Seattle Bubble

P-I Real Estate writer Aubrey Cohen had a nice post on his blog yesterday that pointed me toward a recent report that is worth mentioning here as well.

The report is titled House Prices in America and is published by Global Insight. According to their About page, they provide “comprehensive economic, financial, and political coverage of countries, regions, and industries.” As far as I can tell, they’re a much more neutral source than, say the NAR or Realogy.

The most interesting part of the report is their “statistically normal house values,” which they calculate by considering “not only house prices and interest rates, but household incomes, population densities and any historical premiums or discounts metropolitan areas have exhibited over time.” You can read all about how they determine the appropriate value for a market in their Methodology pdf.

Last time we checked in with Global Insight was September 2006, when they pegged Seattle as 33.8% overvalued. Now that prices have finally begun to drop around here, as of the first quarter 2008 they are ranking Seattle as 22.8% overvalued. Here’s how our area stacks up compared to the rest of the country:

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Hmm, the Pacific Northwest seems to be the last holdout of the overvalued markets. Portland is even worse than Seattle, coming in at 36.8% overvalued.

According to their analysis, Seattle’s current price of $393,200 “should” be $320,195 (19% lower). So does this mean prices here are going to drop 19%? Not necessarily, but based on what has happened in nearly every other part of the country, I’d say it’s pretty likely. Here’s what has happened in some other cities in the last two years:

San Francisco, CA
2006: Primed for an 18.9% drop
2008: Prices lower by 15.5%

San Diego, CA
2006: Primed for a 24.5% drop
2008: Prices lower by 24.1%

Minneapolis, MN
2006: Primed for a 14.8% drop
2008: Prices lower by 6.6%

Boston, MA
2006: Primed for a 7.1% drop
2008: Prices lower by 7.7%

Also note that the standard deviation of their valuation is +/-15 percent, so Seattle could be anywhere between 7.8% overvalued and 37.8% overvalued, which would mean “normal” prices of $364,750 and $285,350, respectively. In any case, it’s an interesting report that I recommend you check out.

(Global Insight, House Prices in America, Q1 2008)

Whenever we talk about the detailed NWMLS stats for King County, someone inevitably asks for a map of the various areas. While I have had a map from the Seattle Times posted on the KC Breakouts history page for quite some time, I’ve never been all that satisfied with the imprecise nature of that solution.

So, I created my own map based on some more detailed pdf versions of the maps that I was pointed toward by Greg Perry (thanks Greg!).

I’ve finally finished drawing all the perimeters, and before I do much more work on it, I thought I’d solicit some feedback from you. So what do you think? What would be the best way to display this? What features does the map need? Any and all relevant feedback is appreciated.

Also, I haven’t posted regarding the Fundraising Drive lately, and as a result donations have somewhat slowed. Thanks to the 54 people that have contributed so far, we’re nearly 50% of the way there. Thank you everyone!

Please consider donating if you have not already. Your money helps make Seattle Bubble a better resource for everyone. Thank you!

A pair of maps containing interesting statistics surfaced in the past few weeks that are worth sharing here. First is the “Map of Misery” from BusinessWeek, showing “the percentage of new and refinanced mortgages into loans with payment options.” This is important to note, because as BusinessWeek explains:

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

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As you can see, the Seattle area is right up at the top, with only portions of California, Nevada, and Florida having a larger percentage of option ARM loans. Note that this only includes option ARM, and does not include interest-only loans or other ARM products. Who knows how high that number would be if it did.

The second map comes courtesy of the Detroit Free Press, and shows the difference in inflation-adjusted median household income from 1999 to 2005. (Correction: The Detroit Free Press used inappropriate statistical methods, leading to incorrect values on the original map. The below map is a corrected version generated by yours truly. See this post for details.)

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So, during a time when wages have decreased 7.0%, home prices have doubled, defying all logic. How is this possible? Sure, low interest rates were a factor, but they only dropped about two points from 1999 to 2003. That does not explain 100% home price appreciation. No, the primary culprit is certainly the ready availability of adjustable-rate mortgages, including a large number of option ARMs. Too many people have been swept up in home ownership psychosis, and have been all-too-willing to jump head-first into dangerous financing.

And yet there are still those that insist that our housing market is 100% healthy.

(Cover Story, Business Week, 09.01.2006)
(John W. Fleming, Detroit Free Press, 08.30.2006)