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Wednesday, January 31, 2007

Fleckenstein: Seattle "Just a Little Less Dark"

Wow, Aubrey Cohen over at the P-I is really slipping lately. First he prints the prediction that Seattle will see "slight year-over-year price declines this spring or summer," and now he has penned an entire article about Bill Fleckenstein's "not-so-rosy" outlook for local real estate.

Like many economists and real estate professionals, hedge fund manager Bill Fleckenstein thinks Seattle's housing market is, relatively speaking, in decent shape. But, while others see Seattle as a bright spot, he describes it more as just a little less dark.

The national market is going through "probably one of the biggest, most dangerous bubbles we've had in this country," said Fleckenstein, president of Seattle's Fleckenstein Capital, MSN columnist and a panelist Tuesday at a forum on housing trends sponsored by the Greater Seattle Chamber of Commerce.

Although Seattle is in better shape, its home prices will go down, Fleckenstein said after the meeting. Asked if he would buy a home in Seattle now, his response was an immediate, definitive "no."
"I really think it was more of a lending bubble and an abdication of responsibility by the lending institutions," he said. "Anybody with a pulse could borrow any amount of money."

Meanwhile, the rising home values created equity, which homeowners cashed in to live beyond their means, Fleckenstein said. He said the [national] market peaked in mid-2005 and has serious potential for prolonged trouble.

Real estate prices declined for a decade after Japan's equity bubble burst in 1989, with commercial property values falling 90 percent and home values down 70 to 80 percent, Fleckenstein said. "You can look to see what happened in Japan as where things could go."

The ultimate depth of the fall is not yet knowable, he said. "When the tide starts to go out, then you start to find out all the crazy stuff that's gone on."

Fleckenstein said the recent tightening of lending standards could affect the lower end of Seattle's home market, while the national fallout would hit the city's higher-end buyers.
I don't really have much to add. I've been reading Bill's stuff over at MSN Money for a while now. He's a sharp guy, and was accurately warning of a national slowdown and credit tightening well before it all began. I'd think carefully before dismissing his local predictions just because they don't reflect your preferred version of the future.

(Aubrey Cohen, Seattle P-I, 01.31.2007)


Mikhail said...

I am becoming more and more of the oppinion that the Puget Sound might not see much of a downturn at all, until some major event, or "tipping point", is reached as the real-estate bubble unwinds in the rest of America.

It may be that there is a failure of some major lender, a sudden loss of liquidity in mortgage securities, or a general stock market crash. Whatever it is, I think there will be some "event" that occurs which finally makes the nation wake up to the growing real-estate disaster.

When this happens, the Seattle area real-estate market will go into a deep-freeze overnight, seemingly. Yes, our region might be one of the last to show signs of the real-estate decline, but I suspect we will catch up quickly when the time comes.

confused said...

I would agree. I did attend the Seattle Chamber yesterday and thought it was helpful. Fleckenstein did say that he was expecting some very big news tihin the next 2 weeks in the subprime lending industry. He referenced shoes dropping. Great speaker. He also had a chart reflecting the wealth effect in GDP due to the MEW, mortgage equity withdrawal.

Quadrant's president Peter Orser said that they are now counseling buyers on how to clean up their credit and payoff debt in order to buy a house in a year or so.

Chris said...

I sold my CH condo two days before the rocket left the launch pad (end of 2004) so to continue my inability to time investments anything remotely close to profitability my wife and I started a SFH/2+ condo search yesterday with an RE agent. Our target area for a SFH is in the 75th to 105th St (G'lake etc), probably no futher west than Greenwood ave.

We're also looking at condos but would expect to pay a lot less. I noticed a large, very nice looking Greenwood 2-floor condo go on the market last week for $260k. By the time I called my real estate guy it was under inspection and it is closing now less than a week later.

I definitely agree the market could make a very painful correction and this worries me though, and it is a struggle to decide whether to seriously consider buying at this time or not. Not incidentally my wife's parents were one of those on the 90% loss side of the 1990 Japan crash, and they are STILL paying for it, 17 years later.

I do have some money left over I could use to hedge (interest rate options on TLT, put options on homebuilders, mortgage lenders, [NFI, NEW etc]), but it isn't much, and timing option investments is very critical to their returns.

Now that it's been five, even ten years of 10%+ annualized returns, the question becomes have I been indoctrinated that this home is worth nearly a half million dollars?

Confused and tired of renting a dump in Seattle,

Chris said...
This comment has been removed by the author.
Chris said...

Stupid Blogger....

confused said...


If you have the means and plan on staying there for the next 10 years I don't think it is too bad. Just use conservative disciplines like no more than 3 times your income, 25% of monthly income for a motgage etc. If you buy within your means the market can get cut in half and it will not affect your ability to pay. I am saying if you ahve to buy. Otherwise, a 5% CD sounds very tempting. I pay 775 for rent right now. It would cost me about $3000/month if I were to buy the house I live in. That is just nuts and in few years it will be very evident.

matthew said...

I feel somewhat vindicated today at work!

Anonymous said...

I couldn't help posing this question after Fleck handed Seattle his great gift of "Seattle is in better shape than the rest of the US..."

I said: "Bill, you mentioned that Seattle was 'different' because there was less available land to develop, whereas areas such as Vegas and Arizona would be hit much harder - however, what do you make of areas with similar geography and density; such as San Diego and Boston. These places and many others are are going through major dislocations at the moment. During my 3 years in San Diego, the mantra was similar "With mexico to the South and Mountains to the north, there's no land. Housing will continue to go up up up!; further, values in King County have risen has much as 160 percent in the last 5 years. Based on this, why do you still think Seattle is different."

He responded "Well, you have a great point and I think you're correct. I was trying to point out that we don't, as of yet, have as much of an oversupply problem as some of these other areas you mentioned"

That's not word for word but I think it's pretty accurate. I made the comment because, overall, the entire forum was turning into a softball planning commission meeting, more or less. People were posing most of the questions to the Seattle planning Director, Diane Sugimura. (She kept speaking about the virtues of affordable housing and "green" housing; good luck with that!)

Maybe fleck wanted to get back writing his (column, highly recommended @ $10/mo) or he was afraid of offending some of the business leaders in the audience. I was hoping for more of a point, counter point between Fleck and Orser.

Orser believes his company is "safe" due to their median home price of $330K and the fact that they build in places such as Puyallup. He also pointed out that the median king county household income was $65,000; and that family could only afford a $265K home (10% down, 6.6% interest and approx 35%+/inc going to housing)... so the question was poised: How is this sustainable, even at your "low" prices.

He also pointed out that people were driving 1-2 hours each way to get to work (Where will the poor Puyallappians go to find affordable housing?). Is that sustainable? Is the price of home ownership worth sitting in the car all day long?

From what I can tell, Seattle is headed along the same path as SD, Mass, So. Florida, etc -- take a look around at all the high rise condos going up. These plans were made years ago and many have no choice but to go forward with building-- which will result in an oversupply of unaffordable housing.

Seattle is not special. We've had the same runup in prices that San Diego and Boston have - and I'll say it again, we're just LATE to the party (see .com crash and 9/11's effect on PNW)

matthew said...

2007 is going to be the year of great change!

Chris said...

confused - based on your sensible guidelines, that puts me around a $350k max price and that is right around where I was looking.

The place I'm renting now is $1400 versus a zillow value around $475,000. My mortgage calc (10% down, 6.0% fixed) gives this a monthly payment of $4100 ($3300 after tax benefit and principal paydown). This gives a mortgage to rent ratio of 2.7 (2.2 after tax/princ.) The scenario you gave above was a much higher ratio of 3.9. Are you confident with your numbers?

For all the general readers, one question I have is with all this talk of renting shortages in Seattle. If the condo market has made it a real pinch on renters then buying a reasonably priced condo may be sensible versus stretching finances thin on a SFH. For example, if I bought a place and moved out of town for a year or two AND the renters market stayed competitive then I would be in better shape?

matthew said...


If the ratio is higher than 2.0 its a better idea to rent and save your money.

betamax said...

Where's shug's rebuttal? For that matter, where's shug? Holiday? Hit by a bus? Or maybe the worm has turned?

Lake Hills Renter said...

Chris, you are making the assumption (as many do) that renting means renting an apartment. I rent a house and see lots of others for rent in the area. I'm not seeing a rental shortage personally, at least in my casual observation. Just the opposite in fact -- I see more "for rent" signs than normal right now.

Anonymous said...

>My mortgage calc (10% down, 6.0% fixed) gives this a monthly payment of $4100

If you're renting for $1,400, why on earth would you buy at nearly 3X the price? Are you factoring in PMI, Taxes, Insurance, Repairs, Upgrades (not to mention all those unforseen costs! I've had to replace HVAC units, a roof, had water damage, unforseen tax assessments, and was onced forced to pay the city $2,000 to do some sewer work after THEY put in a new sewer system and tore up the road in front of my house!)

>renting shortages in Seattle. If the condo market has made it a real pinch on renters then buying a reasonably priced condo may be sensible

a) there are no renting shortages. I just spent 3 weeks finding my new place and most people were willing to take LESS, no more. My current landlord did not raise the rent after our first year here either.

b) show me a sensibly priced condo? Why not live in 1000sq feet for $1200-1500 vs. paying double or more for virtually the same thing (not to mention the horrible risk to your financial future)

Stop buying into the hype that you'll be "priced out forever". That's a load of Bull$hit.

The "equity train" has derailed and will bring our economy with it. Seattle will not be spared, sorry!

The Tim said...

If the rental market is so tight right now, why are apartment complexes advertising on craigslist and offering incentives on recently remodeled apartments? You don't have to look hard at all to find more examples of your own.

Chris said...

Synthetik - granted this condo went super fast:


my mort calc says $1800 TMP (true monthly payment - whch accounts for mortgage, insurance, tax, HO dues and all the goodies PLUS some - I'm not here to argue in favor of buying a place - I'm here to compare apples to apples).

Now I pay $1400 + $115 average montly utility for a house in G'lake. $1800 to own versus $1500+ rent is a no brainer, even if prices don't appreciate.

As for renting, the landlord called a while back and said they wanted to raise rent and I just laughed at them. Interestingly I haven't heard a word about that since. But I haven't noticed any "great deals" on rentals on craigslist. If you see any please let me know. I would love to get out of my place into a nice reantl if it made financial sense.

The Tim said...

Check out P-I real estate "professional" Susan Ryan's non-sensical retort to Fleckenstein's outlook.

Anonymous said...

>$1500+ rent is a no brainer, even if prices don't appreciate.

I couldn't find that condo on Zillow, however $260,000 might seem like a "good deal" until you realize that it was probably worth around $100-120K maybe 5 or so years ago.

Do you really want to buy at Peak when there is a good chance 30-50%+ reduction in values are in order - especially for a property that's up around 97th St./Greenwood Ave.

Also, in the event of a serious recession (we may already be in a recession now) that I'm predicting by mid-2007, how safe is your job? If you are renting @ $1500/mo, you can easily move down to a 1 bedroom for $600-900/mo, much closer to Seattle (eg. Capitol Hill) in the event of an extended period of job loss or under employment.

You could be living in that 80's style condo for MANY years while you wait for your value to rise above $250K. That may take 10-15+ years (See Japan, 1986), or that may never occur if we are really experiencing energy depletion as Kunstler and many others believe.

Why risk it? Why not pick up a 3bd condo in Queen Anne/Magnolia/Madrona @ 1350 sq feet in 2-3 years for $250,000 that was $699,000 today?

Of course, I can't say that'll happen for sure, but I'd bet the complete farm (and I have) against property values increasing any more than they have.

At this juncture, renting provides you with many more financial and security options than buying.

Why be a slave to consumption/housing/automobiles, especially when all the evidence points to "the party is over".

Mat said...

I don't understand your "sky is falling" attitude. If indeed the market slows down, but that the region is "less dark", that actually means that the region will have a net gain over other regions.

If you're in a non-traditional mortgage and in over your head, yes, you're in deep doo-doo. For those of us who are still way up on our values, if we leave, we'll enjoy an even bigger spread versus the rest of the country.

The big story here isn't the "Seattle Bubble" - if anything it's better here than a lot of places. The real tragedy is the non-traditional lending that has desperately affected this bubble. In fact, it's my belief that the lending rules are 100% to blame for the increase and subsequent bubble. Remove that effect, and you do still have a net gain for the area.

It's not all that bad.

wreckingbull said...
This comment has been removed by the author.
Anonymous said...

>I don't understand your "sky is falling" attitude. If indeed the market slows down, but that the region is "less dark", that actually means that the region will have a net gain over other regions.

I don't see how this area is any different from other bubble markets? Whether looking at housing or the economy.

Oil prices go way up or another terror attack involving an airplane, how will Boeing do? How does Tech do in a recession? Answer: it gets creamed.

I'm new here but from what I understand, Seattle has always been a "boom and bust" town -- going back to the gold rush days.

>For those of us who are still way up on our values, if we leave, we'll enjoy an even bigger spread versus the rest of the country.

How are you going to sell your house when everyone else has the same idea? (See: Most of the rest of the USA right now) As a renter with plenty of liquidity, credit has no purpose for me: ultimately, if I have to leave in a pinch I can say vaffanculo to my landlord and I'm gone.

Most likely you won't price it correctly and it'll languish on the market. Most sellers follow the market down in this scenario. They don't 'see the light' until it's too late.

Sorry for the Gloom n' Doom, but that's just what the macro economics of our situation look like at the moment.

Seattle is not immune to what's going on in other areas of the country - or globally for that matter. 30% of PNW economy relies on global trade.

If the median home price in San Diego is close to that of Seattle, how can you not expect a migration of people and jobs back into that region? How is it reasonable to expect a King County average asking price of $545K to be sustainable when you can have 70F temps nearly all year round and pay $100K less than that?

Mikhail said...

I think Synthetik might be off the mark by arguing that the Seattle market is NOT special, and that it will be impacted if the rest of America has a severe housing crash.

From what I can tell, real-estate believers like Mat, Financeguru, and Meshugy don't really believe there will be a significant real-estate crash in the US (a drop in some select areas maybe, but not a general crash). If one doesn't believe there is a SEVERE national real-estate melt-down brewing, then I can fully understand how one might conclude that everything is peachy in Seattle.

Richard said...

The sheer volume of condos and conversions that sold above 85th on Greenwood Ave last year means we'll likely see a big jump in inventory there this year. There are also dozens of townhomes being built within 5 blocks of Greenwood ave.

A few flippers are already selling in the conversion at 9200 Greenwood, at a tidy 15-20% premium. That building started conversion last January.

confused said...


I have a great deal on rent. It should go for about $1,200 to $1,300 which would put the numbers in line.

I talk to a lot of builders who build in the 500k-750k range. I complain that we have eliminated the first time home buyer and lending standards haven't hit yet. Thet usually just laugh me off and say that their clients are affluent and have the cash. They don't have ot deal with people who cna't afford their homes. They don't get it. Who the hell are the people that are buying their new home going to sell to. You cut off new home buyers, you cut off the market. Nothing moves, it is all based on selling the crappy homes to some poor schmuck. Don't be that schmuck.

Synthetic- That was a great question yesterday. It think Fleck was just being polite to his envirnment. I would bet that he really thinks Seattle is gonna get creamed like everwhere else. Orser is a very bright guy. He knows it is coming too.

Matthew said...

The future is so bright, I gotta wear nightvision!

Alan said...

> Thet usually just laugh me off and say that their clients are affluent

I think people have different standards of what "affluent" means.

To the builders "affluent" probably means anyone who can qualify for a loan.

I looked at income data at the census a few weeks ago. I think it said that 12% of households make $100k-150k.

Does anyone know how many SFH's are in King County? It should be simple to compare population to SFH count to see what percentile of the population should be able to afford a SFH. From there one could look at income percentiles to see what the cheapest SHF should sell for if people only purchased at 3x income.

Chris said...

Does anybody here invest in derivative strategies? I'm thinking I could buy a house with 10% down and if the SuperCrash(TM) that many people on this site and are predicting comes to fruition then one could be well hedged for such an event.

Even better, renters on the side could invest in these strategies and then use enormous gains from price depriciation to buy even cheaper homes in the future.

But anyway, I am more for the former over the latter, as I usually use shorting/derivatives as a hedging-only, and not an income strategy.

A couple of example investments I already am speculating on are:

Toll Brother Puts
NEW Century LEAP puts

It's interesting to see these mortgage chop shops like NEW and NFI that pay 25%+ dividend yields -- much not be a whole lot of confidence in their future earnings potential! Hell - why buy a house making 12% a year when you can own a stock making 25%?? ---- LOL!!

When I read articles about those poor bastards getting foreclosed on who got duped into creative financing schemes, I wonder who made all the upside on those deals and then I see NFI's dividend yield and it all makes sense.

Comrade Chairman Greenspan said...

"A few flippers are already selling in the conversion at 9200 Greenwood, at a tidy 15-20% premium. That building started conversion last January."

Sounds like it beats the hell out of working at MSFT and propping up this moronic bubble like we're apparently supposed to.

Mat said...

You guys can be Bears, and that's fine. I'm not saying there isn't a surplus, but your Keynesian is off the mark. Someone said how we rely on global trade here -- good! US dollar weakness keeps us better off. Someone said "San Diego" -- well, if it was that different, people would move down there. As it stands, payroll is higher here than SD, making housing more affordable relative to that market.

Obvious exceptions aside, if we're going to compare regions, you guys are off in your pessimism. Yes, there's housing weakness, but the numbers don't lie - a little bad year beats the hell out of a really bad year.

Mikhail said...

Mat: "Yes, there's housing weakness, but the numbers don't lie"

I am just curious, Mat, as to whether you believe there will be a severe real-estate crash across America? Or do you feel that the talk of a nation-wide "bubble" is just overblown, and that only handful of areas will see major price declines?

If you actually believe that a major real-estate crash is starting in the rest of the country, then I am a little confused as to how you could think the Seattle area wouldn't take a significant hit. However, if you aren't a big believer in a general nation-wide crash, then your views on the Puget Sound market would make more sense to me.

officeboy said...

Not to jump all off topic but I'm pretty sure Aubrey is a guy.
(If it's the same Aubrey Cohen who used to write for the Bellingham Herald)

Vickie said...

Matt, check your numbers, Seattle's payroll is NOT higher than San Diego's.

Regarding Aubrey, I have e-mailed Him/Her a couple of times using the Ms. Cohen, moniker and was never corrected by him/her

Eleua said...

I'd like to address the "little less dark" made by Fleck at the Seattle CoC yesterday morning.

I was in attendance and to put the comment into the proper context, you have to understand WHY he said it.

The ONLY reason he said that the PNW might be a "little less dark" was due to the lack of mindless development on the scale of Phoenix, Orlando, Miami, and Vegas. On the subject of a speculative washout of the PNW market, he was decidedly pessimistic about Seattle's ability to prevent a complete disembowelment.

Be clear on those two points.

I have been reading his columns for 8.5 years, and I think I have a pretty good insight into his way of thinking about bubbles. Normally, he talks about stocks (specifically tech), but during speculative runups, he does say that some companies may not have all the negatives that his pet projects do, but all stocks will suffer to some degree based upon the bursting of the bubble. THE GREATER A STOCK (local RE market) BENEFITS FROM A MINDLESS BOOM, THE GREATER ITS EXPOSURE TO THE PAINFUL BUST!!!!!

So, with that in mind, how can we interpret his comments? First, consider his audience. He is a class act and does not make a habit of insulting his host. He has been on CNBC countless times, and has not once told them they are part of the problem on national TV. He says this on a regular basis when he is not on their nickel. The CoC is a de-facto bullish organization. If they were to endure a full barrage of what Fleck thinks is in our financial future, it would create an atmosphere of discomfort, rather than the avuncular setting that was desired.

Second, he is not an idiot. He sees Seattle for what it is when it comes to the mindless speculation and national/macro finance issues. Obviously, the PNW has held up well against the more overbuilt markets, but the main thrust of his answer to a question that I asked, was that the "liquidity tidal wave" (his words) is working its way through the system, and will leave many ruined in its aftermath.

Orster (to whom I directed my question) did say that they were concerned about the liquidity drying up, and they had no real solution for that problem.

Bottom line: Fleck expects the PNW to get gutted, just like many areas of the country. Liquidity and affordability will drive the pain in our region.

As for overbuilding...while the PNW is in good shape compared to Vegas, Florida, & Arid-zona, it is still getting plenty of new supply. Just walk around DT Seattle and check out all the building. Take a drive to the 'burbs and see all the houses that have been built since '04. I can tell you that the current development in the North Kitsap region (a very small community) will increase the population (or available housing) by a significant amount. Adding 1000 homes to a community of 20K is pretty significant. While not outrageous by Vegas standards, it is still outrageous, and will weigh on the market when the bust arrives.

Keep in mind that housing is an inelastic commodity. Prices go up sharply on reduced supply, and they also go down just as sharply on increased supply/reduced demand.

I hope that helps.

T,V & Mr.B said...

Bravo Eleau,
I think you put it perfectly. a leak in the pipe is still a leak. If it starts out just slight mist, in time it will be a burst pipe.

0x029A said...

Puh-lease! How can anybody still read Fleckenstein's advice and take it seriously?

Sure, he was right at the time of the .com bubble, but his track record since then is pretty dismal.

He's like the proverbial broken clock that's right twice a day.

T,V & Mr.B said...
This comment has been removed by the author.
T,V & Mr.B said...

0x029A "Sure, he was right at the time of the .com bubble, but his track record since then is pretty dismal."

What the heck have you been reading? Or do you have a comprehensive reading disability?
Fleckenstein only predicted the current National housing bubble in 2005 at the peak of the rise. I would say his track record is right on. But then, I can understand what I read.

Eleua said...


WOW! You sure have high standards. My guess is that anyone that has bold predictions, and is right at least 60% of the time, qualifies as a Jedi Master of finance. Fleck is well above that mark.

If you think reciting the latest momentum play, and getting every inflection point wrong, qualifies someone as "worth listening to," you are welcome to it. Personally, I think that takes no talent, and is a waste of space (even if that space is on cable channel 46).

If there is one knock against Fleck, it would be that he is usually too early. I think that when you are across the battlefield from THE FED, the MSM, and the entire LUMPENINVESTORIAT (who have a tremendous amount of power to forestall the inevitable) that is not much of an indictment.

softwarengineer said...


American Consumers will believe anything and when it comes to real estate the Seattle Area is the breeding ground of pig-headedness.

see related article:

Yes, we're the ones who invented the $5 cup of coffee and although we get upset with totally insane Seattle gridlock, we're the last environmental chicken to scream "overpopulation". We save three old growth trees and a spotted owl; then celebrate with an environmental pat on our back, like we saved the world. The Orcas whale has PCPs and mercury in its blood, we go in to denial and point at a few that are still alive, like the "dead areas' in Puget Sound aren't really dead or even remotely caused by the Seattle area overpopulation and over-development we encourage.

We drive a lot of foreign cars in Seattle and will gladly pay $10-14K for used ones with 100,000 miles on it, that sold new for $16K. We shun the perfectly good domestic cars as unreliable, that sell brand new for $14K (or 1/3rd the price used with 1/3 the milage)with twice the options and extremely positive JD Powers Quality Reviews to boot.

Yes, Seattle is a bad area to gage real estate or common sense in purchasing of big ticket items in general.

This is the area where buying new is king and the foreign kings make buffoons out of those that follow and buy used or too late. The Seattle Elite want you to listen only to them and become their buffoons, so they get rich and you get poorer buying their cast off junk.

This is a very bad area to gage a real estate bubble.