or less.

That kind of thin leverage sets consumers up for some disturbing math that could magnify any downturn that might come, Valentine said.

A 5 percent drop in housing prices would wipe out 100 percent of the equity for a homebuyer with only a 5 percent stake in their house. A 10 percent drop in price would leave them owing more than their house is worth.

In a worst-case scenario, that could encourage a rise in foreclosures, especially if adjustable-rate mortgages continue to rise, potentially pushing more supply onto the housing market.

Given five straight years of booming price hikes, though, some buyers are seeing nothing but euphoria.

Brian Stallcop, an Edward Jones investment representative with a west Bend office, says he doesn't advise his clients to sell their own homes and he's certainly not planning to sell his. But he's trying to steer most of them away from jumping into the local investment real estate market, where the income yields from rents on a median-priced home have dipped below even the yield on secure short-term U.S. Treasury bonds.

"When you start getting hot stock tips from your hairdresser, like we did in 1999, you know things have gotten out of control, and it's the same thing in 2006," Stallcop said. "By the time the amateurs are crashing the party, the smart investors have already gone home."

Recent foreclosure numbers nationwide are mixed. More than 117,000 properties entered some stage of foreclosure in February, up 68 percent from February 2005, according to RealtyTrac, a California company that tracks the real estate foreclosure market for investors. The numbers, however, were driven by high foreclosure rates in a few states.

The rates in some of the largest states, including California, Texas, New York and Florida, actually improved.

On a positive note, the National Association of Realtors reported that existing home sales rose 5.2 percent in February, ending a five-month decline. Median home prices in the West reached $306,000, up 12.1 percent from a year ago.

But the stock market tends to share Valentine's and Davio's gloom. The PHLX Housing Sector Index, which tracks stock prices for the nation's largest publicly traded homebuilders, dipped to 262.89 last week, 10.5 percent off the peaks it reached last July.

In some ways, Valentine and his wife, Jessica, have followed a typical Bend homebuying trend.

They moved here six years ago from the San Francisco Bay Area for the lifestyle and quickly settled into a quiet neighborhood on west Bend's Southwest 16th Street.

They don't intend to leave the neighborhood into which their four young children have settled. Valentine says he will only sell the house to an investor who will agree to lease it back to him on a two-year lease.

Such a move is not for everyone, he's quick to point out, adding that anyone who has plenty of equity in their home and doesn't intend to move should just stay put and enjoy their home.

He's also planning to return to home ownership at some point in the future when market conditions have, in his view, reached more stability.

But for now, he suspects the Bend market could be heading for a price dip of as much as 10 percent. He would prefer to enter a renter's market where rents have remained flat for five years and reinvest his home equity elsewhere, rather than stay in a home-ownership market that has doubled in the same period of time.

"My strategy is not for everybody," Valentine said. "It's for people who have an eye on the equity in their house; they have a purpose for it; they need to do something with it in the future. As for me, I don't want my equity to go away.

"I'm hoping somebody is going to buy it just to spite me."

David Fisher can be reached at 541-617-7862 or at dfisher@bendbulletin.com.