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Thursday, February 01, 2007

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
YearMed. Income% ChgAvg. Rent% Chg
Total 2000-2005+14.1% +3.3%
Average Yearly+2.67% +0.65%

Median Household Income vs. Median Home Price: 2000-2005
YearMed. Income% ChgMed. Home% Chg
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)


CarbonRiver said...

But these numbers make perfect sense when compared with the other figures on savings that came out today. (savings at 74yr low)

Talking about housing affordability is downright un-American. If you're not spending 40-50% of your income on housing, and then taking out a nice big HELOC to furnish your palace, you might as well go off and join the axis-of-evil.

Viva la credit!

blog said...

A question/comment about "median" home price. With all the activity in recent years around fixing up homes, additions, teardowns and replacements with mega mansions, a heavier market shift toward expensive homes, it would seem that median would be affected in no "appreciation". If I buy a lot and tear the home down that was worth 300k and now I sell one worth 900k? Is this market appreciation? Maybe its not that significant, or maybe price per square foot is more accurate than "median"....just wondering...

Chris and Akiko said...

Taking in all that I've read (here and on real estate pump sites) I think buying a house now is a mistake.

Money is coming out of commodities and back into the stock market, which is growing like gangbusters, and my nickel is worth more there.

I remember back in the '97-2000 era thinking why would anyone buy a house when a conservative stock portfolio wsas making 30% a year?

Then during the 1% interest days and wild wild west unregulated 'creative' finance days that followed the money flowed into commodities. Hell even a my MEN/MQY tax-free muni bonds paid 6% yield and that's when WaMu savings was paying 0.1%!

Higher interest rates, bubble pops in other areas, stock index charts and furious pumping by dying lenders/builders show the truth of what's coming over the next five years. Price stagnation or even deflation.

Never forget the past, like building on an earthquake fault, my parents bought a house in 1981 and sold it in 1997 for less than double.

Rob Dawg said...

But you forget tax consequences and hedonics and interest rates. While those don't explain all they go a long way in places like Seattle where appreciation has been so modest.

Rolandovich said...

I posted about this a couple of days ago. I would enjoy your comments about the implications of the seemingly willful manipulation of economic indicators to benefit those who produce the numbers, despite the clear absence of any rational relation. Nowhere is this clearer than in the housing sector.

The scariest snippet from the article referenced above is this one:

"On the inflation front, a gauge tied to consumer spending that is preferred by the Federal Reserve edged up by 0.1 percent in December. This gauge, which excludes volatile food and energy prices, was up 2.2 percent over the past 12 months ending in December, still above the Fed's comfort zone of 1 percent to 2 percent."

Imagine if the cost of a mortgage was factored into the figures used to calculate inflation rates?

The X factor in the housing bubble nationally (but not Seattle, of course due to limited geography and the strong job market), is the Federal Reserve’s action. If they push up interest rates, then building decreases and new projects are abandoned; sales continue to decrease. If they lower the rates, then they exacerbate the concern that they have admitted exists, (phrased innocuously as "froth"). However, if interest rates remain constant, then someone else takes the blame for the train wreck.

Alan said...

30% overvalued? That has been my estimate.

Would a 30% drop in prices be considered a soft landing or not?

Richard said...

Interesting that the median household income is lower than the median individual income from a typical engineering/software/biotech job.

I'd expect the median to jump substantially after all the "high paying job" creating in 2006 - are these figures available yet?

Puget Sounder said...

Richard --

How many high paying jobs were created last year in the categories that you mention?

Even if the Puget Sound Area indeed added 30k new 75k-100k per year jobs in 2006, that still isn't material enough to skew the average income up significantly.

plymster said...


What would happen if the Fed raised interest rates? The already crumbling housing market would collapse instantly. The stock market would choke. The country would likely be thrown into a recession pretty quickly.

If the Fed lowered interest rates, confidence in the dollar would likely collapse, commodity prices would soar, and the US Dollar would be more likely to lose its role as the global reserve currency (meaning foreigners will not be likely to buy our debt). This would create upward pressure on bond prices, resulting in upward pressure on Mortgage interest rates, and the housing bubble would still pop.

If the Fed holds interest rates, then everything should continue to play out. The housing bubble will pop (though not as badly as in the previous two scenarios). The stock market will continue to try to move up, but the housing led recession will keep stock growth in check.

Eventually, the Fed will have to raise interest rates to keep foreigners from dumping their dollars, but in the meantime, I think the world will try to be patient as this global liquidity bubble unwinds. The alternative is global depression, and nobody wants that.

The Fed may be trying to increase liquidity via Treasury repos (part of the recently abolished M3) while keeping interest rates low to keep foreign investors at bay but to keep the house of cards from falling apart. This sort of manipulation can only be kept hidden for so long.

In the meantime, the BoE and BoJ are both rin a similar position, and are looking to raise their interest rates and clean up their liquidity messes.

I don't have any deep financial training, so my guesses may be naive, and I may be missing a lot of other maneuvering, but this is my best guess.

Finance said...

The Tim - Please check the accuracy of the rent figures. 2Q05 to 2Q06 the avg rent in Seattle was $905/month, which is a 9.3% increase from the prior year. The vacancy rate is currently 3.3%. For the year ending 2006 I read in the Seattle Times last week the avg rental rate was $950/month.

I agree with your main point about affordability declining...not arguing that. It would be interesting to see a histogram of salaries in the Seattle area to show the distribution of wealth. As in a 10K range for the number of people in each salary range.

The overall appreciation of houses was 8.09% over the past 5 years. Thats not nearly as much as other heated markets. Having the market appreciation slow to the rate of 2000 & 2001 seems reasonable.

The Tim said...


As I stated in the post, the rent figures come directly from the King County reports, which you can download yourself at the link in the post. The data you linked to comes from a national private company whose stated purpose is to provide "real estate market intelligence" to "apartment investors, developers, owners and lenders." The "average rent" on the MSN page you linked to is not qualified in any way. I would bet that it includes everything from a studio apartment to a 4,000 sqft penthouse suite.

Given that King County's figures are for a fixed commodity—a 2 bedroom, 1 bath—It makes sense that it would be lower than an across-the-board average. If you have questions or concerns with the county's methodology, I suggest you take it up with them.

Also for the record, King County places the vacancy rate at 6.0%. Given that at least some private firms only poll large apartment complexes (since neither the article you linked to nor the company's site say, I don't know about this particular company), I would again tend to believe King County's number.

However, the point wasn't the fixed dollar amounts, but the year-to-year changes. Since the King County report uses a fixed commodity, I think it is a better report to use than one whose methodology is a mystery.

MisterBubble said...


The Tim said...

Oh one more thing, FG. You said:

The overall appreciation of houses was 8.09% over the past 5 years.

I have no idea where you pulled that number from, but it's just plain wrong.

Most recent King County data (December '06):
Combined: $399,900
SFH: $440,000

Five years prior (December '01):
Combined: $243,000
SFH: $265,000

That's an average of 10.48% per year for houses + condos, and 10.67% per year for SFH.

Although, as I've shown already, doing a strict price increase comparison while ignoring income and interest rates does not give the complete picture.

But then I suppose that was your point.

Anonymous said...



Mat said...

You know, once again, you're skewing this data. Why don't you add back in all of the crazy rents from 96-99? Why not give a more complete picture? Is that because rent was crazy in the dot-com era for Seattle? Yes, it was. Now that the housing availability and mature IT jobs exist here, and pay more than they did (your numbers), you have housing going up accordingly.

You're also not accounting for the huge tax break that Bush signed during this period. I know I'm selling my house after the two year line, and getting the hell out of here. I'm taking my gains with me to a less expensive market, and buying outright. But the value increase does relate to the tax benefits, the "conservatives" in power, and the associated monetary saving laws.

I won't argue one bit that saving is at a terrible low, and it's dragging the dollar and our economy dramatically. If we all saved more and spent less, you wouldn't have a bubble to talk about. But it's not *that* bad. If you want bad, go look at Phoenix and Vegas.

The Tim said...

You know, once again, you're skewing this data. Why don't you add back in all of the crazy rents from 96-99? Why not give a more complete picture? Is that because rent was crazy in the dot-com era for Seattle?

No, it's because that was all the data that was available in the pdf from King County.

Sheesh, settle down.

Finance said...

The Tim - I was using your figures from this post that shows an avg 8.09% appreciation per year over the past 5 years. Overall I was saying that this is not rampant avg appreciation...

[I forgot to mention the 8.09% on avg, as it looked like I was saying it for 5 years]

biliruben said...

Both 8 and 10%, when viewed historically and considering our generally low inflation numbers, are certainly rampant appreciation.

1% after inflation is what was the average over the last 100 years in the US until this recent run-up.

While we have had previous run-ups which generally were small enough to allow incomes and rents to catch up, this one has been so large and so prolonged that I don't see how prices cannot correct to make housing affordable to regular humans again. Particularly since most of this appreciation occurred during a period of historically extremely low interest rates.

Piper's bill coming due in a neighborhood near you in 2008, with special pre-billing in select locations and price ranges.