In case you haven't noticed, Gregory Wharton has posted the final chapter in his series on Seattle real estate prices. If you thought my response to his previous post was long, you're in for a shock. Find a comfy chair and make sure you have a good-sized block of time to tackle his 3,500-word thesis on what the future has in store for Seattle real estate.
Here are a few highlights from the beginning and the end:
First off, let's get this out of the way: if you're expecting the real estate market to continue with double-digit price gains at the mean while wages are stagnant and interest rates are rising, you're dreaming. It's not going to happen. We've seen some great gains in the market over the last five years, but they are historically atypical. It is also not true that "real estate prices always go up." Sometimes they go down, and anybody who tells you otherwise is ignorant of history.In my (uneducated in real estate) opinion, his prediction that Seattle's real estate market is in for a soft landing seems to be based on four main factors:
However, if you're predicting a large decline in real estate prices while inflation is rising, regulation is propping up land values, and other markets remain volatile and risky, you're going to be disappointed. That's not going to happen either.
What I've been talking about here is probabilities and expected values. There is a probability that Seattle is experiencing a real estate bubble. I don't mean to suggest that it's zero. In fact, the probability is higher than it has been for a while, but is still quite low: low enough that the widespread angst about it overstates the danger significantly (in fact, the angst itself is an indicator of just how low the actual probability is). Bubbles are rare in all markets, but especially so in real estate due the unique characteristics of that market. I don't say this in an attempt to gloss the possibility, but to be realistic in the analysis. I do know what bubbles look like, and have even had some success trading them (It may have been dumb luck, but I predicted the stock market bubble years beforehand, and got out well before the decline started in March 2000).
The bulls should also be aware that the probability that the bull market we've been seeing is going to continue at anything like the recent pace is also comparatively low. For every unrealistic bear expectation, there is an unrealistic bull out there right now.
The probability that the market is going through and is near the end of one of its typical bull cycles is much, much higher. That bull cycle is showing some signs of exhausting itself, so the expected value of the probability of stagnation that might result must be factored into any investment decision.
The Seattle real estate market is historically cyclical. Seattle has experienced other periods of price appreciation similar to what we've seen in the last five years. They've all been followed by decade-long plateaus before the next cycle gets going. My parents bought a house in Bellevue near the peak of the last major upswing, in 1979. It was eight years before it began to appreciate in price, but its nominal value never actually fell. That is typical of this market when it goes soft.
- his argument that the price run-up was based on "solid economic" foundations
- Seattle's historical real estate pattern of boom-then-flatten
- government and the banks won't allow real estate to go down (much)
- when real estate softens, people just won't sell
I'm still not convinced that the future will at all resemble the picture Mr. Wharton has painted, since I fundamentally disagree with at least 3 out of the 4 above-listed supporting arguments. I highly encourage you to go read it for yourself, and make up your own mind.
(Gregory Wharton, Seattle Real Estate Professionals, 07.12.2006)