Seattle Bubble

The following is adapted from a recent forum post by user Hyperbola.

After a year of occasionally posting comments on this blog, it’s only fair to disclose that my wife and I just bought a house in Woodinville! My rationale about the overall market hasn’t changed — I still think we would have gotten a better deal by waiting. There were many factors that influenced our decision:

• The house is only a few years old and in good condition.
• The price was good for the neighborhood and recent comps.
• The commute to Redmond/Bellevue is about the same as our current apartment.
• Our (downtown Seattle) apartment is too small.
• We find significant sentimental value in owning our home. We wanted to be able to redecorate, make improvements, and not have to worry about being forced to move if our unit goes condo.
• We were only willing to look at houses we could reasonably stay in for 10 years or more.
• We were only willing to consider arrangements where my wife could stop working once we start a family.
• Our plan is to pay off all loans except a $417k 1st mortgage within 3 years. For the first 3 years, our net expenses will be quite a bit more than our apartment. After that, it’ll be less than our apartment by several hundred. Of course, our house costs much less than our apartment would sell for, so this is apples to oranges. In any case, our expenses are well within our means, but we won’t be saving as much for stocks/bonds as before.
• We were not willing to move to rent somewhere in the burbs with enough space, and then move again when the dust settles from the bust.
• Our loan package is as follows: $417k 1st mortgage, with a note rate of 6.25%. 10% and change for a HELOC at PRIME+1.5, with a teaser rate. 10% down.

The RedFin experience was perfect for us — we did the research that we would be doing anyway and got 2% back. The field agent that actually accompanied us to the property did a good job looking out for us, but it wasn’t the same person as the agent in their office that helped us negotiate the paperwork. It really didn’t matter; they stayed in touch. Our loan agent got very confused when we wanted the rebate to be applied to our closing costs. She kept trying to bully us into using the rest on points instead of taking a check after closing, saying we weren’t allowed to take a credit more than closing costs, etc.

The biggest problem by far was the seller and their agent being completely dishonest with us (and each other) about the repairs and their (in)ability to move out on time. Ended up closing one day late after a standoff between us, the seller, and our loan agent. Yuck!

But the deal is done as of yesterday and we are officially homeowners!

Some people seem to be under the impression that Seattle Bubble is a site for people that think buying a home is never a good idea. On the contrary, the purpose of Seattle Bubble is to educate people about the realities of the housing market, and equip them with the facts so they can make a decision based on reality instead of some real estate agent’s slick sales pitch.

Hyperbola and his wife went into the home buying process with both eyes open, weighed the risks and benefits, and decided to buy. He got a loan he could afford, and bought a house he will be happy staying in for at least 10 years. This is exactly what Seattle Bubble has been promoting here since day one (here’s an example post from April 2006).

Congratulations to Hyperbola. He and his wife get that you buy a home as a place to live, not as some sort of can’t lose investment account. I agree with what Hyperbola said in his post, that they most likely could have gotten a better deal by waiting, but they were comfortable with the price and the risk, and they bought smart. Good for them.

It’s been a while since I posted any anecdotal observations, so I think it’s time for a few.

First up, the 8-unit condo/townhome complex in my neighborhood, which we have visited a few times before. Here’s the summary of the action in this complex of eight essentially identical units since 2005:

• September 2005: Unit #5 listed for $274,950 (link)
• October 2005: Unit #5 sold for $280,950 (link)
  18% more than the previous sale just 14 months prior
  +15.5% average YOY
• October 2005: Unit #6 listed for $300,000 (link)
• December 2005: Unit #6 sold for $300,000 (link)
  28% more than previous sale 4 years prior
  +5.8% average YOY
• March 2006: Unit #3 sold for $293,000 (link)
  40% more than previous sale 4 years prior
  +8.26% average YOY
• January 2007: Unit #6 listed for $350,000 (link)
  taken off the market without selling
• April 2008: Unit #5 listed for $360,000 (link)

This latest listing has an asking price 20% higher than any unit in this complex has ever sold for, and 28% higher than this specific unit sold for just over two years ago. We’re talking Kenmore here, which is not exactly “close in,” but not really the boonies either, so this should make an interesting test of how soft the condo market is outside the downtown cores of Bellevue and Seattle.

Personally, I doubt they’ll get more than $320,000, if even that. They may well just pull it off the market when they can’t get their fanciful price. According to Estately, there are 47 condos on the market in the 98028 zip code right now (after eliminating duplicates). This townhome is priced higher than 78% of the competition, and for just $30,000 more, you could get a pretty nice view. Good luck friend, you’re going to need it.

The second anecdotal update is much shorter. Just a quick note to point out that the sellers of my favorite million-dollar home over on Avondale have dropped the price twice now since listing in December at $1,650,000: once to $1,590,000 in March, and again to $1,550,000 a few weeks ago.

They paid $1,275,000 in February last year, and if they don’t get more than $1,385,000, they won’t even make enough to cover agent commissions and excise tax. I have a feeling this will be sitting on the market even longer than the nine months it languished last time.

Update: May 13: Another 60k price drop on the Avondale Albatross, down to $1,490,000. That’s $160,000 in total price drops spread across 150+ days on the market. Coming up quick on that six-month mark…

When I posted last week’s 61-year home price history, I promised a follow-up on affordability. So, here it is.

Before I get to the chart, here’s a quick refresher on what the “affordability index” is, and what it isn’t. What it is is a simple measure that shows relationship between median home prices, median household incomes, and interest rates. It is calculated by determining the monthly payment (principal and interest) that would result from buying the median-priced home, assuming a 20% down payment and current interest rates on a 30-year fixed-rate mortgage, then comparing that to 30% of the monthly median household income (the standard measure of “affordable housing”). Thus, an affordability index of 100 means that the median household would pay exactly 30% of their monthly income toward the mortgage of the median-priced house. Above 100 is more affordable, while below 100 is less affordable.

The affordability index does not take into account lending standards or exotic mortgage availability. It also does not necessarily indicate that an area is overpriced if the affordability index is below 100. More desirable areas are inherently less affordable. No reasonable person would expect housing in Bismark, ND to have the same affordability index as New York, NY. What is somewhat instructive however, is comparing the affordability index of a given area to that same area’s affordability index in the past. How convenient then, that this is exactly what we are doing with this post.

What you see below is a graph of the Affordability Index for King County from 1950 through 2007. For ease of reference, I’ve overlaid the graph of inflation-adjusted home prices on the right axis, so you can see how the two relate. I want to note though, that when calculating the affordability index, actual home prices are used, not inflation-adjusted prices.

Click to enlarge

From 1950 to 1970, while home prices more or less just kept up with inflation, affordability was sky-high, reaching peaks as high as 227. Of course, it shouldn’t come as a real surprise that when home prices began to jump up in the mid ’70s, affordability dropped like a rock. Of course, home prices are only part of the equation. Affordability tanked from 1976 to 1981 not only due to a leap in home prices, but an even more extreme spike in interest rates. On the following graph you can see the other two components of the affordability index: median incomes and interest rates.

Click to enlarge

I should point out that pre-1971 interest rate data is quite difficult to find, and I was forced to make my best estimate based on a chart of 30 Year FHA Mortgage Rates. Also, I believe that sometime during the period that is displayed on the graph, the “standard” mortgage shifted from a 15-year to a 30-year term. I couldn’t locate any data on historical mortgage standards to back that up, but maybe one of our resourceful readers can. Even with the ridiculously high interest rates of the early ’80s, the long-term average of the affordability index through the ’80s and ’90s comes out to 101.9. Here are the averages for each decade since the ’50s:

• 1950s: 160.6
• 1960s: 194.6
• 1970s: 178.4
• 1980s: 97.4
• 1990s: 106.5
• 2000-2007: 89.7

The affordability index for 2007 stood at 72.5, which is 29% lower than the 1980-1999 average. To get back in line with long-term trends, the affordability index would have to increase by approximately 40%. This could happen through increasing incomes, falling home prices, or falling interest rates. Lower rates seems fairly unlikely, so I’m predicting that it will be some combination of the first two, with the emphasis on the falling home prices.

This analysis may remind you of Deejayoh’s excellent post that compared disposable income, interest rates, and home prices from 1985 through 2007. The data is slightly different, but the conclusion is largely the same. Today’s home prices are seriously out of whack with long-term trends.

Sources:
(Home Prices: see this post)
(Household Income: US Census Bureau)
(1950-1970 Interest Rates: Financial Forecast Center)
(1971-2007 Interest Rates: Federal Reserve)

Let’s say you’re a prudent person who has compared the financial realities of buying vs. renting and made the decision to rent for now. However, with the frequent news reports about increasing rents that seem intended to scare people out of deciding to rent, you’re a little concerned about finding a good deal.

Well fear not, because you have the internet. In this tutorial, we will show you how to find a good deal on a local rental using free online tools. By following these steps and exercising a little patience, you’re sure to find a great rental. Please keep in mind that this process will work best if you are not rushed. If your current lease is set to expire in three months, start looking now, not in two and a half months.

[Read more →]

Just a quick note to remind you that Seattle Bubble advanced to round 2 of the little blog tournament they’ve got going on over at Metroblogging Seattle. They put us up against last year’s winner, but so far we’re actually slightly in the lead. Voting closes Sunday, so a little boost going into the weekend would be nice. So if you would be so kind, how about taking a few (more) seconds to vote for Seattle Bubble (again)?

Also worth noting is the brief interview they did with me over email. It’s probably nothing new to anyone that’s been around here for a while, but I thought I’d point it out.

Update: Huzzah, Seattle Bubble wins again!  Now go vote in round 3, the quarter finals!

Apparently the only necessarily qualification for becoming a “world class” or “superstar” city is to keep on repeating that it is so. That’s the message I’m getting from the latest quotes from the Realtor’s spokesman Lawrence Yun, anyway.

Seattle-area home prices are manageable for typical workers, according to the chief economist for the National Association of Realtors.

“You may even say Seattle is underpriced if you believe Seattle is becoming a superstar city,” Lawrence Yun told area brokers in Bellevue on Thursday. “Seattle is underpriced in relation to other West Coast markets.”

First off, we have addressed this “superstar” or “world class” thing before. If you haven’t read it already, take the time to check out On Luxury Cars and World Class Cities. Also be sure to read P-I columnist Bill Virgin’s take on the world class question. The gist of our argument is that although Seattle is great, and we love it here (really we do), it is not a world class city by any available objective measure. Sorry, it’s just not, and repeating over and over again that it is doesn’t make it so.

When people like Mr. Yun make the assertion that Seattle is a “superstar city,” they never back that claim up with any sort of quantifiable data. There are measurable characteristics that one can use to judge whether or not a city is world class (a good list can be found on Wikipedia), and Seattle simply does not measure up, any way you look at it.

But that’s not my only problem with Mr. Yun’s speech yesterday. He also made a some verifiably false assertions and ludicrous predictions. [Read more →]