Seattle Bubble

There’s lots of blah, blah, blah going on about the latest Street of (Materialistic) Dreams, where every-day commoners like you and I can pay $18 to tour a bunch of over-the-top abodes. The local press seems to have stars in their eyes, and spends most of their time talking about all the low-flow toilets, and Energy Star-qualified appliances and how isn’t it just marvelously eco-friendly that the 4,000 square foot homes are “built green.” Bo-ring.

In a bit of a twist, let’s ignore this year’s dog an pony show, and take a few moments to go back to 2006’s Street of (Materialistic Pink Pony) Dreams, which I actually had the misfortune of personally attending. The first thing that comes to mind when I recall walking through these homes was the surprisingly cheap feel of the finish work. We visited near the end of the run, so by this time, thousands of people had traipsed through the halls of these houses, opening and closing every door and cupboard more times in four weeks than would usually be experienced in a year. In a way it was like an accelerated wear process. Closet doors were jamming, knobs were loose, hallway doors didn’t sit quite straight… in general it was quite unsightly. Plus there were a number of things that didn’t even have to do with wear, such as poorly-painted trim lines and wood trim that didn’t quite match up correctly. I’m sure that they went back through the homes after the tour dates were over and fixed most of these things, but seeing them near the end of the tour was like getting a preview of what things would look like after five years of normal use. For multi-million-dollar mansions, you think they would have sprung for better hinges and rails.

Another thing that struck me as odd was the wine cellars. Not that the houses had wine cellars at all, but just how ridiculously huge some of them were. In the house with the largest wine cellar (Hillcrest Farm), I estimated that there was space for 1,646 bottles of wine. Is it just me, or does that seem a bit unnecessary, even for the Street of (Materialistic Uber-Excess) Dreams?

Also amusing were the houses that had “secret” doors to hidden rooms. I personally think that hidden rooms and secret doors are fun, but wouldn’t the kind of person buying a $3,000,000 home be a bit above such trifles? Besides, what is the point of a secret room when it’s been on display to the (entrance-fee-paying) public for four weeks? Not very secret anymore.

Here’s a random review of the six featured houses from last year’s Street of (Materialistic Gluttonous) Dreams, including square feet, sold status, price, and # of TVs in the staged house.

Verandah Bay
Size: 7,150 sqft on 6.89 acres
Status: Sold October 2006
Price: $3,625,000
Buyer(s): Christopher Wilcox
# of TVs: 8

Kensington Manor
Size: 6,110 sqft on 5.00 acres
Status: Sold May 2007
Price: $3,575,000
Buyer(s): Duane & Heather Baker
# of TVs: 6
Other notes: Builder still listed as the taxpayer. Possibly due to recency of sale?

The Retreat
Size: 9,000 sqft on 5.05 acres
Status: Still Unsold, on the Market
Price: $5,695,000 (asking)
Buyer(s): N/A
# of TVs: 17
Other notes: This was the most extravagant home in the show (pictured above), with an enormous pool, a “secret cave,” and a huge outdoor entertaining area. The builder (Parmenter Homes) is stuck paying $42,000 per year in taxes until they can unload this beast.

Casa Montecito
Size: 6,950 sqft on 5.15 acres
Status: Sold April 2007
Price: $3,400,000
Buyer(s): Scott & Kelly Bingham
# of TVs: 4
Other notes: Builder still listed as the taxpayer. Possibly due to recency of sale? Pictured at right.

Hillcrest Farm
Size: 7,220 sqft on 5.46 acres
Status: Still Unsold, on the Market
Price: $4,395,000 (asking)
Buyer(s): N/A
# of TVs: 9
Other notes: The builder (Design Guild Homes) is presently stuck paying $43,000 per year in taxes on this one. Pictured below-right.

Twin Cedars Lodge
Size: 5,030 sqft on 6.69 acres
Status: Kept by Builder
Price: N/A
Buyer(s): Philip & Jan Bononcini
# of TVs: 5
Other notes: The Bononcini’s were the owners of the entire plot of land that all six homes were built on until they parted it out in 2005 to the individual builders. They paid a total of $1,750,000 from 1998 to 2004 for the land that the 2006 SoD was built on. They made a total of $4,605,000 by parting the other five lots out to the builders. Since this was the least audacious home in the show, with the largest and most private plot of land, I’m assuming that they kept this one as their family home, paid for using the $2 million (plus) profit from the land sales. Nice move.

I’m not particularly interested in taking in this year’s show, certainly not for the $18 cost of admission. But, if anyone out there really wants a Seattle Bubble report on the 2007 Street of (Materialistic Uncontrollable Drooling) Dreams, you can pay my admission with a PayPal donation, and I’ll make the time.

Some of you may recall the Rhodes / Gardner real estate Q & A a few months ago in which the following question was asked by a Seattle Bubble reader:

I can’t help but notice that the Times’ take on local real-estate prices is often excessively optimistic. For example, during the last NWMLS report, we saw double-digit gains in inventory in many parts of King County (nearly 100% in some places!), but the Times’ article largely ignored these facts to focus on (slowing) gains in price. This is just one example; I can think of many others.

My question is this: how much money does the Times derive from real-estate advertising, and why should it be trusted as an unbiased source of information in the face of this rather blatant conflict of interest?

Will the Times’ take a pledge to disclose these conflicts of interest in future articles about real-estate?

Rhodes’ response:

As for how much money The Times derives from real-estate advertising, I can’t tell you because I don’t know. The advertising and news departments are totally separate - so much so that they’re even in different buildings. There is no conflict of interest because the ad department doesn’t influence our stories. That would be a violation of our ethics policy and basic good journalism - things we take very seriously.

Uh-huh… right. Well, maybe Ms. Rhodes is truly completely ignorant regarding the extent to which real estate advertising is keeping the S.S. Times afloat. However, as anyone who is paying even a little bit of attention can deduce, real estate advertising is a huge portion of most newspapers’ revenue.

Unfortunately for the Times and other papers, despite the best efforts of the “unbiased” real estate “reporters,” those advertising dollars are beginning to dry up…

Earnings: Newspapers see big declines in advertising

Publishers blame real estate slump

Newspaper publishers reported sharply lower advertising revenue for the second quarter Thursday, and two of them laid part of the blame on a drop-off in real estate advertising in key markets.

McClatchy Co. and Media General Inc. both reported steep advertising declines and lower profits…

…

McClatchy, which owns The Miami Herald and several newspapers in California, including The Sacramento Bee and The Fresno Bee, had a 9.8 percent decline in advertising revenue across its 31 newspapers, with the biggest drops coming in Florida and California.

McClatchy is the country’s third-largest newspaper company, behind Gannett Co. and Tribune Co. McClatchy owns a 49.5 percent stake in The Seattle Times Co.

McClatchy attributed much of the weakness in those markets to economic factors including the slowdown in the formerly hot housing sector. With real estate playing a key part of the local economies, other ad categories such as automobiles and employment also sagged, McClatchy Chief Executive Gary Pruitt said.

There are some doubts about how much real estate advertising would come back to newspapers even after the housing market recovers, given that classified advertising for jobs, cars and real estate — a very profitable business for newspapers — is increasingly migrating to the Internet.

Expect the real estate cheerleading to kick up a notch. “Best selection in years! Now is a great time to buy!” “Check out these sad people that didn’t buy and now they’re priced out forever! Don’t let this happen to you, buy now!” “Sales declining, but from record highs, so they’re still really high!”

(Seth Sutel, Associated Press, 07.19.2007)

There have been a few mildly-interesting articles in the last couple days on the subject of condo conversion projects and Seattle’s increasing density. Here are a few highlights.

Aubrey Cohen updates us on the status of the proposal to condo-ify the Smith Tower:

Owners of the Smith Tower have one of two key city approvals needed to convert the Pioneer Square landmark from offices into condominiums.

Walton Street Capital, a private real estate investment company based in Chicago, filed an application with the city in February to build 150 homes in Seattle’s first skyscraper, which was completed at 506 Second Ave. in 1914. On Monday, city planner Lisa Rutzick approved the plan with several conditions, including that it get a required approval from the Pioneer Square Preservation Board.

…

The developers still haven’t decided, [Walton Street operating partner Michael Allmon] said Wednesday. “We’re probably two months away from making a decision. But nothing’s happened at this point to keep us from looking.”

Pioneer Square’s neighborhood plan, which was last updated in 2003, calls for more housing, particularly private development for middle-income residents, to help revitalize the area.

I’m as starry-eyed as anyone when I think of how cool it would be to live in a building with that much character, but somehow I doubt that the condos they’re planning will fit the bill of “development for middle-income residents.” Also, while the building itself has desirable character, the same cannot be said of the surrounding neighborhood. I’ve spent some time on the streets around there at night, giving out jackets and coffee to homeless people, and even though we stayed in groups of at least half a dozen, it still felt pretty dangerous. There are some real freaky people that wander the streets of Pioneer Square at night.

Also on the subject of condo conversions was a story from Amy Rolph about one man’s quest to prevent an old church building from going condo:

Sure, it would be great to live in a converted turn-of-the-century church. But it would be even better if that historic building could be enjoyed by music-lovers across the Puget Sound region, right?

For months, Dan Fievez has been posing that question to anyone who might lend a sympathetic ear or, more important, a sympathetic check made out to the tune of $100,000.

Fievez wants to turn the First Church of Christ Scientist on Capitol Hill into a performing arts center that small opera companies, chamber groups and orchestras around the Seattle area could call home. With its cathedral-inspired sanctuary and seating capacity of 1,300, the 101-year-old building at 1519 E. Denny Way fits the profile of what a community music center should ideally be, Fievez said.

But there are a few things standing in the way of his vision: The church, which its dwindling congregation vacated last year and then sold, is being converted into townhomes. The new owners are willing to sell for less than half of what the returns on the homes could be, but the asking price would still tally up to about $4 million — $100,000 of which would be required upfront in earnest money.

How generous of the developer. I’m sure their willingness to consider other options has nothing to do with the inevitable explosion of condo inventory in Seattle over the next few years. Nah.

Lastly, Joni Balter rambles about Seattle’s “growth” in a column that leaves me asking, “what’s your point?”

As part of the neighborhood-planning effort, certain neighborhoods agreed to accept higher density in exchange for urban amenities, such as traffic circles, parks and libraries. Seattle is bracing for another 100,000 residents over the next 15 to 20 years.

In a good news/bad news conundrum, Seattle’s real-estate market is still humming while sales in other parts of the country are slowing.

That means a host of developers and would-be homeowners are still willing to pay $800,000 or more for a teardown. There is a cost to a neighborhood if the teardown’s replacement overwhelms all the other more modestly sized homes with noise, construction dust and view-blocking megahomes.

There it is again: that knotting, clenching, uncomfortable feeling. Will our city feel as livable after all the real-estate money sloshes around and maxes out so many comfortably sized lots in neighborhoods where scale and taste used to mean something?

…

New laws will help. But some things can’t be fixed. More people means traffic keeps getting worse all the time. Home prices are soaring into the stratosphere. Quality of life here remains quite good but you can feel some of our world-famous livability ebbing. Our angst is palpable.

So, we need more laws to help us get comfortable with McMansions? Sorry Joni, I don’t follow. What do McMansions have to do with growth and density, anyway? It seems to me that they’re counter-productive on the density front. I can understand the logic behind filling Seattle with townhomes, but 2,000+ square foot homes on city lots seem to have more to do with builder profit than with increasing density. But maybe that’s just me.

(Aubrey Cohen, Seattle P-I, 07.18.2007)
(Amy Rolph, Seattle P-I, 07.18.2007)
(Joni Balter, Seattle Times, 07.19.2007)

Yesterday Inman News had (subscription needed) a piece by Lou Barnes regarding this large blip showing on the Radar screen. The blip kept showing July 22, 2007. The Boston Globe picked up Lou’s piece and you can read it here.

New guidelines making it tougher to qualify under interest only mortgage terms begins on July 22nd.

In summary: “any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment”

My interpretation of this new Fannie Mae underwriting requirement is that owners who have mortgages with interest rate adjustments coming up soon, had better have incomes rising substantially because it is going to be tougher to refinance (or purchase) with these new guidelines in place. For example, a buyer who obtains an ARM mortgage with a start rate at 7%, but has a cap of 12%, would have to qualify based upon the highest interest rate (12%) or subsequent amortizing payment. Unless some other creative mortgage products come to market to circumvent these new guidelines, as Lou Barnes suggests, it could worsen a difficult market. Why? I suggest it is due to the high number of borrowers who’s only hope in opening the door towards homeownership is via an interest only mortgage product. Further, if it is difficult for any home buyer to qualify, then the domino chain reaction of sales could stall.

My sense is that many borrowers with existing ARM’s will not be able to handle these new guidelines and the fallout speaks for itself. While I tend to side with Lou that this may be overreaching policy, it begs the question, can the market handle these guidelines, and …..now?

It’s getting more and more difficult for the local press to pretend like everything is roses, bubbles, and white puffy clouds in the local housing market. So, what’s the next best thing to pumping housing? Spreading fear about renting!

Renters have been saying loudly that rents are rising steeply and vacancies are few.

Now comes fresh proof they’re right.

Average rents in the region jumped almost 2 percent between the first and second quarters of this year and are now 9.1 percent higher than this time last year, reports apartment analyst Tom Cain, of Cain Inc. He surveys 149,000 King and Snohomish county apartments quarterly.

The current two-county average is $1.14 per square foot, or $967 per unit.

Meanwhile, the vacancy rate continues to drop, now at 4.24 percent for the two counties. Anything under 5 percent is considered tight.

“The rental market will continue to tighten as a result of job growth, in-migration and a combination of an insufficient amount of new construction to fill demand and apartments leaving the rental pool for conversion to condominiums,” says Cain, publisher of Apartment Insights Washington.

Obviously it would be stupid of me to try to argue that rents have not increased. I will however point out that while the article seems to imply that 9% per year increases are somehow indicative of a new trend, and likely to continue consistently for years, this is likely not the case. Rents are directly tied to wages. You can’t go out and get a 0%-down, I/O-ARM to finance your rent.

Rents are experiencing a temporary spike due to the extended period of stability and even decreases during and after Seattle’s post-dot-com economic downturn. Unless wages have been and continue to increase at 9% per year, rents will most likely jump a bit, then increases will fall in line with incomes.

To support this premise, I pull this statistical standby out of the vault:

Click to enlarge (source)

Notice how from 1999 to 2000, rents and incomes tracked (on average) perfectly? Also notice that from 2000 to 2005, rents lagged a bit behind incomes. Incomes experienced 5 years of 2.7% annual increases (average), for a total increase of approximately 14.2%. Rents’ total increase was 3.5%. Assuming that income increases hold mostly steady, it will take just two years of 8% rent increases for rents to catch up to incomes.

Put another way, eight quarters of 2% rent increases would bring rents back in line with incomes. Since early 2006, rents have been rising fairly steadily at roughly 2% per quarter. That’s six quarters, out of the eight required for rents to catch up. Remember, rents are not dictated by what landlords wish they could charge, they’re dictated by what the market can bear, i.e. - what people can afford to pay based on their income.

In all likelihood, rent increases will have tapered off significantly by this time next year. But don’t expect to read an article that comes to that conclusion in the Times any time soon.

(Elizabeth Rhodes, Seattle Times, 07.15.2007)

Inventory Reaches Big Round Number

As some astute readers have noticed, as of noon today, the number of single-family homes on the market in King County passed the big round 10,000 mark (see the left sidebar—which I am continually working to improve based on your suggestions). Since surpassing the previous confirmed high (Sept. ‘02 - 9,176) last month, inventory has grown at an average rate of about 26 homes added per day, despite decreasing by over 150 during the days leading up to Independence Day.

Also worth noting is that in my recent research of the historical Seattle Real Estate Research Reports mentioned by Steve Tytler, I was able to obtain inventory information for King & Snohomish (combined) back through 1988. The highest level of inventory in these reports was in August 1991 at 26,646 (that includes SFH, Condo, Land, Mobile, Commercial, & Multi-family). In breakdown data that was provided from 1993 to 1996, approximately 59% of total listings were SFH. This translates to a record of roughly 15,721 SFH on the market in King and Snohomish counties in August 1991. As of this post there are 15,648. I’m betting we break the all-time record here really soon.

Guest Posting at Get Rich Slowly

Tomorrow I have a guest post going up over at the excellent personal finance blog Get Rich Slowly. As you might expect, the subject of my post is how renting vs. buying affects ones personal finances. Head over there tomorrow to check out my post, and bookmark J.D.’s site or add it to your feed reader. I highly recommend it.

Seattle Civil Defense Manual

I mentioned this before on here, but it was way back when there were a few hundred readers a day instead of a few thousand, so I thought I’d throw it out there again. Check out the Seattle Civil Defense Manual from 1951. It has nothing to do with real estate, but it is probably of interest to anyone living in Seattle that enjoys a bit of history.

The Civil Defense Manual is a 25 page booklet that instructs local residents on how to be prepared for an atomic attack. A coworker discovered it in his garage, and it was so interesting I had to scan it and share it online. Be sure to check out pages 10 and 11, which contain pictures of Seattle and other Puget Sound points of interest as they existed 54 years ago. The entire publication is both interesting and amusing in a twisted sort of way.

Dragonfly

Lastly, check out this picture of a cool dragonfly that I took in our flower garden on Friday:

Click to enlarge