Seattle Bubble

I’m a bit confused. Just two weeks ago, Matt Woolsey’s latest real estate list in Forbes placed Seattle as the 8th best real estate market in the country. Now this week, Forbes writer Joshua Lipton pens an article titled Selling Your Home In A Down Market, which highlights the difficulty many people are having in selling their homes. So where did Mr. Lipton find the example of this phenomenon that he chose to highlight in the article? Believe it or not… super-special Seattle!

When Doreen Cardin first put her house on the market, she was hopeful that the house would find a buyer right away. Cardin’s husband, a mechanic, was unable to work. The loss of an income had proven tough for the young couple, who live 20 miles north of Seattle. They needed the money.

So they first spent some cash fixing up their three-bedroom, 1,600-square-foot house, with a new coat of paint, carpeting in the family room and flooring in the bathroom. They hired a local real estate agent and put the house on the market for $300,000.

That was five months ago.

There have been a couple of offers since then, but those both fell through. The Cardins have now hired a new realtor, slashed the price down to $279,000 and even thrown in a $5,000 buyer’s bonus. Doreen Cardin blames the lack of real interest in her house now on the cold weather, which discourages people from visiting open houses, she says, and also a more general sense of financial unease in her community, as people face new challenges like higher gas prices.

The couple recently moved into her parents’ home. They’re starting to consider whether they should rent their house, at least for now.

Okay, so it wasn’t technically Seattle Proper, but 20 miles north puts them roughly in Lynnwood / Mill Creek area, which I’m certain is being included in Mr. Woolsey’s definition of Seattle for the “Best Housing Markets” piece.

So I guess the question is, if the Seattle market is so great, how can there possibly exist people like the Cardins, who put their home on the market in Spring (the best time of the year for home sales) at 80% of the median single-family price in Snohomish County, and still haven’t sold? Hmm…

I liked the comment from Grvetti the other day that calling Seattle one of the “best” housing markets is like calling “the last part of a ship to sink ‘temporarily the most driest.’”

(Joshua Lipton, Forbes, 11.29.2007)

These “top real estate market” lists by Matt Woolsey in Forbes are really starting to seem pointless and repetitive, but I suppose I should at least mention the latest one, since it will probably be proudly touted in local real estate marketing material for the next few months. The latest fill-in-the-blanks list from star reporter Matt Woolsey is titled Best And Worst U.S. Housing Markets, and Seattle comes in at #8 on the “best” list.

Scaled-back lending practices, risky loans, oversupply and low demand continue to plague the nation’s housing markets, driving down prices and stalling sales.But it’s not so in Salt Lake City, Charlotte, N.C., and San Jose, Calif., where prices have continued to climb without so much as a hiccup.
…
The Emerald City housing market continues its ascent on the back of a strong local economy and the prudent construction rates of the past five years. Although prices are reaching record highs, the city remains a cheap alternative for Northern California residents and businesses looking for better value.

Funny he should say “continues its ascent,” right at the time when the ascent finally seems to be leveling off and changing into a descent. Of course, if we stay behind the curve like we seem to have been the last five years or so, we could still qualify as one of the “best” housing markets next year on the way down, with a -5% change in prices, compared to -10% or more elsewhere.

(Matt Woolsey, Forbes, 11.21.2007)

Forbes just loves to frame their articles around lists. You may recall Seattle showing up frequently on previous such real-estate-related lists, such as Best Places to Flip a Home (#1), Richest Cities In The U.S. (#8), Best Cities For Jobs (#34), and Most Overpriced Places In The U.S. 2005 (#1). Well, lucky us, we made yet another Forbes list: America’s Most Stable Housing Markets (sort of like picking out the warmest hangouts in Antarctica).

Nationwide, home prices are falling, sales are sluggish and the number of foreclosures is mounting. Ask any economist and you’ll hear that things are bad, and likely to get worse.

Unless you live in Seattle, where the market is slowing but fundamentals remain strong.

“Fundamentals remain strong” appears to be nothing more than code for “prices haven’t fallen… yet.” Here in Seattle, things aren’t yet “bad,” but they are almost certainly likely to get worse. I guess being “barely ok, and likely to get worse” is enough to catapult us to the top of the list.

The Emerald City has experienced strong price appreciation over the last six quarters, and that’s expected to continue in the new year, though at a slower pace. In addition to a very low housing inventory and a strong sales rate…

Wait, did he just say “a very low housing inventory”? That’s a riot. And while sales have been slowing YOY for 21 of the last 22 months, I will grant that through July, it could still be described as a “strong sales rate.” July’s sales were higher than every year outside of 2003-2006. Of course, with the tightening mortgage market, sales in August came to a screeching halt, coming in lower than any August since 2001… but we’ll let that slide, since Forbes probably isn’t working off of data that current.

…there are few non-conforming and high-risk loans on the books than in other cities, which means the area will likely see fewer defaults in the coming months than the rest of the country’s markets.

Really? I suppose with a statement as vague as “than in other cities,” it’s true. But the list of qualifying “other cities” is frankly pretty short. We’re right up there with most of the other cities that started experiencing increasing foreclosures once the appreciation music stopped. For more on the loan picture, check out this and this.

To arrive at our list, we teamed with Moody’s Economy.com to develop three prediction models based on a range of factors that affect how prices move. These include, among other things, the state of local economies, new construction contracts, foreclosure rates, local credit markets, sales rates, affordability and inventory.

[From the slide show:]

Median home price:$395,000
Annual price change from 2006: 8.9%
Projected price change to 2008: 3.09%

Moody’s Economy.com sure seems to be fickle with these predictions. Just last month CNN reported on “an analysis conducted by Moody’s Economy.com” that showed prices in “Seattle-Bellevue-Everett” declining 2.9%.

Also, it’s not at all clear from the article what specific geographical area they’re referring to when they say “Seattle.” It’s definitely not just the city of Seattle, where the median home price sat at $439,000 last month. It’s also apparently not King County, where the median is $415,000. My best guess is that they’re using some combination of King, Pierce, and Snohomish counties—which makes the prediction of continued price increases seem even more unlikely to come true.

In related news, the author of this piece and the previously-featured “Best Places to Flip a Home,” Matt Woolsey, contacted me after my post about that article:

I came across your blog while looking for information on Seattle real estate and I must say a lot of the analysis looks great. Your apparent desire to punch me in the face regarding the flipping story is of some concern to me for my next visit to your city, but I nonetheless will continue to follow your site. For future consideration, you should know that all of our stories are comprised of data driven analysis

For the record, my comment that I would “really like to gut-punch these reporters” was tongue-in-cheek. You have nothing to fear in Seattle, Matt. Well, not from me, anyway. I can’t speak for anyone that giddily jumped into the market to flip a house after reading that article, only to find that the time for flipping in Seattle is long gone…

(Matt Woolsey, Forbes, 10.01.2007)

Are prices in Seattle based on strong fundamentals or speculation? While we can certainly look at the data and draw conclusions for ourselves, there is little to no hard information out there about how many people are buying merely to turn a quick buck.

There are those that treat the lack of hard data regarding speculative buying as evidence that there is little to none of it occurring in Seattle. I highly doubt that is the case (for reasons discussed here numerous times before), but even if we assume that it were true up to this point, I’m inclined to think that speculation in Seattle is on the rise.

Exhibit A: Thursday’s Seattle P-I front-page story about a local flip:

The last time Al Johnson was inside the house at 4425 Cascadia Ave. S. in Columbia City, there were no walls.

“You’ve done a nice job,” Johnson told owner Thomas Loeser after touring the rehabilitated 1911 Craftsman house Monday.

Johnson, an associate broker with Windermere Real Estate, was the listing agent who sold the “extreme fixer” in February to Loeser and his brother, Derek — lawyers when they’re not fixing up houses.

In recent years, many developers have fixed up run-down houses and then put them right back on the market. The Loesers’ house offers an extreme example.

They paid $315,000 for the run-down abode Feb. 20 and put it back on the market for $549,000 last weekend. Thomas Loeser wouldn’t say how much they spent on renovations, but acknowledged that one agent who said back in February the house would take $150,000 in work wasn’t far off.

Johnson speculated just before the sale that the house, once fixed up, could fetch $150,000 over the sales price in the current market — at most.

So, $549,000?

“Let’s see what happens,” Johnson, who is not representing the house this time, said Monday.

Exhibit B: #1 on Forbes’ latest list, “Best Places to Flip a Home“? You guessed it… Seattle!

Flipping—in which an investor buys a home, makes quick improvements and resells at a higher price—”was a rage in the housing market surge,” says Anthony Sanders, a professor of real estate finance at Arizona State University. “But it is not as popular in this flat housing market.”

It’s easy to understand why. With prices falling quarter after quarter, the prospect of buying low and selling lower doesn’t sound nearly as appealing as buying low and selling high.

However, those looking to make a quick buck may do so in a number of markets ripe for a well-spotted flip.

Best among them is Seattle. It landed atop our list based on a number of measures.

I’m not a violent person by nature, but part of me would really like to gut-punch these reporters that are encouraging people to go out there and jump into Seattle’s already-stalling housing market to try to turn a quick buck. The days of easy money from flipping real estate in Seattle are over (if they were ever even here to begin with).

Exhibit C: Anyone seen or heard from “Seattle Eric” lately?

(Aubrey Cohen, Seattle P-I, 07.25.2007)
(Matt Woolsey, Forbes, 07.26.2007)

P.S. (For those not in the know, Seattle Eric was the proprietor of a blog titled Tales of a Seattle Real Estate Investor (formerly located at this address), where he chronicled his quest to flip houses in Seattle for fun and profit. He was also a contributor over at Rain City Guide for a short while. The last time anyone heard from him, he had gotten out of the flipping business to become a real estate agent, and was still having trouble unloading a few of his houses.)

Addendum: Be sure to check out a relatively new Seattle-area blog that focuses specifically on local flips: ReMuddle. I have added a link to them on the sidebar under Bubble Sites -> Regionals. Thanks to RedmondJP for pointing them out in the forum. Speaking of the forum, also be sure to check out the long-running thread on this very subject: Audacious Flips and Renovations.

Forbes has come out with yet another real estate “Top 10″ list, this time gabbing on about the “Top Home Sellers’ Markets.” Interestingly, Seattle is conspicuously absent from the list. They explain:

The Methodology
To measure inventory glut, we used Moody’s Economy.com and National Association of Realtors data that tracked a market’s current sales rate by projecting the amount of time it would take to sell off the excess housing stock at the current rate of sales.

We also looked at the change in sales rate over the last year to measure the relative tightening or loosening of the market. Finally, a measure of price stability was applied so as to prevent the list from being a rundown of upstart markets.

The measurements left out a few cities that lacked comprehensive data. Seattle, for example, has incredibly strong market fundamentals—the lowest vacancy rate of major metros at 0.9% and is a small geographic area not conducive to overproduction. It is a good seller’s market, but for tracking what we were after, Seattle data was incomplete for our analysis.

I’m not sure why their data was “incomplete” for Seattle, and I imagine that if they had access to everything they were looking for, it probably would have been on their list. However, while Seattle might be a better sellers’ market than most of the country, all indications are that we have been granted only a temporary reprieve.

While the language in the article makes their calculations sound fancy and complicated, it would appear that their primary measure of whether a city has a good “sellers’ market” comes by dividing the total monthly sales by the current number of homes for sale. This is commonly referred to as “months of supply” (MOS), but they are referring to it as the “rate of sales.” Here’s a graph of King County’s SFH from 2005 to the present:

Click to enlarge

Forbes mentions that they “also looked at the change in sales rate over the last year to measure the relative tightening or loosening of the market.” As you can see, the Seattle market can only be described as “loosening.” At the end of May, MOS stood at 3.02, up 59% from last May’s value of 1.89, which was itself up 18% from the May 2005 value of 1.61.

Sales have been declining at an average rate of 10% year-to-year for the past 19 months:

Click to enlarge

While inventory has been increasing by over 24% year-to-year for over a year:

Click to enlarge

Is Seattle presently a seller’s market? Probably. Will it still be a seller’s market by the end of the year?

“Outlook not so good.”

(Matt Woolsey, Forbes.com, 06.22.2007)

Sometimes you read something and it just makes you say “huh?!?” An article in Forbes last week titled Most Resilient U.S. Real Estate Markets gave me just such a moment. In it, Forbes writer Matt Woolsey attempts to predict the future, making some absolutely bizarre claims along the way:

When it comes to real estate, the questions on everyone’s lips are: How low is low, and when’s the perfect time to buy back in?That moment has passed in Seattle and Charlotte—both metros hit bottom in the first quarter of 2006 and have since posted price gains of 12.3% and 6.3%, respectively, according to National Association of Realtors (NAR) data.

Huh?!? What kind of “bottom” did the Seattle market hit in the first quarter of 2006? As far as I can tell, that was darn near the peak appreciation time.

Among the “Most Resilient” markets highlighted in the article (links go to S&P Case-Shiller Data): Phoenix, Las Vegas, San Diego, Miami, Boston, and… wait for it… Detroit (I kid you not).

I just want to say… Huh?!?

(Matt Woolsey, Forbes, 06.08.2007)