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.

18 responses to “Case-Shiller Second Derivative Weakness Continues”

  1. softwarengineer

    The Scarce Inventory Factor

    May likely be making the price increase by coastal cities more on the upward trend, albeit the wage deterioration during a stagnant labor pool for new job entrants can make it trend downward too.

    The skewing by high tier purchases, unaffected by the wage deterioration can make negative cities seem positive…..especially if the data is sales dollar weighted [one $10M home sale requires 100 $100K home sales]….the high tier is more 100% cash buyers unaffected by “buying up” to sell the old one too.

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  2. Craig Blackmon

    Tim, forgive me, I barely got out of Algebra 2/Trigonometry alive…

    You say: “The level we’re seeing now is comparable to late 2008.” Isn’t it also comparable to June of last year? And February of 2011? And if that’s the case, I’m not entirely clear on the conclusion to be drawn from the data.

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  3. softwarengineer

    RE: Craig Blackmon @ 2

    Tim and I Agree on the Charts

    The data is the same. Its in green and red.

    Now, why is there no improvement since the billionaire controlled MSM allegates the 2008 Great Recession is over? Why did the GDP for Q1 go down, indicating we’re still in a recession, especially if Q2 goes down too?

    Don’t trust MSM, use common sense and think out your own personal MSM. Those that did, avoided the “buy now before its too late” 2007 lies in Seattle.

    I read a lot of financial magazines, and even those I find too “NWO brainwashing”….I learn from my enemy’s news sources too, even if I don’t believe a word they say. I’ve made some lucky financial decisions for my family too, as I believe as the Bible states, “the truth will set you free”.

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  4. sam

    What is a second derivative gain/loss? Sounds too complex to try and understand.

    I want to see some data on

    Number of home sold without a home inspection or waived
    Number of homes sold without financing contingency
    Number of homes sold without 20% down payment, but a distribution of <5%, 5-10%, 10-15% and 15-20% in the last 1-2 years

    Can you present this data to us? Especially the data on home sales without 20% down payment in King county?

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  5. Another Mike

    RE: softwarengineer @ 3 – I agree with you. I listened to the MSM group-think and bought my house at the top, and I got clobbered. Now, I’m listening to the contrarians, the guys who I should have listened to in 2007. I suggest other folks do likewise, if only to hear a competing view.

    ps: the MSM can’t blame the weather for 2Q2014 numbers like they did for 1Q2014.

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  6. Shoeguy

    I would sure like to see a chart comparing house price gains to median income…gains? Losses? Stagnation?

    At what point does the divergence in those two graphs indicate the resurgence of a housing bubble again, because there has to be a thresh hold there somewhere, and I submit that the tip top of the 2006/2007 curve shouldn’t indicate the STARTING point of a bubble.

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  7. Mike

    RE: Shoeguy @ 6 – it doesn’t indicate a bubble in itself. It did last time because the difference was explained by a predominance of loans that were not affordable for a large number of buyers.

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  8. Tim Deerhawke

    Tim, during a month when Case-Shiller index reported solid month-to-month gains for Seattle, you say about the second derivative, “The level we’re seeing now is comparable to late 2008.”

    Seriously? C’mon man you can’t do that. That is like saying “The geopolitical situation sure looks an awful lot like Europe in early August 1914.”

    If you are going to make a prediction, make a prediction. And please give your reasons for it.

    My own perspective on Case-Shiller is that it is instructive about big trends at the national level, but has limited utility regarding particular local trends during the next quarter or two. In the case of Seattle, I have never found it all that useful as the numbers it uses include King, Pierce and Shohomish counties and come relatively late.

    Nevertheless, I watch it. It is a huge mistake to think there is no connection between the local market and the national market for real estate. For a variety of reasons, Seattle tends to come late to the national economic party. We enter a downturn later and come out of a recession a bit later. That is why you had the phenomenon of buyers (and builders) in Seattle investing in real estate at absurd valuations in late 2007 and the first 3 quarters of 2008. They were all spouting the line that Seattle was somehow disconnected from the national economy because we were undergoing a tech transformation and becoming a technology destination city.

    If you are surfing and pay attention to the next wave and are not focused on the ocean or the wave beyond that wave, you could miss the signs of the tsunami.

    The real question right now is whether we are experiencing some choppiness, seeing the first in a line of big waves or are getting telltale signs of a tsunami.

    Is what we are seeing part of the normal statistical pattern of stabilization on a higher base after a rapid run-up in prices during 2012 and 2013?

    Or has the market outrun itself and we need to drop a bit to stabilize a bit lower?

    Or… as The Tim seems to be hinting darkly, is this the beginning of the next deluge?

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  9. Erik

    RE: Tim Deerhawke @ 8
    “The Tim seems to be hinting darkly, is this the beginning of the next deluge?”

    He seems to do that a lot. When a snapshot of data lines up such as the 2nd derivative graph, Tim likes to imply the rate of change in market conditions are about the same. These things are mutually exclusive. He picks an equal data point depending on what he thinks may happen. The rate of change could be heading up or down.

    We could be at a top here for a lot of places. I think Seattle proper is not gonna see a hit. Cities in Snohomish and Pierce county may go down. There isn’t a lot to support house values in those areas.

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  10. Erik

    RE: Erik @ 9
    Tim could be right this time though. Seems likely that prices may level off or head down based on the big run we have had.

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  11. Another Mike

    RE: Tim Deerhawke @ 8 – I think your analogy about focusing on one wave is really great. As seen over the past few years, all markets are global and intertwined – equities, bonds, real estate, and now sovereign debt and margin debt. You can’t really analyze the Seattle housing market in isolation, but the charts that Tim posted is good evidence to analyze the bigger picture.

    One thing I do wonder about is whether the continuing devaluation of the Ren Min Bi will accelerate real estate buying on the West Coast by Chinese investors, or will they pull back and buy more gold.

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  12. Ira Sacharoff

    By Erik @ 9:

    RE: Tim Deerhawke @ 8
    “The Tim seems to be hinting darkly, is this the beginning of the next deluge?”

    He seems to do that a lot. When a snapshot of data lines up such as the 2nd derivative graph, Tim likes to imply the rate of change in market conditions are about the same. These things are mutually exclusive. He picks an equal data point depending on what he thinks may happen. The rate of change could be heading up or down.

    We could be at a top here for a lot of places. I think Seattle proper is not gonna see a hit. Cities in Snohomish and Pierce county may go down. There isn’t a lot to support house values in those areas.

    People were saying that 7 years ago too, that Seattle proper was not going to see a hit. It did. Maybe the more desirable, cooler areas will see less of a hit, but we’re really not insulated from macroeconomic conditions. Also, just because things are going along swimmingly for Amazon doesn’t mean they always will be. What if Jeff Bezos gets arrested for child molestation?

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  13. Erik

    RE: Ira Sacharoff @ 12
    Anything could happen, but that situation seems highly unlikely for Jeff Bezos. I see Jeff Bezos as someone that gets his rocks off by sending out packages to customers in the mail. His fetish is selling products and delivering them to people.

    Enough about Jeff’s package delivering fetish, I have topic a valid topic of interest… Why are condos in Alki beach so cheap right now? Well, they aren’t cheap, but they aren’t crazy expensive like all the other nice places in Seattle. I was wondering if people are possibly scared of the water rising or what. I don’t know how to get the fancy graphs plotting condo prices in Alki, but by observation, prices never rebounded there. It looks like they didn’t rebound while everything else recovered. Seems like a good area to buy right now. Do you agree?

    One reason could be because there are still a lot of foreclosures out there for some reason. Again, I don’t know how to validate that.

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  14. SaffyThePook

    By Erik @ 13:

    RE: Ira Sacharoff @ 12

    Enough about Jeff’s package delivering fetish, I have topic a valid topic of interest… Why are condos in Alki beach so cheap right now? Well, they aren’t cheap, but they aren’t crazy expensive like all the other nice places in Seattle. I was wondering if people are possibly scared of the water rising or what. I don’t know how to get the fancy graphs plotting condo prices in Alki, but by observation, prices never rebounded there. It looks like they didn’t rebound while everything else recovered. Seems like a good area to buy right now. Do you agree?

    One reason could be because there are still a lot of foreclosures out there for some reason. Again, I don’t know how to validate that.

    How do they compare to other parts of West Seattle? My impression, backed by no hard data whatsoever, is that the difficulty of getting in and out of WS holds down prices there in general. Add to that a glut of condos in Ballard and even downtown and WS condos may be taking a double whammy.

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  15. softwarengineer

    RE: Shoeguy @ 6

    Yes Shoeguy

    Historically, the 1929 Great Depression went on and on for two decades….never ending….the economic collapse of 2008 is similar in its chronic nature, albeit unemployment was just reported as U6 during the Great Depression, the Cooked Books low-ball U3 unemployment rate wasn’t dreamed up yet. Another main difference, prices crashed during the Great Depression, versus today’s “stagflation”, with $4/gal gas and $5/lb burger and chronic hopeless joblessness. IMO, if it wasn’t for the lack of a dust bowl and surplus food for food banks, it would be far worse today:

    “…1929
    Herbert Hoover becomes President. Hoover is a staunch individualist but not as committed to laissez-faire ideology as Coolidge.
    More than half of all Americans are living below a minimum subsistence level.
    Annual per-capita income is $750; for farm people, it is only $273.
    Backlog of business inventories grows three times larger than the year before. Public consumption markedly down.
    Freight carloads and manufacturing fall.
    Automobile sales decline by a third in the nine months before the crash.
    Construction down $2 billion since 1926.
    Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent.
    Stock market crash begins October 24. Investors call October 29 “Black Tuesday.” Losses for the month will total $16 billion, an astronomical sum in those days.
    Congress passes Agricultural Marketing Act to support farmers until they can get back on their feet.
    1930
    By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Expands the money supply with a major purchase of U.S. securities. However, for the next year and a half, the Fed will add very little money to the shrinking economy. (At no time will it actually pull money out of the system.) Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: “Liquidate labor, liquidate stocks, liquidate real estate… values will be adjusted, and enterprising people will pick up the wreck from less-competent people.” (More)
    The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen. Even this is compensated for by the fact that American businesses are no longer investing in Europe, but keeping their money stateside. The consensus of modern economists is that the tariff made only a minor contribution to the Great Depression in the U.S., but a major one in Europe. (More)
    The first bank panic occurs later this year; a public run on banks results in a wave of bankruptcies. Bank failures and deposit losses are responsible for the contracting money supply.
    Supreme Court rules that the monopoly U.S. Steel does not violate anti-trust laws as long as competition exists, no matter how negligible.
    Democrats gain in Congressional elections, but still do not have a majority.
    The GNP falls 9.4 percent from the year before. The unemployment rate climbs from 3.2 to 8.7 percent.
    1931
    No major legislation is passed addressing the Depression.
    A second banking panic occurs in the spring.
    The GNP falls another 8.5 percent; unemployment rises to 15.9 percent.
    1932
    This and the next year are the worst years of the Great Depression. For 1932, GNP falls a record 13.4 percent; unemployment rises to 23.6 percent.
    Industrial stocks have lost 80 percent of their value since 1930.
    10,000 banks have failed since 1929, or 40 percent of the 1929 total.
    About $2 billion in deposits have been lost since 1929.
    Money supply has contracted 31 percent since 1929.
    GNP has also fallen 31 percent since 1929.
    Over 13 million Americans have lost their jobs since 1929.
    Capital growth investments have dropped from $16.2 billion to 1/3 of one billion since 1929.
    Farm prices have fallen 53 percent since 1929.
    International trade has fallen by two-thirds since 1929.
    The Fed makes its first major expansion of the money supply since February 1930.
    Congress creates the Reconstruction Finance Corporation. (More)
    Congress passes the Federal Home Loan Bank Act and the Glass-Steagall Act of 1932. (More)
    Top tax rate is raised from 25 to 63 percent.
    Popular opinion considers Hoover’s measures too little too late. Franklin Roosevelt easily defeats Hoover in the fall election. Democrats win control of Congress.
    At his Democratic presidential nomination, Roosevelt says: “I pledge you, I pledge myself, to a new deal for the American people.”
    1933
    Roosevelt inaugurated; begins “First 100 Days” of intensive legislative activity. (More)
    A third banking panic occurs in March. Roosevelt declares a Bank Holiday; closes financial institutions to stop a run on banks.
    Alarmed by Roosevelt’s plan to redistribute wealth from the rich to the poor, a group of millionaire businessmen, led by the Du Pont and J.P. Morgan empires, plans to overthrow Roosevelt with a military coup and install a fascist government. The businessmen try to recruit General Smedley Butler, promising him an army of 500,000, unlimited financial backing and generous media spin control. The plot is foiled when Butler reports it to Congress. (More)
    Congress authorizes creation of the Agricultural Adjustment Administration, the Civilian Conservation Corps, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Emergency Relief Administration, the National Recovery Administration, the Public Works Administration and the Tennessee Valley Authority. (More)
    Congress passes the Emergency Banking Bill, the Glass-Steagall Act of 1933, the Farm Credit Act, the National Industrial Recovery Act and the Truth-in-Securities Act. (More)
    U.S. goes off the gold standard.
    Roosevelt does much to redistribute wealth from the rich to the poor, but is obsessed with a balanced budget. He later rejects Keynes’ advice to begin heavy deficit spending.
    The free fall of the GNP is significantly slowed; it dips only 2.1 percent this year. Unemployment rises slightly, to 24.9 percent.
    1934
    Congress authorizes creation of the Federal Communications Commission, the National Mediation Board and the Securities and Exchange Commission. (More)
    Congress passes the Securities and Exchange Act and the Trade Agreement Act. (More)
    The economy turns around: GNP rises 7.7 percent, and unemployment falls to 21.7 percent. A long road to recovery begins.
    Sweden becomes the first nation to recover fully from the Great Depression. It has followed a policy of Keynesian deficit spending. (More)
    1935
    The Supreme Court declares the National Recovery Administration to be unconstitutional.
    Congress authorizes creation of the Works Progress Administration, the National Labor Relations Board and the Rural Electrification Administration. (More)
    Congress passes the Banking Act of 1935, the Emergency Relief Appropriation Act, the National Labor Relations Act, and the Social Security Act. (More)
    Economic recovery continues: the GNP grows another 8.1 percent, and unemployment falls to 20.1 percent.
    1936
    The Supreme Court declares part of the Agricultural Adjustment Act to be unconstitutional.
    In response, Congress passes the Soil Conservation and Domestic Allotment Act. (More)
    Top tax rate raised to 79 percent.
    Economic recovery continues: GNP grows a record 14.1 percent; unemployment falls to 16.9 percent.
    Germany becomes the second nation to recover fully from the Great Depression, through heavy deficit spending in preparation for war.
    1937
    The Supreme Court declares the National Labor Relations Board to be unconstitutional.
    Roosevelt seeks to enlarge and therefore liberalize the Supreme Court. This attempt not only fails, but outrages the public.
    Economists attribute economic growth so far to heavy government spending that is somewhat deficit. Roosevelt, however, fears an unbalanced budget and cuts spending for 1937. That summer, the nation plunges into another recession. Despite this, the yearly GNP rises 5.0 percent, and unemployment falls to 14.3 percent.
    1938
    Congress passes the Agricultural Adjustment Act of 1938 and the Fair Labor Standards Act. (More)
    No major New Deal legislation is passed after this date, due to Roosevelt’s weakened political power.
    The year-long recession makes itself felt: the GNP falls 4.5 percent, and unemployment rises to 19.0 percent.
    Britain becomes the third nation to recover as it begins deficit spending in preparation for war.
    1939
    GNP rises 7.9 percent; unemployment falls to 17.2 percent.
    The United States will begin emerging from the Depression as it borrows and spends $1 billion to build its armed forces. From 1939 to 1941, when the Japanese attack Pearl Harbor, U.S. manufacturing will have shot up a phenomenal 50 percent!
    The Depression is ending worldwide as nations prepare for the coming hostilities.
    World War II starts with Hitler’s invasion of Poland. ”

    http://www.huppi.com/kangaroo/Timeline.htm

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  16. Tim Deerhawke

    Tim is claiming that we are back in 2008 and you are claiming that we are back in the 1930’s.

    Meanwhile, my daily real estate experience here in Seattle above the ship canal is more like the late 90’s or, if you like, 2004-2006. Prices rising by the month, over-price offers, all cash closes, non-contingency purchase and sale contracts, etc. etc. But this time, everyone seems to be putting 20% down.

    There sure are a couple of different data sets at work out there. We sound a bit like the blind men describing the elephant.

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  17. Erik

    RE: SaffyThePook @ 14
    Isn’t It a long commute from Ballard to the I-5 corridor? Ballard prices are booming. I have never commuted to and from west seattle during rush hour, but I will look into commute times. It is worth saving $100k and living on the beach to spend an extra 10 minutes commuting for me.

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  18. SaffyThePook

    By Erik @ 17:

    RE: SaffyThePook @ 14
    Isn’t It a long commute from Ballard to the I-5 corridor? Ballard prices are booming. I have never commuted to and from west seattle during rush hour, but I will look into commute times. It is worth saving $100k and living on the beach to spend an extra 10 minutes commuting for me.

    It is heading East or South, but getting downtown via the Ballard Bridge and Elliott Ave is quick. Keep going via 99 and 509 to get to the airport. It’s usually faster than I-5.

    Heading North, just take 15th to Holman and you make a fast diagonal to Aurora and I-5.

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