Predictions: 2007 Revisited, 2008 Prognosticated

2007 Revisited
It’s that time of the year again. As the calendar rolls over, the real estate predictions start rolling in. But before we get to the predictions for 2008, let’s look back at 2007.

My own guesses as well as predictions from most of the frequently-quoted local real estate insiders were covered in this post from last January, save for Steve Tytler, whose predictions are covered here. Let’s see how we all did.

The Contenders:

  • Bill Riss, chief executive of Coldwell Banker Bain
  • Randy Bannecker, consultant housing specialist for the Seattle-King County Association of Realtors
  • Glenn Crellin, director of the Washington Center for Real Estate Research
  • Matthew Gardner, local land-use economist
  • Steve Tytler, owner, Best Mortgage
  • Tim Ellis, editor-in-chief, Seattle Bubble

You can go back to the post to see the full context of all of our predictions. However, for this post, I have condensed everyone’s predictions into a convenient table format for your convenience:

  Riss Bannecker Crellin Gardner Tytler Ellis King Co. SFH
Listings: >0% >15% +51%
Sales: 0% <0% <0% <0% <-5 to -10% -14.5%
Prices: +10% +6 to 10% +3 to 5% +5 to 9% <=0% -5% to +3% -1.14%

And the person whose predictions most closely matched the 2007 outcome was… Tim Ellis of Seattle Bubble! Steve Tytler gets the honor of being the only other person to be at all accurate, with his generic prediction of a “big increase” in inventory and a general reduction of buyers.

Note that the final reported median price change was almost exactly in the middle of my estimated range of -5% to +3%. And although my inventory and sales forecasts were the closest of the bunch, reality was unbelievably even more extreme than my predictions. So I either got pretty darn lucky, or after one year of following the market in my spare time, I had a better sense of where it was headed than the majority of those whose very livelihood is the market.

2008 Prognosticated
So that brings us to the 2008 forecast. First up, let’s check out what some of the same local real estate insiders are guessing this year:

Glenn Crellin:

Year-to-year drops should continue “for a little while,” said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. “I think that the next several months are still going to be challenging, but it’s a little hard to tell,” he said, adding that he also expects interest rates to increase during most of the year, potentially wiping out any savings gained by waiting.

Glenn also made some more specific predictions for the Pierce County market in a Q&A with the Tacoma News Tribune.

Matthew Gardner:

For 2008, Gardner is predicting anywhere from zero appreciation to home prices falling as much as 5 percent. “Do I think we’re going to see pain next year? Yes, I do. If there’s some glimmer of hope, it’s the fact we didn’t get terribly overbuilt because of the expense of land,” Gardner says.

Steve Tytler:

I expect home prices to drop about 10 percent to 20 percent over the next year or so, and then the housing market will flatten out with very little appreciation or depreciation for a few years.

Dick Conway:

Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008. “Given that we had a pretty good run-up in prices, some downward adjustment shouldn’t be surprising,” he says.

It would appear that after being so off base with last year’s optimistic forecasts, most of this year’s predictions are a bit more down to earth. The general concensus seems to be price declines of up to five percent. As with last year, Mr. Tytler is the most bearish of the bunch, and will probably be the most accurate as well.

The Tim’s Predictions
Personally, I’m expecting to see a continued surge in inventory, with year-over-year increases between 10% and 25% throughout much of the year. As prices stagnate and drop, the number of “must-sell” homes will only increase. Furthermore, when public sentiment shifts from “buy now or be priced out forever” to “sell now or be stuck there forever,” listings will continue to increase further.

Sales will probably continue their slide as lending standards continue to tighten (regardless of which direction interest rates go). I would guess that sales will be down at least 5% to 15%. Think of it this way: The record sales that we saw in 2005 and 2006 were basically just the housing market borrowing sales from the future. Well, the future is here, and the debt must be repaid.

I do not expect prices to drop like a rock, but I think that 5% is the minimum drop we’ll see in the median, not the maximum. I’d put the range at -5% to -10%.

So there you have it. Your doom and gloom for 2008. I may be way off base, but at least I’m willing to stick my neck out there and give it a guess. I have yet to see any signs that the market is “bottoming out” or at any kind of turning point. 2007 was the turning point, and we’re pretty plainly headed down into 2008. I don’t expect this mess to work itself out before the year is out.

What say you, the readers?

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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.

186 comments:

  1. 1
    notabull says:

    I think a lot of this is going to come down to whether or not we officially enter a recession. If we do, the sales figures will likely decrease even more than they have done in the last year, which was during the “good times”, economy-wise. Given stickiness in prices, I am guessing that a recession (if we get one) will make the “corrections” 10-15%, rather than the 5-10% that you’re predicting.

    It’s pretty pathetic how wrong the “professional” real estate prognosticators were, overall. Any person with a modicum of intelligence and a willingness to research for oneself could see that prices were going to come down. Perhaps they felt the party came to an end too quickly? Personally, I’m not even sure if they realized they were at a party in the first place, let alone one that might end.

  2. 2
    notabull says:

    Question for Tim: Did your price prediction include the possibility of a run up in prices in the Spring, followed by a VERY abrupt 10% decline? Or were you thinking that you’d get a gradual decline throughout the year?

    Also, congratulations in being accurate with your predictions!

  3. 3
    Scotsman says:

    I don’t think inventory will rise that much- too many discretionary sellers who will hold off until they think things have improved. Inventory may rise 10%

    However, I think sales prices will take a solid hit, perhaps 20%. If you think about it, 20% really only takes prices back to their level a few years ago, and still leaves all but the 2005-2007 buyers with a gain. The national economic picture will have a lot of influence as people’s expectations about the future become more of a consideration. Obviously, the easy days of constant gains are gone, but I’m not sure a consensus has emerged about what the future holds. Caution will rule the day.

    And those who stay in, and need to sell….. need to sell! The following graphic posted in the comments section below is a great example of how things can change- one recession/turn-down is not necessarily the same as the last.

    link

  4. 4
    Pegasus says:

    Get a clue!

    “I think a lot of this is going to come down to whether or not we officially enter a recession.”

    We are in a recession already and we will soon be in a depression. Stop waiting for the media to tell you what already happened. Sales are falling off cliffs, our major financial institutions are under water and they only confess part of their problems AFTER they have raised new capital from the next round of suckers. They have been reduced to taking money from crooks, communists or terrorists to bail themselves out as they sell America down the drain. They are trying to salvage their own hides and capital at your expense.

    WAKE UP!!!

    Ask your two worthless Senators in D. C. what they are doing and if you are lucky enough to get an answer back it will say “Duh”.

  5. 5
    notabull says:

    “Get a clue!”

    Get communication skills that enable you to interact with people in a civil manner without looking like a total ass!

    WAKE UP!

  6. 6
    Sorin says:

    2008 will see zero or negative economic growth (i.e. recession that has already started). It will take a little longer for Seattle to get the full force of this, but when it does hit, I think it will just make for further declines in home prices well into 2009.
    There are a lot of homes that people are trying to sell for more than double what they bought for 5 or 6 years ago. That’s quite simply insane. Worse is that some of them actually get sold still. The main thing that’s going to draw out the fall in prices are the remaining suckers that are still eager to buy at these inflated prices.

  7. 7
    AndyMiami says:

    Today’s PANIC selling while the Fed chief met with our so called lawmakers was actually a bit unsettling. I am truly concerned that we may spiral into quite a steep economic downturn that may be so deep that we may not even care to postulate about Seattle’s real estate market. The de-leveraging of the US (and the UK, Australia, New Zealand, Spain, and more) will be a long and painful process. This may finally result in the masses actually questioning material life on credit and focus on what really matters..family, friends, the enviroment..

  8. 8
    just_checking says:

    What are you guys talking about ? I just got an email this
    morning from a local realtor that
    “Our market is stable. Our market is solid.”
    “The average price for 2007 had a healthy increase,
    and was consistent every month.”

    True story :)

  9. 9
    common1sense says:

    -5% to – 10% is not a “bubble”. It is a badly needed correction.

  10. 10
    Sniglet says:

    I tend to agree with Notabull that we we will see fairly steep depreciation in 2008 once the recession kicks in and becomes official. When Boeing and Microsoft have their first earnings disappointments (which is inevitable as the global economy cools) the downward trend will REALLY pick up.

    My prediction: a 10% to 15% price drop for the Seattle area in 2008 and another 20% drop in 2009. I will go further to say that we won’t hit bottom until the medians are at least 60% to 70% lower than 2005 prices, sometime in 2010 or 2011.

  11. 11

    If lenders continue to feel the pressure by regulators (and now enter stage left: The Politicians) to modify defaulting loans, we will only see defaults and foreclosures continue to rise for a long time. The banks are hiding their problems for a few more years so they can minimize their billion dollar write-offs today.

    It is painful to watch all this taking place in slow motion.

  12. 12
    hesotriflin says:

    “common1sense said,

    on January 17th, 2008 at 9:55 pm

    -5% to – 10% is not a “bubble”. It is a badly needed correction.”

    In terms of nominal value it may seem like a “correction” but when you factor the dollar has been tanking and inflation has been rising for the past year, the ‘real’ value of the loss in home prices is much greater.

  13. 13
    economist says:

    Get communication skills that enable you to interact with people in a civil manner without looking like a total ass!

    Look, if you come across a drunk passed out on the railroad tracks with a train coming, you don’t interact with him in a civil manner. You slap him in the face until he wakes up.

    That drunk is J6P, and that train is something called reality.

  14. 14
    Garth says:

    I am amazed the median is not down again, jumbo loans in California this december are down 70% from december 06 and the median is way way down.

    Even in a great market, with prices where they are the near disappearance of jumbo loans should have had more of an impact.

  15. 15
    crystalball says:

    I think Tim’s estimate of -5% to -10% change in prices YOY is probably accurate by the end of 2008.

    If a regression of the YOY change in the CSI for Seattle during the last 12 months may represent the deceleration into the future at least for the near term, then this plot shows what the predicted future deflation might be over time:

    http://i251.photobucket.com/albums/gg317/bubbleblog/deflation_projection.gif

    For comparison, I have also included projected deflation for Boston if it’s current rate of deceleration continues. The deflation that Boston has seen may be more like what we would expect to see in Seattle beyond 2008. Boston has had the longest downhill run of any city on the CSI and it seems to closely track the observed deflation of the 20-city-average CSI.

    The chart above probably is a “worst case” over-estimate of the rate of deflation for Seattle beyond 2008 because at some point its deceleration will probably slow down like it did in Boston.

    Seattle probably won’t show negative year-over-year until early 2008, but it will probably be in the -5% to -10% YOY by the end of 2008.

    I also calculated the actual deflation from the peak Case-Shiller Index for every city in the chart at this link:

    http://i251.photobucket.com/albums/gg317/bubbleblog/deflation_all_cities.gif

    To create this chart I found the peak CSI for each city and then calculated the percent reduction from the peak for each subsequent month.

  16. 16
    col says:

    Prediction: 8 percent correction in 2008, and price drops continue for at least 3 to 4 more years (depending on this depth of the recession).

    Downer side note: I calculate just a 10 percent price price drop in King County will cut household wealth by around $17 billion.

  17. 17
    Pegasus says:

    notabrain…….

    “Get communication skills that enable you to interact with people in a civil manner without looking like a total ass!”

    Yes you can shoot the messenger or attack anyone who voices a strong opinion that makes yours look stoopid but have at it while your brains fall out here. Perhaps you were defensive because you are a fan of Sen. Patty “Useless” Murray?

    My point still is and has been that this is going to end in a massive depression that may end in a revolution because our financial institutions and government are so corrupted that it is beyond repair. By this year’s end you will figure it out. In the meantime have some more koolaid for the masses being bantered about today by our heroes in D.C. and in New York . Free money for the peasants. Bushels full in the form of tax rebates to bailout the economy. Tomorrow they promise free beer!

  18. 18
    notabull says:

    “Yes you can shoot the messenger or attack anyone who voices a strong opinion that makes yours look stoopid but have at it while your brains fall out here.”

    You may not realize it, but it’s possible to express strong opinions without being offensive to others and acting like a child. You seem to lump the two things together.

    I’m not debating whether we’re going to be in a depression or not, and I actually happen to believe we’re in a recession already. However, that point is still open to debate amongst others so I feel it’s best to not jam my opinions down other people’s throats, as you are doing.

    The fact that you’re unable to express your opinions without being a complete jerk shows a lack of communication skills and a bad attitude that will likely hold you back in your life, if it hasn’t done so already.

  19. 19
    Kime says:

    “In terms of nominal value it may seem like a “correction” but when you factor the dollar has been tanking and inflation has been rising for the past year, the ‘real’ value of the loss in home prices is much greater.”

    You have to keep in mind that the inflation of the last few years was driven by the housing boom. The housing bust will have the opposite effect, to some extent. It’s just that there is a lag of a year or two between the cause and effect. I don’t think we will be seeing the inflation you are expecting.

  20. 20
    Buceri says:

    Survey – will anyone here spend the money they get in the “stimulus” coming up?
    I think the answer for most Americans will be “no” (most will lower debt). Some of us will throw it in the bank. So what good is it?

  21. 21
    notabull says:

    “You have to keep in mind that the inflation of the last few years was driven by the housing boom.”

    In what way? While this may be true, it should be noted that in a direct sense “inflation” doesn’t include house prices, but “owners equivalent rent” which actually stagnated during the housing boom.

    I’ll readily admit that you may be looking at other factors, like perhaps the extra wealth and equity withdrawal putting extra money into the hands of consumers, chasing fewer goods, etc, etc.

    IMO, inflation will moderate but it will take time. I find it hard to see a situation in which we’re in a recession, people have less jobs, but still demand is high for oil, goods, etc. Anyone remember the last recession? At the end of it the worry was *deflation* not inflation. And this was at a time when the interest rates were at rock bottom.

    Some suppose that the fed is in a bind, and that it’s in a tough situation because it can’t lower rates for fears of stoking inflation. But if it’s also true that rate cuts take 6 months or more to actually hit the economy, and it’s true that we’re in a recession (likely), then the rate cuts should take effect at about the same time as inflation pressures moderate. I think this is the balance that the fed is trying to achieve, while at the same time trying to stop Wall Street crying like babies because some hedge fund managers are losing money.

  22. 22
    ray says:

    predictions.ahhhhhhhh…easy 1 here. Trendline down, excess inventory, increasing short sales and BK activity.

    Personally my real estate portfolio will see an increase of 20% adding 5 additional properties.

    500 Realty will see an increase of over 2000% from our Grand Opening in Aug 2007. Our Kent and Reno office will be open.

    Easy year to predict. Also EGHT will be up over 100%. But, that is my biggest risky call. I’m in over 80k long at .95 pps.

    Ray Pepper
    Broker
    http://www.500Realty.net

  23. 23
    notabull says:

    Ray,

    What’s your rough estimate for house price changes in King county this year? In your opinion, when is a good time to buy for a consumer that wants to buy one property and can’t “dollar cost average” like yourself?

    Also, you neglected to tell us to always be looking for GEMS! Just teasing… :)

  24. 24
    sf_boomerang says:

    Buceri,

    I’m not holding my breath on the stimulus refund or tax cut or whatever form it will take. Any money that does come my way is going into savings, hopefully to buy a house in a couple years…

    And, if people do chuck their rebate check at their debt (with much the same effect of throwing a paper cup at a tidal wave, I’m guessing), of course that will do some good! It’ll help the big banking corporations get some much-needed cash. And in the end, isn’t that the important thing? ;-)

  25. 25
    MacAttack says:

    Yes, but Tim, did you factor in that GWB wants to borrow $1600 from China to give to my wife and I, in hopes that we’ll spend it on more consumer crap? Sorry, George, into savings it goes.

  26. 26
    Kime says:

    “I’ll readily admit that you may be looking at other factors, like perhaps the extra wealth and equity withdrawal putting extra money into the hands of consumers, chasing fewer goods, etc, etc.”

    Yes, I am referring to the increase in the money supply from the housing boom which took a while to reach the prices of goods. The increase in debt from housing, including mortgages, home equity loans, etc, was really incredible, which increased the money supply. This dwarfed the increase in the money supply from the war by a factor of about 10 at the height of the boom. This along with the general feeling that since the home is worth so much we must be rich caused a flurry of spending that was not related to income, plus it did actually increase the income of some people, but not most people.

    The collapse of debt will shrink the money supply, and the strange realization that maybe it is better to live within your means and that when you take money out of your home it is actually another way of saying you are going more into debt, and not that you are richer, or even the possibility that lenders might only lend money to people who can actually pay it back are going to have the opposite effect from the opposites of these things that occurred during the boom.

  27. 27
    notabull says:

    “The collapse of debt will shrink the money supply, and the strange realization that maybe it is better to live within your means and that when you take money out of your home it is actually another way of saying you are going more into debt, and not that you are richer, or even the possibility that lenders might only lend money to people who can actually pay it back are going to have the opposite effect from the opposites of these things that occurred during the boom.”

    Absolutely true. It bugs me so much that the general perception is that this equity is “locked up” in your house not doing anything for you! Free the poor locked up equity!!!

    Even using your home equity to pay off credit card debt is an amazing thing. While being a sensible decision, if done correctly, it’s just another way of paying for the past with the future, but using a tax advantaged loan. And we’re all seeing what the effects of that are, as the credit card companies are feeling the squeeze, and are squeezing back at consumers. Who could have know that these people would just keep on spending and max out their cards again?! Shocking!

  28. 28
    sf_boomerang says:

    Notabull,

    Reminds me of this old commercial:

    http://www.youtube.com/watch?v=hn5EP9StlVA

    Someone should do a follow-up with ol’ Stanley Johnson… see how well things are working out for him these days: “Now I lost my house, and my wife and kids left me. Somebody help me… with a quarter. Any spare change at all… seriously… I need food…”

  29. 29
    ray says:

    notabull I personally don’t find Washington State with the highest returns. All my money and investors money is going South. Of course there will be isolated “Gems” everyday. But, you must find them. Homes will not come down enough in our PNW region in 2008 -2010. Just too many jobs, port, etc. Remember we come in and buy @ 40-60% off of artificial highs that we already discounted.

    The Gems here always tend to get bought up quickly. Do your leg work, watch the MLS, target your area, and have an aggressive Agent. Keep an eye on **Puyallup**. Huge excess inventory will make for many a deal in the coming year.

    You don’t need luck. Just time and effort. 2008-10 will be an outstanding time to build a portfolio for you. I also love World Savings as a lender. They got bought up by Wachovia but have great products. COSI and CODI. Mtg reps if you are going to attack me over this statement. Remember I’m talking investing for REAL INVESTORS. Not Joe Schmo homebuyer.

    http://www.500Realty.net

  30. 30
    sf_boomerang says:

    Hey! Who you callin’ a Schmo?

    Just cuz some of us make money in other ways. Let’s see you make $1000 a night pole danci…err… I mean… writing code.

    :)

  31. 31

    I realize it’s early and my brain is foggier than usual, but I’m seeing that Steve Tytler predicted zero for ’07, The Tim predicted minus3 to minus 5, and the actual number was minus 1.14, so why does The Tim get to declare himself the winner? Wasn’t Tytler closer? and is the prize a 300,000 house costing 500,000 with a subprime mortgage with adjustable rates?
    My prediction for ’08:
    The price of the median SFH in King County will decline by 8-10%.

  32. 32
    Cynic says:

    Ira,

    The Tim predicted plus 3 to minus 5, not minus 3 to minus 5.

  33. 33
    The Tim says:

    Ira,

    As Cynic pointed out, my prediction was -5% to +3%, of which -1% is smack in the middle. Also, I made more specific and closer predictions on inventory and sales. As I said in the post though, Steve Tytler was in fact accurate on the direction of his inventory and sales predictions, and essentially just as close as I was on price, which is why he gets the close-second honors.

  34. 34
    AndySeattle says:

    My prediction: Price drops between 15% – 25% in outlying areas like Marysville/Lake Stevens, Snoqualmie Ridge, Kent/Maple Valley and drops between 5% – 15% in closer areas like Ballard, Redmond, Sammamish, West Seattle and White Center. Inventories will continue to rise (~20% – 25%), foreclosure percentages will rise but not be as prevalent as earlier expected. This trend will continue into and through 2009.

    Buceri said:
    Survey – will anyone here spend the money they get in the “stimulus” coming up?

    I’m in an interesting position personally… I spent two years in a promising start-up that ended up tanking a few months ago. I knew going in that I would be paid at 50% my market rate salary and times got real tough near the end. I ended up incurring some debt, while manageable, it’s far more than I feel comfortable with. Now back with a more traditional company I’m on target to have it all paid off by late fall 2008. That being said any ‘windfall’ that the ‘great’ GWB sends my way will just get thrown at the pile.

    I will continue to rent and save aggressively until 2010, 2011 on the outside, as I don’t think the housing market rebound will be very steep.

  35. 35

    Got it. Congrats to the Tim. I just can’t read early in the AM, takes a while for the eyes to focus.
    I will also predict that by the time ’08 is over, inventory will be down a little bit. How much higher can it go?

  36. 36
    Chris says:

    Jillayne -“The banks are hiding their problems for a few more years so they can minimize their billion dollar write-offs today”

    this makes no sense to me. why not come totally clean now, as it can be blamed on the market, not individual incompetence, and hit rock bottom (so long as it not a BK scenario) and provide investors with the confidence to know things can only improve? Seems a more logical tactic than drawing out the pain over a longer period and loosing investor confidence in the company

  37. 37
    NotaBull says:

    “this makes no sense to me. why not come totally clean now, as it can be blamed on the market, not individual incompetence, and hit rock bottom (so long as it not a BK scenario) and provide investors with the confidence to know things can only improve?”

    I’m not an expert in this, but it seems to me that if a bank were to come clean on the (lower) value of its assets, then it would either have to stop lending so much *new* money (so they lose transactional fees) and/or they would have to increase rates on savings accounts and CDs in order to attract new deposits. There is a ratio of assets to liabilities they are allowed to maintain.

    Check out bankrate.com and look for the best rate for a 5 year CD. You’ll find all the banks that have been in the news recently. WAMU are offerring a 5.1% 6 month CD! That’s crazy in the current interest rate environment. They need the deposits and they need them BAD. Having to give higher rates to savers will thin their margins at the same time as they are losing transaction costs on loans they make. So it’s a triple whammy:

    -Less money from loans.
    -Less profit from deposits
    -Losses that they *are* willing to admit to

    And besides, if they hide some of the losses for a while, maybe the problem will go away? :)

  38. 38
    monkey says:

    Does any one know why the prices in Lynnwood, WA still high? Prices range from 550K – 700K?

  39. 39
    Ken Mott says:

    I agree with Andy, but i think it will be 10-15% decline in great King County.

    So my predictions
    Prices -10 to -15%
    Inventory +25-35%
    Sales -25%

    Oh and i look at houses in the Vancouver WA area and it seems like 1 out of 5 is a short sale if approved by the bank. This is in the 250k range houses.

  40. 40
    sf_boomerang says:

    Speaking of inventory, looks like we’re solidly above the 9k mark on KC SFH. Just keeps creeping up…

  41. 41
    crystalball says:

    Only real estate brokers and mortgage brokers will tell you it is a great time to buy now. In reality there will never be a better time to sell than now if you hold real estate as an investment.

    You should only buy now if you are ok with a 30% or more drop in value over the next 5+ years.

    Sell now!

  42. 42
    vboring says:

    now would also be a good time to buy if you expect hyperinflation and you think your salary will go up with inflation.

    40% of your income today would only be 20% of your income after a few years of 10% inflation.

  43. 43
    vboring says:

    if we consider the macro impact of a 30% drop in house prices nationwide, hyperinflation starts to sound pretty likely.

    if you believe in one, you have to at least consider the possibility of the other.

  44. 44
    b says:

    Chris,

    The reason is because of what you said, bankruptcy. Many of these banks would be insolvent if they actually priced their assets to market value. So many, in fact, that the government/Fed is colluding with them to prevent just that. Better to dribble out a few billion here and there for the next two years than everyone go tits up now and slam the entire world into the next great depression. That is the current thinking at least, however it looks more and more likely that people are not being fooled anymore.

  45. 45
    b says:

    vboring,

    A 30% drop in national housing prices is a huge sign of deflation, not inflation. The Fed is dropping rates into the toilet because they know any inflation caused by it is temporary and the hope is that they can front run deflation enough before it contaminates the rest of the economy. If they are unsuccessful we are looking at another depression.

  46. 46
    AndySeattle says:

    monkey said:

    Does any one know why the prices in Lynnwood, WA still high? Prices range from 550K – 700K?

    Same as anywhere… Hype. It’s just one more micro-market with inflated prices. For what it’s worth it seems Lynnwood (yes, Lynnwood) and Mill Creek are the hotspots in Snohomish County right now. ~15 miles from downtown, decent schools and a ‘destination’ shopping mall adds to all the Pink Pony criteria. Yes, Lynnwood is special too apparently.

  47. 47

    Hi Chris and b,

    This is from the MBA report on preforeclosure workouts released today:

    “Borrowers who had worked with their lenders and established loan modification or formal repayment plans, and then failed to perform according to those plans, accounted for 29 percent of all foreclosures in the third quarter. The inability of borrowers to meet the terms of their repayment plans or loan modifications accounted for 40 percent of subprime ARM foreclosures, 37 percent of subprime fixed foreclosures, 17 percent of prime ARM foreclosures and 14 percent of prime fixed foreclosures.”

    It’s at the top of the CR blog at the moment.

    http://calculatedrisk.blogspot.com/

    This tells me that if lenders didn’t perform due diligence work at the retail level, then at the workout level, the loan must be completely re-underwritten in order to figure out if the lender is better off cutting their losses now.

    Slamming loan modifications through will only drag out the foreclosure statistics for many years.

  48. 48
    economist says:

    A 30% drop in national housing prices is a huge sign of deflation, not inflation.

    Well I guess a drop in the price of any capital asset is a sign of deflation, then? Like the 50% drop in the stock market in the 1970’s?

    Asset prices – stocks, RE – are driven by different mechanisms than consumer prices and they can, and do, move in different directions. That’s essentially because they are correlated with bond prices which fall with inflation. Falling asset prices aren’t going to do anything about the cost of imported oil, or any world priced good such as food, which rises as the USD falls.

  49. 49
    vboring says:

    b,

    Ben Bernanke talked about how any government could insure inflation over deflation by devaluing or threatening to devalue their currency in 2002.

    if the people who have the strongest control over the value of a currency whose value is based only on confidence are convinced they can decrease its value, then i see no way to disagree with them. the Fed can’t do this unilaterally, but the gov’t could.

  50. 50
    Marc says:

    Since erveybody’s going on record in one place here’s my two cents.

    King County single family median price will decrease 1%-10% and I’ll hang my hat on -5%. Seattle “core” will handle the slow down better, likely decline just under -5%.
    Overall closed sales will continue downward trend but low rates keep enough people buying that the decline will be less than 15%. Inventory up but not dramatically, say 15%.

  51. 51
    patient says:

    If I understand it correctly the 10y bond yield is simplified a rate that the market predicts will beat the average inflation the next 10 years. It’s currently at 3.6%. Hardly hyperinflation. The market is not always right but the bets on hyperinflation seems to be very few.

  52. 52
    b says:

    economist,

    The housing bubble deflating is being caused by banks not lending money anymore because they are worried about their loans. Unlike asset prices such as oil or grain, housing prices are directly correlated with lending and are a huge part of the banking system in the world. Prices decreasing 30% nationwide points to a huge amount of lending that is NOT being done anymore, causing a severe contraction in the money supply. I am sure as an economist you understand how our fractional reserve lending system works. The problem right now is deflation because banks do not want to lend each other money and thereby “create” new money. The Fed can put the rates at 0% and it won’t matter if the banks do not want to lend it back out because the risk is too high. This is a fundamental issue of solvency and trust, not liquidity, and that is why deflation is almost a guarantee unless something dramatic happens.

  53. 53
    b says:

    vboring,

    No, all they can do is hope that they can stop deflation with inflation. The rates that caused this enormous credit bubble are so low already that the Fed has a very small amount of room to work with. The rates could go to 0% or even negative like in Japan and it won’t matter if the primary lenders don’t think the collateral/risk is worth it. There is no way hyperinflation is going to occur in this environment because, again, this is an issue of solvency and trust and not one of liquidity. All signs point to serious contraction in money supply and not the opposite. Just wait until all of the other derivatives created in the last few years (auto loans, credit cards, etc) start defaulting higher than predicted, we are at a serious risk of total credit collapse.

  54. 54
    NotaBull says:

    “It’s currently at 3.6%. Hardly hyperinflation. The market is not always right but the bets on hyperinflation seems to be very few.”

    I think a lot of people throw the term “hyperinflation” around without really having an understanding of the term. To them, it might mean 5% or 10% inflation. This is *high* or *very high* inflation and not *hyper* inflation.

    Check out the picture of the woman loading her furnace with bills! That is hyper inflation to the extreme degree.

    http://en.wikipedia.org/wiki/Hyperinflation

    The same extremist descriptions are thrown around when people state with 100% certainty that we’re headed towards a DEPRESSION! I’m not even sure what a depression is, at a technical level, and it seems pretty darn unlikely we’re headed back into a 1930s depression era. Deep recession? Yeah, I could see that…

  55. 55
    NotaBull says:

    “The problem right now is deflation because banks do not want to lend each other money and thereby “create” new money. The Fed can put the rates at 0% and it won’t matter if the banks do not want to lend it back out because the risk is too high. This is a fundamental issue of solvency and trust, not liquidity, and that is why deflation is almost a guarantee unless something dramatic happens.”

    I think this is exactly right.

    We can’t say that the only way people can spend in the US is through credit, and at the same time state that people will keep spending even while credit is contracting. We’re already seeing consumers slowing down in spending and credit card companies seeing higher delinquencies. Lower demand will reduce price pressure on commodities, even oil (in the short term). Maybe not “deflation” but certainly a reduction in inflation…

  56. 56
    vboring says:

    yeah, i don’t know what the technical definition of hyperinflation is either, so i threw 10% out there as a high, but not unimaginable rate.

    to be fair, i was actually referring to a 10% increase in cost of living, not 10% increase in money supply. the two are related, but not identical. both are referred to as inflation.

    if we think house prices will continue to decrease, and acknowledge that this will lead to difficult financial and economic circumstances internationally, then can’t we assume that the Fed will respond the one way it knows how to and lower the reserve rate?

    if they do this, then either nothing will happen, like in Japan 1990 and we’ll know we’re screwed for the long term or banks will take on more debt, sell it to consumers at new lower rates, more loans will be taken and the money supply will increase. aka inflation. and we’ll bubble our way our of this crisis and into another one a few years down the road.

    the increase in money supply will likely result in an increase in cost of living, since there will be more dollars chasing the same set of goods.

    so, if you think this is likely to result in high rates of increase in cost of living and if you think your employer will match those cost increases with salary increases for you, then you may be better off buying a house now while interest rates are low, since it is unlikely that nominal house prices would fall while the currency is being aggressively devalued.

  57. 57
    Buceri says:

    I remember Buenos Aires in the 70’s. Prices on clothing in boutiques’ windows were replaced by letters. Then, there was a sheet taped on the window with all the letters and the current price. If you walked by a few hours later, the prices had gone up. People used to get paid and run to fill up with groceries, otherwise they could not make it to the end of the month. Now, THAT was hyperinflation!!

    If you still feel the mierda won’t hit the fan, read this:
    http://articles.moneycentral.msn.com/Investing/JubaksJournal/TheNextBankingCrisisOnTheWay.aspx

  58. 58
    Joel says:

    I agree with b on deflation and my guess for 2008:
    Prices -10%
    Inventory +50%
    Sales -25%

  59. 59
    SunTzu says:

    “I’m not even sure what a depression is, at a technical level….”

    Try 25% unemployment and a 50% dive in stock market indices.

    I agree that kind of meltdown seems unlikely today because we’ve learned some stuff from the 30’s.

    I can see something like that happening only if some sort of unexpected, extraordinary catastrophic event on top of the current financial problems takes place.

  60. 60
    John says:

    Like a terrorist attack?

  61. 61
    Kime says:

    “I’m not even sure what a depression is, at a technical level, ”
    A depression is a long and deep recession but it doesn’t have an exact definition, like a recession does, so you might not realize it at the time but after it happens people say “That was actually a depression, not a simple recession.” During the depression people weren’t saying “We are going through the Great Depression.” They said, “Times are tough right now” and mostly just went on with life. If we have a depression, and I believe we will, conditions will still be better than during the Great Depression because we are beginning at a higher standard of living. In many ways it would be a good thing because it would encourage people to live within their means and get the economy back on a firm footing (assuming that the government doesn’t “help” too much). The way things are right now the only thing the government can to to avoid a depression is to try to blow another bigger bubble leading to a worse depression or else leading to true hyperinflation, which would be worse than a depression.

  62. 62
    patient says:

    My guess is that the KC median price will take a real bath in 2008, something like -25%. For Case-Shiller I guess -10%. The reason for the spread is that I think the market for +$700k homes is almost gone. I suspect those homes made up a significant part of the high side of the median the last couple of years.

  63. 63
    Matthew says:

    We will see a 5-10 percent correction in prices by this July, you won’t have to wait till the end of 2008.

  64. 64
    NotaBull says:

    “The reason for the spread is that I think the market for +$700k homes is almost gone.”

    This is precisely the reason that I’m considering entering the high end of the market. As much as I’d rather get a 600K house for 500K, I’m considering getting the 700K house for 600K instead.

    To me, it seems that I’m getting better value by doing this, and assuming that I sell in the distant future when jumbo/conventional spreads are more reasonable, then maybe I’ll make more profit?

    I really go back and forth on this. Any ideas anyone?

    (note that I’m talking about buying in about a year or more, depending on how things go)

  65. 65
    patient says:

    Notabull, personally I think that the main reason for the desirability of homes in the 700k range has been that it has been the entry point to a newer home in the more expensive areas. If that entry point falls that price range will struggle even more since they are now mainly competing with pure bulk which is more sensitive than location, so my bet is that you will generally do better ( from an investment point of view ) with the 500k home.

  66. 66
    patient says:

    Ups…when reading my own answer I realize that you might be right in the sweetspot if you pickup that former 700k home for 600k! So, yes I think you could be right.

  67. 67
    deejayoh says:

    I expect we’ll see 5-8% decline in the Case Shiller index by the end of the year – bringing it back to the 175-180 level. The KingCo SFH median may actually decline less. It’s a far “noisier” series than C/S and as of this month it’s tracking under the trend line for C/S – let’s say 5% bringing the median back to ~$410-415k

    Inventory: +10-15%. Growth will slow as home prices fall, and more sellers give up/wait
    Sales will be down probably low double digits.

    I won’t be surprised to see home prices headed back up in April/May/June. The first half of the year could actually look ok.

  68. 68
    patient says:

    dj, is that -5% or +5%?

  69. 69
    patient says:

    The mix of range and absolute guesses is a bit unfair. I think I’ll change mine. +25% to -25%…

  70. 70
    david losh says:

    My wife and I sold our little menagerie of rental properties to buy the biggest house we could afford. It went against everything I personally believe in, but you only live once.
    The appreciation is still strong even today. Larger houses are in demand.
    As far as home pricing goes; 2005 was the top of the market. I think you can write off the past two years of double digit appreciation and still come out ahead.

  71. 71
    alex says:

    On Tim’s comment:

    – “either got pretty darn lucky, or [nip] I had a better sense of where it was headed than the majority of those whose very livelihood is the market”

    I would risk saying that in their heart of hearts, the specialitsts knew where the market was headed. They just couldn’t say it because their opinion had already been bought.

  72. 72
    deejayoh says:

    dj, is that -5% or +5%?

    Median: -5%
    C/S: – 5-8%

    And I gave both the estimate of range and the correlating absolute number :).

  73. 73
    patient says:

    Thanks dj, the range comment was not aimed at anyone particular just a note that it’s hard to compare how good a prediciton is when you give a range compared to when you give and absolute number. For example if one person says that he predicts -15% and another says -3% – 10% and the fallout is -10%, who did the best prediction? Person number one is off 5% from he’s absolute number while person number two is off 7% from his lowest prediction even if his range predicition was spot on.

  74. 74
    Alan says:

    What is this +10% inventory prediction people are making? YOY? 10% from current?

    I’m going to make the following inventory predictions:
    Jan: 70% YoY
    Feb: 55% YoY
    Mar – Nov: 40% YoY
    Dec: 70% YoY

  75. 75
    sf_boomerang says:

    Patient,

    Well, we could go with the Price is Right model — the closest bid to the actual retail price without going over.

    Except… wait… negative numbers… arrgh! Help me, Bob Barker!

  76. 76
    patient says:

    David Losh said,
    “The appreciation is still strong even today. Larger houses are in demand.”

    Uhm…let’s check that with an example. mls 27214789 is a nice home in a nice area. It’s been listed for a month without any takers at $789k. It was purchased in late Oct 2004 at $650k. C/s indicates appreciation of ~18% between Nov 04 and Nov 05 and ~13% between Nov 05 and Nov 06. This home would be valued at 650k * 1.18 = 767k in Nov 05 and 767k * 1.13 = 866k in Nov 06. So from Nov 06 until now we have a strong appreciation of the difference between 866k and 789k. Almost -10% appreciation in the last year if it sells at listing price. That’s stong alright. A strong indicator where prices are heading for these kind of homes and it’s not up.

  77. 77
    Warren Bubble says:

    Thought this article from the NYTimes was interesting:

    Sorting Out the New Housing Market

    The shape of the new American housing market — the post-bubble market — is starting to emerge. It is one that favors the young who never owned a house and the banks that have access to cheap deposits. It may be harshest on the two coasts, where both distress and a newfound lack of mobility may be on the increase.

    The ideal home buyer now — in a reverse of what was true for years — is a renter who is not burdened with a house. Such a buyer will need a down payment from somewhere, and he or she will need enough income to meet the monthly payments for the foreseeable future, including any increase in adjustable rates that seems probable.

    But not owning a home, which may be hard to sell, is a big plus.

    http://www.nytimes.com/2008/01/18/business/18norris.html?_r=1&oref=slogin&pagewanted=print

  78. 78
    david losh says:

    Ah the McMansion; I knew some one would bring that up as soon as I made the comment. That house in Kirkland is a piece of poop. Number one it’s in Kirkland; in my opinion the most over priced, out of the way place a person could buy. Number two it was built according to International Building Codes, always suspect, yet to be proven a dismal failure in the Pacific North West.
    I buy only buy in Seattle proper. No SoDo though I do like Renton for the proximity to Tacoma, Seattle and Bellevue.
    I like late 1950s construction of big houses. I like timber, four by eights, and steel beams. I like concrete six to eight inches thick with expansion potential. I like funky fifties architecture that can be updated to be retro or modern.

  79. 79
    Eleua says:

    Jillayne -”The banks are hiding their problems for a few more years so they can minimize their billion dollar write-offs today”

    this makes no sense to me. why not come totally clean now, as it can be blamed on the market, not individual incompetence, and hit rock bottom (so long as it not a BK scenario) and provide investors with the confidence to know things can only improve? Seems a more logical tactic than drawing out the pain over a longer period and loosing investor confidence in the company

    Chris,

    If the banks came clean and marked down all their underperforming assets to market, it WOULD be a bankruptcy event.

    Right now, they are at the “…and then a miracle happens…” part of their recovery plan.

  80. 80
    Eleua says:

    Guys,

    Don’t listen to the RE schleppers. They are trying to unload inventory. Their lies caused this mess, and more of them won’t fix it.

    They found functional morons to buy their wares when prices were unsustainably high. The only people dumber than the previous crop are those that are buying when the lie of “real estate always goes up” is an obvious falsehood.

    Sit back and enjoy the show.

    The phrase “real estate always goes up” has turned out to be the lie that killed our banking system. Remember this when the bank runs start and your stock market is sailing through the 6000s.

  81. 81
    economist says:

    Unlike asset prices such as oil or grain

    Oil and grain are commodities, not assets. Sorry, you just don’t know what you’re talking about.

    I repeat, commodity prices can and do up while asset prices (RE, stocks, bonds) go down.

    yeah, i don’t know what the technical definition of hyperinflation is either, so i threw 10% out there as a high, but not unimaginable rate.

    No need to imagine, we had it during the 70’s. I think a lot of posters on this board really don’t know much economic history beyond post-1980 US.

    Hyperinflation is when prices go up every day. When the money you use takes up more space than what you buy with it. We’re talking about a 100%+ annual rate. Like 20’s Germany, 80’s Brazil or 90’s ex-USSR. Or Zimbabwe, right now.

  82. 82
    Matthew says:

    We’ll see a deflationary spiral much like Japan had in the 1990’s. In the short term we may have serious stagflation, bi-flation, or just plain inflation, but eventually it is going to lead to massive deflation.

    Money is currently being destroyed, not created. I’d be surprised if we didn’t see a sharp rally in the dollar before the end of the year, and a serious decline in oil and gold.

  83. 83
    b says:

    economist,

    So a single mistaken word makes my entire post invalid? Classic internet “I am wrong” response. Please explain to me in detail why you believe the current situation will not lead to deflation.

  84. 84
    Lionel says:

    Well, LA had about a 10% price drop YOY in a relatively good economy. Considering that we’re entering what appears to be one mother of a recession, I’m going to wager Seattle prices drop 15% or more this year.

  85. 85
    Steve-o says:

    I just read through all the posts in one sitting. Man, all this back and forth by the arm chair economists about money supply and falling dollar and bla bla bla puts me to sleep. To some degree, economics isn’t a science or even an art…it’s a religion. Some people believe one thing and some believe another and in the end….who gives a flying f*ck.

    Regarding the argument about whether we are going to go through a “depression” versus a “recession”: They are the same damn thing. Economists called dowturns in the economy “depressions” right up until the “great” one. After the Great Depression, everybody agreed that we should start using a different word or people would get freaked out when they heard the word “depression”, so they started using the word “recession” instead. The recession of the 70s was as bad as the depression of the 30s. The reason it didn’t seem as bad was because there was govt assistance in the 70’s to ease the pain of the common man.

    On a separate note: I think there is a general assumption by the average reader that the coming negative yoy % price curve will be shaped like the mirror image of the positive yoy % price curve of the last few years. That is to say, that the yoy% price numbers will go down slowly to about -10% and stay there for a couple of years and then generally trend up. This is backed up by looking at local housing markets that have recently tanked and then using the “Seattle is 14 months behind the other markets” reasoning. However, if a recession hits, it’s going to hit all the market at once and not wait 14 months to hit Seattle. So I predict that the negative yoy% numbers will drop quicker and go deeper then The Tim predicts – like -10% to -20% by end of 2008. Also, I believe that we will not see house prices rise in the spring of 2008 – at the best a flat line in the spring and then further dropping. I think 2009 will see a flattening of the yoy% curve or the beginnings of a long slow crawl upwards.

    Tim: if I’m right, I think I should win that Pink Pony of yours, to do with as I please (demonic laugh and rubbing of hands).

  86. 86
    economist says:

    Please explain to me in detail why you believe the current situation will not lead to deflation.

    Because the Fed is going to keep creating money out of nothing, which leads to a falling USD, which leads to rising prices. Like we are seeing for things like food and oil.

    As I have previously pointed out, and is indeed happening right now, RE and stock prices can go down during a time of inflation. But consumables, i.e. the things which you actually have to buy, go up.

  87. 87
    b says:

    economist,

    How exactly does the Fed create money out of nothing? If deflation is not on the way, why is the Fed bypassing the banking system and arguing for “helicopter drops” of tax checks sent out to everyone immediately? Do you believe that temporary price inflation in some areas means that there is not a large contraction in monetary supply occurring right now? The Fed is stuck because lowering rates now is pushing on a string, that is why they are going to extraordinary lengths to try and stop the deflation that is already occurring!

  88. 88
    what goes up comes down says:

    Steve-o: Great post.

  89. 89
    Eleua says:

    The FED can’t stop the deflation.

  90. 90
    economist says:

    How exactly does the Fed create money out of nothing?

    Is that a serious question? What does it say on that dollar bill in your pocket? What do you think “fiat currency” means?

    Of course paper currency accounts for only a small fraction of the money supply, but the Fed can create electronic money, i.e. bank balances, even easier.

    It just buys bonds from the USG and then the USG spends the money.

    I am not claiming that the price of everything is going to go up. I am saying the the price of things like oil and food in USD will probably keep going up, while the price of houses and other things that people don’t have to buy, will go down. How that will be reflected in the “official” inflation figures I don’t know.

  91. 91
    Angie says:

    I am saying the the price of things like oil and food in USD will probably keep going up, while the price of houses and other things that people don’t have to buy, will go down.

    This is too simplistic—makes it sound like having a roof over one’s head is optional, unlike energy and food.

    It’s not necessary that each person own the roof over their own head, but each roof is necessarily owned by someone, and those costs are borne somehow. Being a renter does not totally exempt you from market forces.

  92. 92

    I’ve heard that the difference between a recession and a depression is:
    It’s a recession when the newcasters call it that, but it’s a depression if you’ve been laid off.

  93. 93
    SteveH says:

    Correct me if I’m wrong, but we seem to be comparing apples and orqanges when talking about price appreciation and depreciation. For example, if a property initially sells for $200k and then later sells for $400k, the price has gone up 100%. However, if a $400k property sells for $200k, the price has declined 50%. Am I wrong here? And if not, how do we easily express the two in the same way so we are comparing apples and apples?

  94. 94
    SteveH says:

    make that ‘oranges’.

  95. 95
    Moe Ronn - Realitor® says:

    David Losh,

    Of all the things you’ve written, the one comment that I always remember is that of you telling the blog that you’re a drug addict and an alchoholic. Need I say more?

  96. 96
    what goes up comes down says:

    Moe, what does that have to do with real estate? Maybe we should keep things on topic and not get personel.

  97. 97
  98. 98
    deejayoh says:

    Is that a serious question? What does it say on that dollar bill in your pocket? What do you think “fiat currency” means?

    Of course paper currency accounts for only a small fraction of the money supply, but the Fed can create electronic money, i.e. bank balances, even easier.

    For a guy who goes by the tag “economist”, that conveys a woefully simplistic and misguided view of how the money supply is managed…

  99. 99
    david losh says:

    When I first started working on houses in the late sixties and early seventies we workers drank and smoked pot. I’ll bet you college kids did the same thing. The difference is that my school was a job site having to do with wether the Real Estate market was boom or bust. It booms and busts all the time.
    I talk with doctors and lawyers about Real Estate matters today. The point I’m always making is that the threshold of entrance into the Real Estate business is low because some of the most successful people in the Real Estate business are the people who live it. There is no substitute for experience.
    My life is extraordinary. I am so grateful each day for what I have. The Real Estate business has allowed me to do so much good.
    What I always hope to share in blogging is that anything is possible for anyone. If it can happen for me it can happen for anyone.

  100. 100
    patient says:

    David Losh, I happen to agree with your taste in homes. The large 1950s homes are really cool and often well built and the recent McMansions are POSs for the price. There are only a handful of the large cool 1950s on the market in Seattle proper so there might be enough buyers with the cash and income to keep them afloat. In the context of this thread however that is KC SFH predictions there are whole villages of overpriced McMansions on the eastside ( Sammamish, Issaquah highlands, Newcastle, Redmond Ridge etc, etc ). The main impact on KC stats from the higher price ranges will more likely come from these than from a narrow segment of a handful homes in Seattle proper.

  101. 101
    Anon says:

    A bit of common-sense may help in the predictions for Seattle. 2-3 years ago, Seattle looked like a relative bargain for someone coming from other large coastal cities, myself included. I moved here with many others. The prices jumped to a point where it’s better to keep my equity and rent. Renting here is still a bargain, compared to New York and San Francisco, trust me. But no way would I buy a tiny crappy house for over half a million bucks. I think the market is headed at a minimum back to 2005 prices, if not more, which would be a 30% drop. Why? Using myself as an example, my family’s income is relatively high for the average here- low six-figures- and anything over $500,000 would be a stretch on a monthly basis. Yet, most of the homes big enough to have a family in and stay in the city are well over $500,000. Luckily, rentals cost less than half of what it would cost to buy the same place. It just doesn’t make sense that these prices can hold because 1: they are utterly out of whack with the rental market, and the rises in rents are small percentages, not doubling and tripling, and 2: families making decent money can’t afford them. Yes, there will always be corporate vice-presidents moving in from somewhere, but they are not looking at- for example- 1950’s saltbox homes in a valley in West Seattle where half of it is underground (current asking price: $670,000… on the market 8 months, no offers: wake up sellers!). I was looking for a while, but decided to wait until the sellers here have realized how far off they are.
    If Seattle conditions alone weren’t enough to merit a big bust, if anyone here still thinks that Seattle is somehow immune from the national financial crisis- and it is a major crisis that’s been brewing for years- they are either lying or naive.

  102. 102
    economist says:

    This is too simplistic—makes it sound like having a roof over one’s head is optional, unlike energy and food

    No, I said that buying a roof over one’s head is optional. But people most certainly have to buy food and fuel. You can’t rent it. This is what I meant when I said that the prices of assets and consumables are driven by different forces.

    each roof is necessarily owned by someone, and those costs are borne somehow. Being a renter does not totally exempt you from market forces.

    Of course a house is neccessarily owned by someone, right from the time that it is built. But that does not mean that anyone necessarily has to buy it from the previous owner, whatever the price. Nor does it mean that anyone necessarily has to rent it.

    The owner just can’t decide to pass all ownership costs on to the renter. Market forces determine what rent can be charged, and right now they result in a rent that is half the cost or less of owning the same house. That means the price of houses has to come down. Because rents certainly aren’t going up – they never do during economic downturns.

    that conveys a woefully simplistic and misguided view of how the money supply is managed…

    It was supposed to be simplistic. I was just pointing out that fiat currency is indeed created out of nothing.

    As for being misguided, I think Alan Greenspan has me beat by a mile, and nobody pays me $100K a night to give them my opinions.

  103. 103
    Lone says:

    Seattle is going to get hit hard.

    Think about, we bucked the trend until now.

    Now it is clear that the financial tsunami that is banking and mortgage fall out. This in turn is dragging the entire economy down into what will be a recession, and likely a hard one.

    Seattle is no longer special, and the fallout from the NATIONAL economy will take 20-25% off of the top of housing here.

  104. 104
    Matthew says:

    There are some serious inaccuracies going on in this thread. First of all, the Fed does not “create” money, the Treasury department does. The Fed controls the rate at which money is lent, aka the Fed Funds Target (FFT). The Fed cannot, and does not, “create” money.

    Yes the fed can “loan” money. However, the Fed is not going to just loan money to anyone. The Fed is a PRIVATE institution and they are not interested in completely destroying themselves by lending to distressed institutions. Therin lies the problem. If you have no collateral (or at least your collateral is deemed worthless) how can you borrow from the Fed? You can’t. How is the Fed going to magically “create” money. The aren’t. That is why ultimately we will see deflation, and not inflation. The money supply is being destroyed, not created.

    In the short term gold and oil are going up, but in the long run the price of gold and oil will come down as the value of the dollar goes up. As there is less and less money in supply, the value of the dollar is going to sky rocket.

  105. 105
    Moe Ronn - Realitor® says:

    “Moe, what does that have to do with real estate? Maybe we should keep things on topic and not get personel.”

    And perhaps we should not post such personal information about ourselves on a public forum. Get my point?

  106. 106
    Moe Ronn - Realitor® says:

    If not, read back through the history of the blog and you’ll see David’s post ranging from fairly rational to barely intelligeble.

  107. 107
    Moe Ronn - Realitor® says:

    intelligible, that is.

  108. 108
    b says:

    economist,
    First, I think you should change your posting name as it is woefully inaccurate. Second, you have never once answered my questions as to why you believe that deflation is not occuring. Continually pointing out oil prices are high right now is not a rational argument against monetary deflation.

  109. 109
    Markor says:

    First of all, the Fed does not “create” money, the Treasury department does. …

    … How is the Fed going to magically “create” money. The aren’t. That is why ultimately we will see deflation, and not inflation.

    What if the Treasury department creates enough money?

    Others have reasoning to disagree with you. From Fiat Money Inflation In The U.S.:

    As the government increases debt to fund domestic projects, the national debt continues to reach lofty peaks. For decades, much of U.S. debt has been shipped abroad, away from North America. Thus inflation has remained relatively tame. Yet, as global bond holders collectively liquidate debt positions, dollars will flood back into the U.S. creating an instantaneous hyper-inflationary scenario.

  110. 110
    softwarengineer says:

    HAPPY MARTIN LUTHER KING JR DAY BLOGGERS

    Dr. King summed it up well, he stated that overpopualtion is the plague attacking mankind, yet its solvable!

    Yes, oil prices sky-rocket in America when overpopulation demand does, Tweedle-dee and Tweedle -dum. Yes, the dollar can lose value too, as manufacturing dries up in America because an overpopulated world is too tempting a labor market for the elite. Yes, the price of homes must collapse as wages collapse in overpopulation, what else will they do?

    Imagine what Dr. King would say about America’s 50% increase in population [I think Seattle’s population went up like 400% since 1968] since he was assassinated 40 years ago? What kind of an example on overpopulation control is America to the rest of the world? An example not to follow.

    If Dr. King, a real liberal, were alive today, he’d totally agree with me. Overpopulation is definitely the root cause of all our problems!

  111. 111
    Markor says:

    Second, you have never once answered my questions as to why you believe that deflation is not occuring. Continually pointing out oil prices are high right now is not a rational argument against monetary deflation.

    It’s not enough for it to be point blank obvious that prices across the board are on the fast rise? Save for electronics and houses and a few other things (I have a house, so I don’t benefit there). Every visit to the grocery store in the past few months, I notice price increases. If you’re in quicksand, there’s no need to prove it.

  112. 112
    disbelief says:

    “As there is less and less money in supply, the value of the dollar is going to sky rocket.”
    I can’t see this happening in relation to other currencies though. If our currency continues to fall in relation to other currencies, and most of the goods we consume come from other countries, how can this deflation take place. It’s just a question, and not a statement.

  113. 113
    Markor says:

    Overpopulation is definitely the root cause of all our problems!

    Yeah, but what is the root cause of overpopulation? I say it’s lack of education. Even with all the evidence, it’s still socially acceptable to have 3+ kids. (And lauded by the you-know-what bonehead political party.) When people who have 3+ kids are shunned, then we’ll be getting somewhere about this problem.

  114. 114
    b says:

    Markor,
    For that to occur you’d have to believe that the US is now totally disconnected from the rest of the world economies and especially China, our biggest buyer of debt. With a global credit contraction going on, and a large recession here and very likely in Europe, the US will continue to be the reserve currency for the time being (especially since we still have all of the guns, so to speak). Our largest debt buyers, the ME and China, have a huge interest in keeping our import prices low, much more so than worrying about their average ROI. I am sure the governments of all of those countries would much rather lose money than be overthrown.

  115. 115
    b says:

    Markor,
    In relation to your other point, that is temporary price inflation in certain classes, we are still in the moment of flux. What I am talking about is massive credit contraction that is occurring right now and will continue for the foreseeable future, accelerating on itself. Its quite obvious from the news everyday that this credit contraction is occurring, is rapidly increasing and is global in nature. Just because it has not shown up yet at Safeway does not mean it won’t soon.

  116. 116
    b says:

    disbelief,
    See my comments above. The only way this does NOT occur is if you believe the US can suffer a bad recession and huge credit contraction, but leave every other country (especially those we import from) still going gangbusters. I, personally, do not think this is realistic yet. Maybe 50 years from now, but today we are still the worlds economic engine.

  117. 117
    whats my name says:

    Too many text book definitions here. The idea that treasuries are the risk free rate plus expectations for inflation is an academic construct; logical, plausible, internally consistent, and maybe true in a perfect rational world. In the real world treasuries are a place for money which must be liquid and carry a minimal risk for loss of principal. Those two concerns statutorily or by binding agreement control the disposition of huge portions of institutional capital regardless of eventual yield. From there it becomes a matter of supply and demand.

    The war, the debt, the trade deficit: we’ve been here before. The oil people seem to be the first to realize they need more dollars to get the same value – and have the power to get it. The next five or ten years is everyone else trying to equalize the pressure, and eventually we settle at higher prices. Although the textbooks, republicans and your boss say wages cause inflation, they don’t. Wages trail inflation, at least in my lifetime

  118. 118
    Markor says:

    Market forces determine what rent can be charged, and right now they result in a rent that is half the cost or less of owning the same house.

    Unless the house is paid off.

    That means the price of houses has to come down.

    They may well, but they need not. Bubbles can persist indefinitely.

  119. 119
    Markor says:

    With a global credit contraction going on, and a large recession here and very likely in Europe, the US will continue to be the reserve currency for the time being (especially since we still have all of the guns, so to speak).

    Maybe, although I think the guns are pretty ineffectual for that nowadays, given MAD. A strong argument can be made—and lots of smart people are now making it—that the reserve currency is in the process of switching to the Euro, the difficulties of such a switch notwithstanding. The EU is not nearly the house of cards that the US is, and that’s a powerful incentive to switch. (Plus they have nukes too.)

  120. 120
    b says:

    Markor,
    The problem is that the EU is the same house of cards as the US. They have also participated in a huge credit expansion and also have an enormous housing bubble. Some areas of Spain and England would put Phoenix to shame. Again, that is why deflation and a currency switch is very unlikely. The US is currently imploding and the EU is right behind it.

  121. 121
    Matthew says:

    Don’t kid yourself, Europe and Asia are just as screwed, if not more screwed, that the U.S. They bought just as many if, not more, US mortgage backed securities than we did. The only reason the EURO is rallying so hard against the dollar right now is the fact that the ECB has yet to cut rates. But don’t worry, they will.

    Bubbles cannot persist indefinitely. We are out of potential bubbles right now, and the FED knows that.

    The rest of the world is dependent upon the U.S. consumer. As we go, the world goes. Who is China going to get to buy their cheap textiles? Who is going to buy cheap Japanese electronics or German autos? Keep telling yourself that the dollar is going to continue to tank and that EU is going to be the next super power.

    Sure there are plenty of hyper inflationist goldbugs with websites out there. I used to believe in the hyper inflation theory until I really studied what happened in the 1990 Japan housing bust and the U.S. great depression. The short term inflation we are experiencing right now is a byproduct of the huge runup we have had in housing prices and easy money. As the money contracts, we will experience deflation.

  122. 122
    b says:

    oops, INflation is unlikely.

  123. 123
    Markor says:

    Correct me if I’m wrong, but we seem to be comparing apples and orqanges when talking about price appreciation and depreciation. For example, if a property initially sells for $200k and then later sells for $400k, the price has gone up 100%. However, if a $400k property sells for $200k, the price has declined 50%. Am I wrong here? And if not, how do we easily express the two in the same way so we are comparing apples and apples?

    Good question. You use the natural logarithm. It’s the “ln” key a calculator. The ln of 4/2 is 69.3%. The ln of 2/4 is -69.3%. Gains and losses of the same initial weighting can be averaged this way, by simply summing them (try it; whether you average them or sum them, the result is the same).

  124. 124
    b says:

    Markor,
    Here is a good piece in the Economist about the size of the european housing bubble. The US created the derivatives that started it all, but it was soon exported to London financial markets. Inflation has hit here temporarily because we started to pop first, but the EU is right behind us (remember Northern Rock?).

  125. 125
    Markor says:

    Bubbles cannot persist indefinitely.

    “Indefinitely” doesn’t mean forever, it means an unspecified length of time.

    Time will tell on inflation/deflation. Renters have a lot more riding on this ultimately unknowable outcome than owners do; that’s partly why owning appeals to me. Owning is the way to not literally “bet the house” on that outcome, as long as you can make the payments or pay it off.

  126. 126
    Matthew says:

    Owners actually have a lot more riding on this than do renters. I read a very good article recently that talked about how the next wave of home buyers are going to be the ones that are not dependent upon selling a house.

    Recently, owning a house and piling up equity has been the desirable transition to moving up in this market. However, as the market turns for the worse, owning a house is going to be like having a 2 ton anchor tied around your ankle and being dropped in the ocean.

    Owning a house means you are going to have to sell your house to upgrade. If you plan on staying in your house for the rest of your life, the only downside will be making payments on something that is depreciating. However, if you plan on selling to buy a larger home, that means you are going to have to put your house on the market to compete with growing and growing inventory and declining prices.

    People that don’t own, but yet have been saving cash, are going to be in a prime position to buy assets at the bottom of a deflationary spiral.

  127. 127
    b says:

    Renters have a lot more riding on this ultimately unknowable outcome than owners do; that’s partly why owning appeals to me

    I am not sure how you come to that conclusion. In a normal or better economy, with normal or better housing appreciation and owner can do fine and usually do. However if the economy falters (it is) and/or housing depreciates (it is) then it is a much more precarious situation to own, especially if you have not owned for many years. I would be very very nervous right now if I had bought in the last 5-8 years with the way the economy is going. If I lose my job for a while I will have to downgrade my apartment, but I won’t have to bring $50k to the table to avoid foreclosure.

  128. 128
    Angie says:

    The owner just can’t decide to pass all ownership costs on to the renter. Market forces determine what rent can be charged, and right now they result in a rent that is half the cost or less of owning the same house.

    I know you all cling to this like the holy grail, but it is not true across the board—not even for recently-purchased houses. Not true for my house; judging by the places in my hood advertised for rent on craigslist, we’d about break even renting it out, and we bought almost 2 years ago. (Maybe I have some of Ray’s native ability to find GEMS.)

    That means the price of houses has to come down. Because rents certainly aren’t going up – they never do during economic downturns.

    Oh, I don’t know about that. What happens to urban vs. rural populations during economic downturns? Where are the most jobs? Does the law of supply and demand go on vacation during an economic downturn?

  129. 129
    Markor says:

    Here is a good piece in the Economist about the size of the european housing bubble.

    Good article, thanks.

    Owning a house means you are going to have to sell your house to upgrade. If you plan on staying in your house for the rest of your life, the only downside will be making payments on something that is depreciating. However, if you plan on selling to buy a larger home, that means you are going to have to put your house on the market to compete with growing and growing inventory and declining prices.

    All true. May not be as bad as it seems though. Regardless of the house’s dollar value, it’s still worth 90+% of a comparable house in the region. High inventory isn’t that much of a hurdle. You sell at a deep discount, and buy at a deep discount, while the rest of the sellers are crying about their lost paper profit. Every house sells at the right price, and there are always houses to be had at the right price.

    People that don’t own, but yet have been saving cash, are going to be in a prime position to buy assets at the bottom of a deflationary spiral.

    Maybe. Or maybe the bank will be an empty shell when you go to get your savings. In a deflationary spiral, it may be best to have the bulk of your net worth in real assets.

    However if the economy falters (it is) and/or housing depreciates (it is) then it is a much more precarious situation to own, especially if you have not owned for many years.

    You might lose money on paper, but you’ll still have your house as long as you can make the payments, which a strong emergency fund helps ensure during downturns. My goal is to pay off my house ASAP so it’s one less payment to worry about.

  130. 130
    david losh says:

    Holy Cow; Fiat Money, the price of gold, and oil, make for interesting reading, but has nothing to do with the price of houses in Seattle. Prices will come down at least twenty per cent, it’s a no brainer. The market will give up the past two years of appeciation as of August 15th 2007 and back to the 2005 spring selling season.

  131. 131
    Markor says:

    Yep, prices will be down 21.4% from the peak on 9/3/2008.

  132. 132
    Selwyn King says:

    National Real Estate Broker and investor.

    You are all playing it safe.

    Inventory will be up 35-40% and sales will be down 15-20%. The biggest decline will hit after the summer and will continue WELL INTO 2009.

    You have to look at who will be buying. First time buyers? Sorry you need a down payment now, have documented income and good credit. Investors, I think not… except for the few that have their heads in the sand…or are coming off a 1031 exchange. Move up buyers, I think not…they have to be able to sell their home first!

    This may sound a little bit basic but you need buyers to have sales. It may be years before the credit issues are resolved.

    On the bright side, everything comes around in time. We seem to forget real estate cycles run 5.-7 years. We have a ways to go folks!

  133. 133
    economist says:

    “they result in a rent that is half the cost or less of owning the same house”

    Unless the house is paid off

    Wrong. You don’t understand opportunity cost. If you have a paid off house which is worth, say, 500K, you could sell that house and buy a bond yielding, say, 5%. That lost income (along with taxes, etc) is what it’s costing you to hold on to that house.

    Even if his house is paid off, if a landlord is netting only 2% or so on the market price of his house, and prices have stopped rising or are falling, there is no reason for him to hang on to it. That’s why investors start bailing as the market declines.

    The smart ones, anyway. The dumb ones just ride the market down.

  134. 134
    wreckingbull says:

    I know you all cling to this like the holy grail, but it is not true across the board—not even for recently-purchased houses. Not true for my house; judging by the places in my hood advertised for rent on craigslist, we’d about break even renting it out, and we bought almost 2 years ago. (Maybe I have some of Ray’s native ability to find GEMS.)

    Judging by the place I actually do rent and sales records actually filed with the county, I’d say 50% is pretty accurate. Nothing ‘holy’ about simple common sense.

  135. 135
    Bits_of_Real_Panther says:

    I’m renting a house out in the Seattle suburbs at a small profit, purchased (sorry, indebted) in 2005. It’s all about quality

  136. 136
    ray says:

    My goodness everyone. With the inability of people to buy homes due to tighter lending standards and deteriorating credit rentals have become increasingly profitable for me. I own homes in Pierce County, Kitsap, Mason, Albany/Turner Oregon, and Fallon /Dayton Nv. With more and more homes coming down, less buyers available, the opportunities will be HUGE!

    Each and everyone gets a rental increase upon exitus of tenant. Most every property is on a standard lease with an option to buy that increases cash flow on property 200-400 per month. If tenant buys they get a credit at closing for up to 2-3 years of renting then I get cashed out.
    Tenants hate to have their rents go to nothing. Homeowners want things fixed by tenants so we rarely get a call on a rent/option. I pleasantly remind tenant that they are responsible for ALL repairs while under option.
    As I say over and over, the coming years will bring many Gems to investors. Get some at 40% off, get locked in with Wells or World, stated int only loan, rent/opt on 2-3 year term and forget about home and hope they cash you out.
    If they don’t you have had a very profitable rental for 2-3 years and guess what??
    Do it again!! But, the key……FIND THAT GEM!! But, be patient. There is no rush. There will be plenty.

    Ray Pepper
    Broker
    http://www.500Realty.net

  137. 137

    For a while there , maybe 5 years ago rents were dropping and landlords seemed be waving all kinds of incentives to get people in. At that time home prices were escalating, but buying a home was really appealing because the monthly payments weren’t nearly as far out of whack to rents as they are now.
    So fast forward a few years, and right now home prices are dropping and rents are going up.
    As Yogi Berra said “predictions are hard to make, especially about the future.” but I think rents will continue to rise for a while. Yes, there is or will be a recession, and Seattle is not immune from it, but shouldn’t there be some lag time from the time the bad news hits to the time that rents no longer rise? A year or two?
    Seems to me that sometimes rents and home prices move in the same direction, and sometimes they don’t.
    So my guess is that rents will continue to rise til 2009, and home prices will fall until then. After that my crystal ball becomes fuzzy, and like the old Soviet five year plans, I don’t think my long term prognosticatons are very reliable.

  138. 138
    economist says:

    I’m renting a house out in the Seattle suburbs at a small profit, purchased (sorry, indebted) in 2005. It’s all about quality

    Not quite – it’s about paying the right price for a given quality. Looks like you got the right price in 2005. Congratulations. The point is can you buy for the the right price now?

  139. 139
    economist says:

    “Indefinitely” doesn’t mean forever, it means an unspecified length of time.

    Really? If someone says, “I can stand on my head indefinitely”, does that really mean “I can stand on my head for a limited amount of time that I can’t tell you”?

  140. 140
    Faster says:

    If someone says, “I can stand on my head indefinitely”, does that really mean “I can stand on my head for a limited amount of time that I can’t tell you”?

    Pretty much. You don’t supposed that it means they can stand on their head an infinite amount of time do you?

    Hell, we’re not even sure if time is infinite. Think how disappointed you’d be if time just ended while you were busy standing on your head indefinitely.

  141. 141
    notabull says:

    “Really? If someone says, “I can stand on my head indefinitely”, does that really mean “I can stand on my head for a limited amount of time that I can’t tell you”?”

    To me it would mean that there is nothing that would *stop* you from continuing to stand on your head, and therefore the length of time you could do it for is undefined.

    So to say that bubbles can exist “indefinitely” implies that there is no particular force that is acting on the bubble to get rid of it. This would therefore be incorrect.

    That’s my interpretation, and I’m pretty sure that’s how 95% of people would interpret it too.

    What was the topic of this post? :)

  142. 142
    Runs With Scissors says:

    Could go either way on the indefinitely; I tend to go with definition number two as opposed to the first definition which is closer to ‘infinite’:
    1. not definite; without fixed limit
    2. not cleary defined or determined

    Not truly an appropriate term for a RE bubble, but “indefinitely” is more appropriately utilized to define the stationing of U.S. armed forces in Iraq, the decline of the U.S. dollar against other currencies, the growth of the national debt, and the continuation of RE agents saying that “Real Estate Always Goes Up and Is a GREAT Investment!” ;-)

  143. 143
    Warren Bubble says:

    The ability to rent out your property and break even or gain a profit will be based on the economic and business climate. There’s an article in today’s Sunday paper warning of how Seattle’s “Rosy Times” won’t last due to globalization and lack of affordability. The author contends that Seattle has a shrinking middle class.

    Maybe all of the landlords commenting on this blog are the cause for the shrinking of the middle class.

  144. 144
    Angie says:

    Wrong. You don’t understand opportunity cost. If you have a paid off house which is worth, say, 500K, you could sell that house and buy a bond yielding, say, 5%. That lost income (along with taxes, etc) is what it’s costing you to hold on to that house.

    I understand opportunity cost, thank you very much.

    However, that bond isn’t going to do a very good job of keeping the rain off of your kid’s head now…or give them an opportunity to live close to you without going into indentured servitude when they’re grown up. Or give you a direct stake in your community, or all that other stuff that also matters, along with the bottom line. Stuff that is, as the credit card ad says, priceless. ;)

    The smart ones, anyway. The dumb ones just ride the market down.

    Seems to me that the ones that are bailing now are probably the ones who bought high and are selling as things head lower. What do economists usually say about that?

  145. 145
    what goes up comes down says:

    Oh no — Angie has fallen for the old “buy and hold while I get out of the market” Angie why do you think large cap investment funds sometimes dump a stock? Could it be it may be overpriced? Of course before they do such– dump it –they tell everyone esle to hold.

    You have a talent for hypebole — “However, that bond isn’t going to do a very good job of keeping the rain off of your kid’s head now…or give them an opportunity to live close to you without going into indentured servitude when they’re grown up. Or give you a direct stake in your community, or all that other stuff that also matters, along with the bottom line. Stuff that is, as the credit card ad says, priceless.” Are you going back to that same useless over hashed arguement of renting versus buying?

    I have to say you are one thick brick.

  146. 146

    What’s the difference between an economist and a befuddled old man with Alzheimer’s?

    The economist is the one with the calculator.

  147. 147
    crystalball says:

    Buy low and sell high. For investors who bought low, now is the best time to sell before the prices start dropping at a rapidly deflating rate in 2008. Right now the prices are still near the peak and they are the highest you will be able to sell for a long time to come. It is not very often that investors can be as confident as they are now that we have just past the peak of a huge bubble for Seattle.

  148. 148
    EconE says:

    Angie…your “spin” skills are far better than your reading comprehension skills.

    The quotes you pulled from “Economist’s” 9:42 posts were spun quite eloquently.

    Economist was talking about a LANDLORD selling a house that was completely paid off and then putting the proceeds in a 5% account.

    Why would the LL’s children not have shelter from the rain after that? Should we assume that the LL was living under a bridge to begin with?

    Wouldn’t selling that house then leave someone living in it that has a greater stake in the community rather than one of us dirt poor JBR’s?

    You can put all the winks and “snappy braggart” one liners you want into your posts. It really just shows your fear. Just the fact that you (an owner of TWO homes) is here on SB says something IMHO.

  149. 149
    EconE says:

    sorry for the spelling and grammatical errors…it’s still too early for me.

  150. 150
    crystalball says:

    Our economy is heading for an iceberg. Just this week, Jim Cramer warned that private mortgage insurers are going belly up.

    Here is a video of Cramer on Hardball on the imminent collapse of several mortgage insurance companies in 2-3 weeks (PMI, MGIC, MBIA and Ambac):

    http://www.youtube.com/watch?v=4w-TwsvX4q4

    According to Cramer, if this happens we can expect a 2000 point drop in the DJIA and the stock market may need to shut down.

  151. 151
    economist says:

    However, that bond isn’t going to do a very good job of keeping the rain off of your kid’s head now…

    If you will take a look at my posts of “January 19th, 2008 at 10:56 am”, and “January 19th, 2008 at 9:42 pm”, you will see quite clearly that I was talking about the yield and opportunity costs for landlords.

    I wasn’t talking about owner-occupied houses.

    But since you brought it up, paid-up owner-occupiers have opportunity costs too. You could sell the house, buy a bond, and rent the same kind of house for 1/2 the interest you’re getting. So actually that bond does a much better job of providing shelter than owning the house does. That’s because housing has such a lousy yield now.

    That’s what Bill Gross of Pimco did. But most homeowners are reluctant to sell their primary residence, even if they are bearish, for non-economic reasons (i.e. just don’t want to move). However selling a secondary residence is a lot simpler – as Warren Buffett did (California).

  152. 152
    Markor says:

    Wrong. You don’t understand opportunity cost. If you have a paid off house which is worth, say, 500K, you could sell that house and buy a bond yielding, say, 5%. That lost income (along with taxes, etc) is what it’s costing you to hold on to that house.

    Unfortunately the bond pays me only 3-something percent after taxes, and I have to apply all of that, and then some, that to renting a comparable house. You can use the CEPR Housing Cost Calculator to see that owning a house outright is cheaper than renting it, unless house prices fall significantly. (On the Eastside at least, where the price/rent ratio is a lot less.) But if prices fall significantly, there’s a greater risk that my money invested in intangible assets will vanish.

  153. 153
    david losh says:

    I do love this blog. The factor not mentioned here is owner financing and a wrap around. Dr. pepper touched on it without fleshing it out. If I want to sell, I sell at my mortgage amount and have the buyer take over the payments on a lease purchase. In the seventies and eighties it was done all the time. Fortunes were made by those brave souls who took the risk.
    As far as the economy goes we are all here on the internet. We have a world wide platform that is new. In terms of predictions what will the internet do for our economy?

  154. 154
    Warren Bubble says:

    Sounds like globalization will hit our neighborhoods if landlords are interested in selling at a profit.

    Overseas Investors Buy Aggressively in U.S.
    http://www.nytimes.com/2008/01/20/business/20invest.html?ref=business

  155. 155
    softwarengineer says:

    KEEP IT SIMPLE

    If you buy a $200K house to rent, pay 20% down ($40K), you borrow $160K at like 6% interest, that’s about $1100/mo., unles you 15 Year it, then its like $1550/mo…..add to that cost property tax (about $150/mo) and insurance (about $40/mo). Add to that vacancy costs to get it rented (about $50-100/mo). Add to that excessive damage costs when the felon you rented turned it into a crack labratory (about $1000/mo)…..

    Ohhhh….I forgot, you owe capital gains taxes on the rental income (about $400/mo). I know, the $1200/mo mortgage payment and property tax is tax deductable….lol….but we didn’t add in the roof leaks and needs replacing, etc ,etc (add another $500/mo)…..

    How can you as a landlord make money being $160K in debt on a $200K home…..ya can’t!!!!

    My advice, buy land.

  156. 156
    old_B says:

    I think my patience is getting thin with those who blithely assert that renting has significant risk of price increase in an economic slowdown.

    Economist makes a good point above, which has been pounded home time and time again on this blog/forum. Rents respond to supply+demand, and are hemmed in by wages. Wages haven’t gone anywhere (in fact, recent studies show that they actually faded in recent years) while cost of living has gone up as expected (modulo oil scares…), with the exception of nonessential purchases, such as speculating on real estate.

    The demand for rental housing isn’t going to be skyrocketing, especially in the face of recessionary times. And seattle has no shortage of supply, even if great hordes of people decide they wish to rent. I’m thinking of some wonderful condo buildings that will make great apartment complexes, here.

    Agree with the comment (by eleua?) above about RE-industry types trying their darnedest to spin, market, and lie their way out of a truly damning refutation of everything they stood for during the bubble years. Housing prices are deflating. “when life gives you sh*t, make sh*t-ade” isn’t going to work here. Bubble buyers crapped their beds, and now they must lie in them.

  157. 157
    Matthew says:

    If you look at the areas hit the hardest by the subprime fallout (particularly the mid-west), rents have actually been decreasing substantially. As owners realize they cannot sell their homes, more and more rentals have flooded the market.

    As inventory piles up in Seattle, and more and more owners are underwater, I expect the same to happen here. Ignore the threats of “rents are going to increase!”. They may increase in the short term, but as the bubble pops, I expect rents to actually decrease as more and more owners rent their houses out as the futility of attempting to sell becomes more apparent.

  158. 158
    Markor says:

    Rents respond to supply+demand, and are hemmed in by wages.

    Demand is not hemmed in by wages. If Microsoft decides to fill even half of the 7,000 employee spots they’re making/leasing on the Eastside with new employees at current wages, it’s a safe bet that rents will go up there. MS has thousands of open positions, so it’s a safe bet as well that a large percentage of those spots will be filled by new employees, and not just to make existing employees comfier.

  159. 159
    jspan says:

    Question: what do people think will happen to “entry point homes in N end Seattle, Shoreline (under 310K)? Same potential to drop?

  160. 160
    Moe Ronn - Realitor® says:

    Many are slow to accept this, but we ARE in a recession already. MS has not seen the adoption of Vista and Office 2K7 that was projected. I don’t really see them filling thousands of jobs in the next year. If they do, it will in India.

  161. 161
    Moe Ronn - Realitor® says:

    “In the seventies and eighties it was done all the time. Fortunes were made by those brave souls who took the risk”.

    At what ratio to those whom lost their ASSES?

  162. 162
    Grubbie says:

    Markor,

    Do you work at Microsoft at all? Your statements about how much they will fill of the 7000 new office spaces with new employees sounds like you don’t.

    The new campus if for the Hardware and Entertainment Division, which has HORRIBLE overcrowding. The offices I’m in, have FTE’s that have been there for over 5 years doubling up. Contractors and Vendors are being trippled even quadrupled up. The feeling I have from what I have seen/heard is the majority will be goign to existing employees/contractors/vendors.

    You keep stating that you think the majority will go towards new employees. My bet is that the new spaces will go to a majority of existing employees. The Millenium campus is one of the worst with over crowding(Xbox/Zune).

  163. 163
    Kime says:

    “The short term inflation we are experiencing right now is a byproduct of the huge runup we have had in housing prices and easy money.”

    Mathew, You are so right, this is what I keep saying.

    “Yet, as global bond holders collectively liquidate debt positions, dollars will flood back into the U.S. creating an instantaneous hyper-inflationary scenario.”

    So when the bond holders all decide to suddenly sell their bonds what happens? The price of bonds goes down, interest rates go up. The bond holders lose 20-30% or more perhaps of their dollar denominated capital. The money supply drops because the value of the bonds drops. Just like so many investors in CDO’s are suddenly finding that the value of their CDO’s is considerably less than they paid for them. The high interest rates would increase the temptation to save money instead of spending it, which would help slow velocity.

    I am not sure this is a hyper-inflationary scenario.

    “What if the Treasury department creates enough money?”

    The whole idea of the Treasury or Fed creating money out of thin air gives the wrong impression. I am not saying the money isn’t created out of thin air. I am just saying that it gives the impression that they just say “let’s create some money and they just go to the printing presses and hey presto, they are handing out new money. New money creation in the US takes willing lenders lending to willing borrowers. The problem arises when the lenders and/or borrowers are not willing. There is a point where there is no one left to lend to who wants to borrow and who can also pay it back. We passed that point and then they lent money to willing borrowers who couldn’t pay it back and now they are realizing their mistake and are not so willing to lend. Borrowers, overall, are pretty maxed out on debt. Not that there is a shortage of people who are perfectly willing to borrow money and not pay it back, but pretty soon the credit card companies are going to have to be more picky about who they loan money to, also.

    There is a point in bubble creation where you just can’t go any farther, which leads to the collapse of the bubble. This giant credit bubble has already started to collapse, and I don’t really see how it can be stopped before it runs its course.

  164. 164
    michael says:

    “In the seventies and eighties it was done all the time. Fortunes were made by those brave souls who took the risk”.

    You are so right. That is why I’ve been buying ultrashort ETFs like they are going out of style. The ones I bought six months ago – SRS and SKF have been great. Shorting real estate is fun and lucrative. You can drive to work in the morning with a smile on your face as the market burns.

  165. 165
    david losh says:

    My contention for the past five years is that banks were buying assets rather than lending money. Take a second to consider that there is plenty of money in the world today.
    In my opinion the Euro was created out of thin air. How did that happen? How did a bunch of countries get together and decide to create one currency? As a matter of fact there’s talk here about buying currencies. How crazy is that?
    How about oil futures that were hovering around sixty dollars a barrel and are now, a few years later, pushing one hundred dollars per barrel. How many fortunes were created there in a very short number of years?
    Who would have thought corn as a commodity to rival oil? For certain the ethanol industry did. Health, medical, pharmaceuticals, and medical equipment make millionaires every day.
    Rather than talking about jobs in Seattle, let’s talk about wealth. Property is wealth.

  166. 166
    old_B says:

    David Losh, what the hell are you talking about?

  167. 167
    Markor says:

    The new campus if for the Hardware and Entertainment Division, which has HORRIBLE overcrowding. The offices I’m in, have FTE’s that have been there for over 5 years doubling up. Contractors and Vendors are being trippled even quadrupled up. The feeling I have from what I have seen/heard is the majority will be goign to existing employees/contractors/vendors.

    I’ve seen no FTEs doubling up in HED, in any of three buildings.

    You keep stating that you think the majority will go towards new employees. My bet is that the new spaces will go to a majority of existing employees. The Millenium campus is one of the worst with over crowding(Xbox/Zune).

    I’ve seen lots of empty cubicles at Millenium.

    I don’t doubt there’s overcrowding some places; I haven’t personally seen any since about 1998, but I don’t go exploring either. It doesn’t really matter though, since it’s absurd to think that MS is going to go to all that expense just to make existing staff comfier, when they have thousands of open positions and a nonstop track record of blazing staff growth in the area. Their incentive is to claim that new space is for anything but room for new staff, since that helps them on salary negotiations. Likely the only way they’d go to that expense just to make existing staff comfier is if people were leaving the company en masse due to the overcrowding; I’ve seen no sign of such mass departure.

  168. 168
    what goes up comes down says:

    Markor I think the question was do you work at MS? I assume by your statements you do.

  169. 169
    deejayoh says:

    I don’t doubt there’s overcrowding some places; I haven’t personally seen any since about 1998, but I don’t go exploring either.
    whoa – you sure you work at MSFT? I’ve been interviewing around quite a bit, and every group I know in just about every building I’ve visited has space problems. obviously this is due to adding people – you really should walk around more!

  170. 170
    ray says:

    Software engineer “keep it simple”

    Since you used an exp. Let me use Real numbers on a real transaction.

    I close on Friday on a 190k home. Got locked with Wells Fargo(no points) int only @ 5.855. Seller concession of 4k toward closing costs. Loan amount 152k. The home is virtually brand new in Dayton Nv. yes, it was foreclosed on from a bank out of Florida at 283k. Anyway home is flawless and all rock landscaping is done. Homes in this golf course community rent for 900-1100.

    I leased optioned the home for 3 years at 1250.00. The payment is 762 plus T and Ins. About 948.00 per month. Under lease option owner/tenant fixes all problems while under the lease but since the home is new I forsee very few issues. I don’t even own the home yet and I have rented it, with 3 back-ups. It cash flows and I locked owner/tenant in at 259k. All comparables are selling at 249-269k. Owner was delighted to know their monthly payment (280.00)was going toward something and YOU know I was quite happy to have a cash flow property that may or may not sell. The extra 280.00 is non-refundable if home is NOT purchased. I credit back the buyer the 280.00 for up to 3 years as a seller concession=about 10k at the end of 3 years.

    variables: home doesn’t appraise in a few years at 259k-I doubt it but I’m very willing to lower price and still make 40k instead of 60k
    .
    variable 2- tenant doesn’t buy. All the better. I’ve had a cash flow property for 1-3 years. So I do it again or sell it on the open mkt.
    Either way____NO BRAINER but the KEY!!

    **YOU MUST FIND THE GEM**

    There will be many. This is NOT a time to cower. Its a time to begin looking. For the next few years the saavy investors will be buying from the investors who blew it. Educate yourself Washington!

    Ray Pepper
    http://www.500Realty.net

  171. 171
    david losh says:

    Money; that’s what I’m talking about. People here talk about where to invest wages. What if you’re a bank who invests in credit. You’re getting 12% to 32% on consumer credit. A bank lends money to business or invests in business. Business is good. Banks have made millions of loans that have been sold, package, then resold for five years, but now it’s a meltdown?
    Holy Cow, you all want rentals, now you’ve got them. If you want to buy a house, do that, there are plenty right now. If you want to rent, do that, I don’t think the banking industry, or lenders care at this point, it’s all money.
    You’re all looking at a snap shot in time. The only question is where the money is going next. Let’s assume Investors with billions of dollars are taking a loss today on Real Estate holdings, I doubt that very much, but let’s assume, where will they invest next to recoup the losses?
    Wealth, billions of billions of dollars of wealth, are investing, not creating jobs.

  172. 172
    softwarengineer says:

    HEY RAY, YA MENTIONED NEVADA, NOT SEATTLE TO BUY….LOL

    You also failed to mention, property taxes, capital gain taxes on the rental income, insurance, maintenance, cost of an empty home with no rentor for periods of time, etc, etc, etc

    Ray, ya should of done what a lot of my realitor friends did [or wish they could], get out of debt now, that house you’re renting is a money pit. Also Ray, who ya paying to watch the house from Seattle?

    Now, raw land makes much more sense. You realitors want us techies buying your rental houses so you guys can get out?

  173. 173
    economist says:

    Unfortunately the bond pays me only 3-something percent after taxes

    And what is the landlord’s yield on rental income after taxes?

    Do you have to serve up easy targets like that?

  174. 174
    Ray says:

    read again my friend. I think you need an education in investing. T and Ins is (taxes and insurance) maintenance, empty home…….read my post again and try and understand it. Its a lease option. renter pays all repairs and there is no lapse in tenancy. GOOD LORD!

    Who am I paying to watch the home in Seattle? Are you serious? I think you need to show up to the Seattle Bubble meeting and get enligtened. I have a feeling your realtor FRIENDS are the ones WE will be buying from in the coming years!

    Ray Pepper
    http://www.500realty.net

  175. 175
    Markor says:

    And what is the landlord’s yield on rental income after taxes?

    It wouldn’t matter to me. My point was just that owning a house outright is cheaper than renting it (yourself, that is, not to someone else & being their landlord), unless house prices fall significantly.

  176. 176
    Markor says:

    I’ve been interviewing around quite a bit, and every group I know in just about every building I’ve visited has space problems. obviously this is due to adding people – you really should walk around more!

    Keep in mind that groups can double+ up people to save money. Groups pay for their space at MS. Lots of times I’ve seen contractors crammed in when there were plenty of empty offices nearby. Crowding of FTEs could be by design. As long they put up with it, why not?

  177. 177
    WestSideBilly says:

    I close on Friday on a 190k home. Got locked with Wells Fargo(no points) int only @ 5.855. Seller concession of 4k toward closing costs. Loan amount 152k. The home is virtually brand new in Dayton Nv. yes, it was foreclosed on from a bank out of Florida at 283k. Anyway home is flawless and all rock landscaping is done. Homes in this golf course community rent for 900-1100.

    I leased optioned the home for 3 years at 1250.00. The payment is 762 plus T and Ins. About 948.00 per month.

    Ray, the Nevada example doesn’t hold water in Seattle. The properties I see dual listed (rent/FS) in that rental range are listing at $225-250k, plus HOA dues often in the $150-200/mo range. Seems like most landlords include G/S/W in their rent, so there’s another $100/mo. You end up looking at getting $1250 rent but paying out $1800-2000. When you get the unit for $150k or so, the numbers make sense – as they did in your NV example.

  178. 178
    Ray says:

    West Side you are exactly right. As I mentioned on one of my earlier blogs 70% of my money and investors money is being put to work in NV where homes are 40-50% off. They are all NEW and under 200k. They are always foreclosed upon or just about and rarely need anything. 190k is the most I will pay. Over that the numbers don’t make sense.

    I’m hoping to secure about 8 more of these in the next 2 years all under 190k. This 190k has skewed the comps for all other closings are above 249k.

    Keep an eye on Puyallup. Many of those new homes sold for 250-290k will be coming back and finding a few Gems in the 170’s could happen.

    http://www.500realty.net

  179. 179
    NostraDamnUs says:

    Dont worry your pretty little heads – Bush is going to give us a nice high with a $150MM fix, and aunt Hillary is going to jolt the spirits as well as the economy in 2009!

    All is well – you will all survive – you are survival machines, and the proof of it is your mere existence – you are the one single sperm that survived all the way into the egg!

  180. 180
    WestSideBilly says:

    Keep an eye on Puyallup. Many of those new homes sold for 250-290k will be coming back and finding a few Gems in the 170’s could happen.

    Yeah, but then I’d have to live in Puyallup.

  181. 181
    Runs With Scissors says:

    David Losh, you do bring up a great point.

    Money is made by working and getting paid.

    Wealth is made by speculation in combination with one’s own evaluation and perception of what that word actually means. The U.S. has been great at doing this in a service driven, non-manufacturing economy where at the wave of a magic wand something doubles and triples in price. Hence why the rest of the world has moved on from fantasy land and our currency and economy is a joke.

  182. 182
    Steve Tytler says:

    Thanks for including me in your prediction round up, however, to be fair I think you should have included my full quote where I said that housing inventory would increase in 2007 and there would be no appreciation and “possibly even a slight decrease in prices.” Which matches the actual number.

    I went out on a limb this year by predicting a 10-20%average home price decrease. The reason for the wide range is because of all the variables in comparing different neighborhoods to one another. Some will do better, some will do worse. But overall,
    I think my guesstimate of 10-20% average depreciation will be pretty close.
    %

  183. 183
    patient says:

    Hey deejayoh, I see over in the forums that you guess a -4% median YoY for January. Are you getting more bearish or do you believe in a “spring bounce” since you predict -5% median YoY at year end?

  184. 184
    deejayoh says:

    Patient –
    Actually – it’s bad math. I was using a figure of $420k but grabbed the wrong number for last year. should be 2.5%. down. but median prices bounce all over the place. I’m far less confident of my median price guess than the Case Shiller…

  185. 185
    patient says:

    Ok that explains it. I like your posts with statistics and put a lot of credibility to your models and predictions in general but I was surprised of the conservative prediction for median. I would expect the median to by trend continue to lead the way for case-shiller as it is currently doing. The logic would be that the first impact of buyers not being able to come up with large funds is that by large they will buy cheaper homes which will lower the median. This will force the sellers of expensive homes to lower their prices which will put pressure on the lower priced homes. This will lead to lower home values and falling case-shiller.

  186. 186

    […] he would be quoting Dick Conway as any sort of expert, considering how off base he has been with his 2008 real estate predictions so far this year. Conway anticipates average Puget Sound-region home prices will decline less than […]

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