Goldman Sachs and the Magical 20%

[Ravenna Or Bust]

Hello All,

I've enjoyed reading this blog every day with my morning coffee for the past year or so. Finally, I decided to bite the bullet and post. Was hoping some of you could do what you do best, and share your opinions...

I'll be forthright and say I'm in the middle of a shortsale process, that I was perfectly happy with... until the news broke about this. Now, I'm starting to get cold feet. On the one hand I don't trust GS because of shady record. But on the other hand, this seems to be right up their ally, so who am I to call B.S.

Here's the part I don't get. GS referenced Case Shiller in their report. From what I can gather, what Case Shiller calls "Seattle" is a rather large area, composed of King and Pierce county. So, when GS says "Seattle housing prices to fall 20% over two years", is that suppose to be a blankt one-size-fits-all rule applied to everyone? My feeling is that it applies to some situations more than others.

We all know that Seattle is still inflated, but it's my feeling that high end homes (say +800K) are the ones that have the biggest chance of falling 20%. What about the lowly entry level 250-300K homes. Would you really expect them to fall as well? With 20% down, they are already reasonably affordable (especially on a two earner family). Also, if we talk about the Rent-to-Mortgage ratio, these prices are not too far off... 2BED/1BATH house rental in Seattle proper (Wallingford, Fremont, Ballard) will go for 1400-1800. That's about the cost of a PITI mortgage.

Getting back to how Case Shiller defines "Seattle". When prices start to fall again, it would seem that the places outside the city (Kent, Shoreline, Lynwood) would be more suceptible, rather than places near the heart of Seattle proper (Greenlake, Ballard, Fremont, Wallingford). These have always been highly desirable areas as long as I've lived here. Wouldnt you think that prices in these areas would weather the storm better than others?

Anyway, those are my thoughts. What are yours? I'm a bit new to this, but I've been reading as much as I can over the past year. I can't be that green, right?.... right?... guys?

[SummitSeeker]

I think you're pretty much spot on. Not every place will decline the same amount, nor bottom at the same time. Like you say, the outer areas will bottom first, attracting more buyers and stealing demand from inner areas, causing prices further in to decay. There will be no magical alarm that goes off to notify everyone that NOW is the true bottom. It will depend on the neighborhood. Places like Kent and Auburn are probably close to bottom right now. Rental parity is a reality there. Closer in, more desirable areas still have a ways to fall. It all boils down to rent vs own cost for a particular property. When rent=mortgage+hoa (if any), it's a buy. (Prop taxes more or less offset mortgage interest deduction, so you can simplify the analysis by calling those two a wash).

Case Shiller is a valuable tool but you need to understand its limitations (which it seems like you do), namely, it covers a broad area.