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Tuesday, October 31, 2006

Retail Spending Spikes In Washington

Seattle Times writer Melissa Allison seems a bit too excited about today's report that retail spending in Washington State grew by 10.5% from spring '05 to spring '06.

Those were the days, back in the spring when the flowers bloomed and the housing market sizzled.

Washingtonians had such confidence last spring that they spent with abandon on computers, hotel rooms, jewelry and other items.

They spent 10.5 percent more than they had a year earlier, the largest increase for taxable retail sales in Washington since 1990, according to April-to-June data released Monday by the state Department of Revenue.

Rising gas prices didn't wreck the mood and are not included in the retail-sales data.

Economists say the spending has calmed since then, doused by a slowdown in the housing market and slower employment growth.
The state's economic growth and therefore the spending are propelled by employment gains, particularly in high-wage sectors such as aerospace, software and construction, Sohn said.
So, the spending is "propelled by employment gains," but when it "calms" it's because of a slowdown in the housing market? What a delightful contradiction. I fail to see how a 10.5% retail spending increase can be attributed to "employment gains." Were 10.5% more jobs added? Did everyone get a 10.5% raise? Smells like false assertion to me. I think it's much more likely that the spending increase is primarily the result of home equity extraction and a declining savings rate.

Maybe it's just me, but the news that people are spending increasingly more as incomes stay practically flat doesn't seem like something to celebrate.

(Melissa Allison, Seattle Times, 10.31.2006)

Time For A Sale

Queen Anne High School - Price Reduced!
Our local condo enthusiast Matt made a post this morning pointing out an interesting sign of slowing:
For a limited-time, Queen Anne High School is offering a $5,000 BUYER BONUS on all homes under $400,000*!
With its close-to-downtown location, Seattle's perma-hot real estate market, and all the free fawning press that this project got when it opened last month, you would think it would have sold out in record time.

Of course, I'm sure the local real estate cheerleaders would be more than happy to provide me with a plethora of perfectly rational-sounding explanations about the slow time of year, undesirable floorplans, and a "return to normal" for the market. Still though, does anyone doubt that this would have sold out in a week had it opened in September 2004 or 2005?

I'm just sayin'...

(Matt Goyer, Urbnlivn, 10.31.2006)

Monday, October 30, 2006

Puget Sound Cities Not Very Safe

Research company Morgan Quinto released its latest "safest and most dangerous cities" rankings today, and overall, the Puget Sound did not fare particularly well. The Associated Press story reprinted in the P-I explains a little bit about how the 371 cities were ranked:

Cities are ranked based on more than just their crime rate, Morgan said. Individual crimes such as rape or burglary are measured separately, compared to national averages and then compiled to give a city its ranking. Crimes are weighted based on their level of danger.
While no city in Washington showed up on the "25 Safest" or "25 Most Dangerous" lists, the only Puget Sound city that managed to break out of the bottom third of the list was Bellevue, at #57. Seattle came in at #262, more dangerous than 70% of the cities that were ranked. Federal Way, Everett, & Kent fared even worse, ranking 277, 283, and 289, respectively. However, in what probably comes as no surprise to most of us, the lowest-ranked city in the Puget Sound (and even the whole state of Washington) was Tacoma, coming in at a miserable 324 (more dangerous than 87% of the ranked cities).

Here's a table with all the cities from Washington State that were ranked:
57.Bellevue, WA
134.Spokane Valley, WA
188.Vancouver, WA
220.Spokane, WA
262.Seattle, WA
277.Federal Way, WA
283.Everett, WA
289.Kent, WA
304.Yakima, WA
324.Tacoma, WA
I just thought this would be worth pointing out in the context of the "Seattle is a hugely desirable place to live" argument that we frequently hear regarding home prices. For the record, seventeen cities in California ranked higher than Bellevue, our area's safest city on the list.

Seattle is a nice place to live (I like it here, really!), but I think we would do well to remember that it's not some kind of perfect paradise.

(Christopher Leonard, Associated Press, 10.30.2006)
(Full Rankings: Associated Press, 10.30.2006)

Beware the Hidden Costs

Here's a bit of balance for you after that rental horror story. Astoundingly, today's "home buying isn't always a walk in the park" story comes to you courtesy of the Seattle Times (but not E. Rhodes of course).

Katherine and Robert McCartney thought they'd found the perfect first home in a 1,400-square-foot 1950s rambler in Boise, Idaho, a few years back. They thought they were getting a deal.

They actually were getting in way over their heads.

A few months after they bought the house, the couple had to move to Washington for work. But before they put the house on the market again, they spent thousands of dollars on a new roof, garbage disposal, paint job, window screens and sand for the oil furnace.
In the process of buying and reselling quickly, they discovered one of the cardinal rules of homeownership: That cool condo or cozy craftsman likely will cost thousands more than you paid for it, most notably for maintenance and repairs, furniture and fixtures — expenses that buyers should plan on but don't.
Which is one of the many reasons that stretching your budget to buy a home is never a good idea. You never know what will come up, and you are pretty much guaranteed that there will be something that you didn't expect. The "rule" that you shouldn't spend more than 30% of your gross income on housing wasn't just pulled out of thin air. If you don't leave a financial buffer in your budget, you're setting yourself up for problems down the road.

Home ownership is great, and I'm all for people buying houses—as long as they can actually afford to. There's more to "affording" a house than the simple [INCOME] > [MONTHLY PAYMENT] equation.

(Heather Rae Darval, Seattle Times, 10.28.2006)

Saturday, October 28, 2006

Offbeat Weekend News: Home Rental Scam

Maybe all those reports about the rental market getting tighter and tighter were true. In fact, the market is getting so tight, people are paying thousands to rent places that aren't even available!

Imagine checking on a vacant rental house you own, only to find a family you don't know living there.

It happened this week to a King County man. But the people who were living on his property insist they paid another man they thought was the owner nearly $6,000 to move in.
Mike and Lia Lester claim that they and another couple rented the house after seeing an ad on the Craigslist web site.

They met a man they thought was the owner of the house and paid him $5,700 in rent and security deposits and he gave them the keys to the home.

Now, they say they've been scammed.
Sean Stewart doesn't know who they paid — but it wasn't him. Stewart owns the house and he's never met the Lester's.

"I feel sorry for anyone who gets screwed like this," he said. "There's no doubt about that."

The problem is Stewart has other renters moving in next week, so he says the Lesters have to go.
Doh. Seriously though, that would really suck. How would you even protect yourself from a scam like this? Demand to see the title to the property before moving in?

Of course, if the Lesters had just gotten on the equity escalator, they wouldn't have put themselves into such a vulerable situation to begin with.

(KOMO Staff, KOMO, 10.28.2006)

Friday, October 27, 2006

Seattle "Losing Some Steam"


Thanks to the reader / college mate that sent this in. Seattle got a mention in yesterday's Wall Street Journal story: Home Prices Keep Sliding; Buyers Sit Tight.

The air continues to seep out of the U.S. housing market, according to the latest data, and some economists are warning that prices will keep declining through much of 2007.

The National Association of Realtors yesterday reported the biggest drop in home prices since the trade group began compiling price data in 1968. Specifically, the association said the median price for home sales completed in September was $220,000, down 2.2% from a year earlier. That matched a revised 2.2% decline in August. In addition to being the largest price drops in at least 38 years, the back-to-back declines are the first time median home prices have fallen since 1995.
Seattle has been one of the strongest markets in recent months but is showing signs of losing some steam as inventories of unsold homes rise. In 17 counties of western and central Washington State covered by the Northwest Multiple Listing Service, the median price in September was up 9.4% from a year earlier, the first single-digit increase in two years.

Mike Skahen, owner of real estate brokerage Lake & Co. in Seattle, says inventory is still lean in good neighborhoods near the area's biggest employers. But the overall market is slowing to a more normal pace as "buyers are feeling they can be more selective."
That seems to be the line I've been hearing a lot around here lately. We're just "returning to a normal market." That is certainly possible, but with the increasing rates of declining YOY sales and building YOY inventory, I'm not quite ready to accept that assertion.

(James R. Hagerty, Wall Street Journal, 10.26.2006)

Thursday, October 26, 2006

The Supply Side of Real Estate

I've been reading a tremendous amount recently on the subject of building and it's impact on local real estate markets. Over the past several weeks, at every opportunity both privately and out on the town, I have talked with people who are involved in the supply side of housing: builders, contractors, and suppliers (big box stores, retail, specialty flooring goods, roofing, paint, cabinet suppliers, lumber stores etc.).

Here is a glimpse into the local Puget Sound market from an individual heavily immersed into building and who I would characterize as exceptionally credible. Below are a few of the weekly e-mail updates I've received over the past several weeks. The individual works for a large builder and has agreed to let me post some of the e-mails:

End of September update:

...and I don't ever read about the builder's side of things on your blog or any blog about Seattle. The newspapers never talk about it. It is very wierd. Our inventory around the sound has increased 85% from last year. Sales have totally fallen off. Some builders are planning on functioning on fewer neighborhoods but increasing their sales rates to stay at the same level. So instead of have 8 communities selling 5 a month you have 4 selling 10/month. The problem with that is that you have 1-3 field managers per neighborhood and 1-2 sales agents and so on. We just had just about every sales agent buy a new 35k-60k car in teh last 8 months. The average age is probably 30.
1st week of October Update:
Last week, we had 8 sales and 7 cancellations. This is beginning to be the story everywhere. We still have quite a bit of traffic but for other builders it is different. It has dropped off 75%. Builders are using incentives but it is not working. They can't even get people to show up. The poeple that didn't buy contingent I feel sorry for. Land prices have come down, but it still doesn't pencil
2nd week of October Update:
....Standing inventories are becoming a big problem for some.
3rd week of October Update:
They have a lot of inventory down there. We aren't planning on buying anything unless it is of compelling value. I have been tracking standing inventory, specs, which is getting interesting. Most site agents I talk to all say the same thing. Traffic has stopped, not declined, stopped. The further out markets are feeling it first. 80% of our buyers are on ARM's, not the toxic kind. It's the only way they can afford to buy.
Today (Oct. 25th) Weyerhauser announced a decline in earnings.
"While anticipated, the housing market decline was more abrupt and drove wood products prices and demand into a deeper plunge than expected," said Weyerhaeuser Chief Executive Steven Rogel in a statement."
So, if there are any small builders, contractors or supply side people that would like to comment on local experiences, please fill us in.

In other news

Our escrow office has experienced a lot more refinances lately. I am seeing more fixed rates than in months past, but ARM's are still king. Refinance business has sustained our business over the last two years. While our market share has increased by taking baby-steps and being very fiscally conservative, we do know of companies (escrow & mortgage) that are showing the earmarks of struggling.

Today, Fidelity National Title announced it will eliminate 650 jobs. Personally, while I understand they answer to Wall Street, I find this hard to stomach because title companies have been absolutely raking in obscene amounts of income while riding the appreciation wave over the past few years. For those new to purchasing, title insurance premiums are based upon the sales price of a home, generally speaking. When home prices go up, premiums tag along for the ride.

In contrast, when you close a home sale at a escrow company like ours, our price is generally fixed, irrespective of the sales price. In other words, there is not necessarily more work in closing a $250,000 home vs. a $800,000 home. Same goes for refinances. I just can't understand why consumers fall for all the fluff out there. I don't care where people go to do business, just shop for crying out loud. Sorry for the rant, I just can't believe some of the settlement companies are charging people $250.00 for loan document e-mail fees. In years past, loan documents were delivered overnight by UPS or FedEX. Today, they are e-mailed which is highly streamlined to save time. So now you see these junk e-mail fees. Total garbage. I wonder what junk fee will be invented next?

This week I had the pleasure of telling some clients that they would not be receiving more money back than anticipated when their cash-back refi closed. Why? $10K 'n change pre-payment penalty. That takes the cake this month.

More to come...

Bubble-Proof Superstar Seattle

A commenter over at RCG pointed out this Business 2.0 article that labels Seattle as "bubble-proof."

About the last place a prospective homebuyer might want to peruse MLS listings these days is in one of the country's most expensive markets, like San Francisco, where the median cost of a single-family dwelling has jumped 37 percent since 2003. (It's now more than triple the national figure.)

A couple of leading economists, however, think buyers shouldn't be intimidated, even if prices in these markets go into a slump. San Francisco, New York, and a small handful of other big cities may suffer dramatic swings in a downturn, but their long-term trends "are so strongly upward that if you're willing to buy and hold, it's a good strategy," says Todd Sinai, an associate professor of real estate at the Wharton School and coauthor of a recently released study called "Superstar Cities."

The same logic, Sinai says, applies in other inflated markets like Boston, Los Angeles, and Seattle.
Given the admission that there may be "dramatic swings in a downturn" I guess I don't really understand the "bubble-proof" label. If they were making the usual claim, that the worst case scenario is for prices to level off for a few years, then it would make sense. It seems more like they're just pointing out the cities with the best long-term growth prospects, and I actually don't disagree with their assessment. Seattle is a desirable place, and will likely take a less severe beating as the housing bubble busts. However, that hardly makes us "bubble-proof."

Their reasons for including Seattle on this list are all the ones we've heard dozens of times before:
Seattle has a lot going for it physically, with its green landscape of towering trees laced with bays, inlets and rivers connected to Puget Sound.

But what makes the city effervesce is its status as the epicenter of the software industry, courtesy of Microsoft, and the birthplace of other marquee giants like Starbucks and As these companies have grown, so has their demand for workers.

Other attractions include access to natural beauty, an active lifestyle and a lively pop music scene: Seattle is a home to numerous heavy metal and grunge bands. All this spurs demand for Seattle's tight housing supply.
Not to mention historically low interest rates and loose lending standards...

(Paul Kaihla, Business 2.0 Magazine, 10.25.2006)

Wednesday, October 25, 2006

Big Picture: Supply vs. Demand

Why have residential real estate prices experienced an unusually rapid increase in last few years? That's the big question that we all want the answer to, right? There's one argument that goes something like this:

There just aren't enough homes for everyone. People are moving to the Puget Sound at a rapid pace, and homebuilding just isn't keeping up. Furthermore, even as more people move here, the size of households keeps shrinking, meaning that demand is increasing even faster! So it makes good sense for home prices to soar and rents to increase, because people have far less choices about where they will live than they did ten or twenty years ago.
Indeed, this would be a pretty compelling argument, if it were backed up by the facts... but is it? I dug through the Census archives to find the answer.

As it turns out, most elements of the above argument are true. Population is indeed rising at a fairly rapid pace. From 1960 to 2000, King County population surged from 935,014 to 1,737,034—an increase of 86%. During that same time period, the average household size dropped 21%, from 3.04 to 2.39. These two statistics combine to give us a 136% net increase in the total demand as measured by the number of households (307,759 to 726,792).

On the supply side of the equation, the number of "housing units" also experienced a greater than two-fold increase (122%), from 333,959 in 1960 to 742,237 in 2000. Of course, 122% is not as large of an increase as 136%, so you can see that from 1960 to 2000, home building did not in fact keep up with demand. This caused the percentage of occupied housing in King County to steadily increase from 92.15% in 1960 to 97.92% in 2000.

This is all very interesting, and so far would appear to back up the "not enough housing" argument. Of course, it is said that the best lies are those that contain the most truth. The real boom in King County home prices didn't start until after the year 2000. So let's compare 2000 to 2005*, using numbers readily available directly from the Census website.

In 2000, there were 742,237 housing units available to 726,792 households, for an occupancy rate of 97.92%. In 2005, there were 792,682 housing units available to 747,157 households, dropping the occupancy rate to 94.26%, a level not seen since 1980. Whoa. It would appear that during the five years of most aggressive home price growth, home building has more than kept up with increased demand.

Here is the complete data table for 1960 to 2005:
YearPopulationHouseholdsHshld SizeHsng Units% Occ.
It should be noted that there are many different sources available for current (2005) population estimates. However, even under the most aggressive of these estimates, the occupancy percentage still declines from 2000 to 2005 (down to at least 1990 levels). I chose to use the data on the Census website since it was most directly comparable to previous Census data, and it is the only source I have been able to locate that contains an estimate of the average household size and number of housing units for 2005.

So what does this all mean? I think at the very least it shows that home building in King County has kept up with demand during the recent housing boom. It seems most likely that building has even surpassed demand by a non-trivial amount. If you have data that shows otherwise, I would love to see it. However, after considering the available data, I believe we can safely bury yet another unfounded argument that attempts to justify today's housing prices.

*2005 data based on the 2005 American Community Survey, which "is limited to the household population and excludes the population living in institutions, college dormitories, and other group quarters." Therefore, while total population is likely to appear low when compared directly to Census data, the number of housing units is also scaled down accordingly. Since this post is about housing supply for "households," the exclusion of group quarters does not affect the final "percent occupancy" calculations.

(US Census Bureau, 2000, 2005)

Tuesday, October 24, 2006

Kids + Condos = No Way

Here's a tidbit from a Seattle P-I story last week about the lack of families with children downtown. The article doesn't really have much to do with home prices or bubbles, but we have talked at length about downtown condos in the past, so it is at least worth mentioning.

Sure, there's a way to get families to live in Seattle's urban core, but someone needs to go first — and that seems to be the problem.

Parents say they need condos built with families in mind. Developers and families say they need a downtown school. And school district officials say they need to see some demand.

But many local parents leave condos — big ones, in neighborhoods with good parks and schools — because they feel the need for their own yard. So maybe the real problem is an intangible — a cultural bias against raising children in condos. And observers suggest changing that might require gas to become so expensive and affordable houses with yards to be so far away that commuting takes too much time and money.
Oh my, it sounds like such a delightful utopia, doesn't it? After reading this article I remembered how we're always hearing that demand for downtown condos comes from "retiring baby boomers" (old people whose kids have grown up and moved out) and "young professionals" (young people with no kids). If families with children won't move downtown unless they're basically forced to, I guess those two groups would have to be the ones driving condo demand, considering they're pretty much all that's left. That is of course, if you assume that the demand coming from "investors" is negligible.

(Aubrey Cohen, Seattle P-I, 10.16.2006)

Monday, October 23, 2006

Anecdote Extravaganza

It's been a while since the last anecdote post, so I thought now would be a good time for an update.

First up, let's go way back to early June. Remember the million-dollar new construction in Redmond? It was originally listed in mid-May for $1,625,000, and the last time we checked in it had taken $130,000 in price reductions, dropping the price to $1,495,000. It has now been languishing on the market for 159 days, and taken two more price drops—$70,000 on 09/05 and $150,000 on 10/14—for a new grand total of $450,000 (28%) off the original asking price. Do you smell that? I think that's the smell of desperation.

It's been two or three months since my former coworker and her husband moved to California, and their rural King County house still has not sold. However, the good news is that they did finally lower their asking price (though not by much), from $490,000 down to $480,000. I'm still predicting that they won't sell for much more than $430,000.

Remember my coworker that listed his rural Snohomish County home for $350,000, then dropped down to $305,000 and announced that as the "*FINAL PRICE REDUCTION*"? Well apparently he wasn't kidding, because after receiving no bites for weeks at that price, the house was taken off the market, and hasn't reappeared in the months since. I know that he has moved to Moses Lake, so I can only assume that he is now paying two mortgages and hoping that next spring will save him.

I got an email from a friend (that I don't see often enough) a few weeks ago, enthusiastically telling me that he and his wife had just bought a condo... in Kent. From what I can tell, they paid just over $200,000. I didn't even know they were looking. I still haven't responded to him, because I just don't know what to say... all I can think of is "that's exciting."

Lastly, lest I be accused of cherry-picking only the most dismal-sounding stories, I offer the following tale from the Fremont / Greenlake area. I mentioned this friend's story in passing, but (by request) I was saving the full story until after the closing date. After doing some relatively inexpensive (under $5,000) sprucing up to improve "curb appeal," the house was listed in the $450-$475k range. They collected offers for a week, receiving a total of 11 offers (five of them over $500k!), and eventually closed for over $510,000.

It should be noted that before listing, when my friend asked his agent "what is available in this neighborhood for under $500k" the answer was "nothing." It is also worth pointing out that Zillow's estimate of his home's value came in at around $535k. While I don't think the close-in neighborhoods are likely to slow as much as those further out, I think his "price low and see where the bidding process takes you" strategy was a good one (it's what I recommended he do when he told me he was selling his home). As far as I can tell, that seems to be the best way of determining a home's true "market value."

So what have you been seeing "on the streets" lately?

Seattle Bubble Announcements

Good Monday everyone. I'd like to take a moment to announce a few new things going on here at Seattle Bubble.

First off, you may have noticed that the "About This Blog" section on the right has been transmogrified into "Read These Posts." I realized that there were some posts that I was consistently referring back to, that I feel really do the best job of getting across the major points we've explored on this blog. The idea behind the "Read These Posts" section is that if a newcomer to the blog reads through each of those posts, they'll have a pretty good summary of what's going on in the Seattle housing market, with respect to the bubble. If you have any additional posts that you think should be included, or if you think that one of the posts that are included shouldn't be, please let me know. It's a work in progress.

Secondly, although Synthetik has already pointed this out in a comment thread, I wanted to draw attention to the fact that the domain name / link is now functioning. For now, it just forwards to the "old" address (, but my not-too-distant plan is to migrate to a fully-hosted WordPress blog, which would just use the address So get a head start, and change your bookmarks now.

Lastly, I thought I would point out the "tip jar" link on the right side. Believe it or not, I added this only because it was privately requested by readers. I started this blog primarily as a way to keep track of the changing Seattle market conditions for myself, but it has morphed into something much bigger. As a result, I do spend quite a bit of time finding interesting things to post, and working on original content. Unlike many of the other "bubble blogs," I have not resorted to advertising, and I intend to keep it that way for the forseeable future. Honestly, writing this blog is its own reward, but I definitely don't mind getting a few dollars out of it now and then. So, if you like what you've been reading, and have been wishing for a way that you could repay me, now you have it. Unfortunately, for those of you that despise what you read here and wish I would just shut up and go away, I haven't yet figured out a way to make an "un-donation" link, so I guess you're just going to have to keep leaving snide comments.

That's all for now. If you have any suggestions of ways to make this blog better, this thread would be a good place to speak up.

Friday, October 20, 2006

A California Comparison, Part 2

Yesterday I compared King County to San Diego County in order to address some of the reasons we commonly hear that the Seattle housing market will remain strong. The focus of this post is slightly different than Part 1, where I used San Diego as an example to show that certain positive local attributes will not shield us from declining prices. Today's topics turn the question around, looking at negative attributes of San Diego's housing market that are presumably lacking here.

Since real estate trends in the Northwest are said to lag California by six months to a year, I'll be comparing the period of 2000 — 2005 in San Diego County to July 2001 — July 2006 in King County.

The two issues I'll address were brought up in the comments on Part 1:

Deejayoh: One oft cited argument that you left off (which I hear from my real-estate bull friends) is that "prices haven't gone up as much here as they have in California" so they won't go down.

E-sidedave: What about the affordability factor? Back at the peak, affordability in SD was 11%. It has never been that low here.
"Prices haven't gone up as much here as they have in California" turns out to be an entirely true statement. From 2000 to 2005, the median sales price of Single Family Homes (SFH) in San Diego County went from $260,000 to $575,000—an increase of 121%! King County's five-year SFH appreciation has been positively tame in comparison, increasing from $268,725 to $435,000—a comparatively paltry increase of 62%.

At face value, the "we haven't appreciated as much as California (and therefore aren't as vulnerable)" argument appears to hold water. However, I don't believe that looking only at total appreciation offers a complete picture. What does offer a much more complete picture (in my opinion) is the affordability question. It makes perfect sense for home prices to shoot through the roof if incomes are experiencing a similar rise, while interest rates hit the floor. That's how people buy homes: they use their income to pay back a loan. It's a little thing that I like to refer to as fundamentals.

Before I get into the affordability numbers, I want to point out a few things that I am not attempting to show with this post. I am not making any claim about how affordable either county "should" be for potential buyers. I am well aware that a family earning the median household income is probably aiming too high to purchase a home priced at the median. Whether or not that is a good thing is not the point here at all. I am also not attempting to compare one county's affordability to another. I'm going to compare each county's affordability numbers to a different time period in that same county, not to the other county. There is a historical price premium that is paid to live in more desirable areas that can largely be seen in an area's average affordability index. Highly desirable areas will always be unaffordable compared to less appealing ones.

Keeping those caveats in mind, here is what I am interested in. During the recent ridiculous run-up in home prices, how has affordability in each county changed? In order to find out, I'll be calculating Tim's Affordability Index (explained in my soft landing post) for San Diego and King Counties.

Let's see how San Diego stacks up.
San Diego County 2000
Median Closed SFH: $260,000
Median Household Income: $47,236
Interest Rate: 8.06%
Tim's Affordability Index: 76.9

San Diego County 2005
Median Closed SFH: $575,000
Median Household Income: $56,335
Interest Rate: 5.86%
Tim's Affordability Index: 51.8
Yowza! That's a 25.1 point drop in affordability in just five years, despite interest rates over two points lower. No wonder home prices in San Diego have declined since last year. So what about King County? Surely since our home appreciation has been so much lower, our affordability dropped much less than San Diego, right?
King County July 2001
Median Closed SFH: $268,725
Median Household Income: $53,610
Interest Rate: 7.13%
Tim's Affordability Index: 92.5

King County July 2006
Median Closed SFH: $435,000
Median Household Income*: $59,500
Interest Rate: 6.76%
Tim's Affordability Index: 65.8
Apparently not. In fact, King County affordability has taken a larger hit than San Diego County, plunging 26.7 points in the past five years. Although San Diego home prices shot up much further than King County homes, their income also increased 19% to King County's 11%, while interest rates during the 2000-2005 period took a much more favorable turn than 2001-2006 (2.2 point drop vs. a 0.37 point drop).

So when you look at the complete picture, factoring in all of the home buying "fundamentals," King County actually seems slightly more poised for a drop than San Diego was last year. Does that mean that we definitely will see a drop in prices? Obviously not, as there are many more factors at work, including the national economy, market sentiment, and acts of God. However, I think we can safely say that there is little comfort to be found (with respect to the housing market) in comparing the Northwest to California.

(San Diego County Home Prices: The Real Estate Report)
(King County Home Prices: NWMLS)
(2000-2001 Incomes: American Community Survey)
(2005 Incomes: American Community Survey)
(Interest Rates: Federal Reserve)

*2006 income for King County was (optimistically) calculated by assuming a yearly increase from 2005 to 2006 ($1,130) of roughly 1.5 times the ACS' estimated yearly increase for 2003-2005 ($745/year).

"...didn't buy their ticket on the last spaceship flight off a planet that's about to explode."

What a delightfully entertaining gift the Seattle P-I has given us this Friday in the form of guest columnist Sarah McCormic's amusing thoughts about the Seattle housing market:

Several years ago, on a stroll around my Ballard neighborhood, I stopped to gawk at the huge price tag on a For Sale sign in front of a modest 1920s-era bungalow. A young woman joined me, grinning ear to ear. "Isn't it great how all our values are going up?" she said.

"Actually, I rent," I said.

Her smile vanished. The woman cleared her throat and we shuffled awkwardly away from each other.

I walked back to the tiny house my husband and I were renting nearby, and felt a little seed of bitterness taking root in my stomach. I thought about the guilty look on the woman's face. She had been crowing about the same rising prices that might keep me out of the market, and I had caught her red-handed.

I was in my early 30s, newly married, and we had just started talking about buying our first house. Our friends were meeting with real estate agents. Everyone we knew was getting hungry for equity. A lot of people were starting to talk about getting "left behind" and we wondered if we might already be too late to the home-owning game.
With friends who have also been lucky enough to land a Columbia City cottage or a Shoreline rambler, there's a sense of shared joy and relief. I remember feeling like this in fifth grade when my best friend and I landed parts in the school play: "Thank God we both got in." We toast our hefty mortgages and spend long evenings discussing hardwood floor finishes, crown moldings and our all-important soaring equity.

But with friends who have not yet "squeezed in" to the housing market, I am reminded of how I felt when I got accepted by my first choice for college and my best friend got nothing but rejections. What do you say to each other? I try to offer soothing assurances: "I hear there are still some great deals up north." "600 square feet is plenty of room!"

But no matter what I say, I know we all feel like they have probably missed their chance, like they didn't buy their ticket on the last spaceship flight off a planet that's about to explode. I fear they're doomed to move back to Missouri in order to afford more than a studio condo on the fringes of the city.
Hah! That is probably my favorite analogy so far of Seattle's housing market—a planet that's about to explode. Only, I have a feeling that Mrs. McCormic may have it backward, about who has missed what chance.

I just don't understand the appeal of spending 2-3 times as much money (or more) for less space and more upkeep. Throw in the very real possibility that all of that "all-important soaring equity" could easily disappear into thin air, and I just don't see how "owning" (aka renting from the bank) is at all more desirable than renting in Seattle right now.

Is it just people's mindset that owning is always better, no matter what? At what point do you step back and say: "wait a minute, renting just makes a lot more sense right now"? If mortgage payments were 5 times comparable rents, would that do it? 10 times? When does the home ownership above all else mindset finally apply the brakes?

Congratulations on your "little house in Ballard," Mrs. McCormic. May you still be so elated about your purchase three years from now.

(Sarah McCormic, Seattle P-I, 10.20.2006)

Thursday, October 19, 2006

WaMu: Housing Slowdown Driving Down Profit

In the past, we have drawn attention on Seattle Bubble to cutbacks or other unpleasant news for local mortgage-related businesses. The reason for this is to draw attention to the fact that the national slowdown in housing is having negative local effects here in the Seattle area. With that in mind, I thought I should probably mention today's Washington Mutual news.

Seattle-based Washington Mutual blamed a 9 percent drop in its third-quarter profit Wednesday on a slowdown in its mortgage business.

The drop was more severe than Wall Street analysts had expected, and shares of WaMu stock fell $1.70, or 3.89 percent, to $42.01 in after-hours trading.
WaMu has eliminated nearly 10,000 jobs in the past year as it tries to become more profitable.

"The housing market is clearly weakening, with the pace of housing price appreciation slowing in most regions of the country," Chief Executive Kerry Killinger told analysts and investors in a Wednesday conference call, held after the close of regular trading.

"We are also experiencing somewhat higher delinquencies and loan losses," he said.

WaMu reported a profit of $748 million, or 77 cents a share, for the July-through-September period. That was down from $821 million, or 92 cents a share, a year ago, marking the second consecutive quarter in which WaMu has failed to report a profit increase.

Analysts had been expecting a profit of 93 cents a share, according to a poll by Thomson Financial.

"Patience is running out," said Fred Cannon, an analyst at Keefe, Bruyette & Woods. "2007 is really going to be a watershed for the company."
It is important to note that $748 million is still an awful lot of money. I'm not trying to say that WaMu is in dire straights, I'm just pointing out that Seattle's economy is most certainly tied to nationwide events. If housing (or the economy as a whole) takes a serious downward turn nationwide, Seattle will not be unscathed. We're not that special.

(Amy Martinez, Seattle Times, 10.19.2006)

A California Comparison

Since Mr. Kelly did such a poor job of actually comparing the Northwest to California, I'd like to get my own idea of how the two compare. For the illustrative purpose of this post, I'm going to be comparing the regions of Seattle and San Diego. Here in King County, the median home price (condos & SFH) for September was up 8.6% YOY, and down 3.0% from the peak (Aug. 2006). In San Diego, the median home price for September was down 4.4% YOY, and down 8.1% from the peak (Nov. 2005).

Most people would say that an 8.1% drop in 10 months is pretty major. So I have to wonder, what's to stop that from happening here? Let's take a look at some of the claims we frequently hear to see if they hold any merit. The purpose of this post is not to discover why prices have dropped 8% in San Diego, but rather to find out if some of Seattle's oft-cited positive attributes will shield us from price declines.

In Sunday's article, Mr. Kelly repeated a claim that we have heard over and over again in this debate, that "availability of jobs props up the housing market." Let's look at San Diego to see how well that claim holds up. Using unemployment figures from the Bureau of Labor Statistics, we find that the Seattle area's unemployment rate has fluctuated between 4.1% and 4.8% in 2006. Those are pretty good numbers. So what about San Diego's unemployment rate? 3.7-4.3% this year. So despite having better "availability of jobs" than Seattle, San Diego's home prices have tumbled 8%.

What about foreclosures? If Seattle has a low rate of foreclosures, will that prevent housing prices from dropping? Looking again to San Diego, Dustin (of RCG fame) showed us in Monday's open thread that the current number of foreclosures in San Diego is only 81% of the 1991-2006 average. Doing my own search of, I see that King County has 2,043 properties in foreclosure or pre-foreclosure, while San Diego County has 6,180. Using 2005 population estimates, I calculate 1 foreclosure for every 878 people in King County, and 1 foreclosure per 475 people in San Diego County. So while San Diego may not yet be reaching historic highs foreclosure rates, they're still higher than King County. Thanks to Dustin's investigation though, we know that historically high foreclosures is not a prerequisite for declining prices.

Of course, there's always the "desirability factor" that people love to cite, about what a great place Seattle is to live. I agree that this is indeed a great area (otherwise why would I still be living here?), but I think you've got a great career as a salesperson ahead of you if you can convince a majority of people that cloudy, sound-side Seattle is more desirable than sunny, ocean-side San Diego.

San Diego has lots of jobs available, low foreclosures, and a highly desirable climate, yet prices there are clearly dropping. I would like to suggest that none of these things will shield Seattle from price drops, despite what the local media may like us to believe.

Update: I'd like to point out SDtoSEA's comment below. As a San Diego resident, they offer some interesting insights: "Now, SD has brought in significant amounts of both high tech and bio related jobs. We have yet to see any reductions in any area of our economy. It continues to grow. Many companies are having a hard time finding qualified employees." Sound familiar?

Read A California Comparison, Part 2.

Wednesday, October 18, 2006

"Local Prices Are Not Headed Backward"

Here's a familiar song, courtesy of Tom Kelly at the Everett Herald.

It used to be a popular notion among local real estate agents that the Northwest housing market lagged behind the California market by about six months.
I thought about that idea recently when I read that home sales decreased 30.1 percent in August in California from the same month in 2005, the largest sales decline since August 1982.
Things are a bit different here, and will continue to be. According to the Northwest Multiple Listing Service, home sales were down about 15.7 percent in September from the same month last year yet prices were up 9.4 percent, marking the first time in two years that year-over-year price growth has not been in double-digit territory in Western Washington.
The premise of this article appears to be that the Northwest only lags California on the way up, but we won't have to worry about following California down. Let's see how well the author backs up that claim.
While the past 24 months have been crazy, the long-term outlook for the Puget Sound housing market continues to be bright. Here's why.

Availability of jobs props up the housing market, and the job outlook for Western Washington continues to be extremely healthy, according to data compiled by Stewart Title Company. In fact, the Seattle-Tacoma-Everett area is expected to add jobs at a rate of double the national average for at least the next three years. While homes might take longer to sell and sellers again are considering offers contingent on the sale of the buyer's home, local prices are not headed backward or even close to a "soft landing."
Okay, so our housing market will remain strong because there are plenty of jobs available. But wait, what happened to the California comparison? What does the job situation look like in California? Are jobs not plentiful there? Tom doesn't say.

Instead, he totally drops the original point he seemed to be making, and closes the article with a series of bold assertions.
"No housing market has ever collapsed unless the underlying economy went sour," [real estate economist John] Tuccillo said. "Short of recession, this means that virtually every housing market in the U.S. will hold up even though sales may slump and prices decline." He did note, however, that home prices may slump in upper-Midwest rust belt areas.

What about a worst-case scenario — mass foreclosures and rising inventories?

"If the United States undergoes a recession in 2007, the housing market will do much worse than we anticipate, but so will autos and retail," Tuccillo said. "Exotic mortgage instruments will have an impact in increasing the foreclosure rate, but in any loan made before 2005, the consumer is in a positive equity position and will weather financial distress."

So, when your friends in California swear the sky is falling and real estate will no longer be the same, remind them that property is cyclical and that their neighborhood will rebound when the "down" period ends late next year.

And, the down period in the Puget Sound will mean slower, not negative, appreciation.
Sweet. Home prices definitely won't drop significantly unless there's a recession, but even if there is one, every pre-2005 loan will be totally safe, and worst case, all the pain will be over by the end of next year. Those are good things to know. I'm glad Mr. Kelly let us in on this reassuring absolute knowledge that he and his real estate economist friends are in possession of.

(Tom Kelly, Everett Herald, 10.15.2006)

Tuesday, October 17, 2006

Advertising the Bubble

As I was catching up on the comments, I was rather intrigued by the direction that you all took Monday's open thread. Here's a recap for those of you that do not closely follow the comments. When it comes to the blatant cheerleading nature of the real estate section of the newspapers, they probably feel that they have no choice, since a very large percentage of the papers' advertising budgets come from real estate interests. However, that gave Mikhail an idea...

It's not as if the bubble bloggers are going to pick up the slack with full page ads sticking their thumbs at the real-estate industry, and encouraging to general public to stop buying.
Hey, the quickest way for the bubble bloggers (like us) to influence the editorial policy of our local papers is to start taking out negative advertisements about our housing markets.

As soon as anti-bubble content becomes the biggest financial contributor to the paper, we will see a complete about face in article bias.

Maybe Tim should start holding out a tin cup for donations to place anti-bubble ads in the Times?
The conversation just took off from there:
Nolaguy: If we paid for it, I wonder if the Times or PI would run a full page add that was "anti real estate"?

Mikhail: ...for a 6 inch by 6 inch ad we would need to raise $17,438.4... Seriously, if we really could pull something like that off (i.e. getting enough people to donate to a Puget Sound housing boycott advertisement) that would likely generate a lot of publicity, beyond publishing the ad itself. And if the papers really were silly enough to decline the ad, we would have an early Christmas, and be able to take our story to the national media and get a LOT of coverage.

synthetik: $17K is a lot of scratch. I think it might be possible if a website was created around this endeavor and then posted on all the national blogs (HB, HP, etc). Might be fun to try... If they wouldn't run the ad we could donate the funds to charity.
However, not everyone has warm fuzzies about throwing around that kind of money. Plymster suggested some other possible activities:
$17K? You guys are saving waaaayyyy too much money renting.

I disagree with handing $17K to one of the key creators of the bubble. Why not just hand WaMu a giant novelty check for $1 trillion dollars to cover next year's ARM resets?

If you really want to raise awareness, build up a fund that donates money to debt education, and then send a press release to the appropriate news rags. Then you'd be doing some good and not contributing to the problem.

Or you could buy me a ladder so I can get off my high horse. ;-)
A few people suggested some cheaper methods of advertising:
msrelo: Maybe I don't have a full understanding of how the ad sales work but it seems like a single page insert is cost effective.

Wanderer: Alternative to the PI: I just called Seattle Weekly and got the following quotes: 1/2 page = $1471, 1/4 page = $732, 1/8 page = $389. Those rates are for a single week and there is ~10% drop for 4 weeks consecutive.
Wanderer takes it a step further and starts proposing fundraising methods and ad print subjects:
Wanderer: I personally would put in $200 toward a 1/4 page add the first week to get some attention and then follow it up with a 1/2 page add the next. I am relatively new to the scene, but I would trust synthetik and Tim to put together a well thought out and RATIONAL explanation of:
  • real estate fundamentals
  • where the current market stands relative to them
  • current trends locally
  • what the REI wants you to believe
  • Many, many, people will dismiss it as paranoid anyway, so it really needs to be conservative and not over the top.
    There are of course still questions of whether this would even be a valuable exercise:
    synthetik: If you were firmly plugged into the matrix like most people, wouldn't you simply dismiss the ad? Wouldn't people wonder what we all had to gain?

    Wanderer: It would be hard to convey motives in a 1/2 page article, so it probably isn't worth trying anyway. Anyone that is going to ask, "What do you have to gain from this?" probably can't answer the same question about the writers of the RE section. For me, there is value in just putting out good information where very little currently exists.
    Which brings me back to ad print and to Eleua's comment:
    If all of you are serious about this...

    It would probably be best to collect all the turbo-Bull quotes from late '05 early '06, and string them all together. Show just what REIC shills all these bulls have been.

    Then you ask if you would spend $500K on the wisdom of those Carnacks. If not, why not?

    Perhaps you can also include quotes from all the Wall Streeters back in the late 90s. Let the inquisitive reader draw his own conclusions.
    I think before anyone gets too serious bandying about large sums of money, we would need to come up with a simple way of getting people's attention. Printing a half-page essay about "fundamentals," "unprecedented run-ups," and "ARM resets" would be a waste of money. Very few people would read it, and of those that did, you would probably convince about 0.1%. I think Dilbert creator Scott Adams neatly sums up what is necessary in a situation like this:
    The challenge was that the bad ideas sounded terrific to the uninformed person. You couldn't kill these particular bad ideas with logic because the arguments against them would be too complicated. You had to go in through the back door.

    I suggested a few cleverly designed, hypnosis-inspired phrases that were the linguistic equivalent of Kung Fu. They were simple (that's my specialty), and once you heard these phrases, they made any competing ideas seem frankly stupid.
    I think that Shiller's home price graph is a good example of the kind of thing that Scott is talking about. So that's the challenge. Come up with a simple phrase, image, or series of phrases that make buying a home at the peak of the bubble "seem frankly stupid." If we can do that, then I think we can consider buying some ad-space.

    Saturday, October 14, 2006

    Goldilocks Has Analgesia

    This article from the Seattle Times this morning, Housing Bust? No, a cyclical correction, reminded me of a recent episode of Grey's Anatomy. A young girl believes she has superpowers because she feels no pain. If Goldilocks had Analgesia she could have easily gorged herself on the hottest of porridge without a second thought.

    "With all the dismal reports about the home real-estate market, don't lose track of something critically important: Mortgage interest rates have been falling quietly but steadily for weeks, and are now at their lowest level in half a year, barely a percentage point above 40-year lows."

    New mortgage applications are up sharply, the number of pending home sales is up, the national economy continues to expand moderately, and the rate of unemployment just declined again — to 4.6 percent. All of which begs the question: Just what kind of housing bust is this anyway? With gloom-and-doom purveyors forecasting imminent crashes in dozens of metropolitan areas, how could such key fundamentals as jobs, interest rates and even pending home sales simultaneously be trending in the opposite direction?

    Kohn sees no imminent bust or crash in housing at all. It is a "correction" that's under way — a cyclical rebalancing of a marketplace that got too hot for too long in some parts of the country, and is now heading back toward more "normal" conditions, where prices are more in line with what consumers can afford.

    Not all home sellers have fully grasped the altered realities in their markets — that they've got to reduce their asking prices if they truly want to sell — so the process is still unfolding. Re-priced houses, in turn, should stimulate greater numbers of potential buyers to get off the sidelines and make offers.

    The nationwide 4.3 percent increase in pending home-sales contracts, reported Oct. 2 by the National Association of Realtors, could be a sign that Kohn's prediction is already taking shape.

    Second, said Kohn, the housing correction — expressed through new home
    starts — "may be closer to (its) trough than to (its) peak."

    A final key factor, Kohn said: "Continuing growth in real incomes should underpin the demand for housing, and as home prices stop rising, help erode affordability constraints."

    Mike Moran, chief economist of Wall Street's Daiwa Securities America, minces no words: The financial press and TV news shows are overly dramatizing what is a normal and long-predicted cyclical rebalancing, and "portraying it as a catastrophe."

    "[Housing] is going through a correction that's badly needed," Moran said. "The key issue is whether it is orderly or disorderly." And all signs point to a continued orderly process, not a breakout bust or panic.

    Doug Duncan, chief economist of the Mortgage Bankers Association, points out that national housing-sales numbers are merely rolling back to 2003 levels — "and that was a record year."

    Serious sellers and buyers shouldn't be misled by predictions of imminent crashes, Duncan says. Not only do the doom reports ignore the positives out there in the marketplace — mortgage rates in particular — but "the rhetoric is just way overwrought."

    In this fable, will the Bears will eat Goldilocks in the end?

    (Keith R. Harney, Seattle Times, 10-14-2006)

    Friday, October 13, 2006

    NAR: Seattle Coming Up Roses!

    There haven't really been many interesting stories out there in the last few days that are Seattle-specific, so I guess now is a good time to post the NAR's Home Price Analysis for Seattle Region (pdf) I haven't bothered posting it yet because it's not really anything new or interesting, but rather the same rah-rah real estate fluff you've come to expect from the NAR. Here are some choice quotes.

    • Home prices, though high, are affordable when compared to those in California markets.
    • Because of the strong increase in home prices over the past two years, mortgage debt servicing costs have risen significantly. Nonethless, [sic] the debt service cost relative to household income stood at 23% — only a tad higher than the national average of 22%.
    • Local job growth has been strong. The three-year job growth of 3.5% easily tops the national pace. Gains have been particularly strong in 2006.
    • Job growth attracts additional potential homebuyers to the market and limits the number of "forced home sales" (as was the case in the early 1980s and 1990s). This suggests that any price decline will likely be short lived given the additional buyers ready to enter the market.
    Granted, none of these statements are necessarily false, but it's clear that they're being very careful which facts they choose, in order to paint the rosiest picture possible.
    • However, the biggest risk is the drastic slowdown in home sales activity that could result from further measurable increases in interest rates. Should the 30-year average fixed rate approach 8% (from its current 6.8%) as a result of too much monetary tightening by the Federal Reserve, home prices in the region could well decline.
    Newsflash guys, a slowdown in home sales activity is already under way. But hey, at least we're making a little bit of progress toward the truth. If you recall, a year ago they were saying that price declines would occur "only under extreme unlikely scenarios" such as "mortgage rates rising to 10.5% in combination with 3,000 job losses could lead to a price decline."
    • A more relevant measure [than home prices] for assessing the risk of a home price bubble is the median mortgage servicing cost relative to the median income. This ratio is at near the local historical average. It implies no widespread financial overstretching to purchase a home in the region.
    What they conveniently fail to mention here is that this is only possible because of the wide variety of risky, "exotic" loans that are now available.
    • Only 3% of new loans had a loan-to-value ratio of greater than 90%. Therefore, prices would have to decline by more than 10% to have a measurable impact on foreclosure rates.
    That number sounds really low to me... too unbelievably low. I have a feeling that when they say "of new loans," they're counting 80/20 loan combinations as two individual loans that are neither one for more than 90% of the value of the home that was purchased. How convenient.

    Oh, and if the "Additional Discussion Points" on page 8 sound familiar, that is because it is the exact same drivel that they included in last year's PDF on page 7.

    All in all, what we have here is another disappointing showing from the NAR. If they're going to have any chance of convincing a thinking person of a strong, resilient Seattle housing market, they're going to have to come up with something more than this steaming pile of tired catchphrases and misleading statistics.

    (National Association of Realtors®, 07.2006)

    Wednesday, October 11, 2006

    Let's Talk Inventory

    With the number of homes for sale rapidly increasing the last few months, and the pivotal month of October now nearly halfway over, I think it is a good time to take somewhat of an in-depth look at inventory. I refer to October as "pivotal" because as far back as I have reliable data (2000), inventory has always decreased from September to October. If inventory increases this month, I believe we will have truly turned a corner.

    Some of the local papers in the last few months have claimed that the Seattle area is becoming a "buyer's market." Personally, I think that's malarkey. I'm a potential buyer, and there's still no way I'd touch this market with a ten foot pole. It has been said by some commenters on this blog that in order to see any significant slowdown in price appreciation and a return to a "balanced market," the Seattle area would need to experience a two-to-three-fold increase in homes for sale. Let's take a look at some historical inventory data to see how that claim holds up, and to explore the following questions: What does a true buyer's market look like for the Seattle area? How soon will we at least experience a balanced market?

    Unfortunately, I have been unable to obtain solid MLS data on inventory & sales any further back than the year 2000 (if anyone out there can help me on that, I'd love to hear from you). However, I was able to locate a number of data points back through 1993 via the Seattle Times archives. All of their reports from that time period give numbers from the "Puget Sound Multiple Listing Service," which includes all of King, Snohomish, and "North Pierce" counties. When I refer to record highs below, the time period under consideration is from 1993 to the present. For the purposes of comparing current (post-2000) data to these historical figures, I'll be assuming that 75% of listings and sales in Pierce county take place in "North Pierce." With that introduction, here are some of the interesting data points I found.

    Record High Inventory (pre-2000)

    As well as I can tell, the record high inventory in the two-and-a-half county region was 17,292 homes in July 1996. (The Seattle P-I claims that the summer of 1994 had 23,000 homes on the market, but that figure is not corroborated by the Times—which put the number at 14,000-15,000,—and is so far outside of every other number I can locate, that I believe it to be a typo.) That month saw 3,315 pending sales, making the Months of Supply (MOS) 5.22, while YOY appreciation stood at 5.1%. For the most part, it looks like that was a fairly "balanced" market.

    Record High Inventory (post-2000)

    The all-time (since 1993) record high inventory appears to have been in the summer of 2003, just as housing mania was really taking hold in Seattle. Specifically, June 2003 had 20,807 homes for sale in King, Snohomish, and North Pierce counties. While the number of homes on the market was quite high, so was the number of pending sales: 6,396. The MOS for June stood at 3.25, and appreciation hovered around 3-5%. I'd call that a seller-friendly market.

    Record High Months of Supply & Record Low Pending Sales

    Going back a bit further we find that late 1994 to early 1995 had an even more balanced market than 1996, possibly even tipping slightly in the buyers' favor. MOS exceeded 6.0 from October '94 through March '95, while YOY appreciation was 3-4%. The record high MOS was 6.89 in December 1994, a month that also saw the record low pending sales of just 1,726.

    Current Situation

    So where do we stand currently? Last month there were 19,173 properties for sale in King, Snohomish, and North Pierce counties. Note that this is very near to the record high inventory of 2003, while the 5,530 pending sales are slightly fewer than June 2003. September's MOS comes in at 3.47. A year ago, the 2.5-county region had an MOS of just 2.13.

    The Future?

    If September's YOY trends (+36% listings, -17% pending sales) carry through to 2007, next September we will be looking at approximately 25,994 properties for sale, 4,595 pending sales, and 5.67 MOS. Of course, no one really knows whether the current trends will continue. Looking at the trend of the last few months' YOY numbers, it would be fairly easy to make the case that inventory will increase even faster, while pending sales decline faster.

    YOY % Change
    King County SFH only

    So does inventory need to double for Seattle to be a balanced market? No. Even if sales held steady where they are (not likely), we would only need approximately 70% more inventory to reach a balanced market. Personally, I think we are likely to see the elusive 6.0 MOS balanced market as early as next spring, and no later than next winter. Will it stop there? What will happen if the greater Seattle area sees 8.0, 9.0, 10.0 or even higher MOS? I think it's possible, and based on the historical data, I think it could push "appreciation" into negative territory.

    Your thoughts, corrections, and analysis are welcomed.

    Tuesday, October 10, 2006


    I've never taken part in a "blog war" before and I don't really know what one looks like, but after witnessing the events over the past few days I'd say we're in the middle of one.

    You might have seen Rain City Guide's recent post by Galen Ward, "There will never be a real estate bubble" and the comments that followed.

    It appears that Galen posted the above article simply as a joke about the heat over Susan Ryan's post "Just Say No to Bubble Talk" post as well as others over on the Seattle PI-sponsored Seattle Real Estate Professionals blog.

    Side Note: Notice how Susan Ryan's latest posts do not allow comments and contain very long images that scream "Get thee behind me, and much further down the page ye satanic bubblehead posts!"

    Rain City's Galen e-mailed me, wanting to know why his post had irritated me so. I responded that I felt the blog appeared to be a REIC cheerleading forum (seems like a reasonable assessment if you take a gander at their authorized bloggers) My apologies to Galen for misinterpreting his post as potentially malicious.

    Here is part of his response:

    "My take on our blog is this: we have 2 tech people (myself and Robbie) who rarely talk about real estate specifics, a lawyer who talks about lawyer crap, Dustin who has posted one negative story in his life, and Ardell and SeattleEric."
    I accept this and move on until this evening when I find this puff piece posted on Rain City. Ardell writes a completely benign article about the shocking truth of banks owning a large portion of our assets (unless you happen to be wealthy).

    I noticed this quote right away:
    "I was perusing The Tim's blog while writing something on my blog earlier today, and ran into the comments regarding King County median income and median home prices, again. I never seem to draw the same conclusions as other people."
    She fails to link Tim's blog but does a nice job of linking her blog post (which takes aim at Tim's "In A Nutshell" post, which she apparently believes is poorly written and hard to understand) as a "oh by the way".

    My point is this: If the "Rain City Guide" is not a Real Estate Cheerleading blog, then why is Ms. Ardell DellaLoggia allowed to use it as a pulpit?

    When I first moved to Seattle, the Rain City Guide was the first blog I came across. "Great resource!" I thought. I'm just a tad upset because I know how many hits this site gets.

    How many people with homeowner envy are reading these articles? How many will be pushed into Greater Fooldom after reading it? Would you be interested in hiring Ardell as your realtor when you are ready to enter the housing market?

    Me, not so much.

    Note: If you do choose to post on one of the above mentioned blogs, please be civil and think your arguments through all the way. I realize it can be difficult, however it won't go far in helping persuade potential home buyers from understanding our position. Thanks ;)

    (Ardell DellaLoggia, Rain City Guide, 10-10-2006)
    (Galen Ward, Rain City Guide, 10-09-2006)
    (Susan Ryan, Seattle Real Estate Professionals, 10-08-2006)

    The Bubble Isn't Bursting Here!

    Yesterday afternoon I received the following friendly mass e-mail from our resident representative and real estate expert, Jennifer Fisser.

    This PDF was attached to the e-mail.

    Hi Chad:

    The bubble isn't bursting here!

    Please see this breakdown of renting vs owning.

    I thought you might find it of value.

    Hope things are well.



    Jennifer Fisser
    ZipRealty, Inc.
    Licensed in California
    Licensed in Washington
    Toll Free: 1.800 CALL ZIP x4824
    Cell: 206.890.0131
    Fax: 206.508.0848
    My Profile:
    Pick any complete sentence out of that PDF, google it, and you'll see that this article is being circulated all over the place.

    Can you smell the desperation?
    "Nearly a full third of households are still renting...but if you are one of them, you could be paying a hefty price. Additionally, the children of the baby boomer generation are close to or at the home buying age, but these "echo boomers" could mistakenly decide to put off the purchase of a home because of all the noise about a "bubble" in home prices."
    Another Darren Meade quote, from his website
    "No one should ever have to lose there [sic] home and live on the street, especially when you have already spent half your life building your career"
    Irony at its finest.

    (Darren Meade, American Chronicle, 08.19.2006)

    Monday, October 09, 2006

    In a Nutshell

    True story.

    A friend of mine was renting a decent apartment in the Fremont / Greenlake area in early 1994 for $850 per month.

    In late 1994 he bought a decent, mid-range house in the same area for $150,000. Over the next 12 years, he didn't do any major remodels, just regular maintenance and a few minor projects here and there.

    He just sold the house... for over $500,000. That's 240%+ appreciation in 12 years, an average of about 10.75% per year.

    Now he's back to renting a similar quality apartment to what he had in 1994, in the same general area. His monthly rent is $1,150—35% higher than in 1994.

    I think that about sums up why I think there is something seriously out of whack with home prices in Seattle.

    Hey! Look Over Here!

    Happy Monday.

    Feel free to enjoy these two posts, complements of the Seattle PI.

    Opportunity is Knocking at Your Next Front Door

    "The unfortunate reality here is that good news seems to get buried in the newspapers and it's the negative headlines that get all the attention. What we're trying to do [with the ad] is motivate buyers with the facts. Mortgage interest rates have come down, there's an ample supply of inventory and homes are selling."
    New condos: Which one's the tallest of all?
    "Developer R.C. Hedreen Co. announced Wednesday that it was adding three floors, pending city approval, to Olive 8 -- a hotel-condo building under construction at Eighth Avenue and Olive Way. That would bring the tower to 39 stories, 455 feet above street level, and make it the tallest residential tower in Seattle when it opens in the summer of 2008.

    The three new floors would mean the hotel-condominium project would have to meet city requirements to use environmentally sustainable construction and contribute toward affordable housing."
    In sales we call this move "hey, look over here!" (distract the buyer so they won't think about the important questions, such as "how much will those condos be worth next year?")

    1(Marlow Harris, Seattle Real Estate Professionals Blog, 10.08.2006)
    2(Aubrey Cohen, Seattle P-I, 10.09.2006)

    Nightmare Renting Scenarios

    I'll freely admit it - renting is suck. This evening I opened my door to take out the trash and my 16 pound psychotic Pug broke loose and ran down the hall to meet my new neighbor, who was headed for the elevator.

    The man, easily in his early 50's, backed into the wall while shrieking like the 10 year old girl in "Little Miss Sunshine". I quickly gathered up the dog and apologized profusely - aware that there are a few select "special" people who can be afraid of even the tiniest of pooches. Later my wife and I were treated with a visit from building security. Yeah, tasty.

    I've been noticing quite a few condos for rent on craigslist as of late, and at very attractive prices. I believe that most of these units are investor owned.

    Before you decide to rent one of these units, invest a little time researching the financial condition of the owner. You could save yourself thousands of dollars and years of headache.

    In San Diego in 2004, my wife and I rented a small house near downtown from a young mid 30's couple. The house zillowed out at $550,000 and had been fully renovated, with stainless steel appliances, hot tub and a large, beautifully landscaped courtyard. My wife had to have it, and at only $1595/mo it seemed like a real keeper.

    The landlords were giddy with excitement, having just purchased another home in the trendy nearby neighborhood Hillcrest, using the equity from their new rental. They, the new "Lumpenvestoriat"; passive-income loving landlords and us, puny serfs, only too happy to be their first tenants.

    The two barely cleared $50K each working as managers at chic national establishments such as (yes, I'm serious); Smart & Final and Alamo Car Rental, yet now owned over $1.3M in Real Estate.

    "Don't worry, someday you'll be where we are now. All it takes is a little hard work and a few years to build equity." they said.

    We stayed for a year and then decided to rent a condo in Little Italy (downtown San Diego). We didn't get our $3200 deposit back, so we sued the smug retail managers in small claims court. They countered, saying we had destroyed the house; even producing photos taken during the renovation and passed them off as current! The judge believed them and we lost another $2200. We then appealed, won the case and were awarded our entire deposit plus all attorney fees.

    The entire process took nearly two years and we are still trying to collect from these mental giants. The checks they send us are coming less and less frequently and in much smaller amounts. My wife wanted to bail on the whole thing, but I have this pesky issue with injustice and hypocrisy.

    Their deed records indicate some impressive loans and it's clear they are in deep financial trouble. An attempt in 2005 to sell their rental failed, and now both of their properties have already lost over $200K in equity, combined. I see BK in their near future.

    The Little Italy condo we rented was a 2 bedroom with nice views of the city and harbor. At $1800 per month it also seemed like a great bargain, zillowing out at around $650,000.

    The 22 year old kid we leased it from was also a first time landlord and homeowner and occupying the unit. "Where will you live?" I asked. "Oh, I'm going to live at my Mom's house in Chula Vista." Odd. If you own this great place downtown, why move back in with moms?

    I still didn't have a clear picture of what was going on.

    It turned out that the neophyte landlord was also a fledgling real estate agent and purchased the property with a friend. They bought it in 2004 for $440K and were probably expecting to net a tidy $100-150K after renting to us for the year.

    My wife and I spent the New Year in Japan and upon our return were presented with a $200 rent increase. It then occurred to me that this was all part of his master plan. We had been used!

    Luckily we had already made plans to move to Seattle so we weren't affected.

    Since March 15 of 2006 he's had the property on and off the MLS twice and it's now listed on craigslist for $515,000. The problem is that there are many other identical condos 5 to 10 stories higher up going for $75-100K less. In addition, there are now 10 units in the building in preforeclosure or foreclosure. A 14th floor unit was just listed this weekend for $320,000! The $1M to $1.4M 17th floor penthouses are now going for $700-1.1M - and still aren't selling.

    I'm posting this story as a warning to renters who may be lured into a "good deal" while specuvestors continue to play the market here in Seattle. You may have some of the issues described above - or, in the case of foreclosure, you may actually have to vacate.

    Having said all that, I'm still not willing to destroy my financial future by purchasing now just to avoid a few temporary headaches. The grass is always greener (quite literally) on the other side; there are just as many headaches with owning, but at least you have a bit more control of your density.

    For what it's worth, my advice is to stay away from investor rentals. If you must rent from these types, write your own lease agreement and force them to sign a two or three year lease that gives you the option to break your lease after 1 year (with a small financial penalty; say, one months' rent) at any time. That way you may be able to take advantage of a potential buying situation during your lease. Build in 5-7% yearly rent increases to make them feel warm and fuzzy. If they don't take the bait, just move on to the next future retail chain manager.

    Saturday, October 07, 2006

    "This doesn't mean that a 'bubble' has burst"

    Ms. Rhodes follows up yesterday's admission that the Seattle market is actually (gasp) slowing, with a softened article full of reassurances that the market from here will surely be "steady." She kicks off the article with a paragraph that just cracks me up.

    At the beginning of the year, local housing experts predicted the Puget Sound area's super-heated real-estate market would slow. What they couldn't predict was exactly when or how much.

    It's now, and the drop-off has been marked.
    Hmm, that's interesting. Does anyone here recall any articles by Ms. Rhodes about the predictions of these "local housing experts"? Let's see, what was Ms. Rhodes saying about the housing market earlier this year?
    It's also keeping King County prices climbing, putting to rest any notion that ours is a "bubble market" where prices will stall or even fall.
    - Elizabeth Rhodes, 04.30.2006
    Oh yes, that's right... Ours is not a market "where prices will stall." It seems that she's singing a slightly different tune now.
    And, after rising for seven consecutive months, King County's median single-family home price hasn't risen since June. In fact it declined $10,000 from August to September, to $425,000. Month-to-month declines are not unusual — it happened four times in 2005 — but four months without an increase is a signal of a trend.

    Plus, inventory is building and homes are selling more slowly.
    Granted, it's only a slightly different tune. There's still a huge helping of everything is fine, nothing is ruined-style reporting.
    "This doesn't mean that a 'bubble' has burst and property values are declining," said Redmond appraiser Alan Pope. "It means we're moving to a more-normal market where buyers have more choices. If buyers have more choices, they're less likely to pay in excess of the list price to obtain a property."

    Bill Riss, Coldwell Banker Bain's CEO, said we are starting to see signs of a slower market. A real-estate veteran who has been through many housing cycles, Riss says he's not upset by the cooling because "there's nothing to push it dramatically down."

    "All the mechanics are in place to have a steady market," he said.

    Those mechanics include strong local job growth, which feeds housing demand, and moderating mortgage rates.
    There's nothing to push prices down? What about the turning of mass psychology against housing? What about the fact that the median home price in the county comes in at about seven times the median household income? What about the rapidly increasing inventory? What about the California equity river drying up? What about boatloads of resetting ARMs?

    Yeah, we're all set for "a steady market."
    King County houses and condominiums combined have appreciated 8.6 percent in the past year, below the regional average.

    In the central Puget Sound region, Pierce County reported the highest annual price increase — 12.9 percent — followed by Snohomish County's 10.4 percent. Kitsap County's annual appreciation came in at less than 1 percent.
    While it's true that Kitsap's "appreciation" of -0.33% (yes that's negative zero-point-three-three percent) is "less than 1 percent" that kind of word-twisting makes it seem as though Ms. Rhodes just can't quite bring herself to admit in print the fact that home prices in a nearby county have actually decreased year-over-year.
    Pauling says the slowdown is a relief for buyers.

    "We have more inventory than we've had in the past, so buyers can pursue the home that meets their needs without having to make a decision based on fear that someone else is going to get their house," Pauling said. "They can actually make a thoughtful decision."

    Compared with a year earlier, September buyers had 32 percent more properties to choose from in King County — some 9,890 properties compared with 7,496 in September 2005.
    Oh, I get it. So now suddenly we're on the side of the buyers. That's cute. After months and months and months of "rah-rah double-digit appreciation" reporting, I'm finding the sudden concern for buyers hard to swallow.

    At leaset she's finally admitting that the market has slowed. She's only about five months too late.

    (Elizabeth Rhodes, Seattle Times, 10.07.2006)