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Wednesday, July 26, 2006

More "FairValue" Malarkey

Why this is in the news again is beyond me, but apparently CNN/Money is really keen on some dude that uses a secret formula to determine which housing markets are overpriced. We talked about this same guy's babblings just three short months ago, and very little has changed since then.

After years of local home markets getting more and more overvalued, the trend has reversed, according to an analyis (sic) published this week.

Each quarter, Local Market Monitor, which provides research to the real estate industry, assesses 100 markets, comparing selling prices to "equilibrium" values. Company president Ingo Winzer bases those values on local economic and population growth, construction costs, vacancy rates, household income in the area and interest rates.
Winzer says that 56 of the 100 markets he covers are now fairly priced, up from 54 last quarter.
As I pointed out last time, this dude's "analysis" of the "Seattle/Tacoma" region covers so broad an area as to be completely and utterly useless. June median home prices (residential & condo) across the area in question were as "low" as $275,250 in Pierce County, and as high as $415,000 in Seattle. To take such a broad range of data and make a determination that it is all a "FairValue" is ludicrous.

Furthermore, I'm calling BS on the numbers given in the report. Take a look at the first quarter report. The home price listed for Seattle-Tacoma is $311,000. Now notice that in the second quarter report, that number went down, to $308,700. Excuse me? Last I checked, median prices were still going up in King, Pierce, and Snohomish counties. This report has zero credibility. I wish I could say that I'm shocked (or even a little surprised) that it was unquestioningly parroted by CNN.

(Les Christie, CNN Money, 07.25.2006)
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Anonymous said...

The Mainstream Media can ignore, spin and sugarcoat just about everything from Iraq to the true conditions of the Housing market.

Unfortunately, I believe that the US is in for one hell of a Recession that will peal back ALL the Malarley being Feed to American Public.

Like the man said in "Apocalypse Now as he prepared to release the Fire Bombs..."Stand Back - THIS is going to be a BIG ONE"

Anonymous said...

Ya. It's BS to group Seattle-Tacoma. But if you want to take their 'fairvalue' number and apply it to the true median price that would make Seattle approx 45% overvalued not 8% as they say.

Anonymous said...

Redmond/Seattle inventory numbers since 5/5:

Date Redmond Seattle
5/5/06 144 22023
5/8/06 149 22171
5/9/06 149 22203
5/10/06 140 22307
5/11/06 143 22398
5/15/06 151 22587
5/16/06 152 22715
5/17/06 150 22784
5/18/06 148 22975
5/19/06 157 23178
5/22/06 155 23382
5/24/06 149 23419
5/25/06 155 23469
5/26/06 157 23585
5/30/06 149 23747
5/31/06 156 23753
6/1/06 155 23719
6/5/06 168 24196
6/6/06 165 24264
6/7/06 162 24417
6/9/06 157 24684
6/12/06 161 24985
6/13/06 162 25168
6/14/06 163 25303
6/19/06 180 25635
6/20/06 181 25715
6/21/06 173 25914
6/23/06 185 26106
6/26/06 199 26349
6/27/06 194 26440
6/29/06 189 26564
7/5/06 182 26586
7/10/06 193 27380
7/11/06 191 27367
7/12/06 192 27537
7/14/06 196 27849
7/19/06 195 28170
7/20/06 194 28207
7/21/06 193 28340
7/25/06 199 28638
7/26/06 197 28713

Draw your own conclusions...

Anonymous said...

Any thoughts on the recent WSJ article titled "For-Sale Signs Multiply Across U.S.".

From article, "Metro areas showing large increases of homes for sale and relatively weak employment growth include Boston, Los Angeles, Philadelphia and New York. Among the strongest markets overall are Houston, Dallas-Fort Worth and Seattle. All three areas are benefiting from robust job markets, and modest home prices are drawing investors and new residents to Texas."

I understand why RE-related people have a vested interest in keeping the bubble afloat as long as possible, but as the Media gets harsher and harsher on local RE markets, why don't they agree with you guys that Seattle is ready to take a swan dive?

AmazedRenter said...

Did you guys look at the "stats behind the stats"? CNN keeps a detailed tab on population / income & job growth.

Pick any WA city, and you see that we're lagging big time in job growth. Seattle, WA 2000 - 2005: -1%. And let's not forget, that is WITH all the realtor selling each other houses. That's about to end. Game over.

象象 said...

Local salary level is about flat after
adjusting for inflation. i just don't see how people can afford to buy houses 60-70% more expensive than five years ago. There is gonna be an upper limit on how much people could stretch in order to buy RE. The party is already over in Florida. So it will be for Seattle. Florida has close to the lowest jobless ratio in the nation and job growth is also tremendous. Retirees are also flocking in....

Christina said...

i just don't see how people can afford to buy houses 60-70% more expensive than five years ago.

I don't either, but I am ignorant of the munificence of rich dead relatives, lucrative stock options, and lottery winnings. There are probably more of those pots of gold out there than you and I know of. It could also be that EVERYBODY's income went up 60-70% or their expenses DECREASED by 60-70% (or more likely, a combination of both) to make these houses affordable. And yet the proliferation of adjustable rate mortgages and interest only mortgages: what to make of those?

I am very sure that among the pundits here, anonymous or no, someone can tell us at what point Seattle had an UNDERpriced market and when Seattle had a market priced at fair value, and what statistical data were used to arrive at those conclusions. Because there are so many people telling us Seattle's market is overpriced. I believe them of course, but I'd like to know when the Seattle real estate market was underpriced. Are we looking at an underpriced market three-five years from now?

Anonymous said...


by Peter Schiff
Euro Pacific Capital
July 21, 2006

When Ben Bernanke told Congress that moderating economic growth will likely contain inflationary pressures, Wall Street responded with its biggest one-day rally in nearly two years. Unfortunately for the Wall Street party boys, the Fed Chairman is likely wrong on both counts. In the first place the U.S. economy will not merely slow, but tumble, in the coming months/years, and rather than quelling inflation’s fire, the inevitable recession will actually stoke its flames.

Bernanke’s faulty logic assumes that inflation is somehow a by-product of economic growth. However, real economic growth emanates from increased productivity, which tends to hold prices down. Bernanke also dramatically underestimates the strength of the economic headwinds that will quash consumption and crush GDP growth. The rising costs of energy, adjustable rate mortgage payments, rents, insurance, food, and local taxes, combined with the reverse wealth effects associated with collapsing real estate prices will combine to produce a recession much worse than those seen in the last 30 years.

The argument that weaker growth will somehow cause consumer prices to rise more slowly focuses on the demand side of the price equation and ignores the supply side. Prices are a function of both supply and demand, and while slower growth, or an outright recessions, would certainly reduce demand, it would also work to reduce supply. The result could well be equilibrium prices that are higher during a recession than during an expansion.

As the U.S. economy contracts, the Federal budget deficit will grow and the perceived appeal of U.S. financial assets will be lost. As a result, foreign capital will flee at precisely the time it is needed the most. This will put additional upward pressure on interest rates, further increasing mortgage rates, suppressing real estate prices and consumer spending. More importantly, it will also cause the dollar to fall, making imports more expensive and pushing up raw material prices, thereby increasing production costs for domestic manufactures as well. As the dollar loses value relative to other currencies, foreigners will be able to outbid Americans for scarce consumer goods. As a result fewer products will be imported into the U.S. and more of America’s domestic production will be exported. Therefore, despite the fact that financially strapped Americans will be consuming much less, they will be paying much higher prices for the privilege of doing so.

Interestingly, in response to a direct question from Congressman Ron Paul, Bernanke actually admitted that growth was unrelated to inflation. Unfortunately, the Congressman missed the opportunity to press Bernanke to explain the inconsistency between that admission and the implication in his prepared remarks that the Fed might pause in its rate hikes based solely on the expectation that a slowing economy would contain inflation.

Another interesting admission was Bernanke's forecasts that oil prices will stay around $75 to $80 dollars per barrel for the next several years. This is tantamount to an admission that the Fed’s exclusion of energy prices from inflation measurements over the past several years was a mistake. Remember, the Fed's long held justification for favoring "core" inflation over "headline" was the belief that high oil prices were a temporary fluke.

Bernanke went on to say that he continues to favor the “core” because the futures markets were predicting stable oil prices. This makes no sense at all. Futures markets reflect forecasts, not facts, and have had a very poor track record predicting oil prices. However, if the futures markets are correct, then why not use the actual CPI, which will reflect the stable oil prices the futures markets are forecasting. If on the other hand the futures markets are wrong, and energy prices continue to rise, what is the justification for excluding them given the Fed’s new position that high oil prices are here to stay?

The bottom line is that the Fed’s perceived battle against inflation has already been lost, and the biggest casualty will be the American standard of living. Those who are hoping for an economic slowdown to contain inflation are in for a rude awakening. They will get a whole lot more than they bargained for when it comes to the former, and no relief whatsoever with respect to the latter.