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Friday, March 23, 2007

Real Estate Myth Debunking

I'm compiling two lists for future posts, and I'd like to enlist the help you, the intelligent readers, to help assure the lists are as complete as possible. The purpose of the posts will be to list common real estate myths and briefly debunk them one by one. Many common myths have had entire posts dedicated to them here in the past, which will of course also be linked to. Following are some examples of the kinds of things I'll be including on these lists.

The first list is "Seattle Housing Market Myths," which will contain items such as:

  • Home prices in Seattle are supported by:
    • Job growth
    • Population growth
    • Puget Sound's unique desirability
  • Prices here did not go up as fast as other places, so therefore they won't fall.
  • Prices can simply level off for a few years while "the fundamentals" catch back up.
  • etc.
The second list is "General Home Buying Myths." Here's a sample of what I've got so far for that one:
  • If you don't buy now, you'll be priced out forever!
  • Renting is "throwing away" your money. It's always (financially) better to buy, regardless of the circumstances.
  • Buying a home is a great way to "build wealth."
  • etc.
I have additional items for each list, but I'm sure there are plenty of myths I'm forgetting. What myths would you include on such a list? What's your best brief debunking of said myths?

51 comments:

Slinky said...

30-second debunking of "house prices keep going up because more people are moving to XXXXX:"

Demand for SHELTER will increase as population in an area increases. "Shelter" does not necessarily equal "house for sale." The demand for shelter can be satisfied by rental units, communal living arrangements (families and roommates), work-provided housing, live-aboards on boats, and all other kinds of shleter arrangements besides signing a mortgage on a property.

If the population in XXXX were increasing SO FAST that there was a true shortage in all forms of shelter, then it would show in areas other than the housing market. Rents would increase substantially. Household size would increase (aka more people living with roommates, family, etc). And the number of people living in "alternate" living arrangements such as the liveaboard boat would both increase and have to pay more for the privelige. Slip space costs money, too.

The only sector of the shelter market where large increases in price were observed was in the price of sale properties. Rent tracked inflation. I'll wager that the number of people choosing to have extra roommmates or live with their families didn't skyrocket, and last I was in Seattle I didn't see the marinas falling all over themselves to build new slips.

matthew said...

Just look at areas like Phoenix AZ. Massive immigration into the region making it the 5th largest city in the U.S. Builders have easily been able to keep up with the growth and then some. They overbuilt and prices are falling.

Kaleetan said...

If you debunk all these "myths" about the housing market, how do you explain the current run up in prices? Are all the gains attributed to speculation, loose lending standards and exotic loans.

Now that is the myth you are trying to sell.

WTF said...

Kaleetan,

Check your facts buddy. It's more of a credit bubble than a housing bubble. You make credit so cheap and easy to get, you create a bunch of additional prospective buyers driving up prices. You cut that stream off, you lose those buyers - guess what happens to prices....

Matthew said...

Kaleetan,

The answer is:

D. all of the above.

WTF said...

How about:

"they're not making any more land"

"growth management act is restricting the ability to build more housing"

"blame the Californians"

Scott said...

The US Census's figures for King County show that the county's population increased by only 5% between July 2000 and July 2006. That's 5% total, not 5% per year. Likewise, the Census also estimates that between July 2005 and July 2006 King County's population increased 1.5%. So population growth has not been a driver of increased home prices in King County at the rates that have been seen.

You can also take a look at my post Seattle Real Estate Market Conditions Jan 2007 where data from ZipRealty shows that the average sales price in Seattle declined 4.6% between Dec 2006 and Jan 2007.

wreckingbull said...

My favorite myth came from the Lil' Blue Babe:

Single family homes have become a luxury for the gilded few. The rest of you heathens shall be packed into dumpy multi-family compounds.

The real irony is that the homeowners who are forced into dumps these days, whereas renters get better homes and neighborhood for 1/2 the money. I say this as I type from my rented SFH on Sunset Hill.

Mikhail said...

I don't know if it's a "myth" per-se, but I hear the logical falacy about how Seattle real-estate can remain bullish even if the rest of the nation goes in the toilet all the time.

It strains all logical thinking to believe that Seattle real-estate prices could somehow remain unaffected if prices crash everywhere else in the country. There go the equity locusts... There go all the businesses (and jobs) that were goosed by construction and financial jobs...

I can understand how someone could say there won't be a nation-wide real-estate bust, but to maintain that Seattle would remain immune if one did occur is just barmy.

Christina said...

I can understand how someone could say there won't be a nation-wide real-estate bust, but to maintain that Seattle would remain immune if one did occur is just barmy.

Right... just because one lives in Seattle doesn't mean one's 401(k), Roth or SEP-IRA, 529 plans, pension plans or taxable mutual funds and stocks aren't holding collateralized debt obligations (CDOs) or GNMAs or derivatives about to blow. You don't have to have bought a house in King County in the last two years, or even beyond the last ten to be affected somehow: you just have to be invested in the stock market somehow.

meshugy said...

The two biggest talking points of bubble theorists are

1) Historically Low interest rates

2) Loose lending practices

Since rates are now higher then 2005 (probably the hottest year on record) and loose lending has been severely curtailed in the last 6 months, then how do you explain the continued resilience of the Seattle market?

Pegasus said...

Seattle is different.

I think this article splains it best:

Velkomin to the United States of Foreclosure

Monday, 19 March 2007
by Mike Whitney

The stock market is about to crash. The only question is whether it will quickly fall down the elevator shaft or follow the jerky flight-path of a man pushed down a stairwell. Either way, the outcome will be the same; stocks will nose-dive, the dollar will plummet, and the bruised US economy will be splattered on the canvas like George Foreman in Rumble in the Jungle.

Troubles in the sub-prime market have just begun to materialize and already 38 main sub prime lenders have gone kaput. Foreclosures have reached a 37 year high, and an estimated 2 million homeowners will be put out on the street in the next few years.

And that’s just for starters.

The contagion has spread beyond the sub prime sector to other ARMs (Adjustable Rate Mortgages) where late payments and defaults are cropping up faster than their sub-prime counterparts. According to Goldman Sachs chief economist Jan Hatzius, “Prime ARM delinquencies are above their worst levels of the 2001 recession…. By contrast, sub-prime fixed-rate delinquencies are well below their recession levels.” (Barrons)

more:

http://www.atlanticfreepress.com/content/view/1201/81/

Matthew said...

Shug,

Loose lending has only been tightened in the last couple of weeks. It will get tighter, and the effects will not be fully felt for another 6-7 months. Sit back and watch.

Kaleetan said...

Heres another myth

"Seattle's housing market lags behind san diego by a year"

This is total BS.. i will give you one stat about san deigo.

“For the fourth year in a row, San Diego County saw thousands more people leave for other destinations than relocate here, cementing its position as one of the nation’s top 10 losers in that category, new census figures reveal.”

“That ranking is all the more stunning given that two of the counties ahead of San Diego – Orleans Parish and St. Bernard Parish in Louisiana – were devastated in 2005 by Hurricane Katrina.”

“Between July 2005 and July 2006, 42,034 more people moved from San Diego County to other places in the country than came here from elsewhere in the nation, according to county population estimates released today by the U.S. Census Bureau.”

WTF said...

A new take on the old saying, "Loose lips sink ships":

Loose lending sinks economies

meshugy said...

Loose lending has only been tightened in the last couple of weeks. It will get tighter, and the effects will not be fully felt for another 6-7 months. Sit back and watch.

But I thought you said after March, prices would go down. Are you now saying it won't happen till this fall?

Scott said...

The Seattle Times has a headline today that says "Census shows folks flocking to King County." When you read the actual numbers, King County grew 1.5%; which is actually less than the whole state's growth rate which was 1.7%. So the headline is misleading in a way which panders to the prejudices of the anti-growth crowd. In any case a 1.5% increase in population wouldn't justify high single digit or double digit rates of home price appreciation

MisterBubble said...

"But I thought you said after March, prices would go down. Are you now saying it won't happen till this fall?"

Last I checked, "this fall" comes after March.

That said, I don't recall hearing any such thing from matthew. Perhaps you're making up facts again, Hammer?

meshugy said...

That said, I don't recall hearing any such thing from matthew. Perhaps you're making up facts again, Hammer?

matthew said...I think my prediction of this market topping out in March 07 is going to be dead on.

meshugy said...

Sorry...link got messed up:

matthew said...

plymster said...

Here's what matthew said:
I believe that next months [March 07] median house price will be the highest Seattle will see in the next 5 years.

His statement today:
Loose lending has only been tightened in the last couple of weeks. It will get tighter, and the effects will not be fully felt for another 6-7 months. Sit back and watch.

To paraphrase: We'll peak in March. The downside of the lending tightening will not truly be felt until November.

I can see how this doesn't make any sense to you 'shug, since matthew is relying on logic, and didn't post a link from the great depression and claim it was breaking news. Likewise, he didn't post sales numbers from New Century and try to claim that they represented the entire industry.

Matthew, you and your crazy logical, truthful analyis.

Deejayoh said...

pwned!!!

refractedthought said...

Not everyone here agrees with the assessment, but I for one think the numbers will be significantly affected by standards tightening before this fall. I would actually be surprised if we didn't at least start to see some effect in March's numbers.

As for severe tightening in the last six months -- Shug, you spin more than a clothes drier. Try less than six weeks.

meshugy said...

Try less than six weeks.

Right, our bet is still on? If we don't have double digit drops in June, then you have to be my pal!

refractedthought said...

Oh, I'll hold good to that bet. And I'm gonna win it too.

But I said nothing about being your "pal."

Lionel said...

If there's such a housing shortage in Seattle, how is it that I was able to find a perfect house for a reasonable rent, exactly where I wanted to live? Craftsman. Check. Three bedrooms. Check. Walk to UW. Check. Walk to Ravenna park. Check. Access to three good elementary schools. Check. Walk to Zoka coffee. Check. I literally could not have imagined a better place for my family and me, AND it's not expensive. The only scenario in which this makes sense is where an equity bubble has hyper-inflated away housing prices. I look forward to purchasing this same house for 30% less three years from now.

meshugy said...


But I said nothing about being your "pal."


But that's the wager!

uptown said...

How about debunking the myth of how much it really costs to maintain a house in the wet and soggy (but beautiful) northwest?

My parents have lived in the same house (in one of the dryer areas) for about 20 years. The house was built in the 70's.

-Soon after moving in they redid both front and back decks. Painted interior.

-After 5-10 years: they added some windows for more light, replaced kitchen counters, and replaced exterior siding on part of house. Painted exterior. Replaced front door. Replaced carpet downstairs.
New washer and dryer installed.

-After 10-20 years: replaced windows (vacuum was gone in most windows, causing them to fog). Replaced roof. Updated one bathroom. Replaced outdoor stairs on side of house.

-Things that should be done: replace front deck again (not with wood this time). Replace water heater. Replace wooden garage door. Replace carpet upstairs. Update other bathroom.

Home ownership can be expensive; even when you try to hold costs down like my parents have.

0x029A said...

I'd like to debunk the myth that KVI is a legitimate radio station.

It's more of an experiment involving mentally retarded people... on both ends of the microphone.

Jillayne said...

Homebuying myth:

"you can totally trust your loan officer"

Reality: your loan officer has absolutely no duty to put your interests above his or her own intere$t$. The relationship is strictly retail: I can take you for all I can get away with. If you can't understand what I'm saying and what you're signing, it's not my problem.

Obviously not all loan officers treat their clients this way. However, a consumer who puts total trust in his or her loan originator is an easy mark.

EconE said...

Jillayne said...

Homebuying myth:

"you can totally trust your loan officer"

Reality: your loan officer has absolutely no duty to put your interests above his or her own intere$t$. The relationship is strictly retail: I can take you for all I can get away with. If you can't understand what I'm saying and what you're signing, it's not my problem.

Obviously not all loan officers treat their clients this way. However, a consumer who puts total trust in his or her loan originator is an easy mark.



Is it possible that this is the same Jillayne that said...


Why would a consumer need a class before embarking on homeownership? Isn’t this what real estate agents and lenders are for: to help educate the consumer?


...over on the RCG blog Feb 12 2007?

Jillayne said...

Hi EconE

That absolutely was me. In context, I was referring to not using our tax dollars to teach children in junior high school how to amortize a loan, which is what the Nat'l Assoc of Mortgage Brokers is advocating. Instead, NAMB should focus on educating its loan originator and mortgage broker members before coming into the classroom and teaching 13 year old kids how to avoid predatory lenders and how to understand exotic mortgage loan products. The following link is dated Sept 06.

http://www.namb.org/namb/NewsBot.asp?MODE=VIEW&ID=148&SnID=1473830157

EconE said...

The National Association of Mortgage Brokers is the voice of the mortgage broker industry, representing the interests of mortgage brokers and homebuyers since 1973.

Please don't dig yourself into an even deeper hole Jillayne. Your statements in general are quite contradictory.

You didn't seem to be in favor of any education of the consumer outside of what the realtor and the lender would "teach" them.

The NAMB has had 34 years to get it right. They are now a day late and trillions of dollars short to even feel that they deserve to come to the table and plead for self regulation.

Fox guarding the hen house.

Eleua said...

Plymster said,

I can see how this doesn't make any sense to you 'shug, since matthew is relying on logic, and didn't post a link from the great depression and claim it was breaking news.

I just woke up my 4yo after laughing at that statement. That statement has taken over the #1 slot for "slam/comment of the week," which was previously held by Mr. Bubble and his observation that 'Shug is no barometer because a barometer gives USEFUL predictions.

Too funny!

matthew said...

Shug,

No. I am still saying March will be the peak. But the additional lending tightening won't be felt until 6 months from now.

matthew said...

It is good to know that some of what I am saying is sinking in though!

meshugy said...

No. I am still saying March will be the peak. But the additional lending tightening won't be felt until 6 months from now.

Peak what? Prices...are you predicitng prices in April will be lower the March?

Lisa said...

"The only sector of the shelter market where large increases in price were observed was in the price of sale properties. Rent tracked inflation."

Bingo. Rent tracked income as well, because there is no voodoo financing to help pay your rent. But with home purchases, EVERYONE (from well qualified buyers to subprime) had access to mortgage loans that exceeded their ability to pay.

Pegasus said...

It can't happen here. What if Microsoft and Boeing experience a slow down at the same time? Like in the rapidly arriving recession/depression?

Houses cheaper than cars in Detroit

By Kevin Krolicki
Mon Mar 19, 11:48 AM ET



DETROIT (Reuters) - With bidding stalled on some of the least desirable residences in Detroit's collapsing housing market, even the fast-talking auctioneer was feeling the stress.


"Folks, the ground underneath the house goes with it. You do know that, right?" he offered.

After selling house after house in the Motor City for less than the $29,000 it costs to buy the average new car, the auctioneer tried a new line: "The lumber in the house is worth more than that!"

As Detroit reels from job losses in the U.S. auto industry, the depressed city has emerged as a boomtown in one area: foreclosed property.

It also stands as a case study in the economic pain from a housing bust as analysts consider whether a developing crisis in mortgages to high-risk borrowers will trigger a slowdown in the broader U.S. economy.

Realtor Ron Walraven had a three-bedroom house in the suburb of Bloomfield Hills that had listed for $525,000 sell for just $130,000 at the auction.

"Once we've seen the last person leave Michigan, then I think we'll be able to say we've seen the bottom," he said.

more: http://tinyurl.com/2tv4q8


Remember that old billboard ad in Seattle saying for the last person to turn out the lights?

S Crow said...

The lender tightening is being felt today. I feel it too.

Jillayne said...

econe

Once again, you're quoting out of context, and missed several comments from me supporting your viewpoint.

Non-profit agencies do a good job of educating uninformed consumers about the home buying process. Some lenders and some realtors also do a good job of helping a first-time homebuyer learn about the home-buying process.

Right now, I'm the only one, besides non-profit government-sanctioned agencies, offering classes to homebuyers or refinancing home owners about how to avoid predatory lenders.

NAMB does not want to self-regulate. They have a code of ethics with no teeth, and no enforcement mechanism to handle consumer complaints. On their website, if a consumer has a problem with one of their members, NAMB directs the consumer back to the state regulator.

NAMB is a political trade organization with lobbyists working for the intere$t$ of its members. In the latest press release, you'll see that right now they are working to lower the barrier to make it easier for mortgage brokers to originate FHA loans. Am I in favor of this? No.

http://www.namb.org/namb/NewsBot.asp?MODE=VIEW&ID=166&SnID=1342881967

You and I agree that NAMB does not want to self-regulate its membership. Punch in the name of a known predatory lender and you may find that they are a member of NAMB. An easy example is Ameriquest. Still an NAMB member after that massive predatory lending settlement.

Jillayne said...

Uncheck "deals, tax liens, fsbos and bankruptcies" and you get 1098 foreclosures for King County.

http://www.foreclosure.com/search/wa_033.html

514 Snohomish County

928 Pierce County

When you leave those boxes checked, the numbers skyrocket.

David Losh said...

Good Morning!
I love this site!
As a Real Estate professional with over thirty years of experience I agree with the majority of the thoughts or opinions expressed on this site. There is a bubble. This particular market has brought out some of the worst swindlers I have ever seen. It shames me to be associated with the new wave of Real Estate agents in the market place today.
Mortgage reps, banks, and bankers have stolen the dreams of millions of people in this country and also abroad. Many of the people who came here with the American Dream have been robbed.
OK? Let's talk about it. Real Estate is not for everybody. It's hard work. Yes I repair, yes it costs money, yes I lost millions of dollars, and yes I've made millions of dollars. That's the business. As my an early mentor told me, "we're not in the business to sell Real Estate, we're in the business to buy it."
You're right the market is down, it will continue to go down, there is no happy face to put on that. The Board of Realtors have added a million agents to thier roster. The person who cuts my hair has a real estate license. They tell people that home ownership is easy and it's not. I tell people all the time to keep renting; it's a part of my business.
There is no trading up or sideways or speculation that makes sense as a stand alone strategy. I have shared housing, worked two jobs, and eaten more beans than a body can stand. You do what you have to do and never stop working. It's a job. There is a light at the end of the tunnel if you're good at it, but many people end up with nothing. You pay your mortgages with the idea your properties will be owned free and clear so you can retire.
It is possible by virtue of all of the things this blog talks about. Falling house prices coupled with inflation make a powerful combination for the ability to pay off a mortgage with future dollars. The trick is holding onto the property in the mean time.

meshugy said...

To quote Schiller: Mortgage rates have been falling for 25 years and when I look at the whole history of mortgages and home prices, I don't see a strong relationship. The psychology is more important. In the late '70s, interest rates rose to double-digit levels, and there was still a housing boom.

The Bubble Guru's Take On Housing

So Shiller, the God of economic predictions, doesn't think rates matter.

So how would he explain this?

When It Comes to House Prices, the Bloom Is Off the Cactus

Some areas continue to do well. Prices in Seattle rose 12.1 percent last year, the only double-digit rise, although Portland, Ore., came close with a 9.9 percent gain.

Seattle was the only city in the US with double digit gains! I think the verdict is out...we are indeed special. But for how long? According to Shiller, this can only be attributed to a unique market psychology in Seattle. Not surprising, we are America's smartest city!

But will it change?

matthew said...

Shug/Hammer,

Yes I am predicting that prices in April will be lower than March. That is what peak means right???

You are a quick one!

meshugy said...

Yes I am predicting that prices in April will be lower than March. That is what peak means right???

Are you talking about SFH, Condos, or both?

That's a pretty brave prediction to make smack in the middle of Spring selling Season.

matthew said...

I am talking SFH + Condos

Yes it is brave prediction, I am a brave man.

Sean said...

And the biggest myth of all:

The housing bubble is going to burst and I'll finally be able to afford the house of my dreams.

matthew said...

Move along troll.

Joel said...

Myth: Seattle is a desirable area to live in.

I know that this may be hard for most of you to accept, as I have noticed that Seattlites are even more stuck-up than people living in San Francisco (I'm from that area), but consider it for a moment. Everybody thinks, or wants to believe, that the area they live in is more desirable than most so just because you think this area is more desirable doesn't mean most people think the same way. The fact is Seattle is no more desirable than any other large, metropolitan, costal city. So I'd imagine we'll experience the same housing bubble problems as those other coastal cities.

Sean said...

Matthew, just because I'm not a member of this blog's flock doesn't make me a troll.

As a Seattle homeowner, it's surreal to read these comments when most of these "myths" have been proven true for me.

My house has in fact been the most profitable investment I've made.

Had I not purchased when I did, I would certainly be priced out of this market.

I've put off buying a new house in anticipation of lower prices, only to find out a year later that the houses I passed on are now too expensive for me.

Apparently, I live in a mythical version of Seattle.