Friday Flashback: “You’re not going to see the prices come off that much.”

This is one of my favorite gems, dating from November 2007, just a few months after home prices in the Seattle area began their long decline. Robert Mak asked the question: “Where’s the bottom?”

In order to find the answer, he has a host of industry insiders give their marketing pitches. Unfortunately the original video seems to have been taken off the King5 site, but you can still read the synopsis I posted at the time. Here are a few of my favorite nuggets:

Suzanne Britsch, with New Home Trends, on why it’s pointless to try to wait for the bottom (and why you should obviously jump in and buy a house right now):

The problem is, is when it flips, it goes in one day! You know… I mean… So you never know when the bottom is.

One day… four years… You know, it’s all the same, right?

Lennox Scott (CEO of John L. Scott) on why the Fortune forecast calling for a 19.5% drop in prices over five years absolutely would not be happening:

That’s not the projections that we’re seeing. We’re in one of the best markets in the nation here in the Northwest. We have positive job growth, we have low interest rates… And we just do not see that taking place.

Oh, wait. Prices have dropped over 25% in just over three years. It turns out that not looking at realistic projections doesn’t magically make them not take place. Go figure.

Mak: Should I be scared though, of jumping in, and then seeing the price continue to slide, even once I’m in?
Scott: You’re not going to see the prices come off that much. They may come off ever so slightly off the peak.

Just ever so slightly.

The purpose of our Friday Flashback series is to remind people why it’s never a good idea to base your home purchase decisions on the word of someone with a vested financial interest in selling as many homes as possible for as much as possible, no matter what. If you’ve got a good example of local home salespeople or other industry shills on record making fools of themselves in the years before the bubble burst, shoot me an email.
  

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.

25 comments:

  1. 1
    LA Relo says:

    I still hear the “oh, but Seattle is different” rebuttal to claims that home prices will continue to drop, as if Boeing and MSFT could single handedly erase the nationwide unemployment rate but instead save all the jobs for Seattlites.

    I heard the same thing about the movie industry in LA and that didn’t stop LA from dropping 30% before Gov’t life support kicked in.

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  2. 2

    RE: LA Relo @ 1

    Boeing Seattle Suffered a Huge Job Loss After 911

    And never really regained much of it back to date.

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  3. 3
    Scotsman says:

    Let’s get real- what’s a couple hundred grand? And at least you won’t be a dirty renter anymore.

    Buy now or miss the big rebound!

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  4. 4
    Still Anonymous says:

    J.L. Scott isn’t the idiot. He’s the one sitting in the gold-plated bathtub counting his c-notes. The idiots are the fools who listened to him.

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  5. 5
    Dirty Renter says:

    Words can be so cruel…especially when they’re your own.

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  6. 6
    ray pepper says:

    (and why you should obviously jump in and buy a house right now): AGREED!! Today at least for me..

    I should have jumped today at Trustee Sale (only 2 bidders on this!) but some other cornball kept bidding me up 100 over my bid. Started out at 51750 and it got to my strike price of 53500 and he jumped his bid to 54k and got this: 3705 S 12th St Tacoma Wa 98405…..Didn’t need much work but not sure how much higher he would go. He appeared motivated and it was on a busy street anyway..!..

    Oh Well…Always next Friday…

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  7. 7
    One Eyed Man says:

    As most Bubble readers know, I have a keen sense for the obvious. Most of you already know the things I’m about to say, but I’m going to say them anyway.

    As much as I enjoy humor and making light of what Lennox says, I think there are a couple of important things this Post brings up that are substantively very important even if they’re simple.They’re items you can glean from the Fortune article that Robert Mac asked Lennox about and Tim linked to.

    First the article says that at the peak, the Seattle gross rent multiplier was something like 38 whereas the 15 year average had been something like 23. Perhaps there were restrictions on what Mac could ask in the interview, but if Mac understood the article and wanted to go to the heart of the issue, he should have asked Lennox point blank “how can you advise someone that there isn’t a huge risk prices will go down when the average gross rent multiplier is currently 38 and the 15 year average is 23?.”

    Here’s the very simple fundamental investment analysis at the heart of the Fortune article:

    “Economists assessing a region look at interest rates, employment, and population growth. But over time the most reliable guide to home values is rents.
    In most markets people won’t lay out much more in monthly costs to own a house or condo than they would to rent a similar property unless they expect a huge profit when they sell. Indeed, speculators chasing quick profits did a lot to inflate the recent bubble.
    But once the fervor fades, prices must fall to restore their normal, long-term relationship with rents. Rents exercise a kind of inevitable gravitational pull on prices. The ratio of prices to rents “behaves much like price/earnings ratios for stocks,” says Yale economist Robert Shiller. “Like P/Es, price-to-rent ratios are mean-reverting.” In other words, while prices soar from time to time, sending the ratio to exceptional heights, sooner or later the relationship is bound to return to its historical average.”

    The second point goes to regulation of the lending industry and the appraisal requirements for “conventional loans.” The GSE’s (and now FHA) for years set lending requirements that had to be met for them to buy (or in the case of FHA, insure) a loan. It’s my understanding these were the loans referred to as “conventional loans.” I won’t try to enumerate the list of requirements that made them conventional loans, but to the best of my knowledge one item that was never included was an appraisal component based upon rents.

    If one of our goals is to have stability in the residential housing and lending markets then it would only be reasonable to eventually have some portion of the appraisal for conventional loans be based upon a valuation approach grounded in economic fundamentals rather than market momentum. The income approach is the common method used to value commercial buildings. It would make residential appraisals more expensive and it would mean some loans would get turned down for conventional fianancing because the sale price couldn’t meet the valuation, but that’s the whole point. Conventional loans should have a reasonably safe set of lending standards and not be a source of funds for low risk speculation. If we’re going to keep Freddie and fannie, their underwriting criteria should be based upon sound business principles. A reasonable down payment amount and an appraised value at least partially supported by an income approach would help achieve this. The real estate industry would scream bloody murder and some homes, especially those above the median would go down in value because they might no longer qualify for conventional financing at as high a price, but that’s tough. If conventional financing is going to be cheap, it should also be subject to underwriting standards that make the amount of the loan managable, safe and secure for both the borrower and the lender.

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  8. 8
    Lurker says:

    RE: One Eyed Man @ 7

    Does it really matter? Lenox isn’t stupid and a question like that would just slide right off of him. He would immediately retort with a variety of reasons on how you are quickly losing precious time by reading a magazine instead of buying a house.

    But otherwise, yes. I agree.

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  9. 9
    One Eyed Man says:

    RE: Lurker @ 8

    You’re probably right about Lennox. I’ve met him in a group before and he is witty, personable and funny. He could likely deflect any pointed question with disarming humor rather than engage in a substantive exchange of ideas that might challenge the business model.

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  10. 10
    Hugh Dominic says:

    I love Fridays!

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  11. 11
    Hugh Dominic says:

    RE: One Eyed Man @ 7 – As long as we’re rewriting the approach to appraisals, let’s rewrite the approach to loan qualification.

    The 30-year conforming loan comes with a requirement that the borrower is presently employed and can show 2 pay stubs. That was a good idea when having a job today meant you could keep it essentially as long as you want, or need to pay off the loan.

    Not so today. Few people hold a job for 30 years, many switch every 3. Laid off, quit, kids, want a break, etc. The qualification should put more emphasis on the long term employment picture rather than the two most recent pay stubs.

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  12. 12
    Scotsman says:

    RE: One Eyed Man @ 7

    If we just took the distortions out of the market I’ll bet you a reasonable equilibrium would be found in short order. The first step would be to eliminate the tax deduction for mortgage interest, quickly followed by the elimination of Freddie and Fannie. Why is the government involved in private property purchases in the first place, especially through what is essentially the subsidization of unqualified or marginally qualified buyers? The next step would be to tie consequences to decision makers- no more bailouts, no more interest rate manipulations, no more laws favoring one group or another. A real kicker would be tighter regulation on the secondary market for mortgages.

    In short, if the lender had to stick around and deal with the consequences of his underwriting decisions and the buyer had to be able to afford the house, we probably wouldn’t have had this bubble. Sure, lots of regular buyers made out well, but my guess is the bulk of price appreciation was driven by marginally funded speculators and those who got liars loans, negative am loans, etc. It’s not as if income and demand naturally grew at the rate needed to support the bubble.

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  13. 13
    Lurker says:

    RE: One Eyed Man @ 9

    We can’t get too upset. He was telling many of us what we wanted to hear anyways – that the gravy train was still rolling. All of those fancy terms and numbers didn’t mean a thing. What was so incredible was how we were putting so much weight on a salesperson’s opinion! Did we really expect them to say anything other?

    And for some reason we still listen to some of these people today. I guess it’s habit, like the 40 year habit that’s been hammered into our brains that RE always goes up.

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  14. 14
    Chris says:

    Lennox Scott in 2007 may end up being similar to those who are urging people to buy gold today. Gold could go to $2,000 an ounce or it could drop by half – most salespeople are trying to sell, not educate or advocate for their customers.

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  15. 15
    One Eyed Man says:

    RE: Scotsman @ 12

    Welcome to the voodoo world of social engineering through tax policy. If the psychological nature of economic decision making (“animal spirits”) wasn’t vague and potentially irrational enough already, you probably compound its twilight zone character tenfold when you add on a layer of social engineering goals.

    We’ve all heard most of the cliché social engineering goals and the arguments. Basically they relate to all sorts of historic goals to bring the middle class from tenant serfs to partners in their society though encouraging broad based land ownership rather than allow concentrated land ownership in a medieval class society with a small powerful leisure class that owns the means of production and lives off the labor of others.

    Is the mortgage interest deduction necessary to put individual family home ownership on an economically competitive basis with landlords who can deduct their cost of borrowed capital as a business expense? Would millions of Americans become a class of indentured servants to the ownership class? Would the indentured servants lack sufficient ties to their society to prevent them from eventually disregarding its laws in economically difficult times and potentially guillotining the landed gentry as difficult economic times spawn true class warfare?

    Or are all those arguments anachronisms from another day when collective bargaining didn’t exist, we were an agrarian society, there was little or no representation of the populace in the political decisions, and you couldn’t obtain a share of the ownership society by just calling a stock broker.

    There’s way too much unquantifiable voodoo there for me to say I understand and can quantify the social value of Fannie, Freddie and the mortgage interest deduction. If you get rid of Freddie and Fannie, I’m not sure that the housing market won’t do irrational things anyway, but I’m not intellectually wed to them either. If you get rid of them you probably have to faze them out slowly to avoid shock to the system and unintended economic dislocations.

    In the short run I think it may be necessary to rather quickly do away with the mortgage interest deduction to achieve the greater near term goal of deficit reduction (as recommended by the committee). But that’s probably easier for me to say (I don’t have a mortgage) than it is for the politicians to do without incurring the wrath of millions of voters.

    For me the even more nebulous corner of Pandora’s Box is the Fed. Is it a necessary component of our banking and economic system that both regulates banks and dampens economic crisis and unemployment rates by manipulating short term interest rates? Or did the low interest rates of the early part of this century build the economic distortions that erupted when the housing and credit bubble burst? Are they necessary to control and contain the damage? Or are they the perhaps unintentional architects of the crisis?

    Not that I’m all that smart, but if I don’t have any confidence in my understanding of the practical implications, the average voter probably doesn’t have a clue other than what they’ve assimilated by hearing the rants and incantations of the ideologues they look to for guidance. That’s why it never ceases to amaze me when the checks and balances of our seemingly absurd political system slowly grind out a compromise that allows if not encourages society to sustain itself. When I fear the absurd incantations, its voodoo. But when despite the absurdity we survive and occasionally thrive, its magic.

    For the time being the Fed’s probably necessary to manipulate the economy as we try to extricate ourselves from the debt crisis. Will we be less likely to avoid future dangerous economic distortions without fannie, freddie and the fed? Sadly, I don’t know if they’re voodoo or magic. With the limits of my minds economic model, I can’t tell if the earth is flat and they keep me from sailing over the edge or if the earth is round and they keep me from reaching the new world.

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  16. 16
    TheHulk says:

    RE: One Eyed Man @ 7

    Quick question on this. If at the time of the interview, the Seattle gross rent multiplier was 38 and the long term average is 23, what is the value now?

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  17. 17
    TheHulk says:

    RE: One Eyed Man @ 7

    I like your meta point about using some long term economic fundamentals to appraise houses. What I would like to differ on is the requirements from the buyer. If you are a buyer and you are willing to buy a house for 450K with a long term economic appraisal value of 400K, the bank should be ok with that as long as you (the buyer) is willing to pony up the missing 50K in addition to the normal 20% down on 400K. In other words it transfers the risk from the bank to the buyer and when your own skin is in the game, people inevitably get much more cautious.

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  18. 18
    Ron Nelson says:

    RE: One Eyed Man @ 7

    This has to be one of the Best Ideas, I’ve heard…
    You kind of struck a cord with me… because I totally agree 100%– Everything you say makes total sense, if people even began to look at things and measure value in this sort of manner, you think we would even be close to where we are now in Seattle..

    I totally look at the Rental Values and relationship with home values..
    That is why i’m not invested in the Seattle Market because its not Logical to be here..

    I do see at the Bottom of the Totem Pole there are some properties that do measure up, however when I take into consideration maintenance/especially going forward and especially LOCATION, they just about in 100% of cases do not work in Seattle.

    With that being said its almost not worth my time to Bother Looking at the Seattle Market.

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  19. 19
    Ron Nelson says:

    RE: TheHulk @ 17 – By TheHulk @ 17:

    RE: One Eyed Man @ 7

    QUESTION: Since when does 400k constitute any real sort of fundamental valuation of current Residential rental market conditions??
    I see a market where 2,000. rents are hard to surpass, I don’t see Real wages supporting this.. there is certain properties that would support this price level, however the risk factor also is much higher for extended periods of vacancy..

    I like your meta point about using some long term economic fundamentals to appraise houses. What I would like to differ on is the requirements from the buyer. If you are a buyer and you are willing to buy a house for 450K with a long term economic appraisal value of 400K, the bank should be ok with that as long as you (the buyer) is willing to pony up the missing 50K in addition to the normal 20% down on 400K. In other words it transfers the risk from the bank to the buyer and when your own skin is in the game, people inevitably get much more cautious.

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  20. 20
  21. 21
    softwarengineer says:

    RE: Hugh Dominic @ 11

    We Had That Kind of Bank Loan Requirements in the 50s and 60s

    You were lucky to borrow your annual salary back then, and/or you could borrow more if you gave the title to the bank of other equity. You could also buy more with more of your own down payment cash.

    Can you imagine homes in Seattle selling now for max a household yearly income on loan principle….LOL? $100K-$150K would be the upper crust units.

    The trouble is, the past loans using government motors bank surrogates [Fannie and Freddie] become toilet paper, but the future loans become solid. I imagine too the demise of the high risk federal subsidized mega banks and the rebirth of the safe ma and pa neighborhood banks again.

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  22. 22
    The Tim says:

    RE: TheHulk @ 16, MikeB @ 20 – Unfortunately my methodology isn’t necessarily consistent with the methodology used in the 2007 Fortune piece. To get a real comparison you’d need the same people that ran the numbers in 2007 for Fortune to run them again in the same way today.

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  23. 23
    Cheap South says:

    By Hugh Dominic @ 11:

    RE: One Eyed Man @ 7 – As long as we’re rewriting the approach to appraisals, let’s rewrite the approach to loan qualification.

    The 30-year conforming loan comes with a requirement that the borrower is presently employed and can show 2 pay stubs. That was a good idea when having a job today meant you could keep it essentially as long as you want, or need to pay off the loan.

    Not so today. Few people hold a job for 30 years, many switch every 3. Laid off, quit, kids, want a break, etc. The qualification should put more emphasis on the long term employment picture rather than the two most recent pay stubs.

    I believe you brought up this point a month or two ago; and I agreed with you back then and continue to believe this is an outdated model. As in mutual funds, “past performance does not guarantee future results”. AND to make things worst, they consider household income (mom and dad) as the basis for approval. So now nobody can leave the job market for the next 30 years.

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  24. 24
    EconE says:

    By Cheap South @ 23:

    By Hugh Dominic @ 11:
    RE: One Eyed Man @ 7 – As long as we’re rewriting the approach to appraisals, let’s rewrite the approach to loan qualification.

    The 30-year conforming loan comes with a requirement that the borrower is presently employed and can show 2 pay stubs. That was a good idea when having a job today meant you could keep it essentially as long as you want, or need to pay off the loan.

    Not so today. Few people hold a job for 30 years, many switch every 3. Laid off, quit, kids, want a break, etc. The qualification should put more emphasis on the long term employment picture rather than the two most recent pay stubs.

    I believe you brought up this point a month or two ago; and I agreed with you back then and continue to believe this is an outdated model. As in mutual funds, “past performance does not guarantee future results”. AND to make things worst, they consider household income (mom and dad) as the basis for approval. So now nobody can leave the job market for the next 30 years.

    2 jobs needed + Less job security = More efficient debt enslavement.

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  25. 25
    Michael Long says:

    It frustrates me when people want to talk about “animal spirits” and all that other BS. The major problem with all of this talk about free markets is that it ignores so much of modern economic theory. If the only two variables that are required for economic modeling are supply and demand then free markets make sense. However, efficient markets theory assumes that both buyer and seller are on equal footing. Basically the buyer has to understand exactly what they are buying in order for the market to work. If one seller has a bag or oranges and the other seller has a bag of rocks the buyer must understand this. We never had a housing bubble we had a financial bubble. While there were many causes for this I believe the most important cause was simple fraud. Bond rating agencies were giving AAA ratings to piles of dog crap. If you can not get your pile of bad mortgages rated AAA then you would lose pension funds, municipalities, sovereign wealth funds and just about everyone with a large enough pile of money to do damage. We are seeing synthetic financial assets with AAA ratings that have 100% losses. In other words a bond with the same rating as a US Treasury is seeing losses of 100% of it’s value.

    What’s more this is completely legal as bond rating agencies are protected under “Freedom of Speech.” Both parties, but especially the Republican party seem to believe that efficient markets will stop fraud – so you have no need to protect against it. How would you feel if this was applied to other crimes like murder? Would murderers stop because society would shun the murderer? Of course not. We have completely decriminalized financial fraud under the banner of free markets. Any sensible government regulation, oversight, or criminal proceeding is immediately cast as “socialism.” If you have three variable in a market – supply, demand, and information then suddenly the market looks significantly different. How the hell did Goldman, Citigroup and every other Wall Street bank have record profits in the middle of the worst financial collapse since the depression?

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