Seattle Bubble

I received the following in an email from a reader:

About the condo—comment article… the real issue is not the really cheap/ugly/tasteless and likely unlivable condos (apartments). Nor is it the equally horrible “townhouses.” It is about greed and lack of public (government) oversight and control.

The developers wanted the money, the government wanted the taxes and fees. The people were too busy raking in the first real money the bulk of Seattle has ever seen in history… to say HEY, what the heck are you doing.

Sad, the city I have loved for years is nearly off my list. No wonder the lovely, polite, civil people have turned rude and nasty (in a Northwest passive-aggressive kind of way).

This kind of behavior and housing greed has ruined many cities in this country…

How about opening a dialog on how to take back our city and stop being passive-aggressive whiners and start being organized and vocal about KEEPING our fabulous city just that.

This is not about money or affordability, it is about planning and demanding our rights as residents of a wonderful, (almost) world class city and LIVABILITY.

So what do you think? Has greed and lack of government oversight ruined the culture of Seattle? If so, can anything be done about it, or is it too late?

I’m interested to hear what people think about this topic.

I got a pair of emails this weekend that are worth discussion. Here’s a portion of the first:

…we’re looking at buying a townhouse as a temporary place to stay. Our income is pretty good, more than 100k a year.

But the math that’s involved in figuring out all the possibilities of whether its better to rent or buy (we’re renting at $1800 a month right now) is sorta complicated, especially considering the number of unknowns.

The second was from a 23-year-old looking for their first home:

…not being able to afford the minimum 400k condo (or 600k houses)… Is there any place for me to look where I can find postings and debate this healthy on homes in the 200-300k range? (which I guess is obviously not in downtown or on the east side.)

While the “real estate is local” cliché is certainly true, it is also true that even in a specific local region, the market for high-priced properties for sale or rent will be quite different than the low end of the market. When we plug the numbers for rent vs. own type scenarios on here, we typically do numbers close to the median / average, where it’s still easy to find a rental for 50-75% of the cost to buy.

What have you been seeing out there in different price ranges? Are there some price ranges where the numbers actually come out in favor of buying in today’s market?

A reader posted the following question in the forums a few days ago, and while there has been some good advice and discussion there, I thought it would be good to bring the question to the larger audience of the blog for feedback as well.

I have owned a 2-bed 1 bath 975 sq.ft. condo, built in the late 70s, in the middle of Fremont since fall of ‘03, and for a lot of reasons I’d like to move into a house or townhome in a lower-nightlife Seattle neighborhood.

My husband is starting a 10-month graduate program in July and will not be working, and while we can subsist in the condo on my teacher income, we can’t really afford to increase the mortgage until he goes back to work. FYI, my husband is a social worker and right now I make more than he does.

Oh, and we’re trying to get pregnant and ideally we’d like to move into a place that will work for us with up to two kids. It’s been our plan to stick it out until grad school is over and the kids actually arrive, but I’m telling you: Fremont is really really starting to drive us crazy.

So as I see it, I have four options.

1. Stick it out in frat boy hell for another year with the plans to sell next summer.
2. Sell now and buy a house with a risky loan (interest only ARM?) that will have an artificially low payment with plans to refinance when my husband goes back to work in a year.
3. Sell now and rent until hubby goes back to work, buy next summer.
4. Rent out our condo to frat boys and rent a house until the right time comes around to buy.

I’m not really a big fan of #4, but choosing between options #1-3 requires me to have a clue about the state of the market… and it turns out I don’t have one. I’ll take thoughts from anyone who is willing to give me the time of day… Thanks for reading.

Sarah

The consensus on the forum seems to be that option #3 is her best choice. I agree with that advice, assuming that she’s willing to price aggressively (see regular biliruben’s first-hand advice on that here) and can find a good deal to rent a place that her family will be happy in for a year or two (be sure to check out our how-to on watching Craigslist for rentals here).

What advice do you have for Sarah?

Here’s an email I got from someone named Andy:

I am in the process of relocating to the Seattle area from the Midwest and have been monitoring your blog in an attempt to get some insight into the local real estate scene.

First, thank you for your highly interesting and informative blog. Knowledge is power and you certainly are providing some interesting information for the consumer.

Here are my questions for you. What is with the psyche of local home buyers and sellers in the Seattle market that they are willing to overpay for housing (at least that is my impression)? Am I crazy to pay what people are asking for a home?

Let me elaborate. I have been scouring every information source I can for real estate information in order to become the most informed consumer I can. Here is what I have learned in a nut shell. Nationwide housing is in a slump (to put it lightly). For example the recent announcement that U.S. median sales price of a new home fell 13 percent in October, compared with a year ago. There are some markets however (Seattle, Salt Lake City, San Jose) whose home prices actually rose YOY. I get that Seattle is somewhat special in terms of real estate markets.

An additional piece of information is that I’m one of those people that wants to be a home owner. I appreciate that home ownership may not be the smartest financial move when compared to renting (especially at this time) but I put a great deal of value on the intangibles. I have two small children and the concept of “home” is very important to me so I accept the potential financial downside of home ownership.

BUT as you have stated on your blog, Seattle prices rose 4.69% YOY as of September. So here is my conundrum. I have been monitoring housing prices on the internet using various real estate tools. I have been specifically monitoring a few houses to see if their asking prices are dropping, how long they stay on the market and what the actually sell for. I have noticed a disturbing trend that I simply can’t figure out and would like your insight. I have monitored a couple of houses (in Issaquah and Bellevue for example) that were purchased in September of 2006 for around $600,000. They were put on the market in the fall (September-ish) and the asking prices were about $720,000. My calculations show that these people were expecting a 20% increase in the value of their property in one year. Is that realistic for Seattle regardless of the market – prior to 2007 were people really getting 20% annual growth. The interesting thing is that I have seen the asking price for these properties now drop to about $695,000. This is still a 16% increase. If the numbers show that Seattle prices rose 4.69% YOY as of September, why would anyone pay more than $628,140 for a house that was previously purchased in 2006 for $600,000? Furthermore, I’m thinking for that house that was purchased in 2006 for $600,000 I would pay about $610,000 right now because even though it gained 4.69% in 2007 it will probably lose value in 2008. Are Seattle home purchasers crazy enough to pay $700,000 for a house that was just purchased a year ago for only $600,000?

Andy seems to have three basic questions: Do you have to be crazy to pay today’s home prices in Seattle? Is an asking price 20% over last year’s purchase price realistic? And lastly, how does the median home price relate to specific houses?

To address the last two questions, I will point out the statistics only tell part of the story. We primarily focus on the median single-family home price in King County when discussing prices here, but that number is useful only in gaining an overall picture of market direction, and is fairly useless when trying to determine a reasonable price for a specific home. There are a few reasons for this. First, as has been discussed here a couple of times before, the median price can easily be (and has been) skewed by a change in the demographic mix of homes sold.

Secondly, while the market in general tends to build momentum and move together in the same general direction, every neighborhood has its own unique considerations that will result in larger or smaller changes in price. For example, looking at the county-wide statistics (or even the more local NWMLS areas within a county) won’t tell you that a particular neighborhood just had a big box store approved to build two blocks from a home you’re looking at, causing its value to drop like a rock. When you are seriously interested in a particular home or neighborhood, you really need to look at all the factors that affect that particular location.

That being said, if the county-wide median is flat year-over-year (which it is), it’s a pretty safe bet that someone asking 20% over last year’s price has got their head in the clouds (to put it politely). Maybe that neighborhood has had some significant improvements in the last year, making them more desirable relative to other choices in the Seattle area, and a 5% would be realistic. You can’t tell just by looking at median prices though. Statistics are useful for gaining a high-level view, but to know whether a particular house should be appreciating and by how much, you have to look at that particular house.

As far as the more general question about the sanity of those that would shell out $600,000 for a run-of-the-mill house in Seattle, my personal opinion is that most people paying these prices have been caught up in the “bubble mentality.” It’s the little voice that says:

Look how fast prices are going up! Don’t you want to get in on that action? You know, if you don’t take advantage of it and buy now, you’re going to be priced out forever! You don’t want to be the only one of your peer group that doesn’t get a ride on the equity train, do you? Buy now before it’s too late!

For a great example of this mentality in action, check out this article I highlighted in 2006. It’s that mentality coupled with the easy, standards-free lending we saw 2004-2006 that pushed prices up to their present ridiculous highs.

However, as I’ve said many times before, if you have the finances, place a high value on the “intangibles,” and can tolerate the downside risk of buying now, more power to you. I’d at least hope that you will take your time home shopping and not pay full asking price for whatever place you end up selecting.

Here’s a question I received via email from a reader, whom I shall refer to as Malcolm:

I will be getting married next August and am beginning to look at buying my first home that we could be in for 5-7 years before children would demand a bigger home. My fiancée and I have a combined income in the ballpark of $90,000 and have 50k available if needed to down payment and closing cost. However, I would like to keep the 50k invested where it will make me 8% annually but at the same time keep my monthly down. I have found that zero down and a low monthly can be conflicting goals. However, in my research I came across a fixed 30 year interest only loan with 100% financed and lender payed PMI. This would allow me to keep my 50k invested and take the saving from the interest only loan and pump back into the same or new investments where my money is working for me to prepare for the future. Also, I know that interest only loans are not for everyone and can be risky and have thoroughly researched the pros and cons. I am looking for unbiased feedback from someone completely unrelated to my situation. Now that I have explained my situation I have three questions.

1. From the the above description do I sound like a good candidate for an interest only loan? I should also mention that I am fortunate to have significant upside for compensation in the years to come.
2. From your knowledge do you feel that the Seattle real estate market will hold for 5 to 7 years when I look to sell or refinance my interest only loan? Obviously, my fears are depreciation and significantly higher interest rates at the time of sale or refinancing. I know that I don’t want to take the interest only into the 11 year but I want to be comfortable that I can refinance or sell at that time even though I will be carrying the original principal amount after 5 year of interest only payments.
3. Do you think it would be a good idea to make the extra payment every other month on principal to decrease the amount of risk I carry?

First off, I should point out that while I obviously do not have an emotional attachment to Malcolm’s decision, I’m certainly not “unbiased.” Everyone has biases to one direction or another. The best I can do is try to give rational advice based on my own perspective. Here is a slightly condensed version of my response to Malcolm’s questions:

From the scenario you describe, it sounds like you and your future spouse have made the decision that buying a home is the way to go, and the advice you are looking for is about what kind of mortgage to get. Personally, I would look into renting a nice house for at least a few years (see this post for a strictly financial comparison between renting and buying similar homes in the Seattle area). However, if you have the funds, the “intangibles” of buying are more important, and you can stomach the financial downsides of buying in today’s market, then buying would be your best bet.

That said, I’m afraid I can’t offer much specific advice about loan types, except to offer a general warning to stay away from adjustable rates if at all possible. For the best advice on mortgages, I would have to recommend that you talk about your situation with a mortgage professional. I highly recommend Rhonda Porter, who has a website here that contains information on how to contact her. I’ve met with her a couple of times, and she is both knowledgeable and personable.

To address your second question, a lot can happen in 5-7 years. My “gut feeling” is that we’re going to see 3-5 years of 5-10% price drops, followed by another 3-5 years of stagnation. It could be better than that, or it could be worse. Alternatively, you can believe those in the real estate industry, who are much more optimistic, and are not expecting price declines to last beyond next year, followed by a return to 3-5% yearly appreciation. Personally I have a hard time accepting their predictions, given that they have been calling the “bottom” since December of last year.

As for your third question, my personal financial inclinations are decidedly anti-debt. I will most likely be taking on a home mortgage some day, but I will be making every reasonable effort I can to start with a large down payment and pay the debt off early. I highly recommend making extra payments whenever possible, as long as it’s not at the expense of a prudent retirement savings plan, and whatever other savings plans your personal budget entails (e.g. - emergency fund, stock investing, etc.).

Malcolm replied with a few more thoughts:

It sounds like you feel as if the Seattle housing market will slow and depreciate or stay flat in the coming years. That being said am I correct to think that interest-only loans may not be the best idea in a depreciating housing market? For example, if I buy at home at $370,000 and prices drop 20% over 3-5 years I am left owing $370,000 while my home may be worth considerably less. Is that the correct thinking? It seems that interest only loans are only advantageous if you are in a strong market that is on the up swing where you can be confident in the home’s appreciation. Anyway, I am curious to see what comments we get on the blog after Monday.

He also pointed out a few upbeat articles in the Seattle Times as possible reason to believe that “Seattle will continue to be stable riding a strong economy.” In order to keep the comments on this post more focused, I will address those in a separate post. For now, let’s hear your advice for Malcolm’s situation.

Personally, I’m of the mind that you really can’t lose right now by renting for at least a year or two while all this nasty stuff plays out. 2007 was really just the beginning of the unwinding, and things seem likely to get worse throughout 2008, before they get better. What advice do you have for Malcolm?

I’m not one to monopolize the conversation on home prices. In the interest of fairness, I present to you the following counterpoint, which I received in an email today.

Can we please stop all of the doom and gloom?

As you have probably have seen in the news, the real estate market has been going through some big changes, good and bad. Our local market had years of double digit growth that became unsustainable. At the same time as the slow down, lenders were getting hit hard with record foreclosure rates. The driving force behind the problem was a meltdown of the sub prime mortgage market that had been making risky loans.

While many other areas of the country are reeling from all of this, Washington State has held strong with low unemployment and economic growth. Although, the pool of real estate buyers in our area has dried up, buyers from California with all cash offers and high risk loans for buyers with questionable credit scores have gone away the home values are NOT in a free fall as has been reported in some of our local papers. The high inventory is a direct result of the scarcity of buyers due to the stricter lender guidelines, seller’s high expectations and public opinion. Recently a story was printed that the average sales price in Pierce County had slipped twelve thousand dollars yet, in reality, last summer and fall, it was difficult to find a jumbo loan. A jumbo loan is a purchase price over $417,000. The average reported on did not include many of the upper end properties we normally see selling in the late summer, thus greatly pushing down the average. I believe that the average prices on homes under $417,000. have been steady increasing, though not at the double digit rate that sellers have come to expect.

On a positive note, this situation has created new opportunities for investors looking to purchase rental properties that can cash flow now. The rental market is hotter than it’s been in years and the reality is people are working and everyone needs somewhere to live.

Buyers looking to move up from a starter home to a jumbo type property have lots of good properties out there to choose from. Mortgage interest rates have remained low and available for those with good credit and the jumbo programs have started to make a comeback. Analysts are saying that the market is poised to come storming back this spring.

Remember when the high tech stocks crashed, I still scratch my head and wonder why I didn’t buy, buy, buy!

Gregory Loe
Better Properties North Proctor
Tacoma, WA

I think Mr. Loe’s letter speaks for itself.