Seattle Bubble

Here’s a pair of interesting articles from the Puget Sound Business Journal this weekend.

Puget Sound job growth slowing to trickle

The [Puget Sound] Economic Forecaster, published for the last 15 years and used by companies and governments across the region, is predicting the four-county region will add just 5,900 jobs in the third quarter of this year, boosting employment a fraction of a percent to 1.86 million.

In the fourth quarter, the region is expected to lose 4,100 jobs — a 0.22 percent decrease from the previous quarter — ending the year with employment of 1.856 million.

That’s in contrast to the 2.9 percent annual growth rate in 2007, compared with 2006. The region added 51,500 jobs in 2007. Conway expects a growth rate of 1.7 percent in 2008.

“We’ve seen the economy all of a sudden go limp recently, largely because of the collapse of the housing and credit markets,” said Conway, who also is the senior member of the Governor’s Council of Economic Advisors.

Much of the slowing job growth can be traced to the construction and financial sectors, which have been shedding jobs statewide over the past few months.

I thought our strong local economy was based on Boeing and Microsoft, not this shakey construction and financial stuff that’s been causing so much trouble everywhere else. Well, that’s what they were telling us anyway.

But if you’re a landlord, fear not. “Experts seem comfortable with rent levels.”

Residential Real Estate: Demand from Puget Sound area renters sustains a ‘landlord’s market’

…experts crunching local rental-unit supply and renter-demand projections seem comfortable with the rent levels expected over the coming year or two.

Even with a surge in unsold homes and condos competing in the rental arena, the consensus counts on sufficient rental-minded residents to keep vacancies and rents at landlord’s-market levels.

Residential real estate distress nationwide, in fact, is actually giving something of a boost to the local rental arena, observed veteran rental agent Michael Wilson, broker/owner at Windermere Property Management in Seattle. The relatively healthy local employment scene is still attracting newcomers, he said, “but they’re nervous about buying, so they’re renting instead.”
…
Meanwhile, the Seattle vicinity remains one of the most attractive markets for savvy apartment investors able to identify and provide what renters want today, added Bob Hart, president of Beverly Hills, Calif.-based Kennedy Wilson Inc.’s hyperactive KW Multifamily division.
…
Despite the slightly lower prices investors have been willing to pay for apartment properties here and elsewhere of late, Hart said, it would take a real economic calamity to significantly diminish renter demand.

Oh, good. Luckily, there’s no economic calamity on the horizon, whatsoever. Erm… wait…

(Kirsten Grind, Puget Sound Business Journal, 09.12.2008)
(Brad Berton, Puget Sound Business Journal, 09.12.2008)

Interesting story from Kirsten Grind over at the Puget Sound Business Journal: Experts see more subprime-loan pain ahead

Another big wave of subprime mortgages will see interest rates reset to a much higher rate over the next six months in the Seattle area, an indication that the Puget Sound region might still be facing further economic trouble.

The large number of resets mean it’s possible that foreclosure rates could continue to rise across the state as homeowners struggle to make higher payments. Banks, already weighed down by bad loans, could face an even more hefty load of troubled mortgages on their books, according to experts.

The result could be a damper on some sectors of Washington’s economy — including the housing market — which has so far fared better than many states in recent months.

About 12,600 subprime loans are scheduled to reset in the Seattle-Tacoma-Bellevue area over the next six months, or about 52 percent of the subprime loans left to reset in the area…

In addition, a large chunk of Alt-A loans — known for little or no income documentation — will start resetting with the possibility of higher rates in about a year, a trend that mortgage experts are watching warily because less is known about their loan performance.

Reading the entire article, I can’t help but see an eerie similarity to what has already happened down in California. The “experts” quoted in the article claim that since home prices are only down 5-10% here, loan resets won’t be as big of a deal as they have been in the Golden State. But when most people put 0-3% down, it seems to me that a 5-10% drop in prices is more than enough to send those people into foreclosure.

I don’t think the Seattle-area will see as many foreclosures as San Diego or Sacramento, but I do think we’ll have our fair share, which will probably be more than any point in Seattle history.

(Kirsten Grind, Puget Sound Business Journal, 08.22.2008)

Last week the Puget Sound Business Journal ran a piece comparing King County to San Diego County. It was behind a subscriber-only wall, but now it’s fully available on their website: How King County dodged mortgage mess compared to San Diego. Unfortunately, the article doesn’t really have any new material that regular readers here haven’t seen before.

While the housing market’s downturn has certainly struck the Puget Sound region, it hasn’t wrought the widespread havoc that hit cities like Miami, Las Vegas and San Diego.

On the surface, there appear to be few reasons why the Puget Sound area has been able to escape the worst of the mess. Housing markets in both cities saw companies, jobs and people pour in during the first half of the decade. Both are desirable places to live. Home prices rose. And subprime mortgages were widely available.

But a detailed comparison of the two regions shows why King County’s economy is heralded as a bright spot across the country while San Diego County has come to represent everything that went wrong.

First off, I agree 100% with what appears to be the basic premise of this article: that the housing bust won’t be as bad here as it will be in San Diego, Phoenix, Florida, etc. I don’t think anybody has ever tried to argue that things will be as bad or worse here.

Unfortunately, while the article promises a “detailed comparison,” it doesn’t really deliver.

Builders in San Diego raced to build homes to keep up with demand, pushing farther into the previously undesirable areas of southeastern San Diego County, far away from the ocean.

In contrast, Seattle builders were restricted in part by the state’s growth management law and weren’t able to build at nearly the same pace.

In addition, mortgage companies and banks in San Diego — including Seattle-based Washington Mutual — wrote thousands of subprime loans. Their counterparts in Seattle wrote far fewer.

Ok, those are some interesting assertions, but where’s the data? What were the per capita rates of new construction and subprime lending in the two counties? The article doesn’t say. In fact, the only data I’ve been able to find that compares lending in San Diego to the Seattle area shows suprisingly similar amounts in both areas.

Later in the article, they do cite some raw data on homebuilding:

In San Diego, developers got 9,749 permits for single family homes in 2002, up about 6 percent from 2000, according to the Building Industry Association of San Diego County. That pace held steady through 2004 and then started to fall. By 2007, building permits for single family homes had plummeted 64 percent to 3,508 from the heyday of 2002.

By comparison, King County’s single family building permit activity remained flat between 2003 and 2005, with about 1,300 permits filed each year, according to the Washington Center for Real Estate Research. In 2007, permits dropped slightly to 1,239.

So, San Diego permits went up in 2002, leveled off for two years, then fell. In King County they leveled off for two years, then fell— the same pattern as San Diego, but offset by a year.

Of course comparing raw data like this is rather deceiving since the population of San Diego County is 2.8 million, versus King County’s 1.7 million. A better comparison would be King, Snohomish, and Pierce combined, with a population of 3.0 million. And as anyone that’s spent much time driving around outside King County knows, there was a heck of a lot more development in Snohomish and Pierce than there was in King. (And there are a lot more foreclosures out there, too.)

Another big reason: It took Seattle longer to recover from the economic aftershocks of 9/11 and the dot-com bust. As a result, the city entered the housing boom late and “although it got heated, it wasn’t as seriously overheated as some of the other parts of the country,” said Glenn Crellin, director of the Washington Center for Real Estate Research, Washington State University’s real estate research arm.

“Our economy has done very well compared with many other parts of the country,” said Crellin.

Does it occur to folks like Mr. Crellin that perhaps the only sectors of San Diego’s economy that are suffering are those related real-estate, and that perhaps the reason our economy looks so great is because the housing bust here is only just getting started?

I also don’t understand how someone can say “we entered the housing boom late” then when we likewise exit the boom late, say “look how unique and strong we are!” How does that make any sense?

What lies ahead? Chad Ruyle, an estate planning attorney and co-founder of You Walk Away, a foreclosure advice firm, thinks San Diego is not near the end of its housing market downturn.
…
“No one can predict when the market will bottom out and return to normal,” said Ruyle. “But I think we’re only a third of the way through it.”

Seattle, on the other hand, has likely made it through the worst of its downturn and will slowly start recovering, said [University of San Diego professor Norm] Miller.

I’d be curious to know exactly what Mr. Miller is basing his theory on. Unfortunately, the article doesn’t say.

No offense to Ms. Grind, as I realize there’s only so much you can fit into an article of this nature. But I have to say that this article came across to me as light on details and high on wishful thinking.

(Kirsten Grind, Puget Sound Business Journal, 06.06.2008)

Here’s an interesting story that popped up over the weekend and had people emailing me and discussing it in the comments and forums. A downtown luxury condo building named Escala is having trouble moving the last 70 units (of 270, so roughly 25%), so to try and juice up their sales, they’re raising prices. Yes, you read that right: raising prices.

Developer Lexas Cos. said this week that on June 5 it will raise the asking prices 3 to 7 percent for about 70 unsold units that have been on the market since last spring.

Another 22 units that will be released for sale May 1 also will have higher price tags.

Lexas principals John Midby and Eric Midby said prices are going up partly to send a message to prospective buyers: If they’re waiting to buy until prices drop, they’re reading the local market wrong.

And they have until June 5.

“We look at the underlying fundamentals and see a different picture than those that have been scared off by the national trends,” John Midby said. “It doesn’t match the psychology that’s pervasive in the market, even in Seattle.”

Seattle’s economy is strong, he said. Housing prices here have held up fairly well while those in much of the rest of the country have plummeted.

Stupid? Arrogant? Crazy like a fox? Or perhaps… genius?

Even our allegedly unbiased friend Glenn Crellin at the Washington Center for Real Estate Research doesn’t see the logic in this move:

“We are trying to create value for our current buyers and take [potential buyers] off the fence,” Midby said of the price increases.

But Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University, suspects those are not the only reasons.

“It is surprising that they are increasing prices to that degree unless there’s something else going on,” he said.

Lexas may feel an urgent need to move units, Crellin said: “A developer has to sell them because the carrying costs on a project that size are enormous.”

High-end downtown condo projects are particularly vulnerable to the real-estate market’s slowdown, he said, because many prospective buyers who are looking to move downtown from big, expensive suburban homes are having more trouble selling those houses quickly.

Matt Goyer over at Urbnlivn has some additional analysis:

Here are the number of $500,000 to $5 mil condos sold over the past few years in downtown:

2005: 134
2006: 129
2007: 207
2008: 45 so far

Currently there are 189 units in that price range active on the MLS. There are certainly more than this because not all new construction inventory is in the MLS.

So it looks like downtown Seattle is track to sell about as many luxury condos as it did in ‘05 or ‘06, which would mean about 90 more this year. Apparently Escala thinks that pretty much all of those will be from them. Good luck with that.

On the other hand, an article in the Puget Sound Business Journal this weekend claims that the condo supply downtown is “expected to dry up.”

With 40 condominium projects in the pipeline for downtown Seattle one might expect a glut of new units on the market. But tight-fisted lenders and hesitant buyers, both reacting to the nationwide credit crunch, have severely hobbled the once high-stepping market.

The pace of development has slowed so sharply that local experts predict a shortage in 2010 that could drive prices up. One consultant forecasts delivery of just 189 new units that year — down from an average of 1,100 anticipated in each of the prior three years.

Behind the prediction: No new condo project has broken ground downtown since the last two buildings — 275-unit Escala and 204-unit Equinox — got under way last summer, said the consultant, Dean Jones, president of Realogics Inc., a Seattle-based condo research and marketing firm.

Since it can take as long as two years to build a high-rise condominium tower, the dearth of new construction is pushing delivery into 2011 — assuming those projects, which represent more than half of the 40 in the pipeline, can find financing.

So it looks like that nifty rendering of Seattle’s 2010 skyline might be a bit off. So are the developers at Escala on to something, or off their rockers? I suppose by the end of the year we’ll know.

(Eric Pryne, Seattle Times, 04.26.2008)
(Matt Goyer, Urbnlivn, 04.27.2008)
(Jeanne Lang Jones & Kirsten Grind, Puget Sound Business Journal, 04.25.2008)

If you thought last month’s reporting was fun, just wait till you get a load of the goomy tone of the latest wave of articles.

I find it interesting that the NWMLS chose to release the statistics so late in the day yesterday, on the fourth business day of the month (rather than the fifth, which has been the recent standard). It’s probably just a coincidence, but I can’t help wonder whether it might have something to do with the fact that the election results are sure to grab all the headlines today, pushing the nasty real estate news out of the spotlight…
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