Predictions: Will 2011 Finally be the Bottom?

With 2010 well behind us now, it’s past time for another roundup of yearly Seattle real estate market predictions. Here are our past prediction posts for 2007, 2008, 2009, & 2010.

Rather than playing the usual game of scraping and searching through the local papers for notable prognosticators going on the record with someone else about what’s ahead in 2011, I decided this year to go straight to the sources myself. I directly contacted three gentlemen who are plugged in to the market and whose opinions I respect: Glenn Kelman, Stan Humphries, and Glenn Crellin. All three of them were gracious enough and bold enough to respond.

Before we get to the 2011 predictions though, let’s have a quick look back and see how our 2010 contenders fared.

And the 2010 Winner is…

As you may recall from last year’s post, most of the usual suspects pretty much avoided making any guesses about what was in store for 2010. Only Steve Tytler and I were willing to go out on a limb with predictions. Steve had prices down “about 5 percent,” and I guessed that barring additional government intervention, “most” of a 10% drop would come in 2010.

Here’s where prices went in 2010, according to four measures:

  • Down 2.6% – King Co. SFH Median (NWMLS, 12/2009 – 12/2010)
  • Down 6.6% – King Co. SFH Median $/SqFt (Redfin, 01/04/2010 – 01/03/2011)
  • Down 4.7% – Seattle HPI (Case-Shiller, 11/2009 – 11/2010)
  • Down 9.6% – King Co. ZHVI (Zillow, 11/2009 – 11/2010)

Both Steve and I were off on our guesses if you use the change in the straight-up median between Decembers. Other measures came in right around the 5% to 10% range we were expecting. I think it’s fair to call this one a tie on price.

A far as I am aware, I’m the only one who made any predictions for sales or inventory in 2010. My guess was sales up 1st half, flat 2nd half. I got the first part right, but was overly optimistic on the second half, as sales actually crumbled quite dramatically once the tax credit went away. Inventory stayed slightly ahead of 2009 for most of 2010, so my call of “flat to down slightly” was also off a bit. On the whole, my sales and inventory predictions were slightly too optimistic.

The Contenders Take On 2011

Let’s have a look at the 2011 predictions from our panel. I asked each of them for a prediction on price, sales volume, and inventory, as well as their general thoughts on the market.

First up is Glenn Crellin, the director of the Washington Center for Real Estate Research over at WSU. Glenn and I disagreed about the direction the market was heading in 2006 and 2007, but we are largely on the same page these days.

Obviously the key to stabilization of the housing market is job creation, and that’s still a problem. Additional private sector jobs need to increase rapidly because state and local budgets are going to be shedding jobs throughout the state throughout 2011. This will keep demand low, and the added pressure of additional foreclosures will add to the downward pressure on prices. My casual expectation is for an aggregate price decline of about an additional 5% on the median. That means that potential buyers have missed the biggest bargains since mortgage rates are already rising, and a 1% rise in rates would require nearly at 10% reduction in prices to keep payments as low as they would have been to purchase late last year with the record-low mortgage rates.

On the sales side, like most economists I prefer to look at seasonally adjusted annual rate data, and that rate dropped very close to its early 2009 low during the third quarter. It will probably remain well below the levels of a year ago through mid-year 2011, but I do not expect significant quarter-to-quarter declines. Presuming the economic recovery continues, I anticipate gradual improvement in home sales, especially during the second half of 2011. The real key is how lenders behave. What will they require in terms of down payments? What will be their credit score threshold?

I don’t see potential sellers (except distressed sellers and financial institutions) rushing to put homes on the market, so I do not anticipate significant increases (or decreases) in properties available for sale compared to year-ago levels.

As I often say when I am making presentations, the crystal ball is cloudy.

I’ll put Glenn C. down for -5% on price, mostly flat sales and inventory for the year.

Next we have Stan Humphries, Zillow’s Chief Economist. Stan gets paid to spend all his time digging into housing market data. He slices it, he dices it, and he regularly cooks up a delicious filet of fresh insights. Here’s his take on where Seattle is headed in 2011:

I really can’t make any predictions about King County median sale price since the price mix of closed sales is going to be bouncing around like a BB in a tin can between now and then because the price tiers themselves are depreciating at quite different rates and the Federal tax credits have produced significant distortions in the sales mix. Looking at the Zillow Home Value Index for the Seattle metro, however, I expect to see another 5-10% decline in home values over the next year in our region, so I’ll put a marker out there for 7%. A 5% decline would make our peak-to-trough decline for Seattle at 33%, push values back to April 2004 levels, and get the region’s price-to-income ratio back to the average level seen in the 1985-2004 period (arguably a bit high because of the run-up in the 2001-2004 period). A 10% decline would make our peak-to-trough decline 37%, push values back to June 2003 levels, and get the region’s price-to-income ratio back to the average level seen in the 1985-2000 period.

For King County SFH closed sales, I estimate we’ll top out monthly sales in the summer time of 2011 at about 1,500-1,750 units. That largely discounts the mid-2009 to mid-2010 trends because of the Federal tax credit. We’ll get the higher number if the anticipated further local price declines coupled with an improving national economy and increasing mortgage rates get people thinking about value shopping versus keeping them on the fence fearing the purchase of a depreciating asset. We’ll get the lower number if fence-sitting is the dominant behavior prompted by the further price declines.

Foreclosures will continue to increase in our market next year, likely peaking in the back half of the year at around 2 out of every 1,000 homes being liquidated each month (current rate in November is 1.3 per 1,000 homes).

So Stan is at -5% to -10% on price and -7% to -20% on sales (2010’s summer peak was 1,879 in June).

Let’s hear from Glen Kelman (my boss). As CEO of Redfin, Glenn is in a unique position. He not only has his finger on the pulse of data coursing through Redfin’s vast databases, but he also has a direct line to hundreds of “boots on the ground” as Redfin’s agents in Seattle (and around the country) share what they’re seeing in home tours and in deals.

The data are so mixed just now—and the whole real estate market is so closely tied up with the overall economy—that this exercise is, at least for a guy of my talents, a crapshoot. I also feel a little wary of predicting any outcome better than the apocalypse just because so many people expect anyone in the industry to be totally full of it, but here’s my best guess (anyone who pretends he’s not guessing is full of it.)

In Seattle, we believe that limited inventory, not demand, is the gating factor in sales volume, which will be 10% lower than in 2010, almost entirely due to a slow January, February and March. Nationally, we actually expect the economy to improve a bit as rising corporate earnings slowly bolster consumer confidence and probably even employment. With Seattle sellers holding out for better prices and buyers becoming impatient, prices will stabilize: the broader Seattle area may decline by 2% – 4%, driven in part by increasing short-sale liquidity and in part by the momentum created by buyers and sellers accustomed to falling prices, but the core Seattle and Eastside neighborhoods are not going down right now, and probably won’t all year.

My guess is that the number of homes for sale on January 1, 2012 will be 20% higher than it was on January 1, 2011. The total number of listings activated in 2011 as compared to 2010 will be 5% lower.

Glenn K. comes in at -2% to -4% on prices, -10% on sales, -5% on new listings, and +20% on active on-market listings.

Finally, here’s a bonus prediction from long-time contender Steve Tytler, posted to his “Mortgage Guru” blog:

I was hoping that I might be able to report that we had finally reached the elusive “bottom” of the housing market by now, but we are not there yet. I think we are in for another year of slowly falling prices next year. I do not expect a dramatic crash in home prices, but I think there’s a good chance that home prices will continue to drift downward by an average about 5 percent. But again, home price appreciation/depreciation will vary widely from neighborhood to neighborhood with some doing much better and some doing much worse than the overall average.

Why do I think home prices will continue to decline slightly? Supply and demand. The inventory of homes for sale is currently higher than it was at this time last year, while the number of sales is lower than it was at this time last year. That’s a bad combination if you are trying a sell a home, but it’s good news for home buyers.

The only problem is that despite historically low mortgage rates, not many people seem to be interested in buying homes right now. So an increasing supply of homes for sale combined with weak buyer demand indicates that home prices are likely to continue dropping until they get low enough to attract more buyers.

Again, I don’t want homeowners to panic. I don’t think we will have a 15 to 20 percent “crash” in home prices in 2011, I just think that the housing market will be “flat” with a slightly downward trend.

Steve is sticking with down 5% on prices again in 2011.

2011 According to The Tim

The consensus among this year’s forecast guessing contest contributors is remarkably unified. Everyone seems to be expecting about a 5% drop in price and a decrease in sales.

For the most part, I agree with these guesses. I’m expecting prices to fall another five to ten percent in 2011, mostly closing the remaining gap between incomes and home prices. Price drops will probably be more severe in the further-out suburbs and rural areas, and much less pronounced in the close-in areas.

On sales and inventory I’m actually slightly more bullish for 2011 than the panel. I expect sales to come in between 5% and 10% higher than 2010, as the “borrowed sales” pulled forward by the tax credit have mostly been made up, and continued price declines draw people in to purchase now-affordable homes in neighborhoods that were previously out of reach. Inventory is already showing a clear slowdown, and I expect this to continue through most of the year as people who don’t need to sell just sit out the market. I expect that by this time next year active inventory will be at least 10% lower.

“But wait,” you say. “If sales are increasing and inventory is dropping, won’t that drive prices up?” Good question. Simple supply and demand would suggest that increasing demand coupled with decreasing supply should drive prices up. However, as we have seen, the housing market reacts very slowly to changing supply and demand. By the time prices peaked in July 2007, we had seen twenty-one consecutive months of year-over-year sales drops, and sixteen consecutive months of year-over-year increases in inventory. If YOY sales went positive in January, and we see a similar pattern as we did leading up to the peak, prices would not start to increase until late 2012.

Well, that’s pretty much all I’ve got to say on the matter. Let’s hear your predictions in the comments, as well as in this poll:

What's your King County SFH median price prediction for 2011?

  • Down more than 10% (23%, 80 Votes)
  • Down 10% to 5.1% (37%, 131 Votes)
  • Down 5% or less (27%, 95 Votes)
  • Up less than 5% (10%, 34 Votes)
  • Up 5% to 10% (2%, 6 Votes)
  • Up more than 10% (1%, 6 Votes)

Total Voters: 352

  

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.

62 comments:

  1. 1
    Jacob Beaty says:

    With Servicers / Banks still managing an increasing REO portfolio with hundreds of properties needing to be foreclosed on it will drag prices down another 5 – 8%. Until we actually see >25% of sales from distressed properties we won’t bottom out.

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  2. 2
    Chow King says:

    Here’s my two cents for you bubbleheads. Zillow, a Seattle base real estate web site had reached a 15.7 million unique monthly visitors in January. That’s 75 percent year over year and a new record. Their loan request are up 56% from December to January! That’s a signal that people are definitely diving into the market. Herd mentality is coming right to yah. Another good indicator is that Wells fargo bank is loosening their loan qualifications. You just need a 580 FICO score w/ 3.5 percent downpayment in order to qualify. BAM! BABY! The economy is growing, employment is gaining momentum according to ADP. Doom and gloom prophecy is a thing of the past. What is this all tells you? A 10 to 15 percent increase in value.

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  3. 3
    LA Relo says:

    Great feedback, thanks for sharing.

    Personally, I think 2011 will be worse. I’ve been watching foreclosure activity and there are more Auctions (supposedly) taking place than I can fathom. My guess is most of these are not being bought on the spot in the parking lot in Bellevue square but are instead spending the following 6 months or more becoming an REO.

    Remember, we went down about 5% in 2010 with the Gov’t throwing every housing prop up scheme in the book. That’s all gone.

    If rates go up, prices will eventually fall. Only a substantial rise in incomes will stabilize them and that’s not happening.

    I agree with Tim that tax credit bribes pulled late 2010 sales into early 2010, but I also think there is a lot of shadow inventory waiting, and I don’t think there are enough sideline sitters to out number that inventory, pending REOs, normal sales, and pending new completions.

    I do think the summer months will be better year over year, but overall I don’t think total closed sales in 2011 will trump 2010, at least by much.

    Sales flat
    Inventory up – 10%
    Prices down – 10%

    We’ll see.

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  4. 4
    K says:

    Chow King, I suspect you’re trolling since you started with an insult. But hey, let’s go with it: what you seem to be arguing for a reinflation of the bubble, prices trending back away from historical averages. That seems to be based on kicking the can down the road, since interest rates have literally nowhere to go but flat or up. Unless we see a massive shift in employment you won’t get your bubble back, and when interest rates go up it will have to force prices down unless we have big-time inflation going on.

    In short the only way I see your scenario playing out is if we are inflating at the same time.

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  5. 5
    Scotsman says:

    Let’s back up a bit and start with the macro environment. Consensus for 2011 is 2.5% GDP growth with 1.2% inflation leaving 1.3% real growth for the year. But if we properly subtract out the $1.5T in deficit spending/QE2-3 etc., (roughly 10% of GDP) we are left with a real growth rate of almost negative 9%. Negative growth of 10% is the technical definition of depression. Like it or not, this is the reality of our national economy. Sure, it doesn’t appear to be that bad, but like the freshly painted house with the newly sodded lawn that looks great in the photos, further inspection shows the foundation is collapsing and the real value just isn’t there.

    Unemployment is expected to drop into the mid-to-lower 9% range by the end of the year but as many of you know this number is a statistical fiction. The number that counts, the percentage of the population that is employed, will probably continue to fall. This, coupled with the fact that one out of nine housing units in the country is currently empty will continue to depress prices. Remember that if Seattle appears to be “special” now over time regional differences tend to equalize in both employment and housing.

    We are living in a mirage of normalcy fueled by ignorance, apathy, and habit. Sure, some people will continue to buy homes, some will still think they are great investments, but in the end it comes down to cash flow. Do you have a job, what does it pay, what are interest rates, can you really afford it? For more and more people the answer will be no.

    For 2011 prices down 10%, sales may climb a bit, government intervention can change the game at any time, but only for a short period. Fundamentals will continue to deteriorate. We will most likely overshoot the trend line on the way down. Bottom in 2013/2014.

    http://web.rollins.edu/~wseyfried/forecast.htm

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  6. 6
    mojo says:

    RE: Chow King @ 2

    Most of my freinds look at Zillow not because they are scoping out new homes to purchase, but because they want to use that z-estimate feature to gauge if they have lost money on the home they have already purchased. Web traffic on Zillow probably isn’t the most reliable indicator.

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  7. 7
    Cheap South says:

    RE: mojo @ 6

    Correct. I have been at zillow about a million times myself; and I have no plans (other than to get depressed looking at the values in my ‘hood).

    I think this rate will continue. We’ll finish 2011, 8-12% lower. Looking forward to seeing the numbers from Dec-March.

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  8. 8
    ray pepper says:

    Prices going up in 2011-2015 just as sure as my middle name is Hector……………..

    Pray for a flat line in housing and the market continue to run!

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  9. 9
    Ben says:

    RE: Scotsman @ 5 – I agree with Scotsman on the macro view.

    Government intervention aside, if the market is allowed to work its magic and finally let supply, demand, and price work towards a natural balance, I believe we should go down 10% or more in 2011. I believe we are overdue for interest rate increases as well.

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  10. 10
    deejayoh says:

    Nice post Tim. Great to get the guest predictions straight from the horse’s mouth. and this reader thanks all that participated!

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  11. 11
    Ross says:

    By Scotsman @ 5:

    Let’s back up a bit and start with the macro environment. Consensus for 2011 is 2.5% GDP growth with 1.2% inflation leaving 1.3% real growth for the year. But if we properly subtract out the $1.5T in deficit spending/QE2-3 etc., (roughly 10% of GDP) we are left with a real growth rate of almost negative 9%.

    That’s the kind of sketchy math that politicians try to pull:

    * QE/QE2 are not debt (printing)
    * You can’t subtract debt spending from growth. It makes no sense. If a company grows revenue by 50% while taking on debt of 50% of its former market cap, does that mean the company didn’t grow? No, debt and growth are different concepts.
    * This spending happened in prior years. So even if it were valid to subtract debt from growth, it shouldn’t be carried forward. The debt was incurred in 2010; growth is for 2011.

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  12. 12
    Ross says:

    When all the “experts” agree, they are almost certainly wrong (there’s actually studies that back this up). So, I’d take a contrarian point of view that we could see flat to small growth for 2011 (on the order of 0-2%).

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  13. 13
    Blake says:

    My “guess”… prices down around 10%, with the last part of the year being particularly gloomy.

    Folks had a nice little Christmas season buying more stuff they wanted… and Congress gave them all more tax breaks to perk them up for the New Year… and the booming stock market creates more “wealth affect”… But, like in time series modeling, there is a “decay” effect. The chickens will need to roost…. eventually!

    The wild card in here are possible actions by the Fed and Treasury… as Ray keeps alluding to. You know that they are game-planning various scenerios – – drastic actions. Helicopter Ben will do most anything. As China and the emerging markets take action to stem inflation we could see major corrections in the BRIC economies, leading to a crash in the commodity bubbles and deflation. There is an awful lot of risk (not to mention the momentous changes afoot in the Mideast!)

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  14. 14
    Ben says:

    RE: Ross @ 11 – Ross, it’s your math that is sketchy. A better analogy for you to understand would be this: If you borrow 12% of your spending on credit cards, are you 12% richer? How many years can you do that before maxing out your credit? How rich will you feel when you have to actually pay it back or when your credit is damaged enough that your rates get jacked up?

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  15. 15
    karl says:

    It has been mentioned here many times before. Growth measured in GDP is flawed….I wish they would find a new bel-wether. GDP includes government spending ect… that really doesn’t reflect the true health of an economy.

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  16. 16
    Devmud says:

    Great Post Sir:- Thank you

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  17. 17
    Crashcadia says:

    More than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.

    http://gazettextra.com/news/2010/dec/28/baby-boomers-near-65-retirements-jeopardy/

    Homeownership rate for that age group is about 80%

    Put that in your shadow inventory cup and drink it.

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  18. 18
    EconE says:

    It depends on what part of the market we’re talking about. Some people got better deals than others in 2010. I think that there is more room to fall in the condo market than in SFH’s and as Tim says, the outlying areas will get hit moreso than the close-in areas. The people trying to sell the high end (1,000,000+) properties will find out that there are far fewer potential buyers (or renters) in that strata so I expect to see the high end fall more than the low end.

    Put me down for a 10%-20% drop depending on the product/area with no quick rebound until the next bubble whatever it may be.

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  19. 19

    I agree with Ross that the agreement of the four panelists disturbs me most, and I even see some potential rosiness in Tim’s prediction. What about the other side? There is the very real possiblity that prices collapse. The Fed is doing all it can to prop up the economy with false hope, which could very well lead to a significant crisis. Unrest in the rest of the world, exported inflation, rising food prices, more defaults in Europe, and a number of other events could conspire to lead the average American to spend more on necessities like food and have less money to upgrade a home or buy a first home or banks to stop extending loans (how big do you think a cash market or even a 20% down market would be among today’s anti-saving culture?). Foreclosures could also flood into the market from the inventory that we know is sitting on the sidelines. Given these factors, a prediction that prices could fall another 20% or more is not ridiculous, and though it may feel like a less “safe” prediction, it could well turn out to be right.

    I want to sell my downtown Seattle condo, so this isn’t what I want, but I’m a realist enough to see that it is a statistically reasonable possibility.

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  20. 20
    Scotsman says:

    RE: Ross @ 11

    “That’s the kind of sketchy math that politicians try to pull”

    Nothing sketchy about it- the only reason this economy is afloat is because an essentially insolvent federal government has kept itself and the national economy alive by using a combination of borrowing and money creation. Had the feds continued to run $300-500B deficits which were the norm you might have a point. But they have gone well beyond that, and in fact are pretty much committed to a decade or more of similar levels of borrowing. But they aren’t really borrowing at market rates from the pool of available funds because that would ramp interest rates and kill the “recovery.” Through a series of manipulations they are essentially borrowing from themselves with the help of a Fed/Treasury collusion that will prove extremely difficult to unwind, and will prove horrendously inflationary when it finally collapses.

    Will housing “crash?” No, it moves too slowly and is too sticky on the upside, and with the Fed pumping $trillions of dollars a year into the sick patient we’ll get a slow but certain death, not a dramatic collapse. Anyone who thinks the foundation is solid and that we will not only continue to move forward but eventually recover and return to a sustainable position anything close to what this country has occupied for the last 40 years is either grossly uniformed or seriously delusional.

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  21. 21
    Dave0 says:

    “I think it’s fair to call this one a tie on price.”

    um… what? So let me get this straight… Steve Tytler’s prediction was about equal to the Case Shiller index, which is worshiped on this blog as the most accurate measure of change in home prices out there (by myself as well). Meanwhile, Tim’s prediction was about equal to some index Zillow put out that I’ve never heard of, and it’s Zillow, which we all know if not very accurate at valuing homes. And you want to call that a tie? Admit it Tim, Steve Tytler had a more accurate prediction for 2010 that you did. You can’t win them all.

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  22. 22
    corncob says:

    By Dave0 @ 21:

    And you want to call that a tie? Admit it Tim, Steve Tytler had a more accurate prediction for 2010 that you did. You can’t win them all.

    I agree, Steve totally won this one comparatively.

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  23. 23
    Blake says:

    RE: karl @ 15
    “Growth measured in GDP is flawed….I wish they would find a new bel-wether.”

    Yup… Over the last 40 years we’ve seen a huge increase in two income families where the kids are in daycare ($$) and instead of an inexpensive home cooked meal they either eat out or eat prefab frozen dinners.

    In terms of GDP the daycare and extra expenses on eating out or frozen meals are an “increase in per capita income”… = “quality of life”??

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  24. 24
    Ross says:

    By Scotsman @ 20:

    RE: Ross @ 11

    “Thatâ��s the kind of sketchy math that politicians try to pull”

    Nothing sketchy about it- the only reason this economy is afloat is because an essentially insolvent federal government has kept itself and the national economy alive by using a combination of borrowing and money creation […]

    I don’t disagree at all that the fed, Bernanke and the government are running various shenanigans to prop up the economy. There’s definitely market manipulation going on (though when hasn’t their been). And the outstanding debt is a huge problem that doesn’t have seem to have any viable solutions proposed by the politicians. And I agree with various other commentators that GDP, as a measure of growth, has many flaws.

    BUT, none of that means you can subtract last year’s debt from this year’s GDP growth numbers and derive anything that is meaningful. It isn’t.

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  25. 25
    Jillayne says:

    I wonder what this economist will say?

    http://www.seattlemba.org/blast/20110215_DinnerBio.html

    I’ll be attending this dinner event. What questions should I ask him on behalf of Seattle Bubble readers?

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  26. 26
    Jonness says:

    Stimulus driven or not, I believe the consensus is for around 3% GDP growth during 2011, a greater than inflation increase in the stock market, and about a 5% drop in home prices nationwide. In addition, most analyst expect some job growth, but not enough to bring unemployment down much.

    We have economic headwinds of underwater homeowners, the notion of homes being crazy wealth generators long gone, a massively looming foreclosure mess, high unemployment, rising interest rates, wages stagnating, Seattle home prices historically high compared to rents and incomes, and no more $million mortgages to unemployed strawberry pickers.

    So you have a kind of blah growth picture coupled with house prices needing to decline considerably. Since, house prices are notoriously sticky on the downside, I expect them to fall less than 10% this year. However, I don’t expect them to fully bottom until we at least get to general 2003 prices in the region. I do expect some Spring price and sales support, but I do not believe the bounce will represent the upside after the bottom. IOW, this mess will take years to fully work its way through the system. To be certain, house price appreciation will lag a recovery in jobs.

    My oil stocks are up about 14% in the month of January alone. I’m diversified, so I’m by no means up that amount in total on the month. But it demonstrates money is always flowing somewhere. People got used to money flowing into Puget Sound houses, but that’s betting on a dead horse these days. Looking at the above consensus, what’s the better risk, stocks, cash, other, or local real estate? Of the three, leveraging 100% of your wealth into depreciating Puget Sound real estate that costs 10% to sell is the worst strategy.

    There are a million and one reasons to buy a particular stock, commodity, or asset. Buying is easy because we all love to spend money. But the biggest trick in investing, is selling. People don’t want to admit they lost, or they don’t want to pull profit because they might miss future gains, or they want to get their money back when their bet starts losing value, so they stay in too long. Enter today’s on-the-fence home sellers. This group mostly consists of clueless amateur investors who are heavily leveraged, overly attached to the idea of getting rich simply because they placed a bet, and incapable of making good investment decisions. For these and other reasons, house prices will remain sticky on the downside. But down they will continue until homes once again represent a less risky investment.

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  27. 27
    Jonness says:

    By Jillayne @ 25:

    I’ll be attending this dinner event. What questions should I ask him on behalf of Seattle Bubble readers?

    Hi Jillayne:

    What micro and macro economic signs and symptoms should we expect to see when house prices finally reach bottom in Seattle? How will these signs and symptoms differ from the bottom of the Phoenix housing market?

    Thanks :)

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  28. 28
    Scotsman says:

    RE: Ross @ 24

    “none of that means you can subtract last year’s debt from this year’s GDP growth numbers and derive anything that is meaningful”

    Sure it does. I don’t want to start a pissing match, but think this through- I know you’ll see it differently. It’s the difference between real or organic growth and and a one time shot of cash. It’s like the difference between your getting a raise to increase your income from $85k to $100k, and your putting $15k on your mastercard. Both get you to $100k in year one, What happens in year two? The raise is still there- an increase in real productive capacity. The Mastercard advance isn’t happening again, but the interest expense, a negative, will be there year after year for a long time, so in a very real sense you’re now worse off in year two than you would have been without taking the advance. Your income has not only dropped back to $85, but now it’s hit with a new $3k expense. The national economy or GDP number works exactly the same way. The increases aren’t real or lasting, and the interest will kill us in the end. Rising stocks, commodity prices, none of it is real, just like your first $15k borrowed “income” increase wasn’t real in my example above. When rates rise, when the easy flow of new debt or “printing” stops, it will all collapse.

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  29. 29
    Scotsman says:

    RE: Jillayne @ 25

    Ask him if he thinks the U.S. still has a competitive advantage in terms of cost and education over countries like China and India, and whether that advantage will be sufficient to support an increase in our standard of living, simply allow us to hold even, or leave us increasingly vulnerable to the new global market place. The answer to that question will go a long way toward determining what incomes, and hence housing prices, will do over the next decade.

    Be sure to remember while you’re listening to him that he is a paid speaker, hired by a group that has a clear interest in home prices not only stabilizing but increasing, and he is loath to insult or discourage his hosts. After all, there are many other mortgage groups out there and a good review here will help him land other similar gigs.

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  30. 30
    Cheap South says:

    We have to stop equating growth with well being. Basic math tells you there is a point when it can’t continue. And economics is not exempt from basic math.

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  31. 31
    One Eyed Man says:

    I’ve always believed that my personal quality of life isn’t measured in GDP, per capita income, GPA or win/loss record. But what’s true for me as an individual isn’t necessarily true for a society. I’m a “would be” hippie lost in time. I’d rather fish from a sea kayak and farm for produce and grains than draft commercial lending documents or design software.

    But if you want to change the macro measurement of quality of life from one that involves macro economic productivity, you’ll probably have to change human nature if not the laws of nature. Even in a quasi post scarcity society where food and shelter are abundant, people will trade their time for more economic security and more consumer crap. But the reasons aren’t as simple as just plain old greed. They go back to the laws of Darwin. The first things that a band of indians wanted when they encountered europeans were fire arms, powder and lead.

    The natural law of survival of the fittest requires that human populations adapt and survive. In the modern age survival requires technology to compete with other societies (both peacefully and for defense). And technology generally dictates and demands a social path of resource exploitation and increased efficiencies that are generally measurable in GDP growth.

    The hippie dream died at the hand of Darwinian theory as much as anything else. Some say that native american cultures were more respectful of the environment and lived in harmony with the environment. Others say that’s only true because they lacked the technology to rape mother earth the way modern society has. In any event, their cultures lacked the ability to compete with the mechanized leviathan of the industrial revolution.

    I doubt that anyone uttering their last dying words said “I just wish I’d spent more time at the office.” No one aspires to be a workaholic. I’ve probably spent over a thousand hours in a sea kayak. I measure my quality of life by my personal relationships and the ability to choose my own destiny and allocate my time to something other than the pursuit of another digit on an account statement. But being a pacifist who values protection of the natural environment isn’t necessarily the formula for survival in a hostile and competitive world.

    Measuring success based upon GDP isn’t a life style choice. Its more likely than not a biological imperative according to the laws of Darwin. Nevertheless, its extremely ironic that our need to adapt to remain the strongest may eventually result in the destruction of our species if not the destruction of our planet’s ability to support any complex life form.

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  32. 32
    Cheap South says:

    RE: One Eyed Man @ 31

    I doubt that anyone uttering their last dying words said “I just wish I’d spent more time at the office.”

    I have to use that one.

    “Nevertheless, its extremely ironic that our need to adapt to remain the strongest may eventually result in the destruction of our species if not the destruction of our planet’s ability to support any complex life form.”

    I agree; but let me point out that the planet has been around for about 3 billion years and will be around for another 7 billion; with or without our species. When the day comes that the planet can not support us any longer, we will be the ones in trouble. The planet will do just fine without us.

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  33. 33

    By One Eyed Man @ 31:

    I’ve always believed that my personal quality of life isn’t measured in GDP, per capita income,. . ..

    Rather obviously you have no idea how much happiness you can obtain with a $600 smart-phone that has a $100 a month service plan. ;-)

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  34. 34
    One Eyed Man says:

    RE: Kary L. Krismer @ 33
    But unless they have a new app I haven’t heard about I’ll still probably need the number for the Mustang Ranch on my contact list? ;-)

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  35. 35
    NumberMonkey says:

    I agree with an above poster that the aging baby boom is going to have a significant effect, but I’d like to hear some opinions on what it will be. Conventional wisdom says the elderly sell their homes and retire, but I’m skeptical about that. Could, in an environment of low home equity growth, the over 65 crowd simply sit on their current homes, removing them from aggregate supply? Certainly when they die (sorry fellas, but you will!) a huge chunk of supply will come down the pipe, but we are years away from that.

    What are the debt/equity ratios in the baby boom? We have a few years of baby boom retirement to look back on, what are the patterns in their behavior? If anyone has a suggestion for a place this data might be borne out I would be happy to run some analysis, but I’m far too busy to go hunting for the data myself.

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  36. 36

    RE: NumberMonkey @ 35 – I don’t know that you’re going to find meaningful answers. I’ve seen people retire with their home owned free and clear, and I’ve seen others that have owned their home a long time that owe more than they paid. Like everything else, different people act differently.

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  37. 37
    Still Anonymous says:

    Miniscule increase in 2011. Possibly even <1%. But it's an increase, so the media will break out the streamers and fanfare. "Mission Accomplished" banners behind the news anchors, etc..

    And 2012-2013 will be utter disaster.

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  38. 38
    Dan says:

    RE: Scotsman @ 5

    Scotsman, your math is quite wrong.

    You are comparing the GDP in two years, saying that there is a 9% contraction. However, in one year you remove deficit spending from the GDP. In another year, you do not.

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  39. 39
    NumberMonkey says:

    RE: Kary L. Krismer @ 36 – In aggregate there are bound to be patterns; even the old norm of “sell house, move to country, retire” was only true in aggregate yet it was a significant driver of the market.

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  40. 40
    Ben says:

    RE: Dan @ 38 – In Scotsman’s defense, he only mentioned one year (2011).

    I think your glasses need to be checked.

    “Consensus for 2011 is 2.5% GDP growth with 1.2% inflation leaving 1.3% real growth for the year. But if we properly subtract out the $1.5T in deficit spending/QE2-3 etc., (roughly 10% of GDP) we are left with a real growth rate of almost negative 9%.”

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  41. 41
    Marc says:

    My prediction is for prices countywide (and around the larger metro-area) to continue the gradual decline through the better part of this year before flattening. Increasing REOs and short sales being the primary driver of the declines. For the year, a 5% decline in median seems like a good guess. Price declines like this will draw buyers into the market but keep a good number of non-distressed sellers out of the market.

    I think the neighborhoods like Greenlake, Wallingford, and Phinney Ridge may be the exception and may actually see slight appreciation (i.e., flat to 2-3%). These areas are well stocked with homes in the $400 to $600k price range and the ones that come to market will be highly coveted. We started seeing multiple offer scenarios on this type of inventory last year and that will only gain steam in the spring.

    Falling prices generally result in increased demand so I’m inclined to think sales volume will be up a modest, but significant amount. I’d bet that the 16,000 (or so) average sales of SFR in King County of the past few years will increase this year to more like 17,000.

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  42. 42
    NumberMonkey says:

    RE: Ben @ 40 – Growth rates and inflation compare the current year to the previous: (2011 GDP/2010 GPD)= 1.025, or a 2.5% gain.

    If you wanted to look at GDP grown without deficit spending it ought to be subtracted from both 2011 and 2010 in the ratio above.

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  43. 43
    Ben says:

    RE: NumberMonkey @ 42 – That is a good point. Apples to apples for both years. I also understand the larger context of Scotsman’s point: namely that current GDP is being propped up by unsustainable deficit spending.

    In other words, we are borrowing 10-12% of GDP for 2% growth. I don’t even think Krugman would say that is sustainable.

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  44. 44
    WestSideBilly says:

    By Jonness @ 26:

    My oil stocks are up about 14% in the month of January alone. I’m diversified, so I’m by no means up that amount in total on the month. But it demonstrates money is always flowing somewhere. People got used to money flowing into Puget Sound houses, but that’s betting on a dead horse these days. Looking at the above consensus, what’s the better risk, stocks, cash, other, or local real estate? Of the three, leveraging 100% of your wealth into depreciating Puget Sound real estate that costs 10% to sell is the worst strategy.

    Worst? Not really. You’re paying for the roof over your head (which you would otherwise need to deduct from your profits from other investments), gaining a marginal tax deduction, and if by some chance you profit on the sale of the investment it is tax free. Even if a house loses 10% annually (borderline worst case scenario), that’s better than investments that can lose 100% of their value in a short time frame (hours/days). Selling most investments also has a fairly high transaction cost (20-40% tax on the profit + fees).

    Now, if you have no wealth whatsoever, and are leveraging 100% to buy a house, then that is a pretty risky proposition. Of course if you have no assets, you have nothing to lose except your credit score.

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  45. 45
    NumberMonkey says:

    RE: Ben @ 43 – I agree “how long can this continue” is a pretty good question, but I don’t think is has much to do with growth rates; deficit spending has been a fact of American political life for a very long time and to look at trends in GDP without it is silly.

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  46. 46
    Scotsman says:

    RE: Dan @ 38

    Dan, you don’t know what you’re talking about. In case you missed it we ran a roughly $1.5T deficit last year. . . and we’re going to do the same thing this year, and probably next year too. In fact, the CBO puts the average federal deficit for the next decade right at $1.0T/year, or another $10+T in federal debt. And I assure you that’s optimistic. Tell me the last time the federal government met a budget that was projected 5 years prior. My point is that without the deficit spending we would experience a 9% contraction in GDP and be in a near depression situation. That’s a fact. The question is how long can this continue?

    Heads up- at this very moment the federal government has to borrow 40 cents of each dollar it spends. And where in my post did I say anything about last year? All the numbers are projections for 2012.

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  47. 47
    Scotsman says:

    RE: Ben @ 43

    Bingo- we have winner! In fact, the numbers suggest that the borrowing is dragging the economy down, not jump starting it as was the expectation. Lots of studies showing the net return on new debt has been negative for a couple of years now.

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  48. 48
    Nancy Hill says:

    Well written post! Thanks for the information and predictions coming from a variety of sources. It is better to be armed with realistic predictions than rose colored opinions. I have my armor on and ready for 2011.

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  49. 49

    2011 Will Be the Year Home Prices Bottom Out

    Haven’t you seen the movie 2012? After 2011 we’re cooked gooses anyway…LOL

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  50. 50
    Blake says:

    RE: Blake @ 13
    “My “guess”… prices down around 10%, with the last part of the year being particularly gloomy.”

    I should have noted – tho it is implicit in what I wrote – that 2011 will NOT be the bottom for housing prices… in nominal or real dollars. The financialization whizzos are cookin’ up another mess for us to clean up later in this decade! They have the gov’t in their pocket and are not chastened in the least by what transpired over the last 3 years. And remember… they’re really, really intelligent!

    “Nothing doth hurt more in a nation than that cunning men are mistaken for wise.”
    – Francis Bacon

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  51. 51
    Jillayne says:

    Regarding if 2011 will be the year we hit bottom……Can we guess a year? I’ve been saying 2014 since 2007 but everyone told me I was insane back in 2007. I am still sticking w/2014.

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  52. 52
    Dawn Glover says:

    On RainCityGuide I have been commenting on a piece about voting if a homeowner is a miserable deadbeat or nice person for walking away from mortgage. I found the article to be baited considering the author is a Lawyer who is counselling such situations. It would really be interesting if more people joined the discussion

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  53. 53
    Jillayne says:

    Okay, Dawn I will check it out.
    J.

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  54. 54
    The Tim says:

    RE: Dawn Glover @ 52 – I’ve been following that as well. Haven’t contributed (well, mostly) mainly because I feel like I said everything I have to say on the subject in this pair of posts last May:

    The much more popular personal finance blog Get Rich Slowly also had a post on this recently that generated a lot of discussion: When To Walk Away From A Bad Mortgage.

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  55. 55
    Crashcadia says:

    We know the homeownership rate for those age 65 and up is about 80%.
    http://www.danter.com/STATISTICS/homeown.htm

    So about 8,000 homeowners per day will turn 65 years old, starting last January and continuing for 19 years.
    They do typically stay in their homes…..typically. These are not typical times as this population accounted for a large percentage of the home second home purchases during the boom. They account for 57% of the vacation/recreational home market.
    http://www.lendingtree.com/smartborrower/mortgage-news/baby-boomers-second-home-market/

    With difficult economic times and retirement at hand, how many of these will hit the market and when? That is the question.

    They will have two impacts. They will not be purchasing homes and will eventually sell or give the homes to their children. In either case we will see less demand going forward and more supply.

    I am still trying to figure out how much and when.

    From what I can see, the impact would typically be 10 years out, but I feel this has been pulled forward due to bad investments in RE (being underwater on their investiment properties, purchasing second homes at the peak, Heloc) and bad economic times (needing to sell to fund retirement or cut their losses).

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  56. 56
    Dawn Glover says:

    RE: The Tim @ 54 – interesting posts and comments…I wonder how attitudes will change on this topic over time. One thing is certain, the discussions on Seattle Bubble have much more substance.

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  57. 57
    Jonness says:

    By WestSideBilly @ 44:

    Worst? Not really. You’re paying for the roof over your head (which you would otherwise need to deduct from your profits from other investments), gaining a marginal tax deduction, and if by some chance you profit on the sale of the investment it is tax free. Even if a house loses 10% annually (borderline worst case scenario), that’s better than investments that can lose 100% of their value in a short time frame (hours/days). Selling most investments also has a fairly high transaction cost (20-40% tax on the profit + fees).

    Now, if you have no wealth whatsoever, and are leveraging 100% to buy a house, then that is a pretty risky proposition. Of course if you have no assets, you have nothing to lose except your credit score.

    I own my home outright, so I have no tax benefit (as if paying all that interest on debt can be thought of as a benefit). Capital gains on stocks and dividends is 15% if held for a year or more. It costs $14 to turn a stock round trip if you use Scottrade and $2 if you use InteractiveBrokers.

    It’s becoming clear to me why I am profiting from the economic downturn and so many others are going bankrupt. The cheerleading for the housing sector has no end; yet, foreclosures are expected to break a new record over the course of the coming year. If homes are such a good investment, why are the people who mindlessly listened to the cheerleaders going bankrupt in record numbers? And how is the borderline worst-case scenario for losses on a home only 10% when recent history has proven homes can lose over 50% of their value in a short period of time? All this flies in the face of most professional financial advisors who recommend keeping a well diversified portfolio as opposed to leveraging 100% of one’s wealth into a rapidly depreciating asset that’s not expected to increase in value for many years to come.

    Good investing involves maket timing. People need to start cheerleading real estate when asset inflation takes hold. Cheerleading leveraged asset purchases in the midst of asset deflation is like whipping a dead horse hoping it will bring it back to life. IMO, anybody who buys in to the notion a RE agent can raise the dead simply by talking is taking a major risk of ending up in the poor house like the many millions of other victims who recently bought into the housing sector hype.

    http://taxdollars.ocregister.com/files/2011/01/hinn-and-crowd.jpg

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  58. 58
    David Losh says:

    RE: Jonness @ 56

    You own your home free and clear. You should have stopped there.

    Once again, the value of Real Estate never changes. There is no top, or bottom to the market. There are cycles to the market for purchase, or sell, mostly due to the buyer pool, and economic advantages.

    You buy it, pay it off, rent it, live in it, or use it for commercial purposes. That’s it.

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  59. 59

    RE: Jonness @ 56 – By owning the house free and clear you get a return out of it every month–the rental value of the house (less RE tax and maintenance costs).

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  60. 60
    xz says:

    I think it is only the CS Index that matters. So I would say Tytler wins this round with his guess of 5%

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  61. 61
    Sottocapo says:

    I will say prices will drop more than 10% in 2011 in the Seattle area (inc. places like Bellevue, Clyde Hill etc.) and 2011 will not be the bottom. I would say at least 2014 for bottom and then staying there for some time.

    This is without any government intervention.

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  62. 62

    […] continued price declines are the main reason I’m breaking from many other commentators with my prediction of a slight increase in home sales in […]

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