Seattle Bubble

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?

It looks like the picture for renters may not be quite as bleak as we have been led to believe in recent articles. Turns out that new apartments are being built, and even some condo projects are becoming apartments instead.

Apartments have been the poor stepchild to condominium towers over the past few years in downtown Seattle. They’re back in vogue now, but the national housing storm may dampen their return to prominence.

“Isn’t it always this way?” Seattle’s Dupre + Scott Apartment Advisors asked in a December report on the apartment market. “Apartment development picks up just as our economy slows down.”

Los Angeles developer Urban Partners announced Monday that it had broken ground on Aspira, a 37-story apartment tower on a former church parking lot at the southwest corner of Stewart Street and Terry Avenue. The Hanover Co., of Houston, is already building the Olivian, a 27-story luxury apartment building at Eighth Avenue and Olive Way, and several other towers are in the works.

Aspira was originally slated for condos. Julie Benezet, managing director of the Urban Partners’ Seattle office, attributed the change to a glut of announced condominium projects, skittishness among the investors who fund condo towers because of condo speculation in other parts of the country, an apartment supply that has shrunk because of a lack of new construction since the dot-com meltdown in 2001 and conversion of existing apartments to condos in recent years.

The article goes on to quote predictions (by Matthew Gardner, amazingly enough) of slowing job growth, rising vacancy rates, a “complete stop” of condo conversions, and stabilizing rents (i.e. tracking with salaries). Now where have we seen this pattern before? Hmm… Oh yeah, pretty much every other bubble city that has seen their market deflate before us.

So much for all the anti-rent scare tactics to keep up the flow of suckers buying overpriced homes.

(Aubrey Cohen, Seattle Times, 12.10.2007)

As many of you have already noticed, the latest Case-Shiller data (June) has been released. Here’s an update of the graph I’ve been keeping of the west coast cities:

Click to enlarge

For those that are into this sort of thing, here’s what Aubrey Cohen over at the Seattle P-I had to say about the latest data:

Seattle-area home appreciation continued its long slide back to reality in June, according to data released Tuesday.

The typical home in King, Pierce and Snohomish counties was worth 7.9 percent more in June than a year earlier, but June had the lowest increase since February 2004 and was the 16th consecutive month of slowing growth, according to the S&P/Case-Shiller Home Price Indices.

Still, while market observers say that the national housing credit crunch is affecting the area’s market, Seattle had the largest yearly increase of the 20 metropolitan areas the indices track and was one of just five with increasing values.

…

A 7.9 percent annual growth rate still is extremely good, Matthew Gardner, a local land-use economist, said Tuesday. “No markets can continue to see real estate values spiraling and double-digit annual appreciation rates. It doesn’t work.”

…

Annual appreciation is expected to continue to slow until the end of this year and possibly into early next year, Gardner said. “I think we’ll probably end up somewhere between 3 and 5 percent.”

From the looks of the above graph, Seattle appears to be right on schedule… If the local real estate bulls such as Matthew Gardner are correct, we’ll see the red line drop another 2-3 points, then completely level off. Is it possible? Sure. It’s also possible that the legions of crows that fly by my house every day at dawn and dusk are really robotic spies, deployed by clandestine Soviet Union operatives poised to carry the motherland out of the shadows and onward to glorious new heights.

Just to give you an idea of how ridiculously unlikely it is that Seattle will escape unscathed, as the sole beacon of housing appreciation light in the dark valley of the bursting national bubble, behold the following graph, which shows thirteen of the twenty Case-Shiller-tracked cities (with Seattle and Portland still time-shifted back 15 months):

Click to enlarge

You should note that while there are examples of cities that saw home prices rise much higher and faster than Seattle and are already falling much harder (Las Vegas, Phoenix), there are also examples of cities that never saw much more than 10% YOY appreciation, and yet have already hit negative YOY (Chicago, Minneapolis, Boston). The “we didn’t rise as much” excuse really holds no water at all.

In fact, looking at that graph, the existence of robotic USSR spy crows seems more likely than a near-future return to steady 5% appreciation for Seattle. I suppose that by this time next year, either Matthew Gardner or The Tim will look like a fool. We shall see.

(Aubrey Cohen, Seattle P-I, 08.29.2007)

As the nation’s home lending situation continues to deteriorate before our eyes, you can count on the local press to keep pushing the “we’re completely immune here” line. (Emphasis mine)

Nationwide, Americans are finding themselves unable to make their mortgage payments. Those folks share common traits: They’ve borrowed too much, they’ve lost their jobs or they hold an adjustable rate mortgage — and rates are soaring.

They also share this — for the most part, they don’t live in the Puget Sound region.

“It’s not happening in Seattle to any degree whatsoever,” local land-use economist Matthew Gardner said Wednesday. “We’re not really seeing any fallouts.”

As home prices in other cities have soared, people have relied on exotic loans to enter the housing market. But now, those decisions are looking suspect.

If anyone had any misconceptions about Mr. Gardner being anything other than a salesman, an overarching, absolute statement like that should clear up any doubt. Not happening to any degree whatsoever? Really?

Is that why foreclosures have quadrupled since March?

Chart complied by Deejayoh

Of course we’re not seeing people falling behind on mortgage payments to the same degree as elsewhere in the country, since so far, anyone that starts to have trouble can just sell the house for more than they paid. Those days are rapidly coming to an end though, even in Seattle. Remember this chart?

Click to enlarge

When that line makes its way down to zero, as it’s likely to do in the next 6-9 months (not certain, but likely), the Seattle area will see just as many mortgage problems as other parts of the country. As CKT pointed out in the forums, it’s coming up on us faster than you may think, with Pierce County already flirting with 0% YOY price changes.

Keep in mind that the exact same pie-in-the-sky, no problems here talk was common in other markets, right up until the problem became undeniable.

(P-I Staff & News Services, Seattle P-I, 07.25.2007)

Update: Matthew Gardner pays us a visit to defend himself in the comments:

I continue to find your site interesting for in part, but amusing for the greater part. Two points that I would make are that the statement concerning foreclosure rates was applicable to the city of Seattle and not the MSA. Even if we were discussing King and Snohomish counties, one might suggest that 1,400 or so foreclosures in a 596,000 unit market is actually statistically insignificant (0.2%) and pre-forclosures in decline!