Condo Shoppers Lie Low

This article appeared on the front page of the Puget Sound Business Journal early this month. While typically not read by the general public, "Biz Journals" are widely circulated throughout the business community. Local businesses use the publication to keep tabs on their customers and competitors and to stay abreast of local business news.

I've posted the entire article with permission as it's currently only available to subscribers of the Journal. Enjoy!

Puget Sound Business Journal
February 2, 2007
by Justin Matlick

Walk into the "Trio" condominium project's Belltown showroom, and it looks like many other glitzy condominium projects rising in downtown Seattle. Many of Trio's units, when they're completed this fall, will feature bamboo floors and faux-granite countertops. Tenants will share a roof deck just a block from the new Olympic Sculpture Park.

But there's one key difference between Trio and some other recent projects: It isn't selling.

With a median price of $405,000, the project opened for presales in December 2005 and, as of Jan. 7, had sold just 28 of its 116 units, according to the Fat Report, a monthly newsletter that chronicles local condo sales.

Trio is among a growing number of struggling condo projects in Seattle. A downtown Seattle high-rise project at Fifth Avenue and Madison Street has sold about 52 of its 126 unfinished condominiums since September 2006 [sic]. Lumen, a 94-unit project in Seattle's Lower Queen Anne neighborhood, started selling in June 2005, and roughly a third of its units are still up for grabs. In Ballard, a project dubbed Hjarta, which started presales in October, had sold seven of 79 units as of Jan. 7, according to the Fat Report.

The stagnant sales could pick up once the projects are completed, and don't mean Seattle has been dragged into the condo tailspin now affecting markets in Las Vegas, Boston and other cities -- some recent local projects have sold out within days. Still, many local developers and real estate watchers agree that Seattle's condominium market is decelerating for the first time in years.

The reason: With thousands of local condos slated to go up in the next few years, buyers believe the recent period of rapid price appreciation is disappearing, and it's taking away the buy-now urgency that fueled the local boom with it.

"Buyers have a lot more to choose from and are playing a bit of a waiting game," said Mark Schuster, president and chief executive officer of the Schuster Group Inc., a Seattle-based real estate development company.

Nationwide, the condominium outlook is bleak in cities such as Washington, D.C., where a rush to build left the market oversaturated. In the fourth quarter of last year, developers in the Washington metro area switched roughly 5,900 projected condos into rental apartments, while plans for another 2,500 new condominiums were shelved, according to Delta Associates, a research firm based in Alexandria, Va.

While the Puget Sound region's housing market is slowing -- in King, Pierce and Snohomish counties, the Northwest Multiple Listing Service has reported falling home sales and rising inventories since last summer -- none of the real estate professionals contacted for this story were aware of any local projects being canceled or postponed, and most economists agree that the local market is well-insulated against a dramatic decline.

According to Dick Conway, co-publisher of the Puget Sound Economic Forecaster newsletter and Web site, the ongoing Boeing boom, a Microsoft hiring spree and strong demand for the region's exports from Asia set the stage for an ongoing population inmigration that should keep housing demand steady.

"We have very strong fundamental demand for housing because of population growth," Conway said.

The critical question facing local condo buyers: whether supply will outstrip that demand. While it's nearly impossible to predict how many condos are too many, it's apparent that the region's developers remain in the throes of a condo-building spree.

Developers in King, Pierce and Snohomish counties filed permits to build 8,300 units of multifamily housing, including apartments, condominiums and townhomes, in 2005, according to Conway. That number rose to 11,200 last year.

Meanwhile, developers are converting apartments into condos at a rapid clip. Roughly 7,000 apartments were transformed into condominiums in 2006, or were scheduled to hit the market soon, according to Dupre + Scott Apartment Advisors in Seattle.

The bevy of new projects "has probably put a little rain on the sales parade," said Lin Shih, a Seattle real estate agent who specializes in condos at Coldwell Banker Bain. "Buyers think that, with all these new developments coming up, they can be picky."

Another factor: a widespread belief that the days of rapid price gains are over. "When the market was hot, people knew they were buying today for ready-made appreciation," said Brett Frosaker, owner of Columbia Real Estate in Seattle and publisher of the Fat Report. "Now they're starting to wonder if today's condos are listing at tomorrow's prices."

According to Frosaker, a project's sales typically accelerate once it is completed, in part because buyers feel more comfortable seeing the actual units instead of showroom mock-ups.

Nonetheless, some projects have sold rapidly in the presale phase, especially lower-priced developments targeted at first-time buyers. The 251-unit Moda project in Belltown, for instance, came on the market for presales last summer and sold out within days, according to Frosaker. Many of Moda's condos were small units priced under $300,000.

Looking ahead, Frosaker believes this summer could be a ripe time for condo buyers to get good deals, especially as the bigger projects get closer to completion and their developers feel a greater sense of urgency to fill them up.

"With all these projects fighting tooth and nail," Frosaker said, "summer might turn into a great buying opportunity." Schuster believes demand will remain strong enough to support current price levels. "I don't see price drops being part of the equation even if there were a significant slowdown," he said.

What do you think? Pretty objective, no? Why aren't we getting this "fair and balanced" type of reporting from most of our friends over at the Times or PI?

What makes this article unbiased in regards to residential real estate is the fact that 100% of its advertising is B2B related.

From my own personal experience, the B2B world (especially in the business networking community) have little use for the B2C crowd (i.e. real estate clerks and mortgage brokers). Since B2C types are usually dealing exclusively with consumers, it can be difficult for them to provide B2B referrals, and, worse yet, they often attempt to solicit business from their fellow networking partners.

Newspapers such as the Seattle PI and Times are co-conspirators to the REIC as they rely heavily on residential real estate advertising for their revenues, often leading them to distort the truth.

(Justin Matlick, Puget Sound Business Journal, 02-02-2007)

Urban Growth Boundary Malarkey

A common argument about housing prices that I've personally noticed popping up frequently in the last few weeks is that they are as high as they are here in King County thanks in very large part to the Growth Management Act (GMA). Specifically, the argument claims that the Urban Growth Boundary (UGB) has so limited the available land to build on that the supply of new homes simply has not been able to keep up with increasing demand.

Here are two simple reasons that the UGB argument is nothing more than a red herring and a canard:

Reason #1: The UGB pre-dates the present run-up by roughly 10 years.
The UGB was put into place in 1992, and has remained largely unchanged since. If the UGB were to blame for high home prices, one would expect to see home prices begin to shoot up shortly after its enactment.

From January 1993 (the earliest month I have data for) to January 2002, the median closed price of single-family homes in King County increased an average of 6.3% per year. However, from January 2002 to December 2006 (the most recent month I have data for), the median increased 11.1% per year.

If the UGB is to blame for the ridiculous run-up in prices, why were its effects not noticed until ten years after it was enacted? That makes no sense.

Reason #2: King County was not alone in the home price run-up.
Many cities and counties across the entire country have experienced runaway home price growth over the past five years. UGBs cannot account for this near-nation-wide phenomenon. Absolutely zero evidence been provided to explain the notion that even though King County home prices jumped up by an unprecedented amount, it was not due to the factors that drove home prices up elsewhere in the country. If it is granted that these macro-economic factors had a hand in driving up King County home prices, why blame the UGB?

It would take quite a stretch of the imagination, combined with a healthy dose of tortured logic to attempt to claim that although home prices in King County were skyrocketing at nearly the same time as the rest of the nation (delayed by ~1 year), it was for an entirely different reason. Oh, and by the way that reason is a law that was passed ten years ago.

Yeah, that's the ticket.

(King County, History and Background of the Comprehensive Plan)
(HistoryLink, Urban Growth Boundary)

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?

Pop Quiz Time: Fundamentals or Speculation?

Here's a pop quiz for you. Take a look at the following two tables and try to determine which one more closely resembles a market based on fundamentals, and which one represents a market based on speculation.

Median Household Income vs. Average Rent: 2000-2005

Year	Med. Income	% Chg	Avg. Rent	% Chg
2000	$53,200	+3.9%	$784	+3.9%
2001	$55,900	+5.1%	$826	+5.3%
2002	$58,000	+3.8%	$838	+1.5%
2003	$59,200	+2.1%	$821	-2.0%
2004	$60,400	+2.0%	$803	-2.3%
2005	$60,700	+0.5%	$810	+0.9%
Total 2000-2005		+14.1%		+3.3%
Average Yearly		+2.67%		+0.65%

Median Household Income vs. Median Home Price: 2000-2005

Year	Med. Income	% Chg	Med. Home	% Chg
2000	$53,200	3.9%	$225,000	4.9%
2001	$55,900	5.1%	$235,000	4.4%
2002	$58,000	3.8%	$249,000	6.0%
2003	$59,200	2.1%	$265,000	6.4%
2004	$60,400	2.0%	$289,950	9.4%
2005	$60,700	0.5%	$332,000	14.5%
Total 2000-2005		+14.1%		+47.6%
Average Yearly		+2.67%		+8.09%

These figures come from the most recent King County Benchmarks Report, released yesterday. Both the Times and the P-I have their usual un-insightful blabs about it, if you're into that sort of thing.

If the implication of these numbers is not obvious to you, you are either:

• willfully ignorant of basic economics
• incapable of comprehending basic math
• in the real estate business
• all of the above

How anyone can argue (with a straight face) that home prices are based on "fundamentals" when those very same "fundamentals" have somehow allowed rents to climb slower than incomes is beyond me.

(King County Budget Office, Affordable Housing 2006, 01.2007)
(Sharon Pian Chan, Seattle Times, 02.01.2007)
(Aubrey Cohen, Seattle P-I, 02.01.2007)

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)

Notes From the Trenches

Last Wednesday there was some great conversation about what people are experiencing as they are out there right now trying to find a home. I think it's worth re-posting these comments on the front page, since they give a good feel for what the housing market is really like right now that you can't get just by looking at graphs and spreadsheets.

Peter:

I've actually started looking seriously at homes in the $400k-$500k range and have toured probably at least a dozen from the Kennydale Area up to Juanita/Kirkland. Here's what I've noticed:

1) Pretty much everything you've heard about flipper renovations is true. These people are morons. I've seen some work so shoddy that it would blow your mind. We toured a home in Newport Hills and the owners were still there - he pointed at the electrical plates and said, "we upgraded to the latest style!" Um, yeah. You went to Home Depot and dropped a hundred bucks and spent the afternoon with a flathead screwdriver. No.

2) The $400k-$500k unrenovated properties are bottom of the barrel garbage. Borderline unliveable. Most of these are in such a state of disrepair they will probably need to be torn down. We saw a house in Finn Hill that had been vacant for quite some time. It smelled like death. My wife said, "this place is haunted!" I saw something - I'm not sure what - but it was brown, papery, and slightly organic looking in the fireplace. I asked our agent what it was and she just said, "let's get out of here!" And a steal at only $450k.

3) Prices are all over the board and don't appear to be based on recent nearby sales or appraised value + whatever. People are just asking whatever they feel like and seeing if they can get any bites.

4) The increase of inventory is definitely accelerating. It's all crap though.

5) Most builders are idiots. They will shoehorn a house into just about any space, regardless if the front door of one house is directly facing the house next door. Yeah, I want to look out of my living room window and see my neighbor reading the newspaper in his bathroom. Most are still not offering concessions.

6) I'm not seeing any of these houses move. No one is buying them. However, if a decent house at a decent price does get listed, it is snapped up immediately. The crap is sitting forever though.

7) This has been one of the worst and most depressing experiences of my life. I've seen more than one house that *could* have been nice but had been ravaged by a flipper and had the price jacked up $100k from the purchase price a year ago. It seems every flipper runs out of money and you can tell exactly where they did - 4 out of 5 rooms will have hardwood floors, for example. The last one will have 30 year old filthy carpeting in it. 3 out of 5 closets will have been redone - the last two look like something like the meat locker from Texas Chainsaw Massacre.

Anyone who thinks this is a "healthy market" is certifiably insane.

Alan:

I know what you mean, Peter. My wife and I went to an open house a few weekends ago. We could tell that the owner had done some shoddy renovations, but we thought we would have to redo it and so we would have wanted a discount *because* of the renovations (if we had even wanted the house -- which we didn't because the floorplan was horrible).

I enjoy messing with the realtors. They ask if I am in the market and I say, "No, I'm currently priced out of this market. I only make $X per year." (where X is significantly above the mean income for the area). The last realtor I said this too got excited and started telling me that the owners would probably sell for less than the asking price and that he could get me a good deal on the house.

B:

Peter:

Wow, I haven't been looking as hard at as many properties as you have, but your observations exactly parallel my own. What a strange twilight-zone of inventory and comps we're looking at right now.

I came back from the last place we walked through (SFH in Greenlake listed at $699, which was absolute junk inside) with a resolve to renew my apartment lease through 2007 - let the flippers flop.

The only thing worth less than a "fixer" is a house where someone did a crappy remodel/flip on a fixer. Now I have to tear out all your shoddy garbage and re-do it. Honestly!

stephen:

If you are going to buy (like we are) it is extremely important to do loads of homework and tons of driving. We've been looking since the first and still haven't set foot in a house. One passed the drive by sniff test but fell out due to the flood report.

So have any other readers been out there looking at homes? What have you experienced? Is the market as strong as local real estate agents would have us believe? Let's hear your tales.

Seattle's PMI Risk Index Continues Climb

The latest PMI report (pdf) is out, and much to no one's surprise, Seattle's risk index has increased yet again.

Click to enlarge

Jumping 14 points from the fall to a total of 167, Seattle now boasts a PMI that is 2.6 times its Summer 2005 low of 64. Although Seattle's Risk Index is still a good margin below regions such as San Diego or Sacramento, it is certainly interesting to note that it has now increased in five of the last six PMI reports.

But don't you worry, Seattle is special and all that. Surely price growth will simply stabilize, and the Risk Index will head back down.

(PMI Mortgage Insurance Co., Winter 2007 Report (pdf), 01.2007)

Foreclosures On The Rise, Even In Seattle

Here's some interesting news. Apparently even double-digit appreciation isn't enough to keep foreclosures from rising around here, much like they are across the country:

Following a national trend, Washington state's mortgage foreclosures increased significantly last year, claiming 18,527 homes.

In the Seattle/Bellevue/Everett area, one in every 136 homeowners was displaced by foreclosure, as was one in every 75 Tacoma owners.

Still, the state and the Seattle area faired better than the nation as a whole, according to RealtyTrac, a California-based foreclosure-information provider. It released its 2006 annual report late last week.

Washington state foreclosures grew 25 percent last year compared with a year earlier — far below the national increase of 42 percent.

Phew! Thankfully we're safe because we're "far below the national increase."

However, since Ms. Rhodes mentioned that we are "following a national trend," and given the assumption that the Seattle housing market lags most of the nation by six months to a year, I wonder how much foreclosures increased nationally in 2005?

Let's see... Ah, here we go:

January 23, 2006 – RealtyTrac™ ... today released year-end data from its 2005 U.S. Foreclosure Market Report, which showed that 846,982 properties nationwide entered some stage of foreclosure in 2005, and a 25 percent increase in the number of new foreclosures from the first quarter to the fourth quarter.

Hmm, interesting.

(Elizabeth Rhodes, Seattle Times, 01.27.2007)

Kirkland-Based HouseValues Continues Slide

More bad news for local real estate lead-generation company HouseValues:

Amid a slumping real estate market, HouseValues Inc. is cutting 12 percent of its work force and closing its online lead generation business for mortgages.

Sixty employees are losing their jobs, all at the company's Kirkland headquarters.
...
In a memo to employees, HouseValues Chief Executive Ian Morris said that the company has encountered a number of challenges because of a "steep decline in transaction volume in many local real estate markets."
...
A HouseValues employee, who was not involved in the layoffs and asked not to be identified, said that "morale has been very low and a lot of people have been quitting from all departments." As of September, the company employed 590 people. But the employee count has drifted lower in recent months as people have left for other jobs.

Also, HouseValues stock is down another 46% since I last mentioned them nine months ago. Maybe it's just me, but now doesn't exactly seem like the best of times to be building a business centered around real estate sales.

(John Cook, Seattle P-I, 01.25.2007)

"This is a great time to buy a home."

Check out this absolutely delightful paid advertisement masquerading as a "guest editorial" in today's Seattle Times. It's penned by Mr. Samuel L. Anderson, the executive officer of the Master Builders Association of King and Snohomish Counties.

The media have been all abuzz over the past year about the softening in the housing market.
...
At the same time, local analysts point out that even though home sales in the greater Puget Sound region have slowed, now is still a good time to buy a home, particularly in our area.

What does this slowdown really mean for consumers? Is it wise to sit back and wait for a home in the hopes that prices may drop? Most real-estate experts in our region say don't bet on it.

Oh really? Okay, well why is that exactly, Mr. Executive Builder Man?

One reason we have not experienced the steep decline seen in other markets is that while other parts of the country face an oversupply of housing, we do not.

So you're saying that supply is not growing faster than demand, so we're not headed for an oversupply? Interesting... very interesting.

Here in Washington state, the Growth Management Act (GMA) actually limits the supply of new housing entering the market by directing where new development can occur. As long as GMA is in place, we are very unlikely to find ourselves in a housing glut.

Growth management act, huh? You don't say.

Another key factor is that the area in and around Seattle has a healthy supply of jobs and a strong regional economy — factors most experts agree help keep prices from falling.

What a compelling argument.

Sitting on the fence waiting for the absolute best deal is a gamble that prevents consumers from taking advantage of buying a home, while prices are moderating.
...
In today's housing market, the real risk is in waiting to buy a home.
...
Unlike some cities where the real-estate market is in a slump, the Seattle area is healthy and analysts feel certain it will stay that way. As a result, the deep discounted prices some consumers have been hoping for simply won't be happening here.

For consumers sitting on the sidelines, the bottom line is simple. Homeownership is always attractive. Besides being a stepping-stone to a future of financial security, homeownership provides a sense of community and personal satisfaction. In fact, studies show that homeowners are more content with their lives, enjoying a stronger sense of belonging and increased activity in community groups.

The equation is simple: Since housing is always a smart investment and interest rates are still near 40-year lows, savvy consumers know this is a great time to buy a home.

Well dang, I'm convinced. Now is a great time to buy, and I'd better be quick about it or else I'll be priced out forever, doomed to be a miserable, broke, dissatisfied loner, renting from the man for the rest of my life.

(Samuel L. Anderson, Seattle Times, 01.24.2007)