A while back (September 2006, to be more precise) the Seattle Times published a 22-year “analysis” of King County home prices, which essentially came to the conclusion that Seattle would be immune to the home price drops that were beginning to occur elsewhere around the country. Their graph of local home prices going back to 1984 was interesting, but I was frustrated by two things. First, that it was not adjusted for inflation, and second that it did not go back further.
A while later, I had a lengthy email conversation with local mortgage company owner Steve Tytler, in which he made the following claim:
Home prices in the Seattle area follow a very predictable pattern: 2-3 years of rapid appreciation followed by 4-5 years of virtually no appreciation. I call it a “stair step” pattern. Prices jump up, flatten out, jump up again, flat out, and so on. You will never see a major housing price crash here.
I wanted to do the research to find out whether or not Mr. Tytler’s claims hold water, and to improve upon the Seattle Times graph, but with reliable home price data from the NWMLS only going back to 1993, I was in a bit of a jam.
Thankfully, Mr. Tytler pointed me toward a source of home price information that goes further back than the available NWMLS reports we have previously relied on at Seattle Bubble. The Central Puget Sound Real Estate Research Report (originally known as the Seattle Real Estate Research Report) has been publishing local housing market information every six months since 1946. After doing some digging I discovered that the UW Special Collections has a complete set of the reports going all the way back to the beginning.
So, after more than a few Friday afternoons spent at the UW pouring through the old reports and hours spent merging the old data with the modern NWMLS data and adjusting for inflation, I have come up with the following graph. The red line shows inflation-adjusted median single-family home prices (in 2007 dollars) from 1946 through 2007. The gradient area depicts the year-over-year change in home prices.
Looking at home price data this far back shows us a few interesting things. The first thing that jumps out at me is how flat the graph is from 1946 through about 1969. It would seem that as far as home prices are concerned, the early to mid 1970s was when Seattle made the transition from small town to real city. As such, I don’t think we can really gain any useful information from looking at home price patterns pre-1970.
The second thing I notice is that from 1969 to the present there have been three periods where prices have declined for more than a year:
- 1969-1975 (6 years) – Total Drop: 21%
- 1979-1985 (6 years) – Total Drop: 20%
- 1990-1992 (2 years) – Total Drop: 5%
In fact, if you look at the graph from 1968 to 2000, it actually seems to support Steve Tytler’s “stair step” theory. The only problem is that there’s a spike from 1997 to 2000 that—if the stair-step pattern were to continue—should have been followed by 7-9 years of declining and/or flat prices. Instead, after a very short breather, prices only begin to skyrocket even further up.
Let’s look at the three “steps” from 1968 to 1997.
Jump: Fall ’68 to Spring ’69 – 11% in 6 months
Drop: Spring ’69 to Spring ’75 – -21% in 6 years
Peak to start of next big run-up: 7.5 years
Jump: Fall ’76 to Spring ’79 – 71% in 2.5 years
Drop: Spring ’79 to Fall ’85 – -20% in 6.5 years
Peak to start of next big run-up: 9.5 years
Jump: Fall ’88 to Fall ’90 – 41% in 2 years
Drop: Fall ’90 to Fall ’92 – -5% in 2 years
Peak to start of next big run-up: 6.5 years
So we’re looking at an average run-up of around 2 years, followed by a dropping/flat period of about 7.5 years. Now look at the present “step.”
Jump: Spring ’97 to Spring ’07 – 93% in 10 years
So, the current run-up has basically lasted five times as long as any previous spike in King County. All other factors being equal (which of course they aren’t), one could logically conclude that the upcoming period of dropping or flat prices will also last five times as long as previous steps, meaning we would be looking at 32-48 years of flat prices on the horizon.
Do I really think we’re facing 30+ years of flat prices? Probably not. Notice that previous year-over-year price declines have never exceeded 5% for more than a year and a half. We could easily correct for this extra-long run-up by having just 3-5 years of price declines in the 5-15% range, sparing us the 35-year stagnation. Personally I think that’s a lot more likely. In any case, I’m just presenting you with the facts. You decide how you want to interpret them.
(1946-1992 Home Prices: Seattle Real Estate Research Report)
(1993-2007 Home Prices: NWMLS)
(Misc. Price Data: Seattle Times)
(Inflation Data: Bureau of Labor Statistics – Consumer Price Index)