A Conversation With Steve Tytler

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.

On affordability:

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.

In closing:

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.

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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
    deejayoh says:

    Tim –
    Interesting stuff, and thanks for sharing. I think he’s right that we aren’t going to see a huge drop – but after one filters out the depression-mongers and gold-bugs from the discussion that’s probably an accurate consensus.

    However I do think he misses on a couple of issues:
    1) Seattle may have been, in his historical perspective, a “boom-flat” market. But never in his time frame of reference have we had a national (even global!) environment of falling home prices. I think that that meta-trend is one that needs to be factored in – and which adds a little bearishness to the boom-flat viewpoint
    2) drawing conclusions from the last 20 years of market behavior seems dangerous to me. As shown by Shiller, the returns on real estate on a national level over the last 20 years have been a historical anomoly. Unless we can point to fundamental changes that have increased the basis for returns on real estate, I don’t see why we won’t have regression to a more historical mean for appreciation.

  2. 2
    The Tim says:

    Also worth noting:

    Steve said:

    I don’t think we will ever return to the affordability level of the early 1980’s when I could buy houses in West Seattle for $80,0000.

    According to the 1980 Census, King County’s Median home value was $71,400, and Median Household Income was $20,717. In the early ’80s, interest rates were 13-16%.

    Although a $71,400 house sounds dirt cheap now, with ’80s incomes and super-high interest rates, the Affordability Index was actually around 82 (very rough estimate).

    I don’t think Steve actually meant that we’ll never return to a level of affordability in the low 80s, but if he did, dang.

    He also pointed me toward a real estate statistics report that has been published bi-annually since 1949. I’ll be heading down to the UW in the near future to grab as much data from these reports as I can. Hopefully the end result will be some really interesting graphs and analysis of long-term trends in Seattle housing.

  3. 3
    Lake Hills Renter says:

    Thanks for posting this, Tim. This is exactly the type of discussion I love to see.

  4. 4
    Joel says:

    Quick bug report: I just got deejayoh’s info in the Post a comment fields.

    Man that conversation was irritating. I think he was constantly contradicting himself in order to avoid coming to the same conclusions as you. He claims things will be the same as always from his experiences while saying that the current run-up in prices are due to things that he has never experienced (low interest rates, loose lending). He says you can’t compare us to desirable places like San Diego, which had a big bust, but apparently we’re just like desirable places like San Francisco (which also had a bust in the early 90’s). It seems he can’t decide on whether prices will stagnate and affordability will catch up or prices will continue upwards and affordability will continue to tank, eventually settling on the “nyah, nyah, nyah, I’m not going to give a straight answer because affordability is meaningless” tactic.

    Did you catch the veiled insult at the end where he says you are doing “number crunching” while he does “statistical analysis”?

  5. 5
    j says:

    great post. some other notes on why it is not always wise to use past performance of boom-busts in seattle

    1) previous booms have not been so largely affected by the credit push. the credit push didn’t just add buyers that wouldn’t have been in the market before, but far worse, it artificially inflated prices. another blog had a terrific numerical look at how at the same payment level, using 30fxd vs. no-interest arm increased the price available to purchase in the high double digits.

    2) his disregard for “affordability” didn’t exactly seem right. the affordability index does indeed factor in interest rates/median incomes/etc to arrive at current affordability. correct? if that’s so, then push the interest rate up to historical norms and tighten credit to normal standards and affordability is actually lower than we’re at right now.

    3) we just had a seattle-lite wwin Dance with the Stars, and perhaps the next American Idol, that’s good for about 10-15% more appreciation this year due to desirability!!

  6. 6
    explorer says:

    I can see some of the points, but I keep coming back to the mantra of investing: “past performance does not guarantee future results.”

    There are new factors he is NOT considering that could have a big impact upon whether this market is ultimately sustainable. I also believe it is NOT sustainable.

    20 years ago, townhouses in-city were rare. in 1990, a nice two bedroom condo could be had for $80K. Agreed that the sub-prime and low interest rates have had a big effect, but it is a two-edged sword. The number of townhouses built and on line to be built, along with new condos, conversions, and rental houses that cost nearly what a mortgage does, are skewing the market in ways not before seen.

    Add to that, the S&P report of a 30 percent overvaluation/price for Seattle, and you have conditions that did not exist in the past, but have a direct bearing upon the present and future.

    You MUST have some kind of affordability equilibrium for first time buyers. Granted the conditions today are strongly influenced by the equity-rich Californians. It does not take a large number of them to skew the market. The investors and flippers NEED first time buyers, as well as those who are cashing in on equity. The number of Microsoft millionaries is not infniate, and how many of them who are buying 2nd, 3rd, 4th homes/condos as investments will still have them in the next few years?

  7. 7
    j says:

    one other somewhat unrelated, but related note. As a homeowner (yes, i know, the enemy) with good “real” equity in my place, I am still receiving a slew of solicitations to re-finance into interest only/1 year arm/etc. It appears up here in kool-aid land, there are still plenty of lenders willing to doll out “cash” even as their bretheren fall by the wayside nationwide. I fear that the real tightening hasn’t exactly started full-bore up here and there’s still a lot of unqualified buyers out there falsely adding to demand.
    we won’t exactly see THAT part of the puzzle for a few more months or even years potentially (to add to the oversupply, affordability, out-of-state drought issues already visible)

  8. 8
    sniglet says:

    Are Steve’s comments about how the Seattle market has had similar manic price increases (as we’ve seen in the last few years) accurate? Has there been 60% increases over 3 year periods before?

    I think this is the crux of the whole debate. If Seattle really has been through booms that were every bit as frothy as this one in the past, with no major crash, then one can certainly argue that we might not see a crash this time. However, if this recent run-up in prices is more substantial than has been seen in the past, then we are in completely uncharted territory, and citing past bubble deflations for our region won’t be applicable.

  9. 9
    plymster says:

    I don’t know about you guys, but I can’t wait for my salary to go up by 8-10% per year! If Steve is right we should all be millionaires before this housing bubble (oops! I meant “stairstep”) rights itself. :-D

    Plus Steve has some good points about how today is a replay of the early 90’s, what with the trillion-dollar wars, massive current account deficit, offshoring of white-collar jobs, destruction of retirement programs, financial sector accounting for 20% of GDP, dissolution of subprime lenders, spiking energy and raw materials costs, and the rise of global markets.

    Oh wait, none of that was going on then. Heck, my raise might not be such a sure thing after all…

  10. 10
    Shawn says:

    stair steps go down, not just up

  11. 11
    MisterBubble says:

    In the last 20 years, Seattle has witnessed the IPO of Microsoft (one of the greatest wealth generation engines in history!), as well as those of of Amazon, Costco and Starbucks. The last major Seattle IPO occurred in 1992.

    Pretending that the last 20 years are representative of a long-term economic trend is a classic example of sample bias. This guy is smoking crack.

  12. 12
    MisterBubble says:

    Incidentally? I miss my icon.

  13. 13
    David says:

    Excellent discussion. I still think that Steve is moving the goalposts a bit (the out-of-town/California dodge, and the way he allows for demand to be influenced by credit/loan availability, but not by income). I also think the relative remoteness of Seattle has to do with why people have stuck around when the economy collapsed in the past–not just the loveliness of the Puget Sound region. It is that same (largely endearing) provincialism that has people thinking that Seattle = San Francisco.

    It also seems odd that we could go through the biggest expansion in mortgage credit in the history of the country, yet expect the housing market to go through the same sort of cycles it did in the years before the explosion in liquidity. That just doesn’t make sense to me.

    I think Tim is closer to the mark in that there will have to be some convergence to narrow the affordability gap. Prices will come in a bit and incomes will rise a bit.

  14. 14
    Ravenor says:

    Great post…a lot of info to chew on. My thoughts on some of the issues:
    -with respect to the economic crash in the 70’s, I think the fact that inflation overall was increasing at that time mitigated the size of the home price drops in Seattle…prices rising across the board cushioned how much laid-off workers had to cut the price on their homes to get out…if you factored out general inflation the real depreciation was probably greater than that 6% number…

    -as far as the early 1990’s, my sense is that the Seattle market was supported by Californians laid off from the defense industry purchasing homes up here, which was a one time event…the 1990 bubble that Steve refers to was part of the last legs of the 1980’s housing runup…
    -As you say, “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”…I agree 100%…this run-up was due to a combination of the steep drop-off in interest rates after the dot-com bust; followed up by the loosening of lending standards that has occurred as the real estate industry did everything it could to keep the market going. Although Seattle may not have had as high a percentage of subprime loans, it defies belief to say that Seattleites didn’t participate in mortgage equity withdrawal refi’s at the same rates as in other metros. That said, there will be significant defaults and I can see price drops of 20% over several years. Take a look a The Housing Bubble Blog and you’ll see that in other states 33% haircuts are occurring daily due to foreclosure auctions and other types of fire sales…
    -I happened to post “An assessment of the Seattle housing market” just the other day where I talk about the average wage in the Puget Sound area and what the influence of two-income households is on home prices…

  15. 15
    Ravenor says:

    I missed a couple of other good points from the commenters….I think David’s comment about the remoteness of Seattle is especially relevant to the 1970’s downturn…I can see where a lot of the laid-off Boeing workers just hunkered down hoping for the company to turn around. With respect to desirability of the metro; there are so many other areas in the US that are attracting massive numbers of in-migrants…Arizona, Texas, Florida(although that has slowed down due to the hurricane issue), Georgia, North Carolina…in all of these states the volume of in-migrants in absolute numbers of people dwarfs in-migration to Washington. Also, the Washington migration numbers have been skewed by the Vancouver WA situation where people priced out of Portland moved across the river. I myself lived in Vancouver for three years before selling at the top of the market(:))…my point is that Seattle is certainly not unique in its desirability when people are deciding where to move to.

    MisterBubble’s point about the IPO’s is a good one as well. The factors that made Seattle a good place to grow companies in the late 1980’s and early 1990s to a degree have been whittled away. I think that the glacial nature of progress on mass transit systems and the gridlocked nature of the areas highways are a serious liability. However, Boeing’s apparent victory over Airbus recently looks like it will provide a floor to any decline in Seattle for quite a while.

  16. 16
    Mike2 says:

    Ah, I wish you would have asked him if the “soft landing” after the 1990 boom was helped by the 48% drop in mortgage rates over the next 3 years.

    That is the primary reason I don’t think the early 90’s recovery will be a good guide for the next 5 years.

    Between 1990 and 1993 mortgage rates dropped from 10% to as low as 6.8%.

    A similar drop from the Spring ’06 rate of 6.3 percent would mean 4.3% fixed rate mortgages will be available by 2010.

    It could happen, but is it likely?

    Along the same lines, since interest rates were at 10% during the late 80’s boom, it doesn’t seem that credit was as widely available then. Without the kind of liquidity we have now it wasn’t nearly as easy for the average joe ’90 to dig himself a grave this deep. Or for that matter dig himself 5 graves with slab granite tombstones and bamboo wood coffins.

  17. 17
    deejayoh says:

    As a homeowner (yes, i know, the enemy)

    seems the conversation is a bit out of whack here if that’s how you are feeling! some of my best friends are homeowners. I’ve been one myself – twice!

  18. 18
    rentfornow says:

    It comes down to two factors for me: cheap money, and and everyone chasing performance (or easy money in R.E.) — unusually high demand and unusually low rates; market may be flat for a long time….

  19. 19
    Jay says:

    Yes, in past recessions and housing slumps many people didn’t leave Seattle, instead choosing to “hand around” and wait for the recovery. But was that becuase they “loved Seattle so much” or just becuase housing here was then cheap? In the next downturn (I hope no one thinks one is never ever going to come here!), houses will be expensive. Just like Californians left CA to escape to cheaper places, people will not hesitate to leave their “beloved Seattle” – many will not be able to afford to stay and others will choose to leave for more other more affordable areas.

  20. 20
    mydquin says:

    I can understand why Tim is so concerned about the affordability index. However, there are 2 things I do not understand about that index.

    1) Does the affordability index account for interest rate changes? If not, then Steve has a good point.

    2) The index is based on averages and does not take distributions/variance into account. When considering the role of affordability, the mean or median income of the overall population is not particularly relevant. What is relevant is the mean or median income of the HOME BUYING SEGMENT of the population.

    By virtually all accounts, growth in the average income of the overall population has been held down by stagnant wages at the bottom end of the economic scale. Unskilled workers are getting poorer in real terms. On the other hand, skilled workers/tech workers are seeing much higher income gains.

    So in my mind, the affordability index would be more accurate if it compared skilled workers’ average incomes to real estate prices.

  21. 21
    The Tim says:


    A few responses:

    1) Yes, the affordability index does take into account interest rates. The basic formula is:

    [30% of Median (monthly) Household Income] / [Monthly payment on the median-priced home, assuming 20% down & current interest rates]

    2) I agree completely. Which is why I’m more interested in the rate of change in the affordability index than the absolute value. It’s not a perfect metric, and lacks many desirable features, but I believe it does give us a useful baseline for discussion.

  22. 22
    mydquin says:

    I am not sure how the rate of change in the affordability idex offers any advantages. In fact, my original point was focused on the rate of change, not that absolute value.

  23. 23
    fj says:

    > 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.

    For anyone that works in the high tech industry (especially computer software) Seattle is only 2nd in desirability to SF/Bay Area. IMO, this is the big difference between Seattle today and Seattle in the past. No longer is Boeing the only dominant employer. I remember growing up, the economy around here was completely dependent on Boeing. Now Microsoft, Google, Amazon, Adobe, and a slew of others dominate the economy.

    For a software developer, there are several orders of magnitude more opportunities in the Pacific NW then NYC.

    > 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.

    Do you want to know what has happened since 2004? Amazon.com turned its first profitable year and hired some 3500 IT staff (who make 70-100k a year). That is just one example of the impact the high tech market has had on the local economy.

  24. 24

    It seems fairly obvious that the national run up in prices and run-down in affordability is almost completely due to the fed’s 1% interest rate environment. What Steve seems to gloss over is the fact that even AFTER 17 rate hikes, the Fed rate is still at the low end of the historical average.


    When Tim points out that the affordability index is incredibly poor, and then we consider that interest rates are more likely to rise than fall, we can only conclude that housing will get even less affordable, unless the Fed chooses a hyperinflationary path and devalues the dollar significantly (and this is actually quite possible).

    While the Seattle housing market might look a lot like the last 20-30 years, the global financial system has NEVER looked like this, and that’s why Seattle housing is starting to look like it is diverging from its past as well.

    We’re in a new financial era, so the future will follow the Fed, not the past. I think Steve’s perspective fails to appreciate any of this.

  25. 25
    Steve Tytler says:


    My conversation with Tim has triggered quite a reaction!

    I don’t have time to answer every single comment, but let me make a couple points …

    All real estate is local. National trends are irrelevant. It doesn’t matter what happens in San Diego, Las Vegas or Phoenix. They are unique real estate markets and Seattle is a unique real estate market. You can’t assume that just because home prices are dropping in one market that the same thing will happen here.

    As I told Tim, I am looking at what the Seattle housing market has done over the past 40 years, not just the last 10 years.

    Believe me, I would LOVE to see the Seattle housing market crash so that I could buy some rental houses cheap. But I’ve been waiting for that to happen for more than 20 years and it hasn’t happened yet, and I don’t think it will happen this time either.

    Let me correct some common misconceptions.

    First of all, mortgage rates are NOT at historically low levels! Mortgage rates typically average about 3% above the inflation rate. The CPI is currently about 2.6%, so mortgage rates should be 5.6% which is right where they are.

    The reason people think rates are low today is because they were historically HIGH in the 1970’s through the early 1990’s.

    Did you know that the last time mortgage rates were as high as they were in the 1979-1981 was during the CIVIL WAR!

    Most people have a very short frame of reference for financial trends. That’s why most of you are only focused on the last few years.

    Everything has happened before and it will happen again.

    As I told Tim, higher priced homes will come down from their 2006 price peak because the upper end of the housing market always increases the most during the boom and comes down the fastest during the slowdown.

    For example, homes that would have sold for $1 million last summer, might sell for $900K to $950K today. Multi-million dollar homes will see even bigger price drops.

    But that does NOT mean that the housing market is collapsing. The average starter home will hold its value because there is always a market for first-time home buyers.

    And the only people who may actually lose money are the homeowners who bought at the very peak of the market in 2006 and have to sell in the next few years.

    If you have owned your own since 2005 or earlier, you will be fine.

    I’ve seen this all before, and the 1990’s is a very close comparison to the market we are seeing now.

    I’m sticking with my prediction of a flat market for the next few years while incomes and demand catch up to the supply of homes for sale.

  26. 26

    […] worth noting is that in my recent research of the historical Seattle Real Estate Research Reports mentioned by Steve Tytler, I was able to obtain inventory information for King & Snohomish (combined) back through 1988. […]

  27. 27

    […] been pretty much the most reasonable voice in the local media on the housing market. Despite our difference of opinion on just how things will play out, I find his views to be much more reasonable than, say, Elizabeth […]

  28. 28
    Tricia Lane says:

    So is it a GOOD or BAD time to buy a home??? It’s a buyer’s market but if prices are going to go down…then you end up overpaying and going backwards in a mortgage. I just moved back to the area and want to buy but am extremely nervous about proceeding.

  29. 29
    biliruben says:

    You should be, Tricia. You might have a bit more bargaining power, but prices are still at historic highs here. Most sellers aren’t budging, hence the huge drop in sales.

    My advice would be to wait a couple years until prices have come down a bit. Then you have better prices and maybe even stronger negotiating position, as the sellers have been beat up already, and are not expecting 10% over what the last guy got. In fact they maybe be expecting 10% less by then.

  30. 30

    […] while later, I had a lengthy email conversation with local mortgage company owner Steve Tytler, in which he made the following claim: Home prices in the Seattle area follow a very predictable […]

  31. 31

    […] only commentator I’ve found still willing to join me in predictions is perennial Seattle Bubble favorite Steve Tytler. Here’s his piece: Forecast for 2010 housing market: slow decline I think […]

  32. 32

    […] by Interest PaidBy The Tim on May 10, 2010 | Leave a responseThis weekend Seattle Bubble favorite Steve Tytler fielded a question from a very confused homeowner in his real estate Q&A column in the Everett […]

  33. 33

    […] Somehow last month I missed the five-year anniversary of my lengthy email conversation with local mortgage broker Steve Tytler. […]

  34. 34
    Erik says:

    RE: Steve Tytler @ 25
    You were very wrong. You said the average starter home would hold its value as you were selling loans to buyers as quickly as possible. The low tier starter homes dropped the most, not the least. Your artistic analysis was garbage. I feel sorry for the poor people you sold loans to and ruined what their financial life based on your gut feelings.

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