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Seattle Bubble on Inman News

The remaining portions of Glenn Roberts’ piece on Bubble Blogs have been posted to Inman News. I recommend you read it today, because after today it is only accessable to subscribers.

Read about Glenn’s conversations with a “Bubble Debunker” (real estate agent), John Doe of Southern CA, Bill Bond (Housing Panic contributor), an anonymous blogger from Southern CA, and Inman blog commenters

Oh yeah, there’s also a Q&A with yours truly.

Below is the full text of my Q&A interview with Glenn.

View/Hide Full Interview


Hello. I am a real estate reporter for Inman News and I’m working on an article about the real estate bubble debate. I’m wondering if you’d care to share your thoughts.

Many blogs have been born around the notion of a housing bubble. The definition of housing bubbles; explanations for their formation and fate, size and location; and the very existence of housing bubbles have fueled arguments among real estate enthusiasts and experts alike for several years. And everybody seems to have an opinion. The debate has inspired T-shirt designs and sales of other bubble-related memorabilia.

First off, I would like to make it clear that I am highly focused on the issue of a residential real estate bubble in the greater Seattle area. When it comes to the national market or other specific regions, I am merely a consumer of other people’s opinions. Therefore, I do not feel qualified to make predictions or assertions regarding any housing markets outside of Seattle.

Also, I do not claim to be an expert on issues of real estate or economics, and I have never received formal training nor held a job in either of those fields. That being said, I have spent a large amount of time researching these topics and taking in data and opinions from all sides of the issue. As an “amateur enthusiast” I definitely believe that I am qualified to make predictions and assertions regarding the local housing market. If you would like to see data to back up any such assertions made in the responses below, I would be happy to provide it, just ask.

[Although Glenn did not request any supporting information from me, I have added links throughout this online version of my responses to posts where I explore the topics mentioned.]

i) Is this the real estate equivalent of the global warming issue? Will there ever be a unifying bubble theory or are we doomed to never find a consensus?

I don’t think the real estate bubble is anything like the global warming issue. We will know in just a few short years whether there is/was a real estate bubble or not. The “unifying bubble theory” will be what is written in the history books. In the late ’90s the consensus was that we were in a “new paradigm” and that tech stocks were a sure thing. Looking back just a few years later, we see that it was in fact a bubble, unsupported by the fundamentals. The real estate bubble will be the same.

1) What makes you a real estate bubble believer, a bubble debunker, or bubble neutral?

I would describe my feelings about whether there was a bubble or not at the time I started Seattle Bubble as “leaning toward bubble believer, but open to exploration.” Since that time, all the data I have investigated has pointed to the existence of a housing bubble in Seattle.

In the last six years:

Furthermore, every time I investigate the data behind the most common claims of factors that will prevent the Seattle-area housing market from declining, I find that the data does not support the claim.

  • As long as the number of jobs is increasing, home-buying demand will stay strong: FALSE
  • People are moving here faster than new housing is being built: FALSE
  • Growth Management laws have restricted supply too much: FALSE

I just can’t ignore the facts. Things are seriously askew, and overripe for a serious correction.

2) How do you define a housing bubble?

I believe there is a housing bubble when home sales prices become seriously out-of-line with the fundamentals that should drive the housing market: fundamentals such as incomes and the cost of rent. The only difference between the driving forces of rental prices and the driving forces of home prices is that home prices have a speculative premium built in.

The easiest way to spot a housing bubble is to compare home purchase costs with rental costs. If you are looking for a quantifiable definition, if it is more than 1.5 times more expensive to purchase as it is to rent a comparable home, I would say that is a bubble.

3) How does this definition fit (or not fit) the national housing market? Which regional or local housing markets have exhibited the most bubble characteristics?

As I stated above, I really do not feel that I am in a position to make assertions about markets outside of Seattle. However, my definition is simple enough that you can get a general picture for markets using basic data available on the Census FactFinder website. The available data is overly broad and does not make for the best direct comparison, but it is at least worth looking at. Here are the rent vs. own ratios (as in, median monthly mortgage payments are X times median monthly rent) as of 2005 for a few areas (whole counties) according to that source:

  • Seattle: 2.2
  • San Diego: 1.9
  • Boston: 1.9
  • Miami: 1.8
  • Phoenix: 1.7
  • National: 1.8

As you can see, many cities across the country as well as the nation as a whole apparently meet my most simple definition of a housing bubble.

4) Which bubbles [have already] burst? Which ones have deflated? Which ones are inflating? Which are about to pop?

Again, with the caveat that my focus is on Seattle, I do not think that any of the housing bubbles across the country can honestly be said to have popped yet. In many places, including the nation as a whole, there has been a slight deflation, but I am of the opinion that things are just getting started.

Only a few regions are still inflating, and as of last spring Seattle was definitely one of them. I can’t really say whether we still are or not, because the vast majority of price gains come in a 3-month time span in the spring, which we are presently just on the verge of. Personally I expect price gains to be very small this year in Seattle, if prices even go up at all.

5) Are there any common traits among the bubble markets?

Yes: Loose lending standards and a mass psychology based on two beliefs: “Home prices are shooting up, so if I buy now I will reap the rewards of large appreciation.” –and– “If I don’t buy now, I may be priced out forever!

7) Is it possible to accurately identify the existence of a bubble before it is gone? Explain.

Can a bubble be identified? Absolutely. When the price of an item becomes grossly out of line with the actual intrinsic value of that item, you have a bubble. However, what cannot be identified is exactly how a bubble will dissipate. Perhaps it will pop rather suddenly, perhaps it will gradually deflate, or perhaps it will simply stagnate for a very long time while the fundamentals catch back up. I will say that that last option does not seem very likely.

8) How are bubbles born and how do they die?

It is all primarily about mass psychology. When a large enough group of people get it in their heads that purchasing something will result in guaranteed high returns, it becomes a self-fulfilling belief. Unfortunately it is basically akin to a pyramid scheme, and eventually there is no one new to buy in. When that happens, people finally realize what a crock it was and they all try to get out at once. This of course causes prices to plummet, bringing the death of the bubble.

9) Why do people get so fired up about the concept of a housing bubble?

That is a question I have often asked as well. I think there are a variety of reasons for the emotional charge that some people exhibit. Some homeowners bought into the idea that their house will appreciate endlessly at 10%+ per year, and are defensive against any suggestion to the contrary. Some renters are frustrated that home ownership has moved out of reach, seemingly for no good reason. Of course, anyone in the real estate business gets defensive about the notion of a bubble because a bursting or deflating bubble would affect their bottom line.

10) Will there ever be an explanation for bubbles that we can all agree upon?

I doubt it.

11) Will there ever be a time when the discussion about bubbles goes away? Is this just a passing fancy?

I imagine that we will stop discussing bubbles when they stop crapping all over our economy. Seriously though, the root of the problem is that people want a way to make money quickly and easily. If an opportunity comes along that appears to offer that, they will jump on it. There are no guaranteed shortcuts to riches, but as long as enough people keep jumping on the latest “sure thing” with their investments, we are doomed to see plenty more bubbles (real estate or otherwise) in the future.

12) What has motivated you to participate in the bubble discussion and what have you learned? What has happened with traffic volume at your blog site as the U.S. housing market has slowed? What is your background in real estate/economics?

I started the blog primarily as a place to keep track of everything I was reading while I researched the housing market. My wife and I had been “window shopping” for a home, and were extremely discouraged with how unaffordable they all were, despite our above-average income. The more I researched the housing market, the more disturbed I was about the state of things. A good summary of what I have learned is stated above in response to question 1.

In 2006, monthly traffic to my blog increased nearly seven fold. However, since I only started the blog in August 2005, that is probably primarily a function of the blog’s newness rather than the state of the national market.

As I stated above, I do not have a “background” in real estate or economics. My formal schooling and career experience is in the field of electrical engineering. As someone with a very analytical mind, able to seek out and process data, I feel that I have built a fairly complete picture of the local real estate market.


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(Glenn Roberts Jr., Inman News, 02.16.2007)

  

About 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.

13 comments:

  1. 1
    synthetik says:

    Q: Will there ever be a time when the discussion about bubbles goes away? Is this just a passing fancy?

    A: I imagine that we will stop discussing bubbles when they stop crapping all over our economy.

    [cartman] sweeeet. [/cartman]

    Rate this comment: Thumb up 0

  2. 2
    Eleua says:

    I enjoyed all the interviews. The self-proclaimed “debunker” was particularly enjoyable. He spent his entire time talking about the motivations of the REBC (real estate bubble complex), rather than the fundamentals of the market.

    Reading his interview was just like watching 30 minutes of CNBC back in ’99/’00.

    You could feel the fear in his responses. My guess is he is stocking up on Depends.

    Rate this comment: Thumb up 0

  3. 3
    synthetik says:

    Boy, this Glenn Roberts Jr. isn’t all that bright, is he? What will all the Real Estate Clerks do when their are no jobs available at Mcdonalds?

    “Most members of the Real Estate Bubble Complex (REBC) believe that if you don’t agree the market is ready to collapse that you’re still predicting prices will rise without end. It’s an inane argument. Prices have declined in some areas, but I don’t believe they will fall to pre-2004 prices.”

    So when is the next meeting of the REBC? I need to stop by and pick up my check…

    It’s not a bubble, prices are just declining.

    It’s not a civil war, just sectarian violence.

    It all depends on what the meaning of the word IS, is.

    Rate this comment: Thumb up 0

  4. 4
    The Tim says:

    Boy, this Glenn Roberts Jr. isn’t all that bright, is he?

    Let’s be fair here. The words you quoted were those of Jonathan Dalton, Phoenix area RE agent. Glenn Roberts Jr. was just the interviewer.

    Give credit where credit is due. :^)

    Rate this comment: Thumb up 0

  5. 5
    synthetik says:

    I also liked this statement from the SoCal Bubble Blogger:

    Q: How does this definition fit (or not fit) the national housing market? Which regional or local housing markets have exhibited the most bubble characteristics?

    A: Housing markets are local, but credit markets are national (and in certain ways global).

    This is a fantastic response to the Real Estate Clerks who love to say “ah, but RE is local!”

    Of course it’s local. And, of course, the cheap easy-sleazy money is national. Why do you think BK’s and foreclosures are going through the roof in places that saw little in the way of home appreciation? (flyover country anyone?)

    Rate this comment: Thumb up 0

  6. 6
    SeattleMoose says:

    “Also, I do not claim to be an expert on issues of real estate or economics, and I have never received formal training nor held a job in either of those fields.”

    And it is precisely for this reason that I am a fan of your blog. YOU make MUCH more sense than all the “expert” talking heads that monopolize the media.

    The great value of an “expert” is to make sound judgements and predictions in their field of endeavor.

    Given this definition it is sadly ironic that someone who is humble enough to admit he not an expert but who is 100% correct is ignored while the “true experts” whose quotes are treated as gospel by the media are 100% wrong.

    Remember it took the innocence of a child to state the obvious….”The emperor has no clothes”…this parable succinctly sums up the human tendency to be delusional. As you stated…root cause is mass psychology.

    Great interview Tim and keep up the good work.

    Rate this comment: Thumb up 0

  7. 7
    The Tim says:

    Thank you for the kind words, SeattleMoose. They are certainly welcome after the ravaging I’ve been taking over at RCG this afternoon.

    Rate this comment: Thumb up 0

  8. 8
    SLTO says:

    fear is a very sour taste in the mouth… in a booming market they wouldn’t even bother responding to you…

    If the market was fungollyetally sound no level of blog speak can shake it’s foundations…

    However in a speculative market, the mass psyche is about selling at the top and not selling too early…

    this is where blogs like these make too many people lose sleep and eventually sell too soon…

    To all the potential sellers here… DONT SELL YOUR HOUSE… and if no one did I wonder how many homes these realtors will actually sell…

    On the other hand I wonder what education a realtor has to achieve to sell…

    is it a college or university degree? I ask coz I don’t know…

    I always find it interesting when people think experience is everything… it’s something but not everything…

    Rate this comment: Thumb up 0

  9. 9
    SeattleMoose says:

    Word on the street….both Boeing and Microsoft employment are past peak and headed down.

    Have confirmed Boeing (engineering down with manufacturing holding steady).

    Waiting to confirm MS (Zune/Vista sales off and major design effort over).

    Sources are local head hunter/recruiters.

    Just more fuel on the fire.

    Rate this comment: Thumb up 0

  10. 10
    witzend says:

    Selected tidbits from the “debunker”:

    A: Most of the markets that rose precipitously in 2004-05 featured investment purchased with positive cash flow

    A statement that is just begging for some kind of factual support. Translates to: ” there is no danger of mass-loan default” I suppose

    A:Most members of the Real Estate Bubble Complex (REBC)

    WTF!!!!????

    A:Members of the REBC seek capitulation, not agreement

    What a brutal bunch, the REBC!

    A:When your theme is doom, it’s hard to take any other stance even if statistics eventually point to a different scenario.

    Funny how the opposite could be said just as easily! Didn’t think that one through did he.

    A:the inability of many to understand the difference between a real estate agent and a lender

    Give me a break! But I think I see where you’re going with this. Answer to the intended statement: No you’re not an innocent party.

    A:At least those of us in the industry have some sort of accountability.

    Fading fast, my friend

    A:Traffic on my blog spiked when I dared question the REBC

    No one dares question the REBC!!! We have ways of making you capitulate, eventually.

    Rate this comment: Thumb up 0

  11. 11
    Eleua says:

    I am curious about the term REBC.

    I’ve been using the term REIC for some time. It fits. It fully encapsulates how the financial interests of the REIC cabal are against their customers and the public at large.

    There is A TRAINLOAD of money in the REIC. How much money do the regulars at SB and other bubble blogs take in based upon being in the REBC?

    For me, all my bloviations have been pro-bono (you are welcome). I have no fianancial dog in this fight. For me, it’s just a bloodsport.

    When the pinnacle of some idiot’s argument is the identification of a sinister cabal called the REBC, you have to know that the motor is running, but nobody is behind the wheel.

    Keep in mind, this guy is a licensed professional. YIKES!

    If licensed airline transport pilots were this incompetant, we would have a fatal crash every other takeoff.

    Morons.

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  12. 12
    FlipFlop says:

    Excellent job Tim. The RE fangs are coming out leading me to believe they know you make sense. Thanks for doing this blog.

    Rate this comment: Thumb up 0

  13. 13
    T,V & Mr.B says:

    Righto SLTO. Me thinks they doth protest too much

    Rate this comment: Thumb up 0

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