Seattle Bubble

The remaining portions of Glenn Roberts’ piece on Bubble Blogs have been posted to Inman News. I recommend you read it today, because after today it is only accessable to subscribers.

Read about Glenn’s conversations with a “Bubble Debunker” (real estate agent), John Doe of Southern CA, Bill Bond (Housing Panic contributor), an anonymous blogger from Southern CA, and Inman blog commenters

Oh yeah, there’s also a Q&A with yours truly.

Below is the full text of my Q&A interview with Glenn.

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Many blogs have been born around the notion of a housing bubble. The definition of housing bubbles; explanations for their formation and fate, size and location; and the very existence of housing bubbles have fueled arguments among real estate enthusiasts and experts alike for several years. And everybody seems to have an opinion. The debate has inspired T-shirt designs and sales of other bubble-related memorabilia.

First off, I would like to make it clear that I am highly focused on the issue of a residential real estate bubble in the greater Seattle area. When it comes to the national market or other specific regions, I am merely a consumer of other people’s opinions. Therefore, I do not feel qualified to make predictions or assertions regarding any housing markets outside of Seattle.

Also, I do not claim to be an expert on issues of real estate or economics, and I have never received formal training nor held a job in either of those fields. That being said, I have spent a large amount of time researching these topics and taking in data and opinions from all sides of the issue. As an “amateur enthusiast” I definitely believe that I am qualified to make predictions and assertions regarding the local housing market. If you would like to see data to back up any such assertions made in the responses below, I would be happy to provide it, just ask.

[Although Glenn did not request any supporting information from me, I have added links throughout this online version of my responses to posts where I explore the topics mentioned.]

i) Is this the real estate equivalent of the global warming issue? Will there ever be a unifying bubble theory or are we doomed to never find a consensus?

I don’t think the real estate bubble is anything like the global warming issue. We will know in just a few short years whether there is/was a real estate bubble or not. The “unifying bubble theory” will be what is written in the history books. In the late ’90s the consensus was that we were in a “new paradigm” and that tech stocks were a sure thing. Looking back just a few years later, we see that it was in fact a bubble, unsupported by the fundamentals. The real estate bubble will be the same.

1) What makes you a real estate bubble believer, a bubble debunker, or bubble neutral?

I would describe my feelings about whether there was a bubble or not at the time I started Seattle Bubble as “leaning toward bubble believer, but open to exploration.” Since that time, all the data I have investigated has pointed to the existence of a housing bubble in Seattle.

In the last six years:

• Home buying demand has grown much more rapidly than the number of jobs.
• Home prices have grown 86%, while…
  • Incomes have grown just 14%
  • Rents have held steady or in some cases actually decreased
• Affordability has dropped 43 points below its 1993-1999 average
• Exotic mortgages and zero-down financing have become more and more common

Furthermore, every time I investigate the data behind the most common claims of factors that will prevent the Seattle-area housing market from declining, I find that the data does not support the claim.

• As long as the number of jobs is increasing, home-buying demand will stay strong: FALSE
• People are moving here faster than new housing is being built: FALSE
• Growth Management laws have restricted supply too much: FALSE

I just can’t ignore the facts. Things are seriously askew, and overripe for a serious correction.

2) How do you define a housing bubble?

I believe there is a housing bubble when home sales prices become seriously out-of-line with the fundamentals that should drive the housing market: fundamentals such as incomes and the cost of rent. The only difference between the driving forces of rental prices and the driving forces of home prices is that home prices have a speculative premium built in.

The easiest way to spot a housing bubble is to compare home purchase costs with rental costs. If you are looking for a quantifiable definition, if it is more than 1.5 times more expensive to purchase as it is to rent a comparable home, I would say that is a bubble.

3) How does this definition fit (or not fit) the national housing market? Which regional or local housing markets have exhibited the most bubble characteristics?

As I stated above, I really do not feel that I am in a position to make assertions about markets outside of Seattle. However, my definition is simple enough that you can get a general picture for markets using basic data available on the Census FactFinder website. The available data is overly broad and does not make for the best direct comparison, but it is at least worth looking at. Here are the rent vs. own ratios (as in, median monthly mortgage payments are X times median monthly rent) as of 2005 for a few areas (whole counties) according to that source:

• Seattle: 2.2
• San Diego: 1.9
• Boston: 1.9
• Miami: 1.8
• Phoenix: 1.7
• National: 1.8

As you can see, many cities across the country as well as the nation as a whole apparently meet my most simple definition of a housing bubble.

4) Which bubbles [have already] burst? Which ones have deflated? Which ones are inflating? Which are about to pop?

Again, with the caveat that my focus is on Seattle, I do not think that any of the housing bubbles across the country can honestly be said to have popped yet. In many places, including the nation as a whole, there has been a slight deflation, but I am of the opinion that things are just getting started.

Only a few regions are still inflating, and as of last spring Seattle was definitely one of them. I can’t really say whether we still are or not, because the vast majority of price gains come in a 3-month time span in the spring, which we are presently just on the verge of. Personally I expect price gains to be very small this year in Seattle, if prices even go up at all.

5) Are there any common traits among the bubble markets?

Yes: Loose lending standards and a mass psychology based on two beliefs: “Home prices are shooting up, so if I buy now I will reap the rewards of large appreciation.” –and– “If I don’t buy now, I may be priced out forever!“

7) Is it possible to accurately identify the existence of a bubble before it is gone? Explain.

Can a bubble be identified? Absolutely. When the price of an item becomes grossly out of line with the actual intrinsic value of that item, you have a bubble. However, what cannot be identified is exactly how a bubble will dissipate. Perhaps it will pop rather suddenly, perhaps it will gradually deflate, or perhaps it will simply stagnate for a very long time while the fundamentals catch back up. I will say that that last option does not seem very likely.

8) How are bubbles born and how do they die?

It is all primarily about mass psychology. When a large enough group of people get it in their heads that purchasing something will result in guaranteed high returns, it becomes a self-fulfilling belief. Unfortunately it is basically akin to a pyramid scheme, and eventually there is no one new to buy in. When that happens, people finally realize what a crock it was and they all try to get out at once. This of course causes prices to plummet, bringing the death of the bubble.

9) Why do people get so fired up about the concept of a housing bubble?

That is a question I have often asked as well. I think there are a variety of reasons for the emotional charge that some people exhibit. Some homeowners bought into the idea that their house will appreciate endlessly at 10%+ per year, and are defensive against any suggestion to the contrary. Some renters are frustrated that home ownership has moved out of reach, seemingly for no good reason. Of course, anyone in the real estate business gets defensive about the notion of a bubble because a bursting or deflating bubble would affect their bottom line.

10) Will there ever be an explanation for bubbles that we can all agree upon?

I doubt it.

11) Will there ever be a time when the discussion about bubbles goes away? Is this just a passing fancy?

I imagine that we will stop discussing bubbles when they stop crapping all over our economy. Seriously though, the root of the problem is that people want a way to make money quickly and easily. If an opportunity comes along that appears to offer that, they will jump on it. There are no guaranteed shortcuts to riches, but as long as enough people keep jumping on the latest “sure thing” with their investments, we are doomed to see plenty more bubbles (real estate or otherwise) in the future.

12) What has motivated you to participate in the bubble discussion and what have you learned? What has happened with traffic volume at your blog site as the U.S. housing market has slowed? What is your background in real estate/economics?

I started the blog primarily as a place to keep track of everything I was reading while I researched the housing market. My wife and I had been “window shopping” for a home, and were extremely discouraged with how unaffordable they all were, despite our above-average income. The more I researched the housing market, the more disturbed I was about the state of things. A good summary of what I have learned is stated above in response to question 1.

In 2006, monthly traffic to my blog increased nearly seven fold. However, since I only started the blog in August 2005, that is probably primarily a function of the blog’s newness rather than the state of the national market.

As I stated above, I do not have a “background” in real estate or economics. My formal schooling and career experience is in the field of electrical engineering. As someone with a very analytical mind, able to seek out and process data, I feel that I have built a fairly complete picture of the local real estate market.

(Glenn Roberts Jr., Inman News, 02.16.2007)

I know you all totally keep on top of all the popular Canadian magazines, so this is probably totally old news to you,* but Seattle Bubble got its first mention in a mainstream dead-tree publication last week, in an article in Maclean’s titled Bubble, bubble, toil and trouble.

As with politics, the real-estate blogosphere is a place for people who feel deceived by the “mainstream media.” “I got tired of the grinning chimps on local media boasting about million-dollar condos,” says Alan Ashton, a 40-year-old single parent who regularly visits his local “bubble blog,” the Vancouver Housing Market Blog (van-housing.blogspot.com). Ashton, who rents, recalls sharing his views once on a pro-investment real-estate website. “I got positively roasted by bullish real-estate types. Any suggestion I made that affordability was becoming a problem was met with outright hostility.”

“There’s a fair amount of emotion when you’re talking to people who would like to buy a home but aren’t willing to commit financial suicide to do it,” says Timothy Ellis, author of the blog Seattle Bubble (seattlebubble.blogspot.com). “And that emotion was a large factor in creating the bubble itself.”

Mr. Chong wins points for not taking me completely out of context (as I’ve more or less come to expect from the “mainstream media”). Here’s my full quote:

There’s definitely a fair amount of emotion in the air when you’re talking to people who would like to buy a home but aren’t willing to commit financial suicide to do it. And I think that emotion was definitely a large factor in creating the bubble itself. People bought into the argument of “get in now or be priced out forever!” Or they saw people selling their houses for tons of money and got in so they could get some of that action. Most financial bubbles have emotion as one of the major underlying causes.

For those that are interested, in the extended post below is the full text of my email interview with Kevin Chong, the author of the article.

View/Hide Full Interview

Anything that I know about interest rates and general housing numbers I have only learned from watching the market for about the past year and a half. I do have a fairly strong background in mathematics, as I am an Electrical Engineer for a living (designing circuit boards for control systems), but aside from that I really don’t know anything that anyone else couldn’t figure out if they spent the same time I have on the subject.

As far as media requests, yours is actually the first. The media in Seattle only seems interested in getting their real estate quotes from people in the business of selling real estate. Go figure.

2. I know so many people who have stories where they could have bought a place five years ago that has tripled in value. Do you have one of those?

Five years ago I was still in college, accumulating a fairly sizeable amount of debt in the form of student loans, so I wasn’t in the position to buy a house, overpriced or not. I got married a few months out of college, and my wife and I decided that it would be in our best interests to pay off all our debt before incurring any more in the form of a house. We have been successful in paying off about $40,000 in debt since late 2002, and that’s something I’m quite proud of. We don’t owe any money to anyone.

However, hindsight is of course 20/20, and had we known that real estate would skyrocket the way it has, we probably would have kept our debt payment at a minimum and bought something, even if only to sell it a few years later and walk away with $100,000 or more. I don’t regret our decision, but the way real estate has gone in the meantime is certainly discouraging. Although, we’re currently living with 100% free rent, so I really don’t have much to complain about at all.

3. Has there been any recent developments that have been encouraging or discouraging to you and your belief in the bubble?

Looking at the monthly MLS numbers for the Seattle area (King County), there’s been a definite trend toward sanity in the market. You don’t see it reflected in the median price yet, but the “hot hot hot!!!” market of 2005 is definitely gone. Although it is currently quite subtle, the trends of declining sales (year on year) and increasing inventory are a signal of hope to me that Seattle is finally cooling off.

4. What, in your opinion, is the most commonly held argument for people who see the a continuing spike in the market, and why is it incorrect?

“Supply and demand” is probably the one I hear the most. They cite the growing economy in our area, and the growth management restrictions, and claim that there just aren’t enough houses to go around. The main thing I disagree with in that argument is the demand side. As I said, sales have been decreasing (sales in April 2006 were down 10% from April 2005), and despite the “robust economy” our area supposedly has, wages in King County have actually decreased in the past few years. So where on earth is all this money coming from to continue to drive prices through the roof? A recent article in our largest local daily newspaper had one sentence in it that was quite telling. It said that people making the median wage in King County have only 45% of the necessary income to afford a home. Demand cannot continue to grow when no one can afford the price of homes in our area. It’s as simple as that.

5. Why do you think bubble blogs are so enormously popular? Whom do you think is your typical reader? Do you think Internet-savvy people (i.e. those who are aware of the tech bubble of a few years back) are more pre-disposed to see a bubble? Do you think the bubble has anything to do with emotion?

I think many people are turning to blogs for news for a couple of reasons. First, they are tired of the same old predictable stories from conventional news outlets. Take a look at this post (http://seattlebubble.blogspot.com/2006/05/sizzling-strong-dynamic-crazy.html) to see what I mean when I say predictable. Secondly, blogs are able to offer a much more focused view on a subject. Newspapers try to cover the whole range of news topics and cram it all into a daily package. Blogs can focus on a very specific topic (such as a housing bubble in the Seattle area), are not limited by space, plus they have the full resources of the whole Internet right at hand.

I think the typical readers of Seattle Bubble probably don’t own homes, but wish that they could, and are frustrated by the complete insanity that housing has taken in the past few years. They are definitely tech-savvy, and I would venture to guess that many of them followed the tech boom and bust quite closely too. Your question about emotion is fairly vague. There’s definitely a fair amount of emotion in the air when you’re talking to people who would like to buy a home but aren’t willing to commit financial suicide to do it. And I think that emotion was definitely a large factor in creating the bubble itself. People bought into the argument of “get in now or be priced out forever!” Or they saw people selling their houses for tons of money and got in so they could get some of that action. Most financial bubbles have emotion as one of the major underlying causes.

6. If the bubble does burst, where would you see your blog going from there? Would change its name to the Seattle “I Told You So” Housing blog? Or would you quit blogging? Or start blogging about your home renovations?

If the bottom does fall out of the market, there will definitely be a lot of interesting stories to write on my blog all the way down to the bottom. It’s called the “Seattle Bubble” blog, but I think a better title may be the “Seattle Real Estate Price Trends” blog. That’s not as catchy, though. When it comes down to it, I’ll probably keep up the blog as long as there’s a decent amount of interest. I’ve been seeing 500-600 visitors per day the past few weeks and it seems to grow by 25-50 daily visitors each week. If the market tanked, and my readership tanked with it, down to maybe 50 or fewer readers per day, I might consider hanging it up. Maybe.

7. Do you think the mainstream press coverage about real estate has been fair and unbiased, or do you think there is a bubble-building slant to their coverage?

In Seattle specifically, there’s definitely a slant toward poo-poo’ing any talk of a real estate bubble. They constantly quote realtors and other people who profit from increasing home prices, or they highlight people who have recently bought houses, but rarely do they talk to people that are sitting the market out because it’s just too crazy. Not never, but rarely.

In the national (USA) and international media I’ve been noticing more and more articles pointing out the seriousness of the situation and the real danger that is posed by such ridiculously high prices. I think it’s probably easier for big news outlets and magazines to be more even-handed, since they don’t have a huge number of local realtors and mortgage brokers filling up their advertising budgets.

8. Are there any favourite posts I should read that will sum up your arguments?

I pretty much summed up where I stand in my “About the Blogger” post, here: http://seattlebubble.blogspot.com/2005/08/about-blogger.html The one major point I would add to that is that some people say it’s stupid not to get in now, because interest rates are on their way up. But a lot of very smart people think that housing is likely to drop in price, possibly by as much as 35-50%. If I buy a house in five years for 50-65% of its current cost but at a higher interest rate, my payments may be the same as they would be now, but 10 years later when interest rates drop I can refinance. You can’t refinance away the mistake of overpaying 35-50%.

9. Do you have any favourite bubble blogs? What do you think about Zillow? Any other real estate sites on the internet that you like?

The Bubble Meter blog (http://bubblemeter.blogspot.com/) based near Washington, DC, is one of the most entertaining and informative bubble blogs. I really liked the “There is no housing bubble!” blog, which was extremely satirical and quite amusing. Unfortunately the author decided to take it offline. If you would like to see what he did write, you can check out my archive here: http://timothyellis.googlepages.com/nohousingbubble.html (it would make the most sense to start at the bottom and work your way up). I try to keep on top of all of the blogs that I link to on my sidebar, though. It’s not as daunting as it sounds, thanks to Bloglines, which puts them all in one place for me to read.

There aren’t really (non-bubble) real estate sites that I especially “like.” The local real estate blog Rain City Real Estate Guide (http://www.raincityguide.com/) is interesting once in a while, although I’m not particularly fond of the attitude of one or two of their contributors. Zillow is certainly interesting and fun to play with, but I have a hard time taking it seriously at all as a real tool that would be helpful in doing any actual sales research.

10. One more question… do you think there are many real-estate voyeurs on the internet. Has it become a pastime for many people?

Definitely the readers on my blog that comment regularly make heavy use of the various “voyeuristic” tools out there. Many of us are constantly looking up how much certain houses sold for, what they’re asking now, etc. Since it’s all public domain information, I wouldn’t really call it voyeuristic in the truest sense of the word, but it’s definitely a hobby that’s growing as we (I think) finally reach the top of this real estate madness.

(Kevin Chong, Maclean’s, 05.29.2006)