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.

11 responses to “Regulations “unlikely to contribute more than 1711” of home price”

  1. jon

    Besides regulations, the study also has a lot to say about housing affordability.

    From page 6 of the study: “Comparing the monthly house payment for a median-priced house with the median-income household’s monthly income reveals that the percent of income spent for housing was less in King County in 2007 than it was in 1980 and just slightly more than in 1990. See table below.”

    page 7: “Total land costs—raw land plus physical development—on the average, amount to about 20%-30% of the final price of a home.7 These data undercut the assertion that a rise in land costs after the passage of GMA drove up housing prices.”

    The main problem with the idea that a median income household should be able to afford a median house is that people in the bottom half of income are less likely to be in a position to buy a house. Here we see that the median income statistics have not been an accurate indicator of the actual rise in income of the subgroup of the population that determine housing prices:

    page 9: “in King County, households earning above 150% of area median income have risen from a quarter to nearly a third of the total.”

    In addition, it is not just salary income that drives housing prices:

    “Many investors shifted their assets from the stock market to real estate before and after the dot-com crash of 2001. Research has shown that people who have accumulated wealth through financial investments have reinvested a significant portion in real estate, driving up demand.”

    That part does suggest that the large drop in the stock market will reduce demand for housing. On the other hand, another article said that the current fraction of wealth that is in cash is now about the same as it was at the bottom of the stock market in the early 90’s.

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  2. Ben

    I never see new houses for sale on the Eastside for less than $600k. Most of them are more than $700k.

    17% of $700k is $119k. That is a lot of chump change, and when I talked to a builder familiar with the Eastside he said that Bellevue + Redmond are expensive and painful to build in. The cities make it hard to turn a profit unless you build big on a small lot.

    The same builder tells me that Renton is a dream to work with.

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  3. mukoh

    Redmond, Woodinville, and Bellevue are insane in their planning departments. Thats not an understatement.

    As far as the original article or its merits lets take a REAL life example.

    $400k purchase done in 2004.
    Level lot 29k sq ft. Back then an easy 9-10 unit complex. Grandfathered with old set backs. Back then units selling for $35k Raw. Granted this would be called an overpriced deal in typical terms of investment.
    However later in the year codes were updated and can now accomodate 21-22 units. Considering prices have come down from 08 peak for multi units and are now in the $35k.
    Now is that a bad deal? Lets say prices even come down to $25k. Still worth the while to bank properties such as this.
    Thats of course just my opinion. I could be wrong.

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  4. Plymster

    Jon @ 1,

    The stats they cite regarding home affordability on page 6 supposedly include median SFH prices from 2000 and 2007, which they cite are $245k and $390k respectively. Looking at Tim’s data from the NWMLS, it looks like 2000 and 2007 median prices were actually $249k and $453k. Even if they were taking the median for the entire year, the monthly median home prices in King County never dipped below $420k.

    This is probably just a mistake. The combined (SFH and Condo) median prices in 2000 and 2007 were $231k and $400k respectively, so maybe they just goofed and transposed combined 2007 data where thy should have put SFH 2007 data.

    Running those numbers with the interest rates they’ve cited, you come up with a mortgage costing 36% of median income in 2000, and 43.8% in 2007. That means that 7.8% of the median income just vanished in 7 years.

    Their method of determining affordability is very simplified as well, and does not include maintenance, property taxes, or insurance which are dependent upon sale price. These costs remain static, and so are not reduced by the gradual drop of interest rates since 1980, so it can be argued that their method of calculating affordability is fairly skewed.

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  5. jon

    Plymster, The $390K number for 2007 looks about right for Dec of 2007, according to
    http://seattlebubble.com/blog/wp-content/uploads/2008/12/king-sd-projection_2008-11.png

    They also used sales numbers for 2007, and census number for earlier years. I would expect median sales numbers to be higher than overall median home values for a couple of reasons: people fix up houses to put them on the market after which they depreciate, and areas with higher than average income people moving in will buy more expensive homes than the overall average.

    As for costs, if there has been a shift from SFH to condos over that time, then the amount of maintenance costs would also drop.

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  6. David Losh

    Very dated opinions like these make for good news stories. If you built town houses in Seattle it was a dream process. If your McMansion plans for approval looked like every other set of plans the “Land Use Specialist” had looked at, it was approved. Municipalities generate fees and tax revenue by rubber stamping blue prints. The trick is to be normal, quiet, kiss ass, do what you’re told, and believe that the Department of Planning and Development can do no wrong. These people are infallible, it’s in the code book.

    What he got right is that building practices are set to a national standard. In my opinion Home Depot did more to drive up the cost of housing than any municipal regulations. Pricing manipulation drove up the cost of construction. National demand and the ability to transfer goods from a central location had every one paying more. It is the cost of doing business.

    Let’s talk about the transient labor pool. I think it’s pretty common knowledge that Hispanic labor was building this country. What started as cheap labor became the most skilled labor. The cost was that the skilled labor pool was still transient. Labor migrated to better working conditions and higher pay. At one time a builder would augment local labor with cheap Hispanic workers. It kept the costs down. Now a builder comes into a town with a crew that they pay to bang out some units, get paid, and move on.

    Land cost has been talked about here on the SeattleBubble, The number of units per lot keeps going up with regulations. Land Use regulations are adding more units per lot so the land cost should be going down.

    Don’t even get me started on building materials of Strand Board sheating or the Mickey Mouse eartquake tie downs. Then you have the inspectors that you have to coach as they stop by, remember to kiss ass.

    If anything government regulations should be decreasing the cost of housing. That was the plan and the mandate. Build cheaper housing for affordability. It didn’t happen, something else went horribly wrong.

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  7. Plymster

    Jon@5,

    Thank you for correcting my mistake. I didn’t notice that they picked home price data from the BLS for 1970, 1980, 1990, and 2000, and then pulled data from the NWMLS.

    That doesn’t change the fact that any way you slice it, affordability has gotten creamed from 2000 to 2007 and is way out of whack with historic norms, assuming you use consistent data (and not this apples to oranges nonsense). I believe that, given the closeness of the data, that the BLS was using SFH data, and that the APA mistakenly used SFH+condo data for 2007.

    As for costs, if there has been a shift from SFH to condos over that time, then the amount of maintenance costs would also drop.

    Is the maintenance of a condo (ie: water heater, plumbing, typical indoor repairs) and the HOA fees (which take care of the building maintenance) somehow less than the standard 1% of the home price annually? In my personal experience, HOA fees are typically well beyond this amount, suggesting that HOA fees, in addition to maintenance of the individual condo unit would generally drive up costs, though I’ve never seen any statistics on this figure.

    I think the unavailability of HOA data is one reason why most organizations use SFH median prices as opposed to SFH+condo medians.

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  8. Demersus

    This sums up the situation with the economy in 16 comic book pages.

    http://economicmeltdownfunnies.org/

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  9. Buceri

    Shilling: Housing Market Could Fall Another 20 Percent
    Jan 06, 2009 08:30am EST

    The already crumbling housing market could plummet an additional 20%, says Gary Shilling, president of A. Gary Shilling & Co., and author of the popular INSIGHT newsletter.

    Although housing is already down 25% peak-to-trough based on the latest S&P/Case-Shiller numbers, there’s no near-term bottom in sight, says Shilling, one economist who presciently saw the crash coming.

    Excess inventory – nearly a year’s worth supply – is the “mortal enemy” of any recovery in housing, says Shilling, who does not believe the Fed’s efforts to lower mortgage rates will resolve the crisis.

    Barring a prolonged period of weaker prices, Shilling believes only radical action – like bulldozing homes or letting immigrants into America to buy homes – can solve the crisis, as detailed here last month.

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  10. Ray Pepper

    For Jillayne (as promised)

    Active Agents with the NWMLS

    Jan 2008 25,662

    Dec 2008 26,584
    *************************************************
    Closed sales:
    Jan 2008 Med Price 300k Avg Price 360,476

    Dec 2008 Med Price 272k Avg price 329,000

    OUCH!

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  11. mukoh

    David L,
    You make statements that are either misinformed or found through a very dirty Jack D glass.

    Land values historically have gone up as unit counts increase.

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