Seattle Bubble has moved! Redirecting...

You should be automatically redirected. If not, visit http://seattlebubble.com/blog/and update your bookmarks.

Off-topic comment? Interesting link?
Head over to the forums, or click here for open threads.

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.

Sources:
(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).

31 comments:

flopfolder said...

Great post The Tim,

It would be really informative to see your affordability index over a longer time frame. This would enable one to get a better sense of the baseline affordability for a given area.

Unfortunately, I don't know if the necessary data is easily accessible.

As it stands now, we don't a good idea of what 92% afforability or 64% affordability means. Obviously the significant drop means something and probably something bad. If we knew that 75% affordabilty, for example, was the historic norm in a given area, one would be able to say a lot more confidently just how overpriced a given area is.

The Tim said...

Ask and ye shall receive:

Q1.93 - 121.0
Q2.93 - 119.1
Q3.93 - 125.1
Q4.93 - 126.7
Q1.94 - 122.0
Q2.94 - 108.7
Q3.94 - 105.8
Q4.94 - 102.5
Q1.95 - 106.8
Q2.95 - 114.4
Q3.95 - 117.5
Q4.95 - 121.3
Q1.96 - 123.3
Q2.96 - 112.0
Q3.96 - 106.7
Q4.96 - 116.4
Q1.97 - 114.8
Q2.97 - 108.9
Q3.97 - 110.8
Q4.97 - 112.7
Q1.98 - 112.2
Q2.98 - 108.3
Q3.98 - 109.6
Q4.98 - 111.7
Q1.99 - 108.1
Q2.99 - 103.4
Q3.99 - 94.0
Q4.99 - 95.0
Q1.00 - 89.6
Q2.00 - 85.9
Q3.00 - 90.4
Q4.00 - 94.1

1993 - 2000 Average: 109.3

For reference, the WCRER Affordability Index averages to 109.9 for 1994-2000.

And of course, I've added this to the Seattle Bubble Spreadsheet. It's on the first page (NWMLS Data), on the far right.

SDtoSEA said...

Excellent analysis Tim.

Very interesting to see similiar drops in affordability in both SD and Seattle.

flopfolder said...

Well then, if 109 is the baseline affordability for the area, then in today's wage/interest rate environment, home prices need to crash about 40%.

That is some serious damage.

This would bring home prices down to 4.3 times the median income, which is still higher than the national historical average. That higher than average number would be supported by current historically low interest rates.

biliruben said...

Nice job, Tim. You rock.

Mikhail said...

Another interesting data point to compare is the percentage of "exotic" loans between regions. I gather that well over 70% of all mortgages in San Diego were of the exotic variety in 2005. The figures for the Puget Sound were less than 25%, right?

Also, what about construction rates? Has King County been much more restrictive in allowing new construction than the Puget Sound? If so, then maybe that would mean the chances of an inventory glut in the Puget Sound are far less.

Lake Hills Renter said...

Salaries increased only 11% in 5 years. That's pathetic. I assume that's not adjusted for inflation either?

dalas said...

We should just hire the_tim, mr. SPU, EE major to do all the market studies. Obviously he's well ahead of the curve and experts.

How about looking at it this way:

San Diego:
Median Closed SFH: $575,000
Median Household Income: $56,335

King:
Median Closed SFH: $435,000
Median Household Income*: $59,500

San Diego's medium income is 94.68% of Seattle's, and house price is 132.18% higher.

How about that. Try and factor that in using your obvious superior and keen observational skills than everyone else.

Kaleetan said...

Thanks for the comparison between San Deigo and Seattle Tim.

So what does this mean then?

"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."

San Deigo Prices are falling and Seattles have not yet.

Does this mean that Seattle is a better place to live?

Do we have less land available to develop?

Are there more investment properties in Southern Cal.?

Or are we just lagging 6 months and price drops will occur.

It will be interesting to see how it plays out.

We should see some real numbers next week with the existing home sales report. With the drop in interest rates they might be up. I saw new home construction was up last week.

Lake Hills Renter said...

Try and factor that in using your obvious superior and keen observational skills than everyone else.

Obvious superior and keen grammar skills than everyone else.

biliruben said...

The problem is, Dalas, most of the so called experts are bought and paid for by those with a strong interest in RE.

The objective economists I read pretty much agree with this blog.

Feel free to bring your own unbiased opinions to the table, however.

The main reason you can't directly compare San Diego's housing to here is the same reason you can't compare Hawaii to Buffalo. It rains 8 months out of 12 here, in case you haven't looked out your window lately.

So the best you can do is compare each city to itself, back when affordability was sane, and see if the madness that caused such a horrendous state of affairs, where people with good jobs, 20% down and decent incomes are relegated to not being able to buy in the city they love without making decisions that risk destroying their economic future.

I don't see how anyone that looks at the housing situation in the city and this country can be so blind as to not see the absurdity that is the current housing market.

I'm a homeowner, and even I can look peer through the stultifying mists of magical equity-fog and see the center cannot hold.

Joe Consumer said...

Tim:

I still think a major difference is the necessity to sell. In San Diego, I'm guessing (I would love to find data on it) that with all the speculators stuck holding the bag in a market falling fast, you see the effect similar (but opposite) of a short squeeze. Lots of inventory dumped on the market because there is no choice.

Here, as anecdotes from at least one of your commenter/contributers show, sellers are choosing to take their homes off the market. Clearly, they don't need to sell, which keeps inflated inventory from leading to a dramatic price drop.

Even for those buyers using 'exotic' loans with adjustable ARMs, unless they went ahead and pulled out the equity they had via a HELOC, these borrowers can simply refinance at a fixed rate, or another ARM. The effect of that would be stability in the market, since their homes wouldn't need to be sold.

However, since prices are set on the margin, do you believe that there are enough borrowers that are upside down after 2-5 years of very good appreciation to make a significant impact to inventory levels? Not just an increase of inventory, but an increase large enough to result in the 60%+ drop that Eleua is predicting?

I think the key is the speculators. Can someone find data on that?

The Tim said...

dalas,

Congratulations, you have shown that San Diego is less affordable than King. A true, but entirely irrelevant point.

I assume that you are resorting to petty insults because you have no relevant, fact-based arguments to bring to the table.

The Tim said...

Lake Hills Renter,

Correct, those income figures are not adjusted for inflation, but are rather real dollars for that time period.

The Tim said...

"Joe,"

As I said yesterday, I would absolutely love to discuss the amount of speculation / investment in the Seattle area. Unfortunately, the only data I have seen relates only to "flipping," and (as I explained last month) really doesn't give a remotely complete picture of the total investment scenario.

seattle long term owner said...

actually I don't think it's just speculators that's bringing down the SD market

Think about this:

2002 you bought a house coz you had to... stretched your budget to make ends meet

2005 you find out you made more equity in 3 years tha you did working your 9-5 job and it's tax free...

2006 you find out that equity is at risk and you could easily lose 300K if you don't sell now... actually your house already lost 50k in 3 mos... you see the gravy train going away...

what do you do? watch as that equity dries up or try to cash in and hold real paper between your fingers...

It's about greed... greed will bring down this bubble...

I'm sure those who pulled out of the market did so because their RE friends advised them to... (hmmmm did those same friends have 2 houses they are trying to sell and want less competition)

my 2 cents

emailers2 said...

Prices are moving down in Western Washington according to:

Northwest Multiple Listing Service
September, 2006
Summary Report
Active Listings Report - Residential
Area Statistics Report for the Month of September

Sorry I can not find the link to this pdf that I downloaded on 10-4-06.

Island and Whatcom counties show YOY price declines.

If anybody has the link please post it so all can check it out.

My theory is that the areas farther from the MSA will show price declines first.

Peckhammer said...

I don't see how anyone that looks at the housing situation in the city and this country can be so blind as to not see the absurdity that is the current housing market.

I think things look just fine in Metrounatural. Take this announcement in Thursday' Seattle Times:

A Portland developer and hotel-industry veteran from the Northeast announced intentions Wednesday to build a 23-story hotel and condominium called "1" at Second Avenue and Pine Street.

Condo units will sell for $700,000 and up, with the largest of seven penthouses going for as much as $10 million, said Paul Brenneke, president of Avalon Holdings.

mydquin said...

dalas, you need to consider the interest rate differential.

Merger Dog said...

Let's go along with the Seattle is a worse place to live than San Diego and therefore its home price shouldn't appreciate as much argument. But Florida and Arizona, which have harsher weather than San Diego, have both appreciated much more so than Seattle has in comparison.

As far as affordability goes, the rich gets richer and so on. Isn't it safe to assume that affordability will continue to trend down in the long run?

flopfolder said...

As far as affordability goes, the rich gets richer and so on. Isn't it safe to assume that affordability will continue to trend down in the long run?

If this is true, then eventually all but the richest people will be able to afford homes. Are they just going to swap homes amongst themselves and rent to all us at negative cash flow?

Come on man, think a little.

While affordability can certainly trend up or down over a given stretch of time, it is not going to change drastically from one generation to another without some paradigm shift in the economy. The only craziness we have seen in this economy is loose lending standards and cheap money.

If the affordability trends don't start reverting back to a historic norm, good luck trying to sell your house, ever. Who is going to buy it?

In a normal market, first-time homebuyers make up about 1/3 of the market. These are the people making median (or less) salaries. If they can't afford a house, how will any current homeowner trade-up?

Up until recently, the answer to this question had been speculator purchases and exotic loans. Well, one appreciation dries up, the speculators become scarce and those stuck in exotic loans who have trouble making payments due to rate resets, etc just lost their ability to refinance or sell.

All this will create a lock-up of the real estate market. First-time buyers can't get in because prices are too high. Current homeowners can't leave because they can't find anyone to but their current homes.

Eventually, the lock up will be fixed by price depreciation that results when current homeownwers become forced to move and thus become motivated to sell.

It isn't rocket science. It is just a return to fundamentals. No one knows the time scale over which this will occur. It very well could take years. Remember Greenspan's irrational exuberance comment about tech stocks? That was made years before the crash and only recently have stock prices returned to their historical values, i.e. a price/earnings ratio of about 15.

LARenter said...

To the person who asked, "since San Diego prices are falling and Seattle prices are not falling (as much - yet), is it timing or is Seattle 'special'?"

I moved from Seattle to S CA in 2003 - directly into a California-bubble-town-at-the-height-of-the-real-estate-mania. I informed my friends in Seattle about what was going on down here - they had no clue and were pretty disinterested since the housing market was tame up in the NW in 2003.

At one point in 2003 in the beach town I live in there were 6 resedential properties of any kind on the market. There were ZERO for sale signs in this town (I had never seen this anywhere in my life). The few real estate ads you could find specified that a potential buyer must submit an approved offer in order to even have the chance to view the interior of a property and qualify to enter a bidding war with other select approved potential buyers. Again, at the time circa 2003, telling friends up in Seattle about this fell on deaf ears...

Flash forward to 2006. In this same S CA beach town, there are for sale signs in front of every building, and multiple open house signs crowding almost every corner.

While there were 6 total properties for sale in the town at one point in 2003 - there are 4 properties for sale IN MY BUILDING ALONE in 2006. Three of which have been for sale since JANUARY of 2006 - NOW 10 MONTHS ON MARKET AN NO BUYERS IN SIGHT. The realtors seem to have given up since the weekly open houses have been abandoned (I used to see them sitting in the lobby, waiting hour after hour, reading novels.). Still the sellers have not budged on asking price... we are only at the first phase of this thing, the tsunami is moving toward the coast...

LARenter said...

...Let's agree to meet one year from now and you can tell me how special and metronatural $eattle is then.

dalas said...

Wish i have a nickle for everytime that is said in similar blogs like this.

This blog has been around for more than a year...I guess you can say the same thing next year, too.

LARenter said...

What part don't you understand? There are bubble blogs that are older than one year old... I visited housing bubble related sites in 2003... irrevelant.

We are seeing the downturn starting here in S CA - it is acually happening (The first phase: inventory increases, REIC layoffs, foreclosure increases...). I am observing this with my own eyes in a "special" (it can't happen here) town.

Seattle mania started later - bubble pops later.

If you doubt that this is inevitable, hop on a plane or jump in your car and visit some early bubble towns to see for yourself... I suggest walking around downtown San Diego. It is undeniably a "special" place - see for yourself the enormity of the popping bubble (vacant new condos with no buyers as far as the eye can see) - Seattle too will have its day.

SeattleMoose said...

dalas = ostrich=FB=RE Agent=Flipper=Troll

Do not feed....

synthetik said...

For a place as connected as See-@-tle, you'd figure the metronaturalists would bother to pick up a newspaper or read stuff on the internet or have any family or friends living in Boston, San Diego, Vancouver, Sacramento, Hawaii, Phoenix, Las Vegas, Orlando, Ft. Lauderdale, San Francisco, Modesto, San Jose, Los Angeles, Washington DC, Palm Desert, Chicago, Jacksonville, New Hampshire, New Jersey, Asheville, Charleston, Tampa, Miami, Atlanta, Manhattan, Boise, Denver... er, Austrailia, UK, Europe, Shanghai....

Stocks have reached what looks like a permanently high plateau.' - Irving Fisher (1929)

dalas said...

It ain't hard to see a downturn in the slow season.

Funny how I came on this blog believing there is a bubble, then somehow you guys convinced me otherwise. Maybe it's because none of you know WTF you're talking about...

Bubble in 2003? Point proven. Personally I think there has been a bubble since Mayflower arrived.

Matthew said...

Dalas,

Until the bubble bursts, everyone is speculating. Some are speculating the market will have a soft landing, some a hard landing, some think the housing market will forever continue up. That's the point of this blog, for people who think the market is overpriced, to share ideas. If you don't like it, don't post.

I wouldn't go to a "I love Britney Spears" blog and talk about how much Britney sucks. Use some common sense.

If you are going to make a rational argument for why there is no bubble, then post some rational data instead of the same old tired RE rhetoric that is spat forth daily in the Seattle Times. Otherwise you are just using up my oxygen.

synthetik said...

"dalas",

riddle me this... why do you think Seattle will be different from EVERY other bubble market in the country that are now experiencing big haircuts?

What is unique about this bubble market?

What happened in early April 2000? hvvm? A bit of irrational exuberance, much like what we are seeing today? no?

And then what happened in early Sept 2001? Maybe a few boeing-type aircraft go explodey?

What area of the country might have had a double whaammy from these two events?

Hmm... now think - I know it's difficult, but I'm confident that you'll come up with the right answer.

This is why Seattle was "late to the party". If you look at the numbers, we didn't start climbing quickly until 12-18 months after most bubble markets.

It stands to reason that we'd be a bit late getting out of the game, since RE tracks similar to a sine wave; and we're right on track.

DaveVW said...

Great posts. Some of the comparison between areas is anecdotal, and a function of more variables than can be accurately modeled. However, as a 20 veteran of the San Diego area markets, and owner of a RE and Mortgage Brokerage, I can describe a phenomena that is now occurring that is somewhat of a repeat of the 90's. That is the timing of cycle and the magnitude of downturn. The final price depreciation of 20% is likely to be the same. The market here seems to have peaked about mid 2005. Since then, prices have come down about 10% across the board. They are likely headed down another 8-10% over the next 18 months, assuming flat to slightly varying interest rates. At this time, their is a two-tiered market that allows us to foresee that market trend. That is, 10-20% of sellers are in a distressed mode (slightly higher for condos, a little less for detached). Of the 80% of sellers that reperesent "normal" sellers" they are still hanging on to 6-12 month old prices, and as a result are of course not selling. The 10-20% of sellers that are sucessful are the distressed sales which are comprised of desparate sellers, foreclosures in process, designated short sales, and lender REO's. These sellers have ackowledged the 10% price from peak reductions, and are willing and able to discount their rpices another 5-10% to ensure a sale. They are leading the way down to the bottom which is likely to be 20% from the peak, much as it was in 1991-1995. Considering that the remaining leg down for the market as a whole will take another 12-18 months, before buyers find favor in coming back in a meaningful way, that would take us out almost 4 years from peak to trough, and the move up will likely follow the historic norm of 2-4 years giving us a very traditional So. Cal real estate cycle of 7-8 years. The smart buys are likely to be made over the next 12 months. Once the market as a whole comes down, the prices should firm and the best "assets" will have been acquired. The unknown is of course alwasys interest rates. But, with an election coming up one would suspect downward pressure. So, the whole cycle repeats itself with no great mystery or "paradigm shift". One only needs to ask a buyer the standard questions, what, where, how much, do I want to buy a home. As a lender with many flexible loan options available these days, the question to buyers is not, Are prices going down further and can we get you qualified?, the question is, Do you want to make the payments? If the answer is yes, then now is the time to start looking for deals again.