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Tuesday, March 20, 2007

"Market fundamentals are extraordinarily strong."

By now most of you have probably already seen today's article in the P-I: Homes overvalued by 31.7% in city, report finds. It's pretty much the usual shtick. "Homes are expensive here, but..." followed by lots of quotes from various real estate "analysts" and "professionals" yammering on about how wonderful the "fundamentals" here are, what with all the high tech job growth, etc., etc..

Here are a few obligatory quotes:

The typical house in the Seattle metropolitan area was 31.7 percent overvalued in the last quarter of the year, up 6.4 percent from the prior quarter and 24.3 percent from the end of 2005, according to Monday's joint report from Global Insight...
"You're sort of on the edge," [Global Insight talking head Jim]Diffley said. "We would say you're not in the riskiest group of metro areas."

Seattle's strong economy and the fact that its prices started their recent climb later than many areas further diminish the risk, he said. "We're not forecasting a 31 percent decline by any means."

Local experts question the idea that Seattle houses are overvalued at all.

"Sure, prices have gone up, and they've gone up rapidly," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. "But we're still in a situation where the market fundamentals are extraordinarily strong."

Matthew Gardner, a local land-use economist, said Seattle did not see the 100 percent to 150 percent appreciation or the overbuilding that occurred in places such as Southern California.

"We've got high incomes, we've got a job growth rate twice the rate of the country as a whole, we've got growth management," he said. "Will we see a slowdown in appreciation? Absolutely, and that's appropriate."

Randy Bannecker, a consultant housing specialist for the Seattle-King County Association of Realtors, said there just are not enough homes available to cause overvaluing.

"The overwhelming supply shortage is really what's keeping the prices where they are," he said. "It's hard to see where just kind of a run-up for run-up's sake is in play."
But my favorite quote actually comes from the "Sound Off" comments section attached to the article, posted by a user calling himself ravennaboy:
Its no longer a matter of "Californians willing to pay premium prices for our houses" its a matter of a vibrant high tech economy that has created massive amounts of wealth, drawn talented individuals and families from around the world whose high paying tech jobs allow them to afford high priced houses.

In reality, Microsoft and other employers have made Seattle much more of a meritocracy -- where the talented earn much more than those unskilled in high-demand technical knowledge. These higher paid folks see the value in Seattle housing, and are willing to pay high prices for this ideal location.

So, instead of blaming Californians, blame highly skilled microsofties for pulling Seattle out of its historic "boeing dependent manufacturing economy" with its boom and bust cycles.
How delightful for us to have an economy that has evolved so vibrantly.

Getting back to the article itself, I find it interesting that the 31.7% figure is said to be "up 6.4 percent from the prior quarter," when the last report I saw out of Global Insight had Seattle at 33.8% overvalued. Anyone know what's going on there?

Anyway, make of this report what you will. Personally, I don't need some "global leader in economic and financial analysis" to tell me that homes prices in Seattle are seriously out of whack. It seem pretty much self-evident to anyone willing to do half an hour of research.

(Aubrey Cohen, Seattle P-I, 03.19.2007)


refractedthought said...

Actually I read a different report about a year ago (wish I still had a link) that had Seattle about 33% overvalued.

Guess it depends on who's crunching the numbers.

In any event, some neighborhoods are probably way more than 33% over -- especially condos.

Matt Rivett said...

You know, its weird. I get this deja vu feeling when I read malarky from the likes of commentors like Revenna Boy. It really goes to power of propaganda and the press...

...Not to get off topic but since its the 4 yr anniversary of the Iraq invasion, as a dissenter from the first day, I remember idiots and knuckle-draggers going on about 'mushroom clouds' and Saddam's 'arsenal of camelpox'.

Then I thought, "wait a minute!, we've been flying jets over every sand grain in that miserable dustbin for 12 years and they can't figure out what's going on in there? whether or not they're building a nuclear bomb! WMD's my arse, this is all a joke!"... low and behold...

So now, when I hear jokers like Revenna Boy go on and on with this myopic gilded-age that Seattle's now arrived at (anybody remember the recession of 2002 that hit us harder than the rest of the country? nope? ... thought so) I hear parroted talking points from NAR/WAR. People barfing up press clippings without a shred of intellectual curiousity.

Again and again, I find it amazing the bulwark people erect to keep back the rising tide of truth. It is just bizarre...

Comrade Chairman Greenspan said...

'So, instead of blaming Californians, blame highly skilled microsofties for pulling Seattle out of its historic "boeing dependent manufacturing economy" with its boom and bust cycles.'

1999 called, it wants its new paradigm back.

BanteringBear said...

"Sure, prices have gone up, and they've gone up rapidly," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. "But we're still in a situation where the market fundamentals are extraordinarily strong."

When I read something as absurd as this, I cannot help but laugh and shake my head. I mean this stuff is just ludicrous. Since when is it prudent to blatantly lie? Fundamentals? Somebody take away this guys crack pipe. We're at record levels of unaffordability, and this guys preaching about strong fundamentals. The first time buyer is pretty much gone. Delusional doesn't even begin to describe this mouthpiece. He should be fired. In fact, he might be after the meltdown. It is my intention to remind all of these talking heads of their foot in mouth disease after the dust settles. I want them to wear these quotes as scars, just as the foreclosed homeowner does his credit rating.

I am ready to put my money where my mouth is with these Kool Aid swilling, pigheaded, vacuous motormouths. I am so certain of a major correction, I would risk everything I own. If prices can settle at a permanently high plateau, unaffordable for first time buyers, then I'll happily part with all of my cash and possessions.

It aint gonna happen. Think supply and demand. Who are all of these phantom rich people that will hold this market up? Where are all of these high paying jobs? Oh that's right, THEY DON'T F***ING EXIST! It's a CREDIT bubble. Where in the hell did common sense go? If anything, I have found solace in the fact that the competition is not too stiff for high paying public jobs.

Trickshot said...


Word, Dude.

meshugy said...

I am so certain of a major correction, I would risk everything I own. If prices can settle at a permanently high plateau, unaffordable for first time buyers, then I'll happily part with all of my cash and possessions.

Can you please write that check to me?

MisterBubble said...


flotown said...

the exceedingly frustrating part of this is that, yes, prices are out of whack with fundamentals, but increasing construction costs are making the creation to cheaper replacements impossible, which insulates (somewhat) the market from overbuilding.

Rents are still fairly affordable in and around seattle and barring a recession (albeit a big if) in the next two years, rents are likley to increase and make up a lot of the gap while home prices will probably stagnate on a per sf basis, and drop a little on the per unit number as the average unit size drops with new TH and condo construction.

Now if China ovreheats, we may have something. I think prices will stagnate and maybe decrease nominally. Middle-income condos are the most problematic in terms of retaining value from where I stand - more investors, more product by way of conversions and tightening lending may drop this area 10-15%

flotown said...

One other thought, refute as you will:

Affordability typically refers to prices compared to household income, but how much of a reliable indicator of buying power is MEDIAN household income.

Cases in point:

1)Elderly households with below median incomes owning homes free and clear. Most elderly couples I know don't earn a median income in KC (84 k) but they do own a home, usually free and clear. Yes, they might have an opportunity cost by not selling an "overvalued" home, but they may not make decisions that way and want to stay put.

2)Echo boomers - mommy and daddy made/make a fortune which affects the average income but not the median while the child/child plus spouse earns at or below median, which should indicate they can't afford to live in Seattle. But Mommy and daddy help child/children buy their home

2) Second home buying among boomers, again not reflected in median income. They have more ability to sell (usually) than the old folks, but decide to keep multiple homes for lifestyle reasons.

3) Other young singles. They state income independently and earn below median for their household, so they would seem to be unable to afford a homes, but they partner with a friend/friends to by a place, as is becoming more common now.

The rebuttal is that these trends were all building in 1999 as well, but we didn't see the deviations from inflation that home appreciation is showing now. However, I think the flow of assets into real estate and credit bubble that exists to some extent have masked some fundamental changes that will still exist - and cushion a fall- once the lending standards return to more historical norms

The Klondike said...

this time it's different. Seattle is different. This time things won't go down. this time fundamentals don't mean what they used to. there are other things that make this time different. It's different this time. Different, differen, differe, differ, diff. zzzzzzzz

Alan said...

Did flotown just claim that median income in King County is 84k? Any idea where that stat comes from?

The Klondike said...

Yeah, He's been smokin' too much Tai

refractedthought said...

rents are likley to increase and make up a lot of the gap

Yeaahh, do you have any rationale for that at all? Care to offer a reason why you think this?

Cause, based on a test sample of, oh, the rest of the country, I don't see that happening. Rents are either (a), going to track inflation, or (b), go down with rising inventory.

I suggest you start collecting your own data on this. Take a sample from some classifieds or craigslist, then compare those samples to some new ones in a few months. I did this myself for Bainbridge, and gosh darn it, those rents actully look a bit lower since last fall.

flotown said...

Sorry, $74K- the median for a family of four, per the WA State Housing Finance Commission

..59k is is the median for all households...regardless. I'd like to read responses on the likelihood that some of the fundamentals have changed in the last seven years

flotown said...

Rent data per Pederson Economics, Dick Conway, and Dupre and Scott. Rents rose 6% last year, far outpacing inflation. Expected - yes, just an expectation, to rise 7% this year and 2008 before new product comes on market and vacancies are back down to historcial norms. These are the same assumptions being usd by all apartment developers - Harbor, Security, Trammel Crow, Lorig, Mastro, etc etc.. Not saying its god's honest truth, just saying its accepted in the industry here

The Tim said...


The thing you have to keep in mind about the Dupre Scott rental reports is what they're using as their sample: "80 percent of properties with 20 or more units"

This is important, because as the number of speculators unable to sell their SFH and condos increases, the number of rental SFH and condos on the market will increase as well, putting downward pressure on the entire rental market. However, this factor is completely unaccounted for by the Dupree Scott surveys.

refractedthought said...

It's funny. When I left Virginia, the apartment complex I was vacating thought rents were going up too. They were raising the rent on my place by 15% (as if I needed any more motivation to leave). Unfortunately for them, there were a lot of very nice houses and condos for rent in that area for less money. Needless to say, I was not the only person packing his bags.

I did another check on that place's rents a week ago, and they've reverted to the rates they had before I left.

flotown said...

True, I don't think they account for that factor well. There is an assumption that 20% of all apts converted to condos wil come back on the market as apts, but nothing to track how many new condos (or existing) will become rentals.

How many could possibly come on the market? Help me out here...lets say, very, very generously, 10,000 new condos and conversions have been built in Seattle (city of, that's where the 7% rents bump is predicted, less sure elsewhere) in the last 3 years, when the first product started coming online after the recession. And lets say, very, very aggressively 20% are investors, thats only 2,000 units. Apartment absorption is projected to be around 4,000 annually for the next 3 years - 12,000 units. That's still a lot of demand to be met.

Just loo at the office market. the city quietly absorbed over 2 million sf last year. and the same absorption in the next two years is driving the construction cost of at least 5 major office projects downtown. 2 million SF equate to about 10,000 jobs. Not all new, as some old stock falls out, but thats a lot of growth.

nitsuj said...

"1999 called, it wants its new paradigm back."

Funniest thing I've read in a long, long time.