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Wednesday, June 07, 2006

Seattle "Buffered From Cooling Trends"

A number of readers pointed out USA Today's "Close to home" profile of the Seattle residential real estate market. There's not a lot of substance to it, and this quote is almost the entire text:

Seattle's strict growth- management policies and an economic rebound are buffering the region's real estate market from cooling trends. The number of new jobs has outpaced building permits for single-family homes and condos by 30% the past 15 months. Though single-family home sales fell about 7% in April, compared with April 2005, there's only a three-month supply of homes in the Seattle market — half the national average. That's largely why prices rose nearly 18% that month, according to the latest data available.
There's something really fishy about those numbers... Take a look at the graphic on the right. It shows the median home price in Seattle at $275,700, while all of Washington State is $320,000... huh? Not only is that backward (I'm certain that Seattle has a higher median than the state as a whole), but even if you simply reverse them, the $320,000 number doesn't match up with any numbers I have available. They're talking about April, so take a look at the April MLS numbers. King County median home price: $377,000. Seattle median home price: $410,000.

They highlight some 950 sqft. house with a price tag of $279,000 as the "median-price home." Not only is a home that cheap nearly impossible to find in Seattle, but good luck finding such a house at that price pretty much anywhere in King County. I have to wonder... what were they smoking?

Regarding the write-up portion, I don't really have anything to add over what we just discussed last month. There is however an active discussion on the topic going on over at Sound Politics, where contributor Matt Rosenberg seems to think that the primary reason that Seattle home prices have gone so high is growth management.
The "no affordable housing" plaint also betrays an ignorance of the effect - especially pronounced in other Seattle communities - of the basic laws of supply and demand under the heavy hand of regional growth management regulations.
I would buy that argument if Seattle was alone in its wild appreciation, but the housing bubble is not a localized phenomenon.

(Noelle Knox, USA Today, 06.05.2006)

24 comments:

matt said...

This growth management business is crap, Portland has even more restrictive growth management and its Real Estate market is stating to sour...

You can also look at Manhattan, which hasn't had any available new lands to build on for... oh... a good 150 yrs.

Also Tokyo RE's been on the decline for the past 15 yrs...

Never buy the limited land/growth management article, never, its a sham.

seattle slacker said...

Wait till the great ARM reset of 2007...

meshugy said...

Tim....I noticed those #s were totaly weird too. Where did they get those??!!

meshugy said...

I wouldn't bet on the "Great ARM reset" to do much damage. I don't think most people with ARMs are as stupid or desperate as you might hope. Also, the cap rate prevents the rates from going up too much per year.

See:

Will The Housing Bubble Take the Economy With It?

So what is wrong with this picture? A few things jump out and one is his all-round
condemnation of the adjustable rate mortgage and his certainty that this product
will do much to sink the ship. One thing he fails to take into account is rate
caps. Most ARMs can only move 1.75 to 2.5 points at each adjustment. As it seems
to be the longer term hybrid mortgages such as the 5/1 or 3/1 that he is concentrating
on, (and these are now more popular than the 1-year ARM) another mitigating
factor may be that during the stable period many borrower's incomes have
improved or will and there will be some increase in equity. Also, hybrid ARMs,
some taking as long as seven years to reach a first adjustment, will spread
out the effects of rising interest rates and perhaps even carry those homeowners
into a new cycle of low rates.

synthetik said...

USA Today is to the LA Times as STAR Magazine is to the Atlantic Monthly.

I wouldn't really count USA Today as a bastion of reliable stats or journalism.

Anonymous said...

i don't know that i would consider the LA Times one either.

S-Crow said...

Meshugy-

Whoaaa!

The information you have is just flat out incorrect.

Disagree completely with the assertion that ARM adjustment period is capped in the manner described. And this is what is going to absolutely decimate people....

A trainload of ARM's have the adjustment anniversary wholeheartedly allowing the FULL maximum cap at 5-6% over the start rate! ONLY AFTER the first adjustment period will the adjustment caps be limited to, say 1.75-2%--thereafter on each anniversary adjustment date.

For example, the ARM I have will not adjust until October of 2009,yet it can adjust to the full cap rate of 9.5%. In comparison, many transactions we close these days have the caps at 12-13%. Can you imagine those adjusting in the next two years with loans in our market around 400,000 or more for the Seattle area?

After the first adjustment date, we normally see a 6 mos ARM adjust 1% up or down, whereas 1 yr ARMS will adjust 2% up or down, depending upon borrower's loan program. FHA loans are different.

For those with ARM's you should check your loan terms either online (county records) or dig them out of the box in the garage rafters.

Hope this clarify's things for readers.

meshugy said...

Check out todays daily poll at the Seattle PI:

What do you think will happen to Seattle housing prices over the next 12 months?

Keep going up 60.6%


Level off 23.2%


Drop 9.0%


Don't know 7.2%

synthetik said...

"I have learned to hold popular opinion of no value"

- Alexander Hamilton

Translation: People are stupid.

meshugy said...

I don't think the poll means much...just funny to look at.

s.crow-do you have stats on what cap rates people are getting with there arms?

Anonymous said...

S Crow:

thankyou so much for coming on board and setting people straight about these loans.

I wish you would/could contribute more often.

Anonymous said...

Damn Meshuga!

Stop with the stat minutia! its annoying... we all know you've got a quesy stomach about your Ballard 'purchase' and are looking for any shred of data to support you're 'popular' opinion that the streets of Ballard are paved in Gold... and I know you're going to retort in some passive aggressive tone, like "Anon, I realize, etc... but I'm just saying, etc..." but please stop!!! you're a jazz musician or whatever, not an Escrow broker/what-have-you... S-crow sees it every day! do you?

you always do that, you're as transparent as all get out.

meshugy said...

If people are interested, I'd like to steer the thread away from predictions (which are next to impossible to make accurately) to a more in-depth look at what is going on now.

The big question is: why are other bubble markets (i.e California, Florida, Massachusetts, etc.) slowing down while Seattle remains strong?

It seems that the other bubble markets are collapsing under two main pressures:

1) Rising interest rates

2) Over appreciation (i.e. prices are so high no one can afford to buy)

Rising interest rates is a national phenomenon, so why hasn't that affected us? It seems to have taken the edge off...we're seeing some slightly lower #s for King County. But in the city it's pretty much the same as last year. Rising prices and low inventory. We haven't had the huge inventory build up that other bubble areas have had. My guess is that we really do have a genuine shortage of houses in Seattle. It's not just because speculators are buying them all up...there just aren't enough houses for regular folks. For comparison, in May of 2003 there where 12,422 houses for sale in King County. May 2006 there were only 7,382...the were 70% more houses for sale back in 2003. And the market wasn't crashing in 2003...it was chugging along quite nicely with about 6% median price gains. My guess is that's were we'll be in a few years, back to 6% appreciation (oops...that was a prediction)

Over Appreciation is a more local phenomenon...so maybe we just haven't hit the top yet. But how much higher can it go?

I'd like to know what other think about this...

synthetik said...

maybe Seattle was late to the party due to the money and jobs flowing out of the area due to the Tech Bubble.

I don't think the question is "how high will it go", but most certainly, how far and fast will it drop?

Who is asking how high will it go? Anyone? Other than possibly Donkey Kong and a certain contingent in Fremont.

mercer_island_guy said...

I've started a blog to focus just on Mercer Island. I've done some analyss on the 2005 and 2006 NWMLS numbers. If anyone is interested, go to mercerislandhousing.blogspot.com.

Christina said...

midnight meshugy:

How about including a collapsing dollar, and the looming threat of an oil catastrophe or crisis?

I was reading John Rubino last night, and listening to a good interview from last year with him yesterday. He had written in How to Profit from the Coming Housing Real Estate Bust that these two factors would start the deflation of the housing bubble.

He listed other signs of "bubbledom" but I'll save that as artillery for when a "it can't happen HERE" true believer spouts off some nonsense. Then again some other blog commenters might have read the book.

Anonymous said...

I think if we see a true, long-term, national housing price depreciation trend it will likely be accompanied by a similar downward trend in the stock market (see Japan as an example of this). The economy as a whole will also be suffering, probably with increased unemployment. I don't think anyone here who's gloating over their genius in renting and laughing at "stupid people who buy overpriced houses" will be spared losses. Who knows, you might even lose more money in the stock market (see Nasdaq 2000-2001), which can and has fallen far faster than home prices historically.

I'm not arguing that in that in a your money will be better off "invested" in your house, just that anyone who is putting their money into the stock market instead of a house isn't really any safer. Perhaps if you manage to sell all your holdings after housing prices drop but before whatever your invested in does too. Anyone here think they can time the stock market perfectly? Please email me at .... :-)

As someone pointed out a couple of threads ago, the stock market has appreciated at 10%/year for the last 70 years, if you take the whole 70 years into account. During the years 1982-2000 it was something like 20% a year for the S&P. Housing has also appreciated, but typically a rate of only 4%/year, slightly more than inflation. In the last 5 years it's been something like a compound rate of 50-100%. Any price drops have been followed by periods of broad appreciation (with obvious localized exceptions in the housing market and certain stocks).

All sorts of events have come and gone with their "market ending" effects on both markets (e.g. Great Depression, World Wars, Oil embargo, dot-com boom, deflation, stagflation). So I don't buy the doom and gloom predictions (get ready to lose 50% of your house value, no matter where you live, massive foreclosures loom on the horizon) or the rosy (housing never goes anywhere but up, everything's fine, put 0 down and make a million) predictions.

In fact, that's the only thing I would bet on - that anyone saying, "I'm 100% sure this is what will happen to the broad housing/stock market" is going to be wrong.

biliruben said...

The big question is: why are other bubble markets (i.e California, Florida, Massachusetts, etc.) slowing down while Seattle remains strong?

You already answered your own question, 'Shugy:

---

What do you think will happen to Seattle housing prices over the next 12 months?

Keep going up 60.6%


Level off 23.2%


Drop 9.0%


Don't know 7.2%

---

Bubbles are primarily a psychological phenomenon. It's momemtum investing at it's worst. If people think housing will continue going up, it will continue going up... until it doesn't.

I've said all along (3 years now) that Seattle will lag the biggest bubble markets by 6 months to a year, and I stand by that.

Just wait, and examine Tim's sales and inventory graphs for the relavent trends. They don't look good.

meshugy said...

Bubbles are primarily a psychological phenomenon. It's momentum investing at it's worst. If people think housing will continue going up, it will continue going up... until it doesn't.



I'd agree with that...the psychological element is a big part. But it seems like low interest rates got the ball rolling. But it doesn't seem like an increase in rates has slowed down the bubble in Seattle.

I've said all along (3 years now) that Seattle will lag the biggest bubble markets by 6 months to a year, and I stand by that.

That might be true...other markets have been going longer and reached prices which got so high that even the most fervent housing bulls couldn't swallow. I guess we haven't reached prices which scare people yet...but we couldn't be too far away.

I still think that a genuine lack of housing and strong hiring in Seattle has made us more resilient. Thornburg mentioned that in California they didn't have a shortage of houses at all...they actually were building far more then needed. The Washington Center for Real Estate research reported that Washington state has only provided 1 new home for every 5 jobs created. So I think we simply don't have enough houses...

Anonymous said...

Geez, went into the Bellevue BOA and noticed they are introducing a new mortgage product.....this is a 40yr mortgage with first 10yrs interest only then the final 30yrs as a fixed rate. They are really getting creative to get people into the houses at these prices (although I am not buying at thrse levels I think that is a clever product that I might consider using on my next purchase depending on how much more the rate is then a normal 30yr).

synthetik said...

>who knows, you might even lose money in the stock market (See NasDaq 2000-2001

The stock market is not a guarantee, it's just an alternative. An alternative to a very GOOD chance of a very long period of negative growth for RE.

You reference to 2000-2001 makes no sense at all. You might as well say "remember the great depression"? Or "don't fly on airplanes because of terrorists". I seem to have forgotten about Black Monday.

Early April 2000 drop in the Nasdaq was ONLY due to one thing. The stock market bubble, created by a similiar kind of irrational exuberance you see in this real estate market today. Internet companies stock driven up by greed and what they MIGHT (speculation) accomplish vs. real economics. We know a similar story is going on today. While it might be inconvenient for you to think that way it may very well be the case.

Money moves around, changes hands.

A tremendous amount of it flowed out of the Stock Market and into homes.

Now you will see a shift/transfer of money into another area, possibly the stock market.

Sure, if RE takes a complete dump, and as a result we have tremendous job loss, you could easily see a big drop in the market.

A good stock to buy right now for you would be GM.

biliruben said...

I still think that a genuine lack of housing and strong hiring in Seattle has made us more resilient. Thornburg mentioned that in California they didn't have a shortage of houses at all...they actually were building far more then needed. The Washington Center for Real Estate research reported that Washington state has only provided 1 new home for every 5 jobs created. So I think we simply don't have enough houses... -'Shugy

I love ya, man, and I'll be happy to take a look at your link to that last stat and rip whatever time frame they are using, but you really have no idea what you are talking about.

Since 2001 Seattle has lost jobs and those jobs that replace the jobs we lost in manufacturing are paying less and are primarily associated with construction, real estate or housing finance.

Seattle job trends>

We have plenty of houses.

Regardless, it has been demonstrated over and over again that places far denser than Seattle (think NYC, Tokyo, LA) can and do see their home prices crash. Don't listen to this baloney.

If people can't rationally afford to own a home in Seattle without assumptions of double digit appreciation in the mix, they will be forced to stop buying. Period. At that point housing prices will need to adjust to levels where they are again affordable.

Jackson Wallace said...

Umm, syn thetik has it right. You could still find good housing prices, by
today's standards, only as recently as 2004, and 2001-2002 was a miraculous time to buy.

BTW, there are lots of houses available for 279K in King Country. They're
just all down south, and in not the fave areas.

Anonymous said...

I don't think the market will repeat NASDAQ 2000-2001 any time soon. The run-up preceding that crash was unprecedented, the overvaluation is just not there right now. NAS would have to crash back to 800 or so to repeat that loss. I just don't see that happening. You'd be down to price-earnings of 5-6. That said, I think the dollar is in serious trouble and you are probably better off with your money in yen or euros.