Seattle Bubble

It’s been about a month since I introduced the Distressed Sellers Index, so I thought it would be a good time to check in with another update.

Here’s the latest graph:

Click to enlarge

As you can see, since our last update the DSI has jumped nearly 20 points up into the 70-80 range, where it has been holding somewhat steady. The latest reading came in at 77.

Again, I’d like to remind you that the DSI is non-scientific, and is provided merely as a curiosity. A value of 77 has no particular “meaning” other than the general theory that higher index values means more distressed sellers in the Seattle area. I’m not attempting to make any claims regarding predictive or even descriptive qualities of this index. We’ll need more than a few months’ worth of data before we can begin to form any such hypotheses.

Continuing with the excellent suggestion from the previous DSI post, here is the current DSI for select additional cities as of today:

• Boston: 83
• Las Vegas: 148
• Sacramento: 153
• Miami: 137
• San Diego: 206
• Los Angeles: 138
• Phoenix: 201

Unlike the other cities across the country that experienced surging prices and are now seeing price declines, Seattle will be immune from such forces. Why? Because of our strong employment, of course! Here in Seattle, our job market is so much better than the rest of the country, there’s no way our home prices could falter!

Wait, really?

Let’s check out the latest unemployment statistics to see how that claim holds up. In the table below, I have compiled the September unemployment rate and the Case-Shiller HPI YOY change (as of July). For the nationwide statistic, the Case-Shiller HPI refers to the 20-city average. Metro areas are sorted by unemployment rate, in descending order.

Is it just me, or does that data appear to be all over the place, with little to no correlation between unemployment and the trend of housing prices? Let’s take a page out of Deejayoh’s book, and check out a scatterplot:

Click to enlarge

Nope, not just me. There appears to be little to no correlation between unemployment statistics and home prices. Since unemployment statistics are generally considered to be a decent measure of the relative strength of an area’s job market, I think we can yet again conclude that “strong employment” is not sufficient to prevent home price declines.

There’s an amusing article over at Seattlest on the strange proclivity that Seattle P-I reporter Aubrey Cohen has for quoting the marketing firm Williams Marketing:

Did you know that there’s only one credible real-estate industry voice in Seattle? It’s a marketing firm in town that works with real estate developers. We’ve learned this from reading Aubrey Cohen’s real estate reporting in the Seattle P-I. Here’s a search on articles containing the exact phrase “Williams Marketing” — they’re quoted in at least one article per month since last November. (Who are the schmoes paying the P-I for ads when there’s so much free ink available?)

A “Seattle marketing firm that works with condo developers” seems to be the autotext descriptor. We get all of our most trusted information from marketing sources, so we understand Cohen’s willingness to dive into that well for quotes so many times.

Speaking of Williams marketing, Matt at Urbnlivn calls them (and Aubrey Cohen) out yet again on the “we aren’t lowering our prices” lie:

Well today Williams Marketing priced reduced Mosler Lofts unit #TH2 $20,000 to $655,000.

Seattle reporters, please do your homework. You’re paid to report; this is my hobby.

And as long as we’re on the subject, here’s the latest piece of condo marketing reporting from the P-I:

The national real estate hangover spooked some Seattle buyers and the national lenders who fund condo projects, leading developers to shelve building plans. Others, however, insist the Seattle market will hold up.

For example 83 percent of the more than 1,200 new downtown condo units that came on line in 2007 sold. All of the more than 1,400 downtown units built from 2000 through 2006 have sold, according to market research firm Realogics.

And the amount of building pales in comparison with cities like Miami, which had 60,000 condos in the development process at the peak of its boom and where people bought condos site-unseen with no intention of living in them, said Bryon Ziegler, developer representative for Williams Marketing, a Seattle company that works with developers. “We never even remotely had that kind of market in this area,” he said. “We’ve got real jobs here supporting our growth.”

But there was some evidence of a speculative frenzy in downtown Seattle in the past year, when investors in the newly completed 2200 Westlake and Cosmopolitan condo projects bought about one-third of the units in those two buildings, then immediately put them up for sale, said Dean Jones, president and chief executive of Realogics, another Seattle condo marketing firm.

But don’t worry everybody. Now there’s a “cap” on the amount of units that they’ll sell to “investors.” Wait, why would a developer care whether the person buying their condo is an “investor” or not? Isn’t it money on their books either way?

Unless a huge amount of these projects in the pipeline fail to break ground, I don’t see any compelling reason to believe that we won’t have an extreme glut of condo inventory in a few years. But hey what do I know. I’m not a “condo marketer” after all.

Here’s Matt Goyer’s take on the piece.

(Michael van Baker, Seattlest, 10.22.2007)
(Matt Goyer, Urbnlivn, 10.21.2007)
(Aubrey Cohen, Seattle P-I, 10.21.2007)

I’ve noticed a few posts in the comments and over in forums regarding inventory levels - which appear to be flat to down over the last couple of weeks. Given these I thought it was worth laying out a historical perspective on inventory levels.
If you’ve delved into the Seattle Bubble spreadsheet, you know that The Tim has collected NWMLS stats for KingCo SFH back to January 2000. Based on this data, you can get a pretty good feel for how inventory levels rise and fall over time, and what today’s market looks like compared to previous years.

First, lets have a look at seasonality. The chart below compares normalized inventory levels for each year - relative to inventory at the beginning of the year (or, more precisely - versus December 31 of the prior year). As you can see, fluctuations by month are fairly predictable across the years - lowest at the beginning of the year, growing steadily through fall, and then dropping off in Oct-Dec. For the 69 months of data charted below, the standard deviation from the BoY inventory is +/- 23% of the average change of 130% of BoY inventory. So if my recollection from stats class is correct - 68% of the time inventory change falls within one standard deviation of the average change (red dashed line), and 95% of the time inventory changes fall within 2 standard deviations of the average change (blue dashed line)

What is atypical about the market in 2007 is that since July of this year, the inventory growth has been more than 2 standard deviations higher (<3% probability) than the 2006 year ending inventory - and the September change was 3.2 standard deviations outside the norm - an event which I think has about a 0.1% probability of occuring! So while inventory is following a typical pattern - the swings in inventory have clearly been far outside the norm, and only to the upside.

The next chart shows the absolute inventory levels, and compares them to sales. On this chart, you seen the same seasonal fluctuations as above, but in context of the yearly swings of the market. You can also cleary see that it’s not just the relative inventory level that is an issue - the number of homes currently on the market is almost 3 standard deviations above the average for 2000-2007; an event which again, has about a 0.1% probability of occuring. The dashed black line shows the rate of absorption - calculated as pending sales/active listings for each month. As you can see, the growth in inventory is not in any way being met by an increase in sales. The level of inventory absorption has dropped to its lowest level in seven years.

So, while some may argue about how much impact all this inventory will have on prices, it seems pretty clear that any arguments that the market is just returning to “normal” levels of inventory are coming from sources that either haven’t looked at the data, or that are just plain bad at math…

Yet another fear-mongering “rents to skyrocket” article popped up this weekend, this one over at KIRO 7.

Odds are, they’re going to hike your rent next year — perhaps by more than you expected.

She slowdown in the Seattle housing market is beginning to impact apartment, condo and home renters, too.

For sale signs are becoming permanent fixtures in our neighborhoods. Buyers are scared. Many are now opting to rent, which means, more competition — and higher prices for rental units.

It’s true that if demand for rentals were steadily rising while the supply stayed constant (or declined), prices would continue to rise (to a point). That’s what the article, whose headline is “Housing Slowdown Expected To Send Rents Higher” is obviously claiming will happen when they talk about “scared buyers” driving up the demand for rentals. But amusingly, they go on to (apparently unwittingly) explain exactly why that is not likely to happen…

Two houses down the street haven’t sold, so Dave Goldberg decided to rent his instead.

At $1,600 a month, the rent payments will cover most of the mortgage.

“Sellers are scared. Sellers are feeling the effect of the downturn in the market — of what everyone thought would be a continuing rise in the market,” Goldberg said.

So, as the number of “scared sellers” increases, guess what? The rental supply increases, too. Increasing demand plus increasing supply equals rents stabilizing (or to be more accurate, rising steadily in line with incomes).

(Scott MacFarlane, Kiro 7, 10.19.2007)

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