Posted by: Timothy Ellis (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.

100 responses to “Low Rates Make WA Real Estate Appear Undervalued”

  1. Kary L. Krismer

    I don’t really deal with these types of issues (IMHO the market is what the market is), but the herd mentality could easily cause both what you refer to as overvaluation and undervaluation.

    BTW, on the disposable income issue, last night I ate at Pasta Freska on Westlake. Great food, but the least you’re going to get out of there for is $25 assuming you don’t have anything to drink but water. Even so, the place was packed, so apparently there is a lot of disposable income even in the midst of the Great Recession.

    Rate this comment: Thumb up 0

  2. SummitSeeker

    Something to keep in mind is that “disposable personal income” has become concentrated in fewer and fewer hands during the period that the chart shows. So it is not surprising that home prices are now below a trendline that is derived from a period when the income distribution was flatter. When more people have disposable income house prices have a higher equilibrium. Take that same disposable income, but in fewer people’s pockets, and you get a lower equilibrium.

    Rate this comment: Thumb up 0

  3. Joe Manausa, MBA

    Tim, fascinating analysis. I wonder how much disposable income is being allocated to adjusting mortgage rates though? I think a lot of people, even with fixed rate loans, are feeling cautious with their money. Prior to the burst, a lot of people were spending the equity in their homes and feeling very cocky about disposable income. Not so much anymore.

    Rate this comment: Thumb up 0

  4. patient

    One thing I’m curious about is how large portion of the “typical” market under a median type of economic circumstances that are not first time buyers? If the disposable income trend line depends heavily on move-up buyers bringing equity from a sales transaction how relevant is this trendline when the equity has dried up for a large portion of buyers and how long time will it take for the absolute equity and equity growth to come back to typical levels? I think the trendline will be signfificanly re-shaped by the next 10 years.

    Rate this comment: Thumb up 0

  5. Updog

    What does the graphic look like if disposable income is out of the equation and charted on interest rates alone?

    Rate this comment: Thumb up 0

  6. Basho

    The difference is that in the past people expected housing to appreciate over their holding period. Now people are well aware that if they sell their house in three years time it could be for less than what they paid.

    Rate this comment: Thumb up 0

  7. LA Relo

    Try telling the people living on welfare, in the unemployment line, trying to survive rising healthcare, food and fuel costs, or those straight out of college looking for a job that they have enough disposable income to buy a house and see what they say.

    The disposable income is all at the top.

    Rate this comment: Thumb up 0

  8. Scotsman

    “State home values are over 25% undervalued as of the end of 2010″

    Well there you go! I read it on the internet- a couple of nice charts and GS was mentioned, so it must be legitimate. Lennox Scott is working up a post for his agents as you read this.

    Buy now, or miss your chance to lock in instant equity!

    Rate this comment: Thumb up 0

  9. Scotsman, MBA, PHD- School of Hard Knocks

    A few serious points. No, really. The R2 for data fit is quite remarkable, right up to the point where it doesn’t work any longer. Twenty years of near perfection, then a complete blow out. A cherry-picker’s paradise, useful to either confirm or completely disprove the notion of price/income ratios (or even other measures of affordability) as a guide to future housing prices. Can this be used to make the argument that eventually we’ll return to the trend and home prices will improve? Of course, but it’s predicated on one very important input- rising personal income. I don’t think that’s necessarily a given for a whole host of reasons, at least not over the coming decade.

    The point about shifting income distributions is an excellent one, as well as inflation expectations, job security, etc. One factor that hasn’t been accounted for in any of these posts is the rise in personal debt above and beyond mortgage debt and how it limits future purchasing power.

    Rate this comment: Thumb up 0

  10. deejayoh

    By Patrick @ 10:

    Nice charts, and it’s an interesting new way of looking at things. Regarding 25% vs 9%, I think this index shouldn’t be interpreted as an absolute. The value is in *relative* comparisons. So 25% below trendline doesn’t mean home prices are 25% undervalued, it just means we’re 25% out of whack relative to the long-term trend. It’s telling you interest rates are way of whack, which really highlights just how strongly the Fed is trying to prop up the market to try to get those data points to move back towards the trendline.

    Good observation

    Rate this comment: Thumb up 0

  11. Kary L. Krismer

    RE: deejayoh @ 13 – I would agree.

    Rate this comment: Thumb up 0

  12. Hugh Dominic

    RE: The Tim @ 15 – Hi there, I’m your friendly log scale reminder. This could be taken right out of “how to lie with charts”.

    Your chart makes it look like a super-close correlation until the last 6 years. But that’s because the relative differences are magnified as the numbers get bigger. In the 80′s we may be looking at an index of 95 vs predicted 75. (25% high). That is similar to the ’05 data of 425 over 350 but it looks radical by comparison, but it’s not.

    Your chart is a liar.

    Rate this comment: Thumb up 0

  13. Scotsman, MBA, PHD- School of Hard Knocks

    RE: The Tim @ 16 -

    “Then: The data confirms my opinion, so this analysis is obviously right-on!
    Now: The data refutes my opinion, so this analysis obviously has major shortcomings!”

    B.S. Waaaay too much of a stretch. Please focus your snark on the following modifiers:

    “long term”
    “short term”
    “many variables can bump”
    “data fit is quite remarkable, right up to the point where it doesn’t work any longer”
    “in the end”

    Context, son. Forest-trees. Love ya- but stick to data. You have no future as a lawyer. ;-)

    Rate this comment: Thumb up 0

  14. Kary L. Krismer

    RE: The Tim @ 20 – The blue, red and green colors indicate a lot of bias. ;-)

    Rate this comment: Thumb up 0

  15. patient

    The chart shows two things to me..
    1. There is a strong correlation betwen disposable income and home prices. ( No surprise )
    2. The correlation is crushed by large shifts in lending standards and home equity.

    We had an epic financial crisis with homes being in the epicenter that has no equal in the last 30 years. However, it’s logical to assume that there will continue to be a strong correlation between income and value once the wounds are healed. When that will be and what the gradient will look like is really hard to predict though.

    Rate this comment: Thumb up 0

  16. Scotsman, MBA, PHD- School of Hard Knocks

    RE: The Tim @ 20

    Did I say you haven’t stuck to data, or did I just suggest that you do so? Is there an inference here:

    “stick to data. You have no future as a lawyer”

    I just don’t see the supposed conflict in any of my statements. In fact, post #12 above contains this:

    “Can this be used to make the argument that eventually we’ll return to the trend and home prices will improve? Of course, but it’s predicated on one very important input- rising personal income. I don’t think that’s necessarily a given for a whole host of reasons”

    Will personal income continue to rise? What’s the track record on that for the last 30 years, net inflation? Ouch. What’s changed in the last 10 years that supports the idea of rising personal incomes in the U.S?

    You’ve suggested I’ve contradicted myself. I don’t see it- but if it’s true, have at it since I clearly need additional schooling. I’m only interested in getting it right, not so much in being the guy who is right. But I’m not just going to roll over and wet on myself if someone tries to “pfft” me.

    Rate this comment: Thumb up 0

  17. softwarengineer

    RE: LA Relo @ 7

    Household Income Used on Charts Is Anomalous

    Especially trending past 1978 data with it, when it took one per capita professional income’s net pay to make the house payment and one to eat and get to work. Most single incomes households or non-DINKs (double income, no kids) folded at the Seattle poker table after 1978 and saying that’s the affordable green line trend is like saying spending half your net pay on housing is affordable [its CLEARLY not and by the late 80s, after the Savings and Loan collapse Housing Bubble, the maximum allowed was 30% of net pay after car payments, student loans, etc].

    Sooooooooooo….I’d do the regression analysis on affordability not to cattle herd data barely affording it before a price collapse after 1985 fixed it, I’d put that green line at a much lower slope where the small pre-bubble curve indicates…

    Also, notice your absissa data is in billions? LOL, the high skewed rich elite buying mansions are averaged in most likely, making this regression analysis not a science but an Wild A__ Guess (WAG) guestimate…at best…LOL

    Still, all-in-all, if we put on our rocket scientist cap emphasizing common sense math/science in graphs and not clueless bankster business mesmerization MSM assumptions, we can conclude effectively, “Lord Only Knows” Tim….LOL

    Rate this comment: Thumb up 0

  18. SmarterThanYesterday

    RE: Joe Manausa, MBA @ 3 – I think that this is a big issue for the overall economy. To comp to 2006/2007 spending levels on goods and services, we have to account for the wealth effect created by artificially inflated house values as well as by easy credit. That overage still needs to be recovered by consumers before long-term disposable income/spending trends come back to equilibrium

    Rate this comment: Thumb up 0

  19. SmarterThanYesterday

    I have a hard time believing that, if interest rates were to climb significantly in an inflationary environment, as many believe they will in short order, housing prices would not be put under even more pressure.
    Ultimately, it is affordability…and affordability is impacted greatly by interest rates. While I currently could afford a $500,000 house at 4.75% (with $50,000 down, assume), if interest rates rise modestly to 6.75% (more typical long-term), I could only afford a $400,000 house on the same down payment.
    I don’t see, then, how higher interest rates wouldn’t put more severe downward pressure on prices….especially now with little expectation of sugnificantly rising home values in the near term.

    Rate this comment: Thumb up 0

  20. Dangermouse

    Do you have equivalent info for King County only, or just Puget Sound?

    Rate this comment: Thumb up 0

  21. Real World Express

    Since you can buy the same home elsewhere for 1/2 the price as Washington in a region where there is sunshine more than once every three months….still way overvalued.

    Rate this comment: Thumb up 0

  22. deejayoh

    The view that the model doesn’t work during the period of 2004-2009 should not be interpreted to mean that the relationship is no longer applicable. A more sophisticated view would be that there is another factor at work that is more meaningful than the single variable being used. So if in this case, I added a second dummy variable into the model for the years of the housing boom and called it something like “loose lending” it would make sense. Might even make sense to have another for the years of 2008-present called “interest buydown”. Or this could also be the widely held “over correction” variable

    “Can this be used to make the argument that eventually we’ll return to the trend and home prices will improve? Of course, but it’s predicated on one very important input- rising personal income. I don’t think that’s necessarily a given for a whole host of reasons”

    Scotsman, I am not sure from where your criticism is coming. The chart basically shows how the bubble drove home prices out of synch with incomes – aka “The Bubble”. It doesnt say incomes must continue to rise. It says that if incomes drop, then this home prices would drop as well. It’s a linear relationship.

    As for the comments about inflation – as a factor inflation applies to both incomes and home prices – so over time it washes out. e.g. a 10% inflation rate increases both salaries and home prices. There may be some slight differences in timing but they are likely not meaningful in the long run. What is more meaningful are real wage gains or losses.

    Rate this comment: Thumb up 0

  23. deejayoh

    By Real World Express @ 28:

    Since you can buy the same home elsewhere for 1/2 the price as Washington in a region where there is sunshine more than once every three months….still way overvalued.

    Oh, the old sunshine measure. That’s a good one. I guess you could use that to explain differences in the median price of homes between Phoenix than NYC too, I’d imagine.

    Rate this comment: Thumb up 0

  24. deejayoh

    By Hugh Dominic @ 17:

    RE: The Tim @ 15 – Hi there, I’m your friendly log scale reminder. This could be taken right out of “how to lie with charts”.Your chart makes it look like a super-close correlation until the last 6 years. But that’s because the relative differences are magnified as the numbers get bigger. In the 80′s we may be looking at an index of 95 vs predicted 75. (25% high). That is similar to the ’05 data of 425 over 350 but it looks radical by comparison, but it’s not.Your chart is a liar.

    Actually, you are a bit off base with your recollection of math and stats. His chart is a scatter plot, not a time series. So he could have used a log/log scale on both axes and it wouldn’t really have mattered. The chart doesnt really look any different (unless you change the point where x and y intercept) and the relationship remains exactly the same.

    And since I was the one who originally copied this analysis from GS – I’d guess that Tim didnt use logs for the same reason I didn’t. They weren’t used in the original analysis that we were trying to copy

    Rate this comment: Thumb up 0

  25. Pegasus

    RE: Kary L. Krismer @ 1 – When you don’t pay your mortgage you have a lot more money to eat out, buy big screen TV’s, etc. As Donald Trump once said if you dine on soup while you are working through a bankruptcy it won’t solve the bankruptcy problem.

    Rate this comment: Thumb up 0

  26. Alan

    Has disposable income really increased over the last few years? Where is that data coming from?

    Rate this comment: Thumb up 0

  27. CHoc Donut

    Economic analysis from Goldman Sachs is about as credible as Hitler’s military advice to his generals.
    This sucker’s going down – GWB’s most accurate quote ever.

    Rate this comment: Thumb up 0

  28. Scotsman

    RE: deejayoh @ 29 -

    ” bubble drove home prices out of synch with incomes – aka “The Bubble”.

    Right. So the relationship doesn’t always hold- “bubble” or other as yet unexpected factors may have a greater influence than income for a short period of time. We agree. Income is the primary driver over long periods of time. Agreed.

    My only point, in light of the above, is that absent bubble-like factors we’re going to need increases in income to see a rebound in housing prices. I don’t think we’re going to get them for a wide variety of reasons, first of which is the combination of globalization (competition) and high debt service costs (less capital for research and innovation, i.e. productivity increases). I always ask people where they think the money is going to come from to push housing prices up. If they know anything about economics that’s usually the end of the conversation.

    Rate this comment: Thumb up 0

  29. GetReal

    The model does not take into account the availability of credit, does it? The houses may be undervalued according to this model, but not according to the supply-demand model, perhaps.

    Rate this comment: Thumb up 0

  30. karl

    It is just a plot of yoy inflation. +/- 3% until 2005. The trend line is going to turn into a bell curve once the 10 year note starts back up. It is (and has been) being manipulated to spur growth.

    You need to factor in supply ect…. your chart is missing too many variables. you now have a saturated market, lack of easy credit.

    not sure where your disposable income data came from. all the other charts i have seen have the numbers going down (factoring in inflation)

    Rate this comment: Thumb up 0

  31. Ross

    Implicit in a lot of this discussion is that change in disposable income caused proportional change in housing prices. Though that intuitively makes a certain amount of sense, it could also be that this causation may be backwards. Home prices could be changed by some completely unrelated factor(s). But once housing prices rise or fall, and people need to pay more for mortgages and rent, then it seems obvious that people would have less disposable income (a greater portion of their income needs to pay for housing).

    Rate this comment: Thumb up 0

  32. David Losh

    Oh boy!

    First is 11% of housing units in the United States are vacant.

    Second is that interest rates are a larger issue than housing: http://www.bloomberg.com/news/2011-04-13/weber-says-higher-ecb-rate-warranted-if-economy-forecast-met.html These historically low interest rates are attempting to repair grave global economic issues.

    Third is you would need to define disposable income in a broader sense: http://dshort.com/articles/2011/PCE-real-disposable-income.html

    It all looks good on a chart of set circumstances. It’s when you begin defining the terms of the real circumstances that we are in that is becomes much more complex.

    The supply and demand argument that was tossed around at the same time as these charts were first made is refuted by the sheer volume of housing units that have been created. Housing itself has shifted from an asset class to something of a joke.

    The interest rates are masking, for now, massive debt related repayments that most governments are stretching out for as long as possible. This also helps banks regain footing, but in the process is also driving up commodity prices.

    Which brings us to that disposable income which is being spent on higher gas prices.

    The charts, rather than showing any correlation to the price of housing, are demonstrating vividly, as one commenter put it, that the economy is out of whack.

    Rate this comment: Thumb up 0

  33. jj

    I think the disposable income stats are quite limited for this assessment (net disposoable income for all US households). Houses are purchased using both total household wealth and household income. Household wealth has become progressively more concentrated in the upper 25%, 10%, and 1% wealth holders of the population. Household income increases for the upper 10% of earners are greater than 100% in the last decade, for median households are less than 25%, and for the bottom quartile are negative. It is probably difficult to account for household wealth (assets-debts), but I still would be far more interested in seeing the same graph using median household income instead of a skewed stat like total disposable income.

    Rate this comment: Thumb up 0

  34. Sanguis

    Re: Hugh Dominic “these charts lie”
    -I think this statement has some merit, here’s why:

    -disposable income is increasing exponentially
    -home prices (FHFA) are increasing exponentially
    These data are exponential due to inflation, while they may also be affected by other linear/nonlinear factors such as price*income multiples people are willing to pay for houses.

    If you plot any two exponentially increasing data series against each other, I think you’ll see more apparent correlation at low digit data points and much less at higher data points… Perhaps adjusting for inflation on both FHFA & disposable income could hold some value. Also I believe per-capita income would be more valuable since WA population has almost doubled since 1975..?

    Rate this comment: Thumb up 0

  35. Real World Express

    RE: deejayoh @ 30

    So you’re saying it’s employment?

    Unemployment Rates for Large Metropolitan Areas
    http://www.bls.gov/web/metro/laulrgma.htm

    Phoenix: 8.8
    Seattle: 9.3

    Rate this comment: Thumb up 0

  36. deejayoh

    By Real World Express @ 41:

    RE: deejayoh @ 30

    So you’re saying it’s employment?

    Unemployment Rates for Large Metropolitan Areas
    http://www.bls.gov/web/metro/laulrgma.htm

    Phoenix: 8.8
    Seattle: 9.3

    Fail

    Rate this comment: Thumb up 0

  37. Mel J.

    It’s an interesting subject to say the least.From above: “factors like interest rates, unemployment, and population appear to have no more than a random relationship with home prices over the long run.”I tend to agree (under normal circumstances), except when it comes to extreme swings in key economic areas which can overwhelm what might be considered a normal (or historic) data trend. In this case, I would suspect the dramatic change in employment and how it mandated a significant change in lifestyle for a great number of people. For example, the consolidation of households as adult first time home owners moved back in with parents due to economic necessity, etc.There has been a paradigm shift induced through economic necessity factors that will take some time to revert back. Having little else other than the Great Depression to compare with in modern times, the economic assumptions originally assumed to be in control (or highly correlated) in the statistical regression line analysis must be held up to a strong light and questioned.

    Rate this comment: Thumb up 0

  38. ARDELL

    RE: Sanguis @ 40

    “Also I believe per-capita income would be more valuable since WA population has almost doubled since 1975..?”

    How do you factor in the impact of increased housing supply?

    A full 30% of all Single Family Homes sold in King County in the last 100 days were built since 2000.

    Compare that to only 10% built in the 90s and 10% built in the 80s?

    That leaves only 50% of all sales represented by property that existed 30 years ago. Only 45% of the homes sold in the last 100 days were homes that existed in 1975.

    The median price for those built prior to 1975 was $315,000.
    The median price for those built from 1975 to 2000 was $350,000.
    The median Price for those built 2000 or later was $390,000.

    (Required Disclosure: Stats not compiled, verified or posted by The Northwest Multiple Listing Service.)

    Rate this comment: Thumb up 0

  39. Michael B

    DEEJAYOH: Debt Deflation and the New Normal

    The critical and extremely faulty assumption underlying both this analysis and “King County Affordability at Levels not See Since 1998″ is the assumption that the most important factor driving home prices is the monthly payment as represented by disposable income divided by interest rates.

    During the last 30 years the USA has been on a debt binge. We have been increasing debt at an increasing rate. If you look at debt per capita, you will find a very big problem and that is that Americans are up to their necks in debt! As Americans begin to deleverage and pay off that debt, disposable income is decreased.The increase in housing prices was not due to increased disposable income, it was due to people taking on increasing amounts of debt to purchase inflated assets. Debt got to a point where it could no longer be serviced and the bubble burst.

    Now we are in the “New Normal”. People earning $65,000 per year are not going to take on $300,000 in debt to buy a home, even at 4% interest. And guess what? Banks are not going to loan money for it either unless they get at least 20% down. Why would anyone want to apply so much leverage to an asset that is decreasing in value – So you can lose 100% of your initial investment? When you could rent the same asset for less? Really?Until the average home can be purchased for 3 x the average income (which, by the way does reflect disposable income!) prices are going to keep dropping.

    Let’s see a chart with the relationship between private debt, wages/disposable income per capita and home prices from 1978 to present.

    Rate this comment: Thumb up 0

  40. Aaron Smothers

    It is tempting, but could be wrong, to transfer implications from the Washington State analysis to the Seattle area/King county. How about a similar analysis for King/Pierce/Shohomish counties?

    Rate this comment: Thumb up 0

  41. Aaron Smothers

    It is tempting, but could be wrong, to transfer inferences from the Washington state analysis to the narrower Seattle area. How about doing the same analysis for King/Snohomish/Pierce counties?

    AS

    Rate this comment: Thumb up 0

  42. David Losh

    RE: Michael B @ 45

    Paying off debt is disposable income. That is where the entire presentation falls apart.

    Disposable income paying for more debt created by lower interest rates.

    It’s a circle that isn’t related to housing units other than housing is the biggest debt trap.

    Rate this comment: Thumb up 0

  43. softwarengineer

    RE: David Losh @ 48 -Exactly

    Even lowering mortgage debt by just $80K at around today’s 5% “loan shark interest rate” nets you $30K in tax-free interest CASH every 5 years….Hades, try to get that much CASH with even $800K sitting in a paltry CD/MM account for 5 years…LOL

    Rate this comment: Thumb up 0

  44. deejayoh

    By Michael B @ 45:

    DEEJAYOH: Debt Deflation and the New NormalLet’s see a chart with the relationship between private debt, wages/disposable income per capita and home prices from 1978 to present.

    Yes. Lets see it. And how about I suggest that YOU could find the data and post it?
    Not my role to prove whatever PIROOMA theories people put forth.

    Rate this comment: Thumb up 0

  45. Scotsman

    If income is the primary driver of housing prices, and people are expecting a recovery, we have a problem. OK, we have two problems:

    “The share of the population that is working fell to its lowest level last year since women started entering the workforce in large numbers three decades ago, a USA TODAY analysis finds.
    Only 45.4% of Americans had jobs in 2010, the lowest rate since 1983 and down from a peak of 49.3% in 2000. Last year, just 66.8% of men had jobs, the lowest on record.
    The bad economy, an aging population and a plateau in women working are contributing to changes that pose serious challenges”

    And on unemployment trends, it’s a swing and a . . miss:

    “New U.S. claims for unemployment benefits unexpectedly rose last week, bouncing back above the key 400,000 level, a government report showed on Thursday.
    Initial claims for state unemployment benefits rose 27,000 to a seasonally adjusted 412,000, the Labor Department said.
    Economists polled by Reuters had forecast claims slipping to 380,000″

    Rate this comment: Thumb up 0

  46. Ross

    I didn’t see if anyone already pointed this out. The FHFA data is derived from completed sales. Based on the tightening of the credit market and the small number of middle-class buyers with 20% down, I suspect that the sales that have occurred are currently strongly biased towards smaller and less valuable homes.

    It is extremely possible for recent sales to be “more affordable” if the less expensive homes are dominating the numbers of what’s selling at all. If it’s almost impossible to sell any home for $800k no matter what location, size, or condition; the $200k homes will skew the numbers towards apparent affordability. Without some normalization for location and size distribution, these analysis tools fail to control for some highly relevant confounders and should be viewed with a grain of salt.

    Rate this comment: Thumb up 0

  47. Hugh Dominic

    RE: Sanguis @ 40 – Yes, exactly. The effect is that at the high digit numbers, a 20% value difference vs the trend line puts the point 100 pixels off the line, at low digit numbers a 20% difference would put the point 10 pixels off.

    In this case you need to use a plot where a given % difference always equates to the same linear distance on the screen, for any value of X.

    Rate this comment: Thumb up 0

  48. Lurker

    If the data has any value, in the home values/disposable income relation it looks like the points may get back to the means in about four years all things were being equal except that past seems to show that it takes longer to get back from the under as opposed to being over. (sorry, I’m not a chart person and don’t know the correct terminology)So, in a nutshell, what this personally says to me, is that we are in for several more years of being “undervalued” with perhaps a bigger drop ahead..

    Rate this comment: Thumb up 0

  49. Hugh Dominic

    By The Tim @ 18:

    RE: Hugh Dominic @ 17 – Average variance of points from the trendline in the chart posted at comment 15 above:

    1975 – 1984: +3.7%
    1985 – 1994: +0.3%
    1995 – 2004: -0.7%
    2005 – 2007: +21.7%
    2008: +8.0%
    2009: -2.8%
    2010: -9.1%

    Sorry, I’m not seeing the “lie” here…

    I don’t have a magnifying glass handy, but it looks like you arbitrarily grouped and averaged data to support your conclusion. You have ten years of data between 1975 and 1984 that look like they have big swings below then above, but which average out near the trend.

    Then the last few years you list the single-year data or in two year averages (instead of an average of the past 10 years) so that we can see the swings. That’s another lie.

    Rate this comment: Thumb up 0

  50. grumble

    Couple thoughts/suggestions:

    1. Don’t use the 10yr Treasury rate. Instead use the Freddie Mac Primary Mortgage Market Survey Rate – this is a better proxy for what borrowers are actually paying:

    http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp

    2. Don’t include 2008 and later in your calculation of R2. If those data aren’t part of your “model” and are off trend, they shouldn’t be included.

    Rate this comment: Thumb up 0

  51. deejayoh

    By grumble @ 56:

    Couple thoughts/suggestions:

    1. Don’t use the 10yr Treasury rate. Instead use the Freddie Mac Primary Mortgage Market Survey Rate – this is a better proxy for what borrowers are actually paying:

    http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp

    2. Don’t include 2008 and later in your calculation of R2. If those data aren’t part of your “model” and are off trend, they shouldn’t be included.

    FWIW, I think 30 year fixed mortgage rates track 10 yr treasuries pretty closely, so I am not sure this change would matter.
    http://www.bankrate.com/funnel/graph/Default.aspx?cat=2&ids=1,-1&state=zz&d=1825&t=MSLine&eco=22

    and the R2 is based only on the green dots – which in all cases run only through 2004

    Rate this comment: Thumb up 0

  52. Scotsman

    This is a repeat of something I posted over on the Global Economics thread, but it deserves to be here too. If you believe that income drives home prices, and you’re looking at the charts above and thinking we will soon be working our way back to the trend line- i.e. rising home prices are just a year or so away, consider this:

    We as a country are about to undergo a forced shift in spending priorities, both as individuals and as a nation. The huge transfer payments that support an ever growing portion of the population will be forced to end. The people currently relying on those payments will then become the wards not of the state, but of the communities and individual family members who should have been supporting them all along. That means less income for housing and other discretionary purchases. When these programs, and the borrowing that has been supporting them come to and end there will be a contraction in GDP of about 8-10% at a minimum. We currently borrow 12+% of GDP but that will have to stop or at least dramatically reduce.

    Here’s an illustration of how big the problem is. According to todays WSJ if we taxed all income over $100,000/yr at 100%- yes, we took ALL of it- it still wouldn’t cover the current deficit. So we either collapse the system through spending reductions, or we collapse it through draconian tax rates which still don’t reign in an ever expanding “safety net”, or we collapse it through printing/borrowing and the destruction of the currency. But it will collapse.

    It is NOT a good time to buy a house. Especially if you agree with what this post is all about- that income is the primary driver of housing prices.

    Rate this comment: Thumb up 0

  53. Lurker

    Alan @ 33:

    What may be confusing is mistakenly mixing wage or cost of living data with statewide disposable incomes.

    “Disposable income” is just total income for the entire state after personal taxes (does not include sales, motor, home, etc taxes), In 2010 the disposable income for Washington State was roughly at 271 billion dollars, about 7 million dollars more than in 2009. These numbers are not inflation adjusted and appear to always be up YOY.

    It doesn’t mean that everyone made more money. It could mean that everyone in 2010 lost a dollar while one another dude made an extra 14 million of them.

    Rate this comment: Thumb up 0

  54. bjbest

    I think median WA income is dropping, not increasing, and that may be driving this effect.

    I’m sure there was an easier way to do this… but, manually pulling median household income from the US as listed by the Census data for 2009-2005 (http://factfinder.census.gov/servlet/GRTTable?_bm=y&-geo_id=01000US&-_box_head_nbr=R1901&-ds_name=ACS_2009_1YR_G00_&-redoLog=false&-format=US-30&-mt_name=ACS_2008_1YR_G00_R1901_US30&-CONTEXT=grt), Washington median household income is given as:

    2009: $56,548
    2008: $58,078
    2007: $55,591
    2006: $52,583
    2005: $49,262

    The census site says these are all using inflation adjusted dollars for that year (so 2007 is given in 2007 inflation adjusted dollars), so if I’m understanding that, background inflation is not accounted for. Median income seems like it might account for the “hook” in the data — it’s at least going in the opposite direction of the disposable income metric.

    Brad

    Rate this comment: Thumb up 0

  55. Lurker

    RE: Lurker @ 61

    Oops, I mean a 7 Billion increase from 2009.

    Rate this comment: Thumb up 0

  56. Macro Investor

    By patient @ 22:

    The chart shows two things to me..
    1. There is a strong correlation betwen disposable income and home prices. ( No surprise )
    2. The correlation is crushed by large shifts in lending standards and home equity.

    We had an epic financial crisis with homes being in the epicenter that has no equal in the last 30 years. However, it’s logical to assume that there will continue to be a strong correlation between income and value once the wounds are healed. When that will be and what the gradient will look like is really hard to predict though.

    Tim, why do you so stubbornly refuse to see that leverage explains all your chart anomalies. Obviously income, however you choose to define it (mean, median, mode or commode), is going to correlate with prices. But the amount of debt laid on top of that is how much people pay for houses. That “how much” is a function of sentiment — how collectively drunk or sober are buyers and bankers.

    Rate this comment: Thumb up 0

  57. Macro Investor

    RE: Scotsman @ 35

    “I always ask people where they think the money is going to come from to push housing prices up. If they know anything about economics that’s usually the end of the conversation.”

    Rich foreigners. You forgot the agent’s favorite line ;)

    Rate this comment: Thumb up 0

  58. Michael B

    RE: deejayoh @ 51

    O.K. I will see what I can come up with. But that was actually the least important part of my post. Do you agree with my post or not?

    Cheers!

    Rate this comment: Thumb up 0

  59. grumble

    By deejayoh @ 58:

    FWIW, I think 30 year fixed mortgage rates track 10 yr treasuries pretty closely, so I am not sure this change would matter.
    http://www.bankrate.com/funnel/graph/Default.aspx?cat=2&ids=1,-1&state=zz&d=1825&t=MSLine&eco=22

    Might not be that significant, but it is arguably “more accurate” to use the mortgage rate, so it would be interesting to see. The spread between mortgages and treasuries changes significantly between times of booming refi’s (generally due to capacity constraints) vs other times. Also, the relative change will be quite different looking at the mortgage rate vs 10yr treasury.

    Rate this comment: Thumb up 0

  60. Michael B

    RE: David Losh @ 49 -

    David,Exactly! The chart looks great unless you consider that the country is in the middle of The Great Deleveraging and the general unwillingness to take on debt!

    Fact is, it is no longer about “making the payment” as Tim and Deejayoh assume. Of course, for Redfin and the rest of the real estate industry, this kind of thinking is anathema and might lead to excommunication.

    The following quote is true for all investments, including real estate:

    “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
    Warren Buffet

    Rate this comment: Thumb up 0

  61. Michael B

    RE: deejayoh @ 51

    PIROOMA would be a good description for the quality of your work supposedly showing that Washington real estate is undervalued – Fantastic Work! As Tim says, it doesn’t pass the “sniff” test. Possibly PIROOTA would be a better description.

    Here is a link to some analysis by a professor in Australia on the relationship between debt, deflation and GDP in the USA. http://www.debtdeflation.com/blogs/2010/09/20/deleveraging-with-a-twist/

    Rate this comment: Thumb up 0

  62. Michael B

    RE: deejayoh @ 51

    Here you go: The relationship between debt, disposable income and dwelling prices. Click on the link to view the charts. The USA Real Estate bubble was caused by an increase in debt and not an increase in disposable income. Pretty obvious, if you think about it….

    http://www.debtdeflation.com/blogs/2011/02/10/a-motley-crew-interview-on-australian-house-prices/

    “The turning point in that process appears to be nearby: both debt per dwelling to price (Figure 16) and debt per dwelling to disposable income (Figure 17) appear to be topping out.”
    ” This underscores the fact that, just as in America, rising mortgage debt was the real fuel for rising house prices.”

    Rate this comment: Thumb up 0

  63. David Losh

    RE: Michael B @ 70RE: Michael B @ 69

    Great links.

    There is a defined disconnect between the housing price bubble and the over all economy. It is the single most frustrating point about the dicussions we are having. It’s like some how, by magic, housing prices will conform to some by gone era of value.

    Rate this comment: Thumb up 0

  64. deejayoh

    By grumble @ 67:

    By deejayoh @ 58:

    FWIW, I think 30 year fixed mortgage rates track 10 yr treasuries pretty closely, so I am not sure this change would matter.
    http://www.bankrate.com/funnel/graph/Default.aspx?cat=2&ids=1,-1&state=zz&d=1825&t=MSLine&eco=22

    Might not be that significant, but it is arguably “more accurate” to use the mortgage rate, so it would be interesting to see. The spread between mortgages and treasuries changes significantly between times of booming refi’s (generally due to capacity constraints) vs other times. Also, the relative change will be quite different looking at the mortgage rate vs 10yr treasury.

    yes, I agree it would more accurate. But when you are doing a regression analysis what matters more is the relative pattern of changes, so thats what I meant. Either one will give you about the same predicitive value because the two indices track each other. Income variables work the same way. HHI, PCI, and disposable income pretty much track together. But at the end of the day, the long term relationship between interest rates and home prices is at best random anyway. Almost no correlation.

    Rate this comment: Thumb up 0

  65. Michael B

    RE: David Losh @ 71

    Agreed David. Steve Keen is one of the few economists who predicted the GFC. I think he’s 100% correct on debt’s role.

    Speaking of Moody’s, here’s a new prediction from them that is spot on.
    http://www.nytimes.com/roomfordebate/2011/04/14/chinas-scary-housing-bubble

    When China implodes, imagine the impact on the world economy and commodity prices – another crash… Not to mention the bursting of Australia’s and Canada’s housing bubbles. This is a train wreck in slow motion and at the end of the day it will be interesting to see who is still standing.

    Rate this comment: Thumb up 0

  66. deejayoh

    RE: Michael B @ 70RE: Michael B @ 69 – Where to start on this, Mr. “15 comments, I’ve been here since last month”?

    First off, I never said that the housing bubble was caused by “an increase in disposable income” as you claim. As matter of fact, if you went through my posts on this site over the past four years you would find find multiple examples (like here, here, and here) of analysis I prepared that showed how home prices had diverged from the long-run relationship to incomes as proof of the scope and scale of the bubble here locally. I haven’t done any analysis “supposedly showing that Washington real estate is undervalued”. You may have comprehension issues on that one.

    And I actually agree with you that loose lending and easy credit were responsible for the bubble. If you had read my comment at #29 you might have picked that up.

    But what I don’t agree with is your putting my name in all caps at the top of a post that doesn’t even respond to anything I have said, and suggesting I run out and do some analysis that you’d like to see.

    Sorry if I was snarky, but your comment was d!ickish and I had no intention of responding based on the way you presented it. And then you post a link to an article to “prove” your point and it A) is about the Australian market, B) refers only in passing to the role of debt in the US market and presents it as an unsupported fact (“just as in America”? Really? That’s your support?) and C) doesn’t even supply a chart that demonstrates the point you were trying to make (e.g. I would have expect to have found “a chart with the relationship between private debt, wages/disposable income per capita and home prices”. I looked. It isn’t there. Am I missing something?)

    So again, I’m not disagreeing with you about the role of debt. It was critical. But Tim’s post was about intepreting signals that seem to show that by some traditional metrics we appear to be returning to historical levels of stability. You can agree or disagree that they are still relevant, but you are spouting off about issues that have been hashed over for the past 5 years on this blog and acting like you discovered them.

    Simply put, I would suggest you back off on the attacks. It’s comments like yours that were the reason I quit making posts in the first place. But maybe Barry Ritholtz has it right over at TBP in his paragraph above the comments section:

    Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

    Rate this comment: Thumb up 0

  67. David Losh

    RE: Michael B @ 73

    The Real Estate market in Peru has quadrupled since 2003. The economy is rapidly expanding.

    In the last election the incumbent did not run. The opposing party started a rigorous campaign then faltered about a month, maybe two ago. The election is now in a run off between a left wing military person, and the daughter of the jailed past President Fujimoiri.

    My opinion is that no one wants to be at the helm when the economy collapses. It’s unsustainable, over built, and under funded. China is the same, as is Australia, and Canada.

    The problem with housing was the mortgages that were traded as debt instruments called securities. Real Property had never been worthless before. Mortgages seemed to be a safe bet. No one, in my opinion ever paid attention to the fact Real property was over built globally.

    If it was just that we over built San Diego, Miami, Las Vegas, and Phoenix, OK, great, we can handle that, we can absorb that. When you over build, New York, Seattle, Dallas, Washington DC, Detroit, and Chicago, at the same time, then you give people a lot of market places to chose from. Well then you have every stinking little fill in community nationally that also over built, maxed out pricing, and still sells for twice what it did seven years ago, and you have a problem.

    I’m still deciding if we will be moving to Peru, or Spain, well it’s now a no brainer that it will be Spain. We’ll look at Miami next month, but I’m sure we can do better in some other country.

    As for China, it has consumers. Those consumers need to be fed every day. Without construction jobs I don’t know what the job base will be. Any one here know what the economy in China is based on?

    Rate this comment: Thumb up 0

  68. David Losh

    RE: deejayoh @ 74 -

    Actually he put up http://www.debtdeflation.com/blogs/2010/09/20/deleveraging-with-a-twist/

    Second is that the post is misleading, along with the chart, or graph, whatever it is. Last but not least, there is no normal. What is going on today is not normal. We won’t be going back to normal.

    New commenters have a perspective.

    Rate this comment: Thumb up 0

  69. deejayoh

    By David Losh @ 76:

    RE: deejayoh @ 74 -Actually he put up http://www.debtdeflation.com/blogs/2010/09/20/deleveraging-with-a-twist/Second is that the post is misleading, along with the chart, or graph, whatever it is. Last but not least, there is no normal. What is going on today is not normal. We won’t be going back to normal.New commenters have a perspective.

    Thanks David. I can click a link. And that link wasn’t the one in the post I referred to. But I did read it and it doesnt have the pertinent chart either. But I think you missed my point.

    Rate this comment: Thumb up 0

  70. patient

    Another thing to consider is that an upward move away from the trend line is not sustainable and need to come back down to where it has support by sustainable funding ( income , wealth and debt ). A move away to the downside do not need to return to the trend line, it can create a new sustainable level and trajectory anywhere below the trend line, theoretically even at 0.

    Rate this comment: Thumb up 0

  71. Michael B

    RE: deejayoh @ 74

    Deejayoh. I apologise for putting your name in caps. Had no idea it offended you. Also, my last comment was not directed at you, just a general comment about what I though would be useful – I wasn’t asking you to do it…I’m sorry if you were offended.

    I will try to make my posts more civil in the future.

    Rate this comment: Thumb up 0

  72. Michael B

    RE: David Losh @ 75

    David, I believe China’s economy is currently 70% based on development of fixed assets of which 20% are residential real estate. China is said to have enough commercial real estate for every man woman and child in the country – very over built.

    Fujimori’s daughter running for president – very short memory of the general public…

    Rate this comment: Thumb up 0

  73. Michael B

    RE: David Losh @ 75

    David,

    It’s interesting that you are thinking about heading to Miami, or Spain. Why Spain?

    Rate this comment: Thumb up 0

  74. Sanguis

    I’m curious why this post’s charts haven’t been retracted yet? I fear this blog may fall into a spurious chart of the day website without regard for validity.. For illustration and my amusement, here’s a chart of disposable income vs DOW: http://is.gd/Tem8OW

    Rate this comment: Thumb up 0

  75. Kary L. Krismer

    What I find interesting is the rejection of data that doesn’t fit with someone’s views. Not only what Tim posted here, but also by way of example, how many here reject the median as being relevant because of changes of mix, but then when it’s shown how a change in mix is driving the median down, that’s somehow illegitimate.

    Rate this comment: Thumb up 0

  76. Scotsman

    RE: Kary L. Krismer @ 83

    It doesn’t really mean anything, that’s the problem. The change in trend is completely reliant on macro factors not captured in the original analysis. Like I said way back in comment #12:

    “The R2 for data fit is quite remarkable, right up to the point where it doesn’t work any longer. Twenty years of near perfection, then a complete blow out. A cherry-picker’s paradise, useful to either confirm or completely disprove the notion of price/income ratios (or even other measures of affordability) as a guide to future housing prices.”

    It’s an interesting chart, especially if you’re in to statistical analysis and such. But as was pointed out above there is no reason, especially in light of current macro trends, to ever expect that it will return to the original trend line. And even if it did return to some historical relationship if incomes fall then the entire curve/line will shift- 1/2 the income times the traditional 3 equals 1/2 the home value. Ouch.

    Rate this comment: Thumb up 0

  77. deejayoh

    By Scotsman @ 84:

    …there is no reason, especially in light of current macro trends, to ever expect that it will return to the original trend line

    Another way of saying this might be “It’s different this time”.

    Where have I heard that before?

    Rate this comment: Thumb up 0

  78. Scotsman

    RE: deejayoh @ 85

    Looking into my bag of clichés I come up with “even a stopped clock is right twice a day” and something about a guy named Peter and a wolf. Didn’t the wolf get him in the end?

    I know you’re a pretty smart guy and well versed in analysis. What probability are you assigning to the possibility that this time really is different? Do you really understand the concept of “money” in modern society and the roles of debt and currency? Have you assessed the probability and potential of upside risk/returns verses downside risk/losses?

    Do you have a plan if you’re wrong? What’s that other cliché- “the man without a plan is always at the mercy of the man who does have one.”

    Rate this comment: Thumb up 0

  79. Scotsman

    RE: deejayoh @ 85

    One possibility that insures housing prices will not recover:

    http://www.oftwominds.com/blogapril11/setup-con-of-decade4-11.html

    Rate this comment: Thumb up 0

  80. Sanguis

    By The Tim @ 86:

    RE: Sanguis @ 82 – Why on Earth would I “retract” the charts in this post?

    By Sanguis @ 41:

    Re: Hugh Dominic “these charts lie”
    -I think this statement has some merit, here’s why:

    -disposable income is increasing exponentially
    -home prices (FHFA) are increasing exponentially
    These data are exponential due to inflation, while they may also be affected by other linear/nonlinear factors such as price*income multiples people are willing to pay for houses.

    If you plot any two exponentially increasing data series against each other, I think you’ll see more apparent correlation at low digit data points and much less at higher data points… Perhaps adjusting for inflation on both FHFA & disposable income could hold some value. Also I believe per-capita income would be more valuable since WA population has almost doubled since 1975..?

    The original data presented is shown to have high correlation, however, this is erroneous due to use of exponential data series. I plotted DOW vs income in my previous post, and got high correlation between 1975-1995, and saw the chart blow up, similar to your original data series. I think you could plot many exponential series and also get apparent high correlation in low data points, then see the correlation ‘blow up’ at higher data points.
    Since the correlation is invalid, the chart should be removed, or appended with an asterisk saying “caution: apparent correlation of data is a result of exponential data point growth and is invalid”.

    Rate this comment: Thumb up 0

  81. Sanguis

    I thought of another way to illustrate my point: If a 20% change in the year-over-year FHFA number has the same significance regardless of year (ie FHFA value increase from 50 to 60 in one year carries the same meaning as an increase from 400 to 480), then we can plot variation against the R^2 = 98.9% trendline, normalized by the trendline value in that year. Here is the chart: http://img163.imageshack.us/i/trendine.jpg/ How well correlated does this data look to you? The 2005-2010 period doesn’t stand out so much anymore…

    Rate this comment: Thumb up 0

  82. deejayoh

    By Scotsman @ 88:

    RE: deejayoh @ 85

    One possibility that insures housing prices will not recover:

    http://www.oftwominds.com/blogapril11/setup-con-of-decade4-11.html

    So, let me ask a hypothetical question. If the article you post is correct and we are setting up for hyperinflation – who benefits most: savers, or debtors?

    That article makes saving for a down payment seem pretty foolish. I’d hope anyone agreeing with the author is in debt, gold, or Renimbi

    Rate this comment: Thumb up 0

  83. Scotsman

    RE: deejayoh @ 91 -

    Not that simple- here’s the other side of the story with some math. The good stuff starts half way down the page. Key is that we are talking about the future- perhaps years out. The current menu is still offering asset deflation:

    http://tickerforum.org/cgi-ticker/akcs-www?post=184358

    Two issues are timing and liquidity. The high rates haven’t hit yet and asset prices are still falling/about to fall. Interest rates up, stock market down. Liquidity is key so that you can move to the asset class that is inflating. I don’t think it will be homes since high rates and constrained wages don’t lead to price increases. And as pointed out in the second piece we may well get collapse before significant inflation takes hold.

    I should add I don’t think we’ll get high inflation. I think we’ll get currency destruction- which feels like inflation- everything is more expensive- but your wages don’t go up to match. Lose, lose. Dang. The winning move there is having cash, basic neccessities, or capital goods like machinery, tools, etc.

    Rate this comment: Thumb up 0

  84. David Losh

    Yeah I gave up on inflation a couple of years ago and this year for sure with the entire global economy dumping in currencies trying to spark it. I also don’t see currency destruction. The Euro guarantees currency solvency.

    Where would currencies go? If it were just the United States, if we weren’t in a global mess. If the financial markets were separated where we could default, or Russia could default, China, Europe, emerging markets, then great, we can afford to lose a currency here or there, but we can’t.

    I think the oil argument will be settled by lack of demand. I think we are due for a dose of reality where you just pay off a declining asset. We may, and that maybe a big challenge see a period where pricing needs to come down so people can afford to pay.

    In my opinion we will see a decline in lending. As more of the big players in debt default on payments there will be less inclination to lend. For that I have no idea where the sector will go. If lending stops being the biggest part of the global economy we would be in a period of rampant deflation.

    Rate this comment: Thumb up 0

  85. Tim

    Like sand through the hourglass, these are the days of our lives…

    Rate this comment: Thumb up 0

  86. Ross

    RE: Kary L. Krismer @ 83 – The change of mix makes the median suspect when you’re comparing two categories that have changed differently. If the mix of recently sold homes has changed in a different way from the mix of recently rented homes, then a comparison of median rental to median sale price is not comparing the information needed to reveal whether a particular home in a particular neighborhood for sale for $Y is actually in line with nearby rents for equivalent properties. I’ll go further and assert that critical data point is impossible to determine unless you’re sampling much closer to streets and neighborhoods and $/sf.

    There is a parallel issue for median income (household or per-capita) to median recent sale prices for exactly the same reason. If rotten homes in terrible neighborhoods are selling much faster for much less, while there are relatively fewer sales of well-maintained homes near good schools, but the selected data includes both, that change in the data set compared to 20, 30, 50 years ago wipes out signal I’m seeking: the affordability of well-maintained homes in good neighborhoods near good schools.

    Median to median comparisons intended to provide reference to long-term trends are possibly useful if the sample group for both sets remains similar over the relevant time frame. If the population being sampled changes differently between the two sets, the comparison of median to median may still be fascinating subject material, but it isn’t comparing what you think it is.

    In this case, I think what we’re seeing is a deeply broken market where middle-class owners can’t afford to sell at the prices middle-class buyers might be able to pay. Until most of the under water mortgages are cleared (and prices are reduced to what buyers can pay) and middle class buyers have restored household savings to be able to put down 20%, this problem will continue to create significant distortions in the RE sales market and any comparison to RE sales needs to find some way to account for the change or be refuted by reference to more precise data (i.e. rental property A to that equivalent for sale property B).

    When I look in decent eastside neighborhoods, annual rents are still at most 5-6% of the asking prices of a nearby equivalent home, and I assert that means that home prices are still pretty far from equivalence with rents in better neighborhoods. No matter what the King country median rental to King country median sale data indicates.

    Rate this comment: Thumb up 0

  87. Kary L. Krismer

    By Ross @ 95:

    RE: Kary L. Krismer @ 83 – The change of mix makes the median suspect when you’re comparing two categories that have changed differently. If the mix of recently sold homes has changed in a different way from the mix of recently rented homes, . . . .

    You don’t need to be comparing the median to anything else besides the same median for a different period for the change in mix to be important. Take for example the median house price in King county for January 1950 compared to Jaunary 2011. You couldn’t just say prices went up X% by looking at those two numbers, because the houses sold were likely considerably different.

    Usually that’s not all that important if you’re dealing with shorter timeframes, but you can have events that change that. The first time buyer credit being implemented and expiring would be such an event. The economic crisis of 2008, would be another.

    You mention smaller areas and that’s where it is even more important to look at the mix. When you look at individual NWMLS areas, the change in median can be severe from month to month and YOY because of a change in the sold mix for every month.

    Rate this comment: Thumb up 0

  88. JG Bell

    RE: Scotsman, MBA, PHD- School of Hard Knocks @ 12
    Scotsman, your point about incomes not going up is probably accurate. You should read Bill@CR’s blog post:
    http://www.calculatedriskblog.com/2011/04/more-than-lost-decade.html
    What he points out to U.S. is that for the last decade there has been no improvement in our incomes, and there has been a huge decrease in “labor participation”.

    While looking at “debts” might be interesting, what CR is showing U.S. is that our “income” has been disappearing. All you need to do is look at “contributions” to: UI and Wa DL&I; federal income tax withholdings; tax receipts at all levels of govt; and to SS, Medicare & Medicaid revenues.

    If we are not working, we are not paying into the services that we need and will need before we die. Fighting wars and putting many of U.S. in prison costs somebody some money, sooner or later.

    So, putting U.S. back to work is actually FAR more important to solving the budget deficit problem(s), than increasing taxes on the rest of U.S.

    Rate this comment: Thumb up 0

  89. JG Bell

    RE: Macro Investor @ 64
    Macro, not so fast, with all that “it’s the leverage/debt, stupid”, stuff.

    While that does impact some decisions, and income does others, there are times, and places, where other things are going on – such as the sand states, during the ‘dead years’.

    When the Wall Street banksters created all those “securitized” (was that not a joke) RE loan packages containing all the bad ARMs and subprime originations by Countrywide, WAMU, Wichovia and New Century, they plowed US$ 2.5 Trillion into the ground – literally & figuratively – in the sand states.

    And, while that was going on “down there”, you might have assumed that it did not affect you, or PUGit Sound. As the WAMU building might suggest, that might not be true.

    What Tim is looking at is the reasons for the changes that did occur during the RE collapse, and what really is going on.

    What we might also look at is the different “reverse mortgages” that were written before, during and now after (that’s a joke) the collapse.

    A reverse mortgage in the sand states prior to the collapse assumed that they would make most, if not all, the appreciation profits – paying the reverse mortgagor some, but not much, of it. However, Said reverse mortgagors made out like bandits, when the values of their properties collapsed – the assessed values in Phoenix now “average” down by 62%. THEIR income was fixed, by the lender who was also now “fixed”.

    When the collapse started, the reverse mortgage values were revised down, substantially; but still not nearly enough to cover the lost values. When we hit the bottom, reverse mortgage values will NOT be adjusted back up to reflect stable or increasing values.

    As “They” say: “Place your money, and make your bets.”

    While the “take” in Vegas does correlate to some peoples incomes, and to some peoples line of credit with the house or the banksters, some people still bet for the GDest reasons.

    Rate this comment: Thumb up 0

  90. JG Bell

    RE: JG Bell @ 98
    And, we might also need to look at “equity extraction” by REFIs and HULOCs, which were almost all based upon “inflation expectations”.

    Oddly, Californicators were much more active in the extraction their paper profits than were people in Nev, Fla & AZ. Have not heard or read any explanations for that.

    Which also means that they are NOT “underwater” in the same way most of the rest of U.S. are. What is that line: “Get the money, sweetie! Before you get pucked.”

    Rate this comment: Thumb up 0

  91. Steve Roth

    Suppose this future scenario: disposable income rises some, while interest rates rise (proportionally) by more. What happens in the three charts?

    In the DPI/Yield chart, 2011/2012 would be to the left of 2010. It could move far enough left to hit the trend line, with the index remaining flat. Smaller moves to the left would require larger increases in the index.

    In the DPI-only chart, future years would be to the right of 2010, moving father away from the trend and requiring (projecting) an even greater rise in the index value.

    In the Yield-only chart, future years would be to the right of 2010, requiring/projecting a significant drop in the index value to get back to trend.

    Peering out over the next five to ten years, the first scenario seems (to me) the most likely. Assuming disposable income goes up some and interest rates go up more, house prices should be flat to slightly rising over coming years.

    This all assuming we avoid another financial meltdown/recession — the prospect of which, IMHO, is what still has everybody sitting on their hands waiting to see what happens.

    Rate this comment: Thumb up 0

Leave a Reply

Do you want a nifty avatar picture next to your name, instead of a photograph of Tim's dog? Just sign up with Gravatar, and make sure to use the same email address in the form below. It's that easy!

Please read the rules before posting a comment.

You have 5 comments remaining on this post.

Archives

Find us on Google+