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Monday, April 10, 2006

Bankrate.com: Seattle Immune To Bubble

Eileen Tefft over at Rain City Real Estate Guide pointed out that Bankrate.com has ranked Seattle (together with Portland) as one of the top ten "bubble blowers" — places that they say "appreciation should continue to grow."

The overall news out of the Pacific Northwest isn't great. The area lost jobs in the tech bust and is still recouping. But in terms of housing price appreciation, the thing these cities have going for them is a restriction in supply. Tight controls on development have prevented the normal progress of builders going farther out from the city core to find cheap land in the suburbs. Hence, demand stays high for available units. (Forbes Magazine lists Seattle as the most overpriced place to live in the country; Portland was third on the list.)

"Portland and Seattle have really benefited from California's growth," says Richard Gollis, principal of San Francisco-based real estate consultants The Concord Group. "Portland is starting to see the next generation of housing product, which is large-scale, high-density projects in downtown. The same thing is happening in Seattle. People who moved there 20 years ago for the tech market are older now and have a different lifestyle."
Granted that's only a two-paragraph explanation, but I find myself unconvinced... I see plenty of new construction around here. I'd be surprised if people are moving here faster than new houses/apartments are being built. Furthermore, the claim that Seattle has "really benefited from California's growth" is certainly true, but what happens when that growth dries up? Even on Bankrate.com's own list, Los Angeles and Sacramento are in the top ten "bubble busters" where "values [can be] expected to decline" and not a single California city made the "bubble blowers" list.

Of course, since Rain City Real Estate Guide is by realtors, for realtors, Ms. Tefft agrees wholeheartedly with Bankrate.com's analysis:
Interestingly, sales are down, but so is inventory. In March 2004, there were 7,156 homes for sale countywide. March 2005's inventory was 5,244 homes. This March recorded a further drop, to 5,100. This is the pinch that causing the rise in prices.

At the same time, the local economy is growing and employers are adding jobs, bringing more potential buyers to the area. So the competition for available homes is strong and prices are reacting accordingly.

We agents have been experiencing this hot market all spring as we did through most of last year, possibly feeling the market fluctuations first. We're out there in it, pricing homes to reflect the low inventory and coaching buyers for the best positioning in a multiple offer situation. I just watched the price of an Eastside condo jump $20,000 in a two week period!
Rah, rah, rah... gooooo home prices! But seriously, even as the local economy continues to grow, unless wages start to make significant gains, there will come a point where home sales will falter because people just won't be able to afford them. Personally, I think we are very close to that point. One way or another, 2006 is going to be an interesting year.

(Pat Curry, Bankrate.com, 03.01.2006)
(Eileen Tefft, Rain City Real Estate Guide, 04.07.2006)

24 comments:

Mikhail said...

I find it hillarious that this article from Bankrate actually acknowledged the existence of a (growing) bubble, and even categorizes the Pacific Northwest as a "bubble blowing" region. Of course, the implication of the article is that the PCNW housing bubble is behind that of California, still creating a good opportunity for people to get on board.

But at least we aren't arguing as to whether or not there is a bubble, just about how long it will last.

As far as the claims that new construction is greatly restricted in the PCNW, I would dearly like to see stats on this. I too seem to see new units going up wherever I drive in the Puget Sound region. Even in Bellevue I see lots of old homes being torn down for a forest of small cookie cutter match-boxes.

Does anyone know where we can see stats for Puget Sound construction?

Anonymous said...

But seriously, even as the local economy continues to grow, unless wages start to make significant gains, there will come a point where home sales will falter because people just won't be able to afford them.

We're already there. I have some friends who work at MS and who are trying to recruit people to work there. But even MS is having a hard time getting people to move to this area with the housing prices being as high as they are.

When the local newspaper splashes a the headline "$405,000" as the new median home price, you'd better believe that it has a ripple effect. One effect that it is having -- due to the internet and wide distribution of information -- is that potential employees are comparing Seattle to not just California, but markets all over the country. Believe me, we're on the losing end of that comparison.

One of the great ironies of this market is that people who can easily afford $400,000 for a home are balking at the price and choosing not to buy. However, people who cannot afford a home without exotic loans and signing their life away to the bank are still entering the market ... blissfully unaware of the storm of foreclosure that is on the horizon.

Anonymous said...

"One of the great ironies of this market is that people who can easily afford $400,000 for a home are balking at the price and choosing not to buy."

That's been characteristic of this whole mess:

Sane person with 6-figure income and savings: "$500K for a sh!tbox? WTF? I can't afford that."

J6P with low-5-figure income and high-5-figure debt: "I can afford a $500K sh!tbox! My Realtor said so!"

Anonymous said...

Once again, the Seattle Real Estate myth perpetuates...

Myth number 1: Seattle is NOT California, San Diego/So Cal, its warmer, doesn't rain, wages are superior, and while traffic is terrible, its not as bad as Seattle. So why should Seattle deserve another 200K worth of median home price inflation to match its SoCal neighbors?

Myth number 2: High income jobs are NOT flowing into Seattle. Real income growth in Washington has faltered to -7% of what it was in 2000. Mainly because all those high paying dot-com jobs got swapped with all those mediocre paying mortgage/construction/real-estate jobs.

Van Housing Blogger said...

$400K? Ha! In Vancouver BC we're well over C$500K with no home mortgage interest deduction or other fancy tax breaks for homeownership.

And our weather is even worse than yours!!

Keep the faith, brothers. Our time will come.

meshugy said...

Seattle may not be California, but that's exactly the point. I can't tell you how many Calif. refugees I know that like the slower, cheaper, safer lifestyle of the NW. Some even like the weather...personally I don't want to live in a desert. I'm from the NE and think Seattle winters are a joke...50 degrees and rain? I'll take that.

Seattle has 4 times the national average for job growth. And these are high paying jobs...it's not a myth. Sorry...even Google is setting up an office in Fremont. We have a strong economy...why deny it?

There is tons of construction going on...but it's on already developed land which is a big difference then places like Arizona, Atlanta, and S.Calif where they are just gobbling up farmland. It's much more expensive to build in the urban core and you can't build as much. Hence higher prices. We are definitely low on the National average for sprawl.

We may see a market crash at somepoint...but it's just not happening yet. In fact, the market is tighter and more competitive then ever. If you follow the MLS you'll see what I mean...you can't even find something to buy in N.Seattle!! I took a walk through Ballard yesterday...saw 1 super crowded open house and 7 sold signs. That's not an indication of a troubled market.

We all want cheaper houses...but I think it's still very likely that if you bought today it will be worth at least 10% more next year.

matt said...

meshugy

Yeah, we keep talking about the strong high paying job growth but the numbers aren't here to back it up, they're just not, if people are relying on Boeing and Microsoft to keep the ship afloat, dream on, we've been there, done that (I work for Boeing as an engineer and would never buy into this overinflated housing market)... and Google? last time I checked their stock's doing a tailspin. The truth of the matter is that the biggest surge in job growth over the last 4-5 years has been in the housing sector (coincidence? I don't think so)...

And for the weather? All my Cali friends grimace at the drizzle and when its sunny in the winter complain that the sun's always in their eyes, no great love (or desire) to relocate.

The limited land arguements as dead as the Japanese economy over the past 15 years. Toyko's about as land-limited as it can get yet real estate's been on a steady decline at about 2.5% a year. That arguement doesn't hold water.

What's keeping Seattle's bubble floating is the same thing that's floated the rest of the U.S. housing boom, dirt-cheap money, once that goes away... its done.

Mikhail said...

I work at Microsoft, but don't think that it is in any way immune from any economic stress the country may feel from a recession. Things got very tight around here in 2002/2003, and employment growth and salaries slowed dramatically.

If there is another recession, resulting from a real-estate implosion in other bubbly parts of the country, then I wouldn't be surprised in the least to see a Microsoft retrenchment, and belt tightening exercise.

Just watch what happens when Microsoft employees start getting puny bonuses and salary increases. The excitement for leveraging up on expensive new housing goes out the window pretty fast...

But all this assumes that Microsoft is really one of the prime engines for Puget Sound real-estate. I think Boeing has a far bigger impact, since it employs more people.

marin_explorer said...

What about investor-driven sales volume? Is Seattle still denying that's a factor, despite the recent NAR admission that investment and second homes comprise a significant percentage of sales?

T.S. said...

The job situation is misleading. While there may be low unemployment, which is good, the newly created jobs are simply not high-paying enough to support the current housing market. Unless all the jobs being created are executive positions, that is, which I don't think is the case.

Think about it: how much money do you need to make to buy a $450K house? Now that interest-only ARMs are a pretty much a thing of the past, I can tell you (from experience) that you need to make over $100K to buy a starter home.

Jobs really don't have anything to do with the current situation, other than the fact that Seattle wages are so much lower than other bubble cities that no one can afford to leave their houses now. It appears to me that the majority of people buying entry-level houses are only able to do so through inherited wealth or family loans. I suppose there is also the Seattle mania for buying, fixing, and flipping, but the effect of those folks on the marketplace seems to be waning.

I guess my basic point is that the housing market in Seattle divorced itself from wage-based fundamentals quite awhile ago, and those looking for comfort from the "good economic news" in the region are misguided at best.

I actually find this fascinating. When's the last time a doctor or lawyer's salary wasn't enough to buy a nice house in a decent neighborhood? I suppose it's been like that in New York for ages, but I don't see anywhere near the concentration of wealth here. There are large economic and social forces at play that I just can't understand.

T.S. said...

I can't tell you how many Calif. refugees I know that like the slower, cheaper, safer lifestyle of the NW.

I don't know about that. We recently relocated here from the Bay area. Maybe those things were true in the past, but I don't see it.

1.) Slower - not sure what that means. People are pretty relaxed in California. The traffic is slower here, that's true.

2.) Cheaper - nope. Not cheaper here. In fact, this was a real surprise. Especially given the wage differential up here - you make less, but restaurants, groceries, movies, energy, gas, etc. cost the same or more.

3.) Safer - That might be true. I feel very safe in Seattle (though more bugged by homeless panhandlers), but actually I never felt unsafe in Oakland or SF. It depends on where you live and how you spend your free time, I suppose.

I don't mean to come off like a jerk--Seattle is a beautiful place. But there is an unattractive self-congratulatory tone to a lot of the real estate articles I read that seems to hang in the Pugent Sound air like pixie dust. People forget the "adjustment period" they went through when they moved here and lived in darkness for seven months. Seattle is neat but there are a lot of mid-sized cities with cute neighborhoods and natural beauty--and some of them don't have the traffic or the rain.

Every city has this impulse to a degree, and of course you want local boosters, but let's not lose all perspective. Every city is special in its own way, but no city is immune to the basic laws of economics.

Nick said...

"Yeah, we keep talking about the strong high paying job growth but the numbers aren't here to back it up, they're just not, if people are relying on Boeing and Microsoft to keep the ship afloat, dream on, we've been there, done that (I work for Boeing as an engineer and would never buy into this overinflated housing market)... and Google? last time I checked their stock's doing a tailspin. The truth of the matter is that the biggest surge in job growth over the last 4-5 years has been in the housing sector (coincidence? I don't think so)..."

I've only been in this area for 18 months and I tend to be a real estate bear- but let's at least be truthful on both sides. I think the whole point is that this area is no longer so overwhelmingly dependent on just those 2 companies. This economic boom has seen a much wider breadth of big employers. What about Starbucks? What about Amazon? Costco? Frank Russell?

And despite the fact that Google's stock price is probably largely irrelevant to whatever point you were trying to make, it's up over 20% since February. You can't just pick random data points and ascribe meaning to them.

I do in fact think it's likely that prices will eventually go lower than where they are now, but I learned a long time ago not to bet against the American consumer. Just make your points honestly- there's no need to deny truths just because they make it seem like there's a chance you could be wrong.

Anonymous said...

Meshugy sez:

"If you follow the MLS you'll see what I mean...you can't even find something to buy in N.Seattle!!"

Bull. After your last post (where you said that the housing inventory is flooded with crap) I went to the NWMLS and did a search for houses under $400k.

I found dozens of properties in North Seattle. What's more, I saw at least as many new townhouses for sale as existing construction.

What's more...I live in Ballard, and there's three large construction projects going on within 2 blocks of my home. The Ballard market will soon be flooded with hundreds of new townhomes and condominiums.

The market may be tight, but we're a long way from having "nothing to buy" in North Seattle....

marin_explorer said...

"Seattle is neat but there are a lot of mid-sized cities with cute neighborhoods and natural beauty--and some of them don't have the traffic or the rain.

I think that's eventually why many professionals--and businesses will leave overpriced coastal areas for places that provide better economic opportunity. Despite how "special" Seattle, SF, SLO, Santa Barbara, etc. considers themselves, attitude has little cost-benefit to many people. There's nothing to prevent people and businesses from packing up and moving to restarting elsewhere.

matt said...

What about Starbucks? What about Amazon? Costco? Frank Russell?

And despite the fact that Google's stock price is probably largely irrelevant to whatever point you were trying to make

If you've only been here for 18 months, you obviously weren't here for the dot-com devestation. Venture capital went nuts and people were flooding here, making stoopid money humping for that IPO. When I see a dot-com (Google included) with stratospheric unhinged stock prices, stay away...

But that's beside the point, the point is that if good jobs were the foundation of house prices the price/rent ratio in this town would be in line with each other, they're not, they haven't been for five years when Seattle saw its last boost in median income.... That's the problem.

Places with booming economies have steep rents AND steep home prices, we have a sharp disparity. The small upsurge in rents we've seen lately are mostly speculators doing condo conversion (kicking renters out, selling off units to speculators in NYC), which again is not in line with the fundementals.

As far as the other companies in the area you mentioned? All decent companies but all vulnerable to recession and consumer spending, which at this moment has been closely tied to the housing re-fi boom.

wait and see

Anonymous said...

I recently moved to Seattle from out East for a job in biotech. I spent a long time researching the housing market and realized that there was a lot of misinformation and expectation that Seattle would somehow become the next SF. I believe there are many reasons why it hasn't, nor won't be the next SF anytime soon.

Clearly, houses are extremely overpriced here and I believe there are not the fundamentals to drive the market higher. Also, new home starts have risen by 47% in that past five years compared to prior years, this is a sign of rising inventory. And yes, out on the Eastside there are areas of development that rival anything I've seen in the CA market with huge swaths of new developments with hundreds of new home and neighborhoods being built.

In short, I believe that Seattle has been in just as much of a bubble as the rest of the country and will definitely deflate quite significantly when the free money spigot is turned off and people can no longer afford to easily put themselves up to their eyeballs in several lifetimes of debt to buy a house with the expecation that they can "earn" hundreds of thousands in return. This just won't happen and Seattle will deflate. The decline will be much more swift and dramatic than the rise and for those reasons it will be a good time to be out of the market and ready to buy, probably sometime next year once mortgage rates and restricted lending rules take their toll on the US bubble.

Anonymous said...

Thankyou Anon for your excellent post. We need an outsider's view around here to get anything straight.

For God only knows what reason, that NAR economist chose Seattle as the extension of the CA market, the next San Fransisco as you say.

Of course, he was full of it (and should probably be tarred and feathered by the time this thing is over) but, Seattle realtors lapped it up.

Seattleites are very good at self-boostering. We always have been. If it's not the grunge scene it's high priced RE.

We are very proud of our overpriced homes here and would like nothing better than to see it continue until NOBODY can buy a house in Seattle and every neighborhood looks like crap from abandoned buildings.

If we're not careful, we may get exactly what we are wishing for. So sorry! No homes for your children!

Eric D. said...

Maybe Seattle is immune to the bubble (so far) but Pierce County is not. Take a look at Barbara Clements new post in her blog (New Tribune->Business section) about asking price vs selling price. It's pretty eye opening and even explains
part of the reason median prices are still going up so much (read: median prices are reported in asking price not final selling price!)

Take a look at my blog for more explanation.

Eleua said...

It is absolutely true that incomes are just not as high as they are in California or many other areas.

I love to use Bainbridge Island as a great eye opener on incomes and house prices. Most think of BI as the land of OZ, where everyone is filthy rich, and lives the good life.

WRONG!

Anyone care to guess what the median household income is on BI? $120K? $100K? How about $80K? Nope. According to the Y2K census, BI ranks 24 out of 522 Washington population areas in income, and sports a $71K household income. That's annual, not monthly.

59% of homes sold on BI are to out-of-state buyers (according to 3 realtors I know - it might be a sketchy stat), and the lion's share of that are X-Cal equity refugees.

Selling/building/financing/appraising/fixing real estate is the biggest economic sector on BI. People move here from the OC, and start schepping real estate.

So, what happens when the equity refugees are trapped in their Brady Bunch tri-level, and can't escape California? Can incomes on BI support home prices? Can the 41% step up and supplant all the equity money that will vanish? Can everyone sell RE?

Highland Village, Texas is just north of Dallas. It has a population that is better educated, and less prone to commit crimes than Bainbridge Islanders. Their schools are also better. Their city is completly built-out (you have to tear down to build). Median income of HV is $102K, which is 48% higher than BI. Median home price is $210K, and it isn't a 1500sf, mildew infested crap-box.

Seattle isn't immune to anything (except genuine, civil humility). It's going to blow and blow hard.

20 cents on the dollar by 2010. You heard it here first.

sick of it said...

Eric D-

It is not true that Seatle is immune to the bubble.

The only thing we have here in Seattle that other places do not have is a surplus of lying realtors who are doing everything they can to pretend that all is well.

The MLS lists are laughingly manipulated to make inventory appear smaller than it actually is.

Different RE companies are trading listings back and forth to keep inventory numbers looking smaller than thery actually are.

Do a comparison of the same neighborhood on 2 or 3 different lists. Keep it up for about a month and you'll see how they trade properties back and forth.

Then, take a walk through that neighborhood and check out the properties that have been removed from lists but are STILL ON THE MARKET.

There is a lot of "hidden inventory" in Seattle.

Other unscrupulous stuff is being done with the MLS list to make it appear that Seattle is doing fine. It's all been mentioned elsewhere on this blog.

Anonymous said...

Eric D said...
The only thing we have here in Seattle that other places do not have is a surplus of lying realtors who are doing everything they can to pretend that all is well.

Too bad you're not in the trenches with us. We hate the current market.We work for our clients, though sounds like you'd never believe that,and this market is too hard to work in.Easy to sell, tough to buy with prices jumping 20000 in a week and presenting an offer trying to beat out another escalator.
And, where did you get the idea that agents swap listings? That's ridiculous. If a seller has an overpriced home and can't get it sold, they're in the drivers seat and might chose to change companies. Speaking for the real estate community, no one is swapping listings. Our legal and ethical position MUST be to do what's best for our client, not for ourselves, though I can't understand how we would benefit from spending our time trying to influence market statistics.
Regarding the mls stats. The numbers come from real sales. If they didn't do you think banks would loan based on appraisals based on the mls history? They are not made up.It's a data base.And yes, pendings don't show the real sales price, but sold stats do, not the list price. Those numbers come from real data that you can confirm in the tax records, albeit several months later.
I'm a graduate of a fine University in Science with 3 years of graduate school, so not stupid, unethical, etc. Why such rigid predjudice?

Anonymous said...

most of the crap I see being built is stuff where you're rammed in next to your neighbor. it may be better than an old dryrot dump, but is it worth over 300k over time as its condition declines rapidly? I dont think so. I would love to see numbers on how all those five-year-old homes in the outskirts with LONG commutes are doing. Rural areas that everybody was yammering on about with 'exurban flight' are coming apart at the seams from what I've been reading. With these energy and gas prices, that idea has flown right out the window. Get ready for Homaggeddon.

Anonymous said...

Comparing Seattle to Santa barbara is ridiculous. That place is gorgeous, filled with tanned snizz as far as the eye can see. This place is filled with hefelinas who think they can demand diamonds. SB has sun what 275 days iof the year. Its like 80 days up here in dumpsterville. Seattle central is ok, but go out to the burbs and let me tell you what, its BLEAKVILLE. This area blows chunks period, except for the mountains and being near vancouver BC and Portland. If housing does collapse, id rather snag a place with a view in SB than anything in this eternally gray dump. Well, it has been more sunny lately, and not so many gangbangers as CA. Speaking of the music scene, most of the people who made money here, Chris Cornell, Melvins, etc, long ago moved out of this clooud-infested self-absorbed yokelville.

Anonymous said...

Wow. Somebody should start a "Why we Hate Seattle" blog.

Sadly though, there is truth in what you all say.

Anyway- I left years ago and have not missed the things you mention- especially the self-importance.