As amazing as it may seem to readers here, there are in fact many people that are completely convinced that Seattle is not in a housing / real estate bubble of any kind. Not that our bubble is less extreme than Florida or California, but that all of Seattle’s home price gains have been 100% justified, and furthermore that we are likely to see continued strong gains in home prices. With that in mind, I present the following two reports (both in PDF format), which come to very different conclusions about the future of real estate in Seattle. Neither of these are new, but they’re quite interesting when compared side-to-side like this.
Our first report is from none other than our favorite organization, the National Association of Realtors®. Surely you already know who the NAR is, but I want to quote from their NAR Overview page anyway: “The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful.” This is what their 10 page report, Home Price Analysis for Seattle-Tacoma-Bellevue (published during the third quarter of 2005), pruports to prove:
With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the Seattle-Tacoma-Bellevue metro market, as detailed below, reveals that there is little danger of this. In fact, the local housing market is in excellent shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run.
Furthermore, in a section called “Stress Test,” they claim that:
- Price declines in the local market are unlikely according to our stress test.
- The local housing market will experience a price decline of 5% only under extreme unlikely scenarios. For example, mortgage rates rising to 10.5% in combination with 3,000 job losses could lead to a price decline.
- Such scenarios are highly unlikely. Most credible forecasts predict the region will create 60,000 to 100,000 jobs over the next 24 months and mortgage rates will hover around 7% by the end of 2006, which bodes well for future price gains.
- Even in the unlikely event of prices declining by 5%, most homeowners will maintain sizable equity build-up in their homes.
But I think my favorite part of their report is the “Additional Discussion Points” section. I believe in political circles they are known as “talking points.”
- Home price declines are very rare. In fact, the national median home price has not declined since the Great Depression of the 1930s. Stock market collapses, the OPEC oil crunch, economic recessions, and even wars have not negatively impacted national home prices since the 1930s.
- There have been few times when local prices declined. In nearly all these cases, the price declines were accompanied by sharp prolonged job losses. It is difficult to foresee a price decline in a job creating economy.
- Homes trade far less frequently than financial assets (about one home sale every 7 to 10 years for most homeowners). There are also larger transaction costs associated with selling a home due to the lengthy careful examination demanded by home buyers and sellers. Therefore, home prices are not prone to fluctuations as in the stock market. There are neither panic sells nor margin calls associated with homes.
- Many non-quantifiable factors could be important for this metro market in determining home prices. Access to cultural life, the quality of museums, nearby local and national parks, water views, exclusive neighborhoods, weather, the international airport, city vibrancy, restaurants, and a host of other non-quantifiable factors could have an important influence on the overall pricing.
- There are immense tax benefits to owning a home.
If all of this sounds strangely familiar, it’s probably because the local media has been dutifully repeating it nearly every chance they get. Or maybe it’s because you spend a lot of time over at the Rain City Guide (I kid, I kid).
Our second report is from HSBC, which in their own words is “one of the largest banking and financial services organisations in the world.” Here is the summary paragraph from their 110 page report, A Froth-Finding Mission – Detecting US housing bubbles (published January 2006):
We suggest that about half of the US housing market is frothy and that this ‘bubble zone’ may be overvalued by as much as 35-40%, after taking into account low interest rates and tax advantages. Current valuations imply a large permanent reduction in the risk premium and/or a sizable step up in future capital gains, not all of which, we think, is justified. The ‘bubble zone’ accounts for 50% of US GDP, or over USD6trn, nearly the size of the German, French, and UK economies put together. In other words, it’s big. Therefore, when these housing bubbles begin to deflate, it is likely to have substantial macroeconomic consequences.
As you can see, HSBC’s report is not focused specifically on our area. However, Seattle does show up rather prominently in their table of “Potential over/undervaluation: cities” (page 6). Coming in at the 12th-most overvalued market, Seattle is rated as 34% overvalued. Doing a little quick math, taking 34% off the 2005 year-end median price for King County of $393,000 comes to $259,380. Along with their (very) detailed report, HSBC has released an incredibly fancy Excel spreadsheet, HomePulse, that allows you to choose specific cities across the country and see a plethora of graphs detailing all the facts and figures that the report was based on.
In stark contrast to the NAR report, HSBC found that
Using HomePulse, we find evidence that about half the housing market is ‘frothy’, even after taking into account the benefits of low mortgage rates and tax advantages. We suspect around 40% of US housing units are frothy, but by value, that proportion rises to about 60%. Annual homeowner costs relative to rent or income are higher than in the late 1980s for the US as a whole and as high as the early 1980s (when mortgage rates were over 16%) for the ‘bubble zone’. As a result, the required capital gains to financially justify buying versus renting have never been higher for many areas.
So there you have it. The heavy hitters come out and argue both sides of the bubble debate, each supposedly analyzing the facts, but coming to completely opposite conclusions. Are both (or either) of these sources trustworthy? I guess that’s for you to decide.
(National Association of Realtors®, Q3.2005)
(HSBC, 01.2006)