Seattle Bubble

A few days ago I got an email from a reporter named Luck Mullins from US News & World Report, telling me about his new housing blog: The Home Front. Then yesterday, a story pops up on his blog specifically about Seattle. Looks like someone really wants to get our attention for some reason. Here’s an excerpt from his post: Next Housing Market to Crash? Seattle

Few American cities have weathered the national housing crisis better than Seattle. According to the recently released S&P/Case-Shiller Home Price Indices, home values in the drizzly gem of the Pacific Northwest have fallen a modest 4.4 percent over the past year—a cakewalk compared with former housing boom hot spots like Las Vegas (-25.9 percent), Miami (-24.6 percent), and Phoenix (-23 percent).

But that may soon change. In a recent interview with U.S. News, ZipRealty CEO Pat Lashinsky predicted that Seattle’s so-far resilient housing market would suffer big losses relatively soon. Excerpts:

What makes you think the Seattle housing market is going to crash?
In Seattle, if you look at it right now, on a year-over-year basis, you will see that inventory levels [of unsold homes] are up between 45 and 50 percent. And then if you looked at prices—in the price report that just came out—it would say that prices are down in Seattle by 4 percent. This is exactly what we saw in the rest of the country six to nine months ago. We saw inventory levels starting to spike [and] properties were taking longer to sell. But the sellers were not willing to [reduce] the price; they were holding the line. And so you get into this scenario where buyers don’t buy, because they have too many choices and they are trying to get a good value, and sellers are trying to hold on to their value. So now, nobody buys a home today, and then more homes go on the market tomorrow. And then all of a sudden, people have to sell or foreclosures come in. And all of a sudden it pops because everyone is competing against a significantly lower price.

This is not really anything new to people that have been paying attention to housing trends here and elsewhere, and have not deluded themselves with the fantasy that Seattle is somehow special and immune.

(Luke Mullins, US News & World Report, 05.29.2008)

Regarding last night’s Amazon-only Vulcan open house, a reader wrote:

I work for Amazon and just got back from Vulcan’s exclusive Amazonian-oriented event. They’re offering $5,000 incentives for those of us who want to work just a SLUT stop away from home. The excitement was not palpable, though the beer and wine were free.

According to the comment linked above, the event will be repeated again tonight.  Would anyone else that enjoyed an evening on Paul Allen’s dime care to share your thoughts about the event?

Here’s our monthly look at Seattle’s price tiers from Case-Shiller. Remember that Case-Shiller’s “Seattle” data is based on single-family home repeat sales in King, Pierce, and Snohomish counties.

Now here come the graphs. First up is the straight graph of the index from January 2000 through March 2008.

Click to enlarge

At its peak, the low tier’s index was over 15 points higher than the high tier. As of March, the difference has shrunk to 10 points, a clear indication that homes in the low tier are so far experiencing steeper price drops than those in the high tier.

Here’s a chart of the year-over-year change in the index from June 2002 through March 2008.

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The low and high tiers both nearly doubled their YOY decline from last month. Here’s where the YOY price change for the three tiers sit as of March - Low: -6.3%, Med: -4.4%, Hi: -3.2%.

Lastly, here’s a decline-from-peak graph like the one posted yesterday, but looking only at the Seattle tiers.

Click to enlarge

Declines in the high and mid tiers continued to moderate somewhat, but the month to month drop in the low tier was the largest yet, at nearly 2%. The total decline from peak ranges from 7.0% for the high tier to 8.9% for the low tier.

At this point, even if the index suddenly and unexpectedly leveled off, prices in the three tiers would be down between 7 and 8 percent year-over-year by August. If values continue dropping between 0.5% and 1.0% per month, all three tiers will hit -10% around August.

(Home Price Indices, Standard & Poor’s, 05.27.2008)

The Seattle-area housing market gets some national attention in an article in today’s New York Times:

While Wall Street is growing hopeful that the economy might dodge a recession, many economists warn that the pain in the housing market may last for several years. Even local markets like Seattle, which once seemed immune to the slump, are weakening. Prices nationwide might fall as much as another 10 percent before a turnaround takes hold, economists said.
…
In Seattle, where housing had held up better than much of the rest of the country in the last two years, home sales have slowed sharply. Sales in King County, which includes Seattle, fell more than 33 percent in April from the same month a year earlier while the number of homes for sales is up 55 percent. Prices of single-family homes have fallen about 6.5 percent from their peak in July 2007 to February, according to the Standard & Poor’s Case-Shiller index.
…
[Tukwila resident Dennis] Humphrey, who works in the home improvement division of Sears, has made offers on two homes but the sellers have refused to negotiate with him. He is willing to spend up to $300,000 and has enough money to put 20 percent down, but Mr. Humphrey said he is afraid to buy right now because he is worried prices are going to fall further and could wipe out any money he puts into a home.

“I am not afraid of the monthly mortgage payment, and I am not afraid of taxes, but I am afraid of losing the value I am putting in,” he said, adding that a friend recently bought a home near San Francisco that has fallen in value by $70,000.

“I believe the right deal will come along,” he added. “And I am in no rush.”

I think a lot of potential buyers in the Seattle area are like Mr. Humphrey: not in a rush, despite the frenzied claims of many local real estate agents and organizations that the time to buy is now, now, now.

This piece marks quite a turnaround from the “wow, look how immune Seattle is” kind of stories we were seeing in the national press as recently as midway through last year.

(Vikas Bajaj, New York Times, 05.28.2008)

The March Case-Shiller Home Price Index came in fairly close to, but slightly worse than the NWMLS statistics for the same month.

Down 0.9% February to March.
Down 4.4% YOY.

According to Case-Shiller, home prices in Seattle have now declined a total of 7.3% from their July 2007 peak, and have retreated to just above where they were in June 2006.

In related news, if you are looking for a laugh, check out this recent column over at Inman News: Put a gag on Chicken Little. In it, the author actually tries to argue with a straight face that Case-Shiller is the least accurate gauge of home prices. Her “logic” is centered on the fact that data from Case-Shiller shows larger price drops than indices from OFHEO (which includes refinancing and only conforming loans), the NAR (you know how trustworthy they have proven themselves to be), and Realogy (parent company of Century 21, ERA, Coldwell Banker, and Sotheby’s International Realty—definitely no bias there, either), so obviously Case-Shiller must be incorrect. Heh.

Here’s the usual graph, with L.A. & San Diego offset from Seattle & Portland by 17 months. Portland’s YOY drops nearly caught up with Seattle in March, coming in just over 4% to Seattle’s 4.4%. The vertical axis on most of these graphs had to be expanded, due to the continued declines in cities such as San Diego and Miami, now topping 20% YOY, and 25% total decline from the peak (with still no sign of slowing).

Click to enlarge

And here’s the graph of all twenty Case-Shiller-tracked cities:

Click to enlarge

Here’s an update to the peak-decline graph, inspired by a graph created by reader CrystalBall. This chart takes the twelve cities whose peak index was greater than 175, and tracks how far they have fallen so far from their peak. The horizontal axis shows the total number of months since each individual city peaked.

Click to enlarge

8 months into home price declines, Seattle has shed 7.3% off the peak. At this point in San Diego’s decline, prices were down a whopping 0.5%, San Francisco was down about 3%. They have now seen a total decline of 26% and 23%, respectively.

Here’s the “rewind” chart I introduced last month. The horizontal range is selected to go back just far enough to find the last time that Seattle’s HPI was as low as it is now. This gives us a clean visual of just how far back prices have retreated in terms of months.

Click to enlarge

Prices have been rewound approximately 21 months to June 2006. In the 8 months since Seattle’s peak prices, 13 months of price gains have been wiped out.

One thing I hear a lot is that price drops will never get as “bad” here as they will in Florida or California. I agree with that assertion. However, even if we take that as a given, we won’t really know anything about where Seattle’s bottom will be until we finally see a bottom in Florida and California. San Diego and Miami are down 26% so far, but who is to say they won’t continue dropping until they reach 50% off? They’re certainly not showing any sign of leveling off any time soon. If that were to happen, prices in Seattle could drop “only” 35-40% (which would put us at 2003 prices) and still not be as “bad” as Florida or California. A scenario like that seems entirely plausible to me.

Check back tomorrow for a post on the Case-Shiller data for Seattle’s price tiers.

(Home Price Indices, Standard & Poor’s, 05.27.2008)

Update: Here’s the Aubrey Cohen’s P-I story on the data. Apparently Elizabeth Rhodes at the Times is too busy today to do anything more than add a single sentence to the AP story.

It’s official: The Seattle condo market has hit finally a wall. Here’s a little article from the Puget Sound Business Journal on Friday that goes into all the details:

With more than 400 condominiums under construction in a faltering housing market, Seattle-based Vulcan Real Estate has decided to sweeten the deal for potential home buyers.

In the coming weeks, Vulcan will roll out incentives aimed at buyers living and working in South Lake Union, where it has three condo developments under construction.

While its incentive plan is still in the works, one of its perks will be to pay a chunk of the closing costs for buyers who are currently renting at a Vulcan property and want to buy in the neighborhood, said Lori Mason Curran, real estate market research manager for Vulcan, Microsoft Corp. co-founder Paul Allen’s real estate investment company.

“There has definitely been a slowdown in condo sales at all projects in Seattle,” said Mason Curran, who declined to release Vulcan’s pre-sale figures.

Vulcan’s move is a reflection of the slowdown in the housing market across the Puget Sound region that’s given prospective condo owners the upper hand. Developers of condos, fighting stagnant sales, are offering more perks than ever to potential buyers — including cars, vacation packages and, in one case, Vespa scooters.

So, if I inVest in a Vulcan, I can get a Vacation and a Vespa? Sorry, couldn’t help myself. With the number of projects still scheduled to come online in the next few years, I think it’s going to take a lot more than a few worthless “incentives” to move these things. I’m talking price drops. Serious price drops.

The push to bring buyers in the door is a striking indication that the market for condos has stalled and buyers, reacting to a string of bad news about the economy across the country, are still waiting out the tumultuous market.

“We have a substantial amount of buyers out there, but they are all on the fence,” said Matthew Gardner, whose consulting firm Gardner Johnson works with Vulcan.

“The last thing anyone wants to do is buy in a market that is declining.”

Indeed, which is exactly what they would be doing today. Also, I really wish we could get past the nonsense that the downturn is somehow due to all the “bad news,” as if people would just go out and buy those houses and condos if only the media would just quit making up all these nasty lies and scaring the buyers. Give me a break.

(Kirsten Grind, Puget Sound Business Journal, 05.23.2008)