Seattle Homes Still 10-20% Overpriced Compared to Rents and Incomes

Inspired by this post from Rich Toscano down in San Diego showing that home prices there have reached historically reasonable levels when compared to rents and incomes, I thought I would put together some similar charts for Seattle to see how close we are to reasonable home prices.

Here’s the chart for home prices to per capita incomes, from January 1990 (as far as Seattle’s Case-Shiller data goes back) through January 2009:

Seattle-Area Home Price to Income Ratio

As of January, Seattle’s home price to income ratio is at levels last seen in May 2002. Not bad, but still about 8% higher than the 1990-2001 average, and 16% higher than where the ratio bottomed out during the bust that followed the early ’90s housing boom.

And here’s the chart for home prices to rents:

Seattle-Area Home Price to Rent Ratio

The home price to rent comparison has “rewound” to approximately October 2003, and is overall less in balance from a historical perspective than the price-to-income ratio. January 2009’s value came in 23% higher than the 1990-2001 average, 34% higher than the previous bottom, and even 17% higher than the June 1990 peak value.

[Update: I should add that the specific area-wide rent ratio values are somewhat arbitrary, and are only really useful to compare to their own past performance. I strongly recommend against using them as a valuation tool for any specific home or neighborhood.]

It’s worth pointing out that both rents and incomes in the Seattle area are currently on downward trends of their own, which will only serve to prolong the inevitable correction to historically sustainable ratios.

The good news is that at the present rate of correction, Seattle-area home prices will likely hit the “reasonable” range compared to local incomes and rents sometime late this year to early next year. Note that home prices will likely continue to fall even after we hit that range, (as they are currently in San Diego), but that would at least indicate that homes are no longer overpriced with respect to historical fundamentals.

  

About 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.

83 comments:

  1. 1
    masaba says:

    Are current interest rates a factor in these charts? Ah, nevermind, I just glanced at the page you quoted and saw that interest rates don’t factor into these charts.

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  2. 2
    Guest says:

    I think the price will go below 5.5 or even 5.0 ratio.

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  3. 3
    DaveyDave says:

    Excellent, excellent thread, Tim. Is this what you’ve been working on? There are 2 things that I like about this. One, it’s a concise relationship of data sets that gives us a clear(er) sense of affordability over time. And two, it removes inflation and interest rates as considerations. Presumably, higher interest rates and inflation would affect housing prices, income and rent in a similar fashion. Not necessarily identically, but close enough.

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  4. 4
    The Tim says:

    Also, for reference:

    Home Price to Income Ratio w/ Seattle Bubble Founding Date

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  5. 5
    Scotsman says:

    Good stuff! I pulled up the complete historical CS plot to check the assumption of the 1990-2001 time frame as representative of longer term values. It appears the home price data shows average inflation adjusted home prices from 1990-2001 were higher than the longer term trend from 1945-2001. So your analysis has us returning to a still above trend norm, if that makes sense. Or in simple terms, the reality will be worse if longer term trends are taken into account, since this analysis uses as a baseline data that is outside the norm.

    And of course, none of these predictions include the effects of a deep national recession/depression.

    (Snarky comment self edited. You can thank me later)

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  6. 6
    Sniglet says:

    I think Tim’s point about how incomes and rents are declining is particularly poignant. This correction is a moving target. Rents are clearly coming down, and wages are under considerable strain.

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  7. 7
    Dave Lincoln says:

    One thing that’s not taken into account in the 1st graph (prices vs. income) is the difference is tax rates. Unless there is a major revamping of the US income tax system, the “bracket creep” phenomenon means that due to inflation, the average tax payer is in a higher bracket (slowly). So, as Seattle average income is rising slowly (let’s say) the average take home income is not rising as fast. On the other end, I guess there could be some relief as property taxes possibly don’t rise linearly with house price, but I am not sure of that (not an owner here – don’t wanna be)

    If all else were equal the dotted red line might have a slight negative slope to it. People are getting into higher tax brackets (on average), and so a ratio of 6.0 (house price to gross income) maybe meant 8,0 (h.p. to real income) in the past, but the same 6.0 (h.p to g.i) now = 8.5 (h.p to real income) now. The IRS and SS get their cut- they don’t give a rat’s a$$ about your fancy Cascade view house ;-)

    I am not knocking the whole idea here, Tim.

    Of course, you could always vote in a conservative government that cares about your taxes… nahhhh, not in Seattle. .. not so … compassionate.

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  8. 8

    “Of course, you could always vote in a conservative government that cares about your taxes… nahhhh, not in Seattle. .. not so … compassionate. ”

    I’m not the one who introduced politics here, but weren’t the last 8 years governed by a conservative? didn’t government expenditures go WAAAY up during that period, while revenues went down partly due to tax cuts for the wealthy?
    Doesn’t seem to me to make that much difference which party is in power, either taxes go up or the deficit goes up. Sometimes the size of government shrinks a little over the short haul, but revenues are usually reduced drastically during that time, increasing the deficit, and somebody has to pay the piper , eventually.

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  9. 9
    The Tim says:

    By Ira Sacharoff @ 8:

    I’m not the one who introduced politics here, but weren’t the last 8 years governed by a conservative?

    IMO, George Bush was not remotely conservative, at least not fiscally, which is what matters in this discussion.

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  10. 10
    Nick says:

    I’m kinda surprised the historical multiple for the Seattle area is over 5.5. Here in LA, for example, the historical multiple is generally quoted around 4, and SoCal is generally considered a very nice place to live (aside from the California laws and court rulings, of course). A 5.8 ratio doesn’t seem sustainable, but maybe I’m not accounting enough for the more favorable personal financial environment in Washington.

    Anyway, good analysis; I think this will be a fairly good predictor of when housing prices are close to “bottom”. I’d expect rents to decline maybe 20% or so with occupancy consolidation and rental conversions (for failed condo projects and investment purchases), and income to drop maybe 10% with the recession; the former being a very loose guess, and the latter being very dependent on how much the government exacerbates the recession. That and the expected overshoot to the downside should get prices where I’d expect them in a few years.

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  11. 11
    Kary L. Krismer says:

    And administrative issue. There are now three recent threads that have 20% in their title. It makes it a bit confusing when looking at the recent comments. Tim, could you try to avoid that type of situation in the future?

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  12. 12
    dw says:

    Actually, since the main tax brackets are indexed to inflation, there’s little bracket creep. The one place there is creep is in the AMT which isn’t indexed.

    I’ve heard more than a few people wave around the “bracket creep” canard, and it’s just not true on a national level. Locally, yes, you can see it, but the #1 reason people “creep” into another bracket is because they’re getting raises, not because of cost of living adjustments.

    It’s like my brother saying that when you change tax brackets all your income is taxed at that new rate. I wasted half an hour at Christmas explaining the federal tax system to him, only to have him continue to say I was just some liberal commie for thinking what I did. And this was even after I showed him the IRS website and the brackets. (Not bitter about losing that 30 minutes.)

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  13. 13
    singliac says:

    RE: Kary L. Krismer @ 11 – If you’re tired of seeing 20%, just hold tight. It won’t be long until we see some posts with 30% in the title.

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  14. 14
    Dave Lincoln says:

    Nor was the governer a conservative, either, Ira, nor the mayor.. I am suprised that someone with such clearly worded and logical posts could still be a left-winger. Maybe some type of mid-life crisis or what-have-you could shake the conservative out of you, Ira. It’s never too late. Just don’t tell your neighbors what happened, of course.

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  15. 15
    Kary L. Krismer says:

    RE: singliac @ 13 – But then we’ll have the same problem, just different numbers! ;-)

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  16. 16
    Kary L. Krismer says:

    RE: dw @ 12 – The one that gets me is people who don’t understand the real estate tax system over in the P-I Soundoffs. Every time there’s a story about dropping prices there will be a comment about either how taxes will go down or not go down, when really that has nothing at all to do with it.

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  17. 17
    Anon MSFT says:

    I am somewhat alarmed by the very high average Price to Rent ratio of 319.6. While I would estimate that home prices would be “reasonable” once we are 35-40% off the peak, just like you do, the basis of my estimate is a Price to Rent ratio of 180 i.e. 15 years. San Diego has a similar average PR ratio. By my estimates once prices are 35-40% off the peak on the East side we get a PR ratio of about 180. But your target ratio of 319.6 seems to be extremely high. By that estimate, East side homes are quite underpriced now.

    I suspect the problem is your source for the rent data. Where did you get the historic rental data from? It would seem that the rental data is drawn from lower priced homes than CS Index. Nevertheless, the final conclusion of the estimated bottom price would be “correct” if PR ratio is inflated accordingly.

    Note that 319.6 PR ratio is extremely high. This corresponds toa Price to Revenue ratio of 27, which means the corresponding P/E ratio would be in excess of 30 for a business whose profit growth can only track inflation.

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  18. 18
    Dave Lincoln says:

    dw, good points. I mean, I agree with you on what marginal rates mean. I don’t know which site it was (I think not this one), but a thread went on for 100 posts about the $250,000 limit on some bracket, and people did not get the whole “marginal” idea.

    However, I did not know if our 35 % Fed. tax bracket is indexed to inflation or not. If it is, probably not for long. Keep in mind, for the point I’m making, inflation or no inflation, if someone is making $100,000 their real income is a smaller share of that (unless they’ve got a REALLY BIG mortgage and other deductions) than the family making $50,000, or course. The only way around that is a flat tax or no income tax, both of which I would vote for, BTW.

    So, whatever way people end up making more money (be it more great software jobs or the 747-800), the ratio that Tim has is flawed somewhat by not comparing prices to real income (after giving the US government big bucks) and it can’t because gross income is all you can get sometimes. I’m just saying, all other things being equal, the red dotted line should probably have a negative slope, due to the fact that taxes never go down. According to Ira, they can’t, right? ;-) It’d be the end of the world as we know it.

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  19. 19
    Dave Lincoln says:

    Oh, Kary, I have the same thing happen to me a lot. There I am, fixin’ to write a really smart-a$$ comment, and I can’t tell which post I am under because all 5 of them have the word “DOWN” in them. Yeah, straighten that crap out, the Tim, will ya?

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  20. 20
    The Tim says:

    RE: Anon MSFT @ 17 – For the rent data I used the Census “Median Contract Rent” value for 2000 and 2005, interpolating the rent for the rest of the dates using the Bureau of Labor Statistics “rent of primary residence” component of the CPI.

    This is similar to the method used by Rich Toscano for his San Diego charts, except that instead of “Median Contract Rent,” he used the average San Diego rent from rentslicer.com. If I use that method the home price to rent ratio tops out at 408.2, and the 1990-2001 average is 237.0.

    The specific ratio values are somewhat arbitrary, and only really useful to compare to their own past performance. I strongly recommend against using them as a valuation tool for any specific home or neighborhood.

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  21. 21
    cm says:

    I would be interested in real life examples of people on this site who own rentals and what the numbers look like. I have 2 rentals, one in Kirkland and one in Bothell. Kirkland is at 247 times rents and bothel is 242. And at the peak values Kirkland was 317 and Bothell was 278.

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  22. 22
    Groundhogday says:

    By cm @ 21:

    I would be interested in real life examples of people on this site who own rentals and what the numbers look like. I have 2 rentals, one in Kirkland and one in Bothell. Kirkland is at 247 times rents and bothel is 242. And at the peak values Kirkland was 317 and Bothell was 278.

    250 times monthly rent? That is quite frothy, isn’t it? No one purchasing now could cash flow positive.

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  23. 23
    One Eyed Man says:

    One piece of good news, if you are going to use 1990 through 2001 as the mean to which housing prices will revert, your baseline economic assumptions can include a 30 yr fixed rate of 8% because that was the approximate rate during that period according to Freddie Mac. That doesn’t mean that prices will or won’t level out when reaching the 5.77 times per capita income level. It just means that a housing market with stable prices at about 5.77 times per capita income can probably endure 30 yr rates at 8%. The bad news is that I think rates will eventually revert to 7 to 8% just like prices will revert to a ratio closer to 5.77 times per capita income.

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  24. 24
    PhinneyDawg says:

    I know it doesn’t make much sense to do a personal ‘home price to income ratio’, but I gave it a whirl.

    I took our recently assessed bank value (for a refi) and our 2008 income, and it comes to 4.6. Not too bad in my mind, but then again, this ratio isn’t meant to be done at such a fine scale.

    What’s the general rule for home price to income? Home price that is at the most 3 times your yearly household income?

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  25. 25
    pfft says:

    “nspired by this post from Rich Toscano down in San Diego showing that home prices there have reached historically reasonable levels when compared to rents and incomes”

    kary, here is our real world and real time market to use our timing signal. we won’t say buy until we have 3-6 (mostly)consecutive months of YOY price growth in SD. then we will issue a “buy” in real-time.

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  26. 26
    mukoh says:

    RE: cm @ 21 – I have a grandfathered duplex in Kirkland that had a unit clear out right before December. Took longer then I expected 3 weeks to find a renter this time vs. two years ago it took four days, but got $1 a foot for it on 2yr lease. Depending on the area of course, this is not too far from market st. My associates rental over the freeway took two months and didn’t get a superior number.

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  27. 27
    Anon MSFT says:

    RE: cm @ 21

    As Tim pointed out, he has used data for rent and price from different sources. So the ratio he gets 319.6 is not the price to rent ratio for the same property. However, the percentage difference between the historic average and current average would still be correct.

    Traditionally, price to rent ratio is expected to be 180. this implies a price-to-revenue ratio of 15 years. Rental incomes are only expected to track inflation. It is useful to compare this to P/E ratios for company stocks with limited growth prospects (i.e. large caps). 15 is the typical ratio in a fair economy. Note that this is price to revenue ratio. The price to earnings ratio would be still higher. A ratio of 250 is too high IMO, i.e. it is more profitable to sell the property and invest it in “stocks”. MSFT is trading at 10.33 right now, corresponds to a ratio of 124 (pure earnings, not revenue). This is excluding the modest dividends too.

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  28. 28
    Groundhogday says:

    By PhinneyDawg @ 24:

    What’s the general rule for home price to income? Home price that is at the most 3 times your yearly household income?

    I’ve heard anything from 2.5-3.5 x income for the loan amount under traditional lending standards. Assuming a down payment, the house would cost a bit more. Using the Washington State Employees Credit Union Calculator, I get 3.5x income for max purchase price assuming no other debt, 30 year loan, $70k annual income and 20% down.

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  29. 29
    Groundhogday says:

    By Anon MSFT @ 27:

    RE: cm @ 21
    Traditionally, price to rent ratio is expected to be 180.

    This seems rather high? I’ve heard 120-150, with actually ratios dropping below 100 during busts. Are you referring to investment properties or owner-occupied?

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  30. 30
    Scotsman says:

    I think there’s some confusion on what is really being said by The Tim’s analysis. The number he generates as a price to income ratio is all inclusive in the sense that it includes older purchases, and even homes that were paid off long ago. Remember, about a third of all homes are owned free and clear. So the data as he reports it doesn’t really capture the crux of the matter, which is the purchasing power of new buyers for current inventory.

    A little thought makes clear that very few buyers can purchase homes worth 5 or 6 times their income- only move-up buyers with a lot of equity can play at that level. For first time or repeat buyers who have little or no equity to bring to the table, the more traditional 3-3.5 times income rule is still very much in effect. As Tim said in his initial presentation, the numbers generated by these graphs are really only useful for tracking relationships, not as predictors for when the market may or may not bottom or return to prior levels of activity.

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  31. 31
    Anon MSFT says:

    RE: Groundhogday @ 29

    Random data :-) I saw that on some reliable pdf somewhere on the net. It was higher than I expected. I would have expected a P/E of 15 and not a P/R of 15. If you have reliable sources that quote 120-150 as the ratio then please use that figure. But I fear that such a low ratio implies that Seattle home prices will tank more than 50% off the peak :-( That will bring certain economic disaster to Seattle.

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  32. 32
    Dave0 says:

    By dw @ 12:

    It’s like my brother saying that when you change tax brackets all your income is taxed at that new rate. I wasted half an hour at Christmas explaining the federal tax system to him, only to have him continue to say I was just some liberal commie for thinking what I did. And this was even after I showed him the IRS website and the brackets. (Not bitter about losing that 30 minutes.)

    It’s funny, I find myself having to explain the same thing to people. Except last time I had to explain it was to the Sr. Staff Acountant at my work (I work in the Finance dept with him), whose last job was to do people’s taxes for them! it’s amazing how many people don’t understand the concept of MARGINAL tax brackets. Even the professionals!

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  33. 33
    Dave0 says:

    By Dave Lincoln @ 14:

    Nor was the governer a conservative, either, Ira, nor the mayor.. I am suprised that someone with such clearly worded and logical posts could still be a left-winger. Maybe some type of mid-life crisis or what-have-you could shake the conservative out of you, Ira. It’s never too late. Just don’t tell your neighbors what happened, of course.

    RE: Dave Lincoln @ 14

    I’m surprised that someone with such clearly worded and logical posts could still be a right-winger.

    Oh, and I thought that the mid-life crisis made people into conservatives, not vice versa. It seems like it’s all the young kids out there are trying to change the world to some utopia (a.k.a. liberals), but then they settle down, get a job, grow up and before you know it they are fighting to keep things how they’ve traditionally been because it’s comfortable and they understand it cause that’s how it’s always been (a.k.a. conservatives). The other way around doesn’t make sense to me.

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  34. 34
    Deran says:

    “That will bring certain economic disaster to Seattle. ”

    Hmmm, no, not really. Or, rather, it depends if a person is trying to attain yuppie status, or, you just want to be able to live, like me. Deflation is my friend. Deflation is the friend of all people who are not trying to work their way into yuppiedom.

    Personally; I’m hoping these endless months of chilly gray weather (I love it), the collapse of the local housing bubble and the collapse of Boeing, MSFT, etc, leads to lots and lots of out-of-towners crawling their way out of here. I promise I won’t throw rocks as you leave, I’ll even strew the path with rose petals! And no thorns!

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  35. 35
    Lionel says:

    Here’s some deflation for you, Deren. An email from the UW president —

    Dear Students, Faculty, and Staff:

    As you have likely heard, the Washington State Senate and House of
    Representatives earlier this week released their operating budget
    proposals for the 2009-2011 biennium. While we expected significant new
    cuts, the Legislative budget reductions are dramatic and disturbing. All
    of higher education will be severely impacted should these proposals
    pass. For the University of Washington, the Senate has proposed a state
    budget cut of nearly 23 percent, or $189 million, while the House has
    proposed even deeper cuts of 31 percent, or $260 million. These cuts are
    worse than we had anticipated, and although they could be mitigated
    somewhat with federal stimulus funds and tuition increases, they still
    represent a serious challenge to our ability to serve our state.

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  36. 36
    redmondjp says:

    Hey, not only rents are going down, WAGES and benefits are too!

    Case in point #1: Paccar used to provide a company match of 100% for the first 5% of employee contributions into their retirement accounts. The 100% match just got cut back to the first 1% of contributions. Benefit cut. OUCH!

    Case in point #2: Genie Industries, now part of Terex, is “temporarily” cutting all workers’ salaries, by 5% if you make less than $80K/yr, and by 10% if you make $80K or more. Wage cut. KAPOW!

    Now, if we could just get this same kind of thing to happen at all levels of government (full disclosure, I now work for the federal gov’t), maybe we could get these massive budget deficits scaled back a bit. HAH! Yeah, right . . . They’ll lay off law enforcement and prosecutors, close parks, and what have you, trying to force the public into a tax increase, long before they will cut their own salaries. And that needs to start right at the top with the highest paid executives on down (I’m sure we can find somebody to be a fine mayor of Redmond for less than $128K a year plus car allowance). Since Ron Simms is leaving, we can just adjust the salary level of the position before we replace him and the new person won’t even know the difference.

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  37. 37

    RE: Dave Lincoln @ 14
    It’s not that I’m such a left winger, it’s more like none of the elected officials of any party have shown much fiscal responsibility.
    Under Jimmy Carter, we had inflation of nearly 20%. Under Reagan, taxes might have fallen, but the federal deficit came close to quadrupling under his administration, and federal spending drastically increased.
    I just haven’t seen any elected official really reduce expenditures over any extended period. Not saying they should, but if you are increasing expenditures while reducing tax revenues, there’s some sleight of hand going on and the buck is being passed. Sure, it’s not responsible to unfairly burden taxpayers to support a bloated government, but it’s maybe even more irresponsible to lower their taxes while increasing expenditures at the same time, letting the next lucky sucker to handle it.

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  38. 38
    Lukasz says:

    Tim,

    Can you please include references to data sources for your charts? Based on my data and linear regression from 1976-2002 housing prices are still 142% of the norm. What is worse – wages are recently falling faster than house prices, so in the last few months we got further from the norm, not closer.

    Thanks,

    Lukasz

    PS. I was looking at wages data from http://www.seattle.gov/financedepartment/cpi/docs/Seattle_CPI_History_–_Bimonthly.xls and from http://www.seattle.gov/financedepartment/cpi/docs/Seattle_CPI_History_–_Annual.xls. I was looking at housing data from OFHEO: http://www.ofheo.gov/hpi_download.aspx (CSI for Seattle starts in 1990, OFHEO starts in 1975.

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  39. 39
    BillE says:

    By redmondjp @ 36:

    Now, if we could just get this same kind of thing to happen at all levels of government (full disclosure, I now work for the federal gov’t), maybe we could get these massive budget deficits scaled back a bit. HAH! Yeah, right . . . They’ll lay off law enforcement and prosecutors, close parks, and what have you, trying to force the public into a tax increase, long before they will cut their own salaries.

    Cut salaries? Snohomish County laid off 160 people, then gave RAISES to everyone else.

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  40. 40
    Herman says:

    Another great data plot.

    You know what would be some good data to gather, would be the ages of the home purchases out there. What I mean is, how much of our inventory was purchased in 2008, 2007, 2006, etc. It’d be a useful overlay on some graphs, and an interesting graph unto itself to show the trends of who’s selling.

    For example, if the inventory of 2007 vintage purchasers is declining, I’d say it’s foreclosures that are selling.

    If the 2005-2009 vintages are unusually stagnant, then I’d suspect they are locked into their homes. I’m guessing that those vintages are going to be stuck for some time, while the earlier vintages gradually sell out at a profit even with the declines.

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  41. 41
    Herman says:

    By dw @ 12:

    Actually, since the main tax brackets are indexed to inflation, there’s little bracket creep. The one place there is creep is in the AMT which isn’t indexed.

    Although the bracket breakpoints and home prices are influenced by inflation, the upward mobility of the population is not. That’s the meaning of bracket inflation. Seattle citizens have a lower percentage of gross take home pay than citizens of Tulsa. If the citizens of Tulsa all suddenly got IT jobs and went from $50k to $100k, their take home would not double, it would be less. That is an unaccounted-for impact on these charts.

    By the way, the higher marginal tax rates up the brackets is just the teaser. The real ass kicker is the phase out of the deductions.

    By the time someone gets to about $500k in reported income, all his deductions are phased out completely. The IRA deduction is long gone, forget all the child credits, everything he can itemize is voided, the AMT deduction is zeroed, personal and dependent deductions are phased out as well.

    That’s why the wealthy start getting paid in stock options to defer the gains to a down year, shift revenue-production into dividends or long-term cap gains, and switch to the David Losh “salaries are for suckers” philosophy of disguising earnings as business expenses.

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  42. 42
    Jonness says:

    “I am suprised that someone with such clearly worded and logical posts could still be a left-winger.”

    I think Ira is saying he doesn’t worship either the left god or the right god because he believes both are short-sighted dishonest theives. I suspect it will be difficult to convert him to any particular religion that’s not founded upon logical principles, which of course is consistent with his logical posting style.

    Politics = religion. Most people choose their parents affiliation and typically don’t spend much time questioning it thereafter. I believe this is because the brain is still wiring when young. Thus, it forms (hardwires) to believe a certain way, which is diffult to change as the mind loses plasticity (as the brain ages).

    But that’s just my theory of how 95% of people can believe in only one of two possible trains of thought.

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  43. 43
    Buck says:

    @31 At Irvine Housing Blog the rent multiplier of choice seems to be 160x for owner occupancy. Larry Roberts AKA Irvine Renter, a commercial RE finance analyst, IIRC, runs through a calculation here

    http://www.irvinehousingblog.com/blog/comments/rent-versus-own/
    that come in at 154 as the own/rent breakeven point. Is this the same ratio being discussed here?

    A cash-flow investor (as opposed to a price speculator) would need a number well below that, so I can’t imagine there are a lot of purchases of rental units going on now by people who expect to profit from rents.

    California has pretty weird property tax characteristics, so maybe the rates differ here enough to get a different result. I don’t have the numbers for my home handy, so I’m spared the guilt of not repeating his calculation! ;-)

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  44. 44

    “I think Ira is saying he doesn’t worship either the left god or the right god because he believes both are short-sighted dishonest theives.”

    I couldn’t have said it better myself. 100% accurate reflection of how I feel.

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  45. 45
    Marquis De La Loins says:

    RE: Ira sacharoff @ 44 – Word to the mother.

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  46. 46
    hzg says:

    reply to #35 re:state cuts to higher education

    anyone against terminating the WSU Dept of Real Estate Research?

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  47. 47
    David Losh says:

    RE: redmondjp @ 36

    I’ve worked for the federal government and am pleased with the way they spend tax payer money. In my opinion the federal government should spend more here at home for the benefit of the people. Health Care is the number one thing that our government avoids spending money on in favor of private enterprise.

    For profit Health Care is only one example. Leaving energy research up to oil companies seems like a big waste of every ones money. I can go on for hours about the war on drugs as a way to prop up pharmecuetical companies, as well as the war in Iraq to protect oil interests.

    Our government spends money in a prudent frugal manner on things that cost consumers real dollars.

    It’s our government and we have the right to tell them how to spend our money. We instead want bigger cars, we want fancy hospitals with granite, we want little boxey town houses, and we want to go to the moon.

    The waste is that we want stupid stuff out of the government rather than substance.

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  48. 48
    Mikal says:

    RE: David Losh @ 46 – That was a good post.

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  49. 49
    Mikal says:

    RE: Jonness @ 42 – You must not have kids.

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  50. 50
    Mikal says:

    RE: Herman @ 41 – Could anyone make that kind of money anywhere else in the world? Or is it the system? Warren Buffet thinks it is the system and wants to pay more in taxes. What a rube.

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  51. 51
    what goes up must come down says:

    Herman @ 41 if you make 500k a year do you really have anything to whine about? If you make 500k a year here is an idea — ENJOY IT.

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  52. 52
    economist says:

    I’m kinda surprised the historical multiple for the Seattle area is over 5.5. Here in LA, for example, the historical multiple is generally quoted around 4

    The multiple Tim is giving for Seattle is based on per capita income (take a look at the graph), but the multiple you’re giving for LA is based on household income. Two different things.

    Seattle is historically more affordable than LA, i.e. the multiple based on household income would probably be around 3.

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  53. 53
    harbored says:

    RE: what goes up must come down @ 50

    if you make 500k a year ?

    Mercifully please point me in the right direction

    I’m a frequent and longtime depositor in the bank of karma

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  54. 54
    Sleepy says:

    By Ira Sacharoff @ 8:

    “Of course, you could always vote in a conservative government that cares about your taxesâ�¦ nahhhh, not in Seattle. .. not so â�¦ compassionate. ”

    I’m not the one who introduced politics here, but weren’t the last 8 years governed by a conservative? didn’t government expenditures go WAAAY up during that period, while revenues went down partly due to tax cuts for the wealthy?
    Doesn’t seem to me to make that much difference which party is in power, either taxes go up or the deficit goes up. Sometimes the size of government shrinks a little over the short haul, but revenues are usually reduced drastically during that time, increasing the deficit, and somebody has to pay the piper , eventually.

    Tax revenues went up both under Reagan and Bush. The deficits were caused by increased SPENDING. This was especially true during the Bush years after Democrats took over Congress 2 years ago. Not trying to be political. Just stating facts. You can look it up yourself.

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  55. 55
    Sleepy says:

    I have a question about the chart. Is income computed to mean average income of those who are working or is it per capita average income?

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  56. 56
    Dave Lincoln says:

    DaveO, switch “left” for “right” wingerr. Otherwise, my post makes senses.

    Ira, it sounds like we agree some, but I don’t think we would if it comes down to blame for our (well, not mine, I’m doing fine) fiscal problems. I blame over-regulation (especially coerciion of banks into bad loan via CRA) in different ways, and I think you would say the opposite. I”m not trying to start a discussion on this now, but just explaining why I picture you as a left-winger.

    Herman – that’s what I said ..#18. I didn’t mention the deductions going away, but I know about it from one year. BTW, that’s about the level at which the AMT stuff kicks in too.

    one more thing, Ira: Ronnie would have done a better job at both lower taxes and lower spenditures if he had Republican majorities any of the time. He was fighting the dems the whole time. No, don’t bring up 6 years of GOP under W. Bush – that guy was no conservative, as Tim said, and he totally squandared the possibilities. G. W. Bush was not fit to wipe R.R’s a$$, before or after the altzheimers. I dislkie him more than you do; I’ll put money on it.

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  57. 57
    AmyM says:

    Historical data is great, but the past is no definitive predictor of the future. SFH inventory is approx 1,000 units below this time last year in King County. I don’t think you’ve taken into account population trends and the fact that you have very little land here. There are a ton of extra people living here, especially since 1990. I agree that we aren’t done with the correction but look at how many more people are living here now than in the past. One of the reasons prices are so expensive here is because of the geography. Mountains and water just aren’t convenient and you can’t build on top of them, at least we haven’t found a way. That’s why Dallas and Houston can keep sprawling and are still affordable,because they can. Western WA doesn’t have that luxury.

    When I first moved out here two years ago it seemed like there wasn’t a huge price difference, at least not the amount I was expecting due to what I call the “convenience factor”. For ex: Duvall prices were about the same as Redmond in some places, yet it was a lot less convenient and the roads flood out there. Now I am seeing all that fall into line as expected. The outer areas are correcting harder.

    I don’t think you are going to see “over-correction” in the most convenient areas where “everyone wants to live”, ie. close to work, schools, freeways, etc. Green Lake, Kirkland, Bellevue, Queen Anne type places are going to command a premium over the norm against Tukwila, Carnation, etc. They always have but now you are taking out “speculation”. You’ve heard “a rising tide lifts all boats”. Well now that the tide is out we are starting to see which areas will sink hardest or keep their head above water the best. This should actually be a great indicator for potential buyers who will stay put. This correction is telling us what neighborhoods will be the best long term investment/risk. The first rule of real estate is back in action: Location! Location! Location!

    I think it is very tough to generalize at this point. We know the junk isn’t selling and the outlaying areas are suffering but I’ve been watching certain neighborhoods and they are starting to see some action at these lower prices, at least in the SFH market. It could be a spring bounce, but maybe not if inventory stays low. It is clear that no group of neighborhoods escaped round 1 of a correction, but round 2 who knows, and to what extent?

    If you look at a basket of stocks they do the same thing. At first, the tide goes out and everything gets punished. In phase two though people start buying up value while the junk continues to languish and finally in phase three the better stocks or sectors lead the way. We’ve seen phase one of this real estate collapse. Are we still in it or are we now entering phase two, where people see value in the best neighborhoods and start buying?

    Just some additional food for thought.

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  58. 58
    Herman says:

    By what goes up must come down @ 50:

    Herman @ 41 if you make 500k a year do you really have anything to whine about? If you make 500k a year here is an idea — ENJOY IT.

    I don’t make 500k per year. I make 750k per year, mostly by writing popular works of fiction and commenting on blogs.

    .

    RE: Mikal @ 49 – People can and do acquire that kind of wealth in other parts of the world. Not always fairly. We do live in a good system relative to others wrt to freedom and free markets, but not wrt responsibility. At some point our system will run up so much debt that it fails.

    I’d prefer that our taxes were levied based on how we used our money rather than on how much went into our bank accounts. Our tax system is rigged against savers and earners. Our tax system wants borrowers and narcissistic spenders.

    And there are still a lot of ways to make a ton of money without delivering any value to our system (i.e. arbitrage; hedge funds). We could work on that.

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  59. 59

    RE: Dave Lincoln @ 53

    I think you’re right, Dave. I think some of these financial company CEO’s are nothing but thugs, and I’m not going to blame Barney Frank for this country’s financial problems, even if he does sound and look like Elmer Fudd.

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  60. 60
    The Tim says:

    By AmyM @ 57:

    SFH inventory is approx 1,000 units below this time last year in King County.

    False. As of January and February it was only down 200-300. March looks like it will fall in the same range.

    I don’t think you’ve taken into account population trends and the fact that you have very little land here.

    You’re kidding me, right? We most certainly have taken this into account. We have done posts on that very subject and found that construction of new housing units has consistently outpaced population growth. In fact, overbuilding has driven King County’s overall occupancy down to levels last seen between the 1970 and 1980 Censuses.

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  61. 61
    mukoh says:

    Tim,
    Since CS is a lagging indicator is it safe to assume that the ratios are closer to normal now?

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  62. 62
    The Tim says:

    RE: mukoh @ 61 – Well I did use the latest CS data (January) but yes, since they use a 3-month rolling average and even January’s data is about 2 months old now, we can probably assume that the ratios are even closer to their historically reasonable values now than they were when this data was recorded.

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  63. 63
    mukoh says:

    Great info Tim. Something I haven’t seen before.

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  64. 64

    YOUR -20% PREDICTION COULD BE RIGHT TIM

    Its anyone’s guess actually, but I’d also humbly predict when your blue/green lines finally bottom out [if ever], its most likely [at best] that they’ll flatten out out like a heart monitor on a dying patient.

    I heard an analogy by a RGE Dr Roubini blogger that the American economy’s rate of demise appears to have slacked off, because the bleeding is slowing down as the body runs completely out of blood. Improvements in the rate of economic decline don’t always mean bottoming out with recovery [“U” shaped recession], but rather the bottoming out [in my humble opinion and Dr, Roubini’s too] will be “L” shaped; bottoming out with no quick recovery in Seattle home prices.

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  65. 65
    DrShort says:

    Question:

    What’s causing the price/income ratio to peak in 2006 when housing peaked in 2007? Interest rates? Income gains?

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  66. 66
    deejayoh says:

    It is interesting how almost every way you slice this, it comes out looking like a 30-40% drop in prices is the likely outcome. The results triangulate pretty consistently

    – If I take the current 20% drop and add another 10-20% based on this analysis it ~comes out there.
    – I did a couple of earlier analyses – one on “buying power” (disposable income/interest rate) that suggested 40% and another on price:rent and price: income that suggested a 30-40% drop.
    – Also, I updated the boom/bust charts and drew the line for where Seattle should be it comes out at 30%

    That suggests prices need to roll back further to somewhere between October 2003 and November 2004 before they are in line with “historical norms”. This is not a bottom call (as prices could overshoot) but I would say that if I could find a home that is priced where it sold in that time frame, it’s a reasonable bet that it will hold it’s value. Even if they overshoot on the down side it seems likely they will recover.

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  67. 67
    mukoh says:

    DJ, I was sort of rolling eyes previously at 2004 predictions at the end of 2007. Now it looks real. Going to be an good opportunity.

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  68. 68
    observor says:

    Have you consider baby boomers retiring? Next 10-20 years will be different as more people will retire than anytime in past US history. The future will be very different than past.

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  69. 69
    observor says:

    In next 10-15 years, baby boomers are going to retire in big chunk. This should have huge impact on housing market. Is there any analysis done for what would be impact with baby boomer retiring and moving away from Seattle area?

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  70. 70
    Jonness says:

    “Are we still in it or are we now entering phase two, where people see value in the best neighborhoods and start buying?”

    You said areas in good locations have seen very little correction. It seems to me these same areas doubled in price as a result of lax-lending and overspeculation. Who is going to get the loans to buy up this overpriced and overspeculated stuff amidst tightened lending standards and mainstream economic consensus that the unemployment rate is headed above 10% and won’t correct to normal levels of 5% until 2013?

    IMO, phase II will represent the loss of stickiness, and the overpriced homes in good locations will go down in price to historically appropriate values that line up with mainstream economic functions having inputs of incomes, rents, etc.

    Phase III will represent overshooting the bottom. Phase IV will represent sustained sideways action, and phase V will represent gradual increases in prices.

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  71. 71
    Jonness says:

    “In next 10-15 years, baby boomers are going to retire in big chunk. This should have huge impact on housing market. Is there any analysis done for what would be impact with baby boomer retiring and moving away from Seattle area?”

    I recall a lot of news about a year ago on a study done on the impact of baby boomers retiring in mass. Perhaps someone that knows more about it than I and can link the study and comment. I recall it predicting a lot of boomers will be downsizing, and this will lead to a housing surplus, but areas with jobs will fare better than other areas.

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  72. 72
    Esol Esek says:

    This is nonsense. Prices have not returned to 2003. Then you could find homes in NW QA near dravus etc for under 400k and tons in S sea for 200k (with views). While the outskirts are being abandoned steadily, There is NOTHING CENTRAL for that price now. Magnolia just had a bunch of homes that were listed for around 450k all go, and I’m not talking that cheaper area near fisherman’s terminal. My point is that prices are not at 2003 levels. There was a horridly steep increase that started in late 2004, mostly because the residue of the dotcom debacle had lingered longer here than CA. However, anyone who buys (now a long-term decision) in Seattle, get ready to enjoy no summer. The winters are getting worse. There still seems to be tech work. We’ll see for how long. Seattle is full of resetting option ARMS and Alt-As as well. When I stiop getting angry at greedy and stupid people, then it will be time to buy. Things were looking better over the winter, but people are still buying. in-migration, call it what you want..its still happening. logical or not.

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  73. 73
    deejayoh says:

    RE: Esol Esek @ 72 – If you are replying to my comment, then you need to read more closely. I said “that suggests prices need to roll back further to somewhere between October 2003 and November 2004 before they are in line with “historical norms”.”

    We are still 10-20% above that point

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  74. 74
    old ballard says:

    Regardless of all the other good reasons for the state and federal minimum wages, the real reason is to put a floor under prices. When prices go up there is a push (or should be a) to raise the minimum wage, to raise the floor, to maintain profits, keeping aggregate demand on track, hopefully, not risking over production.

    So what?

    The ultimate floor for rental prices is the minimum wage.

    Not all rental units need to be affordable to the bottom income earners but there must be some equivalent number, ratio, of units to the majority of individuals in all income brackets for prices to stabilize.

    Just looking through craigslist it is clear that very few rental units are affordable to individuals making less than 75%, much less 50%, of the medium income. That is, if we expect to them to do more than survive, i.e. save money for a down payment on a new home, rents will have to fall considerably.

    Your landlord will tell you that he can charge more than you can pay because some other guy makes more money than you do, but that is not the way it works. In a healthy economy, rental pricing is established from the bottom up, not from the top down; simply because there are more people in need at the bottom than there are people in need at the top. The real aggregation of demand is in the bottom 75% of income earners. This is why bubble economies are so perverse. They try to turn reality on its head.

    The Home Price to rent ratio will stabilize when the income to rent ratio for the bottom 75% of earners stabilizes. The question is:

    What is the reduction in pricing needed, in what percentage of rental units in a given area, for these earners to save the money needed for future home purchases?

    There has been all most zero growth in incomes /wages for this demographic over the last 25 years. Hourly wages were actually higher in the 70’s ($18.50 on average) than they were in the 80’s, 90’s, or 2000’s ($11.50 to 12.50 on average), which means that if the bottom 75% loss income over the next two to three years they will be dropping to levels equal to the 1960’s.

    So how much could you rent an apartment for back in say, 1968?

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  75. 75
    Kary L. Krismer says:

    By old ballard @ 74:

    Your landlord will tell you that he can charge more than you can pay because some other guy makes more money than you do, but that is not the way it works. In a healthy economy, rental pricing is established from the bottom up, not from the top down; simply because there are more people in need at the bottom than there are people in need at the top. The real aggregation of demand is in the bottom 75% of income earners. This is why bubble economies are so perverse. They try to turn reality on its head.

    I’m not sure why you say this. It’s the totality of demand. I don’t think you can look at it from either the top or the bottom. Can you explain further?

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  76. 76
    george says:

    It is interesting how almost every way you slice this, it comes out looking like a 30-40% drop in prices is the likely outcome.

    If that’s right 30-35 percent off the peak will be a good time for some people to start looking. Even then there’s no hurry though, right? Does anyone expect this market to recover very quickly?

    The question is, when? Looks like late 2009 or maybe 2010? If I had to guess I’d say the market won’t really go up again until after 2013-2014 at the earliest.

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  77. 77
    deejayoh says:

    Mish referenced a friend’s Case Shiller Analysis over on his blog today. There were some observations regarding the Seattle and Portland markets that were interesting:

    When one looks more closing at the current “Price Level” data you can see that cities such as San Francisco have likely already experienced the bulk of their price decline as prices have already returned to those of 8 1/2 years ago (Oct 2000). However, cities in the Pacific Northwest (Seattle & Portland) have only seen prices return to mid-2005 levels and likely have significant price declines in their future

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  78. 78
    Groundhogday says:

    By hzg @ 46:

    reply to #35 re:state cuts to higher education

    anyone against terminating the WSU Dept of Real Estate Research?

    It is a center, not a dept (basically Glen with a bit of assistance). And they don’t actually get much state money… mostly soft money from the RE industry.

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  79. 79
    old ballard says:

    RE: Kary L. Krismer @ 75

    I need to make a qualifier.

    First, it’s a slow day at work. Wish I was camping.

    Second, it doesn’t matter what you call it, but in general, it’s any economic system that comes under the Anglo-Saxon system of economic modeling, a.k.a., classical, neo-classical, laissez-faire, trickledown economics, or the Neo-Liberalism of Reagan and Thatcher.

    Ever sense Adam Smith’s “invisible hand” the economic modeling that has come out of Western Europian thinking has been constructed around fictional beliefs based on the pseudo Christian mythologies of 18th century Romanism, Smith’s invisible hand was meant to replace “God” with “providence” to explain why evil deeds would eventually benefit society in his anti-enlightenment Scottish post-enlightenment/romantic worldview. William Burke did pretty much the same thing with his criticisms of democracy and the French revolution.

    Ever since the beginning of the Anglo-Saxon system of economic modeling, economist have used the same utopianistic models (more or less) that were developed two hundred years ago. Milton Freedom’s monetarism is a good example. The only difference between today and two hundred years ago is the use of super computers in the creation of these fictional universes.

    Some people call them ideologies; some call them mythologies, no matter the label, ideas like: the free market, supply and demand have no relation to the real world.

    Sorry about the long qualifier. But, I never really know what to say to people who still believe in utopianistic capitalistic ideas. It seems to me to be more of a religious believe than a science, because of the reliance on faith.

    Anyway, in the real world prices are set not by the mythical law of supply and demand, prices are set by what people can pay. There can be millions of people in need thus creating demand, as well as over production of the object in demand, but none of that matter’s if no one can buy the product.

    This is what the credit bubble was/is all about, because of the lack of increased earnings/wages/incomes the world economy would have stalled 30 years ago if it had not been for the extension of credit to consumers. Supply side economics created a situaion where the production of goods out strip, not demand, but consumers cash reservers. Without credit there was no purchasing power.

    In a healthy rental market, prices should adjust to what people can pay. There are a number of things that this does, not least of which is the creation of disposable income and the ability to save. If the perversion of the credit bubble had not turned the world on its head landlord’s would have had to adjust rents to incomes. As a rule landlord’s tend to be very pragmatic people. They don’t want to rent to people who can’t pay the rent. The availability of credit cards no doubt had an impact on their decision making.

    Yes, I am a firm believer in Keynesian economics.

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  80. 80
    Kary L. Krismer says:

    RE: old ballard @ 79 – Thanks for the lengthy explanation.

    I would say though that it’s not what people can pay, but what they will pay. For example, I could go out and buy virtually any car made today. But what I would be willing to pay is considerably less.

    What that gets to is incomes are not the sole deciding factor. People can have a stable income, but decide to spend more or less of it on any given area of their lives. That’s where what they can do and what they will do separate.

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  81. 81

    […] good news is now that home prices are approaching reasonable levels again, sales volume is likely to pick up, which will bring excise tax collections up as […]

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  82. 82

    […] the 20 Case-Shiller markets. If you’re wondering why their ratios are so much different than what we graphed earlier this month, note that they are using median household income, whereas our chart used per capita […]

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  83. 83

    […] Here’s an update to the area-wide price-to-income and price-to-rent ratio charts we first posted back in April. […]

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