Buy Now, or Wait it Out?

Now that prices are undeniably dropping in Seattle, a common refrain from real estate salespeople is that “you can’t time the bottom,” or “you can’t predict the future,” implying that you should go ahead and just buy now, because we’re probably at or near the bottom already, and if you wait you’ll be sorry.

This is an interesting line of reasoning, but while it is true that no one can know with certainty what the future holds, blindly making a gut decision based on our lack of knowledge would be foolish. Instead, we can and should consider the different possibilities and base our decision on a rational analysis of what we do know.

So let’s look at three different possibilities for where prices might go from here, and look at what it would mean if you buy now versus if you continue to rent a while longer, waiting for either two years, or six consecutive months of price increases before you decide to buy, whichever comes first.

Scenario A: We’re not at the bottom yet. Prices continue to decline, eventually bottoming out at summer 2005 levels in the summer of 2010. Prices begin to inch up slightly through the end of 2010.
Scenario B: We’re at the bottom, but we’ll be here for a while. Prices stay more or less flat through 2010, increasing no more than about 1% per year.
Scenario C: We’re at the bottom. Prices begin to increase again, rising 5-7% YOY through 2010 and beyond.

Hypothetical Seattle Price Scenarios
Click to enlarge

In our hypothetical scenario, let’s say that you are looking at a $450,000 house, you have the 20% down ($90,000), can afford a fixed-rate 30-year loan, and your alternative is to rent for a monthly cost of $1,500 (increasing 5% per year). There are comparable houses for sale and rent right now in Ballard that fall within these specifications, so I think they’re reasonable.

Scenario A
Buy now: Your total monthly costs are around $3,000. The value of your home decreases around 15% by 2010. If you have to sell, agent fees and excise taxes will eat up most of the $30,000 that remains of your down payment. If you don’t have to sell, who cares what it’s worth—enjoy your house and the (mostly) fixed payments.

Rent for now: Your rent increases to $1,650 per month by 2010, and if you save the extra money you would have put into the mortgage every month, and invest your $90,000 down payment at 5%, your savings has increased to $125,000 by that time. You see the prices start to increase again, and after six months of steady increases, you decide that now is the time to buy. Houses that would have formerly sold for $450,000 are now $380,000, allowing you to put down over 30%. Your total monthly costs are around $2,300 at 6% interest, $2,500 at 7%.

Advantage: Rent for now

Scenario B
Buy now: Monthly costs are $3,000. The value of your home stays more or less flat through 2010. If you have to sell, you’ll get back about $70,000 of your down payment after agent fees and excise taxes. If you don’t have to sell, who cares?

Rent for now: Rent goes up to $1,650, savings to $125,000. You decide to finally take the plunge on that house, and you can get one for $455,000 that is just like the one you were considering before. Your total monthly costs are around $2,750 at 6% interest, $2,900 at 7% interest.

Advantage: We’ll call it a wash (depends on future interest rate)

Scenario C
Buy now: Monthly costs are $3,000. The value of your home increases around 12% by 2010. If you have to sell, you get to pocket over $115,000. If you don’t have to sell—well, you know the drill.

Rent for now: You save six month’s worth of payments before realizing that prices are already going up again. Homes that were $450,000 are now $465,000. Your down payment investment has gone up slightly to $99,000. Your monthly costs are around $3,000 at 6% interest, $3,150 at 7%.

Advantage: Again, more or less a wash (also depends on your interest rate)

Of course, I don’t personally believe that all three of those scenarios are equally likely, but even if they were, there still is no real benefit to buying now. Even if we’re currently at the bottom and prices start climbing relatively quickly starting now, you’re really no worse off for waiting six months to find that out.

The biggest factor that makes this a feasible strategy is the continued large discrepancy between rents and home payments. I’m sure a skilled real estate salesperson could concoct some scenario in which waiting out the market right now is a foolish financial move, but based on this analysis of three fairly reasonable possibilities, I’m comfortable recommending that course of action for the time being.

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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.

82 comments:

  1. 1
    explorer says:

    Tim — What seems to be happening now, is that there is a big push for rents to INCREASE, so the gap is narrowed quickly. Especally for SFH rentals, but apartments and condos are not far behind. That would theorically rescue the sellers from their loss of equity, and give buyer’s more incentive.

    The fatal flaw with that, is you would have to raise rents so high that there would be a severe backlash that may have the opposite effect. Kinda like raising the price of condos as punishment for not buying now.

    The rental market in Seattle has been rasing the median rent steadly, while other markets have been declining since 2005. The increases this year would not surprise me if they become the highest on record.

    One good source for a regional, rather than local indicator is realfacts.com. Their latest newsletter mentions rents in the Seattle MSA already up 2.1% in the first quarter of 2008.

  2. 2
    David McManus says:

    Sorry, Seattle home prices have to fall a hell of lot farther. Show me how motivated you are, sellers! I won’t be buying a home again here for a while now until you do

  3. 3
    Ray Pepper says:

    “Agent fees and excise taxes will eat up the remaining 30k”.. Wow! Not sure what Agents you are using but I suggest you refigure the numbers with utilization of a different Brokerage for Buying and Selling. Not to mention you are saavy enough to find a GEM out there and make an offer that is very “aggressive” in the coming winter months and then run your graphs based on utilizing the right team around you.

    As one poster here suggests. ” I will not buy a home if I cannot turn around and sell it the next day for a profit. ” I like that statement but it just may not work in this climate.

    Never wait to buy. Never Never. Always Look! The Gem you find today just may not be available when the bottom hits. 1 year or 5 years. Just keep looking. Educate yourself ! You will then know that YOU as an individual, ON A SPECIFIC PURCHASE, nailed the bottom. You can’t buy em all. Macro-
    level theories just don’t support the ability to buy a GEM at the right time.

    Everytime I buy I know I nailed the bottom. Its not hard. It just takes time and EFFORT!

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

  4. 4
    Happy Renter says:

    I think I’ll wait to find that “gem” I can’t afford until it’s a better deal. I hope I never lose so much sense that I think “I must have this now and I’ll never find anything so good again” for ANYTHING, let alone a house.
    There will always always be OTHER “gems”. Other diamonds in the rough, other “great buys” that no one else has found. Ther will always be houses for sale, and always some of them will be exactly what I want and always some won’t.

    Why was I looking for a great gem today if I don’t want to buy today anyway?

  5. 5
    Ubersalad says:

    Option D: house sit for free and make money off blogs.

    I think I’ll go with option D.

  6. 6

    My only quibble is that in Option A, one is investing the downpayment , earning 5% interest. Without any risk at all, I’m not sure how easy it is to currently earn that.

  7. 7
    Scotsman says:

    Option E. The world economy, led by the U.S. and G.B. takes a major dive to near Great Depression levels, then stays flat for a decade as infrastructure and manufacturing bases are rebuilt. Home prices fall to 2002 levels and stay flat. Nobody sees a home as any kind of investment, indeed it is seen as a luxury. Then I buy several.

  8. 8
    john says:

    ” The Gem you find today just may not be available when the bottom hits.”

    Great high pressure sales effort! many people have gems that turned into nothing but a big pile of headache that’s worth 20% less.

    but hey, used home sellers need the commission!

  9. 9
    Ray Pepper says:

    High pressure? Never……It doesn’t matter when you buy….Its how…….. Take your time……………………….But, always look…..Ok? …..Or take 5 years off and then look….Your call.

  10. 10
    yeslerhill says:

    I do understand the point The Tim is making here, but his use of ’05 home values as a for instance low end on the Seattle/King County home values got me thinking.

    I can’t imagine in-city Seattle home values maintaining anything close to their ’05 levels, at least not over the next fews years as the economic depression settles over Seattle, as well as the rest of the US. Not with stagflation looming.

    And the official economists charming allegiance to the “broadest measure” of the GDP which alleges a “surprising” growth of the US GDP? When you snip out the .8% of unsold “stuff” (and who is going to be buying up all that? Even here in Seattle?) that the experts are figuring in, the US GDP was really, -.2%.

    And talk of the financial markets being somehow more stable now? The other day the IMF suggested only a quarter of the one trillion in bad debit held by financial institutions has actually been declared/acknowledged.

    And I just want to say again; I can’t believe the majority of home owners in Seattle have not used equity to create, and spend!, lines of credit on their homes, just like the rest of the US.

    All this is going to make it much tougher on low and middle incomes. And I can’t see the current economy (even here in King County) generating enough additional nouveau riche to pick up the slack in home buying to maintain even ’05 in-city Seattle home values?

  11. 11
    Cynic says:

    john,

    You’re right, this isn’t the “bottom”. But, if you are thinking about buying and holding long-term, it’s a good time to look — there’s sure a lot of inventory. If you think the market will fall another 20%, remember that it’s not a linear, homogenous decline. Some houses might increase in value from now until the bottom — if purchased cheaply enough. Others might drop 40%, due to a buyer overpaying. Find a good house, negotiate a good deal and move on.

  12. 12
    singliac says:

    In response to #1 (sort of):

    I commented last week that my apartment complex wanted to increase my rent from $1170 to $1305. I told them that I would be moving elsewhere, and they reduced it to $1205. Maybe I could have haggled more aggressively and gotten the price a little lower, but I thought the offer was fair, so I accepted.

    Just a reminder that it’s always worth it to open your mouth when you feel like you’re being ripped off.

  13. 13
    johnnybigspenda says:

    If you can afford a slightly higher price (which if we have learned anything yet… only buy a house if you can afford it people…) Ok so if you can afford to buy at slightly higher prices, the the least risky way is to wait for confirmation that we are back in a sustained uptrend. (or atleast not a steep down trend) Could be a while until you get that confirmation… hope your wife is patient (and that she doesn’t question you too much about spending your time on some realestate blog).

    If we are still in a downtrend, you are gambling that the trend will end. (the trend is your friend.. in stocks anyways).

    There is some merit to this gamble though. If you are a contrarian (and like risk) you could argue that people are going overboard on their extrapolations of the trend. (like in 2001 after the .com bust.. when you could have bought many stocks at 1/5 their current level)

    Homes being a ‘consumer’ type purchase, there are a lot of factors that go into what a home is ‘valued’ at. No real way to ‘calculate’ its worth at any given moment… its just worth what its worth. Market sentiment and future expectations are definitely some of the bigger drivers.

    I don’t think it would be a bad idea to start shopping in the next couple of months while sentiment and future expectations are so low. (some would argue too low).

  14. 14
    b says:

    Tim –

    Your numbers are all off, you did not take into account the hypothetical down payments for each scenario when you ran the calculations.

  15. 15
    The Tim says:

    b, could you explain what you mean? I ran all the numbers (down payments included) through the spreadsheet I made for this post.

    To come up with a total monthly cost of buying, it figures in the costs of principal, interest, taxes, insurance, utilities, home owner’s association (which for this post I set to zero), maintenance, and the income tax benefit.

  16. 16
    david losh says:

    interesting.

    six months is a blip on the screen so why not wait, i would. besides we have an election coming up. one thing though is that after this june, going into july, and august, with uncertainty around the corner, i’d have to think that some sellers are going to blink and feel they have to get out of the “investment” they currently own.

    the thing about Real Estate is that there are both buyers and sellers. the Real Estate agent makes money either way. if you don’t buy some one else will, or do you think that all Real Estate is going to stagnate for the next six months, year, two years?

    aside from appreciation or depreciation there is the control of the mortgage dollars. by all means lock the 30 year fixed no matter what, so the payment is fixed. it’s a thirty year plan of paying off the loan.

    it’s a plan. i own a big house. i always recommend if you are young and can stand it get a big house. rent rooms to your friends, work two jobs, and establish the payment pattern. jump start the payment pattern because in time inflated dollars will allow you to work less and pay the same. at year fifteen the mortgage begins to amortize and you are paying on a declining principle balance.

    you pay with future dollars rather than today’s dollars. so six months, why not wait. the future begins from the time of purchase and the purchase price, as long as it’s reasonable, is irrelevant in the thirty year scheme of things.

  17. 17
    b says:

    johnnybigspenda –

    If your wife wants to push you into an unaffordable financial mistake then you are likely going to have bigger problems down the road than your house price (she is going to keep the house in the eventual divorce anyway).

    There are plenty of ways to “calculate” what it is worth, you might not be able to get an exact to-the-penny representation but you can sure get a close range. There, in fact, is an entire large business segment dedicated to this practice known as appraisers. Before the bubble, they actually could value your house pretty damn well because the bank was keeping the loan and not selling it to Kuwait or China. Some people might be willing to pay more or less by some margin of a few percent for certain characteristics they prize greatly, but again it is a tight range.

    Finally, if you really think low market sentiment is already “priced in” right now and is in fact too much of a discount I am curious how you arrived at such a conclusion. Prices are barely off peak and sentiment shows that 40% of buyers have disappeared. Does not seem to me that the market has actually caught up with sentiment at all yet.

  18. 18
    b says:

    Tim –

    Oops, I thought it was just mortgage payments! My bad.

  19. 19
    The Tim says:

    No problem. I should also note that when figuring the monthly savings of renting for 6 months to 2 years, the “total cost” of renting was used (rent + utilities + insurance, etc.).

    I guess I figure that I spent all that time coming up with a rather complicated spreadsheet to do just these sorts of comparisons, so I may as well use it when the opportunity presents itself.

  20. 20
    jon says:

    The 5% increase in rent seems quite low to me. The failing dollar and increased demand for food and oil world wide point to higher inflation going forward. As for people not liking that, Seattle has an excellend port and Washington is very strongly export based and so will benefit from a low dollar, so there will be no shortage of people after the jobs that will be available to pay a higher rent.

    The other gotcha is that many of the houses for rent now are there because the owner is also waiting for the market to turn around. When it does, the lease will end and the selection of houses will be smaller and your bargaining power gone.

  21. 21
    Alan says:

    I was looking for a GEM but I instead I found this:

    http://www.youtube.com/watch?v=JNqrWm1M3Sc

    Truely outrageous!

  22. 22
    b says:

    jon –

    Rent increases cannot outpace wage increases for very long and population growth is not exactly blazing. Those waiting for the market to turn right around to sell again will be waiting for a long time if their target price is 2007 peak pricing. Besides, all the money that used to pour into new condo developments will pour into new apartment complexes instead.

  23. 23
    Alan says:

    Nice job, singliac!

  24. 24
    explorer says:

    singliac — The 3% increase is indeed fair, if they really MUST raise it at all every year for a good tenant. Especially if you have to pay most utilities on top of that.

    I am being heavily marketed now by the current property manager AND the listing agent’s company to “let us find you a condo” when my lease runs out in September. I can’t see any of the Tim’s scenarios playing out for me by then, but I am not a fortune teller either. I would like to negotiate another 9 months to one year lease at 3 to 5%, but for what the new owner’s overpaid for the triplex I am in, they are going to need to feel more pain than pleasure I’m afraid, before the mistake they made sinks in.

    I will move if I have too, again. Hopefully there will be someplace cheaper to move to. I am not ruling out a REAL condo, for a fair price, or even a SFH, at that time, but I don’t plan on it for at least a year or two from now.

  25. 25
    Fripp says:

    In regard the first post about trying to increase rents asap.

    Our landlord recently tried to up our rent from 1450 to 1600. We told him we would have to consider our options and he caved and left it the same. They may be trying to raise rents but it seems like a litle pushback can go a long ways.

  26. 26
    Alan says:

    My landlord told me that he loves having me as a tenant and to live there as long as I want and he won’t even raise the rent. I’m sure he will raise the rent eventually, but it is a nice 2-3 years of comfort.

  27. 27
    Garth says:

    The use of craigslist rentals skews the numbers. If you look at the rates at property management companies with a lease of at least a year the comparison is more valid.

    A month to month craigslist rental is going to be less expensive than a professionally managed property with a lease. If you have a desire to settle down and buy a house, if you were to choose to rent instead, you probably want a place that you are going to be in for a predictable period.

  28. 28
    wreckingbull says:

    Rent increases cannot outpace wage increases for very long

    Bingo. Not only are wages stagnant due to such factors as global wage arbitrage and a slowing world economy, rising fuel and energy prices leave even less money remaining for the mortgage payment or rent. This is not the 70’s. When all is said and done, we may wistfully long for 70’s style inflation though.

    Remember (even you gold bugs) that cash is king at a time like this and cash does not necessarily mean USD. So far, this is playing out exactly as noted in Professor Kindleberger’s playbook.

  29. 29
    hzg says:

    the march (Seattle) case-shiller will be (prediction): 178.43
    April: 177.11
    May: 175.03

  30. 30
    jon says:

    Landlords avoid raising the rent on existing tenants because the increase won’t cover even a month of vacancy. However, once the tenant leaves, then they will increase the rent because the expense is a given, and they might as well get to market. That means that the average rent increases at a faster rate than existing tenants see.

    There is also a big difference between average wages and wages in a growing city such as Seattle. Seattle is still shifting gradually from a blue collar city into a high tech center. That allows the average wage in Seattle to grow at a faster rate than the average increase that any individual sees, because the new jobs are being filled by people who didn’t use to live here.

  31. 31
    whats my name says:

    This is fantastic. I have my $90,000. Where can I get 5%.?

  32. 32
    b says:

    jon –

    Seattle grew at 1.3% last year (about 6k people) and that was the fastest growth rate in a decade. The number of homes created during that period grew by about the same rate. The tech change that you talk about happened in the nineties, no so much these days. Overall KC growth was 21st in the nation according to the same statistics, not bad but nothing to write home about. Hoping for some magical surge of population growth all of the sudden, during a recession and with home prices here still expensive compared to other higher growth areas, is a fantasy.

  33. 33
    vboring says:

    safe 5% return:

    TIPS (Treasury Inflation Protected Security, or some such). they return a fixed rate + inflation. right now the fixed rate is 0% b/c the premium for safety is so high. inflation is about 4.8% according to the CPI.

    viola, risk-free 5%

    or find an FDIC CD with a 2yr term. they go for about 4% right now, if you really have $100k to put in.

    the only good argument for buying a house now is if you think we’re heading into unusually high price inflation rates across the economy, like we saw a few decades ago. if that happens and you have an inflation-protected income, you may be better off locking in the low rates today, because they wouldn’t be available later.

    you could even end up with a interest rate below inflation. how cool would that be? in real terms, you could end up paying back less than you borrowed.

  34. 34
    elmore says:

    When peoples housing needs are met to at T they should move. If a person is totally cranked about a property and a price they should buy it and smile. Now is the time to be looking for the perfect situation. You don’t have to buy, but the shopping is excellent and loan rates are still at historical lows (but not for long). To be head strong about waiting right now is a weak position. Keep an open mind.

  35. 35
    Buceri says:

    b – where did you get the data? (KC growth – 21st in the nation)

    I am not challenging the number; I just want to see who’s where.

    Thank you

  36. 36
    Garth says:

    b,

    It was the fastest growth for single year in the last 40 years, not ten.

  37. 37
    3rd Generation says:

    What about owners? What should they do in your finite wisdom and laser-like intellect?

    Geezus, the Yuppie menatlty never ceases to disgust me. ME ME ME.

  38. 38
    Gill says:

    Hi Tim —

    First time post and I’m just wondering where you got your numbers for the house prices in the future for scenario C —

    i.e., the 12% increase in value in 2010 of a home you bought now doesn’t seem to be reflected in the purchase price of the future home if you never bought in the first place. How would that home price in 2010 only be $465K vs the $450k in today’s market if the home you bought today was worth 12% more in 2010?

    If that’s a stupid question my apologies —

    Gill

  39. 39
    david losh says:

    King County gained 124,254 people since 2000 — by far the most of any of Washington’s 39 counties. Its growth rate of 7.15 percent, however, was good for 21st place, well behind first-place Franklin County’s rate of 36.58 percent.

    It’s in the article he provided a link to. BTW it’s a good article about growth here in Seattle.

    What I’m more interested in is: The number of homes created during that period grew by about the same rate.

    If that’s true then the supply and demand theory so many of you advocate would say housing prices should be stable or be going up.

  40. 40
    50%off says:

    I’m thinking you’re gonna get more than a 15% decline in prices still. I know, I know, not possible you say. This decline will take a bit more time than most of the ‘now’ generation believes. A year or two won’t ‘get it over with’.

    Remember the bubble thingy? It always lasts longer than you think it can possibly last.

    Same thing going the other way….

  41. 41
    AndySeattle says:

    Ray Pepper: Never wait to buy. Never Never. Always Look! The Gem you find today just may not be available when the bottom hits. 1 year or 5 years. Just keep looking…. Everytime I buy I know I nailed the bottom. Its not hard. It just takes time and EFFORT!

    The fundamental difference between your mindset and the majority of the folks on here is that you treat each property as an investment versus a place to live. The large majority of the readers of this site are future buyers who simply want to make an effective purchase, once.

    What The Tim, and others, have shown us is that the time to buy more than likely isn’t right now.

  42. 42
    Everett_Tom says:

    Hey Gill ,

    I think it’s one of those word problem things… the house goes up 12% by 2010 but from the example above

    You save six month’s worth of payments before realizing that prices are already going up again.

    The the assumption is that after waiting 6 months, and seeing the price skyrocket, you decide not to wait, and buy the place now. (hence the prince being _only_ $465K)

    Dont’ca hate word problems?

  43. 43
    patient says:

    Regarding rent increases I can recommend getting yourself into a privately owned SFH rental. My experience is that the owners are much more concerned about having a stable, clean non destructive tenant than getting top dollar. We have not had one cent increase in the last 3 years and just renewed for the same amount.

  44. 44
    patient says:

    Regarding buying when inventory is high or before you miss “the bottom” these are redicolous attempts of scare tactics to make unfunded fear and not logic stear your decision. One thing is for sure with the housing market. It doesn’t turn course quickly. Home values are not like stocks where they can be down 20% one month and then up 20% the next month. The same goes for inventory it doesn’t fall off the cliff in a month or two. In other words you will easily be able to time the market if you follow trends for a couple of months.

  45. 45
    NotaBull says:

    “Regarding rent increases I can recommend getting yourself into a privately owned SFH rental.”

    I generally disagree with this statement because of the decreased stability. I, for one, had to leave a rental because the stupid landlord got in over their head on the new “big house” so they decided to move back into their old place (the rental) when the lease was up.

    Also, just had lunch on Wednesday with a friend that’s lived in a privately owned rental in Seattle for 5 years and is going to have to leave because they’re selling the place. They’ll soon realize they probably missed the boat and rent it out again… But that doesn’t help my friend.

    Sure, they’ll be lots of rentals out there from desperate sellers that can’t sell and so will “wait the market out” and rent it. That just means they might foreclose, or sell soon if prices go back up (unlikely, I know). I don’t recommend renting from these people unless you’re fairly mobile and don’t have too much crap to drag around from place to place.

    I know everyone’s personal experience can be different, but I would only recommend renting a SFH from a private owner if that person had bought the house >5 years ago and didn’t *seem* like they were interested in selling soon. It’s hard to judge, I know.

  46. 46
    b says:

    Buceri –

    Sorry, I totally misread the article to say that KC growth was 21st in the nation. It looks like it was actually 21st in the state. From the same article at the bottom it looks like Seattle growth is still nothing great so the point stands:

    Seattle’s 3.4 percent growth from 2000 to 2006 was good for 127th place among U.S. cities with at least 100,000 people.

  47. 47
    b says:

    Garth –

    You are right, again my brain was apparently not functioning when I read the article. The _next_ highest was over a decade ago, but it was not higher. On average it looks like we had a good clip last year but overall nothing special compared to other large cities. Basically, population growth is not so explosive here that it is going to push up rents enormously or keep home prices artificially high.

  48. 48
    b says:

    David –

    Home prices should have been stable during the bubble, that is the entire point. Those numbers just show that there was no incredible decrease in supply, or increase in population, to justify the bubble prices. I think most people here believe that prices will return to their fundamental pricing of true supply/demand from the bubble pricing eventually, however it will likely undershoot it for a while as market corrections tend to do.

  49. 49
    deejayoh says:

    King County gained 124,254 people since 2000 — by far the most of any of Washington’s 39 counties. Its growth rate of 7.15 percent, however, was good for 21st place, well behind first-place Franklin County’s rate of 36.58 percent.

    It’s in the article he provided a link to. BTW it’s a good article about growth here in Seattle.

    What I’m more interested in is: The number of homes created during that period grew by about the same rate.

    If that’s true then the supply and demand theory so many of you advocate would say housing prices should be stable or be going up.

    Some facts:
    1) 7.15% growth over 7 years is pretty lame. That’s 0.99% CAGR – probably slightly under the overall growth rate of the US.
    2) Housing growth for King County was much higher – 9.5% over the same period according to the spreadsheet at OFM. That’s a CAGR of 1.3%.

    In other words, Housing stock grew 30% faster than population from 2000 – 2007.
    Why should prices be stable or going up?

  50. 50
    patient says:

    NotaBull, for stability I agree but for price vs value it’s normally a good deal. Pros and cons but for someone like us whose rental plans are shortterm as in a couple of years it’s been great. We have had landlords selling the rentals before and we always ended up in a better place for a better value by using the experience we gain from the area and what we like/ned in a home. So I would say it depends what you look for. If stability is no. 1 I agree with you that private SFHs are not the best.

  51. 51
    Lake Hills Landlord says:

    Regarding rent increases I can recommend getting yourself into a privately owned SFH rental. My experience is that the owners are much more concerned about having a stable, clean non destructive tenant than getting top dollar. We have not had one cent increase in the last 3 years and just renewed for the same amount.

    Exactly the case for me. I have great tenants and will do all I can to keep them. I am planning on raising the rent (~5%) next year when they sign a new lease, but of course that is negotiable.

  52. 52
    Tsuru says:

    You’re planning on raising your rent 5% just as the impending recession is in full swing? Good luck with that one.

  53. 53
    deejayoh says:

    You’re planning on raising your rent 5% just as the impending recession is in full swing? Good luck with that one.

    Average rent increases back to 1985 have been about 4.2%. There’s nothing really out of line about a 5% increase.

    https://seattlebubble.com/blog/2008/01/03/rents-to-rise-or-homes-to-fall/

  54. 54
    Tsuru says:

    I didn’t say that there was anything out of line with his projected rent increase, I’m just saying that if we are indeed in the middle of a recession by then he may find that his beloved tenants are not able to pay.

  55. 55
    deejayoh says:

    I guess I’d say we aren’t in the middle of a recession. We are at the start of one. And inflation is typically high at the front end of a recession, and goes down through the course of it. Pricing pressure really hasn’t started to hit home yet.

  56. 56
    Lake Hills Landlord says:

    Yep, they may not agree to it. They did talk me down about 6% during the initial lease negotiation and I am a great landlord, so I am hoping I have some room to negotiate next year.

    On the other hand, I did say I will do all I can to keep them, which may mean keeping the rent the same.

    On the other-other hand, I have their credit report and rental application and know that a 5% increase is a rounding error in what they can afford, but is a big deal for me.

  57. 57
    Buceri says:

    deejayoh –

    Correct me if I am wrong. But the 30% housing growth over population is only if every person lives by itself. If you throw some families in the mix, the increase of new housing is over 30%.

  58. 58
    Lake Hills Renter says:

    For the record, I don’t think Lake Hills Landlord is my landlord. :)

  59. 59
    Tsuru says:

    Ben Jones’ blog has a link to an article about rents falling due to the increase of inventor-owned rentals SFH coming into the rental market in Broward and Palm Beach counties (Florida).

    http://www.sun-sentinel.com/news/local/broward/sfl-flbrenterssbmay02,0,2357523,full.story

    They are also warning renters not to rent from investors that may be financially invsolvent…

  60. 60
    Tsuru says:

    inventor = investor

    Can you tell I work in patent law?

  61. 61
    David Dooshbag says:

    buy, buy, buy now

    carpe diem you people of little faith

  62. 62
    deejayoh says:

    deejayoh –

    Correct me if I am wrong. But the 30% housing growth over population is only if every person lives by itself. If you throw some families in the mix, the increase of new housing is over 30%.

    I meant on a relative basis, which means assuming a constant household size. I don’t know if household creation has outpaced population growth. According to the most recent ACS, it hasn’t

  63. 63
    jon says:

    There’s something wrong with that ACS. It says the total population of the city of Seattle went down from 2000 to 2006

    2006 562,106
    2000 563,374

    I would treat the household size equally suspect.

    From http://www.city-data.com/city/Seattle-Washington.html

    Population (year 2000): 563,374. Estimated population in July 2006: 582,454 (+3.4% change)

  64. 64
    deejayoh says:

    Source for population and housing I quoted were both OFM.

    What ACS has to say about population was just FYI. As I said
    “I don’t know” but I doubt it has changed much.

  65. 65
    Garth says:

    overall nothing special

    This is where being special is not good. Being at the top of the list for growth really increases the chance you will lead the list down.

  66. 66
    Mark L says:

    I’d just like to find where to earn 5%, relatively risk free, on my down payment money over the next two years. Even before taxes it is near impossible to find that right now.

    Where are the rest of you parking your down payment cash? Are there better returns possible for reasonably large amounts – say $100-200K?

  67. 67
    biliruben says:

    Me too. My CD at 5.4% just matured and I just sold my house as well.

    I’ll probably keep some in a MM and toss some into stocks.

  68. 68
    whats my name says:

    How can the bank give you 5% interest on your deposits when they are only charging me 4.49% on my HELOC?

    Watch out for MM; many of them have toxic instruments previously thought liquid. Stocks? Any financial planner will tell you they are not for money you want to get at in the next 5 years.

  69. 69
    biliruben says:

    Yeah, I got out of my 5% MM because they were invested in CDOs on not FDIC insured. Now I’m getting a safer 3%.

    Financial planners are generally just looking to avoid volatility and blame. I can take volatility in exchange for higher returns. As long as I’m not stupid of enough to pay a financial planner.

  70. 70
    whats my name says:

    “I can take volatility in exchange for higher returns”

    I think that the financial planning concept is that you don’t want high volatility in money you want short term. If it’s August of 2000, and I plan to cash out in 14 months, I will get volatility; I will not get high returns.

  71. 71
    biliruben says:

    I understand the concept. I counter that there is no place “safe” for your money right now. If you take it for granted that core inflation is an absurd concept (unless you are one of those people that doesn’t need to eat or drive), not investment is going to keep pace with inflation where you aren’t risking principle.

    So you make a choice. My choice is to accept volatility and risk in the portion I invest in stocks, but counter that by keeping the majority in cash (or low risk MM). You may see a better strategy. If so, share it. I’m just not going to give 1% to anyone to tell me I could nearly keep pace with inflation if I hadn’t been stupid enough to pay them that 1%.

  72. 72
    david losh says:

    real estate, pay cash; it’s tied to the CPI as you renters know.
    example $40K house rents for $250 to $275, rural community.

    OK housing vs population growth. you had me for a minute but check your own data against the article. that doesn’t look like a 30% increase in housing to population growth.

    if i read it correctly that’s an average change of about 10000 housing units per year over seven years. population about 15000 per year..

  73. 73
    tele2tip says:

    10,000 units of housing outpaces a 15,000 increase in population by 30% if you have 1.95 people per household.

    The 2000 census numbers report 2.38 persons per household in King County. Using this number, housing outpaced population by 59%.

    Even using the Seattle number of 2.08 persons per household, housing outpaced population by 39%. Both of these numbers outpace the 30% number given.

    http://quickfacts.census.gov/qfd/states/53/5363000.html

  74. 74
    GoodnGodless says:

    I love the bubble but hey tim why isn’t intrest rates factored into the prediction? I mean if the economomy especially the housing economy is a bad as we all think it is and as I have read recently there is a good chance that Freddie and Fannie will be the next to go down, affecting the US AAA bond rating, wouldn’t the potential for intrest rate increses have to figure in somehow? Is the economy fkkd up as bad as ’29? as 80’s? when interest rates were 13%? Any advice?

  75. 75
    david losh says:

    that stinkin’ census data link took me out of this site, but you should reread the data.

    it shows households, then the number in the households as a seperate statistic.

    the data shows a direct relationship of housing units keeping pace with households and the data is for only between 2000 to 2003.

    i would also like to see a separate post about interest rates. it occurred to me a few weeks ago that lower interest rates show have never had anything to do with the price or value of real estate. so what the payments are less, or more, it doesn’t change the value of the item.
    in this case and this case alone i’d like to make the analogy to buying a car. the cars worth $23K , no matter what the car’s worth what the car’s worth. there are all kinds of gimmicks to get you into the car, and negative financing to get you to pay more through the finance swindles, but the car is worth $23K.

    How did the mortgages companies end up for taking the rap for the run up in real estate pricing?

  76. 76
    S-Crow says:

    How did mortgage co’s end up with the bad rap for the run up?

    Because of buyer and seller cooperation in adding on buyer closing costs to the sales price in 100% transactions, never mind if the buyer was invovled in multiple offers—which would compound the problem further. The artificial appreciation created by this program by lenders and the wake it is leaving in the markets around the country speaks for itself.

    Because of unscrupulous and unethical loan officers who would do anything to jack up fees and/or tell their customers that “they can just refi again” before their ARM recasts or when their pre-payment penalty expires.

  77. 77
    tele2tip says:

    You were discussing the 15,000 increase in population; 10,000 increase in housing units. I didn’t fact-check it. That is incorrect?

    david losh

    the data shows a direct relationship of housing units keeping pace with households and the data is for only between 2000 to 2003.

  78. 78
    deejayoh says:

    Since I posted the original 30% figure, let me explain.

    – Population grew at 7.15%.
    – Housing stock grew at 9.5%
    – 9.5/7.15 – 1 = 32%

    So housing stock grew 32% faster than population. Just like saying if you had one stock that returned 10% and another that returned 5%, the first one did twice as well.
    Looking at the absolute number of homes added or houses added is pointless. you need to compare the relative rate of change.

  79. 79
    david losh says:

    it wasn’t the point made by the commentator. introducing new data or statistics could keep us here forever. that person quoted an article the same as the census data person.

    it wasn’t just the closing costs. maybe here in the Seattle area we didn’t see the kind of run ups they did in other parts of the country. Say Nevada, some places there the price did in fact double.

    it’s a national, even global phenomenon. adding closing costs didn’t do it. i also don’t buy the consumer is an idiot theory.

    here in Seattle i do blame the real estate agents. i also blame them in Nevada. there was no way doubling prices wasn’t noticed, commented on, or talked about amongst real estate professionals.

    i had the conversation a lot over the past few years. i just told buyers there were better deals to be done.

    there again some one pointed out to me Sunday i look at real estate from an investor perspective. still i am having a problem believing the banking industry is to blame. in my opinion they got caught up in the greed every one else did.

    there again, a lot of money changed hands, and money doesn’t just get lost, so what was the real deal.

    now that i reread my comments it kind of sounds like a conspiracy theory, but i do want to know.

  80. 80
    jw says:

    Following up a few weeks later here to Lake Hills Landlord: I hope you’re being sarcastic, the idea that you’d use a person’s stated income from their credit application when evaluating their ability to pay your increase… doesn’t sound very ethical. Shame on you.

    “On the other-other hand, I have their credit report and rental application and know that a 5% increase is a rounding error in what they can afford, but is a big deal for me.”

  81. 81

    […] a year from now. Also, we’ve already shown that today’s “fence sitters” have nothing to lose by waiting it out, so the argument really doesn’t hold […]

  82. 82
    MarkF says:

    Do not trust comments from realtors. They are not objective and you can’t blame them for that because if no one bought, they would not make any money. That’s how they make a living. A realtor will never tell you that it’s not a good time to buy. Any salesman, whether it’s real estate, major appliances, a car or even cable service, will tell you what they need to in order for you to buy.

    True, that although the market will probably not bottom out until 2010 there may be some homes who are at the “corrected” price to use the economic term. However, there are still flippers, realtors and developers who have made a certain investment and want a high price. This is especially evident when there are two almost identical homes for sale next door to each other and the price difference is over $100K.

    Eventually they will drop their prices after frustration from not being able to sell. You may be able to find a “bottomed out” price but the inventory will be much bigger next summer or even the summer after. Human beings just don’t get it. If we suck the marrow out of a particular industry without any regard for the future consequences, we are destined to repeat scenarios in other areas of our economy.

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