For the first interview in our “ask the industry insiders” series, we turn to Dan Klusman, Director of Communications for the Master Builders Association of King and Snohomish Counties, the group behind the website Right Time to Buy.
Rather than pick and choose what portions of the interview to share, I’m just going to include the full thing, in order to give Dan a completely fair shake. So without further ado, Dan Klusman answers our questions about the Seattle area real estate market.
1) Median home prices have been falling in the Seattle area since late summer 2007, and are down 10-20% from their peak values (source: NWMLS). Given the drop so far, how much further do you expect prices to fall?
Let me start by putting my cards on the table. Some of your data-specific questions are better answered by other experts who are drenched in data every day.
1a) If you believe that home prices are at or near the bottom, what specific evidence can you cite to support this view?
I predict we are at or near bottom for drop in home prices. We may bump along the bottom until mid-2009. I don’t have a specific data source for my predictions. I’m basing my opinion on a number of factors including the fact that several city-specific areas have remained strong during this downturn; values of remodeled, resale homes have been strong throughout 2007; and some types of homes (such as those that are Built Green or otherwise environmentally certified) have continued to sell faster and hold their value. We haven’t seen precipitous price or value declines across the board in all types of housing in all areas.
Some may think I’m being optimistic but I’d put out that I’ve been right more times than those who’ve predicted that our Puget Sound market would follow Detroit and Southern California’s off the cliff.
However, the single biggest threat to the housing market is the limited supply of credit and home loans. A thaw in the mortgage market would help, whereas additional, significant blows to the economy or reducing mortgage availability further would make things worse.
1b) If you believe that home prices will drop further, what makes it a smart decision for potential home buyers to buy a highly leveraged asset in a declining market?
We’re experiencing a short term decline in what is a healthy market over the long term. Now is a good time to buy if you have a steady job, good credit, have money for the down payment and can make the mortgage. Plenty of choice in inventory available. Sellers and builders may be willing to deal. Also, FHA loans have become a great opportunity for first time buyers. The current FHA loan limit is about to go down from $567,500 to $506,000 in our area and the required down payment is about to go up from 3% to 10%. [Editor’s note: while the FHA limit and the conforming loan limit through Fannie and Freddie are both being lowered to $506,000, the FHA minimum down payment is only increasing to 3.5% (thanks for the clarification, Rhonda).] For many people that makes it a good time to buy. May not be the right time for everyone but we’re not saying it is.
2) Housing and population data from the Census Bureau shows that from 2000 through 2007, construction of new housing units in King, Snohomish, and Pierce County exceeded household growth by 60% (see this post for further details and citations). During this same time, incomes increased less than 30%, but home prices increased over 85%.
How do you explain this rapid increase in Seattle-area home prices that has been so disconnected from the fundamentals that traditionally drive the housing market?
An excellent question and one that I think has several answers. I’m going to be brief in my response but I know people who can talk your ear off about this stuff. In general, we believe there is a lack of affordable housing in our region and that homes prices have increased substantially over the last decade for a variety of reasons. Looking at the big picture, central Puget Sound is a growing region with a strong and diverse job base. As residents look for housing, they run up against multiple roadblocks limiting the supply of housing near employment centers, including:
GMA. The Growth Management Act has been a double edged sword in this area. While it has prevented the overbuilding that now plagues some areas like Arizona, where partially-built inexpensive spec homes now lie abandoned, there is no doubt it has artificially increased home prices over the years.
Increased regulations. An ever-increasing number of local regulations (including impact fees) have driven up the price of homes. Research by UW Economics Professor Theo Eicher pegged the price of regulations at $200,000 for a Seattle-area single family home.
Lack of density. Local jurisdictions across the board have resisted attempts and, at times, outright ignored their responsibility to meet housing targets under GMA. Low supply + strong demand = higher prices. Increased density (whether it’s small lot sizes or allowing more multi-family development) will bring more affordable housing choices.
Traffic concurrency. While it sounds good, traffic concurrency requirements can create leapfrog developments, moving congestion from one community to the next.
Reductions in land supply. Local regulations have also removed buildable lands from the market (i.e. critical areas ordinances that increase the size of no-build buffers in urban areas, stormwater rules requiring larger detention vaults, etc)A no-net loss of buildable lands policy that requires increased density within the urban growth boundary any time buildable lands or housing supply is reduced would allow capacity to expand and help prevent sudden increases in price.
Attractive region/quality of life. Never underestimate the fact that our region has attracted people for all kinds of reasons. I moved here in 1990. I met my wife, had two kids, owned two dogs, and have owned two homes. The second one more expensive than the first. Does that make me part of the problem? Some would say yes, but I don’t think so.
3) What do you predict will happen (on average) with local home prices in 2009?
3a) Specifically, what data do you base this prediction on?
See my answer to question 1a.
3b) Same questions, for 2010-2015.
I would expect an improved overall economy and housing market, but other experts have a clearer crystal ball that far out.
4) Given the loss/sale of WaMu and Safeco, Boeing’s troubles with strikes and customer financing of new plane purchases, Starbucks’ massive drop in profits, and Microsoft’s “re-evaluation” of its hiring plans, how do you think the Seattle-area economy will fare in a prolonged recession, compared to the rest of the nation?
I’m confident in our long term economic health partly because of your question. You mentioned five companies in five industries that are all regrouping in the face of hard times. I grew up in the Midwest and clearly remember how hard the auto industry (and economy in general) was hit in the late 1970s and early 1980s. We’re fortunate that we don’t live in a one company/one industry region. I think we will fare better than many areas of the country in part because of our diverse economy, access to a thriving port, and a region that grows businesses from entrepreneurs rather than relying on businesses relocating to the Puget Sound area. You have to have some perspective with all of this. The Seattle-area market is nowhere close to the experience of Southern California, Florida, Nevada, or Detroit. If you think we are in the same situation in terms of building starts, price drops, employment or economic outlook you are very wrong.
5) In retrospect, what do you think could or should have done differently that would have helped avoid the current rate of real estate value depreciation?
Initially the slowdown in the market in 2006 and 2007 was fueled by consumer perception and not necessarily market reality. I wish we had been faster and more proactive to educate consumers about the market.
5a) Put differently, what are the top 3 lessons we need to learn from recent real estate events?
- Fortune favors the bold but devours the reckless. Those that are able to accurately asses their own financial resources and tolerance for risk will fair better than those that foolishly buy more than they can afford.
- Real estate, despite short term fluctuations, can be an excellent investment.
- That said, a house is a home and not an ATM. You should buy a home because it has a great floorplan, is near good schools, because it has the perfect spot for a Christmas Tree, or any of the other reasons that reflect your lifestyle, hopes, and dreams.
6) What changes do you see happening in the real estate industry as a result of this?
I think the next group of professionals involved in the residential real estate to be hurt by this market are remodelers. The new housing market and the remodeling market statistically are positively and not inversely related. Common sense would say when one is up the other is down but historically it hasn’t played out like that. The remodel market’s peaks and valleys are about 1-2 years behind the new home market.
Most people who remodel in our region finance the project themselves through one of several ways: home equity line of credit (or other loan), proceeds from the sale of an asset (such as stock), or spending saved cash. The first two on my list are drying up and stocks drop and credit is harder to get.
I’m sure there will be (and there should be) systemic changes to the lending industry as a result of this downturn. I’m sure I could give you my opinion but it would be just that. Others will have a better eye for this than I do.
The one thing that I don’t expect to change is the role of the housing and real estate industry as a primary driver of the economy.
7) Is there anything else you would like to say about the Seattle-area housing market to the readers of Seattle Bubble?
Yes, I have read some of the posts on SeattleBubble and other websites about the real estate market. I have agreed and disagreed with many of the posts and positions of their authors. The only thing I am offended by is the notion that somehow our association (or the other industry professionals that you’ve sent questions to) are “the other side.”
I have talked to local business owners who feel as though they have personally failed their employees, customers, and community because their company won’t survive this economic downturn; their out-of-work employees who feel scared and alone; and homeowners who feel helpless as forces beyond their control.
Our association has been a champion for affordable housing. We do not advocate that families buy more house than they can afford. We are not any more or less excited about the current market than you are. And for 99 years we have provided a basic human need: shelter. We are all in this soup together.
I’d like to thank Dan for being willing to share his thoughts on this forum. While I definitely don’t agree with all aspects of his assessment, I do appreciate his openness and enthusiasm.
Here are my biggest issues with Dan’s responses. First, Dan’s answer to 1a) seemed to be a bit of misdirection, talking about “several city-specific areas” and specific types of homes that have supposedly held their value. That’s fine, but most areas have had falling prices, and the question was whether those price drops are finished or not.
Second, Dan’s answers to 2) seem to totally ignore the reality that building has exceeded household growth in the Puget Sound, in spite of whatever restrictive effects the GMA may have had.
Also, in his response to 4), Dan seems to be putting a lot of faith in the area’s diverse economy. That’s fine, but right now, as the national/international recession is just getting started, nearly every aspect of our local economy is experiencing stress. Even just this week, our major local retailers have also announced that they are under significant stress.
Finally, I really can’t let Dan’s response to 5) just slide. I’m sorry, but there is zero evidence to support the view that the initial market slowdown was merely due to poor “consumer perception and not necessarily market reality.” Better “education” is not going to magically give people the ability to purchase an overpriced home. Sorry.
On the other hand, I agree with Dan’s comment that the Seattle housing market will likely not get as bad as Southern California, Florida, Nevada, or Detroit. That being said, if home prices in those areas fall 70% and Seattle only falls 50%, that condition will be met.
I also would like to say that in the initial interview post when I mentioned “the other side,” the reason I put it in quotes is because that is not how I personally feel, but rather how I feel many folks in the real estate industry view Seattle Bubble. I agree with Dan that we’re all in this together. It is a benefit to everyone that we work to improve the quality and quantity of market information that is available to potential home buyers and sellers.