If someone had told me in early 2022, when mortgage rates were below 3%, that rates would jump over 120% in the next twelve months, I would have expected home prices to crash. We had just packed a decade of price gains into two years, so a correction seemed inevitable. As it turns out, rates did more than double, climbing from under 3% to over 7% in just over a year. That is what I'd consider a violent move in rates. So, did home prices crash? Not at all. Today, Portland’s housing market still hovers within ~5% of the all-time highs from early 2022, when rates were below 3%. I would have laughed at anyone predicting this back then. It’s wild how resilient the housing market has been despite extreme financial pressures. The stock market crashed, crypto plunged, and the bond market faltered. Yet, residential real estate remained almost untouched. Here are the facts that contributed: We've been under-building new homes to keep up with new household formations. Due to a variety of reasons (a topic for another day) 2. We have a severe shortage of housing inventory for sale • In 2007, there were 4 million active listings. Today, we have 1.32 million 3. Over 40% of US homes are owned outright, and many of the rest are financed at historically low rates (thanks to widespread refinancing when rates dropped) 4. No major credit stress in housing like we saw in 2007 • In 2007, there was significant credit stress. In 2024, there is none The housing market has shown remarkable resilience in the face of a pretty extreme stress test. Despite the unprecedented shifts in mortgage rates and broader financial turbulence, the fundamental strengths of the housing market—low inventory, low credit stress, and substantial home equity—have kept prices stable. As we move forward, these factors suggest that while the market may face challenges, its foundation remains strong.

The cap rate is widely misunderstood in the real estate world. When it comes to value-add deals, a low going-in cap rate is not necessarily worse (or better) than a much higher one. Cap rates on their own do not tell you much about whether a particular deal is a good real estate investment or not. A 12 cap can easily wipe you out, a 3 cap can be the deal of a lifetime. The professional buyers understand this when looking at deals. Hobby buyers not so much. As an example: The 12 cap could come with a tenant that has a high risk of leaving (single-tenant building or anchor tenant). And the 3 cap could have a clear value-add path to get to a 10 cap by doing major renovations and marking rents to market (now that would be a homerun). So as you can see cap rates are largely irrelevant in the value-add real estate world. You’re buying real estate, not a cap rate.