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Thursday, November 10, 2005

Poll: A Bubble In Seattle?

A reader suggested and created the following polls:

Do you think the greater Seattle area is in a bubble?

How will prices change in 2006 for the greater Seattle area?
I'd be interested to know what people are thinking.


Anonymous said...

As long as there is no significant job losses, home prices should continue to rise. The interest rate is still at the lowest level in many decades. Seattle is not even close to the NYC level yet.

Anonymous said...

Is NYC a benchmark? how many people u think know of seattle outside US? within tell people to name top big cities in US. and see how many times nyc appears and how many times seattle. Why every god forsaken city has to compare itself with NYC. Get it right man. Seattle can never be NY or even come closer to being NY in atleast a century. how many job losses have happened in Boston or California for prices to crash so that you got to see it here. Its all about psychology, this boom has gone beyond any FUNDAMENTALS.

Anonymous said...

Calm down, man. I wasn't trying to say Seattle is or even wants to be NYC. People can stomach even higher prices given the average household income in the area. Prices came down after the dot-com crash in 2000 but they have recovered and then some in Silicon Valley and other tech towns. Rates are still very low for buyers and that is the most important fundamental.

Dukes said...

Seattle will definitely, absolutely, positively be just like the rest of the country and see prices drop. There is much speculation going on here but as of yet people are too stupid to see it. This will change as well.

Anonymous said...

Just for fun, I called a bunch of Bainbridge Island realtors and asked them what they thought of the "bubble." This was back in Feb of 05. Most were pretty testy at the temerity of even asking such a question.

Without exception, the dozen or so I polled said that Seattle, and particularly Braindead Island, will never see price depreciation. Why? you may ask. Most of the agents said something to the effect of "it is a special place, and there is a lot of money chasing relatively few houses."


Just for kicks, let's compare apples and oranges.

Braindead Island has an average household income in the low $70K range. Not bad, but not all that great. It has the 5th longest commute in the entire country in terms of time to get to work (that is really something, given that at least 1/3 of BI is involved in selling BI real estate). The schools are above average, but not "the best in the state" as all the RE agents claim. Average home prices are in the $500K range, and many in that range are nothing more than mold/mildew incubation facilities.

Highland Village, Texas has an average household income in excess of $105K, lower unemployment, higher education attainment, better schools than BI, and is 100% built-out. A major interstate connects it to Dallas, and is about a 25 minute commute (half of BI). Average home price is $210K. That average home is a 3000sf, pimped-out, brick, starter mansion.

Ratio of home price to income on BI is 7:1, HV is 2:1 (with tons of excess disposable income compared to BI).

If this pricing ratio landed on BI, home prices would be in the $150K range.

Can it happen? You betcha it can. $150K for your average BI POS is a bit bearish, even for me, but we will see something that will make people very uneasy.

Once Californians get locked into their homes, it is GOODNIGHT for BI real estate.

Just the RE agents having to sell their homes would cause the market to crater.

Anonymous said...

If incomes are stretched, as the 0% national savings rate would indicate, and...

If inflation is creeping up in all the "hard" categories (food, energy, health, cable TV), and...

If the only reason home prices are at historic highs is because interest rates are at historic lows, and...

If desparate, stupid BabyBoomers are dumping their savings into real estate, because they got gutted in the tech stock bust, and...

If Californians are buying property sight-unseen, and renting them out for a massive negative cash flow at rediculous cap rates (lower than 5), while spending $50-$100K to fix them up, and...

If Californians can only do this because they have tons of "equity" in their 2 bedroom rat-trap, located in the middle of or on the frontiers of a multi-ethnic gangland, and...

The macro economy is showing signs of a slowdown/recession/depression/complete financial collapse/dawn of another stone age (depending on whom you read), then...

How can anyone with the brains of a banana slug think that real estate is "bullet proof?"

Think about it...

Anyone who can work the amortization formula can figure their monthly payment, based upon interest rates, principle, down payment, and length of loan. Run the numbers on what people are paying today IN TERMS OF THEIR MONTHLY PAYMENT!!!

(Now the fun part)

Take the payment, and subtract out whatever you think is the "hot" money that is chasing real estate. This is the extra money that Mary and Joe think is a prudent investment in these times, versus a "balanced" housing market. Then back out "scared" money that people would pull out of a housing payment if they thought they would lose money on the house, or would be enticed to rent.

Come up with the new MONTHLY PAYMENT.

Example: If principle, interest, taxes, and insurance comes to $3450/mo in today's market, and you think that Joe and Mary are paying an extra 15% because they just think this is the greatest investment, and they suck at picking stocks, so they justify putting an extra few bucks at a great home, you would subtract out the $450. That leaves you with the $3000/mo in a balanced market.

Now, let's say that the market is taking a headder. Joe and Mary decide that they will, in addition to pulling the "hot" $450 out, they are scared and will pull out an additional $300. That takes us down to $2700/mo. Joe was just informed that their medical co-pay went up, and the his/her Ford Extinctions are guzzling gas at 40% higher prices than when they bought the house, and the grocery bill is getting a little testy, so they pull out another $250/mo. That leaves them, or more importantly their potential buyer of their house, with $2450/mo to spend on housing.

(Now the really fun part)

Joe and Mary really couldn't afford that starter mansion on a 30y fixed, so they listened to their all-knowing FED chairman, and took out a 3/1 ARM at 4%. Interest rates start to creep up and before you know it, the FOREX market has the 10Y Treasury yielding enough to push the 30Y fixed up to 8.5% (where it was in the summer of '00).

Taxes remain constant in dollars, as the county assessed lower than purchase, and the insurance company keeps rates steady.

Recompute and run the amortization formula backwards and find principle (use the =FV() function for Excel users) using $2450/mo (less taxes and insurance) and 8.5% interest.

You will be shocked to see what happens to principle when you do this. It is not pretty.

Also, given the massive defaults in mortgages, the FED institutes Regulation X (yes, it is called that), and sets a minimum down payment. No more, no-docs, piggy-back, wink-wink appraisal loans. Nope. You get an honest appraisal in a crappy market, and you have to come up with cold, hard cash to put down on your new home.

Nowz I ax ya...

How many people can put 20% down on a $100K home? $200K home? $300K home? How many people will be able to put 20% down on your average Puget Sound house? Not many, especially if all the equity has been wiped out in the market correction.

Using the above numbers, I had Joe and Mary buy a house for $580K. Under the new parameters, Joe and Mary need to find someone to pay even more per month than they do, or reduce their price to meet the affordability of the prospective buyers. That price reduction takes the sales price down to $272K.

They lose $308K plus RE fees. If the buyer needs to buy PMI, that makes it all worse. Fuhgetaboutit if the buyers need 20% down.

Isn't this fun?

Ask your friendly RE agent what they think of this. Wear a cup.

Anonymous said...

Just a quick note:

The above example assumes no money down, and no PMI. Let's assume Joe/Mary put 20% down, and their buyers will put 20% down.

Joe/Mary bought the house for $705K. Jose/Maria can only afford $338K (assuming they can get $67K).

Just by moving interest rates back to normal levels, and getting the "hot" money out of the market, and having inflation butt-in on your household budget...


Picture how much you can lose if unemployment/underemployment gets rocking and rolling....

Dukes said...

I posted this at the other topic, but it fits here too...

Seattle is NOT immune! God damnit I get so tired of hearing that. These assholes who write these articles want everyone to think things are so rosy here. Is this guy seriously trying to say that we didn't have a huge runup in the # of real estate related jobs here? Or that everyone or almost everyone is some high tech, highly paid geek? What a schmuk!

We will suffer, and what's worse is that so many people will not see it coming. At least in other areas people are taking evasive action and getting out while they can. Here the fools are still buying. This is going to be a trainwreck and we all have front row seats.

Anonymous said...

Even though we get more rains, Seattle housing market is behaving exactly the same as the rest of the country.... multiple-offer bidding war, 20K ~30K above the asking price, waive inspection, second homes as investment property, high usage of “creative” loans products etc.

I live in east side. The average home price in East side for a 1600SQFT SFH ~$400K; a 200SQFT SFH, the average price is 450K; for homes > 2000SQFT, they seldom sell under 1/2 million now.

This is a run-up >25% from 2004 alone. The absolute price increase is >100K. But this doesn’t prevent people from buying ….

Has the Seattle RE been undervalued before? Let’s look at the affordability.

The major buyers of homes in East side are Microsoft employees. Most recent buyers are newer MS employees worked here < 2 years.

How much is the average income of a MS employee? 85K. Many are making lower than this number even after working 5 years in MS. Do they get lot of money from their option? No, most MS employees started later than 1998 made almost nothing in MS stock options. And the average MS salary incease in the past 4 years is only 3%.

To comfortably buy a house in east side, the MS family must have double incomes. Otherwise, they have to stretch, use creative loan with <20% down payment.

Everything will be fine only if the appreciation rate keep in double digits … if it’s possible. Once the price goes flat, “investors” have to sell their “investment property” because they don’t have positive cash flow … according to a RE agent, >20% buyers in 2005 are “investors”. And the recent buyers will get burned and the fear will start spreading ….

When we look back in 2 years, we will know Seattle’s housing market has been behaving in the same crazy way. The only difference here is we get more rainy days than any other part of this country ….

marin_explorer said...

When we look back in 2 years, we will know Seattle’s housing market has been behaving in the same crazy way.

Until then, many Seattle homeowners will assume they somehow earned that appreciation on their house.