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Tuesday, August 01, 2006

Condo Cheerleading Continues

A pair of articles over the weekend joined forces to paint a rosy picture of the Seattle home market in general, and the Seattle condo market specifically. First, a proud moment for the "Seattle is Special" crowd, with this mention in a national article about slowing home sales:

The correction in the U.S. housing market continued in June, with inventories rising to a nine-year high while price appreciation slowed to the weakest pace in 11 years, the National Association of Realtors reported last week.
...
Some local markets, including the Seattle area, remain very strong.
Of course what set of rah-rah real estate stories would be complete without our favorite local reporter Elizabeth Rhodes (and her apparent lackey Justin Mayo). This week's beneficiary of Ms. Rhodes' unbridled housing optimism is the "handsome" and "strong" condo market:
How much do Puget Sound-area condominiums appreciate compared with single-family houses?

Are they significantly more affordable than houses?

Which size condo is a better investment around here: a studio or one with two bedrooms?

Questions like these have long intrigued condominium buyers, but no comprehensive answers were available because there had been no in-depth analysis of condo appreciation and supply.

This year, The Seattle Times did such an analysis, based on data from the King and Snohomish county assessors. The Times analyzed condominium data in much the same way it has done for its annual report on single-family home values.

Some of the condo results are surprising.

Take appreciation. Lore relegates condos to default housing, if you will, for people who can't quite swing a house purchase. But buyers apparently don't feel that way.

Demand has caused condos to appreciate handsomely, thank you.

Since 2000, King County condominiums have outperformed single-family houses two out of five years. And even when they haven't, their appreciation has been strong.

In 2005, for example, the county's single-family houses appreciated 16.3 percent per square foot. Condos climbed a healthy 13.5 percent.

Here's the kicker: Last year, the median price per square foot for condos in King County was $211 — or $4 more a square foot than houses in the county.
...
"It's not a second-class form of living — no, not at all," said Marilyn Hill, who with her husband, Don, recently bought a one-bedroom-plus-den unit on the 22nd floor of Cristalla in downtown Seattle.
...
"A condo is a different mentality than being in a home," Marilyn Hill said. "You have to think entirely differently."
...
In the Seattle area, there are three main categories of condo owners: first-time buyers, often singles; empty nesters ready to downsize; and investors. They'll have a lot more to chose from in the coming years, [Matthew] Gardner, the economist, said.

There is significant condo construction in Bremerton, Bainbridge Island, Everett, Federal Way, even Bellingham. Downtown Seattle is expected to add more than 8,000 units over the next four years.

Gardner thinks the county's strong job growth guarantees that the area won't be overbuilt.
What I find most interesting about this report is what it doesn't say. Notice that at the end they tacked on a passing mention of "investors" as one of the "three main categories of condo owners." Why didn't their "in-depth analysis" reveal what percentage of condos are being bought by these "investors"? Or maybe it did, and they didn't feel like reporting the result? If they're a "main category" of purchaser, how much of an affect will it have on the supply when large numbers of them get cold feet and start to take out their money? And how does strong job growth "guarantee" that we won't have an oversupply of condos? Frankly, this report raises more questions than it answers.

(Rex Nutting, MarketWatch, 07.29.2006)
(Elizabeth Rhodes & Justin Mayo, Seattle Times, 07.29.2006)
Please read the rules before posting a comment.

59 comments:

matt said...

I feel like I'm in a time-warp reading this stuff. Its the same boilerplate silliness you could have found yourself reading in the local Vegas/Florida/D.C./San Diego newspapers last year.

Condo-mania is indeed the last gasp of a listing housing market...

Buy luxury condos in the Denny triangle? Not in a million years, everytime I drive through that part of town I keep asking "Where would friends park?","Where would I buy groceries?", "Traffics only going to get worse with the A.W.Viaduct boondoggle", etcetera... Downtown Seattle ain't San-Fran/NYC folks, its not geared for urban living, not yet, not in a long while.

and I think the title of this syrupy-piece "Condos appreciate strongly; studios lead", tells it all. Studios? $300K for 500 sq ft? Are you kidding me? based on that stat, I'm onboard with The Tim's comment regarding the 'percentage' of buyers. My guess if studios are leading, its the over-leveraged suicide-loan applicants infatuated with the manias psycology, the last fool in the greater fool line.

matt said...

Another interesting tidbit, this data was 'compiled' with '04-'05 stats... hmm... Its conjectured that the peak of the national housing boom was the spring/summer of '05.

How about some '06 stats Ms. Rhodes? Or is this just another window-dressing article to get people to open the vast Windermere/ReMax ad section a few pages into the Real Estate section of the 'Times.

meshugy said...

Why didn't their "in-depth analysis" reveal what percentage of condos are being bought by these "investors"?

Just from casual observation, I think speculation has really spiked this year. I didn't notice as much last year, but in Ballard I'm seeing flippers quite often now. Too bad for them, because I think they got in a little too late. They might make a little now, or maybe break even. But I think the days of 100K profit in 1 year are over.

Hyperbola said...

Studios make good investments? I got a good laugh out of that one. So what happens when housing keeps going up faster than income? Will bottom feeders get priced out of studios too? What next? Will the flippers start cheerleading the investment value of closets?

I can see it now... "This cozy, artificial-light-filled cabana is HOT!!! An incredible value at $799,999.99!!! Seller will hold a lottery for appointments to make offers!"

Translation... "This tiny, 200-ft^2 closet has no windows and no air conditioning. How badly do you REALLY want to own a piece of this market?"

Peter Taylor said...

What usually follows a condo party? A condo hangover. I've posted before about jumping in to a condo boom in Victoria, BC in the early 90's and losing around $60k Canadian in the process. $25k is repairs for shoddy construction and a $35k haircut (~25%) when we sold the property in 2002.

And, unfortunately I'm seeing all the same signs around here. Buildings being thrown up as quickly as possible, designs inappropriate for the climate, and mass hysteria compelling everyone to buy, buy, buy now before it's too late.

Take a look at this building in Kirkland. No overhangs to guide rainwater away from the exterior walls, cheap exterior windows/flashings/wall caps, flat roof, etc. etc. etc. In a few years, the accumulation of rainwater which leaks in around windows, decks, roof caps and other exterior details will cause mold to leech out leaving dark brown streaks on exterior walls.

Yep. Been there, done that, no really all that interested in doing it again.

Peckhammer said...

"Where would friends park?","Where would I buy groceries?", "Traffics only going to get worse with the A.W.Viaduct boondoggle", etcetera...

1.) On the street, which is safer than parking in the garage space provided by the building. Condo garage space is a shopping mall for nefarious characters.

2.) Whole Foods... the ancor tenant of 2200 Westlake, or QFC, the ancor tenant of the Lumen.

3. The STREETCAR is the traffic messiah. You must accept it as your personal savior.

matt said...

All very-well and good peckhammer, but right now, all's I see goin' on down there are unattended hit-n'-runs, corner groceries selling the Mad-Dog and Streetcars? Unless they're levitating streetcars, they're going to be stuck on the Denny Ave. mess like everybody else...

When's this urban utopia gonna get here to justify my 500 sq/ft bread-crumb of the american dream?

Peckhammer said...

What usually follows a condo party? A condo hangover. I've posted before about jumping in to a condo boom in Victoria, BC in the early 90's and losing around $60k Canadian in the process.

King 5 reported that 1 in 5 condos built will result in a $30K [average] assessment to each owner. Look around Seattle and you'll see plastified examples of the aftermath of water intrusion -- often the result of poor design and equally poor construction. And watch those same building over the next five years and see how many get wrapped again. Lighting does strike twice...

Anyone familiar with Belltown Court? My realtor told me to stay away from that one, and I listened. However, she said that many people didn't heed her warning and they bought anyway. Guess what? The building is wrapped up like thanksgiving leftovers.

Seattle Heights? Every window in the building needed to be replaced because of water instrusion issues. They sued, and didn't get enough money after paying 33% of the total settlement to their lawyers. This left the owners with the uncomfortable task of raising several million dollars to complete the repairs. That's one hell of a bake-sale.

How about the apartment to condo conversion in downtown Bellevue? The entire plumbing system failed shortly after the owners had moved in. The sales contract (from the conversion) was rock solid, so they had no one to sue. 14 unit-owners declared bankrupsy as a result.

But let us not forget:

1.) Condos are good investments
2.) Seattle is special
3.) The check is in the mail

biliruben said...

A little too convenient that the data didn't go back before 1995.

I've heard anectdotally that condos took the biggest hit, and went down signficantly in the early 1990s.

Just like they will in the late 2000s.

richard said...

Lore relegates condos to default housing, if you will, for people who can't quite swing a house purchase. But buyers apparently don't feel that way.

Demand has caused condos to appreciate handsomely, thank you.


It certainly seems like a new paradigm. Previously undesirable units are now the most popular, as evidenced by the rapid appreciation.

Or, it's just another cycle.

Peter Taylor said...

Here's another interesting related link

It's a blog posting on the RI RE Blog from "Susan Ryan, Realtor" regarding the bait n' switch technique. That is, a developer will put up a sign that says, "Units starting in the $100s" but in fact there are only one or two units in the whole development under $300k. Old news.

But, the really interesting thing is down in the comments from Susan Ryan herself. She's defending her post against an anonymous commenter suggesting she take action rather than just talk. Here's an excerpt of what Susan Ryan had to say:

I hope to prevent more buyers from being taken in by posting here and think that is more likely to be effective than by anything else I can do. I quite agree that these salespeople should be drummed out of the biz, and I applaud my blogmates for their posts calling for more stringent education and other requirements to be a real estate agent. I also would like to point out that I have no confidence that the builders have done good work on the construction, so recommend against buying these condos at any price. Given the marketing method they use, I can easily imagine that corners were cut in the building process. There are other projects in town that are selling like mad, without the need to trick, trap, or pressure buyers. And, to beat the drum once more, your best protection is to have a Realtor you trust at your side.

Amazing. Utterly amazing.

The Tim said...

Hey now, you're getting ahead of me. I'm in the middle of a post highlighting Susan's post at this moment.

Peckhammer said...

"I also would like to point out that I have no confidence that the builders have done good work on the construction, so recommend against buying these condos at any price"

I'd be willing to bet that if she held a gun to any number of potential buyer's heads and stated that she will pull the trigger if they put in an offer, she'd empty the magazine in 5 minutes. People are delusional and will buy anything at any cost.

Home ownership has become more important than food, drink, healthcare, and retirement. I believe that if I took a crap in the middle of Ballard and declared that you can live in it, someone would buy it.

Case in point: I know of a building that has warnings in the resale certificate about actual water intrusion damage to the building(1) -- the exntent of which is unknown. A minimal amount of document review also reveals that the reserve fund will be bankrupted by 2011, and will never recover. Last summer, units in that building were flying off the market only hours after being listed, with multiple offers. Winning bids were always more than the asking price.

(1)the building was completely stripped and reclad a number of years ago for the same problem -- and it will need to be done again.

cnealy said...

Hello all, I'm new to this site. I just received a renewal notice on my apartment. Lived there for 4 years. The rent increase is 13%, which has thrown me into a rent vs buy frenzy. I have never purchased and am scrambling to try to educate myself. I stumbled across this blog and have found some good information here. In my naivete, I was encouraged by the "condo cheerleading" article from the weekend. But, after reading comments here, I'm understanding that condos are not a good investment. Am I interpreting the comments correctly?

matt said...

cnealy,

As one of the bigger bubble bears on the blog, I would say this...

Perform a rent vs. buy calculation using one of the many rent v. buy calculators on the net, and see where your finances sit. Each person's financial situation is different, and if you're planning on living in your condo for at least 5 years (or more) using a standard mortgage product, and can afford the monthly's I'd say go for it. Even though I'm forseeing an inevitable 'crash', I think over the long term, housing still tracks 0.5% - %1.0 over infaltion and has since the beginning of time, give or take.

As for my situation, I was thrown into the rent vs. buy conundrum earlier this year, but chose to continue renting. It all left a bad taste in my mouth as the local Realtors really could care less about your business since there's hordes of other likely buyers seduced by the 'mania'.

I had reduced it to a quality of life issue. I now am living in a beautiful duplex in Ballard with an amazing view of the Olympics for about a 1K less than I would a viable 2-bedroom condo. I'm still investing for the inevitable down payment and can continue my traveling/eating-out addicitons.

I'm going to wait it out for a couple of years.

Lake Hills Renter said...

I believe that if I took a crap in the middle of Ballard and declared that you can live in it, someone would buy it.

Funniest thing I've read in a long time! =)

cnealy said...

Thanks, Matt. I, too, have travel/eat out addiction, so buying is not high on my priority list. :o) BUT, the Kirkland apartment rent situation has me in a quandary. In the past, the rent/buy calculators have indicated a strong 'rent' for me. But, now it's leaning towards buy. Decisions decisions. I will welcome feedback from others.

Lake Hills Renter said...

Cnealy, the two most important things for me in the rent/buy conundrum are the following:

* Can I afford to buy on a 30-year fixed mortgage, including all taxes and interest (PITI)? This means no adjustable or teaser rates.

* Will I be ok if the value of the property decreases in value? While not completely assured, I think this is a likely scenario considering the current housing market. What are the odds I'd need to be able to sell if I get underwater on the mortgage for several years?

If you have satisfactory answers to those two questions, buying right now might be good for you. For me, I am fine with #2, but still working on the 20% down for #1. I also am fortunate to have very inexpensive rent for a good place close to work and a landlord who says he specifically wants me in there (knows I'll take care of the place) so he won't be raising the rent.

biliruben said...

Cnealy - I would strongly recomend you rent for at least another 6 months to a year to see how this market shakes out.

I bought 2 years ago, and at that point it was touch-and-go whether to continue renting. My big, active dog was the kicker.

However, I would never, ever have bought a condo is this market, or even 2 years ago.

Condos do not hold their value. They are cheaper, easier to maintain, and therefore much more accessable, attractive and susceptible to the speculator mania.

When this market starts to slide, condos, particularly new condos, will slide the hardest and will be the hardest to sell.

I'd save my pennies, get a nice downpayment saved up and buy in a few years.

cnealy said...

If condos don't hold their value, then why is everybody buying them? My reason for being interested in a condo is that I don't want the responsibility (yard, etc) of a house. I want something small and easy to maintain. I've been watching the Eastside condo listings and I don't even get to "oh that's cute" until they hit $300k.

Celis said...

Sure, condos are great investment. Let me show you how I got rich buying after the crash of 1990. I bought a condo from an "investor" in Toronto in 1991. $176K, no downpayment, because all I had to do was to take over the balance of his 14% mortgage. His monthly mortgage payments were $2400. Oh, and condo maintenance fees were $440. I can't remember the taxes. "The investor" was getting killed by his investment, since the most you could rent out these 2 BR apartments for was $1400-$1500 a month. He bought it a few years back for $239k. The crash had already happened, before I jumped into the market. Prices still seemed a bit high to me, but what did I know. I was a newcomer to the city, and everyone talked about immigration, how prices always go up, how they knew people who missed the boat and were doomed to rent forever. Everybody believed that real estate will soon jump back up again.

Fast forward to 1995. I got married, we were moving elsewhere, so we decided to sell. It sold for $136k. Only $40k loss and I couldn't get over it for years... And I'm not even counting the real estate commission, closing costs, the excess of my monthly payments over what I could rent for. Oh, and a funny thing: my wife lost exactly the same nominal amount together with her brother in similar timeframes.

Draw your own lessons. The ones I value most:

1. Don't listen to others, trust your own gut. If prices seem high to you, they just might be too high for everyone else.

2. Don't just jump in after the crash. It may have a long way to go.

biliruben said...

Many people for the same reason you are - they are the only thing they can afford and they are low-maintanence.

I don't know for sure that condos will go down, that's simply my best guess.

Unfortunately the data is hard to come by, but I've been told by an economist friend who works for the city that what he saw during the last downturn in the early '90s was a fall in the condo market and and high-end house market.

cnealy said...

I am listening. And, yes - these prices seem ridiculous to me ... $300k for a condo? Please. On the other hand, so does my rent. Grrrrr.

matt said...

Condo flipping today is what Day-traders were in the late 90's. If you query news articles from Miami,D.C.,Vegas and San Diego, its easy to see they dynamics that bring down a frenzied condo market.

Seattle IS not different, its just on a delayed fuse do to the 'California equity affect', which creates an echo affect in our local market. The trends we see today are carbon copies of trends in other cities a few years ago.

biliruben said...

Shop around. If you're willing to be mobile, patient and diligent I would guess you will find a decent place to rent, particularly if they even build half the condos planned - plenty of speculators competing with eachother to try and get their carrying costs paid.

I don't know for certain this will be true, but it's a lot less risk than buying right now, as frustrating as it can be.

Peter Taylor said...

There's one other aspect of condo living that doesn't get talked about very much: they tend to be purchased by people who can't afford anything else. In other words, a condo was their last resort. Are these the types of people you'd want to have as permanent neighbors? Maybe, maybe not. My experience has been maybe not.

It's part of the reason I refuse to purchase a condo or townhouse ever again.

Anonymous said...

Man, the prejudice against condo buyers/dwellers on here is shocking. I didn't buy a condo because I couldn't afford a house. I wouldn't ever live in a house - it's the most wasteful, anti-environmental lifestyle a person could choose. More than 60 individuals and families live in my condo building, which has the footprint of maybe 3 single family homes. And I live downtown and don't have/need/want a car. And I will tell you why the condo market will be strong in the future: because when the s**t finally hits the fan with Americans' wasteful, oil dependant, suburban lifestyles, the single family home developments will become unsustainable (in truth, they already are). People will be dragged kicking and screaming into urban living, but there won't be any choice when gas is well over $5/gallon. The people on here love to obsess over this "housing bubble" like it's the biggest thing that is going to happen to this planet in the coming years. Get real -- it is NOT the housing bubble that is going to restructure the very way we live.

biliruben said...

True, Dat.

I think it's either going to be nanotechnology or an asteroid.

Well maybe some strain of infectious liver cancer.

...or superintelligent katydids.

But all I can do is try and keep a comfy house over my fam's head, until the katydids come calling.

biliruben said...

I rented a condo in Fremont for 8 years, and have lived 7 of my adult life without an auto, even 1 year here, though it sucked to have to rely on others to get into the mountains. I still bike close to 50% of the time, though less now then I used to.

Cool for you finding your nich and hanging downtown.

I think about a lot of other things than houses, btw.

I can't, however, get my dander up over things I can't control.

Just do my small part and live my life the best I can.

matt said...

It is sure easier to make fun of somebody rather than examine your own wasteful lifestyle.

Lordy, lordy. Comments like this make me long for more frequent Meshugy posts...

Lake Hills Renter said...

People will be dragged kicking and screaming into urban living, but there won't be any choice when gas is well over $5/gallon.

You are aware that there are jobs in the suburbs too, right? Why would I spend an hour driving from downtown to work when I can live in the suburbs and drive 10 minutes? Or ride a bike?

plymster said...

cnealy,

Let's break down the rent v. buy argument. First, what are your monthly expenses for buying a 300K condo, assuming you live there for 10 years at 6.17% interest (according to Bankrate.com)?

Down Payment
(assuming you
could make 5% on
the 60K you spent): $250.00

Monthly Mortgage
(less principal
averaged over
10 years): $1,146.51

Homeowners Dues: $200.00

Taxes: $200.00

Total Cost: $1,796.51

Now I don't know about you, but I can find a darned nice apartment for $1,800 a month, and you'd have way less risk. It seems like a no brainer to me, but everyone's situation is different, I suppose.

Anonymous said...

yes, i'm aware of edge cities etc. how many people who work in the suburbs get to work by bike, do you think? 1% on a good day? you really think that can keep going forever? you really think gas has peaked out at $3/gallon?

Anonymous said...

Apparently one gets censored on this blog for suggesting that the bubble folks on here tend to be a bit on the hysterical side! Can't have anyone challenging you...I understand.

Peckhammer said...

People will be dragged kicking and screaming into urban living, but there won't be any choice when gas is well over $5/gallon.

Yeah, it's a well know fact that there aren't any single family homes in Europe.

Lake Hills Renter said...

I have no problem with dissenters as long as they something behind their arguments more than the sky is falling. No one knows how high gas will go, or what it's effect on commuting will be in the short term, but to say that everyone will live in condos because of fuel costs is simplifying the situation a bit much IMO.

cnealy said...

Thanks plymster.

The Tim said...

Apparently one gets censored on this blog for suggesting that the bubble folks on here tend to be a bit on the hysterical side! Can't have anyone challenging you...I understand.

No, you get censored on this blog for breaking two out of my three explicit rules. You know, the ones that are now linked at the bottom of every post. Specifically, the snarky reply in which you refered to other commenters as "looney-tunes" and this blog as "Hysteria Central" was in violation of:

1) No personal attacks.
2) No intentional antagonism.

In addition, you are also ignoring the "strong suggestion" of no "anonymous" posting.

However, you will notice that I left up your original post (which was marginally in violation of #2), so that kindof shoots a big hole in your sarcastic/smug "Can't have anyone challenging you" comment.

I welcome debate on this blog, as do most of the people commenting here. What I do not welcome is name-calling and anonymous rabble-rousing.

Anonymous said...

the tim -- i think you have a double standard because you don't censor personally insulting posts from those with whom you agree.

Anonymous said...

Where did I say everyone will live in condos? All I'm saying is that huge suburban tract developments where you have to hop in the car to get a quart of milk, or do anything, are unsustainable and are so entirely built around the assumption of eternal cheap oil that they will not be able to adapt in the future, when oil is a lot more expensive. I do believe that many people who've left the cities will return and that suburbs have seen there peak. I'm sure the implications in terms of real estate will be huge. There is nothing radical about any of this, but I realize it scares people to think that things are going to have to change (kind of like the people who say "Seattle is different!" when confronted with the housing bubble argument).

And if you don't like "sky is falling" arguments, how do you handle this blog?


I have no problem with dissenters as long as they something behind their arguments more than the sky is falling. No one knows how high gas will go, or what it's effect on commuting will be in the short term, but to say that everyone will live in condos because of fuel costs is simplifying the situation a bit much IMO.

jcricket said...

Now I don't know about you, but I can find a darned nice apartment for $1,800 a month, and you'd have way less risk.

I'd say you're merely exposed to a different kind of risk. Expect your rents to shoot through the roof when the housing bubble bursts. Part of the resulting rising inflation will be rapidly rising rent rates. In fact, one of the core measures of inflation is rental housing prices.

Sure, those that are under water in their homes and need to sell are more immediately screwed than renters. But those with a fixed price mortgage they can afford who don't need to move may, in fact, be less exposed to risk in their housing than renters if the doom-and-gloomers are correct about the US economy.

Don't forget that the doom-and-gloom scenario includes the stock and bond markets tanking, taking the value of any money you hadn't invested in housing right along with it (again, may not be any worse than how much under water your house is).

None of that makes any particular house or condo a good buy, or renting a bad move, just that any equation that compares renting to housing has to include the fact that as housing falls because of rising interest and inflationary pressures, renting usually rises. I regularly see equations here that only include current rental prices, although several posters have indicated a 10% rise in their next year's rent in the last couple of months. Expect that to continue.

This has been, in fact, one of the primary reasons housing has been a good buy over the last 50-75 years. That may not be the case if housing prices now are higher than your rent will ever be, but that's not historically been the case.

jcricket said...

but to say that everyone will live in condos because of fuel costs is simplifying the situation a bit much IMO.

This is probably true. Condos are not for everyone, especially in America. The American psyche is so wedded to tract homes in the suburbs (50+ years) that it will take a long time to unwind that trend, if it even happens. I'm really shocked at the whole "ex-urb" trend where people work in the suburbs and commute from even farther, but obviously that's where the market headed in the 80s and 90s.

It is true, however, in countries with very high gas prices (for whatever reason), that people tend to cluster far closer together. Whether that's in-city living in apartments or condos, or row-homes or small detached homes close in to the cities they work.

Having just seen that Toyota and Honda had a banner month for sales (up 20%, mainly cars) and Ford, GM and Chrysler sucked eggs (down 20-30%, mainly in SUVs), we can see that Americans are willing to change their behavior when they are at a decision point (new car? perhaps I'll factor gas prices into my thinking.).

Perhaps housing will become like that. 2-hour, $10,000 commute or 500 less sq.ft.? Hmm....

PepeDaniels said...

I think the condo craze must be the proverbial "canary in the coalmine" everywhere. All of this is starting to really sound like S. Florida all over to me. The sleaze ball tactics to sell, the ridiculously small housing units and equally crazy prices.

Hell, if we get few days of sun and it breaks 75, I'll break out the suntan lotion!

Lake Hills Renter said...

And if you don't like "sky is falling" arguments, how do you handle this blog?

Because most of the predictions on this blog are supported up by economic fundamentals and interpretation of data/trends.

Lake Hills Renter said...

I'm really shocked at the whole "ex-urb" trend where people work in the suburbs and commute from even farther...

If you work in the suburbs, why is commnuting from farther out any worse than communiting from farther in? Less traffic, lower prices, less noise, less pollution, etc. It's even worse here in the Seattle area because there's only two major arteries to get from Seattle to the Eastside. Much easier to commute from out I-90 or even Duvall, relatively.

plymster said...

jcricket,

You're right about rent being subject to inflation, but unlike real estate prices, rental prices tend to track wages and employment. In fact, that's the whole argument behind switching to using rental equivalencies in the CPI - it's more stable than home prices (Rental Stats). So if we hit a recession soon (which, thanks to the inverted yield curve, seems fairly likely), rental prices will do what they did in 2001-2005: stagnate or fall.

Also, you can get 5% in a 2-year treasury note (tax free), which is backed by the Government. Or you could invest $60K in FDIC insured 5-year CD at 5.6%. Either way, that's better than risking $60K on a condo that's priced twice what it was valued at 2 years ago.

Of course, the bears could be wrong, and housing could continue to rise, or plateau. Rent could spike like mad as landlords and apartments would rather have empty homes costing them thousands to maintain each year than rent them out at a reasonable price, and 80% of the wage-earning populace could be living on the streets.

The bears could be wrong, but the evidence (rumors of tightening lending practices, rising interest rates, a Fed concerned about inflation, rising fuel prices, stagnant wages, weakening job market, mortgage companies rushing out of the business, accounting irregularities at Fannie Mae and Freddie Mac) says otherwise.

The Tim said...

the tim -- i think you have a double standard because you don't censor personally insulting posts from those with whom you agree.

It is likely that nothing I say on this matter will make you believe otherwise, but I feel compelled to at least mention that I frequently delete insulting posts on both sides of the argument (including a petty reply to your original comment in this thread). Furthermore, as I already pointed out, I do leave up posts that are marginal, but again, on both sides of the argument.

jcricket said...

The bears could be wrong, but the evidence ... says otherwise.

I don't actually disagree that the likelihood of recession is high, and that, in that sense, the bears are right. I disagree, however, with what the economy will do during this recession, and do not believe that bears will likely be any safer if their predictions come true.

If we truly are at the end of a a-historical runup and the credit and housing bubbles are going to burst and the Fed won't be able to do anything, etc. - It won't just be housing that drops. The stock and wage markets too (meaning you will be out of a job and even rentals will be, in effect, more expensive for the immediate future). Coupled with high inflation or rampant deflation and your paper money might be in trouble too.

To me if the most bearish here are right, with the whole "nightmare scenario" for the US, I have no doubt that the RE bears will get just about as hammered as everyone else.

Unless you're like Soros and have enough money hedged against the world's bull markets.

jcricket said...

Here's a better description of the nightmare scenario for the US economy and why some big names believe it's coming.

But I'm in no rush to sell my house with it's low fixed-rate mortgage, or my paid off cars, or transfer all my money out of stocks and bonds and into CDs. Can't live your life with that kind of fear (at least if you've got 20-30 years to retirement).

meshugy said...

the tim -- i think you have a double standard because you don't censor personally insulting posts from those with whom you agree.

I've also noticed that...what gives?

plymster said...

The stock and wage markets too (meaning you will be out of a job and even rentals will be, in effect, more expensive for the immediate future).

Right. So if I'm out of a job, and rental prices are "in effect" higher because I have less money to pay them, wouldn't I be worse off with a home that I'd also be underwater in (with a higher monthly payment, to boot).

To me if the most bearish here are right, with the whole "nightmare scenario" for the US, I have no doubt that the RE bears will get just about as hammered as everyone else.

Wrong. Bears aren't carrying a mountain of debt. If you go into a recession with heavy debt, you're far worse off than someone who actually has some savings to fall back on.

But I'm in no rush to sell my house with it's low fixed-rate mortgage, or my paid off cars, or transfer all my money out of stocks and bonds and into CDs. Can't live your life with that kind of fear (at least if you've got 20-30 years to retirement).

Good. I'm not advocating selling everything you own, living in a rental until it all blows over, and hoping for the worst. I'm advocating holding off on buying a house that is arguably overvalued by 100%.

The Tim said...

I've also noticed that...what gives?

What "gives" is exactly what I said in the post where I laid out the rules:

Keep in mind that this is a dictatorship, not a democracy. It is solely at my discretion whether a comment is in violation of these rules.

I do my best to be fair, but when it comes down to it, it is not "Anonymous," not Meshugy, but The Tim that determines whether a post is annoying enough to be deleted.

I delete comments from both sides, and I get flak from both sides accusing me of favoring the other side. I'm just trying to keep the level of the conversation at least marginally civil. I'm not perfect at it, but it's my blog, so I get to make and enforce the rules as I see fit.

jcricket said...

Wrong. Bears aren't carrying a mountain of debt. If you go into a recession with heavy debt, you're far worse off than someone who actually has some savings to fall back on.

Yes, but I dispute that most homeowners have nothing to fall back on. It seems convienent to focus on the flippers, marginal buyers, etc. who came about in the last couple of years. But a huge percentage of people did nothing but lower their fixed monthly payments or keep them the same but use the lower interest rate to take out equity and fix up their places. Others (at least 50% in WA state) got fixed-rate mortgages. Many of those with ARMs are getting fixed-rates right now, and can stomach the increased payments.

I think there's a ton of subjective validation in bears only looking at "f*d borrower", "flippers", and generalizing that the entire market's about to implode and take everyone with it.

BTW - This homeowner (me) is doing just fine with his low %, fixed house payments. I've also got plenty earmarked for retirement, and probably as much or more than the average bear (ha) in emergency savings. Oh, and I've got the added "bonus" of a HELOC (which I already have) I could tap if I absolutely needed to in case of a short-term "shock".

Cashflow wise, I could probably survive for 4-5 years if I liquidated retirement and other accounts (except the house). And I'm far enough "above water" in my house (taking out all the gains of the last 6 years I'm still ok), that I don't think I'd end up any worse than "break-even" if I had to sell. I don't think that would be my plan, but I wouldn't feel any better off selling everything in a panic right now.

Then again, I didn't buy at the height of the frenzy or stretch myself to the absolute limits.

If your only point is that people shouldn't buy a house right that stretches you to the limit, or relies on exotic financing, I'm on board. If you also want to say housing is so high-priced that there is significant 5-10 year risk of the house being worth less, I'm slightly less on board, but still "with you". If you think that no one should ever buy homes or that anyone who buys a home is an idiot, forget it.

Anonymous said...

As to the accounting done on rent v. buying I think I've read here, I don't remember anyone mentioning the advantage of home ownership at least in one area, i.e., tax write off. I am a small business owner, and currently look into buying because I paid over 30K in fed income tax for just last year. My understanding is that interest paid on mortgage (as well as capital gain - should there be any such in the future in purchasing a piece of RE whether it be condo or a house) can be fully written off. If so, what does it matter whether that condo appreciates or deprecitates so long as the very ownership allows me to keep write off all my tax! Just a thought ...

Peckhammer said...

"If so, what does it matter whether that condo appreciates or deprecitates so long as the very ownership allows me to keep write off all my tax!"

For every dollar you spend in interest income, you get 27 cents back. Sign me up!

celis said...

My understanding is that interest paid on mortgage [...] can be fully written off,

Not always. Do not forget personal exemption. Your mortgage deduction will only count if your deductions exceed the personal exemption. If they don't, it is a wash and you have not saved anything. In a state without income tax you are even less likely to exhaust that personal exemption, and less likely to have a significant benefit.

Anonymous said...

It sounds to me that everyone on this site just about despise downtowns and/or condos - and RE owners in general. Well, here's what other people say about 'the tax benefits of homeownership: http://www.alllaw.com/articles/tax/article3.asp

Although I am not sure how this article too is wholly unbiased and that readily applicable in this state, I would appreciate an impartial opinons/feedback from all of you who care to read this stuff. Thanks.

richard said...

Wow, here's the worst new construction flip I've seen lately in this area:
MLS# 26097918

On the market 50 days, price drop from $599K to $585K... purchased 10/4/2005 for $582K.

http://www5.metrokc.gov/reports/property_report.asp?PIN=4045900108

Now here's where it gets interesting:

The primary mortgage is for $466K, and it's a 40 year option ARM with initial rate at 1%, but adjusted starting in December 2005 to (currently) above 9% based on LIBOR+3.75%.

Minimum payment is around $1100/month, with the rest getting tacked onto principal.

Then, an additional $65K is in the form of a HELOC - bringing the total financed to $531K.

Doing a quick calculation, they have likely paid or deferred between $30K-$40K in interest over the past 10 months.

If they manage to get the asking price, they will have likely lost their entire $50K down payment, and then some after comissions and taxes.

richard said...

Also worth noting that the primary option arm mortgage in the above example is capped at 110%.