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.

29 responses to “Case-Shiller Second Derivative Suggests Softer Prices”

  1. Erik

    Based on this data, it would have been pretty smart to sell by the end of 2013. This market has nowhere to go but down. Interest rates will inch up and so will inventory. We experienced cardiac arrest from 2007-2013, and now the monitor is going to flat line. Moving forward, I would subscribe to Losh’s concept that housing is no longer a good investment. A fixer upper in the right area is good, but people aren’t going ballistic to own their own shelter any longer when they can just rent it. Now is not a good time to be a home owner unless you can find a good deal in an area that may boom.

    I just spent $40 on 30 pills of probiotics. Seems like a way better investment than a house at this point. There will atleast be potential benefits.

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  2. drshort

    By Erik @ 1:

    Moving forward, I would subscribe to Losh’s concept that housing is no longer a good investment.

    What other investment can you leverage to 95% at rock bottom interest rates, deduct the interest from your taxes, live in while you invest in it, reap the capital gains tax free, and walk away with only a hit to your credit score if it doesn’t work out? That doesn’t support buying something over-priced, but the advantages in investing in a house are pretty high compared to other assets.

    I do believe that housing on a national level will generally track inflation, but it won’t be uniform. If I were to invest in housing (which I don’t), I would concentrate on areas that are poised to grow both employment, wages, and in population. Those areas should do better than inflation over the long term. Those without that growth (such as Ohio, rust belt, etc.) will do worse than inflation. Places with growth and limits on housing development (geographical or regulatory) would be the best bets.

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  3. Erik

    RE: drshort @ 2
    Buying a house and expecting it to appreciate is as foolish as paying 20% down. In ten years after the market resets again it will track with inflation. After a big run up, it seems foolish to buy. Especially when nothing has changed.
    What this area has going for it is boeing will stay here for a while, so there will be demand. I am identifying that now is the worst time to buy in a long time. Things should soften up in the next few years.

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  4. mike

    By Erik @ 1:

    Based on this data, it would have been pretty smart to sell by the end of 2013. This market has nowhere to go but down.

    Except there’s no evidence that it will become more difficult to sell a house this year than it was at the end of 2013 or that the selling price will be lower this year, or even the next. Could it happen? Yes. Is there evidence of such? Not yet.

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  5. boater

    Seattle proper has been going through a major tech change for the last seven years and its accelerating. Prior to 2007 amazon was up on the hill, google was in Kirkland and Microsoft really wasn’t in Seattle. When google opened its engineering office in Fremont it changed the game. Every tech company had to have an engineering office in the city near UW to compete for talent. Prior to that the start ups were in Seattle but not the big boys. Not in fun areas. Thats I think a major driver of increasing home prices in Seattle proper. Well paid tech employees from fortune 500 companies that just don’t want to commute. Those downtown offices are only getting bigger. And the people coming to work for those tech companies compare the housing to LA San Francisco and NY. From those perspectives Seattle is cheap. Oh and remember they get about a 10% pay raise due to no income tax to work in Seattle vs California or New York.

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  6. Kary L. Krismer

    By drshort @ 2:

    What other investment can you leverage to 95% at rock bottom interest rates, deduct the interest from your taxes, live in while you invest in it, reap the capital gains tax free, and walk away with only a hit to your credit score if it doesn’t work out? That doesn’t support buying something over-priced, but the advantages in investing in a house are pretty high compared to other assets.

    By Erik @ 3:

    RE: drshort @ 2
    Buying a house and expecting it to appreciate is as foolish as paying 20% down. In ten years after the market resets again it will track with inflation

    You apparently don’t understand the concept of leverage. Tracking with inflation is great if you’re highly leveraged.

    Buy a $200,000 house with 5% down and wait eight years. At 3% inflation your property would be worth $253,000. After costs of sale your $10,000 would have turned into $40,000.

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  7. Xizor

    RE: boater @ 5

    I think Boater has a point. And I read today that King County was the 4th fastest growing County in the nation in population last year, and second out of the top 25 largest counties. It is population growth and limits on development that drive demand and prices. That suggests there may be more to come. Let the good times roll.

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  8. Erik

    RE: Kary L. Krismer @ 6
    That sounds like something a house salesman would say. Tim has shown many times on this site that there are many hidden costs when buying and owning a house. There are fees and there are repairs. Plus you aren’t very mobile. Maybe you didn’t read those posts? Sounds like something one of the Clark county people would say.

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  9. Kmac

    By Kary L. Krismer @ 6:

    Buy a $200,000 house with 5% down and wait eight years. At 3% inflation your property would be worth $253,000. After costs of sale your $10,000 would have turned into $40,000.

    And if you figure the annual property taxes that it took to hold on to that property for eight years at ~$2200, you give back ~$17,500 of that alleged $30,000 inflation gain, to the state and local government.

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  10. drshort

    RE: Erik @ 8

    I don’t know about you, but a big part of my retirement investment plan is to own the home I live in without a mortgage. Even if you could invent some numbers that show me I would be financially better renting as a senior, I would never want to be in the position of having to up and move with 30 days notice at some landlord’s whim when I’m 65+.

    Also, I’ve owned 3 properties prior to the home I’m in now. Each time I bought a new place, I sold the old one (except in 2008 when I decided it’d be better to rent a couple of years prior to buying again). Even with the big drop in prices between 2007 and 2010, I would be way better off financially had I kept those 3 properties and rented them out. I kick myself for not keeping them.

    Regardless of the benefits, any overpriced investment is a bad idea. But if you don’t buy at a terrible time, have a long time horizon, and have ample savings/income to cover the unexpected, real estate can be a vert good investment. You just need to use your brain and invest wisely.

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  11. Kary L. Krismer

    By Kmac @ 9:

    By Kary L. Krismer @ 6:
    Buy a $200,000 house with 5% down and wait eight years. At 3% inflation your property would be worth $253,000. After costs of sale your $10,000 would have turned into $40,000.

    And if you figure the annual property taxes that it took to hold on to that property for eight years at ~$2200, you give back ~$17,500 of that alleged $30,000 inflation gain, to the state and local government.

    Actually, you wouldn’t necessarily deduct that number from the $30,000. You would deal with taxes as an ongoing expense and compare it to the rent you would have to pay. In the example I gave, principal, interest and taxes would be about $1,200 a month, so if you could rent a house for less than that, you would account for that there. (BTW, I purposefully picked a low property value/loan amount so that tax savings would not be a consideration). If rent was more than $1,200 a month, you would add that to the $30,000, assuming you thought you could save that money (rather doubtful for most people, so I wouldn’t include that).

    And in doing that calculation you would need to assume that the rent would go up at 3% a year, while the same would not be true of the $1,200 payment. There the taxes would be the only thing to vary, but they would be unlikely to change more than $50 a month (that would be almost a 25% change).

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  12. Kary L. Krismer

    By Erik @ 8:

    RE: Kary L. Krismer @ 6
    That sounds like something a house salesman would say. Tim has shown many times on this site that there are many hidden costs when buying and owning a house. There are fees and there are repairs. Plus you aren’t very mobile. Maybe you didn’t read those posts? Sounds like something one of the Clark county people would say.

    There’s a reason I don’t respond to many of your posts. I’m well aware that houses are not liquid investments and require maintenance. But even changing the roof, furnace and painting the exterior wouldn’t eat up half the $30,000.

    But go back and read my post. I specifically quoted the prior post that you responded to because that helped show that you totally missed the point of that prior post. And because you missed the point I explained leverage to you. I assumed that leverage was a foreign concept to you.

    And BTW, in addition to picking a low loan amount where tax savings wouldn’t be a factor, I also picked a rather low inflation rate. At 6% the value of the house would be almost $320,000 in 8 years.

    And I also didn’t mention the fact that the loan would be payable in less valuable dollars, due to the inflation. So the $190,000 you had to pay back wouldn’t be worth the same amount as the $190,000 you received.

    The bottom line is having a highly leveraged investment is good even if it only keeps up with inflation as long as there is even minimal inflation. And if you can do that at a low interest rate and not be taxed on your gain (the point made by Dr. Short), that’s even better. So your comment that a house would only appreciate at the rate of inflation made very little sense.

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  13. mike

    Wow – some investor stands to make a killing on this place. I checked it out today and it really has only been cleaned and painted since the 2007 sale based on conversations I had with a number of neighbors that knew the history…

    http://www.redfin.com/WA/Seattle/9210-28th-Ave-NW-98117/home/289415

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  14. Kmac

    By Kary L. Krismer @ 11:

    And in doing that calculation you would need to assume that the rent would go up at 3% a year, while the same would not be true of the $1,200 payment. There the taxes would be the only thing to vary, but they would be unlikely to change more than $50 a month (that would be almost a 25% change).

    That makes sense.
    If year one rent is $1500, and with three percent increase of rent every year, year eight rent would be $1845.
    Over the eight years you would save $44,856 in rental payments by purchasing instead.

    So the purchase, over eight years, would net a $30,000 capital (inflation) gain
    and $27,356 (44856 (rent savings) – 17,500 (tax bill)) monthly expense savings.

    A 573% cash on cash return after eight years. Not too shabby.

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  15. SaffyThePook

    By Kary L. Krismer @ 11:

    By Kmac @ 9:
    By Kary L. Krismer @ 6:
    Buy a $200,000 house with 5% down and wait eight years. At 3% inflation your property would be worth $253,000. After costs of sale your $10,000 would have turned into $40,000.

    And if you figure the annual property taxes that it took to hold on to that property for eight years at ~$2200, you give back ~$17,500 of that alleged $30,000 inflation gain, to the state and local government.

    Actually, you wouldn’t necessarily deduct that number from the $30,000. You would deal with taxes as an ongoing expense and compare it to the rent you would have to pay. In the example I gave, principal, interest and taxes would be about $1,200 a month, so if you could rent a house for less than that, you would account for that there. (BTW, I purposefully picked a low property value/loan amount so that tax savings would not be a consideration). If rent was more than $1,200 a month, you would add that to the $30,000, assuming you thought you could save that money (rather doubtful for most people, so I wouldn’t include that).

    And in doing that calculation you would need to assume that the rent would go up at 3% a year, while the same would not be true of the $1,200 payment. There the taxes would be the only thing to vary, but they would be unlikely to change more than $50 a month (that would be almost a 25% change).

    Don’t forget that the property taxes are deductable from your Federal income taxes, so you’d actually get up to 39.6% of them back, depending on your tax bracket.

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  16. Kmac

    After visiting a mrtg calculator and re reading Kary L. Krismer @ 11, I see that $1200/mo includes property taxes.

    748% return on cash if no repairs and or maintenance is needed.

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  17. Kary L. Krismer

    By SaffyThePook @ 15:

    Don’t forget that the property taxes are deductable from your Federal income taxes, so you’d actually get up to 39.6% of them back, depending on your tax bracket.

    Before it depends on your tax bracket it depends on your other deductions and tax filing status. The interest paid would be under $9,400 a year in my hypothetical. If you’re married and didn’t have any other deductions besides your real estate taxes I’m not even sure you could itemize. The standard deduction is $12,200 if you’re married.

    In any case though, my hypothetical was made to explain the concept of leverage, and I tried to purposefully keep it simple. If you were talking about a much more expensive house to live in, then the chances the rent would be as much as the PITI would be much less, but the tax savings would start to kick in. But that gets beyond explaining leverage.

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  18. Erik

    RE: Kary L. Krismer @ 12
    You are a feisty house salesman!

    I guess if you have enough money to take care of problems as they arise, houses would be an investment. The thing you and mr. short are not considering is if you are like most americans living pay check to pay check, it is pretty tough in my opinion to keep a house as a rental. The risk of having to sink money into it is too high for most people. I would have rented my last place if I had some money in the bank for reserves.

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  19. Kary L. Krismer

    RE: Erik @ 18 – Okay, I’ll be a bit more blunt. The reason that I don’t typically respond to you is I don’t want to waste my time. There’s far too much that you don’t understand and far too many things you think you understand that you don’t.

    But why oh why are you now bringing up keeping a house as a rental? The discussion has obviously been in the context of owning the house to live in instead of renting, which is why we’ve been comparing rent to PITI. If you’re living paycheck to paycheck, buying a house probably isn’t the best idea for numerous reasons.

    If you want to bring rentals into it, prior to the peak leverage was the only reason to buy rental properties at the going prices. Residential real estate made little sense otherwise, unless perhaps conversion to condo was contemplated. The return from operations was minimal.

    Finally, I made an error in post 11 above. It should have said subtract from the $30,000 if the PITI is more than the rent would have been. I said add.

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  20. softwarengineer

    RE: Kary L. Krismer @ 19

    Yes Kary

    I attribute the bull stock market the last 6 years to a lack of good investments to pour hard earned cash. Including rentals. Apparently, a lion’s share of the rich elite think just like SWE on investments.

    Many wannabe landlord X gens looking for more real estate debt haven’t a clue what they’re getting into in that dire investment:

    1. More risk debt, with their empty units “noose” as tennants move on continuously [sometimes 2-3 a year].

    2. Continuous maintenance costs/time cutting into a “free” life style. Subletting by tennants and animals can really tear a place up fast [new floors, stink and paint]. You better know basic electrical and plumbing skills yourself or pay the yellow page ones like $300 for every “15 min” fix BTW. Boy have their rates “sky-rocketed” the last several years [I paid one $450 recently just for a "15 min fix" thermostat for my furnace last week....that was with a $60 off coupon].

    3. Finding tennants with good credit ratings and background checks that will sign “longterm” leases is hard [if not impossible] too.

    They don’t have a clue what they’re getting themselves into. Most savvy investors do and “reluctantly” are buying stocks anyway with their cash [they'd rather get safe returns on Money Markets and CDs, but that's gone now too with low interest rates]…..the current bull stock market is “flush” with cash…

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  21. Erik

    RE: Kary L. Krismer @ 19
    You are a rude house salesman!

    I got rid of a $116k house debt and acquired a $128k from a sale all within 2 years. All I had was about $4.5k to start. My income wasn’t really that high either. I may be dumb, but it seems like I must have some kind of idea how to do something. The difficult part was that I had such little money to start. For someone on a budget, I think I did very well. I am not a real estate agent nor do I have tons of experience in real estate. Bottom line is that my real estate decisions have made me a lot of money in security with little work. The average person can do this if they make good decisions like I did. You like to argue specific details and tax laws. That is not that interesting to me because in the big scheme of things, it doesn’t really matter. I will cross that bridge when I come to it.

    You are able to fight about specific tax laws or calculations, but you don’t see the big picture and you never have.

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  22. Erik

    RE: Kary L. Krismer @ 19
    You are a rude house salesman!

    I got rid of a $116k house debt and acquired a $128k from a sale all within 2 years. All I had was about $4.5k to start. My income wasn’t really that high either. I may be dumb, but it seems like I must have some kind of idea how to do something. The difficult part was that I had such little money to start. For someone on a budget, I think I did very well. I am not a real estate agent nor do I have tons of experience in real estate. Bottom line is that my real estate decisions have made me a lot of money in security with little work. The average person can do this if they make good decisions like I did. You like to argue specific details and tax laws. That is not that interesting to me because in the big scheme of things, it doesn’t really matter. I will cross that bridge when I come to it.

    You are able to fight about specific tax laws or calculations, but you don’t see the big picture and you never have.

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  23. drshort

    By Erik aka “The Real Estate Investment Wunderkin”:

    Housing is no longer a good investment.

    I just spent $40 on 30 pills of probiotics. Seems like a way better investment than a house at this point. There will atleast be potential benefits.

    Buying a house and expecting it to appreciate is as foolish as paying 20% down.

    I got rid of a $116k house debt and acquired a $128k from a sale all within 2 years.

    I would have rented my last place if I had some money in the bank for reserves.

    Bottom line is that my real estate decisions have made me a lot of money in security with little work. The average person can do this if they make good decisions like I did.

    If you have enough money to take care of problems as they arise, houses would be an investment.

    My interpretation ==> “I don’t have enough money to buy a place right now, so I’m going to convince myself and anyone who will listen it would be a bad investment anyway. You’ll know it’s the time to buy when I qualify for a mortgage.”

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  24. boater

    RE: Erik @ 22
    Eric how would you determine if you’re current outcome was due to skill or luck? how much did each play in your success?

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  25. mike

    RE: Erik @ 21 – I found the perfect ‘fixer-upper’ remodel project for a Big Dog. Price is a little low now, but after you work your magic I’m sure you can turn this Olympic Manor house around for over a $mil given that other top notch remodels in the area have hit that point.

    http://www.redfin.com/WA/Seattle/9030-22nd-Ave-NW-98117/home/290082

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  26. Tim Deerhawke

    This thread started with “Based on this data, it would have been pretty smart to sell by the end of 2013. This market has nowhere to go but down. Interest rates will inch up and so will inventory.”

    I don’t know what the current status is on interest rates, but inventory for King County is down from March a year ago– from 3169 in 2013 to 3152 this past month. Not a huge change, but March of last year was already bare bones.

    I just got the monthly wrapup for my neighborhood from a local real estate agent and it has about half the normal sales for the month. That makes it sound like the market is soft because nobody is buying. But all the listings went for nearly full price or full price and several went way over asking.

    I for one don’t believe this market has nowhere to go but down. However I was also a skeptic in 2007 when people were saying the market has nowhere to go but up,

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  27. mike

    RE: Tim Deerhawke @ 26 – In 98117, the area of my recommended Big Dog remodel for Erik, inventory is down 30% YOY!

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  28. wreckingbull

    By Erik @ 18:

    RE: Kary L. Krismer @ 12
    You are a feisty house salesman!

    I guess if you have enough money to take care of problems as they arise, houses would be an investment. The thing you and mr. short are not considering is if you are like most americans living pay check to pay check, it is pretty tough in my opinion to keep a house as a rental. The risk of having to sink money into it is too high for most people. I would have rented my last place if I had some money in the bank for reserves.

    Ah, you are stumbling across one of the basics of personal finance. “It is expensive to be poor”.

    Maybe instead of buying expensive clothes, bogus nutritional supplements, and nights of $10 cocktails in Fremont, you could have used the money for an emergency fund. Once a solid emergency fund is built, it opens up all sorts of new doors, (such as using your condo as leverage to build out a rental portfolio). If you ever hope to be financially independent, you will first need to find a way to put your ego in check. Sadly, I don’t think this is possible.

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  29. eponym

    By Tim Deerhawke @ 26:

    inventory for King County is down from March a year ago– from 3169 in 2013 to 3152 this past month. Not a huge change, but March of last year was already bare bones.

    Just curious, where are your inventory figures coming from? The ones in the sidebar (when you click on the SFH link to get all the numbers) show the following:

    2 April 2013, 5pm:2870
    2 April 2014, 5pm: 3111

    What am I missing?

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