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Thursday, October 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 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.

24 comments:

SDtoSEA said...

Great post The Tim.

I just posted this on another thread, but obviously belongs here as well.


Here's a little insight into San Diego. The economy here is healthy and become extremely diversified over the last 10-15 yrs. During the last housing downturn, SD was hit hard with defense/military cuts and closures. 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.

Yet, while all of this is going on, the median home price is down 5% and come November it will be down double digits year-over-year.

How could this be happening? Plenty of jobs, strong economy, everyone wants to live here right? Why in the world would home prices be falling? and so fast?

Last year, San Diego county lost population for the first time in years. More people left the area than came here. Housing had become too expensive. We have an all time high inventory of homes. So, we have plenty of jobs and plenty of houses but where are the workers and buyers.

So, I need either Dustin or Darren to explain how a place with such a good, strong economy would have falling home prices. What's the reason?

Maybe you can't answer that, so I'll take a stab.

Everyone is priced out of this market. Anyone that wanted to buy has already bought and they did so by whatever means they could, including exotic loans. Now people are beginning to realize that the sky's not the limit and that their house won't increase forever.

The foreclosures are coming don't worry. The majority won't even reset until 2007. The fact that the median will be down double digits before we even get to 2007 should be absolutely frightening to everyone (including Seattle). What will happen once we have 500+ foreclosures a month?

What's going to keep prices from falling further? We already have the jobs and strong economy.

What will keep Seattle from experiencing the same fate?

Dustin?

Darren?

Anyone?

Deejayoh said...

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.

E-sidedave said...

What about the affordability factor? Back at the peak, affordability in SD was 11%. It has never been that low here.

Richard said...

When Seattle had the second highest unemployment rate in the country during the early part of this decade, San Diego was below the national average.

For much of the past 6 years, SD's unemployment rate has been 2+ points below Seattle.

4 of my friends (2 engineers, 1 architect and another w/ no degree) bailed to jobs in SoCal after getting laid off here.

SD's fundamentals have been better than Seattle's for a long time.

I believe it rains less there too...

Richard said...

Deejayoh prices haven't gone up as much here as they have in California

With the massive job losses early on in the decade, we probably should have seen a significant drop in prices. But that didn't really happen.

Looking at specific sales between 2001 and 2002 I've found a few instances of 10-20% drops on resales of the same or substantially similar homes.

However, *something* started around 2002 that kept Seattle from seeing any real correction.

The bad local economy kept prices in check for a while.

SDtoSEA said...

"prices haven't gone up as much here as they have in California" so they won't go down.

-----

So they won't go down at all, or not as much? I'm in the camp that says they won't go down as much.

Seattle was late to the party; I believe partly because a lot of the Calif. equity (that took a year or two to build up)was taken out and spread over all parts of the west.

If you just look at the median prices and median incomes you'll see that Seattle doesn't have as far to fall as San Diego to get back to fundamentals. However, I still see a substantial fall for Seattle.

Darren Meade said...

Hello Everyone:

Tim I appreciate the time and diligence that your put into your reply.

May I qoute from your post; "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."

Please note that Mr. Kelly made numerous errouneous claims in his post, to which myself and Dustin responded.

It seems people qoute numbers and statistics without including historical numbers to balance out short term trends.

For instance a comment is made pertaining to high foreclosures in San Diego. Here's the correct statistical data for San Diego County to balance the conclusions:

"Foreclosure activity hit a low during the third quarter of 2004, when lenders filed 12,145 default notices. That year California home prices rose at an annual rate exceeding 20 percent. This year annual price gains have slipped into single digits in many of the state's larger housing markets. Last month San Diego and Sacramento counties saw their median home prices dip about 1 percent compared with a year ago. Second quarter defaults shot up about 99 percent in San Diego County and 109 percent in Sacramento County from last year.

Still, today's statewide foreclosure activity amounts to about one-third of the peak level in the first quarter of 1996, when 59,897 defaults were filed. The state was in a housing slump back then and foreclosure activity tugged home values down by about 10 percent in some areas.

Today, only about seven percent of homeowners who find themselves in default lose their homes to foreclosure. Most stop the process by bringing their mortgage payments current, or by selling their home and paying the home loan(s) off."

Source: http://www.dqnews.com/RRFor0806.shtm

In order I feel to take a true base-line study of a nationwide housing bubble, I'd offer the following:

North County San Diego for 2005 offered the following appreciation in 92004 Borrego Springs-

All Home Sales Combined Appreicated 39.1%

New Homes Appreciated 48.3%

Condos 43.6%

Single Family 35.5%

Therefore a 8.1% drop from this peak would still net a minimum 30% appreication YOY. Therefore the good job market and job growth (equally important) show themselves in the appreciation figures.

The numbers in any small area can be manipulated for a persons desire or intention.

That is why I believe we need to take into account all factors over a greater period of time.

In my earlier posts I provided data over a 40 year period which provided the statistical data in all factors.

As for Seattle's possible price declines, I put forth the same argument.

That a nationwide average appreciation rate of 6.4% will continue. This means at times as we experienced here in Southern California, the trend lines will need to accelerate to catch up for slower growth periods.

In regards to Seattle - click on this link to compare the YOY data:
http://www.dqnews.com/ZIPWA.shtm

Once again you will see some areas have had good appreciation, other stagnant and others losing a great deal.

I believe I've always heard...location-location-location.

While we do some loans in Seattle, my home is in Laguna Beach, California.

The median price paid for a Southern California home was $484,000 last month. That was down 1.0 percent from $489,000 in August, and up 1.9 percent from $475,000 in September last year. Last month's increase was the smallest since February 1997, when the $160,000 median rose 1.3 percent from $158,000 a year earlier.

A slight decline in median from August to September is normal for the season as purchase patterns shift. The median price per square-foot for resale houses, which analysts often use to adjust for seasonal shifts in market mix, actually increased slightly from August to September, from $343.53 to $343.95. That number peaked in June at $345.72.

Therefore again, depending on where you bought and structured your home financing, this has not been a losing market in the last 40 years.

The double digit yearly appreciation in my opinion are gone for a decade or more. This will return to a single digit 3-7% appreciation per year.

What I believe to be of more importance is to educate potential buyers about certain factors in the home buying process.

Appraisals - The way values are calculated and considered by lenders change on a purchase vs. refinance.

How does this effect the market? Ogten times people buy a home and believe in 6-12 months they will refinance to reduce their payments or take cash out from the home.

Often times, though, they paid a premium for their home (over paid) and when they go to refinance their new appraisal comes back 10-15% lower than when they bought the same home.

Product Knowledge - Anyone looking at home financing needs to perform a total cost analysis.

They also need to understand the FED fund rate and how to calculate prime.

However, I will end before stating what I believe needs to be fixed within my industry.

Kindest Regards,
Darren Meade

SDtoSEA said...

Darren,

I'm having a hard time following you. You seem to be talking "big picture", but you're providing examples for Borrengo Springs and Laguna Beach. Do you know where Borrengo Springs is? It's a small town in the middle of the desert. It's the equalivant of discussing Cle Elum in regards to the Seattle market.

San Diego County as a whole is down 8.1% from the peak. Obviously some areas are faring better than others. And many other areas are down even more than 8.1%.

You can say all you want that nationwide appreciation will continue. That's fine, it very well may. But I'm pretty sure we're talking about Seattle (and San Diego) right now.

john_law_the_II said...

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.

The Tim said...

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.

SDtoSEA said...

"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."

The classic line. This is exactly what the real estate bulls can't comprehend. Apparently new jobs mean that you can afford anything. I've got a job, and I can't afford a house. How of those new jobs are retail and service oriented? Usually paying under 50k a year.

I'd love to see the percentages of new jobs broken down. i.e. 5,000 new jobs were created this month, 300 of them paid enough to buy a median priced home.

john_law_the_II said...

"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.

PeakOil said...

"I'm having a hard time following you [darren]."

classic!!! they throw volumes of meaningless/baseless information at you in order with the intent to confuse... and bore you to death.

this is a prime example as well

im sure there is a military term for this type of tactic, but I don't know what it is... FUBAR?

Joe Consumer said...

Tim - For part 2, you absolutely need to address the impact of speculation in the run up of prices. I'm curious if you can show that Seattle's rate of speculative buying is the same as San Diego's, or more.

If San Diego and other overheated cities didn't start their dive off the cliff, the same could have happened here. With the zoning changes, there are hundreds of condo units in the early, presale/reservation point of the development process.

I think that without the San Diego's and Floridas, we'd have seen a massive rush towards speculative buying with downtown condos here in Seattle. I don't think that's happening now. Also, many of the developers have put rules and caps into place to prevent speculative flipping. Some of the contracts even state that if a buyer flips after the unit is ready for occupancy (within a certain period of time), all profit goes to the developer! That dampens the speculative fervor.

Dustin said...

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.

The Tim said...

"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.

Dustin said...

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?

john_law_the_II said...

"im sure there is a military term for this type of tactic"

disinformation?

Darren Meade said...

sdtosea -

The issues at hand have been that when I talk on a national level, then I get attacked over local issues.

Then when I try to show how you can have such disparity in small local markets, I receive a response such as yours.

Tim had made reference that homes had declined in San Diego at around 8%.

However, I can pull data from San Diego to show large gains or losses. However, the majority of home owners in San Diego over the last 3 years enjoyed the best appreciation in nearly two-decades.

Nationally homes have appreciated at 6.4% over the last 40 years.

There is not a national 'Bubble'. Double digits appreciation will return to the norm. That will mean some periods of slower growth, some of faster and at the end of another 40 years...we will see a continual average.

My home in South Orange County appreciated 118% within four-years. I do not believe that this will take place if I buy a new home tomorrow.

Nor do I believe a bubble popped if prices decline by a certain percentage.

PeakOil said...

>Nor do I believe a bubble popped if prices decline by a certain percentage.

Darwinism, at its finest.

AnotherMIGuy said...

I can shed some light on this. I moved ~1 year ago from silicon valley to mercer island.

Prices on MI were about 50% of what they were in a comparable city (say, Menlo Park) in SV. The ratio is probably somewhat higher now as the bay area flatted in the meantime, and we went up about another ~8-10%.

I also had job offers in both the Bay Area and here - jobs here seemed to pay at least as well as they did there.

Unless you have househunted in both areas, it is very hard to compare based on median prices, etc - these just don't give you the full story.

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.

MisterBubble said...

"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.

plymster said...

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]

SDtoSEA said...

"Nor do I believe a bubble popped if prices decline by a certain percentage."

I guess maybe that's why it's not worth arguing with you. You will fail to see a bublle regardless of what happens. What happens if prices drop 50% and all of the equity from the last 4 years is wiped away? What would you call that?