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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)

42 comments:

Eleua said...

when the "down" period ends late next year.


LOL!

I just love it when someone sticks out their thumb, holds it out at arm's length, closes one eye and gives us a dead-on-balls-accurate prophecy.

Yup. We can see 15 months in advance, but by some miracle, nobody saw 4Q-06 coming until it was upon us.

I love how the California Effect only works one way - just like all other economic phenomena.

Just like Wall Street - good news is good news, bad news is good news, no news is good news.

MisterBubble 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."

What the hell does that mean? Does he have some definition for "housing market decline" that doesn't involve home prices?

Double-plus ungood Mr. Kelly....

Eleua said...

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.

Is this from 4Q-06 or 1Q-Y2K?

I guess all those Californians are going to leave their house in the OC up for rent, while they buy here, and get their Washington RE license. Don't forget, they will still pay top dollar, even though they have not sold in California.

Grivetti said...

Availability of jobs props up the housing market, and the job outlook for Western Washington continues to be extremely healthy

*cough*

I think I'm coming down with something, its probably nothing...

Kaleetan said...

I am currently employed as a software engineer and have recently decided that I would like to test the market just to see what is out there. I have been suprised by the responses I have been getting from recruiters and have been hearing quite often that the market is really hot.

I believe we are starting to develop another tech bubble...version 2.0.

My first interview was last friday with a company that developed mobile devices and they had the entire floor of a building in redmond undergoing a process of renovation with plans to add many new people. - Starting salary...85K...cough cough...

I have not been to an interview in at least 9 years, so I was pretty damn nervous - anyway i bombed it - haha.. but I am not too down. After being in the day to day workplace i was not prepared for the questioning ,but needed to get the first interview under my belt.

I left redmond with the impression that the place really is booming and that for some industrys and areas the economy is strong.

Also, this company is based on London and set up the engineering office specificly in Western WA to attract top class talent.

That might give a little insight into what is going on in the Seattle Metro and the Eastside housing markets.

plymster said...

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."

It would be nice to finish off the weak jobs argument that keeps cropping up. According to the Bureau of Labor Statistics, California has 4.9% unemployment. Washington has 5.2% unemployment. We're actually worse off jobs wise.

Mr. Truccillo is probably right. We will likely not have a housing market that collapses without a recession. In fact, the recession will be caused by the collapse of the housing market.

Ardell DellaLoggia said...

One of the things I've noticed here in the Seattle Area, is that there are a lot of houses with the bedrooms in less than optimum places. The properties that stay on market longer and get reduced and reduced have two bedrooms on main level, one up above and one down in the basement. So that "4 bedroom home" won't be an option for someone with two small children.

The odd bedroom configuration homes, skew the stats and median price range, as they take longer to sell and sell for less than market value on a price per square foot basis.

Instead of using broad stats for determining where the market is headed, it is better to use the properties most people would want to buy. When they don't sell...then we're going down. Otherwise lots of pent up buyers just waiting for a better choice...which is the last quarter of the year, by definition.

If no one wants the 100 on market, that NO one wants, but the next five out the gate that are "optimal" get 3 offers apiece, then you just have a lot of functionally obsolete housing skewing the numbers.

So far I am seeing more obsolete, and just bad, floor plans sitting. Also, flippers who bought in the wrong location and put way too much money into a house on a busy corner. People who converted their garages to "living space" and can't sell a house with no garage. Houses that need too much work, so much that lenders won't finance them.

Not a lot of really good houses, that are not selling. But a lot not selling just the same. But for me...that's normal for this time of year.

plymster said...

kaleetan,

$85K for a software developer with at least 9 years of industry experience? This is supposed to attract "top class talent"?

That's hardly a basis for "tech bubble version 2.0". In fact, since the average salary for an experienced developer in the region was $120K 7 years ago, that's a good argument for deflation.

plymster said...

Ardell,

34.9% increase YOY in inventory (according to Housing Tracker, and people don't have enough choice? That's pretty mind-bending.

But maybe you're right. Maybe all that's left are crappy houses, and that's why inventory is building, sales are falling, and median prices are falling. Maybe that's why prices at the 75th percentile are dropping. The top quartile of homes must be total pieces of crap.

But given the negative savings rate, self-destructing home builders (they must have crappy floorplans, too), and nationwide housing market collapse, I'm guessing something else is causing the housing market slowdown in Seattle.

Nolaguy said...

Tech salaries have been pretty much flat since 2000-2001. Factor in inflation, and you could say salaries are down.

My salary today is the same as it was in 2001. The people that work for me make about the same as those who worked for me back then.

Kaleetan said...

$120K ? Are you just pulling these stats out of your ass..or do i need to ask for more>?

http://money.cnn.com/magazines/moneymag/bestjobs/snapshots/1.html


Average pay: $80,427
Salary Total compensation
(includes bonus)
75% in this career make more than: $67,362 $70,369
50% in this career make more than: $76,294 $78,518
25% in this career make more than: $86,530 $89,822
Top potential compensation (5% make more): $147,338


Anyway..my point was that the economy is pretty strong for certain areas and industries..specificly high tech and the eastside/seattle area

EconExchange 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"

Since when can something be said to 'hold up' and DECLINE @ the same time. People amaze me.

Grivetti said...

housing crash = cyclical correction...

well its a start, at least the talking points are changing, looks like we're off the soft landing none-sense finally.

EconExchange said...

From artical posted by Grivetti

"bolstering the consensus that Washington's economy is slowing but remains stronger than the national average."

This is after stating that the washington unemployment rate was at 5.3%......but isn't the national unemployment rate @ 4.7%. Hmmmmmmmmm. Funny that people always point to our 'strong local economy' for holding housing up yet we are ABOVE the national average on umemployment. Do I hear BS?

EconExchange said...

"According to the Bureau of Labor Statistics, California has 4.9% unemployment. Washington has 5.2% unemployment. We're actually worse off jobs wise."

I didn't read that before posting sorry, same point.

Grivetti said...

kaleetan,

What does that average income work out to be in rupees?

redmondjp said...

And even IF an eastside tech job pays around 100K, that's still not enough to afford the $1M Costco-sized crackerboxes down the street from me (Redmond, just N of MS). Maybe on TWO 100K/yr salaries, but even then, it's still a stretch.

I have noticed a few more for-sale signs around my neighborhood, but not even close to the amount that there were 4-5 years ago (which may have been related to the dot-com bust and general recession at the time). So I haven't seen the increasing inventory yet, at least not in my neighborhood.

Kaleetan said...

I pulled into my neighborhood the other night and saw sign after sign...I was like damn..maybe all these people are going to sell - What the hell is going on..did everyones loan readjust overnight..

As I drove closer to the cluster of signs they turned out they where just political signs for Darcy Burner..

Whew...

Terry said...

Tom Kelly's article was in the Kitsap Sun last Sunday.

Does anyone else feel that MSM articles on real estate in the Seattle area have had a shift in tone recently. To me they seem to have gone from Rah! Rah! Buy now! Everything is great! to "Hey, sales are slowing and the market may be tanking elswhere but it won't happen here because we are different. So Rah! Rah! Buy Now! Everything is going to be okay!"

Brat said...

"..The properties that stay on market longer and get reduced and reduced have two bedrooms on main level, one up above and one down in the basement. So that "4 bedroom home" won't be an option for someone with two small children."

Eh, in my generation homes usually had one bedroom down, two up. An infant could be tucked in a crib in the closet in the parent's room. Going head over tea kettle down the stairs was a test of viability ;)

Whomever is marketing the house has overlooked potential purchasers who would look at putting the kids on the 2nd floor as an ADVANTAGE.

Alan said...

New jobs coming in earning $85k are not going to support this housing market, and I would wager that most of the new jobs are less than $85k.

SeattleMoose said...

The elephant in the room that the rah rah articles never address is that all these great jobs are not all +100K/year jobs. They include 30K/year jobs with the mean most likely close to the KingCo average of 59K (approximately).

At the core of the bear argument is that the price of a median price house in KingCo is about twice that what the median income can afford using a regular 30 fixed loan.

Median Salary: ~60K
Median Home: ~400K

Using a 20% down 30 year fixed loan with a payment to gross income ratio of .28 (just for P&I), the maximum price of a home for the median salary is ~275K with a loan (after 55K down) of ~$220K at a rate of 6.5%.

That means that just based on the above median values the homes in KingCo are about 33% overpriced.

Why doesn't the article address this?

plymster said...

kaleetan,

Sorry, I heard the $120K figure on KPLU at the height of the bubble. According to the Seattle Times, The Washington high-tech average is $105,681, elevated by the state's heavier-than-usual concentration of highly paid software engineers and the exercise of stock options, which count as wages. This suggests that software engineer were making more than $105K (including stock options) to offset all the IT grunts making less than that average (testers, SAs, etc.).

Of course, 2 months earlier you'd find an article citing this figure: Software engineer/developer (average): $49,929 . So ultimately it's anybody's guess.

That said, if the national average by the numbers you've stated are $80K, then I'd ask for at least $85K (just salary, not including bonuses, benefits, options, etc.) since Seattle has a higher cost of living than the US average (16.3% higher according to the American Chamber of Commerce Researchers Association.

And since you have 9 years of experience (probably above average in a field that is realistically less than 20 years old), and since the employer is looking for top tier talent, I'd be more likely to pitch a figure like $95-100K. They can shoot it down if they like, but you're better off not shorting yourself (unless you lack specific experience that they're looking for or have limited experience).

Joe Consumer said...

Here's a hypothetical. You feel so strongly that you are correct. Good for you.

However, at what point do you admit that you are wrong, that you misread the data, that there will be no imminent collapse over the next couple of years?

Will you try to spin it to save face? Will you delete this blog? Will you start buying? Will you simply keep pushing out the bubble burst?

Just curious.

MisterBubble said...

Anyone catch the Times' story about the struggling local biotech industry?

I must be confused....weren't those people supposed to be working their robust jobs during the day, then taking the new Allentown Trolley home to their $750,000 studio condominiums with norwegian wood floors and stainless-steel appliances?

Peckhammer said...

$120K ? Are you just pulling these stats out of your ass..or do i need to ask for more?

I dunno. From 1997-1999, I was making $120/hour for a yearly gross income of $210K. When I came to Seattle in late '99, my pay was cut by two-thirds. My pay since '99 has only increased by 22.6% to date.

synthetik said...
This comment has been removed by a blog administrator.
Nolaguy said...

Joe Consumer,

I'll certainly say, "Wow, I was wrong". I also hope that if your hypothetical happens, that I learn something on *why* Seattle was different, and that it makes me say, "Gosh, I totally didn't consider that."

And then I'll find a more affordable part of the country that meets my career and personal needs and move there.

But right now, I've collected a lot of fundamental data that tells me prices will cease to appreciate or depreciate at some point in the near future.

There will be a regression to the mean appreciation rate. I don't know how long it will take to get back to that point.

Only time will tell...

Ardell DellaLoggia said...

Plmster,

Nope, not enough good choices. I reviewed 148 properties today with a buyer client in North Seattle/Shoreline priced up to $400,000 and we picked out THREE as possibles.

We're going to go see them on Friday. I'll let you know if any of those 3 of 148 are worthy of an offer.

Goldeneye977 said...

A recession does not mean housing will bust. In Netherlands, after having years of scorching growth in house prices, in 2003, there was a severe recession. Yet, housing stabilized although people were not able to sell their homes even for 3 years.

A collapse in housing will surely cause a recession and that too globally. But a cyclical recession can happen without causing a bust in housing.

Housing is currently supported by cheap money flowing from Japan (0% IR) and the US (when it had 1% IR) and till this money finds a better alternative for growth, I doubt that housing will bust.

Pegasus said...

Great post on craigslist Seattle-Tacoma. There is no bubble :) http://seattle.craigslist.org/see/rfs/222688617.html

SourMash said...

At the core of the bear argument is that the price of a median price house in KingCo is about twice that what the median income can afford using a regular 30 fixed loan.

While I don't disagree, I think there is some valuable information in the most recent Census data that changes the $59,000 assumption for this argument a little bit.

This table shows that among families in King County, the number is actually north of $74K, and that among married-couple families, the number is north of $87K.

I suspect that those populations are more likely to be homebuyers, though all of this is open to interpretation.

redmondjp said...

Ardell said: Nope, not enough good choices. I reviewed 148 properties today with a buyer client in North Seattle/Shoreline priced up to $400,000 and we picked out THREE as possibles.

I'm not following you on this. Isn't this like going into a restaurant and looking at a six-page menu, only to lament that "There's only THREE things that I might want to eat in here, waaaaaaaaah!"?

Please explain. Are you dancing around the bush here? Is saying "not enough GOOD choices" your codewords for an overpriced market? Not every house can have the perfect floorplan. Not every house is going to be on a street that looks 'nice' to you. Not everybody's landscaping is going to 'pop' when you drive up. This is reality, not realty.

Is it your contention that sellers just need to stage their houses better in order to justify the current asking prices, or do we all need to tear down our existing (not good choice) structures in order to build new houses with 'the perfect floorplan'?

PepeDaniels said...

plymster said...

It would be nice to finish off the weak jobs argument that keeps cropping up. According to the Bureau of Labor Statistics, California has 4.9% unemployment. Washington has 5.2% unemployment. We're actually worse off jobs wise.


Thanks for this post and I think you are absolutely correct on this. At the risk of getting banned for repeating the point - South Florida is loaded with jobs, it's a great place for many people to restart, jumpstart a new career etc. But the housing market and everything that follows it had been wildly out of control leading to the bubble there. Jobs are a factor but don't prevent bubbles or the breaking of the bubble.

PepeDaniels said...

Florida unemployment rate
3.3% in Aug 2006

It's one of the leading bubble zones in the country.

SDtoSEA said...

"Housing is currently supported by cheap money flowing from Japan (0% IR) and the US (when it had 1% IR) and till this money finds a better alternative for growth, I doubt that housing will bust."

All that money is currently exiting real estate. With appreciation slowing and going negative, anything would be a better alternative for growth. All that money will find the next growth area on its own. But the party's over for real estate.

plymster said...

sourmash - you can wind yourself up in circles trying to prove the best affordability metric. The important thing to track is the trend.

According to this report (look at the bottom of page 16, sorry, it only tracks from 1991-1998), the NAHB's affordability index is traditionally between 40 and 70, with 1995-1998 a pretty solid 60.

According to the NAHB in 2006:Q1, Seattle's affordability was 32.6 (about half of the norm from 1995-1998). Incedentally, it looks like they use that family median income to calculate this affordability metric.

Clearly there's an affordability issue.

PepeDaniels said...

plymster said...

Clearly there's an affordability issue.


Yeah, friends of mine are getting bounced out of their apartment in Ballard in a condo takeover. The new landlord (until he sells the units) said he will raise the rent to the maximum allowed under the law every month on my friends. Their previous lease had run out.

They do not want to fight it as they feel it's not really that big a deal to move to another part of the country where it's more affordable and the weather's better.

I hope the market has the same mercy on the greedy flippers as they do on the avg person out there. Things have a funny way of comin' around on people.

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


Clearly there's an affordability issue.


No argument here.

Matthew said...

"Housing is currently supported by cheap money flowing from Japan (0% IR) and the US (when it had 1% IR) and till this money finds a better alternative for growth, I doubt that housing will bust."

The DOW is at 12,000 and has been growing around 12% rate of return. You would rather have a negative return right now (housing) vs. just about anything else???

Ardell DellaLoggia said...

Redmondjp,

Good question. "Is saying "not enough GOOD choices" your codewords for an overpriced market?"

I don't think so, because the overpriced ones that are "good" are the 3 best of the 148, because all you have to do is work down the price. Then you end up with a good house at the right price.

Not good enough means you can't reasonably be expected to sell the property at a good price if the market turns. If the negatives are correctable and the price accommodates those negatives, that's good. You can fix them before you more and at least get out whole if the market goes down.

But if the negatives are not correctable, then you are truly sunk if the market turns. Excuse me, forgot where I am. I mean WHEN the market turns :-)