Seattle Bubble

In my perusals of real-estate blogs this morning, I ran across a link to Housing Predictor, a site which has recently published a forecast for the top and worst performing housing markets in 2008. Housing Predictor describes their business as follows:

We examine more than 20 micro market characteristics in each market place, including income levels, employment trends and changes, school enrollment, business trends, regional political influences, real estate sales history and current housing market velocity. The factors are all considered to come up with each local market forecast.
All of the information is gathered from hundreds of independent sources the staff develops without bias for the real estate industry to issue the forecasts.
Today Housing Predictor is consulted by the nation’s foremost investment houses, mortgage companies, real estate companies and most importantly consumers for our forecasts. Housing Predictor maintains more than an 85% accuracy rating with its forecasts.

Here is how they show Portland and Seattle in their forecast.

Given what I have seen in the performance of the Case-Shiller indices for the two cities – I found the prediction of a 12.6% spread in appreciation rates to be, well – interesting.

Prior to 2001, year over year appreciation rates in Seattle and Portland seemed to oscillate on different frequencies – but since then have tracked each other very closely. The spread in appreciation between Portland and Seattle has not been that great since 1991. I guess anything could happen – but I suspect the returns in at least one of these markets are going to challenge their claim of 85% accuracy. Perhaps it will be worthwhile to delve more deeply into similarities and differences between these two markets in a later post.

Edit:

Note that this piece has now been the subject of a cheap-shot post by our good friend Ardell over at Rain City Guide - who referenced it in her post entitled “Seattle Bubble Says Seattle Markets Going UP!“.

Most of you, I hope - caught the sarcastic references to the source - for those how didn’t (e.g., Ardell), you might want to read this article

Oh. My. Goodness.

Remember this?

13425 Avondale Rd NE, Woodinville
May 2006: $1,625,000 (Asking)
August 2006: $1,495,000 (Asking)
October 2006: $1,275,000 (Asking)
November 2006: $1,275,000 (Asking - New Brokerage)
January 2007: $1,275,000 (Relisted)
February 2007: $1,275,000 (sold—finally)

You thought it was over, but oh no. It is not.
December 2007: $1,650,000 (Flipping?!?)

I kid you not. February’s buyers have now put this beast back on the market, at nearly 30% over what they paid for it just ten months ago, and $25,000 over the previous owner/builder’s original ridiculously high asking price last summer.

Just for laughs, here is the description in the MLS this time around:

Amazing NW Craftsman Lodge-style home. 3+private acres! Soaring high ceilings announce the entertainment size entry with Brazilian Cherry wood floors flowing into the formal dining room and beyond giving a spectacular entrance. A cozy library greets you, next to a living room/flex room. The Master Suite has a territorial view, fireplace,jetted-tub,and glass block shower. Seperate [sic] Nanny’s quarter’s and bedrooms +. This is a ‘must see’ and too wonderful for words. Come experience this grand home!

I can think of something to describe as “soaring high,” and it’s not the ceilings.

Good luck with this one, you’re going to need it. Badly.

Update [03.22.08]: Price reduced to $1,590,000.  Keep going…

In the months since the unexplained disappearance of the Tales of a Seattle Real Estate Investor blog, and the complete radio silence of its author Seattle Eric, many have wondered what ever happened to the one-time Rain City Guide contributor. Since he was arguably Seattle’s most public real estate flipper, openly discussing the ups and downs of his wild ride on the equity spaceship, it was rather strange for him to just up and disappear like he did.

Well, it would seem that my most recent mention of him was finally enough to bring him out of the shadows. Eric emailed me shortly after that post, and gave me the rest of the story. Here it is in his own words, reprinted with permission (with identifying details removed and with silly doctored versions of his avatar added for amusing effect).

After a couple of successful flips in the first half of last year, I quit my job (partially to do real estate, but mostly because after nine years, I felt that I ran out of opportunities to grow) at [anonymous small tech company] where I joined as the 6th employee back in 1998. For the second half of last year, I dabbled in residential real estate sales, and put the last two flips on the market. Here’s what happened:

1) I realized that I’m not a sales person, and I really didn’t like the real estate agent culture. There was lots of back stabbing and lots of uneducated idiots looking for a quick buck. Hey, I admit that all of that save for being uneducated and a back stabber described me.

2) Our last two flips (if you remember, West Seattle 2 and Seaview) took six miserable months to sell, and we lost a combined $80K on them. Blah. Though we learned from those mistakes, we decided not to continue doing flips. Too much stress, and too much of a need to be detail oriented… I’m a big picture guy, not a details guy.

At a party in December, I met a former boss who’s a bigwig at [anonymous large tech company]. At this point, I was over real estate (I think I had retired my blog at this point), and gave her the rundown on it (see points 1 & 2 above). She thought my skills and experience would be very useful. I applied, and started there in January.

This year, we’ve been selling off our rental properties in the Puget Sound. We have two left on the market, and hope to be rid of them soon. I also dropped my real estate license, and no longer have access to the MLS.

There you have it. The long and short of it. I’ve been away long enough to take a very objective look at our experience. After buying and holding and/or selling twelve homes in the Puget Sound, we’ll have realized a net profit of around $100K. Would we have done this again? Probably not. Did this kill us on real estate investing? Nope, but I did come to realize that I don’t want the stress of managing the details. Currently, we are investing in syndicates that are buying up apartment complexes (mostly in Texas). This provides cash flow (average is 10%) and an estimated appreciation of 70% over two and five years (two different projects).

Also, we still have four houses in Tulsa, which continue to be a nightmare. The property managers turned out to be downright criminals - stealing our rent money and tenants deposits. I’m working with a new PM company, trying to get traction and tenants. I’ve had to make $1,250 mortgage payments three times with no rental income (that’s $1,250 for all four houses… real estate is cheap there). Once income is stabilized, I’ll have a healthy cash flow (16%). Still, hard to do from so far away.

The biggest unexpected boon by far has been the acquisition by [anonymous big tech company] of my old company, [anonymous small tech company]. The purchase price is in the billions. Since I had a ton of stock I held onto (much of it purchased pre-IPO with option prices < 1$), we finally have the financial security that we always wanted, and was one of the reasons we got involved in real estate in the first place.

Now that I’m spending my working time learning about credit card payment fraud and click fraud as part of my new role, I don’t find myself drawn to the local real estate world (i.e. blogs, news, etc.). However, having just returned from a week in Chelan, I am researching possible income producing real estate investments over there.

Regardless of position, I always enjoyed the viewpoints of those looking at the real estate world. The Tim and the bubble folks (non-pejorative) have made some keen observations and backed it with good data. On the flip side, Ardell’s opinions are backed by her lengthy experience and intuition.

Both sides are probably correct in chalking up my (financially) successful experience in real estate to luck. I like this definition of luck, that fits my experience well: Luck is probability taken personally. I was in the right place at the right time, and had the dollars to weather the lengthy holding periods before selling my last two flips. When I started flipping the market was still strong, and the probability of success followed. As the market dipped in areas, my results reflected that.

All in all, a great experience.

Here’s yet another gem from P-I columnist Bill Virgin: We’re all guilty of speculating in real estate

Greetings, fellow real-estate speculators. How ya’ feeling about your gamble on the real estate market these days?

Who, me? Not us, you protest. Our purchase of a home is meant to provide shelter for our families, not as an investment vehicle. If we do benefit financially from the tax breaks and an eventual gain on sale, so much the better, but that’s not our motivation in buying a home.

Ah, but indeed it is a major motivation, and those who claim to have no participation in real-estate speculation doth protest too much. We are all real-estate speculators to some degree. What we’re quibbling about is how much of a degree.

I think the easiest way to get someone to realize that their home purchase was more about financial speculation than they admit is to ask them how they would feel if tomorrow their home was worth just 25% less (which happened recently in California) than they paid, or heaven forbid, 50% less (which happened in Florida). I imagine that most people would be pretty upset. If it’s just “a place to live,” what’s the big deal? Oh wait, you bought into the “equity ladder” myth.

In a way, it’s difficult to blame people for stretching to buy homes in a speculative fever when every single media outlet has constantly pushed the “buy now or be priced out forever” message at every opportunity.

On the other hand, I’m a pretty old-fashioned kind of guy, in that I believe you are responsible for your own decisions. You bought a house that you could barely afford, using a risky loan, and now the interest rate has been jacked up and you can’t make payments? Well, it’s not like the terms of the loan were a mysterious secret, shrouded from the view of the hapless home buyer. And whose fault is it that you didn’t bother doing critical research, choosing instead to blindly accept the cliché that “real estate always goes up,” fed to you from people whose income depends on you buying what they’re selling?

Nobody’s but yours.

(Bill Virgin, Seattle P-I, 08.06.2007)

Are prices in Seattle based on strong fundamentals or speculation? While we can certainly look at the data and draw conclusions for ourselves, there is little to no hard information out there about how many people are buying merely to turn a quick buck.

There are those that treat the lack of hard data regarding speculative buying as evidence that there is little to none of it occurring in Seattle. I highly doubt that is the case (for reasons discussed here numerous times before), but even if we assume that it were true up to this point, I’m inclined to think that speculation in Seattle is on the rise.

Exhibit A: Thursday’s Seattle P-I front-page story about a local flip:

The last time Al Johnson was inside the house at 4425 Cascadia Ave. S. in Columbia City, there were no walls.

“You’ve done a nice job,” Johnson told owner Thomas Loeser after touring the rehabilitated 1911 Craftsman house Monday.

Johnson, an associate broker with Windermere Real Estate, was the listing agent who sold the “extreme fixer” in February to Loeser and his brother, Derek — lawyers when they’re not fixing up houses.

In recent years, many developers have fixed up run-down houses and then put them right back on the market. The Loesers’ house offers an extreme example.

They paid $315,000 for the run-down abode Feb. 20 and put it back on the market for $549,000 last weekend. Thomas Loeser wouldn’t say how much they spent on renovations, but acknowledged that one agent who said back in February the house would take $150,000 in work wasn’t far off.

Johnson speculated just before the sale that the house, once fixed up, could fetch $150,000 over the sales price in the current market — at most.

So, $549,000?

“Let’s see what happens,” Johnson, who is not representing the house this time, said Monday.

Exhibit B: #1 on Forbes’ latest list, “Best Places to Flip a Home“? You guessed it… Seattle!

Flipping—in which an investor buys a home, makes quick improvements and resells at a higher price—”was a rage in the housing market surge,” says Anthony Sanders, a professor of real estate finance at Arizona State University. “But it is not as popular in this flat housing market.”

It’s easy to understand why. With prices falling quarter after quarter, the prospect of buying low and selling lower doesn’t sound nearly as appealing as buying low and selling high.

However, those looking to make a quick buck may do so in a number of markets ripe for a well-spotted flip.

Best among them is Seattle. It landed atop our list based on a number of measures.

I’m not a violent person by nature, but part of me would really like to gut-punch these reporters that are encouraging people to go out there and jump into Seattle’s already-stalling housing market to try to turn a quick buck. The days of easy money from flipping real estate in Seattle are over (if they were ever even here to begin with).

Exhibit C: Anyone seen or heard from “Seattle Eric” lately?

(Aubrey Cohen, Seattle P-I, 07.25.2007)
(Matt Woolsey, Forbes, 07.26.2007)

P.S. (For those not in the know, Seattle Eric was the proprietor of a blog titled Tales of a Seattle Real Estate Investor (formerly located at this address), where he chronicled his quest to flip houses in Seattle for fun and profit. He was also a contributor over at Rain City Guide for a short while. The last time anyone heard from him, he had gotten out of the flipping business to become a real estate agent, and was still having trouble unloading a few of his houses.)

Addendum: Be sure to check out a relatively new Seattle-area blog that focuses specifically on local flips: ReMuddle. I have added a link to them on the sidebar under Bubble Sites -> Regionals. Thanks to RedmondJP for pointing them out in the forum. Speaking of the forum, also be sure to check out the long-running thread on this very subject: Audacious Flips and Renovations.

Here’s a pop quiz for you. Take a look at the following two tables and try to determine which one more closely resembles a market based on fundamentals, and which one represents a market based on speculation.

These figures come from the most recent King County Benchmarks Report, released yesterday. Both the Times and the P-I have their usual un-insightful blabs about it, if you’re into that sort of thing.

If the implication of these numbers is not obvious to you, you are either:

• willfully ignorant of basic economics
• incapable of comprehending basic math
• in the real estate business
• all of the above

How anyone can argue (with a straight face) that home prices are based on “fundamentals” when those very same “fundamentals” have somehow allowed rents to climb slower than incomes is beyond me.

(King County Budget Office, Affordable Housing 2006, 01.2007)
(Sharon Pian Chan, Seattle Times, 02.01.2007)
(Aubrey Cohen, Seattle P-I, 02.01.2007)