Seattle Bubble

Yet another story about some of the downsides of the extreme seller’s market we’ve had here lately:

Achieving the dream of home ownership has become hard-earned for some buyers in South Sound and in some of the nation’s hotter real estate markets.

That’s because builders are struggling to keep up with demand for new homes. On occasion, they can’t meet their construction closing dates and require buyers to find shelter in motels, apartments or with friends until the homes are finished.

Not only is it difficult to finish homes on schedule, but the mad rush of building going on brings questions of quality to mind, as well.

“Finding quality vendors (subcontractors) is tough in this market because they’re all so busy,” McGowan said. “In this sellers’ market, there are more buyers than we have homes to build. So, there is a backlog.”

Twenty, thirty, fifty years from now and beyond we’re going to be stuck with the thrown-together, crammed-in housing that is being built as fast as possible today. Lucky us.

(Jim Szymanski & Rolf Boone, The Olympian, 09.18.2005)

According to a report by an organization called the Silicon Valley Leadership Group, Seattle’s housing is among the more affordable of the eight “technology regions” they surveyed.

For those in Seattle who complain about housing costs, traffic delays, taxes or other issues, the report provides a little bit of comfort.

At least you don’t live in Silicon Valley, where the median home price is $723,914, motorists spend an average of 72 hours a year in traffic delays and the state income tax is among the highest in the nation.

Okay, I’ll give them that. California is about the last place on Earth I would want to live. No offense to my brother or my wife’s familiy (who live there now). Of course I believe that salaries are a bit higher there, though not necessarily high enough to cancel out the ridiculous cost of housing. What really cracked me up though was this statement:

[Seattle] also performed well in terms of housing, with half of the available homes affordable for those who make the median income. That compares with just 20 percent in Silicon Valley and 30 percent in Boston.

I’m curious to know exactly how they define “affordable.” The median income in Seattle comes in at around $55,000. The median house costs $385,000, meaning that half the houses cost less than that. Doing some rough calculations, mortgage payments on a $350,000 home with 20% down and 6% interest rate would be roughly $1,675 a month. Don’t forget property taxes, which would come in at roughly $480 a month, for a total of $2,155, or 47% of the median income’s pre-tax monthly earnings (that’s not even considering insurance or maintenance costs). Plus, who has $70,000 laying around for a down payment? “Affordable” indeed.

(John Cook, Seattle P-I, 09.16.2005)

The real estate blitz is having a noticeable effect on state revenue:

Washington state’s surging economy, driven by a continuing construction boom and red-hot real estate market, will pump an additional $493 million into state coffers, forecasters said today.

The good news - the third quarterly revenue surge in a row - brings the state’s reserves to over $1.1 billion.

Will the state be as blithe with the money as some local governments have been? Hopefully not, but what politician can resist spending money?

[Washington State Chief Economist ChangMook] Sohn said the sizzling housing market is responsible for nearly half of the latest windfall. But he cautioned that the pace will soon start slowing to a more normal rate.

It will be interesting to see if his advice is heeded.

(David Ammons, AP (Seattle Times), 09.15.2005)

To me it’s not a question of whether or not the ridiculous price gains of recent years will continue, but rather how long will they continue? Though other parts of the country have shown some signs of slowing, in the Seattle area the answer is apparently “a little longer.”

King County’s home price increase means the median home cost $385,000 in August — $56,000 more than the median home cost in August 2004, according to figures released on Monday by the Northwest Multiple Listing Service.

That’s a 17 percent year on year increase.

In Snohomish County, the median price of homes soared 23 percent to $296,725, while the figure for single-family houses soared 24 percent to $311,525, the first time it has climbed above $300,000.

Yowza. Considering that even by semi-rational financial standards, my wife and I shouldn’t spend much more than $240,000 for a home, it looks like we’ll be continuing to rent for a while.

Maybe the bubble non-believers are right, and prices will never drop. Maybe we missed the time to “buy now before it’s too late” and we’ve been priced out forever. I rather doubt it though.

(Kristen Millares Bolt, Seattle P-I, 09.13.2005)
(Bill Kossen, Seattle Times, 09.13.2005)

Are local governments setting themselves up for budget troubles if/when housing takes a downturn? That is to say, are they taking increased revenues from the high volume and high price of home sales and using them for regular operating expenses, rather than treating it as a surplus?

More tax money is forecast to flow into Snohomish County coffers in 2006, but the county appears to be in a tight budget year anyway.
…
The county is riding a wave of higher-than-expected tax revenue collections, chiefly real estate excise taxes from high home sales prices and the number of homes sold. Those taxes are forecast to be $19.7 million by year’s end, up $5.6 million.

For Snohomish County it would appear that the answer is “yes.”

(Jeff Switzer, Everett Herald, 09.12.2005)

One of the arguments that is frequently heard from people who don’t think there is a real estate bubble in Seattle is that the Seattle area is somehow special, and has unique characteristics that will protect it against real estate price corrections. Although I agree that Seattle is a wonderful place to live (why else would I be here?), I also recognize that every place has a list of unique characteristics.

However, I am still an open-minded kind of person, and I know full well that there are lots of people around that look at other markets in the country and see a bubble, but think that Seattle is either not in a bubble or has special protection against a bubble bursting (i.e. - price decreases). So, I would like to hear from you. What is it about Seattle that makes it special and immune to a price correction in real estate?

Please keep your comments on the subject of why Seattle is special/unique, as opposed to arguing why it is not. Next Friday I’ll post the opposite question.