Seattle Bubble

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)

A couple people pointed me to a great article in today’s Wall Street Journal on the prevalence of sub-prime lending across the country over the last few years. The article discusses the surge in such risky loans, and the fallout that is already underway and likely to continue.

The data suggest that financial suffering is likely to persist in many parts of the U.S. where subprime lending had surged. Many loans at risk of going bad have not yet done so. As much as $600 billion of adjustable-rate subprime loans, for example, are due to adjust to higher rates by the end of 2008, which means that more and more borrowers are likely to fall behind.

Attached to the article is a nifty interactive graphic that shows just how widespread subprime lending has become since 2004. Here’s a bit about the methodology they used:

High-rate loans are defined as those having an annual percentage rate of at least three percentage points above a Treasury security of comparable maturity for first-lien loans and five percentage points for second-lien loans. Lenders have been required to report pricing details on high-rate loans since 2004. High-rate loans are considered to include many, but not all, subprime loans.

So how does the Seattle area stack up? Obviously we didn’t have nearly the amount of sub-prime lending as other parts of the country, such as Miami, Orlando, Las Vegas, or Los Angeles, where sub-prime made up over 30% of all mortgages in 2006. But we still experienced plenty of a “surge” of our own:

2004

2005

2006

Yup, sub-prime lending more than doubled as a percentage of the total mortgage market in the Seattle area. Tacoma was even worse, clocking in with 31% of all loans being sub-prime in 2006, earning them special mention in the WSJ article.

Lest you think that 20% is a low enough number to keep us out of trouble when the appreciation music stops, consider San Diego’s sub-prime stats for the same period (2004-2006): 8.1%, 19.1%, 22.7%. So no, sub-prime lending itself does not precipitate the decline of home prices. But once home prices do start to decline, even having 10-20% of recent mortgages being sub-prime can result in skyrocketing foreclosures.

Am I saying that things in Seattle will shake down exactly like they have in other places (such as San Diego) with similar statistics? Of course not. All I’m saying is that if they do, no one should be surprised. The real estate “professionals” that are frequently quoted in the media keep saying that the market is different enough in Seattle to protect home prices from falling, but every time we see the real data, such statements appear to be nothing more than wishful thinking.

(Rick Brooks & Constance Mitchell Ford, Wall Street Journal, 10.11.2007)
(Interactive Graphic, Wall Street Journal, 10.11.2007)

By now most of you have probably already seen the Today Show video from last week in which financial entertainer Jim Cramer stated the following:

Don’t you dare buy a home now. You will lose money.

Of course, real estate salespeople across the country were outraged by this, and pretty much immediately flew into frenzied attack mode. In a follow-up interview on the Today Show a few days later, Jim clarified:

Matt Lauer: “The overwhelming majority of the responses we got through email said that you’re ignoring the fact that real estate is regional, and there are some places where it is a good time to buy. How do you respond?”

Jim Cramer: “Seattle, and 10005 are the only two. Maybe Montgomery County in Maryland. Three. That’s it.”

Nice. Gotta love that. I am wondering though, does Jim know something I don’t know? Because the recent trends in the Seattle numbers don’t seem to indicate that a buyer today is be any less likely to lose money than anywhere else across the country. All the numbers show is that last year’s buyers haven’t lost money—yet, which is certainly a step above the rest of the country.

But I’m just some know-nothing blogger with too much time on my hands. So don’t take my word for it. Listen instead to what Robert Shiller (Yale professor and economist—of Irrational Exuberance and Case-Shiller HPI fame) had to say on the matter in a Marketwatch interview last week:

John Wordock: “And what about the Pacific Northwest? Still sort of immune from everything else that’s going on?”

Robert Shiller: “I don’t say they’re immune… Nobody is immune… Generally cities have been weakening, even though their price has been going up, these cities have shown weakening price increases, and if you extrapolate that, it might not be too long before they show price decreases too.”

I suppose we only have to wait 12 months before we find out which of these two men is correctly interpreting the evidence before us. I think you know who I’m betting on.

(Today Show, 09.27.2007)
(Today Show, 09.30.2007)
(Marketwatch, 09.25.2007)

More words of wisdom from the P-I’s Mark Trahant, who seems increasingly out of place in the stubborn, denial-prone local media.

I’ve been on vacation and had a chance to travel around the West. In many of the places I visited, concerns about a real estate crisis are growing. People are starting to fear what this means for them personally. The interesting thing about coming home is the narrative in Seattle remains “we’re different.”

I continue to be skeptical. I think the region’s housing market is playing a regional version of the “Prisoner’s Dilemma.”

…

The game is the same if it’s about money — or really anything else. If players cooperate, they maximize their potential. When they don’t cooperate — someone loses big time (and someone else wins).

The Seattle real estate version of the game is a bit more complicated, but it starts with a huge supply of housing inventory. Everyone trying to sell a house is competing with other people trying to sell houses.

Folks want to sell their house for as much as they can. So they keep it on the market, looking for that one buyer. (Although Seattle’s prices remain strong, the indicator to watch is the inventory of unsold houses and condos.)

As long as everyone plays together — and sticks roughly to the price they want (even if it means staying on the market forever), Seattle’s prices will continue to be fine.

But if I am selling a house — and see my neighbors sticking to their prices — I have an advantage by selling at a discount. If I am early enough, I can play the Prisoner’s Dilemma to my advantage.

On top of that, there is another twist. Some home sellers cannot afford to drop their price because that would result in negative equity. They’d have to come up with cash to close. (I did that once and is it ever painful.) That notion is an additional incentive for those who decide to get out early and discount; they know their competitors cannot match their price.

Mark is spot-on here (although he gets one detail of the Prisoner’s Dilemma incorrect—the best outcome is if neither confesses, not both), and does a good job of explaining why Seattle is in fact notspecial. Take the time to read the entire article.

(Mark Trahant, Seattle P-I, 07.27.2007)