Seattle Bubble

Here’s a few quickies to start off your Monday morning.

First up, Seattle’s market got a mention in the LA Times on New Year’s Eve while I was cavorting about the country. Note that this was a week or two before the NWMLS statistics for December came out, showing a year-on-year price decline.

It’s the kind of house that a year or two ago would have been snapped up in days: a refurbished rambler in a woodsy residential neighborhood minutes from downtown.

The asking price: $559,000.

But after seven weeks, Kristen and Al Dittmaier have not received a single offer on their Wedgwood home.

“I really believed there would be no problem selling,” Kristen Dittmaier said. “But the whole feel of the market has changed. We might have to drop the price.”
…
Of 20 major U.S. metropolitan areas, all but three — Seattle, Portland, Ore., and Charlotte, N.C. — experienced a decline in real estate values this October compared with last October, according to the Standard & Poor’s/Case-Shiller composite price index, released last week.

Home prices have fallen most in the Midwest, Southwest, Florida and California. In Los Angeles, prices fell 8.8%; in New York City, 4.1%.

Seattle prices increased 3.3%, but that was the smallest year-to-year rise for the city in more than a decade. The annual appreciation in Seattle has been slowing for more than a year and a half. Some economists say it’s only a matter of time before Seattle joins the national slump.

Next up, Aubrey Cohen points out the “not-so-fine print on the conforming loan limit:”

It appears conforming loans still would be capped at less than $500,000, under the economic stimulus package deal announced last week.

The deal would raise the cap from $417,000 to 125 percent of a metro area’s median home price, with a ceiling of $730,000, according to Congressional leaders.

The Seattle area had a median home price of $394,700 in the third quarter of 2007, according to the National Association of Realtors. That would put the new cap at $493,375, an increase of $76,375 (18.3 percent) from the current level.

And lastly, get ready for a shock: slowing sales means lean times for real estate sales offices. Shocking, I know. But it’s really happening in Olympia.

A slower Thurston County housing market has been felt by not only buyers and sellers but also South Sound real estate professionals.

Exit Northwest Realty decided last month to vacate its 5,000-square-foot office on Martin Way in Olympia because it had become too expensive to rent in a slower market, co-owner and broker Steve Cahill said.

The real estate company had occupied the space for about 18 months, but now will retreat to a Shelton office while it looks for smaller, cheaper office space in Olympia, Cahill said.

“We have to change the way we do things and get leaner,” Cahill said.

Golly, if I didn’t know any better, I’d say the bubble around here has finally burst.

(Tomas Alex Tizon, Los Angeles Times, 12.31.2007)
(Aubrey Cohen, Seattle Real Estate News, 01.27.2008)
( Rolf Boone, The Olympian, 01.18.2008)

This is not really new news for many of you , but the story circulating around news organizations and blogs about a buyer who has filed suit against their agent mentions a twist. Aside from the main story is the “smaller” issue that the agent evidently also arranged the buyers financing. At least that is how I interpreted it, although I could be open for correction.

Agency (who is representing who in a purchase and sale transaction for those new to buying) is a tough thing to sort out for some consumers. In Washington State, agency law has gone through several variations and changes throughout the years.

But, when an agent is actually representing a buyer in a fiduciary capacity and then places their loan officer hat on, with no fiduciary duty as of today (could be changing), it makes for some potentially serious complications when things go sideways during a transaction.

Speaking solely for myself, if I were an agent, knowing what I know about the challenges they encounter, there is no way I would ever want to put myself, livelihood or assets at risk by playing a dual role.

I’ve never played with a live grenade before…..but, sheesh, acting as a buyer’s agent and arranging their financing is just not my recipe for fun. It’s exciting enough working in the escrow business thank you very much.

PS. If any of you have not had a chance yet this season to grab your boards out of the basement, do so, because the snow has been superb this season.

The inspiration for this post is from the existing homeowners, prospective homeowners and allied real estate professionals that have corresponded with me and commented on this blog over months past to the present.

I’ve learned and received much more than I’ve provided on this blog I assure you, but the common theme I’ve come away with is that consumers want authentic advice and to trust the people who are assisting them with their real estate endeavors. They want value and to know how real estate professionals will earn their business. The following is what consumers want:

Dear Real Estate Professional,

• I want to be treated like a partner, not a “lead” or a means to an end.

• I want relevant information, fast and accurate.

• I want to know why I shouldn’t buy a particular home and why I should.

• If my objective is to build equity, I want solid advice based upon my ownership horizon.

• I want to know exactly how my agent is being paid and by whom.

• I want to know if my mortgage broker’s company or my agent’s brokerage firm has any financial interests in the referrals they give me for third party providers (mortgage, escrow, title, insurance, etc….). I want to know these disclosures at the start of our working relationship, not when I’m signing my loan or closing papers.

• I want to know how my mortgage broker is being paid or if any of the associated fees are duplicate in nature or unnecessary.

• I want my best financial and personal interests to be looked after in my transaction.

• I want to know exactly what the market conditions are. I don’t want to learn about the market conditions from other sources after the fact……

…..Three factors caused this decade’s housing boom to spiral upwards: 1) a run-up in home price valuations that spurred a high sense of urgency in home buying and selling; 2) poor lending practices, which caused many homebuyers to secure loans that they ultimately couldn’t afford over the long term; and 3) speculative purchases of homes also increased, with buyers investing in real estate with the hope of a quick return-on-investment.

• I want to know what the benefits and detriments are of entering into a multiple offer situation.

• I want to trust you.

• I want to know if there is an incentive of any kind, financial or other benefit, from a seller to you (my agent) and how it impacts me.

• I want my agent to be responsive, authentic and collaborative with everyone in my transaction.

• I want to work with a professional.

• I want you to anticipate potential problems before they occur, not react to them as they are upon us.

• I don’t want to receive my loan documents to sign at the very last possible moment.

• I don’t want to pay for inexperience at the same rate as I do for an experienced professional.

Comment Add on’s:

• I would like choices in the service levels I would like to receive/purchase.

If you do this you for me you will have my business for life and I won’t have to go here when I decide to sell, buy or refinance again.

Sincerely,

Consumer

Seattle got a little bit of attention in a recent Wall Street Journal story titled Housing Slump Starts to Hit Stronger Cities:

It’s getting harder to hide from the housing bust.

Tight credit, fragile consumer confidence and a weakening economy are slowing sales and depressing prices even in some places — such as the Pacific Northwest and North Carolina — that until recently had avoided the housing slump afflicting most of the country.
…
Some of the fastest increases in home listings have occurred in relatively strong markets. The inventory in the Seattle metro area counties of King, Snohomish and Pierce leapt 50% last year. At the end of December, when listings are lower than usual because of the holidays, the inventory there was enough to last 4.9 months, denoting a fairly balanced market — but up from a very lean 2.7 months at the end of 2006. In King County, the median price in December was down 2.6% from a year ago.

Given the rise in supply, home prices in Seattle probably will fall further, says Glenn Kelman, chief executive of Redfin, a real-estate broker based there. “If you walk around town, you see cranes everywhere,” he says.

I guess Glenn figures that it isn’t really possible to be any more reviled than he already is by “traditional” real estate salespeople, so why not call it like he sees it. It’s nice to see the national media giving some attention to the Seattle market that is something other than the usual look what a great investment type of stories.

I’m not sure where the WSJ got their months of supply figures from though, because the numbers they quote don’t match any that I’ve seen from the NWMLS. They’re correct when they say inventory across King, Pierce, and Snohomish is up 50%, and prices in King are down 2.6%, as that data matches the “res + condo” figures from the NWMLS. However, when you divide the total inventory at the end of December by the number of pending sales (the traditional method for determining “months of supply”), you get 8.4 months of supply in December 2007 (not 4.9), and 3.8 in December 2006 (not 2.7). If anyone can figure out where those numbers came from, let me know. The NWMLS data can be found in the December 2007 Recaps linked here.

(James R. Hagerty, Wall Street Journal, 01.14.2008)

Update: In the comments Garth pointed me toward the chart that was included with the story, which I overlooked. In the chart, the “Overall Strength” of the Seattle metro area housing market is listed as “moderate.” In the footnotes, it indicates how they arrived at their months of supply figure:

Number of months that homes listed at year end would last at the average 2007 sales rate. Listings normally decline for seasonal reasons in December and rebound in January.

Taking the average of the whole year is a ridiculous way to calculate “months of supply,” for all the same reasons laid out in this post. In reality, the seasonal decline in sales rate is accompanied by a seasonal decline in listings, which tend to balance each other out. As you can see below, the “months of supply” really took off in late 2007.

Click to enlarge

HouseValues, a locally-based online real estate agent lead generator has been swirling the drain since the national real estate market first started slowing down last year. They were in the news again yesterday, as their CFO jumped ship.

For the second time in a year, Kirkland-based HouseValues is restructuring its executive team and laying off employees.

In a filing with the Securities and Exchange Commission on Wednesday, the online real-estate company announced its chief financial officer, R. Barry Allen, has resigned and 45 jobs are being eliminated.

Allen came to HouseValues last January during a restructuring that eliminated the chief operating officer position on as well as 60 other jobs. It also closed its Yakima call center in July, eliminating 100 jobs.

Anybody want to make wagers on how much longer HouseValues will last? I’ll be surprised if they still exist at this time next year. With the pressure of Zillow’s free service on one side, an increasingly slow market on the other, and generally poor service to their only real customers (real estate agents), I’m amazed they have lasted as long as they have.

(Elizabeth Rhodes, Seattle Times, 01.24.2008)

The TV and radio news stations are all blathering yesterday and today about the 2007 year in review report put out by the NWMLS. Most of the reporting is similar to what you can see at the Seattle Times, where they printed a short, unattributed blurb that basically parrots the positive spin put out by the NWMLS. For all I know it’s a direct quote of some press release. They also published a colorful pdf of their own to drive the upbeat message home.

With all the dismal national news about home sales, wasn’t 2007 supposed to be the year the local real-estate market died?

Well, surprise. Although home sales indeed were down 14.5 percent in King County and the number of for-sale homes was up almost 9 percent, prices more than held their own.

Compared with 2006, the county’s single-family home prices climbed 7.1 percent last year, according to the Northwest Multiple Listing Service’s annual report released Tuesday. King County’s condominium prices appreciated 12.4 percent.

Over at the P-I Aubrey Cohen has a more skeptical take on the release, with his story titled Two sides to ‘07 housing market:

Overall, home prices posted healthy gains — 5.5 percent for houses and 10.3 percent for condominiums in Seattle and 7 percent for houses and 12 percent for condos in King County, according to data the Northwest Multiple Listing Service released Tuesday.

Look closer, and there’s one market from January through July, when steady year-over-year increases in home inventory and declining sales didn’t keep the median King County house price from posting double-digit increases.

Then came August, when skittish lenders tightened mortgage standards, making it harder to get a loan, and investors pulled out of the mortgage market, driving up rates on jumbo loans — those above the $417,000 threshold for mortgage giants Fannie Mae and Freddie Mac. The Seattle area’s high home prices make for a lot of jumbo loans.

Of course, none of the press write-ups bother to link to the actual NWMLS report (pdf), but are instead content to repeat out-of-context quotes such as the one about prices rising seven percent.

Anyone who has actually been paying attention to the market knows that something is fishy about that 7.1% figure. To figure out what’s behind that number, take a look at page 19 of the report. Basically, they arrive at that figure by comparing the median price for all sales in 2007 with the same figure for 2006. In a market that is consistently and steadily headed in a single direction, that kind of comparison would make sense. However, in today’s volatile market, such a statistic is totally meaningless.

Allow me to attempt to demonstrate the specific problem with comparing entire-year median prices between 2006 and 2007 graphically.

Click to enlarge

During the first half of 2007, closed sales were down from the same period in 2006, but “only” by about six percent. From July to August, the slowdown accelerated to over a twenty-two percent decline in closed sales versus 2006. The net result is that the entire-year median for 2007 is more heavily weighted toward the first six months than the 2006 entire-year median.

Click to enlarge

The sales imbalance wouldn’t really be an issue, except that in the first half of 2007, while sales were only slightly down, prices were up from 2006 an average of ten percent. Then, in the second half of the year while sales plummeted, prices were up only four percent (on average), and as we all know, finished the year negative. So when the price drops finally began in earnest, the declining volume of sales caused these lower prices to effect the entire-year median less and less each month.

People occasionally accuse Seattle Bubble of “skewing the data” to fit a preconceived notion of market declines. Obviously I am biased, but it looks to me like that is exactly what the NWMLS is doing by touting this entire-year median number as if it provides an accurate reflection of the 2007 market.

(NWMLS, 2007 Review, 01.2008)
(Aubrey Cohen, Seattle P-I, 01.23.2008)
(Seattle Times, 01.23.2008)