Analyze a “Below-Market” Deal: Conclusion

The perpetual motto of real estate salespeople that “it’s a great time to buy” is still a load of nonsense. It’s only a great time to buy when your personal finances, your stage in life, and the right home at the right price all come together at the same time.

Granted, you never know if the entire world economy is going to collapse tomorrow, driving home prices even further down than they have already fallen, but in my personal opinion, we’re close to the point today that home prices around Seattle line up with the current economic fundamentals.

Hopefully these posts will help you determine whether you have found a home at the right price if buying today is something you decide to do.

How To: Analyze a “Below-Market” Deal


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.

32 comments:

  1. 1
    softwarengineer says:

    If the Current Economic Fundamentals Are Global

    And most MSM economists would say they are, we have a long way down the crapper to catch up with the rest of the world economy.

    2010 article in part:

    “…China’s minimum wage is lower than that in 32 African countries, and is almost the lowest in the world, according to “World Wage Research” (“WWR”), a widely viewed report circulated on China’s major Web sites and blogs.

    “China’s average annual wage is less than 15 percent of the world average, ranking 158th in the world,” said Liu Zhirong, independent Chinese scholar and author of “WWR,” during an interview with Radio Free Asia (RFA).

    His research showed that the lowest average annual income of the 183 countries and regions in the world is approximately US$6,078, while China’s is only US$896….”

    http://www.theepochtimes.com/n2/content/view/30453/

    Until we catch up with China’s overpopulated wage depression [and we’ve got a long ways to go], real estate in Seattle will keep collapsing with American wage rates, IMO.

  2. 2
    doug says:

    Chinese workers are beginning to push for higher wages, some say the Yuan must soon appreciate to combat inflation in China, and their labor force is aging. I don’t think we should be looking to China as the standard, as they’re in for some very busy times (not necessarily a bad thing for China, mind you).

  3. 3
    whatsmyname says:

    “Granted, you never know if the entire world economy is going to collapse tomorrow, driving home prices even further down than they have already fallen, but in my personal opinion, we’re close to the point today that home prices around Seattle line up with the current economic fundamentals.”

    WTF? Have you already submitted an offer?

  4. 4
    sallybuttons says:

    Redfin-guy…you are lost.

  5. 5
    Lurker says:

    RE: whatsmyname @ 3

    I look forward to the eventual day that The Tim announces he was handed over the keys to his new home purchase.

    I’m curious how many SB site viewers are just waiting for The Tim to buy before they do :)

  6. 6
    Blurtman says:

    Nobody knows, but when you consider that the housing bubble was inflated due in large part to a bonus lubricated Wall Street fraud machine, and that there has been no accontability for this fraud, assumptions of what seems possible based upon an honest economy may be in fact based upon a house of cards.

  7. 7
    rationalguy says:

    Housing prices still 10-20% above its fair value historical pricing. 10-20% is significant amount to risk. But as assets gets overpriced over its underlying value, assets does get priced below its underlying value, no guarantee that it will not fall below its fair value.

    Also, another assumption is that “coming decades” will reflect the economic prosperity and housing demand of past decades. With baby boomers retiring, we should see significant decline in housing market. This is something not seriously discussed on this blog ( to my knowledge).

    Also, do not ignore the loop back effect of house prices drop, more people have negative equity, causing them to walkaway, causing housing to fall back and more people to have negative equity…

    In my opinion, there is still significant risk of owning house and people will be much better off renting in current market conditions.

  8. 8
    Scotsman says:

    There are 860 financial institutions on the FDIC’s official list of problem banks. It’s a great time to buy.

    http://www.businessinsider.com/bailed-out-banks-failing-tarp-december-27-2010-12

  9. 9
    Blurtman says:

    RE: Scotsman @ 8 – Oh, the pity of being a NTBTF.

  10. 10
    softwarengineer says:

    RE: Scotsman @ 8

    Not to Worry

    EU2 will straigten it all out until rates sky-rocket due to out-of-control cumulative debt. China won’t cause interest rates on American mortgages to go up.

    Article in part:

    “…A steady stream of anti-inflation talk from the Chinese central bank has led many investors to bet on more rate increases in 2011.

    A Reuters poll showed investors see the benchmark one-year deposit rate rising to 3.25 percent by the end of next year, from 2.75 percent now….”

    http://www.huffingtonpost.com/2010/12/27/china-raises-interest-rat_n_801457.html

  11. 11
    wsuengineer says:

    To tell you the truth, I stopped caring. I got tired of analyzing all the damn numbers. We found a home we loved in one of our favorite neighborhood, in a great school district, and determined our offer price as a projected inflation plot based on the 2 sales before the bubble even happened. The poor beaten down sellers accepted our offer because they were sick of paying 2 mortgages. It was the right set of conditions for us. We just got to that point where we wanted a home instead of a house. In the past 18 months, I’ve racked up EXP points in in DIY projects. I have my own man cave with my own home brewery. The wife is happy, the house is more than enough for our growing family, and the neighbors all have strong pride in ownership.

    IMO, it’s all about stability and location. If you are at the point in your life where you know you’re gonna stay put for ~10 years, then by all means buy a home if everything is in order. I don’t worry about whether the house is going to drop in value another 5%. It would bother me tremendously if I was hoping to upgrade to a new home or relocate in 5 years. Actually my particular neighborhood has held its value for about 2 years and is actually up if you believe Zillow’s algorithms. I suppose if my home value tanks 10+% and the new congress kills the mortgage home interest tax deduction, the pride of ownership will take a big blow to the kisser.

  12. 12
    Hugh Dominic says:

    RE: wsuengineer @ 11 – You sound just like a guy by the handle Magnolia44, when he bought in. His more recent posts are much different. It’s cool that he still stops by here sometimes.

  13. 13
    Hugh Dominic says:

    By Lurker @ 5:

    RE: whatsmyname @ 3
    I’m curious how many SB site viewers are just waiting for The Tim to buy before they do :)

    And Tim, in turn, was waiting for Roubini. Now that he bought, the chain reaction begins and will spread across the land.

  14. 14
    Jonness says:

    By Lurker @ 5:

    RE: whatsmyname @ 3

    I look forward to the eventual day that The Tim announces he was handed over the keys to his new home purchase.

    I’m curious how many SB site viewers are just waiting for The Tim to buy before they do :)

    I am. I expect to buy about 2 years after he does for an additional 25% off. :)

    (That’s if he pulls the trigger this winter as per his postulation from an earlier post)

  15. 15
    Jonness says:

    By wsuengineer @ 11:

    I suppose if my home value tanks 10+% and the new congress kills the mortgage home interest tax deduction, the pride of ownership will take a big blow to the kisser.

    IMO, 10% is the minimum downside risk. However, living now is worth something. And, if you stay for 10 years, you’ll most likely come out OK. :)

    I don’t see the interest deduction going anywhere anytime soon. Worst case scenario is a cap for the rich. I doubt the Republicans will allow it though. Politicians will keep borrowing until the big one.

  16. 16
    Scotsman says:

    “and is actually up if you believe Zillow’s algorithms.”

    . . . and the Dreamliner will fly next month, right after the Skittle- sh#tt*hg unicorns fly over and drop little colored plops of love on it.

    Desperate rationalization.

  17. 17
    Sleepwalker says:

    Zillow thinks my house has appreciated 15% since June 2006.

  18. 18

    By Scotsman @ 16:

    “and is actually up if you believe Zillowâ��s algorithms.”

    . . . and the Dreamliner will fly next month, right after the Skittle- sh#tt*hg unicorns fly over and drop little colored plops of love on it.

    Desperate rationalization.

    Aw c’mon. Zillow is usually within 50% of the actual market value :)

  19. 19
    Blake says:

    Tim: “…we’re close to the point today that home prices around Seattle line up with the current economic fundamentals.”

    Nice hedge Tim… unfortunately, the near future is more than a little cloudy and stormy!!
    -snip- “#9. The potential for a significant down-leg in home prices is being underestimated. The unsold existing inventory is still 80% above the historical norm, at 3.7 million. And that does not include the ‘shadow’ foreclosed inventory. According to some superb research conducted by the Dallas Fed, completing the mean-reversion process would entail a further 23% decline in real home prices from here. In a near zero percent inflation environment, that is one massive decline in nominal terms. Prices may not hit their ultimate bottom until some point in 2015.”
    *from: http://www.ritholtz.com/blog/2010/12/10-reasons-to-be-cautious-for-the-2011-market-outlook/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

    … I’d say a further 10% down leg in prices is rather conservative or perhaps optimistic!??

    ** You all should also check out this “inflation (or lack thereof) chart show”
    http://www.ritholtz.com/blog/2010/12/an-inflation-or-lack-thereof-chart-show/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

    -snip- “there is scant evidence that disinflation has left the scene.”
    ack! … deleveraging is nasty sh*t!

  20. 20
    Lurker says:

    “but in my personal opinion, we’re close to the point today that home prices around Seattle line up with the current economic fundamentals.”

    From my viewpoint, when you look at historical data from the past twenty years or so it does appear that pricing could be where it might normally land if there was never a bubble however I feel that we could also be in a situation that does not economically jibe with the past twenty years and will continue to do so for several more.

    To put another way – I don’t yet feel that today’s pricing meets the fundamentals of today.

  21. 21

    RE: Lurker @ 20 – We’ve talked about the tax credit stealing buyers from the future. My concern is more that condos have locked in buyers from the future. Locally the condo market was much more over-heated than the SFR market.

  22. 22
    Lurker says:

    It does seem like tomorrow’s pool of buyers keeps shrinking a little bit more and more.

  23. 23
    ARDELL says:

    How could prices today “better fit fundamentals” when they are about the same as they were two years ago? If they didn’t meet the fundamentals in March of 2009 when prices were the same as now…than they wouldn’t fit them now either.

  24. 24
    Lurker says:

    very good point!

  25. 25
    doug says:

    RE: ARDELL @ 23

    Well for one, rents have gone up… A LOT!

    Our rent went up $300 when our lease expired this year. It would have been $225 if we had signed another year-long lease. Rents are up at least $150 in Kirkland, where I live.

    The house we have an offer in on is $260,000. By my best estimate, it would cost $1600-$1800 to rent. Giving me a rent ratio of 13.5-12. Rent is just going to go up over the next two years.

    Not to mention the pre-bubble appreciation slopes have had another 9 months to go up… though that’s less concrete.

  26. 26
    Lurker says:

    Another good point, rising rents can put buying in a better light. I may disagree that rents are rising A LOT but they do appear to be rising. I would guess that rent and home prices tend to mostly stay in line with each other so I don’t think rents are going to get too high around here in the near future.

    If someone found a place that they can afford, plan on living long term and with a P/R ratio of 12-13 like Doug did then buying could definitely make sense.

  27. 27
    sallybuttons says:

    RE: ARDELL @ 23 – This marks the first time that you have made a lick of sense to me…

  28. 28
    doug says:

    RE: Lurker @ 26

    Actually, rents ARE rising a lot. I thoroughly examined the rental market last November and this November. Comparing the same properties from a year ago all across the eastside, up into Mill Creek and Bothell, Shoreline, rent has, without exeption, gone up by at least 15%. 15%-20% in a year is a LOT! (Disclaimer: I didn’t examine really junky rentals very closely, just rentals I would call livable)

    Rent will not trend with house prices in this environment, precisely the oppossite:

    Each foreclosure increases the supply for housing, and increases the demand for rent. Most people who foreclose are going to have to rent, as their credit will be ruined for a while. Greater supply of houses = lower housing prices, greater demand for rentals = higher rents.

    Now, some renters are buying houses (as we are, hopefully), but for now, and as long as we have a shadow inventory, rent’s on its way up.

  29. 29

    Rents are far more volatile than house prices. Because of that I would question whether they have any value at all in making a house purchase decision.

    Your individual rent, however, that’s entirely different. I’ve seen some incredible sweetheart deals where someone was getting a very good rental rate, sometimes even on a very good property. If you had that type of deal, or could get one, it would be hard to pass up.

  30. 30
    Lurker says:

    I rarely set foot in any of those neighborhoods you listed but as far as Seattle goes none of the rental trend data I’ve seen has shown price increases that high. In early 2010 we were hearing about how Seattle was showing near 15% drops in rent.

    On the flip side to your suggestion that rents will increase because of owner to renter status changing there is also the new increase of “accidental landlords”, people that can’t sell their place so they are trying to rent them out and investment money that picks up REOs or equivalent cheap housing to rent out as well. There is also the issue that many people are merging households now (moving back in with parents, friends, etc) which can further increases the gap between housing units and households causing oversupply.

    Kary had a very good observation and I agree. Rental prices can be very volatile!

  31. 31
    ARDELL says:

    RE: sallybuttons @ 27

    I was going to answer that as to why, but I didn’t want to spoil the moment for either of us.

    Happy New Decade!

  32. 32

    […] Analyze a “Below-Market” DealIntroductionComparable SalesNearby RentsHistoric PricingConclusionPosted in Features | Tagged appraisal, how-to, overvalued, undervalued, valuation, value Posted by: […]

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