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.

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.

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.

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

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.

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?

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?

We are still 10-20% above that point

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.

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.

– 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.

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

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.

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.

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.

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.

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.

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.

“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.

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

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.

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.

anyone against terminating the WSU Dept of Real Estate Research?

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

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! ;-)

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.

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.

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.

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.

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.

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.

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.

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!