Seattle Bubble

I’ve been reading a tremendous amount recently on the subject of building and it’s impact on local real estate markets. Over the past several weeks, at every opportunity both privately and out on the town, I have talked with people who are involved in the supply side of housing: builders, contractors, and suppliers (big box stores, retail, specialty flooring goods, roofing, paint, cabinet suppliers, lumber stores etc.).

Here is a glimpse into the local Puget Sound market from an individual heavily immersed into building and who I would characterize as exceptionally credible. Below are a few of the weekly e-mail updates I’ve received over the past several weeks. The individual works for a large builder and has agreed to let me post some of the e-mails:

End of September update:

…and I don’t ever read about the builder’s side of things on your blog or any blog about Seattle. The newspapers never talk about it. It is very wierd. Our inventory around the sound has increased 85% from last year. Sales have totally fallen off. Some builders are planning on functioning on fewer neighborhoods but increasing their sales rates to stay at the same level. So instead of have 8 communities selling 5 a month you have 4 selling 10/month. The problem with that is that you have 1-3 field managers per neighborhood and 1-2 sales agents and so on. We just had just about every sales agent buy a new 35k-60k car in teh last 8 months. The average age is probably 30.

1st week of October Update:

Last week, we had 8 sales and 7 cancellations. This is beginning to be the story everywhere. We still have quite a bit of traffic but for other builders it is different. It has dropped off 75%. Builders are using incentives but it is not working. They can’t even get people to show up. The poeple that didn’t buy contingent I feel sorry for. Land prices have come down, but it still doesn’t pencil

2nd week of October Update:

….Standing inventories are becoming a big problem for some.

3rd week of October Update:

They have a lot of inventory down there. We aren’t planning on buying anything unless it is of compelling value. I have been tracking standing inventory, specs, which is getting interesting. Most site agents I talk to all say the same thing. Traffic has stopped, not declined, stopped. The further out markets are feeling it first. 80% of our buyers are on ARM’s, not the toxic kind. It’s the only way they can afford to buy.

Today (Oct. 25th) Weyerhauser announced a decline in earnings.

“While anticipated, the housing market decline was more abrupt and drove wood products prices and demand into a deeper plunge than expected,” said Weyerhaeuser Chief Executive Steven Rogel in a statement.”

So, if there are any small builders, contractors or supply side people that would like to comment on local experiences, please fill us in.

In other news

Our escrow office has experienced a lot more refinances lately. I am seeing more fixed rates than in months past, but ARM’s are still king. Refinance business has sustained our business over the last two years. While our market share has increased by taking baby-steps and being very fiscally conservative, we do know of companies (escrow & mortgage) that are showing the earmarks of struggling.

Today, Fidelity National Title announced it will eliminate 650 jobs. Personally, while I understand they answer to Wall Street, I find this hard to stomach because title companies have been absolutely raking in obscene amounts of income while riding the appreciation wave over the past few years. For those new to purchasing, title insurance premiums are based upon the sales price of a home, generally speaking. When home prices go up, premiums tag along for the ride.

In contrast, when you close a home sale at a escrow company like ours, our price is generally fixed, irrespective of the sales price. In other words, there is not necessarily more work in closing a $250,000 home vs. a $800,000 home. Same goes for refinances. I just can’t understand why consumers fall for all the fluff out there. I don’t care where people go to do business, just shop for crying out loud. Sorry for the rant, I just can’t believe some of the settlement companies are charging people $250.00 for loan document e-mail fees. In years past, loan documents were delivered overnight by UPS or FedEX. Today, they are e-mailed which is highly streamlined to save time. So now you see these junk e-mail fees. Total garbage. I wonder what junk fee will be invented next?

This week I had the pleasure of telling some clients that they would not be receiving more money back than anticipated when their cash-back refi closed. Why? $10K ‘n change pre-payment penalty. That takes the cake this month.

More to come…

A commenter over at RCG pointed out this Business 2.0 article that labels Seattle as “bubble-proof.”

About the last place a prospective homebuyer might want to peruse MLS listings these days is in one of the country’s most expensive markets, like San Francisco, where the median cost of a single-family dwelling has jumped 37 percent since 2003. (It’s now more than triple the national figure.)

A couple of leading economists, however, think buyers shouldn’t be intimidated, even if prices in these markets go into a slump. San Francisco, New York, and a small handful of other big cities may suffer dramatic swings in a downturn, but their long-term trends “are so strongly upward that if you’re willing to buy and hold, it’s a good strategy,” says Todd Sinai, an associate professor of real estate at the Wharton School and coauthor of a recently released study called “Superstar Cities.”

The same logic, Sinai says, applies in other inflated markets like Boston, Los Angeles, and Seattle.

Given the admission that there may be “dramatic swings in a downturn” I guess I don’t really understand the “bubble-proof” label. If they were making the usual claim, that the worst case scenario is for prices to level off for a few years, then it would make sense. It seems more like they’re just pointing out the cities with the best long-term growth prospects, and I actually don’t disagree with their assessment. Seattle is a desirable place, and will likely take a less severe beating as the housing bubble busts. However, that hardly makes us “bubble-proof.”

Their reasons for including Seattle on this list are all the ones we’ve heard dozens of times before:

Seattle has a lot going for it physically, with its green landscape of towering trees laced with bays, inlets and rivers connected to Puget Sound.

But what makes the city effervesce is its status as the epicenter of the software industry, courtesy of Microsoft, and the birthplace of other marquee giants like Starbucks and Amazon.com. As these companies have grown, so has their demand for workers.

Other attractions include access to natural beauty, an active lifestyle and a lively pop music scene: Seattle is a home to numerous heavy metal and grunge bands. All this spurs demand for Seattle’s tight housing supply.

Not to mention historically low interest rates and loose lending standards…

(Paul Kaihla, Business 2.0 Magazine, 10.25.2006)

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? There’s one argument that goes something like this:

There just aren’t enough homes for everyone. People are moving to the Puget Sound at a rapid pace, and homebuilding just isn’t keeping up. Furthermore, even as more people move here, the size of households keeps shrinking, meaning that demand is increasing even faster! So it makes good sense for home prices to soar and rents to increase, because people have far less choices about where they will live than they did ten or twenty years ago.

Indeed, this would be a pretty compelling argument, if it were backed up by the facts… but is it? I dug through the Census archives to find the answer.

As it turns out, most elements of the above argument are true. Population is indeed rising at a fairly rapid pace. From 1960 to 2000, King County population surged from 935,014 to 1,737,034—an increase of 86%. During that same time period, the average household size dropped 21%, from 3.04 to 2.39. These two statistics combine to give us a 136% net increase in the total demand as measured by the number of households (307,759 to 726,792).

On the supply side of the equation, the number of “housing units” also experienced a greater than two-fold increase (122%), from 333,959 in 1960 to 742,237 in 2000. Of course, 122% is not as large of an increase as 136%, so you can see that from 1960 to 2000, home building did not in fact keep up with demand. This caused the percentage of occupied housing in King County to steadily increase from 92.15% in 1960 to 97.92% in 2000.

This is all very interesting, and so far would appear to back up the “not enough housing” argument. Of course, it is said that the best lies are those that contain the most truth. The real boom in King County home prices didn’t start until after the year 2000. So let’s compare 2000 to 2005*, using numbers readily available directly from the Census website.

In 2000, there were 742,237 housing units available to 726,792 households, for an occupancy rate of 97.92%. In 2005, there were 792,682 housing units available to 747,157 households, dropping the occupancy rate to 94.26%, a level not seen since 1980. Whoa. It would appear that during the five years of most aggressive home price growth, home building has more than kept up with increased demand.

Here is the complete data table for 1960 to 2005:

It should be noted that there are many different sources available for current (2005) population estimates. However, even under the most aggressive of these estimates, the occupancy percentage still declines from 2000 to 2005 (down to at least 1990 levels). I chose to use the data on the Census website since it was most directly comparable to previous Census data, and it is the only source I have been able to locate that contains an estimate of the average household size and number of housing units for 2005.

So what does this all mean? I think at the very least it shows that home building in King County has kept up with demand during the recent housing boom. It seems most likely that building has even surpassed demand by a non-trivial amount. If you have data that shows otherwise, I would love to see it. However, after considering the available data, I believe we can safely bury yet another unfounded argument that attempts to justify today’s housing prices.

*2005 data based on the 2005 American Community Survey, which “is limited to the household population and excludes the population living in institutions, college dormitories, and other group quarters.” Therefore, while total population is likely to appear low when compared directly to Census data, the number of housing units is also scaled down accordingly. Since this post is about housing supply for “households,” the exclusion of group quarters does not affect the final “percent occupancy” calculations.

(US Census Bureau, 2000, 2005)

Here’s a tidbit from a Seattle P-I story last week about the lack of families with children downtown. The article doesn’t really have much to do with home prices or bubbles, but we have talked at length about downtown condos in the past, so it is at least worth mentioning.

Sure, there’s a way to get families to live in Seattle’s urban core, but someone needs to go first — and that seems to be the problem.

Parents say they need condos built with families in mind. Developers and families say they need a downtown school. And school district officials say they need to see some demand.

But many local parents leave condos — big ones, in neighborhoods with good parks and schools — because they feel the need for their own yard. So maybe the real problem is an intangible — a cultural bias against raising children in condos. And observers suggest changing that might require gas to become so expensive and affordable houses with yards to be so far away that commuting takes too much time and money.

Oh my, it sounds like such a delightful utopia, doesn’t it? After reading this article I remembered how we’re always hearing that demand for downtown condos comes from “retiring baby boomers” (old people whose kids have grown up and moved out) and “young professionals” (young people with no kids). If families with children won’t move downtown unless they’re basically forced to, I guess those two groups would have to be the ones driving condo demand, considering they’re pretty much all that’s left. That is of course, if you assume that the demand coming from “investors” is negligible.

(Aubrey Cohen, Seattle P-I, 10.16.2006)

It’s been a while since the last anecdote post, so I thought now would be a good time for an update.

First up, let’s go way back to early June. Remember the million-dollar new construction in Redmond? It was originally listed in mid-May for $1,625,000, and the last time we checked in it had taken $130,000 in price reductions, dropping the price to $1,495,000. It has now been languishing on the market for 159 days, and taken two more price drops—$70,000 on 09/05 and $150,000 on 10/14—for a new grand total of $350,000 (21%) off the original asking price. Do you smell that? I think that’s the smell of desperation.

It’s been two or three months since my former coworker and her husband moved to California, and their rural King County house still has not sold. However, the good news is that they did finally lower their asking price (though not by much), from $490,000 down to $480,000. I’m still predicting that they won’t sell for much more than $430,000.

Remember my coworker that listed his rural Snohomish County home for $350,000, then dropped down to $305,000 and announced that as the “*FINAL PRICE REDUCTION*”? Well apparently he wasn’t kidding, because after receiving no bites for weeks at that price, the house was taken off the market, and hasn’t reappeared in the months since. I know that he has moved to Moses Lake, so I can only assume that he is now paying two mortgages and hoping that next spring will save him.

I got an email from a friend (that I don’t see often enough) a few weeks ago, enthusiastically telling me that he and his wife had just bought a condo… in Kent. From what I can tell, they paid just over $200,000. I didn’t even know they were looking. I still haven’t responded to him, because I just don’t know what to say… all I can think of is “that’s exciting.”

Lastly, lest I be accused of cherry-picking only the most dismal-sounding stories, I offer the following tale from the Fremont / Greenlake area. I mentioned this friend’s story in passing, but (by request) I was saving the full story until after the closing date. After doing some relatively inexpensive (under $5,000) sprucing up to improve “curb appeal,” the house was listed in the $450-$475k range. They collected offers for a week, receiving a total of 11 offers (five of them over $500k!), and eventually closed for over $510,000.

It should be noted that before listing, when my friend asked his agent “what is available in this neighborhood for under $500k” the answer was “nothing.” It is also worth pointing out that Zillow’s estimate of his home’s value came in at around $535k. While I don’t think the close-in neighborhoods are likely to slow as much as those further out, I think his “price low and see where the bidding process takes you” strategy was a good one (it’s what I recommended he do when he told me he was selling his home). As far as I can tell, that seems to be the best way of determining a home’s true “market value.”

So what have you been seeing “on the streets” lately?

Good Monday everyone. I’d like to take a moment to announce a few new things going on here at Seattle Bubble.

First off, you may have noticed that the “About This Blog” section on the right has been transmogrified into “Read These Posts.” I realized that there were some posts that I was consistently referring back to, that I feel really do the best job of getting across the major points we’ve explored on this blog. The idea behind the “Read These Posts” section is that if a newcomer to the blog reads through each of those posts, they’ll have a pretty good summary of what’s going on in the Seattle housing market, with respect to the bubble. If you have any additional posts that you think should be included, or if you think that one of the posts that are included shouldn’t be, please let me know. It’s a work in progress.

Secondly, although Synthetik has already pointed this out in a comment thread, I wanted to draw attention to the fact that the domain name / link SeattleBubble.com is now functioning. For now, it just forwards to the “old” address (seattlebubble.blogspot.com), but my not-too-distant plan is to migrate to a fully-hosted WordPress blog, which would just use the address SeattleBubble.com. So get a head start, and change your bookmarks now.

Lastly, I thought I would point out the “tip jar” link on the right side. Believe it or not, I added this only because it was privately requested by readers. I started this blog primarily as a way to keep track of the changing Seattle market conditions for myself, but it has morphed into something much bigger. As a result, I do spend quite a bit of time finding interesting things to post, and working on original content. Unlike many of the other “bubble blogs,” I have not resorted to advertising, and I intend to keep it that way for the forseeable future. Honestly, writing this blog is its own reward, but I definitely don’t mind getting a few dollars out of it now and then. So, if you like what you’ve been reading, and have been wishing for a way that you could repay me, now you have it. Unfortunately, for those of you that despise what you read here and wish I would just shut up and go away, I haven’t yet figured out a way to make an “un-donation” link, so I guess you’re just going to have to keep leaving snide comments.

That’s all for now. If you have any suggestions of ways to make this blog better, this thread would be a good place to speak up.