Seattle Bubble

• Seattle Soft Landing: Do The Math
• King County Affordability: 1950-2007
• King County Job Growth To Outpace Nation?
• "Prices plateau as incomes catch back up"
• Bubbles vs. Steady Appreciation

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151 responses so far ↓

• 1 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.

• 2 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.

• 3 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?

• 4 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.

• 5 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?

• 6 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.

• 7 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.

• 8 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.

• 9 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.

• 10 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.

• 11 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.

• 12 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.

• 13 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.

• 14 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.

• 15 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.

• 16 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.

• 17 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.

• 18 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%.

• 19 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.

• 20 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.

• 21 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.

• 22 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.”

• 23 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”

• 24 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

• 25 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.

• 26 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.

• 27 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!

• 28 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”.

• 29 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.

• 30 Sniglet // Mar 21, 2008 at 10:38 pm

  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

  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…

• 31 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.

• 32 FreedomLover // Mar 21, 2008 at 11:10 pm

  Sniglet - don’t count on it.

• 33 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!

• 34 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.

• 35 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

• 36 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. ;)

• 37 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??

• 38 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”.

• 39 Garth // Mar 22, 2008 at 7:24 am

  Tim,

  dragdrop.js and controls.js are throwing errors on all of your pages for me.

• 40 Sniglet // Mar 22, 2008 at 8:41 am

  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.

  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)

• 41 Sniglet // Mar 22, 2008 at 8:45 am

  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

  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.

• 42 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.)

• 43 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.

• 44 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.

• 45 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.

• 46 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.

• 47 johnnybigspenda // Mar 22, 2008 at 10:06 am

  when did tax law change (ie. being able to write off interest on your mortgage)?

• 48 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.

• 49 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.

• 50 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.

• 51 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

• 52 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.

• 53 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.

• 54 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.

• 55 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”.

• 56 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.

• 57 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.

• 58 whats my name // Mar 22, 2008 at 12:38 pm

  b,

  Where did the “smart money” put their dollars?

• 59 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….

• 60 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.

• 61 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

• 62 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.

• 63 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.

• 64 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?

• 65 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.

• 66 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.

• 67 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.

• 68 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?

• 69 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.

• 70 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.

• 71 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.

• 72 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.

• 73 b // Mar 22, 2008 at 3:08 pm

  “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?

  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?

• 74 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.

• 75 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.

• 76 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.

• 77 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?

• 78 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.

• 79 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.

• 80 Sniglet // Mar 22, 2008 at 4:38 pm

  just sold two homes to small investors in south King County. It penciled out bu the way

  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?

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