Housing Prices A "Simple" Problem
P-I Columnist Bill Virgin makes light of the housing situation in today's column, titled How to rein in housing prices? It's simple. The thrust of the article is a sarcastic proposal to make it illegal to profit from the sale of a home. However, he makes some interesting claims that I can only assume he's serious about...
Folks around here hardly need an invitation to commence remarking about the prices of homes in this market. Wrote one reader: "How can the average price continue to escalate so radically beyond the means of the average household income? I would hope there is some correction on the horizon — though I confess I've been amazed that housing prices have continued on the current course for as long as they have."Okay first off, what is Bill talking about when he says that housing prices have been running up "for nearly two decades"? Even as recently as 2001 housing was still relatively affordable for people making the median wage around here. The real explosion in prices didn't hit until the easy money started flowing. It is the zero down, interest-only, exotic loan extravaganza (not "well-paid lawyers" and "software millionaires") that is creating the "demand" Bill refers to, and propelling prices into the stratosphere (relative to wages). When the easy money dries up, the appreciation party will be over.
Amazement is close to becoming a permanent condition around here; for nearly two decades people have been looking at housing prices and presuming that at some point we'd run out of corporate executives or well-paid lawyers or prematurely retired software millionaires to fuel the run-up.
But in two decades, it seems, we haven't. The median price of closed sales on homes and condominiums was $365,000 in King County in March, according to the Northwest Multiple Listing Service; in Seattle the median price was $407,000, on the Eastside more than $476,000. Each of those numbers reflects a double-digit percentage increase from the same month a year ago.
Obviously there's enough demand to keep prices as high as they are, and climbing, just as there is still plenty of demand for gas even at more than $3 a gallon.
Secondly, it's almost as if Bill was reading this blog yesterday, because he seemed to directly respond to the "is Seattle special" question:
Seattle housing prices are going to be higher than other places on the map, given the geographic and regulatory constraints and the attractiveness of the region as a place to live.It's true that prices in Seattle are going to be higher than say, Yakima, but that certainly doesn't mean that the current ridiculously high prices are justified or even destined to stick around much longer. Seattle is attractive, but I hate to break it to you Bill—it's not magic.
(Bill Virgin, Seattle P-I, 04.27.2006)
37 comments:
The past two decades are not necessarily how things go in a normal economy. The economic story of the past two decades is really about how we moved from 20%+ prime rate to 1% FED FUNDS rate. This makes time-purchased assets more expensive, and fuels a liqidity based economic boom.
Granted, tax cuts played a significant part in the past 25 years' party.
Now, we have the opposite in play. Interest rates have nowhere to go but up, and I think tax cuts are all in the rear view mirror.
You can't look at the past 25 years and extrapolate that into the future. Most REIC pimps extrapolate the past 24 months into the future.
Keep you eye on the fundamentals. Ask yourself what the REIC is going to look like with rates going from 6% to 12%, and $4/gallon gas.
In Seattle, between 1988 and 1990, annual home price appreciation went from 7% to 23% during a time period of 10% mortgage rates.
That tells me nothing.
Did rates go from 12 to 10, 8 to 10, or hold steady at 10 and allow X-Cal equity to fuel the boom?
What happened in '90-'91?
Keep in mind that the late '80s was when the oil glut hit. Cheap gas was fueling that boom. Easy Al just took over the FED, so you know he was cutting rates. The liquidity after the 10/87 swoon was breathtaking.
All I know is that I'm 37 with about 100k in the bank, and there is no way I'm paying over 400k to live in a dump. Besides, if I buy now, the appreciation has been run. Every market eventually turns. You get in on the downside, not the up. It would make more sense to put my money in what? The stock market or commodities? oh, wait, they're overpriced, too.
As prices in places like San Diego and Santa Barbara come down to closer on par with this area, where do you think someone would rather live? In Cloudtown or near the beach? I guess I can sort of swallow that prices are at 400-500k even though it seems pretty stupid, but when I see someone selling new construction near Discovery park on a 4000 ft lot for 799K!
then I know someone is serving cyanide koolaid and I aint drinking.
There are no homes under 550k selling in Interbay or Ballard. Everyone's patting themselves on the back for their appreciation. mass hysteria.
Yeah, ok, lets see how long those homes keep moving if at all.
Its getting to the point I would rather move out of this area or rent and wait til my parents die (sorry rents) to get a house, because this market is straight up BS, and I have money saved. I know lots of people my age that either already have houses or have no hope of getting them. Baby boomers aint gonna live forever, and they have their retirement tied up in their housing. I am so much hoping for a complete annihilation in their hands, but we'll see. Dont talk to me about inflation or the imminent death of the dollar, because A. nothing's going to replace the dollar, and there are lots of counter theories to the idea that inflation is going haywire. Yeah, maybe I'm wrong and then I guess all homes will be a million dollars, but somebody better start paying average workers 200k or these prices simply will not be viable.
I also have about 100K saved for a DP once housing falls. It's in CD's because everything else looks too iffy.
There is no way I am throwing away 100K on an overpriced dump in Seattle.
When I put down 100K on a house, I expect to GET something for it, and to not be burdened by an overwhelming mortgage payment.
To me, 100K seems like a lot of money. I suspect that the people who are "buying" crap at these high prices, most of them cannot even compute that amount of cash. It's all about imaginary monthly interest payments to them.
I adore Seattle, I was born and (for the most part) raised here. I've told everybody I know who has never lived here that it's the best city in the world...in the spring and summer. Rainy, gray, dull and dreary crap the rest of the year.
And then I say, “the rain’s what keeps us green”. So I, ever the smug Seattlelite, can then remind people that we are called the Emerald City. I have lately been seriously considering fleeing to Kansas.
I'm a new bubble watcher. I'm a 30 year old, single woman, with an income smack dead on the Seattle median. I have little debt and I have a bit more than 30K in the bank. I can't spend it on as much as a condo in Federal Way because I’m know the risks outweigh the potential benefits. Besides, I pay less renting in Queen Anne.
What I'd like to know is, what will a deflating northwest bubble REALLY look like? Won't a higher interest rate wipe out any foothold first time home buyers may have hoped for even if the prices of houses drop substantially? Are we looking at six of one, half dozen of the other?
"Won't a higher interest rate wipe out any foothold first time home buyers may have hoped for even if the prices of houses drop substantially? Are we looking at six of one, half dozen of the other?"
I suppose in theory, if they went high enough. It's very far from clear that they are going higher than this.
If you have $100K in free, unencumbered cash, you are very smart to wait this one out. Most of the knuckleheads buying the median home today don't have 1/10th of that amount, unless they are equity refugees.
The big scare tactic the REIC uses is to tell you that you are just wasting your $100K while the market appreciates that much every 24 months. The REIC tells you that homes will become less affordable as interest rates rise.
True...
But...
That assumes that people will not drop their price to keep the median buyer in the market. They are spewing another version of their big lie "RE only goes up in value."
If you have not seen it, go here to see just how vulnerable home prices are in an environment of rising rates and unemployment.
Home prices are set by buyers, not sellers. The easy money of the past few years has allowed buyers to conduct bidding wars, and allowed sellers to troll for suckers. When the easy money is gone, the very same leverage that got people into homes will pop them out.
Your average mortgage broker of today will give the dead, insane, and indigent a home mortgage with no money down. Mortgages of the future will conduct background checks that will make you feel like you just got a prostate exam with a beach umbrella. $100K free cash will be a King-Kong down payment.
When the equity escalator vanishes during the exhaustion of this bubble, you will be one of very few people who will have $30K, let alone $100K.
Do some research into what happened in Texas during the late '80s. They didn't have a RE bubble, per se, they had an oil bubble that fueled local real estate. When oil crashed in '86, over 1,000,000 Texans lost their homes. That was with RE being an echo bubble. Now, with places like California, Boston-NY-Washington, and Seattle being in a REAL ESTATE bubble, when it goes, I expect the fallout to make Texas look very tame, by comparison.
Keep your cash. Put up with the REIC lies. Endure your neighbor's smugness. You will be able to pick your home and name your price.
"Seattle housing prices are going to be higher than other places...and the attractiveness of the region as a place to live."
What about the speculation component to the RE runup around Seattle? Are people (and newspapers) still denying that reality? Of course, it's all due to the "unique special-ness" of Seattle (eye roll). Seattle, wake up!
Anon 3:26-
In answer to your question "what will RE prices look like when interest rates go up?":
At least 20% of Seattle homes are currently price-reduced- this means we've reached a plateau.
As interest rates rise, asking prices will go down.
Frankly, I think they'll go down even WITHOUT a rise in rates. So rising rates will push them down farther and faster.
The "get in now before rates rise" slogan is nothing more than hype by the RE community- a last ditch effort to keep this puppy afloat. Just another scare tactic thrown at a public increasingly petrified by the outlandish run up in prices.
So hold your ground and have no fear- your 30K will be worth something!
And you're right, St. Louis is looking increasingly good, isn't it? Even charming, delightful!
I'm holding out one more year in Seattle tho. By Fall it should be clear to all but the completely brain-dead that the party is over. If stuff looks like it's falling fast enough, I'll stay and wait til it gets into my range.
If it's not falling fast enough , St Louis here I come.
A charming 'hood in St Louis has a condo in Federal Way beat, hands down.
there was an article today on Ben's blog about a couple who were preparing to move out of a $650/mo rental and take on a $2,300/mo. mortgage (they had not, of course, calculated property taxes and insurance in!).
They said, basically: "Well, no more going out to eat, no movies, no nothing...it's just the mortgage payment from here on out".
What struck me was, this massive run up in home prices was, at some point, deemed good for the economy because people could pull equity out and spend spend spend.
Now, it appears that this is about to backfire big time.
Bye bye consumer when it's all you can do to pay your mortgage.
Anon 1:31,
You can still find pretty nice places in Ballard for around 450K....especially 2 bedrooms. The three bedroom in that range are sometimes nice too.
But it does seem like we're at the top right now...I'd only buy if you knew you could stay there for 10 years or more. We might see some rough times ahead...
'm
Has anyone seen this in the NY Times?
U.S. Economy Still Expanding at Rapid Pace
The industries leading the way are ones that have been receiving far less attention than cars or real estate, though they have been adding thousands of new workers each month. In the last year, hospitals, doctors' offices and other health care employers have created almost 300,000 jobs; restaurants have added 230,000; and local governments — including schools — have added 170,000.
"The good news for the U.S. is that growth has diversified," said Nariman Behravesh, chief economist at Global Insight, an economic research firm. "We aren't just relying on the consumer and housing."
In parts of California, Florida and the Northeast — places where home prices soared in recent years — houses are no longer being snapped up, and many appeared to be selling for less than they would have last summer. But the housing market is still healthy in much of the country.
The Boeing Corporation, for instance, plans to deliver 395 commercial planes in 2006, up 36 percent from a year ago, many of them to foreign airlines. The company has already sold all the planes it will build this year and 98 percent of the planes it will build in 2007.
Shhhhhhhhhhh, don't tell the bears.
"health care employers have created almost 300,000 jobs; restaurants have added 230,000"
Yes! the new economy's in emptying bedpans and serving McGriddles!!! Awesome, where do I sign up! This is the kind of industry that launched the internet, satellite technology, telecommunications...
Oh boy! So exciting, maybe I can work my way up to a bubble-created construction job, pounding nails!! Or a new teacher, recently hired due to hyper-inflated property taxes resulting from said bubble. Nothing like creating a bunch of poorly compensated part-time teaching positions!
Its a brave new world people, get ready for greatness!!!
Diversified, indeed...you get your choice:
"You want fries with that?" (restaurants)
"You want prunes with that?" ("healthcare" aka "keep the boomers alive")
"What the hell do you want?" (government)
Bah. Who needs manufacturing or IT jobs....
"The other thing about this market that was not around in 1990: Blogging and information. Oh,and those dang lending standards. Sheesh. "
Add to your list:
77,000,000 Mouseketeers that all (well 65%) think they can fully bankroll their retirement by selling the garagemahal. This is the last opportunity for them to get their money.
Add to it the stock market (DJIA) is approaching historic highs. Granted, this is on rather weak earnings, and with a full tail wind. Once the balance sheets get gutted, and the economic winds shift to the front quarter, that will tank (I'm expecting a sub-7K DJIA).
Boomers are going to be curled up in a fetal position while they figure out how they are going to make the next payment on the Escalade, Botox, Levitra, and their kiddies college education.
Of course this means that GenX grommet-heads will be paying most of their income in taxes to float their elder Disco-Ballers.
Mexico is sure looking better and better. I might try Leon.
"Yes! the new economy's in emptying bedpans and serving McGriddles!!! Awesome, where do I sign up! This is the kind of industry that launched the internet, satellite technology, telecommunications..."
I love how you people always drag out the same tired talking points. Anytime the economy does poorly, there's no jobs. Any time it does well, then those jobs aren't worthy. Give me a break. You know that good news is allowed to exist SOMEtimes don't you?
nick,
Sure, people are pointing out the darker side of the news.
Can you find for me, "mainstream" article on how the underlying fundamentals of Seattle's housing market might not seem as rosy as the REIC would have you believe?
More economic news from the NY Times:
U.S. Economic Growth Rose Sharply in 1st Quarter
The American economy grew at its fastest pace in more than two years in the first quarter of 2006, the Commerce Department reported today, as consumers and businesses spent briskly.
The gross domestic product, the widest measure of the nation's output, grew at an annual rate of 4.8 percent in the first quarter, as Americans bought more computers, furniture and cars. Businesses invested more in office buildings, industrial equipment and transportation equipment, and the government spent more on national defense.
Stocks and bonds fell slightly after the report came out. The major stock indexes were led down by Microsoft, which fell 10 percent after warning that it may not meet Wall Street's profits expectations in the coming months.
Most of the growth came from consumer spending, which jumped 5.5 percent after a muted 0.9 percent increase in the fourth quarter. Investments in construction, equipment and software, which increased by 6.5 percent, added much of the rest.
"Most of the growth came from consumer spending, which jumped 5.5 percent after a muted 0.9 percent increase in the fourth quarter."
EXACTLY! This is the problem!!! Since the U.S. has no savings rate, in fact a negative savings rate, there's no money being moved into sustainable investment capital. Basically, there's hardly any money being invested in nerds so the nerds can come up with a new widgets/ideas to push us into a 'new economy', whethere its energy research or biomedical, etc...
If a report came out and said 50,000 new jobs were created in reneweable energy start-ups, that would be give me a warm fuzzy feeling. But 50,000 new jobs in food service? Come on, that's an industry 40,000 yrs old for crying out loud.
Consumer spending fueled by debt is not good news, in fact its scary because it means the burn rate's going up and we're headed towards the cliff that much faster.
I'll take the tech-boom of the late 90's over this 'housing-bubble' business anyday. Least the tech-bubble proliferated the broadband sector....
Anyone who believes government econmic statistics is seriously gullible. Those stats are tortured more than my ears were when I had to endure the cathartic screeds of my pacifist potheads for peace college professors.
Johnson would send his econ stats back to the labor dept until they "got it right." So did Nixon. Reagan did it for the '84 electioin. Clinton's economic numbers hit "the number" just about every time during the mid-90s. Anyone remeber the "goldilocks economy?"
Government stats are crap. It is always worse than they report. this is how you get "jobless recoveries" and how the party in power can whine about how people don't believe the economy is doing as well as they report.
Rent the movie "1984." During the bulk of the movie, you will hear the background drone of the Information Ministry chirping about how wonderful the economic output of Oceania is. It is like CNBC, just less pizzazz.
Look at the report. Consumer spending on furniture and cars (can anyone say HELOC?).
"Can you find for me, "mainstream" article on how the underlying fundamentals of Seattle's housing market might not seem as rosy as the REIC would have you believe?"
The WSJ routinely runs articles about the housing bubble. Over the pas 12 months, I would describe their coverage as "bearish".
400 to 340 is a drop of a mere 15%.
The bubble popping will mean price drops of 25-50%. Plug in those numbers and do the calculations again.
emcityjill,
You're underestimating the percentages. Consider that 5 years ago, that $400k house was worth about $250k. A drop to $340k is a rosy scenario.
Besides...let's say that you buy now, using your 20%-down, 6%-interest fixed loan. Your principal is $400k. Next year, the market tanks, and your $400k house is now valued at $300k. You're now in a scenario that economists call "negative equity," and it means that you're screwed if something happens that would require that you sell -- relocation, sickness, natural disaster, etc. You would face the choice of losing $100,000 in real money, or holding onto your home, come hell or high water....
"You're underestimating the percentages. Consider that 5 years ago, that $400k house was worth about $250k. A drop to $340k is a rosy scenario."
This seems like an awfully definitive statement based on nothing. The house going from $250K to $340K would have been 36% appreciation over 5 years. That annualizes at between 6 and 7%. That might be higher than it should be in your opinion, but it's far from stratospheric.
emcityjill,
Your question is best answered here or if you prefer a humorous approach, try this link.
The long and the short of it is, as far as affordability goes, the house may be the same, but as far as the price that gets you that same house payment, it will drop dramatically as interest rates go up.
If you have higher interest rates, AND a crappy job market, coupled with inflation (stagflation - very real scenario), the property value just freefalls.
We have not had stagflation for almost 30 years.
meshugy,
It seems that you always try to bring up rosy articles to defend this housing boom. I have a single question to ask all the housing bulls out there – where do the banks/lenders get the money to give loans to American people to buy more and more expensive houses while the saving rate of our country is negative for the whole year last year, the first time since the Great Depression? They get it from the foreigners – Chinese, Oil exporters, Japanese, etc. We are living on borrow time because of the kindness of the strangers. For what ever reason, if they think that buying up our debts is no longer profitable or feasible, then the whole housing pyramid will tumble like a stack of cards…
If interest rates were to rise, thus knocking many buyers out of the market, and sellers held their prices, there would be no market.
Nothing would move. Median house price would be zero. We would have piles of inventory and no lookers.
In order to create a market, buyers would have to shell out even more money for homes. This is unrealistic, as the only reason people are taking out these exotic loans is because they are MAXED OUT (and this is in a "good" economy). Also, buyers are treating homes as investments, so there is investment money in the price people are paying. If the market starts to sour, people will pull their investment money away from homes.
On the seller side of the equation...
They would have to lower their price to keep the buyers in the market. Granted, if they don't have to sell, they can sit on their home as long as they can make the payments. They can chirp that it is worth $1B, but without a sale, who the hell cares?
If they get forced to sell in a bad climate, they will have to plumb the depths of the market to find a buyer. You do this by lowering your price. In an inventory glut, they would have to lower it enough to find a buyer, and lower it enough to make their property stand out above all others.
Rising interest rates, lack of speculation, and a tentative job market will absolutely kill real estate.
It is my opinion that the bulk of today's buyers/owners are overextended, and are betting the entire house on it going up in value. The leverage that got them into the house will pop them out.
Nick,
A) You get an "F" in math. $250k to $400k annualizes to about 10% growth over 5 years, not 7%.
B) I was being conservative. The last 3 years have seen closer to 15% annual growth in home prices. Prior to that, it was slightly lower. We can debate the use of the word "stratospheric," but I think it's safe to say that these numbers justify the use of the term "insane."
If you're going to nit-pick people, you should make sure that your arguments are logical. At the least, learn how to calculate annualized growth....
OK, everyone. How does one calculate IRR for a speculative rental in a declining market with negative cash flow?
Rising interest rates, lack of speculation, and a tentative job market will absolutely kill real estate.
It is my opinion that the bulk of today's buyers/owners are overextended, and are betting the entire house on it going up in value. The leverage that got them into the house will pop them out.
Exactly.
If the Pollyanas complaining of 'negativity' want a happy story instead of reality, then they should check out the Disney channel.
"A) You get an "F" in math. $250k to $400k annualizes to about 10% growth over 5 years, not 7%."
Um, no. You are the one who said "a drop to 340K would be a rosy scenario". So, that means you are de facto saying that if the growth had only been from 250 to 340, then that would have been a "rosy scenario" also. My math applies, and it is 100% accurate and pertinent to the scenario you laid out there.
Also, it might help if you could even read what the other person wrote before establishing yourself so handily as a condescending douchebag.
"The house going from $250K to $340K would have been 36% appreciation over 5 years. That annualizes at between 6 and 7%. That might be higher than it should be in your opinion, but it's far from stratospheric."
That's exactly what I wrote. At no point- NO POINT- did I ever say anything about the IRR between 250 and 400. No, that was YOU- the douchebag- making those words up and putting them in my mouth.
Grow up, Nick.
"Grow up, Nick."
You grow up. You get all condescending about an "F" in math and nonsense like that- and as it turns out YOU are the one who misread everything.
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