Posted by: 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.

28 responses to “Around the Sound: Snohomish County Inventory Shoots Up”

  1. Erik

    Inventory is only down 168 houses this month. Last year by this time, we were down 294 houses. Hopefully inventory starts a death spiral soon!

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  2. mike

    For King County, 2 months of inventory and a 22% YOY increase in sales, to me, does not point to a situation where home values are likely to remain flat over the next 12 months – unless we see another sharp rise in mortgage rates. Even then it doesn’t seem to point to any kind of downturn.

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  3. Erik

    RE: mike @ 2
    Please explain how 2 months of inventory and 22% YOY increase in sales equates to a future increase in real estate prices. This situation can easily change. Very poor analysis.

    You are saying that since right now the inventory is really low, in the future it will be lower. I would guess the exact opposite. Since inventory is low now, prices are at their highest. When this changes, prices will decrease. Prices would be lower if it wasn’t for low inventory and artificially low interest rates. Please enlighten me and tell me what I’m missing.

    Things are still falling into the sine wave scenario with decreasing amplitudes I suggested last year. The wave really began in 2004 and peaked mid 2007. The wave began decreasing at the end of 2007 and reached bottom February 2012. I think we are approximately at the top of the second oscillation. It could go a little higher, but i’m not sure. I think this smaller wave will begin to decrease and hit bottom in 2016. After that, the waves will be small and hardly noticeable. The people that “did the right thing” and kept their underwater homes and aren’t selling now will be stuck with their decision and their family will suffer their decision.

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  4. Erik

    If I was able to buy a new place right now, I would buy this place with FHA financing. Most likely it will be gone before I am able to buy anything.

    http://www.redfin.com/WA/Seattle/1017-W-Nickerson-St-98119/unit-336/home/38888

    I go online for hours and look up places and imagine myself remodeling the entire place. May seem like a lame life, but this is what I do. Even though this seems like a good deal and I can visualize the remodel, I think renting until 2016 in the puget sound area is a good idea.

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  5. Macro Investor

    Inventory is low because:

    1. Many people are under water and can’t sell.
    2. Many people see rising prices and are holding out for more money.
    3. People who would like to trade up or down see the crappy inventory and decide it would be too hard find a new house. They would be stuck renting and moving twice. Or would have to out bid someone for the few decent houses for sale. Two unpleasant options.

    Interest rates spiked up 1.5% last spring AT THE MERE MENTION that the fed might some day reduce QE slightly. That caused mortgage activity to crater nationally (though not in Seattle). They’ve had to retreat like the french army on that idea. For the time being rates have backed down about 0.4%.

    The fed knows they’re trapped. Like the little boy with his finger in the dike.

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  6. Corndogs

    RE: Macro Investor @ 5 – “Inventory is low because:”

    “1. Many people are under water and can’t sell.”
    WRONG – sales are back to pre-bubble levels, all along underwater people sold/lost their properties at about the same ratio as those above water through foreclosure, short sale or selling at a loss..

    “2. Many people see rising prices and are holding out for more money.”
    Wrong – most people relocate and buy another house. Everyone knows that trading houses in a down market is better than when it’s up because transaction costs are less. Waiting would be stupid.

    “3. People who would like to trade up or down see the crappy inventory and decide it would be too hard find a new house. They would be stuck renting and moving twice. Or would have to out bid someone for the few decent houses for sale. Two unpleasant options.”
    WRONG – If your looking for a new house, you do that while you reside in your old house. If you find something you like you put in a contingent offer based on your own house selling. If your house is nice it will sell right away.

    I understand that you’re trying to make sense out of a world that is very complicated. When you come up with an hypothesis you should explore the available data and find out if what your saying is true.. Your hypotheses are minor players at best.

    The reason inventory is low and consistent is because when smart investors dumped their properties on stupid home buyers there was a glut of houses on the market and people stopped building new houses and the mechanism for creating supply was obliterated. At the bottom of the market the smart investors took the excess inventory back. The only way inventory can change dramatically in a short period of time is when people buy without selling or sell without buying, those people are investors. When prices get sufficiently high to encourage building and the supply industry gets back on line we will see supply that will meet demand. For instance, Corndogs is an investor, he bought his house at the bottom of the market. He didn’t sell anything. At the top he might consider selling, if he does he certainly won’t buy anything. Capisce?

    Also, interest rate hikes affected primarily refi loans. It didn’t have a major effect on home purchases.

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  7. boater

    Corndogs you forgot one group that buys without selling (first time buyers) and one group that sells without buying (the dead or dying or transitioning to cared for environment)

    The latter in many cases are going to continue to need to sell their home to finance retirement. The former will depend on home much home ownership is still considered part of the American dream.

    I’d argue but with little proof that my two groups outsize your investor group. I believe that has been the historical case but there’s a lot more investors getting in over the last 5 years.

    I also take issue with your assertion that everyone know swapping in a down market is good due to low transaction costs. It’s true and smart but from what I’ve seen housing gets swapped because the gal says the house no longer works. Up market down market doesnt matter its just can it be done within their budget.

    The limited supply of decent homes is an issue. Anecdotally I know folks looking and they mostly see people putting crap on the market for high prices. When a good house comes up it goes fast and for over asking. That to me is desperation doing the buying but its thier money.

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  8. softwarengineer

    RE: Corndogs @ 6
    Personal Wishes Don’t Change the Total Labor Force Stagnation In Seattle/Tacoma/Bellevue

    Its been stuck at about 1.9M since 1/2009, note the BIG 15,000 jobs RECENTLY lost in this Total Labor Market for Aug 2013.

    http://data.bls.gov/timeseries/LAUMT53426606?data_tool=XGtable

    Meanwhile we’re adding workers to just King County alone at about a 50,000/yr clip since 2008.

    “…While Washington’s economy has held up better than those of its southern neighbors and many other states, population gains due to people moving here dropped from 81,000 in 2006 to 58,000 in 2008 and 39,000 for 2009, noted Theresa Lowe, the state’s chief demographer….”

    http://www.bls.gov/eag/eag.wa_seattle_msa.htm

    But this “bull in the real estate china cabinet” can all be ignored as just a small strain on a chronically stagnant total labor market…BTW, where’s your proof for your allegation that its all looking rosey for Seattle real estate in the future besides [planned?] inventory shortages?

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  9. softwarengineer

    RE: boater @ 7

    I Agree

    Its slam dunk a lion’s share of the $100-200K household incomes in the Seattle area already bought a house, many bought in decades ago….they aren’t in the real estate market.

    Investors buying up Seattle real estate gets far fetched too unless you point at foreign investors like the Chinese….BTW, America similarly “hood-winked” Japanese investors to buy in at over-priced sales during the 80s price degradation and they lost their shirts too.

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  10. corndogs

    RE: boater @ 7 – Boater, I think your comment is good. Corndogs didn’t forget about people being born and dying. These groups tend to balance themselves out. I think you’d agree people don’t usually die in waves. There was no plague in 2006 that led to a sell off of properties (that I’m aware of). At the bottom of the market it has been well substantiated that houses were being bought by cash buyers and there was an alarming (to some people) lack of first time buyers, leading to this concern that you alluded to about home-ownership no longer being part of the American dream. So, I at least, think it’s clear that your two groups aren’t contributing in a major way to the inventory situation. I would continue to go with what seems to be overwhelming evidence that investors were the key players.

    It’s obviously true that not everybody knows that trading up in a down market is beneficial. It was a bit of an exaggeration to poke fun at M.I. who presumably doesn’t know this to be the case. The main point was to show that M.I. was incorrect which you seem to agree with.

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  11. Ira Sacharoff

    RE: Corndogs @ 6
    I mostly agree with you on this( I better not keep that up), except on your #3 about putting in a contingent offer. Maybe that works during certain periods or in certain areas, but in Seattle or the eastside right now? No. An offer contingent on you selling your house is very unlikely to be accepted, because there are plenty of buyers putting in offers without that contingency. Instead, there are buyers offering all cash with quick closing dates, and offers waiving inspection contingencies. In a more balanced market, offers with contingencies like selling your house would be more likely to be considered. But right now it’s still a seller’s market here.

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  12. boater

    Softwareengineer I disagree. Many of the 90k plus jobs are going to people under 30 and in many particularly as it relates to Seattle and Bellevue. They haven’t bought houses and from what ive seen wont for another 5-10 years. They love their city’s and wont move until schools for children force them too.

    The investors are local as well as international. I buy rentals in the SFH and small<4 muliplexes. I lose to locals more than foreign money. I dont disagree their are more investors these days.

    I do think demographics are an issue. Boomers are getting older and dying. The kids aren't buying at the rate the parents are disposing.(unsupported by its my gut) I do see family groups holding on to parents property because they dont believe they could ever afford it on what they make. Lots of unintentional landlords in that group while they decide what to do with the asset.

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  13. Erik

    RE: Corndogs @ 6
    If you are an investor in Washington state, I don’t see a bright future for you either. Boeing is moving out. I don’t expect the 777x to be built here, but we’ll see. I think we’ll have an answer this year. Microsoft sold their property in Issaquah. They aren’t so hot on Washington state either. You may be able to stay alive collecting sweaty renter cash, but you will not see the equity you once saw in my opinion.

    I think real estate will stay flat for the next 10 years at best. I really do believe that it will decrease in price though. If I were you, I’d sell and put my money elsewhere. If you have lots of reserve funds and you want to ride this out for the next 10 years, maybe you can. You will not be stacking chips for the next 10 years in Washington state though.

    ” Everyone knows that trading houses in a down market is better than when it’s up because transaction costs are less.”

    I do not know this. Please explain. You always pay sellers agent, buyers agent and excise tax, right? That is transaction cost.

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  14. corndogs

    RE: Erik @ 13
    “I do not know this. Please explain. You always pay sellers agent, buyers agent and excise tax, right? That is transaction cost.”

    Are these fees not a fraction of the sales price? If the sales price goes down, won’t the fees as well? By the way, you wet your diaper on post 3, Mike on post 2 was more correct. A two month inventory with recent increases in sales volume, points to stable or increasing prices in the future. It’s not guaranteed because there are other factors to consider but that’s what it indicates.

    RE: Ira Sacharoff @ 11 – right, so the inability to compete and win the bid is caused by low inventory and high demand. You just have to get the cause and effect right. What you are talking about is a side effect of the low inventory. Any way you look at it, a guy selling one house and buying another house does not affect inventory in appreciable manner as the other factor I mentioned do.

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  15. Erik

    RE: corndogs @ 14
    I’m taking my profits soon and getting out. I don’t want to lose my equity like I did on my last remodel. I may have missed some gains, but I’m not willing to risk losing what I have built. $100k profit is a lot of money for me. I’m taking my profits and renting with my pockets full of dollar bills until the market dumps again.

    You have a bigger foundation than I do and you will be fine during some downturn. I will take my cash and run. Not worth the risk. I don’t understand yet how to predict what the market is going to do unless it is obvious. The future of real estate seems gloomy around the seattle area.

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  16. ARDELL

    Regarding “Everyone knows that trading houses in a down market is better than when it’s up because transaction costs are less.” Perhaps right answer; wrong reason.

    When you are trading up and the market is down 20% then your $300,000 condo will sell for $240,000 but your move up house at $600,000 will be down $120,000 and cost $480,000, all things being equal. So in a 20% down market you lose 20% on the sale but you make up double that on the buy side if your move up is twice the price of your existing residence.

    Reverse is true if you are an empty-nester trading down to the same degree. Then an up market is better because what you are selling at 20% up brings you a lot more than what you are losing on the downsize buy side at 20% up.

    Transactions costs are not a consideration, or at least not a primary consideration.

    I agree with Ira on the “contingent” idea…sounds good…but in real life only works with new construction or overpriced homes that are willing to risk the contingency in order to get a higher price than any intelligent person would pay.

    You pay a premium for “contingent” no matter what, new or old. You are basically making the seller an offer he can’t refuse, and so he sucks up the contingency as the trade off. For some people the security of knowing where you will go when you sell is worth it. But you never get a fair deal with a home sale contingency, unless you are buying it from your parents or someone who has a personal reason to subject themselves to the contingency at fair market value.

    New Construction has so much premium built in that the contingency premium is often absorbed by the new home premium, and so “offer contingent on the sale of my current residence” is more common in new construction. The other reason contingent sales are more common in new construction is the seller has a dozen or more products to sell. Tying one home up in a contingent pending…no biggee. He sells the other ready, willing and able buyers one of his other homes on market.

    In resale, huge risk for the seller to get tied up in a contingent transaction, as he only has one home to sell. Better to wait for someone without a contingency, unless the offer is too good to pass up.

    More common than contingency is a cross-collateralization loan or a bridge loan or pulling the equity you need to purchase out of the house you are going to sell with a HELOC or cash out refi. Not saying I recommend any of these. Just saying for people who want to lock in where they will go, before they sell, these are the more common methods in a market where the absorption rate is less than 3 to 6 mos.

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  17. No Name Guy

    …am I the only one to notice….

    The Tim – fix the last chart, the Months of Supply. You have the bars fixed at 6 months (as in a 6 month supply would have a zero length bar), instead of zero. The Snohomish County going from 1.9 months to 2.4 months shows a SMALLER bar.

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  18. boater

    Ardell I agree with everything except that all things are never equal. Anything under the confirming mortgage size is more likely to increase at a greater rate than anything over. There’s just always going to be more buyers for that level. So if you trade out of the conforming range you’re usually giving up some of the percentage gains.

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  19. David B.

    RE: No Name Guy @ 17 – I believe that is Tim’s way of indicating that a 6 month inventory constitutes a neutral market, so that the length of the bars indicates the degree to which it is either a buyer’s or a seller’s market.

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  20. Macro Investor

    By Corndogs @ 6:

    RE: Macro Investor @ 5 – The only way inventory can change dramatically in a short period of time is when people buy without selling or sell without buying.

    The only way? You just showed your diapers, fella :)

    Inventory fell dramatically because sellers cancelled their listings. People were convinced that real estate NEVER FALLS. The media was full of industry “experts” saying that each down tick was a mistake or a very short term fluke. Many kept their listings at high prices and stubbornly refused to budge. After a while they gave up hope and cancelled their listing.

    If you had visited this blog back in those days, this was constantly discussed and analyzed to death. For the most part, only folks WHO HAD TO SELL listed at prices that would attract bids.

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  21. One Eyed Man

    RE: Corndogs @ 6RE: Macro Investor @ 5

    Stop, you’re both right. (At least to some degree according to the WSJ.)

    http://blogs.wsj.com/developments/2013/01/22/six-reasons-housing-inventory-keeps-declining/

    WSJ says that MI’s category #1 has some statistical validity because inventories were affected the most in markets where the highest percentage of owners were underwater.

    Interestingly, I think MI’s category 2 of people holding out for a better price and CD’s category of “investors” overlap to some degree. CD says if you buy without selling, you’re an investor. I know several people in that category and they consider themselves move up buyers who are holding their old house as a rental and waiting for better prices. CD’s category of people who buy but don’t sell is pretty much the same as that portion of the people in MI’s category #2 who bought but didn’t sell.

    To CD’s credit, MI did leave out the huge drop in new home construction and the influx of investors buying purely for investment, which CD mentions.

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  22. mike

    RE: Erik @ 3 – I said specifically within the next 12 months – not for “the entire future ever”. And you’re wrong about prices peaking when inventory is low. Quite the opposite. Prices peaked after a rapid rise in inventory. I agree, we may be at the beginning of that rise now like we were in 2006 – however the actual peak values occurred after inventory rose. Likewise, the price bottom didn’t coincide with peak inventory – prices continued to fall as the peak inventory sold.

    The reason I don’t think we’re going to see a *sharp* rise in inventory is because appreciation is already slowing – and that means the number of homes going ‘above water’ is slowing as well. When you look at the make up of distress sales it’s still overwhelmingly bubble era loans or post bubble FHA duds. Default rates are falling and distress sales are contributing less to inventory this year, and likely even less next year.

    At the same time, I expect lending standards to slowly loosen as more bubble victims find their way into the buying pool now that their credit, income and (meager) savings have been heading in the right direction for a few years.

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  23. mike

    One other thing – My comments on inventory relate to houses, not all units. I’m expecting many of these newer apartment buildings that popped up in the past few years to start converting to condos once they hit the 5 year mark. As a result, there’s definitely a chance the condo market will see a precipitous rise in inventory that is not mirrored in the SFH/Townhouse market.

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  24. corndogs

    RE: One Eyed Man @ 21
    Yes, I also know several people owning two homes for that very reason. I consider them investors, which of course they now are. I think there are a lot of people in this category.

    RE: Macro Investor @ 20

    As I said sales volume is back to pre-bubble levels while inventory remains low, how does that fact jive with your claim that everyone has canceled their listings. It does not. Sales are happening. Houses are changing hands, even those houses that are underwater are changing hands.

    To develop a better understanding look at home-ownership. It has been steadily decreasing (as a percentage) for nearly 8 years. This should increase inventory right? But available inventory is historically low. Why is that? How is it that a larger percentage of people are becoming renters everyday? Who are they renting from? Could it be investors? WOW!!! I guess so, huh?

    As Ira and Ardell noted, you can’t just go buy a house on contingency as a lot of home-owners would need to because there is always somebody waiting with cash and as Boater said these people are local and international buyers. Who are these people? Do they sound like investors? They do to me.

    So are people changing their minds about home-ownership and are people going to want to be renters more so in the future? Maybe so, but the reality of escalating rents are going to cause some regrets and at the moment there seems to be demand to get back in the game. So how are these renters going to get back in the game? There will need to be more housing built or they will have to pay the prices being asked.

    This understanding of the housing market that I’m sharing with you is the reason I’ve been able to predict the steep escalation in housing prices, the inventory problem wasn’t something that was going to get fixed overnight, I knew that

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  25. Dave

    RE: softwarengineer @ 8
    I agree with the BLS employment data, it’s even worse when you calculate in inflation and local cost of living.
    Even beyond all the weird cash offers keeping prices high we do still have that negative equity overhang to work through, (see zillows cool maps to see the local data). http://www.zillow.com/visuals/negative-equity/

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  26. Azucar

    By corndogs @ 10:

    RE: boater @ 7 Corndogs didn’t forget about people being born and dying. These groups tend to balance themselves out. I think you’d agree people don’t usually die in waves. There was no plague in 2006 that led to a sell off of properties (that I’m aware of).

    You’re overlooking a little thing called “World War II”, which resulted in a large wave of people being born in roughly the 10 or 15 years following 1946. Those people are called “Baby Boomers”, and the front edge of that wave (the ones born in 1946) are just turning 67 this year. There will be a wave of people in the coming 15-20 years moving out of their SFH’s and into assisted living, downsized and easy to maintain condominiums, and burial crypts. It won’t drive the market totally, but it is a factor to think about.

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  27. ARDELL

    Boater 18,

    I would agree that all things are never equal. I do not agree that “Anything under the conforming mortgage size is more likely to increase at a greater rate than anything over.” Sounds logical, but in my experience that has not been the case.

    Likely because the increase in interest rates impacted the lower price range more than the higher price ranges. Also the spread on high balance and jumbo rates in the last 18 mos to 2 years has been miniscule to nil compared to conforming with certain lenders, most notably Chase. Recently there are more lenders offering favorable rates on jumbo loans that do not vary greatly from the conforming rate. This could change, of course.

    Corndogs 24,

    “As Ira and Ardell noted, you can’t just go buy a house on contingency as a lot of home-owners would need to because there is always somebody waiting with cash and as Boater said these people are local and international buyers.”

    EVERYTHING trumps contingent, Corndogs. I did not mean to suggest that there is always someone waiting with cash. Usually anyone ready to close with nothing to sell beats contingent. Cash does not need to be in the room. In fact it is not uncommon for a seller to reject a contingent offer with NO other buyers in the room.

    At least half the time a buyer who submits an offer thinking contingent is just hunkey dory, also puts their home on market at a price it won’t sell and without doing all that is needed to prepare the home to sell. They seem to go hand in hand. Not always, but often. For that reason no seller should accept a contingent offer without their agent seeing the house and the buyer agreeing to list it at “x” price, a price that all parties agree to before a seller accepts that contingent offer. They are not as common as you may think. In fact even builders have been giving me a hard time with contingent offers. It’s a hard sell and there are trade offs. The buyer definitely gets a worse deal with a contingent offer, and likely should.

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  28. boater

    RE: Dave @ 25

    Looking at that site it appears that at worst your talking 6 houses out of 100 that could go into default. Thats not a lot of inventory. That’s in the hardest hit areas. In most areas it’s 1-2 per 100.

    You guys remind me of and old boss I had. Bright guy but always waiting for the disaster to prove he’d be right. Well gold did go up from 250 and housing did drop but he lost a lot of opportunity to make money waiting.

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