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The following essay was submitted to the Bulletin, the local Bend newspapaer, in response an article titled, “Economist: Area prices for homes unlikely to drop,” that ran in Saturday’s edition.

Last Saturday the Bulletin reported that, “Central Oregon’s housing market could cool off in coming years, but the region’s home prices aren’t part of a bubble, and they’re not going to burst, Oregon State Economist Tom Potiowsky said on Friday.”

I read Mr. Potiowsky’s comments with interest and was eager to understand the reasoning behind his assertions. Yet I couldn’t find a single fact or statistic in the article to support his view.

Former Mayor Oran Teater seemed to take up the challenge in suggesting that, “it used to be that when the state caught a cold, Bend caught pneumonia. I think because of our construction and our boom and our growth, we’re a bit insulated from the rest of the state.” In other words, because we’ve had a bigger boom than the rest of the state we should avoid a bust. Huh? What? Doesn’t it usually work the other way: the bigger they are the harder they fall?

The former Mayor’s line of thought sure sounds like the familiar, “it’s different this time,” mantra extolled by stock-market aficionados in 1999. He is essentially asking us to believe that, while the country’s “New Economy,” espoused during the height of the stock market bubble, was unmasked as a sad fallacy, maybe Bend has succeeded in developing its own “New Economy” that is immune to natural economic cycles. I don’t buy it.

In stark contrast to Mr. Potiowsky’s comments, I believe there is ample evidence to suggest that Bend real estate is experiencing a bubble. My calculations of local property prices versus rental incomes, a common measure of property investment value, suggest this ratio currently hovers in the high 20’s. This means that a home yielding rental income of $10,000 per year, for example, is selling for over $250,000 in Bend today.

Bend’s high 20’s ratio is significantly higher than the national average of 17.1 and even the national average, we should keep in mind, is up dramatically from the 11.6 level of only five years ago. Bend’s ratio is not just above average; it is roughly on par with the most overvalued areas in the nation. In fact, the only regions in the country with ratios similar to Bend’s are Southern California, South Florida, New York City, Boston and Las Vegas, areas even Federal Reserve Chairman Alan Greenspan concedes to be bubbles.

Another characteristic of asset bubbles that can be seen here in Bend is wide-spread speculation. People, driven by hope and greed, flock to rising asset prices. Just as people flocked to the stock market a few years ago, they are now flocking to real estate. The day-traders of 1999 are today’s real estate investors and it is happening here in Bend. Everyone knows at least one friend or neighbor that has leveraged their home into multiple investment properties. These speculators all seem confident about prices rising from here to eternity.

Research conducted by the International Monetary Fund, however, suggests otherwise. Their studies show that a sharp rise in house prices is more likely to be followed by a bust than is a stock-market boom. Perhaps the reason for this is that real estate, as is widely understood, is one of the most economically-sensitive sectors of the business world. As such, a real-estate-focused economy, such as Bend’s, would not escape catching “pneumonia” were the state to catch a cold. There is no “New Economy” for the country or for Bend.

Mr. Potiowsky, as a successful economist, knows this. And it might have even been on his mind when he recently told “Oregon Business” magazine a very different story than that which the Bulletin recently reported. “Oregon state economist Tom Potiowsky says the more he hears about speculative buying of property in places such as Bend and Ashland, the more concerned he becomes about the potential for a bubble-like deflation of housing prices,” reports the June issue. While Mr. Potiowsky is surely a capable economist, it seems he’s an even better politician.