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Friday, October 20, 2006

A California Comparison, Part 2

Yesterday I compared King County to San Diego County in order to address some of the reasons we commonly hear that the Seattle housing market will remain strong. The focus of this post is slightly different than Part 1, where I used San Diego as an example to show that certain positive local attributes will not shield us from declining prices. Today's topics turn the question around, looking at negative attributes of San Diego's housing market that are presumably lacking here.

Since real estate trends in the Northwest are said to lag California by six months to a year, I'll be comparing the period of 2000 — 2005 in San Diego County to July 2001 — July 2006 in King County.

The two issues I'll address were brought up in the comments on Part 1:

Deejayoh: One oft cited argument that you left off (which I hear from my real-estate bull friends) is that "prices haven't gone up as much here as they have in California" so they won't go down.

E-sidedave: What about the affordability factor? Back at the peak, affordability in SD was 11%. It has never been that low here.
"Prices haven't gone up as much here as they have in California" turns out to be an entirely true statement. From 2000 to 2005, the median sales price of Single Family Homes (SFH) in San Diego County went from $260,000 to $575,000—an increase of 121%! King County's five-year SFH appreciation has been positively tame in comparison, increasing from $268,725 to $435,000—a comparatively paltry increase of 62%.

At face value, the "we haven't appreciated as much as California (and therefore aren't as vulnerable)" argument appears to hold water. However, I don't believe that looking only at total appreciation offers a complete picture. What does offer a much more complete picture (in my opinion) is the affordability question. It makes perfect sense for home prices to shoot through the roof if incomes are experiencing a similar rise, while interest rates hit the floor. That's how people buy homes: they use their income to pay back a loan. It's a little thing that I like to refer to as fundamentals.

Before I get into the affordability numbers, I want to point out a few things that I am not attempting to show with this post. I am not making any claim about how affordable either county "should" be for potential buyers. I am well aware that a family earning the median household income is probably aiming too high to purchase a home priced at the median. Whether or not that is a good thing is not the point here at all. I am also not attempting to compare one county's affordability to another. I'm going to compare each county's affordability numbers to a different time period in that same county, not to the other county. There is a historical price premium that is paid to live in more desirable areas that can largely be seen in an area's average affordability index. Highly desirable areas will always be unaffordable compared to less appealing ones.

Keeping those caveats in mind, here is what I am interested in. During the recent ridiculous run-up in home prices, how has affordability in each county changed? In order to find out, I'll be calculating Tim's Affordability Index (explained in my soft landing post) for San Diego and King Counties.

Let's see how San Diego stacks up.
San Diego County 2000
Median Closed SFH: $260,000
Median Household Income: $47,236
Interest Rate: 8.06%
Tim's Affordability Index: 76.9

San Diego County 2005
Median Closed SFH: $575,000
Median Household Income: $56,335
Interest Rate: 5.86%
Tim's Affordability Index: 51.8
Yowza! That's a 25.1 point drop in affordability in just five years, despite interest rates over two points lower. No wonder home prices in San Diego have declined since last year. So what about King County? Surely since our home appreciation has been so much lower, our affordability dropped much less than San Diego, right?
King County July 2001
Median Closed SFH: $268,725
Median Household Income: $53,610
Interest Rate: 7.13%
Tim's Affordability Index: 92.5

King County July 2006
Median Closed SFH: $435,000
Median Household Income*: $59,500
Interest Rate: 6.76%
Tim's Affordability Index: 65.8
Apparently not. In fact, King County affordability has taken a larger hit than San Diego County, plunging 26.7 points in the past five years. Although San Diego home prices shot up much further than King County homes, their income also increased 19% to King County's 11%, while interest rates during the 2000-2005 period took a much more favorable turn than 2001-2006 (2.2 point drop vs. a 0.37 point drop).

So when you look at the complete picture, factoring in all of the home buying "fundamentals," King County actually seems slightly more poised for a drop than San Diego was last year. Does that mean that we definitely will see a drop in prices? Obviously not, as there are many more factors at work, including the national economy, market sentiment, and acts of God. However, I think we can safely say that there is little comfort to be found (with respect to the housing market) in comparing the Northwest to California.

(San Diego County Home Prices: The Real Estate Report)
(King County Home Prices: NWMLS)
(2000-2001 Incomes: American Community Survey)
(2005 Incomes: American Community Survey)
(Interest Rates: Federal Reserve)

*2006 income for King County was (optimistically) calculated by assuming a yearly increase from 2005 to 2006 ($1,130) of roughly 1.5 times the ACS' estimated yearly increase for 2003-2005 ($745/year).


The Tim said...

Ask and ye shall receive:

Q1.93 - 121.0
Q2.93 - 119.1
Q3.93 - 125.1
Q4.93 - 126.7
Q1.94 - 122.0
Q2.94 - 108.7
Q3.94 - 105.8
Q4.94 - 102.5
Q1.95 - 106.8
Q2.95 - 114.4
Q3.95 - 117.5
Q4.95 - 121.3
Q1.96 - 123.3
Q2.96 - 112.0
Q3.96 - 106.7
Q4.96 - 116.4
Q1.97 - 114.8
Q2.97 - 108.9
Q3.97 - 110.8
Q4.97 - 112.7
Q1.98 - 112.2
Q2.98 - 108.3
Q3.98 - 109.6
Q4.98 - 111.7
Q1.99 - 108.1
Q2.99 - 103.4
Q3.99 - 94.0
Q4.99 - 95.0
Q1.00 - 89.6
Q2.00 - 85.9
Q3.00 - 90.4
Q4.00 - 94.1

1993 - 2000 Average: 109.3

For reference, the WCRER Affordability Index averages to 109.9 for 1994-2000.

And of course, I've added this to the Seattle Bubble Spreadsheet. It's on the first page (NWMLS Data), on the far right.

Surkanstance said...

Another interesting data point to compare is the percentage of "exotic" loans between regions. I gather that well over 70% of all mortgages in San Diego were of the exotic variety in 2005. The figures for the Puget Sound were less than 25%, right?

Also, what about construction rates? Has King County been much more restrictive in allowing new construction than the Puget Sound? If so, then maybe that would mean the chances of an inventory glut in the Puget Sound are far less.

Shadowed said...

Salaries increased only 11% in 5 years. That's pathetic. I assume that's not adjusted for inflation either?

Shadowed said...

Try and factor that in using your obvious superior and keen observational skills than everyone else.

Obvious superior and keen grammar skills than everyone else.

The Tim said...


Congratulations, you have shown that San Diego is less affordable than King. A true, but entirely irrelevant point.

I assume that you are resorting to petty insults because you have no relevant, fact-based arguments to bring to the table.

The Tim said...

Lake Hills Renter,

Correct, those income figures are not adjusted for inflation, but are rather real dollars for that time period.

The Tim said...


As I said yesterday, I would absolutely love to discuss the amount of speculation / investment in the Seattle area. Unfortunately, the only data I have seen relates only to "flipping," and (as I explained last month) really doesn't give a remotely complete picture of the total investment scenario.

SLTO Troll said...

actually I don't think it's just speculators that's bringing down the SD market

Think about this:

2002 you bought a house coz you had to... stretched your budget to make ends meet

2005 you find out you made more equity in 3 years tha you did working your 9-5 job and it's tax free...

2006 you find out that equity is at risk and you could easily lose 300K if you don't sell now... actually your house already lost 50k in 3 mos... you see the gravy train going away...

what do you do? watch as that equity dries up or try to cash in and hold real paper between your fingers...

It's about greed... greed will bring down this bubble...

I'm sure those who pulled out of the market did so because their RE friends advised them to... (hmmmm did those same friends have 2 houses they are trying to sell and want less competition)

my 2 cents

David Aldrich said...

I don't see how anyone that looks at the housing situation in the city and this country can be so blind as to not see the absurdity that is the current housing market.

I think things look just fine in Metrounatural. Take this announcement in Thursday' Seattle Times:

A Portland developer and hotel-industry veteran from the Northeast announced intentions Wednesday to build a 23-story hotel and condominium called "1" at Second Avenue and Pine Street.

Condo units will sell for $700,000 and up, with the largest of seven penthouses going for as much as $10 million, said Paul Brenneke, president of Avalon Holdings.

Matthew said...


Until the bubble bursts, everyone is speculating. Some are speculating the market will have a soft landing, some a hard landing, some think the housing market will forever continue up. That's the point of this blog, for people who think the market is overpriced, to share ideas. If you don't like it, don't post.

I wouldn't go to a "I love Britney Spears" blog and talk about how much Britney sucks. Use some common sense.

If you are going to make a rational argument for why there is no bubble, then post some rational data instead of the same old tired RE rhetoric that is spat forth daily in the Seattle Times. Otherwise you are just using up my oxygen.

Unknown said...

Great posts. Some of the comparison between areas is anecdotal, and a function of more variables than can be accurately modeled. However, as a 20 veteran of the San Diego area markets, and owner of a RE and Mortgage Brokerage, I can describe a phenomena that is now occurring that is somewhat of a repeat of the 90's. That is the timing of cycle and the magnitude of downturn. The final price depreciation of 20% is likely to be the same. The market here seems to have peaked about mid 2005. Since then, prices have come down about 10% across the board. They are likely headed down another 8-10% over the next 18 months, assuming flat to slightly varying interest rates. At this time, their is a two-tiered market that allows us to foresee that market trend. That is, 10-20% of sellers are in a distressed mode (slightly higher for condos, a little less for detached). Of the 80% of sellers that reperesent "normal" sellers" they are still hanging on to 6-12 month old prices, and as a result are of course not selling. The 10-20% of sellers that are sucessful are the distressed sales which are comprised of desparate sellers, foreclosures in process, designated short sales, and lender REO's. These sellers have ackowledged the 10% price from peak reductions, and are willing and able to discount their rpices another 5-10% to ensure a sale. They are leading the way down to the bottom which is likely to be 20% from the peak, much as it was in 1991-1995. Considering that the remaining leg down for the market as a whole will take another 12-18 months, before buyers find favor in coming back in a meaningful way, that would take us out almost 4 years from peak to trough, and the move up will likely follow the historic norm of 2-4 years giving us a very traditional So. Cal real estate cycle of 7-8 years. The smart buys are likely to be made over the next 12 months. Once the market as a whole comes down, the prices should firm and the best "assets" will have been acquired. The unknown is of course alwasys interest rates. But, with an election coming up one would suspect downward pressure. So, the whole cycle repeats itself with no great mystery or "paradigm shift". One only needs to ask a buyer the standard questions, what, where, how much, do I want to buy a home. As a lender with many flexible loan options available these days, the question to buyers is not, Are prices going down further and can we get you qualified?, the question is, Do you want to make the payments? If the answer is yes, then now is the time to start looking for deals again.