Two years ago, Jim Carter and his wife, Caroline, got fed up with Bay Area traffic, sold their house in Walnut Creek and bought a home with a gorgeous view in the woods above Lithia Park in Ashland.

"It's the best decision I've ever made," says the retired firefighter. His cholesterol has dropped 50 points and he and Caroline have never been happier. They have a close-knit group of friends — all recent transplants like themselves — and, while they frequently visit family in California, they're always eager to get back on I-5 and head north again.

Their home, bought cheap by Bay Area standards at $639,000 two years ago, is now closing in on $1 million as more refugees from high-priced real estate markets flock to Ashland and its surrounding communities, lapping up the cultural amenities, small-town feel and natural beauty.

In fact, the Carters and others like them have made the Medford-Ashland area the fastest-appreciating housing market in the state, with prices increasing nearly 20% in 2004, and close to 70% over the last five years.

Oregon's housing prices haven't begun to touch the appreciation of some West Coast markets such as Las Vegas, Southern California and the greater Bay Area. Still, places popular with retirees and other lifestyle refugees — Bend, long stretches of the Oregon coast, Southern Oregon and a few of Portland's most glorified neighborhoods — have seen steep price inclines and speculative buying, leading some observers to deduce that parts of the state are getting in on a nationwide residential real estate bubble.

Home prices started their ascent during the late '90s, part of an asset grab among those flush with tech stock gains. But while the bubble burst on the stock market, housing prices continued their ascent, prodded further by low interest rates and the reputation of real estate as a safe-haven investment from the stock market's notorious volatility.

Economists have been warily eyeing what they see as a housing bubble, bid up by the familiar forces of irrational exuberance. "Much as it did in the stock market in the late 1990s, the bubble psychology is emerging in housing," writes HSBC Securities economist Ian Morris in his 2005 nationwide economic outlook report.

Homeowners have taken out equity loans to finance their consumer spending habits. Others, tempted by low interest rates, are leveraged to the hilt, buying more house than they can afford and borrowing the balance. The assumption these buyers make is that the value of real estate can only go up, giving them more equity to leverage, or more profit to roll into their next home.

Meanwhile, on the global stage, the faltering U.S. dollar, as well as the persistently high international trade gap and the soaring federal budget deficit, have put the U.S. economy on shaky footing. Swollen fuel prices have rattled the U.S. Federal Reserve with inflation worries.

If the nation's central bankers get nervous enough, they will start hiking interest rates more aggressively. The Federal Open Market Committee maintained its "measured" stance in May, raising interest rates by a quarter point. And while mortgage rates have remained fairly low despite the Fed's action so far, they'll eventually go up. Which could mean an end to the housing boom.

The scenario goes that highly leveraged buyers will default, forcing mortgage interest rates up even further as lenders are stuck with foreclosed properties. And those who are able to hold onto their homes will no longer have the disposable income to keep the U.S. economy humming. Those who anticipated a move up the real estate food chain (into bigger homes or second homes) will stay put, their cash locked up in stagnant real estate.

This spring saw the first indication of a potentially weakening housing market. In the fourth quarter of 2004, housing prices tracked by the Office of Federal Housing Enterprise Oversight (OFHEO) increased just 1.7%, compared to 11.2% for the year. And housing starts declined in March by 17.6%, the largest monthly drop since 1991.

But, in a statistical counterpunch for those who argue that there is no bubble, March numbers showed that existing home sales remained strong, increasing by 1%.

JUST HOW BUBBLE-PRONE is Oregon's housing market? It depends on where you look. In markets tracked by the OFHEO, Medford/Ashland is the clear leader in price appreciation, thanks in part to transplants such as the Carters.

Gateway Real Estate's Chris Hale, who sold the Carters their home, doesn't see a bubble, just high demand. "I don't see it waning," Hale says. "People come to our market by choice, not by necessity."

Barbara Allen, an agent with Windermere Van Vleet & Associates in Ashland, agrees. "People come to the Oregon Shakespeare Festival year after year and finally say, 'Let's just move here.'" Allen estimates that about 40% of her clients are moving to Southern Oregon from outside the area. "Our first quarter this year was double what it was last year. People are wanting to sell while the market is good."

Markets along the Oregon coast have also seen steep price increases, in part because of investment and second-home buying.

In Brookings, agents say appreciation has hovered around 15% per year, nudging up average home prices to around $350,000. In Cannon Beach, North Coast Realty agent Tracy Gardner says the inventory of homes for sale is almost nonexistent because of pent-up demand. And price appreciation? "It's so hard to tell. In four months, things can go up 20%," he says. "If I were to guess I'd say 15% to 20% per year in the last five years."

Bryant Green, an agent with The Hasson Co. in Bend, says about 75% of his clients are from out of state, most of them buying investment property or vacation homes. "There are a number of people in other major metros on the West Coast who have seen their homes appreciate at a high rate," Green says. "They see a lot of value in Bend."

Meanwhile, the Portland metro market saw a strong, 10% housing price appreciation last year, though pockets of the city are decidedly hotter than others.

In the heavily-hyped Pearl District, some property jumped 20% in price last year. "Every time I check I say it can't keep going up this much, but it does," says Debbie Thomas, founder of Debbie Thomas Real Estate, an agency that specializes in Pearl property. Thomas says she actively discourages speculative buying, especially of brand-new units. But she acknowledges that some condos sold through her resale division are indeed being snapped up as investments.

The pre-selling of buildings still under construction limits the inventory of vacant Pearl condos. But with other new developments in and around downtown Portland coming online over the next few years (such as The Eliot Tower in the museum district and the South Waterfront's Meriwether building), there's a good chance Pearl District real estate will face more competition, potentially putting a damper on values.

Aside from Eugene, which saw an impressive 12% jump in housing prices last year, housing markets in other parts of the state have remained relatively tame for the most part, often tempered by stubbornly high unemployment and a limited amount of in-migration.

"We've had very modest increases compared to the rest of the state," says Art Kegler, a Boardman-based agent with American West Properties. In this case, modest means about 3% appreciation per year with an average home price hovering between $105,000 and $110,000. But the promise of new jobs — from a new Home Depot in Hermiston and an expansion of the Tillamook Cheese plant in Boardman — gives Kegler hope for a steady future. "We'll be stable for the next five years," he says. "We'll stay alive as Realtors."

SHEER APPRECIATION DOES NOT a bubble make, though. While Oregon's hottest markets are the most prone to deflating, each market has its own factors at play. Ashland, for example, is close to California and replete with quality medical facilities, making it a great retirement spot for people such as the Carters.

Still, rising interest rates will have an impact on home values in Ashland and other popular Oregon cities. But economists are divided on how serious the downside of the housing market upside will be.

HSBC Securities' Ian Morris readily calls the current market a bubble and expects the fallout to hit some time in the second half of this year. As housing prices flatten, he estimates there will be a 2% slowdown in consumption growth.

Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University, counters that a bubble is technically defined as a relatively quick loss in real estate values, in the neighborhood of 40%. "Typically, when we have a market decline in real estate," he says, "it's no more than 20% to 25% of value."

That said, Crellin does believe that selected communities will see housing price declines in the next few years. And, he says, "interest rates will be the number one driver." Crellin predicts that commercial real estate, on the other hand, is likely to remain healthy — provided that office leases continue to trend upward — potentially moving in the opposite direction of cooling residential markets.

Oregon state economist Tom Potiowsky says the more he hears about speculative buying of property in markets such as Bend and Ashland, the more concerned he becomes about the potential for a bubble-like deflation of housing prices. "As mortgage rates go up and high housing prices continue, people will draw back on consumption. That's going to soften the demand for housing," Potiowsky says.

And if California's housing market catches a cold, Oregon's is likely to at least get the sniffles. That's because as values stagnate or decline in places such as the Bay Area, Oregon markets popular with Californians might see a drop-off in in-migration and investment purchases.

"The concern I have about Ashland is that a lot of people are buying for investment purposes," says Ric Holt, associate professor of economics at Southern Oregon University. "Many of them are buying on the margin, thinking that they'll be able to turn it over in three or four years. With the national deficit and the falling dollar, there's a lot of precariousness, a lot of uncertainty out there."

WHETHER OR NOT YOU BELIEVE in the bubble, it's clear that interest rates will go up in the near future, putting pressure on the housing market. Does that mean a correction is on the way and the value of your house will deflate like a slow-leaking tire?

When the stock market was making its untenable climb in the late '90s, plenty of sages, including Fed Chairman Alan Greenspan, warned that stock prices would stop climbing eventually. They did.

And now? On one hand, real estate professionals — including National Association of Realtors chief economist David Lereah, author of the book, Are You Missing the Real Estate Boom? — contend that housing prices are a simple equation of supply and demand.

On the other hand, there are national economists such as HSBC's Morris, who estimates that the coming climb in interest rates will suck some $200 billion in consumer spending power out of the U.S. economy.

A hit to the housing market would hurt Oregon's less-than-robust economy. As Ric Holt of Southern Oregon University puts it, "precariousness" could be the watchword if housing prices start to fall.

[SIDEBAR]

OREGON HOME-PRICE APPRECIATION
	2004	5-year
Medford/Ashland	19.57%	69.49%
Eugene	12.26%	30.70%
Portland Metro	10.15%	32.70%
Bend	9.66%	47.40%
Corvallis	7.68%	24.77%
Salem	6.34%	24.22%

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Copyright 2005 Oregon Business magazine