Seattle Bubble

With the numbers we’ve been seeing for the last few months, it is clear that Seattle is not the red-hot market that it was a year ago. What is still not clear though is just where we are in the boom/bust cycle. Many theories have been suggested recently in the comments about how soon Seattle will turn, how extreme the turn will be, etc. I’m curious to know what kind of timeline you expect the Seattle area housing market to follow in the next 5-10 years. Here’s my (very) rough guess:

• 2006
  • In most parts of King County appreciation slows to a crawl through the end of the year. The closer to Seattle you get, the more stagnant the appreciation. Near the end of summer and into fall, inventory begins to build slightly. Realtors and newspapers proudly proclaim a "soft landing."
• 2007
  • Inventory stacks up at an increasing pace, prices are level in some areas, slightly declining in others. By the end of the year, prices in some areas are approaching 2004 levels. Realtors still in denial.
• 2008-2010
  • Prices continue to decline at slightly less than the rate they appreciated in 2001-2005. By summer of 2010, prices are at or near 2002-2003 levels for most areas and holding steady.

Of course, what will really happen depends on so many factors (interest rates, strength of the dollar, foreign investors, lending practices, etc…) that it’s impossible to really predict with any certainty, but that doesn’t stop it from being fun. So what’s your predicted timeline?

In a real estate advice column this weekend, Everett Herald reporter Steve Tytler explains the difficulty of finding good foreclosure deals in Seattle’s still-at-least-lukewarm market:

Question: Where can I learn about investing in foreclosures?D.E., Renton

Answer: There are some truly extraordinary bargains to be found in the foreclosure market. Unfortunately, finding these bargains is like finding a needle in a haystack. I know, because I have tried to find them myself. To listen to the late-night TV real estate hucksters, you’d think people in foreclosure are just waiting to give their house away for half its fair market value. Nothing could be further from the truth.

Think about it for a minute. If you lost your job and fell behind on your mortgage payments, are you going to hand me the keys to your house just because I’ve shown up on your doorstep to save you from foreclosure? Probably not. Most people want to keep their homes, and in the vast majority of cases, they find a way to come up with enough money to head off the foreclosure auction.

Or if they can’t raise the money, they put their home up for sale through a real estate agent and attempt to recoup as much of their equity as possible before the foreclosure auction.

It’s true that as long as the market is at least a little warm, there just aren’t going to be many deals in foreclosures. However, I think we all know what will happen when things level off and/or start to decline—combined with rising interest rates… That will be the time to be in the market for foreclosure properties.

(Steve Tytler, Everett Herald, 04.23.2006)

Is Tacoma being set up for a big fall when the housing party finally ends? Quite possibly—especially when it comes to condos downtown.

A tally of downtown projects by real estate consulting firm McCament and Rogers for the City of Tacoma shows 774 residential units are currently being built in 13 different projects around downtown. In planning and design phases are 1,014 additional units. Hundreds more housing units are in less formal planning stages. Those under-construction and planned units will join 997 condominiums and apartments built downtown since 2000.

That’s 2,785 units — something akin to adding a city the size of Steilacoom in downtown Tacoma.

According to sales people and developers, many of those projects are selling or being rented at a brisk pace.
…
Even with the tax benefits and the gentrifying downtown, some real estate sales people wonder whether the market can absorb the hundreds of units that will go on the market beginning next fall through the summer of 2007.

Privately they say they’re concerned that the biggest projects — such as the 183-unit Esplanade just under construction on the Foss Waterway — are too big to enter the market all at once when so many other projects will hit the market at the same time.

And even more privately (as in—they wouldn’t admit it to a newspaper) they’re concerned that I think that by the time these units are ready, the whole market will have tanked and none of them will be selling… Or at least that’s what they should be concerned about, methinks.

(John Gillie, Tacoma News Tribune, 04.23.2006)

Once in a while you read something and you think: “Is this for real?” That’s the reaction I had yesterday when I received this email (name changed to protect the… well just as a courtesy):

Hello Timothy,

With interest I read your post regarding the “real estate bubble”. Regardless of what happens with the bubble the longer you wait to purchase a home the harder it will become. The only time I would agree that it would be appropriate to wait would be if you feel the bubble will burst and prices/values will fall.

Nothing in anyones crystal ball says anything about values falling in the Northwest, the primary reason being supply and demand. Here in (Mr. F’s) County our market is cooling. Even at that if we only have a 10% appreciation this year it is still great news for homeowners. So my recomendation would be to buy now not later. In not buying now you are loosing appreciation and tax writeoffs. As I tell most new buyers, just get on the up escalator! Once there at least what you currently own is appreciating at the same value as most of the homes around you so it will be easier when you are ready to sell and buy the next one.

Good luck, you obviously are putting a lot of thought behind your decisions…………..good job!

Mr. F

Web Page: (real estate website owned by Mr. F)
Blog: (real estate blog owned by Mr. F)

Though I’m not sure which particular post he may have been referring to, I have to say that this guy certainly has chutzpah if he thinks that one poorly-spelled email can somehow convince me that there’s never been a better time to buy!!! There’s some pretty classic quotes in there though. I think my favorites are “Just get on the up escalator!” and “Even…if we only have 10% appreciation…”

Here is the response I sent him:

Mr. F,

I have to say, I’m shocked, shocked I tell you, to learn that someone in the business of selling real estate would recommend that I buy now. Seriously though, we could certainly qualify for some kind of loan that could get us into a home in our area at this time. However, I’m not interested in “exotic” or “creative” financing. And right now that’s the only way we even could afford a house.

Believe me, I’ve run the numbers many different ways, and right now our money is doing just fine in “escalators” that haven’t just experienced the largest and fastest run-up in history. Despite your claims, and despite how much I love it here, there is nothing magically special about the Pacific Northwest that makes us immune to market correction, and I feel that one is coming—in the relatively near future. I suppose only time will tell which one of us is right.

Thanks for your comments and good luck in your work.

-Tim

I wonder what inspired Mr. F to email me in the first place?

In other news: I miss Arrested Development

Here’s a pair of mostly glowing articles about just how stupendous our state’s job market is, and how much better it’s getting every day.

The roaring construction and aerospace industries helped Washington add 7,900 jobs last month, pushing the statewide unemployment rate back down to 4.6 percent.

That matched January’s jobless rate, before an influx of new job-seekers bumped it up to 4.8 percent in February. The last time the state’s jobless rate was this low was November 1999.

"Washington employers hired workers at a near-frantic pace in March," said Greg Weeks, director of the state Employment Security Department’s work force-data branch. "A lot of industries were growing. This is a very hot labor market."
…
However, the Seattle metro area is still about 5,800 payroll jobs shy of its December 2000 peak.

The state’s construction industry continued to hit above its weight. Construction accounts for less than 7 percent of the state’s payroll jobs but generated more than a quarter of the new jobs added last month.

However, most observers expect high prices and rising interest rates will cool the nation’s — and region’s — housing boom.

I’m certainly not going to say that having more jobs available is a bad thing. However, these jobs that are being added hardly seem like the kinds of jobs that are going to afford people houses in King County. Actually, a large amount of the new jobs continue to be in providing houses:

The construction industry reported the strongest growth, adding 2,100 jobs in March. New construction jobs statewide reflect the "surprising persistence" of the housing boom, Weeks said. Construction jobs increased by 3,600 in January and by 2,400 in February.

"As an economist, I keep thinking the rise in interest rates will have an impact on the housing market, and I’m wrong," he [Weeks] said.

Oh, I don’t think you’re wrong Mr. Weeks. I think the market is just making one last gasp before the frenzy finally dies. By the time construction is completed on all these houses and condos that these thousands of new jobs are building, I think we will be experiencing a very different market.

(Drew DeSilver, Seattle Times, 04.19.2006)
(Dan Richman, Seattle P-I, 04.19.2006)

Here it comes… with the housing market in Olympia beginning to experience more signs of a slowdown than anywhere else in the Puget Sound, it’s time to bring out the excuses. The order of the day? Gas prices.

Thurston County’s real estate market has been one of the state’s hottest because median prices here are lower than in Pierce and King counties. This has lured many buyers to South Sound, but it increases their commutes to jobs in Pierce and King counties.

David Schaffert, chief executive of the Thurston County Chamber of Commerce, worries that rising gasoline prices could slow South Sound home sales if buyers decide the higher commuting costs might wipe out potential savings on the cost of a Thurston County home.

“This used to be less of an issue when gas was $1.50,” Schaffert said.

“With higher prices, you have to wonder how it will affect our home development.”

Maybe gas prices will be the breaking point, but the little detail that they just love to ignore is that despite the fact that "median prices here are lower than in Pierce and King counties," they’re still too high to be sustained once the easy money dries up. If people are so stretched that an extra $50-$100 in gas each month is going to break them, maybe they didn’t have any business spending so much on a house in the first place.

(Jim Szymanski, The Olympian, 04.16.2006)