Seattle Bubble

The real estate reporting/advertising machine kicked into high gear this weekend at the Seattle Times, where they launched a whole new section of reports on local “home values.” The headlining article, titled Home prices: from sizzle to simmer, contains a fun mix of truth and empty assurances.

With real-estate markets across the country reeling, Seattle-area homeowners may have a hard time getting any sympathy from distant relatives when they talk about how much the market has cooled off here.After 2 ½ years of double-digit increases, King County’s single-family home appreciation peaked early last year. But at 16 percent for the year, the increase in home prices for 2006 handily beat the previous five years’ annual average: 9 percent. The same was true in the southern half of Snohomish County.So far this year, King County’s appreciation rate has dropped to 13 percent.It remains to be seen if the housing market is seriously cooling off or merely taking a breather before prices shoot up again.

So they admit that it’s still unclear where the market is going, and yet later in the article they quote the following wild prediction as though it were fact:

“Seattle will have a period of time when home-price gains are positive but modest — less than income growth — and that will allow affordability to catch up,” Fannie Mae’s Berson concluded.

Of course, we’ve already done the math on the “catch up” scenario, and it doesn’t look pretty. When you update to more recent data in the “Catch Up” sheet of the Seattle Bubble Spreadsheet, you can see that even with “modest” appreciation of 4%, and generous wage increases of 6%, it will take at least 20 years for affordability to “catch up.”

In the late 1990s, King County’s tech-fueled economy added nearly 300,000 jobs. Bingo! House prices shot up.Then in 2001, the nation entered a recession that “affected the Seattle-King County area more dramatically than most of Washington’s other areas, rural or urban,” according to Cristina Gonzalez, an economist for the Washington State Employment Security Department.The recession lasted until early 2004; during that downturn the county lost more than 120,000 jobs, and unemployment hit 6 percent. Annual home-price appreciation during much of that time coasted at 4 percent or so — roughly half of what it had been in the late ’90s.

Apparently Ms. Rhodes & Mr. Mayo don’t see any fundamental problem with home prices continuing to rise at 4%, despite the Seattle area being in a “more dramatic” recession than the rest of the country. Yikes. Although they seem to be attempting to show that the latest home price surge has only been post-2004, what they really demonstrated is that even as far back as 2001 home price gains were seriously outpacing incomes.

At least they close the article with a brief glimpse of the real root of the problem:

So why is [Seattle economist Dick] Conway predicting that appreciation won’t go double-digit for a third year running?Because of a sharp drop in affordability, said Conway, co-author of the Puget Sound Economic Forecaster newsletter. House prices have increased much faster than wages, effectively locking the homeownership door for many moderate-wage earners and first-time buyers.

Bingo. Once the “must buy houses” mania dies down, it all comes down to fundamentals, which are seriously out of whack no matter which way you slice it.

More of my take on the Times’ “Home Values” series will be forthcoming later today.

(Elizabeth Rhodes & Justin Mayo, Seattle Times, 05.21.2007)