Seattle Bubble

It’s time again for me to come begging for votes in the Metroblogging Seattle blog tournament. We’re in a close race in the quarterfinal, but I think we can win it. I’m not so sure of our chances should we make it to the next round, but we’ll cross that bridge when we come to it. For now, go vote for Seattle Bubble to help bring more attention to the best real estate blog around :^) Please?

If you want to know why people don’t tend to trust real estate agents, here’s a great example from a Q&A with Bill Hutchinson, president of the Thurston County Realtors Association in The Olympian:

Q: Given where the market is today compared with a couple of years ago, what would your advice be for sellers and buyers now that the market has slowed down a bit?

A: Right up front, this is a great time to buy. Interest rates are historically low; we have a great inventory of homes. As a buyer, what more can you ask for?

What more indeed. How about a reasonable price? Is now a “great time to buy” if finding a reasonably priced home is your top priority? Is now a “great time to buy” if you have a 5% down payment and your house drops 10% in value in the next two years (highly likely), and you have to sell a house that’s worth less than you owe on the loan?

I’m not anti-realtor as a rule, but I definitely am against the variety of realtor who insists that “it is always a great time to buy,” no matter the circumstances. That’s just dishonest.

(Jim Szymanski, The Olympian, 02.19.2008)

Uh-oh, looks like Seattle is starting to get some negative national attention. As in, coverage that isn’t saying “wow, look what a strong, resilient housing market,” but rather “looks like Seattle’s housing market is poised to fall.”

Seattle, wake up and smell the coffee, your housing prices may be falling faster than foam on a latte.

Seattle, whose job growth from such companies as Boeing Co, Microsoft Corp, Google Inc and Starbucks Corp, is seeing the strength of its housing market eroding, Jonathan Miller, Radar Logic director of research, said on Tuesday at the Reuters Housing Summit.
…
Seattle has ranked about the top of all the U.S. housing markets over the past few years, Miller said. Prices have appreciated at about 12 percent to 16 percent yearly.

This past summer, the appreciation rate fell to 9 percent. Today its stands at about 1.5 percent. Meanwhile, the inventory of unsold homes in that market climbed at 40 percent over the last year.

“You can really see a top market like Seattle, which has been consistently performing well, going into the red,” said Miller.

It’s nice to hear something about Seattle’s housing market in the national media that isn’t of the “real estate party in Washington” variety. It’s true, things really are slowing down here. Prices have been falling since the summer, and not just in the usual seasonal way.

If you’re interested in checking out Radar Logic’s data, head over to their website, where you can generate nifty graphs of home prices and transaction volumes so you can see for yourself what Mr. Miller is talking about.

(Ilaina Jonas, Reuters, 02.19.2008)

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.

Click to enlarge

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.

Step 1:
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

Step 2:
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

Step 3:
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.”

Step 4?
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.

Sources:
(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)

Looks like that slowdown in state government revenues that Washington State’s chief economist ChangMook Sohn has been consistently warning us about really has come to pass.

Sharp declines in predicted revenue from the real estate excise tax and a mild national recession have led the state’s top economist to downgrade his revenue forecast by $423 million.

But Washington’s economy will not fall into recession because of strong growth in aerospace, high tech and international trade, said ChangMook Sohn, executive director of the state’s Economic and Revenue Forecast Council.

“The outlook for the state economy is significantly brighter than for the U.S. but we will be affected by the national slowdown as well as our own housing market problems,” Sohn said Friday.
…
Though lawmakers had been predicting a decline in projected revenue for some time, the news came as a blow to Democrats who had hoped to pass a supplemental budget that would leave more than $1 billion unspent.

Most now concede that that level of savings is no longer realistic.

That $423,000,000 drop in the forecast is compared to the previous forecast, which was made only three months ago. Will our lawmakers continue to ignore the obvious warning signs, and spend Washington into a corner, even as revenues continue to decline? Probably.

Don’t forget, while the housing bubble has been inflating revenues, our state’s legislative and executive branch have been spending it just as fast. Since 2004, state spending has increased 33 percent (source). I don’t think it’s likely that they’ll suddenly start cutting back as revenue growth slows to a halt and possibly reverses. But I’m cynical.

(Chris McGann, Seattle P-I, 02.15.2008)

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