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Thursday, January 04, 2007

2007 Optimism, Part III: Some Cracks Appear

This is the last post in this impromptu series. There were just so many articles out there full of "expert" quotes and predictions about the Puget Sound's economic outlook for 2007. Here are three more articles that discuss the interaction of the local housing market with the greater local economic picture. Surprisingly, the housing affordability elephant in the room is actually not completely ignored:

The Good Ride Continues in 2007
Because of relatively high rates of in-migration and household formation, the regional housing market will continue to do better than its national counterpart in 2007 and 2008.
Dick Conway, (Washington CEO)

2007: A Sound economic picture
The one sector no one sees much of a lift from is housing, either in new-home construction or resale activity and prices. Pedersen says in-migration and employment growth are counterbalanced by the deterioration of affordability.
Bill Virgin, (Seattle P-I)

Area's solid economy vulnerable to cracks showing up elsewhere
So even if the local real-estate market holds up better than its national counterpart, "if the U.S. housing market pulls the country into a recession, then we have a problem," Conway said.
Drew DeSilver, (Seattle Times)

I'm keeping this post short because I've said about all I feel like saying on the topic for now. We'll see how things pan out.

22 comments:

sash said...

Really this is stuff we all know - if there is a recession we do have a problem. Otherwise we stay flat for quite a few yrs.

Some one else on this blog had asked a valid question that I would like an answer to as well: Housing has been unaffordable for years now in California. This far even though there have been ups and downs, there has never been any significant correction to improve the affordability. Same for several areas on the north east corridor. May be Seattle is just more of those types of place now? Especially the east side.

The Tim said...

Sash,

That is definitely a good question. It's one that I also asked in a slightly different form in this post in November.

To me the question is what has happened in the last five-ish years to make the Seattle area significantly more desirable, that it should be significantly less affordable now than it has historically been?

MisterBubble said...

"Housing has been unaffordable for years now in California....May be Seattle is just more of those types of place now?"

Uh..."California" is kind of a big place. And there are certainly affordable properties in places that aren't in the silicon valley (or the silicone valley, for that matter).

But if you really want to draw comparisons between, say, San Francisco and Seattle, you need to be prepared to explain away some significant quality-of-life and demographic differences -- SF has more than twice the population density of Seattle, for starters (according to the 2000 census), not to mention nicer weather, more cultural amenities and a disproportionate share of the richest people on the planet (don't forget that something like 90% of US venture capital operates out of the bay area!).

In the end, comparing Seattle to "California" is far too broad to be useful, and comparing Seattle to the bigger cities in California is almost comically naive.

T,V & Mr.B said...

Puget Sound business Journal says 23,000 new jobs for the area in 2007. Minus the lay-offs, of say approx.25% in construction (13,300 in 2006) = 3,000 jobs, minus another 1,000 from Paccar/Eli Lilly equals a net of about 19,000. equivalent to San Diego (even though Mr. Bubble doesn't like the So. Cal comparisons)

Also, I noted in one of the articles, The new job transfer of the Boeing flight instructor can't afford a house here. So this "high paying" job market that Boeing and Microsoft are creating, doesn't really hold water for the RE market if they aren't buying.

matthew said...

The front of the Seattle business monthly for 2007

"IS THE PARTY OVER AT MICROSOFT?"

How's that for optimism?

dan said...

MrBubble: "comically naive" - I don't think so. I spent a dozen years up until ~2005 living in SF/Silicon Valley, making good money, etc. I think I have an excellent idea of the comparison between the two areas, and in my mind (not to mention the minds of several people I know who did similar moves around the same time), the Seattle area is significantly cheaper than the Bay Area per quality of life.

I'm not going to discuss SF vs Seattle proper, as the point that they are not completely comparable is valid (due to higher pop. density, etc).

If you look at silicon valley, first of all, very few people are rich. The majority of people that I worked with (software engineers) are making low-mid 6-figure incomes (just like they would at msft), living in suburbs with crappy schools. The houses in those suburbs cost at least 2x/sq ft what they cost here (I sold one and bought one here, after doing extensive studying). My experience:

selling a house on a busy street in a lousy suburb in Silicon Valley:

$520/sq ft

Buying a house in a good school district here on a quiet street in the same month:

$295/sq ft

I live much closer to the big-city amenities in Seattle than I did in the valley, and my job offers here were for more money than I made in the valley. Yes, the weather is better in the valley, but it's actually easier to go do stuff (ski, hike, etc) here.

I'm wondering when you last owned property in coastal, urban california?

Ben said...

Dan personifies the "substitution effect" I spoke about at the end of the prior "optimism?" thread from yesterday... see below for what I wrote (and no, we are not the same person, and yes I abolutely agree with his comments, having lived for a few months in the Bay Area, myself):

"In response to Seattle Slow and related to the general theory that Seattle will follow California directly off the cliff (just later), take a look at the recently released Case Shiller indices and compare LA historical prices vs Seattle since 1990. If history is any guide, any price drop in Seattle will be far less than any experienced in California. I think this is because California is more volatile, but the other reason is the substitution effect. Real estate in the Pacific Northwest is cheaper than California, and hence Seattle and Portland are experiencing significant net in-migration over last two years, whereas the major California cities are experiencing significant net out-migration (this ignores births, deaths and presumably, low-wage earning illegals). Specifically, LA was down 167.5k people in 2004 and 2005, whereas Seattle was up 43k in 2004 and 2005. These are the marginal buyers! Source - PPR. I don't have final 2006 numbers yet, but would expect they would show more of the same."

wreckingbull said...

The majority of people that I worked with (software engineers) are making low-mid 6-figure incomes (just like they would at msft),

I assume you mean 100-150K. That is quite high for most software engineering jobs here in the NW. More power to you if you are doing well salary-wise, but as someone who has worked in the NW software industry for the last few decades, there is no way I can agree with that statement.

Let's say someone is making 100K. When he or she adds up all living expenses and taxes, there is not much left over after the mortgage is paid on the 500K starter home.

If you are saying that the Bay Area will adjust at a greater magnitude than Seattle, I would say you are right on. In fact, I don't think I have ever heard anyone on this blog state that we are in as bad shape as other parts of the country. The point that I make is a 15 foot fall can hurt just a much as a 25 foot fall.

dan said...

2 points/questions:

1. In my specialized area, typical bay area salaries for 10+ yrs engineering is 120-140k. my friends doing similar work here (and my own job offers) seem to point to similar salary ranges.

2. Are people here really trying to enter the housing market with just 1 income?

FinanceGuru said...

Dan & Ben are right on about the CA impact, however many people claiming that a $500 starter home is unaffordable, well dua! That’s why people don’t start out buying a house in that price range. They work their way up to a house through the years of working and saving. For example, if you have a family and want to buy your first house you might buy way out in the boonies and commute a long way to work (like one of my co-workers that bought a place up past Marysville and works in Redmond). He bought a 3 Br house for $250k. That is a starter home. Over the years as your current property appreciates (in theory) you can afford to use that capital to buy up to a larger house or move closer to the city.

As for myself I bought a condo in Downtown Seattle last year. Why you say, it is a small 1 br starter home (for a single guy). In a few years as I grow out of it, get married, and can afford to move up I will gradually. As for affordability, after tax deductions, it only costs me about $200 more than renting per month. There is also the intangible impact of saying "I own a condo", to women that is very attractive (at least from personal experience). [please spare me the ragging on me for the last comment, as Im sure Mr. Bubble will get his panties in a wad].

wreckingbull said...


As for affordability, after tax deductions, it only costs me about $200 more than renting per month.


Can you itemize this for us?

I must really be missing something. When I do the same math, I get wildly different results. I am a prior homeowner so I do feel qualified on ownership costs. Do you include the statndard deduction in the non-ownership column? Are you including taxes and HOA dues? Are you including the opportunity cost of tying up cash? If I could make ownership pen out to a $200 premium, I would buy today.

There is also the intangible impact of saying "I own a condo", to women that is very attractive (at least from personal experience)

I tell women that I rarely wear underwear, and when I do it is usually something unusual. That beats the condo line every time.

wreckingbull said...


1. In my specialized area, typical bay area salaries for 10+ yrs engineering is 120-140k. my friends doing similar work here (and my own job offers) seem to point to similar salary ranges.


You are specialized and senior, and you probably deserve your salary. Most future homebuyers will not have your credentials nor salary.



2. Are people here really trying to enter the housing market with just 1 income?


Yep. That's the trend. Our beloved census can confirm this for you.

Nolaguy said...

I've lived in both Seattle and California (SB)- for many years in both places. Both have their obvious advantages. A big one for Seattle is affordability in comparison. When Seattle costs the same as SD, SF, or LA, I will just move down there. Anyways...

Both the NW and Californina have seen large gains in appreciation over the last 5 years.

One thing we should consider is if these common gains in appreciation are due to the similar economic variabes. (low rates, increased population, strong salary growth, etc).

If the variables are the same on the way up, why would Seattle not experience a similar decline in prices as California?

How exactly, with regards to fundamentals, is Seattle "different"?

If I remember correctly, the population of Seattle is less that 1% larger than it was in 2000. If so, I'm don't believe it's due to an increase in net in-migration.

matthew said...

Finance,

The condo market will be the first to fall, good luck buddy, it will be interesting to see how the ladies react to "I'm upside down on my mortgage on my dinky condo!".

5,000 more condo units downtown by 2009 and you don't think they are overbuilding???? Operation "Densify Seattle" is going to kill single bedroom condo prices. Even Ardell and the folks over at RCG admit that there is most likely some inflation in the 1 bedroom condo market right now...

But again maybe that's why you are on Seattlebubble right now. As someone who bought at the height of the condo market in the summer of 06, you are praying that "Seattle is special".

Good luck.

matthew said...

Maybe you are on Seattle bubble because deep down you know that the market could be headed for a downturn and it scares you!!!

FinanceGuru said...

$1475 (total mortgage pmt) - $330 (tax deduction)= $1145 + $270 HOA = $1415 Total Cost [10-yr IO Loan]

Could rent my unit for ~$1200/month. However, since I put a sizeable down payment it reduces my Mortgage PMT...so in reality my Opportunity Cost for this money should be built in. But the impact (I feel) on my net Cash Flow per month is ~$200.

My estimate of REAL total cost of owning than renting is probably closer to $400 per month since I could use the down payment money for other uses. As for my condo, it has appreciated ~4.2% based on recent sales for like units in my neighborhood. Due to my leverage with my mortgage, the Gross Cash on Cash ROR would be ~21% (excluding RE Expenses), including expenses Im not sure, yet my guestimate would probably cut it down to single digits positive return if I sold today. Over time the buy/sell expenses get spread over many years, so my REAL return will gradually increase as time progresses.

Also I plan on owning the property for 5 to 10 years and real estate should rebound by then. Also if the market depreciates in a few years I would probably just buy another property and rent out my current one. That way I would be buying at the bottom as well. So Im not too concerned if the market bottoms out, just would be nicer if it continues to appreciate in the mid-single digits for the next several years while the market normalizes.

I do admit that a quick market downturn would make me question my decision, however in the long run (10+ years) real estate is a good investment and in the Seattle market has never had a negative return over this time span.

sash said...

Here is a couple of things I wanted to throw out-
1. Commute in seattle or the east side is just horrible. the only reason i am particularly looking for a home to rent or own close to my place of work is cause i just cannot deal with 2 hours on the road per day. Otherwise for the same cost as redmond, I could get a huge home etc in Bothell. I am wondering how many more there are like that. This is probably now similar to california where folks who work in these tech companies etc dont want to commute. I personally have lost hope tha the commute on 405 or 202 or 520 is every going to get better.
2. Atleast on the east side there is defintely a shortage of land. That in my opinion is one more cause of prices of houses and land going up. Is this the case in CA too?
3. The govt seems to be throttling the number of permits issued and indirectly or directly fueling the home/land prices.

Now ofcourse Seattle is a pricey place to live. I know some folks who work for a mail carrier in memphis who make so much more than us, and their mortgages and rents ARE SO SO LOW. Well now do you all wanna move there ;)

matthew said...

Finance,

The condo market is different than SFH in Seattle. Can you even find data for the condo market in Seattle that goes back much more than 10 years from now? Condo prices are MUCH more volatile than SFH's.

So saying that since SFH's in Seattle haven't depreciated in 10 years is meaningless in your situation. Not to mention the run up the last few years has historically never been seen before. If it's a slow leak out, instead of a bursting bubble, 10 years of depreciation is not out of the question.

Again, good luck with that IO loan.

Comrade Chairman Greenspan said...

1. In my specialized area, typical bay area salaries for 10+ yrs engineering is 120-140k. my friends doing similar work here (and my own job offers) seem to point to similar salary ranges.

Closer to 100K-120K including bonus and benefits for those I've talked to (devs and high-end writers).

2. Are people here really trying to enter the housing market with just 1 income?

I know a few who did during the buying panic. More relaxed people (who already own) admit that there's no way they could do it on 1 income.

Comrade Chairman Greenspan said...

"5,000 more condo units downtown by 2009 and you don't think they are overbuilding???? Operation "Densify Seattle" is going to kill single bedroom condo prices."

A while back I was sitting on the bus when we passed yet another building that was about to be torn down. An old-timer across from me wondered what they were going to put in, and I said "more condos, god knows we don't have enough." To my surprise he told me he'd been a contractor during the last housing bust. Once he and his boss went to strip everything out of some luxury condos that couldn't be sold (and I guess had been foreclosed). There were some gorgeous cherry cabinets, and he asked, "How are we going to get those out?" His boss said, "Like this," and knocked them down with a 40lb sledgehammer. He said "That hurt and they weren't even mine!"

MisterBubble said...

Dan said:

"I spent a dozen years up until ~2005 living in SF/Silicon Valley, making good money, etc. I think I have an excellent idea of the comparison between the two areas, and ....the Seattle area is significantly cheaper than the Bay Area per quality of life."

You've missed my point. I'm not trying to engage in a subjective debate of "quality of life" in Seattle vs. San Francisco. I don't need to do that, because it's comically naive to compare the two areas for purely factual reasons: SF has twice the population density of Seattle, and a far greater density of extremely wealthy people who are willing to pay for expensive housing.

It's just silly to look at Seattle's current prices, and say that they're justified because San Francisco is expensive too (which is essentially what sash was doing in the first post). It's part of Seattle's urban inferiority complex ("we're a world class city!"), and few people stop to really think about the logic of the comparison.

MisterBubble said...

guru said:

"There is also the intangible impact of saying "I own a condo", to women that is very attractive (at least from personal experience). [please spare me the ragging on me for the last comment, as Im sure Mr. Bubble will get his panties in a wad]."

Eh. If you need a $300,000 loan to attract women, that's certainly your perogative, guru.