Seattle Bubble

Given that the housing bubble is so closely tied to the economy, both on a national and a local scale, I feel compelled to mention the $346,500,000 stock infusion that will soon be distributed among 63,000 Puget Sound residents.

If Boeing’s stock ends the day near Thursday’s closing price of $83 a share, employees will receive Boeing shares worth about $5,500, and the regional economy stands to get an infusion from the bonuses.

The windfall, worth hundreds of millions of dollars, will go to an estimated 191,000 full-time, part-time, current and retired employees companywide — 63,000 people in the Puget Sound region — who have worked at Boeing during the past four years. Workers who have been with the company for just a portion of that time will get smaller, pro-rated stock bonuses.
…
Bret Bertolin, a senior economic forecaster for Washington state, said the bonuses will have more significance to the local economy than when Microsoft paid out its $3-per-share special dividend in November 2004.

The reason, he said, is that the vast majority of the dividend went to big shareholders like Bill Gates, Paul Allen and Steve Ballmer, rather than to rank-and-file workers. Gates gave his $3 billion windfall to his foundation, which spends its money around the world.

Even so, Bertolin doesn’t expect the checks to lead to a big boon in state tax revenue. Even with the rosiest of estimates, he said, it could generate only $20 million of tax revenue, relatively small change for a state that expects to collect $28.9 billion in tax revenue in the current two-year budget cycle. Most of the windfall is expected to be spent in retail.

The bonus represents 6.8 percent of the $5.1 billion payroll for the aircraft-manufacturing industry in Washington state in 2005.

Just what we needed to stretch this party out for just a little bit longer.

(Luke Timmerman, Seattle Times, 06.30.2006)

There may still be one part of King County that has affordable housing, but apparently only to the detriment of pretty much every other quality of living measurement:

South King County residents have more problems with obesity, feel less safe from neighborhood crime, and are more likely not to have health insurance than those who live elsewhere in King County, according to a report issued today.

The Seattle Foundation’s report, "A Healthy Community," says South King County lags some or all of the county on nine quality-of-life indicators, while scoring best in one area: affordable housing.
…
"We have been the poorest part of the county for years," said Duclos, chief executive officer for a nonprofit agency that provides temporary and permanent low-income housing.

Families with low incomes are drawn to South King County for affordable housing, said Kathryn Horsley, of Public Health – Seattle & King County.

"They may be able to afford to live there but they can’t afford health insurance," Horsley said.
…
But the cost of housing in South King County has now increased to the point that some are moving to Pierce County, Duclos said. That means driving farther to jobs and spending more on gas.

What people need are better-paying jobs and help saving money, Duclos said.

"When you don’t have money to spend, it’s real hard to learn how to save," Duclos said.

Unless wages start to see some serious increases, if the cost of homes keeps going up for much longer, and rents really do increase the way that some people seem to want, it’s only a matter of time before the Seattle area population stagnates and begins to shrink. I mean, if people can’t afford to live, they’ll leave, right? What other choice is there?

(Steve Maynard, Tacoma News Tribune, 06.27.2006)

With the talk of all the new condos that are allegedly on their way to downtown, we’ve been wondering where all the demand will come from to fill them. Here are three possible answers:

Suddenly, a proliferation of new high-rise residential tower projects is on the books, in for permits, or under construction. In downtown Seattle, there are 13 projects already under construction, with another 49 proposed. If all of these projects proceed to construction, over 8,000 new residential units will be built by 2010 in the most rapid expansion of high-density development in the history of our city. It is anticipated that this number could easily grow to 10,000 new units as additional projects are queued up to meet continued demand.

The question that many are asking is: Will there be enough people moving into downtown to fill all of these towers? According to local economist Matthew Gardener, the market could readily absorb up to 2,500 new units per year. Based on a current assessment of when projects are slated for occupancy, the market will have difficulty providing this supply for the next couple of years because the typical high-rise tower takes three to four years to design and build.

Three significant trends will bring people to live in the urban center, and help maintain strong demand for downtown living:

1) Restrictive land-use rules

Land is scarce — what little land is left is comprised largely of farmland, wetlands or critical areas that need to be preserved. Growth management and jurisdictional planning restrictions on suburban development — in combination with a push for sustainable and responsible growth — is forcing high-density development in the urban center of Puget Sound where mature infrastructure is already built. Because fewer units will be built in the suburbs, demand for in-city living will escalate.

2) Road rage

With gas about $3 a gallon and traffic getting more congested every day, many people are questioning a lifestyle that keeps them on the road for up to 12 hours a week. Free time is precious. The ability to live, work and play in an urban setting that allows a walking commute has a special appeal to many individuals contemplating a move back into the urban center.

3) Seeking new life-styles

Many people are tired of the frenetic pace of modern life and are seeking a new lifestyle that is less stressful. People are seeking calm from the storm; a place of refuge that is connected to something greater but that also affords privacy and security. Living in the city affords a more carefree, pedestrian lifestyle that is less complex and more enjoyable. Downsizing is not a fad, it is a major trend as people look to simplify their lives, and as boomers empty the nest. People are also buying second or third homes to live part-time in the city.

Maybe it’s just me, but I don’t see how forking over half a million or more for a tiny box of a home downtown is the gateway to a "lifestyle that is less stressful." The whole article is very pie-in-the-sky, so take from it what you will.

(Blaine Weber, Daily Journal of Commerce, 06.29.2006)

In a recent post in his continuing series on whether or not Seattle is in a bubble, Gregory Wharton took a look at the actual cost of producing new houses. After doing a bit of math on construction costs, he made the following claim:

…the comparative value of new construction for the median Seattle home is $326,600 not including land.

That would actually be a pretty solid reason for housing prices to be as high as they are right now… if it were true. See, the thing is, I’m not convinced that it is true. Most of you probably read the news reports yesterday proudly proclaiming that sales of new homes nationwide were up in May. In those reports was an interesting tidbit of information about the price of these new homes:

The median price of a new home did drop to $235,000 in May…

So, nationwide the median new home is selling to the consumer for $235,000, but in Seattle the cost to the builder to construct the median home is $326,600? $235,000 is the actual median sales price across the entire US, and does include land. Making what I think is probably a low-ball assumption that only 15% of the cost of these homes comes from the land itself, and allowing for developer profit of just 5%, the construction cost estimate obtained by looking at the actual median sales price comes in at $188,000—over 42% lower than Mr. Wharton’s estimate.

So here’s my question: Are construction costs in Seattle really 70% higher than the nation as a whole (without figuring land into the equation), or are Mr. Wharton’s numbers a bit… off?

(Gregory Wharton, Seattle Real Estate Professionals, 06.21.2006)
(Martin Crutsinger, Seattle P-I, 06.27.2006)

Update: Mr. Wharton posted the following response in the comments, and I feel it is only fair to add it to the main post:

As the original author of the linked article, A few things:

For all these reasons and more, I stand by my analysis.

I found this article about ditching the real estate agent to be unintentionally amusing.

Eric Boerner was shopping for a house in the Seattle area when he decided he couldn’t stomach the idea of a real estate agent pocketing thousands of dollars in fees for work he’d rather do himself.

Did he really need someone to drive him around? And who could choose the best school for his 5-year- old daughter better than he?

So when Boerner checked out Redfin.com, a Seattle-based home-buying Web site, and saw a modern four-bedroom house in Lake Forest Park he liked, he took the plunge.

He hit the red "buy it" button, and made an offer.

Sight unseen.

"It seemed kind of surreal to throw a half-million dollars into a house, but I have a lot of trust in my own judgment," said Boerner, 39, who made the offer online from California as he and his family were preparing to relocate to Seattle last month.

So as their primary example of someone that has kicked the real estate agent habit, they chose an arrogant Californian, so flush with money that he’s willing to throw it into a house he hasn’t even seen, let alone had inspected? Wowzers.

"We represent a buyer or seller throughout the entire process. Redfin does not," said Bill Riss, chief executive of Coldwell Banker Bain. He said Redfin’s model relies heavily on other full-service real estate agents, who often end up showing Redfin clients’ properties.
…
Riss said full-service companies like Coldwell offer an edge, particularly in hot real estate markets like Seattle, where homes sell quickly, often with multiple offers.

"It’s a choice of how you value your time over your money, and do you truly understand the entire real estate process?" he said. "The question is, are you trading off something?"
…
Boerner eventually lost the Lake Forest Park home when the seller backed out of the deal during escrow, leaving him and his wife, Lynn, scrambling. Instead, they found a four-bedroom house for $390,000 with a deck overlooking a wooded backyard in Mountlake Terrace. They toured that one before closing the deal through Redfin.

I love the "particularly in hot real estate markets like Seattle" bit. So basically what they’re saying is that the popularity of the real estate agent has nowhere to go but down? Oh, and $390,000 in Mountlake Terrace? At a whopping 8% less than last month’s King County median, now I know what the Seattle Times means when they called Mountlake Terrace the "sweet spot for affordability".

(Phuong Cat Le, Seattle P-I, 06.24.2006)

Seattle Times columnist Nicole Brodeur points out the downside to the city’s apparent condo-rich future—the condos are pretty much only for the rich.

I like the idea of an army of spit-shine new residents invading downtown. It’s fewer cars on the road, a nod to our healthy economy and hints at the world-class city we’ve always wanted to be.

But I don’t see any place for the middle class. Any firefighter, teacher or store manager (we’re what the city calls its "work force") will have to borrow a jacket to be seated.

One exception is the "green" Veer Lofts at South Lake Union, which start in the mid-$200,000s. With their laminate cabinets and concrete floors, the industrial-style lofts are considered "entry-level."

So of course it’s like scaling a mountain to get one. Potential buyers must attend an informational overview, get pre-approval from a lender, fill out a lottery card and then cross their fingers.
…
…So while some 11,000 new downtown condos are in the works, a fraction of that will be apartments for the working class.

I guess that’s what it means to be "world-class." Like New York and Chicago, Seattle is becoming a place of haves and have-nots, where the affluent enjoy the banquet of downtown life while we mortals can only window shop.

It seems like most of the large employers with lots of well-paying jobs aren’t even located downtown anyway. Microsoft, Amazon, Boeing… Is there really enough demand in the downtown core for all these high-priced homes? I guess we’ll see as these projects are built—or not built, as the case may be.

Update: Condo enthusiast Matt over at Urbnlivn shared his take on the matter yesterday.

(Nicole Brodeur, Seattle Times, 06.25.2006)