Conversely, it may be worse if prices decline at an accelerated rate to catch up with the early declining areas; as some of Tims charts show with the comparisons of Seattle decline from peak vs San Diego etc…

The key being when other cities hit bottom.

In some cases, yes. I sold my house last year (Feb 07). It wasn’t right at the peak but close to it. I’ve conservatively invested my equity since then and I’m ready to buy a house when the market has stabalized. I don’t see any reason to try to “catch a falling knife”. I was confident enough that prices in Seattle would decline like they have throughout the rest of the US that I decided to rent for a year. Keep in mind this was also back when everyone including my friends didn’t think prices in Seattle would ever decline!

I’m very happy that I didn’t buy anything last year!!!!!!!!!!

If you’re happy with your home purchase why are you here? Your decision has already been made so why stress yourself out by reading other’s opinions about the possibilty of real estate prices declining?

Jon, you are correct in stating that someone looking for a new place to rent right now, after being in another place for awhile, will see very significant jumps in prices. That’s were your analogy ends.

I often notice that those most critical of the rent vs. buy ratios, both in publications like Forbes, and locally, have much higher than the median income themselves. They are just are not recognizing that the per capita income is what HUD bases rents on, and the median income of an INDIVIDUAL, not a household has been a weighted factor in determining affordability. At least last I checked. The goal posts for determinining “affordability” both in rentals and in purchases has been out of whack in the Seattle area for quite some time.

Others have quoted frequently stated and demonstated that rents spike up in a bubble, just before the crash. We seem to be at that stage. I don’t see these rents holding up for most of these places for long. Median income renters have been the traditional first-time buyer targets, before things got bubbly. Until it returns to that basis, you will not have many first-time buyers to feed that market, and those that depend upon them to move up themselves will be stuck.

Something always has to give eventually. It is starting to give, and I agree with others that in the Seattle area, it’s only in the second inning.

deejayoh, The graph you link to can be looked at as the relationship of price to rent broken down into two ratios: 1) rent to income, and 2) price to income. Since 1985 those two diverged, reaching a maximum separation in 2001. At that point rents went flat for a few years and house prices took off, and now they have come back together, to the same ratio they had in 1985

Jon – The chart has two vertical axis, so the relative slopes are misleading. Home prices are up 4x in the time of the chart, while rents are up about 2.25x. I probably could have done a better job matching scale – but the reality is that the slope of the lower line is much steeper and they are diverging at an increasing rate, not converging as you suggest.

http://realestate.msn.com/buying/Article_forbes.aspx?cp-documentid=8977461&GT1=35000

Also, RE costs about 10% of its value to liquidate. For a typical buyer, that wipes out half their paper equity the day they take the keys.

Unless you’re buying on margin, stocks are not leveraged. They are also inexpensive to convert to cash.

Example:
$100k down for $500k house.
6% depreciation = loss of $30,000.
10% cost to liquidate = loss of $47,000.

That’d be an 77% loss on the original investment!

$100k in stock mutual fund
12% decline = loss of $12,000

That’s a loss, but not nearly as bad.

Yes i bought a home but have no intention of leaving anytime soon. Yes i bought locked in on a 30 yr fixed payment under 6% , 25% of income. Is there such a thing as a buyer who is just fine with his payment willing to face a 10- 15% decline but since he is in it for the long haul, can he have a view that the doomsday scenario wont happen?

Lol so one sided here, let me guess you are in all cash you have lost nothing on the equity declines… you make all the right moves

Seattle Housing – down 6% if you bought at peak (i sure didnt)
Equity Markets well diversified- easily down 10 – 12% minimum right now.

but no one here is invested in stocks now are they lol.

So when the markets stabilize and credit becomes available for qualified borrowers you are telling me other states that bottomed may stabilize along with the other factors above as well as having prices dropped. So when they stop dropping and buyers are back in, places like Seattle will still fall for a year because we are “a year behind”? I dont buy it, when the financial markets stabilize, and a bottom is in we will be down but will not continue down while places like LA, LV and Fla have the bottom in and see a return of buyers.

I dont buy that scenario, so i see us down 6-7% through the start of the crisis, we have a way to go but not bad all things being considered. I say 12 – 15% drop overall until we stabilize and then when things are back for the economy as a whole (3-5 years from now) we join the party back to stable, slightly appreciating markets. No way do we drop for a whole year more since we are “a year behind” i think its a weak theory.

I somehow posted my other comment on the wrong thread. I don’t know that the unemployment data over the whole period is usefull, because of the people who quit looking being dropped off. I do think we could probably find the start of the increase by adding 6 months or so to the point after 2001 that unemployment settled at a low number.

http://blogs.wsj.com/developments/2008/04/04/report-shows-sunny-outlook-for-florida-renters-gloomy-in-seattle/

Many areas have higher rents than Seattle and somehow they survive.

You may see slow increases in rent while you stay in one place because the landlord does not want to risk a vacancy. Then at some point you will need to find a new place and re-enter the market at the current rate, which will likely be a big jump from before.

For comparison let us assume that the same house is being rented (And is not a primary residence.) Its 2001, a nice 3 br house on the east side costs around 350K. For 20% down and 7% FRM that works out to 1800 bucks or so.

Fast forward to 2006/2007. The same house is in excess of 500K. It doesnt matter though because with 0 down and an ARM a “landlord” can have the same place for a measly 2500 bucks a month. Sure, its an ARM but he is gonna flip it in the next year anyways.

Now 2500 over 1800 represents a 34% or so increase. So, the 26% increase that you were seeing was simply being passed by these landlords to renters. I wonder what was the volume of units that was actually rented at these ridiculous prices.

Please get back to me as to how much rents have actually increased in plain old apartment complexes (which is what impacts majority of the renters). I wouldn’t be surprised to see something like a 4% increase (which is what I have seen) and many of my peers have seen as well.

And as a side note, if poor renters cant even afford to pay the 1800 bucks in rent how in the world are they supposed to be able to afford the grossly expensive houses in the ever tightening credit market?

That is a 3-4x ratio of home prices vs. rents.

If you want to see the longer trend, I’ll point you back again to the chart I posted a few months ago. Rents have risen pretty steadily at a rate of ~4% since 1985 – except for a flat spot after the dot bomb implosion. I got this from Conway-Pedersen – but I am pretty certain it is HUD data for 2bdrms.

http://seattlebubble.com/blog/wp-content/uploads/2008/01/housing-vs-income.png

I didn’t see the data for 1999 on the HUD site. That was the baseline for my earlier post. According the graph in the article I cited above, rents were increasing rapidly prior to 2001 and then flattened out for a while. If one adds 2 years of 10% increases to the 26% observed from 2001 to 2008, then the result is about the 50% I calculated previously.

House prices are presumable based on people’s estimates looking years forward, whereas rents are a spot rate of the current market. So one would expect rents to fluctuate more rapidly, but house prices would ideally anticipate those moves. It is analogous to stock prices being more stable than yearly profits, and will move ahead of changes in profit. So I am not that surprised that house prices would move up a few years ahead of big rent increases, which can be expected given the growth in this region.

http://www.huduser.org/DATASETS/50per.html

http://seattlepi.nwsource.com/local/359900_apartment21.html

Looks a lot like the house price graph.

You are comparing median rent (which would include simple apartments / studios / townhouses and even full fledged houses.) Tell me how much the cost of renting a house (comparable to the houses used in the CSI index) has risen in that time frame. I would suspect that it has barely budged while the cost of owning those homes went up by over 50%. Explain that dichotomy to me.

Personal experience: My rent for a simple apartment has barely budged during the last 10 years or so (least 800, but that was student housing and the most is around 1000 which I am paying right now).

Cities below the line didn’t necessarily experience smaller increases (Miami has seen the largest percentage incease in value but is below the line) but they have experienced greater decreases in value and vice-versa (example of Dallas which has experienced the smallest increase but is above the trend line).

The trend line represents a decrease in value of .17% for every 1% increase in value since the base date of 9/2001. That means that any city above the line has experienced a decrease less than .17% per 1% increase and cities below the trend line have experienced decreases in value greater than .17% per 1% increase.

Thanks deejayoh for the graph

However I agree with the post that each area will be hit a little differently with regards to falling prices. There are so many factors that determine house prices, and again that has been said here again and again.

There is not any hard fast rule what a house will be worth at a certain time.

Jcricket – I argee.

If you actually believe that there is invisible hand that will move real estate towards the line, they you should fly out to Detroit (or any other city in the rust belt) right now and start grabbing those GEMS!

I couldn’t help but grin. You used the phrase “invisible hand” very sarcastically in order to put people that think Seattle home prices will eventually approach the overall trend. However the “invisible hand” is a term commonly used in economics to refer to the natural forces that move the markets. So really, seriously, a lot of people do believe that the invisible hand will push Seattle’s data point down towards the trendline (although I’m betting the trendline will be pushed farther down the chart too).

For example:
A house at 100K in 2001 in location xxx.
Say it appreciates by 70% like Seattle did.
That brings its “peak-of-the-boom” value to 170K.
Now, assuming 3% inflation in 7 years that 100K would be 121K.
Thus, the house should depreciate by about 28% to get back in line with the norm.
Calculate thusly for various values of appreciation.
I get the following for 3% inflation for Year 2008 assuming base is 2001:

Appreciation to Peak(%) Expected Drop for 3% inflation
30 6.923076923
40 13.57142857
50 19.33333333
60 24.375
70 28.82352941
80 32.77777778
90 36.31578947
100 39.5
110 42.38095238
120 45
130 47.39130435
140 49.58333333
150 51.6

one suggestion would be to use the peak for the individual market.

Each market is compared to it’s own peak – as other point out, this makes the time frames of how long they’ve been falling different.

I ignored the timing difference for this, as I really didn’t want to get into the time-shifting discussion. At the end of the day, one might logically expect that they’ll all fall in line over time – but only time will tell.

If you actually believe that there is some invisible hand that will move real estate towards the line, they you should fly out to Detroit (or any other city in the rust belt) right now and start grabbing those GEMS!

I don’t believe in an invisible hand. It’s just interesting to see if you are an outlier or not.

Deejayoh, my bad praising Tim for the chart, but this is really a great way of illustrating the boom/bust cycle across all markets and proving that there was no such thing as a “local real estate market” in the past few years of easy lending.

Another thing: A house in 2001 for 100K appreciates to the top of the boom by 140% (that would be say some house in Miami). That would bring its price to 240K at the top of the boom. It needs to decline by only 60% (from the top) to bring the value back down to 100K. Of course this does not take into account inflation and all that jazz. I would suspect Miami still has around 10% to drop (and respectively scaled down drops for the other markets)

Go out, enjoy life. If you rent and your happy, keep it that way. If you own a house and you’re happy (or not), deal with it.

Everyone has their mind made up (e.g. 95% declines are coming!, we’re at the bottom, deflation is imminent, inflation is rampant, etc.) and so on. At this point (when we’re in the middle of something happening) the armchair analysis has become incredibly repetitive.

What I really object to is that there’s some static set of inevitable outcomes. No recession is exactly like the previous one, and none (save the “great depression”) has really ever been as bad as the perma-bears seem to want/desire/claim is required.

Seattle started up last and will hit bottom last, though with the implosion of bad lending all the markets might eventually sync on the way down.

Actually the recently revised statistics show that 2007Q4, when Seattle experienced the bulk of its price drop, really was negative growth. Since then, growth has been slow but positive and Seattle has been pretty flat pricewise.

Detroit in particular has been hit hard economically by the domestic auto makers, so it’s no surprise it would have taken a steeper drop at this point that most cities relative to its past appreciation.

Let’s also not forget that not one of these cities has clearly hit bottom yet. This would be interesting to look at on a quarterly or semi-annual basis to see how it changes over time.

I think that it may happen faster than 2 years. Markets like SF, SD, and of course Miami, have fallen very quickly in one year. And that was when the economy still had some legs, which are now just stumps…

Enjoy the weekend…

The line thru the middle indicates correlation between percent increase and decrease till now (using the year 2001 as the price baseline).
Cities above the line have seen greater increases in price and lesser declines in general (i.e. on today’s date). For example Seattle saw 65% increase in price from 2001 and prices have come down only 6% from that high. Hence it is high above the line.
Cities below on the other hand saw smaller increases but greater decreases in price from the high point. Detroit for example saw an 18% ish increase but a 25% decrease from that high.
Majority of the cities are pretty close to the middle reminding people not only that “what goes up must come down”, but also “the bigger they are the harder they fall”.

Nice graph Tim.

All in all Portland/Seattle price will have to fall another 15-20% (draw a line vertically from the current position to the middle) from the 2007 highs before they gravitate to the mean. Don’t worry folks we will be there soon (within 2 years).