Posted by: 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.

39 responses to “Bottom-Calling: San Diego Lag Forecast”

  1. David Losh

    It’s another great week of solid information from the Seattle Bubble. It does seem to add validity to Ardell’s bottom call of 20% to 34% decline in house pricing from the peak.

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  2. Kary L. Krismer

    Since when did Ardell’s bottom call become 20-34%? What did I miss?

    The San Diego theory is the most simplistic of all. And while I’m sure it’s possible to design a graph making them look similar, it’s hard to do with the numbers themselves.

    San Diego at it’s peak was over 2.5x it’s January 2000 value. In the year that followed, it only lost just over 3% of it’s value. In the year off our peak (less than 2x 1/2000 values), we lost almost 9%.

    Also, our falls were rather directly driven by external national events, such as the mortgage crisis of August, 2007. Prior to that our market was showing signs of overheating. So does the 17 month lag factor only work if you have a large national event intervening every year? In 2008 we had the bailout talk. What are we going to need for a national news event in the Fall of 2009 for this to supposedly continue?

    And speaking of the August, 2007 mortgage crisis, a year after that San Diego lost about 25% of it’s value, while we lost about 9%.

    San Diego is clearly a more volatile market. For us to be X months behind them, we’d also have to be just as volatile.

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  3. singliac

    Yes Kary. Seattle’s market is declining because of big, bad national headlines. It has nothing to do with fundamentals, right? If you really think that, not only Seattle is special, but YOU are special. I agree that this isn’t very predictive. But the run up in prices here was caused by the same factors that led to the boom elsewhere.

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  4. Herman

    This model has support if a dominant cause of Seattle price gains is California migration. I’ll buy that it was. The economies and culture are similar. Seattle could easily attract the tech end of the California workforce. And with CA home prices soaring they could move here trade way up on their home equity.

    Now I think that price engine has died.

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  5. tomtom

    By Kary L. Krismer @ 2:

    Also, our falls were rather directly driven by external national events, such as the mortgage crisis of August, 2007.

    Our falls are also directly driven by internal events, such as the pool of homes for sale are priced far in excess of the incomes of potential home buyers.

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  6. Kary L. Krismer

    By singliac @ 3:

    Yes Kary. Seattle’s market is declining because of big, bad national headlines. It has nothing to do with fundamentals, right? If you really think that, not only Seattle is special, but YOU are special. I agree that this isn’t very predictive. But the run up in prices here was caused by the same factors that led to the boom elsewhere.

    Well if by fundamentals you mean the price action, I’d disagree. If you mean fundamentals by economic events, I’d agree. I will go so far as to say when you get 20%+ increases in price over a period or a year or years, there are great changes for declines after that. 15%+ good changes.

    But if you look at Seattle’s numbers, what drove them down first was the 2007 mortgage crisis, and then the 2008 bailout talk. San Diego started down because it had gone up 2.5X between January 2000 and November, 2005.

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  7. Magnolia44

    I agree with Kary, the credit crisis and disruption in lending changed the game and Seattle froze. Not to say a correction was not due, but those were the triggers and now the economy is in collapse mode. I am suprised people still even buy homes, I have seen a few sell around here sparingly.

    I don’t buy the lag theory, I called 12-15% -, in the last year now with the crisis who knows how far we fall.

    If someone asked me to value my house at 30% off and we have an economy that will return to normal, I would swallow my pride and take it. Some will say 30% is too low lol, anyway all bets are off economy is in crisis who knows what will happen 6 mos to a year from now.

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  8. Kary L. Krismer

    By Magnolia44 @ 7:

    I agree with Kary, the credit crisis and disruption in lending changed the game and Seattle froze. Not to say a correction was not due, . . ..

    And I’m in fact saying that Seattle was heading into a super-heated mode in August 2007. I missed it at the time because I was looking at YOY increases (which were only marginally alarming) rather than the monthly increases. No telling how high Seattle would have gone but for the mortgage crisis, but it wouldn’t have been a healthy market.

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  9. Boyflux

    RE: Kary L. Krismer @ 8

    I moved here from South Florida last May, and went from a collapsing market to a market on the precipice. All of the signs were here in Seattle, mimicking the over saturated and over-speculated markets of the past. A typical re-adjustment was on the docket, I agree. My guess is that we would have ended up slightly better off than Phoenix or Vega.

    We weren’t necessarily at that tipping point yet, but given the current economic situation, I agree that is what pushed us over. I haven’t looked into it, but I wonder how Seattle compares to other historic bubble markets like Phoenix, Vegas (and even Portland) that really started crashing before the mortgage crisis hit full swing.

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  10. Shaq

    Tim, what about just looking at the median prices of the 2 regions? People used to always defend San Diego by talking about the sunshine and stuff like that. But now that SD Country trades THROUGH King County (I realize there are apples to oranges issues there), what does that say about King County?

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  11. rose-colored-coolaid

    By Kary L. Krismer @ 2:

    Also, our falls were rather directly driven by external national events, such as the mortgage crisis of August, 2007. Prior to that our market was showing signs of overheating.

    I believe that’s a myopic argument, which disregards causal relationships at all stages of the bubble’s development in favor of the simpler Realtor shpeel – all real estate is local.

    The world economy is more coupled than ever. So is the national economy. Prices rose nearly uniformly coming out of the dotcom crash due to macroeconomic and mass psychological effects. All markets are crashing together as well.

    In other words, you’re making pretend if you think prices in Seattle would have risen the way they did from 2002-2007 without money flowing around the world to invest in assets divided in esoteric and “innovative” ways allowing the expansion of exotic mortgages in an environment where literally everyone in the world thought real estate was the only smart investment.

    My personal opinion – I think the San Diego Lag Chart is probably one of the best predictive measures if you ignore magnitude and just look at inflection points. Perhaps it doesn’t have the nice mathematical property that you can explain why they are similar, but it does have the advantage of using real live data. In such complicated real-world scenarios, that real data is usually far more valuable than any equation you can come up with.

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  12. David Losh

    RE: Kary L. Krismer @ 8

    It was the 14% and 17% price increases that tipped the scale. There was no basis for the price increases. It just happened.

    Seattle could have sustained if the global economy, as opposed to individual countries, could have stabilized rather than crashed. In my opinion our Port facilities and proximity to Canada are srong economic factors.

    So in that way I agree that national headlines changed Seattle, but also think our reliance on trade with Asia was what stopped our continued growth.

    I also want to point out the outstanding job Obama did by selecting Hilary Clinton. Her first trip to Asia has brought new life our relations there.

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  13. Dewey

    Off topic.
    From Bloomberg today: Jumbo home defaults increase

    http://www.bloomberg.com/apps/news?pid=20601087&sid=ab4hyMC6aJf0&refer=home

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  14. EastsideWestside its all good

    So to preface this, I am someone who moved to this area from the East Coast. I have solid statistical and forecasting training and I have experience using these techniques in the residential housing industry on a very large scale.

    I’ve looked at the lags from Case Shiller and think the 12 month LA lag is the best call for this area. Aside from being speculative and purely for entertainment purposes, there is quite abit of solid, demographic and population migration analysis that drives this.

    The short answer to why is that Seattle is the #4 destination city on the West Coast behind LA, SD and SF. Any long-term status quo will be founded on this primary relationship until it changes (which it hasn’t).

    As a net importer city, Seattle depends on the outmigration of other cities to drive net household growth. When you look at demand for homes over time, the formation of households (young people becoming adults, married or otherwise) and the migration of households (from city to city) is what will drove demand.

    If you look at migration statistics from the census, you will see that Seattle has been gaining population at the expense of SD, LA, SF as well as NYC and CHI (just like we drive Portland’s growth).

    Why?

    It’s not because of the weather for the CA cities and it’s not because SEA is a megalopolis like New York or Chicago.

    It’s either jobs or cost of living or both.

    Cutting to the chase – what happens when Seattle is losing jobs like all other cities and is as expensive as LA or SD? What we see now – people in So Cal are not even THINKING of moving here (I know many of you are applauding). This is anecdotal and not evidence, but I have three friends who just moved BACK to SD after a decade away because of how much more affordable it is.

    Will it take until 2012? I don’t know. I’ve done the analysis and I see a stronger correlation with a 12 month lag to LA prices. Given the size of LA’s population and the massive net exporter of people that it is, this theory is much more founded in fact. A 12 month lag makes sense as well since it has the RE cycle in sync. A 17 months lag would require winter price growth here and summer price declines and the reverse in SD (or vice versa) – not really plausible over time.

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  15. Kary L. Krismer

    RE: rose-colored-coolaid @ 11 – So let me get this straight. You think that all cities move up and down together (real estate is not local) but that Seattle lags San Diego? That’s rather inconsistent logic.

    It also ignores the fact that there are cities in this country that have had 2 or 3 ups and downs in about the last 20 years, while Seattle has had one.

    Real estate is local, but it is also affected by national and international events.

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  16. Scotsman

    This one is fun… but worthless. It’s too much of a construct, a convenient matching of data points that share little common ground on the fundamental side. It could blow apart at any time.

    It’s all about adffordability and expectations about the future.

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  17. rose-colored-coolaid

    By Kary L. Krismer @ 15:

    RE: rose-colored-coolaid @ 11 – So let me get this straight. You think that all cities move up and down together (real estate is not local) but that Seattle lags San Diego? That’s rather inconsistent logic.

    It also ignores the fact that there are cities in this country that have had 2 or 3 ups and downs in about the last 20 years, while Seattle has had one.

    Real estate is local, but it is also affected by national and international events.

    No, and if you had read my previous post you would have understood I never said or even implied that. I think that between 2001 and 2007 all cities more or less moved up and down together. Wait, let me take that back. I don’t think they did, a resounding body of evidence proves it.

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  18. Kary L. Krismer

    RE: rose-colored-coolaid @ 17 – I’m lost. Do you think they moved together or not?

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  19. rose-colored-coolaid

    Shoot, submitted that on accident. Here’s what I meant to post – Shiller’s historical graph of housing values.

    http://jamesoncapitalllc.net/wp-content/uploads/2008/12/case-shiller-chart-updated.png

    If you want to argue that Seattle prices rose simply because of how bad-ass Seattle is, you’re going to need to explain every place else as well. Why did prices go up in Spokane or Boise? Portland, Maine and Portland Oregon? From Montana to Arizona across to Alabama prices boomed.

    If Seattle is so special, why did we follow this trend? I’d posit that during the real estate boom of the last 7 years, Seattle was no more in control of its own destiny than Yakima or Walla Walla.

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  20. singliac

    RE: Kary L. Krismer @ 15
    During every speculative bubble there is widespread consensus that high values are justified by each market’s special circumstances. We had Boeing, MSFT, trade with Asia, etc. to justify our “irrational exuberance.” Now you want to blame the fallout on external factors. The truth is, people are much more mobile nowadays. EastsideWestside is correct to attribute our bubble to larger bubbles like LA and SD.

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  21. rose-colored-coolaid

    RE: Kary L. Krismer @ 18 – I think it’s a pointless question. Real estate prices are neither local nor national. Real estate prices over the long term always must be based on the cost to hold realized against the benefit from holding.

    Availability of credit is a national trend, hence changing it will affect national prices. Building a new manufacturing plant someplace is a local change and only affects local prices. Changes in free trade are global, and affect prices on a global scale. Same with global recessions. The rise of specu-vestors also turns out to be national or global since they can cross boundaries to buy.

    So no Kary, real estate prices are neither local nor national nor even global. They are a mix of all three, and that’s why the “all real estate is local” tag line is not even wrong; it completely misses the question.

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  22. Ooops

    So Kary – you do not think the affordibility is a problem? Many of my friends in Kirkland, Bellevue who worked for MSFT took out ARMs. So they were partilaly enticed by low initial payments. Doesn’t such lending push prices up? I am sure it does.

    Then what stinks in Seattle real estate – is that salaries stopped rising, MSFT stopped producing those millionaires from stock options and at the same time rent was staying flat. But real estate was shooting up like crazy? People were saying – oh it is because so many jobs are being created and so many people from CA are moving in.

    But the issue – why wasn’t rent rising? On the Eastside you can build more McMansions like crazy?

    So my thinking is that it is suspicious when rent is staying flat, salaries stay flat, there is space to build McMansions and at the same time real estate is shooting up.

    I remember in 2005 when I was in FL – Palm Beach Post was telling about janitors moving into 1 mill villas. So this was not happening in Seattle but – also our prices did not shoot up as much. If janitors with no verifiable income started buying waterfront properties in Kirkland – then the prices would go up even higher. In fact Bank of America should have advertised in poor neighborhoods that they can give a loan and move people to a nice villa because they can afford it after all. I don’t know why B of A and others did not advertise this? They should have also advertised that they do no credit check, no employment verification – they only check ID and maybe the pulse – but if arrythmia is present – then also no problem.

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  23. Kary L. Krismer

    I’m not arguing Seattle went up on it’s own. I’m only saying each city is different.

    Let’s use Case Shiller data. Since 1/2000 only three cities (NYC, Miami and LA) have gone up more, counting recent declines. The worst performing since then are Phoenix, San Fran, ATL, CLE, Detroit and Dallas. Detroit is actually down since then, and CLE barely up.

    NYC, Miami, LA, Phoenix and San Fran all peaked over 2x 1/2000 ((2.0, 2.8, 2.75, 2.25 and 2.2, repectively). Three of those are still above us, two are below us.

    I have to run out, so I can’t complete this, but using non-Case Shiller data, compare cities here: http://mysite.verizon.net/vodkajim/housingbubble/

    Check out the various cities in CA, and tell me they look like Seattle. Each city is different.

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  24. Ooops

    For me what stinked also. My friend worked for Amazon and had a respectable job and income. And you would think this guy can really afford a nice place. Well – the person was conservative and got a fixed 30 year loan and made sure that pyaments are less than 30% of income etc. All cool. But he got an old shabby house in Bellevue.

    A guy like that living in a shabby place in Bellevue – there is sthg wrong with the picture.

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  25. rose-colored-coolaid

    By Kary L. Krismer @ 23:

    I have to run out, so I can’t complete this, but using non-Case Shiller data, compare cities here: http://mysite.verizon.net/vodkajim/housingbubble/

    Check out the various cities in CA, and tell me they look like Seattle. Each city is different.

    Thanks. I checked out every city on that chart. Most only go back to the late eighties, so ignore anything that came before. Frankly, they all look very similar. Just about every city on that graph had a short uptick right around 1990; Seattle’s was smaller than most. Afterward, they all settled back down before beginning a run-up in prices around 1998. I would say those charts are exceptionally strong evidence that housing prices are influenced by national issues.

    Here’s a mathematical argument along the same vein, how similar are the functions
    f(x)=x^3
    f(x)=0.5 * x^3 – x

    They are more similar than perhaps they look (and that’s a pretty simple example).

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  26. softwarengineer

    I AGREE WITH SCOTSMAN AND OBAMA’S NEW ATTORNEY GENERAL

    We’re a nation of cowards when it comes to pragmatically discussing anything to do with uncontrolled population/debt growth destroying America’s/Seattle’s economy….we walk on egg shells to be politically correct and simultaneously, We the People know the news has totally missed the bulls-eye on overpopulation impact.

    What do you think the PI, NYT, etc, etc are all going bankrupt? They feed us this uncontrolled growth debt is good for you slop and no one is buying it anymore.

    Step one to an American recovery, stop being a nation of cowards when it comes to pragmatically discussing demographic science and put overpopulation back into our public schools’ text books.

    I agree with Obama’s new Attorney General.

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  27. Interloper

    I looked at the graphs at: http://mysite.verizon.net/vodkajim/housingbubble/seattle.html

    Really they just seem to support the idea of a Seattle lag. Because virtually every city is a variation on this curve:

    http://jamesoncapitalllc.net/wp-content/uploads/2008/12/case-shiller-chart-updated.png

    I’ll concede Real Estate is local to anyone who acknowledges that the Real Estate Bubble was National (even Global). National factors drove real estate prices of most locales over the last decade.

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  28. Acerun

    RE: Ooops @ 24

    Amen Brother!

    It is messed up that a household can pull in $120K/year and cant get anything but a dump of a shack or crappy condo in any nice neighborhood.

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  29. Cris

    “Step one to an American recovery, stop being a nation of cowards when it comes to pragmatically discussing demographic science and put overpopulation back into our public schools’ text books”

    @ softwarengineer
    Overpopulation for somewhere is only the fellas who are lacking the talent to survive in a city – whereever they are from.

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  30. BubbleBuyer

    These bottom calling models are interesting and irrelevant because there is no bottom to the housing or stock markets. There is a crisis of confidence in the US government (well founded), banking system (very well founded) and economy. Until people believe the economy will turn around there will be no bottom to housing or equities. Only a moron would buy an asset that they expect to continue declining.

    The USA is at the cusp of a dramatic and continuing decline in the quality of life. The housing bubble and irresponsible mortgage lending is not the cause of the economic collapse but a symptom. The real cause is the enormous $ surpluses China, Germany and Japan have with the USA due to the USA’s structurally flawed trade policy that generate $59 billion a month deficits from America living way beyond its means and an American economy that focuses on consumption rather than value creation. While Asians live frugally and save.
    This destructive cycle is fueled by the need for China and Japan to keep recycling dollars by buying treasuries in order to keep exchange rates favorable to maintain exports. The only way out of the downward death spiral America is in is to create an economy based on value creation not value extraction. We already have a deficit of $10 trillion dollars. That’s more than $40,000 for every man, woman and child.

    The next shoe to fall will be the US feds printing dollars to pay debt and fund deficit spending. This is already happening. Once foreign lenders realize the game the US is playing they will sell $ denominated assets and this will cause the dollar to collapse and interest rates to shoot up making the great recession seem like the good old days.

    It is fortunate for the US government that Americans are to passive and stupid to realize what is being done to this once great country.

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  31. drewba

    RE: Ooops @ 24

    Totally agreed. A family member of mine is a builder and I kept having the argument with him that housing couldn’t keep rising faster than incomes, but he wasn’t believing it.

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  32. tomtom

    By Kary L. Krismer @ 8:
    And I’m in fact saying that Seattle was heading into a super-heated mode in August 2007. I missed it at the time because I was looking at YOY increases (which were only marginally alarming) rather than the monthly increases. No telling how high Seattle would have gone but for the mortgage crisis, but it wouldn’t have been a healthy market.

    I think you have this backwards. The reason Seattle was in a super-heated mode was because of the future mortgage crisis. If lenders had maintained rational lending standards, then the bubble would not have inflated.

    And no, the market in 07 was not healthy.

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  33. Kary L. Krismer

    RE: tomtom @ 32 – You could blame a lot of things depending where you were. In Seattle proper I think the state’s first time home buyer program was more to blame than sub-prime lending standards. The state had something like $60,000 in second position loans available in certain areas where the person didn’t even have to have the income available to support it. That drove up prices in certain “select” neighborhoods.

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  34. Oops

    By softwarengineer @ 26:

    I AGREE WITH SCOTSMAN AND OBAMA’S NEW ATTORNEY GENERAL

    We’re a nation of cowards when it comes to pragmatically discussing anything to do with uncontrolled population/debt growth destroying America’s/Seattle’s economy….we walk on egg shells to be politically correct and simultaneously, We the People know the news has totally missed the bulls-eye on overpopulation impact.

    What do you think the PI, NYT, etc, etc are all going bankrupt? They feed us this uncontrolled growth debt is good for you slop and no one is buying it anymore.

    Step one to an American recovery, stop being a nation of cowards when it comes to pragmatically discussing demographic science and put overpopulation back into our public schools’ text books.

    I agree with Obama’s new Attorney General.

    Dude – you have sthg going on in your brain with regards to immigration and overpopulation. Maybe people should just have 1 child maximum so the society starts aging like in Europe.

    WA state is like a country in Europe and has far fewer people living in the state than in Europe. But maybe you are concerned about urban dwellings – then ok. Maybe you should move to a place like Winthrop and not be overwhelmed by the # of people. You should also avois places like NY where there are lots of people living in 1 place. SF and LA is bad too.

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  35. Scotsman

    Nice summary, Bubble Buyer @ #30, but it doesn’t go far enough. We’ve been caught in our own trap by a muddled education system and the failure to teach and reinforce sustainable values. There’s been too much emphasis on short term personal gratification and not enough on thinking through long term consequences.

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  36. BillE

    By Oops @ 34:

    Maybe you should move to a place like Winthrop and not be overwhelmed by the # of people.

    Have you seen real estate prices in the Methow Valley?

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  37. Herman

    RE: EastsideWestside its all good @ 14 – Best post – wins the thread.

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  38. Bottom-Calling: So Where’s the Bottom? | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.

    [...] ← Bottom-Calling: San Diego Lag Forecast John Talbott on Spotting the Bottom in Seattle Real Estate [...]

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  39. Bottom-Calling Week on Seattle Bubble | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.

    [...] Method 5: San Diego Lag Forecast [...]

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