A few days ago I received an email from Steve Tytler, a name you may recognize as the occasional real estate columnist for the Everett Herald. Despite the fact that Mr. Tytler owns a local mortgage company, he has been the only voice in the local media to predict that for-sale inventory would increase and prices will “possibly decline slightly.” We have covered those predictions as well as a few other of Mr. Tytler’s columns in previous posts on Seattle Bubble.
A lengthy and interesting discussion with Mr. Tytler followed over the next few days. Read on for some highlights of our discussion, posted with Steve’s permission…
(Click “Continue reading” below.)
I have been actively involved in the Seattle real estate market for more than 20 years and I have studied the market stats all the way back to the 1960’s. I can tell you that we have never had a major housing price “bust” here like those in other cities such as San Diego. I remember back in the 1990’s when San Diego home prices DROPPED 50%, and it appears that they are headed for that kind of bust again over the next couple of years.Home prices in the Seattle area follow a very predictable pattern:
2-3 years of rapid appreciation followed by 4-5 years of virtually no appreciation. I call it a “stair step” pattern. Prices jump up, flatten out, jump up again, flat out, and so on.
You will never see a major housing price crash here. I know, because I have been waiting for one for more than 20 years! I’ve always dreamed of cashing on a housing bust so that I could pick up a couple rental houses on the cheap, but it has never happened.
Even during the famous “Will the last person Leaving Seattle please turn out the lights” recession in 1970, home prices fell only 6 percent and by 1972 they were back up to their pre-recession levels.
The closest we have come to a “bubble” in the Seattle market was in 1990. From January to June 1990 home prices shot up about 20%. The market then cooled and prices came back down to the January level by the end of the year. The only people who got hurt were the people who bought at the top of the market in March-June 1990. They had to sell for a loss in the early 1990’s or wait until the mid to late ’90’s to get their money back.
Other than that, the Seattle market has never been one of the boom-bust markets. It is typically a boom-flat market.
I just wanted to pass on this historical perspective because I think you may be over-playing your predictions of a major housing crash coming in Seattle.
As you know from my columns, I said the housing market was peaking last year and I predicted this year would be flat. So far, it has behaved exactly as I expected.
I expect the housing market to be flat for the next few years. I do NOT expect to see 20%+ price drops as we have seen in other previously housing markets around the country. People who bought at the very peak of the market last year will probably see the values of their homes drop somewhat, but most homeowners who have owned their house for one year or more will be fine.
The interesting thing that I am waiting to see is how many of the house flippers and novice rental home buyers will be willing to keep eating their losses now that home appreciation has stopped. It will take another year or so for them to really believe that the appreciation party is over and they will probably start to sell . That increased inventory on the housing market could cause the market to soften further, but I don’t think there are enough investors in this market to have a huge impact. But we’ll have to wait and see.
You mentioned my “predictions of a major housing crash coming in Seattle,” but I think if you read through the site, you’ll find that while some of my readers/commenters take a pretty extreme view, I’ve never personally predicted a “major housing crash” for Seattle. Well, I guess that depends on what your definition of “major” is. At most, I’ve (reluctantly) predicted/guessed declines of 6-8% per year for 4-5 years, which would end up being a total drop of 20-25%. However, even that guess was just for fun, as I openly admitted that prices are “impossible to really predict with any certainty.”
That being said, I’m curious about a couple of things you said in your email. First, I don’t really see the logic behind the statement that “You will never see a major housing price crash here. I know, because I have been waiting for one for more than 20 years!” By that same logic, couldn’t someone in 2003 have said “you will never see prices increase by 60% in just four years here, because it has never happened before”? Without additional supporting evidence, I can’t accept “it has never happened before” as reason that it won’t ever happen in the future.
One of the questions I am trying to explore with my blog is whether or not the recent run-up of prices can be compared to the run-ups of the past. Unfortunately this proves to be somewhat difficult when I only have data back to about 1990. However, in your examples I can see a few things that actually point to a 20% price drop in Seattle being somewhat likely.
You said that in the early 70’s recession, Seattle home prices dropped by around 6%. By all counts, the Seattle area was hit harder than most of the country in the recent 2001 dot-bomb recession, and yet throughout that time, prices continued to rise 4-6%. Shouldn’t prices have dropped? Since prices did not correct to account for the recession 2001-2003, didn’t that set them up for a correction even before they really took off 2004-2006?
Also, you gave the one-year mania in 1990 as an example, where prices shot way up, then corrected all the way back down. If it happened in 1990, why won’t it happen again now, with prices correcting back down to an affordable level?
When I look at the affordability data from the WCRER for the 1990s, I see that for a large part of the decade, the affordability index was above 110. The latest data puts that index at 70.7, with the bulk of the drop occurring between the beginning of 2004 and the end of 2006 (45 points in 3 years). For the boom-flat theory to work out, price appreciation would have to slow to an annual rate of 4%, with incomes increasing at 8%, interest rates capping at no more than 7%, and even then it would take twelve years for affordability to reach the previous levels.
So here’s my question for you, and I’m not trying to be combative, I’m actually genuinely interested in your opinion on the matter, and how you back it up. Are you suggesting that prices will stay flat for twelve (plus) years, while affordability catches back up, or are you suggesting that affordability in the Seattle area will simply never reach its previous level, and will indefinitely remain between 80 and 90?
Nobody can predict the future with 100% certainty, so I could of course be wrong, but based on my knowledge of the Seattle real estate market, I expect the pattern to repeat.
I realize you have not lived her forever, but I was directly involved in the 1989-90 housing boom which is very much like the housing boom we’ve had over the last few years. That boom was followed by about 5 year of flat (no appreciation) and I expect the same thing to happen this time.
As I said, the people who bought at the top of the market (last Spring and Summer) will likely seem some price depreciation, but for most homeowners who bought BEFORE 2006, I don’t expect the decline to be much at all.
So, just so I’m sure I’m understanding you, your prediction is that:
Prices will stagnate (zero appreciation, or close to it) for five (or so) years, then pick back up to 6-9% per year, or possibly go through another boom. During this time, the price to incomes ratio will improve, but affordability will never return to what was seen through the ’90s — at some point in the last few years, we have reached a permanently high plateau with prices compared to incomes (and therefore a permanent ceiling on affordability).
Is that a good summary of your position? If so, what has fundamentally changed about Seattle to make it so much more desirable in the last 3 years that affordability should now have a much lower ceiling than in the past? That’s what I just don’t get, and no one has been able to explain to me. For affordability to drop 45 points, and only recover 15-20 of those, there must have been some fundamental change in desirability or supply/demand.
Not Quite. What normally happens is the prices jump up 30-60% over a 2-3 year period, followed by very little appreciation for a few years. The net result is an average appreciation rate of about 9-10% per year but it is NOT a straight line. As I said, it is more of a stair step pattern.
As you point out, “affordability” is very low right now. But if housing prices stay flat for a few years, affordability will increase. That’s why the stair step pattern is so consistent: Home prices jump up until they become unaffordable, then flatten out while income levels catch up.
For income levels to “catch up” during a span of five years, incomes would have to increase 8-9%, while home prices stay completely flat. It seems to me that would be a huge increase in incomes. Has this been the pattern in the past, for incomes to skyrocket while home prices totally stagnate? Or do you believe that income growth will be more moderate, and affordability will never again reach its previous levels?
For me it all comes back to affordability. If the affordability index was in the 120’s in the ’80s, the 130’s in the ’70s, and so forth, that would show a constant decline of affordability as Seattle became a more and more desirable place to live. However, if Seattle’s long-term affordability index tends to be 100-110 (as it was 1994-2004), then there would have to be some reason for it to tank and then never recover.
I understand that the market here tends to historically shoot up and then flatten. However, I still haven’t seen any data to support the theory that the latest price increases are just “more of the same.” The present run-up seem to be longer in duration and larger in magnitude than previous run-ups (such as ’89-’90). Prices increasing 4-6% in the midst of a recession, then 10-20% per year for the following 3-4 years (during only moderate economic growth) just screams “unsustainable” to me.
This was fueled by falling interest rates. During the ’89-90 housing boom mortgage rates were 10%
By 2004, we had 30 year fixed rate loans at 5% and ARM rates at 1-2%. That means you could afford to pay approximately 2-3 times more for a home in 2004 than you could in 1989 with the same level of income. That had a HUGE impact on the real estate market all over the county. On top of that, lending rules were loosened significantly for people with good credit. So buying power increased geometrically.
That’s one of the reasons that I don’t pay attention to the “housing affordability” numbers. To me, they are just government mumbo jumbo. Real Estate is a classic supply and demand market. When the supply of homes for sale is low, prices go up. When the supply of homes on the market increases, prices fall. It’s really as simple as that. The reason home prices are not rising today is because there are far more homes on the market now that there were at this time last year — just as I predicted. I expect the supply-demand curve to swing into the buyer’s favor over the next few years, which will keep appreciation down. But eventually, the supply of homes for sale will start to drop, prices will increase, and we will be back to the races again. It’s a very predictable pattern.
The problem with focusing on the “affordability index” is that you are not taking into account factors such as the impact of out of town buyers. California buyers have been driving our housing market for decades and their incomes are significantly higher than ours and they come with huge piles of cash. Now the CA market is slowing down, you don’t see so much of that, which causes our market to slow down.
I’m sticking with my prediction of a flat market (i.e. little or no appreciation) for the next 4-5 years, then our housing market will take off again. I’ve seen it happen over and over again.
On what makes Seattle “special”:
I think that Seattle is now one of the most expensive housing markets in the country and I don’t expect that to change. Unfortunately, I don’t think we will ever return to the afford ability level of the early 1980’s when I could buy houses in West Seattle for $80,0000.We are like San Francisco, a high demand housing market with a limited supply of housing. That’s why we don’t have the crashes that many markets experience, because a lot of people want to live here, no matter how expensive it gets.
You can’t go strictly by the numbers. The thing that makes Seattle unique is simply that it is a very desirable place to live. That’s why the housing market did NOT collapse during the Boeing bust of 1970. Boeing employment dropped from something like 120K employees to about 50K employees in 2 years (those are guesses, I don’t have the exact numbers). At that time, there was no Microsoft, Starbucks or Amazon.com to cushion the blow. The economy was devastated. But instead of packing up and moving on, most of the laid off Boeing employees chose to stay in Seattle and stick it out. I remember reading newspaper stories about Aerospace engineers pumping gas to make a living. That is unique to Seattle. If you look at what happened to Houston during the oil bust of the 1980’s, most of the people who lost their jobs simply left and moved to other states where they could find work and the housing market totally collapsed. They had no driving desire to live in Houston. The same thing could have happened here, but it didn’t. Because most people decided they’d rather stay in Seattle than move to another state. The same thing happened when Boeing moved its corporate headquarters to Chicago in 2001. Many high level Boeing execs said “No thanks, I’m staying here.” They gave up their high paid jobs to maintain their quality of life in Seattle rather than move to Chicago. That’s unheard of at any company of Boeing’s size, but it just goes to show how strong the desire to live in the Seattle area is for most people around here.
That is what makes Seattle different. The housing market will always be up and down, but most people will not pack up and move away because most of us LOVE living here.
I’m not arguing that Seattle isn’t indeed a very desirable place to live. Obviously I must agree with that, since I live here myself. I’m just trying to get a handle on why affordability has tanked, and if it will not return to the previous level of 110+, why?
In general, affordability is a fairly good measure of desirability. No rational person would expect to be able to afford a home in New York or San Francisco on a median income. This is because those cities are highly desirable. Seattle is nice too, but we’re only kidding ourselves if we think that to the population at large, it’s in the same class as NY or SF.
As you stated, Seattle has been desirable since at least the ’70s, and was definitely a desirable place to live in 2001. And yet, the affordability index today is 30-40 points lower than 2001. If incomes skyrocket while home prices flatten, and affordability returns to its previous levels, then that would make sense. What would not make sense to me would be if affordability only recovered 15-20 points, and topped out at 85-90. To me that says that somehow Seattle became inherently more desirable in the short time span since 2004.
I disagree with you. We are already in the same class as SF in terms of housing affordability (or un-affordability) because Seattle is as popular a place to live, if not MORE popular than SF. That’s why I don’t think we will ever get back to being a “cheap” housing market like we were in the 1970’s and ’80’s.
You can save this email and throw it back in my face 5 years from now if I am wrong, but I’ll bet you a beer that I’m right. : )
Well Steve, this has been an informative and interesting discussion. I can see where you’re coming from, I just don’t agree with you on all the details. Indeed, in 5 years we will know who was right, and who is dead–wait, now I’m lapsing into quotes from The Princess Bride :^)
I think our disagreement is in the process of analyzing the market.
You are taking a “number crunching” approach, whereas my approach is more art than science — based on my experience, statistical analysis and just plain gut instincts.
Only time will tell which of us is more accurate.