Bubbles vs. Steady Appreciation

Posted by The Tim on August 1st, 2008 at 10:38 AM · 88 Comments

Here’s an interesting way to look at the Case-Shiller data: comparing the actual index values to theoretical values as they would look if they grew at a steady rate year-over-year.

Case-Shiller HPI and Annually Compounded Rates

The data starts in 1990 because that is the first year that the Case-Shiller index began tracking Seattle. 1990 may not be the best year to use as a baseline, since it was right at the peak of a good-sized run-up (see the 60-year Seattle home price graph), but it still gives us a good idea of where home prices would be if the appreciation curve had remained in a healthy range.

Up until about 2003, home prices in our area held pretty close to the 5% yearly appreciation curve. At our peak, we crested just over 7% per year, and as of the latest data, Seattle’s Case-Shiller HPI sits at around 6.3% per year, or 25% above the 5% level.

For comparison, here is the same plot, but with New York, Chicago, Boston, and San Francisco added, and all cities re-indexed to 1990=100:

Case-Shiller HPI and Annually Compounded Rates

Is there some compelling argument why home prices in Seattle should be averaging around 6% per year appreciation since 1990, while values in other larger, more world-class cities are all tumbling below the 5% per year mark? If there is, I’d love to hear it. If not, I don’t see any reason to expect that prices won’t keep falling here in the Puget Sound until they are more in line with the norm.

This method was inspired by the Median House Price vs. Annually Compounded Interest tool written by regular commenter Jonness. You can use the tool to compare hundreds of other cities in this manner. Jonness also has a number of other valuable home price comparison tools on his website HousingCorrection.com.

Categories: Statistics
Tags: Case-Shiller, graphs, Statistics

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88 responses so far ↓

1 vboring // Aug 1, 2008 at 10:45 am

why is the 5% line the lowest?

the rate of inflation (about 3%) should be the lowest line showed.

the C-S theory is that house prices have historically matched consumer price inflation rates and will eventually correct to this in the future. so that is the line we should be most interested in.
2 vboring // Aug 1, 2008 at 10:47 am

either that, or adjust the prices for inflation and then we’d be most interested in when to expect a zero crossing.
3 The Tim // Aug 1, 2008 at 10:51 am

Ok, because you axed nicely:
4 jon // Aug 1, 2008 at 11:19 am

“Is there some compelling argument why home prices in Seattle should be averaging around 6% per year appreciation since 1990, ”

Because it started from a lower base? NY and SF are still priced higher than Seattle. Boston has not done well because it has lost its economic edge. Prior to the 1990’s it benefited from a high level of defense spending, and that industry declined at the end of the cold war. It then lost the workstation battle and then the PC battle to Silicon Valley.
5 Alan // Aug 1, 2008 at 11:21 am

The yield curve that looks parallel to a segment gives the return for that segment.

1990-1991 looks like an abberation.
1991-1997 looks like a 3% curve.
1997-2000.5 looks like it is a little more than a 7% curve.
2000.5-2004 looks like a 5% curve.
2004-2007 is "golly" steep. I don’t know what it is, but it is much more than 7%.

I’m assuming the dotcom bust slowed appreciation from 2000-2004.

Questions:
a) What was going on around 1990-1991?
b) What happened in 1997 to change the yield from 3% to 7%?
c) What happened in 2004 to change the yield from 5% to insane?
6 deejayoh // Aug 1, 2008 at 11:24 am

IMO, home prices move with incomes - not with inflation. So if incomes are moving faster than inflation, then home prices will too.

FWIW, incomes in the Seattle area took a huge jump in the mid 90’s when Microsoft was booming. The combination of employees + lots of investors locally was very good for income growth. IIRC If you look back to 95-98 you will see 8-10% increases in incomes in a period of relatively low inflation. I don’t think you will find this phenomenon in other areas you have included - though I have not done the comparison.
7 deejayoh // Aug 1, 2008 at 11:29 am

Income growth for Puget Sound - 1991 - 2001

Year Income growth
1991 4%
1992 5%
1993 2%
1994 4%
1995 4%
1996 6%
1997 6%
1998 9%
1999 8%
2000 6%
2001 0%
8 Joel // Aug 1, 2008 at 11:46 am

Is there some compelling argument why home prices in Seattle should be averaging around 6% per year appreciation since 1990, while values in other larger, more world-class cities are all tumbling below the 5% per year mark?

Yes, jobs! There are no jobs in those cities. Not a single one. Every single inhabitant is unemployed. Contrast that with the Seattle area where every human (and most other primates) over the age of 12 is a Microsoft millionaire and has a 34 year backlog of jumbo jet orders.
9 Lamont // Aug 1, 2008 at 12:02 pm

If you use a logarithmic axis for the CS HPI, then it will straighten out your curves.
10 deejayoh // Aug 1, 2008 at 12:05 pm

As backup for my claim that Microsoft drove income growth - here’s a study by Conway Pedersen that shows Microsoft accounted for 26% of the income growth in King County from 1990-95

Exhibit: http://img352.imageshack.us/img352/9504/cpmicrosoftimpactlq8.jpg

and here’s a chart of MS stock price showing how it continued to increase in price through the point at which income growth stopped in 2001. Even though the study only goes through 1995 all the elements are there for even greater impact.

Exhibit: http://img124.imageshack.us/img124/6013/microsoftstockwv1.jpg

So I think that home price appreciation in the late 90’s was probably reasonable as it can be explained by income growth, and yes, Microsoft is a big factor. Not just employees - lots of locals bought the stock and got wealthy.

But after 2001 - it’s another story. That is the true bubble
11 Brian // Aug 1, 2008 at 12:10 pm

This is an awesome view. Thanks Tim!
12 Brian // Aug 1, 2008 at 12:15 pm

So if I’m reading that right, for Seattle to revert to 4% a year appreciation rate, housing prices would have to fall 30%?

Tim, could you reframe the chart to show how many years of 0% appreciation it would take to reach 4-5%? That’s probably more likely than a 30% decline. Just look at what all those other cities did from 1990 to 1997…
13 FilthyRenter // Aug 1, 2008 at 12:20 pm

Deejayoh,

Couldn’t there be a lag between when the incomes were coming in to when they are being spent? Surely most people don’t go out on the day they get a raise or some stock and buy lots of stuff (which stimulates the economy, raising house prices, etc).. perhaps lag stopped the effects until after 2001?
14 jesse // Aug 1, 2008 at 12:29 pm

Rising real incomes and densification are the only two ways I know of to sustain above inflation growth.
15 TheHulk // Aug 1, 2008 at 12:39 pm

jesse, considering the last few years maybe you should add “easy credit” to that list as well.
16 jon // Aug 1, 2008 at 12:42 pm

The benefit to owning a house is even better than this chart implies, because unlike stocks or CDs, you can live in a house or rent it out. So even when housing prices are flat, the owner is getting some return on it even if not as much as other investments.

Unlike other products that people will spend money on, when a house increases in price the wealth effect allows that person to trade to another house at that higher price level even though their income did not go up. That assumes they don’t spend the increase on something else obviously. That allows prices to rise faster than inflation, because existing owners are able to keep up with the increase automatically.

jesse - The rising real incomes may not be evident to the people living there. As places like Microsoft and Amazon import people from around the country at salary levels above the average here, the local average real income goes up though people living here might not see an increase.
17 Charles Dean // Aug 1, 2008 at 12:48 pm

Seattle is really an issue of supply and demand. There are alot more people moving into the area than moving out. We also have lower unemployment and higher wages than elsewhere. That’s also why it took about 6 months longer for us to start seeing depreciation in our area as well.
18 Brian // Aug 1, 2008 at 12:55 pm

Jon:
But doesn’t that mean that people trading houses essentially don’t care what happens to prices. They aren’t sensitive to changes and thus don’t have influence on the direction of prices. Newcomers to housing are sensitive, and thus should impact the direction of prices much more greatly.

This reminds me of something I read in some popular economics book recently (perhaps The Logic of Life) about how even a small oversupply of something (strangely enough they were actually focusing on the oversupply of women in NY, and how hard it is for them to find a man) can dramatically reduce the price it trades at.

Recently, compared to demand, we’ve had an undersupply of housing. Now that has reverted.

I’m don’t think I buy your “allows to rise faster than inflation” argument.

What we should probably track over time is change in monthly payments, not change in absolute price. I’d think that’d track inflation or houshold income fairly closely, except for brief periods with wild interest rate swings.
19 smeeegs // Aug 1, 2008 at 12:56 pm

seattle is the only place in the world where they are not making any more land
20 Alan // Aug 1, 2008 at 1:00 pm

Brian,

30% has been my target for an appropriate correction for a while. However, I think the market may overcorrect by as much as 50%.
21 LeftOverpricedSeattle // Aug 1, 2008 at 1:09 pm

I hate to ask this, but what’s PDX look like on this graph? I know many PDX’ers claim that Portland is “different”, just like Seattle, but PDX has inventory out the wazoo, growing faster than every other major city except for Las Vegas, IIRC.

I am expecting to see a 40% haircut in PDX before this bottoms out, but what do the numbers suggest?
22 jon // Aug 1, 2008 at 1:10 pm

Brian,

Existing owners continued income growth allows them to trade up , with whatever price their house appreciated to as a base. That increases the market for houses that are priced well above the level that they could buy with their income alone. Their old house then is sold at the lower level that is affordable on income and savings alone. The combination of those two sales is a higher average price. Naturally a falling market reverses that effect. So the overall effect is increased volatility.
23 deejayoh // Aug 1, 2008 at 2:31 pm

I really don’t know how we could drop 30/40/50% off prices. that says we are going back from a max of ~190 to 133/114/95.

Way I look at it, 4% (based on income) is the natural rate of growth. Start in 2001. That would put us at ~144 index today (vs 178 actual)

If we continue to drop at our current 11% annualized rate (one of the fastest in the country per Tim’s chart) the CS values will cross that 4% growth line in Fall 2009 - about 15 months from today. The value when the cross would be about 150. That’s a 22% fall from peak and about 15% more than we have dropped to date.

http://img390.imageshack.us/img390/5528/4scenarioym7.jpg
24 Ira Sacharoff // Aug 1, 2008 at 2:45 pm

Deejayoh,
Seems reasonable to me as far as prices continuing to drop for another 12 months+,, but I’m a little puzzled. If the peak here was July ‘07, and we’ve fallen about 7% since then, where does the 11% annualized rate come from?
25 David McManus // Aug 1, 2008 at 3:06 pm

“We also have lower unemployment and higher wages than elsewhere. “

That’s BS. That argument is going around for years. Pink ponies too, right?
26 deejayoh // Aug 1, 2008 at 3:08 pm

where does the 11% annualized rate come from?

We haven’t been falling for 12 months yet. We’ve fallen >8% in 10 months. I took that and annualized it. That is probably a worst case scenario,
27 MarkM // Aug 1, 2008 at 3:15 pm

Downtown Seattle makes it as #3 on Forbes most overpriced zip code list. We really are special… (*sigh*)

http://www.forbes.com/2008/07/29/overpriced-zips-homes-forbeslife-cx_mw_0729realestate_slide_9.html?thisSpeed=15000
28 Joel // Aug 1, 2008 at 3:19 pm

Way I look at it, 4% (based on income) is the natural rate of growth. Start in 2001.

Prices should track with income assuming inventory stays the same relative to population growth. If we had 4% income growth, but housing stock doubled while the number of households stayed the same I would expect prices to grow at less than 4%. Conversely if incomes grew at 4% and housing stock stayed the same while the number of households doubled I would expect prices to rise much more than 4%.

Also we aren’t factoring in household incomes dropping (since we don’t know how much they will). Other than layoffs and income cuts think of how many times realtors and mortgage brokers have said they will be fine because part-timers will drop out leaving them with the same amount of business despite overall lower transaction volume. Consider that most of these part timers made gobs of money (pumping up household income numbers) and are often the second income in a 2 income household.
29 mikal // Aug 1, 2008 at 3:23 pm

David Mcmanus you are wrong. I am from the midwest and when friends and family visit they are shocked by all the wealth and, not suprisingly, jobs. Obviously there are places that are better, but not many.
30 Joel // Aug 1, 2008 at 3:25 pm

inventory stays the same relative to population growth

Oops, I meant inventory relative to population or inventory growth relative to population growth.
31 Bubbles vs. Steady Appreciation | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area. | Walkabout Seattle // Aug 1, 2008 at 3:55 pm

[...] Bubbles vs. Steady Appreciation | Seattle Bubble — News & discussion about real estate & t…. [...]
32 The Tim // Aug 1, 2008 at 4:20 pm

LeftOverpricedSeattle @ 21:

Yikes!
33 Garth // Aug 1, 2008 at 4:55 pm

The CSI for portland includes Clark county in Washington, which is where all the growth took place.
34 mark // Aug 1, 2008 at 5:09 pm

Alan;

Just going from memory, but here goes:

a) What was going on around 1990-1991?
The steep line end in the summer of 1990 was appreciation from the late 80’s. The early 80’s were brutal - 15-18% interest rates, in the mid to late 80’s rates dropped, 8.5% - 9% were considered good rates at that time, and prices started to rise. Microsoft was just starting take off at that point also. Summer of 1991 was the start of Gulf War I and the start of a recession. Boeing was hit pretty good at that time. That was the small drop in 1990 and the low appreciation rate from that point until about 1997.

b) What happened in 1997 to change the yield from 3% to 7%?
1997 - 2000.5 many things drove the prices from there. The dot com boom in the market. Microsoft had really hit its stride by then. Amazon.com, Real Networks, Costco, and other comapanies were also adding a lot to the local economy. Boeing was also hitting the top of its cycle also. Interest rates were in the 6%-7% range. Congress repealed the capital gains taxes on homes held more than two years. That was truly a goldilocks time around here.

Yes, the dot com bust and 9/11 was the proverbial turds in the punch bowl at that time. It was a mild rescession though, compared to the ones we experienced in the 60’s, 70’s, and early 80’s. Boeing took a pretty good hit at that time but didn’t kill the local economy like it used to do in earlier days.

c) What happened in 2004 to change the yield from 5% to insane?
Well, that’s when a large portion of the country just went crazy and started buying homes. Its all been talked about here. Real estate only goes up, loose lending standars, historicaly low rates, buy now or get priced out forever, etc.
35 LeftOverpricedSeattle // Aug 1, 2008 at 6:06 pm

The Tim,

Thanks for the graph. I thought PDX went ridiculous in the mid 1990’s and it looks like my anecdotes from that time period were correct. I really believe PDX will fall more than Seattle as, of the two cities, while neither is “world class”, IMHO, Seattle does have the upper hand (at least when the Port of Tacoma is thrown in).

I sometimes wonder which city has more real estate kool aid drinkers. Some days I think PDX and other days I think Seattle. I remember an agent in PDX telling me that in her 17 years of experience (this was in 2007), PDX had never had a year of negative appreciation in RE. I replied, “Yes, but what about before that?”

This agent had just purchased an overpriced Old PDX in Irvington to “restore”.

I wonder if she has had to put those plans on hold given the lack of buyers and overpriced sellers.

Thanks again, I still stand by my statement that a 40% depreciation is coming for PDX.
36 Alan // Aug 1, 2008 at 6:16 pm

Is anyone else getting an operation aborted error when they view seattle bubble in internet explorer? I’m not getting it in firefox.
37 Mike2 // Aug 1, 2008 at 6:17 pm

IE7/vista is giving a “www.seattlebubble.com/blog” cannot be displayed error after loading the page. I can’t say I’ve seen this IE error before - and I see a lot of them.
38 Alan // Aug 1, 2008 at 6:19 pm

I think it is failing to download one of the referenced javascript files.
39 The Tim // Aug 1, 2008 at 6:29 pm

Whoa. Um… what the heck is going on here. That is a crazy-weird error. Looking into it.
40 The Tim // Aug 1, 2008 at 6:39 pm

Ok, I isolated and eliminated the problem. Apparently Sitemeter (a website hit counter) did something to their code today that is causing the same problem to everyone using their code. Awesome.

Sound Politics and HorsesAss are affected as well.
41 Garth // Aug 1, 2008 at 6:42 pm

Only crashed in IE for me.
42 deejayoh // Aug 1, 2008 at 6:45 pm

Oh, I get it. Microsoft drove up real estate prices AND they crashed Seattle Bubble

;^)
43 Alan // Aug 1, 2008 at 6:56 pm

Forums still have the same problem.
44 The Tim // Aug 1, 2008 at 7:08 pm

Whoops. Forgot about the forums. They’re fixed now too.
45 DavidB // Aug 1, 2008 at 7:15 pm

“We also have lower unemployment and higher wages than elsewhere. “

Unemployment is lower here than in some parts of the US, however, I disagree that wages are higher here than in other areas of the country. Prices for groceries, gas, housing, and other products are higher than other areas.

I’ve heard people say that Microsoft and Amazon stock sales are contributing to the high cost of homes here. I think that may have been the case in the past (early to mid 90’s) but not so much now. Stock options are no longer offered by most companies and companies like Amazon and Microsoft give stock grants to their employees and they equal about 20% - 25% of the employee’s base salary. An employee can do well if the stock is increasing in value by the time it vests but if they decline then they’ll make less money than they could make at a company that paid a market salary instead of the salary plus grants. Microsoft stock hasn’t done well in quite a while and Amazon’s stock has been trading in a range between $60 - $80 for the past year so there’s not a lot of additional money flowing into the local economy from these stocks. Amazon and Microsoft do bring in a lot of employees from other areas but they tend to be younger and they’re not able to afford half a million dollar homes!

I use to work at both companies so I’m very familiar with their pay structures!
46 Mike2 // Aug 1, 2008 at 7:44 pm

Unemployment is lower here than in some parts of the US, however, I disagree that wages are higher here than in other areas of the country.

In Fairfax County, wages are higher than in Seattle, unemployment is lower, yet the “richest county in the US” home prices dropped a hair below Seattle’s level.

Then again, there are no mountains and lakes here. Fair trade? Meshugy?
47 Mike2 // Aug 1, 2008 at 8:06 pm

As a Seattle transplant I wasn’t all that familiar with Fairfax county when I moved here, but if you’re wondering where the heck it is…

http://en.wikipedia.org/wiki/Fairfax_County%2C_Virginia

It’s not Seattle.
48 Lionel // Aug 1, 2008 at 8:48 pm

http://finance.yahoo.com/real-estate/article/105488/America’s-Most-Overpriced-ZIP-Codes?mod=weekend

Downtown Seattle makes the ten most overpriced list.
49 b // Aug 1, 2008 at 10:41 pm

mikal -

give us a break. seattle was wealthy compared to the midwest back in 2003, before the bubble. the midwest has been stagnant compared to the coasts since the great depression. that does not explain the bubble run up at all. visited any other major metro areas on either coast recently? its all the same.
50 Alan // Aug 1, 2008 at 11:08 pm

Off topic, but notice of trustee sales (part of the foreclosure process) were up 143% in July over last year.

http://seattlebubble.com/forum/viewtopic.php?f=1&t=1552
51 Ray Pepper // Aug 1, 2008 at 11:12 pm

Dang…Everytime I come here I see charts. I hate charts! I must be the only one. I had a horrible time in Geometry and maybe thats the reason. Then I took intro to logic at the UW (a 100 level class) and I dropped it in 3 days. I didn’t understand anything.

I think Tim needs to start http://www.SeattleGems.com Then we can all see which one of us is going to pull the trigger. Without looking at all these charts we already know:

Prices are coming down another 10-15% over the next 3-4 years.
Foreclosures will continue to increase at a record rate.
A home will be considered an albatross around ones neck.
Its better to rent in a decling environment-(no taxes, ins, upkeep)
The economy is going to get worse with temp blips up.
500 Realty is awesome.
Short sales suck.
The Brick and Mortar Brokerage will have to adapt to the new Era of Buyer.

Ray Pepper
Broker
http://www.500Realty.net
52 Demersus // Aug 2, 2008 at 1:30 am

“Dang…Everytime I come here I see charts. I hate charts! I must be the only one. I had a horrible time in Geometry and maybe thats the reason. Then I took intro to logic at the UW (a 100 level class) and I dropped it in 3 days. I didn’t understand anything.”

A salesman that can’t understand math, amazing, just amazing.

I think prices are coming down about 10% per year for the next 3 to 4 years.
53 Ray Pepper // Aug 2, 2008 at 10:01 am

No salesman here. Just an investor who started something for you Demersus and everyone you know. It doesn’t needs sales it just needs education to the masses. Be happy you know “this salesman.”
54 BrianL // Aug 2, 2008 at 10:03 am

Well, 10% a year decrease for 4 years would put me under water by about 40k. I can only take a loss of 7% a year decrease and break even. I bet on a drop to 2005 prices which in our case is closer to 7% a year.

Still, thats only the difference between 25% and 35% cumulative decrease; both are definitely within the realm of possibility. That is even more incentive to up additional mortgage payments. :)

It will be interesting to see how different neighborhoods depreciate. For example, I expect places that require more driving to come down in cost faster as energy costs increase. Same for large houses with higher maintenance/heating costs. I’d also expect the higher end houses (600k) to lose value faster than cheaper places as fewer people can affor them (driving down the cost of cheaper places, but potentially to a lesser extent).

Once the large batch of foreclosures play out (ie once most loans are stable due to more conservative lending guidelines/more people on fixed/etc) it will also be interesting to see how many houses are on the market. I’d expect fewer as more people sit on what they have.
55 Lukasz // Aug 2, 2008 at 2:25 pm

I went to Tom’s inflation calculator at http://www.halfhill.com/inflation.html and according to WAGE INFLATION for the WHOLE USA the wage index should have risen from 60 points in 1990 to 99 points in 2008. That means that wages have been rising at 2.8% a year. 99/180=0.55, so that would mean that home prices have another 45% of declines (in real terms) in the years ahead.

I also went to see government numers at http://www.seattle.gov/financedepartment/cpi/pdfs/Seattle_CPI_History_–_Annual.pdf for WAGE INFLATION of SEATTLE URBAN WORKERS. The index have risen from 124.4 in 1990 to 210.3 in *2007* so I estimate the index would be around 219 in 2008. That means that CSI should have risen from 60 in 1990 to 106 in 2008 (at a rate of 3.2% a year). 106/180=0.59 so that would mean that home prices have another 41% of declines (in real terms) in the years ahead.

Both of the forecasts above mean that prices would go back to the level of summer 2000 in nominal terms.

I think that the calculations above should be treated as a baseline. If economic conditions worsen, then declines can be bigger. If easy credit comes back, then the declines can be smaller.

The calculations above don’t take into “specialness” of Microsoft’s above-average wage growth (Microsoft employees were insignificant in US-wide data, and [AFAIK] were excluded in urban workers) , so they might be skewed toward predicting higher declines.
56 jonness // Aug 2, 2008 at 3:36 pm

Tim: Thanks for the mention on the chart! :)

Ray Pepper: You know I’m going to hire you to handle my next house purchase. But what is this about hating charts? Hmmmm…Okay, I made one for you today that you are sure to love. I’m not sure I can understand it either. It’s median price vs. mortgage rate vs. GDP. I thought the GDP would make more of a difference. It appears lots of factors play into overall growth, but cheap and easy money probably tops the list.

http://housingcorrection.com/medianpricevsmortgagerate/medianpricevsmortgagerate.aspx
57 deejayoh // Aug 2, 2008 at 5:05 pm

jonness, I am sure you just made Ray’s head hurt!
58 softwarengineer // Aug 2, 2008 at 5:05 pm

I WAS DRIVING AROUND MARYSVILLE YESTERDAY

McMansions in the 200s and townhomes at $160s…..half a million dollar homes?

Ohhhhh, even if you paid like an extra $15/day to commute to Seattle from Marysville; that’s like $300/mo….makes the suburbs still look cheap, even with $4 gas. With 4 day weeks and telework, you could even save more.

But don’t grab ‘em up just yet, in my book, they have a long way to price plummet, the Titanic has just reached the outer tip of the iceberg. We’ve still got like $2-3Trillion of bad loans facing us in the future [bailout?....lol] and an economy with a job butcher axe in its hand.
59 deejayoh // Aug 2, 2008 at 5:08 pm

Oh, and by the way - I like your approach. Goldman Sachs has a report where they used disposable income divided by ten year bond rate as a proxy for home price changes. I worked up a similar analysis for washington a while ago. Maybe you could do some interactive magic with that approach?
60 softwarengineer // Aug 2, 2008 at 5:17 pm

YOU THINK THAT $0.3Trillion HOUSING BILL BAILOUT WILL WORK?

How can it, when we’re just fixing a few homes that will go into foreclosure later anyway?

You think my $2Trillion estimate and tip of the icebeg assertion(s) are too gloomy?

Dr. Roubini doesn’t [and he's been right all along]. See the proof:

http://www.rgemonitor.com/blog/roubini

He thinks we’re only in the 2nd inning of the price collapse too, 8 more innings to go. [long ones with lots of walks?]….
61 jonness // Aug 2, 2008 at 6:40 pm

deejayoh:

Nice link. I’ll look around for that data and see about making up an interactive chart. Very interesting :) Thanks!
62 Nabil // Aug 2, 2008 at 7:45 pm

Yes, there is a good reason why Seattle should appreciate at a higher rate. This is because cities like New York are world class cities which are well established, and have firm footing on high housing prices. Seattle is not a world class city and has a lot more room to improve, as it is one of the best of the rest. Prices twenty years were ridiculously low when looked at the type of city Seattle has become today. Other cities like New York and Chicago haven’t changed nearly as much over the last twenty years.
At the end of the day, it’s about supply and affordability. Houses are overpriced here, but the affordability, especially in the suburbs of Seattle, is much better than the suburbs of those other world class cities. While the housing storm might knock another 10% off Seattle’s prices today, long-term, the young smart families with talent in their households will tend to continue to flock here over others like New York, Los Angeles, etc.
A brand new, 2500 sq. foot house in the heart of Mill Creek sold for $340K a couple of weeks ago. If prices go down beyond the bargain prices that can be found today, (not the median), the market will be over-correcting.
63 BrianL // Aug 2, 2008 at 9:48 pm

Lukasz, can you expand on your calculations there? I want to be sure I follow. I am not sure how your dollar inflation leads directly to decreased house prices. Are you assuming the dollar will deflate to 2000 value (ie salaries will decrease to 2000 value)? Or are you thinking the purchasing power of the dollar will decrease (ie dollar inflates, house prices remain stationary)?

What I’ve been doing:

- Assume ~3% ‘normal’ increase in house prices a year on average over a long period of time. This is part inflation, part demand growth (for example, King county population grew by 5% since 2007)
- Take a pre-bubble time period as a reference point. This is tricky for Seattle due to the impact of various companies (ie Boeing/Microsoft/etc)
- Given the initial value, rate and period of time, extrapolate a 2008 value. Measure the difference in value with the bubble value.

Note that this doesn’t take dollar inflation/deflation directly into account - your model may be much better than my rough approach.
64 Herman // Aug 2, 2008 at 10:38 pm

Seattle has undergone a transformation from a blue-collar Boeing manufacturing and engineering town to an industry based on high-tech software and bio. This has attracted higher salaried people to the area.

Money has flowed into real estate. In addition to appreciation from the more moneyed population, the blue-collar housing stock is being renovated or replaced. Anyone who lives in West Seattle or Bal-LARD has seen the shack next door turned into a mansion.

That said, I still think we’re overpriced and have another 15% to fall, either immediately or via sub-par price performance over the next few years. Any when the SR99 construction starts next year, get ready for a price beatdown to hit some of the downtown neighborhoods.
65 Jay // Aug 2, 2008 at 10:42 pm

I guess this is stating the obvious, but it’s all about supply and demand. Income may factor into the equation, but IMO it’s a footnote to supply and demand. The housing demand comes from population growth, and supply comes from people leaving the area and new development. IMHO, historical price chart may be good for identifying and studying long-term trends, but is of little value when it comes to predicting the future (if it were, it would be oh-so-easy to make money), and we need to see the supply and demand picture to make any kind of decent prediction. Seattlebubble regularly updates the data on the supply side, but how about demand? What is the population growth? How many of us are renting vs. owning, and how much are we paying on per sqft basis?
66 Herman // Aug 2, 2008 at 11:27 pm

Jon @16 is incorrect. RE does not have a special status as a financial instrument because you can live in it or rent it out.

Many stocks pay dividends. So you get paid “rent money” for owning them in addition to the change in value of their selling price. You should look at your RE as if it were a stock that pays a dividend, that you bought at a 5:1 margin (20% down). But since stocks may only be purcased at a 2:1 margin, I’ll create a comparitive example based on a 50% down payment.

Example A. You had $250,000 in July 2007. Your tax rate is 33%.

You used it to buy a $500,000 house in Seattle and rented it out.
- You lost 6% in asset value due to the YOY price change, which is tax deductible (-$20,000)
- You spent 1% on maintenance, which is tax deductible. (-$3,300)
- You paid interest on your loan, which was tax deductible. (-$10,000)
- You paid 1.1% property tax, which was tax deductible. ($-4,000)
- You paid insurance. ($-700)
- You collected rent at rate of 3%, but paid income tax on it. (+$10,000)
- You sold it today and paid 10% in sellers fees and taxes, which I assume are tax deductible. (-$31,000)
- You had to put the time and work in to locate the renter and deal with him/her.
———-
You now have $191,000.
You have lost quite a bit of your money.

Example B. You had $250,000 in July 2007. Your tax rate is 33%.

You used it at a 2:1 margin to purchase $500,000 in Proctor & Gamble stock (a dividend producing stock I chose because it’s the one I buy)
- PG stock value rose 1.5% in that time period which is taxable as a short term capital gain. (+$5,000)
- PG pays a dividend rate of 2.5% which is taxable at the lower dividend rate of 15%, and which is just as good as rental income. (+$10,000)
- You paid 7.25% margin interest which is tax deductible (-$12,000)
- You incurred flat fees of $40 to buy and sell the stock ($-80)
- You didn’t have to spend any time managing this investment.
———-
You now have $252,920.
You should have put it in a CD, but at least you didn’t have it tied up in Seattle RE.
67 Ray Pepper // Aug 3, 2008 at 12:09 am

Way way way off subject but I just saw Batman for the second time at the Cinerama. The 1st time was opening night at midnight and I was too tired. I don’t like that venue anymore. I can hardly lean back. The show was long, Batman’s voice was ridiculous, Ledger was awesome, the girl wasn’t cute enough, and I guess I liked it more the second time. In other words no Joker/Ledger no show. But, I still like Nicholson in Batman 1..”This town needs an enema.”

Now back to houses…Hmmmmmmmm Go Find A Gem!
68 jonness // Aug 3, 2008 at 12:57 am

“Yes, there is a good reason why Seattle should appreciate at a higher rate. This is because cities like New York are world class cities which are well established, and have firm footing on high housing prices. Seattle is not a world class city and has a lot more room to improve, as it is one of the best of the rest.”

Spokane does not have a whole lot going for it compared to Seattle. The job market over there is dismal compared to what we have over here. Sure there are jobs, but they tend to be low paying. Yet, Spokane’s house price curve exactly follows Seattle except that it has appreciated at the slightly lower rate of 6% since 1990 compared to Seattle’s 6.5%. In fact, every city around here has an identical looking appreciation curve except they vary in magnitude. What is more striking is that many of these places are not surrounded by water, and they have a surplus of buildable land.

Perhaps the question should be, why is Spokane drastically outperforming every other city on Tim’s chart other than Seattle? I believe we are not witnessing a Seattle phenomenon; we are witnessing a regional phenomenon that has more to do with regional forces and less to do with the specialness of any particular NW city.
69 mikal // Aug 3, 2008 at 5:56 am

Nabil, that makes more sense than alot of what is written here. We aren’t at the bottom yet, but no one should expect it to revert to the form of the early nineties as this city is becoming more diverse in it’s business and some of that business brings big money. I bet there is a gem in Detrot for those expecting the apocalypse. Go Road Warrior, I mean Eleau.
70 David McManus // Aug 3, 2008 at 7:39 am

A brand new, 2500 sq. foot house in the heart of Mill Creek sold for $340K a couple of weeks ago

Sounds like it was still overpriced.
71 mikal // Aug 3, 2008 at 8:14 am

The only thing overpriced is your ego and opinion. Although I wouldn’t want to live there either.
72 [troll] // Aug 3, 2008 at 9:08 am

Snds lk t ws stll vrprcd.
………..

Dvd, wht s yr stmt t bld 2500 sq ft hm + cst f lnd?

340k snds prtty gd.
73 LUC // Aug 3, 2008 at 9:30 am

Herman,

I have to disagree with you on the statement that Seattle is Bio hub. California, Massachusetts, Maryland, North Carolina, Penn. and New Jersey dwarf Seattle and Washington state in terms of companies, jobs, research facilities and incentives to promote biotech and biomedical companies.
74 patient // Aug 3, 2008 at 10:09 am

$340K for a 2500sqft home sounds about right for the more desirable close-in neighbourhoods if we didn’t have a bubble. For Mill Creek, take another $100k off to get to a reasonable price.
75 [troll] // Aug 3, 2008 at 10:15 am

ptnt,

Yr cmmnt bt rsnbl prc dsn’t mk ny sns t ll.

wht s yr stmt t bld 2500 sq ft hm + cst f lnd?
76 David McManus // Aug 3, 2008 at 10:22 am

For Mill Creek, take another $100k off to get to a reasonable price.

Exactly. That was my point.
77 BrianL // Aug 3, 2008 at 11:17 am

Different thought:

The financial communities believe dollar inflation is at something like 10% a year (vastly higher than official goverment numbers). Most investment opportunities are suffering, making it even harder to keep cash from losing purchasing power.

This puts responsible first time home buyers are in a messy spot. Assuming people want to buy in a few years once the market cools, it is prudent to save money for a downpayment. Unfortuntely inflation is chipping away at the value of the cash quickly. This may be compounded by likely increased interest rates.

If inflation accelerates, home prices may not drop dollar - prices may just become more affordable relative to other goods. Existing home owners may not be hurt as much assuming their salaries roughly track inflation. Inflation will make paying mortgages cheaper relative to other goods though who knows how affordable that will be in the end.

My motive here isn’t to argue that houses are a good investment - I think most agree they aren’t. I’m just trying to figure out how a recession would impact the market on a whole.
78 jcricket // Aug 3, 2008 at 1:20 pm

I guess this is stating the obvious, but it’s all about supply and demand. Income may factor into the equation, but IMO it’s a footnote to supply and demand.

I’d argue there are many, many more factors to consider when even attempting to predict the housing market’s next moves. There are local and national downturns to factor in, interest rate considerations, supply/demand for specific types of housing stock/locations as tastes change (i.e. compare “white flight” from the cities vs. new-urbanism). Then there’s government changes in taxes (i.e. increase in progressive taxation v. more regressive tax cuts) or incentives (i.e. whether they ever change towards/away from subsidizing/encouraging homeownership). There’s local income, and even micro-factors (companies like Microsoft or Amazon, or the lack thereof) to consider. And that’s just off the top of my head.

I think the picture’s murkier than anyone can get their heads’ around, so everyone each focus on some set of statistics that proves their pre-determined point (i.e. they fall victim to confirmation bias and subjective validation).
Deejayoh points out that even a 30% drop would take us below the curve we’ve been on for 20 years, and people still argue 80-90% drops are in the cards. It’s not to say it couldn’t happen, but to claim it’s inevitable, or supported by some set of historical statistics is laughable. It’s as silly as thinking “things have changed” and 8-10% annual house price inflation is going to hold into the future. Sure, it could happen, but acting as if your economic modeling of the future is “fool proof” is (as I said) laughable.

Everyone who invested in tech stocks in the mid 90s looked like geniuses for about 5 years, until they lost 90% of their value. And everyone who’s “all cash” or “holed up in my cheap rental b/c housing’s gonna crater” (not just because they’re a happy renter) is going to look like geniuses for 5 (or whatever) years, until they miss the next turnaround. If anything, that’s the only pattern that’s held true during the last 12 US recessions - as this Seattle Times article points out: http://seattletimes.nwsource.com/html/businesstechnology/2008088346_jaffe03.html
79 Ouch // Aug 3, 2008 at 2:20 pm

Well, if a syndicated columnist has his opinion published in an unbiased, MSM publication, like the Seattle Times, then if MUST BE TRUE.
80 jonness // Aug 3, 2008 at 3:50 pm

I keep running into the theory that Seattle is special; therefore, its housing is bound to appreciate at a higher rate than cities that don’t have companies like MS, are not surrounded by water, and do not have such and such attraction. I hate to burst anyone’s bubble. But I feel I must dispel this myth.

The following, cities are listed in the order of greatest percentage of appreciation since Quarter 1, 1990:

Portland, OR 7.6%
Medford, OR 7.3%
Wenatchee, WA 7.0%
Tacoma, WA 7.0%
Olympia, WA 6.9%
Bellingham, WA 6.9%
Eugene, OR 6.9%
Salem, OR 6.8%
Seattle, WA 6.5%
Spokane, WA 6.1%

I believe people are confusing Seattle’s higher median price with higher percentage of appreciation. This is probably due to Seattle having started at a higher price than the other cities. IMO, the housing appreciation we are witnessing is a regional phenomenon, and Seattle is at the bottom of its region’s heap when it comes to the price gains it has experienced. According to “the Seattle is special theory,” the data actually supports Seattle being less special than all the other PacNW cities. I don’t believe this to be the case. I think we are simply witnessing regional fundamentals coupled with national fundamentals, and there is nothing particularly special about any of the NW cities. However, the argument that “the PacNW as a whole is special and part of that specialness is Seattle” might hold some water.
81 jonness // Aug 3, 2008 at 4:53 pm

As an extension of my regional price theory, I’m posting the following info. I think normal pre-bubble price appreciation would be interesting to include as well, but I’m kinda burnt out on looking at data today.

Appreciation percentages in Pac NW cities from 1990 Q1 to 2008 Q1. Listed from highest rate of appreciation to lowest:
Portland, OR 7.6%
Medford, OR 7.3%
Wenatchee, WA 7.0%
Tacoma, WA 7.0%
Olympia, WA 6.9%
Bellingham, WA 6.9%
Eugene, OR 6.9%
Salem, OR 6.8%
Seattle, WA 6.5%
Spokane, WA 6.1%

Appreciation percentages and subsequent percentage declines in early runup bubble areas from 1990 Q1 to 2008 Q1. Listed from highest rate of appreciation to lowest:
Miami, FL: 8.7% - 7.3%
Santa Barbara, CA: 7.5% - 4.3%
Reno, NV: 7.4% - 4.9%
San Diego, NV: 7.3% - 4.5%
Tampa, FL: 7.0% - 5.4%
Las vegas, NV: 6.9% - 4.8%
Orlando, FL: 6.8% - 5.3%
San Jose, CA: 6.6% - 4.7%

The above data was not cherry-picked. It was selected by whatever cities in the areas compared happened to come to mind. IMO, the data rules out the “Seattle is special” theory and appears to lend support to the “Pac NW began the runup later” theory. It looks as though the poor national outlook at the later point in the bubble might have saved the Pac NW some heartache.
82 jonness // Aug 3, 2008 at 5:15 pm

Oops! I posted the wrong data in that post. I meant to post data that can be compared between the two groups. The first percentage is the peak appreciation rate. IOW, I draw an appreciation line from Q1 1990 and measure where that line touches the median price at the highest point. The second percentage given is the appreciation percentage at Q1 2008.

Earlier bubble Areas:
Miami, FL: 8.7% - 7.3%
Santa Barbara, CA: 7.5% - 4.3%
Reno, NV: 7.4% - 4.9%
San Diego, NV: 7.3% - 4.5%
Tampa, FL: 7.0% - 5.4%
Las vegas, NV: 6.9% - 4.8%
Orlando, FL: 6.8% - 5.3%
San Jose, CA: 6.6% - 4.7%

Later bubble areas:
Medford, OR 8.9% - 7.3%
Portland, OR 8.3% - 7.6%
Bellingham, WA 7.6% - 6.9%
Eugene, OR 7.6% - 6.9%
Tacoma, WA 7.5% - 7.0%
Olympia, WA 7.5% - 6.9%
Wenatchee, WA 7.4% - 7.0%
Salem, OR 7.4% - 6.8%
Seattle, WA 7.0% - 6.5%
Spokane, WA 6.6% - 6.1%

IMO, it is extremely risky to buy a house in the later bubble areas right now. In fact, it is flat out scary!
83 Shital Shah // Aug 3, 2008 at 6:05 pm

I think the reason for “stable” high prices in Seattle is because of huge incoming rate of new people AND continuous very high average/median income of people combined with nearly no impact of jobs. Due to this demand has remained fairly unaltered and if you look, forclosures are at minimal in NW.
84 TheHulk // Aug 3, 2008 at 8:03 pm

Shah@80

Short answer: The main reason why foreclosures are minimal (as of today) are we haven’t seen the price declines (yet) of 10-15%.

Refuting you: Please define HUGE incoming rate of people and HUGE demand. Did microsoft suddenly double from 2000 to 2008 (and they were giving everyone they hired a gazillion dollars, yeah right). If anything I believe they stopped giving stock options in 2003 and thats when the millionaire mint ran out of money. From the charts above its easy to see how prices have doubled in that time period. If anything, this has only happened down south in Mountain View where a certain company went public not too long ago. Now if prices went up near Google by a fair margin in that period, I wouldn’t be surprised. Nothing has happened in Seattle to justify the kind of price change in the last 8 years.

We have been only 8 months into our own decline. Prices have already declined to 2006 levels in real terms. I can assure you I personally know at least 3 friends who bought in 2007 who are all in a boat load of trouble. Our peak-awesome-weather-prices-will-always-go-up spring selling season has come and gone. Take a look at redfin. Brand new construction around eastside(2000 sq ft houses) are listed at 500K and below. Which means with 50K in upgrades and after negotiations the real price will be close to 450K. How can 10-20 year old houses compete with that? By lowering prices.

Just wait for xmas and you will see 10-15% declines across the board. People will find themselves 50-100K underwater depending on how much they got into the real estate madness and then the foreclosures will come.

Next year this time we should be 20-25% below 2007 peak prices.
85 Jackson Wallace // Aug 3, 2008 at 11:31 pm

I believe this city is overhyped, but destractors need to realize that is ideal in the summer, that is when it isnt crappy, which is very frequent. The winters here, while gray and rainy, arent as cold as Chicago or NYC, and we do have lots of great skiing nearby. Our culture is tolerable, though cloying, and Chicago surprised me with the trueness and ballsiness of its varied culture, and NYC is, well, NYC, the center of it all. Seattle doesnt have as many scumbags crusing around as other big US cities. We dont have urban hellzones that compete with CHI, NYC, or gasp, hell-a, which does however have far better weather, and other amenities, like an ocean beach. Nowhere is perfect, but lots of Americans find Seattle to be a haven, and thats why its staying expensive. Whether it breaks or not is anyones guess.
Technically it should, and this bubble has made me reassess awful hoods. Renting is more flexible. You can travel the world.
86 jonness // Aug 3, 2008 at 11:49 pm

“I think the reason for “stable” high prices in Seattle is because of huge incoming rate of new people AND continuous very high average/median income of people combined with nearly no impact of jobs”

If that is true, then places in WA with lower median income and higher unemployment rates should not have appreciated as high as Seattle and should not currently be holding their value. As the following statistics show, this is clearly not the case. Seattle is not special after all. We are experiencing a regional phenomenon that is independent of the accolades of any particular Pac NW city.

Wenatchee:
unemployment rate NSA = 6.7%
House price appreciation peak = 7.4%
House price appreciation 1990 to 2008 = 7.0%
Median Household Income (2005) Cowlitz County = $42,592
Percent of state median Household income = 86.3%

Longview:
unemployment rate NSA = 7.3%
House price appreciation peak = 7.0%
House price appreciation 1990 to 2008 = 6.5%
Median Household Income (2005) Chelan County = $40,132
Percent of state median Household income = 81.3%

Seattle:
unemployment rate NSA = 3.6%
House price appreciation peak = 7.0%
House price appreciation 1990 to 2008 = 6.5%
Median Household Income (2005) King County = $58,351
Percent of state median Household income = 118.2%

That pretty much annihilates the theory that Seattle has jobs, is surrounded by water that limits buildable lots, and gave people in other states a fuzzy feeling that caused them to run the price of houses up further than other less desirable NW cities.

If you look at the data I posted in #79, you will see why buying a house in the Pac NW is both scary and dangerous right now. The more I look into this, the more I buy into Tim and other’s “Pac NW is lagging underwater foreclosures by 17 months” theory. I realize it isn’t that black and white because economic fundamentals have changed between the gap. However, it does appear to perhaps be a main factor of current market prices in the Pac NW and could be a valuable indicator of where prices might be heading in the future.
87 Jay // Aug 4, 2008 at 3:55 am

Herman @ 65,

I think houses are in a different asset class than stocks because they are real assets. Of course, one can put money in stocks, bonds, futures, or other financial instruments and get much higher return on investment, but there always is a risk of significant and unrecoverable loss. You can also lose money from real estate, but the land and the house will never disappear (assuming that the structure is well insured), and if you don’t put yourself into risky situations (like getting a loan you can’t afford or understand or counting on short term price increases), the probability of loss is significantly smaller, and if you own the asset outright, you will probably never lose money on it. After all, people will still need places to live even if worldwide economy collapses and all the major companies go kaput.

Consider this scenario for your example: stagflation hits for the next 2-3 years, PG’s operating margin suffers due to lower sales and higher input costs, stock gets halved as a result, completely wiping out your capital after a margin call from your broker. The house you bought is worth 20% less, but you are collecting higher rent (inflation) and you are covering the “payments”. In 10 years, the house is just 10% more than your purchase price, but you have paid off quite a bit of the mortgage debt and your equity is building faster, your cash flow from rent is now solidly positive. In 30 years, the house price has more than doubled, you own it outright, and the rent is great contribution to your retirement income.

Of course, one could buy stocks like PG with no margin and easily achieve better return over 30 year span, and Seattle might become a ghost town in 30 years due to whatever, essentially wiping out any equity in the real estate. But the point is that real estate is safer and more predictable investment because it’s real asset people will always need to use.
88 dawnfromontaio // Aug 5, 2008 at 11:09 am

I enjoy this site - I left Michigan area recently and know all too well the early, middle and severe signs of a downward economy. This area is doing well compared to many parts of the country, however, I am not convinced that it won’t be effected, it has been in the past 6 months. I have chosen to rent, but I could be a buyer in future. One thing that has been stated to me over and over (by real estate agents and home owners) is that the market is different here because of the people that are moving here. Well I am one of those people and I do not feel that real estate is a good investment right now. Just common sense logic and experience talking - I have been through 2 recessions….

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Seattle Bubble

News & discussion about real estate & the housing bubble in the Seattle area.