Seattle Bubble

Here are a few stories from the last week or so that are worth pointing out.

First up a TV report from KOMO News: “Open House” — sign of the times in Snohomish County

Real estate agents in Snohomish County are now resorting to a “shock treatment” for slouching home sales in their area.

Realtors advertised more than 400 open houses over the weekend. Agents say they hope playing the numbers game adds-up to more home sales.

“It’s to get the public excited about all the great listings they can see out here today,” said Rich Williamson, President of the Snohomish County Association of Realtors. “It’s a chance to see more homes than they ever saw in one day or one weekend.”
…
Chris Lamoreaux says the housing market story is more than just numbers.

“We’re going fight the media that’s been negative about the housing market,” he said. “The real estate market in Snohomish County and the Puget Sound is excellent.”

That darn media, always being so negative about the housing market. I wonder if anyone can find me a quote from a real estate agent thanking the media for all the positive press when the housing market was gangbusters? Let me know if you come up with anything.

Moving to the opposite end of the Sound, down in Thurston county the “incentives” are flowing strong. The Olympian reports: Home sellers turn to incentives to draw buyers

A new Honda scooter, a trip to a Caribbean destination and a chance to win free gasoline are just some of the incentives that South Sound real-estate agents are using to entice prospective buyers in a slower housing market.

Some agents, though, are split on whether such incentives and other marketing efforts are worthwhile. Re/Max Four Seasons broker and owner Dean Stohl says the best approach for home sellers in this cooler housing climate is to think carefully about the sale.

“The most important ‘non-gimmick’ are sellers pricing the property competitively and making sure it is in ‘tip-top’ condition before putting it on the market,” he said.

Still, some agents are rolling out increasingly creative hooks to land that next sale because sales have cooled since the piping-hot years of 2005 and 2006.

Sounds like Dean Stohl has it figured out. Good luck to all those salesmen thinking that the prospect of paying 30 years of interest on a scooter will sell houses, though.

Another great column from the P-I’s Bill Virgin popped up last week as well: Economic woes could run deep in the region

As large and influential as those companies [Washington Mutual, Weyerhaeuser, Starbucks, Costco] are, there are less-visible layers of small and medium-sized companies that also keep the region’s economy moving.

Or not.

Those smaller outfits are dealing with the pressures and headaches of a slowing economy, some generated by the same factors plaguing large companies, others the result of cutbacks and retrenchments by larger companies with which those smaller firms do business.
…
“In today’s deteriorating economic climate, the ranks of companies feeling the pinch are growing,” writes Michael Newsome, a principal with Seattle-based investment banking firm Zachary Scott, in a recent newsletter. “Even in a fairly buoyant Northwest economy, we are entering a period of rationalization that will cut across industries. For a number of companies, depressed consumer confidence, ballooning energy costs, restricted credit access and, before long, higher interest rates will trigger sufficient financial distress to mandate restructurings and, in some cases, business sales or outright liquidations.

It’s nice to have at least one voice of realism in the local press. Too bad it seems like nobody is listening. Most people would rather believe that pink ponies will dance through the streets of Seattle forever and ever than consider the possibility that economic slowdown might actually affect us here.

Here’s one a few people pointed out. The latest top-ten list from Forbes’ Matt Woolsey is America’s Most Overpriced ZIP Codes. Guess who gets #3?

3. Seattle, Wash.

Downtown
ZIP code: 98104
Purchase-to-rent spread: 30.3

Until recently, Seattle has been held up as the example of a city immune to price drops as its market posted price increases from 2006 to early 2008. But as transaction volume has slipped and prices have flattened or fallen in many neighborhoods, the downtown area, near Pioneer Square, which experienced some of the most rapid price escalations during the boom, particularly in condos, appears vulnerable to correction.

Hooray for Seattle.

Lastly, here’s one from the national news scene. New York Times: Default rates for “alt-A” loans increasing

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

But I thought subprime was contained.

(Eric Schudiske, KOMO News, 07.28.2008)
(Rolf Boone, The Olympian, 08.04.2008)
(Bill Virgin, Seattle P-I, 07.30.2008)
(Matt Woolsey, Forbes.com, 07.29.2008)
(Vikas Bajaj, New York Times, 08.04.2008)

It’s official: The Seattle condo market has hit finally a wall. Here’s a little article from the Puget Sound Business Journal on Friday that goes into all the details:

With more than 400 condominiums under construction in a faltering housing market, Seattle-based Vulcan Real Estate has decided to sweeten the deal for potential home buyers.

In the coming weeks, Vulcan will roll out incentives aimed at buyers living and working in South Lake Union, where it has three condo developments under construction.

While its incentive plan is still in the works, one of its perks will be to pay a chunk of the closing costs for buyers who are currently renting at a Vulcan property and want to buy in the neighborhood, said Lori Mason Curran, real estate market research manager for Vulcan, Microsoft Corp. co-founder Paul Allen’s real estate investment company.

“There has definitely been a slowdown in condo sales at all projects in Seattle,” said Mason Curran, who declined to release Vulcan’s pre-sale figures.

Vulcan’s move is a reflection of the slowdown in the housing market across the Puget Sound region that’s given prospective condo owners the upper hand. Developers of condos, fighting stagnant sales, are offering more perks than ever to potential buyers — including cars, vacation packages and, in one case, Vespa scooters.

So, if I inVest in a Vulcan, I can get a Vacation and a Vespa? Sorry, couldn’t help myself. With the number of projects still scheduled to come online in the next few years, I think it’s going to take a lot more than a few worthless “incentives” to move these things. I’m talking price drops. Serious price drops.

The push to bring buyers in the door is a striking indication that the market for condos has stalled and buyers, reacting to a string of bad news about the economy across the country, are still waiting out the tumultuous market.

“We have a substantial amount of buyers out there, but they are all on the fence,” said Matthew Gardner, whose consulting firm Gardner Johnson works with Vulcan.

“The last thing anyone wants to do is buy in a market that is declining.”

Indeed, which is exactly what they would be doing today. Also, I really wish we could get past the nonsense that the downturn is somehow due to all the “bad news,” as if people would just go out and buy those houses and condos if only the media would just quit making up all these nasty lies and scaring the buyers. Give me a break.

(Kirsten Grind, Puget Sound Business Journal, 05.23.2008)

Yesterday’s Tacoma News Tribune had an article about new construction in outlying areas, which is becoming front line of the Puget Sound housing bust. In short: it ain’t pretty for builders.

Facing fewer buyers and many, many homes for sale, South Sound builders are pulling back and getting extra promotional.

Builders have slowed construction schedules in recent months, cut prices, offered their biggest-ever incentives and even rented out finished homes that couldn’t find a buyer.

…builders are looking to unload even more of what’s built and empty. In March, 1,485 new homes, excluding condos, were listed for sale.

It used to be that half of the homes sold by Soundbuilt, one of the area’s largest builders, were properties with homes either under construction or yet to be built, said Gary Racca, owner of the Puyallup company.

Uncertainty about the economy, however, means consumers are holding off, and now 90 percent of the company’s sales are on ready-to-move-in homes. But completing homes without a committed buyer can be risky, because the builder fronts the cost and often has to secure and pay to finance the construction.

The company has launched a first-time promotion: a price guarantee, which allows someone to buy a not-yet-constructed home at a locked-in price and ensures that if Soundbuilt lowers prices on other similar houses in the subdivision, the buyer will get the same discount.

Of course, they’re still confident that all they need to do is “get the momentum back” with a few discounts and incentives here and there, then they can get back to jacking up the prices.

(Devona Wells, Tacoma News Tribune, 05.04.2008)

Elizabeth Rhodes hits us this morning with a fun little morsel: Developers dangle discounts, toys to lure home buyers. (I wonder why this article wasn’t in the big weekend real estate section? Hmm… Edit: It would appear that the answer to that question is that they were saving it for the front page [pdf].)

Puget Sound-area new-home developers, motivated by an increasingly soft real-estate market, are resorting to something they haven’t done in years. They’re enticing buyers, like Matt Orlando, with big TVs, motorcycles and other inducements.

The deal sweetener that eased Orlando into his first home was a $3,000 credit toward closing costs on a one-bedroom condominium in Veridian Cove, an extensively refurbished new conversion in North Seattle.

The first year’s homeowners dues, at $197 a month, also were waived.

“I feel like I won the lottery,” says the Shoreline Community College instructor. “They were basically giving me $5,000 to move into a beautiful place I could afford.”

Incentives started appearing in late summer and are the best they’ve been in more than a decade. Indeed, until this year, builders could count on selling many new homes before they were even built.

Now there’s a four- to 13-month inventory in King and Snohomish counties of new houses, town houses and condominiums available, according to New Home Trends, a Bothell data-research firm. That’s spawned a goody-laden battle for buyers.

In other words, they’re dropping prices without actually “dropping prices.”

If this story sounds familiar, it’s because the exact same thing has unfolded in other markets all across the country over the last few years. It’s one of the surest signs that a housing market is transitioning from “boom” to “bust.” The builders are no dummies, they know that it is time to get out. The only problem for them is that they’re all trying to get out at the same time.

This will be interesting to watch unfold.

(Elizabeth Rhodes, Seattle Times, 10.29.2007)

A pair of articles today from the Seattle P-I and King 5 News focus in on those poor, poor sellers that actually have to work to sell a home in today’s slow market. No longer are run-down shacks full of years of accumulated junk being bid up to ridiculous heights. Now, you actually have to clean out your crap, paint a few walls, steam-clean the carpets, take decent pictures, and—oh yeah—knock a few thousand (or a few tens of thousands) off the price.

A year ago, buyers regularly bid above asking prices, waived stipulations such as inspections and used escalator clauses, which raise offers over competitors’ bids up to a set ceiling. Now, good homes in nice neighborhoods with realistic asking prices still can get multiple offers, but many sellers put more time and money into fixing them up, offer more incentives and accept more conditions, including offers contingent on sale of another home.

These days, it would take twice as long to sell the current number of homes on the market in Seattle and King County as a whole at their current sales paces than it would have a year ago. Seattle had 50 percent more homes on the market in September than a year earlier, while the countywide increase was nearly as large. Pending sales, which can be the best indicator of recent market activity, declined by more than 25 percent in Seattle and 30 percent countywide.

Update: Matt Goyer over at Urbnlivn points out a Baghdad Bob-style denial of reality from a condo marketer quoted in the P-I article. “Prices have not been cut.” Wait, yes, they have.

How about trying some of those good ol’ incentives to lure in an unsuspecting victim buyer?

Selling a home in the Seattle area has become tricker. What used to sell in one week can now take months. Home sellers are going to more and more extremes, offering enticing incentives to hook a buyer.

Those boom days when homes in Seattle could be sold in a matter of hours are for the most part over. Residential homes can languish on the market for months, so sellers are relying on incentives to try and seal the deal.

I expect a lot of languishing to carry on through the winter, and probably throughout next year.

(Aubrey Cohen, Seattle P-I, 10.16.2007)
(Roberta Romero, King 5 News, 10.16.2007)

Ah, the joys condodebtorship.

When Jerry O’Leary, 54 and retired, put down over $100,000 dollars toward a new million-dollar condominium in February 2005, he thought he was buying his way into an innovative downtown lifestyle proposed by Vulcan Inc. Vulcan Real Estate’s $200 million 2200 project on two and a half acres at Westlake Avenue…

However, on March 26, 2007 O’Leary filed suit…after a series of delays and construction disputes left him with a condo that…was “substantially [different] from the scope, nature, and extent of the project as it was described”…O’Leary recounts, “The quality, as promised, sounded great.” Instead, he describes the building to The Stranger as “basically a Motel 6.“

Oh, snap!

…some of the problems include irreparably damaged door and window frames; a poured concrete deck that sloped toward his apartment, causing leaks in the unit below; mounting construction delays; and unmet expectations. …O’Leary is not the only person to encounter problems with 2200.

…tenants have dealt with minor annoyances such as low water pressure and leaky shower doors and pipes, as well as major design flaws like incorrectly positioned halogen lights that threatened to ignite kitchen cabinets. The problems were compounded, they say, by promises of room service from in-house restaurant Marazul, a rooftop “garden”—which according to a third resident is nothing more than “a big cement area with a couple of trees stuck in it,”

As of press time, several real-estate websites list 38 condos being resold in the building, and Craigslist reveals at least a dozen units available for rent or sale. … according to John L. Scott Real Estate agent Ben Kakimoto, the number of units being flipped by investors “seem[s] like a lot” when compared to other condo projects of similar scope. Some of these units have sat unsold for months, with several of the pricier units remaining on the market even after $100,000-plus price reductions.

While Vulcan would not release information on its vacancy rate, anecdotal evidence hints that 2200 currently isn’t the bustling urban utopia it was supposed to be. Resident Chris Tanaka notes that he “never see[s] that many people” in the buildings, and Dierst remarks that “the building is not full.”

Matt Goyer, the operator of Seattle condo blog Urbnlivn and a program manager at real-estate website Redfin…believes the problem is oversaturation. “It feels like they’re overbuilding in the higher-end market…. Goyer faults vacancies at 2200 to “people trying to make a fast buck. A lot of [these] people [have] unreasonable expectations.”

Huh? What’s so unrealistic about purchasing overpriced downtown condos during the peak of the greatest real estate asset bubble in history and expecting to flip them for an easy buck?

…units [at 2200] for sale have seen price reductions ranging from $1,000 to $175,000. And one seller is even throwing in a 42-inch flat-screen TV to sweeten the deal.

Is that 1080i or 1080p?

Addressing the O’Leary lawsuit, Jeffries states, “I don’t know why Mr. O’Leary feels like that’s something he needed to go to the media about.” She would not respond to anonymous complaints about the development (nor did she return several calls after a few residents put their names by the complaints). “We’re doing everything we can to take care of our homeowners. The vast majority of people at 2200 are really happy,” she originally told us. We asked Vulcan to put us in touch with some of those tenants, they did not respond to the request.

On a recent Saturday night, as 2200’s three concrete and glass towers loomed in the night—the downtown skyline to the southwest…many of the windows were dark, save for the glow of several flat-screen TVs large enough to be viewed from the street.

During 2005 in downtown San Diego, I noticed much the same. At the time I just assumed that everyone was simply still working at 10pm each night, desperately trying to make their $4500 mortgage payments.

When I am ready to purchase my next house after the crash, it certainly won’t be a condo. I probably won’t buy anything made after 2000 as they’ve likely been built of balsa wood and bailing wire.

While it’s difficult to tell if Seattle will be hurt as badly as other bubbly areas such as San Diego (and this is only the beginning), it certainly won’t be pretty. Be patient - a sixteen year speculative bull market in housing doesn’t land quickly - and certainly not “softly”.

As they like to say on HB, “got popcorn?”

(Jonah Spangethal-Lee,The Stranger, 04.12.2007)