Global Insight: Seattle Still Overvalued (by 23%)

P-I Real Estate writer Aubrey Cohen had a nice post on his blog yesterday that pointed me toward a recent report that is worth mentioning here as well.

The report is titled House Prices in America and is published by Global Insight. According to their About page, they provide “comprehensive economic, financial, and political coverage of countries, regions, and industries.” As far as I can tell, they’re a much more neutral source than, say the NAR or Realogy.

The most interesting part of the report is their “statistically normal house values,” which they calculate by considering “not only house prices and interest rates, but household incomes, population densities and any historical premiums or discounts metropolitan areas have exhibited over time.” You can read all about how they determine the appropriate value for a market in their Methodology pdf.

Last time we checked in with Global Insight was September 2006, when they pegged Seattle as 33.8% overvalued. Now that prices have finally begun to drop around here, as of the first quarter 2008 they are ranking Seattle as 22.8% overvalued. Here’s how our area stacks up compared to the rest of the country:

Global Insight: Home Valuations 2008 Q1
Click to enlarge

Hmm, the Pacific Northwest seems to be the last holdout of the overvalued markets. Portland is even worse than Seattle, coming in at 36.8% overvalued.

According to their analysis, Seattle’s current price of $393,200 “should” be $320,195 (19% lower). So does this mean prices here are going to drop 19%? Not necessarily, but based on what has happened in nearly every other part of the country, I’d say it’s pretty likely. Here’s what has happened in some other cities in the last two years:

San Francisco, CA
2006: Primed for an 18.9% drop
2008: Prices lower by 15.5%

San Diego, CA
2006: Primed for a 24.5% drop
2008: Prices lower by 24.1%

Minneapolis, MN
2006: Primed for a 14.8% drop
2008: Prices lower by 6.6%

Boston, MA
2006: Primed for a 7.1% drop
2008: Prices lower by 7.7%

Also note that the standard deviation of their valuation is +/-15 percent, so Seattle could be anywhere between 7.8% overvalued and 37.8% overvalued, which would mean “normal” prices of $364,750 and $285,350, respectively. In any case, it’s an interesting report that I recommend you check out.

(Global Insight, House Prices in America, Q1 2008)

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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.

76 comments:

  1. 1
    economist says:

    That map is way off. There is NFW anywhere in Ca, Fla, or Mass is fairly valued yet, for starters.

    Also a property is not undervalued unless it costs significantly more to rent it than to buy it, Houston et al are cheap, but not that cheap.

  2. 2
    deejayoh says:

    Ah – you beat me to it Tim!

    The article I found this linked on had an interesting comment:

    In the first quarter 2008, only eight housing markets — down from a peak of 53 in 2006 — were determined to be overvalued, representing only 1% of the U.S. single family housing stock and 2% of total real estate value, down from 32% and 16%, respectively, from 2006. Areas of the Pacific Northwest, including Bend, Oregon and Longview, Washington, continued to be among the most overvalued. However, other areas once extremely overvalued — the Northeast and coastal California and Florida — are now rated as fairly valued

    We’re in a very exclusive club!

  3. 3
    Garth says:

    Tim,

    Did you seen anything interesting real estate wise in Boston? I had some friends in town and one of them is required by by their job to live within the boston city limits. They are not looking very actively right now, but they described formerly “upcoming” neighborhoods just outside the city limits with many foreclosures and boarded up windows while in city prices have remained largely unchanged.

  4. 4
    vboring says:

    methodology, blah, blah, blah. do they account for cities in transition?

    what if Seattle really is changing from Anchorage South into San Fran North?

    everywhere you look in town, we have remnants of old industry disappearing and plans for new professional infrastructure development.

    what if we really are transitioning from a boring one industry port and plane town into modern tech hub mit lots of highly paid professionals?

    i agree RE is overvalued because of the credit bubble. this observation is unavoidable. but what if the fundamentals have improved too. might that not establish a base value different from seattle’s historic norm?

  5. 5
    NostraDamnUs says:

    It will stay “overvalues”, don’t fret…

  6. 6
    NostraDamnUs says:

    “overvalued” – that is.

  7. 7
    deejayoh says:

    i agree RE is overvalued because of the credit bubble. this observation is unavoidable. but what if the fundamentals have improved too. might that not establish a base value different from seattle’s historic norm?

    Um, I think the topic of fundamentals has been covered.

  8. 8
    Alan says:

    Notice of Trustee Sales were up a lot in May.

    http://seattlebubble.com/forum/viewtopic.php?f=1&t=1377

  9. 9
    jon says:

    I didn’t see anything in their methodology about population change. They mention density, but I didn’t see anything about change in density over time. They ought to add that to their model, because looking at this map http://www.npg.org/images/uspopchange0005.jpg, the areas that their model says are overvalued roughly correlate with areas of population growth. Texas and Georgia are the major exceptions, be there the geography is such that cities that can just grow without becoming more dense.

  10. 10
    AndySeattle says:

    NostrDamnUs said: It will stay “overvalues”, don’t fret…

    Thanks for your ‘seagull’ comment… Fly by and shit on us…

    Now I ask, where’s your proof? Can you back up your BS or should we all pull out umbrellas to take care for the next time you decide to fly by?

  11. 11
    waitingforseattletocool says:

    Below is the link to the California Association of Realtors statistics for the month of April. Some of these areas have taken a mortal hit in median price.

    But take a close look at the sales increase year over year and from March to April for some of these areas. It’ll be interesting to see what happens to sales trend over the next few months. There are obviously too many foreclosures in the pipeline in California for prices to increase any time soon, but it begs the question as to where the bottom is for the California market.

    http://www.car.org/index.php?id=Mzg0OTU=

  12. 12
    Ballard Boy says:

    Does this count buy one, get one free homes?

    http://www.signonsandiego.com/news/metro/bell/20080603-9999-1m3bell.html

  13. 13
    b says:

    vboring –

    Unless such a dramatic change happened to occur exactly between 2003-2007, it does not explain current pricing. Houses here were “fairly valued” up to 2003, it was not until then that they began their rocketing ascent.

  14. 14
    notabull says:

    From the report methodology:

    “So, for example, the observation that Phoenix, Arizona is overvalued by 20 percent is mistaken to imply that prices there are headed for a 20 percent drop. This would not necessarily be correct for the following reasons. First, housing markets tend to adjust very gradually and price declines, when they occur, have historically averaged 18 quarters in duration (excluding those corrections not definitely complete). Because two key house price determinants generally improve over that time (population density and incomes tend to rise) we historically observe that price declines are about one-half the initial degree of overvaluation

    I don’t think we have the over valued figure from “peak” from these people, but we *do* have the overvalue of 33.8% from Sep 2006. According to CS, we went up about another 5% until we hit the peak in the middle of 2007. So I’m going to add (not actually “add” BTW) that to the 2006 overvalue figure and say that we were overvalued by 40.5% at the peak.

    If the report is right that declines take a long time, and typically you get about half the decline from “expected”, with the rest taken care of by income inflation and increased density, then Seattle MSA would have been due for *about* a 20% nominal decline from peak. CS also says we’re down 7.3%. Therefore, we might have another 13% of the original decline to go, which equates to a 14% decrease from the current value.

    This is not a small number, and it’s not huge either. As expected, it’s pretty much half way between the perma-bulls (no decline – sellers will hold out!) and the perma-bears (depression! 50% off!). If anything, that makes it a pretty good guess, IMO!

  15. 15

    SEATTLE DENIAL HAS LIMITS

    As the local news touts a few 100 or so Boeing workers added the last few months; what are the Boeing new hires paid?

    We all know the unemployment rate and the CPI are jokes; but brainwashing ourselves that inflation omitting food and energy makes sense and unemployment masking under-employment, part time employment, contract employees (construction) and/or “give-ups” gives us all in Seattle a nice “Pink Pony” feeling that home prices will never stop going up.

    See the proof:

    http://www.doctorhousingbubble.com/the-sham-of-our-current-unemployment-rate-numbers-lessons-from-the-great-depression-part-x-data-mining/

  16. 16
    vboring says:

    okay, so fundamentals are out. i can live with that.

    in the interest of presenting another side to the argument, what about investment psychology?

    some part of the housing boom was caused by people losing their shirts in the tech stock market bubble bursting. losses in the market led to investment in RE. what if RE, like gold, is a safety net when equities are seen as too risky?

    there have been significant losses in the stock market recently. will there be a significant number of investors recently burnt out from the stock market looking for something more stable?

    if i can get a good deal on a distressed sale house with an FHA loan with 3% down and abandon it if things get too bad, isn’t that less risky than leaving my money in stocks?

  17. 17
    notabull says:

    “there have been significant losses in the stock market recently. will there be a significant number of investors recently burnt out from the stock market looking for something more stable?

    if i can get a good deal on a distressed sale house with an FHA loan with 3% down and abandon it if things get too bad, isn’t that less risky than leaving my money in stocks?”

    Vboring, you’re vstretching!

    The stock market has seen something a 10% correction since the 14,000 days. In recent days it’s been pummeled down a few hundred points. So if I have my 3% down (let’s say that amounts to $10k in savings) I have two options:

    1) Buy stocks, using what would be a normal account for a purchase of this nature. i.e. no day trading, no buying stocks in margin. Just normal buying of stocks.
    2) Use the 10K as a down-payment on a 97% LTV property and leverage myself as far as the current guidelines will allow.

    In (1) if the stock market experiences a total MELT DOWN and drops 50%, I lost 50% of my money. On the other hand, if we experience a sustained and MASSIVE bull market over a few years, I might come out with 50% more than I put in.

    In (2) if house prices go down 3%, all my equity is gone and I lost 100% of my investment. If it goes up 3%, I made 100% on my investment and I am a TOTAL GENIUS REAL ESTATE MOGUL. This is with just a 3% swing in prices either way.

    Tell me which one is more risky.

    When people talk about real estate being less risky than the stock market because “real estate doesn’t experience the same wild swings as the stock market” that tends to ignore the fact that *regular people* buy stocks without leverage (i.e loans) but *do* buy real-estate with leverage. So while real-estate might be less volatile than stocks overall (big “might” given recent history), that doesn’t apply to the average Joe that’s fully leveraged on the house, but has ZERO leverage on his/her 401k plan.

  18. 18
    Alan says:

    what about investment psychology?

    I think that is a fair argument. I don’t know how far it goes.

    if i can get a good deal on a distressed sale house with an FHA loan with 3% down and abandon it if things get too bad, isn’t that less risky than leaving my money in stocks?

    Only if enough people think it is less risky.

  19. 19
    vboring says:

    sure, housing is almost always leveraged. but say it loses 15% of its market value, i still have a long term contract for my monthly payment. i can sacrifice my 10k (plus excess carrying costs vs renting for however long i’ve been in the house) or i can stick with it and not worry about the losses. as long as i can afford my monthly payment, maybe i don’t care how good of a financial decision it was.

    most decisions in life are only partially motivated by economics. if they weren’t, people wouldn’t have kids.

    and there is the chance that some neighborhoods may not decline in value for years. maybe some will never see negative nominal price growth. maybe some neighborhoods will appreciate even while the city, county, & country prices fall.

    maybe there is enough uncertainty that some people are still buying today.

    basically, some people are still buying RE. i want to know what motivates them.

    are they all ill-informed and illogical or is there a better way to explain it?

  20. 20
    rose-colored-coolaid says:

    vboring,

    My thought is a lot of people are just going to pull out for the most part and put their money in low return investments like T-Bills. They got burned 7 years ago, on stocks, burned 2 years ago on real estate, and burned again this winter on stocks. Anyone who isn’t serious will just ostrich it (bury their head in the sand) and get government bonds, put money into investments they believe are safe (buying partial shares of Berkshire Hathaway for instance), or just stuff it in the bank for 2% annual.

    FWIW, I know several people who fall into one of these three groups right now.

  21. 21
    Alan says:

    sure, housing is almost always leveraged. but say it loses 15% of its market value

    The being leverages you lose a large percentage of your capital. Possibly even capital you don’t have.

    still have a long term contract for my monthly payment. i

    I’ve said it before and I’ll say it again. If we move into a high inflationary, high interest rate market then people who took out a lot of debt are going to look smart (at least as long as they can keep up with the payments). But what if we enter a deflationary environment?

    most decisions in life are only partially motivated by economics. if they weren’t, people wouldn’t have kids.

    Having kids can be considered a long term economic hedge strategy.

    and there is the chance that some neighborhoods may not decline in value for years. maybe some will never see negative nominal price growth. maybe some neighborhoods will appreciate even while the city, county, & country prices fall.

    Can you identify those areas today? How certain are you? What percent of houses will appreciate and what features do they have that make them different from houses that lose value? If you can’t predict it ahead of time then it doesn’t help you.

    some people are still buying RE. i want to know what motivates them.

    Me too. I always hope that housing bulls like RentersAreLosers will come up with a good argument to convince me, but all I seem to get are things like “I never considered opportunity cost” and “Owning is great! Rah! Rah! Rah!”

  22. 22
    notabull says:

    “Sure, housing is almost always leveraged. but say it loses 15% of its market value, i still have a long term contract for my monthly payment. i can sacrifice my 10k (plus excess carrying costs vs renting for however long i’ve been in the house) or i can stick with it and not worry about the losses. as long as i can afford my monthly payment, maybe i don’t care how good of a financial decision it was.

    most decisions in life are only partially motivated by economics. if they weren’t, people wouldn’t have kids.”

    We were discussing the economic and risk side of housing/stocks when I responded to your question:

    “if i can get a good deal on a distressed sale house with an FHA loan with 3% down and abandon it if things get too bad, isn’t that less risky than leaving my money in stocks?”

    Plainly, buying a house with 3% down right now is more risky than putting your money in the stock market, if you are determining the risk of losing that money. If you end up with a house that is under water, that is not a problem until it becomes a problem. All one must do is maintain 6 months of savings, keep the marriage alive, avoid an expensive illness, and look for 10 years of stability. The risk here is that you will need to sell at some unexpected point. If you have more money down, you can more easily sell even if/when prices decline more.

    I’m not arguing against homeownership (I own myself), but I think you are understating the risk of buying a house right now with minimal down payment.

  23. 23
    notabull says:

    “I’ve said it before and I’ll say it again. If we move into a high inflationary, high interest rate market then people who took out a lot of debt are going to look smart (at least as long as they can keep up with the payments). But what if we enter a deflationary environment?”

    Alan,

    Most people in this country don’t save.
    Most people in this country own houses.
    Most people in this country are in lots of debt (including our government, which is us again)

    Given these factors, which economic outcome will be more fervently avoided by our elected and unelected representatives:

    1) Inflation
    2) Deflation

    I vote for (2).

  24. 24
    Scotsman says:

    Great stuff, Tim- they offer a rational stab at a difficult pricing problem.

    As I’ve said many times, what all of this ignores is the context of the national and world economies. The U.S. is functionally bankrupt, a huge number of our citizens are on the edge of insolvency, and no one is seriously talking about changing the underlying basis for our economy. In the next couple of years, if not sooner, the momentum from the last two decades will fade and reality will set in with a calamitous thud.

    In other less well understood news today, the FED lent another $75 billion to the banking system, which is currently over $150 billion in hock. In normal times, the cumulative reserves are on the order of $15-20 billion, so this represents a significant change. Not that anyone seems to care…

    Look for an inflationary blip up, short term, then significant deflation. House prices will indeed drop from today’sd levels.

  25. 25
    Matthew says:

    Notabull,

    And how do you figure our elected officials are going to get us out of a deflationary environment? And please don’t say “print more money”. Japan lowered interest rates to 0 percent and still could not avoid deflation.

  26. 26

    Interesting to note that the Wenatchee “metro” area (includes Leavenworth and Chelan) is overvalued by 40%. Their value for Q1 in 2008 is $257,000. So that takes the value down to…. $154,000!!

    I think there needs to be some tweaking to the methodology. Obviously the “constant” seems to be the biggest variable. Vboring hit upon something when discussing cities in transition.

    Wenatchee has recently been discovered. Dollars used to buy housing are not coming from earned income. They are retirement dollars and equity dollars from somewhere else. In Leavenworth and Chelan we mostly have second home sales.

    I won’t comment on Seattle, but their commentary on the market I do know well certainly isn’t convincing.

  27. 27
    Matt D says:

    From what I can tell, it looks like we are passing through the nadir a real estate pain right now. MLS listings (supply of real estate) are starting to top out and even drop right now throughout the United States. With supply stable and falling, prices should stabilize as well. Also, the fact that the US and Canada have a decent population growth rate means that prices simply can’t remain low for long. Check out http://www.listingsupply.com

  28. 28
    Ray Pepper says:

    I’m pissed…MLS # 28071447. I offered 330k. The builder was contemplating the offer. I was advised 350k may work. Offer came in FULL PRICE and its signed around PENDING! Originally listed 500k+…………..

    Want to know what this means? My family stays in our GEM in North Tacoma and someone OVERPAID for that GEM!

    I’m hoping for S A L E F A I L . The search continues!

  29. 29
    Rentersarelosers says:

    Ray,

    See what hanging around this blog does to you?
    You have been told to stick your offer just like the rest of ’em have been told.

    A more reasonable offer might have gotten you the property but Noooo, you took the Bubblehead route and landed up with nuthin’ (just like the rest of the losers here)

    This site and the pessimism here is TOXIC, Anti American, somewhere between socialism and communism.

    Cheers!!!!

  30. 30
    BellinghamREnter says:

    Romie-

    I live in Bellingham. If I hear of another city that has just been “discovered” I’m gonna shoot myself. We’ve been “discovered” here since around 2004. Didn’t you hear? Every city is special and/or in the process of being discovered.

  31. 31
    Matthew says:

    RAL = Another FB

  32. 32
    Ray Pepper says:

    Too funny….The bubblers here had nothing to do with it….I’m sure you know that. Packing everything up, moving, renting my home, cleaning it up, unpacking, ugggh…I’m too busy to make my life that difficult…………………………UNLESS………………I’m offered a GEM!

    Plus I just closed on our New Office Monday!. I’ve been dealing with all those contractors and it sucked the life outta me. But, i thought I was just about there with the builder. I had to send a letter as to why my offer was so low. It was a great letter but alas………………The Dwelling Company didn’t bite…The bleeding was not profuse enough…Now I wait…..

  33. 33
    Rentersarelosers says:

    Matthew

    RAL = Another FB
    ………………

    what is a FB?

  34. 34
    economist says:

    which economic outcome will be more fervently avoided by our elected and unelected representatives:

    1) Inflation
    2) Deflation

    I vote for (2).

    What you and other posters don’t seem to get is that asset prices, consumer prices, and wages aren’t necessarily connected and can and do move in different directions. Asset prices are prices of capital goods like stocks or houses. The 70’s saw high consumer price and wage inflation but falling stock prices.

    So where do I think we’re headed?
    – consumer price inflation
    – stagnant nominal wages
    – asset price (houses) deflation

    The third follows logically from the first two.

  35. 35
    economist says:

    Also, the fact that the US and Canada have a decent population growth rate means that prices simply can’t remain low for long.

    Why not? Hasn’t Texas been one of the fastest growing states in the US for quite a while now? What are RE prices in Texas compare to the Northeast or Northwest?

  36. 36
    Rentersarelosers says:

    Ray, I saw the pic’s, it did look like a GEM at $350k, the builders “bottom line”
    (I didn’t see it in person though)

  37. 37
    Rentersarelosers says:

    Matthew

    RAL = Another FB
    ………………

    what is a FB?

    Matthew, be a man and answer the question.

  38. 38
    Roger Renter says:

    You know the local R.E. agents are getting jumpy when they set up cryptic little web sites featuring cherry-picked stats that try to create the impression that things are “stabilizing.” It’s sort of like sticking one’s finger in the dike, but it’s cute.

    Yes, MattD, I’m talking about your site:

    Domain name: listingsupply.com

    Registrant Contact:
    Whois Privacy Protection Service, Inc.
    Whois Agent (rwqnnnfwl@whoisprivacyprotect.com)
    +1.4252740657
    Fax: +1.4256960234
    PMB 368, 14150 NE 20th St – F1
    C/O listingsupply.com
    Bellevue, WA 98007
    US

  39. 39
    Matthew says:

    Economist,

    We are seeing monetary deflation and price inflation. You are wrong, I do get it, we can see some price inflation but ultimately deflation is what is affecting the monetary supply and the FED is powerless to stop it. Hundreds of millions of dollars have been destroyed from our system from the housing bubble and all the major banks are scrambling to raise capital. The Fed has exchanged T’s for crappy collateral, but they do not print money.

    The situation we are in is more reminiscent of 1929 than it is the 1970’s. Commodities are just the next bubble that is being blown by people seeking a place to trade. The Fed has contaminated Treasuries, therefore people are trading commodities as the last place they feel they can make a quick buck.

  40. 40
    Matthew says:

    RAL,

    Google “Another FB”, that will answer your question.

  41. 41
    Rentersarelosers says:

    Matthew,

    I just googled it. I am not a “Fucked Borrower”. My mortgage is less than 20% of the asking price on my home and I have no other debt whatsover.

    Sorry to disapoint you, but thanks for the clarification.

  42. 42
    matthew says:

    Sure you aren’t. That’s why you spend your free time on a bubble site!

  43. 43
    Rentersarelosers says:

    I like heckling you losers.
    I have never seen a generation of such smart asses destined for failure.

  44. 44
    Matthew says:

    Pot kettle, kettle pot

  45. 45
    S-Crow says:

    Ray,

    Sorry to hear that your offer didn’t work out.

    Thanks for the T . Wore it the other day and got my first comment while I was shopping at Costco.

  46. 46
    Scotsman says:

    Ownersarelosers says: “20% of the asking price?”

    I didn’t catch that your home was for sale. Perhaps that’s why you’re here.
    How’s that going?

  47. 47
    b says:

    RAL –

    If you have so much equity, why are you dicking around rejecting offers and sitting on the house you are trying to sell with small price decreases and whining? With that much cash sitting there I think I’d rather put it to work actually gaining money instead of losing it while surfing bubble blogs. But then again, I understand basic economics and investment.

  48. 48

    Vboring asked a good question: are all current buyers miisinformed or illogical?

    No. Some people just want to own a house, can afford the monthly payments, like the neighborhood, and plan on staying there for many years. To them, they realize they might get a better price in a year or two, but it doesn’t much matter.

    Others are finding homes that are priced lower than market value and are convinced that prices won’t drop low enough for them to sustain a loss.
    Not everyone who is buying right now is misguided or illogical or crazy, but some of the sure are.

  49. 49
    Scotsman says:

    There are now 9 homes for sale on my street. Half had had price reductions. Nothing is selling. Some have been for sale for almost a year. It’s hard to get a feel for prices when nothing ever gets “marked to market.”

    There are currently over two million vacant homes in the U.S., and the number is rising. How does that square with the idea that population growth will force prices up?

  50. 50
    jon says:

    “- asset price (houses) deflation

    The third follows logically from the first two.”

    Only if everything else is equal. But they are not. Exports are rising and imports are falling. That allows housing to continue to resume its usual role as an inflation hedge. Commodities are rising because of demand from China and also the corn-based ethanol fiasco. As exports increase, the value of housing in export strong areas, such as Seattle, will be quite strong.

    A drop of 10, 20, even 30% is not that big a deal considering the run-up that preceded it. Of course the effect is huge on the people who bought over their heads with an unwise mortgage, but most other owners are still sitting pretty.

    The recent increase in sales volume seems to have stabilized listing prices, mostly, in SoCal. We will soon see if that extends to sales prices as well.

  51. 51
    economist says:

    Yeah right.

    I will reiterate what I said before.

    Nominal consumer prices (i.e. price in USD) will go up. This is because their prices are determined globally and the USD is falling. Like for oil and food.

    Nominal wages are going nowhere because of weak US economy and globalization.

    Because of the above two, house prices have to fall because people will have less money left over to spend on housing.

    You can call that inflation, deflation, or a chocolate sundae for all I care.

  52. 52
    jon says:

    How can the economy be weak if there is full employment, exports increasing, and imports falling? Stupid lenders are weak, construction and real estate are struggling, but everyone else is fine.

  53. 53
    I actually like it here says:

    Why not? Hasn’t Texas been one of the fastest growing states in the US for quite a while now? What are RE prices in Texas compare to the Northeast or Northwest?

    Geography has to have something to do with it. Texas has tons of space. Nothing but long expanses of desert and prairie. Want to put up a housing development? Boom! There you go. Supply can easily keep up with demand and since high population growth means more tax revenues coming in, the government is more than happy to make it easy to develop anything and everything. It’s cheap to operate businesses there, so more keep moving into town. The next thing that happens, though, is that people suddenly realize that they live two hours from work, their house looks like every other home in their neighborhood, and it is tough to find a restaurant nearby that isn’t an Applebee’s or a Chilli’s. Suddenly this cheap new area isn’t as good as it seemed and people start looking to move elsewhere. You’ve got a market filled with empty houses that all look the same that no one wants to buy. This is why the markets in Phoenix and Las Vegas crashed so much harder than others. There was nothing to constrain the growth (geography or public planning) and consequently there was nothing to constrain the fall either.

  54. 54
    Matthew says:

    The dollar will rebound. If you are so certain of your thesis, then I assume you are short the dollar. Good luck with that, LEH is scrambling for FRN’s as was BSC but yet somehow people honestly believe that there is excess liquidity floating around i.e. monetary inflation.

  55. 55
    Matthew says:

    Jon,

    Full employment according to who? The government figures that count a person having three jobs as 3 employed people? Jobless claims have been increasing, manufacturing is down, yes exports are increasing vs. imports but that’s only due to a weak dollar.

    Only lenders and builders are weak? How about GM and Ford? (GM sales down 27.5%) How about the airlines? (united to park 100 planes) How about GE missing earnings for the first time in a decade? How about food prices up double and gas prices up over 100 percent in a year?

    Are you living in an alternate world or what?

  56. 56
    economist says:

    Others are finding homes that are priced lower than market value

    Market value is whatever a house sells for.

    And for those people who say “Seattle is special so prices can be twice as much here as in Texas, etc forever”. The bottom line for business is the bottom line. They are not going to locate in a high cost metro if they can locate somewhere cheaper. The global economy does not care how “special” Seattle is.

  57. 57
    Matthew says:

    Jon,

    Read this PDF from Merrill Lynch’s North American chief economist and get back to me once you have taken the red pill and understand what is really going on:

    http://www.realclearmarkets.com/The%2520Market%2520Economist%252005%252009%252008.pdf

  58. 58
    notabull says:

    “And how do you figure our elected officials are going to get us out of a deflationary environment? And please don’t say “print more money”. Japan lowered interest rates to 0 percent and still could not avoid deflation.”

    Matthew, I don’t know. What I *do* know is that our elected officials will more aggressively avoid deflation than inflation. How they do that is likely beyond anyone on this blog’s knowledge. As we have recently seen, the fed is capable of doing more than just setting rates, and congress is capable of getting us into more debt than we previously imagined possible.

    Regarding Japan: given that we saw what happened in Japan, and have studied why it happened, I think that makes it much less likely that we’ll experience the same thing. Are you seriously suggesting that we’re going to get into Japan-style deflation? If so, when? I’ll gladly take the other side of the bet.

  59. 59
    notabull says:

    “What you and other posters don’t seem to get is that asset prices, consumer prices, and wages aren’t necessarily connected and can and do move in different directions. Asset prices are prices of capital goods like stocks or houses. The 70’s saw high consumer price and wage inflation but falling stock prices.

    So where do I think we’re headed?
    – consumer price inflation
    – stagnant nominal wages
    – asset price (houses) deflation

    Economist, we’re there already.

    Why did we have wage inflation in the 70s? I’m guessing that it was because organized labor/unions were much stronger and had COLA raises built into their contracts. Today, if businesses aren’t making money or unemployment goes up, it’s much harder to have wage inflation, regardless of consumer price inflation.

  60. 60
    Jimmythev says:

    Come on now… Seattle isn’t overvalued… it must be undervalued… just look at the Escala in Downtown Seattle…. they’re raising prices!

    http://seattletimes.nwsource.com/html/nicolebrodeur/2004453731_brodeur03m.html

    “Since announcing the price increase in April, Escala has had over $6 million in sales, Midby said. Other developers, he said, are following suit and raising their prices, too.
    In doing so, they will build equity for those who have already bought, build anxiety for those on the fence, and build even more exclusivity within their walls.”

    Building equity for those who already bought… wow, I would like some equity… maybe they can “build” some for me.

    Am I the only one that thinks this developer will be going bankrupt by 2009?

  61. 61
    Ray Pepper says:

    No problem S Crow. As soon as the Puyallup Fair Approaches in September I we send you the NEW shirts that are much more eye catching. We have to order another batch. We sent you the originals.

    The offer not working out is quite alright. I have about a 10- 20% success rate on my GEM offers. I usually send my personal offers in via email to get a “taste” 1st. I like to see where I stand. Then I take the 30 min to formally write it up if I feel I’m within 10% of what I want.

    This time someone stepped in….Its all destiny. ..It happens quite often….Were staying in our 1946 Brick Tudor with all its old world charm and character. For Now…..There are 8 other GEMS that I’m beginning to watch now in the GIG.

  62. 62
    Matthew says:

    Notabull,

    We are already experiencing Japan style inflation. The only difference is that a bubble is being blown in commodity prices right now.

    If we are truly seeing monetary inflation than why has the dollar index (USDX) bottomed at 70 and is currently rising? Why did all the goldbugs claim that gold was going to skyrocket to 1600 an ounce while it has actually fallen back to the 880 mark? Isn’t gold the ultimate hedge against inflation?

    We have seen hundreds of billions of dollar wiped off our balance sheets by falling house prices and by contaminated commercial paper. The big banks are on the verge of collapse and are struggling for liquidity. Tell me how this doesn’t resemble a deflationary spiral i.e. Japan or the U.S. via Great Depression? The only difference might be high oil and food prices, but what if that is merely a short term bubble and the last place that people are stashing cash before it all falls apart? Oil rose to 134 a barrel but has bounced off that and is down to 123 a barrel right now.

    LEH is borrowing money from the FED to BUY BACK THEIR OWN STOCK!!! Take a look at the Great Depression. Companies did the exact same thing and it was futile.

    I agree that the FED and the Govt is more concerned with deflation, but they are powerless to stop it.

  63. 63
    Matthew says:

    Sorry that should say “we are already experiencing Japan style deflation”

  64. 64
    monkey says:

    Does any know that the 2009 property tax is decreasing? Talking about Snohomish County, I just checked my property tax and the value of the property went down. I don’t know about King County. So if the seller is asking 3 – 15% above the county price like before, you need to be careful about that.

  65. 65
    NotaBull says:

    “Sorry that should say “we are already experiencing Japan style deflation””

    Make your mind up. :)

    “If we are truly seeing monetary inflation than why has the dollar index (USDX) bottomed at 70 and is currently rising?”

    This seems to be a rhetorical question, so I won’t answer it.

    “The big banks are on the verge of collapse and are struggling for liquidity. Tell me how this doesn’t resemble a deflationary spiral i.e. Japan or the U.S. via Great Depression?”

    Bad debate form.. The onus is not on me to explain why we’re NOT going into a deflationary spiral because you brought up the topic. Instead, the onus is on you to explain why we ARE. Stating that the big banks are on the verge of collapse seems extreme. A few banks are doing very badly, and the fed will doubtless jump in (like it did already) to throw some tax payer guarantees into the mix. I don’t think we’re going to see any big banks actually collapse.

    Really, talking as if we’re going to enter a depression, or experience a ten year Japan-style stagnation just seems rather extreme to me. Thing are bad, no doubt. I think you’ve jumped as far as you can to the extreme end of the spectrum. Too much Roubini? :)

  66. 66

    .”Were staying in our 1946 Brick Tudor”

    This is what happens when in I try to read without glasses. I read ” we’re staying in our 1946 Buick Tudor” and figured “Poor Ray…has to live in his car, and it’s not even a four door, it’s a tudor.”

  67. 67
    Ray Pepper says:

    Now Thats funny. I’m out showing homes and taking a break between clients. I needed that. Thanks!

  68. 68
    TJ_98370 says:

    economist, Matthew, NotaBull –

    It appears the Fed is indeed concerned about inflation –

    Treasuries Fall After Bernanke Says Inflation Indicators Rising

    Treasuries declined for the first time in four days after Federal Reserve Chairman Ben S. Bernanke said that inflation is significantly higher than the central bank wants……

  69. 69
    TJ_98370 says:

    .
    Bernanke says U.S. inflation too high

    U.S. Federal Reserve Chairman Ben Bernanke said rising long-term inflation expectations were a “significant concern” for policy-makers but dismissed worry a wage-price inflation spiral was developing…..

  70. 70
    Sniglet says:

    It appears the Fed is indeed concerned about inflation

    Whatever the Fed is concerned about is completely irrelevant. At the end of the day the Fed will always lower rates if stocks are crashing and t-bill rates are plumetting. Likewise, when stocks and t-bill rates are rising, the Fed will raise rates.

    It’s that simple!

    It’s not so much that the Fed has some secret agenga, it’s just that markets force their hand. Even Greenspan and Volker have said that the Fed is ultimately at the mercy of treasury rates (i.e. the Fed can’t defy the treasury market). Just look at the history of t-bill and Fed rates. You will see that the Fed is always following the direction of t-bills (sometimes a little faster than others). The Fed governors may well be concerned by any number of things (such as inflation), but they don’t have the luxury of going against the treausury market to do anything about it. Bernanke may be scared silly about inflation, and sincerely want to stop it, but given another pending financial disaster such as the near bankruptcy of Bear Stearns, he will cave over like a house of cards and drop rates while goosing liquidity.

  71. 71
    Matthew says:

    Notabull,

    Bad debate form? I believe it was you that brought up the fed/inflation/deflation topic into this thread, not I. Did you not say this:

    “Given these factors, which economic outcome will be more fervently avoided by our elected and unelected representatives:

    1) Inflation
    2) Deflation

    I vote for (2).”

    The proof of deflation is obvious. Hundreds of billions of dollars of credit has been destroyed i.e. home values, commercial paper, etc. BSC is done, LEH is on the ropes, CFC is toast, and C, BofA, WaMu are shells of their former self (see their 6 month stock performance). Extreme? Not at all.

  72. 72
    economist says:

    Tell me how this doesn’t resemble a deflationary spiral i.e. Japan or the U.S. via Great Depression?”

    Well for starters in the 1930’s the US was the world’s largest oil producer AND exporter. Oil prices dropped tremendously in the 1930’s. Today oil prices are the highest ever and the US is the largest oil importer. If the USD keeps falling, oil keeps getting more expensive, which makes other consumables (you know like food) more expensive.

    You see that’s the key. The US was a net producer in the 1930’s. If you produce more stuff than people can afford to buy, you get deflation. The US is now a net consumer. It has to buy stuff from the rest of the world, and the USD will keep falling as long as the US is living beyond its means. Which means higher USD prices for globally traded goods.

  73. 73
    TJ_98370 says:

    This article summarizes the current situation nicely, yes?

    Markets Haven’t Yet Properly Digested the Bad News

    ….Economics has a well deserved reputation for being wrong. So well it may be again. Here is what basic economics suggests about where we are now.

    We are waiting to see how an ongoing credit and housing crisis creates a national economic recession and how this recession reacts back on financial firms and distressed households. You should think in terms of feedback loops. Just like in the bubbly boom, there will be self re-enforcing cycles. The coming set of cycles will be vicious, as opposed to the virtuous cycles of yesteryear.

    Where we had imported deflation from globalization, we will have inflation from rising global commodity prices and weak dollars. Where we had limited demands for wage increases and tax receipts the political wind will change and stressed households and governments are likely to want a larger share of the pie. Households spent the last 6 years borrowing – heavily against their rising house prices. This is running in reverse. They will need more money to pay-off past purchases. Some rebalancing will come as default and the rest as wage demands and lower consumption. Where we had asset prices rising much more rapidly than prices in general- inflation- we will have asset price increases lagging inflation. All of this will take place against an uncertain backdrop of stressed financial institutions and households. This will place significant structural pressure on the national economy. This will have local and global effects……

  74. 74
    deejayoh says:

    Does any know that the 2009 property tax is decreasing? Talking about Snohomish County, I just checked my property tax and the value of the property went down.

    Careful with that one. The assessment might decrease, but I doubt that the tax will.

  75. 75
    Matthew says:

    Economist,

    The dollar will rebound and oil is a bubble. Household wealth has been diminished by 1.7 trillion. I’m still sticking with monetary deflation with short term commodity price inflation.

  76. 76
    joshua corning says:

    RE: Geordie Romer @ 26

    I disagree…sales volume in greater Wenatchee is down 40% yet prices have only dropped in the single digits. My guess is that Wenatchee’s primary employers (ie the PUDs and ag industries and hospital) have been somewhat recession proof. People are simply able to hold on to their homes because they still have jobs.

    Throw in the fact that East Wenatchee has not expanded its UGA in nearly 10 years and mounting anti-growth pressures from groups like Futurewise preventing any real competition for the same time span and you get high prices.

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