My advice would be to wait a couple years until prices have come down a bit. Then you have better prices and maybe even stronger negotiating position, as the sellers have been beat up already, and are not expecting 10% over what the last guy got. In fact they maybe be expecting 10% less by then.

My conversation with Tim has triggered quite a reaction!

I don’t have time to answer every single comment, but let me make a couple points …

All real estate is local. National trends are irrelevant. It doesn’t matter what happens in San Diego, Las Vegas or Phoenix. They are unique real estate markets and Seattle is a unique real estate market. You can’t assume that just because home prices are dropping in one market that the same thing will happen here.

As I told Tim, I am looking at what the Seattle housing market has done over the past 40 years, not just the last 10 years.

Believe me, I would LOVE to see the Seattle housing market crash so that I could buy some rental houses cheap. But I’ve been waiting for that to happen for more than 20 years and it hasn’t happened yet, and I don’t think it will happen this time either.

Let me correct some common misconceptions.

First of all, mortgage rates are NOT at historically low levels! Mortgage rates typically average about 3% above the inflation rate. The CPI is currently about 2.6%, so mortgage rates should be 5.6% which is right where they are.

The reason people think rates are low today is because they were historically HIGH in the 1970’s through the early 1990’s.

Did you know that the last time mortgage rates were as high as they were in the 1979-1981 was during the CIVIL WAR!

Most people have a very short frame of reference for financial trends. That’s why most of you are only focused on the last few years.

Everything has happened before and it will happen again.

As I told Tim, higher priced homes will come down from their 2006 price peak because the upper end of the housing market always increases the most during the boom and comes down the fastest during the slowdown.

For example, homes that would have sold for $1 million last summer, might sell for $900K to $950K today. Multi-million dollar homes will see even bigger price drops.

But that does NOT mean that the housing market is collapsing. The average starter home will hold its value because there is always a market for first-time home buyers.

And the only people who may actually lose money are the homeowners who bought at the very peak of the market in 2006 and have to sell in the next few years.

If you have owned your own since 2005 or earlier, you will be fine.

I’ve seen this all before, and the 1990’s is a very close comparison to the market we are seeing now.

I’m sticking with my prediction of a flat market for the next few years while incomes and demand catch up to the supply of homes for sale.

(http://www.nahb.org/assets/images/Figure-6(1).gif)

When Tim points out that the affordability index is incredibly poor, and then we consider that interest rates are more likely to rise than fall, we can only conclude that housing will get even less affordable, unless the Fed chooses a hyperinflationary path and devalues the dollar significantly (and this is actually quite possible).

While the Seattle housing market might look a lot like the last 20-30 years, the global financial system has NEVER looked like this, and that’s why Seattle housing is starting to look like it is diverging from its past as well.

We’re in a new financial era, so the future will follow the Fed, not the past. I think Steve’s perspective fails to appreciate any of this.

For anyone that works in the high tech industry (especially computer software) Seattle is only 2nd in desirability to SF/Bay Area. IMO, this is the big difference between Seattle today and Seattle in the past. No longer is Boeing the only dominant employer. I remember growing up, the economy around here was completely dependent on Boeing. Now Microsoft, Google, Amazon, Adobe, and a slew of others dominate the economy.

For a software developer, there are several orders of magnitude more opportunities in the Pacific NW then NYC.

> As you stated, Seattle has been desirable since at
> least the ’70s, and was definitely a desirable place
> to live in 2001. And yet, the affordability index today
> is 30-40 points lower than 2001. If incomes
> skyrocket while home prices flatten, and
> affordability returns to its previous levels, then that
> would make sense. What would not make sense to
> me would be if affordability only recovered 15-20
> points, and topped out at 85-90. To me that says
> that somehow Seattle became inherently more
> desirable in the short time span since 2004.

Do you want to know what has happened since 2004? Amazon.com turned its first profitable year and hired some 3500 IT staff (who make 70-100k a year). That is just one example of the impact the high tech market has had on the local economy.

A few responses:

1) Yes, the affordability index does take into account interest rates. The basic formula is:

[30% of Median (monthly) Household Income] / [Monthly payment on the median-priced home, assuming 20% down & current interest rates]

2) I agree completely. Which is why I’m more interested in the rate of change in the affordability index than the absolute value. It’s not a perfect metric, and lacks many desirable features, but I believe it does give us a useful baseline for discussion.

1) Does the affordability index account for interest rate changes? If not, then Steve has a good point.

2) The index is based on averages and does not take distributions/variance into account. When considering the role of affordability, the mean or median income of the overall population is not particularly relevant. What is relevant is the mean or median income of the HOME BUYING SEGMENT of the population.

By virtually all accounts, growth in the average income of the overall population has been held down by stagnant wages at the bottom end of the economic scale. Unskilled workers are getting poorer in real terms. On the other hand, skilled workers/tech workers are seeing much higher income gains.

So in my mind, the affordability index would be more accurate if it compared skilled workers’ average incomes to real estate prices.

seems the conversation is a bit out of whack here if that’s how you are feeling! some of my best friends are homeowners. I’ve been one myself – twice!

That is the primary reason I don’t think the early 90’s recovery will be a good guide for the next 5 years.

Between 1990 and 1993 mortgage rates dropped from 10% to as low as 6.8%.

A similar drop from the Spring ‘06 rate of 6.3 percent would mean 4.3% fixed rate mortgages will be available by 2010.

It could happen, but is it likely?

Along the same lines, since interest rates were at 10% during the late 80’s boom, it doesn’t seem that credit was as widely available then. Without the kind of liquidity we have now it wasn’t nearly as easy for the average joe ‘90 to dig himself a grave this deep. Or for that matter dig himself 5 graves with slab granite tombstones and bamboo wood coffins.

MisterBubble’s point about the IPO’s is a good one as well. The factors that made Seattle a good place to grow companies in the late 1980’s and early 1990s to a degree have been whittled away. I think that the glacial nature of progress on mass transit systems and the gridlocked nature of the areas highways are a serious liability. However, Boeing’s apparent victory over Airbus recently looks like it will provide a floor to any decline in Seattle for quite a while.

-as far as the early 1990’s, my sense is that the Seattle market was supported by Californians laid off from the defense industry purchasing homes up here, which was a one time event…the 1990 bubble that Steve refers to was part of the last legs of the 1980’s housing runup…
-As you say, “The present run-up seem to be longer in duration and larger in magnitude than previous run-ups (such as ‘89-’90). Prices increasing 4-6% in the midst of a recession, then 10-20% per year for the following 3-4 years (during only moderate economic growth) just screams “unsustainable” to me”…I agree 100%…this run-up was due to a combination of the steep drop-off in interest rates after the dot-com bust; followed up by the loosening of lending standards that has occurred as the real estate industry did everything it could to keep the market going. Although Seattle may not have had as high a percentage of subprime loans, it defies belief to say that Seattleites didn’t participate in mortgage equity withdrawal refi’s at the same rates as in other metros. That said, there will be significant defaults and I can see price drops of 20% over several years. Take a look a The Housing Bubble Blog and you’ll see that in other states 33% haircuts are occurring daily due to foreclosure auctions and other types of fire sales…
-I happened to post “An assessment of the Seattle housing market” just the other day where I talk about the average wage in the Puget Sound area and what the influence of two-income households is on home prices…

It also seems odd that we could go through the biggest expansion in mortgage credit in the history of the country, yet expect the housing market to go through the same sort of cycles it did in the years before the explosion in liquidity. That just doesn’t make sense to me.

I think Tim is closer to the mark in that there will have to be some convergence to narrow the affordability gap. Prices will come in a bit and incomes will rise a bit.

Pretending that the last 20 years are representative of a long-term economic trend is a classic example of sample bias. This guy is smoking crack.

Plus Steve has some good points about how today is a replay of the early 90’s, what with the trillion-dollar wars, massive current account deficit, offshoring of white-collar jobs, destruction of retirement programs, financial sector accounting for 20% of GDP, dissolution of subprime lenders, spiking energy and raw materials costs, and the rise of global markets.

Oh wait, none of that was going on then. Heck, my raise might not be such a sure thing after all…

I think this is the crux of the whole debate. If Seattle really has been through booms that were every bit as frothy as this one in the past, with no major crash, then one can certainly argue that we might not see a crash this time. However, if this recent run-up in prices is more substantial than has been seen in the past, then we are in completely uncharted territory, and citing past bubble deflations for our region won’t be applicable.

There are new factors he is NOT considering that could have a big impact upon whether this market is ultimately sustainable. I also believe it is NOT sustainable.

20 years ago, townhouses in-city were rare. in 1990, a nice two bedroom condo could be had for $80K. Agreed that the sub-prime and low interest rates have had a big effect, but it is a two-edged sword. The number of townhouses built and on line to be built, along with new condos, conversions, and rental houses that cost nearly what a mortgage does, are skewing the market in ways not before seen.

Add to that, the S&P report of a 30 percent overvaluation/price for Seattle, and you have conditions that did not exist in the past, but have a direct bearing upon the present and future.

You MUST have some kind of affordability equilibrium for first time buyers. Granted the conditions today are strongly influenced by the equity-rich Californians. It does not take a large number of them to skew the market. The investors and flippers NEED first time buyers, as well as those who are cashing in on equity. The number of Microsoft millionaries is not infniate, and how many of them who are buying 2nd, 3rd, 4th homes/condos as investments will still have them in the next few years?

1) previous booms have not been so largely affected by the credit push. the credit push didn’t just add buyers that wouldn’t have been in the market before, but far worse, it artificially inflated prices. another blog had a terrific numerical look at how at the same payment level, using 30fxd vs. no-interest arm increased the price available to purchase in the high double digits.

2) his disregard for “affordability” didn’t exactly seem right. the affordability index does indeed factor in interest rates/median incomes/etc to arrive at current affordability. correct? if that’s so, then push the interest rate up to historical norms and tighten credit to normal standards and affordability is actually lower than we’re at right now.

3) we just had a seattle-lite wwin Dance with the Stars, and perhaps the next American Idol, that’s good for about 10-15% more appreciation this year due to desirability!!

Man that conversation was irritating. I think he was constantly contradicting himself in order to avoid coming to the same conclusions as you. He claims things will be the same as always from his experiences while saying that the current run-up in prices are due to things that he has never experienced (low interest rates, loose lending). He says you can’t compare us to desirable places like San Diego, which had a big bust, but apparently we’re just like desirable places like San Francisco (which also had a bust in the early 90’s). It seems he can’t decide on whether prices will stagnate and affordability will catch up or prices will continue upwards and affordability will continue to tank, eventually settling on the “nyah, nyah, nyah, I’m not going to give a straight answer because affordability is meaningless” tactic.

Did you catch the veiled insult at the end where he says you are doing “number crunching” while he does “statistical analysis”?

Steve said:

I don’t think we will ever return to the affordability level of the early 1980’s when I could buy houses in West Seattle for $80,0000.

According to the 1980 Census, King County’s Median home value was $71,400, and Median Household Income was $20,717. In the early ’80s, interest rates were 13-16%.

Although a $71,400 house sounds dirt cheap now, with ’80s incomes and super-high interest rates, the Affordability Index was actually around 82 (very rough estimate).

I don’t think Steve actually meant that we’ll never return to a level of affordability in the low 80s, but if he did, dang.

He also pointed me toward a real estate statistics report that has been published bi-annually since 1949. I’ll be heading down to the UW in the near future to grab as much data from these reports as I can. Hopefully the end result will be some really interesting graphs and analysis of long-term trends in Seattle housing.

However I do think he misses on a couple of issues:
1) Seattle may have been, in his historical perspective, a “boom-flat” market. But never in his time frame of reference have we had a national (even global!) environment of falling home prices. I think that that meta-trend is one that needs to be factored in – and which adds a little bearishness to the boom-flat viewpoint
2) drawing conclusions from the last 20 years of market behavior seems dangerous to me. As shown by Shiller, the returns on real estate on a national level over the last 20 years have been a historical anomoly. Unless we can point to fundamental changes that have increased the basis for returns on real estate, I don’t see why we won’t have regression to a more historical mean for appreciation.