Goldman: Seattle Home Prices to Fall 22% More by 2012

I came across an interesting home price forecast for the next two years from Goldman Sachs (via Zero Hedge):

Following their earlier collapse, house prices appear caught in a cross current. On the one hand, there are indications that prices may have bottomed. While alternative house price indices differ in details, they generally show that house prices have stabilized since early 2009 (Exhibit 1). Second, measures of valuation appear to be back in “normal” territory (Exhibit 2). The Case-Shiller price/rent ratio—which stood nearly 25% above its long-run value in early 2006—is now broadly in line with its historical average. Housing affordability—measured as the percent of income spent on mortgage principal and interest—has also improved noticeably during this period.

Other indicators, however, point to further house price declines. First, much of the stabilization of house prices since early 2009 appears due to government housing policies, including (1) the homebuyer tax credit, (2) the Fed’s purchase of mortgage-backed securities and (3) temporary mortgage modifications through the Obama administration’s Home Affordable Mortgage Program. We have estimated that these housing policies have temporarily boosted house prices by around 5%.1 Second, the housing market remains plagued by enormous excess supply (Exhibit 3). Despite recent improvements, both the homeowner vacancy rate and the months’ supply of single-family homes for sale remain well above historical levels. Third, the mortgage market remains troubled. Mortgage delinquencies have continued to rise from their already elevated levels (Exhibit 3).

Given these cross currents, how should we expect house prices to develop over the next one or two years? Our working assumption has been for a renewed 5% drop in the national Case-Shiller index between end-2009 and end-2010, and we already saw a 1.3% decline in the first quarter.2 In this comment we present results from a new house price model suggesting that the remaining decline could stretch out over a somewhat longer time period. Specifically, the model points to declines of 3% over the next year and another 1% over the following year as excess supply and rising mortgage delinquencies take their toll.

Here’s a link to the full source pdf (there’s a Chinese cover page but the rest of the document is in the original English).

I definitely find it interesting that Goldman’s home price model has Seattle home prices declining over twice as much in the next two years than any other city except Portland. Here’s what they have to say specifically about their forecast for Seattle:

We predict the largest house price declines for Las Vegas, Seattle and Portland (Exhibit 6). While high home vacancy rates and steeply rising delinquencies are expected to push down prices in all three areas, some interesting differences emerge. Price declines in Las Vegas are projected to be front loaded, as negative price momentum and excess supply lead to near-term price declines, before valuation undershoots sufficiently to push up prices. For Seattle and Portland, the model projects back-loaded price declines as house prices currently look overvalued.

We have discussed the local housing oversupply here at length in the past, and it does appear that homes are still somewhat overvalued compared to the historical fundamentals. I don’t have a PhD in finance, and I haven’t constructed a 6-variable model of home prices, but my estimates have been for only another 10-15% decline in Seattle area home prices, so I was a bit surprised to see such a dramatic call from Goldman.

  

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.

71 comments:

  1. 1
    ray pepper says:

    GS has their own problems…….http://finance.yahoo.com/q?d=t&s=

    I would like to point out in Nevada, I noted last week while traveling, all the new homes are selling at 65-95k down from 250k. The prices have indeed come into alignment with the cost to rent. They are selling.

    Here in the NW (which is a completely different and far better economic environment) the cost to own still greatly exceeds the cost to rent. A 22% call for a drop in home prices still seems conservative. Over and over I see rents at 1200-1500 for homes selling at 300-400k.

    The bottom is no-where in sight.

    Take your time Buyers. Time is MOST DEFINITELY on your side.

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  2. 2
    David Losh says:

    What I see in Seattle are neighborhoods like Fremont, Ballard, Columbia City, Raineer Valley, the downtown condo market, and around Northgate from Aurora, to Lake City. I left out Greenwood, to Green Lake because they didn’t have the explosion in development.

    I also left out Capitol Hill as the best example of confused land use. Seattle now has more slums than you can shake a stick at, with bad construction, land use, and lack of amenities.

    Aside from that, over all, housing unit prices are way over priced nationally, and globally. It’s not surprising that a company that trades in securities backed by over priced assets would be so optimistic about price decline.

    Pretty much everything I look at is $100K over priced, and over a $1 million in the upper end. I’d be more interested to see the rate, or amount of, wealth reduction from home prices to the devalued securities.

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  3. 3
    Brainiak says:

    But are they selling anything related to these facts to investors (perhaps in China) and then betting against it somewhere else? Or Maybe it is the triple cross since everyone knows about the last time they did that. Reverse-Reverse psychology (which would mean they really are going to go down). Tough call.

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  4. 4
    DavidB says:

    David Losh, there’s a house on 11th Ave W that looks like the one in your picture. Is that yours? There can’t be too many SW themed homes in Seattle.

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  5. 5

    To Quote Ira

    When centrist Seattle homes in the $350K range are subpar fixer uppers money pits and new larger homes, just 10 miles south, can be had for $300K….you know Seattle’s centrist home prices are way off base.

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  6. 6
    drshort says:

    I will once again assert that median income is a horrible predictor to use for home prices. What matters is total income. How much is everyone making and is the population expanding or contracting?

    There are some interesting stats to be had from the BEA. (choose personal income, metro area, etc..)

    http://www.bea.gov/regional/REMDchart/default.cfm#chart_top

    The greater Seattle area had a 40% increase in personal income between 2001 – 2008. I don’t recall what the median income did during that time, but I think it was a lot less than that.

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  7. 7
    Pegasus says:

    drshort @ 6
    I think that was the Microsoft $3.00 special dividend in 2004 that distorts those figures. Bill Gates and Paul Allen are not buying thousands of homes with the extra funds.

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  8. 8

    RE: drshort @ 6

    Household Income Numbers in Seattle are Skewed

    The top 2% of household incomes have sky-rocketed, while mainstream incomes were flat….but you avg the elite apples in with the stale oranges and you can come up with skewed “lipstick on the pig” results, not supporting a housing system prices, but more BS hype. Another anomaly with household incomes, today’s repression has caused family and friends to cohabitate in groves….creating more workers per house and more household income BS hype. Use per capita income, it’s more accurate and recent per capita income job offers too:

    Article in part:

    “…Since the labor market began picking up steam, companies hiring for entry-level or administrative spots with pay that would normally range from $40,000 to $50,000 have been offering workers $28,000 to $38,000, said Randy Miller, founder and chief executive of ReadyMinds, a Lyndhurst, N.J., a provider of online career counseling and coaching.

    For workers further up the food chain, an offer that might have been $100,000 a few years ago is now coming in at $85,000 or $90,000, he said….”

    http://finance.yahoo.com/career-work/article/109735/Low-ball-salary-offers-should-you-take-it-or-leave-it?mod=career-salary_negotiation

    Eventually [very soon too, at the rate we’re deteriorating], assuming uncontrolled population growth globalism stays on track, we’ll all be making an avg world payrate in Seattle, about $3-4K/income each. You’ll be lucky to get $10K for a Seattle home then.

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  9. 9
    patient says:

    Another 22% off Case shiller would bring us to almost 50% off peak. What year was the C/S HPI 22% off the current reading?

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  10. 10
    anonymous says:

    RE: drshort @ 6 – You are aware this post wasn’t about median income as a predictor of home prices, right? The predictive factors in the Goldman model were:
    “(1) price momentum, (2) price/rent valuations, (3) the change in mortgage delinquencies, (4) the mortgage rate, (5) excess supply and (6) temporary factors, including the government housing policies.”

    No median income mentioned.

    Maybe your comment would be a better fit in the open thread?

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  11. 11
    deejayoh says:

    By drshort @ 6:

    I will once again assert that median income is a horrible predictor to use for home prices. What matters is total income. How much is everyone making and is the population expanding or contracting?

    You might want to check that assertion. For King County, median income is 98% correlated with total income. From a predictive standpoint, they are basically the same. I’m not sure one can be “horrible” while the other one “matters”.

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  12. 12
    drshort says:

    RE: anonymous @ 10

    Yes, the GS study doesn’t have income, but Tim’s comments and link go directly to a median income / home price post.

    ” it does appear that homes are still somewhat overvalued compared to the historical fundamentals.”

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  13. 13
    drshort says:

    By deejayoh @ 11:

    You might want to check that assertion. For King County, median income is 98% correlated with total income. From a predictive standpoint, they are basically the same. I’m not sure one can be “horrible” while the other one “matters”.

    I have data from BEA that shows personal income up 40% from 2001 – 2008 and median income up only 12% during that same time. Where are you getting this 98%?

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  14. 14
    KW says:

    RE: drshort @ 13

    You can’t be serious.

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  15. 15
    deejayoh says:

    RE: drshort @ 13 – King county data from 1990 to 2008. simple excel spreadsheet. The CAGR may vary but the correlation is so high any model is going to show the same results in terms of predictive value. Only difference will be the multiplier

    Median (OFM) total Income (BEA) Income per capita (BEA)
    1990 38,676 38,137,113 25,136
    1991 39,923 40,645,981 26,368
    1992 41,790 43,489,502 27,674
    1993 42,431 44,811,620 28,077
    1994 44,063 47,315,478 29,355
    1995 45,710 50,082,964 30,689
    1996 46,726 54,388,157 32,864
    1997 48,271 58,520,628 34,735
    1998 51,266 66,720,072 38,963
    1999 53,157 74,271,228 42,955
    2000 56,677 79,030,597 45,439
    2001 57,495 77,982,196 44,384
    2002 58,673 78,430,868 44,470
    2003 59,400 80,127,397 45,276
    2004 64,445 89,382,311 50,132
    2005 64,095 89,431,448 49,582
    2006 66,936 99,608,475 54,370
    2007 65,981 106,637,605 57,409
    2008 64,714 109,551,329 58,141

    Correlation 0.97986707 0.982904395

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  16. 16
    Coloradoan says:

    Can anyone explain why they project Phoenix dropping Q4 -5%, Q8 -10% and Las Vegas dropping Q4 -12%, Q8 -6%. I know they have a mathematical model, but it seems that Las Vegas and Phoenix have very similar situations that would mirror each other.

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  17. 17
    buystocks says:

    Mathematical models… When they can model future episodes of diarrhea, maybe I’ll give some credence to it…

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  18. 18
    BacktoBasic says:

    Platinumann predicts King County double dip recession in 2012, average wage down another 30%, comparing to housing price, true cost of house up by at leaset 8%, problem solved.

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  19. 19
    drshort says:

    RE: deejayoh @ 14

    Thanks — great data.

    While the data points may be highly correlated, they don’t have a 1 to 1 relationship. Based on your data, the median is up 26% since 2000 and the total income is up 64% during that same time.

    My point was simply that it’s total income that matters to housing prices, not the income at the median. And total income has been growing at a much faster rate than the median.

    Population growth and shifting income inequality can impact total income and housing prices while the median income remains relatively flat.

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  20. 20

    […] the story from Seattle Bubble today on the Goldman prediction that Seattle home values will drop by […]

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  21. 21
    The Other Ben says:

    RE: drshort @ 18 – “My point was simply that it’s total income that matters to housing prices”

    That’s an idiotic assertion. So, if you combine two cities into one logical unit (total income would double), then housing prices should double?

    What matters is median income instead of the mean income (the top 1% earning a lot more can’t raise housing prices across the board) and the availability of housing units compared to the population. The population rose 8% in the last ten years…if our housing supply rose 8% as well, then it shouldn’t (greatly) affect housing prices.

    Even if the supply is constrained as population grows, you’re assuming a linear relationship between demand and price, which is not realistic at all. If anything with land, increased demand for land simply results in higher land prices and therefore smaller living spaces for the same price…but the relationship is certainly not linear in nature.

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  22. 22
    Scotsman says:

    Trying to model this stuff is futile- too many assumptions have to be made about the future macro environment. And at this point the only thing that really matters is what happens on the grand scale. For example, southern CA. alone is about 1/10 of the U.S. economy so a crash there can bring the whole country’s GNP down by a few percent. The availability or lack of reasonable financing is also a key that doesn’t get fully addressed. If banks anticipate another 20% down, will they then require down payments in the 30% range? Who has that? Are these considerations even mentioned?

    What I really find interesting is how the bad news is slowly leaked out over time by those who have probably known the end game for years. They don’t want to shock, or appear too bearish, but they know how it has to end. So out comes just enough real info to keep up the appearance of credibility. This is a great example- who knows better than GS?

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  23. 23
    drshort says:

    By The Other Ben @ 19:

    That’s an idiotic assertion. So, if you combine two cities into one logical unit (total income would double), then housing prices should double?

    If everyone from Minneapolis moved to Seattle, yes. The assumption was that the housing stock was staying relatively constant. Ideally you should compare total incomes to the total supply of housing.

    You see the opposite in a lot of midwest cities that have declining populations.

    What matters is median income instead of the mean income (the top 1% earning a lot more can’t raise housing prices across the board)

    The bottom 25% of incomes are not in the real estate market, so why is the median the right metric? I would argue it’s the upper spectrum of the incomes that set the housing prices. Maybe the top 1% earning more can’t impact prices, but if the top 20% start earning a lot more it certainly can.

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  24. 24
    per_se says:

    By drshort @ 21:

    By The Other Ben @ 19:

    The bottom 25% of incomes are not in the real estate market, so why is the median the right metric? I would argue it’s the upper spectrum of the incomes that set the housing prices. Maybe the top 1% earning more can’t impact prices, but if the top 20% start earning a lot more it certainly can.

    You’ve just defined why median is better then total. If the median goes up that means the bulk of the top 50% are earning more. The median is less sensitive to income increases by small percentages of the population like the top 1%. Also, even though the bottom 25% may not be in the market for a home they still need to live somewhere and someone needs to own where they live. If there are more renters in a given city and the supply of rental properties doesn’t increase then rents go up or people move out of the city. If rents go up then the potential income from a given property increases thereby increasing its value and price.

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  25. 25
    patient says:

    RE: Scotsman @ 20
    “Are these considerations even mentioned?”

    I also wonder if they have factored in the snowball effect if prices fall another 20%? Imagine the buildup of under water owners if in 2012 the majority of owners that bought the preceeding 10 years or so are now under water. If this happens the Seattle bottom might very well be a decade out from now,

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  26. 26
    The Other Ben says:

    By drshort @ 21:

    The assumption was that the housing stock was staying relatively constant. Ideally you should compare total incomes to the total supply of housing.

    That is a terrible assumption. At least in the 1990s, population growth matched housing stock growth exactly: Seattle Demographics. I’m too lazy to look up numbers, but I would assume that if anything our housing stocks have grown more than the population did in this decade…at the very least it didn’t stay constant like it sounds like you’re assuming.

    The bottom 25% of incomes are not in the real estate market, so why is the median the right metric? I would argue it’s the upper spectrum of the incomes that set the housing prices.

    The bottom 25% of incomes are in the real estate market – their ability to pay drives rents which in turn drives the price of real estate. The upper spectrum doesn’t matter as much because each person (roughly) drives up the demand by one house. It may be a more expensive house if you’re rich, but it’s still just one house. And, if you’re super rich, the amount of house you buy stops scaling linearly, and pretty much drops off. Bill Gates does not have a house that it will take him 30 years to pay off – he has a house that he paid for with what would be about $100 for me.

    If a billionaire moves into town, he doesn’t look for 400 median-priced homes to move into, he buys the plots for 4 of them, flattens them, and then builds a mansion on the lot. He may have raised the total income significantly, but he barely made a dent in demand for median-priced houses in the area. You’re ignoring the significant drop-off in the percentage of income that goes towards housing at the top end of the income spectrum.

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  27. 27
    UpDog says:

    Making an effort here to drop the math, because I think it misses the point of the article. Isn’t anyone interested in why Seattle’s predicted drop is so high? Is it simply an indicator that while most places have corrected, Seattle has shown resilience or is delaying the inevitable? I was under the assumption that real estate here has already dropped 15%-20.

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  28. 28
    anonymous says:

    RE: UpDog @ 27 – That’s what I’m interested in, much more than a fight over incomes not even discussed in the headline Goldman paper. The way I’m reading it, Seattle has shown resilience, therefore our houses are still overvalued, even though they have already dropped some, while Cleveland is undervalued, and may bounce back some.

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  29. 29
    Yaj says:

    The rental yield puts the ultimate floor on housing prices. Once people can take out a loan, buy a house and the rent – net of taxes, upkeep, vacancy, etc – will more than cover the cost of the loan – that’s the bottom.

    We’re not even close. At the moment we’re paying $1300 a month for a home that’s in the $450-500K range on the north end of Capitol Hill. It’s small, it’s old, still has the knob-and-tube wiring, has zero insulation from what I can tell, has an ancient boiler, no yard, the basement leaks, the floor needs refinishing, the planks on the front porch need to be replaced, has ancient windows, etc. Needs a minimum of $50-100K in capital investment to make it reasonably sound, modern, and efficient.

    It’s fine for us as a rental, but you’d have to be out of your mind to buy it at these prices. My guestimate is that it’d be cash flow positive and a decent investment at something like 150-200K tops. Seeing as the total after-tax cost of ownership is likely to be in the 4K range, IMO it’s a long way to fall before it would hit anything like a fundamental floor. We’re now in a financial position where we could afford to buy it, but we’re not insane so we’ll gladly keep renting and pocketing the difference.

    As an aside, things are looking very, very, very ugly out there at the moment, and the looming insolvency of Euroland, the coming housing crash in Canada, Australia, and NZ, the massive capital misallocations in China, and the manifestly unfundable pension-burden that’s set to explode in just about every state and municipality in the country have me even more concerned than I was at the peak of the credit crisis in the US. Wish there was a safe harbor out there somewhere, but there isn’t.

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  30. 30
    Ross Jordan says:

    “The rental yield puts the ultimate floor on housing prices. Once people can take out a loan, buy a house and the rent – net of taxes, upkeep, vacancy, etc – will more than cover the cost of the loan – that’s the bottom.”

    Except that rent cost can go up or down very quickly; changing the equation. I would suggest that current rental prices is slightly depressed with a ton of supply (leftover by dreams of big money by amateur owners during the bubble) and depressed demand due to the economic conditions and the economy at large (people have doubled up, moved back with the parents, moved to cheaper locale etc reducing demand).

    In the case you suggest $1300/mo rent for a property valued at 450K-500K is certainly out of whack. 450K /w 50K down is perhaps around $3000/mo carrying cost (on a 30yr, /w estimated property tax around $500/mo). So either $450K is too high for price or $1300/mo is too low for rent; or some combination of both.

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  31. 31
    LA Relo says:

    The point is housing is now off Gov’t life support and will decline further.

    The only way prices can organically increase is with a rise in the average income. Interest rates have a subdued effect, but incomes drive prices.

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  32. 32
    The Tim says:

    Nothing like a sensational story like this to get people’s attention. Seattle Weekly ran a post about this story this morning, and I just got off the phone with KOMO 1000 News Radio, where I’ll be speaking live with the afternoon news hosts about this story just after 4:00 today.

    [Edit: Also posted on the Seattle P-I real estate blog]

    [Edit 2: And at The SunBreak]

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  33. 33
    dw says:

    I keep looking at those numbers and thinking that 22% has to be an outlier. Compared to the rest of the numbers they don’t wash. And I can’t find anything about the Seattle market that suggests it’s that much different from the Portland market other than the prices being about $100K higher. The key difference between the two places is that Portland’s economy was weaker and remains weaker than Seattle’s.

    22% is a massive correction caused by a complete and sustained disappearance of demand. I just don’t see it, not without a true double dip recession. I’m not ruling out a double dip, but I can’t see where it’d come from, other than a total collapse of Europe under the weight of the PIIGS (which I think is unlikely, given how Europe will do all they can to show up the US) or from a popping of the gold bubble (which I don’t think would happen without a real economic recovery, but man, gold is looking an awful lot like housing did in ’06 and oil in ’08.)

    I don’t want to suggest that “it’s different here” but I do wonder if, in a way, it is. Seattle’s housing market has never seemed all that sane. It’s boomed and busted in ways that have had nothing to do with the rest of the country. Seattle was having a boom cycle from 1998-2001 or so, for example, that was 100% high tech driven.

    I just don’t know. But the Goldman reasoning seems to suggest their model kicked out a number and they can’t exactly explain why it did.

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  34. 34
    meadows says:

    RE: Yaj @ 29

    The “safe harbor” is the community of family and friends who look out for one another, minimizing debt, hanging onto cash and getting “liquid.”

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  35. 35

    RE: UpDog @ 27
    Real estate has already dropped closer to 25% from it’s July 2007 peak.
    Which means: A house which sold for 400,000 dollars three years ago would sell for about 300,000 today. If it declines another 22% by 2012, that same house would sell about 235,000 dollars.
    Whether it’s Goldman Sachs or Yahoo or Forbes, most of these predictions are based on so called “experts” pulling facts and figures out of their butts.
    Will we see another 22% drop? I think it’s possible, but unlikely. I wouldn’t be at all shocked to see another 5-10% decline, I wouldn’t be at all surprised to see home prices to be mostly flat for quite a long time.
    Of course, if Microsoft decides to relocate to Mississippi, that might change the equation.

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  36. 36
    David Losh says:

    What I think is that Paul Allen promised a bio- tech mecca here in Seattle. Seattle Washington is the gateway to China, and Boeing is a China darling. Then we have Microsoft, Amazon, Starbucks, and Nordstrom’s. In my opinion, it appeared Seattle had a strong economic base to weather a storm.

    What has happened is a complete break down of economies, and maybe China isn’t the darling we thought either. Boeing is moving to become more national, Microsoft is having issues, and bio-tech died on arrival of health care reform.

    We have a mass of failed condo projects down town, and a general group of future slums surrounding the city center.

    22% seems kind.

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  37. 37
    Pat M says:

    Mortgage rates in Seattle are just now starting to reset. We are facing years of interest rate adjustments on some of the worst mortgages in the country. When the foreclosures start rolling into effect we will definitely see a decline in home values. Our elected officials allowed Seattle to be overbuilt – all based on cooked-up population growth projections. It will be a buyer’s market for years to come. Let’s all hope and pray we only see an additional 22% decline in values. It could be even worse.

    The good news is at least reality has paid a visit for a change. City Hall and, then Council President, Richard Conlin said “the national recession won’t affect Seattle”. In December, 2009 Smart Money said Seattle would be one of 5 best markets in the U.S. in 2010 (http://www.smartmoney.com/personal-finance/real-estate/5-markets-expected-to-fare-best-in-2010/). This prediction came just months after similar glowing reports about Seattle in other national magazines. A few of us saw the writing on the wall beginning in the summer of 2006…but there is no satisfaction in being right. We all desperately want things to turn around.

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  38. 38
    Mikal says:

    RE: Yaj @ 29 – Except Canada banks loaned properly without subprime.

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  39. 39
    Ross Jordan says:

    By Mikal @ 38:

    RE: Yaj @ 29 – Except Canada banks loaned properly without subprime.

    Sort of. There wasn’t sub-prime lending — but Canadian banks did lend with <5% down, low/no doc, and with bank loans bought by Canada Mortgage and housing corporation (Canada's fannie mae) — so Canadian banks did not have to take on the risk of holding the loans (and so did not really care to do the due diligence on the borrower)

    I don't think there's a bubble all across Canada, but there is in the major cities, its very clear there's a bubble. Particularly Vancouver, Victoria, Toronto, Calgary. Housing affordability in major canadian cities, as measured by media home price / median income is higher than places like san francisco, nyc, london, uk. Something is seriously wrong with that.

    http://www.policynote.ca/bcs-urban-housing-unaffordability/

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  40. 40
    Jonness says:

    By drshort @ 23:

    The bottom 25% of incomes are not in the real estate market, so why is the median the right metric? I would argue it’s the upper spectrum of the incomes that set the housing prices. Maybe the top 1% earning more can’t impact prices, but if the top 20% start earning a lot more it certainly can.

    Breaking off the whole and attempting to isolate a small part of the picture will never lead to correct solutions. The entire society makes up an economy. Even the guy on food stamps contributes to GDP. How well off would the upper 20% be if they could not sell their products to the poor? So why is it that only the upper 20% matter when studying economic models?

    Put another way, how many homes would have sold during the bubble years if not for subprime, alt-a, and option-arm loans? How many homes would be selling right now if not for Fannie/Freddie/FHA government subsidies? Can you really say with a straight face that only the upper 20% of incomes matter when it comes to house prices? Of course you can’t, the upper 20% of incomes don’t need government 3.5% down loans? Take away Fannie/Freddie/FHA, and you’ll see how much homes are really worth.

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  41. 41
    Jonness says:

    By drshort @ 6:

    The greater Seattle area had a 40% increase in personal income between 2001 – 2008. I don’t recall what the median income did during that time, but I think it was a lot less than that.

    It seems to me you are confusing granularity and comparing an aggregate to a drill down metric and claiming the increase in median house price was due to an aggregate increase in incomes and had less to do with lax lending standards and home equity loans provided to median wage earners and below.

    To support the above claim I believe you would need to match aggregate personal income to aggregate home values and then adjust downward for lax lending and home equity loans. Otherwise you have a granularity mismatch and cannot take a useful ratio of comparison that applies to today’s marketplace.

    Foreclosures and payment distress have been the main driver of declining house prices. Yet, the upper 20% of incomes haven’t declined nearly as much since the peak of the bubble as the bottom 20%.

    In truth, homeownership percentage increased to record levels over the period from 2001 to the bubble pop, and this is more due to new entrants at the lower income ranges resulting from cheap money, lax lending, investor greed, and HELOC ATM machines on every corner than due to a rise in aggregate non-bubble-related income. Now that these drivers are increasingly being removed from the marketplace, house prices are correcting back to economically sustainable levels.

    Whether Joe Middle Class can afford to buy a house matters as part of the overall solution. If this were not true, all the rich people would be buying their dream homes in more run-down parts of town. Instead, they are buying dumpy rentals to rent to less well-off people. Dumpy rentals are poor investments if poor people can’t afford to rent them. Why would a wealthy investor waste time buying a dumpy rental that costs him money instead of making him wealthier? Even the dumpiest trailers being rented in the dumpiest trailer park factor into the overall equation of housing affordability. A percentage of people renting trailers eventually move up to owning cheap houses. These are eventually sold, and occupants move up to the next level, ad nauseum. The wages of low-income renters matters a great deal to house prices as do the wages of the top 20%.

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  42. 42
    Yaj says:

    @Ross.

    It’s overpriced.

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  43. 43
    Jonness says:

    “The U.S. homeownership rate, already down two percentage points from its 2006 peak of 69%, could fall by another five percentage points over the coming years to levels last seen in the mid-1990s, says a staff report from the Federal Reserve Bank of New York.”

    Expect a 5+ percentage point fall in Seattle.

    http://www.housingcorrection.com/images/homeownershiprate.jpg

    http://blogs.wsj.com/developments/2010/06/07/fed-study-finds-real-homeownership-rate/?blog_id=36&post_id=12701

    http://www.newyorkfed.org/research/current_issues/ci16-5.pdf

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  44. 44
    mydquin says:

    I suspect this prediction is being driven by rental rates. We have a glut of condos, town homes and apartments on the market. The big question in my mind is how much rental rates for 1500 sqft apartments affect the value of 2500 sqft freestanding homes.

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  45. 45
    Jason jackson says:

    RE: mydquin @ 44 – On the other hand, when I looked around a couple months back, a large portion of the 350-400k homes I looked at a few months back where not close to 2500 sqft unless they where a stones throw from being condemned. They where maybe 1700 sqft if you included partial and unfinished basement space that had low ceilings and. A lot of places where maybe 1000 sqt feet. At that comparison the numbers don’t add up. At that point you start looking into condos, which opens up a whole different can of worms.

    The low end of the market has a big hole right now. You have to move outside of the city or into so-so areas in the southern stretches of the city to find houses whose prices correlate with rental prices. Small, first time buyer, single family homes are massively out of line with rental prices and income. Considering their is no shortage of rental options now (quite a change from a couple years ago) something has to give.

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  46. 46
    Anon says:

    Zero Hedge is a notorious blog for being perma-bears when it comes to the economy. The information to be gleaned from that website should be taken with a grain of salt.

    On the other hand, I too believe that rentals are the way to go for first time home buyers in this economy. I did a quick search for what is affordable in the city to those who earn the King Co. median income and … not much came up. When I searched for applicable rentals, however, more properties came up.

    Are home prices overvalued by 22%? I think the answer is no. But are they still overvalued? I believe so. I agree with many aspects of the research here and on this blog. Home loan defaults, the coming wave of Alt-A loan defaults, and oversupply in the Puget Sound area have to take their toll on the market eventually. I think the extension of the first time homebuyer credit was a mistake – it only delayed the inevitable drop downward to market stabilization. People will likely go into a spiral of “home prices keep dropping, I’m going to wait it out” for a while.

    The saving grace, though, is the echo boom of Gen Y parents having children. Most people I know still want houses and not condos to raise children. Eventually, that combined with the continuing influx of people to the Puget Sound region (typically for medical or high tech companies) mean that demand should be solid in the medium term, but short term, nope.

    Long term is a different story. I, for one, am worried about Microsoft completely imploding and being taken over by Google and/or Apple, and Boeing’s eventual departure from this region (no thanks to the unions, way to go idiots).

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  47. 47

    […] for the bank to approve the offer)… and then the news from Goldman Sachs came out… 20% decrease in the next two years.I’m at a loss. I don’t take risks. I methodically scrutinize every single detail. News […]

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  48. 48
    JOSHANG says:

    Anyone have a different link or copy of the .pdf Goldman sachs study? The Link above works.

    Saw this today-

    http://bit.ly/cZlVJu

    It does look from the numbers here that 22% drop would be plausable. ( or an increase in rents I guess?)

    Average listing/ (Monthly Rent X 12m x 20 ratio) =
    461,330/(1546*12*20) = 1.24

    22% drop would make it about even.

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  49. 49
    David Losh says:

    I’m going to post this on the open forum,

    This site is extremely frustrating. It’s very difficult to submit a comment, but let’s try this again.

    Real Estate appreciates at about 4% per year. The price of housing units is tied to, but not a part of the Consumer Price index. Inflation is easier to show

    http://www.inflationdata.com/inflation/images/charts/Annual_Inflation/annual_inflation_chart.htm

    With inflation at about 6% at it’s peak, you can see that the price of housing got way out of control. A 45% drop from the peak seems extremely reasonable. Like I said you have to go back to 1998 to actually see that the rate of appreciation was pure fantasy.

    My point about Seattle lagging was the amount of development that was still going on here after other markets had already crashed.

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  50. 50
    Ben says:

    Where can I find the link to the Goldman report?

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  51. 51
    deejayoh says:

    By Ben @ 50:

    Where can I find the link to the Goldman report?

    I’d like to see this too, because somehow the facts don’t square. According to what I have seen quoted, the rationale for the forecast for seattle is based on high homeowner vacancy rates and/or rising mortgage delinquencies

    Yet when I look Tim’s most recent stats for foreclosures – his conclusion was:

    While the overall year-to-year trend is still increasing here in the Seattle area, we are backing off of the big spike in March, and have yet to see a new surge materialize

    Plus Washington is 20th out of 50 states for the rate of foreclosure. Hardly at the extreme.
    And I don’t know where you can get comparative vacancy rate data – but I suppose if you use the number of listings and days on market as a proxy, it doesn’t look dire. Listings have been relatively flat and days on market have dropped.

    I’m skeptical of a conclusion that is based on claims about trends that don’t seem to meet an objective smell test. For the Seattle market to be such an outlier vs. others – one would think these model drivers would have to be extreme outliers as well.

    I’d like to see the supporting facts.

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  52. 52

    By deejayoh @ 51:

    I’m skeptical of a conclusion that is based on claims about trends that don’t seem to meet an objective smell test.

    Interesting you use that phrase, because I was going to suggest that to find the report he could go step into the nearest Porta-Potty and look down. Although I’d say the same thing about the two reports I linked to indicating prices would rise.

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  53. 53
    deejayoh says:

    OK, Tim sent me the study. Here is the relevant passage:

    3.Excess supply. A one-percentage point increase in
    the homeowner vacancy rate lowers house prices
    by 1.8% four quarters later (and 5.4% after eight
    quarters)
    , while a one-point increase in the
    months’ supply of homes for sale lowers house
    prices by 1.4% four quarters later. A higher
    volume of existing home sales raises prices, as
    excess supply is reduced.

    So if you pull the study they used for vacancies from here you’ll find that Seattle is a real outlier on the stats. Based on Census Data – vacancies in Seattle have gone from 2% to 4.1% in the last year. So a 2.1% increase in the vacancy rate times 5.4% (see bold above) means that 11.3% of the forecasted 22% drop is explained by this single factor.

    Meanwhile, down in Portland, according to the same source – vacancies have dropped 3.3%, and in Riversiide Ca (heart of the CA bubble) they have dropped by 1.1%

    Anyone buying this?

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  54. 54
    The Tim says:

    By deejayoh @ 53:

    Anyone buying this?

    Which part? The relationship between homeowner vacancy rate and home prices, or the Census vacancy rate data for Seattle and the other cities you mentioned?

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  55. 55
    patient says:

    RE: Kary L. Krismer @ 52

    ” I was going to suggest that to find the report he could go step into the nearest Porta-Potty and look down”

    Is this a common research method among real estate agents? It would explain a lot of things :-)

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  56. 56

    RE: patient @ 55 – No, but it does relate to my prior piece about Americans being very gullible. I think that was related to the prediction of houses that would be underwater in X years, where not only do you have the problem with being unable to predict the future, but you also have the problem that you can’t determine the percentage of houses that are underwater even today. But people drank the BS like it was Kool-aid.

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  57. 57
    patient says:

    RE: Kary L. Krismer @ 56 – Your mantra is that you can’t predict the future. This is true in a philsophical sense but what you can and should do is to use available data coupled with common sense and experience to decide what is the most likely future. To live with no whatsoever idea of what the future might bring is a sure receipe for disaster and completely irresponsible.

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  58. 58

    RE: patient @ 57 – I’d rather be prepared for what can happen, than to plan for a certain thing to happen.

    Although you might be hitting on something. I’ve always wondered why people like predictions. Maybe people like to pretend others can predict the future because it gives them a sense of security. A false sense, but still a sense.

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  59. 59
    patient says:

    RE: Kary L. Krismer @ 58 – Whether you admit it or understand it I can guarantee that you make hundreds of decisions every day based on predictions you make of the future.

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  60. 60

    RE: patient @ 59 – That may be true, but none of them involve at over 10 different variables over a 2 year period.

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  61. 61
    deejayoh says:

    By The Tim @ 54:

    By deejayoh @ 53:
    Anyone buying this?

    Which part? The relationship between homeowner vacancy rate and home prices, or the Census vacancy rate data for Seattle and the other cities you mentioned?

    A model that depends on census “vacancy” data which pretty much seems to be arbitrary. I guess they must use estimates of people moving in/out of an area vs. housing stock – but really, how accurate is that estimate going to be on a quarterly (or even annual) basis? Seems to me to be one of those garbage-in, garbarge-out models

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  62. 62
    David Losh says:

    The Goldman Sachs calculations are irrelevant. The fact, the facts are, that Real Estate is way over priced in many, many areas.

    As an example, a woman in Atlanta Georgia bought a condo for $65K way back when. Today it’s worth, can be sold, for less that $99K. If you do the calculations of rent vs buy she’s probably lost money. She owns it free, and clear, but she also invests in the stock market. Real Estate, as a single investment works that way, it’s a wash between rent vs buy, you have the security of having a place to, live.

    The point is that Real Estate has gotten out of control. I understand the psychology of how it did, people read about stuff they have no practical knowledge of, then plunk down money. It’s the same psychology of going to a casino, you know you will lose the money, and go there anyway because you know some one, or saw some one, win a jack pot.

    As I get time I’ll do the calculations for Seattle. I think I did that once about three years ago. It’s not predictions, or seeing the future, Real Estate is all numbers. The psychology skewed the numbers lately.

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  63. 63
    David Losh says:

    Alrighty then, now I see sniglet’s point about Real Estate prices, at least, broader asset prices? maybe not so much. Wait, I can post links here, which evidently aren’t allowed over on the Rain City Guide, to illustrate what I’m talking about:

    http://www.forecast-chart.com/estate-real-seattle.html

    If you look at the chart for annual home price appreciation for Seattle you can see between 1997 and 2007 Seattle home prices appreciated roughly 93%; they essentially doubled.

    Real Estate only appreciates at about 4% per year. It’s tied to, but not a part of the Consumer Price Index. It’s roughly tied to the rate of inflation, which has been surprisingly moderate.

    A simple calculation is that if prices went up 9.3% per year for 10 years, when in the world of reality they only go up 4% per year that’s 5.3% per year that is a false appreciation. Prices can fall 50% from the peak with no problem, except to the financial markets.

    Now here is where the 80% down from the peak comes from. If you look at 1987, 1988, and 1989 you see the double digit appreciations due to true inflation. This is where all of the financial modeling goes out the window.

    OK, put more plainly, if a computer were to look at the rate of appreciation, solely, it would appear as though, if it happened once, it could happen again, but it didn’t. The rate of inflation has stayed steady.

    So if we go back 20 years and calculate, we should be about 80% below peak prices. That would be normal.

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  64. 64
    JS says:

    RE: softwarengineer @ 8

    That is what I call deflation. And the last time we saw deflation was around 1930. You know what was happening then? The Great Depression. Is that where we’re headed? Incomes are decreasing, assets for the average American are gone and for many are actually negative (Upside down). Lower income, less assets, lower prices of goods and services. It definitely is looking a lot like deflation but whether the past is a reflection of the future is TBD.

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  65. 65
    Ross Jordan says:

    By David Losh @ 63:

    Alrighty then, now I see sniglet’s point about Real Estate prices, at least, broader asset prices? maybe not so much. Wait, I can post links here, which evidently aren’t allowed over on the Rain City Guide, to illustrate what I’m talking about:

    http://www.forecast-chart.com/estate-real-seattle.html

    If you look at the chart for annual home price appreciation for Seattle you can see between 1997 and 2007 Seattle home prices appreciated roughly 93%; they essentially doubled.

    Real Estate only appreciates at about 4% per year. It’s tied to, but not a part of the Consumer Price Index. It’s roughly tied to the rate of inflation, which has been surprisingly moderate.

    A simple calculation is that if prices went up 9.3% per year for 10 years, when in the world of reality they only go up 4% per year that’s 5.3% per year that is a false appreciation. Prices can fall 50% from the peak with no problem, except to the financial markets.

    Now here is where the 80% down from the peak comes from. If you look at 1987, 1988, and 1989 you see the double digit appreciations due to true inflation. This is where all of the financial modeling goes out the window.

    OK, put more plainly, if a computer were to look at the rate of appreciation, solely, it would appear as though, if it happened once, it could happen again, but it didn’t. The rate of inflation has stayed steady.

    So if we go back 20 years and calculate, we should be about 80% below peak prices. That would be normal.

    4%/yr appreciation compounded for 10 years: 1.04^10 = 48%
    93%/10yr appreciation means a yearly average appreciation of 6.8%/yr (compounded)

    So the overappreciation is somewhat less that calculated; in this case, using your 4% real estate inflation rate, it would be 2.8%/yr too high appreciation.

    Also, note that after a 100% appreciation, it only takes a 50% depreciation to get back to the start (2*0.5=1). To offset an 80% decline in prices, you need a 400% gain (5*0.2=1). If in the runup of this boom, we’re (93% – 48%) 45% overappreciated, then it would take a drop of 31% to get back to par (1.45*0.69~=1). We’re about 30% down now. Of course, the market behaves on psychology and can easily overshoot this prediction. But eventually inflation will rear its head and prices will rise. So I still think sniglet’s 80% property decline call is very unlikely to happen.

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  66. 66
    Bill says:

    Apparently no one actually knows why these predictions are so pessimistic.

    Arguing over metrics aside, will there be a mass outmigration? Mass layoffs? Mass foreclosures? Businesses fleeing Seattle? Cats living with dogs? I doubt it.

    Yes there was a bubble, but most people are paying their bills and surviving.

    So in a practical sense how can housing prices decline a further 22%? Will you tell me?

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  67. 67
    CandidaAlbicans says:

    I’ve been tracking some Seattle house values on what I call a “schadenfreude” list and I can tell you that double-digit percent recovery happened for over half the houses between 2008 and the present. The people who bought in 2006 are still screwed, with 20+% equity losses. People who bought new-construction condos and in suburban areas had the deepest depreciation. One westside Seattle neighborhood got single-digit depreciation from last year, One eastside Seattle neighborhood about 10% loss and more for houses. The more affordable the neighborhood, the more rapid the recovery climb.

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  68. 68
    SUper BIANO says:

    WHy so much data?

    Easy dear friends! Let’s assume the best possility here. For example, assuming that next quarter – so Jan of 2011 the economy estarts to recover(which it seens unlikely- there is no recover with no jobs), and so pepople would start to be able to save some bucks every month. How long would it take for those people to save enought to put down enought money on a descent home? On a descent home you may need at least $15000 – 20000 down payment. So…. if it takes for most normal workers at least 1-2 years to save this kind of down payment. COncluding, we should not even dream of having the price of houses to start to increase before middle of 2012!

    Hahaha! THanks!

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  69. 69
    KC says:

    I was looking at new homes today and saw a beautiful home built in 2005, fully decked out with all the extras, 3000 SQ, and down from 750K to around 350K. On this block about every 10th home was in forecloser, short sale or behind on payments. I think we have at least a year of home prices dropping and a lot more foreclosers to deal with before we are out of this mess.

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  70. 70

    […] may recall the following prediction from Goldman Sachs in June 2010: Goldman: Seattle Home Prices to Fall 22% More by 2012 Following their earlier collapse, house prices appear caught in a cross current. On the one hand, […]

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  71. 71

    […] If you’re visiting for the first time after hearing the interview, here’s the post I mentioned on the air: Goldman: Seattle Home Prices to Fall 22% More by 2012 […]

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