Seattle Bubble

Apparently the only necessarily qualification for becoming a “world class” or “superstar” city is to keep on repeating that it is so. That’s the message I’m getting from the latest quotes from the Realtor’s spokesman Lawrence Yun, anyway.

Seattle-area home prices are manageable for typical workers, according to the chief economist for the National Association of Realtors.

“You may even say Seattle is underpriced if you believe Seattle is becoming a superstar city,” Lawrence Yun told area brokers in Bellevue on Thursday. “Seattle is underpriced in relation to other West Coast markets.”

First off, we have addressed this “superstar” or “world class” thing before. If you haven’t read it already, take the time to check out On Luxury Cars and World Class Cities. Also be sure to read P-I columnist Bill Virgin’s take on the world class question. The gist of our argument is that although Seattle is great, and we love it here (really we do), it is not a world class city by any available objective measure. Sorry, it’s just not, and repeating over and over again that it is doesn’t make it so.

When people like Mr. Yun make the assertion that Seattle is a “superstar city,” they never back that claim up with any sort of quantifiable data. There are measurable characteristics that one can use to judge whether or not a city is world class (a good list can be found on Wikipedia), and Seattle simply does not measure up, any way you look at it.

But that’s not my only problem with Mr. Yun’s speech yesterday. He also made a some verifiably false assertions and ludicrous predictions. [Read more →]

Seattle got a little bit of attention in a recent Wall Street Journal story titled Housing Slump Starts to Hit Stronger Cities:

It’s getting harder to hide from the housing bust.

Tight credit, fragile consumer confidence and a weakening economy are slowing sales and depressing prices even in some places — such as the Pacific Northwest and North Carolina — that until recently had avoided the housing slump afflicting most of the country.
…
Some of the fastest increases in home listings have occurred in relatively strong markets. The inventory in the Seattle metro area counties of King, Snohomish and Pierce leapt 50% last year. At the end of December, when listings are lower than usual because of the holidays, the inventory there was enough to last 4.9 months, denoting a fairly balanced market — but up from a very lean 2.7 months at the end of 2006. In King County, the median price in December was down 2.6% from a year ago.

Given the rise in supply, home prices in Seattle probably will fall further, says Glenn Kelman, chief executive of Redfin, a real-estate broker based there. “If you walk around town, you see cranes everywhere,” he says.

I guess Glenn figures that it isn’t really possible to be any more reviled than he already is by “traditional” real estate salespeople, so why not call it like he sees it. It’s nice to see the national media giving some attention to the Seattle market that is something other than the usual look what a great investment type of stories.

I’m not sure where the WSJ got their months of supply figures from though, because the numbers they quote don’t match any that I’ve seen from the NWMLS. They’re correct when they say inventory across King, Pierce, and Snohomish is up 50%, and prices in King are down 2.6%, as that data matches the “res + condo” figures from the NWMLS. However, when you divide the total inventory at the end of December by the number of pending sales (the traditional method for determining “months of supply”), you get 8.4 months of supply in December 2007 (not 4.9), and 3.8 in December 2006 (not 2.7). If anyone can figure out where those numbers came from, let me know. The NWMLS data can be found in the December 2007 Recaps linked here.

(James R. Hagerty, Wall Street Journal, 01.14.2008)

Update: In the comments Garth pointed me toward the chart that was included with the story, which I overlooked. In the chart, the “Overall Strength” of the Seattle metro area housing market is listed as “moderate.” In the footnotes, it indicates how they arrived at their months of supply figure:

Number of months that homes listed at year end would last at the average 2007 sales rate. Listings normally decline for seasonal reasons in December and rebound in January.

Taking the average of the whole year is a ridiculous way to calculate “months of supply,” for all the same reasons laid out in this post. In reality, the seasonal decline in sales rate is accompanied by a seasonal decline in listings, which tend to balance each other out. As you can see below, the “months of supply” really took off in late 2007.

Click to enlarge

Theory: Seattle is special, and thanks to our strong local economy anchored by such heavyweights as Boeing and Microsoft, any economic or housing pain will affect us far less than other parts of the country.

Reality:

Conclusion: Er… Um… Jobs! Population Growth! Mountains! Lakes! Pretty Pretty Pink Ponies!

We now return you to your regularly scheduled programming.

A number of people pointed me toward a “white paper” recently released from real estate brokerage John L. Scott titled “Why Now Is A Smart Time To Buy” (pdf). It purports to be “an objective assessment of the housing market as it stands at the end of 2007″ designed “to help home buyers assess the facts of the real estate market objectively.” With a title like that, it sure sounds “objective” to me…

Let’s have a look inside.

Three factors caused this decade’s housing boom to spiral upwards: 1) a run-up in home price valuations that spurred a high sense of urgency in home buying and selling; 2) poor lending practices, which caused many homebuyers to secure loans that they ultimately couldn’t afford over the long term; and 3) speculative purchases of homes also increased, with buyers investing in real estate with the hope of a quick return-on-investment.

Actually it doesn’t start off too bad. That’s an accurate assessment of the boom, with a rare admission that speculative purchases played a part, implying that this is even the case in our area (since Seattle is where JLS is based).

Like the dot com bust, the housing market has begun to correct itself after a number of years of unwise purchasing, but unlike what the media would have us believe, a correction in the housing market doesn’t equate to a crash. Unfortunately, the ongoing negative news about the troubled areas in the U.S. has caused a ripple effect, with home buyers and sellers on a national level exercising caution before making a decision.

Ok hold on. Did you catch what they said just there? “Unfortunately… buyers and sellers [are] exercising caution…” (emphasis mine). Huh?!? How is it “unfortunate” that people are being more cautious? Oh, right. John L. Scott sells real estate, so they would prefer it if all caution was thrown to the wind. Also, they’re blaming the downturn on “negative news.” That is so laughable it’s not even worth a detailed rebuttal. Here’s a hint though guys: it’s the other way around—the downturn is real, so the news is negative.

The rest of the paper focuses on superficial points that are unlikely to sway any but the most gullible (page numbers refer to the number printed on the page, not the actual pdf page number):

• We’re not as bad as Arizona and California! (p. 2)
• High inventory means more choices for buyers! (p. 2)
• Mortgage rates are low! (pp. 2-3)
• Did we mention we’re not as bad as California? (pp. 3-4)
• Subprime is like practically non-existent. For reals. (p. 5)
• We are so much better than other places in the US like, say… California. (p. 6)
• Never mind the fact that you could wait a year and buy at a lower price—real estate is a long-term investment. (p. 7)
• Here, look at some historical price drops in which the factors of the preceding booms were nothing like they were recently. Those weren’t so bad, so this drop won’t be bad either! (p. 8)
• In summary: Buy, buy, buy! (p. 9)
  

Take a few minutes to read through the pdf. It’s not that any of the things they’re saying are necessarily untrue, it’s just that this is definitely not an “objective assessment.” It’s quite clearly a marketing document intended to dupe cautious home buyers into throwing their money into a freshly-declining market. I hope nobody takes this document seriously.

I’ve added this paper to the library for future reference.

with Crystal, the pretty pink pony

Hey gang, it’s me again. Just wanted to update everybody on our big road trip. We’ve seen lots of places all across the country. It’s fun seeing new places. It’s like, as exciting as you can expect places outside of Seattle to be, anyway.

January 2:

Happy New Year everybody! Since I last popped in, we’ve driven through Dallas, New Orleans, Tallahassee, and stayed a few days in Fort Myers Beach on the gulf coast of Florida, where we rang in the new year, followed by a day trip to North Captiva Island.

While these places were all fun, I’m sad to report that I still haven’t found a place as special as Seattle yet. Here’s a quick rundown of what these places are missing that could make their real estate market invincible like our own.

Dallas / Ft. Worth: Where are the mountains? I didn’t see any. It’s just flat and brown as far as the eye can see. Yuck. Also, we drove right through town in the middle of the afternoon rush hour, and hardly hit any traffic at all. Those Silllyheads have built too many freeways. How can they expect downtown real estate to gain value when it’s so easy for people to get where they’re going?

New Orleans: We visited the French Quarter for lunch. It was a pretty wild experience! New Orleans totally has a lot of history, but you know what they don’t have (other than protection from hurricanes)? That’s right, Boeing and Microsoft. How can a city expect to have valuable real estate without special employers like that?

Tallahassee: Wow, there was like, nothing going on in this town. Seriously, the capital of Florida is the capital of boring. What do people do around here for fun? I mean, there’s no mountains, I didn’t see a single REI (where do they get their gore-tex?), and there definitely weren’t any Space Needles or EMPs. As our first stop in the so-called “sunshine state,” Tallahassee was a bit of a disappointment.

Fort Myers Beach: This beach town sure had a lot of people from all over the place for new years. And yeah, they had sunshine and temperatures in the 80s. But seriously, that would get so old like, fast. I guess you could say that they’re running out of land, since it is an island after all, but warm temperatures and sandy beaches are hardly a match for mountains, lakes, and Ballard.

North Captiva Island: OMG guys, I swear like, half this island is for sale! We rode on a golf cart from the marina to the house our friends were renting for the week, and like, nearly every other lot had a for sale sign out front! My guess is that people are selling their island vacation home here so they can buy a cute rambler in Kirkland. Best move they ever made, if you ask me.

Well, that’s all for now, gang. I’ll report back again in a few days. We’ve still got a long ways to go before we make it back home to the most specialest place in all the world!

Picked this up from Aubrey Cohen’s blog. Lawrence Yun, Chief Economist for the NAR and well-known real estate seer has confirmed what our local press and real estate folks have know for years: Seattle really is special! It’s about jobs and Microsoft millionaires. Why didn’t we think about that?!?!

Seattle a “superstar” market
Seattle is becoming a “superstar” market, where housing costs may never settle back into historical relationships to incomes, a national analyst declared on Tuesday.

Speaking at the annual conference of the National Association of Realtors, association Chief Economist Lawrence Yun used comparisons of mortgage payments to incomes to put much of the nation in a positive light.

“If anything, middle America appears to be under priced,” he said.

Some coastal cities where the payments and incomes are less in balance may be overpriced, Yun said.

An article in Fortune magazine recently predicted Seattle housing prices would fall 19.5 percent in five years, while rents would increase 19.2 percent, to bring prices and rents back into their historic relationship. (See this story.)

But it’s also possible that some are joining the ranks of international cities like London, Paris, San Francisco and New York, where costs are less tied to incomes, he said. “Now I’m beginning to think: Miami, Seattle, are they becoming superstar markets?”

Many wealthy baby boomers are moving to Miami, Yun said. “In Seattle, Microsoft millionaires are there.”

While the Seattle area’s job market is still strong, Yun said the affordability crunch caused by rising home costs would slow sales and cause prices to plateau.

“I feel that the Seattle market is very healthy in terms of the local job market conditions,” he said. “I don’t see any prolonged price declines.”

Now remember, this is from the guy who has provided the following forecast of Pending Sales - in which even when he possessed 9 of the 12 months of data, he still couldn’t get the annual forecast right… (Chart courtesy of Paper Economy)

Addendum by The Tim:

Elizabeth Rhodes also made sure to point out the “superstar” quote as well. It’s also worth mentioning that this “superstar” thing seems to have become a yearly ritual. The first sighting of the label came a mere month after I started the blog, in September 2005. Then it was repeated a year later in October 2006.

It’s really just a variation on the refrain that Seattle is becoming a “world class city,” a claim that we’ve addressed here before, and I still don’t buy. Seattle’s nice, but it can be both a nice city and stupidly overpriced at the same time. In fact, I contend that is exactly what it is.

(Aubrey Cohen, Seattle Real Estate News Blog, 11.13.2007)
(Elizabeth Rhodes, Seattle Times, 11.14.2007)