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.

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.

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.

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!

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.

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.

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

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.

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

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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.

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

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Sounds like it was still overpriced.

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.

Now back to houses…Hmmmmmmmm Go Find A Gem!

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.

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.

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.

Nice link. I’ll look around for that data and see about making up an interactive chart. Very interesting :) Thanks!

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?]….

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.

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

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.

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.

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.

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

http://seattlebubble.com/forum/viewtopic.php?f=1&t=1552

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.

Downtown Seattle makes the ten most overpriced list.

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

It’s not Seattle.

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?

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!

;^)

Sound Politics and HorsesAss are affected as well.