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Wednesday, April 12, 2006

Newsflash: Rapid Appreciation Not All Good

Peter Callaghan must have missed the memo. A local reporter actually covering the dark side of increasing home prices . Holy cow, I think I might faint.

Homeowners seem to enjoy the breathless stories about superheated real estate markets. Pierce County, for example, saw an 18 percent increase in the median price in the last year. In King County it was 12.3 percent; in Thurston, 24.9 percent.

It's nearly always covered as good news. Apparently we all feel that much richer, given that many people's personal wealth is tied up in their homes. We tell stories about how much houses in our neighborhoods are going for with a "can-you-believe-it?" shake of the head. No matter when you bought – last year or last century – it's worth more now than it was then.

The news isn't so good for the folks who haven't been able to buy a house because they're poor or young or coming here from places where prices aren't so nutty. They certainly have a different reaction to the news.

A rising tide raises all boats, which is cool as long as you have a boat but not so cool if you're standing on the beach.
...
No one wants the price of housing to stagnate or decline, not even those who have hopes of becoming owners. But bad stuff results from repeated double-digit increases. At the risk of bringing everyone down, here's why:
  • It makes it even more difficult for people to buy homes. Despite lottery advertising, the American Dream is not winning the lottery, it's owning your own home.
Granted it's a pretty short article and doesn't go into any real depth on the serious issues of high home prices, but it's better than the ra-ra real estate pieces we're normally limited to. Although considering my own position as well as the nature of many comments on this blog, I have to disagree with his assessment that "no one wants the price of housing to decline." I think plenty of us do in fact want just that.

(Peter Callaghan, Tacoma News Tribune, 04.09.2006 )

51 comments:

Nick said...

I personally don't see what's so bad about houses being unaffordable for purchase. So you rent. Big deal. Next.

Another point: many overseas markets have been markedly hotter than the hot US markets, yet have experienced cooling rather than bursting. Case in point, the UK. They had something like 15 straight months of modest price declines (totaling 5% maybe), yet the profile of outstanding mortgages there is much more geared towards short-term ARMs than here.

Anonymous said...

Uh yeah...Really terrific for the health of the US economy when everyone's paying such high mortgages that they can't do anything else with their money.

Brilliant!

Nick said...

Uh, yeah, did you see where I said "you rent" instead?

Anonymous said...

Nick, don't be simple.

The housing bubble directly affects the renters market. First, it tends to reduce the number of available aparments, as speculators convert dcecent apartments into trashy condominiums (this is happening in Seattle on a large scale).

Second, any renter in Seattle will tell you horror stories about asshole landords who recently purchased their property as an "investment," and are now trying to jack rents through the roof to compensate for their massive mortgage and property tax payments. Speculative price bubbles make this problem much worse.

Third, as the article notes (did you bother to read it?), rising property "values" equal rising property taxes. Aside from school levy failures and library funding cuts, these increases disproportionately hurt the elderly and the low-income. People who purchased homes many years ago suddenly find themselves unable to pay their property taxes.

Fourth, it leads to speculative, low-quality, poorly-planned building. When property owners see froth, they start ripping down existing properties to build "dense," cookie-cutter properties with poor construction, terrible aesthetics, and little-to-no likelihood of being attractive in ten years' time. There are a number of semi-historic Seattle properties slated for demolition, so that condos can be built in their place.

Fifth, prices for everything you buy increase. Business owners want to own property, too. If they can't afford it, I'll give you two guesses which way the prices of their goods will trend. One of those guesses is wrong.

I could go on. Speculative real estate bubbles affect everyone, whether due to direct costs, or indirect things, like libraries that don't open on Sunday, due to (property-tax-based) funding shortages.

Nick said...

"First, it tends to reduce the number of available aparments"

Houses can be rented also.

"asshole landords who recently purchased their property as an "investment," and are now trying to jack rents through the roof to compensate for their massive mortgage and property tax payments."

Um, so are rents too high or are they too low? - because they can't be both.

"Aside from school levy failures and library funding cuts, these increases disproportionately hurt the elderly and the low-income. People who purchased homes many years ago suddenly find themselves unable to pay their property taxes."

I would assume that people who purchased their homes many years ago are sitting on close to 100% equity. So, they can sell or they can borrow. I have a hard time feeling bad for people who own an asset which appreciated well beyond their wildest expectation.

"Fourth, it leads to speculative, low-quality, poorly-planned building. When property owners see froth, they start ripping down existing properties to build "dense," cookie-cutter properties with poor construction, terrible aesthetics, and little-to-no likelihood of being attractive in ten years' time."

This is pure opinion on your part. I prefer the aesthetic of the new construction. A friend of mine just moved into one of these "terrible" renovated homes in Ballard. It's MUCH better than any of the other shitboxes on his street.

"Fifth, prices for everything you buy increase. Business owners want to own property, too. If they can't afford it, I'll give you two guesses which way the prices of their goods will trend. One of those guesses is wrong."

I suppose that's why hugely important homeware items like computers have continued to plummet in price.


Look, I'm not saying there's no housing bubble. But I don't think it pays to exaggerate your argument. I stop listening the first second that someone trots out the "old people and minorities are hurt the most" routine.

Anonymous said...

"Um, so are rents too high or are they too low? - because they can't be both."

Eh? Where the hell did you get this? I never said that rents were "too" anything. I said that the housing bubble will tend to increase rents. Think before you write, Nick.

"I would assume that people who purchased their homes many years ago are sitting on close to 100% equity. So, they can sell or they can borrow."

If you don't see the problem with forcing elderly and low-income homeowners to "sell or borrow" to cover their bubble-inflated property taxes (brought on by people spending way beyond their means on mortgages) then I hope that someday you're on the wrong end of this equation.

At this point, I'm not even going to bother answering your other silly arguments (i.e. computer costs as a measurement of cost-of-living), because you're clearly either a troll, or you're very, very dense. Either way, you've wasted enough of my time.

econ 101 said...

Anon 3:31

Amen.

One of the worst aspects of this bubble is the absolute greed and total fiscal irresponsiblity of accquiring HUGE amounts of debt that it has brought out in Americans.

Guess what folks? Houses are about to become homes again. Not "Appreciating Assets".

Prepare yourself.

matt said...

As far as renting goes, its been flat for the past 5 years... a definite sign of a speculative bubble that WILL return to the mean. It has to. If the economy were going 'gangbusters' then home prices and rent would climb together, they flat out haven't.

Speculators renting out homes in hopes of flipping 'em can be an inconvenience to the renter, but if they jack rent... move. The condo conversion's driving up rents artificially, which is problematic for people renting on the margin, but again, this will 'correct' in time.

Its the Price/Rent ratio that determines a healthy market, everything else is just sepculation

Anonymous said...

Yes. I moved twice in Seattle as a renter because of homes being bought and sold and then rents jacked up.

In fact, the first time it happened, the whole BUILDING moved! (4 apts.)

I've seen apts. just stay empty because of landlord gouging. If you can't afford your mortgage w/o premium mega-rents, don't buy. Plain and simple.

I've also had a previous landlord (who'd driven me out with a rent hike) ask a couple years later if I wanted to move back in at a new reduced rate. It was a good deal but I had to say no.

Absolutely can't trust someone who'll jack up the rent like that on a whim.

Or because they bought a building they really couldn't afford.

Anonymous said...

I agree with nick completely. I keep hearing from RE bears that rents are low and disconnected from home prices. So if you think home prices are out of whack, rent! Think property tax is too high, sell and rent! Everyone has a choice.

Give me a break about the social service rants. Did you not notice a few of the libraries in Seattle are brand new and most of them are open on Sunday?

As far as tearing down older buildings and constructing ugly condos, taste is subjective. If you have to blame, blame the local government for permits and zoning.

We live in a democracy with free market. If you want a socialist hell hole, move to Cuba. Even China isn't one anymore.

Anonymous said...

Anon 10:11:09 PM

True, move to China if you want a socialist hellhole, that way you could be closer to the owners of everyone's mortgage backed securites.

Yep, that's right, Seatle's "democratic free market" is being funded by the likes of the People's Republic of China.... wow, is that irony I smell?

Anonymous said...

Read it again. I said move to Cuba.

As far as the national debt goes, the bears have the script down pat, don't they? Always the same old doom and gloom. How many cans of chili do they still have from Y2K?

Anonymous said...


Third, as the article notes (did you bother to read it?), rising property "values" equal rising property taxes.


The article doesn't say that, and if it did, it would be wrong.

The article says two things about property taxes in a housing bubble:

-the perception of higher tax liability makes it more likely that voters will reject school levy increases.

-the change in balance between residential and commercial taxation becomes skewed toward residential, which is unhealthy.

Either assertion is debatable. But property taxes don't necessarily go up because valuation goes up. If everyone's valuation goes up in equal proportion and the tax basis stays the same, the tax you owe remains equal. (My property tax dropped in 2005.)

Governments do derive revenue from each transaction, however, and that change in revenue stream is sometimes spent unwisely. That's an aspect of the economics of housing bubbles that the author of the piece left out, but it's a good one to keep in mind when legislators start looking to spend windfalls. I hope they learn from the mistakes made during the stock valuation bubble.

S Crow said...

Mutliple offers continue. Just received a couple transactions this week that were involved in this price bidding.

Over at Seattle's 'Rain City Guide'(Blog)the most recent posting talk's about his own experience this week.

Side note: We also received a transaction that was a multiple offer situation, but it was generated via Craigslist. FSBO, no agents involved on any side. That was a first for us anyway.

Anonymous said...

Case in point, the UK. They had something like 15 straight months of modest price declines (totaling 5% maybe)

The UK isn't a good comparison anymore since their central bank responded to the housing crisis by cutting rates.

Sure, the FED can reverse course and cut rates if and when the housing market goes soft. However with persistent inflation, low unemployment and rising commodity prices, its going to take MAJOR downturn in housing to make it feasible for the fed to cut rates.

banker said...

The Fed will choose to save the dollar over the indidual f***ed homeowner any day.

Afterall, this is a capitalist society, not communist.

Interest rates are going to go trough the roof.

If you need to refinance, do it now.

seattle price drop said...

S Crow-

It is true that multiple offers continue. However, they are few and far between and there is a far greater majority of properties being sold well below asking.

I ran 57 properties through the county tax records from Ravenna/Laurelhurst.
40 of them sold below asking, 9 sold at asking, and 8 were bidded up. Eight out of 57.

There's 167 properties on my list. I'll keep you updated as they show up on the county records.

But as of March 1, it looks like MOST Seattle sales were under asking.

Nick said...

"Eh? Where the hell did you get this? I never said that rents were "too" anything. I said that the housing bubble will tend to increase rents. Think before you write, Nick."

I get it from the persistent bear argument that rents are too low. If that's true, then rent. If that's not true, then maybe we aren't in a bubble.

"If you don't see the problem with forcing elderly and low-income homeowners to "sell or borrow" to cover their bubble-inflated property taxes (brought on by people spending way beyond their means on mortgages) then I hope that someday you're on the wrong end of this equation."

Right. I got it. It's ALWAYS about pissing on "elderly and low-income" people, isn't it? My, aren't you just better than the rest of us in all of your hand-wringing self-righteousness. Do you even hear what you are saying? LOW INCOME people OWNING A HOUSE! Either it's good to own assets or it isn't. But you cannot have it both ways. Economic reality exists. Owning a house does not make you automatically immune to them. You take on certain risks when you buy a house.

"At this point, I'm not even going to bother answering your other silly arguments (i.e. computer costs as a measurement of cost-of-living), because you're clearly either a troll, or you're very, very dense. Either way, you've wasted enough of my time."

YOU are the one who breathlessly informed us all of the rising price of goods because of the bubble. I'm simply pointing out that there is massive DEFLATION in prices of very relevant consumer items. Retreat into calling that "silly" if you must- it just shows that you are emotionally wed to your position and are unable to respond to holes poked in it.

Nick said...

"True, move to China if you want a socialist hellhole, that way you could be closer to the owners of everyone's mortgage backed securites."

Also incorrect. China and Japan both own sizable chunks of outstanding Treasury debt. But the vast majority of MBS are owned by US and European Institutional investors. (The Euros are particularly ravenous when it comes to their appetite for US MBS)

Anonymous said...

Nick-
Check out CNBC's "World Wide Watch" (not positive that's the name ). Anyway, it's on Sun- Thurs. 1AM-3AM. Yeah, it's really late at night- tape it if you need to.

EVERYONE, including the Europeans, are wanting to get away from the US dollar.

It's all they've been talking about for 3 months now.

Nick said...

"EVERYONE, including the Europeans, are wanting to get away from the US dollar."

OK...

Anonymous said...

Seattle is full os these snotty little republican WASP types who inherited daddy's properties, including rentals. Just go eat some ketchup you stupid homeless person (typical sea-bvue whiteboy attitude). Well, florida's RE market is detonating, and the housing dooom will eventually spread to this cloud-infested overly-proud of itself dump eventually.

Anonymous said...

Not just Florida, reports are showing that housing is slowing down in every hot markets of the country - NorthEast, California, Las Vegas, Phoenix, etc. And not just this country, it is slowing down in other countries with recent massive run up in housing price.Even the Fed begins to worry about the speed of the slow down. Can they do anything? The end game is close at hand...

Nick said...

"Seattle is full os these snotty little republican WASP types who inherited daddy's properties, including rentals. Just go eat some ketchup you stupid homeless person (typical sea-bvue whiteboy attitude). Well, florida's RE market is detonating, and the housing dooom will eventually spread to this cloud-infested overly-proud of itself dump eventually."

Funny stuff. You're really doing a lot to dispel stereotypes here.

Anonymous said...

Don't be an ass, Nick.

Anyone who has lived in Seattle for the last 5-6 years will be able to tell you that the cost of food, utilities, furniture and other durable goods has increased, just from personal experience.

Yes, you can target on things like consumer electronics (which depreciate virtually instantaneously, and have non-universal demand), but that just shows that you have a poor grasp of basic economics. If you want to measure cost-of-living, you measure the cost of things that everyone needs, not things that some people want.

burst the bubble said...

Anon 2:24-

A few days ago I read an article from one of the big financial interests -sorry, can't remember who- that said the Fed is actually interested at this point in seeing the housing bubble burst. Apparently, they think it's gone too far.

Finally, something me and the Fed can agree on.

It's true that way too much of the economy has been tied to RE. Can't last forever and asset bubbles always burst in the end.

Nick said...

"Anyone who has lived in Seattle for the last 5-6 years will be able to tell you that the cost of food, utilities, furniture and other durable goods has increased, just from personal experience.

Yes, you can target on things like consumer electronics (which depreciate virtually instantaneously, and have non-universal demand), but that just shows that you have a poor grasp of basic economics. If you want to measure cost-of-living, you measure the cost of things that everyone needs, not things that some people want."

I don't know that anyone is denying that some level of inflation exists. It's quite a leap, though, from there to "it's caused by the housing bubble".

And a computer is not just a "consumer electronic". Personal computers create efficiency and cut costs of the people who own them. If you don't have a computer, then you don't have the internet, which means you aren't getting any great deals off of the internet.

Oh, and phone costs and broadband costs have DEFINITELY decreased in the last 6 years. Do those count as utilities?

matt said...

"Also incorrect. China and Japan both own sizable chunks of outstanding Treasury debt. But the vast majority of MBS are owned by US and European Institutional investors."

You're correction, is incorrect. Pick up 'The Economist', these securities are packaged as T-Bills by Fannie Mae and Freddie Mac and held by China's central banks as Federally secured bonds... Sorry, part of your home is barrowed money from the Chinese, but if you're an avid Wal*Mart shopper, you shouldn't have a problem with that.

Nick said...

"Sorry, part of your home is barrowed money from the Chinese, but if you're an avid Wal*Mart shopper, you shouldn't have a problem with that."

Thanks for the snide sentiment, but my mortgage is through a one-branch bank who retains their entire portfolio of loans.

Your Wal Mart comment, although equally snide, is ridiculous however.

biliruben said...

Foreign countries do buy our mortgages via mortgage backed securities, but from what I've read the vast majority of MBS are owned by pension funds and hedge funds right here in the good ol' US of A.

I've been looking for a breakdown of exactly who would be holding the bag in the event of massive bankrupties, but have not yet found a good source for these numbers.

I wish it were mainly China, but I don't think that's the case.

Anyone with solid, or semi-solid, or even very slightly chewed numbers to give us some solid ground for this debate?

biliruben said...

Maybe I'm dense, but I don't even get the Walmart joke. Yeah, Walmart imports goods from China. So?

Nick said...

http://www.realestatejournal.com/buysell/mortgages/20050825-simon.html

This article says that at the end of 2004, foreigner buyers accounted for about 6% of the oustanding MBS balance in the US. Even if it's tripled in 2005, I stand by my original statement.

matt said...

nick:

Great, your mortgage isn't owned by the Chinese, but I wasn't talking bout nick's mortgage....

Sorry about the snide comment, didn't know you were a Wal*Mart shopper

Nick said...

"Sorry about the snide comment, didn't know you were a Wal*Mart shopper"

Matt, I'm not. I just don't understand what you think you even meant with such a ridiculous statement, somehow equating MBS to shopping at Wal Mart.

You were also wrong regarding foreign consumption of MBS. China in no way holds even close to a majority of that paper. Sorry, try again.

biliruben said...

Well I don't shop at Walmart either, but I still don't understand the joke/shot or whatever it is.

Matt's equating buying a toaster from China via Walmart with China in essense lending us money to finance a small portion of our homes?

Ouch! That was a painful dig.

Wait, no it wasn't. It makes no sense.

matt said...

"Matt's equating buying a toaster from China via Walmart with China in essense lending us money to finance a small portion of our homes?"

Yeah, its called the 60 Billion dollar trade deficit we have with China... Its a big problem and its got a lot of people worried, thus the push to have China revalue the Yuan against the dollar. but again, this bites the hand that feeds because the Fed would have to raise interest rates to stabilize the dollor, something that could push the marginal ARM/neg-amort. lender over the edge.

I'm not trying to be adversarily, although you're obviously reading it that way... there's a significant long term cost with the housing bubble.

Anonymous said...

The joke is that when people shop at Walmart, the Chineese loan the money back to them so they can continue shopping at Walmart...

While MBS aren't the main security the Chineese purchase with their current account surplus - the treasuries they have been buying has kept down rates on all debt, including MBS.

biliruben said...

Absolutely, Matt. Agreed, if that was your point.

It will be interesting to see whether Dubya makes any headway with Hu Jintao on letting their currency float a bit more.

Hu has more problems than a bit of toothless bluster from ol' Georgie, however. He has half a billion farmers to keep happy and not revolting in the streets, and exports fueled by an artificially low currency is part of that.

Anonymous said...

with China in essense lending us money to finance a small portion of our homes?

Almost everyone I know that got a new mortgage in the past 2 years rolled consumer debt into it. Usually just a few credit cards and maybe a car loan, but this is the status quo in 2006.

This wouldn't be anywhere near as lucrative a practice if China weren't keeping rates low by using their trade surplus to buy US bonds.

biliruben said...

Yeah, isn't that a swell practice: turning unsecured debt into secured debt. My friends have done it too.

I tell everyone who is pondering buying a house to rent and wait for this market to settle out.

Predictably, they say "but you bought."

I can't really respond to that, other than to say that I bought with my eyes wide open, and made sure I had enough equity that even worse case, I'm not trapped upside down, sinking.

Anonymous said...

Didn't one of the higher-ups in china come out and say (unofficially) that China needed to get their 850 billion USD down to 250 billion?

Wouldn't that really put a crimp on our economy?

It seems they have a lot of control here.

Anonymous said...

Biliruben-

I think you also said somewhere that you bought in '03.

Don't people understand the difference between buying then and buying at the top?

biliruben said...

Yeah, though it was 04. It felt like top then too.

It's pretty hard to call the top.

There are still people saying we will have double digit increases for 06.

flopped flippers said...

Ouch. Double digit increases? LOL! I'm already seeing people get burned who bought their property last summer for 370K (hoping to flip).

They're down to 375K now and still no buyers.

Too bad they never wanted it as a home- they could end up owning it for a good long time.

Or selling at a big loss. Whatever, no sympathy. Too much havoc caused by flippers all over the US.

Nick said...

The thing I don't understand about the flippers is What about the taxes and transaction costs? Don't they realize they have to take a pretty big gain just to break even?

can people still do basic math? said...

Nick- Apparently they do not take into consideration transaction costs, property taxes, property insurance, rental income vs. cost to own and all the other expenses that anyone with a brain and the ability to do 3rd grade math could compute!

In fairness to the fllippers though, I have to say there are a lot of first-time homebuyers out there who are also not doing their math.

Especially when it comes to the total amount they will actually end up paying for their home once they've finally got all that interest paid off.

This whole episode has done a LOT to higlight the failings of math education in the US school system.

Eleua said...

In the summer of '88, Newsweek did a poll of 17yo American kids.

Q: What is the area of a 4cm x 6cm rectangle?

Less than half got the answer correct.

Those kids are 35 today.

Think about that. Think real, f-ing hard...

Anonymous said...

Re the first "Nick" post, "house prices in UK cooling, not crashing":

Yes, they were "cooling "for quite a while, it now appears they are starting to "crash". Probably has sthg. to do with the global rise in interest rates.

We knew it couldn't last forever.

Anonymous said...

Even if you take the stance that many Americans are bad in math, what does that say? Japanese are better in math and they still went through the housing bubble. Bottom line, everyone wants to make some money or at least tries to do so.

Anonymous said...

"Everyone wants to make some money or at least tries to"

How true. That's what got us to the overinfalted prices- everyone trying to make some money.

And that's why the market's going to crash.

It was never connected to fundamentals at all. Th eonly reason it happened was cuz "everyone was trying to make some money".

A purely speculative market.

We all know what happens after rampant speculation. Look out below.

Eleua said...

My point with the math example was not that we are going to have a housing bust because we are morons. My point was not that we would avoid a housing bust if we could figure out a simple geometry problem.

My point is that jeopardy in finance will not be noticed by the average American until it is way too late. People are incapable of seeing how leverage can turn against them.

Americans are accustomed to having their day saved by miracles and the generosity of others.

My point is Americans will not be able to understand complex issues as evidenced by their inability to understand simple issues.

Poor education and arrogance comes at a heavy price. We are about to find out exactly how high that price is.