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Friday, September 22, 2006

Global Insight: Seattle Overvalued By 33.8%

While Economy.com's secret formula based on "an econometric model" forecasts Seattle home prices to increase 59% over the next 10 years, economic and financial research company Global Insight begs to differ. According to their own non-secret formula, Seattle home prices are overvalued by 33.8%, up from 22.3% overvalued at this time last year. Check out the full report and details of their methodology.

Taking off the top 33.8% of the current King County median single family home price of $435,000 would translate to a new median of $287,970. That would be a roll-back to 2002-2003 prices, which is about when I thought homes were expensive, but priced fairly for the area.

The "Most Overvalued Market in Washington State" prize gets awarded to Bellingham, coming in at 54.3%, followed by Mount Vernon at 45.5%. On the opposite end of the spectrum are Kennewick and Yakima, overvalued by 5.9% and 9.1% respectively.

(Global Insight, 09.20.2006)

Update: Two comments were made regarding my remarks above that I wanted to take a moment to address. I apologize for not getting to this sooner, but this is literally the first time I have been in front of a computer for longer than 2 minutes since making this post.

First, JohnS pointed out that 33.8% "overvalued" is not the same as "take 33.8% off the top." Indeed, rather than subtracting 33.8%, I should have divided the current median by 133.8% to arrive at $325,112 (25.3% less than today's median) as Global Insight's fair value for Seattle. If a $325,112 home were 33.8% overvalued, it would come in at $435,000. $325k is a bit more than I think the median King County home should be selling for, but it's still a heck of a lot more reasonable than $435k.

Second, Meshugy brought up the following bits from the methodology pdf:

Users sometimes misinterpret the valuation metrics by assuming that a particular degree of overvaluation implies that house prices are destined to decline by that amount.
...
This would not necessarily be correct for the following reasons. First, housing markets tend to adjust very gradually and price declines, when they occur, have historically averaged 14 quarters in duration. Because house prices determinants generally improve over that time (especially population density and incomes) we observe that price declines are about one-half the initial degree of overvaluation (see Appendix C in House Prices in America: Valuation Update). Secondly, we caution against over interpreting the metrics since the historically normal dispersion of valuations is quite wide. Specifically, our model has a standard deviation in house price valuations of +/-13 percent, meaning that any valuation between 13 percent overvalued and 13 percent undervalued should be considered statistically normal.
If you read what I said above, you will notice that I did not say (nor did I claim the study was saying) that home prices would drop 33.8% (or 25.3%, as the case may be). I simply pointed out what home prices would be if they were not 33.8% overvalued. Furthermore, if home prices in Seattle declined by 16.9% (one-half the degree of overvaluation) over the course of the next three and a half years, the median home price in the summer of 2010 would be $361,485, roughly where it was last summer. If you want to derive some comfort from that, be my guest. I think most people would define that as a pretty hard landing.

Also you should note that as per the standard deviation mentioned above, the Seattle market could be anywhere between 20.8% overvalued and 46.8% overvalued. According to Appendix C of the study, historically:
The more severe the overvaluation, the greater the subsequent declines tended to be.

The more severe the overvaluation, the shorter the duration tended to be.
Personally, I think the possibility that Seattle is overvalued by 46.8% is pretty severe, and something we should be paying serious attention to.

36 comments:

Anonymous said...

This seems about right to me. As I walked through a $700K open house in Ballard last Sunday, (64th & 34th if I remember) I recall thinking that it really felt like a $475K house. Not cheap, but fair.

It was nice, not your typical Ballard poop-box, but it was nothing special.

Time will tell. I think it is certain that we will at LEAST get a 15% 'adjustment'.

-Jack

Anonymous said...

watching a house over on 82nd and Dayton drop is price now under $800K.

JohnS said...

Actually the post-bubble median would be roughly $325K as they're saying the market is 33.8% overvalued versus that prices will drop 33.8% to get back to normal (i.e. 51% overvalued).

Anonymous said...

Thanks for the links to PDF files.

Last Aug. Seattle was considered overvalued by 26% now it's 33%.

Bellingham was at 46%, now it's over 50%.

These surveys just get more and more dire the longer this goes on.

Now some places are considered over 100% overvalued! (Naples FLA for one). I don't remember seeing any in that bracket a year ago.

This just seems like a really insane time to even consider buying a house.

deepcgi said...

What amazes me is that people don't understand that the demand during a speculative bubble is artificial. People see huge lines to buy homes and assume because people "have to live somewhere" that the demand must be so great as to preclude any crash. The demand must be coming from immigration, right? Wrong. The demand comes from the fact that people are buying a new home every couple of years instead of every 15 to 20 as in a normal market. Each person has to live somewhere, and only occupies one home at a time, but has bought and sold multiple homes just since the mid 90's. All that needs to happen to destroy demand is to have a fair number of those buyers decide to stay where they are for ten years without buying a new house - and boom - there's nobody at the open house but the squirrels.

john_law_the_II said...

in 10 years I doubt prices wil be higher than they are now.

Anonymous said...

Depends on inflation. If the dollar crashes, homes could cost 5x what they cost today. But the economy would be in ruins.

meshugy said...

Taking off the top 33.8% of the current King County median single family home price of $435,000 would translate to a new median of $287,970.

I think you missed this: House Prices in America : Valuation Methodology


Interpreting the Data

Users sometimes misinterpret the valuation metrics by assuming that a particular degree of overvaluation implies that house prices are
destined to decline by that amount. So, for example, the observation that Reno, Nevada is overvalued by 46 percent is mistakenly taken to
mean that prices there are headed for a 46 percent
drop.

This would not necessarily be correct for the following reasons. First, housing markets tend to adjust very gradually and price declines, when they occur, have historically averaged 14 quarters in duration. Because house prices determinants
generally improve over that time (especially
population density and incomes) we observe that price declines are about one-half the initial degree of overvaluation
(see Appendix C in House Prices in America: Valuation Update). Secondly, we caution against over interpreting the metrics since
the historically normal dispersion of valuations is quite wide. Specifically, our model has a standard deviation in house price valuations of +/-13 percent, meaning that any valuation between 13 percent overvalued and 13 percent undervalued
should be considered statistically normal.


Finally, we acknowledge that the estimates of over, or undervaluation will vary with periodic updates, as will the percentage threshold used to
identify “extremely overvalued” markets. These changes, though slight, reflect two things. First,
various “input” data are revised as more current, and accurate, information become available. For
example, the house price data are revised with each quarterly update. Second, the model is reestimated
each quarter to incorporate all available information. As such, the “historic relationships” between home prices and other factors will also
change somewhat.

Anonymous said...

Have to agree with you John Law.

Do not see RE prices getting back to anywhere NEAR where they are now in the next decade, or even the next TWO decades.

This whole run up has just been an unbelievable puke party and we're about to start taking the medicine.

The news now is coming in fast and furious, it escalates every day it seems. that ole proverbial snowball metaphor.

Eleua said...

anon 605 wrote:

Depends on inflation. If the dollar crashes, homes could cost 5x what they cost today. But the economy would be in ruins.

Wrong.

Housing is a multiple of incomes, not a matter of money supply. If the excess money supply (inflation) found its way to INCOMES, then housing would increase.

With globalism, wages are capped.

The normal multiple of home price to income is in the 2-3X range. Only recently has that changed. The 1980s Yuppification of America pushed the ratio into the 4X range, but this latest rage has pushed multiples into the 8-15X range.

Look for rollbacks in prices.

SeattleMoose said...

A good start but the truth will end up much worse....if nothing else from the same kind of "overshoot" we had in the positive direction.

This time the "overshoot" will be negative as RE becomes a pariah and the association of RE with pain sinks into the "herd".

I was in Huntington Beach during the 1989-95 CA bust and all the early numbers in Orange County at the beginning of the bust were way too optimistic.

And this one is MUCH worse....

SeattleMoose said...

"Housing is a multiple of incomes, not a matter of money supply. If the excess money supply (inflation) found its way to INCOMES, then housing would increase.

With globalism, wages are capped."

BINGO!

seattle price drop said...

"The normal multiple of income/home price is 2 to 3 X".

Actually, I think that back in the 50's and 60's (before the creation of Fannie Mae), homes were much cheaper than that. Like 1-1.5X income.

It was when the gov. started "helping" people afford homes in the 70's that they became more expensive.

Looks like the more "help" we get, whether from lower rates, downpayment "help"etc.,the more outrageous prices become.

Wonder how much longer the gov. and banks will be willing to "help us out", as we've proved ourselves to be a nation of financially clueless debtors.

Hopefully, they'll stop "helping" us soon.

cosmos said...

HSBC's 110 page Froth Finding Mission published in Jan 06, stated Seattle (along with SF, Boston, Phoenix & NYC) could be roughly 30% to 40% overvalued.

This is another credible organization with a similar take. The figures make sense if housing prices have to come down to match incomes.

Eleua said...
This comment has been removed by a blog administrator.
Eleua said...

SPD,

Correct again!

The more the gov't helps us, the harder it is to do it withoug gov't help.

You can apply this to housing, and college loans.

Why is college so expensive? Gov't artificially increases the demand for college by injecting money into the mix. Also, as interest rates fall, the cost of college goes up. We have seen this since the peak in interest rates in the early 80s.

I wonder if college will become less expensive as interest rates rise. My guess is that it will do exactly that, provided you control for gov't "help."

Anonymous said...

This is going to get real ugly on the down side.
I think we will overshoot in a big way.

Let us count the ways:

Recession or Depression is on the way – See yield curve and the run to bonds.

Lending standards will tighten up –See the current Senate Panel hearings on Assessing Non-Traditional Mortgages.

There will be a lack of qualified buyers. Those who bought a house over the last few years will be underwater and will not be able to move up to a bigger or better home. They will be lucky to just hang on. The tightening of the lending standards will cause a lack of qualified first time buyers.

Massive job loss in the real estate and real estate related industries. There will be job losses in other sectors due to the slow economy. For example, see Ford and GM.

Foreclosures will hit record numbers and there will continue to be a record number of homes on the market.

Commodities will fall.

Hedge funds will collapse.

FED will devalue the dollar to prop up the markets but the fed will be pushing on a string when it comes to interest rates and the GDP.

Crime rate will soar.

The value of a house will be cut in half. This may not be totally reflected in price, due to a drop in the value of the dollar.

You will know that you are at the bottom of the cycle when the Times (there will be no PI) runs articles telling you it’s a bad time to buy a house (~2012).

It will then be a good time to buy a house.

Anonymous said...

The valuation measures are subjective themselves. As the economy cools and establishes a new equilibrium at a lower pace of activity (or worse if the recession goes to a full blown depression) the valuation will be even lower and the comparisons to todays values will be even more disparate.

Also, the notion that long and gradual declines are ahead is a bunk. The housing market essentially morphed into a stock market from 2004 onwards and the huge gains came from speculative investment based on credit excess, not a fundamental or heated market as in past house run-ups. Therefore, the decline will be equally fast and large. Don't expect slow and long declines. Expect to see about 20% right off the bat and then a slower depreciation as things bottom out, perhaps in mid 2008 to 2009. Then the base could take years to fully form before another gain. Hence the notion that it could easily take 10 years to reach todays valuations is very real, and it may even take more. Look at the stock market for hints. There are periods of 20 years of essentially sideways movement, in a market where things unsually "only go up".

Peace

john_law_the_II said...

"Depends on inflation. If the dollar crashes, homes could cost 5x what they cost today. But the economy would be in ruins."

that could be true, but it may be just a nominal value because of inflation, but the real value could still be low.

e-sidedave said...

The report also says San Diego is only 37% overvalued. That seems awfully low to me. San Diego has some crazy-low affordability rate of 11% or something...how does that translate to only 37% overvalued?

JohnS said...

I'm not sure why these publications need complex methodologies. Simply using the price/rent ratio builds in all of the "uniqueness" of a given local market.

House prices tracked closely with rents until about 1997 in Seattle and then took off, especially starting in 2003 when the global credit default swap market exploded and banks threw their risk management textbooks out the window.

austin bell said...


meshugy said...
Taking off the top 33.8% of the current King County median single family home price of $435,000 would translate to a new median of $287,970.

I think you missed this: House Prices in America : Valuation Methodology


It's quite funny -- people on here, including Tim, love to gang up on meshguy whenever he posts. But when he points out, with complete accuracy, that Tim misinterpreted the Global Insight report in terms of what is means for Seattle's median values...well, let's just say you could hear a pin drop in here -- LOL -- not even a correction from Tim!

seattle long term owner said...

as you said, if he was right what's to correct...

Did you want us to praise shugy?

To be honest, as of late, shug's post are starting to be less extremist...

where as before it was NO BUBBLE at all, now it's SOFT LANDING... and people now argue it won't be soft...

am I right shug?

seattle_slow said...

Even shug is on the verge of capitulating.

meshugy said...

To be honest, as of late, shug's post are starting to be less extremist...

I don't think anything I've ever said is extreme. If you go back, you'll see that I've always said that the boom could not be sustained. I feel the most likely scenario will be a return to normal 3-6% appreciation. In the worst case a few years of flat appreciation.

Poorly timed flips and people who over leveraged with ARMS will get burned...but I feel that while those scenarios will be more likely as the market slows, the vast majority of homeowners will do just fine.

If inventory consistently rises throughout the winter and sales plummet next spring, then we could defintly see some negative appreciation. I still don't think that's likely...but possible. Sales actually went up in August and were only behind 2005 sales by 1% or so. As long as the buyers keep showing up, prices will hold.

(sorry...I accidentally posted this in the open thread.)

Anonymous said...

So, who ever said that the "vast majority" of homeowners would NOT be fine?

You're unbelievable M.

Get this straight please: It is the homeowners who bought in the past couple years under shaky financial circumstances and need to bail during the fallout who will NOT be fine.

All other homeowners will be fine. Duh.

However, it will be the "not fine" homeowners who will determine the direction for the market.

Quit putting words in our mouths M.

Any idiot knows that if you own your home free and clear, or have a mortgage that you can easily pay, or do not need to sell, you'll be fine.

Those are not the homeowners this discussion is about.

Is there any possible way for you to understand this key point?

Anonymous said...

Very interesting that San Diego is considered overvalued by only 37%.

Totally sheds new light on the Seattle overvalue %age.

Looks like we can up them BOTH by another 20%.

thanks for pointing out that pertinent info Anon.

Andy said...

I for one can't understand why meshugy is so villified here. He is not a troll. He is providing rational counterpoint arguments for the belief that we are at the tip top of the housing market in Seattle, and that it's a long way down. Is he right? I don't know, but I'd probablly not be reading this blog if it wasn't for his contrary inputs. I for one happen to believe we are set for a major correction, but I'm also not naive enough to think that I couldn't be wrong.

seattle long term owner said...

If inventory consistently rises throughout the winter and sales plummet next spring, then we could defintly see some negative appreciation. I still don't think that's likely...but possible.

I agree and I find it really interesting that you are willing to admit the possibility...

ANDY:

You have be be following this blog long enough to understand... if you want to browse through the last 3 months of blogs then you'll understand...

Shugy actually presents good info and accurate info, it's the spin that makes it interesting... is your glass half full or halfway to empty?

Anonymous said...

Meshugy is considered a troll because he picks and chooses his data to slant his arguments, and he often reposts old arguments that have already been totally refuted.

Andy said...

"Meshugy is considered a troll because he picks and chooses his data to slant his arguments, and he often reposts old arguments that have already been totally refuted."

Everybody has their viewpoints. He may "slant" his offerings, but he's not doing it in a fashion that I personally would consider "troll" like, but that's just my opinion.

I moved to Seattle back in March from California, with the idea of starting anew in a more "approchable" real estate market than whence I started. I am/was/would be a first time home buyer. Originally a bay area native, I left full well believing that there was a bubble (in cali), and that soon a lot of overleveraged people would be put into some very uncomfortable postions. I got to seattle to discover prices going through the roof, and everybody saying it was "healthy and normal" growth. Anyway, my BS dectetor started ringing pretty loudly, and I started doing my own research. Eventually I stumbled upon this blog, which has been a terrific source of information from both sides of the fence. There is 2 sides to every story, and even though I have formed my opinion about the real estate market here, I'm still open to being wrong, and hearing viewpoints from people who are willing to debate intelligently. I for one look forward to what meshugy has to say because it tickles my own doubts which in turn forces me to understand what I belive to be true, and therefore, to me anyway, his 'slanted' arguments are welcome...Even though I'm pretty sure he's wrong. =)

ob said...

Some interesting comments from the local paper in the most overvalued area.

Of course prices won't drop here cus we are different..
http://www.bellinghamherald.com/apps/pbcs.dll/article?AID=/20060923/BUSINESS10/609230322/1001/NEWS

"Bellingham, as well as much of the Puget Sound, is returning to a more normal real estate market," Crellin said. "In Bellingham's case, the home prices have risen dramatically, making it appear that homes are overvalued"

WaitinginMarysville said...

What exactly is a troll? Is it someone who disagrees with the viewpoint of the blog? Is it someone who disagrees with the consensus of the blog who just is trying to taunt the viewpoint?

I think Meshugy is a thinking person who tries to present his point of view in a reasonable manner. I don't see anything wrong with that. I have very good friends who agree with his viewpoint.

One thing I disagree on is that the fact that August had higher sales is relevant. Here in Snohomish county we had about 12% higher closed sales in August than in July this year and last year, and checking the pending sales for the last 6 years, 4 out of 6 had higher pending sales in August than in July, so I don't think it is significant that sales were higher in August than in July this year. Maybe King county is different and normally sells more homes in July than August, but I imagine that higher August sales are pretty common there, too.

synthetik said...

>San Diego has some crazy-low a
ffordability rate of 11%

San Diego affordability is under 5%. At least that was the number I consistently read when I was down in SD.

Shug?? You didn't put any $$$ down on your house? Does that sucker have an ARM on it too?

synthetik said...

Wait, if the median lost $100K since I've been down there, then, yay, maybe it's more like 11% now.

Again, if the San Diego median is almost at the Seattle median - Houston won't be the only one with a problem.

Let's face it... while some of us understand why it's nice here, the vast majority of people would rather be looking at sun, silicon and sand.

Anonymous said...

And, as the SD median retreats, so will the rest of CA I suppose.

Hey, what do you think the chances are of WA houses sustaining HIGHER prices than CA houses long term? lol!

..Maybe Ballard might, but for sure not WA as a whole.