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2007-05-20T22:09:00.001-07:00

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Tired Stereotypes About Renters

2007-05-17T14:39:00.000-07:00

You've heard these stereotypes about renting, circulated by people and organizations with a financial interest in selling you a mortgage:

Renting is for poor people.
and,
Renters don't get involved in their community.

Here's a specific example of these arguments, courtesy of the NAR:

Low- and moderate-income families, as well as minorities, are the groups that homeownership eludes the most.
...
Homeowners are motivated to stay abreast of local issues to protect their investment.
...
In turn, involvement in community quality-of-life issues helps prevent crime, improve childhood education and support neighborhood upkeep.

- NAR, Homeownership Talking Points

I mention these because a semi-related story in today's Seattle Times caught my attention. In the first three paragraphs it gives a strong counterpoint to these talking points we often hear repeated by those in the home sales business. (emphasis mine)

On the 40th floor of a Seattle skyscraper, in a nondescript hearing room, a young Queen Anne couple sat on one side of a long table. On the other side sat their opponents — lawyers defending a city permit to tear down an old church next door to the couple's rented house.

On this particular day, the Queen Anne couple, Tyler Crone and Jorge Barón, looked far less like the working parents of a 3-year-old daughter and 15-month-old son and more like who they also happen to be: Yale-educated attorneys, one with a master's in public health, both on a mission. There the couple sat, confident, attired in suits, with briefcases of exhibits — and armed with witnesses who pounded home a single, emotional message: Don't poison our children with a toxic cloud of lead dust.

Bill Merkle, a real-estate broker involved in the deal to develop the church property, watched the spectacle with frustration, having never before seen such formidable neighborhood resistance to a demolition.

Surely there was a typo. That doesn't sound like renters at all.

Or maybe it's time to rethink the view that renters are somehow inherently unfortunate, lazy, ignorant, and/or stupid.

(Sanjay Bhatt, Seattle Times, 05.17.2007)

New Housing Bubble Blog: Portland

2007-05-17T09:03:00.000-07:00

Just a quick note to point out that Seattle's riverside neighbor to the south—Portland—has its own housing bubble blog: Portland Housing Blog.

Drop on by and leave Clint a comment or two.

WCRER: Affordability Still at Record Lows

2007-05-16T12:04:00.000-07:00

First quarter data has been released by the WCRER. There's not much new information about King County that isn't already in the Seattle Bubble spreadsheet, but it's worth noting anyway since their audience is somewhat broader than Seattle Bubble's.

Here are a few quotes from the fluffy, feel-good AP report:

Washington's housing market remains a pricey bright spot, but that means renters are seeing fewer opportunities to become home owners, a study finds.

There were 26,720 homes sold statewide during the first three months of 2007, a 9.2 percent drop from the same quarter in 2006, according to statistics released Tuesday by the Washington Center for Real Estate Research at Washington State University in Pullman.

But the median price of $300,800 in Washington was 7.4 percent higher than a year ago. That compares to a 1.8 percent decline in the national median price for a single-family home during the first quarter.
...
Dennis Rose, 2007 President of Washington Realtors, said Washington's economy is helping keep home prices high.

"Strong job growth, coupled with a commitment to quality of life issues, is helping Washington avoid much of the pain of declining home prices observed in other areas," Rose said.

The Housing Affordability Index uses median home prices, mortgage interest rates and family incomes to measure the ability of a middle-income family to afford mortgage payments on a typical home.

In Washington, the affordability index climbed for the second consecutive quarter, mostly because the mortgage interest rate declined slightly during the first quarter, the WSU center said.

Is anyone else getting tired of the state Realtors' It's A Priority campaign and their endless disingenuous quotes about "quality of life"?

To give you some context on that quote that the Affordability Index "climbed for the second consecutive quarter," check out this graph (found in the Seattle Bubble spreadsheet):

Click to enlarge

In King County, after plummeting from 121.3 in the second quarter of 2003 to a low of 69.2 in the third quarter of 2006 (a 52.1 point drop), the index has "climbed" a whopping 1.5 points in the past six months.

Let's throw a party.

(John K. Wiley, Associated Press, 05.15.2007)

King County Foreclosures Keep Rising

2007-05-15T09:08:00.000-07:00

April foreclosure stats from RealtyTrac have been released. No surprise: area foreclosures still on the rise.

More Seattle-area homeowners are facing foreclosures this month, but the region remains far below the national rate, according to new statistics released Tuesday.

The Seattle area, defined as King and Snohomish counties, had 760 foreclosure filings in April, up 16.7 percent from March, but down 2.2 percent from April 2006, according to RealtyTrac, an Irvine, Calif., company that tracks foreclosure filings. The April rate of one foreclosure per 1,287 households -- better than the national rate of one for every 783 households -- ranked the region 128th out of 229 U.S. metro areas.

"Washington has really not followed into what is happening nationwide," said Marc Gaspard, administrative director of the Washington Mortgage Lenders Association. "Certainly if you look at the Puget Sound region, our housing market may have slowed a little bit, but it's still a very strong market."

King County alone had a much worse month, with foreclosures up 37 percent from a month ago and 1.7 percent from April 2006. Its rate, however, still was lower than the national rate, one foreclosure for every 1,347 households. State foreclosures were up 1.15 percent from March and 7.2 percent from a year ago, with one per 1,396 households -- good for 23rd among states.

Although the trend is up, it is true that foreclosures are only slightly up. However, even without an economic downturn (local or national) things can change quite quickly.

But don't you worry, we're special. That will never happen here. The real estate agents quoted in the paper told me so.

(Aubrey Cohen, Seattle P-I, 05.15.2007)

Wanted: Construction Job in Seattle

2007-05-14T08:12:00.000-07:00

Either this report is a fabrication, or the guys in question haven't been clued in to how special Seattle is...

Construction workers from across the country came to the Cedar Rim Apartments in Newcastle for a major remodeling project.

They worked for weeks but were only partially paid. Now, some are stranded and taxpayers are footing some of the bill.

Donald Gill and Marc Cox are now stranded thousands of miles from home with no money, no jobs, and no way back.

The men are two of 14 construction workers who answered a Craigslist ad offering good pay and plenty of work to come refurbish apartments.
...
Somehow the deal went bad and the workers were left to fend for themselves.

Gill says he worked for three weeks but was only paid for one.

Now, a month without money, he and Cox have resorted to food stamps, paid for by Washington taxpayers, to survive.

Somebody should tell those guys that thanks to Seattle's perma-hot real estate market, there are plenty of construction jobs out there building new homes in a futile attempt to meet our area's insatiable home-buying demand.

(Eric Wilkinson, King 5 News, 05.13.2007)

The Ringing "Ka-ching From a House in Seattle"

2007-05-11T17:22:00.000-07:00

Here's yet another boilerplate national real estate article rah-rah'ing Seattle's apparent resilience:

Amid all the news of plummeting national housing numbers, the premise still holds true that all real estate is local, and nothing supports that premise more than the statistics on local home price appreciation. The ka-ching from a house in Seattle rings just as dramatically as the bell tolling for a home in Detroit.

Home prices and sales, while certainly susceptible to national macro-economic factors, such as mortgage rates and lending standards, rely largely on the local economy and local supply and demand. This is precisely why home prices in Seattle are up 10% from a year ago, according to the S&P/Case-Shiller Home Price Index, but down nearly 8% in Detroit. It's the booming tech industry versus the slumping auto industry.

Home prices in Seattle have been on a tear, up for four months in a row, to a median price of $465,000 in April, according to the Northwest Multiple Listing Service. Confounding matters even more, the bulk of the homes that sold in Seattle in March went for above asking price.

"We just have a very strong market," says Sara Hasan, financial analyst for Seattle-based McAdams Wright Ragan, a regional brokerage firm. "Two of the major employers are Microsoft and Boeing, and both are doing very well."

Not to mention that Google has moved into the very limited real estate in the area, which makes another point: Seattle has very short land supply, further diminished by a growth management act, which restricts where and how many single family homes can be built. Limited land supply plus strong employment equals pricey homes.

That's a convincing-sounding equation. Too bad that actual research shows it doesn't at all explain Seattle's high home prices. It's more like limited land supply (growth management) plus strong employment equals a plausible, but entirely false explanation for continued (but slowing) home price gains.

It's not that we don't have somewhat limited land and strong employment. It's just that when you actually take the time to do your research you find little to no correlation between those factors and home price gains.

(Diana Olick, CNBC, 11.05.2007)

Prices In Seattle Still Hot, Hot, Hot!

2007-05-09T14:44:00.000-07:00

Check out this delightful piece from today's Wall Street Journal: Where home prices are hot now

The housing news isn't all grim. Even as prices sag nationwide, there are several cities in the country where home values are climbing smartly.

Portland, Ore., Boise, Idaho, Seattle, Salt Lake City, Houston, Austin, and Charlotte and Raleigh, N.C., are among the cities bucking the national trend. Homes' appreciation there between the fourth quarters of 2005 and 2006 far exceeded the national average of 5.9%, according to the Office of Federal Housing Enterprise Oversight.

In some markets, like Boise and Seattle, the appreciation jumped well into the double digits.

Let me stop right there for a moment. The phrase "well into the double digits" didn't strike me as reflective of reality, so I took a look at the actual OFHEO report (pdf). Sure enough, according to the government, homes in Seattle appreciated 14.5% from Q4 '05 to Q4 '06. NWMLS stats and the Case-Shiller index both reported lower figures:

Dec. '05 - Dec. '06
OFHEO HPI: +14.5%
S&P/Case-Shiller HPI: +12.1%
NWMLS Median (Res, King Co.): +12.0%

I think the difference lies in the following (emphasis mine):

OFHEO calculates appreciation based on repeat sales or refinancings of the same single-family properties.

Including refinancings may have worked in the past, but for whatever reason, it is now apparently skewing the numbers a bit higher than they are in reality. With that in mind, let's take a look at some of the other claims made in the article...

There's no single secret of these cities' apparent success, but many of them missed the housing boom of the past five years. From 2001 to 2005, annual appreciation in these cities was between 2% and 5%, far slower than the 7% to 12% national average, according to the Office of Federal Housing Enterprise Oversight.

Between 2% and 5% from '01 to '05? Really? No, not really:

Quarter: OFHEO, Case-Shiller, NWMLS
Q4 '05: +17.2%, +18.5%, +17.3%
Q4 '04: +10.1%, +11.4%, +9.9%
Q4 '03: +5.3%, +7.1%, +11.3%
Q4 '02: +4.5%, +4.1%, +3.3%
Q4 '01: +5.6%, +4.5%, +5.6%

Looks like we got a late start, with only slight price increases in '01 and '02 but from '03 on, it was off to the races.

Now, their economies are strong...

Good thing our local economy is completely immune to any potential slowdown in the national economy, right?

...and housing prices are still perceived as affordable, luring buyers into the market.

Now it's just getting ludicrous. No one but an ex-Californian perceives homes in Seattle to be "affordable."

The growth of Portland, Salt Lake City, Boise and Seattle can be attributed in part to an influx of former Californians and people opting out of slumping Las Vegas or Phoenix.

Ah, well there you go.

While some worry that a new group of cities could face a boom-and-bust cycle, local real-estate agents and economists predict stable growth for the near future.

In other news, local burger franchise owners and beef producers predict stable growth for the near future in their own industry, as well.

Lest you still come away from the article with a puffed-up opinion of Seattle's superiority, take a look at the seventeen cities with higher appreciation than Seattle (according to the OFHEO):

Bend, OR
Wenatchee, WA
Provo-Orem, UT
Salt Lake City, UT
Boise City-Nampa, ID
El Paso, TX
Flagstaff, AZ
Corvallis, OR
Mount Vernon-Anacortes, WA
Longview, WA
Myrtle Beach-Conway-North Myrtle Beach, SC
Wilmington, NC
Miami-Miami Beach-Kendall, FL
Ogden-Clearfield, UT
Salem, OR
Tacoma, WA
Mobile, AL

I guess the Salt Lake City area is even more specialer than the Puget Sound.

(Dean Treftz, Wall Street Journal, 05.09.2007)

April Reporting Roundup

2007-05-08T09:15:00.000-07:00

Here's a compilation of what your local press (aka real estate advertisers) had to say about last month's home sales data from the NWMLS. It's depressing to think that these sources are where most people get their news of the market from...

Elizabeth Rhodes, Seattle Times:
King County home prices keep rising, bucking national trend
Buying a home here: You'll pay even more

"Overall, people have been getting worn out paying what in their opinion is an inflated price," Martin said.

Plus there are significantly more properties to choose from compared with a year ago.

Mrs. Rhodes' article is riddled with inaccurate assertions such as a claim that decreasing sales are "explained" by increasing inventory (huh?), and a quote that sales activity is "improving" and "at a faster pace than last year." She also says "Whether April will be the strongest month remains to be seen," when in fact it is already known that March experienced both more sales and larger price increases than April. Take home lesson: When reality isn't as rosey as you'd prefer, just pretend that it is!

Aubrey Cohen, Seattle P-I:
Home sales in city shoot up 14% in April

Anshul and Christine Pandhi were in their second week of seeing what they could get for $500,000 to $700,000 if they moved from Tacoma to Seattle.

"It's expensive," Anshul Pandhi said. "In our price range, the pickings are pretty slim."

John and Sahrah Marcantonio sold their Woodinville house in November and have been renting in Seattle while looking for a house in the city.
...
Sahrah Marcantonio was pessimistic about the market, but didn't care.

"I think it's a bubble, we're at the peak of the bubble, and yet, I want a house now," she said. "It's for the long term."

Aubrey's article was much more even-handed than we've come to expect. I was floored by the quotes he managed to get out of recent home buyers.

Devona Wells, Tacoma News Tribune:
Housing market still shows signs of slowing

The jump in the number of Pierce County houses and condos for sale puts the county at a six-month supply, generally considered the point a market moves from one favoring sellers to one favoring buyers, said Dick Beeson, a Windermere real estate broker and MLS director.

"The news is, pay attention, sellers, you’re not going to have the spring and summer you usually have," he said.

Apparently the market just south of us is a bit harder to spin in a positive light. Of course, that doesn't mean they aren't trying...

...though sales have slowed, [John L. Scott agent David Gala] said Tacoma homes under $400,000 remain hot. Two of his listings priced at $250,000 and $210,000 sold in the last week after multiple offers, Gala said.

But agents say three to six months tends to be the time it takes to sell a home today. As recently as two years ago, homes often sold in a few days.

Mike Benbow, Everett Herald:
Buyers drive up condo sales

While Snohomish County houses are less expensive than in King County, they're still out of reach for many people in the market, especially with the tightening of loan qualifications that has followed the recent increase in home foreclosures.

That has attracted more people to condos and their much lower price range.

Those buyers had better get into any type of home they can possibly afford, because as everyone knows, if they don't buy now, they'll be (you guessed it) priced out FOREVER!

Rolf Boone, The Olympian:
Condos sustain housing market

The pace of new South Sound loan applications has so far been strong this year, said Jeff Devlin, a Wells Fargo Home Mortgage consultant. Devlin said he doesn't sense the "doom and gloom" today that hung over the real estate market a year ago.

Hmm. Year over year pending (res + condo) sales down 15%, listings up 50%. SFH median up 9% vs 23% (April '05-'06). But the market is in better shape today than a year ago. Yeah.

Just for kicks, here are a couple of stories from a little further out in Western Washington than we usually focus on.

Dave Gallagher, Bellingham Herald:
Home sales slowing as supply rises

Evan Caldwell, Longview Daily News:
Region's home sales bucking U.S. trend

(Elizabeth Rhodes, Seattle Times, 05.08.2007)
(Aubrey Cohen, Seattle P-I, 05.08.2007)
(Devona Wells, Tacoma News Tribune, 05.08.2007)
(Mike Benbow, Everett Herald, 05.08.2007)
(Rolf Boone, The Olympian, 05.08.2007)

Listings Way Up, Sales Continue Descent

2007-05-07T12:15:00.000-07:00

It's time for April statistics from the NWMLS. King County SFH summary:

April 2007
Active Listings: up 38% YOY
Pending Sales: down 10% YOY
Median Closed Price: $465,000, up 11% YOY

Sales continued their descent, making April the 17th of the last 18 months to register a YOY decrease in pending sales. Likewise, inventory continues to balloon, registering the highest YOY increase to date.

Despite the downward pressure of increasing supply coupled with decreasing demand, median prices still rose $10,000, for a 10.85% YOY increase. Apparently the increasingly small number of people that are still buying are all too happy to continue paying higher prices. Perhaps they're frightened of being priced out forever.

Months of supply bumped back up to 3.00.

As is the custom, I have uploaded an updated copy of the Seattle Bubble Spreadsheet that contains the relevant data. Here is the recap NWMLS pdf.

Here's the supply/demand YOY graph:

Click to enlarge

Here's the chart of supply and demand raw numbers:

Click to enlarge

Here's the graph of YOY percent change in the median sale prices of single-family homes in King County since 1994:

Click to enlarge

I predict that the $10,000 increase in median prices will be the primary focus of our friends at the Times and P-I.

Tick, tock, tick, tock...

My Clients Don't Have Any Money

2007-05-07T06:48:00.000-07:00

Living most of my life in Florida, cockroaches were a fact of life. In general, if you spotted one cockroach, that meant there were at least 1,000 others somewhere, waiting in the wings.

In the past few months homeowner subprime sob stories have been coming at us from all over the country, ad nauseam. With Washington state in the top five for toxic loans, you'd figure we'd see more local stories.

Here's one from the Seattle Times this morning: Borrower, beware: Debt disaster looms as rates rise on easy-money mortgages

It was a sweet little house, with affordable day care nearby for their 6-year-old son. Patrick Fultz and Laurel Swartz were hooked.

But when the couple — with no savings and about $20,000 in credit-card debt — shopped for a mortgage to buy their 1,200-square-foot house in Tukwila last year, they heard the same thing from lenders and in a home-buying class they attended: Forget it.

"You basically had to be Scot free, no massive credit debt, which we had, and to have money in the bank, which we didn't," said Swartz, 31. "How do people buy houses in America anymore?"

Fultz thought he had found just what he was looking for when he came across Gold Mortgage Lending in Renton on the Internet. "No income verification mortgage, zero down," read the firm's Web site. "We fund mortgages the others can't."

Erin Rearden, a mortgage counselor at Solid Ground, a nonprofit social-service agency in Seattle, said the deal Fultz and Swartz struck is typical, especially as the cost of housing skyrockets out of reach for so many.

"They wanted a home. And a lot of this comes from operating under the assumption that owning a home is an inherent American right. So when someone offers a way to do it, you want to go for it," she said.

Fultz makes $12.75 a hour driving a fish-food delivery truck. He recently paid off half of the 12 credit cards he used in buying a motorcycle, a couch and a television, going out to eat, "just buying stuff," Swartz was working at an insurance office, where she made $11.75 an hour.

The couple signed two mortgages to buy their $246,800 house in July. The first loan, a so-called pick-a-payment loan for 80 percent of the deal, had a variable interest rate. The second mortgage, at 12.5 percent interest, covered the rest.

Not long after they signed the loan, Swartz decided to dump her sedentary office job to become a personal fitness trainer. The new job paid less, $7.89 an hour, but she had the opportunity to earn commissions as she brought in clients.

The commissions, however, didn't materialize. At the same time, the interest rate on the first mortgage went up, from 7.06 to 8.15 percent — and it can go up every month until topping out at 11.5 percent.

Suddenly the couple were $300 a month short of paying their bills.

"I feel sorry for anyone who can't get into a house," Mills said. "We beg the banks to give us their turn downs. I help people; that's the bottom line."

Editors note: Always watch your back when a commissioned salesperson beings a sentence with "I help"

But today, people like Fultz and Swartz aren't the only ones having money problems. Mills, and brokers like her, have troubles of their own.

A meltdown in the subprime lending market is drying up the money pipeline.

Across the country, where home values are stalled or plummeting, lenders are watching loans turn upside down, with mortgages grown larger than property values. People behind in payments are losing their homes. Entire neighborhoods in parts of the Midwest and California are shuttered by bad debt.

The situation is nothing like that in Seattle, where increasing home values can still grease the mechanics of subprime deals.

But even here, lenders have stopped serving subprime clients or are imposing tighter requirements to qualify, from higher credit scores to a couple of months' worth of payments in the bank and at least some money down.

"For my clients, that is a deal killer," Mills said. "My clients don't have any money."

Wait a minute... I'm confused. I thought your customers were people that already didn't have any money? Or were you talking about the money to pay your broker fees?

The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.

"I didn't make my own mortgage payment this month," Mills said in April. "But nobody feels sorry for me."

While the map of misery shows a percentage of toxic loans of roughly 15%, I wonder how many of these loans were written in just the last year or so?

Where will future "buyers" get the money for even a 5% down payment. If there are less buyers, what will that do for Seattle home values?

Now that we've seen one homedebtor facing foreclosure story here in Seattle, I wonder how many other stories are out there?

(Lynda V. Mapes, Seattle Times, 05-07-2007)

Throw More Money at the Problem

2007-05-04T08:30:00.000-07:00

Problem: Housing in the Seattle area is too expensive.
Government solution: Artificially inflate the buyer pool by throwing millions in government loans at the problem.

Seattle will soon stake low-income housing developers in the cutthroat bidding wars for building sites.

The idea, which the City Council's Housing, Human Services and Health Committee approved as a two-year pilot project earlier this week, is to lend developers money fast and early — up to five years before they're ready to build.

The program will help non-profit developers secure sites before Seattle land costs get even more out of hand and better compete against their for-profit counterparts, who often can move more quickly, said Kollin Min, regional program director in Seattle for Enterprise Community Partners, an organization that helps fund low-income housing.
...
The program will get $2 million a year through 2009 from the city housing levy's operating and maintenance fund.

That's just a start, Min said.

"It's a very good first step," he said. "We need to have a larger pot to really make a dent in the problem."
...
The Legislature authorized a separate $1 million earlier this year for a similar program statewide.
...
Forty percent of the program money would go to home-ownership programs for residents earning 80 percent to 120 percent of the median income. Other money could go to rental housing for people making no more than 80 percent of the median income.

How does "spend more money" make sense as a solution for the problem of something being too expensive? I'm no economist, but I'm pretty sure that projects like these only serve to further drive up prices.

Should local and state governments bother trying to get involved at all, or should they just let the market work itself out?

(Aubrey Cohen, Seattle P-I, 05.03.2007)

To Open Thread or Not to Open Thread?

2007-05-02T16:01:00.000-07:00

Thanks to the cessation of daily open thread posts during and after my recent vacation, participation in the forums has really taken off. However, when I announced on Monday that I would cease posting open threads for the foreseeable future, a number of you protested.

While I am certainly glad to see the forums well-utilized, I also don't want to alienate those of you who have contributed some of the most interesting discussion to this site. When I post daily open threads, forum usage declines, but without open threads, some people don't really participate as much. So I'm looking for some kind of middle ground.

Does anyone have suggestions for a way that we can facilitate open thread discussion without decreasing forum usage? I was thinking of reducing the open thread frequency, or placing it one click away from the front page (like the forums already are).

What do you think of either of those ideas, and what are some other things we might try?

Renting in Seattle "may make economic sense"

2007-05-01T08:43:00.000-07:00

Finally some semi-useful information out of Dupre + Scott. Mr. Cohen reports on the "1-19 Unit Report" just released by Dupre + Scott in this terrifying tale of skyrocketing rents and plummeting vacancies:

Rental houses get scarce, expensive

The good news for people who cannot afford to buy a house in Seattle is that it may make economic sense to rent for the moment.

The bad news? Rental houses are a lot harder to find and pricier than they were a year ago.

The typical Seattle rental house now costs $1,604 a month, up 4.6 percent from a year ago, according to data that Dupre + Scott Apartment Advisors released Monday. House rents for all of King and Snohomish counties were up 6.5 percent from a year ago.

Dupre + Scott did not release vacancy rates just for houses, but among all King County rental buildings with one to 19 units, including houses, the rate declined from 3.7 percent a year ago to 3.1 percent now. The house trend is similar to that for apartments in general, according to Dupre + Scott.

It should be noted that even this report excludes homes or condos rented out by individuals. According to the Dupre + Scott website, the 1-19 Unit Report is derived from a survey of "apartment owners, professional property managers, and on-site property managers." Given the logistical complexity of such a task, you can't really blame them for not surveying individual owners, but it's important to keep in mind what this data is and is not telling us.

Dupre + Scott's April apartment report asserts that people would make more money renting, and investing the money they save elsewhere, than paying current prices to buy a home.

"There are a lot of reasons to own a home," Dupre + Scott co-owner Mike Scott said. "From a purely financial perspective I'd say no, it doesn't make sense. But if home prices go up 10 or 15 percent in the next year, I'll have to eat those words."

That makes about as much sense as the following: "There are a lot of reasons to visit a casino. From a purely financial perspective I'd say no, it doesn't make sense. But if you make 10 to 15 percent profit on your next visit, I'll have to eat those words."

No words will in fact need to be eaten, because even if home prices go up another 10 to 15 percent next year, it still doesn't make financial sense to buy a home right now. To put it another way... Just because a reckless decision paid off in the short term doesn't mean that it wasn't reckless, it just means that you were lucky.

Bob Melvey, assistant manager of Windermere Real Estate's Ballard office, said renting and investing the savings might pay off "if someone is very, very disciplined and they truly do put that difference in the stock market and they do a good job of managing their stock portfolio."

But most people would end up spending the savings on other things, Melvey said. "Owning your own home is, to a degree, a forced savings plan."

A "forced savings plan" where 80% of the money you "deposit" in the first five years simply vanishes (the interest portion of the payment), and from which you can only withdraw money by paying a 6-9% fee (not on the amount you have "saved" mind you, but on the total sale price) and relocating. Wait, that doesn't sound anything like a savings plan.

To give these figures a bit of perspective, let's say that the average single-family home at $1,583 (King/Sno) is comparable to the median home, which sold for $454,950 last month (King), resulting in an approximate PITI payment of $3,400. We will assume the homebuyer had 20% (almost $100,000) to put down, and we will ignore maintenance, HOA, utilities, and tax deductions in order to keep this simple. Right off the bat, the renter's monthly payment just 46.6% of the buyer.

It would take 13 years of 6.5% rent hikes before the renter's payment exceeded the homeowner's. Of course, during that time, the renter's $90,000 in liquid investments will likely have doubled or tripled, and that doesn't even consider that they're adding the monthly savings to the investment. If they bank the difference, their $90,000 could quite easily become $500-$600k. Also, if you think that rents will increase steadily at 6.5% per year for the next 13 years, I don't think you have a very good grasp of history.

Suffice it to say that despite the scary language in the headline of Mr. Cohen's latest volley, renting still beats buying in the Seattle area hands down (financially speaking).

(Aubrey Cohen, Seattle P-I, 04.30.2007)

Vacation Link Roundup

2007-04-30T08:45:00.000-07:00

Looks like I didn't miss too much Seattle housing news while I was gone. I'm looking forward to seeing the April numbers next week. Here's a summary of what I noticed while clearing my inbox:

Seattle, Portland, and Dallas are the only cities of the 20 tracked by the Case-Shiller / S&P Index in which prices are still rising.
Mr. Cohen discusses the latest Case-Shiller / S&P Index data in an article with more balance than usual. Don't worry though, it still includes the requisite quotes from realtors about "bidding wars" and "soaring prices."
Foreclosures in the first quarter of 2007 in King County were up 37.6% from Q4 2006, and up 0.7% YOY.
Ms. Rhodes does her part to pump up the local home salesmen's egos with another installment of add some rah-rah fluff to an AP article.
Apparently there's a bit of a kerfuffle going on up in Snohomish County over the creeping spread of something that resembles the resulting offspring of an unholy union between condos and SFHs.

I'm also pleased to report that my nefarious scheme of going on vacation appears to have had the desired effect on the forums. Membership swelled by nearly 30%, and posting activity skyrocketed. Here are a few of the more popular and/or interesting threads:

Therefore, I believe it is time to say goodbye to the open threads. For the foreseeable future, all user-driven discussion will take place on the forums. Thanks for your participation. I really enjoy reading what everyone comes up with.

On Vacation, Check the Forums!

2007-04-28T22:00:00.000-07:00

Click here to go to the forums.

I'll be on vacation with little to no Internet access through the 28th, so I likely won't be making new posts during that time. This includes open thread posts.

I strongly encourage everyone to head over to the forums while I'm gone. It only takes a few seconds to create an account, and the discussion is 100% user-driven.

Here are a few forum tips:

After logging in, you'll see an orange icon () next to any groups that have new posts since your last visit.
To post a link, use the following format: [url=http://yourlinkhere.com/]Here is my link[/url].
If you have problems, either PM Lake Hills Renter or Synthetik.
You can also try emailing me, but there's no guarantee I'll be able to get back to you.

Next time I'll try to line up a series of guest posters when I head out.

In the mean time, click here to go to the forums.

Developers! Developers! Developers!

2007-04-24T11:25:00.000-07:00

Reporter Aubrey Cohen and the Seattle PI are at it again, this time pimping new development in Columbia City.

A Seattle developer has proposed a mixed-use project in Columbia City aimed at providing homes typical workers can afford to buy, while another developer also has condo plans in the up-and-coming South Seattle neighborhood.

The 63-condo development, called Columbia City Place, would be built on a vacant former auto lot at 5201 Rainier Ave. S., and units would cost between $200,000 and $400,000 -- plus whatever inflation tacks on in the two years before the project is completed, said Scott Shapiro, managing director of Eagle Rock Ventures LLC.

Shapiro said he and partner Murray Kahn are keeping prices down by using more basic finishes and wood construction for the upper floors, rather than concrete and steel, by installing above-ground parking and by building in Columbia City, where land is cheaper.

"It's a huge risk because no one's done condos of this scale in Columbia City," Shapiro said. "I could be in the right place at the right time or I could be three years early."

Or maybe three years too late?

"We've already explored heading north," he said. "We can't go east and we can't go west. Continued development going down the Rainier Valley is going to be a foregone conclusion."

While other developers are thinking about building in the area, Shapiro's project is "pioneering," Gardner said. "I think he's on the leading edge, definitely."

More like bleeding edge!

Columbia City is "a little neighborhood with a soul," said Denny Onslow, Harbor's chief development officer.

Projects such as these would have been "unthinkable" a decade ago, said Darryl Smith, who bought his Columbia City home in 1994 and became a Windermere Real Estate agent there the following year.

Smith said the projects would create new housing opportunities for people who cannot afford a house or those who might want a smaller home within walking distance of shopping and services. He also praised Harbor officials for saying they want to work with community members on their project and respect Columbia City's character.

Does anyone else call BS on this? If you need to sell something, simply cite affordability or the environment (or both!) and it's in the bag! Evidently Columbia City is the new Ballard.

Check out some of the comments on PI's blog:

"Face Reality" said "What this really means is that land and housing in Ballard, Fremont, Cap Hill, etc has become so expensive that even most developers can't afford to build because housing there is now beyond the reach of even the most affluent. ...Say goodbye to affordable housing in Rainier, hello to gentrification. As has already occurred in the “real” Columbia City."

"heebie_jeebies" added "I don't know why we have to accept these monster townhouse cookie-cutter firetraps...I live on Capitol Hill and have NOTHING good to say about allowing development and density that is absolutely killing our neighborhoods."

"financeguru" chimed in with "Wont development increase the property values of people that currently own near the new condo development? YES! I currently own a condo at the edge of Downtown and First Hill…and yes there are many areas that have high levels of drug usage and other things. Im getting my MBA at SU and it would be nice to see some of these abandoned buildings in the Capital Hill area cleaned up…"

(Aubrey Cohen, Seattle PI, 04-20-2007)

WaMu Trying to Cope With Slowdown

2007-04-19T14:19:00.000-07:00

Local mortgage giant Washington Mutual has been in the news quite a bit the last few days. On Tuesday, Seattle Times business reporter Amy Martinez made the (not-so-bold) prediction that WaMu won't escape subprime turmoil.

During the housing boom of the past several years, Washington Mutual was among the nation's top lenders in the high-risk sector of subprime mortgages.

Now subprime loans industrywide are failing at an alarming rate.

Although the Seattle-based thrift has cut back its subprime lending, it still has a lot of the loans on its books.

Exactly how vulnerable it remains will become clearer today when WaMu holds its annual shareholders meeting and releases first-quarter financial results.

The high-credit-risk market known as "subprime" represented 9 percent of WaMu's overall loan portfolio at the end of 2006. Analysts who follow the company predict first-quarter profit will suffer as a result.

Un-shockingly, she was proven absolutely correct later that day when WaMu's first quarter results were released:

Washington Mutual Inc. said Tuesday its first-quarter profits slid 20 percent amid a nationwide implosion of the subprime home loan market.
...
Kerry Killinger, Washington Mutual's chairman and chief executive, said the company's retail banking, card services and commercial groups fared well, while the home loan market - particularly the subprime segment for consumers with high-risk credit histories - remained a serious challenge.

Washington Mutual's home loans group posted a first-quarter loss of $113 million compared to a $52 million profit during the year-ago period. The company suffered a quarterly loss of $164 million on sales of subprime mortgages, alone.

To limit further damage as the housing slump continues, Washington Mutual said it had scaled back its subprime portfolio and had set aside more money to cover future loan losses: $234 million for the quarter compared to $82 million in first quarter 2006.

"Over the past 12 months, we have taken a number of prudent actions to reduce our exposure to the subprime mortgage industry," Killinger said in a statement. "These actions, along with a diversified business mix, limited our exposure to the mortgage market's downturn and position us well to expand and grow as market conditions improve."

Among those "prudent actions" is an open offer to refinance some of their riskiest loans into more traditional products at discounted rates:

Washington Mutual Inc. said Wednesday it will refinance up to $2 billion in subprime mortgages to help borrowers avoid default and foreclosure.

The program will allow subprime borrowers who remain current on their existing loans and are bracing for payment increases to apply for discounted fixed-rate loans or other refinancing options.

"Stepping up and helping our customers stay in their homes is in the best interest of our borrowers, our communities and WaMu," Kerry Killinger, chairman and chief executive of the Seattle-based savings and loan, said in a statement.

Will measures like these be enough to keep WaMu from experiencing serious financial pain as the consequences of yesterday's loose lending begin to pile up? Only time will tell, but at least WaMu has one important thing going for it: headquartered in the specialest place on earth!

(Amy Martinez, Seattle Times, 04.17.2007)
(Bill Virgin, Seattle P-I, 04.17.2007)
(Associated Press, KOMO TV, 04.17.2007)
(Associated Press, Seattle P-I, 04.18.2007)
(Bloomberg News, Seattle P-I, 04.18.2007)

World-class not "merely boasting how darn great we are."

2007-04-17T07:24:00.000-07:00

If I were the egocentric type, I'd probably think that none other than the P-I's Bill Virgin is a Seattle Bubble reader. A mere five days after I dispelled the notion that Seattle is "world class," Bill delivers the exact same message to a broader audience in today's column: So what makes a world-class city?

Is Seattle a world-class city?
...
During the heady days of No. 1 livability rankings and magazine covers and pop-culture references in music, movies and TV shows, Seattle got to thinking of itself as not just world-class but world-centric.
...
So should anyone care about whether Seattle is world-class?

In fact, there is an aspect to world-class status that goes well beyond meaningless exercises in civic pride (or, some would argue, overly and unjustifiably inflated ego) that does matter, at least in the realm of business and economics.
...
Which brings us to the question of how Seattle stacks up as a world-class city in the business sense.

The answer: Maybe not as well as we used to believe.

Just about every discussion of the economic fortunes of this region focuses on two companies: Boeing and Microsoft — with considerable justification.
...
And after that, what other sectors are there of which we can boast world-class status? Natural resource businesses like timber and fishing no longer figure prominently in the regional economy, much less nationally. Seattle never did emerge as a biotech center the way boosters hoped.

Interestingly, one sector in which Seattle has emerged as a leader is one in which it had not traditionally been a significant player — retailing. Such is Starbucks' status that it has influenced the direction of another giant, McDonald's, while Costco on a national level has forced none other than Wal-Mart to react to it.

Still, the portfolio is a little thin in terms of making Seattle a world-class business center. That's probably just fine with a lot of people. But if Seattle does aspire to world-class status as an economic development strategy, it's got some work to do, beyond merely boasting how darn great we are.

If you have to tell everyone you're world-class, maybe you really aren't.

Ding ding ding! We have a winner. Bill "gets it." Seattle is a nice city, but any way you look at things, it falls short of the "world class" title.

(Bill Virgin, Seattle P-I, 04.16.2007)

Drive By Commenting

2007-04-17T00:02:00.000-07:00

Comments like this one crack me up:

I am not sure what I have stumbled in on. This is the first time I've seen this blog. It seems as though this site is a place where people are trying to convince themselves that the Seattle real estate market is going to fail and that it will be a glorious day of vindication for some (most of the contributors) and crow eating (the rest of society).

There are very few examples in the recent past of real estate being a bad investment over the long haul. It can be risky to buy if you know you need to sell in a couple of years. But if it is a place to live and you are planning to be there awhile it is probably the smartest investment you'll make.

Wait, are we talking about the "recent past" or are we talking about "the long haul"? Also, Seattle Home Owner, could you please explain to me exactly how one can cash in on "the smartest investment you'll make"?

A house is a place to live, period. A home is not a winning financial investment, except during times of irrational exuberance such as the period we are now leaving behind us.

Misdirection Master Strikes Again

2007-04-16T07:19:00.000-07:00

In what is becoming a bit of a regular occurrence, Seattle's #1 real estate cheerleader yet again wields her powers of misdirection in response to a probing reader question.

Q: There is an entire group of people today who've never gone through a major recession. How will home prices be affected if we do have a recession like the pullback of 1974?

A: The recession of 1974, caused by high inflation and an oil crisis, took the wind out of the housing market. Homebuilding dropped 33 percent, according to Time magazine's Dec. 9, 1974 cover story. The Federal Reserve clamped down on the money supply. Mortgages became harder to afford.

But if we were to have a repeat of 1974, much more would happen because recessions cause widespread economic damage.
...
Exactly what that meant for house prices is hard to know because data from that decade is sketchy.

We can say, however, what the local fallout was from two milder, more recent recessions: 1990-91 and 2001-2003. The rate of appreciation fell, but house prices in general didn't. Here are the numbers:

After rising 28.9 percent in 1990, King County single-family home prices basically flat-lined for the next three years, rising just 1.2 percent in 1991, 0.1 percent in 1992 and 1.7 percent in 1993. Then they began rebounding, culminating with 10.1 percent appreciation in 1999.

It would appear that whenever the answer to a question is a bit too difficult for Ms. Rhodes to swallow, she decides to answer a completely different question that wasn't even asked. In this case, the question she appeared to be answering was actually "what is a recession, and how would Seattle be affected in a very mild one?"

Of course, the answer to that question is reassuring and ultimately useless.

(Elizabeth Rhodes, Seattle Times, 04.14.2007)

Vulcan Ridiculous @ 2200

2007-04-14T17:44:00.000-07:00

Ah, the joys condodebtorship.

When Jerry O'Leary, 54 and retired, put down over $100,000 dollars toward a new million-dollar condominium in February 2005, he thought he was buying his way into an innovative downtown lifestyle proposed by Vulcan Inc. Vulcan Real Estate's $200 million 2200 project on two and a half acres at Westlake Avenue...

However, on March 26, 2007 O'Leary filed suit...after a series of delays and construction disputes left him with a condo that...was "substantially [different] from the scope, nature, and extent of the project as it was described"...O'Leary recounts, "The quality, as promised, sounded great." Instead, he describes the building to The Stranger as "basically a Motel 6."

Oh, snap!

...some of the problems include irreparably damaged door and window frames; a poured concrete deck that sloped toward his apartment, causing leaks in the unit below; mounting construction delays; and unmet expectations. ...O'Leary is not the only person to encounter problems with 2200.

...tenants have dealt with minor annoyances such as low water pressure and leaky shower doors and pipes, as well as major design flaws like incorrectly positioned halogen lights that threatened to ignite kitchen cabinets. The problems were compounded, they say, by promises of room service from in-house restaurant Marazul, a rooftop "garden"—which according to a third resident is nothing more than "a big cement area with a couple of trees stuck in it,"

As of press time, several real-estate websites list 38 condos being resold in the building, and Craigslist reveals at least a dozen units available for rent or sale. ... according to John L. Scott Real Estate agent Ben Kakimoto, the number of units being flipped by investors "seem[s] like a lot" when compared to other condo projects of similar scope. Some of these units have sat unsold for months, with several of the pricier units remaining on the market even after $100,000-plus price reductions.

While Vulcan would not release information on its vacancy rate, anecdotal evidence hints that 2200 currently isn't the bustling urban utopia it was supposed to be. Resident Chris Tanaka notes that he "never see[s] that many people" in the buildings, and Dierst remarks that "the building is not full."

Matt Goyer, the operator of Seattle condo blog Urbnlivn and a program manager at real-estate website Redfin...believes the problem is oversaturation. "It feels like they're overbuilding in the higher-end market.... Goyer faults vacancies at 2200 to "people trying to make a fast buck. A lot of [these] people [have] unreasonable expectations."

Huh? What's so unrealistic about purchasing overpriced downtown condos during the peak of the greatest real estate asset bubble in history and expecting to flip them for an easy buck?

...units [at 2200] for sale have seen price reductions ranging from $1,000 to $175,000. And one seller is even throwing in a 42-inch flat-screen TV to sweeten the deal.

Is that 1080i or 1080p?

Addressing the O'Leary lawsuit, Jeffries states, "I don't know why Mr. O'Leary feels like that's something he needed to go to the media about." She would not respond to anonymous complaints about the development (nor did she return several calls after a few residents put their names by the complaints). "We're doing everything we can to take care of our homeowners. The vast majority of people at 2200 are really happy," she originally told us. We asked Vulcan to put us in touch with some of those tenants, they did not respond to the request.

On a recent Saturday night, as 2200's three concrete and glass towers loomed in the night—the downtown skyline to the southwest...many of the windows were dark, save for the glow of several flat-screen TVs large enough to be viewed from the street.

During 2005 in downtown San Diego, I noticed much the same. At the time I just assumed that everyone was simply still working at 10pm each night, desperately trying to make their $4500 mortgage payments.

When I am ready to purchase my next house after the crash, it certainly won't be a condo. I probably won't buy anything made after 2000 as they've likely been built of balsa wood and bailing wire.

While it's difficult to tell if Seattle will be hurt as badly as other bubbly areas such as San Diego (and this is only the beginning), it certainly won't be pretty. Be patient - a sixteen year speculative bull market in housing doesn't land quickly - and certainly not "softly".

As they like to say on HB, "got popcorn?"

(Jonah Spangethal-Lee,The Stranger, 04.12.2007)

On Luxury Cars and World Class Cities

2007-04-12T21:38:00.000-07:00

My car is so great. It has a built-in CD player, a driver's seat with four independent adjustments, a tasteful spoiler, a spacious trunk, climate control, a powered sunroof, and gets over 30 miles to the gallon. It's comfortable, good-looking, and fun to drive. My car is comparable to a BMW or a Lexus, and is a great fit for me. Did I mention how much I like it? I mean, BMW or Lexus are a good fit for some people, but they don't really fit my style. You know though, it really is surprising how cheap it was for me to buy, considering how much other luxury cars go for these days...

So why am I rambling on about my car? What could this possibly have to do with home prices in Seattle?

Every once in a while someone tries to make the case that high home prices in Seattle are justified (or even that prices are too low) on account of what a swell city this is. Their argument goes something like this:

Seattle is so awesome! In fact, Seattle is so swell that it is completely reasonable to compare home prices here to cities such as New York and San Francisco, where homes are much more expensive! Seattle is after all a hip, up-and-coming world class city, probably even the hippest, most up-and-coming world class city around. So you see, it totally makes sense for home prices to shoot through the roof around here. We're just catching up to other comparable cities.

I definitely agree that Seattle is a great place to live. Much like my car, Seattle has many attributes that I really like: low pollution, beautiful scenery, proximity to nature, and a decent job market, to name a few. That being said, comparing Seattle to New York or San Francisco is just as ridiculous as comparing my Saturn SL2 to a BMW or Lexus. They're just not in the same league.

Although I already knew this was the case, since I don't travel much (never been to New York, Boston, San Diego, and have only visited San Francisco once), it didn't really personally hit home with me until my recent business trip to Chicago. Even though I only spent one afternoon cavorting about and seeing the sights, I was immediately struck with the impression of "this is what a real world class city looks like."

These are a few of the things I noticed (and later researched) about Chicago.

Chicago

Density: 12,604 people per square mile (source)
Extensive Rail system, with 8 different lines running through the heart of downtown (source)
Over 2,100 acres of waterfront parks bordering the downtown core (Lincoln Park, Millennium Park, Grant Park, Burnham Park), over 2,800 acres of waterfront parks total
16 major sports teams, with 28 total championship wins (source)
Strong blues, soul, jazz, and gospel music scene. Birthplace of House music. (source)
World famous government center (Richard J. Daley Center), world famous skyscraper (Sears Tower)

Now here's how Seattle compares in those same categories.

Seattle

Density: 6,901 people per square mile (source)
Patchwork rail system, with an independent monorail, various street cars, disconnected, infrequent north-south routes, and various in-progress light rail lines. (source)
18.1 acres of waterfront parks bordering the downtown core (Waterfront, Myrtle Edwards, Olympic Sculpture), over 600 acres of waterfront parks total
6 major sports teams, with 4 total championship wins (source)
Alternative music scene. Birthplace of grunge. (source)
World famous landmark (Space Needle), well-known market (Pike Place Market)

If I had thought of it, I would have asked some Chicago natives whether they think Seattle is an "up-and-coming world class city." I bet they would have laughed at me.

While I was researching this post, I came across the Wikipedia page on world class cities (or "global cities" as they are referred to on Wikipedia). It cites an "inventory of world cities" compiled by a university group in England. In their list, cities can have up to 12 points, with 10-12 point cities being considered "alpha world cities," and so on down the list. Here is the summary of the US Cities categorized on their list:

Alpha world cities (full service world cities)
New York (12 points)
Chicago (10 points)
Los Angeles (10 points)
Beta world cities (major world cities)
San Francisco (9 points)
Gamma world cities (minor world cities)
Boston (6 points)
Dallas (6 points)
Houston (6 points)
Washington, D.C. (6 points)
Atlanta (4 points)
Miami (4 points)
Minneapolis (4 points)

Seattle shows up way down the list with 2 points, having "some evidence of world city formation." Another categorization is quoted that lists "well rounded global cities" (such as New York, San Francisco, and Chicago) and "worldwide leading cities" (including Miami, Atlanta, and Denver), but Seattle is nowhere to be found on their list.

I mention these lists only to demonstrate that when I say "Seattle is not comparable to San Francisco or New York," it's not because I have some grudge against the city that I call home. I am not alone in my assessment of Seattle as a small city. It's not my biased opinion, it's a fact.

Again, I want to reiterate that I like it here. Seattle is great, and I am happy to call it home. But let's be honest, it is disingenuous to compare Seattle to New York or San Francisco. Let's enjoy Seattle for what it is instead of pretending it is something that it's not.

Much in the same way that I would not pay $40,000 for a Saturn sedan, I am simply not willing to shell out $450,000 for an average house in Seattle.

Update: It seems I've got an ally in Seattle P-I columnist Bill Virgin.

King County Foreclosures Up 27% YOY

2007-04-11T10:41:00.001-07:00

Couched in the mind-numbing bubbly language of a press release from Default Research comes this tidbit of information:

"Foreclosures increased by 27 percent in the Seattle area. That is an increase from this time last year," said Serdar Bankaci, president/CEO of Default Research Inc.

Cue the "but we're coming off of historic lows!" nonsense in 3... 2... 1...

P.S. (Does anyone know where to find historic foreclosure / default data for King County? I've had no luck locating a source for such data beyond the occasional press release like this one.)

(Default Research, PRNewswire, 04.11.2007)

Bubble Link Roundup

2007-04-10T14:24:00.000-07:00

There have been a lot of real estate articles in the local dead tree outlets the last few days. It's time for another link roundup before I get too far behind and forget to mention some of them.

First up, it's Mark Trahant of the P-I with yet another thoughtful, well-reasoned take on Seattle's housing market.

What if housing prices decline by 20 percent? That would solve Seattle's affordability problem, right? Most folks would say this is impossible. The data from last week show that house prices keep increasing no matter what. Our boom continues, just slower and steadier. But both our region and our country have boom and bust cycles as predictable as weather. It's as much of our history as innovation, military might or baseball. One minute we're panning gold, the next we're trying to recoup our investment in those nifty machines that pluck gold dust from stream beds.
...
Just think about what those higher credit standards will require: A significant down payment, good credit and, in Seattle, a high income.

More than likely, what it will really mean is that the supply of homes will grow — and prices, sooner or later, will fall.

On the opposite end of the spectrum, we have the Seattle Times encouraging first-time homebuyers to "learn the fine art of compromise."

Rolf Johnson and Kerrie Cooley had different jobs, different priorities and different resources, but on their brave hunt for a $250,000 home in the Seattle area they both learned it came down to what they were willing to give up.

Cooley let go of any notion of buying a house or living in downtown Seattle to find the modern, two-bedroom condo she wanted.

Johnson spent more than a year, bumped up his budget and moved farther from work to find the house, property and studio space he craved.

Compromise is definitely the name of the house-hunting game in the Seattle area, especially for first-time buyers who often can't come close to the $450,000 or so that it costs for a typical single-family house in Seattle and are looking more realistically at prices around $250,000.

Also worth noting is a pair of articles from the P-I and Times reporting on the recent blatherings of Senator Patty Murray. From the P-I:

The lack of affordable housing in Seattle and other places is a "silent epidemic," U.S. Sen. Patty Murray, D-Wash., told representatives of housing agencies, developers, labor and environmental groups Friday.

"We all need to work together, whatever hats we wear, to start to address this crisis," Murray, who chairs the Transportation and housing and urban development subcommittee of the Senate Appropriations Committee, said during a housing forum at Seattle's Opportunity Place.

Some at Friday's forum want more federal money, while others support incentives or requirements aimed at local developers. Cities and counties need to allow more homes through zoning, some said.

Here's what the Times had to say about it:

U.S. Sen. Patty Murray, D-Wash., who was visiting Seattle on Friday during a congressional recess, convened the roundtable with representatives of housing agencies, business, Sound Transit, the Puget Sound Educational Service District and social-service agencies to see what she can do at the federal level to help people with low and moderate incomes find affordable housing.
...
Adrienne Quinn, director of Seattle's Office of Housing, said a recent study by her office reveals that 51 percent of Seattle workers do not live in the city. Households earning between $60,000 and $100,000 a year are the least likely to live within the city limits, she said.

"People are able to buy someplace, but not in the city of Seattle," Quinn said.

As we all know, you're less of a person if you rent, so it makes sense that Ms. Murray et. al. would focus only on buying homes when stating that Seattle is in the midst of a "silent epidemic" when it comes to "affordable housing."

Lastly, here's the latest paid advertisement masquerading as an opinion piece from a "guest columnist." Steve Francks just so happens to be the CEO of the Washington Realtors. His editorial is quite transparently nothing more than the latest volley in the Washington Realtors' It's A Priority campaign.

Transportation experts are tearing their hair out trying to figure out how to fix Puget Sound gridlock. But if they really want to improve transportation, they should focus on housing.

There are just too many people trying to drive between home and their jobs each day. There isn't enough tax money in the world to pave our way out of this problem, especially with our population growing by a million each decade.

Instead of trying to deal with the symptoms, I suggest we address the cause: too few affordable home choices near where people work. That's something that we can fix — with a little help from the Legislature.

Home prices throughout our state continue to rise month after month. Wages, however, do not. The result is a huge gap between typical home prices and what typical families can afford. The Center for Real Estate Research at Washington State University, which tracks the gap with its "Housing Affordability Index," shows home affordability in Washington at a 15-year low. The gap is particularly wide for first-time home buyers, who, according to the index, could afford the local median-price standard only if they were living in Benton or Adams counties.

What's a middle-wage family to do? Hit the highway and drive to find an acceptable home you can afford. Between 2000 and 2005, 67,000 people moved from King County to Pierce County. Another 14,720 Pierce residents moved south to Thurston County during the same period.

If I can make some time in the next week or so, I'd like to write essentially a counter-point editorial of my own in response to Mr. Francks' drivel.

So what other recent local real estate articles have I missed?

(Mark Trahant, Seattle P-I, 04.06.2007)
(Heather Rae Darval, Seattle Times, 04.07.2007)
(Aubrey Cohen, Seattle P-I, 04.06.2007)
(Stuart Eskenazi, Seattle Times, 04.07.2007)
(Steve Francks, Seattle Times, 04.10.2007)

March Reporting Roundup

2007-04-09T11:26:00.000-07:00

Back from my busy week of travel and recharged over the Easter weekend, it's time to post the March roundup.

As usual, let's kick things off with Seattle's #1 real estate cheerleader, Ms. Rhodes, with her fawning article about all about how great and wonderful it is that median prices increased last month.

After stalling for two months, home prices in King and Snohomish counties perked up last month, disappointing potential buyers who thought slowing price appreciation had presented an opportunity.

Brian and Jennifer Rutherford are experiencing King County's strengthening real-estate market firsthand as they shop for a Bellevue home in the $500,000 range.
...
"We were just hoping things would cool off. It might have cooled off from its highest point, but not too far," he said. "Now we're making more of an effort to step up our looking."
...
Thursday's news that Microsoft is leasing 1.3 million square feet of Bellevue office space, enough to house 4,000 employees, is a near guarantee that Brian Rutherford is correct about home-buying prospects.
...
Lennox Scott, chairman of John L. Scott Real Estate, said a shortage of affordably priced homes will keep the local market strong.

Wait, what? Am I the only one that sounds like utter nonsense to? Less affordable = strong market? Hmm.

Surprisingly, Mr. Cohen of the P-I chose to focus primarily on Seattle proper, where the picture is somewhat more grim.

There are more homes on the market in Seattle these days -- and their prices slowly are creeping up.

The number of homes increased by nearly half in March from March 2006, according to data the Northwest Multiple Listing Service released Thursday. The median home price was $418,000 — up 2.7 percent from a year earlier and 3.2 percent from February 2007.

The median price for a Seattle single-family house went up 4.5 percent from a year earlier, to $460,000, while the median condo price was up 5.8 percent, to $316,950.

Of course, a Cohen article wouldn't be complete if it didn't end on an upbeat with the same-old "strong market" arguments repeated yet again:

In a statement accompanying the Northwest MLS numbers, Mike Skahen, owner of Lake & Co. Real Estate, called the market for close-in Seattle neighborhoods "hotter right now than it was at this time last year," with homes in virtually every price range attracting multiple offers.

Dick Beeson, owner of Windermere Real Estate/Commencement Associates in Tacoma, said, "It just feels like a normal market with well-priced homes seeing offers in 30 days or less and sellers of overpriced properties having a gut check and a motivation check to see if they really are serious about selling."

Recent revelations about failing loans in the subprime market, which serves those with poorer credit, have caused trepidation about the national housing market.

But the Puget Sound region is fairly well protected from this because of its healthy economy, continued home price appreciation and fewer subprime loans compared with other parts of the country, said Erik Hand, president of John L. Scott Real Estate subsidiary Response Mortgage Service, in the MLS statement.

Ahh, that's better.

Down in Tacoma, it's getting harder to ignore the picture that the numbers are painting:

The median price was $274,950, up 5.8 percent over the same month a year ago, though down from February, according to figures released today by the Northwest Multiple Listing Service.

Sales, however, continued to fall as the number of listings skyrocketed to 6,554 – up 48.6 percent from March 2006.
...
Bob Niehl, an agent for Crescent Realty, said Thursday that it’s not uncommon for the kind of house that once would draw multiple offers to sit for more than 100 days.

The Everett Herald appears to be doing somewhat of a victory dance, proudly proclaiming Snohomish County as immune to supply and demand.

Prices for homes and condominiums in Snohomish County continue to soar, even as sales of both in March continued to be down compared with a year ago.

The median price for single-family homes hit $382,550 countywide last month, according to the Northwest Multiple Listing Service report issued Thursday. That's nearly 16 percent higher than the median of $330,000 in March 2006.

Prices rose despite a 44 percent increase in the number of homes listed for sale from year to year and a nearly 18 percent drop in pending sales.

Finally, down in Olympia, slowing sales are all too obvious.

Thurston County single- family home and condominium sales dropped 7.5 percent in March, though last month’s results were softened by a surge in the condo market, the Northwest Multiple Listing Service reported Thursday.
...
Other year-to-year March home sales data for Thurston County:

• Total active listings for single-family homes increased 38 percent to 1,802, up from 1,303.
• The median price of a single-family home rose 4 percent to $254,950, up from $244,900.
• Total active listings for condos increased 133 percent to 49 units, up from 21.
• The median price of a condo dropped nearly 6 percent to $171,203, down from $182,000.

Sounds like a stellar spring bounce all around the Sound, wouldn't you say?

(Elizabeth Rhodes, Seattle Times, 04.06.2007)
(Aubrey Cohen, Seattle P-I, 04.06.2007)
(Devona Wells, Tacoma News Tribune, 04.05.2007)
(Eric Fetters, Everett Herald, 04.06.2007)
(Rolf Boone, The Olympian, 04.05.2007)

Aubrey Cohen: Real Estate Cheerleader, Renter

2007-04-08T05:35:00.000-07:00

I'll be posting the March reporting roundup either later today or tomorrow, but I caught this story in my inbox and I couldn't resist mentioning it. Although the subject is "Journalists gamble on job security at the P-I," the article contains some interesting information about one of our favorite local real estate reporters... (emphasis mine)

When Aubrey Cohen received an offer to become the real estate reporter for the Seattle Post-Intelligencer last August, he jumped at the chance. He'd already covered urban growth in Bellingham, didn't want to leave Western Washington, and was willing to gamble that the P-I would survive its current legal battle.

"I decided that at the very worst, I'd have a job for a year, and it was a good job," Cohen said.

Despite the P-I's uncertain future, Cohen is among several reporters who joined the daily in the last year because they believe the career benefits outweigh the risks.
...
Eventually, though, he couldn't pass up the opportunity to advance his career while remaining in the Northwest. Cohen and his wife sold their home in Bellingham and now rent in Seattle while they wait for the JOA ruling. If the P-I goes under and he can't find a job right away, Cohen reasons, the family can live off the money they made selling their Bellingham home.

Now why would Mr. Cohen be renting? For someone whose reporting seems to indicate a strong belief in continued double-digit appreciation for Seattle, the choice to rent seems... odd.

I mean come on man, you're missing out on our area's "extremely strong market fundamentals." Don't you know that "quite frankly, it's time to buy"?

(Heidi Dietrich, Puget Sound Business Journal, 04.06.2007)

Sound Familiar? Sales Down, Listings Up.

2007-04-05T15:18:00.000-07:00

March numbers from the NWMLS are available, and I managed to get a bit of a break before I head back from Chicago, so here comes the data.

March King County SFH summary:

March 2007
Active Listings: up 33% YOY
Pending Sales: down 11% YOY
Median Closed Price: $454,950, up 12% YOY

After an unusual YOY increase in February, sales resumed their previous course of down, down, down. This was the second year in a row that March sales were down 11% YOY.

If anyone tries to claim that this year is shaping up "just like any other year," or that the sales data points any less toward a softening than it has in recent months, they are either in denial or mentally handicapped. Month-to-month inventory jumped 10.42% from February to March, a larger spike between those months than any other year since 2000 (pre-2000 data is not available). February to March sales were up just 14.11%, making this the smallest increase between those months than any year since 2000.

While months of supply is still relatively low, it has increased 49% since March last year, and days on market has increased 33%. Still-increasing median prices are pretty much the only thing that housing bulls have to be happy about.

As is the custom, I have uploaded an updated copy of the Seattle Bubble Spreadsheet that contains the relevant data. The recap NWMLS pdfs are not available yet, but here is the detailed King County data.

Here's the supply/demand YOY graph:

Click to enlarge

Here's the chart of supply and demand raw numbers:

Click to enlarge

Here's the graph of YOY percent change in the median sale prices of single-family homes in King County since 1994:

Click to enlarge

You've got a little bit of a recovery last month, with "appreciation" increasing 3 points to 12%. We'll see what happens the rest of the spring.

"Re-Sales Galore" in Local Condo Projects

2007-04-05T07:41:00.001-07:00

Local condo enthusiast Matt made an interesting observation in a post on Urbnlivn Tuesday. Apparently in many of the recently-opened Seattle condo projects there are, in Matt's words, "re-sales galore." 33 units at 2200, 19 at Cosmo, and 5 (of 48) at Meritage. Plus, anyone who bothers to spend a little time searching on Craigslist can see quite a few more units in these projects up for rent.

I thought that all these projects had "strict limits" requiring that units be owner-occupied, which would supposedly eliminate flipping. It would appear that these rules are being disregarded.

So much for all the alleged protections against speculation in the local condo market...

(Matt Goyer, Urbnlivn, 04.03.2007)

"That's it, I decided. That market's hosed."

2007-04-03T18:03:00.000-07:00

I would like to highlight a post from over on the forum that I think should be read by more people. It was written by my friend Catherine (a.k.a. "Dove"), and posted to the thread How did you first learn of the National Housing Bubble? (Although it really speaks well to the Seattle market specifically.)

It was a long awakening, for me. I put "2004" in the poll, but depending on how you call it, it could've been a year earlier or later.

The first sign of trouble came when we'd been married a couple years, living as poor grad students in an apartment, and I started dreaming about getting a house. Nothing fancy, really - like maybe one of those cute little cottages with a tiny yard that Need Lots Of Love. Surely an itsy bitsy house couldn't be that much, right? Cue realtor.com telling me what a funny little girl I was. That sent my spidey sense tingling a bit - if tiny crappy houses are that much, who the heck can afford a house to raise a family in? Strike 1. That was 2003 or 2004 I think.

Strike 2 came when I first got a job as an engineer - and a good one - and my husband and I started making plans about where to live. My family had recently moved, and now both our families were in the midwest. We wanted to live close, so we eyeballed houses in Denver, just for planning purposes. And promptly realized that they were extremely affordable. That tiny crappy fix-er-up I'd wanted? Less than my annual salary. Big New House For Big Family? We could totally swing it. Heck, save aggressively for a couple years and we could almost buy it outright.

I quickly flipped the page back to Seattle to see if the same was true here, but no dice. Apparently a mansion in Denver is worth about the same as a mud hut in Seattle. We still couldn't afford *anything*. We promptly resolved to rent, save aggressively for a couple years, and then move to Denver, which is where we'd rather live anyway. This was 2005.

I'd heard that big cities were supposed to be expensive, but this was rediculous. I mean, it's not like Denver is that much different from Seattle in terms of size and opportunities. Saving and moving seemed obvious. In fact, why wasn't everyone doing that? I suspected again that something was wrong. Strike 2.

Throughout that year I began actually watching the housing market - planning to buy in the eventual future, I figured I should get a better feel for how it worked. And as I thought about things, I began to put a lot of stuff together very quickly. (1) We can afford a pretty nice apartment, with tons of money to spare. Seems like we ought to be able to afford a crappy house. But we can't. That seems . . . odd. There ought to be some sort of in between transitional product, right? They should be pretty comparable, right? (2) Actually, come to think of it, we're pretty well off - I make more than a lot of friends and neighbors and relatives all of whom are homeowners, and I can't afford a house. What gives? (2) And actually, come to think of it, who the heck is buying all of the houses? Where do all the normal people live???

More complaints confirm it isn't me. My brother in law has trouble with his house and then more trouble with his house and then a little more trouble. My co-worker is crying about how she can't afford the low-end condos. My *boss* is considering buying a townhome full of 70's shag. And she's not your run-of-the-mill manager, either--she's gotta make twice what I do.

As soon as I saw a suggestion somewhere that there was a housing bubble, it all clicked. The market that had smelled so funny for years now made sense. That was maybe a year ago. If not immediately convinced, I definitely acknowledged that it was a strong possibility. Any desire I had to buy a house evaporated overnight.

The final straw actually came recently when someone on that blog pointed out that rent prices were out of whack with housing prices. For some reason, I'd never thought to check that - I'd just always assumed those markets would pace each other. A quick run by Craigslist confirmed it.

That cute little crappy house I'd wanted? Rents for about the same as my apartment. Perhaps a bit more, $200 or $300 more. Psshaw. Shopping around a bit more, I saw nice houses go by at decent rents. And it suddenly dawned on me that if I wanted to, I could live anywhere in Seattle. Fancy condos downtown? Check. I could make rent. 5 bedroom houses? No sweat. Fancy Vacation Homes On The Water With Stunning Views? Ahhh... I might not want to pay for it, but the mechanics says I could afford to live there full time. (Not that I'm going to - still sticking to plan A, but still . . .)

Quick check on the real estate market and . . . yup, I still can't afford the mud huts.

That's it, I decided. That market's hosed.

I think Catherine hits the nail on the head. If the Bull Cadre gets their wish and home prices in Seattle continue to defy all logic and reason... at least I'll already have some local friends when I move to Denver.

Bubble Link Roundup

2007-04-02T22:23:00.000-07:00

Here are a few short quotes from some recent interesting articles (followed by some pithy one-liners) that I haven't had the time to dedicate entire posts to:

Slumping sales of lots could presage fewer new houses for region

A key future indicator of the housing market is down sharply, but that could be a good thing, local real estate executives are saying.

Puget Sound area home builders have been buying substantially fewer finished lots from residential developers as the builders try to gauge the demand for their new homes in the months ahead.

Builders buying fewer lots today could mean fewer new homes tomorrow.

"Finished lots are hanging around longer than they have in quite some time," said consultant Matt Gardner, a principal at Gardner Johnson LLC in Seattle.

But, I thought the Seattle market was still hot, hot, hot!

Generous pay isn't enough to keep some on the road

The number of commuters in South Sound continues to grow, but some people are bucking the trend.

They've quit.

Melinda Spencer of Olympia took the step a few years ago. Spencer used to commute from Olympia to her job as a technical writer at Redmond-based Microsoft, where she earned about $73,000 a year.

Making that kind of money, Spencer's husband, Keith, could complete his degree at The Evergreen State College, and they could invest in property. In 1997, the couple paid $110,000 for their Olympia home.
...
Yet after three years of driving to Redmond, spending three hours in her car each day, something had to change. "It was awful," she said about her commute. "I felt like I showered (in the morning), ate (at night), and turned around and did it all over again. It was time to end this lifestyle."

She ended it by starting her own home-based technical communications business. Another reason to stay home was the birth of her first son, she said. Today, her husband works as a high school teacher in Rochester, while Spencer works at home and raises their two children. The money is tighter. Spencer estimates their combined income at just more than $2,000 a month after taxes and health insurance are deducted.

But in the 10 years they've owned a home, it has tripled in value to $300,000; they would be unable to afford it today, Spencer said.

"We would be looking at one of those old dogs that has been foreclosed on," she said.

Isn't appreciation wonderful?

Home bailout scams on rise

As interest rates rise, many people with adjustable-rate mortgages find their payments too high to manage. That has paved the way for con artists offering relief.

WASHINGTON – As home foreclosures increase across the country, scam artists promise struggling homeowners a quick bailout, but they end up stripping the properties of their value or owning the homes outright.
...
State officials urge cash-strapped property owners – particularly the elderly, immigrants, minorities and low-income – to be wary of mailings, phone calls and visitors offering to help "save your home" and "avoid foreclosure."

The Washington State Attorney General's Office recently settled a suit against three businesses that claimed to save the homes of people who were facing foreclosure for unpaid property taxes. The companies – Fiscal Dynamics Inc. and Cumulative LLC, of Tacoma, and Northwest Assets of Seattle – allegedly broke promises to pay the back taxes and instead tried to sell the houses at auction and keep the owners' rightful proceeds, according to the complaint.

Now wait just a minute. How can people possibly be facing foreclosure in the fantasy rainbow-land of forever double-digit appreciation? Hmm...

Last and most certainly least: Average Seattle worker can't afford to live here

Last year, the typical single person in Seattle earned enough to buy a home for just under $200,000 while the typical family of four had enough to pay just over $280,000, according to the U.S. Department of Housing and Urban Development. The median prices were about $450,000 for a house and $290,000 for a condo.

Typical families can afford apartments, but the rent for the average one-bedroom apartment in King County rose 8.5 percent in the past year as vacancies fell 17 percent — down to 3.9 percent, according to Dupre + Scott Apartment Advisors. Hal Ferris, a partner in developer Lorig Associates, said increasing construction prices mean living in a new development will cost more than what HUD assumes typical families can pay.

And many median-income workers choose to buy and commute rather than rent.

"They can buy somewhere, but that somewhere isn't in the city of Seattle," said Adrienne Quinn, director of the Seattle Office of Housing.

First off, I'd take that data from Dupre + Scott with a giant frikkin' grain of salt. Secondly, government solutions like the ones discussed in this article are like putting a band-aid on a tumor. They completely ignore the root cause of the problem, and don't even effectively address the symptoms.

(Jeanne Lang Jones, Puget Sound Business Journal, 03.26.2007)
( Rolf Boone, The Olympian, 04.01.2007)
(Tony Pugh, Tacoma News Tribune, 04.02.2007)
(Aubrey Cohen, Seattle P-I, 04.02.2007)

Seattle Bubble Concedes Defeat

2007-04-01T00:26:00.000-07:00

Well everyone, it's been a fun couple of years, but the time has finally come for Seattle Bubble to throw in the towel.

Paul Campbell, Some rights reserved.

We've analyzed the local market from every conceivable direction, explained all the logical reasons why today's Seattle home prices are not sustainable, watched the national housing market turn from boom to bust, but still the home price increases in Seattle carry on. At this point, there is only one logical explanation why home prices in Seattle have not fallen: Seattle truly is incredibly special.

Of course, I don't just mean "special" as in "isn't it nice to live in a place with such delightful weather, exciting sports teams, and enlightened liberal politics that have solved all of our social problems." Sure, those things are great, but lots of cities can make the same claims (San Francisco, New York, etc.). No, in order to truly understand why real estate prices in Seattle will never go down, one must consider so much more.

Indisputable facts that make Seattle the most specialest place on the planet:

Every single house sold has stunning views of Mount Rainer, The Olympics, Puget Sound, and at least three lakes.
The Microsoft money factory in Redmond runs non-stop, printing millions of hundred-dollar bills every hour, which are loaded into Boeing planes and dropped from the sky daily, scattering the free money to all homeowners.
Every homeowner is issued a brand new pretty pink pony at closing. (Thanks, Chris)
The waters of all the rivers and lakes contain healing powers that extend life indefinitely, thus allowing homeowners to take on increasingly longer-term loans. This will inevitably lead to the "forever loan," in which principal is never paid down, only interest paid, while the homeowner merely kicks back and enjoys the unending benefits of double-digit appreciation.
Ballard.
Thanks to Growth Management, not only is it true that "they're not making any more land," but in Seattle, the available land is actually shrinking daily! By 2050, the only buildable land will be within a five-block radius of the Space Needle. 2,000-story ultra-luxury condos will be erected, which will range in cost from $500 trillion dollars for a 50 square foot "sleep pod" to $42 septillion for the 500 square foot "presidential suite."
Stunning rainbows fill the sky every afternoon (see above).

Yes, Seattle is truly one in a million. One in a billion. One in a googolplex. With inventory at near-record lows and pending sales increasing over thirty-four percent from January to February, it's plain to see that there's no stopping Seattle's equity spaceship. Of course, all you really need look at is how much prices have appreciated in just the last year (11%, thank you very much) to realize just how special Seattle is.

It is time for this blogger to face the facts: Seattle home ownership is the path to indescribable happiness and untold riches. That's why I'm closing this blog, quitting my job, becoming a full-time Seattle-area home buyer, and recommending that all my readers do the same.

Office space in Snohomish Co. 17-18% vacant, Industrial good.

2007-03-30T08:00:00.000-07:00

Speaking of small business creating jobs: Snohomish Co. office space is currently showing vacancy at about 18%. In Lynnwood, the office vacancy rate is approximately 25-30%. Industrial space (read: Boeing & suppliers) appears firm.

Office space, meanwhile, remains harder to fill. Cushman & Wakefield and Colliers International commercial property firms reported that 17 to 18 percent of the county's premier office space was empty last quarter.
"The cause and effect of this is that tightening in King County tends to push people up I-5 to Snohomish County," Hoban said, though he said there are also a few new businesses sprouting up locally that have leased offices in Everett.

I suppose one could argue that just because there is a good chunk of office space available for small business (who typically drive the economy with job creation), that does not mean that hiring is slowing. Mixed signals?

Doing business in Edmonds recently, I noticed the sign-carrying-day-workers holding large signs on the corner of 205th & Hwy 99. "Comp USA Closing: everything 30-50% off." I also recently read that Circuit City is laying off staff. If consumer products are flying off shelves at these stores, why are these stores closing and laying off staff? What businesses will be taking over these large stores once they vacate?

Spot the Fundamentals, Addendum

2007-03-29T16:58:00.000-07:00

Fact: As of 2005, Seattle area per capita income is the 15th highest in the nation (source).

Fantasy: "That pretty much says it all." i.e. - Incomes in the Seattle area are so high, that it doesn't matter how slowly they are growing. High incomes alone will keep home prices from falling.

Reality: Of the six metro areas with higher per capita incomes than Seattle in 2005 that are included in the S&P/Case-Shiller Home Price Index, all six have experienced YOY home price declines in the past year (source). Three of the six have experienced a smaller total increase in home prices since 2000 than Seattle.

The table below shows Seattle and the six other metro areas with larger per capita incomes that are also covered by the S&P/Case-Shiller Home Price Index. "S&P HPI" values are normalized to 100 in January 2000, so the present value (January 2007) indicates how much home prices have risen since then.

Rank	Metro Area	S&P HPI	YOY Chg
2	San Francisco, CA	211.77	-1.4%
4	Washington, DC	238.05	-3.9%
5	Boston, MA	168.28	-5.6%
8	New York, NY	211.50	-0.9%
13	Denver, CO	135.86	-1.1%
14	Minneapolis-St. Paul, MN	167.98	-0.9%
15	Seattle, WA	183.92	+11.0%

Seattle definitely sticks out as an apparent winner, for now. Honestly, I don't know the reason that prices are continuing to rise here, but I do know some things that are not the reason, and "high incomes" is one of those things.

Spot the Fundamentals

2007-03-28T20:47:00.000-07:00

Let's play a game. It's called "Spot the Fundamentals," and the way we play it is by looking at some of the "fundamentals" to figure out which ones are responsible for our area's high home prices.

The frequent condescending argument of the cadre of Seattle area housing bulls (real estate agents, "analysts," the press, and increasingly combative blog commenters—whom I suggest we all ignore) is that unlike most of the rest of the nation, Seattle home prices are firmly supported by strong fundamentals such as exceptional job growth, high-paying jobs, and increasing population, and as such will not decline.

Let's play "Spot the Fundamentals" to see how well that claim holds up.

Job Growth
The Seattle area has "strong job growth," right?

Click to enlarge (source)

Well sure, if you call 3% growth in the last year "strong." Of course, while Seattle was one of the few parts of the nation where housing prices rose double-digits last year, there were 85 Metropolitan Statistical Areas that had better "job growth."

Unfortunately for the Bull Cadre, a 3% increase in jobs does not account for an 11% increase in home prices during the same time frame. As we have previously explored in detail, job growth (and reduction) in the Puget Sound has had little to no correlation with housing prices.

High-Paying Jobs
Yeah, but even though the job market isn't growing by leaps and bounds, thanks Microsoft, salaries are shooting through the roof... right?

Click to enlarge (source)

Hmm, maybe not. In fact, income growth in the Seattle area was so slow recently that we made it onto a "lowest of" list. Somehow I must have missed it when that little news tidbit hit the papers.

Another swing and a miss for the Bull Cadre.

Population Growth
Well, people are moving here faster than ever, so that pretty much forces home prices higher, doesn't it?

County	2000 pop.	2005 est.	% chg.	%/year
King	1,737,034	1,793,583	3.26%	0.64%
Pierce	700,820	753,787	7.56%	1.47%
Snohomish	606,024	655,944	8.24%	1.60%

(source)

Not. If there actually were people moving here in droves, then yeah, that would explain home prices rising an average of 9.4% per year (King County SFH, 2000-2005). However, that clearly does not describe reality.

Looks like strike three for the Bull Cadre.

Fundamentals vs. Speculation
Here's a refresher:

Click to enlarge (source)

As I have demonstrated before, Seattle area rents (which are not subject to speculation) have indeed been tracking fairly well with "the fundamentals." Home prices clearly have not.

How anyone can (with a straight face) argue that "strong fundamentals" will prop up Seattle area housing prices, when they have so clearly been propelled by factors other than fundamentals, is completely beyond me. You can believe whatever you want to believe about where prices will go from here, but to say that they will be propped up by "strong fundamentals" is just willful ignorance, in my opinion.

If anyone believes they can explain how Seattle home prices have actually been tied to fundamentals since 2000, and wishes to civilly bring such an argument to the table, backed up by hard data (such as what is found in this post), then by all means be my guest. However, don't waste your time with one-liners, "bitter renter" put-downs, and simplistic observations of inventory and ongoing price increases, as they will be ignored.

(Bureau of Labor Statistics, US Dept. of Labor, 01.2007)
(Bureau of Economic Analysis, US Dept. of Commerce, 09.2006)
(US Census Bureau, Population data: 2000-2005, 2005)
(King County Budget Office, Affordable Housing 2006, 01.2007)

Thanks go out to reader Dennis O. for pointing out some of the data in this post.

Case-Shiller: Prices Flat in Seattle

2007-03-27T09:26:00.000-07:00

Uh-oh...

Home prices go negative for first time in 11 years
Case-Shiller price index shows prices falling in 17 of 20 cities in January

WASHINGTON (MarketWatch) — U.S. home prices continued to fall in January, with prices in 10 major cities now down 0.7% year-over-year, according to Standard & Poor's and MacroMarkets LLC, which released the January Case-Shiller price indexes on Tuesday.

The 10-city index is down 0.7% in the past year, the first year-over-year negative reading since 1996. The 20-city index is down 0.2% year-over-year. A year ago, prices were rising 15%.

"The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market," said Robert J. Shiller, chief economist at MacroMarkets, in a statement.

Of course, since you already know how special Seattle is, you obviously know it was one of the three cities in which prices are not presently falling. But the picture isn't quite as rosy as you might think...

Home prices fell from December to January in 17 of the 20 cities; only Miami showed any price gains. Prices were flat in Charlotte, N.C., and Seattle. Prices were falling fastest in January in San Diego, down 1.7%, or a 22.4% annual rate. Prices dropped 1.1% in Los Angeles, or a 14% annual rate.

The 10-city index was down 0.8% in January, or an annual rate of 10%. The 20-city index was down 0.7% in January, or an 8.7% annual rate.

Eleven of the 20 cities had negative price appreciation in the past year, led by Detroit (down 6.9%) and Boston (down 5.6%). The biggest increases were in Seattle (up 11.1%) and Portland, Ore. (up 8.7%).

Prices have now retreated year-over-year in some of the regions that had the biggest price gains in 2004 and 2005. Phoenix is down 0.7% year-over-year. San Francisco is down 1.4%. Washington is down 3.9%.

I am reminded of an image that was circulating a while back. It was a photograph of a roller coaster just as the cars crested the peak and began the ride down. The various cars were labeled as different cities around the country, with San Diego in front (beginning to head down quickly), Phoenix in the middle (just starting a downward trend), and Seattle in the back (just "leveling off").

To me, it only makes sense that the cities that began the ridiculous run-up first (San Diego, Phoenix, etc.) will be the first to head down. Conversely, cities that were late to the wild appreciation party (Seattle, Portland, etc.) will be the last to experience price declines. But why bother with "logic" and "reason" when you can put your blind faith in the mystic power of "job growth" and undefined "fundamentals." 11.1% forever!

(Rex Nutting, MarketWatch, 03.27.2007)

Condomania in Tacoma!

2007-03-26T20:10:00.000-07:00

Tacoma: Your mission, should you choose to accept it, is to sell 1,500 high-end condos in 14 months:

Hundreds of new, pricey condominiums exclude young singles needed for a thriving city core, according to the author of a study analyzing the downtown housing market.

Builders and developers say land costs and water views push prices beyond the mid-$200,000 range generally considered doable for the first-time buyer. And even though the number of unsold units remains high in some neighborhoods, they say demand is strong for high-end condos. Tacoma’s average new condominium price, according to the study, was $348,893 at the end of last year.

The 149-page report, finished last week, identified three kinds of future condo buyers: female baby boomers, young professionals, and married folks with no children at home. It recommended adding edgy lofts and more small spaces that Generation Y buyers can afford.
...
As of December, all six neighborhoods surveyed averaged 14 months of condominium inventory, which measures how long it would take to sell everything built and approved.

A healthy market for new construction tends to be in the six- to 12-month range, said Deanna Sihon, the study’s author.
...
Since 2004, nearly 400 condos have been sold downtown with another 525 for sale and about 1,500 proposed, according to the study.
...
A year ago, a hot market meant condo shoppers had to make rapid buying decisions, said RE/MAX real estate agent George Pilant.

Not so now.

“Buyers have so many choices they don’t feel a sense of urgency,” he said.
...
As in any type of residential real estate, demand is driven by population and job growth, said Paul Turek, an economist with the state Employment Security Department.

But condos are a niche product that at higher inventory levels, he said, raise this question: Will good-paying jobs needed to sell such downtown housing continue to be created?

“I suppose that’s where the gamble is,” he said. “In the Tacoma area, we have some high-paying jobs. Whether there’s enough to support the building of the condos remains to be seen.”

Good luck with that. Seriously.

(Devona Wells, Tacoma News-Tribune, 03.25.2007)

Condomania in Everett!

2007-03-26T19:53:00.000-07:00

Better be careful the next time you drive through Everett, you're likely to get burned, the condo market there is so hot!

On paper at least, downtown Everett is poised for explosive growth.

Nearly 800 new downtown condos and apartments are in various stages of planning.

There's a good chance some of the projects scattered across a dozen development sites will not get off the ground, officials acknowledge.

Still, long-term growth, a property tax subsidy and a strong local economy, buoyed by jet sales at the Boeing Co.'s Everett factory, work in the city's favor.

...

The condo market in the Puget Sound area remains hot, in spite of a wave of foreclosures and slumping housing sales creating jitters and sliding prices elsewhere.

Developers in Everett talk about "pent-up demand" and say they aren't deeply concerned their projects will create a glut of vacant condos for sale, as is the case in Las Vegas and parts of Florida.

"I think the local market is way stronger than people realize," said Joe Zlab, who plans to break ground on Rockefeller Square, a 40-unit condo building on Rockefeller Avenue, north of Everett Avenue, this spring.

...

It's only a matter of time before Everett begins to resemble more affluent Seattle suburbs, including Bellevue or Kirkland, said Anthony Aversano, a Mountlake Terrace remodeling contractor.

"Seattle is overpriced, Bellevue has access problems and is also too expensive," Aversano said. "It's not a place where people can go unless you're working for Microsoft and have been there for a long time."

Gus Boutsinis, a Mill Creek developer working on a 130-unit condo project on 41st Street and Colby Avenue, agrees.

"We think Everett is ready," he said. "It's where Seattle was 15 or 20 years ago.

Yow! Smokin!

(David Chircop, Everett Herald, 03.25.2007)

Real Estate Myth Debunking

2007-03-23T10:12:00.000-07:00

I'm compiling two lists for future posts, and I'd like to enlist the help you, the intelligent readers, to help assure the lists are as complete as possible. The purpose of the posts will be to list common real estate myths and briefly debunk them one by one. Many common myths have had entire posts dedicated to them here in the past, which will of course also be linked to. Following are some examples of the kinds of things I'll be including on these lists.

The first list is "Seattle Housing Market Myths," which will contain items such as:

Home prices in Seattle are supported by:
- Job growth
- Population growth
- Puget Sound's unique desirability
Prices here did not go up as fast as other places, so therefore they won't fall.
Prices can simply level off for a few years while "the fundamentals" catch back up.
etc.

The second list is "General Home Buying Myths." Here's a sample of what I've got so far for that one:

If you don't buy now, you'll be priced out forever!
Renting is "throwing away" your money. It's always (financially) better to buy, regardless of the circumstances.
Buying a home is a great way to "build wealth."
etc.

I have additional items for each list, but I'm sure there are plenty of myths I'm forgetting. What myths would you include on such a list? What's your best brief debunking of said myths?

Get on the equity escalator and trade up later!

2007-03-22T16:08:00.000-07:00

I am hoping someone here will be able to clear this one up for me.

One of the frequently-repeated arguments that real estate salesmen use to try to convince the renter-serfs to buy a home is that once you buy a home, your costs are fixed. While that's not entirely true (taxes, insurance, and maintenance can all increase—and it's not true at all unless you get a fixed-rate mortgage), the costs can certainly be more stable than renting, where your monthly rent is likely to increase with inflation.

However, the very same people that tout the "fixed-cost" of home ownership will turn around and offer another argument for buying: get on the equity escalator so after your home appreciates you can trade up to nicer digs. This is where I get confused. If your goal is to "trade up" for a nicer home in 5-10 years, aren't you negating the entire "fixed costs" argument?

Let me throw a few numbers out here to try to explain what I'm talking about. Let's say Milton S. and his wife are paying $1,200 per month to rent a little two-bedroom house. They decides to stop "throwing away their money" on rent, and rush out to purchase a home (before they get priced out forever), finding a two-bedroom 1,200 sqft house in Shoreline for $325,000. Assuming they get a 30-year fixed at 5.75% and have the $65,000 to make a 20% down payment (a fairly generous assumption), their monthly PITI payment is now just shy of $1,900. They do save over $2,000 that year on their taxes, so let's shave off a slightly generous $200 per month, and round the monthly payment down to $1,700.

Right off the bat our example couple has willingly signed up for a 42% hike in their monthly expenses (not counting maintenance). That's quite a premium to pay just so you can have "fixed costs." With hikes of 3% per year, it would have taken 12 years for their rent to reach that level. But hey, at least their costs are fixed, right?

Well, what happens when 10 years down the road they want to "trade up"? Thanks to the "equity escalator" and annual 4% appreciation, their $325,000 house nets them a sweet payday of $227,500 (after fees & taxes). Unfortunately, the house they would like to trade up to—a four-bedroom, 1,900 sqft house in Ballard that cost $450,000 when they bought their first home—has been appreciating at 4% per year too, and now costs $666,110. Even after putting the entire amount down from the sale of their first home, their monthly PITI payment (minus tax savings) will jump 65% to $2,800. The situation is even more skewed if you assume greater appreciation (like say, 7%), with their $1,700 payment skyrocketing to $3,294.

After 10 years and just one trade up, jumping on the equity escalator has resulted in a 133% increase in monthly costs for our fictional couple (over the original $1,200 rent). If they had instead continued renting, their monthly rent after ten years would have increased "just" 34% to $1,613.

So I guess what I'm saying is that I can't see how the "fixed costs" and the "trading up" arguments can both be true. The real issue here seems to be that the idea of trading up when an over-inflated market is your starting point just doesn't make any sense. If Milton and spouse had bought that $450,000 home to begin with, still only putting down $65,000, the monthly PITI would have only been $2,521 (assuming PMI— it would drop to $2,350 in three years when the equity reached 20%).

Can anyone describe to me a situation in which "trading up" is a winning proposition?

The Tim on AM 570 KVI 3:00 Today!

2007-03-21T14:09:00.000-07:00

I just got off the phone with the producer of the Brian Suits show over at KVI (570AM). Brian will be discussing yesterday's P-I article, and thanks to a heads-up from Eleua, I'll be a guest for a part of the discussion. Tune in at 3:00. They have a web feed for those of you still at work.

Update: I was on the air for roughly the first five minutes of the program. The discussion was primarily driven by Brian's questions, so I wasn't able to work in as many points as I would have liked, and I certainly could have said "uh, um, er..." a bit less, but this site definitely got some decent free advertising.

Here's an mp3 of the portion of the program I was on for. (6:41, 4.6MB)

Only three callers were able to get in a word before the topic transitioned to something else. Here are a few highlights:

John in West Seattle:

I conduct six or seven real estate purchases a week and I see the problem with your guest, the facts of the Seattle market do not fit his theory. ... Real estate values are subjective, they're based upon what people want for their own reasons. There is no objective value that can be placed at any given location or time. ... Housing prices go up because that's what people are willing to pay. ... People are speculating when they buy real estate, they hope it will appreciate in value over the years, but in a strict sense of speculation, that would apply to investment properties.

He sounded fairly angry, and he also called the Global Insight study "hogwash." If I had been able to respond to "I conduct six or seven purchases per week" John (i.e., a real estate agent), I would have pointed out that he is correct, real estate values are subjective. However, home prices have very suddenly spiked up at a historically unprecedented pace in the last five (or so) years.

Has Seattle suddenly become far more subjectively desirable during that time? No. I have covered this nonsense argument in a number of posts, most notably A Question Of Affordability, last November.

Gary on a cell phone:

The "hogwash" comment is absolutely dead on. It's just a function of the market. People pay what they're willing to pay, and people sell what they can sell for. A couple factors that make our market higher than a lot of other areas are at least two things: One is a lack of transportation infrastructure, and the other thing is the Growth Management Act

The transportation argument would perhaps partly explain why Seattle proper is so expensive, but unfortunately for Gary's argument, pretty much the entirety of King, Pierce, and Snohomish counties have seen similar spikes in home prices over the last five years. As far as his Growth Management claim, I've covered that here and here.

Scott on a cell phone

I've been in the lending side for the last ten years. ... Seattle is over-inflated. If you talk to any banker, lending institution, they will tell you, their biggest worries are the big metropolitan areas: San Francisco, Seattle, Los Angeles... where you've had such growth in the appraised value. ... There are a lot of realtors out there who are over inflating the value of these homes. ... The bubble may not burst, but there will be a serious deflation in the next few years, and it's gonna be based on the fact that the lenders have had enough.

Scott's points were pretty much right on. He sounded like somebody that has a pretty good grasp of what's going on before our very eyes with the interplay between home prices and lending.

I have audio of the segments of the show with the callers. If you're interested in hearing it shoot me an email. Hopefully I'll have another chance in the future to get the word out.

Rent vs Purchase: A Comparison

2007-03-21T14:03:00.000-07:00

Also posted at Priced Out Forever.

Buy If You Must. Why Must You Buy?

by guest poster Eleua (with contributions and spreadsheets by Tim)

Click here to download the Excel Spreadsheet that the numbers below are based on.

I need to take a step back and insert a personal note. While I disagree with the motives and actions of the faceless Real Estate Industrial Complex (REIC), there are genuine, honest, intelligent and wonderful people that work as RE agents, mortgage planners, title agents, contractors, appraisers, granite counter fabs, etc. It might be difficult to find one of these in an sub-prime boiler-room, or on a CNBC interview, but there are those out there making a living that are just as much of a victim as their customers. Please separate my disdain for the high priests and the overall entity from the honest people that believe they are trying to help someone achieve a dream. Second, difference of opinion does not constitute condemnation. I enjoy a healthy, spirited, raucous discussion more than most. At the end of the day, drinks are on me.

With that said, let's get on with the flogging.

I will be the first to say that buying is a good idea if you intend to live in the house for the bulk of the mortgage period, you can afford it, and it is viewed as your nest, rather than your nest egg. If you are a transient, or you are trying to save for retirement by living in your 401(k), you might get lucky and you might get ruined. Houses are homes. They should not be investments.

200-7! You Crapped Out.
For the past several years, we have been living in a speculative economy. During the late '90s, this was manifested in stocks, and now it is takes the form of residential real estate. Everyone wants in on the fun. Why not? Real estate, like stocks, always goes up in value. It is a great investment, and the way for normal people to build wealth. At least that is what the Real Estate Industrial Complex (REIC) wants you to believe. They don't make as much money if you are skeptical.

At first glance, it sure seems like a dynamite investment. Everyone has a grandmother that bought her $600,000 home back when it was $60,000, and if you live in California or Seattle, you can't go 15 minutes without running into someone yammering on about how much their home has gone up in value. Some idiots treat a daily visit to Zillow like they would a call from their stockbroker.

By Your Lease, My Landlord
The new homeowners are buying into the idea that America does, in fact, have a class system: the Landed Class, and the Perpetual Renters. The Landed Class have unlocked the secret to passive wealth, and the Perpetual Renters are condemned to the outer darkness of blowing their savings on their landlord's mortgage - a double insult.

All current living generations in America have been force-fed the idea that home ownership is absolutely essential to financial freedom. It is an article of faith in the national religion. Question this and you are branded a heretic. Somehow, through an Orwellian twisting of the language and a corruption of the educational system, debt became wealth. The last two generations that would have disputed this have passed on.

Morons + Money = Lumpeninvestoriat
The REIC sells homes as investments to the Lumpeninvestoriat. Homes are more expensive if the parties attach a high speculative premium. The higher the speculative premium that accompanies a property, the higher the price will be. This reinforces the validity of the speculation. Normally, this is called a bubble. The REIC makes a lot of money fomenting a bubble.

Is a home a good investment? If by investment you mean that it throws off the dividend of a place to call home, then yes. Renting provides the same benefit. If you are seeking a "forced savings program" and capital appreciation, you might be better off with payroll deduction and a quality, value oriented, contrarian investment portfolio.

Pay No Attention To The Details Behind The Curtain
Let's examine a common exercise that many in the REIC like to conduct to shore up their position that your home is your nest egg.

A gracious local mortgage planner responded to my stunned disbelief that someone would refer to a mortgage as a "forced savings plan" by posting a comparison between a hypothetical renting scenario and buying the same house. This is her example that shows how a house can be a great savings plan.

Owning a home is not right for everyone. There are certain benefits to not owning the home you live in. If something goes wrong with the property, you simply ring up the landlord and they get to fix it. You pretty much know what your cost are going to be month to month (unless your landlord decides to sell the property, increase rent, convert the condo, etc.). On comments from last Friday’s post on interest rates, there is a discussion debating if one could consider having a mortgage as a forced savings plan. I know I'm going to seem biased since I am a Mortgage Planner…and I fully expect all of the number-crunching-junkies out there to have a heyday with what I'm about to post…but here goes!

I found two similar homes, both in the north Seattle area. The rental property is available for $1850 per month. The home for sale, with close square footage, rooms, area, etc., is available (actually, an offer is pending) for $499,995.

With the comparison, I'm going to assume someone has 20% down to either invest in the stock market or to buy a home. The current rate for a 30 year fixed is 5.75% (APR 5.904%). Principal and interest is $2,334 plus taxes and insurance equals a total payment of $2623. First year monthly tax benefits are $606 (mortgage interest benefit will decrease, property tax benefit will most likely increase).

The prospects are in the 28% tax bracket; they have a gross income of roughly $8000 per month and can have $700 in monthly debts with credit scores at 680 or better. The investor will receive 11% from the stock market and the homeowner will benefit from an appreciation of 7% on their real estate.

Rent at 5 years Homeownership at 5 years

Total Payment $117,863 Total PITI $157,396

Principal Paid 0 Principal Paid $28,951

Tax Benefit 0 Tax Benefit $35,293

Net Cost $117,863 Net Cost $93,152

Real Estate Value 0 Real Estate Value $701,269

Loan Balance 0 Loan Balance $371,045

Total Home Equity 0 Total Home Equity $330,224

Rent at 10 years Homeownership at 10 years

Total Payment $254,498 Total PITI $314,792

Principal Paid 0 Principal Paid $67,519

Tax Benefit 0 Tax Benefit $67,893

Net Cost: $254,498 Net Cost: $179,381

Real Estate Value 0 Real Estate Value $938,566

Loan Balance 0 Loan Balance $332,477

Total Home Equity 0 Total Home Equity $651,089

Investment Investment

Opening Balance $109,000 Opening Balance 0

5 Yr Return @ 11% $188,452 5 Yr Return @11% 0

10 Yr Return @11% $325,817 10 Yr Return@11% 0

5 Year Net Worth $188,452 5 Year Net Worth $330,224

10 Year Net Worth $325,817 10 Year Net Worth $651,089

The first five years with the mortgage provide an average monthly principle reduction of $482.47 per month. Taking out any appreciation factors, the ~~principle~~ principal paid each month is a forced savings plan. With that said, home equity does not earn interest. And I would probably encourage most clients to consider not using the entire 20% for the down payment to stay more liquid (depending on their entire financial picture).

For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain't so bad.

Let the games begin!

This is a very common proof put out by the REIC to keep the Lumps feeding from their trough. I've seen it in a dozen different forms. If it was posted on a billboard, and you drove past it at 70 mph, on a crowded freeway, it would make sense. Fortunately for the REIC, the flashbulb attention span, in combination with the economic and historical illiteracy of your average homebuyer makes this work.

Is This Apples-to-Apples, or Salmon to Mullet?
Using the provided example as the basis for comparison, we will take out our pencils, calculator, green eyeshade, and a case of Mountain Dew and hammer out a valid side-by-side look at renting vs. owning.

Rent is $1,850/mo. I guess if you show up looking like you just crawled out from a flophouse in Pioneer Square, you would pay full price. In this market, if you showed any semblance of responsibility and wanted to negotiate, you could knock 15% off that price. However, we will go with the $1,850 to keep as close as we can to "apples to apples."

Our poor, pathetic loser renter is on the hook for $1,850/mo + 3% hikes per year. Over the first 5 years he lays $117,863 on the altar of his landlord's good fortune. In 10 years it amounts to $254,498. This assumes that rent tracks at 3%, which with all the building and speculating in real estate is a pretty bold assumption.

Over the same time our budding noble is also shelling out money for his living situation. He paid $100,000 for the down payment, and (according to Rhonda) currently pays out $2,623/mo in principle / interest / taxes / insurance (PITI).

Up until now, I am in agreement with Rhonda. We now need to look deeper into the realities of home ownership to find the true value of each living situation.

Real Estate Always Goes Up - It's In The Constitution
Perhaps the biggest flaw in the classic "Rent vs. Own" comparison, as put out by the REIC, comes in the form of assumed appreciation of the underlying asset. It is given as an absolute certainty that real estate always goes up. Yes, in the past few years that has been the case. Will it happen tomorrow? Nobody knows - nobody. To assume this is, at best, irresponsible. Capital appreciation is never assumed when assigning value to an investment. Capital appreciation may be estimated for speculative purposes, but not investment purposes.

I am not against speculation - I do it all the time. However, it is speculation; it not investing, just as meaningless sex is not love. There is a huge difference. It is very important not to have expectations of one when engaging in the other. Assigning a value based upon the dividend or benefit an asset provides is investing. Assigning a value based upon someone else's view of the price is speculation.

It's Clear Sailing In The Rear-View Mirror
I wonder how anyone in the REIC can so confidently forecast an appreciating market? How do we know the market will not shift into reverse? We don't. Yes, we can guess, but we don't know. I would submit that after the breathtaking run in real estate over the past few years, and the problems that we are facing in the mortgage finance space, a very strong argument can be made for a precipitous drop in real estate prices - even in Seattle.

If you run the appreciation at +7%, you would be well served to run it in reverse to give a range of expectations. Back in 2000, many stock bulls (especially those on Wall Street that profit from high priced stocks) believed in the "New Economy." This New Economy was based upon the absolute fact that certain, high quality stocks will always go up in price. Microsoft, Yahoo, Intel, Cisco, Juniper, Qualcomm, eBay, Lucent, Corning, etc. were all touted as fail safes. Seven years later, these predictions look foolish and self-serving. Had speculators prepared for a significant rollback, the pain may have been alleviated to some degree. Going "all-in" at the wrong time is devastating.

Removing the miracle of perpetual appreciation, the 5 and 10-year numbers for owning would have to be reduced by $201K and $438K respectively. If we reduce the appreciation by the same amount as we assume it appreciates, the owner's position is reduced further by $126K at 5 years, and $240K by 10.

This is a pretty wide differential for something we don't know. A prudent analysis would be to not factor in any appreciation. Such was the example in Northern California from the late '80s to the late '90s.

Show Me The Money! - Well…Let's Hold Off On That.
In addition to the folly of just assuming that an asset will appreciate, it is incumbent upon the buyer to understand why an asset appreciates. Home prices track incomes as well as the ability to find easy money. Without easy money, homes could not appreciate beyond what incomes could support. A house is not a bank account that accrues compounding interest.

Unfortunately for our prospective homebuyer, both sources of rising home prices are under attack. Mortgage lending has been a festival of economic irresponsibility since 2003. Up until early 2007, anyone could qualify for just about any amount of money with absolutely no documentation or lender vetting. The finance industry made billions selling high fee mortgages and chopping them up for sale in the secondary markets. It was a fundamental blunder to build a business model (or an entire industry for that matter) on lending money to questionable borrowers with lousy collateral. That business is now disintegrating right before our eyes. Lending standards will be increasing dramatically (driven by both government and investors), and rates will certainly rise. The go-go days of insane lending are in the rear-view mirror.

Global wage arbitrage with Mexico, India, China, Russia, and Brazil are keeping a tight lid on incomes. Incomes have been stagnant over the entire duration of the housing bubble, and show no sign of any broad-based increase. Other considerations include rising taxes to pay for the increasing scope of government, immigration pressures, and the retirement of 77 million Mouseketeers.

Comparing With Four Hands Tied Behind Your Back
While Rhonda was generous with her assumptions of the ROI of the renter's investment portfolio, I wonder why this investment wasn't treated in the same manner as the appreciation on the house? Why can't the investment portfolio also include 4:1 leverage? Why assume 11%? If we are in the business of forecasting good things by looking in the rear view mirror, why not use a real example from another investment that took place over the same time period as the latest housing bubble? A 4:1 leveraged investment on silver bullion would have returned $1,120,000 on a one-time buy-in of $100,000 over the past 7 years.

Tax Benefits Need A Tummy Tuck
The tax benefit is overstated. Yes, itemizing mortgage interest and property taxes is a great benefit. If you make $96K/yr, you can do quite well come tax time. The problem comes with the "standard deduction," which is the tax deduction that you get without itemizing. The standard deduction is less for a single man, than it is for a family. Rhonda assigns $35,293 of tax benefit for 5 years and $67,893 for 10. If we correct for the standard deduction for a family, that tax benefit is reduced to $20,873 and $39,053.

Oops, Your PITI is Slipping
The PITI was probably too low. $288/mo for taxes and insurance is probably more like $550. Tax rates are considerably above ½%.

It is doubtful that the county would keep property taxes stable. Even in a period of decreasing values, it is very easy for local governments to keep their bloated budgets going on the backs of the local citizenry. Even if you assume the tax rate holds steady, if your property is increasing in value, so is your property's government-assessed value, right? 5 to 10 % property tax increases are certainly well within normal assessments. Let's say the assessment increases at the same rate as the assumed appreciation, but with a 5-year lag.

So, What Are You Doing This Saturday?
Houses are also maintenance intensive. Rhonda assumed that our homeowner never needed to repair his castle, nor make a visit to Home Depot. If the homeowner spends 1% of the value of his home on maintenance and improvements (what's a trendy Seattle home without granite, stainless, and bamboo?), we need to add another $400/mo to the equation.

The Highest Fee Brokerage
Finally, the REIC never likes to bring up that a hefty fee exists for cashing out of the home ownership money machine. You need to pay them a minimum of 7% of the gross sale to get at all that wonderful equity. Assuming the home price remained constant, that is another $35,000 out of the piggy bank.

The Bottom Line
Now that we have a more complete picture of the situation, let's take a look at the financial bottom line for rent vs. purchase in few possible scenarios. We'll use Rhonda's given purchase price, down payment, investment return (11%), and rental price, varying only the assumed appreciation in each case. "Home Value" refers to the total amount of money you pocket upon the sale of the house (since that is the only way you can get the money).

7%	Rent	Purchase
Appreciation	Investment Value	Home Value	Difference	Advantage
@ 5 years:	$224,343	$275,668	18.6%	Purchasing
@ 10 years:	$402,613	$574,573	29.9%	Purchasing
@ 25 years:	$1,662,659	$1,815,340	20.3%	Purchasing

4%	Rent	Purchase
Appreciation	Investment Value	Home Value	Difference	Advantage
@ 5 years:	$224,343	$189,950	18.1%	Renting
@ 10 years:	$399,918	$350,060	14.2%	Renting
@ 25 years:	$1,565,654	$1,030,024	52.0%	Renting

0%	Rent	Purchase
Appreciation	Investment Value	Home Value	Difference	Advantage
@ 5 years:	$224,343	$90,051	149.1%	Renting
@ 10 years:	$396,625	$128,619	208.4%	Renting
@ 25 years:	$2,172,580	$461,100	371.2%	Renting

-2%	Rent	Purchase
Appreciation	Investment Value	Home Value	Difference	Advantage
@ 5 years:	$227,271	$45,749	396.8%	Renting
@ 10 years:	$399,452	$44,272	802.3%	Renting
@ 25 years:	$1,454,580	$156,786	827.7%	Renting

The Million-Dollar Taffy Pull
So, did we answer the question of it being better to rent versus own? Not really. It is all based upon how congruent your assumptions about the future are with the reality. Nobody knows what will happen next week, much less 10 years from now. I would say that wildly optimistic assumptions of owning compared to a watered down forecast of the economic flexibilities of renting is not a valid comparison.

People always forget that using borrowed money for investing (whether it is a brokerage margin account or a mortgage) is leverage. Leverage works both ways. It amplifies your success or failures. What turns 4 walls and a roof into the American Dream is the same mechanism that makes it your financial coffin.

Yes, if you get enough appreciation of a home's value, it makes sense to buy. This is true on any investment. However, if the home stagnates in value, or falls, the damage is magnified by the mortgage, taxes, and illiquidity.

Home ownership brings certain benefits like some level of sovereignty over the use of the property and any ephemeral value from "pride of ownership." It also brings other pitfalls, such as illiquidity, maintenance, acts-of-God, or even your overweight, aging hippie neighbors that insist on walking around naked as they oscillate between the hot tub and the "herb" garden.

Renters may need more than just the consultation of a sledgehammer and a case of Mickey's Big Mouth to knock out a wall, but if a heavy-metal band moves into the house next door, they can give notice, pull up stakes and move into a nicer home. If a renter gets transferred, they don't have to put up with the agonizing process of selling a home in a squishy market, and then paying 7%+ to the REIC. At worst, they lose their deposit and move on.

Lending While Intoxicated
As the mortgage finance industry scraped the bottom of the barrel to find new ~~suckers~~ buyers to put into homes, they swerved head-on into the world of the financially illiterate. Many of these buyers did not have sufficient savings to pay the standard first/last/deposit as required for most rental contracts. Many did not have sufficient income to qualify to rent, yet the finance industry was able to qualify them for a home. This was done under the pretense of getting them into a beneficial financial situation. Rhonda summed it up as follows:

"For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain't so bad."

Yes, I guess you can refer to the principal paydown on a house as a "forced savings plan." It is true that most Americans do not have any form of savings, other than their aging Beanie Baby collections, so I guess this is better than nothing. It also presupposes that most Americans are idiots. With that, I agree, but would like to add that allowing an idiot to juggle a half-million dollar, highly leveraged, speculative savings plan is a recipe for an unmitigated disaster in their personal life. Set this against the backdrop of tens of millions of the very same, and you have the certainty of a national financial disembowelment.

Given the recent activity in the sub-prime mortgage finance companies, this hypothetical is now a reality.

"Market fundamentals are extraordinarily strong."

2007-03-20T11:21:00.000-07:00

By now most of you have probably already seen today's article in the P-I: Homes overvalued by 31.7% in city, report finds. It's pretty much the usual shtick. "Homes are expensive here, but..." followed by lots of quotes from various real estate "analysts" and "professionals" yammering on about how wonderful the "fundamentals" here are, what with all the high tech job growth, etc., etc..

Here are a few obligatory quotes:

The typical house in the Seattle metropolitan area was 31.7 percent overvalued in the last quarter of the year, up 6.4 percent from the prior quarter and 24.3 percent from the end of 2005, according to Monday's joint report from Global Insight...
...
"You're sort of on the edge," [Global Insight talking head Jim]Diffley said. "We would say you're not in the riskiest group of metro areas."

Seattle's strong economy and the fact that its prices started their recent climb later than many areas further diminish the risk, he said. "We're not forecasting a 31 percent decline by any means."

Local experts question the idea that Seattle houses are overvalued at all.

"Sure, prices have gone up, and they've gone up rapidly," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. "But we're still in a situation where the market fundamentals are extraordinarily strong."

Matthew Gardner, a local land-use economist, said Seattle did not see the 100 percent to 150 percent appreciation or the overbuilding that occurred in places such as Southern California.

"We've got high incomes, we've got a job growth rate twice the rate of the country as a whole, we've got growth management," he said. "Will we see a slowdown in appreciation? Absolutely, and that's appropriate."

Randy Bannecker, a consultant housing specialist for the Seattle-King County Association of Realtors, said there just are not enough homes available to cause overvaluing.

"The overwhelming supply shortage is really what's keeping the prices where they are," he said. "It's hard to see where just kind of a run-up for run-up's sake is in play."

But my favorite quote actually comes from the "Sound Off" comments section attached to the article, posted by a user calling himself ravennaboy:

Its no longer a matter of "Californians willing to pay premium prices for our houses"....now its a matter of a vibrant high tech economy that has created massive amounts of wealth, drawn talented individuals and families from around the world whose high paying tech jobs allow them to afford high priced houses.

In reality, Microsoft and other employers have made Seattle much more of a meritocracy -- where the talented earn much more than those unskilled in high-demand technical knowledge. These higher paid folks see the value in Seattle housing, and are willing to pay high prices for this ideal location.

So, instead of blaming Californians, blame highly skilled microsofties for pulling Seattle out of its historic "boeing dependent manufacturing economy" with its boom and bust cycles.

How delightful for us to have an economy that has evolved so vibrantly.

Getting back to the article itself, I find it interesting that the 31.7% figure is said to be "up 6.4 percent from the prior quarter," when the last report I saw out of Global Insight had Seattle at 33.8% overvalued. Anyone know what's going on there?

Anyway, make of this report what you will. Personally, I don't need some "global leader in economic and financial analysis" to tell me that homes prices in Seattle are seriously out of whack. It seem pretty much self-evident to anyone willing to do half an hour of research.

(Aubrey Cohen, Seattle P-I, 03.19.2007)

Seattle Immune to Financing Woes?

2007-03-19T10:49:00.001-07:00

When the question is "how will the current home lending meltdown affect the housing market in Seattle," the answer depends on who you ask. For instance, if you ask #1 Seattle real estate cheerleader Elizabeth Rhodes, the answer is something to the effect of: "Seattle is special. Don't worry your pretty little head about it."

Q: Local real-estate experts keep saying Seattle's housing market will stay strong because the local economy is strong. But I think all the subprime loans going bad will mean a lot more houses on the market and prices here will sink. Why don't you report that?

A: Let's start with an interesting fact from Douglas Duncan, chief economist for the Mortgage Bankers Association: More than one-third of all homeowners have paid off their mortgages (or paid cash). This significantly decreases the potential for overall risk.

However, the growing crisis in the subprime mortgage industry, fueled by an increasing number of mortgage defaults, is real.

How much of an effect it may have is very location-sensitive, said Bob Visini, a spokesman for LoanPerformance, a California company that tracks nationwide mortgage activity.

The Seattle/Bellevue/Everett area "is exposed," but way down the list, Visini said.

The Seattle area is in the bottom 20 percent for subprime mortgages among 331 major metropolitan areas — far below other parts of the country, particularly parts of Texas and California's Central Valley where subprime accounts for nearly a fifth or more of all mortgages. At the top of the list was McAllen, Texas, where some 26 percent of loans are subprime.

By comparison, only 7.9 percent of all Seattle-area mortgages were subprime at the end of 2006 (ranking 278th out of 331), down from 8.7 percent the previous year.

And only a fraction of those loans were in trouble — some 7.6 percent at the end of 2006 were 60 days late or more, a sign foreclosure is looming. This put Seattle in the bottom 10 percent.

Those are certainly some convincing statistics Ms. Rhodes has pulled out. Unfortunately, she still employs her mad misdirection skillz in composing the answer. The reader didn't ask "how does Seattle's rate of subprime mortgages compare to other cities?" Nor did they say "the subprime lending implosion is already affecting Seattle." Rather, they pointed out the high likelihood that the subprime mess will adversely affect Seattle's housing market. Granted, it may not affect Seattle as much as other areas with higher percentages of subprime loans, but there is no reason to believe that it will not have any affect.

On the other side of the media spectrum, ask Mike Benbow of the Everett Herald the same question, and he might say: "Foreclosures are already on the rise, and will likely increase. If the country heads into a recession, the housing market will almost certainly suffer even more."

Others are using risky loans, such as those where they're paying only interest for a while, to get into homes they can't afford. That can only lead to trouble.

In fact, it already has.

A recent article in the Puget Sound Business Journal quoted RealtyTrac Inc. as saying there were 2,377 foreclosures on homes in Snohomish County last year, a 35 percent increase over 2005.

That was lower than King County, where foreclosures rose 41 percent, and Pierce County, which showed a 58 percent hike. But it was higher that the 25 percent increase for the state as a whole.

Such a sharp increase in foreclosures tells us there are problems in the industry.

A local or national recession could trigger even more.

What am I trying to say here?

I guess that a rising local economy has kept the housing market relatively strong locally, but that things could change rapidly if economic circumstances change. Now, more than ever, home buyers should be careful about the types of loans they're using and not expect home appreciation to bail them out of a purchase they never should have made.

Wow, it's refreshing to read something that honest in the media once in a while. Foreclosures up 41 percent in King County? Funny, I must have missed the article in the Times where Ms. Rhodes covered that. I thought our housing market was the picture of perfect health. How could foreclosures be rising so quickly? Hmm.

(Elizabeth Rhodes, Seattle Times, 03.17.2007)
(Mike Benbow, Everett Herald, 03.19.2007)

Rent vs Purchase: Help Me Compare Costs

2007-03-17T00:38:00.000-07:00

A few days ago, Rhonda over at RCG made a post titled The Great Rent vs. Own Debate in which she attempted to prove that even in today's totally out-of-whack housing market, purchasing a home is still a better financial decision than renting. Obviously I disagree with her assessment.

The main problem I have with Rhonda's post is the overly simplistic nature of the comparison. Chief among her oversights were the omission of maintenance cost of the purchased property, overestimation of the purchaser's tax benefits, and not adding the renter's monthly savings to their investment.

In order to properly respond to her post, I have begun to put together a spreadsheet that will compare the financial situations of renting vs. purchasing (I won't say "owning" since you don't actually own it until you've paid off the mortgage). However, before I get my Excel on in a post of its own, I want to get some feedback about what factors should go into the calculation. Here's what I've got so far:

Renting

Costs

rent
insurance
utilities

Savings

cost difference

Returns

investment interest

Purchasing

Costs

interest
insurance
utilities
taxes
maintenance
HOA Dues

Savings

principal payment
tax deduction

Returns

appreciation

My spreadsheet accounts for a yearly increase in rent, as well as increasing maintenance costs, utilities, insurance rates, and property taxes (since we don't live in California). I also have a field where the individual or family standard deduction can be entered in order to calculate the true financial benefit of the mortgage interest tax deduction.

So what am I leaving out? I'd like to make this financial comparison as complete as possible, and I'd appreciate any help you all have to offer. Thanks!

Update: Wow, thanks for all the feedback, everyone! I received more emails about this post than any post yet. It will take me a little while to update my spreadsheet to incorporate your ideas. I doubt I will be able to account for every suggestion, but I will do my best to make it as comprehensive as possible.

Mortgage Mess Difficult to Ignore

2007-03-16T08:01:00.000-07:00

Take a look at the front page of the Seattle Times website this morning:

Click to enlarge

That's Coalition warns of "mortgage tsunami", followed by Accounting, executives at lender New Century investigated, Fraud charges at Metropolitan Mortgage & Securities settled, and of course Mess unlikely to break economy.

First off, I don't think the term "mortgage tsunami" is appropriate, since a tsunamis come with little warning and through no fault of those in their path. I'd call it more of a "mortgage harvest," considering that the mortgage banks and homebuyers are simply reaping what they have sown.

And why is it that they would like us to believe that the ongoing mortgage "mess" is not going to "break" the economy?

However, while stocks of subprime lenders have been pummeled, the industry's effect on the broader market is likely to be muted. "All told, subprime mortgages are worth about $640 billion, and that isn't chump change," says Bob Gay, economist and managing partner of Fenwick Advisers. "However, it's only 0.6 percent of annual gross domestic product. ... On the consumer side, it's not like every subprime mortgage is going to default and get repossessed."

Delightful. An argument that basically amounts to "because we say so."

Hold on tight and enjoy the ride, everybody.

Seattle 79th Most Affordable Metro

2007-03-15T09:07:00.000-07:00

Out of 95 US metro areas, the Seattle-Tacoma-Bellevue housing market ranks as the 79th most affordable. In other words, even with Pierce County dragging the average down, as of 2005 we were still the 17th least affordable metro.

Bizjournals compared housing costs and income levels in the 95 U.S. metros with populations above 500,000. The study used statistics from the 2005 American Community Survey, conducted by the U.S. Census Bureau. From our study, bizjournals identifies the 10 most affordable markets to own a home and the 10 costliest markets to own a home.

Keep in mind that many of the areas that were less affordable than us have seen slight price declines in 2006, meaning we've probably inched up the list a few spots since the data was gathered. Hooray for us!

(G. Scott Thomas, Bizjournals, 03.05.2007)

$400,000 is Not "Affordable"

2007-03-13T09:55:00.000-07:00

A couple of interesting letters to the editor floated to the surface today in response to Ms. Rhodes' latest article.

Here's my favorite:

I guess I don't understand how anyone would think that a $400,000 to $500,000 price tag on a town house is considered to be affordable housing. Not for folks who work for the city of Seattle making less than $35,000 a year. Not all of us are City Council members or managers.

— Diana Rodriguez, Lacey

Indeed, what a bizarro world we live in.

(Letters to the Editor, Seattle Times, 03.13.2007)

Seattle Buyers Not Immune to Credit Crunch

2007-03-12T10:42:00.000-07:00

As you know, I haven't said much on this blog about the ongoing collapse of lending as we've known it the last few years. This is primarily because the issue is being covered quite thoroughly at many of the other bubble blogs linked on the sidebar. However, a reader sent me a pdf report by Credit Suisse titled "Mortgage Liquidity du Jour: Underestimated No More" that contained the following chart:

Click to enlarge

As you can see, home buyers in Seattle have turned to interest-only and neg-am loans just about as frequently as most of the other "bubbly" cities.

As this easy money rapidly dries up, where does that leave the buyers? Well, I'll defer to the opinion of a "Mortgage Expert" on that one (comment #2):

It’s a real feeling of panic for buyers.

Uh-oh, it looks like we may not be as special as we thought. It would appear that all of Seattle's pretty scenery and "world class" amenities don't count for diddly when loans are no longer being handed out like bread crumbs at the duck pond.

P.S. (I have the report in pdf format, thanks to the reader that emailed it to me, but since I could not find a web link to it, and I don't know the copyright status of it, I have not posted the report online. If someone finds a link to the full report I will add it to the post.)

Introducing Priced Out Forever (dot com)

2007-03-12T00:02:00.000-07:00

On the eve of the spring selling season, I am pleased to introduce the latest resource for potential home buyers across the country, Priced Out Forever. In the words of the site's front page:

Priced Out Forever is your Internet headquarters for analysis, humor, and news about the so-called threat of allegedly never-ending soaring home prices.

Spread the word, and enjoy the site!

February Reporting Roundup

2007-03-09T11:23:00.000-08:00

I'm going to do the monthly reporting roundup a little differently today. I'm going to keep it simple. What you see below is a list of my favorite line from each of the local writeups.

Wow, everything's just coming up roses, isn't it?

Sales Up, Inventory Up More, Prices Flat

2007-03-07T10:27:00.000-08:00

February statistics from the NWMLS have been posted. As is the custom, the Seattle Bubble Spreadsheet has been updated and uploaded.

Some of my guesses for King County were fairly close, with the notable exception of Pending Sales (Res), which shot up to 2,375. That's +7.66% YOY, ending the 15-month streak of declining YOY sales.

Interestingly, despite the sudden surge in buyers last month, the median price was essentially flat compared to January, thus leading to the first single-digit YOY increase in median price (+9.41%) in over two years. This could be because although the number of sales is finally on the rise, the amount of inventory is still rising considerably quicker (+7.66% vs +22.50%).

Here are the vitals, with my guesses following:

Median Price (Closed)
Res + Condo: $393,250, +14.00% ($372,000)
Residential: $429,925, +9.41% ($425,000)
Condo: $285,250, +24.59% ($272,500)

Res Only
Active Listings: 6,124, +22.50% (6,250)
Pending Sales: 2,375, +7.66% (1,900)

Here's the supply/demand YOY graph:

Click to enlarge

Here's an update to the graph I posted last month of the YOY percent change in the median sale prices of single-family homes in King County since 1994:

Click to enlarge

I predict that the local press will focus their reports on the increased number of sales, while downplaying the still-declining rate of "appreciation." Just a hunch.

(NWMLS, February 2007 Recap, 03.2007)

Stupid Legislative "Solutions"

2007-03-06T14:19:00.000-08:00

Here's an article that appeared in the Everett Herald a few weeks ago about yet another misguided legislative attempt to solve the "housing crisis."

One of the bills Nathan Gorton is backing in the Legislature this year sounds like it makes too much sense to do anything but go down in flames.

What he'd like to see passed is a measure that would require cities to do what it takes to build enough homes each year to cover the number of new jobs they're expected to create. ...he'd like communities to provide homes for their own work force because it would stick fewer cars on the freeway for the morning commute.

I suppose if people were robots programmed to live only in the closest available place to where they work, legislation to that effect would indeed "make sense." However, as some of us are aware, people do not necessarily live in close proximity to their workplace, even if they can. Even the richest man on the planet, who can clearly choose to live anywhere he wants prefers to live with a 5-mile stretch of overcrowded SR-520 between his home and office.

Housing is important to Gorton. He's the new executive officer for the Snohomish County Camano Association of Realtors based in Everett.

Gorton noted Friday that three years ago, the median price for a home in Snohomish County was $220,000. Now it's $356,000.

"If you're a homeowner, it's a great thing," he said. "But we think we almost reaching a crisis point."

Oh we're reaching a crisis point all right, but not for the reason that home salesman Mr. Gorton is implying. Home prices have experienced such a steep ascent not because of a lack of legislation, but because of fly-by-night lending and pyramid scheme psychology.

Gorton said that from 1993 to 2000, King County added 237,000 jobs and 75,000 homes. Obviously, many of those workers had to look for a home somewhere else. There isn't a statistic handy, but conventional wisdom tells us that many of those workers bought a home in Snohomish County, where the prices are typically $50,000 less.

"That drives up housing prices outside King County and puts a lot of cars on the road," said Gorton, noting he's already hearing of Seattle workers who are buying homes in Whatcom County and making a very long commute each day.

Because there are simply no homes left from Seattle all the way to Bellingham. Right. Give me a break.

That brings us back to House Bill 1726.

"It says if you're going to bring in a lot of jobs, let's do better with planning where you'll put those folks," Gorton said.

He thinks it will help keep home prices down and reduce freeway congestion, which he notes should make it a lot easier for businesses to recruit new employees. And you certainly don't need to be a business to want to reduce traffic and make it possible for people to buy homes.

Maybe it's just me, but Mr. Gorton's comments seem to have the same disingenuous feeling as the It's A Priority campaign—which incidentally is a project of the Washington Realtors, a group which Mr. Gorton is a member of. Hmm.

P.S. (Check out the latest Google search results for It's A Priority. I love it.)

(Mike Benbow, Everett Herald, 02.26.2007)

Bubble Link Roundup

2007-03-05T11:50:00.000-08:00

It's time to clear out all the news alerts in my inbox again. Here's another round of local real estate links from the past few weeks:

Seattle definitely appears to be "special" in one area: real estate websites. Ms. Rhodes reports on ForeclosurePoint; the latest to join the fray.
Bremerton: up and coming? If you say so...
Steve Tytler of the Everett Herald repeats his prediction that appreciation will be flat this year.
Mark Trahant points out that the Pacific Northwest isn't all that special when it comes to consumer spending and the economy.
Mr. Cohen at the P-I:
- kicks off a series following a newly-minted real estate agent,
- reminds us that "Seattle-area houses still are appreciating faster than most,"
- and gives a few local condo projects some free advertising.
Up in Bellingham, the housing market may continue to cool.

Did I miss anything else worth noting?

February Stats Guesses Anyone?

2007-03-01T11:43:00.000-08:00

With February behind us, would anyone care to venture a guess as to what the NWMLS stats will show when they're released in the coming week? Here are my baseless predictions for King County:

Median Price (Closed)
Res + Condo: $372,000
Residential: $425,000
Condo: $272,500

Res Only
Active Listings: 6,250
Pending Sales: 1,900

What is your guess?

Who Should You Believe?

2007-02-28T12:15:00.000-08:00

The post you are about to read is true. The names have been change to protect the... Well, mainly because I don't want to start a blog war. For this same reason, I have not provided links to the posts I mention. They are available for verification upon private request.

By now, most sensible people know that the proclamations of national real estate sales spokespersons should be given little to no weight. The most visible example of course is NAR "Economist" David Lereah, who consistently spews positive predictions, despite market realities to the contrary.

Of course, "all real estate is local," right? So David Lereah's national predictions are fairly meaningless to us anyway. To get a feel for the local market, most people are inclined to turn to their friendly neighborhood real estate salesperson. However, is the friendly neighborhood real estate salesperson any more likely to be open, honest, and/or correct about what is happening in the local housing market, and where it is headed? Let's take a look at a few recent examples.

As January drew to a close, area Realtor "Marzipan" stated of the local housing market that inventory had "shrunk over the last month" and that supply was "tighter, not in excess of the demand." When the data for January became available from the NWMLS, it turned out that (King County res + condo) inventory actually rose 11.7%, with 3,744 new homes coming on the market (supply) and just 2,492 pending sales (demand). Keep in mind that as a member of the NWMLS, Marzipan has access to the data before it is published to the general public. Why she chose to make a verifiably false statement about inventory and demand is anyone's guess.

In another recent episode, real estate agent "Homestar" reprinted a verifiably false headline from the Seattle Times, and used it as the subject of an entire post. Referring to October - December of last year, the headline claimed that "Housing sales fall in 40 states; but not in Northwest." In reality, year-over-year sales declined 8-12% in the last three months of 2006 over the entire region covered by the NWMLS, continuing a trend that began in November 2005.

When called out on his inaccurate assertion, Homestar did not step up to correct the error. In fact, he appeared to ignore the issue all together. However, another local real estate salesperson, "Carol" readily stepped up in an apparent attempt to defend Homestar. Her tactic was to mount personal attacks and divert the discussion to home sales price, which she continued to harp on despite repeated attempts to point out the simple fact that the headline was in error. Carol utterly refused to acknowledge that the headline claim about sales was demonstrably false.

These are just a few of the most recent examples. Anyone who cares to spend some time reading the archives of the near-innumerable local real estate sales blogs is sure to find many other instances of verifiably false data being presented as fact to an unwitting public. In my experience, local real estate "professionals" are no more reliable than national PR talking heads when it comes to providing honest, accurate assessments of the present housing market.

If they can't even manage to honestly convey things that have already happened, why should we believe their predictions of what is going to happen? In my opinion, we shouldn't.

Seattle is Different. We're Totally Immune.

2007-02-27T15:05:00.000-08:00

Dow, Nasdaq, S&P500

Click to enlarge

Microsoft & Boeing

Click to enlarge

Update: By request, here is a graph of today's stock performance for a handful of other locally-based companies.

Other Seattle-Area Companies

Click to enlarge

For those of you keeping score at home:

Boeing: -1.95%
Microsoft: -4.12%
Amazon: -5.00%
Starbucks: -3.94%
Nordstrom: -7.59%
Costco: -3.48%
Washington Mutual: -2.25%

Some immunity.

Forbes: Seattle Job Market Middling

2007-02-26T10:05:00.000-08:00

Seattle home prices can't possibly fall, because we've got one of the best job markets in the country! At least, that's how the argument goes... but according to the latest claims from Forbes, that argument might not hold much water.

Oklahoma has inspired its share of songs and one memorable musical. But it's not exactly a top destination for recent college graduates looking for work. Usually, 22-year-olds flock to cosmopolitan cities like New York and San Francisco, assuming that's where they'll find the most opportunities for work (and, let's be honest, a social life). But they might be heading in the wrong direction. Oklahoma City made it on to our list of the 25 best American cities to get a job. New York's ranking? No. 75.

Of course, if you want a job in finance, you should still consider New York--Warren Buffett notwithstanding. And while Oklahoma City surely has a thriving arts community, the major metropolitan areas are probably your best bet if you want a career in theater. Our list looks only at statistics; we don't focus on which areas are best for specific careers. And for the second time in a row, the big cities performed poorly. While Washington D.C. is fifth on the list (down from No. 1 last year), Chicago (No. 82), Los Angeles (No. 88), San Francisco (No. 86) and Boston (No. 83) couldn't even break the top 75.
...
So where should you look for work? We wouldn't rule out New York or Los Angeles; highly educated job-seekers should be able to find opportunities there. But the major metropolitan areas will probably never shine on this list. Despite high median incomes, they are generally plagued by unemployment, expensive housing and low job growth.

Coming in at number 34 on the full rankings, Seattle out-performed many of the larger cities. Keep in mind though that this is the same source that five months ago predicted Seattle home prices will shoot to the moon.

It should also be noted that #1 on the list is Raleigh, NC, home of Research Triangle Park. Raleigh is a strong competitor to Seattle when it comes to technology jobs, and if you put any stock in Forbes' calculations (which I'm not saying I do), they currently come out on top by a long shot.

Seattle's a great place with a strong job market (at the moment), but you're only fooling yourself if you think we're unique, special, and invulnerable to serious housing market declines because of it. The point I'm trying to make is that there are plenty of places around the country with job markets as good as or even better than Seattle. A good local job market obviously won't hurt the housing market, but it won't save it, either.

(Hannah Clark, Forbes, 02.16.2007)

Seattle Bubble Forum Highlights

2007-02-23T08:14:00.000-08:00

There are lots of great conversations going on over at the Seattle Bubble Forums, why don't you join in too? Here's a sampling of what's going on over there:

Alan offers some perspective on half-million-dollar homes.
A couple of threads toss out predictions for 2007
Matthew points out that stocks may be headed for a big fall.
Shack asks how long would it take for a flatlined market to return to "normal?"

These are just a few of the conversations that are going on. So why don't you head on over and add your voice to the discussion?

Latest Condo Conversion: Smith Tower?

2007-02-22T15:58:00.000-08:00

If the owner of the Smith Tower gets what they want, you can add yet another condo to dozens already planned for downtown's future. Walton Street Capital is hoping to convert the Smith Tower into condos:

Ninety-three years after Pioneer Square's Smith Tower was built as an elegant business address, its new owner hopes to turn the 38-story landmark into residential condominiums.

Chicago-based Walton Street Capital filed papers with the city Wednesday to begin what could be a months-long process of getting approval to redo the tower as housing.

It seems that living in old buildings is more charming — and practical — than working in them.
...
"We bought it, frankly, as an office building, and it wasn't until we found out we would lose the two largest tenants in the building that we really looked carefully at what our options were," [Walton Street representative Michael] Allmon said. "We've just become excited about the possibility of changing its use.

"It's important that all possible current and future uses be explored in the preservation of this iconic tower," he added.
...
Allmon believes a condominium-ized Smith Tower would have little trouble competing with the dozen or so swank condo developments under construction in downtown Seattle.

"I think this really is a category unto itself," he said.

I personally think it would be pretty awesome to live in the Smith Tower (that is of course if I worked anywhere near downtown). It's always been one of my favorite buildings in Seattle. I made a crude LEGO model of it (crude compared to this one), and it is featured prominently in the only painting my wife and I own.

On the other hand, they'll most likely be ridiculously expensive luxury condos, far out of reach for most people, and besides that, does downtown Seattle really need yet another tower full of condos, on top of the 49 others in the works? Really?

(Amy Martinez & Elizabeth Rhodes, Seattle Times, 02.22.2007)

Microsoft & Boeing: Seattle's Firm Foundation

2007-02-22T10:53:00.000-08:00

Illustration: James McFarlane
Click to enlarge

Question: How many of the Seattle-area's much-vaunted Boeing jobs will fail to materialize with the collapse of a $2.2 billion order?

Question: Are predictions about Microsoft job growth perhaps just as "overly aggressive" as Vista sales forecasts (according to CEO Steve Ballmer)?

Just curious.

Seattle Running 6-12 Months Behind

2007-02-21T09:53:00.000-08:00

A common belief (one that I've repeated a couple of times here) is that housing trends in the Northwest tend to lag California and the nation as a whole by six months to a year. Obviously we cannot know exactly what will happen here, but if we have generally followed California and the national averages in the past, then we can look to them to get a general idea of where our housing market is headed in the near future.

Let's take a look at some graphs to see if the theory holds any water. All of the following graphs are from the Case-Shiller Index, which tracks same-home sales in 20 markets across the country, including Seattle:

Seattle Home Price Index

As we all no doubt already know, Seattle has experienced quite a climb in prices in the last few years. You can see in the graph that the gains really started to pick up steam around 2003-2004, but things seem to be leveling off presently.

San Diego Home Price Index

San Diego's rapid gains began in earnest 2002-2003, but they leveled off in 2005, and actually declined in 2006. Hmm, interesting.

Composite-20 Home Price Index

The composite graph appears to shoot up in 2003-2004, with a peak in early 2006, and declines since then. (Note that the composite graph tracks only 2000-present.)

Already you can probably see that on the way up, Seattle did in fact seem to lag the other two graphs. To help us visualize, I took the San Diego graph, and overlaid Seattle onto it, shifting Seattle one year back:

San Diego Home Price Index w/ Seattle Overlay

While they are of course not a perfect match, you can see that when Seattle is shifted back a year, both lines become suddenly steeper around the same point, and they both level off around the same point. This would seem to confirm the theory that Seattle's housing cycle has been lagging California (or San Diego at least) by approximately one year.

Here is the Composite-20 graph, with Seattle overlaid and shifted back by six months:

Composite-20 Home Price Index w/ Seattle Overlay

That looks like a pretty good match, too, with the two tracking very closely since midway through '03.

So what's the conclusion? During the recent unprecedented run-up in home prices, price growth in Seattle has lagged the nation as a whole by roughly six months, and San Diego by approximately a year. Both of these measures have shown real price declines in the past year, despite many positive factors (such as job growth, low unemployment, good interest rates, etc.).

Therefore, a reasonable person would conclude that there is a very real possibility that Seattle will also experience price declines in the coming year. On the flip side, a willfully igorant person would conclude that "Seattle is special" and we are totally shielded from experiencing similar price drops.

Declining prices are not by any means certain to happen, but ignoring the evidence that points to such a conclusion seems to me to be a pretty dumb move.

(S&P/Case-Shiller® Index, MacroMarkets, 01.2007)

"Quite frankly, it's time to buy."

2007-02-20T14:20:00.000-08:00

I think maybe there is some kind of virus infecting the minds of potential homebuyers. The virus settles into the brain and causes the victim to lose the capacity for rational thought in matters of real estate. Symptoms include the delusions that "I need to buy now or I'll be priced out forever," "I should use whatever kind of financing I can get my hands on," and "owning any old dump is better than renting." Possible evidence of that last one can be found in today's P-I:

For those undeterred by the sales flier that warned a 96-year-old Columbia City house is "an extreme fixer, to be entered at your own risk" or by the "hazardous environment" sign on the door, Al Johnson left a flashlight just inside the entry.

"I'm on my second battery," said Johnson, an associate broker with Windermere Real Estate, during an open house earlier this month. He posted this listing on a Sunday evening and got calls about the house every half-hour the following day.

"One, it's about the cheapest thing around," Johnson said. "And two, people just get drooly about projects. ... People get weak in the knees and say, 'Oh, I can do this. I love this.' "
...
Johnson's weekday open house, set up so other agents could get a look, attracted a decent number of visitors. After looking through the house, Windermere agent Susan Sellin said she recently saw a Capitol Hill house in similar condition sell with multiple offers, despite a $500,000 asking price.
...
The increased interest in fixers over the past few years drove up prices beyond where many projects pay off for those who want to fix a house, then sell it right away, according to agents and builders.

"Everybody and their uncle was in this business," said Mark Johnson, who started renovating houses and building new ones in 2001, after five years as a contractor.

Johnson, no relation to Al Johnson, recently paid $360,000 for an old West Seattle house and said he poured about the same amount into overhauling it before putting it on the market last year. When the offers that came in were lower than he wanted, he decided to move in himself.

He said he knew the market was slowing when he started the project, "but I was kind of a little cocky, I guess, and thought that I could beat it."
...
But despite the slowing market, [Mark] Johnson sees an upside.

"As far as flipping, it's going to be a good thing, because there's not as much competition," he said. "Quite frankly, it's time to buy."

Oh yeah. For sure now is a great time to buy an overpriced dump. When isn't it a great time to buy one?

(Aubrey Cohen, Seattle P-I, 02.20.2007)

Industry Extreme Makeover

2007-02-19T16:43:00.000-08:00

Side note: What in the heck is up with the FLU bug. I just got over it after my daughter (out of school for 3 days last week) planted one on me and passed it to me. Now my son has been in bed with it. What a great weekend! I understand Blanchet H.S was shut down recently due to the flu--this is nasty. Moving on....

Industry Extreme Makeover

Our state has recently enacted new rules by our Department of Financial Institutions to have loan originators get licensed, undergo testing and have background checks. Jillayne Schlicke, industry insider and commenter to this blog and Rain City Guide, is tuned in to this segment as her organization provids training, classes and pre-testing for those within the industry. Now, the candidates have to undergo testing (not in place yet, but coming later this year) and background checks 'a la finger printing. Um, how about including credit checks, like required of escrow ownership? Real estate agent candidates take coursework and have to pass an exam to be licensed by the Dept. of Licensing.

The industry needs an extreme makeover. It has a public relations problem that has been ongoing for years. It truly boggles my mind why many industry insiders do not drop by this blog and others not hosted by insiders. It is a laboratory! Bloggers offer gems of information about frustrations, housing issues, buying issues, etc....the very best cross section of existing homeowners, past homeowners, renters, those looking to buy now or in the future---people of all walks of professional and personal life! I digress. An earlier blogger comment I read really hit home for me:

"in my line of work, the MOST bankruptcy's I see on credit reports are from loan officers! hahaha, unbelievable. It's just amazing that people who deal with this amount of money can't keep their own finances in good standing. How can someone who cannot control their own situation give sound advice to anyone else?" - Matt

Here are some thoughts on what I would encourage to help mend the image of the real estate profession:

Minimum of a 4 yr college degree (a far cry from a GED or high school diploma)
Institutional training specific to the sub-set industry: financing, escrow, title, agents, etc..
Background check on all agents and loan officers INCLUDING meeting minimum credit scores---this would include screening for derogatory lates such as 30-60-90 lates, prior foreclosures/ NOD's etc...do this ANNUALLY at the licensee's expense.
Passing state licensing exams and annual continuing 'ed classes.

I agree with Matt's comment. There is nothing more dishonest and revolting than for those within the industry to market themselves as "trustworthy," "would help you like I would my own family member," "integrity filled," etc.... when their own house is out of order.

How would you like ownership in an escrow company or mortgage brokerage/loan officer to have financial distress or have suspect backgrounds, counseling you on a major transaction? Real estate is not like buying a stereo on credit at Magnolia Hi-Fi or a car at your local dealership. It is a big deal. Can you discern who really needs a commission vs. those that don't? I think you can. People can read body language, demeanor and professional image.

Now, before my colleagues get ready to write more hate mail to me, please know that not EVERY loan officer or agent has their house out of order. Realtors complain of weeding out the industry with new entry benchmarks, but they seem to be suggesting just softballs---increasing study hours etc....

If the industry wants respect, start giving it to consumers first by making it a profession, not a hobby. I truly believe that if as much time and money was spent on fundamental real estate knowledge and core customer service coursework vs. as much money and time is spent at a sales seminar on overcoming buyer/seller objections, this industry would be better off.

Bubble Link Roundup

2007-02-19T09:56:00.000-08:00

There were a lot of mildly interesting real estate stories in the local rags this weekend. So, I think it's time for another link roundup: a list of links that are worth posting, but not each as their own post. The following links happen to all be specific to the Seattle area.

Christy L. Thomas asks "Is Seattle only for rich folks now?" in a guest editorial for the P-I.
Pierce County homeowners enjoy 10% appreciation—in their property tax bill.
The key to fincial security is to bank on perpetual 7 percent per year home appreciation?
Hey, as long as you're a proud homeowner, you may as well take every opportunity to cash in on your home, right?
The Times reprinted a warning about the $1.5 trillion ARM reset of 2007 from the Detroit Free Press.

Lastly, I was somewhat surprised to see this quote reprinted in the Seattle Times from a Bankrate.com article:

If you're looking for the best return on your money, you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of financial instruments such as mutual funds.

While the stock market's long-term average rate of return is in the range of 8 to 10 percent, housing historically has appreciated on average in the low- to mid-single digits. Don't buy solely for investment gain.

Seen any other good snippets lately?

Announcing the Seattle Bubble Forums

2007-02-18T15:22:00.000-08:00

As many of you may have noticed, the daily open threads have had an increasingly large number of comments lately. I don't know about anyone else, but for me they become rather difficult to follow after a few dozen comments. Plus, if someone wants to bring up a new subject 30 posts in, it's quite easy to be drowned out.

Well thankfully there is a solution. For your pleasure, I have created the Seattle Bubble Forums. It's like an open thread, only a hundred times better!

I'm hoping that these forums can be a place where people can get together to share information and learn from each other. It's up to you to make them the most they can be.

I don't necessarily plan to stop posting Open Threads on the blog, but if the majority of people move the active discussions over to the forum, I will definitely reduce the frequency of open thread posts, and possibly eliminate them all together. We'll see how it goes.

Have fun.

Saving money is possible

2007-02-18T11:17:00.000-08:00

Today, Everett Herald reporter Debra Smith shows how Laura & Jon Ward saved $9,000 by using Redfin. The caveat is that they did most of the legwork in finding their home to buy. How much work would you be willing to do if you could save thousands? Some have the time, some don't.

"Taking $20,000 in commission? That's absurd. If I'm willing to do the work, I don't want to pay full commission."
- Jon Ward, Mountlake Terrace Homeowner.

The National Assoc. of Realtors projects that the majority of people start their home search online. My personal experience coincides with this too. I found my own home via the internet (at the Seattle Times.) But back in 2004, Redfin didn't exist, nor Zillow, or Shackprices.

It appears the frontier of financing is changing too. The problem is that many consumers are unaware where to get information to help keep money in their wallet. Web logs are probably blowing those doors wide open. Doors that have been kept closed for so long.

-S-Crow

Seattle Bubble on Inman News

2007-02-16T14:41:00.000-08:00

The remaining portions of Glenn Roberts' piece on Bubble Blogs have been posted to Inman News. I recommend you read it today, because after today it is only accessable to subscribers.

Read about Glenn's conversations with a "Bubble Debunker" (real estate agent), John Doe of Southern CA, Bill Bond (Housing Panic contributor), an anonymous blogger from Southern CA, and Inman blog commenters

Oh yeah, there's also a Q&A with yours truly.

Below is the full text of my Q&A interview with Glenn.

View/Hide Full Interview

Hello. I am a real estate reporter for Inman News and I'm working on an article about the real estate bubble debate. I'm wondering if you'd care to share your thoughts.

Many blogs have been born around the notion of a housing bubble. The definition of housing bubbles; explanations for their formation and fate, size and location; and the very existence of housing bubbles have fueled arguments among real estate enthusiasts and experts alike for several years. And everybody seems to have an opinion. The debate has inspired T-shirt designs and sales of other bubble-related memorabilia.

First off, I would like to make it clear that I am highly focused on the issue of a residential real estate bubble in the greater Seattle area. When it comes to the national market or other specific regions, I am merely a consumer of other people's opinions. Therefore, I do not feel qualified to make predictions or assertions regarding any housing markets outside of Seattle.

Also, I do not claim to be an expert on issues of real estate or economics, and I have never received formal training nor held a job in either of those fields. That being said, I have spent a large amount of time researching these topics and taking in data and opinions from all sides of the issue. As an "amateur enthusiast" I definitely believe that I am qualified to make predictions and assertions regarding the local housing market. If you would like to see data to back up any such assertions made in the responses below, I would be happy to provide it, just ask.

[Although Glenn did not request any supporting information from me, I have added links throughout this online version of my responses to posts where I explore the topics mentioned.]

i) Is this the real estate equivalent of the global warming issue? Will there ever be a unifying bubble theory or are we doomed to never find a consensus?

I don't think the real estate bubble is anything like the global warming issue. We will know in just a few short years whether there is/was a real estate bubble or not. The "unifying bubble theory" will be what is written in the history books. In the late '90s the consensus was that we were in a "new paradigm" and that tech stocks were a sure thing. Looking back just a few years later, we see that it was in fact a bubble, unsupported by the fundamentals. The real estate bubble will be the same.

1) What makes you a real estate bubble believer, a bubble debunker, or bubble neutral?

I would describe my feelings about whether there was a bubble or not at the time I started Seattle Bubble as "leaning toward bubble believer, but open to exploration." Since that time, all the data I have investigated has pointed to the existence of a housing bubble in Seattle.

In the last six years:

Home buying demand has grown much more rapidly than the number of jobs.
Home prices have grown 86%, while...
- Incomes have grown just 14%
- Rents have held steady or in some cases actually decreased
Affordability has dropped 43 points below its 1993-1999 average
Exotic mortgages and zero-down financing have become more and more common

Furthermore, every time I investigate the data behind the most common claims of factors that will prevent the Seattle-area housing market from declining, I find that the data does not support the claim.

As long as the number of jobs is increasing, home-buying demand will stay strong: FALSE
People are moving here faster than new housing is being built: FALSE
Growth Management laws have restricted supply too much: FALSE

I just can't ignore the facts. Things are seriously askew, and overripe for a serious correction.

2) How do you define a housing bubble?

I believe there is a housing bubble when home sales prices become seriously out-of-line with the fundamentals that should drive the housing market: fundamentals such as incomes and the cost of rent. The only difference between the driving forces of rental prices and the driving forces of home prices is that home prices have a speculative premium built in.

The easiest way to spot a housing bubble is to compare home purchase costs with rental costs. If you are looking for a quantifiable definition, if it is more than 1.5 times more expensive to purchase as it is to rent a comparable home, I would say that is a bubble.

3) How does this definition fit (or not fit) the national housing market? Which regional or local housing markets have exhibited the most bubble characteristics?

As I stated above, I really do not feel that I am in a position to make assertions about markets outside of Seattle. However, my definition is simple enough that you can get a general picture for markets using basic data available on the Census FactFinder website. The available data is overly broad and does not make for the best direct comparison, but it is at least worth looking at. Here are the rent vs. own ratios (as in, median monthly mortgage payments are X times median monthly rent) as of 2005 for a few areas (whole counties) according to that source:

Seattle: 2.2
San Diego: 1.9
Boston: 1.9
Miami: 1.8
Phoenix: 1.7
National: 1.8

As you can see, many cities across the country as well as the nation as a whole apparently meet my most simple definition of a housing bubble.

4) Which bubbles [have already] burst? Which ones have deflated? Which ones are inflating? Which are about to pop?

Again, with the caveat that my focus is on Seattle, I do not think that any of the housing bubbles across the country can honestly be said to have popped yet. In many places, including the nation as a whole, there has been a slight deflation, but I am of the opinion that things are just getting started.

Only a few regions are still inflating, and as of last spring Seattle was definitely one of them. I can't really say whether we still are or not, because the vast majority of price gains come in a 3-month time span in the spring, which we are presently just on the verge of. Personally I expect price gains to be very small this year in Seattle, if prices even go up at all.

5) Are there any common traits among the bubble markets?

Yes: Loose lending standards and a mass psychology based on two beliefs: "Home prices are shooting up, so if I buy now I will reap the rewards of large appreciation." –and– "If I don’t buy now, I may be priced out forever!"

7) Is it possible to accurately identify the existence of a bubble before it is gone? Explain.

Can a bubble be identified? Absolutely. When the price of an item becomes grossly out of line with the actual intrinsic value of that item, you have a bubble. However, what cannot be identified is exactly how a bubble will dissipate. Perhaps it will pop rather suddenly, perhaps it will gradually deflate, or perhaps it will simply stagnate for a very long time while the fundamentals catch back up. I will say that that last option does not seem very likely.

8) How are bubbles born and how do they die?

It is all primarily about mass psychology. When a large enough group of people get it in their heads that purchasing something will result in guaranteed high returns, it becomes a self-fulfilling belief. Unfortunately it is basically akin to a pyramid scheme, and eventually there is no one new to buy in. When that happens, people finally realize what a crock it was and they all try to get out at once. This of course causes prices to plummet, bringing the death of the bubble.

9) Why do people get so fired up about the concept of a housing bubble?

That is a question I have often asked as well. I think there are a variety of reasons for the emotional charge that some people exhibit. Some homeowners bought into the idea that their house will appreciate endlessly at 10%+ per year, and are defensive against any suggestion to the contrary. Some renters are frustrated that home ownership has moved out of reach, seemingly for no good reason. Of course, anyone in the real estate business gets defensive about the notion of a bubble because a bursting or deflating bubble would affect their bottom line.

10) Will there ever be an explanation for bubbles that we can all agree upon?

I doubt it.

11) Will there ever be a time when the discussion about bubbles goes away? Is this just a passing fancy?

I imagine that we will stop discussing bubbles when they stop crapping all over our economy. Seriously though, the root of the problem is that people want a way to make money quickly and easily. If an opportunity comes along that appears to offer that, they will jump on it. There are no guaranteed shortcuts to riches, but as long as enough people keep jumping on the latest "sure thing" with their investments, we are doomed to see plenty more bubbles (real estate or otherwise) in the future.

12) What has motivated you to participate in the bubble discussion and what have you learned? What has happened with traffic volume at your blog site as the U.S. housing market has slowed? What is your background in real estate/economics?

I started the blog primarily as a place to keep track of everything I was reading while I researched the housing market. My wife and I had been "window shopping" for a home, and were extremely discouraged with how unaffordable they all were, despite our above-average income. The more I researched the housing market, the more disturbed I was about the state of things. A good summary of what I have learned is stated above in response to question 1.

In 2006, monthly traffic to my blog increased nearly seven fold. However, since I only started the blog in August 2005, that is probably primarily a function of the blog's newness rather than the state of the national market.

As I stated above, I do not have a "background" in real estate or economics. My formal schooling and career experience is in the field of electrical engineering. As someone with a very analytical mind, able to seek out and process data, I feel that I have built a fairly complete picture of the local real estate market.

Hide Full Interview

(Glenn Roberts Jr., Inman News, 02.16.2007)

Our Doom and Gloom Media

2007-02-16T08:29:00.000-08:00

It seems that every time the local press prints a story that is slightly less than 100% "rah-rah, go home prices" people come crawling out of the woodwork to accuse them of using "doom and gloom" or "sensationalism" to sell papers. Accusations like that really amuse me, since (as regular readers of these pages know well) the vast majority of real estate stories printed by Seattle's two dailies are overwhelmingly positive about the market, despite looming signs of a slowdown.

Case in point. Take a recent AP story about the nation-wide housing slowdown. The P-I reprinted the story in its original form: Housing sales drop in 40 states. However, over at the Times, they couldn't let a headline like that slip by. No, that just won't do. So they whipped up their own version (additions in bold): Housing sales fall in 40 states; but not in Northwest

The slump in housing deepened in the final three months of last year with sales falling in 40 states and median home prices dropping in nearly half the metropolitan areas surveyed.

The Pacific Northwest bucked that trend, with the Seattle-Tacoma-Bellevue area prices rising 11.3 percent in the fourth quarter, the National Association of Realtors reported today. Spokane prices were reported up 12.2 percent, and Portland up 11.2 percent.

At this point I imagine the Times was pretty proud of themselves. But apparently after going to print, someone thought: "You know, adding just one paragraph might not be enough to get the message across. The Puget Sound housing market is so blisteringly red-hot that it deserves more than that. Let's add a bit more and print it again."

The slump in housing deepened in the final three months of last year, with sales of existing homes falling in 40 states and median prices dropping in nearly half the metropolitan areas surveyed.

Although Washington state's sales of houses and condominiums declined 16 percent, prices continued to climb, thanks to a generally strong economy.

In the Seattle-Tacoma-Bellevue area, prices rose 11.3 percent in the fourth quarter compared with a year earlier, the National Association of Realtors reported Thursday. Spokane prices were up 12.2 percent, and Portland up 11.2 percent.

Formerly red-hot areas were among the hardest hit as the five-year housing boom cooled considerably in 2006.

While some economists think the worst may be over for housing, others predicted more price declines to come in some areas until near-record levels of unsold homes are reduced.

The Puget Sound area is not now reporting an excess housing supply.

At the end of January, King County had a three-month supply of unsold homes, according to the Northwest Multiple Listing Service.

There, that's better.

You want another example of the sensationalist doom and gloom reporting we are subjected to by the local press? Okay, how about Aubrey Cohen's twist on the AP story, appearing in today's P-I: Area's housing prices still strong

Whatever is happening to the region's housing market, its home prices held up better than in much of the nation.

The price of a typical house in the Seattle-Tacoma-Bellevue area was $372,900 in the final three months of 2006 -- up 11.3 percent from the same period in 2005, according to data the National Association of Realtors released Thursday.

The association did not release figures just for Seattle, but the Northwest Multiple Listing Service reported the city's median price for houses and condos increased by more than 9 percent in each of the final three months in 2006, compared with the same months the year before.

I do have to give Mr. Cohen some credit though, as he did manage to bury a little bit of a warning in there between the sub-headline "Homes here buck national trend" and all the starry-eyed cheerleading:

Seattle isn't in the clear, however. The number of homes on the market increased for seven straight months, compared with the same months in the prior year, while year-over-year sales declined for six straight months before going up in January, according to the Northwest MLS.

The rate of price appreciation slowed in recent months, with a year-over-year increase of just 0.8 percent in January. January's median was down 9.5 percent from December. Some analysts have speculated that Seattle will see year-over-year price declines.

What can you say. They've got to throw in a little "doom and gloom" to sell the 'papes, right?

(Martin Crutsinger, Natasha Metzler, Elizabeth Rhodes, Seattle Times, 02.16.2007)
(Aubrey Cohen, Seattle P-I, 02.16.2007)

Let's talk Financing: Gross Income outdated?

2007-02-15T01:00:00.000-08:00

Bonus Picture Day (billboard next to Everett Events Center): Looks like the banking industry is aware of the debt picture.

Gross Income outdated?

For years the lending industry has utilized gross income as the yardstick by which consumers are qualified to obtain mortgages. Let's say the median priced home in King County is $465,000. What would the gross income need to be to qualify for this mortgage?

Here's the generic scenario: Specifically, let's use a 100% financed program as our sample; not to ridicule the program, but because it is used so often. Property Taxes are presumed to be $5000/yr. Homeowner Insurance is presumed to be $600 per year. We won't worry about Mortgage Insurance for this illustration. This is just to make you think, so don't pull out your calculators.

A single 1st Deed of Trust loan is $465,000 @ 6% fixed for 30 yrs: Using the Bankrate.com Mortgage Calculator, the Principle & Interest is $2787.91 Now add $466 per month for taxes/insurance, so your total monthly payment is: $3253.91.

If a rule of thumb is to not exceed, say, 33% of your gross income, then what should my income be to qualify for this loan? If your payment is $3253.91, roughly a third of what you make, then you would need gross income to be roughly $9900.00/month. That is a lot of dough.

But, hey! Meet Bob. After tax income for Bob the borrower is actually around $7,000/mo. That's his net income. But, hey! Wait! Bob spends at least $500 per month on utilities and he needs cable to watch pay per view specials like the UFC Championships. And he spends hours blogging, so Bob needs a high speed internet service at $50/mo. He also drives that sweet Acura TL, so his payments are around $600 mo., including insurance--which would have been less, but that's another story. He loves the Sonics and attends at least 2-3 games per season. Bob and his close friends eat out at least once a week and dang it, he wants to go to REI and buy that Thule car roof rack for his new boards that he purchased last year. Up to a few weeks ago (conditions have been horrible recently) Bob was skiing at Crystal Mountain every weekend. That's a hundred dollar day, just to ski and play. When Bob really thinks about it, he's spending about $2000.00 month on food, utilities, car payments, and other stuff. Once in a while he likes to travel.

What I'm illustrating is probably not terribly far off from reality. After tax income on this borrower does not leave very much left for a housing payment, provided the income stated was a full doc loan---full employment and income verified loan. If the borrower did not actually make $9900 mo/ gross (went Stated Income or NINA--no income or asset verified) but ACTUALLY brings home $5000.00 per month, NET, this borrower is on borrowed time.

Fortunately for Bob, his co-worker is also a part-time loan officer! Bob went with an 5 yr. Interest-only ARM, amortized over a 30 yr term. Bob is paying interest only, $2325 plus taxes and insurance, so his payment is about $2791/mo. That is about $500 less than the previously mentioned loan program. He could take that difference and invest it or have more fun. Is this scenario plausible to readers? It should be. It works well with those who use it wisely.

Should the lenders stick with gross income? I'm probably old fashioned, but when I look at my monthly obligations, my decision making (usually) is based upon take home pay, not gross income. Borrowers should know what they actually bring home and use that figure as the real number to stay within their comfort level.

Kleenex, Q-Tip, Band-Aid... Realtor

2007-02-14T14:53:00.000-08:00

Public Service Announcement for people employed the real estate field:

Whether you like it or not, the general public uses the term "Realtor" in much the same way that we use the terms Kleenex, Q-Tip, Band-Aid, Jell-O, Styrofoam, and many others. Despite the fact that "Realtor" is a registered trademark that refers to a specific product, in practice the majority of people use the term "realtor" to refer to anyone that sells real estate.

I know this really bothers some of you, Realtors or not, but it's just a fact of life, and not likely to change any time soon. Also, you should know that it really gets old when you constantly correct people on the use of the term. Imagine how annoying it would be if every time you asked someone for a kleenex you were told "Kleenex is a registered trademark of the Kimberly-Clark Corporation, and I don't have any. However, I do have two-ply facial tissue; would you like one of those?" It gets old really quickly.

I just wanted to throw this one out there, because I have occasionally seen it become a point of contention on this and other real estate blogs in discussions between real estate "professionals" and the public. I am but a messenger. This is just the way things are. Get used to it.

Ask Seattle Bubble: Just Bought A Condo

2007-02-14T08:24:00.000-08:00

Here's a question I recently received from a reader that I will call "Jack":

I'm 26. From L.A., recently moved here. Saved for a year, and moved with about 30k, (made 110k in '06) I was on disability for a year before after I almost died in an accident, so my previous savings were depleted. We are renting and working in Bellevue. Our rent for a 2 bed / 2 bath is $1,175. It's a pretty nice place outside of downtown Bellevue

I just closed on a 2/2 in Issaquah off of W. Lake Samm. Blvd. and I-90, for $219,950. Got good rates (I deal with loans of a different kind, so I did my homework). Anyway, my payment all in is $1,600, including approx. $140 in tax and $218 in HOA dues. Looking at the comps over the last 6 mos. I didn't steal the place, may have overpaid a couple of grand. I plan on living there for 4-5 years.

I've been well versed in med. emergencies, and work on commision, and am very worst case scenario oriented. My all in, PITI, and everything else is around 30% on the worst month i've had in a year, and around 12-15% on a good month, with plenty in reserves...

What is your HONEST opinion on this one?

Here's what I said to Jack:

My opinions on buying real estate right now are pretty simple. In general, I don't think that now is the best time to buy. However, those that do choose to buy will come out all right as long as their payment is affordable and they would be able to and wouldn't mind staying put if the price dropped to less than what they paid. Be aware that if price drops do come, it could take 5 to 10 years before prices come back up to their previous highs. By "affordable," I mean no more than 30% of gross income is going to mortgage, insurance, taxes, and HOA. Certainly there are exceptions to every rule, but it's always best not to start off with something that you can barely afford (approaching 50% of gross or more), because if a job loss or medical emergency crops up you could be in a tight spot very quickly.

So generally, I would say that if you're happy with your home, you're not stretching to make the payments, and you have a reasonable plan in case of financial problems, then more power to you. Enjoy your place.

What advice do you have for Jack, now that he has bought the condo in Issaquah?

What Cities Does Seattle Compare To?

2007-02-13T12:46:00.000-08:00

In the last few days I've run into a few comments in various discussions about Seattle real estate that have caught my attention:

Dean Jones, Condo Marketer:
"You might cringe at condos that sell for $2,000 a square foot. But it would be twice that in New York. We're still, relatively speaking, a bargain."

Bob, Urbnlivn commenter:
"When I look at the prices in New York, Tokyo, Hong Kong and London where new apartments can routinely fetch $1500 per sqft, Seattle still isn't that expensive but it is getting there."

Emkorial, Ars Technica Forum Member:
"Seattle is a MAJOR city. Like LA and NYC."

What I find interesting about these comments is the tendency to justify Seattle home prices by comparing Seattle to large, major cities. Is this a valid comparison? Is Seattle really a major city like LA or NYC?

Usually when people refer to a city as "large" they are referring to the sheer population of the city. However, population density also has something to do with it, because otherwise any city that expanded their boundaries enough could claim to be a "major" city. So we could rephrase the question to ask: "What cities most closely match Seattle's population and density?"

To answer that question, I made a list of a handful of major world cities and a number of large-ish US cities. Here are the population, land area, and population densities of each:

Click to enlarge

I have highlighted the six closest cities to Seattle in each separate category: population (orange), land area (green), and density (yellow). When looking only at population, Seattle is most similar to cities such as Las Vegas, Vancouver, Milwaukee, Portland, Cleveland, and Sacramento. When comparing land area, St. Louis, Cleveland, Baltimore, Milwaukee, Sacramento, and Las Vegas are all fairly close. Lastly, when you compare density (which the chart is sorted by above), Seattle is comparable to Los Angeles, Baltimore, Buffalo, Detroit, Cleveland, and Milwaukee.

There are two cities on the list that are similar to Seattle in population, land area, and density: Cleveland, Ohio and Milwaukee, Wisconsin.

Keep in mind that I am not attempting to compare all available statistics (such as income, economy, home prices, etc.) for these cities. I simply wanted to determine which cities Seattle should be compared to when discussing city size.

And now we know the answer: Cleveland and Milwaukee.

Update: Some people pointed out that my "highlight the three next highest and the three next lowest" method does not meet the rigorous scientific standard that the readers of this site deserve. Therefore, in the interest of science, I present this updated chart:

Click to enlarge

In this chart I have highlighted cities that are ±20% of Seattle in each category. As you can see, Cleveland and Milwaukee are still a close match to Seattle, with the city of Baltimore, Maryland joining the list.

Why this insider blogs at Seattle Bubble & Rain City Guide

2007-02-12T20:54:00.000-08:00

So, why do I contribute from time to time and participate on Seattle Bubble Blog and over at Rain City Guide? Isn't that like not a good idea?

I'll write as I think, so here goes:

I read, collaborate and discuss housing here because it offers one of the very best cross sections of consumers who are interested in housing. Housing impacts our daily lives, whether you currently rent or are a future, existing or past homeowner. This blog has them all (consumers), mostly absent of insiders who stick around to comment, except for Ardell Dellalogia, whom I've encouraged to join in on the discussion and has both here and at RCG.

Sadly, it's a shame other allied real estate pros don't participate. My sense, right or wrong, is that other folks in the business do not want to be scrutinized or singled out and be the fodder of any blog. I wish this were not the case, but I think it holds true. I also believe there are many people in the business who agree with a lot of what is being discussed in this forum, confirmed from many conversations I have outside the confines of this blog. The real estate community, while large, is small. Enough said.

One of the other reasons that I participate is that I learn. A lot. From everyone. I just wish I had some way of an RSS feed for Eleua's comments. I admit it. Sometimes I just scroll to find his military flavored comments that nearly make me pull a muscle from laughing so hard. Sometimes my kids wake up at midnight from the laughter in my office. They murmur to each other: Dad is on that blog again!

Commenting on this blog has not been counterproductive to myself personally or professionally. Oh, I've had my fair share of hate mail over the months, but I never take it personally. I participate because I have a lot to offer from a perspective that has a unique vantage point: we (escrow) see everything (finance, lending programs; the good and bad as well as real estate issues) from the lens of escrow—a traditionally neutral party (arguable).

If there is anything that concerns me the most about real estate it is that far too many consumers go blindly into a transaction without the best information and receiving full disclosures of fees, any affiliated business relationships, who is paid what, when and why? Most problems associated with a transaction, either purchase/sale or refinance, could be avoided by full transparency and integrity-driven, consumer-FIRST practices. Unfortunately, consumer-FIRST practices are not always on the radar. Sometimes it is off the radar completely.

The difficulty with escrow is that you must maintain a fact-based approach to assisting consumers with closing documents and loan paperwork. By the time a consumer signs paperwork the efficacy of the transaction and question "should I be doing this," hopefully has been previously answered. Sometimes it is not. I say it is difficult because with a "neutral party poker face," we cannot get into a discussion of "gosh, you are paying $10,000 in fees to get $20,000 cash back on your refinance!" It is also difficult watching a 90 year old very bright and fully cognizant woman refinancing her home, again. Probably the most difficult professional day in my life.

For years, real estate has been used as an additional vehicle to build wealth. From my experience, it has been a wealth builder for those who treat the primary home as a place to put down roots. Long term. I recently had the pleasure of meeting with a gentleman who has several properties as long term investments. The youngest in his portfolio was purchased about eight years ago, most much older. Over the past three years, it was an odd day to not hear a buyer, while signing closing and loan doc's, comment about how much equity they would realize. Where did "I'm buying the house because it's a place I want to live" go? It's not that housing should not be a part of asset growth, but when it becomes THE only way to go in the minds of many, many are going to be sadly disappointed.

Does my participation and others' have an impact on the market, its psyche, or whether or not our Puget Sound region is experiencing a bubble as defined by each individual? Should the real estate community be critical of the media now? Is it the classic double-standard? No comment during the run-up, but when the winds blow the other direction, should the media be criticized?

My best guess is that my participation has little to no impact by itself. The market changes were occuring well before I stumbled upon this blog or others. My belief is that, at its core, this blog is helpful to consumers. Buying a home is a large transaction. Seattle Bubble and other blogs provide an alternative and fresh approach to understanding economic dynamics that are in play in our local markets. Filter out cheerleading and rants on both sides and you'll find gems of relevant information. The cumulative power of hundreds of bloggers discussing real transaction issues, market nuances and news is what makes this and other blogs powerful. How influential is difficult to quantify.

Regarding the criticism of the media discussing housing bubbles: in my opinion, this is the more humorous of ironies. Look, there is no doubt in my mind that housing is a large, very large, contributor to our economy. I don't want the housing sector to be hit hard, but what did anyone expect with the enabling and complete abandonment of sane lending practices? As I said to the lender account executive from LA who drove up to Seattle visiting mortgage brokers, "what did you expect was going to happen to all these borrowers with Option Arms and 100% financing?"

While Rain City Guide is a fantastic blog, even though some of my comments or topics may be thought of (8 min. 30 sec mark of the podcast) as controversial, its core audience is allied real estate professionals. The core audience of Seattle Bubble is largely consumers: including people interested in buying a home, existing homeowners like me and others. Each blog serves its own purpose. I would be interested in knowing how many hits Rain City Guide gets from actual consumers vs. industry insiders, but I don't know how you could track it.

Living within or under your means starts with educating yourself about home ownership, when it's right to make that step and the critical stage of understanding financing. Learning strategies to keep more money in your wallet within the realm of buying or selling a home is an important factor in building your future nest egg. Stay tuned.

Inman Talks Bubble Blogs

2007-02-12T13:30:00.000-08:00

This is just a quick note to point out the first article in a series about Bubble Blogs over at Inman News (the all-real-estate, all the time "news" outlet). Since articles over there are only free to view on the day they're posted, you might want to check it out today. I was interviewed for this series by the writer, and I assume/hope that some piece of my interview will crop up in the continuation of the series later this week.

The list reads like a prophecy for real estate Armageddon: The Housing Bubble, Housing Panic, Housing Doom, Ready to Burst, Bubble Meter, Southern California Real Estate Bubble Crash, Seattle Bubble, The Jersey Shore Real Estate Bubble, Southern Maryland Housing Bubble News — and the list goes on and on.

These are titles for real estate blog sites among a giant genre that is devoted to a discussion on housing bubbles and the possibility of a real estate market crash. Despite the sensationalist blog names, the creators say their aim is not to scare people into hiding. Rather, they want to empower consumers with information and commentary about real estate and economic statistics so that they can make more informed decisions about housing.

I'll be sure to post the link if my interview comes up, and I'll probably post the complete text of my Q & A with Glenn as well.

(Glenn Roberts Jr., Inman News, 02.12.2007)

Update 02.13: "Meet the Bubble Bloggers, part 1 has been posted. Read Glenn's interview with John McLeod, co-blogger at HousingDoom.com.

Update 02.14: Part 2 is up. Read Glenn's Interview with Patrick Killelea of Patrick.net

Update 02.15: Part 3, Patrick Veling, real estate industry analyst and consultant.

Buy A Downtown Condo RIGHT NOW!

2007-02-12T11:46:00.000-08:00

Many of you pointed out the latest in a series of paid advertisements masquerading as reporting in yesterday's Seattle Times. The apparent purpose of the "article" was to convince the reader that 2007 is a great year to buy a condo in downtown Seattle, at any cost.

[Condo developer David] Thyer insists that Seattle isn't like other cities, where developers are struggling with an oversupply of new condos. There's a demand for condos in downtown Seattle, he says, drawing a contrast with the speculative buying frenzy that has led to a boom-bust scenario elsewhere in the country.

On Friday, political and business leaders met over breakfast at the Westin Hotel for an annual review of downtown Seattle. Real-estate economist Matthew Gardner shared Thyer's optimism, telling an audience of about 700 that demand for new places to live downtown will remain "very positive."
...
Developers say the new condos will sell, but will they sell at the prices developers want?
...
In Miami and Las Vegas, developers have had to drop their prices after condos outnumbered buyers.

Part of the problem is that many buyers regarded their new condos as investments and had no intention of living in them.
...
[Dean] Jones [president of Realogics, a local condo-marketing firm] estimates that speculators accounted for 30 percent or more of all new condo purchases in Miami and Las Vegas, compared with "no more than 15 percent" in Seattle. Now, developers require buyers to disclose if they intend to live in their new condos in an effort to limit speculators, Jones said.

Ada Healey, a vice president at Vulcan Real Estate, said speculators represent a "very modest minority" of its buyers. Thyer, president of R.C. Hedreen, said he tries to limit speculators to no more than 5 percent.
...
[Seattle real-estate agent Brett] Frosaker counts at least four projects where a significant portion of the condos sell for $1 million or more. Never before, he says, has downtown seen so many ultra-expensive condos come online at the same time.

"A lot of research shows there's a market for them," he said. "But it hasn't been proven yet."

So, a bunch of condo developers, condo marketers, and real estate agents all say that "it's different here." What a shock. And what evidence, pray tell, do they have to support that assertion? Estimates, intentions, efforts, and (I'm just guessing on this one) a sprinkle of pixie dust.

Matt Goyer, proprietor of the local condo enthusiast blog Urbnlivn also had some critical thoughts about this article that are well worth reading. Considering that he is already a condo believer, it is commendable that he takes these cheerleading articles with such a large grain of salt. Kudos, Matt.

(Amy Martinez, Seattle Times, 02.11.2007)
(Matt Goyer, Urbnlivn, 02.11.2007)

Our Present Real Estate Cycle

2007-02-09T18:01:00.000-08:00

Just for kicks, let's take another look at the home price YOY change graph that I posted on Wednesday.

Click to enlarge

I noted that the downward curve on the right that represents the last nine months looks fairly steep. But just how steep is it, compared to the rest of the graph?

In order to get a feel for the "cyclic nature of the market" I ran some calculations. Since things were slowing down at the beginning of the available data (1993), I defined a complete cycle as a slowdown, trough, speedup, plateau. I calculated the average month-to-month change in year-over-year home prices for each slowdown, trough, speedup, and plateau.

In other words, when "appreciation" was on the rise, how quickly was it rising? When it was declining, how quickly was that? I did a little number-crunching, and here are the results.

Cycle #1: January 1994 — June 1998
Slowdown: January 1994 — March 1995
Median YOY Start: +5.33%
Median YOY End: -1.77%
Total Change: -7.10 points
Time Elapsed: 14 months
Average Monthly Change: -0.51 points

Trough: March 1995 — September 1995
Median YOY Start: -1.77%
Median YOY End: -1.82%
Total Change: -0.05 points
Time Elapsed: 6 months
Average Monthly Change: -0.01 points

Speedup: September 1995 — February 1998
Median YOY Start: -1.82%
Median YOY End: +15.10%
Total Change: +16.92 points
Time Elapsed: 29 months
Average Monthly Change: +0.58 points

Plateau: February 1998 — June 1998
Median YOY Start: +15.10%
Median YOY End: +14.67%
Total Change: -0.43 points
Time Elapsed: 4 months
Average Monthly Change: -0.11 points

Cycle #2: June 1998 — April 2006
Slowdown: June 1998 — March 2001
Median YOY Start: +14.67%
Median YOY End: +0.35%
Total Change: -14.32 points
Time Elapsed: 33 months
Average Monthly Change: -0.43 points

Trough: March 2001 — June 2003
Median YOY Start: +0.35%
Median YOY End: +1.72%
Total Change: +1.37 points
Time Elapsed: 27 months
Average Monthly Change: +0.05 points

Speedup: June 2003 — October 2005
Median YOY Start: +1.72%
Median YOY End: +20.00%
Total Change: +18.28 points
Time Elapsed: 28 months
Average Monthly Change: +0.65 points

Plateau: October 2005 — April 2006
Median YOY Start: +20.00%
Median YOY End: +18.17%
Total Change: -1.83 points
Time Elapsed: 6 months
Average Monthly Change: -0.31 points

Cycle #3: April 2006 — ???
Slowdown: April 2006 — Present
Median YOY Start: +18.17%
Median YOY Present: +10.13%
Total Change: -8.04 points
Time Elapsed: 9 months
Average Monthly Change: -0.89 points

As you can see, the slowdown we are currently experiencing is nearly twice as rapid as either of the two previous slowdowns since 1994. Clearly this does not tell us anything about what is going to happen in the near future, but it's definitely an interesting point to note, and one that you're not likely to read in the local newspaper or the blogs by those in "the industry."

Down and down it goes, where it stops... nobody knows.

January Reporting Roundup

2007-02-08T22:25:00.000-08:00

Let's have a look at the local press reaction to the market's continued slowdown, shall we?

First up, the poster child for slowdown denial in the media, Elizabeth Rhodes. This month she actually managed to sandwich a morsel of reality in between the excuses and the unbridled optimism:

A nasty dose of winter last month meant sales of single-family houses and condominiums were down 4 to 14 percent throughout the four-county central Puget Sound region, according to the Northwest Multiple Listing Service's monthly report released Wednesday.
...
"People were not buying in January; it was the weather," said [Jack] Cosby, an agent in Prudential Northwest Realty's Kent office.
...
Besides the weather, two other factors — the number of properties on the market and the rate of home appreciation — point to a continued sluggishness of the market.
...
Compared with a year ago, countywide listings were up 25 percent in King, 31 percent in Snohomish, 42 percent in Pierce and 46 percent in Kitsap.
...
Near the month's end the market started to pick up, said Judy Hay, an agent in Coldwell Banker Bain's Bellevue office.
...
Likewise [RE/MAX Broker Pat] Reagan also sensed a month-end rally with "more appointments being set up to see the interiors of homes, as opposed to just shopping on the Internet."

If that continues this month, spring sales will be strong, Reagan said.

"But if we have a very bad February," added Cosby, "it doesn't look like it will be that good of a year. Still, I'm an optimist, and I do believe in our area the market will be fine."

Keep the faith brother, keep the faith.

The silver medal for bubble boosterism goes to our good friend Aubrey Cohen, who points out some interesting statistics and then does his darndest to explain them away:

Seattle's median home price in January was the lowest it has been in a year, according to statistics released Wednesday.

The median price of $379,990 was down from $420,000 in December, according to the Northwest Multiple Listing Service.

A seasonal decline is consistent with recent years, but Seattle's January median home price also was lower than King County's median — a first since at least 2001. King County's median home price in January was up 8 percent from a year earlier, while the median for all 19 counties in the Northwest MLS was up 10.6 percent.

"That's odd," Bob Melvey, assistant manager at Windermere Real Estate's Ballard office, said of the Seattle numbers. "My personal experience doesn't jibe with the stats."
...
The median price could be dragged down by the sale of condominiums...
...
Melvey speculated that town homes ... might have made up a larger chunk of Seattle's sales in January.

"I've noticed a lot of town homes in what I would consider not desirable neighborhoods coming on the market, and they're at pretty low prices," Melvey said.
...
Shifts in how home sales are distributed among Seattle neighborhoods also could be to blame, said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.
...
Crellin said he expects prices to go up in general, but said they would not go up as fast as they did in the past couple of years and they could decline in higher-end areas or those with many speculators.

Absolutely delightful. You know, I am really starting to enjoy reading this kind of stuff. It just gets more and more ridiculous with every passing month. Moving on...

Lastly, we check in with Mike Benbow at the Everett Herald, who seems to believe that prices will continue to rise no matter how low sales drop or how high inventory gets.

Home sales in Snohomish County continued to slow significantly in January, but that didn't stop a double-digit increase in the median price, according to the Northwest Multiple Listing Service.

Following a trend that emerged last summer, inventories rose substantially and sales dropped from prior-year levels. Prices rose more slowly than they had a year ago.

But the combined median price for single-family homes and condos still hit $348,000 in January, a 16 percent rise from a year ago, when the median was $299,950.
...
Listing service officials said January sales started slowly because of the bad weather but picked up significantly later in the month.

"Pent-up, frustrated people who, due to snow, wind and rain, postponed looking, found their way out of the house and into open houses," said Kathy Estey, managing broker at John L. Scott in Bellevue.

That's the ticket. The market only appears slow because, you know, we had three days of snow last month. Yeah.

Addendum 02.09: I missed the Devona Wells' article in the Tacoma News-Tribune yesterday, so here it is now. Better late than never.

Pierce County median home prices in January were the lowest in eight months, pointing to a market still better for buyers than sellers.

While trending flat, the median sales price of $266,725 did inch upward from the same month last year by 5.3 percent, according to figures released Wednesday by the Northwest Multiple Listing Service.
...
"I think sellers are realizing that there is a whole lot more competition out there," [real estate agent Mike Larson] said.

A strong economy and relatively low interest rates, however, should make for a healthy 2007, he said.
...
"What's going to be interesting is to see what happens outside the winter months. When spring and summer hit, we’ll have our increase, probably 5 percent or 6 percent," [real estate agent Dick Beeson] said.

Pretty much the same template as the P-I article. Quote the stats, then quote plenty of local real estate "experts" telling us all that it'll be okay, nothing is broken.

Stay tuned for even more lame excuses and blind optimism approximately 28 days from now. It's sure to be an entertaining show.

(Elizabeth Rhodes, Seattle Times, 02.08.2007)
(Aubrey Cohen, Seattle P-I, 02.08.2007)
(Mike Benbow, Everett Herald, 02.08.2007)
(Devona Wells, Tacoma News-Tribune, 02.08.2007)

Guess What? Inventory Up, Sales Down.

2007-02-07T16:38:00.000-08:00

An inside source has supplied me with the latest NWMLS statistics, and they tell exactly the story you would expect if you've been paying any attention at all during the prior nine months. For what is now the tenth month in a row, inventory was up and sales were down YOY. In fact, sales have been in the negative YOY since November 2005, making January the fifteenth consecutive month of declining sales.

Here's your SFH summary:

January 2007
Active Listings: up 22% YOY
Pending Sales: down 6% YOY
Median Closed Price: $429,495, up 10% YOY

As is the custom, I have uploaded an updated copy of the Seattle Bubble Spreadsheet that contains the relevant data. The public NWMLS pdfs are not available yet, but when they are I will update this post with the link. [Update: And, here it is.]

Here's the supply/demand YOY graph:

Click to enlarge

It would be a stretch to call the upward curve on the sales graph a "recovery" since it is still in negative territory, but sales are certainly now slowing as much in the last few months as they were during the summer months. Will we see the all-powerful "spring bump"? We'll know in just a few months...

Here's the chart of supply and demand raw numbers:

Click to enlarge

Finally, just because I'm in a charty type of mood (also I'm in Atlanta and there's nothing much better to do), here's a graph of the YOY percent change in the median sale prices of single-family homes in King County since 1994:

Click to enlarge

Wow, that latest dip sure is steep... Huh.

Rent	at 5 years	Homeownership	at 5 years
Total Payment	$117,863	Total PITI	$157,396
Principal Paid	0	Principal Paid	$28,951
Tax Benefit	0	Tax Benefit	$35,293
Net Cost	$117,863	Net Cost	$93,152
Real Estate Value	0	Real Estate Value	$701,269
Loan Balance	0	Loan Balance	$371,045
Total Home Equity	0	Total Home Equity	$330,224

Rent	at 10 years	Homeownership	at 10 years
Total Payment	$254,498	Total PITI	$314,792
Principal Paid	0	Principal Paid	$67,519
Tax Benefit	0	Tax Benefit	$67,893
Net Cost:	$254,498	Net Cost:	$179,381
Real Estate Value	0	Real Estate Value	$938,566
Loan Balance	0	Loan Balance	$332,477
Total Home Equity	0	Total Home Equity	$651,089

Investment		Investment
Opening Balance	$109,000	Opening Balance	0
5 Yr Return @ 11%	$188,452	5 Yr Return @11%	0
10 Yr Return @11%	$325,817	10 Yr Return@11%	0

5 Year Net Worth	$188,452		5 Year Net Worth	$330,224
10 Year Net Worth	$325,817		10 Year Net Worth	$651,089