Seattle Bubble

One common refrain lately among real estate agents desperate to put a positive spin on the local market is that potential home buyers in the Seattle area are just being frightened by all the bad national news on the housing market. The local market is doing just fine, and would be even better if only everyone would stop paying attention to the national stories.

Well, let’s take a look at the latest national housing market data, and compare it to the Seattle area.

Associated Press: Existing home sales fall 2.6 percent in June

The National Association of Realtors reported that sales dropped by 2.6 percent last month to a seasonally adjusted annual rate of 4.86 million units. That was more than double the decline that had been expected and left sales 15.5 percent below where they were a year ago.

The downward slide in sales depressed prices, too. The median price for a home sold in June dropped to $215,100, down by 6.1 percent from a year ago.

The drop in sales pushed inventories of unsold single-family homes and condominiums to 4.49 million units, up by 0.2 percent. That represented a 11.1 month supply at the June sales pace, the second highest level in the past 24 years.

For the purposes of this post, we’ll use King County SFH + Condo statistics, since it is closest to what the national numbers are tracking. Let’s see whether Seattle’s housing market is in better or worse shape than the national market. We’ll see which market is in better shape in a number of categories, rating victories as “strong,” “weak,” or “neutral.”

Year-to-year sales were down 15.5% nationally. Locally, closed sales were down 40.9%. Ouch, that’s nearly three times the drop in the national numbers.
Advantage: National (strong)

Nationwide median prices were down year-to-year by 6.1%. In King County, prices were down 3.6% from last year, about half the drop, but still down, and only a few points different.
Advantage: Seattle (neutral)

At 4.49 million vs. last year’s 4.20 million, nationwide year-to-year inventory was up 6.9% in June. In King County, inventory was up 28.9% year-over-year. Seattle comes in with four times the increase.
Advantage: National (strong)

Nationwide “months of supply” (inventory divided by pending sales) was 11.1, versus King County’s 6.2. Both buyer’s markets, but Seattle is just barely in buyer’s territory.
Advantage: Seattle (neutral)

So, we’ve got Seattle on top in two categories, and the national market performing much better (or less crappy) in the other two. I’d call that a toss-up at best, with Seattle’s huge increases in inventory and decline in sales possibly ranking its market worse than the nationwide stats.

In other words, there’s little to no substance to arguments that the local market is doing better than what you read about in the national headlines. We’re certainly doing better so far than the worst-hit cities such as San Diego, Detroit, and Miami, but I don’t recall seeing many headlines about those cities in the Seattle media.

(Martin Crutsinger, Associated Press, 07.24.2008)

Everybody’s pal Christine Gregoire gave a pep talk to the Washington Realtors last week in which she made some interesting comments.

Gov. Chris Gregoire told about 400 Washington Realtors on Thursday that she has been working to meet goals the group has for transportation, affordable housing, education and quality of life.

Gregoire, who spoke a day after Republican gubernatorial challenger Dino Rossi went before the group, cited a report in Fortune magazine and said the state is a good place to do business. She also offered encouragement for an industry slowed amid recession fears.
…
“The only thing we have to fear is fear itself,” Gregoire said, quoting former President Franklin Roosevelt and referring to national recession fears. “It is a very frustrating time, I know, for you, and it is for me. … I’m struggling to get the message out to Washingtonians. The economy is strong. Buy your home.”

From the Associated Press account of the same meeting:

Addressing the politically powerful Washington Realtors, the Democratic governor said she sometimes wishes people wouldn’t watch the evening news because of all the “doomsday” talk of a home mortgage meltdown and a pending recession.

Gregoire said that in actuality, the state economy has seldom been so strong, with record low unemployment, 222,000 new jobs created in the past three years, and national publications praising the business climate here.

She conceded that the national news is having a psychological effect on home buyers, even though there are relatively few mortgage failures here.

“This is a very frustrating time,” the governor said, adding “Our economy is strong — buy your home. … There is no good reason for a slowing of home purchasing in the state of Washington today.”

Now why do you suppose Mrs. Gregoire would promoting the idea that Washington State residents go out there and throw caution to the wind, ignore the warning signs of declining prices, and jump into that real estate market right now? Obviously one likely reason is the usual pandering of politicians telling people what they want to hear. In this case, the people in question are a room full of “professionals” whose income depends on suckers consumers continuing to buy homes all the way down the declining price slope.

I think there may be another reason though. I think Mrs. Gregoire may really be on the Realtors’ side here, not just talking the talk. Here’s a story that appeared in yesterday’s P-I… (emphasis mine)

Gov. Chris Gregoire and leading Democrats in the House and Senate have reached one early agreement in this year’s budget negotiations: It’s time for a reality check.

Anticipating a bleak revenue forecast, they’ve agreed to start looking for places to trim the $33 billion budget they passed last year. They say they want to have their priorities in order in case the slowing economy forces them to find efficiencies or even cut programs altogether.
…
Gone are the halcyon days of a skyrocketing real estate market and a ballooning economy that had led to back-to-back-to-back upward adjustments in the state’s revenue forecasts.

And gone is the free and easy feeling about spending, the unflinching commitment to “targeted investments” that Democrats have enjoyed for the past three years.
…
Gregoire already has called for frugality this election year and has asked lawmakers to adopt her budget that leaves $1.2 billion unspent.

But her budget also calls for $244 million worth of new spending.

Is it really any surprise that Mrs. Gregoire, who has overseen a 33 percent increase in state spending since taking office (source), would want people to ignore the “doomsday talk” and just buy, buy, buy? What do you suppose has enabled spending to increase by so much? Could it perhaps have been the high-flying home prices and red-hot pace of home sales in 2004-2006 (every one of which puts more money into the state coffers)?

And now Mrs. Gregoire wants us to ignore reality so she and her pals can fund their pet projects. Yeah, that sounds like a great reason to keep this bubble alive. Who’s with me?

(Brad Shannon, The Olympian, 01.25.2008)
(Associated Press, KGW.com, 01.25.2008)
(Chris McGann, Seattle P-I, 01.28.2008)

Another day, another syndicated Associated Press article reprinted in the Seattle Times with an abundant dose of rah-rah local cheerleading awkwardly thrown in by Elizabeth Rhodes (additions in italic): U.S. home prices drop for quarter; not so here.

U.S. home prices marked a quarterly decline for the first time in 13 years in the third quarter, according to government data released Thursday that provide fresh evidence of the housing-market slump.

But Washington cities continued to defy that trend.

U.S. home prices dipped 0.4 percent nationwide in the July-September period, compared with the previous quarter, the Office of Federal Housing Enterprise Oversight (OFHEO) said.

But prices in the Seattle-Bellevue-Everett region rose 1.24 percent, OFHEO found.
…
“Rising inventories of for-sale properties are clearly having a material impact on home prices,” said Patrick Lawler, the agency’s chief economist.

Washington state, however bucked that trend, with 6.98 percent price growth year over year. That was the fifth-highest in the nation behind leader Utah at 12.89 percent.

In other news, a prominent video game journalist was allegedly fired over a negative review of a game which was highly advertised on his employer’s site, serving as an example for journalists everywhere of what happens when you bite the hand that feeds you.

Now everyone go out and buy a condo. Right now.

(Marcy Gordon / Elizabeth Rhodes, Associated Press / Seattle Times, 11.30.2007)

Remember that slowdown in state revenues that we were warned about by our state’s chief economist ChangMook Sohn last year? Well guess what? It’s here!

Washington’s construction industry continues to expand, but real estate tax collections are $18 million below expected levels.

The state Revenue Forecast Council says taxable real estate activity in the past month was nearly 26 percent lower than a year ago, the sharpest decline in 12 years.

In related news, despite the fact that King County government (and Ron Sims specifically) have seen the revenue slowdown coming for nearly two years now, we’re now being faced with new taxes to cover the real estate shortfall.

King County Executive Ron Sims proposed three new taxes Monday, even as he warned that a slowdown in housing construction will strain the county’s general fund during the next two years.

Sims said in his annual budget address to the Metropolitan King County Council that he told his staff to “go back to the drawing board” in September after financial advisers warned that a downturn in construction would hit the county hard. The revised budget, which also calls for higher bus fares, trimmed 2008 spending in order to soften an expected 2009 budget shortfall.

…

Construction downturns are particularly challenging for the county because property taxes are the biggest source of money for the general fund.

Too bad nobody in King County government thought to restrain spending during the times when real estate was flying high and money was flowing in. Not that this is anything other than government business as usual, but it’s still annoying.

(Associated Press, The Olympian, 10.11.2007)
(Keith Ervin, Seattle Times, 10.16.2007)

Hot on the heels of an unusually balanced report on the latest NWMLS home sales data, Aubrey Cohen comes back with another piece on the local market, this one full of non-sensical rationalizations for continued price gains.

Ken Kam, of Honolulu, scoped out second-home possibilities during a Seattle visit last month.

“It seems like it’s an up-and-coming and popular place,” he said while looking through a Queen Anne town-house development in which units start above $800,000. “The prices are still lower than in Hawaii.”

Two doors down, Tim Hug and David Hofmann were washing a BMW outside the town house they moved into in June after relocating from San Francisco.

San Francisco’s still more expensive, but Seattle’s catching up, Hug said.

People such as those help explain new Census Bureau data, which show Seattle’s home values rising considerably faster than incomes in recent years.

The 2006 numbers, released Tuesday, show the value of a typical Seattle home is 7.7 times the median household income in 2006 — a 39 percent jump from the ratio in 2000.

Seattle’s ratio of home value to income is higher than the county, state and nation, although that gap has narrowed in recent years.

But Seattle still is far more affordable than cities such as San Francisco, where houses cost 12.3 times the median income, and Honolulu, where they cost 10.7 times the median income. This ratio increased by more than 50 percent since 2000 in Honolulu and more than 60 percent in San Francisco.

That disparity is one reason King County regional labor economist Cristina Gonzalez does not expect much fallout from Seattle’s rising prices on the wider economy.

“Compared to other West Coast cities, they’re not unthinkable yet,” she said.

So, the take-home message is that prices in Seattle are bound to keep rising, because all of the homes will be bought by wealthy people moving here from places where homes are even more ridiculously expensive. I actually buy the ‘rich out-of-stater’ theory to a degree, but I think the effect is fairly limited. Also, doesn’t the theory that wealthy people from more expensive housing markets are propping up our own market directly contradict the claim that Seattle is insulated from the housing bust going on across the nation? When prices drop in San Francisco and Honolulu, wouldn’t the situation reverse itself?

The article does include some balance, but only because it’s really just an Associated Press report with the local cheerleading tacked on. The AP portions are decidely less optimistic:

“We had an artificial economy,” said Brad Geisen, founder of Foreclosure.com, a Web site that lists foreclosure properties. “There was all this wealth created in real estate, and it wasn’t really created.”

Mark Zandi, chief economist at Moody’s Economy.com, likened the current housing market to the dot-com boom and bust a few years ago, when stock prices for many tech companies soared — before some of them ever turned a profit — and then crashed.

“The parallels are quite similar,” Zandi said.

Anybody remember how that dot-com bust turned out for Seattle?

(Aubrey Cohen, Seattle P-I, 09.11.2007)