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Friday, February 16, 2007

Our Doom and Gloom Media

It seems that every time the local press prints a story that is slightly less than 100% "rah-rah, go home prices" people come crawling out of the woodwork to accuse them of using "doom and gloom" or "sensationalism" to sell papers. Accusations like that really amuse me, since (as regular readers of these pages know well) the vast majority of real estate stories printed by Seattle's two dailies are overwhelmingly positive about the market, despite looming signs of a slowdown.

Case in point. Take a recent AP story about the nation-wide housing slowdown. The P-I reprinted the story in its original form: Housing sales drop in 40 states. However, over at the Times, they couldn't let a headline like that slip by. No, that just won't do. So they whipped up their own version (additions in bold): Housing sales fall in 40 states; but not in Northwest

The slump in housing deepened in the final three months of last year with sales falling in 40 states and median home prices dropping in nearly half the metropolitan areas surveyed.

The Pacific Northwest bucked that trend, with the Seattle-Tacoma-Bellevue area prices rising 11.3 percent in the fourth quarter, the National Association of Realtors reported today. Spokane prices were reported up 12.2 percent, and Portland up 11.2 percent.
At this point I imagine the Times was pretty proud of themselves. But apparently after going to print, someone thought: "You know, adding just one paragraph might not be enough to get the message across. The Puget Sound housing market is so blisteringly red-hot that it deserves more than that. Let's add a bit more and print it again."
The slump in housing deepened in the final three months of last year, with sales of existing homes falling in 40 states and median prices dropping in nearly half the metropolitan areas surveyed.

Although Washington state's sales of houses and condominiums declined 16 percent, prices continued to climb, thanks to a generally strong economy.

In the Seattle-Tacoma-Bellevue area, prices rose 11.3 percent in the fourth quarter compared with a year earlier, the National Association of Realtors reported Thursday. Spokane prices were up 12.2 percent, and Portland up 11.2 percent.


Formerly red-hot areas were among the hardest hit as the five-year housing boom cooled considerably in 2006.

While some economists think the worst may be over for housing, others predicted more price declines to come in some areas until near-record levels of unsold homes are reduced.

The Puget Sound area is not now reporting an excess housing supply.

At the end of January, King County had a three-month supply of unsold homes, according to the Northwest Multiple Listing Service.
There, that's better.

You want another example of the sensationalist doom and gloom reporting we are subjected to by the local press? Okay, how about Aubrey Cohen's twist on the AP story, appearing in today's P-I: Area's housing prices still strong
Whatever is happening to the region's housing market, its home prices held up better than in much of the nation.

The price of a typical house in the Seattle-Tacoma-Bellevue area was $372,900 in the final three months of 2006 -- up 11.3 percent from the same period in 2005, according to data the National Association of Realtors released Thursday.

The association did not release figures just for Seattle, but the Northwest Multiple Listing Service reported the city's median price for houses and condos increased by more than 9 percent in each of the final three months in 2006, compared with the same months the year before.
I do have to give Mr. Cohen some credit though, as he did manage to bury a little bit of a warning in there between the sub-headline "Homes here buck national trend" and all the starry-eyed cheerleading:
Seattle isn't in the clear, however. The number of homes on the market increased for seven straight months, compared with the same months in the prior year, while year-over-year sales declined for six straight months before going up in January, according to the Northwest MLS.

The rate of price appreciation slowed in recent months, with a year-over-year increase of just 0.8 percent in January. January's median was down 9.5 percent from December. Some analysts have speculated that Seattle will see year-over-year price declines.
What can you say. They've got to throw in a little "doom and gloom" to sell the 'papes, right?

(Martin Crutsinger, Natasha Metzler, Elizabeth Rhodes, Seattle Times, 02.16.2007)
(Aubrey Cohen, Seattle P-I, 02.16.2007)

21 comments:

Chris said...

Here one of those Doom-and-Gloom articles.

http://www.dailykos.com/storyonly/2007/2/16/8349/97267

just remember - IT CAN'T HAPPEN HERE (repeat three times and click heals)

Terry said...

It can't happen here because it's different here! Seattle is bubble proof!

MSM articles are intended to influence market psychology / public opinion as much as provide actual news. Like this is something we all don't know already?

witzend said...

It will be interesting to see what they're writing come Fall.

YOY numbers ( and statistics in general) can be pretty misleading, as I think has been pointed out here before:

I don't wish anyone financial ruin, or the loss of a house, but these gains go against market fundamentals (and common sense). It has also been generally accepted that they were fueled in large part by easy (even wreckless) credit.

Prices will almost certainly have to come down, and, I believe, in direct proportion to their unjustified prior rise.

Although they may not come down as much as they would have, had this happened, say, thirty or forty years ago.

The difference, I believe, is in large part due to credit cards and consumer debt since this allows people to subsidize their income, and allows the price of certain "inflexible" commodities such as housing to respond as if people were making, by-and-large, say, 20+% more than they actually are earning.

Retirement?, well, that's a different story.

One thing seems fairly certain to me: If the Puget Sound region doesn't adjust downward enough to result in only an average (modest) gain over, say the last 5-10 years, then it will be stagnant for quite a long time - eight to twelve years perhaps.

I do feel safe making one bet: the era of the "housing slot machine" is over - for the generations in the workforce today, anyway.

blog said...

But housing is still very afforadable here, and there are so many high paying jobs.

FirstTime_HomeBuyer said...

Long time viewer of this site. First time poster....

First of all, thank you Tim for all your work in educating the public

With regards to the comment

"But housing is still very afforadable here, and there are so many high paying jobs."

I work at Microsoft, making 80K / year base. Even with that salary (which is not much), I find it very hard to afford a home on the East Side / Seattle. I am old fashion and would like to put at least 20% down but at these rates, its is nearly impossible. People talk about how microsoft is hiring X number of people and will continue to hire. A majority of the candiates Microsoft hires comes are college grads. Unless these college grads have rich dads and uncles, I dont see how they can afford houses at these rates.


Seattle is indeed a strong market as the numbers dont lie but all trends eventually will come to an end and the crazy lending will also eventually dry up.

rolandovich said...

The customers of print media are the advertisers, not the readers. The readers are the product.

Take a "story" in any paper that contains more advertising space than print and you're essentially getting propoganda. Real Estate is the best example of all.

synthetik said...

"But housing is still very afforadable here, and there are so many high paying jobs. "

I don't know "blog" but I'd bet that he was being facetious.

Comrade Chairman Greenspan said...

FirstTime_HomeBuyer:

Our fellow Borg that I talk to (also making 80K-100K/year) readily admit that they've made more from housing than their income over the last few years, and that they'd have trouble buying their own houses now. The ones who have owned since the last housing cycle are much more able to see this for what it is.

wreckingbull said...

firsttime_homebuyer

You still bring up a point which I don't think gets repeated enough.

To all those idiots that keep saying Microsoft, Boeing, blah blah blah will save us, they need to look no further than the monthly budget of regular, hard-working high-tech folks like you, me and many others on this blog.

No way in heck I would buy a Redmond SFH for 700K. Your salary is right down the middle when it comes to PNW high-tech workers. Someday, you will again be able to afford a median home.

Banteringbear said...

I recently moved away from the Seattle area. My decision was largely based on the hideous cost of living, but other factors as well. The idea that Seattle home prices will not fall greatly is preposterous. I have watched this bubble from the moment it began, to today. It has absolutely nothing to do with fundamentals, and everything to do with greed and speculation. Seattles' "but it's different here" attitude regarding real estate might be the worst in the country. They have some of the sleaziest realtors known to man. The city itself has changed quite a bit since I was a child. There is an influx of obnoxious 20-30 something yuppies from all over the country, particularly the east coast, whose know it all attitudes are not reflective of those born and raised in the area. With their snobbish, smug ways, they act as if they're the higher authority on anything Seattle. They are a terribly annoying bunch. Seattle is the "in" place right now. But this won't last forever. It is merely a phase. With the more than six months of grey skies and rainy weather, it will never be one of the top destination cities in this country. People are drawn to sunlight. When the tide turns, real estate crashes, the economy has a few hiccups, and the yuppies go back home, so will I. I'll see you down the road old friend.

Herb Wright said...

My wife and I are still investing in Seattle area real estate, but are not in a 'buying' phase right now.....just making payments and maintaining. I ran through all the information I could gather and put on paper my thoughts about how the market got to its current spot and where it might go.

Before making big decisions, sometimes it's useful to get as many minds working on a problem as possible. I won't ever pretend to know the future, but if you have money at stake, you do need to make some educated guesses about it.

If any of you has the time, I'd be pleased as punch if you could spare your comments on what I've concluded so far. It's a favor I'm asking, as the posts are lengthy, but I'm hoping on that someone will mention something I've overlooked and send me to further research.

If you just want to rant and call me names,let me know first as I have a lengthy collection saved from my wife, mother and in-laws.

I posted these on another blog, as they are too long to post here.

Thanks to whoever is kind enough to take the time.

http://biggerpicturere.blogspot.com/

Eleua said...

herb,

OK, I'll bite.

Ask yourself if you know what has caused PNW real estate to climb to its present insane level.

If you don't know what caused it to climb, you won't know what it takes to keep it there or what will cause it to go down.

If you don't know this answer, you are not an investor, but a speculator. That's fine with me, but it is important to have a realistic self-assessment when engaging in some sort of activity that takes a fair amount of personal ambition, wisdom, and timing.

I wouldn't touch PNW real estate at half of its current price. Risk is way too high for the amount of reward.

When people are buying for 10-15x income, you have to ask yourself if this is sustainable. For your investment to work out in that type of environment, high income multiples will need to become more of the rule than they are now.

Do your properties cash flow? If not, you are a speculator, and are taking a very risky gamble. The business model of losing every month, only to make it up on selling and taking the cap-gain is fundamentally flawed.

Where do your properties cap out? Can you calculate cap rate/EBIT and IRR? If not, why not? Could you get a better bang for your buck buying a CD? If so, ask yourself why you are "investing" in an inferior, risky, hassle-prone investment. Owning houses rather than CDs or cash may make for sexier party conversation, but if my returns are higher, and I sleep better at night, I'll take it.

What is your exit strategy? How long can you keep going if you have no appreciation? How deep can you go if the market puts you underwater? Are your renters good people, or one step above meth-head?

What situation would put you in a position to be forced to sell? How likely is that?

Are all your assumptions prefaced with..."the market goes up X% per year, therefore it makes sense to buy now...?"


I hope this is what you are looking for.

All the best,
Eleua - the unoffical wet blanket of Seattle Bubble.

Eleua said...

It sounds like banteringbear and I were separated at birth.

Erik said...

Bantering bear said:

There is an influx of obnoxious 20-30 something yuppies from all over the country, particularly the east coast, whose know it all attitudes are not reflective of those born and raised in the area. With their snobbish, smug ways, they act as if they're the higher authority on anything Seattle. They are a terribly annoying bunch.

Bravo! I was born in Seattle and I completely agree with your sentiments. I haven't moved away from the region but every week it feels like I move a little closer to that decision. If nothing else, I will at least be moving to Tacoma before too long, just to get a little further from the BS. I don't care about whether or not Seattle is regarded as a "world class" city by outsiders. Only transplants care about that. The city used to be a nice place to live before they started turning everything into yuppie boutiques, yoga studios, and condos. Everything's marked up based purely upon fashion or fads, real estate included.

Prices are more affordable in Tacoma I still won't be buying because the risk/reward equation is so badly distorted at this time. It's a shame, because in the end I would prefer to own my own place. I'll turn 31 this year and if the market were sane I'd have bought by now. Oh, well. I'll just put that on pause I guess. I hope that you're right about Seattle sliding off the radar again someday relatively soon. Then maybe we'll have our home back.

*whew* Thanks for bearing with me. I feel a little bit better now.

Herb Wright said...

eleua
Not exactly sure what you're biting on, but I hope it's nothing delicate. Thanks for the good questions.

In the blog I posted to, I did ask myself what has caused PNW real estate to climb to its present level. I have my theories, but it appears to be one among many. I'm trying to get confidence in a good theory, but all of them will have holes. I don't want to rewrite them all here, but I did post them on
http://biggerpicturere.blogspot.com/

We started buying in 1989. We paid off some, leveraged others and bought what we have today. I wish I could say for certain that high prices relative to income always make prices unsustainable, but Sydney, Australia has had price-to-income ratios similar to Seattle's current P/I for 25 years now. It they're having a bubble, it's apparently a tough one to pop.

Our properties did not cash flow when we bought them, but they all do now. We were cheap, ate a lot of leftovers, have never taken vacations except to visit relatives, and don't spend a lot on consumer toys in general.

Rental properties have not cash flowed in King County (using 20% as a down payment,)for at least 10 years now......and that was for less expensive properties like S. King County. To me, buyers of those are speculators. Will speculators ALWAYS get burned ? Really, exactly how risky are they being? I'm not sure that there is a broadbrush, simple answer.

Cap rates in Seattle have dropped significantly since we bought our 4-plex. I complained to my wife because the cap rate then was under 6 (2003) and we could have bought 9 or 10 cap rate in S. King. Now, Seattle caps are generally under 4 for 4-plexes, yet investors (speculators ?)especially out-of-state money, are buying them up faster and pushing cap rates even lower. Did we make a bad speculation with the 4-plex? We were offered 33% more than we paid for it a few months ago by a developer currently building on the same block.

We don't have exit strategies. We are both self-employed and real estate is our retirement. We will convert a SF to a triplex, but we don't intend to borrow to build. For rental properties in Seattle, it would take a large economic tragedy to cause their value to plummet significantly. In that case, we don't see many 'investments' that would make much better sense.

We generally have good renters, although the bad ones make the best stories..........pot grower with 74 plants, the 'importer' with $500,000 worth of weed in the garage from Canada....always entertain the cops in the bowling league.

Because we have been so cheap, it would take literally a depression to be underwater with the mortgages. We'll all be screwed then, but if the depression occurs after the mortgages are paid off, we'll take our chances with real estate. We both make decent, not spectacular, incomes so the rentals are our savings accounts. Paying mortgages down has allowed us to borrow against them when we needed to, but eventually the borrowed funds get returned.

cosmos said...

banteringbear

You beat me to the exit. My plan is to leave the NW within the next 3 years. While I wasn't born here, I've been here a long while (multiple decades). From my perspective, the quality of life has declined dramatically since I first arrived - particularly over the last 10 years. Besides the incredible congestion, there is definitely a lot more arrogance; oddly, this is true even among the outdoorsy crowd.

I do think Microsoft has played a big role in the changes, both in the housing market and attitudes in general - by attacting and highly compensating many workaholic nerds who get lost in code and their affluent work-shop-and-be-entertained lives. (Of course, this doesn't include every Softie! But as someone who has "lived" there, I'd say it's accurate about 75% of the people there.)

In the end though, unlike you, I won't return. I can't imagine Seattle regaining its former quaintness, beauty, serenity, and wholesomeness in my lifetime.

BTW - it is clear many people are comfortable with what Seattle has become. Obviously, they get to have their preferences - as do I.

Eleua said...

Herb,

If you have properties that were purchased 15 years ago, then you are probably in good shape.

It's the newbie RE tycoon-wanna-be types that make me puke. When you have a building that has an offer that puts the cap rate at 4, that is Mr. Market standing on your desk, jumping up and down, and screaming at the top of his lungs "SELL!"

A CD at a local bank pays almost 6% We are in WTF? territory around here.

If your sacrifices are behind you, enjoy the fruits of your investments. When it has been 10 years since anything has cash-flowed, and that 10 years is fundamentally coincidental with the runup in this bubble-like real estate, you should conclude what is obvious - sell to the idiot out of state speculators, and buy them when they get puked back onto the market in a few years.

Good to meet you. Enjoy what life has to offer.

E

Amit said...

Nice blog. A few quibbles about some of the facts here.

>> I work at Microsoft, making 80K / year base.

Base salary is not indicative of total compensation. The average compensation at the company is 118K. For anyone who was here in 03, average compensation should rise at least 7% for the next 2 years due to the new stock program.

http://money.cnn.com/magazines/fortune/bestcompanies/2007/snapshots/50.html

>> Unless these college grads have rich dads and uncles, I dont see how they can afford houses at these rates.

College grads don't need houses, they need condos or townhomes at best.

Eastside Business said...

Thanks to THE Tim! It is very good to read the thoughts of someone who does not have his head stuck in the sand.

Unfortunately, no area is bubble proof - regardless of what all the 'experts' are saying.

As a Broker and member of the media, I also take issue with those who talk Doom and Gloom in the media. Should the media be as pollyannish as many in the industry would like?

braintree said...

Eleua:

For the individual investor, the Puget Sound is not the place to invest in real estate. I invest in multifamiles across the US in emerging markets, and look for a cash on cash return of 15-20% (CAP rate is less important, though emergeing markets tend to offer higher cap rates). Adding to the nice return on cash is the future appreciation represented by the future growth in these markets (especially in ones where replacement cost is well above current acquisition costs - the Dallas metroplex is a good example - Supply will lag until values rise some more...and that will be the sweet spot to sell

I buy properties with as little as 50 units (using my own money as down payment), and form syndicates to buy larger properties (up to 300 units so far).

The west coast and Northeast are pretty well shunned by investors like me. That said, there are lots of great deals to be found in markets that have been stagnant but are now on the rebound (biggest indicator - job growth).

In the Puget Sound, you have either foolish individual investors betting on appreciation in commercial multifamily (but ignoring cash flow), or large institutions where small cap rates = diversity in a strong economy.

However, I would argue that average homebuyers only need to consider more advanced metrics if they are buying at 100% LTV, or otherwise leverage themselves too much. As I believe you have agreed on previously, an 80% LTV loan with a fixed long term rate at today's market rates - and assuming that the payments aren't way out of line with income (a little more wiggle room here given the other two factors), a purchase in today's market, in a location more likely to appreciate/depreciate less than other areas, is not a dreadful mistake.

In fact, I know many pilots who invest nationally as I do. They have the luxury of time and travel resources to visit these markets across the US, and typically have some money to make modest investments personally.

marin_explorer said...

"There is an influx of obnoxious...yuppies from all over the country, particularly the east coast, ...With their snobbish, smug ways, they act as if they're the higher authority on anything Seattle."

I'm originally from the Seattle area, and having moved to SF, we saw this same trend from the late 90s onward. I'm so tired of this "Ego-topia", that I'm soon moving on. However, I'm saddened to hear this plague has come to Seattle, because it's doubtful I will return home to live. Good luck with the pricks up there; I hope their egos are cut down to size by the ensuing housing/credit contraction.