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 Foreclosure.com, 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.
11 comments:
Interesting analysis. 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.
Love to hear your take on that one.
What about the affordability factor? Back at the peak, affordability in SD was 11%. It has never been that low here.
what people miss when they cite job growth is they don't tell us what kind of jobs they are and if they can afford to buy a home. that's the problem, affordability. creating jobs is good, but doesn't help the market if homes are too expensive.
GDP growth isn't very helpful unless it translate into wage growth.
Thanks for the feedback and the additional questions. I am working on "A California Comparison, Part 2" to post in the next few days based on the affordibility and "prices haven't gone up as much" issues.
"prices haven't gone up as much" issues.
that's the kicker. if they are right, the longer prices rise the less their position holds. the gap would be closing making SEA less appealing.
Tim,
Thanks for roping this conversation into local conditions...
I'm going to spend some time this evening thinking about the issues you've raised because I think they are interesting.
I definitely am in line with you that Seattle's market could see a drop in the near future based on the recent run-up in local prices. However, I'm obviously not convinced that this drop will lead to a catastrophic popping, but a drop is definitely possible (if not probable).
As you are thinking about affordability issues, keep in mind that the median price home is (almost by definition) not the appropriate home for the first-time home buyer.
For example, when I first graduated from college, I bought my first pair of work shoes from Mervyns. I could have gone upscale to where the "median" prices shoes are sold (maybe Macy's?), but I didn't want to blow my wardrobe budget on shoes, so I stuck with some boring work shoes that did the job. Nowadays, I feel comfortable spending a little more money on shoes and probably bought something much closer to the "median" price work shoe.
The obvious parallel is that if we are looking at new jobs, then we shouldn't expect those new jobs to fund "median" houses. The "median" house is for people who got recent raises (now that they are managing the new hires!) and have been smart enough to save up some equity from a purchase of a "starter" home.
Obviously, if we wanted to see the affordability of homes for people who are just entering the work force, we'd be looking at the homes that are close to the bottom 10th percentile of listings. If someone fresh out of college can afford one of those, then they have a chance to enter the housing market. If not, then we are definitely in trouble.
In my past life as an engineer, I remember when we hired two new people around the same time a few years back. One person bought a small one-bedroom condo while the other person decided to rent until they could afford a home (i.e. they didn't want to live in a condo). The first person recently sold their condo and bought a home, while the second person is still renting. I don't give this story to prove what will happen in the future, but rather to illustrate that if we raise the expectations of people just entering the housing market (i.e. "you should be able to afford the median price home"), then we are probably expecting too much out of them and setting them up for failure.
"Joe,"
I would love to do such a comparison. Unfortunately, I have yet to find any source of hard data regarding the amount of speculative / "investment" purchases in Seattle or any other locale. If you can point me toward a source for such data, I would be quite happy to look into it.
Peakoil,
Did you read this article by Tim?
The article of mine that you cite as being "FUBAR" culminated in Tim's quote:
"Thanks to Dustin's investigation though, we know that historically high foreclosures is not a prerequisite for declining prices."
I think by looking at the data, we're making progress in understanding the health of the Seattle market. Are you suggesting that we should just return to faith-based reasoning?
"im sure there is a military term for this type of tactic"
disinformation?
"Fair comparisons (based on geography, school districts, commutes, etc) (SF - Seattle, Bellevue - Cupertino, Mercer Island - Menlo Park) all feel to me in the same ballpark - prices here around 50% of what they are in the Bay Area."
Sigh...again with the comparisons between apples and oranges. When will people learn that Seattle is not San Francisco or New York??
A quick wikipedia search reveals that the estimated population density of San Francisco (2005) is 6,115 per square kilometer. In comparison, Seattle comes in at a paltry 2,594.
If prices are 50% higher in the "bay area" there's a damn good reason for it -- there are far more people (rich people!) competing for the space.
Misterbubble,
[sarcastic rant=1 malice=0]
I disagree. Seattle is just like New York! Sure we have less people. We have crime, riots, and even terrorist attacks (though ours get thwarted). Sure New York is the home of the lions share of financial, advertising, fashion, theatrical, and legal industries, but we have, ... um, you know... a thriving tech and biotech sector. They're even starting to make a profit here and there (when they're not investing in Indian infrastructure for some strange reason). And don't forget, we have Boeing! Good, old, steadfast Boeing. No booms and busts associated with them (unlike Schwab, Citibank, etc.).
Sure, New York has Broadway, but we have Beneroya hall! Empire State Building - Space Needle, Long Island - Mercer Island, Guggenheim - EMP "The Village" - Fremont, Manhattan - Downtown, Harlem - White Center, Macy's - Nordstrom's, Ethnically diverse population - white bread (with a few asians sprinkled here and there), 8,104,079 people - 573,911 people.
We are so lucky to have a median price of $394,500 (which is nowhere near New York's exorbitant $460,000 according to Housing Tracker).
You sure as hell wouldn't want to compare us to someplace like Boston. Sure our population is the same bunch of erudite techie, yuppie weenies (and "southies"), but they have an accent (and a slightly lower median price, and rising foreclosures, and a collapsing housing market).
[/sarcastic]
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