Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

51 responses to “Big Picture: Supply vs. Demand”

  1. Richard

    The finance boom happened faster than houses could be built.

    I lived in a 2 SFH’s in Seattle during college that the owner planned to demolish for apartments/condos.

    Just from the time that the owner mentioned the plans to actually getting a demo permit was between 12-18 months. The planning phase started probably a year before that on the larger complex.

    Total time to market was 2 and 3 years.

    Compare that to how long it takes banks approve a loan, there’s bound to be a market imbalance.

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  2. EconExchange

    Great breakdown! Good research!

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  3. SDtoSEA

    Just further proves the point that it’s all just been artificial demand.

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  4. The Tim

    So what does a decrease in household size have to do with it? Is it presumed to mean less people living together, thus more houses needed? Couldn’t it also just mean people having fewer children? What am I missing here?

    “Average household size” is simply the number obtained by dividing the total population by the total number of households. So yes, when the household size decreases, it by definition means fewer people are living together (whether children or adults) and thus more housing is needed.

    For example, in a population of 100 that has an average household size of 2.5, there are 40 households (100 / 2.5), and thus there would need to be at least 40 “housing units.” If the population doubled to 200, and the average household size decreased to 2.0, there are now 100 households (200 / 2.0), requiring an additional 60 units of housing. However, if the population doubled to 200 while the average household size held steady at 2.5, there are only 80 households, and an additional 40 units of housing required.

    The average household size must be factored in when calculating the demand for housing, since the number of required housing units does not track directly with population, but rather with the number of households.

    (Glad to see the blog back. It was an RSS feed for a Spanish blog for a little while…)

    I have no idea what that would have been about. I didn’t notice it. Did anyone else?

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  5. Kaleetan

    “Why have residential real estate prices experienced an unusually rapid increase in last few years? That’s the big question that we all want the answer to, right?”

    Of course there is never one reason why this has happened over the last five years, but a combination of factors.

    Heres a new take on this question…

    One of the biggest single factors was Sept-11 2001.

    That was 5 years ago – now why would Sept 11th have anything to do with a housing bubble? Don’t laugh you bubbleheads…

    A combination of things. First, people got a little nervous when they saw Wall Street literally under attack. The stock market plunged and homes tended to be seen as maybe a safe haven both in terms of investment and also a real safe haven. That is the psychological factor.

    Second, Right after 9-11 the Federal Reserve had no choice but to significantly lower interest rates to keep the economy going. This was the spark that lit the fire.

    OK . so theres my two cents…laugh if you want but hey..at least its a legitimate theory…and besides..its original.

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  6. Ardell DellaLoggia

    A lot of the newer construction is not where the people want to be.

    By and large, new constructions is built where people have not built before (available land). Meaning no one wanted to live there before, and they still don’t.

    In Vegas and AZ and areas that still have lots of available land, new construction plays a greater influence on resale prices, than it does here in the Seattle Area.

    Where is most of the new construction being built in the stats you have? Is it the same place where the new population is converging? A lot of Microsoft new hirees, for example, don’t want to live very far from work. Not much new construction in the area where many new people are hired. The area was pretty much built out well before 1990.

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  7. Grivetti

    This is the big question I want the answer to: why do grown adults old enough to remember the dot-com bubble think house values will continue to appreciate at a double-digit lip?

    Never underestimate the power of stupidity and large crowds…

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  8. Lake Hills Renter

    Thanks for the explanation, Tim. I wasn’t quite getting the real meaning of the numbers. You are indeed correct that in just numbers, small households means more housing demand, regardless of the reason for the small size.

    As for the RSS thing, it probably got fixed when you republished to add the new post. I saw the RSS feed for at least 15 minutes, though. Maybe blogger hiccuped?

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  9. Lake Hills Renter

    No reason to laugh at your theory, kaleetan. Makes as much logical sense to me as some of the other reasons put out there.

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  10. Lake Hills Renter

    Where is most of the new construction being built in the stats you have?

    I can’t speak for the stats, but I can tell you what I’ve seen with my own eyes — Maple Valley and Orting. There’s huge numbers of houses in development there, entire subdivisions full of them, apparently built on spec for the most part, considering the “New Homes!” signs plastered everywhere.

    The first thing I wonder when I see them is where people living there will work. Commuting to places like Microsoft would be out of the question for all but the most masochistic IMO. I could see maybe people working in Renton, but SR-167 has to be as bad as I-405 in the morning, and I can’t even begin to imagine how bad the two lane roads like SR-169 and SR-18 would be.

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  11. plymster

    Christina – You are exactly right about the Credit Bubble (though I’m guessing that more than two of us have made this connection).

    kaleetan – hahahahahahahaha

    If 9/11 caused the stock market plunge, then why did the S&P 500 turn almost a year before 9/11? Why did Nasdaq lose the lions share of it’s value prior to 9/11? The terrorism bogeyman had little effect on the markets, and was a convenient excuse for the “irrational exuberance” of the Fed in the late 90’s.

    Also, if you look at the data you’ll see that the fed had gone from 6.5% to 3.5% prior to 9/11, and their trajectory did not change after it.

    When are you housing bulls going to start looking at facts? It’s getting too easy to refute your baseless claims.

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  12. Kaleetan

    Keep in mind that Sept 11 was the biggest single event that any one of us has witnessed in our lifetime, how could anything not be affected by it.

    Following Sept 11, the Federal Reserve aggressively reduced interest rates to levels not seen since the 1950s and held them low for some time. As spending by businesses plummeted, housing demand was stimulated by the low interest rates, keeping the economy afloat.

    Looking back, it seems likely that we might be talking less of a collapsing housing bubble today if 9/11 had never happened.

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  13. Kaleetan

    Plymster,
    You can see the trend in the numbers you posted.

    07/2001, 3.77
    08/2001, 3.65
    09/2001, 3.07
    10/2001, 2.49
    11/2001, 2.09
    12/2001, 1.82
    01/2002, 1.73
    02/2002, 1.74
    03/2002, 1.73
    04/2002, 1.75
    05/2002, 1.75
    06/2002, 1.75
    07/2002, 1.73
    08/2002, 1.74
    09/2002, 1.75
    10/2002, 1.75
    11/2002, 1.34
    12/2002, 1.24
    01/2003, 1.24

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  14. Richard

    Ardell By and large, new constructions is built where people have not built before (available land). Meaning no one wanted to live there before, and they still don’t.

    Sounds like you’re referring to Bothell… More than half of the current inventory is new homes built on previously undeveloped land.

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  15. redmondjp

    Ardell said: By and large, new constructions is built where people have not built before (available land). Meaning no one wanted to live there before, and they still don’t.

    I have to disagree with you on this one, Ardell. You may be correct in that they would prefer to live closer in, but as a RE agent you know full well that most people end up looking farther and farther away from the metro area until they can find something that they can afford, even if it means a hellatious commute. Otherwise, nothing would sell in these way-out developments but that certainly isn’t the case–even out here in Monroe where I work, new houses START at $400K–crazy, esp. considering the westbound 522 traffic that I drive against every morning.

    When I worked in Redmond, I had coworkers that commuted from as far north as Arlington and as far south as Tumwater. When I worked for another company with locations in Tukwila and Kent, I knew several people who commuted daily from the Olympic Peninsula.

    Everybody wants their share of the American Dream–even if that means living out in The Sticks, 10 miles past The Boondocks.

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  16. plymster

    Kaleetan, stop taking the data I provide out of context.

    Here are the federal funds rate changes per the fed meetings from 2000-2002:

    2002
    November 6 … 50 1.25

    2001
    December 11 … 25 1.75
    November 6 … 50 2.00
    October 2 … 50 2.50
    September 17 … 50 3.00
    August 21 … 25 3.50
    June 27 … 25 3.75
    May 15 … 50 4.00
    April 18 … 50 4.50
    March 20 … 50 5.00
    January 31 … 50 5.50
    January 3 … 50 6.00

    Prior to Jan 3, 2001, the Federal Funds Rate was 6.5%

    Notice how it started out at 6.5% prior to the first meeting in January 2001, then dropped to 3.5% in August (3% in 7 meetings). After 9/11, it dropped 1.75% after 4 meetings. Same basic trajectory.

    Oddly enough, this 4.25% drop is similar to what Easy Al did after the 1987 stock market crash. I think he just figured it’d be easier to do it all in one year.

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  17. Richard

    the economy was in the pits before 9/11

    No coincidence that all 4 planes were filled to around 30% of total capacity. Business was bad.

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  18. redmond2k

    I think one reason for the greater demand is the increasing availability of financing. Years ago, people expected 20% down to buy and now people are buying with 0-5% down and interest only loans.

    So, you’ve got a larger pool of buyers who a generation ago would have thought of only renting. This enough can lead to an imbalance in the price equilibrium of homes.

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  19. Christina

    I think one reason for the greater demand is the increasing availability of financing. Years ago, people expected 20% down to buy and now people are buying with 0-5% down and interest only loans.

    Did private mortgage insurance (PMI) go away? What’s cheaper for the homebuyer putting 15% down: paying PMI for two years before achieving 20% equity, or taking out a 15-year HELOC balloon?

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  20. EconExchange

    Yes, I work in the financial planning industry and I find it funny how many clients for some odd reason associate the stock market crash with 9/11 when it clearly happened BEFORE 9/11. The market was already well on it’s way down and the Fed was just continuing on it’s regular path after 9/11. In fact 9/11 had no real effect — Just look at the S&P

    2001
    SEPT 10th – 1,092.54
    SEPT 20th – 965.80
    OCT 1 – 1,038.55
    NOV 1 – 1,084.10
    DEC 3 – 1,129.90
    JAN 2 2002 – 1,154.67

    Compare this to 2000

    Sept 1 – 1,520.77
    Oct 2 – 1,436.23
    Nov 1 – 1,421.22
    DEC 1 – 1,315.23
    Jan2 01 – 1,283.27

    So in the nearly 4 months after 9/11 the market lost NOTHING. yet it had tanked nearly 500 points — NEARLY a third of it’s value BEFORE 9/11. One might actually say it gave a temporary RELIEF from it’s freefall.

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  21. synthetik

    Kaleetan – thanks for the laugh.

    I clearly remember that the country was headed into a recession 2-3 months BEFORE Dubya took office.

    I can’t remember exactly WHY, but I remember it well. I remember it because.. *gasp* I couldn’t stand Clinton’s guts and made the mistake of thinking GW would actually make a good president.

    It wasn’t even a point of argument at the time.

    Here are a few google results that show this to be the case.

    From Whitehouse.gov (very reliable source)

    “When the President and I got elected, we were headed into a recession. The 401k plans and retirement plans of a lot of folks were going downhill because the stock market was in a slide.”

    Hannity Blog

    “By the way, this good Economy came after a Slowdown of 2000, and a Recession that came 40 days after Clinton Left Office.”

    In a recent speech, John Kerry declared, “[President Bush] inherited the strongest economy in the world — and brought it to its knees.” There is no evidence to support this claim. In fact, the evidence now suggests that President Bush inherited a recession.

    Yes, I am a liberal, and yes, all the above links are to neo-conservative sites, however, the truth is that we were already headed into economic decline.

    Changes in the market -usually- have very little to do with the administration. A good analogy for a recession is a gulf hurricane. It tears us a new sphincter, but the they are healthy for the environment.

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  22. Kaleetan

    sorry,
    I thought this blog was about the housing bubble, not the overall economy.

    Interest rates do play a key part of the rise in home prices over the last 5 years. Why were they kept so low, specificly 2002,2003??

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  23. Kaleetan

    “synthetik said…
    Kaleetan – thanks for the laugh.”

    Synthetic – thank you for all the times you have made me laugh.

    Now this is funny.

    “synthetik said…
    my qualifications:

    -never had a RE license
    -didn’t finish college
    -filed CH13 Biz BK in 2001
    -failed many times in business
    -100% self made and self destructed
    -made lots of stupid mistakes”

    uh…does anyone want to start an investment club in my apartment?

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  24. Richard

    Why were [rates] kept so low, specificly 2002,2003??

    Because the Fed was still concerned about deflation. Economic growth was very weak and the previous rate cuts (and tax cuts) hadn’t done much to spur business spending and investment at that point. Instead, the outsourcing trend was killing off the domestic manufacturing industries with great speed.

    If you look at what happened in Japan where rates were kept at 0% for years without stimulating their economy, you can kind of understand what the Fed was trying to avoid.

    It’s not clear if the housing bubble was part of this plan, but it did have the effect of giving comsumers more spending money (and confidence) during a time when wages and job growth were stagnant.

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  25. David Losh

    In my opinion the monopoly investigation into Microsoft started the end of the dotcom era. The final verdict scared a lot of money into Real Estate holdings. 9/11 didn’t help matters. Then with the invasion of Iraq huge dollars were dumped into home mortgages.
    It seemed safe to invest in American housing units, I think, to ivestors around the world. Of course we saw the Euro firm up and it has been an orgy of secured investment through Real Estate mortgages around the world. The bubble is not just here, but in Italy, Spain, and Greece as well.
    The global economy has allowed for huge profits that need to be invested somewhere. Money needs to make money.
    OK let’s pretend that oil futures go to seventy dollars a barrel and it’s a good place to put money. Uh oh that already happened. Let’s say diamonds go to $15K per carat, uh oh. OK what if gold were to go to $600 per ounce or guns were selling for $600 a piece, uh oh again.
    The fact is that for all the data and statistics in the world the financiers in the global economy are making a very good return on Real Estate mortgages. I have been saying for years that it is not the price of the home, it is the price of the money.
    To be clear; if you have a fixed rate 5% loan that a bank allowed through a fair appraisal you probably have a very good investment. Ther reason is that your chances of paying off that loan with future dollars is very good. In my opinion owning Real Estate free and clear is always a good investment.

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  26. vfsv

    Here in Silicon Valley, Santa Clara COunty y-o-y volume was negative for the 22nd straight month (since December, 2004) and 25th out of the last 26 months.

    For more data, please visit:
    http://www.viewfromsiliconvalley.com/id273.html

    We also track housing permits issued at:
    http://www.viewfromsiliconvalley.com/id66.html

    In the last 12 months, new permits issued represent a 4.3-month supply, regardless of other houses for sale. Since the “bottom” in late-2002, total permits issued represent a 16.6-month supply.

    During that same time, jobs & population are essentially flat.

    FOr more Silicon Valley-related news, please visit:
    http://www.viewfromsiliconvalley.com

    Thanks!

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  27. synthetik

    >Now this is funny.
    CH13 BK, etc..

    Nice job of taking my comments out of context.

    The point of that post, obviously, was to show that I’ve LIVED — i’ve been through a lot and have learned from my mistakes – as well to show that I have nothing to gain in my attempts to expose various local media shills (RCG, Seattle PI, Times, etc). A response to Seattleric who asked “what are you qualifications?”

    While this isn’t an economic blog, you aren’t going to get away with making completely erroneous statements.

    I never said I was an expert, but I believe that a strong desire to understand, critical thought and an open mind will come to better conclusions than any so called “experts”.

    So far I’ve seen nothing but ignorance from your posts.

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  28. synthetik

    >Did private mortgage insurance (PMI) go away?

    No… but it’s become common practice for people to immediately get a second mortgage to cover the PMI. How does that make any f’ing sense at all?

    Someone is getting extremely wealthy… Anyone seen Aaron Russo’s (Produced ‘Trading Places’) new movie yet? ‘America: From Freedom to Fascism’. I just finished watching it… and, wow.

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  29. Richard

    No… but it’s become common practice for people to immediately get a second mortgage to cover the PMI. How does that make any f’ing sense at all?

    My understanding is that since the HELOC is a recourse loan, in the event of a short sale you will owe income taxes on the unpaid balance. Unless you declare bankrupcy. Presumably, this would encourage the loan holders not to default on it if they get stuck with a giant tax bill as a result.

    Since we’re not at that point in the housing cycle, I haven’t seen a whole lot written about this… yet.

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  30. Ardell DellaLoggia

    Redmondjp,

    Correct BUT they go there to get NEW homes. Those new homes turn into old homes and who is going to go way out there to buy an old house? And they have to STAY cheaper to get people to go out there and buy them…hence…appreciation is lower. AND everyday I hear people whining about wanting to move closer in. The guy who cuts my hair bought acres and acres of basically unbuildable land in Sultan with a crappy house on it. And he’s been crying the blues every since about the commute and how he may not be able to get out since his “gentleman farm” is mostly useless land.

    I’ll bet a whole lot more of your co-workers live closer in. And when the numbers of buyers drops to the point where there are only 3 buyers for every 10 houses for sale…best to own the better product.

    I started in a market where only 3 of every 10 houses sells. Not a pretty picture. Make sure you have one that will make it to the top three.

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  31. Ardell DellaLoggia

    kaleetan,

    “Why were interest rates kept so low 2002, 2003″

    It was a “save face” for the Country after 911. If they hadn’t dropped interest rates immediately, the impact on the Country would have been even greater than it was. “We” didn’t want to see Bin Ladin in some cave laughing about the destruction of our economy. Maybe if they caught him, they could have let the Country suffer through it. But with him not caught, we had to put on a good face. “You didn’t hurt us!…much”

    If Bush hadn’t won the election, we would have seen things change faster. As it was, it waited until Greenspan left.

    This is my personal opinion BTW, not an expert opinion.

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  32. Richard

    It was a “save face” for the Country after 911. If they hadn’t dropped interest rates immediately, the impact on the Country would have been even greater than it was.

    Although our economy didn’t collapse, the Dollar did. Against the next largest world currency (Euro) it’s down 30% in 5 years. If it weren’t for the Yuan being pegged to the dollar (still is for practical comparison) we’d be seeing a good deal more consumer price inflation. Thanks Wal*Mart!

    Anecdotally, I work with alot of Canadians, and have never heard them complain about gas prices. When gas shot up 225% in US Dollars, Canadians only saw a 75% increase thanks to the strong currency. For a while there, I’d let my Canadian invoices go unpaid because the dollar was sliding so fast I’d get an exchange premium from the time the contract was set.

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  33. Christina

    My understanding is that since the HELOC is a recourse loan, in the event of a short sale you will owe income taxes on the unpaid balance. Unless you declare bankruptcy. Presumably, this would encourage the loan holders not to default on it if they get stuck with a giant tax bill as a result.

    So is a HELOC preferable to PMI for the mortgagee, or the mortgagor? Of the people I know who’ve bought houses lately, those with <20% downpayment are going for the HELOC rather than the PMI. Were they simply told by their mortgage brokers or lenders "we're giving you A so you can avoid B" without wondering "why is A better than B? Let's go check." The assumption seems to be that HELOCs are better than PMI, but I'm not sure if it's better for both parties.

    a HELOC currently goes for about 7.6% for fifteen years. PMI is about 0.0023% of the total mortgage, depending on how much is owed the lender. PMI can be removed in many cases when the following conditions are met: 24 consecutive months of ontime payments, and the mortgagee has at least 25% equity in the property.

    I’ve seen “Rent vs. Buy”, “How Much Home Can You Afford”, rapid paydown calculators but no “PMI or HELOC” calculators online, which leads me to wonder if PMI went away. The cynic in me might think PMI would be a better deal for the homebuyer, otherwise the calculators would be out there.

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  34. lesserseattle

    The NYSE was hammered through 2002 and 2003 as a result of the fallout from MCI WorldCom, Enron, Adelphia and numerous others. IIRC the stock market hit deeper lows as a result of these events than as a result of September 11.

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  35. Grivetti

    I thought this blog was about the housing bubble, not the overall economy.

    Uhmmm… is there a difference anymore?

    BTW, nice job Tim on the census data, as I keep telling people “Its the NUMBERS stupid!” We can wax on about ‘robust job growth’, even though you’ve sized that up with data as well, and other RE talking points but the numbers prove what most economists already know.

    We’re in the midst of a credit-hangover the likes of which God has never seen…

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  36. mydquin

    “In my opinion the monopoly investigation into Microsoft started the end of the dotcom era.”

    Maybe… if Seattle is the center of the universe…

    Most experts attribute the dip to Y2K. Or at least, that got the ball rolling. Remember, Y2K spurred massive investment in info system replacements and upgrade, especially in the business community. Average investers thought the temporary rise associated with that was a permanent upward trend, “a revolution.” Then reality hit…

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  37. Darren Meade

    Tim,

    Where did you get your data? The information is misleading and false.

    Are you going to let me reply, or will you say that I am rambling when I disprove your data?

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  38. The Tim

    I stated right there in the post where I got the data: The US Census Bureau. I would be quite amused to hear you try to explain why the US Census Bureau data is “misleading and false.”

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  39. The Tim

    Oh, and I will say that you are rambling if your response (which I expect to be unnecessarily lengthy) diverges primarily into topics which are completely separate from the subject of this post.

    For the record, in this post I researched the data behind one and only one argument: “home building is not keeping up with the increased demand due to population growth and declining household size.”

    If you post a response that deals with some subject other than that one, then yes, you are rambling. However, if you honestly believe you can “disprove” the Census Bureau’s data, then by all means, be my guest.

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  40. lesserseattle

    STDB (Site to do Business) has ESRI (GIS specialists) projections that show the population in King County for 2006 to be 1,832,101. Household size is relatively consistent at 2.38 and total households at 751,561. Housing units are projected at 794,973. Median Household Income is projected at $68,249.

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  41. Seattle Bubble » Blog Archive » One Third of Seattle Homebuyers Have Unaffordable Mortgages

    [...] Big Picture: Supply vs. Demand [...]

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  42. Seattle Bubble » Blog Archive » What Is "It's a Priority"?

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  43. Seattle Bubble » Blog Archive » King County NOT Running Out of Land

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  44. Seattle Bubble » Blog Archive » Welcome KING 5 Viewers!

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  45. Seattle Bubble » Blog Archive » Is it a good time to buy? Salespeople say YES!

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  46. More “Superstar” Nonsense from Lawrence Yun | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.

    [...] We’ve debunked this claim using sourced, verifiable data at least twice before: Big Picture: Supply vs. Demand, and King County NOT Running Out of Land. There are enough people earning above-average incomes [...]

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  47. Double-Digit Appreciation Returning Soon to Seattle! | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.

    [...] been coming online at a rate easily exceeding increases in demand during the last few years (see this post and this post for details).  Today’s slowdown simply gives demand some time to catch back up [...]

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  48. Housing Shortage or Overbuilt—A New Look at Supply and Demand | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.

    [...] There has been some talk lately about the overall housing stock in the Seattle area, and whether construction has been able to keep up with population growth, or if there is a housing shortage that will lead to another housing boom in a few years. So I thought now would be a good time to revisit an old post from October 2006—Big Picture: Supply vs. Demand. [...]

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  49. "This is a great time to buy a home." | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.

    [...] saying that supply is not growing faster than demand, so we’re not headed for an oversupply? Interesting… very interesting. Here in Washington state, the Growth Management Act (GMA) actually limits [...]

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  50. Interview with The Tim of Seattle Bubble « Estately Blog

    [...] out of land / homebuilding isn’t keeping up with population growth” claim in the post Big Picture: Supply vs. Demand (follow-up here). I examined the claim that job growth has been a primary driver of Seattle home [...]

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  51. Seattle Bubble • Friday Flashback: Expect prices to “go quite a bit higher.”

    [...] statements like “building is not keeping up with demand” as if it is a fact even when readily available data proves exactly the opposite of what you’re saying. So what should we expect now? First, prices will probably go quite a bit higher. The competition [...]

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