Condo Projects Repartmenting, Rental Vacancy Increasing

It looks like the picture for renters may not be quite as bleak as we have been led to believe in recent articles. Turns out that new apartments are being built, and even some condo projects are becoming apartments instead.

Apartments have been the poor stepchild to condominium towers over the past few years in downtown Seattle. They’re back in vogue now, but the national housing storm may dampen their return to prominence.

“Isn’t it always this way?” Seattle’s Dupre + Scott Apartment Advisors asked in a December report on the apartment market. “Apartment development picks up just as our economy slows down.”

Los Angeles developer Urban Partners announced Monday that it had broken ground on Aspira, a 37-story apartment tower on a former church parking lot at the southwest corner of Stewart Street and Terry Avenue. The Hanover Co., of Houston, is already building the Olivian, a 27-story luxury apartment building at Eighth Avenue and Olive Way, and several other towers are in the works.

Aspira was originally slated for condos. Julie Benezet, managing director of the Urban Partners’ Seattle office, attributed the change to a glut of announced condominium projects, skittishness among the investors who fund condo towers because of condo speculation in other parts of the country, an apartment supply that has shrunk because of a lack of new construction since the dot-com meltdown in 2001 and conversion of existing apartments to condos in recent years.

The article goes on to quote predictions (by Matthew Gardner, amazingly enough) of slowing job growth, rising vacancy rates, a “complete stop” of condo conversions, and stabilizing rents (i.e. tracking with salaries). Now where have we seen this pattern before? Hmm… Oh yeah, pretty much every other bubble city that has seen their market deflate before us.

So much for all the anti-rent scare tactics to keep up the flow of suckers buying overpriced homes.

(Aubrey Cohen, Seattle Times, 12.10.2007)

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

119 comments:

  1. 1
    WestSideBilly says:

    Does Seattle really have a market for a 27 story (~100 unit?) luxury apartment building?

    I agree that more finished apartment buildings is better than half-finished condo projects. Just not sure the projected rent on what would have been a million dollar condo is something Seattle needs…

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  2. 2

    LET’S GET WAGE INCREASES IN AMERICA BROKE DOWN CORRECTLY TO INCREASE RENTS

    1. Millionaires/Billionaires: 30-50% Wage Increases
    2. $60-140K Households: 0-3%
    3. Middle Class ($45K): -1-1%
    4. Homeless to Working Poor (Bottom 50%): -2%

    This equates to a 3.8% average American wage increase per household. Sounds like rents should be going down, not up.

    Rate this comment: Thumb up 0

  3. 3
    Jonny says:

    obviously, the rent on that luxury condo is going to be in line with the high-vacancy rental market we’re developing, not the cost of the condo. this means big losses for condo builders (around 50%). they think they are being smart and that the market will come around in the spring and they can eventually kick out their renters and sell the thing for big bucks again. what they are blind to is the probability that their losses will only increase and that they are throwing good money after bad now. this behavior will increase the slide in condo prices rapidly because eventually the smart developers will decide to get out with a smaller loss instead of bleeding slowly, trying to put off their day of reckoning in hopes of a large gain. that will cause the whole market to shift into the red and decline rapidly. condos are a horrible investment in the first place. less than 10 years ago, you could get condos in seattle for $100-120K. there is no land ownership reason we can’t see similar prices, say well under $200K even for a lot of these “luxury” condos. SFHs are a more limited resource and won’t drop as hard.

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  4. 4
    biliruben says:

    I worked behind a luxury apartment building downtown 5 years ago. The rent for some of the high-end was 4K/mo.

    Who could afford it? Well, theoretically folks like international businessmen who want a apartment instead of a hotel room, and get their company to pay for it.

    In actuality: drug dealers. There was a serious gun battle with machine guns in the parking garage, and this was a block away from the cop-shop.

    Another twist on the McMansion grow house. The only ones that can afford these things are criminals.

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  5. 5
    on topic says:

    a quick scan of craigslist supports this claim.

    using a purely unscientific method, the rental market today appears to be about the same as it did last time i was looking in earnest about 9 months ago. there are still aggressive promotions with free months or no deposit and nice stuff in all parts of town for low rates.

    funny thing about markets: when you increase the supply relative to the demand, the price goes down

    apparently, the apartment market works this way too.

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  6. 6
    [troll] says:

    Ww – ’m thrghly srprsd – ppl r sckng t p – thy rn’t byng nd thy rn’t rntng! Wlcm t Pnr Sqr!!< hrf="#" clss="rplyt" nclck="rplyt('32829','∓#91;trll∓#93;','6'); rtrn fls;">Rply – < hrf="#" clss="qt" nclck="qt('32829','∓#91;trll∓#93;','Ww - \'m thrghly srprsd - ppl r sckng t p - thy rn\'t byng nd thy rn\'t rntng! Wlcm t Pnr Sqr!!','6'); rtrn fls;">Qt

    Rate this comment: Thumb up 0

  7. 7
    TJ_98370 says:

    …..Another twist on the McMansion grow house. The only ones that can afford these things are criminals.

    This is way off topic, but something I’ve often wondered about, and since it got mentioned here – How many people are out there, maintaining the perfect soild citizen type image, while supplementing their income by supplying recreational controlled substances? I know it goes on, but I have no idea to what scale.

    Rate this comment: Thumb up 0

  8. 8
    b says:

    TJ_98730,

    Considering how many solid citizens use recreational drugs, and aren’t travelling to the ghetto to buy them, I would say its a lot higher than most people think (no pun intended).

    Rate this comment: Thumb up 0

  9. 9
    jon says:

    “How many people are out there, maintaining the perfect soild citizen type image, while supplementing their income by supplying recreational controlled substances?”

    Are you asking Tim for another poll?

    Rate this comment: Thumb up 0

  10. 10
    TJ_98370 says:

    Are you asking Tim for another poll?

    That’s an amusing proposal, but I think Tim would have problems relating it to Seattle real estate (which is the point of this blog), and there would be accuracy issues also.

    Rate this comment: Thumb up 0

  11. 11
    biliruben says:

    I was about to suggest a poll myself.

    Ask if folks know, ahem…, friends who are supplementing their income illicitly.

    Since most of the regulars are Microsofties or similar, and you HAVE to be high to work there, I would guess the poll numbers would be surprising. ;)

    Rate this comment: Thumb up 0

  12. 12
    Jonny says:

    [ ] i have worked at microsoft
    [ ] i don’t do drugs, man
    [ ] i didn’t inhale

    Rate this comment: Thumb up 0

  13. 13
    TJ_98370 says:

    I don’t want to derail the original intent of this thread, but I find it truly amazing that there is a thread in Ben Jones HBB (see link) where marijuana grow operations are discussed as a significant influence on real estate prices! Of course that’s only in California…….
    .
    ….. For the Arcata-based agent, the effect of indoor medical marijuana operations was a major factor in keeping local housing prices comparatively stable. “It does artificially drive up rental and housing prices. And there’s a built-in disincentive for reporting that information. There’s a huge economy of construction people who take cash,” he added, describing one element of the Arcata gray market……
    .
    Common Sense Just Went Out the Window in California

    Rate this comment: Thumb up 0

  14. 14
    Mike2 says:

    Another twist on the McMansion grow house. The only ones that can afford these things are criminals.

    Did you think stated income loans had some legitimate use besides allowing criminals to convert illicit profits into mortgage payments?

    Rate this comment: Thumb up 0

  15. 15
    TJ_98370 says:

    Did you think stated income loans had some legitimate use besides allowing criminals to convert illicit profits into mortgage payments?

    Mike2, you’re a genius. It all makes perfect sense now.

    BTW – the marijuana grow discussion is in the comments section of the linked article above.

    Rate this comment: Thumb up 0

  16. 16
    off topic says:

    if i was going to grow, it’d be in someone else’s house.

    why would i risk having my basement damaged by a leaking hydroponic system, or my house repossessed as evidence when i can export the risk for a pittance?

    the guys i knew who grew moved every six months or so because of paranoia that they were being watched by the fuzz or their neighbors.

    Rate this comment: Thumb up 0

  17. 17
    Shawn says:

    Holmes on Homes did an episode on fixing a poor lady’s rental that got ruined by growers.

    Rate this comment: Thumb up 0

  18. 18
    B&W Nikes says:

    How are the repartments going to compete in the rental market unless their pricing gets competitive? Isn’t the idea that you can live across the street in a comparable unit for 2/3 or less the cost of a mortgage going to put even more downward pressure on condo sales beyond the increasing inventory of available units?

    I revisited the numbers from that “gloomy” November Fortune Magazine article with the calculations showing declines they thought were needed to bring home prices back to their historical relationship to rents. My own rent would have to increase by 60-75% to be equal to the cost of a monthly mortgage payment for a condo that would be comparable or slightly less than comparable to what I currently rent. I’m thinking that a 20% correction could be too modest of a figure for some areas of the Seattle market. But I don’t discount the unpredictable visits of the Wage Fairy when we least expect to see her.

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  19. 19
    rbp says:

    In the early 90’s, with the world economy booming, and Japan, Inc., the 2nd largest economy, said to be taking over the world (remember we were sending our CEO’s there to learn how to run their businesses), something happened. Japan’s housing market declined 80%, commercial 90%, industrial 80%, along with their stock market (80%). Bank of Japan lowered interest rates to a negative 1% (thats right they were paying people to borrow money). Things are still down 50%, 15 years later. The Japanese had the highest savings rate in the world at the time.

    As I speak the stock market is down 300 pts, having broken important support levels.

    Rate this comment: Thumb up 0

  20. 20
    Brian says:

    There was a great article in The Economist about pot dealers/growers in Chino Hills (a very high-end community in the Inland Empire about 40 miles east of Los Angeles). They buy the houses because they are so big and can run all of their operations from planting to distribution within the confines of the home. I cracked up, because that is the city my Dad (a very wealther guy) lives. Just too funny. Oh, and I don’t see why Tim can’t run a poll on drugs seeing that he ran a poll on favorite video game machines not that long ago.

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  21. 21
    Markor says:

    “Bank of Japan lowered interest rates to a negative 1% (thats right they were paying people to borrow money).”

    Obviously there’d be restrictions on that so it’s no free lunch; otherwise I’ll borrow a $billion.

    “Things are still down 50%, 15 years later.”

    If house prices were 500% too high here now, I wouldn’t doubt that they’d be down 50% 15 years from now. But our bubble is not nearly as big as Japan’s was.

    Rate this comment: Thumb up 0

  22. 22
    Bellevue Ave says:

    japan also wrapped their entire system up within itself. purchasing stocks on leverage by using the increasing price of the property as collateral…

    Rate this comment: Thumb up 0

  23. 23
  24. 24
    Jonny says:

    it would appear the economist thinks our bubble is bigger.

    Rate this comment: Thumb up 0

  25. 25
    TJ_98370 says:

    The Northwest is mentioned again in Ben Jones HBB. The Kitsap Sun is even featured!

    August Happened And The Props Were Gone

    Rate this comment: Thumb up 0

  26. 26
    Orion says:

    SAMPLE POLL:
    How does your housing situation relate to recreational controlled substances?

    [] I just say no.
    [] I didn’t inhale.
    [] Ok I inhaled a little bit.
    [] Sometimes the housing market makes me feel like I’m hallucinating.
    [] I hook up my friends occasionally for extra spending money.
    [] I have a brisk trade which keeps me solvent.
    [] I have a huge grow house operation which nets me millions.
    [] Dude, can you hook me up?

    Rate this comment: Thumb up 0

  27. 27
    anonymous says:

    Forget grow houses needle exchanges are what you want to get into. I had a friend fo mine (who was in the know) explain why the needle exchange is the greatest commercial real estate tool ever invented. Here is how it works.

    Step (1) Find a valuable piece of real estate (2nd and Pike) centrally located and as yet not developed. You can probably get grants for most of your good deeds.
    Step (2) Become an activist and offer to rent your property at below market to a non-profit needle exchange because you want to keep the junkies healthy.
    Step (3) When neighbors complains just launch a press release and you get 1000 Capital Hill bum lovers to march for you. No problem.
    Step (4) Try to keep as many homeless on your block by working with police to make sure that every junkie knows they won’t be hassled.
    Step (5) Watch your neighborhood business close as the only business model that can work on your block is selling Twinkies, Basic Cigarettes, Malt Liquor and Brillo Pads.
    Step (6) Buy up the bankrupt properties.
    Step (7) Bulldoze
    Step (8) Put up Luxury Condominiums and Get Rich

    Rate this comment: Thumb up 0

  28. 28
    Notorious says:

    There are plenty of people in seattle putting up model fronts while selling drugs to supplement their income. Check out the club scene. They can be found there spending money like it grows on trees.

    Since Seattle’s RE boom I’d hear about known crack heads in the party scene becoming somehow involved in the RE industry. Part-time agent seemed to be the number one job.

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  29. 29
    TJ_98370 says:

    Too funny Orion ! :)

    Rate this comment: Thumb up 0

  30. 30
    Markor says:

    From http://archive.mailtribune.com/archive/2005/0711/biz/stories/02biz.htm:

    “But economists say there are significant differences. For a start, Japanese house prices jumped faster and higher. The average price of a 750-square-foot condominium in Tokyo rose to more than 70 million yen, or about $625,000 at current exchange rates, in 1991 from about 25 million yen in the early 1980s. After crashing in the early 1990s, the average house price has hovered around 40 million yen, or about $360,000, for the past 10 years. House-price inflation in major U.S. cities has been more moderate. The Office of Federal Housing Enterprise Oversight’s index of home prices rose 159 percent in the Los Angeles metropolitan area and 129 percent in the New York metro area during the 10-year period through March 2005.”

    On the Eastside I’d say selling prices have risen about 125% in the last 10 years. Inflation and the Seattle area’s increased popularity accounts for a big chunk of that.

    Also Japan prices could have been too high even in the early 80s. $250K for a 750 sq. ft. condo in 1983? Yikes! Wages there aren’t a lot higher than here.

    Rate this comment: Thumb up 0

  31. 31
    Roger says:

    The Renton version of pothouses for profit:
    http://www.npr.org/templates/story/story.php?storyId=16628918

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  32. 32
    rose-colored-coolaid says:

    From above,
    “The average price of a 750-square-foot condominium in Tokyo rose to more than 70 million yen, or about $625,000 at current exchange rates, in 1991 from about 25 million yen in the early 1980s. After crashing in the early 1990s, the average house price has hovered around 40 million yen, or about $360,000, for the past 10 years.”

    I don’t really know, but isn’t $625,000 in the neighborhood of what a small condo would cost in most world class cities today? I’m talking London, NYC…not Seattle.

    For that matter, if if ‘the average house price has hovered around $360,00′ doesn’t that make King County more expensive than Tokyo? That’s positively laughable.

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  33. 33
    Markor says:

    “I don’t really know, but isn’t $625,000 in the neighborhood of what a small condo would cost in most world class cities today?”

    Maybe. But it was $625K *in 1991* in Tokyo.

    “For that matter, if if ‘the average house price has hovered around $360,00′ doesn’t that make King County more expensive than Tokyo? That’s positively laughable.”

    Presumably that’s $360K for a 750 sq. ft. condo. On the Eastside you can get a 2700 sq. ft. house on an 8K lot for $460K; that would likely be $millions in Tokyo, if it existed.

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  34. 34
    jon says:

    The mortgage crisis is starting to have serious consequences now:

    http://online.wsj.com/article/SB119707327901017729.html

    Rate this comment: Thumb up 0

  35. 35
    TJ_98370 says:

    There seems to be increasing renewed interest in Japan’s bubble as of late.
    .
    Markor – to be sure there are differences between Japan’s bubble and ours – but take note of lessons learned:

    Take It From Japan: Bubbles Hurt
    .
    …..By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.
    .
    Their experiences contain many warnings. One is to shun the sort of temptations that appear in red-hot real estate markets, particularly the use of risky or exotic loans to borrow beyond one’s means. Another is to avoid property that may be hard to unload when the market cools…….
    .
    …….Most of all, economists say, Japan’s experience teaches the need to be skeptical of that fundamental myth behind all asset bubbles: that prices will keep rising forever. Like their United States counterparts today, too many Japanese homebuyers overextended their debt, buying property that cost more than they could rationally afford because they assumed that values would only rise. When prices dropped, many buyers were financially battered or even wiped out….

    .

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  36. 36
    Markor says:

    “Take It From Japan: Bubbles Hurt”

    Yes bubbles can hurt. Presumably, though, bubbles that aren’t nearly as big won’t hurt nearly as much. If Seattle prices dropped 25% further over the next 10 years, I’d rather take the hit than endure my landlord’s choices, and other disadvantages of renting, for those 10 years. It helps that a house is worth one place to live regardless of its monetary value, esp. when the bubble is nationwide.

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  37. 37
    TJ_98370 says:

    From article linked (above) by Roger:

    ….The marijuana is grown in the middle of some very respectable Seattle suburbs, such as Renton. DEA special agent Clark Leininger has spent many long hours on stakeouts in quiet cul de sacs outside split-level homes that might sell for more than $400,000. He says he often has good evidence that a house is stuffed with pot plants, but he holds off making arrests, so he can find the larger network
    .
    “Most of these people who are orchestrating these operations have multiple houses. Some investigators say the minimum is three, some say five. The largest number that I’ve run into is 12,” Leininger says, referring to a case he investigated right there in Renton.
    .
    Leininger says the growers prefer to own their houses, because it eliminates the risk of a nosy landlord. And he says growers — or their intermediaries — have little trouble getting the loans to buy the houses they need. He said the man who bought 12 houses was a typical case.
    .
    “Many of the loans were zero-down, no-document loans,” he says. “He did not have any employment, and if I remember correctly, he was able to purchase about $6 million worth of property — and he didn’t have a job.”….

    .
    Wow! It makes you wonder if tightening of mortgage loan standards will have an impact on supply?
    ..

    Rate this comment: Thumb up 0

  38. 38
    TJ_98370 says:

    It appears that marijuana grow operations could be a casualty of the subprime mortgage fallout. Where is the MSM coverage of this important issue !?!

    Rate this comment: Thumb up 0

  39. 39
    b says:

    Markor,

    Is it just me, or have you recently changed your rationalizations in posts from “there isn’t a bubble and we may be flat for a while” to “I don’t care about losing all of my money, I hate renting”.

    Rate this comment: Thumb up 0

  40. 40
    rbp says:

    Markor – there were restrictions, you had to be a large financial instution. Just like our Fed’s window is only open to large institution. Perhaps you have heard of the Yen carry trade, which was one of the main drivers of the massive expansion of credit world wide that has occured over the last decade.

    This is a quote from one of the finest economists who ever lived. “There is no means to avoid the collapse of a bubble brought about by the expansion of credit” There is no question that the US and the world has experienced the greatest expansion of credit in human history. History shows that bubbles recede to below their beginning. In this case the beginning was during the Great Depression. It really doesn’t matter the degree of excess once you reach critical mass.

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  41. 41
    MacAttack says:

    What are we “Aspira-ing” to/

    Rate this comment: Thumb up 0

  42. 42
    bitterowner says:

    Re: “Don’t unpack too much”

    I also wouldn’t bother to unpack to much if I overextended myself on a suicide loan to get into that “dream house” in order to give my kids a ‘stable’ environment.

    give me a break.

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  43. 43
    bitterowner says:

    re: above comment – sorry, wrong post. Dyslexia is a terrible disease…

    Rate this comment: Thumb up 0

  44. 44
    Markor says:

    “Is it just me, or have you recently changed your rationalizations in posts from “there isn’t a bubble and we may be flat for a while” to “I don’t care about losing all of my money, I hate renting”.”

    My position can be summarized like this: Selling prices have fallen quite a bit in the last few months, so any bubble has deflated somewhat. (I see 2005 prices in Bellevue.) Prices could well fall further, but that doesn’t necessarily mean that the best choice is to wait to buy.

    Rate this comment: Thumb up 0

  45. 45
    Markor says:

    “History shows that bubbles recede to below their beginning.”

    Where would that be in Seattle, after subtracting for inflation and increased popularity? If it takes 5 years for the bubble to fully pop, is it worth waiting 5 years to buy, at a possibly higher interest rate?

    “In this case the beginning was during the Great Depression.”

    Was it a good idea to rent during the Great Depression? A lot of people lost their savings when banks folded. Do you trust the FDIC during the collapse of the “greatest expansion of credit in human history”, in the world’s largest debtor nation?

    Rate this comment: Thumb up 0

  46. 46
    deejayoh says:

    I just discovered you can hedge the 30 year rate on the CBOT. Not sure of the exact mechanics, but given that in their example you could hedge $50mm of risk on the 5 year bond for $22k, I bet $500k is less than $5 grand to hedge. In case anyone is concerned about interest rates.

    Rate this comment: Thumb up 0

  47. 47
    Markor says:

    Good find deejayoh. That’s worth looking into for anyone who’s committed to waiting to buy.

    Rate this comment: Thumb up 0

  48. 48
    B&W Nikes says:

    As of July, 2007 according to CNNMoney

    The median Manhattan condo or co-op apartment sold for between $840,000 and $895,000 during the three months ended June 30. The low estimate was reported by two brokers, Halstead Property and Brown Harris Stevens, while the Corcoran Group pegged it at $875,000, and Prudential Douglas Elliman recorded the high figure among the group.

    The average (mean) prices from all four companies more or less agreed – around $1.3 million. The disparity between mean and median prices points out the strength of the city’s luxury market. Four-bedroom apartments averaged nearly $10 million during the quarter, according to figures from Prudential Douglas Elliman.

    CNNMoney reported on the same July day that

    a small boutique office building on Park Avenue and 57th Street – Bloomingdale Country – has sold for nearly $1,600 a square foot, a total of $510 million. That represents a huge increase from 2002, when it was last sold for $158 million, or about $492 per square foot.

    It is thought to be a record price for commercial space in the United States.

    Tokyo is to the rest of Japan as New York City is to the rest of the US.

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  49. 49
    david losh says:

    First, grow operations prefer to rent. The fewer legal documents, especially those tied to mortgage fraud should be avoided.
    Second if you are going to rent an apartment why not convert a very large house into living spaces to rent out for cash. You are allowed to have up to nine unrelated persons living in an owner occupied home. If you are sharing space with a neighbor or being a serf to a land lord why not be the land lord.
    Lastly the Japanese bubble had more to do with the emergence of China as an economic trading partner than anything else. When Hong Kong remained the same under Communist rule Japan became less influencial in the World Trading Arena.
    I was just sayin that more rentals makes more people rich. You’ll see a lot of wealth created in these very certain times.

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  50. 50
    johnnybigspenda says:

    meant to post this here:
    I don’t completely understand what is so bad about renting out a place in a ‘negative cash flow situtation’. Someone is still paying 80-90% of your mortgage. A couple hundred a month of negative cashflow shouldn’t put most people under… cut out your starbucks if you have to.

    Sure, opportunity cost says your downpayment and any existing equity could be used for better ‘investments’, but on the otherhand, after 5-10 years max, rents are most likely going to be substantially higher which should put you cashflow positive.

    The market will come back someday. In the mean time, you may have even built up some equity on someone else’s dime…

    Let it ride.

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  51. 51
    david losh says:

    If you have a negative for a few months with appreciation of value great. If the value stagnates the negative errodes the value. Real Estate is dollars in dollars out.
    Thank you Jamie for the e-mail, yes, if you are in the marijuana growing business you want to avoid tying yourself to the property where the grow operation is. You may hire a straw buyer, but you would need some one very stupid. There are many more greedy land lords out there willing to take excessive rental income in exchange for no questions asked.

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  52. 52
    Anti-Dexter says:

    What the heck is this dude talking about? Reading him reminds me of reading Naked Lunch; no apparent continuety.

    Rate this comment: Thumb up 0

  53. 53
    Jonny says:

    “My position can be summarized like this: Selling prices have fallen quite a bit in the last few months, so any bubble has deflated somewhat.”

    Prices will fall far, far further. The bubble has only just begun to burst.

    Rate this comment: Thumb up 0

  54. 54
    Matthew says:

    Nice day for the stock market….

    If you were short!

    Rate this comment: Thumb up 0

  55. 55
    Markor says:

    “Prices will fall far, far further. The bubble has only just begun to burst.”

    If they more than 15% more, we’d be in a negative bubble, if reports that Seattle was 30% overvalued at the peak are accurate.

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  56. 56
    Jonny says:

    as far as what i’ve read, median prices are not even negative yet in seattle. but even when we hit negative 30%, i’d say we’d just barely be returning to reality. and popping bubbles normally overshoot on the downside in the same way they do on the upside, so i’d say a decline of 30-40% is in the cards. also, this problem took a decade to cause and i doubt it is possible for it to disappear in less than 5-10 years.

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  57. 57
    Jonny says:

    i mean markor, did you look at this graph?

    http://en.wikipedia.org/wiki/Image:EconomistHomePrices20050615.jpg

    that’s a whopping bubble. even if we take half the time to fix our bubble problem than the japanese have taken, it’s still going to be 10 years.

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  58. 58
    economist says:

    is it worth waiting 5 years to buy, at a possibly higher interest rate?

    Man, not that “higher interest rate” chestnut again.

    1. If interest rates go up, prices have to go down, because people can only afford to pay so much per month.

    2. It’s better to buy at a lower price and higher interest, than at a higher price and lower interest, because you can refinance for a better rate if interest rates go down, but you’re stuck with the purchase price if you buy at a high price.

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  59. 59
    bitterowner says:

    “that’s a whopping bubble. even if we take half the time to fix our bubble problem than the japanese have taken, it’s still going to be 10 years.”

    Denial is a very powerful state of mind.

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  60. 60
    Buceri says:

    Economist – don’t forget to add that while you wait you increase your savings for a down payment (making your loan smaller and compensating for the higher future interest rates) PLUS the increase in mortgage interest rates generally will mean an increase in short term rates (those affecting your savings for the down payment). BRILLIANT!!!!!!
    Conclusion – Rent and stay informed!!!!! Wait to buy.

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  61. 61
    rbp says:

    I came onto this website to see what was happening in the Seattle market. A forum on the real estate bubble I figured would give me the most pessimistic view point at the moment. What I can tell you is that you are not yet pessimistic enough. You will know the bottom when no one thinks real estate, stocks, and commodities are a good investment, and there are no buyers. That will be the time to buy.

    During the last great depression, my father used to go with his father to auctions at the county courthouse in Iowa. There they were auctioning off some of the best farms in the county…and there would be no bidders.

    Depressions occur ever 70 years or so. There was a very long one from 1720-1784, two from 1845-1859, the last 1929-1938. What you might notice is that each of these depressions were followed by great wars.

    Charles Mackey once said “It has been well said that men think in herds, it will be seen that they go mad in herds, and only regain their senses slowly, and one by one.”

    You all are at least at the head of the herd, which is good.

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  62. 62

    WELL SAID RPB

    I read in Dr. Roubini’s comments on the imminent severe 2008 Recession that in 1932 a book on “Bubbles” was published. I’m not going to give out the book URL, its a bit dry reading [even for me…lol], but it brought up an interesting fact about the last Great Depression impact….the lenders pumping air into the Bubble were as crazy as the borrowers selling their souls for the cash. In this case though the bubble was over after America just “forgave” the war debts to Europe. I wonder if China and the Middle East are going to want to just “forgive” debts to America, versus watching their own economies go down the toilet if we do?

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  63. 63
    AndySeattle says:

    Markor said: “Prices could well fall further, but that doesn’t necessarily mean that the best choice is to wait to buy.”

    It doesn’t? Could you please elaborate?

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  64. 64
    b says:

    AndySeattle,

    I will elaborate, from his other comments he seems to imply that the psychological trauma that renters experience by not owning costs you more than the several thousand extra $ a month to buy a chocolatebox in the Issaquah Highlands.

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  65. 65
    rbp says:

    softwareengineer – I don’t think forgiveness is the issue. The reality is they will not be able to collect on those debts, just like we were never going to be able to collect on the debts from Europe.

    The only way to pay off those debts is through hyper inflation, which Germany was able to do after the first world war. Unfortunately, that option is not available to us.

    Every depression in history, who’s boom phase was brought about by the expansion of credit, has been deflationary.

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  66. 66
    AndySeattle says:

    b said: “I will elaborate, from his other comments he seems to imply that the psychological trauma that renters experience by not owning costs you more than the several thousand extra $ a month to buy a chocolatebox in the Issaquah Highlands.”

    *phew* That’s what I thought he meant… Thanks for the clarification!

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  67. 67
    Markor says:

    “i mean markor, did you look at this graph?

    http://en.wikipedia.org/wiki/Image:EconomistHomePrices20050615.jpg

    that’s a whopping bubble.”

    Yeah I saw it. Two main problems with it: 1) It greatly understates the Japan bubble during the time of the graph (prices were up 180% in Tokyo at the peak, not just 100%). 2) It ignores the fact that Japan prices were already highly bubblicious at the start of the plot.

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  68. 68
    Markor says:

    “1. If interest rates go up, prices have to go down, because people can only afford to pay so much per month.”

    Can you show that these are strongly correlated? I doubt anyone can do that. I don’t think peoples’ ability to pay for something is the main determiner of its price.

    “2. It’s better to buy at a lower price and higher interest, than at a higher price and lower interest, because you can refinance for a better rate if interest rates go down, but you’re stuck with the purchase price if you buy at a high price.”

    The key word is if. Interest rates are unpredictable. That means there is only a 50% chance they’ll fall below their current state in any given subsequent time period. (Yes, that also means that there’s a 50% chance that 3 years from now, rates will be less than today’s rate. Nevertheless, people who are waiting to buy are making both the bet that prices will go down and the bet that interest rates will not go up. There’s only a 50% chance that the latter will happen. If I was waiting to buy, I’d look into the possibility of locking today’s rate for a long term. It might not cost much, given that you can lock in a rate for a few months for a half point or so.)

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  69. 69
    TJ_98370 says:

    …..I don’t think peoples’ ability to pay for something is the main determiner of its price.

    I totally disagree. Marketing 101 will teach you that prices are mostly determined by what the market will bear. Also, I believe people often do not care what the overall price is, so long as they can make the monthly payment and they push it to the limit. If it were otherwise, why are so many people getting into trouble with their ARM resets?

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  70. 70
    rbp says:

    Markor, I believe the mistake you are making is that you are ignoring the forest and focusing on a single tree, actually just a small branch of that tree, much like everyone is doing by focusing on conversions rates and square footage costs. What is occurring is world wide.

    Values have been rising for virtually every asset class, world wide. People think real estate is local, but what has happened here has happened virtually everywhere.

    The question is what has caused this? Answer: Liquidity (credit). As credit expands there are more and more $ chasing fewer and fewer goods. Prices rise, and in this case way beyond the real value.

    What happens when liquidity starts to disappear? Prices fall, the more it does the more prices fall. In my opinion we are on the cusp of the greatest contraction of liquidity(credit) in human history, and therefor, the results on financial assets will be of the same magnitude.

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  71. 71
    deejayoh says:

    1. If interest rates go up, prices have to go down, because people can only afford to pay so much per month.”

    Can you show that these are strongly correlated? I doubt anyone can do that. I don’t think peoples’ ability to pay for something is the main determiner of its price.

    I have done a regression analysis of this that indicated that income and interest rates explain 91% of the change in home prices since 1985 – except for the last 3 years. See this post…

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  72. 72
    deejayoh says:

    Oh, and by the way – this model is accurate for every state in the union. I based it on a goldman sachs report. Apparently they have been using this approach for years.

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  73. 73
    WestSideBilly says:

    deejayoh – Is the 91% including the 3 outliers? If so, what is the coefficient if you remove those points?

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  74. 74
    NotaBull says:

    Deejavoh, Seattle is special…

    Does your mathematical model include CoM (Coefficient of Mountains)? Are you integrating to the third dimension and performing a Boeing normalization on the numbers prior to the analysis?

    No? I didn’t think so…

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  75. 75
    Markor says:

    “I have done a regression analysis of this that indicated that income and interest rates explain 91% of the change in home prices since 1985 – except for the last 3 years.”

    Then how do you explain articles like this one (granted it’s Australia; I have to search quick here):

    http://www.residex.com.au/index.php?content=article7

    “Do rising interest rates mean decreasing property prices? If history is any guide, not at all. In fact, analysis of our data reveals that interest rates have no effect on the capital growth of property at all. …”

    Interest rates rose almost 10% in the 1980s. I doubt that house prices plunged by more than half as a result; I don’t recall anything like that happening.

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  76. 76
    Markor says:

    “I totally disagree. Marketing 101 will teach you that prices are mostly determined by what the market will bear. Also, I believe people often do not care what the overall price is, so long as they can make the monthly payment and they push it to the limit.”

    I also believe that’s true about most people, and that helps explain why rising interest rates do not necessarily mean falling prices or vice versa. A homebuyer gets pre-approved and finds out she can afford a $600K house max, so that’s what she buys. A year later another homebuyer who has the exact same financial position, but now interest rates are higher, gets pre-approved and finds out he can afford a $400K house max, so that’s what he buys. Here’s the rub: the $600K house and the $400K house need not be equivalent.

    A family of four can survive living in a 1000 sq. ft. house, and that was the norm for many decades circa 1950. If interest rates rise enough, it may become the norm again. That’s not to say that interest rates have no effect on prices; I think they do somewhat.

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  77. 77
    Markor says:

    “What happens when liquidity starts to disappear? Prices fall, the more it does the more prices fall. In my opinion we are on the cusp of the greatest contraction of liquidity(credit) in human history, and therefor, the results on financial assets will be of the same magnitude.”

    When are the best homebuyer’s markets? When the future looks the bleakest for homeowners, of course. Things look pretty bleak right now! The question for a prospective buyer is, will things get bleaker, and if so, by how much?

    In “greatest contraction of liquidity(credit) in human history”, in the greatest debtor nation by far, I want to have the bulk of my net worth in a house or some other real property that I have good control over. During the Great Depression, it was tough to hold onto other types of investments; they tended to vanish. I don’t trust the FDIC to function properly when it has $1 trillion in claims against it and the US is broke. And when I’m jobless I’d rather own my residence free and clear.

    What will trigger another Great Depression? House prices falling too much! Making homeownership a hedge. If prices don’t fall too much I’m okay. If they fall too much, I’m still better off than renting.

    I think that prices won’t fall too much. The reason is that 1% of the world controls 99% of the wealth, or something like that, and those people cannot afford another Great Depression. They, or the companies they control, have plenty of money to prevent a financial catastrophe. Heck, Bush recently gave them $3 trillion.

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  78. 78
    TJ_98370 says:

    ….A homebuyer gets pre-approved and finds out she can afford a $600K house max, so that’s what she buys. A year later another homebuyer who has the exact same financial position, but now interest rates are higher, gets pre-approved and finds out he can afford a $400K house max, so that’s what he buys. Here’s the rub: the $600K house and the $400K house need not be equivalent…..

    Okay so what happens to that $600,000 house?

    Markor, as rbp suggests maybe you need to take a more macro perspective. With reference to your example, as interest rates go up (and/or lending standards are tightened), that is going to preclude alot of previously elegible potential buyers from buying that $600,000 house, right? If demand falls off on $600,000 houses and they don’t sell because they are no longer affordable, they will eventually be repriced at a level where they will sell (ie, $400,000).

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  79. 79
    jon says:

    “Then how do you explain articles like this one (granted it’s Australia; I have to search quick here):”

    deejayoh did a regression on a home price index, while the residex study looked at year to year change in price.

    Statistically speaking, regression really only makes sense if the data points are indepedent and identically distributed. Year to year price changes do not quite meet that standard, but at least they are close. A running index, such as the one deejayoh used, will be very highly auto-correlated and so a regression on that will be very prone to spurious results. Basically all results will be spurious. Since WA real estate prices rose for most of the time from 1985, you will get a close fit between that and any other measurement that rose since 1985, and no fit on any data that did not.

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  80. 80
    Markor says:

    “During the last great depression, my father used to go with his father to auctions at the county courthouse in Iowa. There they were auctioning off some of the best farms in the county…and there would be no bidders.”

    So where would you invest during the Great Depression of 2008 to 2057? I bet those Iowa farms were great buys at 1933 prices. Maybe the reason there were no bidders is because all the people who waited to buy farms lost their money when the banks folded.

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  81. 81
    deejayoh says:

    WSB – the 91% is for 1985 – 2004 – it excludes the outliers.
    Markor – Note that the independent variable used in the analysis was disposable Income as a multiple of the T-Bill yield. This is in essence the purchasing power of money at current interest rates – not solely interest rates (which is what appears to have been used in your Aus example). I don’t pretend to have invented the approach, some smart bastard at Goldman Sachs did – but it is elegant in it’s simplicity. The data I was able to find covered 1985-today – which includes the period from 1985-1991 when interest rates where through the roof. As you can see it predicted price movements pretty well.

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  82. 82
    Markor says:

    “With reference to your example, as interest rates go up (and/or lending standards are tightened), that is going to preclude alot of previously elegible potential buyers from buying that $600,000 house, right?”

    Yes.

    “If demand falls off on $600,000 houses and they don’t sell because they are no longer affordable, they will eventually be repriced at a level where they will sell (ie, $400,000).”

    Not necessarily. The people who used to be able to buy a $800K house max will lower their standards to buy the $600K house, because now that’s the max they can buy. The people who used to be able to buy a $1 million house max will lower their standards to buy an $800K house, and so on.

    Where does it end? Well there’s a $100 million house on Lake Washington.

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  83. 83
    deejayoh says:

    a regression on that will be very prone to spurious results.

    Jon – good point, as they say “correlation does not equal causation”. As I said, I was just copying a GS analysis – but I do find their rationale compelling.
    And if they are auto correlated, I wonder how you explain how far off the predicted function the index jumped in 2005-2007?

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  84. 84
    Markor says:

    “Markor – Note that the independent variable used in the analysis was disposable Income as a multiple of the T-Bill yield. This is in essence the purchasing power of money at current interest rates – not solely interest rates (which is what appears to have been used in your Aus example). …”

    How do you explain that house prices didn’t plummet when interest rates skyrocketed in the 1980s?

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  85. 85
    rbp says:

    markor – i don’t think the 1% of the population you refer to will be able to stop anything. No more than all the federal banks and governments will be able to. Depressions, like booms result from shifts in the mass social mood.

    As far as a home being a reasonable store of wealth during a depression, I would tend to agree. We have to live somewhere, and a home that you like, mortgage free is fine. The relative value of your home vis a vie other homes will be preserved even if it declines in price. The only argument to this I would offer is – if instead of owning a home during a major downturn you instead held that value in cash, you would be ahead of the game . As an example lets say you sold your home for $200,000, and house prices eventually declined 80%. You could buy back your home for $40,000 and have $160,000 in cash to buy other assets at the bottom.

    As for the degree of pessimism present in the mass social mood today, I would argue people as a whole are still very optimistic. The Dow Jones Average is generally considered the best barometer of social mood. Right now it is only about 5% from its all time highs, as are commodities. Real Estate is leading the charge lower right now, but declines have been modest. Until the stock market joins in there will be no economic downturn.

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  86. 86
    rbp says:

    markor says “where would you invest in the great depression of 2008-2057?

    safe cash is about as good an option as you are going to find right now. safe is the operative word.

    Yes one could have made some very good deals on real estate in 1933. The problem was few had any cash, and those that did, weren’t about to part with any. As I said in an earlier post – at the bottom no one will want any financial asset, including real estate. If you have cash, and the guts, to buy when everyone else is selling then you will do very well over time.

    Question: why does a relative optimist like you contribute to a forum on real estate bubbles?

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  87. 87
    deejayoh says:

    How do you explain that house prices didn’t plummet when interest rates skyrocketed in the 1980s?

    Well, I’m just looking at the numbers here – and there are 2 things. 1) the numerator (disposable income) was growing at a rate of 8-12% a year during the same period – so it looks like you had pretty good wage inflation to go along with the high interest rates (makes sense) and 2) home prices did fall in a number of markets, and elsewhere they were pretty flat – looks like they probably trailed inflation.

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  88. 88
    Markor says:

    “Every depression in history, who’s boom phase was brought about by the expansion of credit, has been deflationary.”

    While the author of the following article may not be an expert, he or she has some interesting thoughts on how the coming Great Depression need not be deflationary like the last one:

    http://www.gold-eagle.com/editorials_05/optimist062505.html

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  89. 89
    TJ_98370 says:

    …Not necessarily. The people who used to be able to buy a $800K house max will lower their standards to buy the $600K house, because now that’s the max they can buy. The people who used to be able to buy a $1 million house max will lower their standards to buy an $800K house, and so on.

    Where does it end? Well there’s a $100 million house on Lake Washington.

    The fault in the above logic is that you are assuming equal distribution of household income over the population. Graphically represented, household income is distributed across the population like a skewed bell curve. There are lot more middle income earners than there are top income earners. In your example above, as families slide on down the home price scale there will be fewer and fewer buyers for the $1 million homes, the $800k homes, and $600k homes. As demand decreases for these homes, supply increases which will result in overall depreciation.

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  90. 90
    Markor says:

    “markor – i don’t think the 1% of the population you refer to will be able to stop anything. No more than all the federal banks and governments will be able to. Depressions, like booms result from shifts in the mass social mood.”

    The US has for decades been just a few steps away from another Depression. The US economy is a giant Ponzi scheme. It’s the fed’s actions that keep the economy on its tightrope, indirectly controlling the mass social mood. I think they and big business have more control than you think they do. I think they have a lot more control than they did in the 1930s. But time will tell.

    “As far as a home being a reasonable store of wealth during a depression, I would tend to agree. We have to live somewhere, and a home that you like, mortgage free is fine. The relative value of your home vis a vie other homes will be preserved even if it declines in price. The only argument to this I would offer is – if instead of owning a home during a major downturn you instead held that value in cash, you would be ahead of the game . As an example lets say you sold your home for $200,000, and house prices eventually declined 80%. You could buy back your home for $40,000 and have $160,000 in cash to buy other assets at the bottom.”

    Sure. But where are you going to put your cash? If house prices are down 80%, then the stock market has crashed and the banks have padlocked their doors. The FDIC isn’t answering the phone. What place was safe?

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  91. 91
    TJ_98370 says:

    ….Sure. But where are you going to put your cash? If house prices are down 80%, then the stock market has crashed and the banks have padlocked their doors. The FDIC isn’t answering the phone. What place was safe?

    Now you’re getting a bit extreme. If it ever gets as bad as described above, I have a strong suspicion that having a place to put my cash would be the least of my worries.

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  92. 92
    rbp says:

    Markor asks “Sure. But where are you going to put your cash?”

    Yes, the FDIC won’t be answering the phone, and many, if not most banks will be on a “banking holiday”

    First, there are no guarantees. There are things one can do, and the ability to be flexible over time will be essential.

    There are a small number of banks in the US with a decent safety rating. Weiss Ratings has a list of all banks rated on safety. The safest investment for at least the near future are 90 day US T-Bills bought directly from the US Treasury. Anyone can utilize this approach. At some point even T-Bills may not be as safe as one would like. If you are a sophisticated investor there are two private Swiss banks with an ISI-1 rating. Unfortunately they are the only two with this rating in the world. There are other options, that may provide protection if T-Bills are no longer safe. If we reach that point we will have many other problems besides how to hold on to any cash we may have left. In great bear markets everyone loses, the “winners” are those who lose the least.

    When everything else is going down, the value of your cash is going up. Cash ain’t trash.

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  93. 93
    Markor says:

    Yes one could have made some very good deals on real estate in 1933. The problem was few had any cash, and those that did, weren’t about to part with any. As I said in an earlier post – at the bottom no one will want any financial asset, including real estate. If you have cash, and the guts, to buy when everyone else is selling then you will do very well over time.

    From what I can see, only about a dozen people want Seattle real estate now. Does that mean we’re near the bottom? (OK it’s more than a dozen but the market is all but dead now. It’s not really “no one”–e.g. $millions changed hands even on the lowest days of the Dow.)

    In the last Great Depression lots of people lost their cash when the banks folded. There was no FDIC then. If there’s a run on the banks now, I doubt the FDIC will be effective. Where to store cash during a major downturn should be a prime concern for those waiting to buy, esp. if inflation reigns.

    The property owners in 1933 who also had cash were able to keep their properties, which as you say were good deals then. Being that a house is a leveraged investment, those who buy now can withhold their cash above 20% of the house value, so they have it on hand during the next Great Depression.

    Question: why does a relative optimist like you contribute to a forum on real estate bubbles?

    Well I think there’s a massive bubble and things could get very dire. I just think if things get very dire, renting could be worse than owning, unless you’re very careful.

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  94. 94
    rbp says:

    TJ – yes it is extreme, at least by todays thinking. Understand that great bull markets, like we have enjoyed since the second world war, have always resulted in great bear markets. Extremes in optimism like we have had for many years are always followed by extremes in pessimism.
    Such is the nature of life.

    You are right extremes in social mood have real effects, not only in economics, but politics, and society in general.
    Still, in such pessimistic environments it won’t hurt to have some cash.

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  95. 95
    rbp says:

    marko says: “I just think if things get very dire, renting could be worse than owning, unless you’re very careful.”

    question: how so?

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  96. 96
    Markor says:

    Well, I’m just looking at the numbers here – and there are 2 things. 1) the numerator (disposable income) was growing at a rate of 8-12% a year during the same period – so it looks like you had pretty good wage inflation to go along with the high interest rates (makes sense) and 2) home prices did fall in a number of markets, and elsewhere they were pretty flat – looks like they probably trailed inflation.

    Yes when interest rates skyrocketed, houses probably lost real, if not nominal, value. But I don’t think the value was lost a 1-to-1 ratio. For example, if rates rose during a one year span such that someone who could afford a $100K house max at the beginning of the year could afford only a $50K house max at the end of the year, I doubt a $100K house lost $50K of real value during that year. Maybe it lost $20K of real value over 5 years.

    Suppose there was a 1-to-1 ratio. Then the fed would have perfect control over house prices. But it’s obvious they don’t.

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  97. 97
    Markor says:

    “The fault in the above logic is that you are assuming equal distribution of household income over the population. Graphically represented, household income is distributed across the population like a skewed bell curve.”

    I agree, and that’s why I say I think interest rates do affect house prices somewhat. I just submit that many other factors besides interest rates affect demand at a given price point.

    There should be less people lowering their standards down to a $600K house (should interest rates rise) than those raising their standards to it (should interest rates fall). But if the former group is 70% of the size of the latter group (say), demand is affected by only 30%. The former group is probably stronger financially too, which can strengthen demand; e.g. bidding wars can be common in high-priced markets during a buyers’ market at lower levels.

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  98. 98
    Markor says:

    Now you’re getting a bit extreme.

    I don’t think so! If house prices are down 80% (your example), I would expect a scenario far worse than the last Great Depression.

    If it ever gets as bad as described above, I have a strong suspicion that having a place to put my cash would be the least of my worries.

    Precisely. That’s why I’d want a house if prices fall 80%. Then where to put a lot of cash wouldn’t even be a worry. I could better focus on survival. Banks could fold and the gov’t could shrug their shoulders, but my house would still be worth one place to live.

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  99. 99
    deejayoh says:

    Yes when interest rates skyrocketed, houses probably lost real, if not nominal, value. But I don’t think the value was lost a 1-to-1 ratio. For example, if rates rose during a one year span such that someone who could afford a $100K house max at the beginning of the year could afford only a $50K house max at the end of the year, I doubt a $100K house lost $50K of real value during that year. Maybe it lost $20K of real value over 5 years.

    I’d agree with that. I think the other factor that comes into play in weak housing markets is that the volume of sales drops to nothing – people are scared to buy, sellers want to get their price. Net effect is prices are stickier on the way down than they were on the way up. You can see it on that Japan chart, if I recall correctly. Not that I am predicting that outcome, but the shape of the curve is illustrative.

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  100. 100
    Markor says:

    At some point even T-Bills may not be as safe as one would like.

    Yes, and that’s the point in question.

    If you are a sophisticated investor there are two private Swiss banks with an ISI-1 rating. Unfortunately they are the only two with this rating in the world. There are other options, that may provide protection if T-Bills are no longer safe.

    When there aren’t even flights to Switzerland (or a seat costs $10K), I think that rating could change in a hurry. Their incentive would be to make the money vanish. Similar to how Swiss banks held the ill-gotten gains of the Third Reich and then fought the petitioners for 50 years. Probably no bank can be trusted when the chips fall.

    If we reach that point we will have many other problems besides how to hold on to any cash we may have left.

    Agreed. So why are those waiting to buy so sure they’ll come out ahead if house prices fall 80%? They’ll need to survive and somehow hold onto their cash.

    When everything else is going down, the value of your cash is going up. Cash ain’t trash.

    If house prices fall 80%, it might be best to store cash in cans buried in state or national parks you can walk to. You wouldn’t want to depend on GPS though, since that may stop working. The cash will be subject to inflation and summary devaluation.

    In great bear markets everyone loses, the “winners” are those who lose the least.

    My sentiment exactly. I think homeowners may well come out ahead of renters if prices fall 80%. Suppose the US dollar gets devalued by 50%. Cash loses 50% of its value, but house prices stay the same (their nominal value goes up 100%).

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  101. 101
    Markor says:

    marko says: “I just think if things get very dire, renting could be worse than owning, unless you’re very careful.”

    question: how so?

    See my post immediately above.

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  102. 102
    Markor says:

    Net effect is prices are stickier on the way down than they were on the way up.

    Agreed. That affects my rent vs. buy decision. Suppose the real value of a typical house falls $300 a month for 20+ years. That might be an acceptable cost for those who prefer to own.

    It’s like buying a car. If Seattle Bubblers analyzed cars like they analyze houses, they’d all drive beaters since newer cars depreciate faster. But I bet there’s some nice wheels among the group. They are willing to lose money forever to enjoy the nicer ride.

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  103. 103
    B&W Nikes says:

    Does anyone know whether Japan had anything comparable to the adjustable rate mortgages during their bubble? Did their phenomena have any sequential events equal to tighter lending standards occurring about the same time as monthly payments balloon en masse like the US is on track toward?

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  104. 104
    Markor says:

    Markor said: “Prices could well fall further, but that doesn’t necessarily mean that the best choice is to wait to buy.”

    It doesn’t? Could you please elaborate?

    See my post immediately above.

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  105. 105
    deejayoh says:

    It’s like buying a car. If Seattle Bubblers analyzed cars like they analyze houses, they’d all drive beaters since newer cars depreciate faster. But I bet there’s some nice wheels among the group. They are willing to lose money forever to enjoy the nicer ride.

    Some, perhaps. For me it’s a decision of buy now, or wait 12-18 months. I decided to wait in the crazyness of last fall (2006) after having lost out in 3 multiple bid situations. At the time I was reminded of the “winner’s curse” where the only IPO you can get your hands on is the one that sucks. Now, we’re about 3 months from being back where I got out, and I can take my sweet time picking and choosing. I don’t need to find the absolute bottom (nor do I think we are close to it) If I miss it by six months, that’s ok. I already rode the market up for nine of the last 10 years – so I’m not shedding any tears.

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  106. 106
    Garth says:

    In the Japanese bubble they developed the 3 generation or 90 year mortgage.

    At the peak of the bubble in Japan, just the real estate in Tokyo was worth on paper a few trillion more than all of the property in the US is worth on paper today.

    20 trillion or so in paper value was wiped out in both the stock and real real estate markets.

    There were no CDO’s since CDO’s were invented by our government as a solution to the S&L scandal, banks held most of the loans, and some of the US S&L debt.

    Japan was much much worse.

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  107. 107
    rbp says:

    B&W Nikes – Japan had very little debt, public or private. They were on top of the world economically. Some think the Bank of Japan didn’t lower rates fast enough, but their rates were not that high to begin with. Credit was readily available. No they did not have anything like adjustable rates. China and India were growing rapidily and Japan was the main beneficiary of that growth.

    Their bubble popped, and the Japenese consumer stopped buying, borrowing and investing in the stock market, even though interest rates declined to zero. Instead they increased their savings rate, which already was the highest in the world.

    The social mood changed from optimism to pessimism without any apparent reason. It is believed that mass social mood changes are endogenous, and external causes are for the most part irrelevant.

    Compare that to the US national debt. Including unfunded liabilities, it is over $400,000 for each American family. Considering the vast majority of Americans can’t write a check for $10,000, you can see the untenable situation we are in.

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  108. 108
    Markor says:

    Now, we’re about 3 months from being back where I got out, and I can take my sweet time picking and choosing. I don’t need to find the absolute bottom (nor do I think we are close to it) If I miss it by six months, that’s ok. I already rode the market up for nine of the last 10 years – so I’m not shedding any tears.

    Good strategy. My situation is that I’m relocating w/in the Eastside due to my workplace having moved. I would have rented for a while but was surprised by a relatively great deal that was sitting unsold and that I liked a lot. I don’t like most Eastside houses; I see maybe one house I want every six months. Being picky costs me one way or the other. In normal times I’m outbid, like what happened to you.

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  109. 109
    Markor says:

    Compare that to the US national debt. Including unfunded liabilities, it is over $400,000 for each American family. Considering the vast majority of Americans can’t write a check for $10,000, you can see the untenable situation we are in.

    And yet they still buy their daily $3 latte! And vote Republican (e.g. vote to shower the rich with borrowed money)! You’ve hit on the prime difference between the bubbles. Most Americans don’t have a clue of their true financial situation. That may save us. They’ll still be spending frivolously at the market bottom, so that the bottom is not as deep.

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  110. 110
    B&W Nikes says:

    Thanks rdc & garth – Their example comes up a lot, especially in conversations about prices being slow and sticky on the way down. We have a different kind of bomb to defuse here and now. I also wonder if there is an analogous valuation of NYC compared to the rest of the country, as is often used in the Tokyo comparison. Four bedroom apartments averaging 10 million clams in Manhattan seems pretty over the top.

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  111. 111
    Garth says:

    I’m not sure if rbp’s first paragraph is entirely accurate / in context.

    As for rates, the fed in japan likes to put their rates so low it creates a substantial yen carry trade, the US can’t really do this as other federal reserves adjust their rates based on our fed.

    I find it hard to compare any recessions / crashes previous to the S&L scandal to those post as the impact of the invention of the SIV / CDO seems to be pretty profound.

    Now that these things are no longer liquid and are the problem not the solution, we are in uncharted territory.

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  112. 112
    Garth says:

    NYC data is here:

    http://en.wikipedia.org/wiki/New_York_City#_note-NYC_real_estate

    http://www.nyc.gov/html/dof/html/pdf/07pdf/tent-ass-roll-07-08t.pdf

    Assessed value in 2006 was ~800 billion (search for 71 in the wikipedia article)

    Tokyo was worth 20 trillion in 1990 dollars.

    Manhattan first sold in 1626 for $24, somebody needs to make a excel chart :)

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  113. 113
    rbp says:

    Garth – My first paragraph is a little disjointed, the point I was trying to make was that the Bank of Japan was not tightening, they had a very loose monetary policy. The purpose of which was to try and stimulate the Japenese consumer to borrow, spend, and invest in order to put the brakes on the deflationary collapse that was occurring. It did not work, just like it won’t work here.

    The Yen carry trade was one of those unintended consequences that government programs always seem to create. It’s impact on the Japenese economy was minimal, but it did wonders for expanding credit and leverage world
    wide.

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  114. 114
    B&W Nikes says:

    nice one Garth… but the quote from the NYT Bubbles Hurt article says

    all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.

    not just Tokyo. If it were true, twenty four 1624 dollars worth of beads must have seemed an impressive haul to grant fishing and hunting privileges to the newcomers. :)

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  115. 115
    bitterowner says:

    “In normal times I’m outbid, like what happened to you.”

    Those were the *abnormal* times.

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  116. 116
    Garth says:

    Internet data of the for the japan bubble is kind of weak, as google wasn’t indexing things, and I don’t think the Japanese did a ton of public analysis.

    I took a fantastic international business class in 1997 and wish I could find my course materials.

    Either way it is a paper peak and the total value at the peak is only a estimate.

    http://www.jahrbuch2000.studien-von-zeitfragen.net/Weltfinanz/Hedge_Funds/hedge_funds.html

    Japanese euphoria over becoming the world’s financial giant, was short-lived. The inflated Japanese financial system, with banks awash with money, led as well to one of the world’s greatest stock and real estate bubbles, as stocks on the Nikkei index in Tokyo rose 300% in a space of three years after the Plaza Accord. Real estate values, the collateral of Japanese bank loans, rose in tandem. At the peak of the Japan bubble, Tokyo real estate was valued in dollar terms greater than that of the entire United States real estate. The nominal value of all stocks listed on the Tokyo Nikkei Stock Exchange accounted for more than 42% of world stock values, at least on paper. Not for long.

    rbp,

    Being that their rate was effectively 0 at points during and after the buble that seems pretty loose. The stock + real estate combo that was in play in Japan at the time I don’t think compares to the current US situation in regards to the impact of adjustments in the fed’s interest rate.

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  117. 117
    Markor says:

    “In normal times I’m outbid, like what happened to you.”

    Those were the *abnormal* times.

    This is true.

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  118. 118
    B&W NIkes says:

    Thanks Garth, fascinating stuff. It looks like there was a powerful element of economic policy muscling from the US and the Europe that drove Japan’s slide well beyond the consequences of their own euphoric rise.

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  119. 119
    deejayoh says:

    FWIW – another reason why I think those Goldman guys are pretty smart…

    How Goldman Won Big on the Mortgage Meltdown

    …The group’s big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30, according to people familiar with the firm’s finances. Those gains erased $1.5 billion to $2 billion of mortgage-related losses elsewhere in the firm. On Tuesday, despite a terrible November and some of the worst market conditions in decades, Goldman is expected to report record net annual income of more than $11 billion.

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