Price to Income Ratio Back in Bubble Territory

It has been a while since we last looked at one of our primary housing bubble metrics: local home prices compared to incomes.

In the next chart I am using the Case-Shiller Home Price Index for the Seattle area (which rolls together King, Snohomish, and Pierce counties) and Bureau of Economic Analysis data on per capita incomes for the same three-county metro area.

Here’s a look at the home price to income ratio over the last 24 years:

Seattle Metro Home Price to Rent Ratio

By this metric, the last housing bubble lasted from about mid-2004 when the ratio hit 7.4 through mid-2007 when it peaked at 9.2. The current level of 7.6 is definitely in bubble territory, in my opinion. This chart does show another way that this (possible) bubble is different from the last: From 2004 through mid-2006, the price-to-income ratio shot straight up—32 months without a single month-over-month dip. This time around we’re seeing consistent seasonality, with the index decreasing slightly in the fall and winter each year.

In June the price-to-income ratio hit its highest level since December 2008.

Let’s take a look at a variation of this measure, using King County median home price from the NWMLS and BEA per capita income for just King County.

King County Home Price to Rent Ratio

The overall pattern in King County is the same as for the whole Seattle metro area, but the current level is much higher relative to the past. While the Seattle metro price-to-income ratio is currently 17 percent below its 2007 peak, the King County price-to-income ratio is only 7 percent below its peak—well into bubble territory without question.

Here’s another way of looking at the same data by just plotting each index next to each other. Note that the most recent income data is for 2012, so the 2013 and 2014 data is just a linear projection of the 2009-2012 trend. I’ve also added the faded line for the “flat incomes” scenario, as well as a line for median household income, which has not tracked with home prices since the late ’90s.

Seattle-Area Home Prices and Rents

As of June, the Seattle area’s Case-Shiller home price index is 17.3 percent above the per capita income index. This is the largest difference since December 2008, and roughly the same difference that we saw in November 2004 on the way up during the last bubble.

Of course, as we discussed a few months ago, all of these charts exclude an increasingly large large pool of money that may be having a big effect on the local housing market: investment returns.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

64 comments:

  1. 1
    Blurtman says:

    Who is calling a top?

  2. 2
    Nic says:

    One thing to keep in mind is that there isn’t a 1:1 correlation when it comes to an increase in earnings vs what you can afford. To illustrate, say you purchased a house while your household income was $100k per year and you felt you could afford $1,000 per month payments on a house. When your income goes up to $150k (50% increase), that doesn’t mean you you can only afford $1,500 in payments (50% increase or $500), you’re now earning $4k per month more than you were then. Your fixed expenses don’t necessarily go up with your income (although they can if you let them). I wonder if there’s a chance that could come into play as average household incomes go up in the area, people can afford more because their basic living expenses aren’t going up at the same rate as their incomes.

  3. 3
    Mike says:

    If house prices are showing a bubble, so are rents. One major difference now is people actually seem to have the income and/or savings to support these prices.

  4. 4
    nathan118 says:

    By Mike @ 3:

    If house prices are showing a bubble, so are rents. One major difference now is people actually seem to have the income and/or savings to support these prices.

    Because incomes have skyrocketed in the last 7 years?

    http://www.advisorperspectives.com/dshort/charts/census/household-income-monthly-median-since-2000.gif

  5. 5
    whan says:

    Actually, median household income has gone down; 6% lower than recent peak:

    http://www.deptofnumbers.com/income/washington/seattle/

    Call it a top. Interest rates going up in a couple of months, maybe. But until they do, all economic bets are off. This is not a normal market (housing, stocks, any assets).

  6. 6
    The Tim says:

    RE: whan @ 5 – First off, I use per capita income rather than median income in this series because historically it tracks better with home prices.

    Secondly, the data on that site you linked is out of date and also misleading. The latest data from OFM shows that Seattle area median household incomes fell between 2008 and 2010 but have risen every year since then:

    The 2014 median household income for King County came in 6.7% higher than the level it hit before the recession in 2008.

  7. 7
    nathan118 says:

    Clearly based on the last graph, home prices are diverging from incomes, just like in the last bubble. The question is, how much will they diverge before they correct?

  8. 8
    Mike says:

    By nathan118 @ 4:

    By Mike @ 3:

    If house prices are showing a bubble, so are rents. One major difference now is people actually seem to have the income and/or savings to support these prices.

    Because incomes have skyrocketed in the last 7 years?

    http://www.advisorperspectives.com/dshort/charts/census/household-income-monthly-median-since-2000.gif

    I’d say that’s spot on, the US as a whole isn’t gentrifying. However when you break it down to the region, city or neighborhood level, this area definitely is gentrifying at a rapid pace. I’m seeing lower income people priced out, and wealthier people moving in. Every single old $400K or less house in my neighborhood is being bulldozed and replaced with something only affordable to the upper middle class. The ones that aren’t bulldozed are being remodeled and sold to someone of significantly higher income than whomever was living there before. Some of that is normal age related turnover, but whenever one of those inexpensive houses owned by a pensioner disappears, that inexpensive housing doesn’t come back.

    At the same time, other people are retiring, working age people are leaving the workforce to raise kids – and despite all those new high incomes moving in to the neighborhood, the median income might not go up at all if the other trends towards lower income balance out on a 1:1 basis. On my own block, through turnover, retirement, etc… we’ve had 4 people leave the workforce recently and 2 new high income people move in. The median income likely dropped as a result.

  9. 9
    nathan118 says:

    By Mike @ 8:

    By nathan118 @ 4:

    By Mike @ 3:

    If house prices are showing a bubble, so are rents. One major difference now is people actually seem to have the income and/or savings to support these prices.

    Because incomes have skyrocketed in the last 7 years?

    http://www.advisorperspectives.com/dshort/charts/census/household-income-monthly-median-since-2000.gif

    I’d say that’s spot on, the US as a whole isn’t gentrifying. However when you break it down to the region, city or neighborhood level, this area definitely is gentrifying at a rapid pace. I’m seeing lower income people priced out, and wealthier people moving in. Every single old $400K or less house in my neighborhood is being bulldozed and replaced with something only affordable to the upper middle class. The ones that aren’t bulldozed are being remodeled and sold to someone of significantly higher income than whomever was living there before. Some of that is normal age related turnover, but whenever one of those inexpensive houses owned by a pensioner disappears, that inexpensive housing doesn’t come back.

    At the same time, other people are retiring, working age people are leaving the workforce to raise kids – and despite all those new high incomes moving in to the neighborhood, the median income might not go up at all if the other trends towards lower income balance out on a 1:1 basis. On my own block, through turnover, retirement, etc… we’ve had 4 people leave the workforce recently and 2 new high income people move in. The median income likely dropped as a result.

    That’s a lot of cool anecdotal evidence, but based on Tim’s data…King County incomes are up 6.7%. The others less than that. What percent are house prices up?

    A whole lot more than that. And that’s why there’s a divergence in the graph, just as there was in the first bubble. I was replying to the guy that said incomes support these prices. Oh really? Just like incomes in the first bubble supported those prices?

  10. 10
    Rudolfo says:

    You are comparing the income of a population to the sales of a sample, and assuming they correlate.

    If buyers come from other areas armed with cash from sales in more expensive areas (or other means), and pay prices that drive increase, this post’s correlation is irrelevant.

    Worth considering.

  11. 11

    By Rudolfo @ 9:

    You are comparing the income of a population to the sales of a sample, and assuming they correlate.

    If buyers come from other areas armed with cash from sales in more expensive areas (or other means), and pay prices that drive increase, this post’s correlation is irrelevant.

    Worth considering.

    Or the other thing worth considering is that last time the correction had more to do with the real estate markets in CA, AZ and FL. The next time our market “corrects” it might not even be related to anything in the United States.

  12. 12
    Sytelus says:

    This graph is probably saying something else. The reason we saw such high ratios in past were because of lousy down payment requirements. Now most people are required to put down 20%. That should immediately put upper bound on this ratio and it must be significantly less than last peak. But that doesn’t seem to be case here for King county. That can mean 3 things,

    1. Investors to residents ratio is much more than before.
    2. Lot of people moving from Califormia are selling their houses in current boom, paying all cash here while also breaking bank.
    3. Income levels simply has gone up majestically in King county allowing people to save up enormous sums. Don’t believe it? Look at the last graph. It says median household income in king county right now is whooping $200,000!! This could be because of jump in double income families.

    My guess is that all 3 factors are at bigger play than they were during last boom. Question is how high price to income go now? Insights would probably come from more analysis of above 3 factors.

  13. 13
    nathan118 says:

    RE: Sytelus @ 11 – median is $200k? I see approaching $75k in comment 6 from Tim.

    Is that last graph correct in the post? It does appear to say $200k, using same y-axis as home prices…but a quick google search, and I’m pretty sure median income is closer to $75k.

  14. 14
    m-s says:

    RE: nathan118 @ 13
    I think the “200” on that graph was an index, with the year 1990 set to 100, like many of these sorts of graphs. Average per capita income growing much faster on this index than median family income could be an effect of high income skewing the average, but also that median may be telling us something about fewer spouses in the workplace, or income inequality showing up within families! It would be nice to see MEDIAN per capita income to compare. Tim?

  15. 15
    greg says:

    I am surprised anyone needs chartsngraphs to figure out we are in yet another bubble.

    I figured it out by looking at the prices homes are achieving, it really does not take much more than that.

    Currently even lousy plots of land are selling for insane prices, prices so high the only way to make any money is to over build the site with a toy mansion.

  16. 16

    By greg @ 15:

    I am surprised anyone needs chartsngraphs to figure out we are in yet another bubble.

    I figured it out by looking at the prices homes are achieving, it really does not take much more than that.

    Said may people in 1995, 1996, 1997, 1998, . . ..

  17. 17

    OK…..

    The top 10% of incomes [that already mostly own a home and aren’t in the market] qualify in Seattle. What’s left? Don’t bite your tongue sellers….the Millennials….LOL

  18. 18
    Mike says:

    By greg @ 15:

    I am surprised anyone needs chartsngraphs to figure out we are in yet another bubble.

    I figured it out by looking at the prices homes are achieving, it really does not take much more than that.

    Currently even lousy plots of land are selling for insane prices, prices so high the only way to make any money is to over build the site with a toy mansion.

    You need to look at more than prices to see a bubble. The previous bubble wasn’t due to ‘prices getting too high’ so much as an abundance of loans that were only payable if prices continued to rise.

    What I’m not seeing this time around is the number of vacant investor purchases that were happening in 2005. I look at my own neighborhood and those nearby. People move in to the homes. That wasn’t the case a decade ago.

  19. 19
    ess says:

    With both higher income people piling into Seattle, and foreign investment buying more and more properties, perhaps the old rules about housing costs, rents and income correlations no longer apply in Seattle. Want an example of where that old rule went out the window years ago – look north to Vancouver BC. Due to the huge amount of foreign investments in Vancouver, the price of housing as compared to income and rents has been totally skewed. Most workers and employees in Vancouver BC can’t afford houses, they either rent very small one bedroom apartments, share houses, or purchase residences far outside of Vancouver itself where housing is somewhat cheaper. Meanwhile the rich and foreign buyers are buying up the houses in Vancouver in order to reside in them, to tear them down and build mansions, as oversea safe investments or just to hold with the expectations of even larger increases to property values.

    Those who bought in the Seattle area will be OK, those who rent will either have to adjust to a different lifestyle or when they buy, buy outside of the city. Perhaps that is the future of Seattle.

  20. 20
    Rudolfo says:

    By ess @ 19:

    Those who bought in the Seattle area will be OK, those who rent will either have to adjust to a different lifestyle or when they buy, buy outside of the city. Perhaps that is the future of Seattle.

    ^^^ You are probably right. ^^^

  21. 21

    By ess @ 19:

    Those who bought in the Seattle area will be OK, those who rent will either have to adjust to a different lifestyle or when they buy, buy outside of the city. Perhaps that is the future of Seattle.

    Why is buying outside the City of Seattle considered a bad thing? There are many people who would not live in Seattle if you paid them. It’s main expensive to buy in Seattle because a significant amount of people want a shorter commute, but not everyone commutes to Seattle or is willing to make that trade-off.

  22. 22
    Erik says:

    RE: Kary L. Krismer @ 21
    Seattle is an awesome place to live. I lived south sound and it was nasty. I lived in Everett and it was filled with sick fat nasties, child predators, and drug users. Loved Kirkland, but people were a little uptight and not much diversity. Alki is fantastic.

  23. 23
    Rudolfo says:

    By Kary L. Krismer @ 21:

    By ess @ 19:

    Those who bought in the Seattle area will be OK, those who rent will either have to adjust to a different lifestyle or when they buy, buy outside of the city. Perhaps that is the future of Seattle.

    Why is buying outside the City of Seattle considered a bad thing?

    I don’t recall anyone stating buying outside Seattle is a bad thing.
    Living in Seattle appears to be a preferred thing by many, hence the demand.

  24. 24
    greg says:

    By Mike @ 18:

    By greg @ 15:

    I am surprised anyone needs chartsngraphs to figure out we are in yet another bubble.

    I figured it out by looking at the prices homes are achieving, it really does not take much more than that.

    Currently even lousy plots of land are selling for insane prices, prices so high the only way to make any money is to over build the site with a toy mansion.

    You need to look at more than prices to see a bubble. The previous bubble wasn’t due to ‘prices getting too high’ so much as an abundance of loans that were only payable if prices continued to rise.

    What I’m not seeing this time around is the number of vacant investor purchases that were happening in 2005. I look at my own neighborhood and those nearby. People move in to the homes. That wasn’t the case a decade ago.

    well if we want to be picky of course of course hard data is better than gut. But my point is that to me and to many people I know, it has been very clear the market is irrational and we are in a another bubble. I certainly don’t need any charts or graphs to show the Price Risk has gotten out of hand, one has only to look at the prices homes are achieving.

    I see “investors”, paying insane prices, and with no real plan how to recoup those monies other than appreciation….

  25. 25
    greg says:

    By ess @ 19:

    perhaps the old rules about housing costs, rents and income correlations no longer apply in Seattle. .

    smells like classic bubble talk….. a new paradigm, special case etc. Every time we see a bubble form we see a segment that believes we have special justification due to xyz ..

    Hell we don’t need charts, the bubble talk alone makes it clear we may have bad weather ahead.

  26. 26
    ess says:

    No problems living outside of Seattle. I had a rental property in Seattle when I was in college and single, but later when I got married, my wife and I decided to live north of Seattle where mortgages and taxes were about half of what a house in Seattle cost. So when I sold my half interest in my property in Seattle, we bought another house in the area outside of Seattle, and then a third house. So no arguments from me, for the price of a higher of one expensive house in Seattle – we have our own house and two rentals. I have long maintained that there are places near Seattle that are not only affordable, but have more land for those who like to garden, or just don’t want to live on top of each other.

  27. 27
    Chris Peters says:

    I’m not sure if it means anything, but you can no longer get a VA loan on most King County houses now because the houses are going far too high over the appraisal amounts.

  28. 28
    Jen says:

    As a servicemember considering the purchase of a home in Seattle proper, I would like to see the data on those folks being declined a VA mortgage due to homes selling for too high over appraisal amounts.

  29. 29
    Scotsman says:

    Rising wages and a shortage of housing drive up rents- along with housing prices in general. As long as default rates remain low I’d say we’re on solid ground. Seattle is still cheaper than many places while maintaining a growing presence in the tech and bio/medical industries. That alone suggests growth and price increases will continue for at least a while. It’s gong to take a national/international crisis to knock this train off he tracks. http://www.zerohedge.com/news/2015-07-26/these-13-us-cities-rents-are-skyrocketing

  30. 30
    Carl says:

    Rudolfo @10 and ESS @19 raise good points that I would like to expand on. The median income denominator of the price/income ratio can be misleading if a good portion of the income numbers are from people who either are not interested in purchasing a home or are priced out of buying a home. I think that the supply demand equation trumps the price/income ratio.

    So if there are only 1000 homes for sale, but there are 2000 buyers with high incomes or cash, it doesn’t really matter what the median income is. Ultimately, the market is between sellers (of which there are relatively few) and buyers (of which there are relatively many). To use median income, or even per capita income, is misleading because most of those people are not in the market, and as such, nearly irrelevant.

  31. 31
    Mike says:

    By greg @ 24:

    By Mike @ 18:

    By greg @ 15:

    I am surprised anyone needs chartsngraphs to figure out we are in yet another bubble.

    I figured it out by looking at the prices homes are achieving, it really does not take much more than that.

    Currently even lousy plots of land are selling for insane prices, prices so high the only way to make any money is to over build the site with a toy mansion.

    You need to look at more than prices to see a bubble. The previous bubble wasn’t due to ‘prices getting too high’ so much as an abundance of loans that were only payable if prices continued to rise.

    What I’m not seeing this time around is the number of vacant investor purchases that were happening in 2005. I look at my own neighborhood and those nearby. People move in to the homes. That wasn’t the case a decade ago.

    well if we want to be picky of course of course hard data is better than gut. But my point is that to me and to many people I know, it has been very clear the market is irrational and we are in a another bubble. I certainly don’t need any charts or graphs to show the Price Risk has gotten out of hand, one has only to look at the prices homes are achieving.

    I see “investors”, paying insane prices, and with no real plan how to recoup those monies other than appreciation….

    Right, but the same was true in 1979, 1989, 2000 and 2007. Only one of those periods had an actual bubble. The others were just cyclic peaks followed by several years of below trend growth.

  32. 32
    whatsmyname says:

    I always thought that when an asset recovered its earlier price over the span of a single business cycle, the proper term was “recovery”.

    Can anyone point me to a famous bubble where this happened? In that instance, what happened to “2nd bubble” prices after they regained their original lost ground?

    Thanks

  33. 33

    RE: ess @ 19
    Interesting Opinion

    Do you have any computer site that backs that up? I like BLS.

  34. 34

    By Carl @ 30:

    So if there are only 1000 homes for sale, but there are 2000 buyers with high incomes or cash, it doesn’t really matter what the median income is. Ultimately, the market is between sellers (of which there are relatively few) and buyers (of which there are relatively many). To use median income, or even per capita income, is misleading because most of those people are not in the market, and as such, nearly irrelevant.

    It always has been an irrelevant figure because a lot of people are either not interested or not able to buy a house, and a disproportionate number of those people make below the median income. I’ve been saying that for years.

  35. 35

    By Chris Peters @ 27:

    I’m not sure if it means anything, but you can no longer get a VA loan on most King County houses now because the houses are going far too high over the appraisal amounts.

    By Jen @ 28:

    As a servicemember considering the purchase of a home in Seattle proper, I would like to see the data on those folks being declined a VA mortgage due to homes selling for too high over appraisal amounts.

    Very unlikely such data exists, because any financed transaction requires an appraisal. The only time the property appraising for sale price isn’t important is when the buyer is putting over 20% down and the appraisal still has their down payment being at least 20%, or when the buyer has extra money that they can put down so that the bank’s loan ratio remains the same (e.g. 20% , 10%, etc.) as what they were applying to get.

    One thing I would caution Jen on is making sure she has a loan originator who understands VA loans.

  36. 36
    Blurtman says:

    RE: Kary L. Krismer @ 34 – Indeed. A wealthy 1% can support a market. It always has for pricey goods. The 99% can commute into Seattle from farther and farther away locations.

  37. 37
    Marco Lowe says:

    Tim,
    Great post and two questions.
    1-Given we saw such loose lending leading up to the 2007-8 collapse compared to now, I wonder how that affects the current situation?

    2- With tighter lending, but still increasing home prices, could the increasing prices be a result of the influx of new employees to Amazon and other employers? And if so, does that change the metric for what defines a bubble?

  38. 38

    RE: Blurtman @ 36 – Hardly what I’m saying, but that makes as much sense as including the income of college students in the median income figure, and then using that figure.

  39. 39
    QARunner says:

    “So if there are only 1000 homes for sale, but there are 2000 buyers with high incomes or cash, it doesn’t really matter what the median income is. Ultimately, the market is between sellers (of which there are relatively few) and buyers (of which there are relatively many). To use median income, or even per capita income, is misleading because most of those people are not in the market, and as such, nearly irrelevant.”

    Exactly, median income is not as relevant as it used to be to determine affordability. The reality is that we live in a bifurcated world where income is increasingly skewed by a relatively small (growing in Seattle’s case) number of high income workers. These are generally employed by tech companies like Amazon and Microsoft (to lesser extent) and satellite locations of Facebook, Google and other Bay Area companies searching for talent. Couple a large number of high income transplants into Seattle with limited supply and you have classic demand driving prices up the supply curve.

    I don’t think we are in a bubble since price escalation is now driven by true demand versus low interest rates. Increasing interest rates will also take some of the steam out of the market. However, as Amazon goes, so does Seattle. At some point, Amazon will stop importing people or tech will crater and demand will decrease. At that point who knows what happens to prices that are out of wack with median income.

  40. 40
    ess says:

    Interesting discussion

    As per the income vs housing prices in Vancouver BC

    http://www.bcbusiness.ca/real-estate/vancouver-income-to-home-price-ratio-highest-in-canada

    And remember – our friends to the north are taxed even higher than Americans to pay for goodies such as single payer medical, and have less left over take home pay to pay for those expensive houses. Plus I THINK that interest on mortgages for home ownership is not tax deductible up there. But I can be wrong on that, and will ask my in laws when I see them in a few weeks. I have observed what has happened up there when I visit said in laws, and have talked to them and others about the Vancouver market.

    As to why I hope this is not the same type of market as in 2007-10, I believe there are a few different factors at present

    – more population in Seattle chasing less housing, and Seattle is really become a hip and happening place.
    -the increased population are made up in part of well paid tech workers that can afford rent and buy the available housing
    -foreign investment has discovered Seattle as a good place to park money in the event things don’t go well at home
    -housing in most other west coast cities is even more expensive, and Seattle is still a relative bargain
    -the rate of new housing plummeted after the last recession and still has not kept up with demand as people pour into this area
    -the Urban Growth Management Act is starting to place limits on growth, thus the land costs are increasing at a rapid rate
    -there aren’t the crazy types of mortgages available at present as there were back in 2007
    – there are more all cash sales at present than there were back in 2007. People don’t walk away from their houses when they pay all cash when those prices drop.

    As an aside. One of our businesses is operating our two rental houses. As part of that business, we have attended and continue to attend both open houses for sale and for rent. Back in 2007 I noticed that the prices for houses that were the same size and type as our rentals would cost the buyers almost 2x as much to live when all was said and done with principal, interest, taxes and upkeep. It didn’t make sense to me back then, and I knew something bad was going to happen, although I thought the drop would be about 15%. These days, it is almost cheaper to buy than to rent if the tax benefits are factored in. Thus the market is much different than before the last recession.

    Will I be absolutely right with the above? Who knows? All I know is that for us, real estate has been a great investment vehicle for us over the past 25 years, as well as providing homes for us to reside in for much less than similar rentals. As I have said here before – any real estate deal has to be viewed on its own, and if it makes financial and emotional sense to the people involved.

  41. 41
    Blurtman says:

    RE: Kary L. Krismer @ 38 – I know. I’m just trying to foment revolution.

  42. 42
    Carl says:

    QaRunner @39 and ESS @40 –

    I started thinking more about this after your comments and now I believe whether or not we are in a bubble hinges less on historic metrics, but rather more on whether or not Seattle is now on the cusp of being a “destination city” akin to NY, SF, Van, Sydney, etc . . . .

    If that is the case, then the value of historical analysis of metrics lessens in relevance as a guide to the future market. After all, I am pretty sure that if we looked at price/income ratios for the cities mentioned above, it is well above where we are in Seattle. And yet those cities continue to rise in price unabated.

    And this Chinese movie didn’t help us regular native Seattleites either in finding affordable houses – http://www.theglobeandmail.com/report-on-business/economy/housing/rom-com-heightens-chinese-interest-in-seattle/article24622655/

  43. 43
    greg says:

    By ess @ 40:

    As to why I hope this is not the same type of market as in 2007-10, I believe there are a few different factors at present

    – more population in Seattle chasing less housing, and Seattle is really become a hip and happening place.
    -the increased population are made up in part of well paid tech workers that can afford rent and buy the available housing
    -foreign investment has discovered Seattle as a good place to park money in the event things don’t go well at home
    -housing in most other west coast cities is even more expensive, and Seattle is still a relative bargain
    -the rate of new housing plummeted after the last recession and still has not kept up with demand as people pour into this area
    -the Urban Growth Management Act is starting to place limits on growth, thus the land costs are increasing at a rapid rate
    -there aren’t the crazy types of mortgages available at present as there were back in 2007
    – there are more all cash sales at present than there were back in 2007. People don’t walk away from their houses when they pay all cash when those prices drop.

    .

    Frankly the list of reasons is just another “this time its different ” /”we are a special case” type of post that we see and hear with every bubble of every type.

    In my view Seattle is not magical and does not have a special case that will support this growth.
    Most every city thinks it is special, and mostly they are not nearly as special as they think…

  44. 44
    Chris Peters says:

    RE: Jen @ 28 – I don’t have any solid numbers but I’m a veteran looking for a house and I’ve had offers flatly refused because it was a VA loan three times now. The selling agents have been telling me that the VA is denying almost all of the loans in Bothell at the appraisal level even if the lender has fully approved and underwritten it. They’re just not willing to deal with it anymore. I’d contact an agent about it and talk with him or her as they’ll have more information for your exact situation. My conditions are 3 bd newer than 1988 turnkey with a back yard big enough for kids to run around in.

  45. 45
    ess says:

    At least there will be some good news if we are in a bubble. Seattle won’t need to institute rent control, as rents are going to drop after the big decline.

  46. 46
    ess says:

    Carl – thanks for the article.
    As an aside, I have complained to my Vancouver in-laws about hogging all the rich property buyers. I would explain that not only does Seattle and area have housing that is almost half the price of Vancouver, BC housing, but we have the same lousy winters. Evidently, my in laws finally gave in and here come the out of towners with lots of money. They are going to make anyone who owns a rental or two rich!

  47. 47
    whatsmyname says:

    By greg @ 43:

    Frankly the list of reasons is just another “this time its different ” /”we are a special case” type of post that we see and hear with every bubble of every type.

    Thank goodness. Someone who has knowledge about every bubble of every type. Can you point to a “bubble” consisting of prices pushing up to equal the highs of the previous business cycle, and then collapsing in a more permanent way? Or maybe just one where the market recovered in the next business cycle. No one else can help me with this, and I know that it can’t be that, “this time its different”.

  48. 48
    Blurtman says:

    It is possible that prices are maintained, and possible that the rate of increase slows. Tighter loan standards removes the risk of the NINJA home buyer, and the no skin in the game speculator. In this area, prices are tied to incomes especially in tech, and as long as there is no industry downturn and job cutbacks, prices are likely to be stable and may continue to rise. The area is still a bargain compared to the Bay Area. And I’d say the natural beauty is superior. Can this area achieve Bay Area prices? I hope not, but perhaps in the city, it may.

  49. 49

    By Blurtman @ 48:

    In this area, prices are tied to incomes especially in tech, and as long as there is no industry downturn and job cutbacks . . ..

    That’s probably the key to our local market, and something you can’t tell from historical graphs. Right now a lot of the tech is driven by venture capital. If that dries up, things will get bad for a lot of companies–even those few companies with really good ideas. Sure those few will likely get bought up, but perhaps not stay local or even active. As an example, in 2008 there an advanced GPS device called the Dash Express. The company that made it was about to release their second device when the financial crisis hit. They got bought up by Rim (Blackberry) and as far as I know, nothing was ever done with their technology.

  50. 50
    Jen says:

    I’m looking at 2BR condos in close-in Fremont. Have only put an offer in on one, and was relatively certain I wouldn’t get it (and I didn’t) because I couldn’t escalate any more than 1%, and that’s just not cutting it these days. The eBay-esque style of purchasing in this market makes it difficult for those of us who aren’t flush with cash to compete. I’m surprised any Realtor is even entertaining representing me, given my VA-backed loan. RE: Chris Peters @ 44

  51. 51
    ronp says:

    RE: ess @ 26 – there are great near in more affordable suburban locations that people should look at. Not a bad idea to focus on neighborhoods near light rail or planned light rail stations, or express bus routes.

  52. 52

    RE: Jen @ 50 – I really don’t think VA is a big turn off for agents (although in the condo market it does limit your choices).

  53. 53
    ronp says:

    RE: Jen @ 50 – I wonder if it wouldn’t pay to wait a year for more supply and for Amazon to slow down their hiring? Save up for the inevitable downturn, then buy then? Of course you give up enjoying your own space for the interim.

  54. 54
    Jen says:

    It’s true. I’ve thought about seeing if things cool slightly with the weather leading into winter. But Tableau is also ramping up to hire another 1,400 folks or so in the Fremont area, so it’s give/take on that front. Of course, I also struggle with the issue of not knowing how long I will be in the area (active duty, here) and whether buying is even smart for me as a servicemember at this point in my very-mobile career. The good news is that I have a (rented) roof over my head, in a location I love, and that takes the pressure off. RE: ronp @ 53

  55. 55
    ronp says:

    RE: Mike @ 18 – In NE Seattle the functionally obsolete houses are getting purchased at really high prices, some are tear downs but there is a larger one near our house that just sold for $639K, it was a rental for the past 11 years I believe.

    I am curious to see if it will be owner occupied and immediately remodeled. Last year, a smaller house with a detached single car garage converted to a bedroom (no doubt illegally), was purchased by an investor for $524K and converted to rental. Not sure what they plan near term, but holding onto it seems smart.

    For owner occupiers it definitely makes sense to remodel these older smaller houses at the moment and live in them for several years — if you can deal with the headaches of doing the process and have cash for preliminary design work.

  56. 56

    By ronp @ 55:

    RE: Mike @ 18 – In NE Seattle the functionally obsolete houses are getting purchased at really high prices, . . . .

    I noticed the same thing about three months ago. Single pane windows, terribly dated, poor condition overall, it didn’t matter. It was almost like they were being bought without taking condition into account!

  57. 57
    ess says:

    By ronp @ 51:

    RE: ess @ 26 – there are great near in more affordable suburban locations that people should look at. Not a bad idea to focus on neighborhoods near light rail or planned light rail stations, or express bus routes.

    And the amusing thing is that the way Seattle is situated, and that the major freeway travels only north/south, it is actually easier and faster to drive from suburban locations to downtown Seattle (or other neighborhoods) than it is to get from one part of Seattle to another. As much as the freeways are crowded during certain times of the day (and thus avoided if all possible), the drive on the arterials of Seattle are much more unpleasant, especially traveling east and west.

    And your observation about light rail is spot on, in a number of years residents of Shoreline, Mountlake Terrace and Lynnwood will be able to take light rail to downtown Seattle, and that trip will take 20 minutes or less. At present there is decent bus service between downtown Seattle and areas north, but those buses are also at the mercy of freeway traffic. Light rail will change all of that for a select few that relocate to areas close to the light rail stations.

  58. 58

    RE: Chris Peters @ 44

    “turnkey” may be the most limiting factor.

    It’s not that the loans are “denied” as you say “The selling agents have been telling me that the VA is denying almost all of the loans in Bothell at the appraisal level even if the lender has fully approved and underwritten it.” The fear is that the appraisal will come in low, but that is true of many conventional purchases as well. It is not uncommon for conventional loan buyers to have to waive the issue of low appraisal.

    So whether you are a VA buyer or a Conventional buyer, the issue becomes whether or not the buyer has the cash to compensate for a low appraisal, without regard to type of loan.

    I say “turnkey” may be your most limiting factor as the more recently remodeled the home, the less likely it will appraise by VA standards. If the appraiser can see the home was purchased for $225,000 three or four months ago and now the remodeled home is selling for $350,000, they may include the original purchase price as one of the comps…and not allow $125,000 difference for the remodel. That is why often “flippers” will avoid VA buyers, even if the home has been on market for awhile.

    Your parameters in general “fail” in that only 8 homes in North Seattle met your “wish list” of criteria in the last 6 months. I strongly recommend you test your general parameters against homes sold in a year’s time or longer to see how narrow your field may be, and possibly adjust accordingly. If you are looking for a limited commodity of only 8 homes fit that description…overlaying VA on top of that may make it impossible. But the original parameters weren’t easy to come by even without the VA financing limitation. Remove the VA and set your parameters such that at least 20% of all homes sold in the area where you want to live, meet your criteria.

    The other option is to rent…or to buy something like what you are renting. Often the person who is renting wants to buy something much, much better than what they are renting, and that is not always reasonable.

  59. 59
    Jonness says:

    By The Tim @ 6:

    RE: whan @ 5 – First off, I use per capita income rather than median income in this series because historically it tracks better with home prices.

    According to your chart house prices started shooting up in 1997 and greatly diverged from MHI. Your explanation appears to be that starting in the late 90’s the rich got richer, so all house prices went up due to the increased affordability for the wealthy. Thus, MHI is no longer an important indicator when judging house price bubbles. (Sorry for putting words in your mouth you might not have intended to say)

    My assertion is that the divergence from MHI that’s not present in PCI is, at least in part, due to bubble frothiness due to Fed and government support. MHI tracked beautifully with house prices right up until the bubble run-up period began in 1997. Ever since then, MHI has been greatly beneath house prices. It’s not as though MHI went down starting in the late 90’s. It’s that house prices went up and have yet to recede to previous levels.

    Now if this was only happening in Seattle, I would concede it was probably because the tech economy put more money into people’s pockets and drove up house prices or that land was in short supply, etc. But since it’s happening to some extent all over the country, I feel a certain amount of the deviance between MHI and house prices that’s not shown in PCI is related to bubble-like frothiness. IOW, your observed correlation with Seattle-area PCI going up along with Seattle-area house prices is not an accurate explanation of full causation.

    So the question becomes, how overpriced is Seattle really? Is it just overpriced a little for Bill Gates when he goes to buy a house (as your PCI comparisons suppose)? Or is it overpriced a whole lot for Joe Blow when he goes to buy a house (as MHI comparisons suppose)? Well it’s clearly both. And since there are a lot more Joe Blow’s out there attempting to purchase houses, I think your minimization of the importance of MHI is leaving out a lot of relevant information that should be more carefully analyzed as opposed to simply throwing away and forgetting about.

    To get a better feel for what is occurring, it would be interesting to see a chart of Case-Shiller 20 vs MHI and PCI. IOW, how much of the Seattle trend where PCI tracks house prices is present in other cities around the country? Is this a national trend, or is there a way we can roughly separate out the the differences in these indicators?

    Who knows, such a study might back-up any hypothesis you might have.

  60. 60
    Blurtman says:

    If I anticipate an increasing risk-free rate of return, then as a rentier, I may want a better return on my rental properties, and so will increase the rent. Also might consider a toll booth on the entrance to the property.

  61. 61
    Shoeguy says:

    By whatsmyname @ 47:

    By greg @ 43:

    Frankly the list of reasons is just another “this time its different ” /”we are a special case” type of post that we see and hear with every bubble of every type.

    Thank goodness. Someone who has knowledge about every bubble of every type. Can you point to a “bubble” consisting of prices pushing up to equal the highs of the previous business cycle, and then collapsing in a more permanent way? Or maybe just one where the market recovered in the next business cycle. No one else can help me with this, and I know that it can’t be that, “this time its different”.

    You accidentally made a good point.

    Most economists will tell you that we’re really in uncharted territory right now. Interest rates have been dropping for 30 years, and house prices have risen in response to this. We haven’t been in a situation where asset prices have been driven well past the incomes to sustain them thanks to ZIRP.

    The true test of the housing market is when those interest rates go from 4% to 6.5% again, and that will have to happen long before incomes rise to close that affordability gap.

  62. 62
    whatsmyname says:

    By Shoeguy @ 61:

    Most economists will tell you that we’re really in uncharted territory right now. Interest rates have been dropping for 30 years, and house prices have risen in response to this.

    That is so neat and clean, so comfortable, that I almost neglect to point out that rates have trended modestly upward since 2012. I think we all know what happened to house prices in that period. But more significantly we must remember that history isn’t 30 years old. For example, if we look at the period between 1972 and 1982, rates rose from 7.4% to as high as 17.6%. I haven’t got Seattle house prices for that period, but Uncle Sam keeps numbers on the national median: rising from $24,700 to $71,700. Ouch.

    http://www.freddiemac.com/pmms/pmms30.htm
    http://www.census.gov/const/uspricemon.pdf

    true test of the housing market is when those interest rates go from 4% to 6.5% again, and that will have to happen long before incomes rise to close that affordability gap.

    Please see above. I don’t know where people on this site get the idea that rates must rise fully independent of inflation and income growth. There is not overmuch demand for capital investment sans a consumer base of spendable capital. It’s part of that whole supply and demand thing.

  63. 63
    PhilW says:

    1) Most people buy based on monthly payment, not on price. I bought in 1997 and was killed by the 8% rate.

    2) Lack of investments that pay anything. There are many people sitting on piles of cash that they are not putting into the stock markets or bonds. Housing is still looked as a good long term investment.

    3) I’ve met plenty of older retirees who have collected multiple houses, in different cities, over the years. Until they are unable to spend time in each throughout the year, they seem hesitant to sell.

  64. 64
    boater says:

    RE: PhilW @ 63
    Traditionally housing has been a decent storage of wealth. It’s gains are often beat by other investments and it certainly takes more active management to get the most out of it. But if you want a hedge it’s not bad. It doesn’t trail other investments too badly, it allows sizable leverage and it’s downside risk has been pretty good over the long haul.
    I think that minimal downside risk is part of what’s driving the boom which taken to extremes is a repeat of what failed last time.

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