Seattle Bubble on Inman News

The remaining portions of Glenn Roberts' piece on Bubble Blogs have been posted to Inman News. I recommend you read it today, because after today it is only accessable to subscribers.

Read about Glenn's conversations with a "Bubble Debunker" (real estate agent), John Doe of Southern CA, Bill Bond (Housing Panic contributor), an anonymous blogger from Southern CA, and Inman blog commenters

Oh yeah, there's also a Q&A with yours truly.

Below is the full text of my Q&A interview with Glenn.

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Hello. I am a real estate reporter for Inman News and I'm working on an article about the real estate bubble debate. I'm wondering if you'd care to share your thoughts.

Many blogs have been born around the notion of a housing bubble. The definition of housing bubbles; explanations for their formation and fate, size and location; and the very existence of housing bubbles have fueled arguments among real estate enthusiasts and experts alike for several years. And everybody seems to have an opinion. The debate has inspired T-shirt designs and sales of other bubble-related memorabilia.

First off, I would like to make it clear that I am highly focused on the issue of a residential real estate bubble in the greater Seattle area. When it comes to the national market or other specific regions, I am merely a consumer of other people's opinions. Therefore, I do not feel qualified to make predictions or assertions regarding any housing markets outside of Seattle.

Also, I do not claim to be an expert on issues of real estate or economics, and I have never received formal training nor held a job in either of those fields. That being said, I have spent a large amount of time researching these topics and taking in data and opinions from all sides of the issue. As an "amateur enthusiast" I definitely believe that I am qualified to make predictions and assertions regarding the local housing market. If you would like to see data to back up any such assertions made in the responses below, I would be happy to provide it, just ask.

[Although Glenn did not request any supporting information from me, I have added links throughout this online version of my responses to posts where I explore the topics mentioned.]

i) Is this the real estate equivalent of the global warming issue? Will there ever be a unifying bubble theory or are we doomed to never find a consensus?

I don't think the real estate bubble is anything like the global warming issue. We will know in just a few short years whether there is/was a real estate bubble or not. The "unifying bubble theory" will be what is written in the history books. In the late '90s the consensus was that we were in a "new paradigm" and that tech stocks were a sure thing. Looking back just a few years later, we see that it was in fact a bubble, unsupported by the fundamentals. The real estate bubble will be the same.

1) What makes you a real estate bubble believer, a bubble debunker, or bubble neutral?

I would describe my feelings about whether there was a bubble or not at the time I started Seattle Bubble as "leaning toward bubble believer, but open to exploration." Since that time, all the data I have investigated has pointed to the existence of a housing bubble in Seattle.

In the last six years:

• Home buying demand has grown much more rapidly than the number of jobs.
• Home prices have grown 86%, while...
  • Incomes have grown just 14%
  • Rents have held steady or in some cases actually decreased
• Affordability has dropped 43 points below its 1993-1999 average
• Exotic mortgages and zero-down financing have become more and more common

Furthermore, every time I investigate the data behind the most common claims of factors that will prevent the Seattle-area housing market from declining, I find that the data does not support the claim.

• As long as the number of jobs is increasing, home-buying demand will stay strong: FALSE
• People are moving here faster than new housing is being built: FALSE
• Growth Management laws have restricted supply too much: FALSE

I just can't ignore the facts. Things are seriously askew, and overripe for a serious correction.

2) How do you define a housing bubble?

I believe there is a housing bubble when home sales prices become seriously out-of-line with the fundamentals that should drive the housing market: fundamentals such as incomes and the cost of rent. The only difference between the driving forces of rental prices and the driving forces of home prices is that home prices have a speculative premium built in.

The easiest way to spot a housing bubble is to compare home purchase costs with rental costs. If you are looking for a quantifiable definition, if it is more than 1.5 times more expensive to purchase as it is to rent a comparable home, I would say that is a bubble.

3) How does this definition fit (or not fit) the national housing market? Which regional or local housing markets have exhibited the most bubble characteristics?

As I stated above, I really do not feel that I am in a position to make assertions about markets outside of Seattle. However, my definition is simple enough that you can get a general picture for markets using basic data available on the Census FactFinder website. The available data is overly broad and does not make for the best direct comparison, but it is at least worth looking at. Here are the rent vs. own ratios (as in, median monthly mortgage payments are X times median monthly rent) as of 2005 for a few areas (whole counties) according to that source:

• Seattle: 2.2
• San Diego: 1.9
• Boston: 1.9
• Miami: 1.8
• Phoenix: 1.7
• National: 1.8

As you can see, many cities across the country as well as the nation as a whole apparently meet my most simple definition of a housing bubble.

4) Which bubbles [have already] burst? Which ones have deflated? Which ones are inflating? Which are about to pop?

Again, with the caveat that my focus is on Seattle, I do not think that any of the housing bubbles across the country can honestly be said to have popped yet. In many places, including the nation as a whole, there has been a slight deflation, but I am of the opinion that things are just getting started.

Only a few regions are still inflating, and as of last spring Seattle was definitely one of them. I can't really say whether we still are or not, because the vast majority of price gains come in a 3-month time span in the spring, which we are presently just on the verge of. Personally I expect price gains to be very small this year in Seattle, if prices even go up at all.

5) Are there any common traits among the bubble markets?

Yes: Loose lending standards and a mass psychology based on two beliefs: "Home prices are shooting up, so if I buy now I will reap the rewards of large appreciation." –and– "If I don’t buy now, I may be priced out forever!"

7) Is it possible to accurately identify the existence of a bubble before it is gone? Explain.

Can a bubble be identified? Absolutely. When the price of an item becomes grossly out of line with the actual intrinsic value of that item, you have a bubble. However, what cannot be identified is exactly how a bubble will dissipate. Perhaps it will pop rather suddenly, perhaps it will gradually deflate, or perhaps it will simply stagnate for a very long time while the fundamentals catch back up. I will say that that last option does not seem very likely.

8) How are bubbles born and how do they die?

It is all primarily about mass psychology. When a large enough group of people get it in their heads that purchasing something will result in guaranteed high returns, it becomes a self-fulfilling belief. Unfortunately it is basically akin to a pyramid scheme, and eventually there is no one new to buy in. When that happens, people finally realize what a crock it was and they all try to get out at once. This of course causes prices to plummet, bringing the death of the bubble.

9) Why do people get so fired up about the concept of a housing bubble?

That is a question I have often asked as well. I think there are a variety of reasons for the emotional charge that some people exhibit. Some homeowners bought into the idea that their house will appreciate endlessly at 10%+ per year, and are defensive against any suggestion to the contrary. Some renters are frustrated that home ownership has moved out of reach, seemingly for no good reason. Of course, anyone in the real estate business gets defensive about the notion of a bubble because a bursting or deflating bubble would affect their bottom line.

10) Will there ever be an explanation for bubbles that we can all agree upon?

I doubt it.

11) Will there ever be a time when the discussion about bubbles goes away? Is this just a passing fancy?

I imagine that we will stop discussing bubbles when they stop crapping all over our economy. Seriously though, the root of the problem is that people want a way to make money quickly and easily. If an opportunity comes along that appears to offer that, they will jump on it. There are no guaranteed shortcuts to riches, but as long as enough people keep jumping on the latest "sure thing" with their investments, we are doomed to see plenty more bubbles (real estate or otherwise) in the future.

12) What has motivated you to participate in the bubble discussion and what have you learned? What has happened with traffic volume at your blog site as the U.S. housing market has slowed? What is your background in real estate/economics?

I started the blog primarily as a place to keep track of everything I was reading while I researched the housing market. My wife and I had been "window shopping" for a home, and were extremely discouraged with how unaffordable they all were, despite our above-average income. The more I researched the housing market, the more disturbed I was about the state of things. A good summary of what I have learned is stated above in response to question 1.

In 2006, monthly traffic to my blog increased nearly seven fold. However, since I only started the blog in August 2005, that is probably primarily a function of the blog's newness rather than the state of the national market.

As I stated above, I do not have a "background" in real estate or economics. My formal schooling and career experience is in the field of electrical engineering. As someone with a very analytical mind, able to seek out and process data, I feel that I have built a fairly complete picture of the local real estate market.

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(Glenn Roberts Jr., Inman News, 02.16.2007)