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Saturday, July 29, 2006

More Editorial Truth Spotted In The P-I

Last week when Bill Virgin snuck an uncomfortable Seattle real estate truth into a sports opinion column, I was surprised. Today, when I read a P-I editorial titled 'Easy credit driving housing prices?' I just about fell out of my seat.

Deep in the Commerce Department's report are even more troubling concerns: The personal savings rate of Americans continues to decline; we essentially are spending $141 billion more than we earn. (For those who care, the personal savings rate is now a minus 1.5 percent, dropping from minus 1 percent last quarter.)

Our lack of savings has been a big deal for a while, but we've been able to mask that problem because the housing market has been so strong. But that is changing, too.

Mark Zandi, chief economist at Moody's Economy.com, told The Associated Press last week that the housing peak was a year ago and we are now seeing a slow decline.

The routine spin on the housing slowdown is that there will be a moderate weakening in prices, returning housing costs to more normal levels.
...
Yeah, my friends say, but not in Seattle. We're different. The thinking goes like this: The cost of single-family houses in King County continues to increase at double-digit rates and as long as the housing supply remains tight, our investments will be safe.

And may it always be so.

But what if the driving factor in housing prices is not land, new jobs or even an extraordinary community? What if the key element in housing prices is the ease of access to credit?
Yes, 'what if' indeed. But don't worry your little head. While all the other big coastal cities around the country had their prices driven up by speculation, suicide loans, and general mania, Seattle is different. We've reached a new plateau. Right? Right?
The [New York] Times said the areas of the country most at risk are California, Denver, Washington, Phoenix and Seattle, where a variety of new creative financing packages range from interest-only to adjustable mortgages.
Although the real estate reporters still may not be capable of seeing anything beyond what is right in front of their noses, let alone the storm looming on the horizon, at least the opinion columnists are finally coming around.

(Mark Trahant, Seattle P-I, 07.30.2006)
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20 comments:

Eleua said...

Yeah, my friends say, but not in Seattle. We're different. The thinking goes like this: The cost of single-family houses in King County continues to increase at double-digit rates and as long as the housing supply remains tight, our investments will be safe.

And may it always be so.


I'm so sick of this mantra - DOUBLE DIGIT PRICE GROWTH...

OK, people...let us review.

YOU CAN NOT HAVE HOUSING APPRECIATION OUTSTRIP INCOME APPRECIATION FOR ANY SUSTAINTED LENGTH OF TIME!!!

Why?

Eventually, you will end up spending 100%+ on your house payment. You still have to pay taxes, eat, heat, illuminate, drive, insure, medicate, etc.

Click on this spreadsheet and you will see that even at 0% interest, you will eventually spend 100% of your your GROSS income on housing - which is impossible.

But what if the driving factor in housing prices is not land, new jobs or even an extraordinary community? What if the key element in housing prices is the ease of access to credit?

OK, let's take a look at, what I like to call, Eleua's Maxim:

In economics, if a principle works well in a certain direction, it works just as well, if not better, in reverse, but with opposite results.

OK, so if E's Maxim is correct, and interest rates climb, while lending standards tighten to historical norms, or tighter, what would happen to home prices?

My answer is here.*

*for longtime Seattle Bubble veterans, you may have already seen this.

Anonymous said...

Seattle Times: median price per sq.ft. for King County condos is HIGHER than median price per sq.ft. for detached homes

...and moreover, studio condos are leading the way.

Of course, since Elizabeth Rhodes wrote the article, this insanity is due entirely to the wonderful lifestyle opportunities presented by small conodminiums. It has nothing to do with the fact that all other housing has become unaffordable, or with the possibility that speculators are driving prices through the roof.

No, Never that.

Anonymous said...

But but but what about Ballard? Surely it will be the rock that waves of bubble-crashing will break against! bwahahahaha

Peckhammer said...

It has nothing to do with the fact that all other housing has become unaffordable

With 59 condo projects coming on line in Seattle over the next four years -- many of which have one bedroom units starting at $500K -- I don't see how this is an affordable alternative to all other housing.

Deflation Guy said...

as long as the housing supply remains tight, our investments will be safe.

I hear this arguement all the time in support of Seattle's housing prices. IMO, the one thing that completely neutralizes this arguement is the cost to rent versus own. If housing were so tight then rents would be rising just as fast as house prices.

Rents have barely kept up with inflation (as measured by the CPI) in the last decade.

Anonymous said...

peckhammer:

Is that agreement or disagreement? I can't tell.

Peckhammer said...

Is that agreement or disagreement? I can't tell.

It's both. Condo prices have inflated due to the fact that Single Family Homes are off the chart, so I agree with that general assertion. However, condo prices do not represent affordable housing. $500K to $1.5M is not affordable housing, IMO -- especially when you are talking about condos which also have HODs to pay.

$500K for a one bedroom condo in the South Lake Union Area is an abomination. Oh wait... one of them has rooftop BOCCE BALL,so it must be valuable.

Peckhammer said...

I believe that condo sales pitches have reached a new low in disingenuousness. And the lemmings keep stepping up to the edge of the cliff. They ask no questions, apparently -- and just leap.

Wendy Leung, full-time Realtor specializing in Seattle condo purchases and sales with John L. Scott, says of a recent Vulcan sales event for the Veer project:

"During the event, it seemed like most visitors preferred the flexi-lofts. I can see why. The flexi lofts are approximately 950 square feet with 635 square feet on the main level and 315 square feet on the loft level. Compared to the other floor plans, the flexi loft has a bigger bedroom space and definitely more room for furniture."

What Wendy fails to mention is that the ceiling height in the 315 sq. ft. loft level is approximately 5 feet high, and requires a ladder for access. I kid you not!

Veer is being marketed as housing for first-time home buyers. A [small] undisclosed number of units will be offered in the mid-$200K range (for midgets with rock-climbing experience), with other units that actually resemble something of a normal one and two-bedroom ranging from $500K to $700K.

If they can pull this off, and I have a feeling they will, we will all have to admit that Seattle is SPECIAL.

Dukes said...

Great post Tim. I was talking with the bro-in-law just yesterday. I don't bring up real estate with him anymore because he is in sales and wants to remain positive, I understand that sentiment as I was once in sales as well.

Having said that, he approached me and said..."you are right! There is crazy shit going on right now. I see no one putting anything down on houses, I see CA people buying up here and I am getting worried."

He told me that he is now seeing apartment to condo conversions going on over on the Eastside (he didn't mention where and i didn't ask). But I told him that conversions are the last gasp of speculative nonsense you see before it ends. I told him how in many places (FL and CA) they are now reconverting condos back into apts.

The bell has tolled, we are not special, we are just normal people living in a normal area, gravity affect us all.

PepeDaniels said...

Peckhammer said...
Is that agreement or disagreement? I can't tell.

It's both. Condo prices have inflated due to the fact that Single Family Homes are off the chart, so I agree with that general assertion. However, condo prices do not represent affordable housing........


Some random thoughts this morning....

The experience in South Florida echoes a lot of the opinions here. No one disputes the bubble in South Florida at this point.

As other's have pointed out (eleua etc.) if the fundamentals are off enough these items like "rising asking prices", "tight inventory" etc. won't prevent a decline.

In S. Florida there had been something of a contradiction as well with a glut of "deals" on luxury condo units that had been wildly out of line with wages. The inventory for more modest "studio condos" was very tight. The media's touting the hot market didn't put more dollars in peoples paychecks etc.

Similiarly to what eleua pointed out. I was just looking at avg household income in an upstate NY city (can't recall which). I was shocked to see it at approximately the same level as here in Seattle. Houses, many of which are far better built than here, with real yards etc. often go for half of what 1 bedroom condos go for in Seattle.

Similiar tales were told about how Ft.Lauderdale was so different - no more land, tight inventory, Cubans, Peruvians, Brits, people from Connecticut etc, will always want to put their money here, we have better beaches and on and on and on.

It's an odd connection as well but the two areas where there seem to be a glut of people under 30 driving luxury cars were S. Florida and around Seattle.

Can all of this be based on sound finances? Kind of hard to believe really.

richard said...

He told me that he is now seeing apartment to condo conversions going on over on the Eastside

Juanita/Totem Lake has many recent conversions. If you drive north up 100th and then hang a right on Juanita Woodinville way you'll see signs for at least 8 different condo communities. A friend bought a studio in Woodinville - but I haven't been out there to see how many others are in the area.

I'm also hearing from friends that their rents on the eastside are going up VERY quickly - it's not unsual to hear 15% over last year - but in Seattle there doesn't seem to be the same pressure.

I wouldn't be surprised if the large # of conversions has temporarily removed a large # of units from the rental market.

The Tim said...

Richard,

Just out of curiousity, your friend that bought a studio in Woodinville... was that in the "Timberridge" complex? I lived there when it was Edgewood Apartments. Now the unit I lived in (with two roommates) for $750/month is being sold for $200,000. I figured out the payments, and with taxes and HOA dues, it would cost almost twice as much per month to live in my same dumpy apartment. Awesome!

richard said...

The name, not sure - but the smallest units there (471 sq ft) are the size she mentioned.

I last talked to her right before she moved in, and she was very apprehensive about moving into such a small place - but she could justify it because it "was a good investment and gave her a foot in the door to moving up". That, and whe was quite fond of bragging to her friends that she was "buying a condo".

I was thinking "YOU don't really want to live there, what makes you think 20 year old sub-500 sq ft condos out in the 'burbs are going to be more desirable in the future?"

Instead I just asked if she knew how much it had rented for before the conversion. Nope. Type of loan? Not sure, mom was dealing with the finance, but she helped with a $10K down payment.

seattle price drop said...

This article amazed and delighted me also.

It was written by Mark Trahant and if anyone wants to thank this man for being truthful about the housing situation, his email is marktrahant@seattlepi.com

What a mensch.

Tim, thanks so much for the recent posts. They are much better at explaining the situation than the local reports (Mark Trahant's editorial aside- that's a first for Seattle!)

seattle price drop said...

The condo article timing is very suspect.

Seattle is currently experiencing a ratcheting up in condo inventory and many are planned for '07 and being advertised right now. As we watch the condo market crash in the rest of the US, I suspect some nerves are breaking as to how to make sure these condos get unloaded.

Also, as we saw a few weeks back, a new targeted demographic is the scared 20-somethings who will give up everything to get into a "home"- even if that home is a 500 s f studio.

Nowhere in that article was there any mention of MOM appreciation. In fact the main graph in the front zeroed in on '04-"05 appreciation.

The fact that they emphasized studios, really makes me wonder. Who the heck wants to pay top price for a studio? But there is a fair amount of studio inventory out there trying to sell for top price.

Anonymous said...

I just read that some apartments in Klahanie (Issaquah plateau) were just sold to a developer who is planning to convert them to condos.

Peckhammer said...

Seattle is currently experiencing a ratcheting up in condo inventory and many are planned for '07 and being advertised right now. As we watch the condo market crash in the rest of the US, I suspect some nerves are breaking as to how to make sure these condos get unloaded.

As an example of a building that is being marketed to the 20-somethings that you referenced, check out this information about Veer Lofts.

I especially like the bit about "first-time penthouse buyers."

Jackson Wallace said...

I followed the increase and spread outward from central Seattle to outlying areas, like Skyway, Burien, and Shoreline. What I'm seeing now is that
the garbage from these areas is coming on the market at about the same prices as a year ago, but there is more of it. Decent stuff is also coming on the market, and still selling, but not at any real increase from a year ago.
There is a also a lot for sale in good central locations, but its, of course, much more expensive. Things are turning, albeit slowly. When the general slowdown in the economy takes hold, though, it will get to us too.

sarah said...

Speaking of easy credit, a mortgage broker from NV just posted on the housingbubbleblog that he recieved a notice that FICO scores for 100% loans have been risen, starting end of August.

The new requirement is just a tiny increase, but it's a start.

So if they're tightening in NV, can we assume the same is happening all over the country?

Heard anything about this S crow?

S Crow said...

Sarah -

Not specifically, but I'm going to send out an APB to some contacts I have. Stay tuned.