Seattle Bubble

I realized we have beat the subject to death with a pair of posts and this week’s poll, but I had to at least point out a Rhodes piece in today’s Seattle Times on the issue of gas prices and home buying patterns: Will gas prices drive homebuyers away from suburbs?

The article starts off with an anecdote about a couple of people that currently rent a condo in Kirkland, but allegedly decided due to high gas prices to buy a townhouse in Seattle (presumably around Capitol Hill Update: see below). Unless they’re seriously downgrading the size of their living space, I don’t see how that could possibly pencil out to spending less overall.

A Portland economist predicts that buyers soon will choose where to live based on what they would spend for gasoline.

That, eventually, will devalue suburban housing while strengthening in-city home prices, says Joe Cortright, whose Portland consulting firm, Impresa, recently released a report saying as much to U.S. mayors.

“The new calculus of higher gas prices may have permanently reshaped urban housing markets,” said Cortright, a senior fellow at the Brookings Institution, a nonprofit Washington, D.C., think tank. “What this really means is that as people move, they’re going to look for places that enable them to drive shorter distances and avoid places where they have to drive a lot.

“I expect this to be a subtle process. I don’t expect everyone to put their suburban houses on the market all at the same time.”

I agree that driving less is an important factor, but I still don’t see how it makes sense financially when you factor in the more expensive home prices “closer in.”

Cortright says he’s starting to see proof of change in cities nationwide — from Los Angeles to Pittsburgh, from Tampa to Seattle.

“Statistically, home prices are down more in the most distant suburbs and still relatively strong in the closer-in neighborhoods,” he says. “The closer you are to downtown Seattle, the stronger the single-family residential market is.”
…
“The thing we heard was, ‘Drive until you qualify’ [for a mortgage] because real estate is less expensive the further out you go,” Cortright says. “So if people would put up with a longer commute, they’d have the opportunity to be able to afford a place.”

Just so I can get this straight, the argument appears to be:

1. People bought in the suburbs because it was cheaper than closer to the city.
2. With high gas prices, that discount is eliminated.
3. This will drive people away from the suburbs toward the cities.
4. Therefore, home prices will fall more in the further out suburbs and less in the close-in neighborhoods.

Am I the only one that sees a problem with this logic? Wouldn’t the end result still be that buying in the suburbs would be more affordable than buying close to the city? I still don’t see a convincing argument that gas prices alone will significantly change people’s home-buying habits.

One last time, for the record: I’m not saying that there aren’t a lot of convincing reasons to want to live “close-in.” I’m also not making some sort of general statement about the overall economics of living further out. Articles such as these are making the claim that gas prices alone will drive people into more expensive in-city real estate. I’m simply saying “prove it.”

(Elizabeth Rhodes, Seattle Times, 07.07.2008)

Update: My bad, I didn’t pay enough attention to the very end of the article where it placed the anecdote buyers in the Roosevelt neighborhood.  I just caught that they were moving “as close to their jobs as possible” and that one of them works at Seattle Central Community College on Capitol Hill.  Not that it makes that much difference in home price.

In a discussion last month where we discussed the relationship between gas prices and home purchase decisions, I made the following assertion:

…mathematically the decision to move closer just because of higher gas prices doesn’t really make sense.

In the last few days I’ve run across a few news articles that again make the contrary claim that “fuel prices are driving major changes in the way U.S. residents live,” so I thought I’d revisit this topic. Here’s one such story from The Boston Globe. Locally, The Olympian had a similar story: Homebuyers look to cut commutes and fuel cost

South Sound homebuyers are looking for houses closer to work, to cut the high cost of commuting brought on by record fuel prices, real estate agents and their customers said Wednesday.

It’s another indication that skyrocketing fuel prices are driving major changes in the way U.S. residents live.

Keller Williams Realty associate broker Phil Harlan said gasoline prices and the cost of commuting are frequent concerns raised by prospective home buyers.
…
Thurston Regional Planning Council senior planner Pete Swensson said home-buying decisions can change when consumers are faced with higher fuel prices.

A likely result is that the county’s urban housing market could strengthen while the rural housing market softens, Swensson said.

Home Hunters Realty of Olympia broker Helen Wilkins agrees. She said that if gasoline prices continue to rise, it could result in a huge influx of people wanting to live closer to town.

Let’s take another look at the numbers on this. Suppose we have someone that’s commuting from Marysville to downtown Seattle (35 miles). They’re driving a car that gets them 20 MPG, so their monthly commute costs at $5 a gallon would be $280.

“Screw that,” they say, and decide to move closer-in, to Shoreline. So they sell their average house in Marysville for $300,000 (close to the May SFH median for that part of Snohomish County), and buy an average home in Shoreline for $400,000 (also close to the median). We’ll be generous and assume that they bought in January of ‘03 for $185,000 and didn’t extract any equity, so they walked away with 50% equity out of the sale of their Marysville home after taxes and agent fees.

Up in Marysville, this hypothetical family was spending $280 a month on gas and roughly $1,120 a month on PITI, for a total of $1,400 a month. So lets see how they will do in Shoreline.

The new commute to downtown is only 10 miles, which shaves their monthly gas bill down to just $100 a month. Sweet! Unfortunately, even with $150,000 down, their PITI payment on the new Shoreline digs is about $2,000, bringing their combined monthly total to $2,100—$700 a month more expensive.

Click to enlarge

But what if gas prices keep rising, won’t it make more sense then? At $8 a gallon, it costs $1,645 to live in Marysville vs. $2,150 in Shoreline. At $10 a gallon it’s $1,820 vs. $2,200.

Pretty much any way you slice it, the higher cost of housing close-in far outweighs any financial benefits you get by cutting your commute.  Run the numbers for any pair of far-flung vs. close-in cities around Seattle and you’ll find the same thing.

By comparison, if that same family stayed in Marysville but sold their 20 MPG car and bought a used Prius that gets 45 MPG, they save nearly $200 a month (at $5/gallon), while the upgrade only cost about $10,000 up front.  Heck, they could probably trade straight across for a used Saturn that gets 30 MPG and still save over $115 a month.

The picture is slightly better for first-time home buyers, since they’re comparing both locations at today’s prices, but it’s still not a financial win to go close-in. A potential first-time buyer with a downtown commute looking at putting $20,000 down on an average home in Marysville can expect to spend $2,400 on PITI + commute, vs. $2,850 in Shoreline. With $50,000 down it’s $2,230 vs. $2,780.  That’s still $450-$550 a month more to live close-in, with the high cost of housing more than negating their gas savings.

Again, I’m not trying to advocate moving out to the boonies. I place a high personal value on living close to my place of employment, and consider avoiding time spent sitting in traffic to be far important than the cost of gas. What I’m trying to get at here is that the “high cost of gas” argument for why close-in neighborhoods will somehow retain their value just doesn’t wash.

There is value in living close to your job, but with the current dynamics of home prices and gas prices, that value is simply not financial.

(Rolf Boone, The Olympian, 06.19.2008)

With gas prices passing another big round number lately, there’s been a fair amount of talk about how the high price of fuel is affecting people’s daily lives. When it comes to the real estate market, common knowledge says that higher gas prices will hit home prices in the suburbs and exurbs, while helping to strengthen prices in the “downtown core” and “close-in” neighborhoods.

Financially speaking, I have to say I can’t really buy that. I’ll use a somewhat extreme scenario to illustrate why. Let’s say you’ve got a 30-mile commute from Sultan to Redmond (one of my former coworkers did that—yuk), and that your car gets a decent but not great 25 miles to the gallon. At $2.50 per gallon, you were spending $30 a week (~$120 a month) on gas for the commute. At today’s $4.00 per gallon, that is up to $48 a week (~$192 a month), a difference of $72 per month, or $900 more per year.

So lets say you decide to move in closer, to Kirkland or Woodinville. Now your commute is just 6 miles, and a week’s worth of commuting costs you just $10, saving you a grand total of $1,900 per year.

That doesn’t seem like nearly enough of a price difference to make up for the much more expensive cost of living close-in. It’s certainly possible that most people don’t actually do the math, and make irrational decisions based on their gut and that “pain at the pump” feeling, but mathematically the decision to move closer just because of higher gas prices doesn’t really make sense.

To me, what’s far more important than gas prices is commute time. I personally would never want to live much further away than about a half hour from my place of work. Time with my family is more important than having a huge house that I never get to spend any time in.

What about you? Do gas prices really figure into your decision about where to buy, or are things like commute time, neighborhood, schools, etc. more important?