It’s been nearly two years since I looked at the soft landing question with respect to affordability in a post titled Seattle Soft Landing: Do The Math. Since then, the affordability picture has changed, and we at Seattle Bubble have done a lot more research into historical data, so now seems like a good time for an update to this subject.
For a detailed explanation and graph of the affordability index over the past 55 years, please refer to this post.
First, let’s take the 15-year average of the affordability index from 1985 (just as insane interest rates were beginning to taper off) through 1999 (just before the current real estate bubble got rolling). We’ll call that Seattle’s baseline affordability, which comes in at 109.6.
The most recent complete quarter is Q4 2007, in which the affordability index stood at 70.3. This is slightly improved from the third quarter, when it was at an all-time low of 63.3 (yes, that’s even lower than when interest rates were over 15% in 1981).
For affordability to have dropped 35-40% in less than a decade, one of these two statements must be true:
- The Seattle area has become considerably more desirable, as compared to other cities.
- Real estate in the Seattle area has become considerably overvalued.
A clear example of the first scenario is in the late ’70s to early ’80s, when affordability dropped from 175-200 down to the new baseline around 100. I believe that it was around that time that Seattle made the transition from big town to small city. Has Seattle undergone another such change since 2000? It’s possible, but given the fact that so many other cities around the country have experienced a similar plunge in affordability over the same time period (despite record-low interest rates), the evidence seems to point to the second statement being a better explanation.
Working off of that assumption, it is reasonable to conclude that for the bubble to completely correct, affordability should return to somewhere near its previous baseline. For the sake of argument, let’s say that Seattle is going to return to an affordability index of 100 (which allows for some increase in the desirability factor). The soft landing scenario says that prices will just “level off” or increase less than 5% a year until incomes catch up to support current prices. When we last looked at the plausibility of this concept, we calculated that it would take 15 years or more of level prices for a soft landing to fully play out.
Let’s take another look at what a true soft landing would look like here in King County. Here are a few possible scenarios:
Scenario A
Yearly Home Appreciation: 0.0%
Yearly Income Growth: 3.0%
Interest Rate Growth: 0.25 pts/year
Interest Rate Max: 6.50%
Affordability Index = 100 in: 13 years
Scenario B
Yearly Home Appreciation: 2.0%
Yearly Income Growth: 4.0%
Interest Rate Growth: 0.25 pts/year
Interest Rate Max: 6.50%
Affordability Index = 100 in: 18 years
Scenario C
Yearly Home Appreciation: 1.0%
Yearly Income Growth: 3.0%
Interest Rate Growth: 0.25 pts/year
Interest Rate Max: 7.25%
Affordability Index = 100 in: 22 years
Scenario D
Yearly Home Appreciation: 2.0%
Yearly Income Growth: 3.0%
Interest Rate Growth: 0.50 pts/year
Interest Rate Max: 8.00%
Affordability Index = 100 in: 50 years
Wow, none of those look all that inviting. But what if the “soft landing” is load of malarkey? What if prices really are going to drop significantly? How long would it take to get back to an affordability index of 100?
Scenario A
Yearly Home Appreciation: -5.0%
Yearly Income Growth: 3.0%
Interest Rate Growth: 0.25 pts/year
Interest Rate Max: 6.50%
Affordability Index = 100 in: 5 years
Scenario B
Yearly Home Appreciation: -10.0%
Yearly Income Growth: 3.0%
Interest Rate Growth: 0.50 pts/year
Interest Rate Max: 7.50%
Affordability Index = 100 in: 4 years
Scenario C
Yearly Home Appreciation: -15.0%
Yearly Income Growth: 3.0%
Interest Rate Growth: 1.00 pts/year
Interest Rate Max: 8.00%
Affordability Index = 100 in: 3.5 years
Looks like a much quicker way for the system to correct itself, don’t you think? After running the numbers again, I still believe that the “soft landing” theory is garbage. It’s not happening anywhere else, and I have seen no evidence to suggest that it will happen here.
For those of you that would like to play around with different scenarios for yourselves, I have updated the Seattle Bubble spreadsheet with the latest data to allow just that. Download the Excel 2007 version here, or the Excel 2003 version here. Look for the sheet titled “Soft Landing.”
Joel » Mar 21, 2008 at 1:36 pm
The fact that rents haven’t increased in line with house prices is more evidence that the Seattle area hasn’t rocketed in desirability in relation to other U.S. cities.
TheHulk » Mar 21, 2008 at 1:48 pm
Right on Joel.
Also, nothing earthshattering has happened (think of a local startup growing really really big, like google did in the bay area). Whatever impact microsoft had on this area would have been from 80 thru 90 (stretch it to 95 if you want to be generous).
But the latest run up in prices in Seattle has been from 2001 onwards. And that was when the tech industry was in the doldrums. Nothing here except availability of cheap cheap loans and the so called “wisdom of the masses” saying house prices will never go down.
Vicki » Mar 21, 2008 at 2:02 pm
Don’t get me wrong- I don’t agree with the idea that current prices are reasonable. But a trend toward larger homes is introducing a bias in the affordability index. My guess is that part of the decrease is driven by over-consumption. Would your data allow you to track a change in average square footage?
Bryant » Mar 21, 2008 at 2:10 pm
Vicki, you’re saying that people are just buying bigger/more expensive houses and that will keep the median up. Fine, but if the median stays flat and gets me a bigger house, then that means a smaller house will have to drop commensurately in price. So, for a given house, dropping 5-15% in value annually is still possible even if the median stays flat.
Marc » Mar 21, 2008 at 2:30 pm
Tim,
Are you effectively saying that the difference between Seattle in the late ‘70s and Seattle in the Early 80’s justified a reduction in your affordability index during that time period from 200 to 100, but the difference between Seattle in 1985 and Seattle in the 4th Q of 2007 does not justify a further reduction from 100 to 70?
The Tim » Mar 21, 2008 at 2:36 pm
Marc,
The average affordability 1950-1975 was 183.2. The new baseline average of 109.6 from 1985-1999 was 40% lower.
From 109.6 to the Q3 2007 value of 63.3 was a drop of 42%.
So yeah, I’m saying that to have a similar plunge in the affordability, there has to be a similar major transition in the city’s desirability. Seems like a reasonable statement to me.
b » Mar 21, 2008 at 2:53 pm
Marc -
It should also be noted that in 1999 the affordability index was right above the average of 109. By the end of 03, it was still much higher, 116.9. It only began to drop precipitously around the middle of 2004, from 115.4 to 68.9 by the end of 06, the data ends from WSU at Q107 (not sure why). So either prices went insane starting around 2004, or all of the sudden Seattle skyrocketed in desirability in 2004. Considering I can think of nothing at all that has happened in Seattle between 2004 and 2007 to justify a 30-40% drop in affordability from fundamentals, we can conclude it was probably caused by the housing bubble.
Marc » Mar 21, 2008 at 2:58 pm
I didn’t want to put words in your mouth so thanks for the confirmation. I can’t speak from experience as I wasn’t here in the ‘70s or ‘80s but I did move here in ’92 and by that time Grunge had exploded and Starbucks had begun convincing the American populace to pay over three bucks for a cup of java. I have a hard time buying that the change in Seattle from ’85 to ’07 was any less significant than that from the late ‘70s to early ‘80s. In fact I would’ve guessed it’s changed more substantially in the past twenty years as new industries came into being.
You rely on the “fact that so many other cities around the country have experienced a similar plunge in affordability over the same time period” to discredit the Seattle’s-more-desirable theory but I find that rationale unpersuasive and flat out dismissive.
The Tim » Mar 21, 2008 at 3:05 pm
Marc, it sounds like you missed something in my post. I’m not basing Seattle’s baseline affordability on 1985. I’m basing it on the 1985-1999 average, which is 109.6. As “b” points out above, even if you include 1985-2003 in the average, it’s still 107.1.
So we’re talking about a 40% reduction in affordability in the last 4-5 years, not “the past twenty years,” as you suggest in your comment.
patient » Mar 21, 2008 at 3:11 pm
Yeah, when the rest of country was effected by the buble drivers of easy credit, speculation and mass-hysteria Seattle was uneffected. Instead Seattle as the only area in the US raised it desirability to the moon, right. Puih, I almost got tricked there.
Marc » Mar 21, 2008 at 3:14 pm
No, I picked up on it. I was too subtly trying to suggest that the stability in affordability from ’85 to ’99 was in need of a correction due to the fact that Seattle has changed massively since the beginning of that time. So, to what you and b are saying, yes, I think there may be something to the notion that the past few years may have been a correction to inordinate affordability in Seattle.
I’m not saying this is a fact, but I’m saying that it deserves greater analysis than your post gives it.
b » Mar 21, 2008 at 3:16 pm
Marc -
So your theory is that Seattle has been too cheap and is now correcting to its true level? I think it would have more credence if it wasn’t coincident with massive affordability drops in pretty much every metropolitan area during the same period. But you are correct in that it is one possible explanation.
Marc » Mar 21, 2008 at 3:25 pm
Yeah b, that’s the hypothesis. I’m sneaking out of the office early so I’ll leave it to the fine folks here at the SB to sort it out for me.
The Tim » Mar 21, 2008 at 3:39 pm
I apologize for not giving that theory as much analysis as you would prefer, Marc. Allow me to explain why I do not explore this in more depth with an analogy.
Let’s say that one day I notice that all the fish in my aquarium are becoming lethargic, then the next day they all stop eating, and a few days later, they all die. The most reasonable explanation is a problem with water quality or some sort of disease. Those are the things I’m going to look for and try to fix before I go out and buy more fish.
Now, I could look at one fish in particular and say “maybe he just died of old age,” but that would be pretty silly, in my opinion.
It’s no Calvin & Hobbes analogy, but there you go.
Marc » Mar 21, 2008 at 3:53 pm
Witty banter, I like it.
Your analogy presupposes the fish were properly fed to begin with and that you never stopped feeding the fish. How are we to know your not a busy entrepreneur who forgot to feed his fish? Rhetorical question.
Your bar, your rules. I’m out to enjoy a little sunshine, good weekend all.
Daph » Mar 21, 2008 at 4:46 pm
Can I say, “It’s the economy, stup*d!”
Who’s going to buy houses left right centre when you have:
a) crazy inflation (with the dollar going down the toilet bowl)
b) destruction of “wealth” (yes, stock market & 401k going down the same toilet bowl)
c) no job security (notice companies going BK? Sharper Image? Bear $2 Stearns anyone? Think Wamu is doing very well?)
Even if Seattle is so very attractive, the average folks will not be able to buy when you have a+b+c. Well, except for Bill Gates maybe if he decides to be the Donald Trump of the West and buys up all real estate in Seattle because it’s so special here.
Ken » Mar 21, 2008 at 4:49 pm
Marc,
I think you’re missing something important about the real practical meaning of the NAR’s affordability index. An affordability index of 100 roughly means that median income folks are paying %28 of their monthly income towards their median house. An affordability index above 100 means they’re paying less than %28 while a value less than 100 means they’re paying more than %28.
So a movement in affordability index down from 200 to 100 (-50%) means that those folks go from paying only %14 of their monthly income towards housing to paying %28. Most people just suck that up. Heck, that’s why lenders chose the %28 debt to income guideline in the first place.
But, a movement in affordability index from 100 to 50 (another -%50) means that those folks go from paying %28 of their monthly income towards housing to paying a whooping, budget-killing, foreclosure-inducing %56 of their income towards housing.
Clearly the pain in real personal financial terms of the Seattle affordability index drop in the 70’s was nothing compared to the ponzi scheme nature of the 2001-2006 drop.
The Tim » Mar 21, 2008 at 4:52 pm
Ken, I agree with the larger point you’re making, but I want to point out a couple of minor points. The affordability index quoted in this post was calculated by me, not the NAR. Also, it uses 30% rather than 28%.
Ken » Mar 21, 2008 at 5:17 pm
Sorry about that Tim;-)
Now that I think more about this it would be fun to see a chart showing affordability data expressed in those terms (% of monthly income). It has a more visceral impact than the cold raw index.
A pyramid scheme falls apart when you can no longer recruit people in on the bottom rungs of the pyramid. An affordability index of 63.3 coupled with realistic lending practices clearly shuts the door on first time home buyers and thus ends the scam.
david losh » Mar 21, 2008 at 5:38 pm
The things no one mentions is that after the World Trade Center bombing, the United States economy was taking a hit, literally. The government, as it is doing now, stepped in to make everything appear rosy. Next there was the Invasion of iraqi that was supposed to give us cheap oil and everything would be everything.
Instead The Master Builders Association, and Board of Realtors got a big boost by the further deregulation of the banking industry. A construction economy was manufatured, in my opinion, over night.
The town houses I keep griping about were a perfect example. They were proposed as a entry point property to be built for the working masses. They were already on the books. permits were aticipated, then the promised supply became a mouse trap of unaffordability.
In a way you were right to harp on the priced out forever campaign. We were literally creating thousands of housing units with no end in sight while people scrambled to buy as fast as they were built.
In my opinion the supply is still there. More properties come on the market every day. More and more town houses are on the books, permitted, and waiting to be built. Those units will sell for the regular prices of between $250K and $325K as they were meant to be. In turn that will drag the pricing down for the suckers who paid toooo much for the same product. We are seeing a lot of that out in Lynnwood and South Everett.
Ira Sacharoff » Mar 21, 2008 at 5:41 pm
What Daph said is similar to what I’ve been saying. Even if Seattle is special( we have pink ponies who eat smoked salmon and sip hazelnut lattes) Seattle is part of the national and global economy, and not everything Microsoft, Boeing, WAMU, Starbucks and Amazon produces are consumed locally. We are not the independent Republic of Seattle. We have had a healthy economy because our customers in other locations have been doing well.
Michael » Mar 21, 2008 at 5:42 pm
Welcome to Bubble 2.0
The Financial Times is reporting that the banks are asking for a full bailout. As if the free “loans” that the Fed is handing out are not enough!
How much do you want to bet that Bush is going to give it to them?
“Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices and weakening balance sheets.”
magnolia44 » Mar 21, 2008 at 7:40 pm
can we change the site name to “grasping at straws in Seattle .com”? Just saying….
Its starting to get humorous, we hit Feb stats and you guys still have not got your way so new threads and theories come out…
Have fun “insert smiley waving here”
Sniglet » Mar 21, 2008 at 8:03 pm
It looks like global trade is slowing down big time. There might be a limit to how much of our northwest goods those rich foreigners want after all.
World trade decelerates almost to standstill
david losh » Mar 21, 2008 at 8:13 pm
One of you guys referred me to RGE Monitor which I’ve been reading for a few days now. What I think is missing from these economic discussions is the idealogy behind the global economy.
Chavez in Venezuala nationalizing oil feilds, Iran having diplomatic relationships with Iraq, Momar Kadafy becoming an ambasador for peace, and the emergence of China all shift the balances of power in the world. The old axis of evil or the evil empire concepts are slipping away.
This global credit crisis melt down is funny in the face of ten years of staggering profits. It’s like the last hooray for capitalism. Banks, ten years of profit, and the idea that in one year they may lose a few billion and they fold. Governments panic, stock holders lose savings, and the rich get to keep the money.
What’s changed? The rest of the world is getting along and we are still at war. It’s like a tribal thing in Africa were the United States can not admit defeat.
We have to share. We need to get along. This, my town is bigger than your town, is a school yard brag. Pull it out let’s see it.
Twin Towers in New York still not reconstructed, let’s fight about it. New Orleans, still in shambles, let’s blame the insurance companies. Iraq infrastructure we can’t fix it, we bombed it, we just can’t fix it. War on Drugs, we can’t get a handle on it. Illegal Immigration, let’s talk about it. The economy is like a dim bulb in the back corner of the attic.
We have an over supply of housing and yet the homeless problem is at an all time high. That should be an indication right there that something is wrong. In terms of affordability; banks are taking a loss on debt and yet investors are making billions of dollars buying and selling foreclosures. What’s the deal with that? Why can’t you buy a foreclosure for pennies on the dollar?
You want affordability, then make an offer.
b » Mar 21, 2008 at 8:20 pm
magnolia44,
Come back in about two years. Claiming everyone expects freefall when we all know history shows it will be a dribble is disingenuous at best.
Ira Sacharoff » Mar 21, 2008 at 8:44 pm
David Losh,
You may be nuts but you are funny..Last hurrah for capitalism? Much as I might want that, when Karl Marx said that the state will wither away was 150 years ago, and Lenin’s predictions of capitalism’s imminent end seems to have been off by say…90 years or so.. But ya never know!
takenroad » Mar 21, 2008 at 9:26 pm
Tim, you say:
“For affordability to have dropped 35-40% in less than a decade, one of these two statements must be true:
* The Seattle area has become considerably more desirable, as compared to other cities.
* Real estate in the Seattle area has become considerably overvalued.”
I’m not sure I buy that those are the only two possibilities. Could the large recent shift in affordability have to do with any or all of the following?
1) Growth Management Act reducing land available for building on the periphery?
2) Huge capital gains tax benefit on housing as an investment contributing to speculation?
3) Traffic congestion raising the desirability of close-in housing?
4) Transition from a low tax state where the two political parties competed, to a high tax state dominated by one party?
5) Financial “innovations” removing the risk from risky loans?
6) Poor stock market performance since the dot com bust and 9/11 encouraging investors to put their money in real estate?
I moved to Seattle in ‘88, and bought my Greenwood house for $140k in 1993 (which seemed like a lot at the time). All the above have happened since I bought my house. There are reasons why a person might be unable to move to another city with more affordable housing – thus “stuck” here and forced to pay for more expensive housing. Maybe family is located here. Maybe job is located here. Maybe just “this is home”.
I think even as the credit crisis unwinds, some of the factors listed above will keep housing prices here from falling enough to return the affordability index to 100. Feels to me like we’ll end up somewhere between “soft landing” and “return to affordability”.
magnolia44 » Mar 21, 2008 at 9:28 pm
i have been a bubblehead but man this site is just grasping at everything it possibly can, i guess it takes being on the otherside (homeowner) to see how the othersides claims look unrealistic.
If we were in califronia this site would look genious but fact is 7 months after the credit crisis started this site is “dead wrong”…. we are flat and even 10% decline would show this site is a joke with the recent run up of 12 – 15% a year. 10% down would not mean bubble bursting, thats my point.
Sniglet » Mar 21, 2008 at 10:38 pm
The exact same thing could have been said about the San Diego market a couple years ago. Now it seems as if even the gloomiest of predictions may have been right.
7 months is nothing in the time-frame of the real-estate market, it takes a long time for real-estate markets to change. Actually, since the downturn actually started in the Seattle market in mid 2007 it has really picked up pace even more rapidly than many other US markets that were already further ahead in the cycle (i.e. like Phoenix, where the decline started a couple years ago). Seattle area inventory, and declines in appreciation have been very high.
Now that we have hit 0% appreciation, we will start to see the process of foreclosures pick up, just as other markets have. This time next year the Seattle market won’t look pretty at all…
patient » Mar 21, 2008 at 11:10 pm
Magnolia44 is just worried since he bought a house recently and needs to tell himself things are going to be ok a couple of times a day. To say it on a blog make it feel more real I guess. I.e. you will never change his outlook with facts or economic realities so I think you are wasting your time responding to his self-therapy comments. I wish you luck Magnolia44 and hope you will be able to enjoy your digs one day instead hanging on SB with unsuccessful attempts to pump the market which at this stage can be compared with attempting to fill your flat car tire by mouth while it is still punctured.
FreedomLover » Mar 21, 2008 at 11:10 pm
Sniglet – don’t count on it.
Scotsman » Mar 21, 2008 at 11:27 pm
So many home debtors, so little understanding. The divergence between reality and future expectations has never been greater.
Pardon my pompousness- here is a very short but valuable economics lesson.
Seattle is not special, or different in any significant way. It is part of a global economic system. The soundness and vitality of that system has more impact on Seattle than any characteristic that is peculiar to Seattle. So let’s look at the global system.
For 2007, the planet as a whole had:
$130 trillion in total assets.
$48 trillion in total GDP or income
$340 trillion in actual financial derivatives (reported as $681T thanks to accounting quirks)
Derivatives are highly leveraged debt based hedges, essentially backed by financial instruments like…… sub-prime mortgages, HELOCS, etc. They are a relatively new game in our financial markets, first starting to appear about 25 years ago. They are now substantially at risk of default, part of the “credit crisis” we’ve been reading about lately, a crisis that is fully understood by a very small number of people.
Here’s the crux of the problem. If even 5% of the derivatives default, that wipes out about a third of the entire world’s income for the past year. 15% default wipes out all of the world’s income, and a third of is assets. 5% is a world-wide depression. 15% is unfathomable. The problem is many derivatives are leveraged 40:1 to sometimes 200:1, so even a very, very small default rate gets magnified into a big problem.
The “smart money” has known this for some time, and has been selling assets and putting the cash into what is perceived as the last safe investment around- U.S. Treasuries. There has been so much demand that the effective interest rate on 90 day T-bills is zero. Nadda. Nothing. People don’t care about the interest- they just want to keep their principal safe at any cost. Look up current 90 day t-bills rates on Goggle. Look at a chart that shows their drop over the last 6 months.
Before slamming this site or it’s thesis, I’d ask myself, “what do those who have or manage billions of dollars in world-wide wealth know that I don’t?”
One thing they know is that home prices- everywhere- are going down, and the loss of equity and subsequent defaults will kill the financial markets through the leverage of derivatives. And that will kill the world-wide economy. And finally, with no jobs, no spending, no savings for down payments, and no faith in the financial system Seattle home prices will fall….. significantly.
Cheers!
magnolia44 » Mar 22, 2008 at 12:05 am
patient,
I am enjoying the home very much so… doing all sorts of projects making the home a better place to live and enjoy. I dont need to tell myself anything about the home, how many recent home purchasers do you say the market may decline 10 – 15%? The fact is we are in something we can well afford… about 25% of our pay goes to the mortgage. The reason i come to SB is because i was just that, a bubblehead. I cant break a habbit that i have had for the past 3-4 years visiting real estate sites even though i jumped ship and bought. This has been a family home since 1967 and we intend to keep it the same way going forward so if prices go down so be it, i love the location and the home so i wont really flinch one bit.
Maybe its because i am no the other side now i see how funny the forum topics become week after week month after month, maybe you will see the same one day. Until then i will post my opinion and what i see happening around me and my hood. If you asked me in December i would have told you Magnolia was really stinking it up and homes were sitting and it was ugly, but when Jan and Feb came the story changed, and the stats show that. It will be interesting come spring, if homesmoved off the market here in Jan and Feb… spring will bring the same imo. Sellers are dropping prices somehwat but they are still decent prices that homes are selling for. Good luck to you.
magnolia44 » Mar 22, 2008 at 12:10 am
Patient,
Just to add, in this home I have something I call an office. In the office i have a pc where i like to visit a few sites and spend some of my leisure time reading blogs and forums, I dont see how taking some time to post on an internet site can affect me enjoying the house…. kind of a lame comment by you.
Maybe you can go enjoy life and stop posting on SB?.. that comment sounds lame right?…exactly
kale » Mar 22, 2008 at 3:35 am
Thank you, Scotsman, for stating precisely why mortgages will be propped up and extended at all costs. ;)
Buceri » Mar 22, 2008 at 6:39 am
I was going to post that option C was in my opinion, the most likely scenario:
Scenario C
Yearly Home Appreciation: -15.0%
Yearly Income Growth: 3.0%
Interest Rate Growth: 1.00 pts/year
Interest Rate Max: 8.00%
Affordability Index = 100 in: 3.5 years
I was going to base this on the fact the dollar was in toilet and in order to sell 10 year treasury bills, the feds would have to offer a nice rate; which in turn triggers higher mortgage rates. Then I read Scotsman’s post, which goes in a different direction.
Scotsman?? or anyone else; what am I missing??
Garth » Mar 22, 2008 at 7:22 am
As magnolia44 points out, the site is called the Seattle Bubble, which is the one thing that has yet to happen.
Kind of funny that the most active bubble blog for a single city is about the only city that has yet to have a real bubble.
As I see it now, if Seattle real estate hits 10% declines in the next couple of years it will be related to a recession, not a proper real estate bubble. (Unless we see massive foreclosure based price reductions in Seattle zip codes)
Despite all the predictions (the earliest most negative one’s being here), real estate in Seattle has been amazingly resilient over the last 18 months considering an unprecedented credit crunch in the financial markets which does affect Seattle equally and the deterioration of real estate in the rest of the country.
To be honest can’t believe we are where we are today after everything that has happened over the last year either. Something must be “different”.
Garth » Mar 22, 2008 at 7:24 am
Tim,
dragdrop.js and controls.js are throwing errors on all of your pages for me.
Sniglet » Mar 22, 2008 at 8:41 am
There is clearly no problem in selling T-bills right now. Heck, the interest rates are at all time lows yet we are seeing unprecedented disruptions in the market due to excessive demand!
I think it is quite possible that T-bill rates will remain low for several years, and that the dollar will actually rise in value as the credit crunch forces everyone to de-lever (i.e. cash is king).
What will happen to mortgage rates is another matter. We’ve already been seeing the spreads on mortgage bonds rise over treasuries. Just because investors may be enthusiastic for T-bills doesn’t mean they will want to buy mortgage securities.
Nevertheless, I think this is somewhat beside the point. Mortgage interest rates are most likely going to remain at historically low levels for some time, even if the spread rises over treasuries. But low mortgage rates, in and of themselves, aren’t going to help the real-estate market very much. If lending criteria keep tightening, then many more buyers will simply be frozen out of the real-estate market regardless of the rate. Further, people are much less willing to buy a home if they anticipate prices will fall further.
In short, demand for real-estate is set to keep declining for the next few years regardless of what happens to mortgage rates.
The scenario I see is as follows:
- wages decrease 3% per year
- mortgage interest rates remain steady
- real-estate prices average a 20% a year for 3 years (starting in 2009)
Sniglet » Mar 22, 2008 at 8:45 am
If prices drop significantly then we had a bubble, I don’t think it matters what the “cause” was. We will definitely have a severe global recession which I am sure will help in the cause of house price deflation.
By the way, if prices fall 10%, then they will INEVITABLY fall a lot more. Once we hit negative appreciation then the foreclosures will start to pile up since we have an uprecedented number of Seattle area home-owners with no equity cushion (i.e. they have no skin in the game, or incentive to try and keep their homes).
A 10% drop in real-estate prices will lead to a massive wave of foreclosures that will drive prices considerably lower still.
bitterowner » Mar 22, 2008 at 8:50 am
Maggie, also being on the “other side” I thought that much of the premise of this site was actually playing itself out. Seems as if it will only become more obvious with time. This spring should definitely be interesting. I have a couple of friends selling houses they purchased @ 2005. After several price drops, they can’t unload them at a mere 10-15% premium to their purchase price 2-3 yrs ago. ‘We’re talking about nice places in desirable areas around Greenlake and QA that haven’t received a SINGLE OFFER, one for over a year. They remain convinced that it’s just a matter of time, even as higher and in many cases more competitiively priced inventory hits the market. Add another price drop or more and finally having to accept a lowball offer, and add the rest of the carrying and ownerhsip costs and you have a significant net loss for the privilege of having dealt with many hassles – perhaps even exceeding the money that would have been “thrown away” on rent. And this is during what seems like just the beginning of the downturn. Just a couple of examples in a very large and diverse market, I know, but difficult to ignore for those who have seen their struggles. I wonder what the effect will be when, despite the fact that those who purchased houses in the past couple of years are enjoying their house and their weekend projects (ugh), they realize that their new neighbors are enjoying the same ‘benefits’ for a lot less money and are bragging about it at every opportunity. Envy is a powerful emotion that has probably contributed to the ‘get in while you can’ price movement in the opposite direction. I wonder what its effect will be now?
I am glad that you are enjoying your new house. I don’t think that most who post here wish hardship or discontent on anybody. However, ridiculing the opinion that housing prices in Seattle seem set for a significant downturn under current market conditions after having just made a huge financial commitment to a new house seems like a psychology PhD’s dream thesis. If you were that content with your purchase would you really be visiting a bubble site and posting fallacies about “grasping at straws” in the face of worrisome market shifts? I think you must have a tremendous amount of uncertainty in the back of your mind, (and I aren’t no psych PhD.)
david losh » Mar 22, 2008 at 8:51 am
Sorry, capitalism is something to look up. We already live in a quasi soscialist economy by putting basic services like health care in the hands of corporations. Corporations control huge blocks of retirement investing that in turn control huge segments of the stock market. Corporations in the United States can make huge profits based on government actions which the people in turn are demanding every day. The people are asking for the government to fix this, that and the other thing. It’s quasi socialism.
The Scotsman may be crazy but brings in the point I keep harping about; the global economy. He doesn’t mention the world population, but the numbers are there. Billions of people equal billions of dollars. You all keep mentioning supply and demand, a billion people in China are demanding food, today. Housing is a piece of an over all puzzle. Will people want to live in Seattle? you bet. Will the demand be there? you bet. Do we have supply? you bet. Will it last forever? No.
In Vancouver B.C. there are thousands of Asians that cross our border every day. Forget about Mexico, Asian communities send family members here to be established. Those dollars and economic influence in turn are sent back to Asia. Vancouver B.C. and Seattle have become a conduit for U.S economic growth in thousands of Asian cities. The economy is not standing still. Our country is not better than thier contry any more. We are all in this together.
bitterowner » Mar 22, 2008 at 8:59 am
Re: post #32:
Freedomlover:
The beauty of those who don’t own houses (or more specifically, don’t have a mortgage) is that they don”t really HAVE to count on anything. They can watch and wait. The only way they would lose is if real estate prices were to skyrocket all of a sudden, which under current conditions I would definitely bet against. Those who HAVE to count on anything are the relatively high number of people with mortgages to pay who depend on appreciation to pay their bills. This seems like a far worse position to be in.
bitterowner » Mar 22, 2008 at 9:13 am
Re: post #37 – “Kind of funny that the most active bubble blog for a single city is about the only city that has yet to have a real bubble.”
Not all that surprising actually. If a bubble has played itself out, there is little left to debate with any passion.
Ira Sacharoff » Mar 22, 2008 at 9:58 am
Garth,
So what do you call it when YOY inventory is up 60%, sales are down 40%, and homes are tending to stay on the market much longer?
It’s not that I totally disagree with you; In Seattle, certain neighborhoods (Ballard, Wallingford, Phinney,Greenlake, Queen Anne, etc) are holding up amazingly well, but the rest of the Seattle area is a whole different world.
johnnybigspenda » Mar 22, 2008 at 10:06 am
when did tax law change (ie. being able to write off interest on your mortgage)?
Moe Ronn - Realitor® » Mar 22, 2008 at 10:34 am
“To be honest can’t believe we are where we are today after everything that has happened over the last year either. Something must be “different”.”
Something is different, a few things actually. Our timeline on the run-up lagged many other, larger areas. And, our timeline on the peak & downside has converged with the subprime crisis and resulting credit crunch, which will eventualll accelate our declines. Just be patient, this isn’t like selling stock. Things will need to hit critcal mass for most to accept the inevitable, like you for instance, that they may have lost several hundred thousand dollars in one asset.
Everyone who has been reading this blog long-term has been fairly consistent in their predictions. I’ve been following the topic for nearly 3 years and everything has been falling into place like scenes in a movie that you’ve seen 10 times before.
FreedomLover » Mar 22, 2008 at 10:39 am
bitterowner // Mar 22, 2008 at 8:59 am
Re: post #32:
Freedomlover:
The beauty of those who don’t own houses (or more specifically, don’t have a mortgage) is that they don”t really HAVE to count on anything. They can watch and wait. The only way they would lose is if real estate prices were to skyrocket all of a sudden, which under current conditions I would definitely bet against. Those who HAVE to count on anything are the relatively high number of people with mortgages to pay who depend on appreciation to pay their bills. This seems like a far worse position to be in.
Well I feel lucky that I’m on a fixed-rate 30-year mortgage. Actually that my condo has appreciated 15% in 2 years is bad for me from a property tax standpoint, I’m not selling.
Nabil » Mar 22, 2008 at 11:03 am
There is a world wide housing bubble b/c of the world wide credit bubble.
Prices have already gone down, it’s just a matter of how much more down can they go.
Maybe 10%in Seattle…. Maybe a lot more.
The crazy thing is Seattle is one of the most reasonably priced areas in the West Coast.
I will be the first to admit, I’ve always wanted house prices to crash b/c I was pissed off at the people buying these houses at unreasonable prices.
But from what I see happening in the larger economy (and the unexpected collapse of part of the financial system), I’m scared.
softwarengineer » Mar 22, 2008 at 11:18 am
I’M WITH IRA [THE REALITOR], LOSH IS DISCONNECTED WITH THE PRAGMATIC CLEAR FACTS OF GLOBALISM’S EFFECT ON SEATTLE TO DATE
I imagine Marc is hoping his Bellevue condo is immune from the recent Seattle price crashes too, so apparently argues flippantly too, with our pragmatic Bubble Brain leader, The Tim.
Let’s all take a deep breath and thank God for Easter and even for the possible Seattle Bubble trolls giving their flippant opinions too, albeit I’d call most of it pink pony fairy tale wishes; but it simply/clearly reinforces The Tim’s bubble crash predictions and makes their pipe dream pocketbook politics look more and more like a con game. Hedging bets on pipe dreams is a likely road to economic disaster too. Ask Ira.
Now, on with my contribution. Losh is reading Dr. Roubini’s RGE Monitor, cool, he’s disagreeing with it though, cause he sees Seattle’s going to be infested with his “positive overpopulation” from the East which he flippantly alleges braces up our RE resources. Mr. Losh, where will this hoard of overpopulation work in Seattle, with 20,000 jobs already butcher axed in greater Seattle from 2000-2005? I know, they don’t need jobs…lol.
Or maybe Mr. Losh is one of those unpatriot types that prefer our Middle Class replaced with them [likely at lower wages too I'd add]? Moot point Mr. Losh, then our Seattle Middle Class are unemployed with mass houses on the market. The Tim would be right again, a massive more severe bubble crash with 40-50% price drops with your wage deterioration over population wishes.
My proof is the Seattle area population has like quadrupled since 1990, but wages only doubled [if you were the lucky top 10% of household incomes like most of us educated Middle Class Bubble Brains] since then. Lowering our 401K incomes to create subprime and jumbo bank messes to cover up this trend isn’t working anymore. Lowering wages with more competion for fewer jobs just makes it far worse Mr. Losh. Imagine the impact on Seattle’s economy right now, with Baby Boomer type retirees afraid to spend; because they have no 401K interest base income to speak of. Even that NEO-CON Ben Stein wrote a Money magazine article this month agreeing with me, the butcher axing of the Baby Boomers’ retirement income will cost America [and Seattle too] trillions in lost income as they retire with like 1% money market interest to prop up failing banks. That will cause more wage deterioration added in with your “positive overpopulation” wage deterioration; and more momentum to The Tim’s bubble crash in RE prices.
Ask Dr. Roubini fro RGE Monitor, I’m sure he totally agrees with The Tim and I…lol
S-Crow » Mar 22, 2008 at 11:26 am
This is a sad but true statement by Freedomlover:
“Those who HAVE to count on anything are the relatively high number of people with mortgages to pay who depend on appreciation to pay their bills. This seems like a far worse position to be in.”
It would be interesting to do an exhaustive study on the amount of people who have purchased since late 2004 in King, Snohomish & Pierce Co’s, who owe significantly more than when they purchased. It would reveal what percentage of homeowners fall into the category of the quote above.
Ira Sacharoff » Mar 22, 2008 at 11:37 am
I know quite a few people who have refinanced a few times, borrowing more money each time, so they could go to Europe,etc, using the equity in their home as if it were an ATM, and I’m sure there are a lot of folks in that situation who now owe more than the home is worth, especially with prices falling.
Ira Sacharoff » Mar 22, 2008 at 11:54 am
David Losh says that by putting basic services like health care in the hands of corporations, that’s quasi-socialism..
I come from old socialist stock(grandparents on my father’s side, and I’m sure my grandfather, looking down at me from wherever old Socialists go, would be ashamed to see me selling real estate).
No. In theory, under socialism, the workers control the means of production, and there wouldn’t be a stock market where shares of health care companies would be purchased for investment…what we’re living in now might be corporate socialism or corporate welfare, but let’s not insult socialism. This post’s for you, grandpa.
whats my name » Mar 22, 2008 at 12:15 pm
#15 says: Who’s going to buy houses left right centre when you have:
a) crazy inflation (with the dollar going down the toilet bowl)
b) destruction of “wealth” (yes, stock market & 401k going down the same toilet bowl)
c) no job security (notice companies going BK? Sharper Image? Bear $2 Stearns anyone? Think Wamu is doing very well?)
My thoughts:
a) if the dollar is going down the toilet, what do you keep your money? dollars?
b) if securities are going down the same toilet bowl…..same question
c) you have a point, though highly exagerated. There really is no such thing as job security, even in a better economy, which come to think of it is what we are having in this area right now.
Maybe the answer to your question is “smart people”.
b » Mar 22, 2008 at 12:30 pm
whats my name,
The smart money cashed out of the RE bubble in ‘06 and they sure as hell are not getting back in.
The Tim -
I think your post needs to clarify that the 30-40% drop in affordability occurred between mid-2004 and 2007, not over a ten year or longer span. This puts it much more in perspective with the credit bubble and its effects. Over 10+ years, its possible the affordability naturally declined. Over 2.5 years that is coincident with every other RE bubble in the nation and world (Spain, Italy, Ireland, England, etc) puts it in a different perspective.
John » Mar 22, 2008 at 12:32 pm
I want to see a 50% decline just to prove the anti-bubble crowd to be wrong. Keep on overpaying.
whats my name » Mar 22, 2008 at 12:38 pm
b,
Where did the “smart money” put their dollars?
SeattleMoose » Mar 22, 2008 at 12:44 pm
“After running the numbers again, I still believe that the “soft landing” theory is garbage.”
Your vision is 20/20.
Unfortunately there are still a lot of people still cruising on that river in Egypt (De -Nile).
Bubble is bubble…everywhere. And it was the exact same underlying reason(s) that caused it….everywhere.
Couple that with the ever worsening recession, soon to teeter on a depression, and “Egyptian tourism” will die out quickly.
Eventually the “Seattle Crash” will be so bad that even the ostrich with the longest neck will not be able to ignore it….
b » Mar 22, 2008 at 12:57 pm
whats my name,
Well, first into equities. Then into foreign markets. Now into government bonds. Seen the yields on t-bills recently? Smart money would rather get 0.5% than risk -30% in RE or MBS.
whats my name » Mar 22, 2008 at 1:00 pm
I really need to be schooled by some of you smart guys out there in SB. I have been laboring under the impression that a bubble was a speculative spiral of extreme overvaluation. I see the recent insanity of the Seattle market from 2000 to 2008 equates to a yearly compunded growth rate of about 8%. I don’t know why I am inadequately frightened by this rate. (Perhaps it is because early calculator postings here comparing rent to own use 12% for stock investments).
Another question I have: If this whole thing is a simple extension of the nationwide credit bubble, how come prices here went up half as much as some markets, but twice as much as others? Do they have super clever mortgage lenders in Vegas, middling ones here, and superconservative ones in Detroit?
Please help.
ps. – re King/SD county article, SD median income is lower than Seattle. So under the newly discovered RE fundamentals of median income supporting xtimes house prices, shouldn’t SD be priced lower than Seattle anyway?
Thanks
b » Mar 22, 2008 at 1:02 pm
To put it another way, only a fool would borrow 6-7% on something very very unlikely to appreciate more than that. Even most non-bubble believers think that RE is going to be stagnant or have minimal 3-5% appreciation at best for the next several years. That is not an investment, it is a loss. If you decide the loss is worth it so you can tell your friends at dinner about your sweet house, then more power to you. But only the very worst *investors* in the world would consider it a great way to make money right now.
whats my name » Mar 22, 2008 at 1:06 pm
b,
I see the smart money is very mobile, and very careful about principal risk. Does it care about inflation risk. Read #15’s post again. How good a move are T’s in the environment she describes?
Frankly, the environment in that post is a succinct description of the late 1970’s. From a local perspective, I know where the smart money was back then.
b » Mar 22, 2008 at 2:01 pm
whats my name,
Inflation is running high mainly because of speculation in commodities. The majority of crap we import right now is dollar pegged, so the debasement of our currency has some effect but it is not as great as that of high energy and food prices, especially to the consumer. It is better to get low (negative inflation adjusted) yields in something ultrasafe during a time of great volatility and while we proceed into a recession. During times like this it is all about capital preservation, because there is nowhere else to make better yields without unacceptable risk. There is still a little bit to be made in commodities, but as the recession goes worldwide that too will end. There is pretty much NO way that RE purchases, homes nor MBS, will have acceptable risk/reward for the next several years on a whole. If there was, big money would be buying homes by the dozen from struggling builders for 80c on the dollar. They are not. Big money would be buying short sales and foreclosures as fast as they could. They are not. What does this tell you? It tells me that the smart people are not in RE anymore, how do you arrive at the opposite conclusion?
b » Mar 22, 2008 at 2:03 pm
To clarify what I am saying, inflation is occurring in the prices of consumer staples. Deflation is occurring in the money supply. If you decided to buy treasuries instead of food, its probably a bad bet. But buying treasuries instead of leveraged, depreciating assets is a pretty "golly" good bet.
Scotsman » Mar 22, 2008 at 2:10 pm
There won’t be significant inflation for a long, long time. There will be deflation, and many feel it has already started. Don’t confuse price increases in a few commodities, many of which are driven by speculation, with real monetary inflation.
If you think there will be inflation, and that the government will “print” its way out of the current mess, you’re mistaken. The Federal Government is broke. It needs to borrow a lot of money in the future- to print more dollars would create an expectation of inflation, which would ramp interest rates up in a hurry. And that would increase it’s borrowing cost. If you still think there will be inflation, please describe the last depression that was accompanied by price increases, let alone true systemic inflation.
FreedomLover » Mar 22, 2008 at 2:13 pm
I don’t feel sorry for people who took out ARMs, NINJAs and other assorted knife-catchers.
b » Mar 22, 2008 at 2:16 pm
Oh, and stagflation is what we have been living with since the end of the last recession (quick, wasn’t it?). The difference between now and the 70’s is that people made up for stagnation in wages with easy credit (negative savings rate), which fueled false GDP growth, while corporations used the same easy credit for share buybacks, M&A and all sorts of other fun stuff. The mediocre economic growth during this time was due to credit expansion, it was phantom GDP. Now that the consumer, 70% of our GDP, has maxed out their credit what is occurring?
whats my name » Mar 22, 2008 at 2:18 pm
b,
I think you confuse big money with smart money. Institutional money has lots of restrictions. It CAN NOT buy into perceived high risk, and it certainly won’t try to buy into small individuated assets such as houses. (too much due diligence expense). The people who manage that money also can not be expert in cash, debt, securities, real estate, and derivatives simultaneously. They make big mistakes as we all know. They invest into bad high risk deals in an asset class, then refuse to consider good low risk deals because they are in the same asset class.
Fortunately, I am not an institution, and do not compete against them. I’m guessing nobody else on SB is an institution either.
The thing is that I am not buying HERE either right now, (disclosure: I did buy somewhere else this month). I do play devil’s advocate. I see huge holes in the internal consistency of some commonly accepted arguments which are never challenged here. Hence, my questions. It would be great if someone will answer them.
whats my name » Mar 22, 2008 at 2:28 pm
“The Federal Government is broke. It needs to borrow a lot of money in the future- to print more dollars would create an expectation of inflation, ”
When we say the government is printing more dollars, what we really mean is that the government is borrowing a lot of money.
“which would ramp interest rates up in a hurry. And that would increase it’s borrowing cost.”
Weren’t we just discussing the incredibly low yields on T’s?
” If you still think there will be inflation, please describe the last depression that was accompanied by price increases, let alone true systemic inflation.”
Since price increases are the fact on the ground, perhaps you should be the one to describe such depression.
b » Mar 22, 2008 at 2:48 pm
whats my name,
I mean big money as in, wealthy investors. People who make their livelihood investing, not necessarily large institutional buyers with heavy regulation. Either way, smalltime (less than 10m) smart money investors are not buying homes either. There are plenty of opportunities to buy investment homes at prices much cheaper than the last 1-2 years, even in Seattle. They could be buying several houses from reputable builders for low prices. They could be buying short sales and foreclosed homes. Neither of these is occurring. The only people buying homes right now are regular folks, not investors. Until home prices return to a level where an investor can purchase a property and make money renting it immediately, or make more from appreciation than from similar risk investments, they will stay away. There were plenty of people buying Pets.com at $30 a share because it was “cheap”, they were not the smart money however.
Locust » Mar 22, 2008 at 3:04 pm
I believe the reason baseline affordability would be expected drop over time is NOT primarily due to change in the relative desireability of Seattle vs other cities. I think it has more to do with economic growth adding many more people with money, while the number of desireable homes within close proximity to the jobs does not increase very quickly. The nice areas close in are fully built out, and will grow only slowly with in-fill or redevelopment. This leads to a common situation in economically vibrant cites, that the average person cannot afford to buy a home anywhere near the central areas. While speculation and bubble-think do exaggerate the effect, and allow the market to get way ahead of itself sometimes, the underlying trend should still be one of declining affordability even with no change in desireability of the City relative to other cities.
b » Mar 22, 2008 at 3:08 pm
The incredibly low yield on all T’s suggests that the treasury market as figured out deflation is in the cards as of right now. If headline inflation last year was 4% overall, and we expect that inflation will increase beyond that for the foreseeable future, then it would be pretty stupid for the T market to only demand 3.5% on the 10 year, or 4.2% on the 30 year, wouldn’t it? Where are the smarter investors, those in the T market, or those buying condos in Issaquah?
Scotsman » Mar 22, 2008 at 3:08 pm
What’s My Name-
You’re confusing the rates that result from a short term crowding into 90 day bills with the $50 trillion + the government needs to cover its obligations over the next 25 years. If the government decides to “save the banks, that obligation could easily double. Remember, the current budget is about $ 2.5 trillion. 25 times your current income is a lot of debt. 50 times is unsustainable.
Look at the 10 year rate- it’s about where it has been. The 90 day is down because people value the liquidity and lack of sensitivity to future rate changes, up or down. Apples and oranges.
Scotsman » Mar 22, 2008 at 3:13 pm
Re: inflation. There’s no guessing here. You can look at the Fed numbers for dollars in circulation and outstanding credit obligations. The total number of dollars/debt has been shrinking for the past year. The Fed is trying to get ahead of what it knows is going to be a deflationary spiral by reducing the amount of money in circulation. Deflation is a fact, a few salient price increases not withstanding.
Scotsman » Mar 22, 2008 at 3:17 pm
Arguing about a bubble in Seattle is like a group of old ladies standing around on the Green Lake trail, fussing about who’s dog dropped a turd on the path… while a Metro bus careens across the lawn headed right for them. Look for the big picture.
whats my name » Mar 22, 2008 at 3:40 pm
b,
I’ll grant you even small investors are not buying many homes, especially new homes – it’s always got to pencil. But it’s not like there was a significant movement from rental homes to stocks to foreign stocks to gvmt’s since 2006 either. And if they did move from foreign to gvmt’s, didn’t they just get creamed?Single family has never been a place for large investors.
b and Scotsman: you have to get together on this T thing. Yes; short term very cheap, and the yield curve steepening…..inflation, maybe? Still, they should have stayed in Euros.
As for those rates under the headline inflation… bondholders “demand” inflation pretection, bank depositors want inflation protection plus small risk premium; stockholders want inflation plus bigger risk premium, and so on down the line. But in the end, it’s a market. If your market is overcrowded you take what you get. It seems treasury buyers are just as trapped as house sellers – maybe more so.
Now, when do we get to the 8% bubble, radically different results from a lending driven housing price increase and Seattle to San Diego affordability?
local Realitor » Mar 22, 2008 at 4:32 pm
Beg to differ…..just sold two homes to small investors in south King County. Both in turnkey condition, one even comes with a renter who has been there for 6+ years. It penciled out bu the way.
b » Mar 22, 2008 at 4:34 pm
whats my name,
I did some calculations using the Case-Shiller Seattle numbers. Dismissing the bubble by doubling the length it occurred over, and thus smoothing the appreciation rate, is BS which I assume you know. Here are some numbers to ponder:
Jan 90 – Jan 00 = Approximately 5.5% yearly appreciation
Jan 00 – Jul 07 = 9.1% yearly appreciation (your no-bubble number)
Jan 00 – Jan 04 = 5.6% yearly appreciation
Jan 04 – Jul 07 = 13.2% yearly appreciation
Jan 05 – Jul 07 = 13.5% yearly appreciation
I chose July 07 as that was Seattle’s peak according to this index. Prices had rose about 90% from Jan 00 to July 07.
Now, you apparently look at these numbers and say “who cares, doubling of the rate of appreciation is not that big of a deal, there is no bubble”. Here is what prices look like with, and without, the bubble:
200k house appreciation, Jan 00 -> Jul 07 @ 5.6% = 301k
200k house appreciation, Jan 00 -> Jan 04 @ 5.6%, Jan 04 – Jul 07 @ 13.2% = 387.8k
Todays prices would have to take about a 23% decline to match prices that would have occurred without the sudden doubling in appreciation rates. If you combine that with huge amounts of overbuilding of condos and homes during those same 3.5 years of the bubble, it is not far fetched to see that home prices will probably eventually decline 30% or so from peak. This is all assuming you can still get a mortgage at 6% when that occurs, since most people buy according to the monthly payment and not the home price.
Sniglet » Mar 22, 2008 at 4:38 pm
Does it have a positive cash-flow even if there is no appreciation on the properties? What about negative appreciation? What kind of devaluation would the properties be able to withstand before the return would be negative? Would they still be profitable with 3% annual deprecation, say?
magnolia44 » Mar 22, 2008 at 4:51 pm
sigh… another home just went STI today in the vicinity. They were asking way to much originally @ $789k, but they lowered it to $749k and now its STI….. doomsday is coming guys…its coming. Its these listings and sales that are reasons why i say i dont see it happening in this area.
david losh » Mar 22, 2008 at 4:52 pm
Unpatriotic? Capitalism is without government interference. Our government is propping up every American Corporation we have when they are not giving out and out sudsidies to them. Capitalism would have rebuilt the twin towers of the World Trade Center in a year. Capitalism would have rebuilt New Orleans.
I’m well aware of the Socialistic concepts of Mother Russia but socialism lives in England as well. Colonialism itself was a socialism. Do you really look at the Democratic policies we are pushing around the world today as different than Colonialism?
Global economy is global. I used one example of Asia’s influence in Seattle. China could be called smart money and they are buying Real Estate by buying mortgage backed securities. South America is building it’s own trading partners the way Europe has done. The Euro is a brilliant concept that can translate to any continent. It is a little like Mother Russia when I think about it. Wasn’t that a united socialist republic or some such thing?
As for jobs there is plenty of work to be done. Are you actually expecting some one to give you anything? A job, a pension, a retirement? WAKE UP! The only thing you can do is make your own little piece of heaven. We buy houses to pay them off. I own it. It’s mine. I make my own job by being a business owner. It’s the American Way. I’m tired of whiners who expect some one else to take care of anything.
david losh » Mar 22, 2008 at 4:53 pm
Did some one actually use the phrase Middle Class? Where have you been?
Dave Lincoln » Mar 22, 2008 at 5:03 pm
Who knew that Ira the realtor was a commie? He seemed like just a decent guy to me. Goes to show, you never know about people….
b » Mar 22, 2008 at 5:12 pm
whats my name,
I wrote another post on this but it seems that the spam filters or something ate it, so I will try again.
Saying that there is no bubble because of 8% appreciation (which is too low, btw) occurred over the last 8 years is incorrect logic. I used the Case Shiller historical numbers to derive some yearly appreciation rates for you. Jul 07 was the peak according to CS:
Jan 90 – Jan 00 = 5.5% yearly appreciation
Jan 00 – Jul 07 = 9.1% yearly appreciation (not 8%)
Jan 00 – Jan 04 = 5.6%
Jan 04 – Jul 07 = 13.2%
Jan 05 – Jul 07 = 13.5%
So Seattle generally had about 5.5/6% appreciation for the 14 years from 1990 to 2004. All of the sudden in 2004, appreciation rates more than doubled. Lets look at the effect of that increase on a home price:
$200k house appreciation, Jan 00 -> Jul 07 @ 5.6% = $301k
$200k house appreciation, Jan 00 -> Jan 04 @ 5.6%, Jan 04 – Jul 07 @ 13.2% = $387.8k
Home prices would have to decline 23% total to get back to what the normal appreciation rate should have had home prices at. That would be assuming that you could still get a 2004 mortgage rate at those standards. If you add in record building during the last 3 years and tightening standards/rates on mortgages, it is easy to see how prices will likely decline much more than just 23% since people buy the payment, not the purchase price.
Ira Sacharoff » Mar 22, 2008 at 5:16 pm
Dave Lincoln,
I’m not a commie, not even a socialist…maybe a little bit of a pinko.. was it Groucho Marx who said ..” I’d never belong to any club that would have me as a member?”
b » Mar 22, 2008 at 5:16 pm
magnolia44,
People are still buying here in the bay area too, despite us already having YoY declines, much higher inventory and the same 40% off sluggish sales. Just because some people are stupid does not discount where the market is heading.
John » Mar 22, 2008 at 6:12 pm
b, these anti-bubble people are going to fight to the last street. If Seattle as a whole goes down, they will be pointing out Magnolia, Queen Anne are still flat or not going down much. If even Queen Anne goes down, they will be pointing out the street they grew up on that has 4 sales a year is still doing great.
Dave Lincoln » Mar 22, 2008 at 6:23 pm
OK, Ira, I am relieved … I think.
There are lots of pinko ponies in Seattle, so I hear. Good for housing values. I give you exhibit A) People’s Republic of Freemont. That statue of Lenin is fun and all, just hope he doesn’t come alive at night and purge your ass back to kingdom come.
Dave Lincoln » Mar 22, 2008 at 6:40 pm
oops.
WAS: “Freemont”
S/B: “Fremont”
bitterowner » Mar 22, 2008 at 7:21 pm
Mags, that is great news! Now if only we could move the other 160 listings in Magnolia before the Spring inventory spike. Since there is a sucker born every minute, less than 3 hours worth of suckers should make short work of that backlog.
bitterowner » Mar 22, 2008 at 7:38 pm
Somebody actually paid 749K for a 2000 sq ft no-frills house. Must’ve been the caption on the garage picture that did it: “Doesn’t the alley look spotless?” or Maybe living close to a public pool comes at a 30-40% premium. That’s a nice enough area, but I have a feeling your new neighbors will soon be exhibit A among the legions with buyers’ remorse.
bitterowner » Mar 22, 2008 at 7:56 pm
Mag 44,
I couldn’t help myself, plus I’m stuck at work so during a lull I decided to look into the hot Magnolia market in more detail. From the Windermere site, it appears that there are 161 listings for 98199 – Magnolia. Of those, there are a grand total of 7 that are STI. There are 40 listings for 750K or above, of which exactly zero are STI. So the house you are telling us about is one of the tiny fraction of Magnolia houses that are STI, and also happens to be the one with the highest listing price of the STI properties.
Smokin’ market indeed. Thanks for the cherry-pick. Time for a credibility check?
toad37 » Mar 22, 2008 at 8:32 pm
#64
#Inflation is running high mainly because of speculation in commodities.”
b,
Good post except for that line. It is ALL about the debasement of our currency.
toad37 » Mar 22, 2008 at 8:34 pm
#66
Scotsman,
You are plain wrong, no offense. The inflation has just started, and what we could possibly see is hyperinflation.
toad37 » Mar 22, 2008 at 8:43 pm
#73
b,
In my humble opinion, it shows the fear and poor judgment of the sheople on how exactly to handle what is going on in the markets. The “T”’s and the bonds are the biggest bubble out there. You may or may not agree with this, but most people have NO idea what is going on or there would be much more talk of precious metals and diversifying into stronger currencies. You may argue that you are hearing a lot on these already, but with the paradigm shift that is occurring due to the corrupt government polices controlling naive Americans, in 5 years your barber will be telling you how his Yen dominated equities have been kicking a$$, etc.
Ubersalad » Mar 22, 2008 at 9:13 pm
we been using the word “educated”, where you been david losh?
magnolia44 » Mar 22, 2008 at 9:16 pm
bitterowner,
My response is simple… price it right and it sells… even the one i pointed out I thought was not priced right but it sold within 30 days i think after a reduction. There is plenty of garbage listings over here and constant re-lists…of people who do not have a realistic price in mind. I agree with that, but when they are priced right they move, now wether that right price reflects decline I am not so sure is the case it may be possible. In the last month several townhomes like i mentioned before sold for 575k all the way to 650k plus…. not just one. This latest house suprised me because I agree its overpriced for such a basic home.
One thing i have learned while watching real estate over here is someone always has more money than you or I. Meaning people lists their house for a price and there can be that person who is paying for the home and the $500 – $700k is not that much to them to pay for that particular home. I would like to think thats the case with the ugly townhomes that sell .
Joel » Mar 22, 2008 at 10:49 pm
Then why didn’t rents become similarly unaffordable in the same time? Because there was a sharp upward correction in the desirabilitiy of owning. And why not? You could put zero down, get cash back at closing and expect endless 10-15% YOY appreciation. Now that that’s gone or going away you can expect the price premium to go evaporate too. But it’s probably going to take longer than 7 months.
Joel » Mar 22, 2008 at 11:33 pm
If larger homes push affordability down wouldn’t smaller lots push it up? You can’t insist on factoring in the size of homes while ignoring the size of lots they are built on.
bitterowner » Mar 22, 2008 at 11:49 pm
Re Mag44: “One thing i have learned while watching real estate over here is someone always has more money than you or I. ”
True, but the wealthy normally don’t get that way by making poor financial decisions. IE just b/c someone has a mil or two that they COULD drop on a house doesn’t mean they WILL do so if they anticipate a market decline. I guess this concept pertains somewhat to the “smart money” discussion above.
In any case, you are correct. I have very recently had to get used to the idea that there is someone out there that has more money than me. It was a hard pill to swallow, but I am dealing. You didn’t have to rub it in, though.
Sincerely,
Bill (Gates)
jess » Mar 23, 2008 at 12:17 am
amazing amount of activity on this post today, boys ~~~ did you know it was a nice day outside?
bitterowner » Mar 23, 2008 at 12:28 am
Jess, the only reason it was so nice out is that I had to work. I’m off tomorrow so get out the rain gear.
Scotsman » Mar 23, 2008 at 1:45 am
Toad37- sorry, but you will be rudely surprised if you bet on hyperinflation. Our economy is controlled by the government and the banks. Both hate any kind of inflation. The gov hates it because it leads to higher interest rates, a cost of “doing business” for them, a limiting factor on what they can do, and what they have to spend. Banks hate inflation, because despite their best attempts to factor inflation into interest rates, it means they will always be paid back with dollars that are worth less than the ones they originally loaned out.
There is currently no inflation. There are price increases, due solely to speculation and supply issues in a very few commodities. Don’t confuse specific individual prices with systemic inflation. Again, show me a recession/depression that featured sustained inflation. Ain’t gonna happen.
Garth » Mar 23, 2008 at 6:43 am
Ira,
Inventory and sales numbers point to what should happen to prices, but inventory has been high a while and prices have not moved down the same amount they did in other places. For there to be a price bubble, prices need to be down over 10% in a year and 20% overall. Down 10% total would forever be referred to as a downturn.
My interest specifically lies in Seattle zip codes. The primary cause of the current downturn in every market other than Detroit and Cleveland has been new construction creating pockets where distressed homeowners are concentrated.
I purchased my house a little over a year ago after looking for over a year, and I applied the Warren Buffet system to narrowing down my potential locations. I did and still do not clearly understand the impact on condo prices of the incoming inventory. I don’t totally understand the impact of large new developments in more outlying areas, and I don’t totally understand the impact of a slowdown on an “upcoming” neighborhood or a “stylish remodel”. So, I didn’t buy any of these places / things.
I am in for at least 10 years, got a fixed rate loan, and bought only when I felt the price was under the current market to give me some cushion, and the seller would agree to an inspection. Buying has been cash neutral for me and was necessary for a number of financial reasons, but I read seattlebubble then too and made sure I did as much as I could to make a solid buy, not one based on the fads and frenzy occurring at the time.
In August I figured my paper 20% cushion would be gone by now but according to the recent numbers, zillow and sales in my neighborhood I have my cushion and about 5-10 grand (on paper only naturally).
Sniglet » Mar 23, 2008 at 7:28 am
I suggest you look again at what happened in other markets that have had substantial downturns. The inventory was rising and sales declining for a year or more prior to the prices actually declining. San Diego, again, is a perfect case study of this. They almost went for two years with declining sales and rising inventory before depreciation started kicking in.
By this measure, Seattle is right on track. It’s just that our inventory didn’t start increasing substantially until much later than other markets. We are just behind the curve, that’s all.
david losh » Mar 23, 2008 at 7:54 am
Deflation; again another reason to read this blog. It didn’t occur to me. For that matter if we take the credit crisis a lot of you guys keep going on and on and on about, and if everything again goes to being cash based, deflation, stabalization, and a true worth of currency should be the only thing that matters in the next few years.
OK, Real Estate blog, Housing is a commodity. There are grades to housing that there aren’t in oil by the barrel or gold which has a set standard. Some one mentioned San Diego. Have any of you seen a community called Liberty City? It’s a Mexican worker housing community that looks like card board boxes stacked together. Are you really going to compare that with down town San Diego.
A second thing is which I do know for a fact that a large section of the Mexican work force who came here for construction jobs are home now building a better economy in Mexico. A lot, a lot of those units in Leberty city are going back to the bank. You’re right it makes little sense to hold on to them.
In time however those units will be bought sold and traded by the next wave of people who come here. People come here because we do have the right to practice capitalism. We are one of the few countries in the world that admires winner take all. Anybody can be rich or wealthy here, no matter your family, cast, or color. I see it every day on MTV.
So those housing units may not sell for what they used to a few years ago, but they will sell. I’m waiting for the United States government to adjust the immigration quota for Chinese investment in the United States.
Education? Money has no master and a degree doesn’t mean shut on the street. Ask Bill or Warren.
toad37 » Mar 23, 2008 at 8:36 am
#103
“There is currently no inflation.”
Scotsman, have you looked at the cost of a loaf of bread, gallon of gas, ounce of gold?
S-Crow » Mar 23, 2008 at 8:37 am
Garth,
Sounds like SB is helping people make good decisions, so when the time is right people move forward with a purchase. There is no getting emotion out of buying a home, but it is possible to reduce potential roadblocks both financially and transactionally by being as practical and frugal as possible.
Certainly inventory plays a role in the housing bubble, but people are in the pickle that confronts them because of the type of finanancing over their head. The whole debacle unfolding was finance driven in my opinion.
SeattleMoose » Mar 23, 2008 at 8:47 am
“these anti-bubble people are going to fight to the last street. If Seattle as a whole goes down, they will be pointing out Magnolia, Queen Anne are still flat or not going down much. If even Queen Anne goes down, they will be pointing out the street they grew up on that has 4 sales a year is still doing great.”
Even after the Titanic went down there were still bits of it floating on the surface…..
Does this mean the Titanic did not really sink?
whats my name » Mar 23, 2008 at 10:21 am
“Jan 00 – Jul 07 = 9.1% yearly appreciation (not 8%)”
I used Tim’s chart from the other day showing median prices at 185% of Jan 00 in Jan 08. That’s 8% almost on the dot. Your base period covers two poor markets, and one good one – not a very good control number. Still even with the increase since 2004, there is not enough to get me to hyperventilate. Difference between you and me is a matter of proportion, not direction.
Scotsman, you are dead wrong on the motivation for the banks and government. Banks live on the spread. We hedge and stay short to move past the transition periods. We don’t care about the rate, except as to whether it kills business. Government doesn’t love inflation, but fears revenue loss more. When was the last time a fist world country chose economic collapse over inflation?
Happy Easter.
Ira Sacharoff » Mar 23, 2008 at 11:12 am
Garth,
As Sniglet pointed out, other places with price drops first saw rising inventories and slowing sales before prices dropped, and Seattle was later in seeing these rising inventories and slowing sales.
But….It sounds like you bought your house wisely, and did everything you could have done to minimize risks.
Scotsman » Mar 23, 2008 at 12:05 pm
Toad 37-
Loaf of bread- up, due to increased worldwide demand for U.S. crops, not inflation.
Gallon of gas- up, due to dollar devaluation and increased purchases to restock reserves
Gold- up, due to speculation only. Tell me an industrial use for gold that gives this commodity real value, other than jewelry and as a fiat currency?
None of these represent inflation, they are only specific price increases. Inflation affects the entire economy. So if we look at things like houses, which are clearly down nationally by 10-15%, construction equipment, most recreational goods, raw material costs (with the exception of energy) and labor, prices as a whole are falling. How many people do you know who got a 10% raise this last year? – 5% raise? Are feeling lucky to still have their job?
Also, re: hyperinflation- the gov can’t just print money and give it out, which is required for hyper-inflation. That is currently illegal in the U.S. For every new dollar created, there is an equal amount of new gov debt. That debt carries interest. How much interest would YOU want to earn on your gov. bond if you knew for certain that the gov was just going to keep printing up fresh dollars and handing them out, decreasing their value everyday, making the dollars you were repaid with worth much less than the dollars you loaned out? Would you even buy them, giving your money to the gov? Nobody else wants to loan money under those circumstances either. If the gov tries to hyperinflate, the demand for their debt immediately dries up, and the game comes to a halt. The market, both domestic and international, will put an almost instant stop to any attempt to inflate our way out of this. Unless, that is, you’re willing to just throw out all of our gov’s credibility, and our system of law.
Like a game of chess, think this through to the next several steps or moves, and their consequences.
Scotsman » Mar 23, 2008 at 12:23 pm
Whats my name-
Sorry, I used to be a banker, and you’d better believe they care about rates. Rates are an indication of demand. Rates too low, like now, means there isn’t any demand. Rates to high means there isn’t enough money to lend out. Right now demand is in the tank, bank’s costs are largely fixed, and they’re loosing a ton of money. You can’t hedge an operating loss, or a collapse in collateral values, or high default rates. In fact, this whole credit crisis is the result of bankers not paying adequate attention to rates, risk, and spreads. Ask BS about “hedging”, ask WAMU. Next month you can watch Lehman, MS……
Hey, B of A is getting ready to announce an additional $6.5 Billion of loss reserves. Why is that? Will it be enough? Think they care about rates?…
Scotsman » Mar 23, 2008 at 12:47 pm
One more- Goldman Sachs, one of the premier investment banks in the world just had its credit rating cut to “negative.” I thought they’d hedged that….
Daph » Mar 23, 2008 at 3:06 pm
what’s my name
I won’t go more into where the smart money is. I think I know some but I won’t pretend that I’m so smart and I’m the smart money.
Anyway, if you’ll like to buy, I think you should really check out Redmond, the land of Microsoft. I’ve just moved into a condo here, rent of course. The unit next door has been on the market for quite a while and it’s now on short sale, get this, at only less than 10% decrease from the original listing price. Still not selling though. Oh, and the unit upstairs had just kicked the tenant out and they’re now preparing the unit for sale. Did I mention that this condo has less than 15 units overall?
If that’s not enough selection for you, there’re 3 blocks of new condo for sale within a 1 min walking distance from my place. I’m not sure, maybe they’re all sold out to investors. Only thing I know is there are plenty of for-sale signs and very few lights on at night at those condos.
It’s really great time to buy now, really. Plenty of selection and I haven’t even told you what’s out there beyond the 1 min walking distance from home.
Hamster » Mar 23, 2008 at 3:06 pm
Interesting site. I believe you are correct in Seattle RE being overpriced–as is Bellingham–but I wonder how some variables that have changed over time, and continue changing, might skew the results. For example, simple demography: we’re all getting older. The fastes growing demographic in the US is 86+. Has pretty serious housing implications I should think–and other implications, too (’Honey!! Let’s invest in Geritol!!). Older folks have generally greater resources, so can afford to buy larger houses–or bid each other up on smaller ones. Of course, at some point, most older folks like to be closer in to services, rather than futher out, again driving urban housing prices higher. On the other hand, at soe point a whole lot of ‘em are going to decide the house needs to be sold to move into that nice assisted livig facility. THat will precipitate a crash, barring a new surge in 40-somethings. Then you will really see a crash.
I also wonder at what point women became more or less fully integrated into the workplace. In the 70s and 80s, prices rose because one income households were being supplanted by two-income households, which resulted in greater household incomes, even as per capita incomes fell.
Just a few ramblings…
b » Mar 23, 2008 at 4:53 pm
Hamster -
Unless you believe all of those factors combined immediately to double appreciation rates in 2004, the logic doesn’t factor out. Those are long term trends, whereas the bubble has been a very short (since 04 only) period of extreme increases. I can see those things driving up appreciation rates very slowly over time, however.
Hamster » Mar 23, 2008 at 6:55 pm
b-
Don’t misunderstand me; I was not suggesting that the factors mentioned caused the bubble in and of themselves. However, even irational exhuberance has some rationality at its core, imo. In this case, the very factors you cite – e.g., long term trends affecting the market – could perhaps be at the root of the bubble. Long term trends drive a consistent [rice appreciation. Ater a while, people believe that price will always go up, and look to five or even ten year trends as proof. Throw in historic drops in interest rates, imprudent relaxation of lending standards, a broad array on lending instruments designed to make every person in the USA theoretically eligible for a home loan, and the pump is primed for irrational exhuberance.
fwiw, I’m not saying that these factors caused the bubble. I’m just saying that thinking about them is interesting, and may lead to some beeter understanding of how we got here, and where we may be going. Personally, I believe that for a variety of reasons, we may see a relatively soft landing in the NW, but also believe that prudence dictates one act with considerable restraint in managing personal–and governmental–affairs until we have a better handle on what fiscal reality is going to look like over the next few years.
Ham
toad37 » Mar 23, 2008 at 7:58 pm
#113
Scotsman,
We have inflation in things that are precious and consumer staples.
We have deflation in financial assets and real estate.
I don’t think we’ll see hyperinflation.
Dollar devaluation creates inflation, the Fed is trying to inflate their way out of this debt related Mega-Problem.
Gold will shake out speculators on this correction then head much higher. Gold is money, always has been always will be.
No Fiat currency has ever lasted in history.
Toad
Scotsman » Mar 23, 2008 at 11:28 pm
I think gold is about done. It has a speculative history, and is now not much more than a shawdow fiat currency since it has no real value as a commodity except in jewelry. And people don’t buy a lot of jewelry in bad times. It can’t readily be used as money in the work-a-day world, as it doesn’t come in handy denominations, and it’s hard to “make change.” Historically, gold was a good medium of exchange. But as deflation gets started, the dollar firms up, interest rates go back up to the long term trend of 8% or so, people will want greenbacks. Gold will die a final death as any real store of value. Give me oil, dollars, or food.
Scotsman » Mar 23, 2008 at 11:36 pm
I don’t think the FED is really trying to inflate. They may be trying to slow the onset of deflation, but when you look at the size of the problem verses the available resources of the Fed and gov combined, they don’t have enough bullets to win the war. The dollar size of the problem is overwhelming, trillions of dollars in pending financial disaster verses a Fed with less than a trillion to play with, and a gov that is already on the edge of insolvency.
When the Comptroller of the U.S. gov quits his job so he can go around the country full time, speaking, trying to get people to understand the U.S. is functionally bankrupt, you know there’s not some easy way out.
peter » Mar 24, 2008 at 5:47 am
I found Ardell’s Sunday night stats over on RCG interesting. The median price ‘for sale’ YTD is $525,000 but the median price sold YTD is only $437,500.
We are already seeing a difference of $87,500 or 17% between what people are asking and what people are buying.
Here are her stats:
Active/For Sale – 9,779- UP 148 – median price $525,000- no change
In Escrow – 2,712- UP 11 – median price $444,000 – DOWN $4,000
Closed YTD – 2,883 – UP 332 – median price $437,500 – UP $1,500
local Realitor » Mar 24, 2008 at 5:54 am
Ray Pepper is spamming 500Realty.net on the Yahoo boards now. Found a spam of his on the Zip Realty message board LOL!!!
Marc » Mar 24, 2008 at 11:02 am
At # 51, Softwarengineer said:
“I imagine Marc is hoping his Bellevue condo is immune from the recent Seattle price crashes too, so apparently argues flippantly too, with our pragmatic Bubble Brain leader, The Tim.”
I’m in Magnolia, not Bellevue, and yes, if a price crash happens, I do hope my home is immune. Who wouldn’t?
Flippant argument? I offered constructive criticism of a proposition proffered by your leader that narrowed all feasible explanations to two. As an attorney I am trained to read and interpret a person’s “stated” argument and to determine its relative strength or weakness. To that end, if you review Tim’s original posting you’ll see that his entire premise “works off the assumption” that the “Seattle area has [not] become considerably more desirable, as compared to other cities.” His “evidence” for this assumption is “the fact that so many other cities around the country have experienced a similar plunge in affordability over the same time period.” Thus, he concludes that “for affordability to have dropped 35-40% in less than a decade” real estate in the Seattle area [must have] become considerably overvalued.”
I critiqued Tim’s proposition as unpersuasive on the basis that it flatly dismisses alternative explanations. Such one sided arguments rarely persuade judges or juries and I couldn’t help myself from pointing out this shortcoming. The irony of this is that I don’t disagree with Tim’s general premise. Seattle probably has become too unaffordable. I simply disagree that this is entirely the fault of an easy-credit induced real estate bubble. It’s my belief that Seattle has become a much more desirable city, albeit not the “world-class city” that one national pundit has suggested. Accordingly, the cost of living in Seattle should significantly increase relative to other cities. Thus, it may be the case that massive real estate price drops in other areas of the country represent appropriate corrections of significantly unsustainable affordability losses. And it may also be the case that Seattle’s real estate run up was, while similarly fueled by lax lending standards, speculative bidding, etc., to some degree, a naturally occurring run up that coincided with the overall U.S. real estate run up. Ergo, Seattle might not experience the same degree of correction that many other areas will experience.
The Tim » Mar 24, 2008 at 11:07 am
Indeed, comments like Marc’s and takenroad’s are adding to the conversation, and much appreciated. It’s comments like magnolia44’s “grasping at straws” (#23, #29) that are flippant and pointless (although certainly amusing).
LUC » Mar 24, 2008 at 12:03 pm
I want to provide another viewpoint about the current condo situation in Magnolia. I was laid-off in Oct by a local Biotech firm which is headquartered in CA. I have had my condo (Baywatch condominiums) on the market since May ‘07 (purchased it for 339,000 back in Sept of ‘06). I did not see any foot traffic until I lowered my price to 299,950. I’m waiting to close on a short sale for 250,000.
Across the street from me are a cluster of townhouses that were completed last year. Two “For Sale” signs have been up for > 4mths. There are also numerous “For Sale” signs from Thorndyke Ave to Discovery Park. Don’t tell me that condos are appreciating in Magnolia!!
Marc » Mar 24, 2008 at 1:17 pm
LUC,
Sorry to hear that. In case it wasn’t clear in my post, I live in a house in Magnolia and I can’t speak to what condo prices are doing there. If your unit is two bedrooms let me know if your short sale buyer falls through for some reason. I have a personal friend looking in Magnolia in that price range.
peter » Mar 24, 2008 at 1:26 pm
I have been watching very closely the single family home and townhome market in Magnolia and Queen Anne since last year. Granted, my range is <$600,000 but the places I have been watching have been sitting, then removed from MLS, then they appear again as 1 day on the market with 15-20K price reductions. In particular a few of the new townhomes we were interested in are now showing up on Craigslist for rent.
Marc » Mar 24, 2008 at 3:20 pm
Peter,
I’m a big fan of low balling on houses that have been on market for awhile. So, you might consider friring a shot across their bow to see what kind of a response you get. But, be careful because you might end up owning it!!
LUC » Mar 24, 2008 at 4:50 pm
Thanks Marc. The MLS listing is 27172048.
deejayoh » Mar 24, 2008 at 6:00 pm
I’ve been watching a bunch of houses in Magnolia. From what I see, appreciation there in the last year has been flat at best, and in many cases homes purchased in the last 18 months are selling for less than they were purchased for (if they are selling at all)
Some facts: 21 of the ~125 listings in Magnolia are quick flips like this. At current asking prices, 8 of these owners will end up losing money after they pay fees and taxes.
bitterowner » Mar 24, 2008 at 6:32 pm
The latter posts are far more realistic descriptions of the state of Magnolia’s current RE market than the misleading impressions previously posted. Anyone who is really paying attention to that market can’t help but notice that very little is moving – whether condo or SFH.
whats my name » Mar 24, 2008 at 10:27 pm
Help me out here. In post 104 banks and government control the economy, and rates will be high because the banks and the government don’t want inflation.
By post 114, rates are low because there is a lack of demand for borrowing. (And apparently not because because of the Fed’s lowering actions. Frankly, I’m just glad the problem isn’t that banks won’t lend as some people here think) So, are BS and BofA taking big losses because rates are too high or because they are too low?
Or are these losses really due to a disconnect specific to the securitization markets where opaque bonds can’t adequately be valued and warehoused loans intended for that market can’t be securitized? As a former banker you will be happy to know that traditional commercial banking is pretty healthy for this part of the cycle, and commercial banking operations are generally doing fine. You might even remember that after the panic in the 80’s, even the junk bond market recovered nicely.
whats my name » Mar 24, 2008 at 10:37 pm
Daph,
I don’t like condo’s, especially suburban condo’s. But tell me truly, if you think the dollar is tanking and securities are tanking worse – where do you put your money?,
what goes up comes down » Mar 25, 2008 at 5:24 am
Magnolia 44 said not to worry everything is great and everyone here seems to be posting these ridicules counter points — what gives
Marc » Mar 25, 2008 at 9:04 am
deejayoh,
It seems to me that Magnolia is the tale of two cities, one is the city on the bluff where recently updated older homes with no warts and new construction sell at a significant premium and the other a city where people put over-priced crap on the market and then act surprised when it doesn’t sell in 30 days. In other words, Magnolia is experiencing the same thing happening in many other parts of the city, the good stuff sells and the crap sits.
I have a sneaking feeling the March NWMLS median price for area 700 will not continue the upward trend of the last few months. Then again, a few of the big houses could close by Friday and get our numbers back up!
I won’t be holding my breath.
bitterowner » Mar 25, 2008 at 10:25 pm
Marc,your post offers an exceptional piece of wishful thinking. Check out the post I wrote on Saturday re: the number of houses in Magnolia that actually seem to be moving. Not a single house in Magnolia over 750K (approx 40 houses) was listed as STI. Many of them have been on the market for months. Many of them were on the market last year (for substantially more) and were removed when they did not sell, only to be put on the market again in the new year. Many of these houses are absolutely beautiful. The problem is that they are (now) perceived to be way overpriced, This would not have been the case 18 months ago. There has been a dramatic shift in all tiersof the real estate market here in Magnolia. If well-built houses are selling and crap is not, as of Saturday the score was 154 – 7 for crap.
Marc » Mar 26, 2008 at 12:29 pm
Bitterowner,
For what it’s worth, my sources say there are more than ten homes priced at $720,000 or more that are STI or pending in Magnolia. Granted some of them won’t close until next month and won’t affect March’s median.
LUC » Mar 26, 2008 at 5:03 pm
Marc,
I just checked the Windermere site, I see no houses >750K listed as STI.
bitterowner » Mar 26, 2008 at 11:24 pm
The house Mag44 was touting (749K) is the only one I could find that is listed as STI above 625K.
what goes up comes down » Mar 27, 2008 at 5:30 am
mag 44 is it good to know that you bought at the peak????????
Marc » Mar 27, 2008 at 10:46 am
Luc & Bitterowner,
JL Scott doesn’t show properties that are in Pending status which most of the properties I mentioned are. However, I just saw that there are now two that are STI according to Windermere:
28036419
28028665
The Tim » Mar 27, 2008 at 10:52 am
Marc, are you sure about that (JLS not showing pending)? I’ve got a couple of properties I’ve been keeping my eyes on using John L. Scott’s site down in Vancouver for my parents, and I’ve watched one of them go from “Active” to “Pending” (and then back to Active again). Or do you just mean that they don’t show up in search results when they’re pending?
Marc » Mar 27, 2008 at 11:10 am
Tim,
That should have said Windermere, not JLS, since that was who Alan’s post referred to. I see that JLS also shows only two STIs in Magnolia >$700k and no pending despite there being several homes in pending status in Magnolia.
I suspect your last statement is correct: “they don’t show up in search results when they’re pending.”
LUC » Mar 27, 2008 at 2:22 pm
Marc,
That doesn’t make sense, why would a site not actively update their active and STI status. People searching for homes would never know what is available.
Ira Sacharoff » Mar 27, 2008 at 2:47 pm
The NWMLS does indeed list 9 homes pending at 720+ in Magnolia, and one STI.
Marc » Mar 27, 2008 at 2:50 pm
On the Northwest MLS system, Pending is a completely different status than Active and Active STI. Pending means that a purchase and sale agreement has been signed (i.e., the house is “sold”) and the inspection contingency has been resolved but the transaction has not yet “closed” (i.e., the money exchanged for the deed). Peninding status is a likely indicator that title review contingencies and other similar contingencies have been resolved. However, it typically does not mean the financing contingency has been waived by the buyer because, generally speaking, that often doesn’t happen because the Form 22A, by default, requires the seller to affirmatively seek waiver of the financing contingency.
It’s not surprising to me that public MLS websites would not show Pendings because they probably don’t want other buyers meddling in a “done” deal.
LUC » Mar 27, 2008 at 7:06 pm
So our point has been correct all along, one STI house in Magnolia
bitterowner » Mar 28, 2008 at 3:12 am
I think we’re getting bogged down by the specifics and forgetting about the big picture. Big picture = crickets chirping loudly in Magnolia these days. The new 1.5M STI will certainly give hope to those in that higher market tier whose places have been going nowhere fast.
We used to get monthly postcards from varous RE agents listing every address that sold in the previous month in Magnolia, along with selling price of each property and average (not median) selling price, which would be skewed toward the higher end every month by the one or two ultra expensive Magnolia mansions in the mix. These postcards suddenly stopped coming when it seemed obvious that sales activity had slowed dramatically. They were replaced by ‘informative’ brochures on the value of specific renovations, etc. Then sometime recently we did get a monthly list of all properties sold in Magnolia. I think there were 4 properties listed. It seemed ridiculous. I’m sure somebody’s marketing consultant got an earful.
Anyway, it certainly seems reasonable to discuss how much or how little the Magnolia housing market will tank during this obvious slowdown (ie Marc’s discussion), for those who care. However, to represent the market as being very hot, where crazed house purchasers are insanely snapping up overpriced properties willy-nilly (ie Maggie44’s post) when the evidence overwhelmingly indicates otherwise seems either deluded or oddly self-serving.
Marc » Mar 28, 2008 at 8:57 am
Luc,
Almost. There are two STI but to your larger point, yes there are very few STI’s in Magnolia. My point is that I’d rather have more Pendings because they’re more likely to result in a closed sale than an STI especially in this climate of buyer’s increasingly insisting on defect free inspections and seller repairs.
Bitterowner,
You’ve got a good point about the product mix in the NWLS’s median. I don’t see any behemoths in moving this month so I predict the 700 area’s median is going to go down. However, I haven’t been keeping an eye on Queen Anne so it’s possible they’ll have some big dogs sell and prop us up for another month.
If and when it does go down I’ll be the first to admit I’ll be disappointed. It’s been nice living with the hope that my neighborhood continues to appreciate and I have nothing to fear from the national downturn. What’s not been nice is knowing how tenuous this hope has been.