Seattle Bubble

The latest report from the PMI Group has been released, and the news is increasingly bad for Seattle:

Click to enlarge

As noted on the graph, PMI did improve their model with this latest report, so while Seattle’s new Risk Index of 343 is not directly comparable to its previous index of 167, the news still doesn’t bode well for Seattle home prices.

Of course, the local press puts the most positive spin possible on the news. The headline takes the cake: Home prices likely to hold steady, study suggests

Will the typical home cost less in two years than it does today?That’s the question a new study attempts to answer for the nation’s 50 largest metropolitan areas.

Seattle has a 34.3 percent chance of lower prices in two years — the 25th-highest risk and just under the population-weighted average of 34.6 percent in the summer U.S. Market Risk Index that PMI Mortgage Insurance Co. released Tuesday.

“This bodes well for the market there, in addition to the fact that Seattle has relatively really good affordability … and a solid employment market,” said LaVaughn Henry, director of economic analysis for PMI.
…
The changes to the PMI index, which led the company to skip its spring report, give additional weight to recent price volatility.

Seattle ranked 18th for price volatility, with a higher rank meaning more volatility.

From the perspective of many Seattle residents, home prices shot up quickly to very unaffordable levels. Affordability is down 4.9 percent from six months ago and 10.5 percent from a year ago, but Seattle’s affordability rank remained relatively steady, going from 23rd a year ago to 25th six months ago to 24th now, with a higher rank meaning homes are less affordable.

The likelihood of price declines in Seattle in the next two years, while low, is higher than it was six months and a year ago, although new changes in PMI’s model make comparisons less valid. The metro area’s chance of declines was 16.7 percent six months ago, putting it 32nd among the top 50 areas, and 10.9 percent a year ago, good for 33rd place.

But never mind all that. There’s never been a better time to buy. Get on the equity ladder now, any way you can.

(Aubrey Cohen, Seattle P-I, 06.19.2007)
(The PMI Group,Spring/Summer 2007 Report, 06.2007)

I’ll be traveling today, and I didn’t prepare anything yesterday, so I probably won’t have time for a substantive post.

Instead, I’m curious where everybody works and what they do. Feel free to post anonymously and with a fake email, if you prefer.

I’ll start. I work at Genie in Redmond as an electrical design engineer. My latest project was the GS-3232, featured on the front page of the website.

Update: Wow, that’s a lot of responses! Thanks for all the feedback, everyone. It’s quite interesting what a well-educated, well-employed group of people are reading this blog.

A Note From The Tim: I’d like to welcome Deejayoh as a poster to the blog. His contributions to the forum have been vast, interesting, and informative. I’m happy to help him bring his insightful analysis to a larger audience. He is a great asset to this community.

What gives? Local home-sales market is softening, but prices keep rising
and Local home sales cool off; why are prices still hot?

At the time, I posted some analysis in the forums, which Tim has graciously offered the opportunity for me to share here in the blog. My theory then (as now) was that there had to be some causal link between inventory and price - the law of supply and demand being pretty fundamental to economics. In B-School, I studied econometrics (interesting bubble news sidebar, my professor was Ed Leamer, and my TA was Chris Thornberg) and from that I had learned a couple of tricks for finding relationships that are often missed on initial observation. The first is that it often pays to compare normalized series of data, and the second is that when the relationship is not immediately obvious, sometimes you need to look at lagged impacts. Armed with that insight, along with MLS reports back to March 2000, I tackled the data.

First I looked at the Y2Y change in price vs. the Y2Y change in inventory for the same month. I used the Case-Shiller Index for price, and MLS active listings data for King, Snohomish and Pierce counties for inventory - as that is the same set of geographies included in the Case Shiller index. (Forum readers may note my earlier posts used King County data only). Based on this analysis, one would be forgiven for concluding there is no relationship between price and inventory changes at all. As the scatterplot below shows, there is pretty much zero correlation or explanatory value.

However, when you view the same data in a time series - you can see that there does appear to be a relationship, where changes in price to move inversely with inventory - but lagged in time. Peaks in price echo drops in inventory and vice versa, but they are not aligned.

Using trial and error, I found that the best relationship between the change in price and inventory is found when the inventory changes are lagged by 14 months - that is, the inventory change for a given period is matched with the price change for a period 14 months later. Intuitively this makes sense. Buyers see a big change in inventory, and factor it into their pricing decision. However, the change in price doesn’t show up all at once. Remember we are looking at year over year price changes - so the impact is factored gradually into the price change, showing up completely a little over a year later. The lagged relationship is shown in the scatterplot below. Here you will see a strong relationship between changes in price and changes in inventory.

With an R Square of 0.797, it’s hard to argue that there isn’t a relationship (note that I’m not a statistician, so others can weigh in with critiques). Now we have a model that says a couple things:

• The “natural rate” of appreciation during the period of the model (2001-2007) is the y intercept - 9.2%
• Fluctuations from the natural rate are a function of changes in inventory 14 months in arrears
• Every point change in inventory drives -0.386 points change in the price

Since the model uses inventory changes from 14 months ago AND the Case-Shiller Index is published two months in arrears- we also have a tool to forecast CS Index results for the next 16 months. The chart below shows this model applied. Actual inventory changes lagged by 14 months are shown in green, actual price changes in blue, and what the model predicts is the dashed-red line.

As you can see - the model does a pretty good job of tracking actual price readings for the period for which I have data. The model also forecasts that, based on what we already know about inventory, King, Pierce, and Snohomish counties should see about a 10% Y2Y decline the Case-Shiller index by August of next year. Given that inventories will are likely to continue to climb through September or October, this trend will probably continue on until early 2009.

If you accept this relationship as a predictive, then the other thing I thought might be useful was to look at Seattle neighborhoods and see how they might be faring on inventory. What I found on a neighborhood to neighborhood basis surprised me. Below is what I call the “Seattle Map of Doom”, which shows when and where inventory has been growing on a Y2Y basis. The growth in Seattle SFH inventory has been significant, and some areas seem to be downright glutted. While the formula above is probably not specifically applicable to any single area - it does give one pause to consider what might be the consequences of our rapidly increasing inventory.

While no model is perfect, the relationship identified here is very strong. It also seems clear that it is not the absolute level of inventory that drives change in prices, but rather the change in inventory reflected in buyer behavior over time. Time will tell how predictive this relationship is, but given the rapid increase in inventory we are experiencing - it appears that we are in for a rocky ride.

One of my coworkers noticed an amusing juxtaposition of advertisements last week while he was checking the local weather forecast. I had to disable Firefox’s Adblock Plus to see any ads, but it was worth it for the laugh:

For reference, the monthly payment on a 30-year fixed mortgage of $430,000 at today’s interest rates of 6.5% comes out to about $2,700. Even an interest-only loan at 6.25% comes with payments over $2,200.

What’s your IQ, indeed.

For those of you that are not Seattle Bubble forum readers (but should be), it is worth noting here that yesterday the total number of King County single-family homes on the market passed its previous (September 2002) high of 9,176, setting a new all-time record high.

According to Windermere property search, the MLS (as of this posting) has 9,240 houses on the market in King County, a number which has been climbing by about 250 listings per week. If that rate holds up, next month’s NWMLS report will show over 9,700 listings on the market as of the end of June. I expect there will be at least 9,400 listings.

In related news, OC Renter over at the Bubble Markets Inventory Tracking blog has posted a pair of interesting graphs comparing Seattle to our favorite sister city, San Diego. There’s an eerie similarity between the two…

The Seattle Times has had a good handful of real estate stories in the last few days, but none of them have been interesting enough to merit their own post. However, now that I’ve got a little collection of them in the inbox, here’s a roundup with snippets from all four.

Jane Hodges, Buying on a budget out of reach for some after state program cut:

Of course, there are still many options for first-time buyers, including FHA and VA loans, interest-only loans, conventional loans (with higher rates) and 40-year loans.However, Myrick said lenders in general are showing signs of returning to stricter lending criteria — and that may make shopping increasingly hard for first-time buyers.

“In some ways, though, it seems lenders are going back to the old-school math.”

By that, Myrick said, she’s referring to the percentage limit of total debt to gross monthly income that lenders will generally approve.

In the past, she said, lenders didn’t want to loan to a borrower whose total debt (including housing costs) would account for more than 36 percent of total monthly income.

In recent years that limit adjusted up to the current 45 to 50 percent range as lenders got increasingly creative — some say lenient — about packaging mortgages for buyers. Some lenders make loans to borrowers at the 65 percent level — and that, Myrick said, is a loan type that will likely vanish.

Will first-time and middle-income buyers increasingly sit out the market?

“That’s hard to answer,” Myrick said. “There are two issues: There’s the payment comfort level of the borrower and the question of approvability from the lender.”

Some borrowers may be willing to take on interest-only or higher-interest loans in order to secure a home and cross their fingers that their incomes will either rise or they’ll have refinancing options later.

Others may find that the terms under which they can buy are not attractive enough to warrant an offer.

“Cross your fingers,” now there’s a sound financial plan. Awesome.

Bob Young, Affordable rentals vanish as apartments go condo:

Julie Martin has daily headaches and sleepless nights.Her apartment in West Seattle’s Delridge neighborhood is going condo and Martin, a single mother, is stressed about finding a new home near her daughter’s school and her job at the local YMCA.

It won’t be easy. Vacancies in the Seattle area have sunk to their lowest level in years and rents are climbing.
…
Renters across the Puget Sound region are feeling a similar pinch. Nearly 7,000 apartments in the area were converted to condos last year.

Never mind the piles of “investor” condos and homes that can be found on Craigslist. Renters are feeling a pinch, because we say so.

Bob Young, Developer’s proposal disappoints Seattle officials:

When Seattle city officials sold the Alaska Building two years ago, they expected developer Kent Angier would turn the 15-story office tower into downtown housing.That’s what Angier said he was going to do and what he indicated on a proposal to buy the Alaska Building.

Now Angier plans to convert the historic building into a Marriott hotel. Mayor Greg Nickels is disappointed, along with some City Council members, who thought they had a commitment from Angier to bring market-rate housing to the northern edge of Pioneer Square.

Sounds like a smart developer to me. By the time they’d be able to finish any kind of apartment or condo project, the downtown market will likely be absolutely flooded with all of the projects that are already in the pipeline.

Sharon Pian Chan & Ashley Bach, Megahomes multiplying, but how big is too big?

In an area with little land to build new houses, residents are fighting the megahome — McMansions that balloon to the edges of their properties, three-story giants that block views from quaint craftsman bungalows.Seattle is considering new laws to limit the size of houses replacing those torn down on single-family lots. In Bellevue, residents came to a meeting with city staff Wednesday night to complain of huge homes that block out the sun and “overpower” the neighborhoods.

Those advocating restrictions say megahouses hurt the character and scale of single-family neighborhoods.

I’ll bet those same neighbors haven’t been complaining about how the “character” of their neighborhood was changed by skyrocketing house values the last few years. Go figure.

(Jane Hodges, Seattle Times, 06.09.2007)
(Bob Young, Seattle Times, 06.10.2007)
(Bob Young, Seattle Times, 06.14.2007)
(Sharon Pian Chan & Ashley Bach, Seattle Times, 06.14.2007)