Seattle Bubble

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Aubrey Cohen reports on some interesting population growth data just released by the state Office of Financial Management.

…difficulty selling homes elsewhere has slowed population growth here over the past year, according to new estimates from the state Office of Financial Management.

Seattle and King County grew 1.1 percent and 1.2 percent, respectively, between April 1, 2007, and April 1, 2008, down from growth rates of 1.3 percent and 1.4 percent the previous year. Seattle is now home to 592,800 of King County’s 1.88 million residents.

The state grew 1.5 percent to nearly 6.59 million people as of April 1. The growth rate was down from 1.8 percent in the previous year.
…
Population gain from net migration — the number of people moving in minus those leaving — was 59,000 statewide over the past year, down from 70,000 in 2007 and 81,000 in 2006. King County’s net migration gain was just over 10,000, down from nearly 13,000 in 2007 and 15,500 in 2006.

The nationwide housing slowdown is starting to have a local impact, said Chandler Felt, demographer with the King County Office of Management and Budget.

“We’re not totally insulated from it, and I think we may be seeing more of it in the coming year,” he said.

Another fact not mentioned in the article is that as home prices drop more rapidly in sunny, desirable locations such as California and Florida than they do in Seattle, those places become even more desirable, which can only lead to some people leaving Seattle for more affordable, sunny locales.

(Aubrey Cohen, Seattle P-I, 07.03.2008)

In theory, there are two factors that affect the price of homes: supply and demand. We’ve looked extensively at the relationship between supply (inventory) and price in the past. Let’s take a look at the relationship between demand and price.

For the purpose of this post, we will measure demand by looking at the relationship between the number of closed sales in a month and the total population. For population, I’ll be using the “Civilian Labor Force” data from Workforce Explorer Washington, since it is reported monthly. Note that the number I’m using is not the number of people employed, but the total number of employable people. For the median price and total number of closed sales, I’ll be using the single-family home data released monthly by the NWMLS. All of the data will be for King County as a whole.

First, let’s have a look at a raw chart of all the data, which is available through early 1999:

Click to enlarge

In order to keep the graph from being an unintelligible mess, I’ve graphed the “1 Sale per X People” as a 12-month rolling average. This smooths out the large spikes that occur due to the highly seasonal nature of home sales. The YOY price change is also a rolling average, but only 6 months was necessary to smooth it out. You can see the raw data for both series in faint dashed lines.

Just by looking at this graph, you can see that there seems to be a relationship between the two—when the number of people per closed sale decreases, the price changes increase, and vice versa. Let’s take a closer look at this by graphing the two running averages on a scatter plot.

Click to enlarge

Clearly there’s some sort of relationship going on here, but with an R² of just over 0.5, it’s not very strong. Let’s take a page out of Deejayoh’s playbook and see what it looks like if we compare each month’s rolling-average sales data with price change data sometime in the future. I looked at 3, 6, 9, and 12-month delays, and found that the strongest relationship was in a 9-month delay:

Click to enlarge

With an R² of 0.81, now we’re talking. But what’s with that trail of dots (that I have highlighted in green) deviating so severely from the pattern of all the rest? Those represent the YOY price change data from the last 6 months, October through March. If we stop the series in September, the R² jumps up to over 0.9.

So clearly there was a strong relationship between demand and home price changes, at least until late last year, when things began to fall apart.

But hold on a minute. Let’s go back to that first scatter plot again. I’ve highlighted the last six data points again in green, and given them their own trend line:

Click to enlarge

Whoa. Granted, 6 months of data isn’t much to go by, but still, R² of nearly 1.0 is pretty hard to ignore. I think this is definitely a trend to keep an eye on. If we make the fairly reasonable assumptions that population will continue to grow at the average rate it has grown the last 12 months and YOY sales will continue to drop at the average rate of the last 6 months, this trend line would result in YOY median price drops approaching 20% by the end of 2008.

I am not saying that is what will happen, although it certainly could. I just find it interesting that the time-delay in the relationship between demand and prices seems to have all but vanished with the recent changes in the housing market. Who knows how long it will continue, and who knows what population and sales will really do. What I do know is that I will definitely be paying close attention to this relationship as the mess continues to unfold here in Seattle.

Sources:
Sales & Prices: NWMLS
Labor Force: Workforce Explorer Washington

While I was enjoying a relaxing weekend with my visiting brother-in-law, playing a copious amount of Xbox 360 and Wii games, the local press was going into overdrive with the real estate booster articles. It’s not worth my time or yours to have separate posts for each of them, so here is a link roundup. (Danger: Sarcasm ahead.)

The first three reports in today’s roundup were spawned by an upbeat report on the local condo market that was released by none other than our hero, Glen Crellin.

Elizabeth Rhodes, Condos a bright spot in housing market:

Overlooked for years as a significant housing source, condominiums are now a rapidly growing presence providing a ray of sunshine in an otherwise gray local housing-sales scene.

The condo market is healthier than the detached-house market, and prices are holding their own. Those are the key findings from an analysis released Friday of the Seattle-area condominium market by Glenn Crellin, director of Washington State University’s Center for Real Estate Research.

It was pointed out to me by a reader that the online edition of the Times article was peppered by as many as six ads for local home sellers (I never see ads, thanks to Firefox + Adblock Plus). See a screenshot to the right (click to enlarge). The ads are clearly determined by scanning the text for keywords, but it was still amusing that ads for Prudential Realty, Polygon (houses), John F. Buchan (houses), Olive8 (condos), Brix (condos), Bellevue Towers (condos), The Burnsteads (houses), and ZipRealty were covering the page as people viewed the upbeat report about how great our market really really is. Really.

Aubrey Cohen, Seattle’s housing holding up in market:

The Seattle area’s housing market is stronger than the nation’s, and condominiums have held up better than houses. Still, the market is slowing, economists said at a forum Friday.

Thank the economy for the area’s vigor, Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University, said at the annual forecast breakfast sponsored by Williams Marketing, a Seattle firm that works with housing developers.

Hmm, Williams Marketing… now where have we heard that name before… Oh yeah, only in about every P-I real estate article, that’s where. So, the Washington Center for Real Estate “Research” is teaming up with a condo marketer to tout our area’s great market? How terribly surprising.

Debra Smith, Condo prices in county up 65 percent in 7 years:

Buyers balking at buying a condominium take note: It’s a better investment than people often think, according to a report released Friday.

The price of condos in Snohomish County rose nearly as fast as single-family homes, and in King and Pierce counties, condos performed better, according to the report by director Glenn Crellin of the Washington Center for Real Estate Research at Washington State University.

Psst… here’s an investing secret: Past performance does not guarantee future results. Pass it on.

Elizabeth Rhodes, Rebound talk is big at Realtors annual gig:

Lennox Scott has worked through many market cycles in the decades he’s been in real estate and predicted many months ago that the Seattle market would slow.

So he’s not surprised that it has. Nor is he particularly worried about, calling it no more than “an adjustment phase.”
…
Florida’s Palm Beach County, north of Miami, currently has a 50-month supply of homes for sale.

Las Vegas is also in dire straits for sellers with a two-year supply.

Both had market forces Seattle never had: runaway homebuilding plus thousands of investors who flooded those markets hoping to get rich quick by buying and flipping houses.

Ahh, the old reliable “compared to the absolute worst markets in the country, we’re not half bad” argument. Is it just me, or does it seem like Lennox Scott has turned the volume up a few notches on the “don’t call it a real estate bust” album? He’s being quoted all over the place lately.

Mike Benbow, Housing glut less severe in the Northwest:

Under normal circumstances, Conerly said, first-time buying candidates save for a down payment, work on clearing up their credit and eventually jump into the market. “In 2002, there were cheap mortgages and people were able to buy a year or two ahead of time,” Conerly said. “We weren’t creating additional demand, we were just borrowing from the future.”

Speculators were increasingly investing in houses, with many people entering the market to quickly resell the house for more money, a technique called flipping.
…
After overbuilding in 2003 and 2004, building eased up. In 2005, the number of new homes dropped to about 58 for every 100 new people, which is a number pretty close to normal demand. Last year and this year, the number has dropped even further, to about 42 per 100, which is well below normal demand, Conerly said.

Nationally, there are about 1.5 million houses too many, Conerly said, adding he doesn’t expect a turnaround in the national housing market until 2009. “We’re not working off the overhang very fast,” he said.

But he said things are different here, mostly because we’ve been under-building relative to our population growth for two years.

“We’ve not fully worked off the number of houses we built, but we will work it off faster than the national average,” Conerly said. “This area is going to have continued growth for quite some time.”

This article has the least amount of cheerleading of the bunch, and at least offers some actual statistics and doesn’t just parrot the usual real estate mantras. However, we’re still being fed the “better than the national average” and “continued growth” type of lines, apparently intended to ease any fears that we will experience a downturn at all. Given the figures they gave about the rate of building 2003-2007, and assuming that the present rate of building and population growth keeps up (a big assumption), we’re still looking at 3-years’ worth of new construction oversupply. But don’t worry, we’ll work it off “faster than the national average,” so everything will be okay.

(Elizabeth Rhodes, Seattle Times, 11.17.2007)
(Elizabeth Rhodes, Seattle Times, 11.17.2007)
(Aubrey Cohen, Seattle P-I, 11.16.2007)
(Debra Smith, Everett Herald, 11.17.2007)
(Mike Benbow, Everett Herald, 11.19.2007)

Since I was on KING 5 News last night and KOMO 1000 radio this morning*, I thought it would be good to write up a slightly more detailed post aimed at answering the question: “What is Seattle Bubble about?” So, here’s a summary of the important points.

The Bottom Line: Now is not a good time to buy a home in Seattle.

Here’s why:

• Irresponsible, loose lending drove prices to artificial highs, pricing out responsible individuals and families that just want to make a decent down payment and get a traditional loan on a reasonably priced house.
• We are presently seeing a return to responsible lending standards, as the banks experience the consequences of writing loans to people who did not have the ability to pay them off. As lending standards continue to tighten, further downward pressure will be placed on home prices.
• Macro-economic factors drove home prices up, and will in turn bring prices back down (yes, even in Seattle).
• Home prices in Seattle did not rise as fast or as far as other places in the US, and likely will not fall as far. However, they will most likely fall.
• Why will prices fall? Because the current level of local home prices is not supported by any of the fundamentals that drive a healthy housing market:
  • Incomes (1, 2, 3, 4)
  • Employment (1, 2, 3)
  • Population (1, 2, 3)
  • Rents (1, 2)

  All of these factors are indeed positive for the Seattle area, but prices began to rise out of control while Seattle was still recovering from being hit particularly hard by the dot-com recession. Thanks to the aforementioned easy lending, home prices during and since Seattle’s economic recovery have risen much faster and higher than these positive fundamentals support.

There are lots of people (like myself) who have little to no debt, great credit, and a good down payment, but are not willing to buy into an inflated housing market. We are not against home ownership. We are against taking out massive, dangerous loans to finance an otherwise unaffordable and overpriced asset. We are perfectly content to wait out the declining market, and will not be suckered by real estate salespeople who perpetually repeat claims that “now is a great time to buy.” They said that about the national housing market, and they were wrong. Once the home price drops were irrefutable, they began declaring that “the market has hit bottom” every three to four months.

Don’t take anyone’s word when it comes to what will likely be the largest financial decision of your life. Do the research, and determine if the market is right for you. That’s what Seattle Bubble is for: providing a resource where regular people can assess the local housing market on their own.

P.S. (I’d like to improve / refine this post and make a copy to link at the top next to “Home” and “Forum” as an “About” page. If anyone has any suggestions for improving this post with that end in mind, such as additional posts that should be linked or main points that I left out, please share your ideas in the comments. Thanks!)

* I tried to record the interview through the online stream of KOMO 1000, but halfway through they cut into the feed with an ad for a casino that ran for the entire remainder of the call. KOMO host Nancy Barrick is going to email me the audio tomorrow morning, and I will post it here sometime thereafter.)

Update: Here’s the audio from the interview on KOMO today:

Continuing The Tim’s trend of quick posts, I thought I would add this to the flurry of news today. King5 ran a news piece last night that is summarized in this article, entitled Home sellers upping incentives in crowded market

The piece quotes Reba Haas, one of the contributors over at Rain City Guide. She is quoted as saying:

“There’s too many people coming here for us not to have it continue to be strong,” said Haas.

Let’s see how that statement stands up to reality. Here is the most recent report on immigration from the Washington Department of Licensing.

Wow. Looks like the number of people coming to Washington is actually off 21.6% year over year. Perhaps some fact checking is in order?