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Tuesday, August 16, 2005

About the Blogger

I'd like to use some space to tell you a little bit about myself so you can best understand where I'm coming from, what my purpose is in writing this blog, and what I personally believe with respect to a real estate / housing bubble.

I'm 25 26 years old, living in the Seattle area (North King County), and have been working as an electrical engineer (no, not an electrician) in South Snohomish County (now in the Redmond area) since I earned a Bachelor's degree in EE from Seattle Pacific University in 2002. I do not currently own any property, though I would of course love to. I currently live in a small house (actually a converted garage) with my wife, dog, four ferrets, and an aquarium full of water critters.

Throughout early 2005, my wife and I spent some time "window shopping" for houses, and became increasingly discouraged as we watched prices become more and more unreasonable. In addition, as we window-shopped I did a lot of reading and research. The more I read about housing and real estate in general, the more stories I noticed speculating that there was a bubble. I decided to start this blog as a way to collect these stories for my own future reference as well as to generate discussion among other interested parties. I figured that in a region with over two million people, a decent number of them might be just as interested as I am in the subject.

Given all that I have read as well as what I have observed, I do believe there is a speculative bubble in real estate right now. I don't know it for sure and I could be convinced otherwise, but that's where I stand right now. I believe that the present real estate bubble is due to a combination of factors, among which are:

  • lowest interest rates in history persisting for years
  • lenders falling over themselves to hand out home loans to anyone and everyone
  • people burned by the stock market moving to real estate as an investment
One thing I do know for certain is that the recent trend of rapidly increasing property values (double-digit increases year-on-year) cannot possibly continue indefinitely. If it did, eventually everyone would be priced out of real estate. There has to be a slow-down sometime, and I think it's coming fairly soon (within the next 3-5 years). I don't know if it will take the form of a leveling off of values, or a slow decrease, or a sudden decrease (bubble bursting), but I know it is coming.

Therefore, since the only way my wife and I could afford a home that is even halfway decent right now would be to make use of "creative financing," and there is at least a chance that real estate is due for a "price correction" soon, we have decided that it is not in our best interests to "invest" in a home at this time. Consider these scenarios:
If we buy a decent house right now through "creative financing" and interest rates go up, we'll be unable to afford to keep making payments, and forced to sell the house. No big deal if prices just level off, but we would be in a really bad way if prices drop.

If we buy a house with 20% down and a fixed-rate mortgage, and interest rates go up and prices drop, we're not in danger of not making payments, but we could end up essentially stuck holding onto a mediocre house until prices go back up.

If we hold off buying and prices just level off, we've still saved a bunch of money and are able to afford a lot nicer place than we can right now.

If we hold off buying during this real estate frenzy, and prices dramatically drop in a few years, then we'll be able to take the money we've saved in the mean time and buy a nice house.
Given the options and the uncertainty of the current market, not buying right now seems to be the best choice for us. So that's where I'm coming from. What about you? Do you currently own property, are you holding out, or just not interested? Have you recently bought a home, or are you buying properties as investments? What do you think about the possible risks?

12 comments:

Anonymous said...

I think you are a wise man Tim. You have thought about buying, have done your due diligence and have concluded to stay put. Unfortunately, I can't say that about a relative of mine who just purchased a $400k home with an interest only ARM. They are really stretching their budget so when the payment increases they could be in for a world of hurt. Renting is a much better deal in the Seattle area right now.

I think the best way to gauge that prices are reasonable is if you can purchase a home with a 20% down payment on a 30 year fixed rate mortgage for the same price as renting.

As for me, I have been obsessing over housing prices because I paid off my residence (I bought it in 1996) and am looking for investment property. I came to the same conclusion as you. It is most definetely a bubble by any financial measurement.

Good luck to you and stay the course!

Anonymous said...

Tim, like you I'm sitting on the sidelines. Right now my first priority is to get my student loans paid off, then start saving for a down payment. Being in debt sucks.

I think the 3-5 year timeframe is most realistic. Some of the Bubbleheads on Ben's website seem to think the bottom will fall out of the market overnight ie, within a year, but given the turnover rate in housing and the "stickiness" on the way down I don't see it happening that quickly.

So for my part I am hoping for fortuitous timing; that I will be debt free and have enough money saved when we reach bottom.

Anonymous said...

Hey! I know you! I'm small bouncy-katie from UScholars. Glad to see that great minds think alike. :)

HighSierraGuy said...

The Tim: Thanks for starting this blog. I've been eager to follow the Seattle RE scene as I intend to retire somewhere around Puget Sound in about eight to ten years.

High Sierra Guy actually living in sweltering Sacramento and wishin’ I was living in the high country (but prices are off the scale there too). I'm a forty-something environmental law attorney working a lot lately in NorCal Brownfields (neglected contaminated sites, generally in urban areas), that are aggressively being remediated so that all the people who bought in the Sacramento and Bay Area ‘burbs can now live in the city in condos and lofts–built vertically as far as the eye can see–and cut their daily commute by about two hours.

I rent a very charming home in a great neighborhood quite near the American River (so my two large dogs can romp in the river) for less than one-half of what my mortgage payment alone would be for the same. Sold my modest home two years ago and made enough to reduce my law loans by about half. Swore the market was about to peak then, only to see my buyer flip it in a year, pay the capital gains, and still pocket enough that would’ve zeroed out my remaining loans. Oh well. No regrets. When 1200 sq ft homes go for $350,000 (but rent for $ 1000 per month) and your surrounding neighbors have their cars up on blocks, there’s definitely a disturbance in the force.

I'm sitting on the sidelines accumulating cash and watching the surrounding madness in this area. I max out my 401(k) and Roth IRA in some conservative investments, read all I can from Mauldin, Roach, Gross et al. and wait for the day when Cash is King is back in vogue.

biliruben said...

I've been following the housing bubble for a couple of years now, and always ravenous for info. Kinda like watching a car crash, though since I bought last year, I am watching it from inside the car!

Stupid quarter million dollar dog wanted a yard.

Nice to see someone collecting info on Seattle-specific info. I bought about 5 miles due west of you. We have a couple things in common, as I was born just outside of Edwards, and lived in Champaign and dated a girl from Rantoul. Spooky.

Would have continued renting if I could have found something close to our mortgage payment with a nice yard. Alas.

iron56 said...

Thought you might find this interesting: We lived in the Seattle area from 1981-1986, and bought at the top of the market outside Woodinville, almost to Duvall (on 232nd Ave NE, in fact). (My wife commuted to N. Seattle thru Bothell and Kenmore, back when that was still possible :) Anyway, we were caught up at the tail end of the real-estate frenzy of the late 70s, and all the clich├ęs ("gotta get in while you still can" "They're not making more land" "Real estate always goes up!") were as prevalent then as they are now. (The dynamics were a bit different; interest rates were soaring--we felt "lucky" to get in at 13%. At the time there was a flight into hard assets because of soaring inflation. Nah, that couldn't happen again :)

We sold in early 1986 (after having a couple of sales fall thru), and were lucky to get out of the house without bringing money to the table. The RE market in Seattle was seriously _down_ by the mid-80s. Appreciation was _zero_; we'd've done better to have rented those 5 years, because we could have left a lot more easily. As it was, a scam artist assumed the payments and almost put us into bankruptcy when he didn't make any. Fortunately he finally followed thru when we waved our lawyer over him.

And yeah, on paper anyway we'd've made money if we'd stayed for the next _20_ years, but you just can't count on that!

Timing is everything.

I'm sure, too, if you checked with some old timers you could also get tales of the downturn in the early 70s (will the last person leaving Seattle please turn out the lights?)

Anonymous said...

Good stuff here. I've been hearing so much "there's no bubble" that I wanted to hear the other side.

Like you, I've run through the scenarious, but I've come to a different conclusion - I still think it is best to buy now.

If the housing market pops, it likely means that that's because interest rates went up. If interest rates go up, that not only cuts into my buying power, but puts pressure on rents as well (since more and more people will come to the conclusion that its cheaper to rent than buy). So, with a burst bubble, I may be stuck choosing between mortgages I cant afford (because of interest rates) and rents that I also cant afford.

However, if I buy now, it will be a stretch, but for security I will go for a 30 year fixed with low interest subsidized second mortgage, and for more security buy a place large enough that I know I could stand to wait out a downturn for a few years. My payments will stay fixed, which you cant say for renting or ARMS. I'll be paying more than if I was renting for now, but I dont think it will take long for rents to match my mortgage, especially with the in-migration we are expecting, the Gen Yers entering the market, and rising mortgage rates locking more people into renting.

My bet is that we wont see a price decline over a significant period. History seems to support that, but the creative financing does make me a lot more nervous.

Its a risk, but mortgages are cheap now, and rents are set to rise.

The Tim said...

anonymous,

That's certainly a reasonable conclusion, but there are two main reasons that it's not my conclusion.

1 - When interest rates go up, prices tend to level off or go down, thus balancing out the rate increase. More importantly, if I buy a $300,000 home at 5% now vs. a $250,000 home at 8% in two years, I can always refinance when interest rates go back down, but you can't change the purchase price.

2 - To be honest, our rent is unbeatable right now—free. No, we're not living out of a parent's basement. It's a converted garage in the back of a skinny plot of land that I'm pretty sure the owner is only keeping as some sort of tax write-off. If we were paying market rates for rent we would certainly feel more pressure to buy, but the basic truth is that we just can't afford it right now, and I still think point #1 above holds a lot of sway.

Ed The Man said...

Hi Tim,

Finally, someone who is saying something that I believe deep in my gut.

background: We're a family of six (my wife and I, my mom, and three kids) out over here in Singapore, Asia. My wife works at Microsoft, and she's gonna be transferred to Redmond come June 2006. We're all moving with her.

The pressure and advice we are getting to buy property - from other Microsoft people, and of course, RE agents - is something fierce. Some are happy to tell us they got in early, and that it's still not too late for us to get into the game.

Others feed us the "no more land to build" story.

But my gut tells me we're sitting on the cusp of a crash - the last time my instincts gave me this warning, I ignored it. The year was 2000. The subsequent crash wiped me out, and I had to start over. Fortunately, I was single, had no debt, and no kid at the time.

I ain't about to ignore the alarm bells again.

For me, there are three primary considerations:

I did some sums, based on your example of (A) $300k at 5%, versus (B) $250k at 8%, and assuming 50k down and a 30 year loan, and a monthly payment of (A) $1,976 and (B) $1,911:

We're looking at a total principal and interest payment of:

(A) 300k + $105k = $405k versus
(B) 250k + $144k = $394k

The difference is significant - not great, but significant. But rates are more likely at 6% now rather than 5%, and there is the potential upside of refinancing the 8% when rates go down in the next 30 years.

So yes, it does seem prudent to wait it out, at least where interest rates are concerned.

2. The one thing that may sway me the other way is that, as some have pointed out, rent may skyrocket as more people choose to rent rather than own.

Based on the same example above, I guess as long as rent hangs in the $1,600-$1,800 zone, we'd be ok, assuming an income tax deducation of around 8% or so (to factor in the effect of deductions on the mortage.)

If rent goes up beyond $2,000 - it might make sense for us to just buy the hypothetical house for $300k at 5%.

3. Most of our money is in Singapore dollars, which has strengthed by 5% against the greenback in the past 3 quarter. Assuming the USD continues to weaken, it makes sense for us to leave the money untouched in our bank in Singapore, earning a respectable 2.45%.

So all in all, the numbers seem to indicate that, for first-time buyers like me, the prudent thing to do is to wait things out.

Again, thanks Tim for starting this blog.

Ed

Anonymous said...

The discssion is really lame for those who have a choice between buying a home or renting a home. For many there is no choice, they will rent all their lives as my mother did because she was far too poor to buy anything. For those with a choice the decision is to pay-off the landlord's mortgage or to pay-off your own. Millions of old people have some security because they own their own home free and clear. As for prices, they will go up, supply and demand ditcate this. No they will not come down. Population grows geometrically and land does not grow, there is a finite amount. People need to be in cities, that's where the jobs are and they by their numbers will drive up the price of homes.

If you can buy without overextending you should. If you think you will make more money in the future and you are wiating to buy consider housing has gone up consistantly at about 7% per year. That is 7% of the average priced home today of $350,000 or $24,500/year. Wait long enough and you will not be able to buy. I should say no one can guarantee that homes will continue to go up, but baring a nuclear war and major distruction, I think we have to go with the numbers.

Have a great day...

Anonymous said...

I think it's great that you guys are preparing for the worst. However, if I were you, I would definitely spend some time learning how to buy houses at 20% to 30% discount. Even if the market goes down, it doesn't go down overnight. By buying cheap, you're protecting yourself from this possible downturn.

I bought 15 houses this year so I have some ideas as to what i'm talking about. I do this full time for the past 2 years and have a track record even the most successful investor would be proud of.

For instant, I bought a house for 215k, spent 20k to fix it up, and put in on the market for 290k. My partner and I will make about 40k in profit off this house. The real kicker is we priced it about 25k below the next least expensive house within a 1-mile radius. We got 3 full offers within 2 weeks of listing it. And it was only 2 weeks ago that we listed it. Slow market my butt. Just price it low enough and even the stingiest buyer would buy it.

So stop listening to your own fear and get off your conventional, non-creative, and traditional butt do something about it. Start learning. Do something for yourself and your family for a change.

If you want to talk to me directly to draw some inspiration, email me.

Gus said...

Seattle Bubble?

That's what I thought in SF in 2000 when condo's a half dozen miles south of SF were around $300k.

I managed to get into a TH north of Seattle a year ago and did well buying from an estate. (My 3rd home now).

The Seattle market has some distinct features. Several very strong employers including: Microsoft and Boeing.

Limited real estate close to downtown. The Puget Sound, Lake Washington, Lake Union, and Lake Sammamish all occupy land close to downtown Seattle and downtown Bellevue where a lot of very good jobs are located.

Granted the population only recently passed the 1960 peak. You never know for sure what will happen to Microsoft, but they sure do generate a lot of cash.

If interest rates go up, prices may come down, but that doesn't mean you will have a lower mortgage because interest payments go up. If interest rates go down, prices will go up as payments come down.

Seattle is not identified as a bubble market among most of the real estate journals. The limited land and high incomes, with a growing population and a mild climate make it an attractive place to live and own real estate.

A lot of people already have a lot of home equity. I predict +/- 3% real estate price change over the next 3 years with an acceleration after that as the economy passes through a weaker spot.

Remember, buyers from Singapore, Hong Kong, S. Korea, and California coming to work at Microsoft may not see Seattle as expensive.

I would get into the smallest, oldest property you think you can live in and update it as you can. I've seen old homes in Bellevue for around $400k, or cheaper further out or in tougher neighborhoods. Rent out a room to help with the mortgage for a few years if you can stand to share the living space.

The next challenge is to either pay off the mortgage or generate additional income to move up the housing ladder. This could be particularly challenging when competing with Microsoft employee / stockholders.

As a recent newcomer to the area, (<2 years here), who has lived in many states and a few countries, the Seattle area is a nice place to live if you can afford it and still somewhat cheaper than SF, LA, NY, Boston, and DC. I moved to the east coast from SF to buy my first home, but eventually made it back to Seattle to find a better place to call home.

Best of Luck in your home search in the Puget Sound area.