Misdirection Master Strikes Again

In what is becoming a bit of a regular occurrence, Seattle's #1 real estate cheerleader yet again wields her powers of misdirection in response to a probing reader question.

Q: There is an entire group of people today who've never gone through a major recession. How will home prices be affected if we do have a recession like the pullback of 1974?

A: The recession of 1974, caused by high inflation and an oil crisis, took the wind out of the housing market. Homebuilding dropped 33 percent, according to Time magazine's Dec. 9, 1974 cover story. The Federal Reserve clamped down on the money supply. Mortgages became harder to afford.

But if we were to have a repeat of 1974, much more would happen because recessions cause widespread economic damage.
...
Exactly what that meant for house prices is hard to know because data from that decade is sketchy.

We can say, however, what the local fallout was from two milder, more recent recessions: 1990-91 and 2001-2003. The rate of appreciation fell, but house prices in general didn't. Here are the numbers:

After rising 28.9 percent in 1990, King County single-family home prices basically flat-lined for the next three years, rising just 1.2 percent in 1991, 0.1 percent in 1992 and 1.7 percent in 1993. Then they began rebounding, culminating with 10.1 percent appreciation in 1999.

It would appear that whenever the answer to a question is a bit too difficult for Ms. Rhodes to swallow, she decides to answer a completely different question that wasn't even asked. In this case, the question she appeared to be answering was actually "what is a recession, and how would Seattle be affected in a very mild one?"

Of course, the answer to that question is reassuring and ultimately useless.

(Elizabeth Rhodes, Seattle Times, 04.14.2007)

Mortgage Mess Difficult to Ignore

Take a look at the front page of the Seattle Times website this morning:

Click to enlarge

That's Coalition warns of "mortgage tsunami", followed by Accounting, executives at lender New Century investigated, Fraud charges at Metropolitan Mortgage & Securities settled, and of course Mess unlikely to break economy.

First off, I don't think the term "mortgage tsunami" is appropriate, since a tsunamis come with little warning and through no fault of those in their path. I'd call it more of a "mortgage harvest," considering that the mortgage banks and homebuyers are simply reaping what they have sown.

And why is it that they would like us to believe that the ongoing mortgage "mess" is not going to "break" the economy?

However, while stocks of subprime lenders have been pummeled, the industry's effect on the broader market is likely to be muted. "All told, subprime mortgages are worth about $640 billion, and that isn't chump change," says Bob Gay, economist and managing partner of Fenwick Advisers. "However, it's only 0.6 percent of annual gross domestic product. ... On the consumer side, it's not like every subprime mortgage is going to default and get repossessed."

Delightful. An argument that basically amounts to "because we say so."

Hold on tight and enjoy the ride, everybody.

Seattle is Different. We're Totally Immune.

Dow, Nasdaq, S&P500

Click to enlarge

Microsoft & Boeing

Click to enlarge

Update: By request, here is a graph of today's stock performance for a handful of other locally-based companies.

Other Seattle-Area Companies

Click to enlarge

For those of you keeping score at home:

• Boeing: -1.95%
• Microsoft: -4.12%
• Amazon: -5.00%
• Starbucks: -3.94%
• Nordstrom: -7.59%
• Costco: -3.48%
• Washington Mutual: -2.25%

Some immunity.

Bubble Link Roundup

It's time for another link roundup: a list of links that are worth posting, but not each as their own post. Some of these are Seattle-specific, some aren't.

• Keith at Housing Panic provides a concise history of the housing bubble.
• Calculated Risk expects a recession in '07 and explains what would change his mind.
• The state legislature might take a short break from the important business of neutering the initiative process and imposing an income tax to pass a bill "protecting" renters from condo conversions.
• Matt Goyer points out some of the problems Vancouver, BC is facing thanks to the condo boom there.
• Blogging Realtor Susan Ryan takes Bill Fleckenstein to task for not providing data, yet utterly fails to provide any data of her own.

Seen any other good snippets lately?

Does Job Growth = Home Buying Demand?

An article in the Times yesterday about the Puget Sound's job recovery following the dot-com bust got me thinking again about the oft-claimed jobs to home prices correlation. The usual assertion goes something like this: "Prices are justified because our economy is strong (i.e. - lots of jobs), and as long as we keep adding more jobs, home prices will not stop increasing, because more jobs equals more demand." It's certainly a comforting belief for inflated housing enthusiasts to hold when the local job situation is on an upswing:

Even though it ended on a somewhat muted note, 2006 was still the best year for job creation in Washington in nearly a decade, according to figures released Tuesday by the state Employment Security Department.

The state averaged nearly 2.87 million nonfarm payroll jobs last year, a gain of 3.2 percent, or 91,500 jobs, over 2005's average. That was the most nonfarm jobs added in a year since 1997, when 98,600 were created.

The year-end figures also show that 2006 conclusively marked the Puget Sound region's full recovery, in terms of total jobs, from the dot-com collapse and subsequent recession of the early 2000s.

The article included a nice graph showing the number of jobs in the four-county region since 2000. It has been well demonstrated in other markets that job growth or loss does not directly relate to home prices, but I thought it would be interesting to compare the Seattle Times graph with some data from the Seattle Bubble spreadsheet to see how well the more jobs = more demand = rising prices claim has held up in King County over the last five or six years. To obtain data about the number of jobs in King County I went to Workforce Explorer, the source cited in the Times article.

First I present you with the graph that comes closest to supporting the view that jobs are the primary source of demand.

Click to enlarge

When you compare the percent change year-over-year in both the number of jobs and the median (residential only) home price, the curves actually almost line up, with both job and home price changes being increasingly positive from about early 2003 to the end of 2005. However, the total change in home price increases during that time went from +7.3% to +20.0%, while the total change in jobs went from -1.9% to +2.3%. Despite the similar curves, I think it would be difficult to argue that such a slight change in the job situation drove the major price increases seen over the same period.

Here is same data presented in a slightly different way:

Click to enlarge

At the end of 2006 there were roughly 4% more jobs in King County than January 2000, yet home prices had increased a whopping 85%. I'd like to hear the logic that tries to argue that such a paltry increase in jobs will cause that large of a price increase in homes.

Now let's take a look at home sales. Supposedly the improving job situation is driving demand, and demand is measured by sales, so let's see how the two compare.

Click to enlarge

Hmm. It would appear that sales were experiencing the strongest growth during a time when the number of jobs was actually declining. In the summer of 2003 sales were up by as much as 45% over 2002, and yet the job market was still declining by roughly 1.5%.

Looking at the raw numbers of jobs versus sales the disparity becomes even more clear:

Click to enlarge

If jobs are supposed to drive demand, why is it that once the number of jobs began to increase in early 2004, sales actually leveled off? And why have sales been dropping off so steeply in the last year despite what the Times reports as "the best year for job creation in Washington in nearly a decade"? Could it be, perhaps, that the number of home sales and prices of sold homes in fact have very little to do with the number of jobs in a region?

I challenge anyone out there that still believes more jobs = more demand = rising prices to show me the data that supports any sort of correlation between those data sets. Lacking that, I hope we can finally put this dead argument to rest.

All of the above graphs—and the data behind them—can be downloaded in Excel format.

(Drew DeSilver, Seattle Times, 01.17.2007)
(Workforce Explorer, Industry Employment: Historical Series, 01.2007)

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.

Optimism on the Menu for 2007

In addition to the standard E. Rhodes fluff piece that Synthetik posted about on Sunday, there were a couple other articles posted over the weekend that conveyed a general sense of optimism about Seattle's housing market in the coming year. Here are a few choice quotes from Mike Benbow's article in the Everett Herald titled Smiling at the slump:

David Toyer was having Christmas dinner with relatives when one asked him how he felt about the housing market.

Toyer, a vice president for Barclays Northwest, a major developer in Snohomish County, gets that a lot.

Most people expect him to be down in the dumps, or at least very concerned. That, he said, is because they've been listening to national newscasts about areas of the country where home prices have dropped like a rock or sales have plummeted due to overbuilding.

Indeed, The Associated Press named the rocky housing market the top business-related story of 2006 because of worries that it could push the nation into a recession.

Trouble is, the housing market in the Northwest in general and Snohomish County in specific did well this year and is expected to continue to be strong in 2007.
...
Toyer is very positive about the housing market for 2007, partly because he's seen the numbers in a study recently conducted for his firm by New Home Trends, a consulting firm in Mill Creek.

"There's no reason to think we will not have a very healthy housing market," he said. "We've got some things here that are different than everywhere else."

One of the unique elements, he said, is a state Growth Management Act that forces developers to build close to cities or within them, a law that is gradually reducing the amount of available land.

Toyer also noted that with hiring at Microsoft, Boeing and many other businesses large and small, most analysts are predicting a good economy in the Seattle area in 2007.

That's attracting people looking for work, and many would like to buy a house, he said.

Mr. Benbow goes to town, throwing all the classic arguments out there. We've got "Seattle is special," "we're running out of land," and of course the ever-popular "Boeing and Microsoft will save us," all in just the first few paragraphs! Never mind the uncomfortable fact that affordability continues to drop like a rock, and there is no evidence that all of these new jobs are paying any better than existing ones. Methinks Mr. Benbow's article is heavy on claims, but light on supporting evidence or critical examination, as usual.

Justin Matlick takes a more balanced look at Washington's situation in the Puget Sound Business Journal's general state economic outlook for 2007, but the high point of the article is the clever illustration that so delightfully epitomizes the unwavering hope of local housing optimists.

Illustration: James McFarlane
Click to enlarge

With the national economy expected to continue decelerating in 2007, how will Washington state fare?

First, the big worry: housing. Economists generally agree that the state's housing market will continue to slow throughout 2007, especially in the Puget Sound region, and a precipitous decline could drag down consumer spending, slow the construction industry and dampen economic growth.

On the bright side, the state's economy is poised to continue growing even as housing slows. Around Puget Sound, a strong international economy will continue fueling demand for key Washington exports such as Boeing airplanes and Microsoft software. Outside the region, economists expect the economy to continue expanding, albeit at a more moderate pace.
...
While the national housing slowdown has finally hit Washington — in King, Pierce and Snohomish counties, the Northwest Multiple Listing Service has reported falling home sales, rising inventories, and slowing home-price appreciation throughout the second half of 2006 — homes in core Puget Sound areas are still logging double-digit price appreciation.

[Union Bank of California senior economist Keitaro] Matsuda said this indicates that the housing market in the Puget Sound region and throughout the state is a long way from hitting bottom.

I don't know anyone who has claimed that the housing market around here is "hitting bottom," so I don't really know what point Mr. Matlick was trying to make with that statement. Moving on...

"It will still take a while before things start to really slow down," Matsuda said.

While Matsuda could not guess exactly how far housing will fall, he did say that it's now clear the national housing expansion has been founded on solid economics, and has not been the bubble many feared.

"If it was a bubble, the markets that experienced the strongest appreciation should also experience the largest price drops, and that hasn't happened," Matsuda said.

Whoa, hold on a minute there. How is anything "clear" at this point? If anything is clear, it's that the national housing expansion was not "founded on solid economics," because nationwide housing statistics are moving in reverse. Furthermore, Matsuda seems to believe that "hasn't happened," means the same thing as "won't happen," which is something I happen to disagree with.

For Washington, this means any declines will likely be more moderate than severe, especially since the rest of the state's economy will likely continue growing at a healthy pace, according to Matsuda and [local economist Dick] Conway.

So really, the primary argument for optimism comes back to... Microsoft and Boeing. I realize that both of these companies are doing well right now, and I certainly hope it continues to be the case. However, I truly do not believe that the recent positive performance of two companies is enough to hold up our entire region's economy.

I'm not calling for a huge pile of doom and gloom for the Seattle area, but unless the vast majority of the area's new jobs are paying $80k or more, I think that 2007 will see the start of price contractions in Seattle. I think the unaffordability ceiling has been reached.

What about you? Are you generally optimistic about 2007 for the Seattle area housing market? Do you buy the arguments that we're special and will continue to see price gains while more and more cities across the nation experience price declines?

Stay tuned in the next week or so for a more detailed post dedicated to my personal 2007 guesses. Let's keep the comments in this thread focused on these two articles and more general local economic impressions.

(Mike Benbow, Everett Herald, 12.31.2006)
(Justin Matlick, Puget Sound Business Journal, 12.29.2006)

"Local Prices Are Not Headed Backward"

Here's a familiar song, courtesy of Tom Kelly at the Everett Herald.

It used to be a popular notion among local real estate agents that the Northwest housing market lagged behind the California market by about six months.
...
I thought about that idea recently when I read that home sales decreased 30.1 percent in August in California from the same month in 2005, the largest sales decline since August 1982.
...
Things are a bit different here, and will continue to be. According to the Northwest Multiple Listing Service, home sales were down about 15.7 percent in September from the same month last year yet prices were up 9.4 percent, marking the first time in two years that year-over-year price growth has not been in double-digit territory in Western Washington.

The premise of this article appears to be that the Northwest only lags California on the way up, but we won't have to worry about following California down. Let's see how well the author backs up that claim.

While the past 24 months have been crazy, the long-term outlook for the Puget Sound housing market continues to be bright. Here's why.

Availability of jobs props up the housing market, and the job outlook for Western Washington continues to be extremely healthy, according to data compiled by Stewart Title Company. In fact, the Seattle-Tacoma-Everett area is expected to add jobs at a rate of double the national average for at least the next three years. While homes might take longer to sell and sellers again are considering offers contingent on the sale of the buyer's home, local prices are not headed backward or even close to a "soft landing."

Okay, so our housing market will remain strong because there are plenty of jobs available. But wait, what happened to the California comparison? What does the job situation look like in California? Are jobs not plentiful there? Tom doesn't say.

Instead, he totally drops the original point he seemed to be making, and closes the article with a series of bold assertions.

"No housing market has ever collapsed unless the underlying economy went sour," [real estate economist John] Tuccillo said. "Short of recession, this means that virtually every housing market in the U.S. will hold up even though sales may slump and prices decline." He did note, however, that home prices may slump in upper-Midwest rust belt areas.

What about a worst-case scenario — mass foreclosures and rising inventories?

"If the United States undergoes a recession in 2007, the housing market will do much worse than we anticipate, but so will autos and retail," Tuccillo said. "Exotic mortgage instruments will have an impact in increasing the foreclosure rate, but in any loan made before 2005, the consumer is in a positive equity position and will weather financial distress."

So, when your friends in California swear the sky is falling and real estate will no longer be the same, remind them that property is cyclical and that their neighborhood will rebound when the "down" period ends late next year.

And, the down period in the Puget Sound will mean slower, not negative, appreciation.

Sweet. Home prices definitely won't drop significantly unless there's a recession, but even if there is one, every pre-2005 loan will be totally safe, and worst case, all the pain will be over by the end of next year. Those are good things to know. I'm glad Mr. Kelly let us in on this reassuring absolute knowledge that he and his real estate economist friends are in possession of.

(Tom Kelly, Everett Herald, 10.15.2006)