"Re-Sales Galore" in Local Condo Projects

Local condo enthusiast Matt made an interesting observation in a post on Urbnlivn Tuesday. Apparently in many of the recently-opened Seattle condo projects there are, in Matt's words, "re-sales galore." 33 units at 2200, 19 at Cosmo, and 5 (of 48) at Meritage. Plus, anyone who bothers to spend a little time searching on Craigslist can see quite a few more units in these projects up for rent.

I thought that all these projects had "strict limits" requiring that units be owner-occupied, which would supposedly eliminate flipping. It would appear that these rules are being disregarded.

So much for all the alleged protections against speculation in the local condo market...

(Matt Goyer, Urbnlivn, 04.03.2007)

"That's it, I decided. That market's hosed."

I would like to highlight a post from over on the forum that I think should be read by more people. It was written by my friend Catherine (a.k.a. "Dove"), and posted to the thread How did you first learn of the National Housing Bubble? (Although it really speaks well to the Seattle market specifically.)

It was a long awakening, for me. I put "2004" in the poll, but depending on how you call it, it could've been a year earlier or later.

The first sign of trouble came when we'd been married a couple years, living as poor grad students in an apartment, and I started dreaming about getting a house. Nothing fancy, really - like maybe one of those cute little cottages with a tiny yard that Need Lots Of Love. Surely an itsy bitsy house couldn't be that much, right? Cue realtor.com telling me what a funny little girl I was. That sent my spidey sense tingling a bit - if tiny crappy houses are that much, who the heck can afford a house to raise a family in? Strike 1. That was 2003 or 2004 I think.

Strike 2 came when I first got a job as an engineer - and a good one - and my husband and I started making plans about where to live. My family had recently moved, and now both our families were in the midwest. We wanted to live close, so we eyeballed houses in Denver, just for planning purposes. And promptly realized that they were extremely affordable. That tiny crappy fix-er-up I'd wanted? Less than my annual salary. Big New House For Big Family? We could totally swing it. Heck, save aggressively for a couple years and we could almost buy it outright.

I quickly flipped the page back to Seattle to see if the same was true here, but no dice. Apparently a mansion in Denver is worth about the same as a mud hut in Seattle. We still couldn't afford *anything*. We promptly resolved to rent, save aggressively for a couple years, and then move to Denver, which is where we'd rather live anyway. This was 2005.

I'd heard that big cities were supposed to be expensive, but this was rediculous. I mean, it's not like Denver is that much different from Seattle in terms of size and opportunities. Saving and moving seemed obvious. In fact, why wasn't everyone doing that? I suspected again that something was wrong. Strike 2.

Throughout that year I began actually watching the housing market - planning to buy in the eventual future, I figured I should get a better feel for how it worked. And as I thought about things, I began to put a lot of stuff together very quickly. (1) We can afford a pretty nice apartment, with tons of money to spare. Seems like we ought to be able to afford a crappy house. But we can't. That seems . . . odd. There ought to be some sort of in between transitional product, right? They should be pretty comparable, right? (2) Actually, come to think of it, we're pretty well off - I make more than a lot of friends and neighbors and relatives all of whom are homeowners, and I can't afford a house. What gives? (2) And actually, come to think of it, who the heck is buying all of the houses? Where do all the normal people live???

More complaints confirm it isn't me. My brother in law has trouble with his house and then more trouble with his house and then a little more trouble. My co-worker is crying about how she can't afford the low-end condos. My *boss* is considering buying a townhome full of 70's shag. And she's not your run-of-the-mill manager, either--she's gotta make twice what I do.

As soon as I saw a suggestion somewhere that there was a housing bubble, it all clicked. The market that had smelled so funny for years now made sense. That was maybe a year ago. If not immediately convinced, I definitely acknowledged that it was a strong possibility. Any desire I had to buy a house evaporated overnight.

The final straw actually came recently when someone on that blog pointed out that rent prices were out of whack with housing prices. For some reason, I'd never thought to check that - I'd just always assumed those markets would pace each other. A quick run by Craigslist confirmed it.

That cute little crappy house I'd wanted? Rents for about the same as my apartment. Perhaps a bit more, $200 or $300 more. Psshaw. Shopping around a bit more, I saw nice houses go by at decent rents. And it suddenly dawned on me that if I wanted to, I could live anywhere in Seattle. Fancy condos downtown? Check. I could make rent. 5 bedroom houses? No sweat. Fancy Vacation Homes On The Water With Stunning Views? Ahhh... I might not want to pay for it, but the mechanics says I could afford to live there full time. (Not that I'm going to - still sticking to plan A, but still . . .)

Quick check on the real estate market and . . . yup, I still can't afford the mud huts.

That's it, I decided. That market's hosed.

I think Catherine hits the nail on the head. If the Bull Cadre gets their wish and home prices in Seattle continue to defy all logic and reason... at least I'll already have some local friends when I move to Denver.

Bubble Link Roundup

Here are a few short quotes from some recent interesting articles (followed by some pithy one-liners) that I haven't had the time to dedicate entire posts to:

Slumping sales of lots could presage fewer new houses for region

A key future indicator of the housing market is down sharply, but that could be a good thing, local real estate executives are saying.

Puget Sound area home builders have been buying substantially fewer finished lots from residential developers as the builders try to gauge the demand for their new homes in the months ahead.

Builders buying fewer lots today could mean fewer new homes tomorrow.

"Finished lots are hanging around longer than they have in quite some time," said consultant Matt Gardner, a principal at Gardner Johnson LLC in Seattle.

But, I thought the Seattle market was still hot, hot, hot!

Generous pay isn't enough to keep some on the road

The number of commuters in South Sound continues to grow, but some people are bucking the trend.

They've quit.

Melinda Spencer of Olympia took the step a few years ago. Spencer used to commute from Olympia to her job as a technical writer at Redmond-based Microsoft, where she earned about $73,000 a year.

Making that kind of money, Spencer's husband, Keith, could complete his degree at The Evergreen State College, and they could invest in property. In 1997, the couple paid $110,000 for their Olympia home.
...
Yet after three years of driving to Redmond, spending three hours in her car each day, something had to change. "It was awful," she said about her commute. "I felt like I showered (in the morning), ate (at night), and turned around and did it all over again. It was time to end this lifestyle."

She ended it by starting her own home-based technical communications business. Another reason to stay home was the birth of her first son, she said. Today, her husband works as a high school teacher in Rochester, while Spencer works at home and raises their two children. The money is tighter. Spencer estimates their combined income at just more than $2,000 a month after taxes and health insurance are deducted.

But in the 10 years they've owned a home, it has tripled in value to $300,000; they would be unable to afford it today, Spencer said.

"We would be looking at one of those old dogs that has been foreclosed on," she said.

Isn't appreciation wonderful?

Home bailout scams on rise

As interest rates rise, many people with adjustable-rate mortgages find their payments too high to manage. That has paved the way for con artists offering relief.

WASHINGTON – As home foreclosures increase across the country, scam artists promise struggling homeowners a quick bailout, but they end up stripping the properties of their value or owning the homes outright.
...
State officials urge cash-strapped property owners – particularly the elderly, immigrants, minorities and low-income – to be wary of mailings, phone calls and visitors offering to help "save your home" and "avoid foreclosure."

The Washington State Attorney General's Office recently settled a suit against three businesses that claimed to save the homes of people who were facing foreclosure for unpaid property taxes. The companies – Fiscal Dynamics Inc. and Cumulative LLC, of Tacoma, and Northwest Assets of Seattle – allegedly broke promises to pay the back taxes and instead tried to sell the houses at auction and keep the owners' rightful proceeds, according to the complaint.

Now wait just a minute. How can people possibly be facing foreclosure in the fantasy rainbow-land of forever double-digit appreciation? Hmm...

Last and most certainly least: Average Seattle worker can't afford to live here

Last year, the typical single person in Seattle earned enough to buy a home for just under $200,000 while the typical family of four had enough to pay just over $280,000, according to the U.S. Department of Housing and Urban Development. The median prices were about $450,000 for a house and $290,000 for a condo.

Typical families can afford apartments, but the rent for the average one-bedroom apartment in King County rose 8.5 percent in the past year as vacancies fell 17 percent — down to 3.9 percent, according to Dupre + Scott Apartment Advisors. Hal Ferris, a partner in developer Lorig Associates, said increasing construction prices mean living in a new development will cost more than what HUD assumes typical families can pay.

And many median-income workers choose to buy and commute rather than rent.

"They can buy somewhere, but that somewhere isn't in the city of Seattle," said Adrienne Quinn, director of the Seattle Office of Housing.

First off, I'd take that data from Dupre + Scott with a giant frikkin' grain of salt. Secondly, government solutions like the ones discussed in this article are like putting a band-aid on a tumor. They completely ignore the root cause of the problem, and don't even effectively address the symptoms.

(Jeanne Lang Jones, Puget Sound Business Journal, 03.26.2007)
( Rolf Boone, The Olympian, 04.01.2007)
(Tony Pugh, Tacoma News Tribune, 04.02.2007)
(Aubrey Cohen, Seattle P-I, 04.02.2007)

Seattle Bubble Concedes Defeat

Well everyone, it's been a fun couple of years, but the time has finally come for Seattle Bubble to throw in the towel.

Paul Campbell, Some rights reserved.

We've analyzed the local market from every conceivable direction, explained all the logical reasons why today's Seattle home prices are not sustainable, watched the national housing market turn from boom to bust, but still the home price increases in Seattle carry on. At this point, there is only one logical explanation why home prices in Seattle have not fallen: Seattle truly is incredibly special.

Of course, I don't just mean "special" as in "isn't it nice to live in a place with such delightful weather, exciting sports teams, and enlightened liberal politics that have solved all of our social problems." Sure, those things are great, but lots of cities can make the same claims (San Francisco, New York, etc.). No, in order to truly understand why real estate prices in Seattle will never go down, one must consider so much more.

Indisputable facts that make Seattle the most specialest place on the planet:

• Every single house sold has stunning views of Mount Rainer, The Olympics, Puget Sound, and at least three lakes.
• The Microsoft money factory in Redmond runs non-stop, printing millions of hundred-dollar bills every hour, which are loaded into Boeing planes and dropped from the sky daily, scattering the free money to all homeowners.
• Every homeowner is issued a brand new pretty pink pony at closing. (Thanks, Chris)
• 
  The waters of all the rivers and lakes contain healing powers that extend life indefinitely, thus allowing homeowners to take on increasingly longer-term loans. This will inevitably lead to the "forever loan," in which principal is never paid down, only interest paid, while the homeowner merely kicks back and enjoys the unending benefits of double-digit appreciation.
• Ballard.
• Thanks to Growth Management, not only is it true that "they're not making any more land," but in Seattle, the available land is actually shrinking daily! By 2050, the only buildable land will be within a five-block radius of the Space Needle. 2,000-story ultra-luxury condos will be erected, which will range in cost from $500 trillion dollars for a 50 square foot "sleep pod" to $42 septillion for the 500 square foot "presidential suite."
• Stunning rainbows fill the sky every afternoon (see above).

Yes, Seattle is truly one in a million. One in a billion. One in a googolplex. With inventory at near-record lows and pending sales increasing over thirty-four percent from January to February, it's plain to see that there's no stopping Seattle's equity spaceship. Of course, all you really need look at is how much prices have appreciated in just the last year (11%, thank you very much) to realize just how special Seattle is.

It is time for this blogger to face the facts: Seattle home ownership is the path to indescribable happiness and untold riches. That's why I'm closing this blog, quitting my job, becoming a full-time Seattle-area home buyer, and recommending that all my readers do the same.

Office space in Snohomish Co. 17-18% vacant, Industrial good.

Speaking of small business creating jobs: Snohomish Co. office space is currently showing vacancy at about 18%. In Lynnwood, the office vacancy rate is approximately 25-30%. Industrial space (read: Boeing & suppliers) appears firm.

Office space, meanwhile, remains harder to fill. Cushman & Wakefield and Colliers International commercial property firms reported that 17 to 18 percent of the county's premier office space was empty last quarter.

"The cause and effect of this is that tightening in King County tends to push people up I-5 to Snohomish County," Hoban said, though he said there are also a few new businesses sprouting up locally that have leased offices in Everett.

I suppose one could argue that just because there is a good chunk of office space available for small business (who typically drive the economy with job creation), that does not mean that hiring is slowing. Mixed signals?

Doing business in Edmonds recently, I noticed the sign-carrying-day-workers holding large signs on the corner of 205th & Hwy 99. "Comp USA Closing: everything 30-50% off." I also recently read that Circuit City is laying off staff. If consumer products are flying off shelves at these stores, why are these stores closing and laying off staff? What businesses will be taking over these large stores once they vacate?

Spot the Fundamentals, Addendum

Fact: As of 2005, Seattle area per capita income is the 15th highest in the nation (source).

Fantasy: "That pretty much says it all." i.e. - Incomes in the Seattle area are so high, that it doesn't matter how slowly they are growing. High incomes alone will keep home prices from falling.

Reality: Of the six metro areas with higher per capita incomes than Seattle in 2005 that are included in the S&P/Case-Shiller Home Price Index, all six have experienced YOY home price declines in the past year (source). Three of the six have experienced a smaller total increase in home prices since 2000 than Seattle.

The table below shows Seattle and the six other metro areas with larger per capita incomes that are also covered by the S&P/Case-Shiller Home Price Index. "S&P HPI" values are normalized to 100 in January 2000, so the present value (January 2007) indicates how much home prices have risen since then.

Rank	Metro Area	S&P HPI	YOY Chg
2	San Francisco, CA	211.77	-1.4%
4	Washington, DC	238.05	-3.9%
5	Boston, MA	168.28	-5.6%
8	New York, NY	211.50	-0.9%
13	Denver, CO	135.86	-1.1%
14	Minneapolis-St. Paul, MN	167.98	-0.9%
15	Seattle, WA	183.92	+11.0%

Seattle definitely sticks out as an apparent winner, for now. Honestly, I don't know the reason that prices are continuing to rise here, but I do know some things that are not the reason, and "high incomes" is one of those things.

Spot the Fundamentals

Let's play a game. It's called "Spot the Fundamentals," and the way we play it is by looking at some of the "fundamentals" to figure out which ones are responsible for our area's high home prices.

The frequent condescending argument of the cadre of Seattle area housing bulls (real estate agents, "analysts," the press, and increasingly combative blog commenters—whom I suggest we all ignore) is that unlike most of the rest of the nation, Seattle home prices are firmly supported by strong fundamentals such as exceptional job growth, high-paying jobs, and increasing population, and as such will not decline.

Let's play "Spot the Fundamentals" to see how well that claim holds up.

Job Growth
The Seattle area has "strong job growth," right?

Click to enlarge (source)

Well sure, if you call 3% growth in the last year "strong." Of course, while Seattle was one of the few parts of the nation where housing prices rose double-digits last year, there were 85 Metropolitan Statistical Areas that had better "job growth."

Unfortunately for the Bull Cadre, a 3% increase in jobs does not account for an 11% increase in home prices during the same time frame. As we have previously explored in detail, job growth (and reduction) in the Puget Sound has had little to no correlation with housing prices.

High-Paying Jobs
Yeah, but even though the job market isn't growing by leaps and bounds, thanks Microsoft, salaries are shooting through the roof... right?

Click to enlarge (source)

Hmm, maybe not. In fact, income growth in the Seattle area was so slow recently that we made it onto a "lowest of" list. Somehow I must have missed it when that little news tidbit hit the papers.

Another swing and a miss for the Bull Cadre.

Population Growth
Well, people are moving here faster than ever, so that pretty much forces home prices higher, doesn't it?

County	2000 pop.	2005 est.	% chg.	%/year
King	1,737,034	1,793,583	3.26%	0.64%
Pierce	700,820	753,787	7.56%	1.47%
Snohomish	606,024	655,944	8.24%	1.60%

(source)

Not. If there actually were people moving here in droves, then yeah, that would explain home prices rising an average of 9.4% per year (King County SFH, 2000-2005). However, that clearly does not describe reality.

Looks like strike three for the Bull Cadre.

Fundamentals vs. Speculation
Here's a refresher:

Click to enlarge (source)

As I have demonstrated before, Seattle area rents (which are not subject to speculation) have indeed been tracking fairly well with "the fundamentals." Home prices clearly have not.

How anyone can (with a straight face) argue that "strong fundamentals" will prop up Seattle area housing prices, when they have so clearly been propelled by factors other than fundamentals, is completely beyond me. You can believe whatever you want to believe about where prices will go from here, but to say that they will be propped up by "strong fundamentals" is just willful ignorance, in my opinion.

If anyone believes they can explain how Seattle home prices have actually been tied to fundamentals since 2000, and wishes to civilly bring such an argument to the table, backed up by hard data (such as what is found in this post), then by all means be my guest. However, don't waste your time with one-liners, "bitter renter" put-downs, and simplistic observations of inventory and ongoing price increases, as they will be ignored.

(Bureau of Labor Statistics, US Dept. of Labor, 01.2007)
(Bureau of Economic Analysis, US Dept. of Commerce, 09.2006)
(US Census Bureau, Population data: 2000-2005, 2005)
(King County Budget Office, Affordable Housing 2006, 01.2007)

Thanks go out to reader Dennis O. for pointing out some of the data in this post.

Case-Shiller: Prices Flat in Seattle

Uh-oh...

Home prices go negative for first time in 11 years
Case-Shiller price index shows prices falling in 17 of 20 cities in January

WASHINGTON (MarketWatch) — U.S. home prices continued to fall in January, with prices in 10 major cities now down 0.7% year-over-year, according to Standard & Poor's and MacroMarkets LLC, which released the January Case-Shiller price indexes on Tuesday.

The 10-city index is down 0.7% in the past year, the first year-over-year negative reading since 1996. The 20-city index is down 0.2% year-over-year. A year ago, prices were rising 15%.

"The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market," said Robert J. Shiller, chief economist at MacroMarkets, in a statement.

Of course, since you already know how special Seattle is, you obviously know it was one of the three cities in which prices are not presently falling. But the picture isn't quite as rosy as you might think...

Home prices fell from December to January in 17 of the 20 cities; only Miami showed any price gains. Prices were flat in Charlotte, N.C., and Seattle. Prices were falling fastest in January in San Diego, down 1.7%, or a 22.4% annual rate. Prices dropped 1.1% in Los Angeles, or a 14% annual rate.

The 10-city index was down 0.8% in January, or an annual rate of 10%. The 20-city index was down 0.7% in January, or an 8.7% annual rate.

Eleven of the 20 cities had negative price appreciation in the past year, led by Detroit (down 6.9%) and Boston (down 5.6%). The biggest increases were in Seattle (up 11.1%) and Portland, Ore. (up 8.7%).

Prices have now retreated year-over-year in some of the regions that had the biggest price gains in 2004 and 2005. Phoenix is down 0.7% year-over-year. San Francisco is down 1.4%. Washington is down 3.9%.

I am reminded of an image that was circulating a while back. It was a photograph of a roller coaster just as the cars crested the peak and began the ride down. The various cars were labeled as different cities around the country, with San Diego in front (beginning to head down quickly), Phoenix in the middle (just starting a downward trend), and Seattle in the back (just "leveling off").

To me, it only makes sense that the cities that began the ridiculous run-up first (San Diego, Phoenix, etc.) will be the first to head down. Conversely, cities that were late to the wild appreciation party (Seattle, Portland, etc.) will be the last to experience price declines. But why bother with "logic" and "reason" when you can put your blind faith in the mystic power of "job growth" and undefined "fundamentals." 11.1% forever!

(Rex Nutting, MarketWatch, 03.27.2007)

Condomania in Tacoma!

Tacoma: Your mission, should you choose to accept it, is to sell 1,500 high-end condos in 14 months:

Hundreds of new, pricey condominiums exclude young singles needed for a thriving city core, according to the author of a study analyzing the downtown housing market.

Builders and developers say land costs and water views push prices beyond the mid-$200,000 range generally considered doable for the first-time buyer. And even though the number of unsold units remains high in some neighborhoods, they say demand is strong for high-end condos. Tacoma’s average new condominium price, according to the study, was $348,893 at the end of last year.

The 149-page report, finished last week, identified three kinds of future condo buyers: female baby boomers, young professionals, and married folks with no children at home. It recommended adding edgy lofts and more small spaces that Generation Y buyers can afford.
...
As of December, all six neighborhoods surveyed averaged 14 months of condominium inventory, which measures how long it would take to sell everything built and approved.

A healthy market for new construction tends to be in the six- to 12-month range, said Deanna Sihon, the study’s author.
...
Since 2004, nearly 400 condos have been sold downtown with another 525 for sale and about 1,500 proposed, according to the study.
...
A year ago, a hot market meant condo shoppers had to make rapid buying decisions, said RE/MAX real estate agent George Pilant.

Not so now.

“Buyers have so many choices they don’t feel a sense of urgency,” he said.
...
As in any type of residential real estate, demand is driven by population and job growth, said Paul Turek, an economist with the state Employment Security Department.

But condos are a niche product that at higher inventory levels, he said, raise this question: Will good-paying jobs needed to sell such downtown housing continue to be created?

“I suppose that’s where the gamble is,” he said. “In the Tacoma area, we have some high-paying jobs. Whether there’s enough to support the building of the condos remains to be seen.”

Good luck with that. Seriously.

(Devona Wells, Tacoma News-Tribune, 03.25.2007)

Condomania in Everett!

Better be careful the next time you drive through Everett, you're likely to get burned, the condo market there is so hot!

On paper at least, downtown Everett is poised for explosive growth.

Nearly 800 new downtown condos and apartments are in various stages of planning.

There's a good chance some of the projects scattered across a dozen development sites will not get off the ground, officials acknowledge.

Still, long-term growth, a property tax subsidy and a strong local economy, buoyed by jet sales at the Boeing Co.'s Everett factory, work in the city's favor.

...

The condo market in the Puget Sound area remains hot, in spite of a wave of foreclosures and slumping housing sales creating jitters and sliding prices elsewhere.

Developers in Everett talk about "pent-up demand" and say they aren't deeply concerned their projects will create a glut of vacant condos for sale, as is the case in Las Vegas and parts of Florida.

"I think the local market is way stronger than people realize," said Joe Zlab, who plans to break ground on Rockefeller Square, a 40-unit condo building on Rockefeller Avenue, north of Everett Avenue, this spring.

...

It's only a matter of time before Everett begins to resemble more affluent Seattle suburbs, including Bellevue or Kirkland, said Anthony Aversano, a Mountlake Terrace remodeling contractor.

"Seattle is overpriced, Bellevue has access problems and is also too expensive," Aversano said. "It's not a place where people can go unless you're working for Microsoft and have been there for a long time."

Gus Boutsinis, a Mill Creek developer working on a 130-unit condo project on 41st Street and Colby Avenue, agrees.

"We think Everett is ready," he said. "It's where Seattle was 15 or 20 years ago.

Yow! Smokin!

(David Chircop, Everett Herald, 03.25.2007)