Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

84 responses to “Was King County’s Recent Home Price Boom Unprecedented?”

  1. Hinten

    All things being equal, this would mean that not only 2009 but also 2010 would see significant declines before Seattle goes flat for several years.

    These are excellent representations of the data. I wonder how macro economic issues might influence this. I’m still not convinced that 2010 will be a down year across the board but that might just be my gut and not actual analysis.

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  2. Dave0

    The present boom in King County single-family home prices lasted three times as long as previous booms, and prices rose 11 percentage points higher from the pre-boom price. I’d call that unprecedented.

    I don’t agree with your logic here. It sounds like you’re trying to find a reason to come to the conclusion that it is unprecedented. The current boom lasted three times as long, yet only went a total of 11% higher than in ’79? It sounds to me like ’79 was a lot worse. What if you took those first 6 years from the current boom that aren’t so steep out of the graph. I don’t think it would look like such a large boom then.

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  3. Harley Lever

    I think there are way too many variables to even bother comparing historic data. Seattle is a much different city than it was in the past and will likely be completely different in the future.

    I would like the blog to address the 78 million retiring baby boomers that are starting to retire in 2008 and the fact that we are going to need to import workers throughout the world to meet the employment demands. Especially in those high-paying health care jobs, senior management positions, and other positions we need to fill as the boomers get older and retire.

    Our population and housing requirements as a city and a nation will be forced to grow substantially to meet the employment vacancies over the next 20 years. http://www.bls.gov/opub/mlr/2000/07/art2full.pdf

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  4. Joe

    But that is known information and is already built into the price of housing. If there were no retiring baby boomers your house would be worth less than it is today.

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  5. Everett_Tom

    Is it possible to get these graphs with affordability along the Y-Axis instead of inflation adjust price?

    I’d be really curious to see what that looks like, as it includes some of the other variables (such as interest rate and wages) which don’t show up. I’d also like to see if there is some “magic” affordability point where people stop buying until a market corrects..

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  6. Roger

    Harley, the problem with your scenario is that it requires magic money to fund. With fewer workers in private industry, where is the money going to come from to pay these high-wage jobs you predict. the tax base will be reduced and lord knows this country doesn’t have any savings. And won’t these retirees mostly be flocking to the southwest to soak up the sun anyway?

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  7. Ira Sacharoff

    If indeed the current boom is unprecedented, then how can we predict with any degree of accuracy what the bust will ultimately end up as?
    Some of the real estate pros were saying the same thing just a couple of years ago, that this was the new paradigm, that real estate is a better investment than it ever has been, etc…
    And interest rates have to make a huge difference. In the ’78 ish boom and subsequent bust, interest rates were double digit, out of control, and people couldn’t afford to buy homes not because of the high house prices, but because of the astronomical monthly payments…
    Like Yogi Berra said ” Predictions are hard to make, especially about the future.”

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  8. deejayoh

    Wow Harley – way to start the conversation on one thread and them move it to another…. to your previous post of the same point:

    Thoughts of retirement are probably wishful thinking on the parts of many of those baby boomers. RECENT Forecasts I have seen suggest a good portion of them (half) are going to have to work well beyond the typical age of retirement in order to make it because they have very low savings. The report you pointed to is from 2000, and the bulk of it’s conclusions only extend through 2008…

    From AARP via MarketWatch:

    Consumers 45 years and older are raiding or compromising their 401(k) accounts, shirking monthly payments and skipping regular medications and doctor visits at an alarming rate, according to the American Association of Retired Persons.

    As many as 25% of Americans from the ages of 45 to 64 said they are taking these steps to stay financially afloat, the AARP found in a recent study. That puts them at a decided disadvantage when retirement rolls around, particularly if they have subverted their health, and may lead to putting that retirement on hold.

    Half of their wealth is in Home Equity, and we all know what’s happening to that…

    I think most forecast models assume behavior of this generation will look like past generations. I don’t think that will come to pass. And that’s speaking as a boomer.

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  9. explorer

    On this we certainly agree dejayoh. The leading edge of a very long wave will not hit traditional retirement age unit 2012-13. The money has been spent, and it’s other generations who helped to spend it too. Not all boomers are or were ever wealthy. In fact as is usually the case, most of them are middle class, at best, but shrinking steadily into the working poor more and more every year. That is independent of how much they have been able to save, or spend.

    It makes me wonder if there will ever be another housing cost boom like this last one even possible, provided that the current conditions see though to their logical conclusions.

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  10. obelus

    Regarding the ’79 run up in prices: inflation, folks. Remember that terrible inflation? However, wages went spiraling up, too. Not true today. And remember that interest rates went up because Volcker wanted to stop the crazy inflation and there was a lot of pain for several years (and a couple of recessions during Reagan).

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  11. patient

    Sounds like retirement can be a double whammy for the housing market. Less people retire but sell their homes before the price drops further and rent until they can afford to retire. Result, more homes on the market with no new transplants to buy them since there is no jobs to fill since people do not reitre.

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  12. TheHulk

    Harley read the following carefully:
    A very interesting graph indeed Tim. What especially fascinates me is the graph that peaks out at Fall ’90 then “busts/regresses to mean for about 6 years and then does a relatively faster climb. To sum that graph up, from 1988 to 1998 housing went from 100 to 155 giving an annualized rate of 5.5%.

    Keep this in mind. In 1986 MSFT went public. From 86 to 98 it was the golden age of Microsoft (at least for the employees, with the stock price doubling something like every six months if not sooner). Just imagine, housing should have exploded in the Seattle Area at this time (which maybe it did, just look at the astronomical climb till the peak of 1990). However even in the midst of this incredible creation of local wealth, the housing prices actually collapsed for a good 5 years until inflation finally caught up with the price of the house.

    Now harley, let us zoom to 2000. MSFT stock has pretty much stagnated for the last 10 years. None of the “incredible hyperlocal wealth” creation that we saw in the 90s. Heck in 2003 they even stopped handing out stock options. In the meanwhile the country has been through one recession and right now is mired in one. Between the 2 recessions employees saw barely any salary growth. Let us ignore Salary growth, they also got hammered by the stock market which barely moved and these days are getting hammered by inflation. How in the world can you justify the run up in King County prices from 2000 to 2007?

    In my opinion, there is only one way: Cheap easy credit and a combination of greed on the part of multiple people.

    Regardless, my analysis from the second part of this post leads me to believe not only are we going to regress to the inflation norm, we are going to go below it. If King County couldn’t sustain the run up peaking in Fall 90, there is no way the recent housing runup is sustainable in today’s day and age.

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  13. Harley Lever

    Deejayoh,

    What about the other 60 million who are not raiding their retirement. You cannot point to 25% and say that is the majority of what is happening.

    Yes, the government has squandered social security. One of the best ways to help with this issues is through immigration. If we rely solely on our current population we will certainly not fill all of the jobs we currently have today or the funds we will need for social security. We will have to increase our population through immigration or procreation.

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  14. Harley Lever

    Explorer,

    It starts in 2008. And remember our parents were the generations of unions, pensions, and being lifers at companies. My father with many of his friends just retired this year and are sitting pretty taking home 5k+ month… not too bad for a truck driver. His house is paid for and he gets health insurance until medicare takes over.

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  15. mikal

    Hulk, there is more here now than just Microsoft. To rely solely on that makes your points incorrect. At some point there is so much more in terms of businesses that it grows beyond what you could compare in the past. There is also land use rules that you also haven’t factored in. Most studies say that that has tacked on in excess of $100,000 per SFH. Keep dreaming.

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  16. Harley Lever

    The Hulk,

    Microsoft is not the only game in town… why would you ever cite one company as determining what Seattle is doing?

    From 2006 – 2016 healthcare is going to add 3 million jobs and this is just the early stages of the babyboom cycle. http://www.bls.gov/oco/cg/cgs035.htm#outlook

    Here is interesting quote “. As a result, the need to replace workers who retire or leave the labor force for other reasons–called replacement needs–is projected to
    create a significant number of additional job openings.” and “Over the 2006-16 decade, total employment is projected to increase by
    15.6 million jobs”. http://www.bls.gov/news.release/ecopro.nr0.htm

    I think the problem is that everyone’s vision gets clouded by the alarmist news organizations whose job it is to attract readership or viewership. Let’s not lose perspective here. Each week you churn out new graphs and new data and you cannot wait to see what next month brings. Look at the big picture and tell me where you think real estate is going?

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  17. TheHulk

    Mikal,

    Define more here now than just Microsoft.

    My previous post detailed reasons why the 90s housing boom in the King County had a plausible explanation. Even that supposed boom tapered off until inflation caught up with it (and keep in mind that peoples incomes were rising significantly).

    You still haven’t refuted the main reasoning in that post, nor come up with a better explanation for the housing bubble in this decade. Care to respond to that with some plausible reasons?

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  18. Harley Lever

    Correction!

    “If we rely solely on our current population we will certainly not fill all of the jobs we currently have today or the funds we will need for social security.”

    I meant to say “If we rely solely on our current population TODAY we cannot fill the jobs we will need for the future or the or the funds we will need for social security”.

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  19. deejayoh

    What about the other 60 million who are not raiding their retirement. You cannot point to 25% and say that is the majority of what is happening.

    Harley, that is but one article amongst hundreds pointing to how ill-prepared baby boomers are for retirement. Just because they are not mentioned in that artticle doesn’t mean that they are prepared. A quick google search will yield all the info you need. Not even bothering to cherry pick, here’s 2 mins of searching:

    US News: 06/05

    Assuming current expectations for Social Security benefits, only around 40 percent of workers born between 1951 and 1960 are on track to have enough money to cover basic expenses in retirement, based on their current savings and investment behavior. That’s according to an analysis by the Employee Benefit Research Institute. “And that’s just to meet basic living expenses,” says EBRI Chief Executive Officer Dallas Salisbury. As anyone reaching middle age knows, life can throw out a curve ball, like an illness or the loss of a job.

    NY Times 07/03

    As baby boomers face retirement, they have a problem of their own making. This often-pampered and self-indulgent generation is unprepared financially. Instead of saving, too many of them have mortgaged their futures for a BMW lifestyle.

    The latest figures from the Federal Reserve show that the median net worth — or difference between assets and liabilities — is $123,684 for families whose household heads are 45 to 54 years old. That means that half the families have more than this amount and half have less. The average net worth for the group is $419,073, but the median is probably more representative because income distribution in the United States is heavily skewed toward the top, a trend that has been accelerating in recent years.

    Reuters 02/08

    The Scottrade/BetterInvesting study shows that only 40 percent of
    Americans between 45 and 64 years of age are saving more to alleviate
    their financial concerns, yet more than half of those polled don’t
    believe they have saved enough for retirement. Even more alarming, 38
    percent of baby boomers aren’t even sure how much they should have
    saved or need to save and nearly a quarter (24 percent) have less than
    $25,000 saved so far.

    that’s page one of a single search. There are probably 30 million of those boomers who can retire – assuming they weren’t relying on home equity to see them through. The rest will be looking at “plan b”.

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  20. mikal

    The bubble was caused by cheap money and poor lending oversight. You still can’t compare historical data here because so much has changed in terms of employment and land use restrictions. We are different than most of the rest of the country in that we make things and ship them overseas. That alone gives us the pink ponies. We still aren’t at the bottom yet, but you make me think you should be helping Eleau with his apocalypse bunker.

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  21. Harley Lever

    The Hulk,

    Yes housing prices went up due to low interest rates. Many people were able to lock in interest rates at the lowest points in their lives and they remain low. In addition we benefited from lower fees than what you experience today and less if any money down. They will remain locked in for the rest of their lives. In the end, many of us were hedging our bet. We are betting in 10 – 30 years that our houses will have likely increased over time.

    Some flippers got sucked in by all of the TV shows and the alarmist news. Now we are seeing the opposite effect and they are crying about the crashing economy. Yet the dollar is up, oil is down, commodities are down, and we are looking at adding 15.6 million jobs by 2016.

    Everyone needs to get some perspective. 1 in 20 houses in Stockton California is in foreclosure… that’s only 5 % of the houses! Yes it is not a great number, but 95% of the house are not in foreclosure. In Washington it is 1 in 400 that is .25% of the houses or 99.75% of the houses are not in foreclosure.

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  22. Harley Lever

    Deejayoh,

    30 Million retire with ease (still not a small number). Some may have part time jobs, smaller percentage will have full time jobs, some may use reverse mortgages, and statistically half will be dead by 2025.

    Total employment is still projected to increase by 15 million as we simultaneously lose 30 million workers to retirement. We will still have to increase our population through immigration and increase housing to meet the demands of those jobs.

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  23. mikal

    Then why are we spending money building a border fence? I’m kidding. I suppose we will need educated workers.

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  24. AndyMiami

    Harley Lever // Aug 11, 2008 at 7:20 pm

    The Hulk,

    Yes housing prices went up due to low interest rates. Many people were able to lock in interest rates at the lowest points in their lives and they remain low. In addition we benefited from lower fees than what you experience today and less if any money down. They will remain locked in for the rest of their lives. In the end, many of us were hedging our bet. We are betting in 10 – 30 years that our houses will have likely increased over time.

    Some flippers got sucked in by all of the TV shows and the alarmist news. Now we are seeing the opposite effect and they are crying about the crashing economy. Yet the dollar is up, oil is down, commodities are down, and we are looking at adding 15.6 million jobs by 2016.

    Everyone needs to get some perspective. 1 in 20 houses in Stockton California is in foreclosure… that’s only 5 % of the houses! Yes it is not a great number, but 95% of the house are not in foreclosure. In Washington it is 1 in 400 that is .25% of the houses or 99.75% of the houses are not in foreclosure.

    Harley:

    The dollar is up, yes it’s still a long way away from the 1:1 exchange from just a few years ago. Oil may go under $100 soon, but a Black Swan event like Georgia (and I am referring to Russia – The PI on Saturday had a summary on its second page about the conflict and the arrow pointed to Georgia, our Georgia USA..nice) can take it right back to $130. And eve at $100 the cost is killing the consumer.

    Asset appreciation had been fueled by easy credit with little fundamental analysis in terms of risk/return. Residential real estate was a large component of this bubble. Too many people had the ability to buy $500K homes, and now this will never happen again…on a real basis

    Home prices will head to 2000 levels….in Seattle as well…

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  25. mikal

    AndyMiami, as usual, you base everything on speculation and therefore are wrong. In this area there are alot of people that can afford $600,000 houses. That means there are more that can afford the $500,000 house here. I don’t agree with Harley about immigration. I don’t agree that the boomers will all sell their houses at the same time. Even if some do are they going to then live in tents?

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  26. Scotsman

    Great graphs, Tim. However, I see more similarities than differences among the different time periods. The data alone is more likely to bolster the argument that this run up in prices will follow past patterns with some minor variations. And that is a mistaken assumption.

    It’s impossible to really understand how devastating and permanent this fall in prices will be without looking at Seattle housing in the context of national and world-wide macro economic developments What people fail to understand is that it’s really all about wages and financing. The easy financing is gone, and wages aren’t going up. Sure, there may be more health care jobs in the future, but they don’t, on average, even pay as well as software jobs. We’ve already established that a two income household employed by MSFT can’t afford the median home.

    Immigrants will not be swelling our population and pushing demand for housing up. We’ll be doing those jobs ourselves. America can’t continue to be the land of prosperous knowledge workers if our education system lags the rest of the world. Do a quick search to see how few advanced science degrees we grant verses the rest of the world, and check out the test scores of our high school students. The only thing that gives us an edge over the rest of the world is our political/economic system and the rewards it offers those who will work to be successful. Even that gap is closing as we become increasingly socialist in our tendencies..

    Competitive pressures are holding U.S. wages down as never before, and it will only get worse. In ten years there will be very little the Chinese can’t design, finance, and build for a fraction of what it costs us to do so at home. Our government is running into a wall, and will soon start to talk about reducing, then eliminating benefits while continuing to raise taxes. Less and less will be left for housing.

    I do believe that houses will never cost as much as they do now, on an inflation adjusted basis, during most of our lifetimes. Many find that hard to believe, but as I look for holes in my own arguments I find little to suggest any other outcome. House prices may shoot up in nominal numbers, but for inflation adjusted growth to occur, there has to be a huge surge in U.S. wages based on productivity gains. If you think that will happen, please tell me where the money and gains are going to come from.

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  27. AndyMiami

    mikal // Aug 11, 2008 at 8:42 pm

    AndyMiami, as usual, you base everything on speculation and therefore are wrong. In this area there are alot of people that can afford $600,000 houses. That means there are more that can afford the $500,000 house here. I don’t agree with Harley about immigration. I don’t agree that the boomers will all sell their houses at the same time. Even if some do are they going to then live in tents?

    If you call my thinking speculation, then I will take that as a compliment since I have made more money in the last two years then in my previous 15 years shorting financials and selling my real estate holdings. Speculation, luck, experience, who knows. But if you claim that there are plenty of people who can afford $600K homes in Seattle based on normalized lending standards – 20% down and 30% of gross income to pay for a home, and 36% to pay for all debts, then please show me…I think you are speculating because YOU may be in trouble financially..Good luck and good night.

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  28. Harley Lever

    AndyMiami,

    Let’s not forget about White Swan events like the ending of the Iraq occupation, the end of Bush, and the fact that 45 million jobs are going to be available within the next 20 years and 15 million in the next 8. This is up and above our current levels. Another key factor is that many of the lower paying jobs are predicted to go away. With the median income of the of the 78 million baby boomers at $64,000 please tell me how you cannot expect those retirees job replacements to earn more???
    http://www.infoplease.com/ipa/A0104688.html

    China’s oil consumption is down 7% and there is a greater push than ever to reduce our dependency on oil from the green movement to the desire to rid ourselves of Middle East, Russian, and Venezuelan influence. Soon all of us will be paying a lot less as the commodities bubble eases and we have more disposable income.

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  29. AndyMiami

    Harvey,

    You make good points..

    15–24 6,662 30,937
    25–34 19,435 49,614
    35–44 22,779 60,405
    45–54 24,140 64,874
    55–64 19,266 54,592
    65 and over 23,729 27,798

    If you do some quick math and look at incomes from the 25 – 44 yr old range and say the average is $55K (for couples). that means that at 30% of gross income to pay for a mortgage (30 year) results in a $227K mortgage at 6%. If you need 20% down, the result is they can buy a home for $250K.. That is it. They are the next to buy as baby Boomers die or down size, and most of them are in debt…how can the next 25 – 44 yr old support current prices…without EXOTIC credit or ADDICTIVE credit

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  30. Harley Lever

    Scottsman,

    Do you have any stats to back up your statements?

    I have provided several, many of which go directly against what you are saying.

    Here is one more.
    China is having some troubles of their own.
    http://money.cnn.com/galleries/2008/fsb/0808/gallery.china_cost.fsb/index.html

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  31. mikal

    Andy, more of your speculation. I don’t have to pay for my living expense as I have rentals that pay for all the mortgages. I plan on dying in this house because the thought of moving makes me want to die. More of your speculating. That is all you ever bring.

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  32. AndyMiami

    mikal // Aug 11, 2008 at 9:46 pm

    Andy, more of your speculation. I don’t have to pay for my living expense as I have rentals that pay for all the mortgages. I plan on dying in this house because the thought of moving makes me want to die. More of your speculating. That is all you ever bring.

    Then call me a speculator…who is not stuck with a bunch of depreciating assets and therefore has to convince themselves that they are happy being in ONE place until they die. Dude,,,,get some therapy..I asked you to show me the numbers about afford-ability of $600K homes in Seattle and obviously you are oblivious..DENIAL means self DESTRUCTION…and sounds like you are well on your way.

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  33. Scotsman

    Harley- the info your post references shows the highest median income for families is still less than $70,000. That suggests a median affordable house price of $210,000.

    How does that fit with Seattle’s current prices? I’m all for being an optimist, and hope my country continues to exceed all expectations, but the facts don’t support your claims.

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  34. george

    Scotsman, Tim, Etc.

    So whether “this” runup is “unprecedented” or not depends on what the meaning of the word “this” is?

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  35. AndyMiami

    Scotsman // Aug 11, 2008 at 10:06 pm

    Harley- the info your post references shows the highest median income for families is still less than $70,000. That suggests a median affordable house price of $210,000.

    How does that fit with Seattle’s current prices? I’m all for being an optimist, and hope my country continues to exceed all expectations, but the facts don’t support your claims.

    Right on, and look at incomes for 25 to 44 yr olds. Using 20% down and 30% of gross income at 6% and 30 year mortgage, they can only borrow $230K.

    Mikal…

    is this the group that is buying all those $600K homes in Seattle under the new ( or old correctly fundamentally historically correct parameters) That $600K home will be down to $400k in two years..SELL and move…please do not die in the place that you live in now..move to Las Vegas..have some fun..lots of homes for 50% of their two year ago peaks…someone will make some real money..soon

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  36. jon

    “Then why are we spending money building a border fence? I’m kidding. I suppose we will need educated workers.”

    People closer to the border than us are struggling with the level of crime. People who near there aren’t in the mood to look at the long term employment needs when they have gang-bangers in their neighborhoods.

    “In ten years there will be very little the Chinese can’t design, finance, and build for a fraction of what it costs us to do so at home. ”

    That’s what they said about the Japanese and the Koreans. Then costs go up, and they have to pick an area to specialize in, just like every other country. Lately the non-oil part of our trade deficit has been going down significantly.

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  37. q

    “In this area there are alot of people that can afford $600,000 houses. That means there are more that can afford the $500,000 house here.”

    Hmm, ‘alot’? I guess you don’t have an actual number on that.

    I saw somewhere the average software salary was about 96k in Seattle (the highest average local industry). So, your average programmer should be carrying a mortgage somewhere south of 400k at best. Add in car payments and what have you, I don’t think you get near 400k. Some might have two jobs in the household, but buying a house based on your dual income is a good way to get shafted if one person loses a job or has something come up (babies quite often).

    Most of the people I know that bought expensive houses climbed the equity ladder, but without increasing home prices that isn’t happening much now and it’ll be up to incomes to support the house prices.

    Personally, I’ll keep renting for now, thanks. (And if it gets cheap enough in san diego, I’ll take my software job out of here, which I suspect many people would be more than eager to do if the prices don’t start to come down quite a bit).

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  38. Scotsman

    Jon said: “That’s what they said about the Japanese and the Koreans. Then costs go up, and they have to pick an area to specialize in, just like every other country. ”

    I’d say they’re still winning. Look at GM verses Toyota, Ford and Chrysler on the edge of bankruptcy, Hundai starting to give Toyota fits. China has something like 200+ car manufacturers. A few will succeed big time- bet on it.

    Have you bought an American made piece of electronics in the last 20 years outside of a Motorola cell phone, back in the good old days?

    About the only things we do better are food and airplanes, and the planes are going to fade. Only time will tell on the food.

    Again, where are the facts to support your claims? I’m not trying to pick a fight, but reality has changed while we’ve all been smugly holding onto our pride and prejudice.

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  39. jon

    As is well known, Japan focused on auto and electronics. Ever try making money on a consumer electronics product? Japan is in more danger from China in that regard than we are. Toyota is doing well, but as you point out, that market is extremely competitive also. It will be interesting to see how long they are able to keep their edge.

    The US is strong in too many areas to list. Like every emerging country once did, including the US 100 years ago, China has done well by undercutting the technological leaders. Eventually their costs catch up. China currently has a paranoid and corrupt government, which will prevent them from getting efficient enough to compete with the US on high tech until they change that.

    The news on solar energy these days is really exciting. It looks like it is finally getting close to competing with other sources. When that happens, and we stop bleeding dollars to the scumbags of the world for oil, this country is going to explode with wealth.

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  40. deejayoh

    I move that AndyMiami learn to use the “blockquote” command. All those in favor say “aye”

    :D

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  41. deejayoh

    here’s an interesting graphic taken from the market reports that zillow posted today.

    I call this “falling from the outside in”. Note the darker shades around the perimeter

    http://img362.imageshack.us/img362/1399/zillowringtheoryoy6.png

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  42. deejayoh
  43. deejayoh

    grrr. keeps killing my post. check out this graphic, from the reports in the last link

    http://img362.imageshack.us/img362/5089/zillowringtheoryvf9.png

    Ring theory, in action

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  44. Harley Lever

    Scotsman,

    I’m thinking their will always be a demand for food…

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  45. Harley Lever

    Q,

    Good luck with the state taxes… all of them.

    So, if that software guy happens to catch the eye of the software girl and they want to get hitched and make some software babies, wouldn’t that mean they could pay for like a $600,000 – $800,000 house?

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  46. Harley Lever

    Could it be all the waterfront property screwing up the median price of a home?!?!

    I am kind of half kidding, but did you know King County has 2,000 miles of shoreline??? http://www.metrokc.gov/shorelines/

    In comparison, San Diego County has 58 miles of shoreline. I just thought that is a fascinating statistic. Maybe all those waterfront homes along the sound, lakes, and rivers where the 68,390 millionaires are the reason for the high median cost of a house?

    I am sure I will get hammered for that one!

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  47. mikal

    AndyMiami,
    I paid $97,000 for the first of my depreciating assets and $150,000 for the second. They would have to lose 75% for me to give it much thought. The rents are $2500 per building. Do the math. My main residence is by Greenlake and has gained value over the last year. Many of my neighbors both work and can buy the houses around here. Maybe your wife needs to get a job so you can afford a house and not sound so bitter. Vegas is for @@@@@@@s. I’m 41 with a family and two businesses. I’m not going anywhere. I don’t think anyone is disputing that housing values will go down some. There is no way in hell they will drop as much as Detroit, Las Vegas, or Miami. We have value added products that we make here. Most places in this country don’t. That is our pink ponies. From what I have read even if the US has a hiccup there are other economies that don’t need us as much like they used to like India. That means we will still be shipping things overseas. I still think that theory about shipping costs bring manufacturing jobs back makes long term sense, but we are a ways from that.

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  48. Sniglet

    While the charts Tim posted are interesting, I think they tend to make the different boom times look more similar than they really are. In particular, our recent bubble is quite unprecedented due to one simple factor: credit was never as loose during any previous bubbles.

    It is this availability of easy credit (and now the lack thereof) that sets the current deflating bubble apart from all others. At no other time in Seattle’s history has it even been possible to get negative amortization mortgages (or other new-fangled mortgage products). And we know that the Seattle area did, in fact, gorge on these new mortgage products.

    In short: our bubble was driven primarily by loose credit, and the fact that this is disappearing permanently means that there will be no easy way to recover. In past bubbles all it would take a growth in jobs to spark a recovery. This time, however, more jobs won’t cut it (not that we should be expecting job growth as the world slips into a recession). The contraction in credit has removed a third or more of potential buyers from the market, and there is just NO way they are going to be replaced (i.e. because those wacky mortgage products are now gone for good).

    If one really wants to look at how the different bubble eras compare, look at the percentage of dodgy loans that were made in each time-period.

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  49. rose-colored-coolaid

    It seems to me, that you ignored the single most “unprecedented” facet of this boom. This was a nationwide boom that happened during a recession!

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  50. Eric

    You can always find any trend by choosing the start and end points in your data. The early 70s, not shown, marked the end of the Vietnam War and a huge drawdown in aerospace work, leading to massive layoffs at Boeing. Then, Seattle was a Boeing-company town and once employed 8% of all workers in the area. In the ensuing layoffs, half of Boeing’s workers lost their jobs – and that was 4% of the workforce – and did not include all the vendors, suppliers and service businesses, plus all the economic activity generated by the employees spending their money. Consequently, a sharp rise in housing in the 70s was a climb out of the depths of a depression. The real estate pricing story is more complex than its been presented in the chart above.

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  51. mikal

    I agree that a large percentage of the people that could formerly get a loan won’t be able to now. People were given loans that had no business getting one. I think it to be smaller than a third. What is your basis on that? I think that we will see twenty percent of all aspects of he real estate business disappear. That is already happening for builders.

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  52. patient

    Harley Lever said:

    “So, if that software guy happens to catch the eye of the software girl and they want to get hitched and make some software babies, wouldn’t that mean they could pay for like a $600,000 – $800,000 house?”

    Harley, we have a family income just north of $200k. We also have about $200k in cash savings and no debt. We reckon we should spend max $450k on a home. Reasons? Well we got two kids, daycare is 3100 month. We put 13% of our salaries into our 401ks. We put away college money for our kids. We think we need to be able to handle the expenses on one salary for a while and therefore need both a cash buffer and an income buffer. I think this will be the new dogma for many going foward when hosuing is no longer a cash cow. So no I don’t think the two softies will buy a $600 – $800k home.

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  53. AndyMiami

    mikal

    Sounds like you have a couple of very nice cash flow positive properties that you probably bough a few years ago. That’s the great think about real estate. If you know the numbers than you can make good investments.

    Unfortunately my wife died and she cannot help me afford a house. Be careful with what you say. For a 41 year old with a family, you sound immature.

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  54. mikal

    I’m sorry Andy. Your right about my attacks being immature. Yours were so much more mature. Sorry about your wife, but when attack you should expext a response. I always do.

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  55. AndyMiami

    mikal

    you can “attack” me all you want. I am fair game. Although I think even the use of the word attack is a bit strong. Maybe disagreement on how one views what is happening. but you really should not mention other people’s relative, friends, spouses. I certainly never have. You never know what someone has experienced.

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  56. AndyMiami

    Tim,

    I apologize and will not happen again, but if you take a look at the thread, I did not start the name calling..I reacted and should have been smarter about it.

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  57. being patient

    Patient.

    I am glad that you are able to save so much money into investments.

    One question or comment $3100 for daycare? Wow, I have 1 child was paying $1200 in another state. I found day care to less expensive here then there.

    However I think other people in your situation would buy a house in the $450k price and higher.

    IMO it is personal choice for each person.

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  58. deejayoh

    It seems to me, that you ignored the single most “unprecedented” facet of this boom. This was a nationwide boom that happened during a recession!

    Was it really different? Look back at the famous Shiller chart from the NYT. The early 80′s spike appears to have been national

    http://boom2bust.com/wp-content/uploads/2008/01/home-prices.gif

    And there were 2 recessions in quick succession during the late 70′s/early 80′s according to the NBER

    http://uweb.txstate.edu/~db52/policgap.JPG

    Not as big of a run up on a national basis – but this thread is about local booms and I am not sure the facts are so different.

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  59. Sniglet

    I agree that a large percentage of the people that could formerly get a loan won’t be able to now. People were given loans that had no business getting one. I think it to be smaller than a third. What is your basis on that?

    In 2006 33% of all Seattle area mortgages were of an interest only or negative amortization variety. Keep in mind that this doesn’t necessarily include all other dodgy loan types (e.g. subprime, etc), which I am sure would drive the numbers up more.

    I am sure that some of the people getting these loans could have qualified for a “normal” mortgage, but almost certainly not for the same price amounts. No matter how you cut it, a huge portion of our local market was fueled by loose lending during the bubble years. I just don’t see how all those buyers can be replaced by a growth in jobs, if the loans are no longer available.

    http://www.recharts.com/reports/CSHB031207/e31.GIF

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  60. patient

    Being patient, I agree that it is the case now but I think it will change as more and more people realize that buying a home is a highly leveraged and dangerous purchase if you stretch yourr finances. Seeing their parents struggle with not enough retirement money and friends not being able to fund their kids college from home equity etc will hopefully drive a more pragmatic view on what to pay for a home. Daycare is vicously expensive on the eastside. It’s easy to take advantage of transplants with no family around that feel guilty for leaving their small kids in non family hands for ~10h a day.

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  61. deejayoh

    It seems to me, that you ignored the single most “unprecedented” facet of this boom. This was a nationwide boom that happened during a recession!

    I don’t think these are really huge differences. The late 70′s/early 80′s boom was nationwide (see the NYT Shiller chart), and we had a double dip recession in that time period.

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  62. patient

    To clairfy 3100 is for two kids. 1300 infant fee and 1800 pre-school fee.

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  63. Scotsman

    This is one reason why this time is significantly different. From Bloomberg:

    “Zillow just reported that according to new data, that nearly one-third of all US homeowners who bought in the past 5-years are in a negative equity position meaning they owe more than their home is worth.

    However, this is a best-case scenario, as it is widely thought the Zillow valuation estimates are high because they do not take in account many of the actual foreclosure related sales that made up some 42% of all sales in the state of CA last month and even a larger percentage in other ‘bubble states’.

    This massive flood of foreclosed properties coming back on the market at discounts to recent comparable sales is in part responsible for the 32% median price decline in CA in the past 14 months.

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  64. patient

    Sorry I put it in the wrong order, 1800 is the infant fee ( it costs to get someone to change dirty diapers )

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  65. Scotsman

    The above also doesn’t take into accout those like my landlord who HELOC’d themselves to the max, destroying what would have been a nice equity cushion. From what i know of him, I’m betting he walks before this is all over.

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  66. patient

    Easy credit is defined as the main driver of the bubble prices. I agree with that. However it’s a facilitator of peoples desire to take on the high debt level. That desire was fueled by the expected $$$ that would rain on them in terms of equity gains. When the equity gains do not looks so sure anymore and are even likely to turn into equity loss the desire to take on high debt should be consirably reduced. That’s why it’s not only about tightened credit and that you neccessarily will see prices ending up at the max level the income can support on the new credit standards. It could endup considerably lower.

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  67. Demersus

    Folks, revision to the mean works in almost every mathematical scenario conceivable. It’s like a law of physics, you can’t wish gravity away.

    I like like to put it this way for those still in the irrational. Which do you think will happen first, incomes doubling or housing prices coming down as much as 50%?

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  68. Civil Servant

    I was going to make a point in response to Harley’s comment above — “In this area there are alot of people that can afford $600,000 houses. That means there are more that can afford the $500,000 house here” — and now I must thank Patient, @ 49, for the assist. What I have seen happening, largely just over the last few months, is that would-be and will-be buyers’ perspective on “can,” as in “can afford,” has really changed. Several uncertainties have been introduced into the local market (slowing or stagnating appreciation rates, tighter lending standards, white-collar job cuts, inflation, high gas prices, etc.) that were not been present over the last several years. Sorry if I sound like David Brooks here, but based on what I have seen, it looks like fiscal prudence is returning to cultural favor and that people are getting wise that risk-taking has a downside. (Ugh, this sounds so fatuous — you do see what I’m getting at, though, right?) For the past few years, most people in Seattle have been buying houses that cost more than they would historically have been able to afford. Like so many other things, I think this trend will overcorrect before it returns to the mean.

    One risk I wish I could take is placing a bet on the comeback of the 15-year mortgage. I talk to a lot of people who see that with slightly scaled-back expectations in terms of base price, especially in a declining market, this option becomes very feasible. Most people would love to be mortgage-free in half the time.

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  69. Civil Servant

    Wow, turn away from the submission screen for a little while and look what happens. Patient and I are saying pretty much the same things.

    I want to add, related to some comments here that touch on job and income growth, I’m vetting resumes today for a clerical position — it’s not even a desk job and only requires a high school diploma — and a large proportion of applicants has solid college degrees and many years of outsized experience, could supervise the supervisor of the position being hired for. Cover letters and application forms make clear that the reason they’re scraping the bottom of the barrel is that previous positions have fallen to downsizing and outsourcing. Just a data point, but still.

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  70. Tim

    my wife and I could “afford” a $500,000 house but have no interest in doing so. Being house poor when the perceived value of your house was appreciating 10% per year was one thing, however being house poor when the value of the home is flat or declining is quite another.

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  71. a person

    also, just a data point about those married microsofties and other software company marriages. a great many of those two-job marriages involve one spouse making 70-100k and the other spouse making 20-40k– hardly numbers that would justify a 500-600k home.

    there’s not enough 100k jobs to go around for all the 500k+ houses to be sold to couples making 200k annually. statistically, about 1% of all households bring in more than 200k annually.

    i somehow doubt seattle has some majority share of that 1 percent when its median household income is about the same as the rest of the country’s (50-60k annually, with a little regional variance between the eastside and seattle city limits).

    seattle is not “rich” enough to justify the home pricing it has and i really hope things correct to more sane levels that 90% of the area can afford reasonably.

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  72. Civil Servant

    And not to get catty or anything, but I have known many software couples constituted as A Person describes in which it is the non-software party’s desire not to have to work anymore. And if that person is bringing in between $20 and $40K and a kid or two comes along, the daycare/hassle calculus would support him or her doing just that. We often fail to take into account the opt-out factor when picking at the high end of household-income figures. The couple earning $200K today may not be making that much in four or five years, and maybe they are already planning for that as they decide what and where to buy.

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  73. magnolia44

    a few rules in life

    there is always someone in life that has more money than you
    there is always someone who decides to spend their money differently than you.

    There is quite a bit of counting other peoples money going on in this thread, its not a fun way to live. The same people who make $200k and dont have kids Patient can afford to buy the home you chose not to. Those people might feel that 10% is plenty for their 401k and having one kid is plenty. Somewhere there is a guy payinh 40% of income towards his house because he can make it work and its important to him (i dont advise it but its being done). Its all about choices some make them and are responsible for the outcome and others…. turn over the keys via jingle mail.

    Good luck all..

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  74. patient

    Maggie44, there are always people who act outside the mainstream, however it’s the mainstream that sets trends and in this case prices. Currently the mainstream is to highly expose yourself to all kinds of future financial risks when buying a home. I think that will change and used myself as an example why. You are free to disagree.

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  75. Sarge

    Let me wave my magic wand and see what future housing prices will be. Alakaz… zzffzzz. What? Overheated? Must be global warming… I’ll have to call the help desk in India but they will most likely tell me to send it back to the manufacture in China. That means I’ll have to jump into my Japanese car and buy some Iranian oil so I can drive to the post office and give it to the American postal worker making minimum wage. Guess I should put in my resume while I’m there; my company is starting to offshore software jobs.

    Wonder who’s going to buy my $800,000 house when I can’t afford it…

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  76. Harley Lever

    Patient,

    28% of the people in King County have kids. I am willing to bet a fraction of those individuals would spend the equivalent of $500k mortgage a month on child care in addition to funding college.

    What are we to think about the 72% of the others?

    Ultimately we as a blogging community need to throw out the “medians” and the other “guestimate” figures and look at the raw data. We argue back and forth about what this all might mean, but without the ability to drill down into the data we are still left guessing.

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  77. Harley Lever

    I see people citing a lot of trends and I think it might be worth contemplating these trends for a while. Income, overall, has been increasing in the United States since it’s existence. Secondly, population has been increasing for the last 25,000 years.

    Combine these facts with the fact that we offer arguably the most free society, with some of the best incomes, some of the best human rights, and the ability for people throughout the world to enjoy some of the most stable atmosphere to raise a family. Yes you can cherry pick negatives, especially with this administration, but in the end would you really want to live somewhere else? The United States has been and always will be an immigrant society comprised of individuals looking for a better life than what their native countries can offer.

    China and India both have booming economies and tremendous upside, but only for a tiny fraction of their societies. Many business people in China are stifled by the government and will never truly be free. India’s caste system benefits few, and as a country, they, like China, have a tremendous uphill battle to get their countries even close to a fraction of the level of stabilization the United States currently offers. For these reasons, the United States, as the most free and most open society will always attract many of the best and brightest throughout the world. We provide the freedom to advance as high as you are willing to work.

    If there is a country that provides better opportunity for people willing to work their butt off, then why don’t the Bubbleheads move there?

    Incomes and population will rise and in the end, so will real estate.

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  78. patient

    Harley, do you know how many percent of the buyers of $600k – $800k homes the last 3-4 years that have kids or plan to have? I don’t but I guess it’s more than 28%. You need to look at the set of interrest if your data to be meaningful.

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  79. patient

    And if you have dual income and kids you need some sort of daycare. There is long queues to all the daycares we looked at and they are all in a pretty similar price range so we are not alone in spending several thousands a month for daycare. I wish it wasn’t so but that doesn’t make it so. The demand outstrips supply in contrast to the housing market…

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  80. jonness

    “If there is a country that provides better opportunity for people willing to work their butt off, then why don’t the Bubbleheads move there?”

    “What good fortune for governments that people do not think”…Adolph Hitler

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  81. jonness

    “If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”… Joseph Goebbels

    “The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly – it must confine itself to a few points and repeat them over and over”…Joseph Goebbels

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  82. Sniglet

    If there is a country that provides better opportunity for people willing to work their butt off, then why don’t the Bubbleheads move there?

    As an avowed “bubblehead”, I can testify that I believe the US is a fabulouos country, and actually immigrated here from abroad myself (that distant land of Canada). That said, this doesn’t shake my firm conviction that we are facing the onset of a global recession of a greater magnitude than has been seen for at least 40 years.

    Note that I am NOT saying that this is a just some sort of US problem. The credit bubble was global in nature, and many other countries will likely suffer far WORSE than the USA. So why would a bubblehead such as myself want to leave the country if most other nations are set to experience even more severe economic contractions?

    Sure, I expect the US to see something like an 80% decline in average real-estate prices (nation-wide), but I expect similar trends in Europe, Canada, and Asia. China and India are classic bubbles just ripe for one hell of a bursting!

    I should point out that I am not a pessimist, spreading the gospel of apocalypse. Rather, I simply believe that the global economy needs to go through a major restructuring to weed out the significant mal-investments, and over in-debtedness, that have accumulates in the last 40 or so years. Hey, even the great depression wasn’t really so terrible. My grand-parents tell pleasant stories of their happy (yet austere) childhoods. I am looking forward to raising my own children in such a sober environment.

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  83. Steve Tytler

    Tim,

    Your second chart is a much more accurate picture of the true nature of booms and busts in the Puget Sound housing market.

    As I have said previously, home prices typically spike up over a very short period of 2-3 years, followed by several “flat” years with little or no appreciation.

    Your second chart demonstrates that quite clearly.

    It also verifies my contention that the last housing boom is NOT unprcedented.

    I don’t understand why you think the first chart is accurate, but the second part is not.

    Steve Tytler
    Real Estate Columnist
    Everett Herald

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