Seattle Bubble

Ahh, Les Christie of CNN Money—the perfect national companion to our local captain of the real estate cheerleading squad, Elizabeth Rhodes. Where would we be without your frequent reports reminding everyone across the country just how special Seattle is?

In the middle of a nationwide housing slump, a few markets have held their ground - and then some.

In Seattle, for example, the median home sale price was $380,200 during the first three months of 2007, according to the latest stats from the National Association of Realtors (NAR). That’s a 12.3 percent year-over-year increase.

Ten other metro areas among the 156 markets covered by NAR also recorded double-digit, year-over-year price increases.

So what have they get that other markets don’t?

The main ingredient is a set of positive fundamentals, including strong job and population growth, which then fuel demand for houses.

Ah yes, the fundamentals. Gotta love those positive fundamentals. Our strong job growth that is so directly tied to home buying demand. Our surging population growth that so clearly exceeds the rate of homebuilding. Yup. Ya just gotta love those fundamentals.

Other factors also got the double-digit markets percolating. In nearly all of the areas, prices never overheated, remaining relatively low through the boom years. It’s easier to show outsized growth when you’re starting from a low base.

70% increase in five years? Perfectly normal. Definitely not “overheated,” no sir.

But wait, what’s this? Did I actually see a nugget of truth in this latest puff piece?

But even the strongest areas around the nation show hints of weakness that aren’t covered by NAR statistics.

According to Lennox Scott, of the John L. Scott Realty Company, one of the largest home sellers in the Pacific Northwest, the hottest Seattle neighborhoods are those closest to job centers.

“We see double the demand close in,” he said. “People don’t want the commute.”

Since the most expensive housing markets are the ones closest to the downtown core, that can make home prices appear higher when really it’s just the mix of sold houses that has changed.

The recent subprime mortgage crisis has also significantly changed the types of homes being sold. Demand has fallen among credit-damaged and low-income buyers, who typically buy lower-priced houses.

And tougher lending standards also make it more difficult for marginal borrowers to purchase. In Seattle, Erik Hand, president of Response Mortgage Services, Scott’s lending arm, said, “We’re having a harder time getting first-time home buyers approved.”

The result is that stats can still show double-digit price increases when, in reality, the market may have slowed substantially. It certainly seems that way to Lennox Scott.

“The market may have slowed substantially.” You don’t say. Well maybe there’s a glimmer of hope for our friend Les Christie after all.

(Les Christie, CNN Money, 06.26.2007)

Let’s play a game. It’s called “Spot the Fundamentals,” and the way we play it is by looking at some of the “fundamentals” to figure out which ones are responsible for our area’s high home prices.

The frequent condescending argument of the cadre of Seattle area housing bulls (real estate agents, “analysts,” the press, and increasingly combative blog commenters—whom I suggest we all ignore) is that unlike most of the rest of the nation, Seattle home prices are firmly supported by strong fundamentals such as exceptional job growth, high-paying jobs, and increasing population, and as such will not decline.

Let’s play “Spot the Fundamentals” to see how well that claim holds up.

Job Growth
The Seattle area has “strong job growth,” right?

Click to enlarge (source)

Well sure, if you call 3% growth in the last year “strong.” Of course, while Seattle was one of the few parts of the nation where housing prices rose double-digits last year, there were 85 Metropolitan Statistical Areas that had better “job growth.”

Unfortunately for the Bull Cadre, a 3% increase in jobs does not account for an 11% increase in home prices during the same time frame. As we have previously explored in detail, job growth (and reduction) in the Puget Sound has had little to no correlation with housing prices.

High-Paying Jobs
Yeah, but even though the job market isn’t growing by leaps and bounds, thanks Microsoft, salaries are shooting through the roof… right?

Click to enlarge (source)

Hmm, maybe not. In fact, income growth in the Seattle area was so slow recently that we made it onto a “lowest of” list. Somehow I must have missed it when that little news tidbit hit the papers.

Another swing and a miss for the Bull Cadre.

Population Growth
Well, people are moving here faster than ever, so that pretty much forces home prices higher, doesn’t it?

Not. If there actually were people moving here in droves, then yeah, that would explain home prices rising an average of 9.4% per year (King County SFH, 2000-2005). However, that clearly does not describe reality.

Looks like strike three for the Bull Cadre.

Fundamentals vs. Speculation
Here’s a refresher:

Click to enlarge (source)

As I have demonstrated before, Seattle area rents (which are not subject to speculation) have indeed been tracking fairly well with “the fundamentals.” Home prices clearly have not.

How anyone can (with a straight face) argue that “strong fundamentals” will prop up Seattle area housing prices, when they have so clearly been propelled by factors other than fundamentals, is completely beyond me. You can believe whatever you want to believe about where prices will go from here, but to say that they will be propped up by “strong fundamentals” is just willful ignorance, in my opinion.

If anyone believes they can explain how Seattle home prices have actually been tied to fundamentals since 2000, and wishes to civilly bring such an argument to the table, backed up by hard data (such as what is found in this post), then by all means be my guest. However, don’t waste your time with one-liners, “bitter renter” put-downs, and simplistic observations of inventory and ongoing price increases, as they will be ignored.

(Bureau of Labor Statistics, US Dept. of Labor, 01.2007)
(Bureau of Economic Analysis, US Dept. of Commerce, 09.2006)
(US Census Bureau, Population data: 2000-2005, 2005)
(King County Budget Office, Affordable Housing 2006, 01.2007)

Thanks go out to reader Dennis O. for pointing out some of the data in this post.

In the last few days I’ve run into a few comments in various discussions about Seattle real estate that have caught my attention:

Dean Jones, Condo Marketer:
“You might cringe at condos that sell for $2,000 a square foot. But it would be twice that in New York. We’re still, relatively speaking, a bargain.”

Bob, Urbnlivn commenter:
“When I look at the prices in New York, Tokyo, Hong Kong and London where new apartments can routinely fetch $1500 per sqft, Seattle still isn’t that expensive but it is getting there.”

Emkorial, Ars Technica Forum Member:
“Seattle is a MAJOR city. Like LA and NYC.”

What I find interesting about these comments is the tendency to justify Seattle home prices by comparing Seattle to large, major cities. Is this a valid comparison? Is Seattle really a major city like LA or NYC?

Usually when people refer to a city as “large” they are referring to the sheer population of the city. However, population density also has something to do with it, because otherwise any city that expanded their boundaries enough could claim to be a “major” city. So we could rephrase the question to ask: “What cities most closely match Seattle’s population and density?”

To answer that question, I made a list of a handful of major world cities and a number of large-ish US cities. Here are the population, land area, and population densities of each:

I have highlighted the six closest cities to Seattle in each separate category: population (orange), land area (green), and density (yellow). When looking only at population, Seattle is most similar to cities such as Las Vegas, Vancouver, Milwaukee, Portland, Cleveland, and Sacramento. When comparing land area, St. Louis, Cleveland, Baltimore, Milwaukee, Sacramento, and Las Vegas are all fairly close. Lastly, when you compare density (which the chart is sorted by above), Seattle is comparable to Los Angeles, Baltimore, Buffalo, Detroit, Cleveland, and Milwaukee.

There are two cities on the list that are similar to Seattle in population, land area, and density: Cleveland, Ohio and Milwaukee, Wisconsin.

Keep in mind that I am not attempting to compare all available statistics (such as income, economy, home prices, etc.) for these cities. I simply wanted to determine which cities Seattle should be compared to when discussing city size.

And now we know the answer: Cleveland and Milwaukee.

Update: Some people pointed out that my “highlight the three next highest and the three next lowest” method does not meet the rigorous scientific standard that the readers of this site deserve. Therefore, in the interest of science, I present this updated chart:

In this chart I have highlighted cities that are ±20% of Seattle in each category. As you can see, Cleveland and Milwaukee are still a close match to Seattle, with the city of Baltimore, Maryland joining the list.