Pearl District Real Estate Collapse

Oyster-sized condos that no longer produce Pearls. Shedding light on the reasons we are where we are.

The Pearl District has enjoyed many years of a steep ascent to the top of Portland's real estate market earning the top spot for the most expensive neighborhood. Encompassed within the Pearl District are many of PDX's hippest restaurants, martini bars, art galleries, and chic boutiques. Merely a few pleasantries that most definitely helped spur real estate prices into the stratosphere. If you want to know how I define stratosphere, well, the median price reported in April is a whopping 8 TIMES the median family income for the area. The very obviously old affordability guidelines were 3 times yearly income. If you're thinking YIKES, you're not alone. Please note the factor of 8 doesn't even consider the giant monthly HOA dues and back-breaking Portland property taxes which can total another 20% or more to the mortgage payment.

So, this begged the question, screamed the question some might say, where were all of these high income buyers coming from? I've been in the real estate field for 20 years and my colleagues and I have been asking these questions of each other for the past 5-8 years. Was there really this many high income bracket people on an exodus into the Pearl? If so, how were the numerous other high value neighborhoods maintaining their prices because, presumably, the people migrating from the burbs into the Pearl means that there would need to be another high income buyer stepping into their old place, right? Baffled to say the least.

Thus began our quest for answers. We first started with the ever-optimistic Portland Realtor. The answers ran the gamut, but the most prevalent answer was "It's Baby Boomers downsizing". Sorry, but the median age range in the Pearl is 32-42 years so, there goes that theory. The second most popular answer was "It's out-of-state and out-of-country buyers". Sorry, the non-resident buyer accounts for less than 3% of Pearl District ownership. Another often reported theory out the 15th floor condo window. Still feeling wholly unsatisfied, and a little slimed by the Realtor experience frankly, we turned our attention to the still slimier Mortgage Broker.

The most prevalent answer was pretty damn shocking. Every single person reported that at least 90% of all loans they did in the Pearl District were done with "Stated Income" loan programs. Why? Because these loans paid HUGE to loan officers who pushed them is why, and they were so easy to qualify for that my pug could get a loan if he wanted to. What's worse than the "stated" aspect of these loans is that the majority of these loans also had crazy features such as no verified assets (no bank statements, no tax returns, etc.), adjustable rates, option monthly payments (negative amortization payment, interest only payment, 30-year payment, or a 15-year payment), and even no verification of employment (supposed to check, but often never did or verified though a co-worker friend who was alerted to the coming call time and date). These loans are now lovingly referred to as the "Liar Loan". Loan programs created by banks and Wall Street specializing in Mortgage Backed Securities (MBS).

These loans were born into the world for numerous reasons, but the top three reasons consisting of just what you would imagine...MONEY, MONEY, & more MONEY. Universe sized amounts of money made through the process of mortgage securitization. I still laugh out loud at the word "securitization". Secure for whom? Any idiot with an IQ over 12 would know that these were the most ridiculous thing ever invented and clearly had criminal intent. But when you're talking the kind of money involved, there was no looking back because these people were off like Greyhounds after a mechanical rabbit. With the government's eyes squeezed tightly shut so as to see no evil, they were gone baby gone.

Stated Income loans now made it possible for people to qualify for a loan that, under normal circumstances, they would never have qualified for in the past. The advent of these hybrid loans stepped up the sheer number of loans being done by Brokers and banks 10-fold and also upped their profits by an equal amount. Banks lend the money with their army of brokers pushing the loans by giving HUGE Yield Spread Premiums (YSP) to do so, lenders package the loans in a pool of other loans and sell them off to other banks, some have them rated AAA quality by rating firms they themselves paid (sham we'll go into another day), and then sell them to hundreds of thousands of unsuspecting investors from Cleveland to Calcutta. I mean everyone from your local municipality to Sovereign Wealth Funds bought into these cesspools of loans. Enter biggest market downturn and loss of wealth in recorded history. Mind you it's has yet to reach Great Depression status, but baby it's coming and it's coming fast. I'm just so shocked at how all of this happened - note the sarcastic tone for those of you who didn't pick up on that.

The Pearl District is headed toward the ground like a a fighter jet pointed nose down at full throttle. And still we hear people spouting the "This is the bottom" mantra day after day. You know the people puking this rhetoric everyday? It's those with a vested interest in convincing everyone at any cost that we've reached the bottom like Realtors, Loan Officers, Wall Street, and our lovely Fed and Treasury. If you say the same thing day after day eventually you'll be right. Then they can pat themselves on the back for having such clarity 10 years from now. Maybe it will merely become a self-fulfilling prophecy. We're going to MAKE it so.

- Project after project being converted to apartments for lack of sales.
- The Pearl District being literally flooded with rental units with no where near enough renters.
- People suing builders to get their earnest money deposits back because the loan programs that existed 24 months ago no longer exist.
- Builders refuse to return earnest money deposits for units that will not appraise out at the purchase price agreed to 24 months ago because the builders themselves have lowered the prices for the same exact unit 200k in a desperate attempt to unload.
- Numerous condo buildings still under construction with nearly ZERO pre-sales.
- Lenders less and less willing to loan on condos without huge cost to rate hits.
- So few sales that it's nearly impossible to get something appraised. You must have at least 3 comparable sales in an appraisal report. That is becoming harder by the second.
- Defaults rising exponentially.

I digress....

Although this downturn has many guilty parties, the guiltiest are clearly the banks, Wall Street, and our government who invented and turned a blind eye to this colossal damage. This downturn is no longer adversely affecting just the idiot speculators who purchased using 100% Option-Arm loans. It is so much dangerously larger than that now. This disease has now spread into every corner of every household in American and beyond. Our government's response to this problem? BAILOUT, I mean "lend liquidity", to every bank and brokerage to the tune of hundreds of billions of dollars (soon to be trillions-mark my words) to the industry that were the fathers and mothers of this mess to begin with, and at the expense of every tax-paying citizen in America. Then these people have the nerve to blame the citizens for being stupid for being addicted to credit and borrowing as much as they did? Really?

These banks and brokerages leveraged themselves 100 times more than earnings with the most ridiculous collateral ever invented, and we're the ones with the problem? Anyone out there ever allowed to borrow 100 times your earnings? I thought not. Hey Mr. Bernanke et al, there's millions and millions of hardworking taxpayers that have some pretty big liquidity issues right now thanks to you and your predecessor. What the hell are you going to do for us? I've got an idea - How about you and your co-conspirators create a limitless fund called the Term Lending Facility For The Average American Family (TLFFTAAF) where we can all get ourselves a nice large chunk of liquidity? That's ridiculous you say? It's exactly what you and your co-conspirators are doing daily. Too big to fail only means that there are too many Americans willing to let themselves and their families be used as ATMs for the government, banks, and brokerages. Of course you can't fail, you've got the ability to force us to BAIL your asses out.

Do borrowers themselves share the blame in this catastrophe? Totally. I ask you who is worse, the crack dealer or the crack buyer? One is totally pathetic, but the other is facilitator and TOTALLY CALCULATING. I'll let you decide you needs to go to prison.