Seattle A "FairValue"

A commenter pointed out this article on CNN Money a few days ago regarding overpriced coastal housing markets:

Some of the most overheated U.S. housing markets did become a little less overvalued during the fourth quarter of 2005 — but homes there didn’t actually fall in price.Other factors, such as rising income, combined to increase what Local Market Monitor president Ingo Winzer calls the equilibrium value — what the typical house should sell for . Winzer compares the equilibrium value to actual prices to compute the percentage overvalued.

The more overvalued a market is, the more likely it will regress toward its equilibrium, according to Winzer. He also says that the greater the overvalue, the larger the correction will be and the longer the time period before the market starts growing again.

An overvalue of 40 percent or more indicates very high risk of correction, he says.

So, according to Ingo’s secret formula, Seattle-Tacoma is only 8% overvalued, ranking as a “FairValue” and not likely to “regress.” Not surprisingly, I find myself unconvinced. Though I do wonder what the numbers would look like if they focused more on just King County. The figure given in their table for “Seattle-Tacoma’s” actual home price is a mere $311,000. That’s probably correct for such a broad area, but as we all know thanks to the huge headlines last week, King County’s median home price of $405,000 is 30% higher than that, and 41% higher than the “equilibrium” value.

In other news, I’d appreciate it if the tone of the comments was taken down a notch. There’s no reason to get snippy with one another. Also, I happen to quite like Seattle. This is not the “We Hate Seattle” blog. If you just want to complain about the town, you can start your own blog for that. Thanks.

(Les Christie, CNN Money, 04.07.2006 )

Seattle Bubble Tip Jar

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    Anonymous says:

    The tone of the comments escalated with the arrival of your new troll, Nick.

    As for the comments regarding Seattle life, I think you should suck it up a bit. If you want to discuss housing prices in an area, you’re going to have to consider quality of life in that area.

    I am one of the people who doesn’t think Seattle is worth the cost of living, and part of that reason is that I don’t like the rainy, moldy, introverted life that people live here. I’m sorry if you disagree.

  2. 2
    Nick says:

    Tim, at least I use my name. I think a REAL troll drops by anonymously to spew.

    Please point to one thing I’ve said that’s “troll like”. I have called people out for making random assertions and backed it up with facts.

    I was treated to a bigoted diatribe about “waspy republicans” and the like.

    So, to summarize my main points:

    I DO think housing prices will begin to decline soon, but I don’t like it when the bears exaggerate facts or ignore counter-facts in order to bolster their claims. So sue me.

  3. 3
    Anonymous says:

    So if you don’t have a bleeding heart or don’t agree with everything RE bears spew, then you are a troll? I too think home prices will go down, just not an outright crash unless unemployment skyrockets.

  4. 4
    Anonymous says:

    I am a housing bear too. But I have to agree that the most likely scenario is that housing price will decline slowly and will be stagnant for quite a while, 3-4 or more years depending on many factors that nobody quite understands yet, including the Fed. This scenario is OK for most ordinary homeowners but will create a lot of pain for speculators, investors or people who took risky loans (IO, option ARM, etc) with the hope of quick appreciation to bail them out. And as far as I know, more than 50% of home buyers in Seattle use these types of loan last year, one of the highest in the nation.

  5. 5
    Eleua says:

    I am wondering what the basis is for homes to just “stagnate” for a “quite a while” (3-4 years).

    Is there anything scientific behind this, or just wishful thinking?

    Bubbles pop. That’s what they do. With interest rates rising, risky loans readjusting, employment being more and more RE bubble related, and expectations being projected into fantastical world, I am wondering how the RE market will just simply call a 4 year “time-out.”

    No, this bubble will pop, people will panic, and prices will crater. It will feed on itself. It won’t last 4 years (that is what the early ’90s “time out” did, and it was a mild housing bust, with none of the underlying demons this one faces.

    20 cents on the dollar by 2010. You heard it here first.

  6. 6
    Anonymous says:

    I have to agree Eleua.

    Although some of what you’ve written here and elsewhere seems a bit far-fetched to me, on this I wholeheartedly agree with you:

    After the excesses of the past several years, this market can only end with a SEVERE POP.

    There are national economists out there who have come right out and stated that they believe the appreciation of ’04 and ’05 will be wiped out in one fell swoop.
    Yesterday, one included ’03 appreciation in his estimate.

    After one last puke this spring and summer, I think you’ll have to be brain dead to not know that “RE goes down”- sometimes with a vengeance.

    By Fall ’06 RE “investors” will be a thing of the past. It’s only the most stupid among them who are still in the game.

  7. 7
    Eleua says:

    Every model I use to look at this problem keeps pointing to a wholesale slash of RE prices.

    If the present economy is just a bubble that was used to bail out the last bubble, and that bubble started in ’97, why would we stop at ’03 prices?

    If bubbles pop, the immediate aftermath us usually worse than if the bubble had never taken place. That puts us back into the trough created in the aftermath of the exhaustion of the late ’80s boom.

    In the PNW, what do we have? Manufacturing? No, we have internet related firms, biotech, real estate, finance, coffee shops, software, and retail. Of those, I think only biotech has any real legs. Internet can be done anywhere, and margins suck. Finance and real estate are one in the same – when the bubble blows, both are going to be gone overnight. The consumer never retrenched after the ’01 bust, and they are on severely borrowed time (and money collateralized by their garagemahals). So that leaves coffee shops.

    Great! Coffee shops. 3 million people walking around in a jittery buzz.

    Nope, the entire US economy is based upon speculation, and that has to be wiped out by the bear. Seattle is a poster child for what is wrong with the US economy. Once that happens, we can start the next, genuine business cycle all over.

    Look for rollbacks to the early to mid ’90s.

  8. 8
    Eleua says:

    I know it is very tempting to say that RE will only lose 10-15% To me, this is a varient on the “real estate can not go down” theme. One reason people hold this view, is they have not see a monsterous decline in their lifetime.

    Look back at the 20th Century…

    You had the Great Depression (where speculation and capital misallocation was just a small fraction of what it is today), and you did have homes declining 90%. Then you had the Second European Civil War, and the Pacific War, which ended with the US being the only superpower, and the only nation that exited the war FAR, FAR stronger than it had entered the war. The US was the only game in town. Our currency was the only currency that meant anything. If it was built, or financed, it was built and financed in the US.

    This lasted up to the late 60s. Then the inflation caused by the destrucion of the dollar by a guns/butter gov’t program (war and welfare). The dollar tanked, but people could still command higher salaries to compensate, due to unionization, and fixed based manufacturing.

    Adults finally gained control of the FED, and interest rates were cranked up to 20+%. The story of the ’80s and beyond is the story of falling interest rates, and the financial speculation that occured. Everytime the housing market got in trouble, interest rates were cut to compensate. Then you had tax cuts, and lots of gov’t spending to keep the punchbowl spiked.

    Today, we have gone from historic highs of interest rates, to historic lows, and gov’t spending is at epic highs. These trends will reverse, and cause a period of high taxes, low spending, and rapidly rising interest rates, and increased military challenges. This will occur against the backdrop of the largest, most ill-prepared generation in US history starting to move out of their productive years and into retirement.

    The upcoming generations are increasingly third-world peasants that are increasingly hostile to their host culture.

    How do you estimate that RE can only lose a small fraction of what it has gained in recent years? You can’t. You have to look at the complete rebuilding of the US economy, and the starting over of US house prices.

    I have said that 20 cents on the dollar by 2010. That is assuming interest rates don’t crack 12%, and the job market/economy can undergo an orderly shift from the non-productive speculative economy, to a productive manufacturing economy.

    Those are BIG, and long shot assumptions.

  9. 9
    Eleua says:

    I will grant that RE will only lose 10-15%, IF…

    -interest rates are held at levels 1-2% lower than today

    -inflation drops to less than 2% (in real, not FED terms)

    -wages increase 20%

    -rents coming up to meet housing prices and a reasonable cap rate (all this without causing inflation)

    -HELOCs get paid off (without causing inflation)

    -ARMS adjust with no retrenchment in consumer spending

    -US manufacturing base returns to US.

    -Boomer Generation actually sells Garagemahals to GenX, and GenX can afford them without disrupting their economic livelihoods.

    Nowz, I axe ya…What is more reasonable? The above list, or RE getting trimmed by 80%?

  10. 10
    The Tim says:


    First, I’m not pointing fingers at any individual, I’m just asking everyone to cool off. Differing opinions are one thing, but blatant personal attacks are another.

    And I don’t have a problem with “comments regarding Seattle life” when they’re made as part of a discussion regarding real estate prices or topics that this blog is concerned with. But some of the recent comments can basically be summarized as “Seattle sucks!” That’s just out of line and uncalled for.

  11. 11
    Anonymous says:

    It’s funny but I think that a major part of the reason the blog got pulled off onto a “Seattle Sucks” rant is BECAUSE it costs too much to live here for what it’s “worth”.

    That’s something that the RE boosters in the area fail to take into account:

    At some point, when cost of living exceeds desirability, people leave.

    Seattle is a pretty city with some great neighborhoods. Let’s hope that the outcome of this RE mania isn’t a massive desertion of the city as people decide there are better, cheaper places to live.

    Everything in life is a trade-off. Seattle may have reached it’s limit on how much people are willing to trade.

  12. 12
    Anonymous says:

    Internet can be done anywhere, and margins suck.

    “Internet” is kinda general. The business of the internet is advertising, which at its roots is very local.

    Businesses rarely farm their market research and advertising out too far from home.

  13. 13
    Anonymous says:

    Tim, I think things are going to get alot more heated on your blog as the tide turns – even in Seattle.

    The Craigslist housing forum, if you haven’t visited lately, has turned into a warzone.

    It’s great that you allow anonymous posting. As long as people are polite that works, but you can’t count on that for long.

  14. 14
    tom stone says:

    i live in sonoma county ca,and have been a loan broker about a year,10 years of property management before that and 14 years in credit/collections.if interest rates stay where they are today,50% of the homes sold here in the last 3 years will end up foreclosed.rates will be in double digits by the end of ’07.hard money loans are already at 14% and points.there is finally some acknowledgement by lenders that there is risk involved in real estate loans but too little too late.

  15. 15
    marin_explorer says:

    “Seattle-Tacoma is only 8% overvalued”

    What utter nonsense. Tell that to anyone buying a home recently in Seattle.

  16. 16
    Eleua says:

    Keep in mind that CNBC bulls were calling the “bottom” every 500 points on the NAZ during the ’00-’02 meltdown. Even the bears would not commit to a sub 3000 NAZ.

    It went to 800.

    YHOO was a “quality” stock with a P/E of 2400.

    The NAZ will trade below 500, the DJIA will trade below 7000, and homes will trade at 20 cents on the dollar.

    I have no idea how we are going to retire 77,000,000 Mouseketeers. No one else does either.

    America has always had a convenient deus ex machina to save the day (Midway, Manhattan Proj., microprocessor, internet, oil glut, Reagan, RE bubble). What will be the next American Miracle? Is there another rabbit in the hat?

  17. 17
    Anonymous says:

    Eleua said…
    Every model I use to look at this problem keeps pointing to a wholesale slash of RE prices.

    You need to cut down on coffee and soda drinks, Eleua. This thing you call “model” is really a darts board, is not it, gangster?

  18. 18
    Anonymous says:

    It is hilarious to see that guy talks like how this coming great depression is a certainty. If he is so sure, he should put all his money into shorting home builder and bank stocks.

  19. 19
    Eleua says:

    I guess if I did pour everything into shorting homebuilders and such, I would just be cheerleading for something that would financially enrich me.

    You might be right. The two biggest financial bubbles in modern history will end with the mild inconvenience of a 10% correction.

    Back in ’99-’00, I was chided for predicting an epic wipeout in the NAZ. People thought I was headded for a padded room, board games, structured activities and pastels. Funny how they never said that in late ’00 to ’03. The only thing that kept the whole system from grinding down was the inflation of the RE bubble.

    I lost plenty of money shorting the NAZ from ’98 to ’00, and made up for it, and then some, in ’01-’02.

    I was early to believe the NAZ was a bubble, but my predictions were the NAZ would trade in triple digits. I thought they would have stayed there – another error.

    With housing, I have been saying this since late ’03. My predictions for how bad it will get have only intensified as it has completely departed reality.

    My advice to you is to back up the truck and buy every property you can when it goes down 10%. Use margin, and creative financing. Hit relatives up for a loan. Rob banks to buy RE. When the 10% correction comes, you can be certain that is the bottom.

    Back up the truck.

  20. 20
    Anonymous says:

    You claimed to have shorted tech stocks back in 2001-2 and now if you short home builders and such, you “would just be cheerleading for something that would financially enrich [you]”? You were probably doing the same thing at the stock boards what you are doing now. How the burst of the tech bubble would put America into the dark ages. I always say, there are many doom and gloomers still pissed about how the Y2K thing turned out.

  21. 21
    Eleua says:

    I shorted prior to the bust, and lost a significant portion of my ass. I was made whole as the bubble burst – the bulk of it in April ’00, and September ’01.

    I was not doing this on financial boards six years ago. I was having conversations with friends and coworkers, and they all thought I was crazy.

    I wasn’t upset that the US didn’t disappear down the hole on 1/1/00. The only thing that got me going on “the millenium” was that the real millenium change wasn’t until 1/1/1.

    Kidding aside…I was really pissed then, and I am really pissed now, that our financial system is run by people that have had their brains rotted by 4 decades of crappy music and bong resin. Irresponsible jerks run our financial system according to the applause meter. If Kauai had a high tower, I would have been there with a high powered rifle after Mr. Magoo did his surpirise 25bp cut in 10/98.

    If our financial system was allowed to run its course, and the bear allowed to punish debt, speculation and bad business, we would have a fundamentally healthy economy. Instead, we are like the drunk that keeps drinking to avoid the hangover.

    Yeah, I’m pissed that our economy is a bubble economy, and has been for 8 years. Bubbles burst, and the misallocation of capital will haunt us for years.

    The fact I am short is out of defense, not some sense of social enlightenment.

    Back up the truck when the property market dips 10%. Leverage yourself as much as you possibly can. Make a fortune.

  22. 22
    Anonymous says:

    I am short builders, real estate, and mortgage companies.

    I will then buy all your houses for pennies on the dollar and then rent them back to you.

    I will not buy any houses in Seattle as the only people that will want to live there are writers and other pale skinned freaks.

    Many people I know that have had mental breakdowns end up moving to Seattle as it is filled with depressed people and they feel at home wondering around in the gray, gloomy weather all year around.

    Once the real estate bubble crashes many people from crappy places like Seattle will move back to California, this will give an under pin to prices in California will there will be NO BOTTOM IN SITE for Seatle.

  23. 23
    Eleua says:

    If people actually want to move back to California, I might actually lease a bus and start driving people.

    Let me know when it happens.

  24. 24

    […] get a little heated sometimes—that’s natural. But pasting a link (one that we have already talked about, no less) two dozen times is not a discussion, it’s […]

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