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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)

24 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.

Matt Rivett 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...

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.

Matt Rivett 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.

Matt Rivett said...

kaleetan,

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

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!"

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.

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).

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?

David Aldrich 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.

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.

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.

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.

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 :-)