Seattle Bubble

Jon Talton wrote a great article for the Times a few days ago that goes deeper than the usual “Boeing! Microsoft! Pink Ponies!” type articles and explores all the ways the Seattle region is exposed to the slowing economy: For local economy, it’ll be a long slog.

…the national slowdown is finally hitting the Puget Sound region, slowing job creation as well as pressuring would-be home-sellers, the construction industry and credit-strapped homeowners.

As recently as last year, employment growth here was more than twice the national average, according to Dick Conway, a Seattle economist and co-publisher of the Puget Sound Economic Forecaster. Now, he forecasts it will decelerate from a peak of 3.2 percent in the first quarter of 2007 to less than 2 percent this year. On a quarter-to-quarter basis, job creation could be essentially flat, something backed up by recent state job numbers.

It’s nice to read a somewhat realistic article once in a while, instead of constantly being fed the feel-good fluff stories about how special and different we are in Seattle.

What are the chances of a state like Washington… avoiding a recession?

…the economic model of Pacific Northwest economies maintained by Jeremy Piger, associate professor of economics at the University of Oregon, showed a 99.4 percent chance of recession for Washington in its latest reading. The model is based on data from the Federal Reserve Bank of Philadelphia.

So you’re telling me there’s a chance… Yeah!

My one problem is that Talton quotes Dick Conway as some sort of expert on the local economy and housing.

“The picture did change substantially with housing,” Conway said. “Ours held up pretty well for a while. We’ve finally succumbed.” Price appreciation has stalled and inventory is swelling as potential buyers try to time the bottom of the already favorable market.
…
Conway compares today’s climate to 2001’s and uses the term “rubber-band effect.” The faster you drop into recession, the faster you bounce out. This has been a slow slide. He said the Puget Sound region may touch bottom in the next few months and begin growing again.

I’m not sure why he would be quoting Dick Conway as any sort of expert, considering how off base he has been with his 2008 real estate predictions so far this year.

Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008.

Let’s see… According to NWMLS July data, “Puget Sound-region” (King, Pierce, Snohomish, Kitsap, & Thurston Counties) average prices are already down nearly 5 percent, while sales are down over 35 percent. Even if you just look at King/Pierce/Snohomish, prices are down over 3 percent and sales have dropped 37 percent.

The bottom line seems to be that the local economy is not bulletproof, despite what the papers and real estate agents have been saying for the last few years.

(Jon Talton, Seattle Times, 08.26.2008)

2007 Revisited
It’s that time of the year again. As the calendar rolls over, the real estate predictions start rolling in. But before we get to the predictions for 2008, let’s look back at 2007.

My own guesses as well as predictions from most of the frequently-quoted local real estate insiders were covered in this post from last January, save for Steve Tytler, whose predictions are covered here. Let’s see how we all did.

The Contenders:

• Bill Riss, chief executive of Coldwell Banker Bain
• Randy Bannecker, consultant housing specialist for the Seattle-King County Association of Realtors
• Glenn Crellin, director of the Washington Center for Real Estate Research
• Matthew Gardner, local land-use economist
• Steve Tytler, owner, Best Mortgage
• Tim Ellis, editor-in-chief, Seattle Bubble

You can go back to the post to see the full context of all of our predictions. However, for this post, I have condensed everyone’s predictions into a convenient table format for your convenience:

And the person whose predictions most closely matched the 2007 outcome was… Tim Ellis of Seattle Bubble! Steve Tytler gets the honor of being the only other person to be at all accurate, with his generic prediction of a “big increase” in inventory and a general reduction of buyers.

Note that the final reported median price change was almost exactly in the middle of my estimated range of -5% to +3%. And although my inventory and sales forecasts were the closest of the bunch, reality was unbelievably even more extreme than my predictions. So I either got pretty darn lucky, or after one year of following the market in my spare time, I had a better sense of where it was headed than the majority of those whose very livelihood is the market.

2008 Prognosticated
So that brings us to the 2008 forecast. First up, let’s check out what some of the same local real estate insiders are guessing this year:

Glenn Crellin:

Year-to-year drops should continue “for a little while,” said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. “I think that the next several months are still going to be challenging, but it’s a little hard to tell,” he said, adding that he also expects interest rates to increase during most of the year, potentially wiping out any savings gained by waiting.

Glenn also made some more specific predictions for the Pierce County market in a Q&A with the Tacoma News Tribune.

Matthew Gardner:

For 2008, Gardner is predicting anywhere from zero appreciation to home prices falling as much as 5 percent. “Do I think we’re going to see pain next year? Yes, I do. If there’s some glimmer of hope, it’s the fact we didn’t get terribly overbuilt because of the expense of land,” Gardner says.

Steve Tytler:

I expect home prices to drop about 10 percent to 20 percent over the next year or so, and then the housing market will flatten out with very little appreciation or depreciation for a few years.

Dick Conway:

Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008. “Given that we had a pretty good run-up in prices, some downward adjustment shouldn’t be surprising,” he says.

It would appear that after being so off base with last year’s optimistic forecasts, most of this year’s predictions are a bit more down to earth. The general concensus seems to be price declines of up to five percent. As with last year, Mr. Tytler is the most bearish of the bunch, and will probably be the most accurate as well.

The Tim’s Predictions
Personally, I’m expecting to see a continued surge in inventory, with year-over-year increases between 10% and 25% throughout much of the year. As prices stagnate and drop, the number of “must-sell” homes will only increase. Furthermore, when public sentiment shifts from “buy now or be priced out forever” to “sell now or be stuck there forever,” listings will continue to increase further.

Sales will probably continue their slide as lending standards continue to tighten (regardless of which direction interest rates go). I would guess that sales will be down at least 5% to 15%. Think of it this way: The record sales that we saw in 2005 and 2006 were basically just the housing market borrowing sales from the future. Well, the future is here, and the debt must be repaid.

I do not expect prices to drop like a rock, but I think that 5% is the minimum drop we’ll see in the median, not the maximum. I’d put the range at -5% to -10%.

So there you have it. Your doom and gloom for 2008. I may be way off base, but at least I’m willing to stick my neck out there and give it a guess. I have yet to see any signs that the market is “bottoming out” or at any kind of turning point. 2007 was the turning point, and we’re pretty plainly headed down into 2008. I don’t expect this mess to work itself out before the year is out.

What say you, the readers?

The stories have been piling up in my inbox at a faster rate than I’ve been able to post them lately, so that means that it is time for another bubble link roundup. I’ve got a lot of ground to cover in this post, and I don’t want to totally clutter up the front page, so click below to read the entire post.

[Read more →]

This is the last post in this impromptu series. There were just so many articles out there full of “expert” quotes and predictions about the Puget Sound’s economic outlook for 2007. Here are three more articles that discuss the interaction of the local housing market with the greater local economic picture. Surprisingly, the housing affordability elephant in the room is actually not completely ignored:

The Good Ride Continues in 2007
Because of relatively high rates of in-migration and household formation, the regional housing market will continue to do better than its national counterpart in 2007 and 2008.

Dick Conway, (Washington CEO)

2007: A Sound economic picture
The one sector no one sees much of a lift from is housing, either in new-home construction or resale activity and prices. Pedersen says in-migration and employment growth are counterbalanced by the deterioration of affordability.

Bill Virgin, (Seattle P-I)

Area’s solid economy vulnerable to cracks showing up elsewhere
So even if the local real-estate market holds up better than its national counterpart, “if the U.S. housing market pulls the country into a recession, then we have a problem,” Conway said.

Drew DeSilver, (Seattle Times)

I’m keeping this post short because I’ve said about all I feel like saying on the topic for now. We’ll see how things pan out.

In addition to the standard E. Rhodes fluff piece that Synthetik posted about on Sunday, there were a couple other articles posted over the weekend that conveyed a general sense of optimism about Seattle’s housing market in the coming year. Here are a few choice quotes from Mike Benbow’s article in the Everett Herald titled Smiling at the slump:

David Toyer was having Christmas dinner with relatives when one asked him how he felt about the housing market.

Toyer, a vice president for Barclays Northwest, a major developer in Snohomish County, gets that a lot.

Most people expect him to be down in the dumps, or at least very concerned. That, he said, is because they’ve been listening to national newscasts about areas of the country where home prices have dropped like a rock or sales have plummeted due to overbuilding.

Indeed, The Associated Press named the rocky housing market the top business-related story of 2006 because of worries that it could push the nation into a recession.

Trouble is, the housing market in the Northwest in general and Snohomish County in specific did well this year and is expected to continue to be strong in 2007.
…
Toyer is very positive about the housing market for 2007, partly because he’s seen the numbers in a study recently conducted for his firm by New Home Trends, a consulting firm in Mill Creek.

“There’s no reason to think we will not have a very healthy housing market,” he said. “We’ve got some things here that are different than everywhere else.”

One of the unique elements, he said, is a state Growth Management Act that forces developers to build close to cities or within them, a law that is gradually reducing the amount of available land.

Toyer also noted that with hiring at Microsoft, Boeing and many other businesses large and small, most analysts are predicting a good economy in the Seattle area in 2007.

That’s attracting people looking for work, and many would like to buy a house, he said.

Mr. Benbow goes to town, throwing all the classic arguments out there. We’ve got “Seattle is special,” “we’re running out of land,” and of course the ever-popular “Boeing and Microsoft will save us,” all in just the first few paragraphs! Never mind the uncomfortable fact that affordability continues to drop like a rock, and there is no evidence that all of these new jobs are paying any better than existing ones. Methinks Mr. Benbow’s article is heavy on claims, but light on supporting evidence or critical examination, as usual.

Justin Matlick takes a more balanced look at Washington’s situation in the Puget Sound Business Journal’s general state economic outlook for 2007, but the high point of the article is the clever illustration that so delightfully epitomizes the unwavering hope of local housing optimists.

Illustration: James McFarlane
Click to enlarge

With the national economy expected to continue decelerating in 2007, how will Washington state fare?

First, the big worry: housing. Economists generally agree that the state’s housing market will continue to slow throughout 2007, especially in the Puget Sound region, and a precipitous decline could drag down consumer spending, slow the construction industry and dampen economic growth.

On the bright side, the state’s economy is poised to continue growing even as housing slows. Around Puget Sound, a strong international economy will continue fueling demand for key Washington exports such as Boeing airplanes and Microsoft software. Outside the region, economists expect the economy to continue expanding, albeit at a more moderate pace.
…
While the national housing slowdown has finally hit Washington — in King, Pierce and Snohomish counties, the Northwest Multiple Listing Service has reported falling home sales, rising inventories, and slowing home-price appreciation throughout the second half of 2006 — homes in core Puget Sound areas are still logging double-digit price appreciation.

[Union Bank of California senior economist Keitaro] Matsuda said this indicates that the housing market in the Puget Sound region and throughout the state is a long way from hitting bottom.

I don’t know anyone who has claimed that the housing market around here is “hitting bottom,” so I don’t really know what point Mr. Matlick was trying to make with that statement. Moving on…

“It will still take a while before things start to really slow down,” Matsuda said.

While Matsuda could not guess exactly how far housing will fall, he did say that it’s now clear the national housing expansion has been founded on solid economics, and has not been the bubble many feared.

“If it was a bubble, the markets that experienced the strongest appreciation should also experience the largest price drops, and that hasn’t happened,” Matsuda said.

Whoa, hold on a minute there. How is anything “clear” at this point? If anything is clear, it’s that the national housing expansion was not “founded on solid economics,” because nationwide housing statistics are moving in reverse. Furthermore, Matsuda seems to believe that “hasn’t happened,” means the same thing as “won’t happen,” which is something I happen to disagree with.

For Washington, this means any declines will likely be more moderate than severe, especially since the rest of the state’s economy will likely continue growing at a healthy pace, according to Matsuda and [local economist Dick] Conway.

So really, the primary argument for optimism comes back to… Microsoft and Boeing. I realize that both of these companies are doing well right now, and I certainly hope it continues to be the case. However, I truly do not believe that the recent positive performance of two companies is enough to hold up our entire region’s economy.

I’m not calling for a huge pile of doom and gloom for the Seattle area, but unless the vast majority of the area’s new jobs are paying $80k or more, I think that 2007 will see the start of price contractions in Seattle. I think the unaffordability ceiling has been reached.

What about you? Are you generally optimistic about 2007 for the Seattle area housing market? Do you buy the arguments that we’re special and will continue to see price gains while more and more cities across the nation experience price declines?

Stay tuned in the next week or so for a more detailed post dedicated to my personal 2007 guesses. Let’s keep the comments in this thread focused on these two articles and more general local economic impressions.

(Mike Benbow, Everett Herald, 12.31.2006)
(Justin Matlick, Puget Sound Business Journal, 12.29.2006)