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Saturday, June 17, 2006

Local Real Estate Blog Talks Bubble

Over at the P-I's Seattle Real Estate Professionals blog, Gregory Wharton (identified as an architect and developer) is in the middle of a very detailed series of posts tackling the subject of—you guessed it—a real estate bubble in Seattle.

In the next series of posts on the subject, I'll investigate Seattle housing prices and associated economic conditions. Some of the answers I'll discuss may surprise you, no matter which side you're on. It turns out that Seattle real estate prices are unsustainably high in many cases, maybe even ripe for a serious correction, but outside of the condo-flipper market there is no bubble...yet. The situation presents a very real problem for our city, and we need to start thinking about remedies.
He's about a third of the way through, and so far I'm relatively impressed with the balanced view he is presenting. It's certainly a lot better than the fingers-in-ears, "la la la, I can't hear you" approach we've seen on other local real estate blogs. I may not agree with all of the conclusions he comes to, but at least he is giving the subject a genuinely thoughtful analysis.

I'll probably post about this again as he gets further along in the series.

(Gregory Wharton, Seattle Real Estate Professionals, 06.12.2006)


seattle_slow said...

Yeah, this guy is actually fairly intelligent, and presents his view from both sides of the fence which gives him way more credibility in my book. By far, some of the most balanced reporting I've seen in awhile.

reskeptic said...

but outside of the condo-flipper market there is no bubble...yet.

Hmm...what about the house-flipper market? No bubble there?

Anonymous said...

Seattle real estate prices are unsustainably high in many cases, maybe even ripe for a serious correction, but outside of the condo-flipper market there is no bubble

Do many people not understand what a bubble is?

Anonymous said...

actually I thought the local housing bubble was actually driving up the condo speculation and the flipper... almost a chicken before the egg arguement. Condo appreciation is the due to affordability being so low for single family houses, the only people who can afford to buy any longer are the condo buyers...

What I do find amazing is how insular the press is with regard to national trends. There's plenty of housing bubble examples out there, and too think Seattle's just 'coinciding' with this mania is almost arrogant.

Anonymous said...

Anon : It certainly SOUNDS like people do not understand the definition of a bubble!

"Prices unsustainably high but no bubble"!!!!!????

jj said...

Today's Seattle Times actually came right out and said it: "Seattle is overvalued by 35%".

It's in the Sunday RE section.

Anonymous said...

Man, this thread is in desparate need of some microscopic Ballard day-to-day MLS stats ala Meshugy to refute this overly sensical 'big picture' Seattle bubble what-have-you...

Meshugy? we miss you!

Anonymous said...

I eagerly anticipate some in depth coverage of the ways people have been financing properties in Seattle. The unusually high rate of risky(er) loans along with the poor cash flow on many rental properties seem to be the real weakness in the Seattle market.

ballard watcher said...

Here's the Zip stats for Ballard (98107, 98117):

June 11: 83 on market/ 4 reduced
June 18: 89 on market/ 6 reduced

June 11: 55 on market/14 reduced
June 18: 54 on market/ 13 reduced

Note: neither of these zips are including the massive condo inventory soon to be flooding the market. WOWZAHS!!!! Have you seen the building going on in Ballard!?

Anonymous said...

One of my friends just moved out of a 700 sq ft 1 bedroom she rented for $850 a month into a 480 sq ft studio condo for $1200/month (mortgage, taxes, dues).

This was a converted apartment unit that previously rented for around $600/month.

She's pretty apprehensive about moving into such a small place, but is convinced it's her "foot in to door" to buying a more desirable home 2 to 3 years from now. Plus, she doesn't want to be seen as a "renter" so the sacrafice is worth it to her.

When I asked her about the possibility of needing to live there for 10 or more years before being able to sell it or rent it out at a profit, she said "god no, I wouldn't want to live there that long. That's not going to happen."

Fortunately she's young and cute, so it'll probably be up to her future husband to bail her out of this one when they buy a home together.

concerned homeowner said...

Anon 6:14-

Too bad about your friend. Every time I see a house go off the MLS list the past few months, I say a silent prayer for that person, hoping they could afford the home and really want to live there for the rest of their life.

I believe that is what this is going to end in.

As someone who bought in the 90's and now own my home outright (no rent payment to the bank), I know there is no way this is sustainable.

My 150K house is now "worth" 850K? I don't think so.

Please encourage friends and loved ones to do a little reading and thinking before buying in to this market. If they don't listen, at least you'll know you tried.

Anonymous said...

Any thoughts on the people who have homes now but want to upgrade? I don't need to sell, but want a little bit bigger of a house (we're under 1400 now) and a nicer neighboor. Our first mortgage was a zero down, this time we'll be putting 12%-15% down so we actually are going into a less risky mortgage.

Is this a bad time to relocate in the same area? If we wait 12 months and homes drop 5% then current house has also dropped 5% and we're no better off than we are now.

I'm trying to figure out how to sensibly move in the midst of a bubble without getting screwed?

ser said...

Can you sell now, rent for 6 mos./year and then buy?

That could be a way to "buy up".

Anonymous said...

Yes, we can rent for 6 months. Although 12 months might be pretty rough. Maybe I'm in denial, but I can't see prices dropping that fast. Do guys really think the housing market will see price decline (as opposed to staying flat) fast enough and far enough to make a difference?

Even if the prices dropped 10% in a year (which in my opinion is highly unlikely) we're only talking about 50k on a 500k house. Don't get me wrong, saving 50k is a lot of money, but I just don't see that kind of results.

If we 5% drop, that's 25k and by the time you rent for a year plus 2 moves and storage costs, I'm not sure you'll gain all that much.

Housing inventory is really really low (in our price range and area) so we are fully prepared to rent or do whatever until we find the right home so if prices do see a dramatic drop in the next 100 days, maybe that will give us motivation to keep renting and see how low they go.

Anonymous said...

Anon 10:40-

Have you been checking Zip for price reductions and then checking the county records to see exactly what individual properties sold for?

It can be a very illuminating way to find out what's going on now and where we might be one year from now.

Divergence between asking and selling price has been large in a lot of areas of Seattle this year.

Start checking your area of interest. Follow the market closely for yourself and that should give you the info you need to make up your mind about how fast/far the market may fall.

Anonymous said...

Rule #1: Don't rely on anonymous blog posters for major life decision making :-)

The reaction of some commentors to Greg Wharton's balanced (and not yet completed) analysis is telling. If they even hear a glint of writing that contradicts their conclusions that massive (30-50%) price drops are around the corner they simply dismiss it as shilling for the real estate industry. I'd say that these people are simply the flip side to the whole "Absolutely no bubble" people at the NAR, and no more likely to be right.

I'm not saying now is the perfect time to buy your house, but you point out how it's not as simple as "rent for cheap and then buy up in 6-months when all the prices have come back to earth". Sure, you could buy now, put 15% down and end up stuck in a house with 0 equity if prices drop in the next 3 years. Or, prices could go up for 2 more years and then drop back to where they are now, meaning you're just out 2 years of rent. Or prices don't ever drop in your price range, they just flatten. Or houses you want will come off the market (a real inventory shortage), rent will go up in your building, the apartment's you're renting could go condo, etc.

Home buying is not without risk. Renting is not without risk either. And the simplistic macro-level discussion you get within the anonymous comments on this board ("I see 30, 40 5% price drops. Bubble's here baby") aren't to be relied on to best understand that risk. My comments included :-)

Anonymous said...

Anon @ 7:46 - You are correct, but these guys are the only voice of the other side of the debate. I do agree that they might be the polar opposite of the NAR end of things, but I think it is helpful to get all the opinions and see which ones make sense.

I'm looking (and selling) in the Kirkland, Redmond, Bellevue area and I'm not seeing much stuff sell for under list price. There are some reductions and houses are staying on the market longer, but people are getting list price.

Anonymous said...

To Anon@10:40:

You're right in that renting for a while may not result in being able to purchase an equivalent house at a significantly better price. And the longer you wait, the less likely it will work--housing does appreciate slightly faster than inflation in the long term.

However, there is one MAJOR consideration you left out: renting currently costs far less than owning. This will still be true if your down payment is 15%.

So selling and renting is a cash-flow positive move. Take the condo in Anon@Sun:6:14's post and let's run the numbers. The mortgage is $1200, with about $1000 interest. After tax deductions, this is (at best) about $750. Add taxes and condo fees (for houses, condo fees = maintenance), which brings it up to about $1100 per month in housing expenses. Ignore principal payments, since you're paying yourself, and insurance, since you're paying about the same in renter's insurance.

If you sold this condo and rented an equivalent one, you would now be paying only $600. That means you're saving $500 per month in cash. While you're waiting for a buying opportunity, you can invest this money and let it grow. And you can invest any equity currently locked up in your house, too!

The bottom line: prices do NOT have to drop to make renting more profitable. They just have to rise slowly. I did very detailed calculations several months ago and determined that prices would have to appreciate on par with inflation to make buying profitable after 5 years. Any less than that, and I end up with more equity by renting and investing the difference. (And I could never afford to buy my apartment.. I'd have to downgrade to buy.)

There are other risks that fall in favor of renting. Buying carries depreciation risk because it's highly leveraged, and renting carries only inflation risk. Buying also carries the risk of loss due to having to move suddenly (lack of liquidity).

Personally, it's a no-brainer for me, since I'm looking at condos. The risk is just so high right now that it's better for me to rent. Things might not be quite as clear with houses, though.

Anonymous said...

The argument that renting is better than owning is based on how much you can save and how much better you can do with that money you saved by renting.

Stock market is not that easy and is a 50% crash in housing price a certainty?

Anonymous said...

No, a 50% crash is very unlikely. But you're missing my point. There doesn't need to be a 50% crash for buyers to lose money. Even if prices go up at 3% per year, you will lose more money by buying a house than you will by renting an equivalent house. And what's the likelihood that houses will not be able to sustain growth beyond inflation for the next 10 years? I'd say high.

Anonymous said...

No Anon, of course a 50% crash is not a CERTAINTY. How could it be?

Nothing in life is for certain until it happens.

But a 50% crash does look like a possibility.