Seattle Bubble has moved! Redirecting...

You should be automatically redirected. If not, visit update your bookmarks.

Off-topic comment? Interesting link?
Head over to the forums, or click here for open threads.

Wednesday, January 03, 2007

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.
The Puget Sound economy in a nutshell
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)


The Fortunate One said...

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...

By anyone who do you mean? I have read this blog since August, and while you tend to back up your opinions with data, I frequently read post from others screaming down other posters about their "mcmansions" dropping in value by 40%. I was just catching up on Nov, and Dec post and came across synthetik post on 12/18 that said:
"This family is only one job loss, sickness, or interest rate hike away from a CH13 bankruptcy. The American Dream is looking more and more like a nightmare. The suburbs with their large McMansions will be the slums of the future."
I am not here to debate if this is true or not. I am simple making the observation that if you believe the above statement you are indeed stating that the market will hit bottom. There can be no other conclusion from making the statement that a suburban neighborhood of mcmansions will be a neighborhood of slums in the future. That is hitting bottom.

seattle_slow said...

2007 will be interesting for the puget sound region; but even more so for the rest of the country. For Seattle, perhaps one last GF/FB 'flurry' will occur this spring, and then we'll follow California's pattern from a year ago. We're a year behind them, just like 1990.

We're at the tippy top right now. After spring someone will blow a whistle saying "STOP" that only dogs and homebuyers will hear.

A major force in the eventual Seattle area slowdown will be the drying up of credit and equity locusts from California. Those two phenomenons will eventually sag the puget sound market. They are huge factors, despite what the RE shills tell you.

It's going to take 3-5 years to play out.


The Klondike said...

Matsuda seemed to contradict himself in that article stating that the area has a long way to go before it hits bottom , and then states that our area will be better off than others. I almost think the writer of the article may have distorted his quotes a bit to try and fit it inot a semi positive spin.

Now the part where he says, and I paraphrase..."if it was a bubble, then the areas that experienced the greatest increase would also experience the greatest decrease, and that didn't happen"

I don't know where he pulled that out of, because what I see, So, Cal, massive increase (I tripled my home) and massive decrease, comp Houses in my neighborhood are now selling 200k less than what I sold for and that was 100,000 less than what we knew we could have gotten 6 month prior.
Arizona, same, Vegas, Same, Florida, same. the list goes on.

Here is another big balloon buster for ya, Everybody said San Diego was special 2 years ago. It won't happen here, they said, San Diego passed the same type of land use law limiting the amount of buildable land...Actually I am tired of using San Diego as an example, just look at any city that has seen decreases. Boston.. Special..Vegas...special,

Look! the economic indicators have shown positve growth in all these cities, unemployment low, all the same crap we hear about here. The fact is this, each and every one of those places have increased beyond the local affordability. Seattle, and no one can argue differently, has gone above the affordability of the majority of the local home buying public. Will it continue to do so? I don't know and I certainly hope not, I don't see it happening. But that is the big debate.
All I know is that I saw all these same articles 1 year and a half ago. (as Tim so astutely posted recently, articles from there and then) I was the one arguing that the prices wouldn't drop. I have learned a lot since then and the optimists can say all they want, they can call us chicken littles, doomsdayers, etc...I don't care. I ain't buying it, and I ain't buying. period.

Lionel said...

Slow, I think you're dead-on. The only addendum I would make is that there exists a possibility that this bubble story really makes national news in the MSM, and when it does so, all markets could be affected at a faster rate. At this point, outside of Florida, maybe Arizona, I think the bubble only exists in the blogosphere. Here in LA, the LA Times has almost completely avoided reporting on the potential for a bubble. It will be difficult to avoid once people start losing their homes and prices really start dropping.

plymster said...

I think everyone can agree that David Lereah, Alan Greenspan, and Robert Toll all seem to think we've hit or danced on the bottom.

Synthetik never said we've hit bottom, but does suggest that the market's bottom will be very low indeed.

But just for Wendell, I will go out on a limb, and say that at some point, the market will go as low as it will go (hit bottom, that is). ;-)

However, back to Tim's point, here's the original quote:

...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'm inclined to agree with Mr. Matsuda on this point. We're at least 5 years and a major recession (depression?) away from hitting bottom.

Thanks for the "optimistic" post, Tim. With optimists like Matsuda, I won't need to watch "House of Sand and Fog" for a long time.

The Tim said...


I think what we have here is just a grammatical misunderstanding.

Matlick attributes Mr. Matsuda with saying that "the housing market in the Puget Sound region and throughout the state is a long way from hitting bottom."

Allow me to rephrase that to hopefully convey it the way that it came across to me.

"Although some people may think that the Puget Sound / Washington State housing market is currently hitting bottom, in fact we have a long way to go before that happens."

When I said "I don't know anyone who has claimed that the housing market around here is 'hitting bottom,'" I meant presently "hitting bottom," not "is going to hit bottom."

I hope that this clarifies what I was trying to say.

Anonymous said...

Actually, with the democrats now in power, I expect the taxes will increase (on virtually everything). The 'give-away' programs will increase and our economy will decrease. If (heaven forbid) another attack comes and hits one or more major cities (Chicago, New York, LA, Seattle) we will plunge into a deep, deep abyss.

As for my own circumstances - the only thing I owe on is one vehicle, we've cut living costs to the bone and - no, we don't own real estate and it will be a while before I decide to enter those waters again. We are not (thank God) one paycheck or illness away from BK, but it is hard to get some breathing room.

Do I believe that the real estate market has hit bottom? The short answer is no.

Matt Rivett 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

Glue sniffer?.... solid economics? Oy Ve!!! Right there Matsuda's $0.02 is worth exactly that... $0.02

I got two words for this joker...

Cheap Credit

E-sidedave said...

Seattle, and no one can argue differently, has gone above the affordability of the majority of the local home buying public.

Depends on what you mean by "majority" and "home buying public."

"By the end of 2005, King County's index had dropped to 80.1. That meant that a family fell almost 20 percent short of the income needed to buy the median-priced house."

"But first-time buyers everywhere were hammered... By the end of 2005, that had fallen to 44.7 percent."

When we were living in SD in '03/'04 affordability was around 11%. If that is what we are comparing Seattle to, we have a long way to go.

biliruben said...

Washington adopts nontraditional mortgage guidance

This will make it even more difficult to wedge your way into a house priced above your means. Maybe it will help return a bit of sanity to housing prices in the next year or three.

D Housley said...

Slow -
In my opinion, it is going to be even longer to play out, probably 5-7 until a bottom settles in and another 5-7 years until we return to the levels we see now. Market cycles are long, and who knows, the market may just be flat for 10 years (IF mortgage rates stay in a range, otherwise if rates go up, there could be quite a nasty crunch) with small ebbs and flows mixed in until the fundamentals catch up. The liquidity spigot can't get cranked open any more, its already at wide open, there is just no more juice left in them oranges to squeeze.

Kaleetan said...


Its hard to take the rest of the post seriously when you struggle spelling the first word

The Tim said...

Whoops! Usually I spell-check and proof-read everything before posting, but I was in a bit of a hurry yesterday as I posted this. Thanks for catching that. I feel silly!

MisterBubble said...

Oh, grow up, kaleetan.

Comrade Chairman Greenspan said...

I work at MSFT and I'm afraid payroll hasn't gotten the memo about the truckloads of money we're all making to support current prices by any sane methods. Hell, we're feeling grateful just to have gotten the towel service back.

Christina said...

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?

Optimistic for whom, the sellers or the buyers? I am anomalous among homeowners in that I am keeping my fingers crossed for prices to go down. I don't treat my house like a bank, I want families to buy homes in my neighbourhood, among the renters and folks who've been here for 40-plus years.

Seattle was special when Boeing, the biggest employer in the mid 1970s, laid off tons of employees, in that it was hit the hardest. Seattle also wasn't spared from the 1991-1993 recession. One could make a case that it was special in 2000-2002, as dotcoms folded up and people sold and moved elsewhere. I wouldn't trust the words "Seattle is special" spoken by the blind, myopic or forgetful.

Yet it seems that many other people can afford $550K+ homes, and the gas guzzling vehicles commanding $40-$50/week fillups. I don't know how many there are, and if they're that motivated to change houses or refinance every two-five years to keep the bankers and Realtors happy.

Pundits and prognosticators are guessing 2012 will be the national bottom. If one's not fully invested in real estate, the gradual depreciation of house values will not sting so much.

I'm optimistic that revitalization projects will begin in 2007 in my neighbourhood, possibly slowing the eventual depreciation. I'm pessimistic that federal lawmakers will be bullied by financial institutions and developers' lobby groups to keep the spree going. I'd like to see interest rates go up and house prices go down. I'd like to see financial sanity, but I'm in the wrong country or the wrong time for that.

disgruntledengineer said...


It's hard to take the rest of "whatever you say" seriously when you struggle to spell the first word.

The Tim said...


To be fair, Kaleetan was quoting from the headline of this post, in which I had originally carelessly left out the second 'i' in "optimism." I have since corrected the error, although the permalink to the post still contains the typo.

Granted, he could have pointed it out in a more civil way, and it's a rather silly thing to claim that because of a typo in the headline, the entire post is invalid... but hey, whatever floats your boat.

Shadowed said...

I work at MSFT and I'm afraid payroll hasn't gotten the memo about the truckloads of money we're all making...

I hear you. I'm in the same position. Mind if I ask if you're a single income household? I make what seems to be an typical salary at Microsoft and I can't afford a 30yr/fixed on a modest house on a single income, even with good savings. So when I hear about all these new Microsoft hires that will save the housing market, I'm just slightly skeptical.

I do have a neighbor that is supporting a family of three on a single Microsoft income, doing almost exactly what I do so I assume a similar salary, who just recently bought the house next to me for way too much money in addition to a big new SUV. I'm afraid he may be one of the ARM reset casualties.

Unknown said...

Ok so I agree that affordability is way down and logically, the housing market should contract. But when I think about the bay area and NYC, their housing mkt seems to defy this logic.

For NYC, maybe they have wall street wealth but the bay area has a lot of middle class working folks who does not make over $80k/yr, just like the puget sound area. Can someone enlighten me about this?

Matthew said...

I'd like a tall, non-fat, double dose of optimism with a sprinkle of ignorance and a side of Shug. Thanks!

Ben said...

In response to Seattle Slow and related to the general theory that Seattle will follow California directly off the cliff (just later), take a look at the recently released Case Shiller indices and compare LA historical prices vs Seattle since 1990. If history is any guide, any price drop in Seattle will be far less than any experienced in California. I think this is because California is more volatile, but the other reason is the substitution effect. Real estate in the Pacific Northwest is cheaper than California, and hence Seattle and Portland are experiencing significant net in-migration over last two years, whereas the major California cities are experiencing significant net out-migration (this ignores births, deaths and presumably, low-wage earning illegals). Specifically, LA was down 167.5k people in 2004 and 2005, whereas Seattle was up 43k in 2004 and 2005. These are the marginal buyers! Source - PPR. I don't have final 2006 numbers yet, but would expect they would show more of the same.

Ben said...
This comment has been removed by the author.
Ben said...

Here is that link BTW:
"Case Shiller"

Unknown said...

Ben - how do you read the xls file? what does the numbers mean? Much obliged.

Ben said...

This pdf explains the Case Shiller indices...
Case Shiller Primer
Note that in the spreadsheet, all indices are set to 100 in the year 2000. As I understand it, the spreadsheet depicts nominal price changes off the index value. What that means is that LA fell by ~25% on a nominal basis from 1990-1995... which is obviously 40%+ on a real basis. Seattle, on the other hand, fell less than 5% on a nominal basis (and presumably fell around ~20% on a real basis) during that same time frame.

sash said...

please explain in plain english ;)