Case-Shiller: Price Declines Continue Unabated

It’s time once again for an update on the Case-Shiller Home Price Index. According to August data, home prices in and around Seattle continue to decline at a steady pace.

Down 0.7% July to August.
Down 8.8% YOY.

Last year prices fell 0.10% from July to August (their first month-to-month drop), and year-over-year prices were up 5.7%.

Here’s the usual graph, with L.A. & San Diego offset from Seattle & Portland by 17 months. Portland extends its streak of outperforming Seattle to nine months, falling 7.6% YOY in August.

Case-Shiller HPI: West Coast
Click to enlarge

Note: This graph is not intended to be predictive. It is for entertainment purposes only.

Here’s the graph of all twenty Case-Shiller-tracked cities:

Case-Shiller HPI: All Cities
Click to enlarge

In August, eight of the twenty Case-Shiller-tracked cities experienced smaller year-over-year drops than Seattle (vs. seven in July and six in June). Dallas at -2.7%, Charlotte at -2.8%, Boston at -4.7%, Denver at -5.1%, New York at -6.5%, Cleveland at -6.6, Portland at -7.6%, and Atlanta at -8.5%. Phoenix just barely edged out Las Vegas for the largest year-over-year drop, with prices in both those cities falling over 30% in a single year.  There does appear to be something of a “bottom” in price decline intensity reached in Miami, with year-to-year drops having flattened at -28% for four months in a row now.

Here’s an update to the peak-decline graph, inspired by a graph created by reader CrystalBall. This chart takes the twelve cities whose peak index was greater than 175, and tracks how far they have fallen so far from their peak. The horizontal axis shows the total number of months since each individual city peaked.

Case-Shiller HPI: Decline From Peak
Click to enlarge

In the thirteen months since the price peak in Seattle prices have declined approximately 9%. The two cities with the most similar degree of price drops thirteen months after their respective peaks were Los Angeles and Las Vegas.

Here’s the “rewind” chart. The horizontal range is selected to go back just far enough to find the last time that Seattle’s HPI was as low as it is now. This gives us a clean visual of just how far back prices have retreated in terms of months.

Case-Shiller HPI: Seattle Price Reversion
Click to enlarge

Seattle’s Case-Shiller value for August 2008 was fairly close to its May 2006 values. So now prices have “rewound” twenty-seven months. For comparison, the latest Case-Shiller data for San Diego shows a rewind of over five years. Ouch.

Check back tomorrow for a post on the Case-Shiller data for Seattle’s price tiers.

(Home Price Indices, Standard & Poor’s, 10.28.2008)

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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.


  1. 1
    LeftOverpricedSeattle says:


    But Microsoft and Amazon will keep the prices from falling further.

    I moved away from Seattle because I thought prices would take a while to unwind back to a reasonable level.

    It actually is happening quicker than I thought. I had a 5 year plan that is starting to look like a 2 year plan to me.

    Anyone seen SFO’s numbers? Everyone likes to pretend that San Francisco (City and County) prices have not dropped compared to the Bay Area in general, but they have.

    This is no different than the people in Seattle claiming the city itself will be spared and only the suburbs will be hit hard.

    Look out below!

  2. 2
    Another Tim says:

    It wouldn’t bother me to see -15% YOY. Others will probably be unhappy with that but as long as it starts a reasonable trend upward afterwards, say 4%, I think we’ll be ok.

  3. 3
    blueskitten says:

    That San Diego “rewind” chart is incredibly symmetrical. Weird.

  4. 4
    The Tim says:

    Re: blueskitten @ 3,

    I know, isn’t it though? I noticed that a few months back, but have until now resisted saying anything. Pretty odd coincidence. Just for fun I made this chart, which just mirrors the run-up and copies it on the way down. It’s pretty crazy how closely they’ve mirrored the run-up during their crash.

  5. 5
    patient says:

    That’s a very interresting observation on the rewind chart. Even Seattles is more or less identical in time on the up and down sides. 14m up took 13m to rewind. If it didn’t seem so easy that 1 month appreciation takes two 1 month to erase it could have been a candidate for a formula to predict price declines from a bubble. Hardly any need for a formula when 1 = 1.

  6. 6
    The Tim says:

    The decline in Seattle hasn’t been nearly as symmetric. Here’s the mirror chart for Seattle’s HPI.

  7. 7
    patient says:

    It would be interresting to see Seattle on the type of chart The Tim made for SD to see how long it would take from now until the bubble is deflated/rewound if theory of the time being very equal from the bubble start to top and top to bottom.

  8. 8
    Buceri says:

    I have noticed the rewind to 2006 prices on my daily Redfin updates for a while now.
    A few are coming in even lower than 2005.

  9. 9
    patient says:

    Thanks The Tim, you mind reader. I wasn’t saying that Seattle’s month to month symmetry was perfect the time symmetry over many months seems very good.

  10. 10
    patient says:

    So, fall 2010 could be a time to buy at pre-bubble prices should this theory be reasonable.

  11. 11
    The Tim says:

    If Seattle’s decline continues at roughly the same pace as the ramp up, next January’s Case-Shiller HPI will be around 165 (the same as January 2006), or roughly 14% off the peak, pretty close to most people’s guesses.

  12. 12
    Buceri says:

    Patient –

    It’s worth noting that even though the Seattle “bubble” might have lasted only 2-4 years; home prices in Seattle have been out of whack for some 10 years, and many would argue, even more.

  13. 13
    patient says:

    Buceri, good point and I agree with that for now though we only have “symmetry” data from top back to 2003 from the San Diego chart so it’s to early to now how long the symmetry will continue.

  14. 14
    The Tim says:

    One more chart. This one mirrors the run-up as a “forecast” and compares Seattle’s long-term HPI since 1990 to annual average 3% through 7% increases.

    Disclaimer: this is highly unscientific, and purely for entertainment.

  15. 15
    LeftOverpricedSeattle says:

    I think PNW prices have been ridiculous since at least 1998 or so.

    I would argue Seattle and PDX will end up rewinding much earlier than 1998 and it’s going to be UGLY.

  16. 16
    patient says:

    LOpS, looking at The Tim’s excellent “forecast” chart highlights your point of unusual price growth from 1998. Though that is 10 years ago and we have had some salary inflation since then so I kind of doubt we will see a rewind to those prices.

  17. 17
    Scotsman says:

    I’ve made this comment before, but it bears repeating. In studying all kinds of bubbles that have occurred through history, the one thing that really stands out is their symmetry. Most see this as a function of the human psychology/sociology that underlies them. Bubbles are as much a function of crowd psychology as they are of economics. With this in mind, and given that Seattle’s bubble really took off in 2000 and peaked in 2007, it would make sense to assume the bottom is also 7 years out, or 2014. This also fits nicely with the historical fact that most real estate cycles are 12-15 years long. We’re still in the second inning of this game…

  18. 18
    EconE says:

    Patient…with all of the layoffs and companies that are asking workers to take paycuts/work fewer hours, why is it so incomprehensible that we might see salary DEFLATION over the next few years?

    IMHO, the bubble started in 1997…about the same time people started to really roll in the dot-com bubble dough.

  19. 19
    patient says:

    EconE, not incomprehensive at all, it’s quite possible but personally I don’t take it for very likely to be a significant salary deflation in dollars. I’m not saying it will or can;t happen that we rewing to pre 1998 prices in dollars but I myself do not think it will. I think it will rewind to somewhere around 2003 prices but that’s just my guess.

  20. 20
    TheHulk says:

    Its also funny how the Seattle HPI bar graph Tim has made makes the seasonality very clear. For instance, you will see massive increases during the peak selling season. In the run up to the bubble, I am guessing each year in ’06 and ’07, people indulged in bidding wars on properties.

    I suspect we will see massive downturns as we head out from the winter selling season. Sellers stubbornly held on to prices (no doubt the MSM saying the bottom is here etc etc didn’t help things). This winter should be pretty brutal and I see a steep drop coming by the time spring comes around.

  21. 21
    Buceri says:

    Hell; when I arrived in Seattle in late 1991 I thought housing was crazy.

  22. 22
    Mike2 says:

    The “Seattle Bubble” easily started in the late 90’s. Look at the sale prices compared to the mid 80’s. You can pick out plenty of properties that sold at more than 3X the purchase price in 15 years.

    The lakes and mountains weren’t all built during that era.

  23. 23
    Herman says:

    I remember buying in 1997 in what I felt like was a housing panic. With the runup at the time, I was afraid that if I didn’t buy then, I’d be priced out forever. Seriously.

  24. 24
    Ben says:

    I will probably cop some flack for this but I don’t care, I think it needs to be said.

    The Seattle area is different to what it was in the early nineties. I have faith in this because it is different now to what it was in 2000 when I moved here.

    I am in no way saying that the increase in house prices in the area has been completely rational, but I do think that the ‘premium’ that the area deserves has increased in the past 20 years. There are far more jobs that pay well and the infrastructure and services have increased as well.

    If there is one thing that can make you money in real estate it is buying something in a one horse town and selling it when it is a ten horse town. I won’t call this a sure bet, because knowing what towns will grow in this way ahead of time is hard. But when towns grow like this money can be made.

    I think that the floor of RE prices is when nice, <10yo 3-4 BR homes in Redmond are selling for around $400k. People nowadays want 550-600 for this, so this is effectively saying that 30% off current prices will bring people to the tables on the Eastside. Since there are hardly any listings in Redmond like this it is hard to know how far down we have already gone.

  25. 25
    what goes up must come down says:

    Ben, couldn’t what you just say apply to those other places that have seen deep reductions in prices?

  26. 26
    what goes up must come down says:

    Oh and BTW where is Harley with his unique perspective?

  27. 27
    b says:

    what goes up must come down –

    I think thats a pretty solid point. Pretty much everywhere that bubbled up is a lot better/different now compared to 20 years ago. Its just the nature of any area that gets a lot of job and population growth (see China for this on a huge scale). Seattle is one of probably 20 metros like this in the country.

  28. 28
    Interloper says:

    This set of comments are the most interesting ever, and the symetry charts are simply amazing.

    I think this real estate bubble contradicts the maxim that “you can’t time the market”. I think you can, using the Case Shiller data and the other indicators (e.g. Months of Inventory) I think the bottom will be evident when it comes. This is a rare opportunity for people who will need homes and for investors.

    Regarding how to time it: the Case Shiller numbers don’t account for cost of living changes, so prices shouldn’t fully “rewind” unless they overshoot the bottom. We’ll have the opportunity to watch the San Diego, etc. bottoms first to see if this happens.

    In theory, prices should “rewind” to the intersection of the Case Shiller “mirror” chart and the cost of living changes (e.g. CPI or Consumer Price Index). For Seattle, assuming May 2004 was a reasonable market price (*huge* assumption), an annual CPI of 3% would converge with the decline around September of 2009 – a little above 150.

    PS figuring out when the Seattle market was last “reasonably” priced is a task for a bigger brain than mine.

  29. 29
    Scotsman says:

    A bottom in Sept. ’09 ignores the fact that a huge number of loans are due to reset beginning the first part of next year. It takes time for these factors to work their way through the system and affect prices. Also, real estate prices are very sticky on the way down, as only those who really need to sell complete transactions. Also, unemployment is just starting to increase, and will likely continue to rise for some time. A bottom in 9/09 is very premature IMHO.

  30. 30
    deejayoh says:

    I disagree with those who claim that Seattle real estate has been out of whack for 10, 20 or more years. Real estate prices have historically tracked very closely to income growth – I’ve tracked it back to the mid- 80’s and seen a very close correlation between home price changes and income changes up through about 2001/02. IMO, that is when the bubble started here – but it didn’t really pick up steam until 2004.

    Home prices went up in the 90’s rapidly because income went up. Remember Microsoft? Adding a few thousand millionaires in the space of a couple years actually does matter. Now that income growth has come down, I expect we will get back to the historical relationship between incomes and home prices. Maybe we will overshoot by a bit – but how much? You have to remember that in the intervening 7-8 years incomes have grown (just not as much as home prices) and will continue to rise even as home prices correct. So that tempers the down side.

    I also looked at Price/Rent ratio and it says pretty much the same thing. Prices started getting out of whack in 2001/2002

    I’d love to see some evidence to back up claims the bubble started in the 90’s – other than WAGNERs. By what metric? If prices track incomes you can’t claim affordability. And please don’t trot out the “3X median income rule”. Home prices have never been 3X median income in Seattle and never will be. The long run average is more like 6-7x incomes. And that is simply because the median income recipient is very unlikely to own a house (50% home ownership in Seattle folks)

    My $0.02

  31. 31

    Interloper, 10/03 would be a better date, if you agree that 80/20 loans as the norm created the bubble. They started appearing more frequently as of 10/03 based on my research of Seattle Area closings and financing used at time of purchase. My data tends to come from the Eastside, BTW.

  32. 32

    I don’t get why the Seattle line is going down from 2005 when we all know prices went up 2005 to mid 2007. I would expect the blue line in San Diego to be going down from 2005 while the red line Seattle was still going up. What am I missing? As you know I usually do my own stats, mainly because looking at other people’s stats and charts raises these types of questions for me. Any help appreciated.

  33. 33
    patient says:

    The use of the rewind chart to predict does not explicitly analyse fundamentals as the ones brought forward by Scotsman but they do include them as part of the emperical obervation of charts that has gone through many of the fundamentals of a decline as San Diego. It’s a technical analyses method not a fundamental. It still can be very good. The problem with Interlopers prediction of a bottom based on the charts could be that he views 2004 prices as viable to get buyers back in force in the aftermath of a bubble the size we have. I doubt 2004 prices will do it, as I said before my guess is fall 2010 and 2003 prices.

  34. 34
    The Tim says:

    Ardell, the y-axis on the first two charts is “YOY Change.” Year-to-year appreciation peaked in ’05, while prices didn’t peak until ’07, as seen in the last chart in the post.

  35. 35

    hmmm. I’m hearing San Diego is up 65% in volume YOY, but it would appear that the increased volume is not helping with prices. More people buying at cheaper and still cheaper prices?

  36. 36
    Ben says:


    I think that Deejayoh made a lot of my backup points for me. Look at how many people worked at MS 20 years ago, and how many work there now. Back then we were a Boeing economy, and now we have Amazon, Microsoft, etc driving the economy. Slightly more diverse, definitely more college educated jobs.

    Can you make the claim that Miami or Scottsdale had this kind of change in the economy? San Diego went backwards in this regard, by all accounts (military pulling out). San Francisco had a slight growth spurt as well, and the floor of the prices there will reflect that there like I predict it will here.

    Like I said, I think prices will fall at least 30% from peak, so I am not a housing bull. Just pointing out that there are too many people here that make good money and want a nice place to live for housing to go below a certain price, especially in Redmond.

  37. 37
    patient says:

    2003 prices would be a ~40% drop from the top and 2004 prices ~30% if I did the math correctly.

  38. 38
    patient says:

    Ardell, I think the sales volume dropped for about 2 years in Seattle until prices started to give. It could be the same before it turns the other way.

  39. 39
    The Tim says:

    Back then we were a Boeing economy, and now we have Amazon, Microsoft, etc driving the economy.

    FWIW, Boeing still employs far more people that Microsoft and Amazon combined.

    Employees in WA as of 2008:
    Boeing: 76,849

    Microsoft: 39,311
    Amazon: 18,400 (worldwide)

    If we assume that 50% of Amazon’s employees work in Washington (for MS it’s 43%), then the total between the two is about 48,500, or 63% of the total number employed by Boeing.

    Just thought that was worth pointing out.

  40. 40
    TT says:

    All of the talk of it going back down to 1994 is no better than people who said appreciation would continue at 13% per year forever – both sides looked at a graph and said “if the current trend continues …”

    You need to look at the fundamental drivers of housing prices – Income and Mortgage Rates primarily, and other factors after that. Incomes have gone up since 1994, by about double (this includes a substantial chunk of inflation), and interest rates have fallen by about 1/4. Unless the market over shoots its fundamental bottom on a cataclysmic scale, we won’t see prices back at the 1994 level.

    Another way to judge the fundamentals is to look at people’s propensity to spend on housing in the rental market. The ratio between rent and buy (that is, the monthly cost of each), should stay relatively constant over time. I don’t have numbers on this, maybe someone else does?

    Neither of these methods are perfect, but they are certainly better than saying “the graph in san diego was symmetrical, so it should be in seattle too.”

    Based on the above factors, I am expecting either: 1) another 10 to 15% drop in prices and no appreciation for 1 to 2 years or 2) prices stay where they are now, and no appreciation for 2 to 5 years.

  41. 41
  42. 42
    BackToBasic says:

    Seattle is overvalued by 50% according to historic norm. So do expect 40% drop in a long period of time assume buying/rent=1.1. Housing price is very sticky. So I will rent until mortgage/rent=1.0 and use the 50% saving do other safe invest.

  43. 43
    Interloper says:

    Note — I did not say May 2004 prices were reasonable, I said that *if* they are, then the rewind/cost-of-living model points to Sept 2009 as a possible bottom.

    Also, I disagree with the idea that we need to consider the time of a particular catalyst as the start of the bubble (whether it’s 80/20 loans, or interest rates, etc.). A bubble starts when asset values themselves become unsustainably high, regardless of the cause(s).

    Am open to empirically based opinions of when the bubble started. According to Case-Shiller, Seattle home prices were booming in 1997-1999, not booming from 2000-2002 before picking up in 2003 and accelerating from 2004.

  44. 44
    jon says:

    So I was looking for historical levels of employment and Boeing, and came across this interesting headline:

    Kind of funny that we could look back at that year and say it was the beginning of the Seattle housing bubble. Shows you how much our prognosticating is really worth.

    Anyway, bottom of that article shows the historical employment levels at Boeing up to 2001.

  45. 45
    patient says:

    TT said:

    “Neither of these methods are perfect, but they are certainly better than saying “the graph in san diego was symmetrical, so it should be in seattle too.”

    Well TT, the fact is that Seattle have rewound 14m appreciation in 13 months. That’s a pretty symmetrical pattern. So it’s not just only looking at at SD and saying Seattle will do the same. It’s the combination of SD being symmetrical and Seattle showing the same tendency for over a year. It’s kind of the same as the 17m lag chart. everyone who doesn;t like it or wishes it wasn’t happening is attacking it with fundamental differences without being able to produce a prediction that is even remotely as accurate as what can be taken from the charts. So sorrry if I don’t believe that price drops will end today as one of your predictions is.

  46. 46
    Scotsman says:

    Jon- the Boeing article is a reasonable response to the events of the week prior- 9-11-01. What is doesn’t for see is the FED and others driving interest rates down in an effort to cushion the economic blow. It also doesn’t foresee the growing influence of FANNIE/FREDDIE and their efforts to bolster housing, at great cost to the entire economy, as we’re experiencing now.

    You bring up a valuable reminder though. Going forward from where we are now, no one can accurately foresee what unknown factors may affect the economy and housing prices. I still don’t see any positives on the horizon though, so the assumption has to be we continue down.

  47. 47
    mikal says:

    Can someone actually find something to support rent and mortgage payments being the same. It doesn’t seem right unless you have owned the property for some time.

  48. 48
    BackToBasic says:

    Assume rent and housing cost increased equally in line with inflation, then rent should <= house interest payment+property tax+insurance. Since house is an inliquid asset and transition cost is 6% plus tax, so rent should slighly high then mortgage payment. The equity locked in the house will give you min return in the long run. The national historical average rent/mortgage=0.9. So do expect in the long run housing price back to normal. So now, keep renting and keep you saving for other investment. Remeber, house has P/E ratio too. The house in Seattle has a PE of 305/12=25. The S&P PE is just 12. So you figure out which is the best value.

  49. 49
    deejayoh says:

    Another way to judge the fundamentals is to look at people’s propensity to spend on housing in the rental market. The ratio between rent and buy (that is, the monthly cost of each), should stay relatively constant over time. I don’t have numbers on this, maybe someone else does?

    Is below – as posted earlier

  50. 50
    microsoftie says:

    Even though it has taken longer to see a compression in appreciation and the inevitable drop in price, why isn’t anyone talking about the macroeconomic factors that could ultimately hasten the bounce?

    Let’s assume the bailout begins to “work” and the rest of the country bottoms out next year. Prices start to climb elsewhere, and suddenly the difference between current prices and the speculated bottom for Seattle will not be attained.

    Yes, it has taken longer to correct, but these people will come back in droves and prices will remain artificially inflated. We may not fall down as far as the graphs show we COULD go if Seattle follows the trend.

    What I’m trying to say is that when things pick up around the country, this will be one of the first places to recognize that and the greed will prevent the full correction.

  51. 51
    Ben says:


    What makes you think that anything short of inflation will have house values increasing again any time soon? The banks are currently learning the very important lesson that lending money to people who cannot pay it back is dangerous.

    Look at house values in California or Japan in the 90s to get an idea of what the next 10 years will look like.

  52. 52
    LeftOverpricedSeattle says:

    I don’t see how housing can possibly rebound next year without a LOT of bulldozing of new and resale homes in MANY areas and bank lending loosened up again to the point where the banks put too much at risk, again, which seems very unlikely.

    There are just too many homes for sale in most metro areas and not enough people to qualify for them to satisfy the new requirements.

    Inflation of housing prices doesn’t seem to be in the cards because that would require inflation in salaries and everything else and I just cannot see that happening here. Further wage inflation simply means more jobs going overseas to cheaper workforces.

    I expect to see decent non flip homes in desirable areas of Seattle proper selling for between $200-250K when we finally hit bottom.

    But then, I see SFO homes in places like Millbrae, San Bruno and Burlingame selling for $250-300K when this finally all unwinds.

  53. 53
    EconE says:

    How will housing “rebound” to “artificially inflated” prices microsoftie?

    Will every mortgage come with a built in principal reduction?

  54. 54
    jonness says:

    “What I’m trying to say is that when things pick up around the country, this will be one of the first places to recognize that and the greed will prevent the full correction.”

    It’s possible that the Seattle-lag will have the effect of keeping prices from correcting to CA,NV levels. However, even if homes don’t fully correct, their is no such thing as a v-shaped recovery in the housing industry. Thus, anybody who feels rushed to buy a home before a very long lull in price depreciation is most likely going to get burned on the investment aspect of the purchase.

    Homeownership rates recently reached record highs due to easy loan availability. This bubble-level of lending to buy houses will not happen again in our lifetimes because regulatory bodies will not allow for it. Thus, the bidding war that ran prices way up beyond historical rent:own and income:price ratios will not be present in the marketplace in the future. So even if prices don’t fully correct, there is no hurry to jump in and buy anytime within the next 5 years. And even the biggest bulls among us should never buy a house prior to supply reaching favorable levels. IMO, at best, prices will stabilize around 2013, and we will see a sideways market from there. It’s a supply/demand issue, and demand is not likely to outstrip supply anytime in the near future.

    Why do I believe 2013 is the soonest we will see price stabilization? Partly because that’s when we finish off the next wave of massive mortgage defaults. Interestingly, the data supports a lag in defaults in 2009, so a lot of people could get the false idea we are out of the woods right before the big slaughter takes place.

    2nd wave

    Also, before house prices even stand a chance of stabilizing, the banks have to start lending mortgages again to Joe and Jane average citizen. So far, none of the money the govt. has pumped into the banks provides them with incentive to not hoard the money.

  55. 55
    Matthew says:

    “assuming the bailout works”

    LOL, I needed a good laugh!

  56. 56
    Scotsman says:

    Looks like we’re bailing out South Korea, Brazil, Mexico, and Singapore first. If there’s any money left, maybe the FED will send some to Seattle, but I wouldn’t bet on it. There are banker’sbonuses to pay, auto manufacturer’s mergers to finance, etc….

  57. 57
    Joel says:

    Can someone actually find something to support rent and mortgage payments being the same. It doesn’t seem right unless you have owned the property for some time.

    Actually monthly cost of buying should be less than the cost of renting. Buying a house and renting a house deliver the same basic need, shelter, but buying is much more risky. Renters should pay more because the owner takes on all of the financial risk. The problem is that for the past several years housing was seen as a risk free investment that delivered enormous returns. Once perceptions turn after 4+ years of nationwide declining prices people (if not people then banks) will go back to carefully weighing the risk and only taking it on when the price is right.
    Also, because of the self-feeding spiral that declining prices cause, many believe that investors (real investors, not flippers) will cause a floor in prices. However, investors won’t buy in until they can make a profit on day one. For more on this read. Want to Know When Housing Has Bottomed? Here’s How and More on Catching the Bottom in Housing.

  58. 58
    mukoh says:

    Actually banks are pretty happy about the funding and the leg up. That is on the inside circuit.

    As far as back to 1994 prices. Good luck on that, and it is very well wishful thinking.
    Whoever thought it was out of whack then just didn’t have a job that paid anything.

    Prices IMHO are going to revert to ’02 ’03 levels. Some areas less some areas more. I do not see any data that points to anything otherwise.

    Even hard hit areas like Las Vegas which has had 40% declines in areas, are seeing 80% MOM sales growth as of September.

  59. 59
    mikal says:

    Joel, that is based on that guys opinion. I’m sure I could find another guy to refute. Lets see some facts based on something.

  60. 60
    mukoh says:

    Joel, is just stating what he has learned in the last 4 years about investments, real estate and renting, not the continuous understanding of underlying value, and its scarcity.
    It doesn’t speak for property owners, land owners, multi family owners, commercial property owners, who have owned property for 15+ years, which is paid off and has appreciated with accrual. This is a big segment of the owners.

    Monthly costs of buying have never been in line with renting. Buying is always more costly. The last few years have seen the gap narrow because of the competitiveness of banks, investors, funds in allowing a person with Credit Risk of C to get the rate of person with credit risk of A. I can write a case study on how this snowball rolled from ’02.

  61. 61
    mikal says:

    Mukoh, That is my understanding as well. It will never be cost of renting=cost of buying. Nor should it.

  62. 62
    TT says:

    Actually monthly cost of buying should be less than the cost of renting. Buying a house and renting a house deliver the same basic need, shelter, but buying is much more risky.

    The argument that buying is riskier than renting is incomplete at best. Yes a house is somewhat illiquid, and yes a house has transaction costs. But, with rent , you have the risk of price increases, can’t control maintenance, and could be evicted for a variety of reasons. Renting isn’t without risks, and it is difficult to even say that renting is less risky as you can’t readily quantify and compare the different risks; at best you can say that buying and renting have a different risk profile that will be best suited to people with different tolerances.

    Buying has risks that renting doesn’t, but the price of renting goes up whereas the price of your mortgage should stay relatively flat (or totally flat if you’re in a fixed product) over time.

    At even low rates of inflation (3% is low by historical standards), inflation alone can swing the balance in favor of purchasing IF you hold for long enough. For example: assume rent goes up by 3% each year. If you pay 1.5 times as much to buy as to rent each month, have no appreciation and thus sell for a loss in real terms, pay 6% to sell, buy with redfin (thus taking closing costs to essentially zero), and put 5% down – you would have a positive NPV at a 5% discount rate after about 24 years.

    Using the same assumptions and just having the house keep its real price, you are NPV positive at a little over 4 years.

    The current market doesn’t justify a 3% per year appreciation assumption, but once the prices finish adjusting it should be a conservative assumption for longer holding periods. It is conservative long term average assumption because it implicitly assumes no increases in real income.

    Thus, it is pretty easy to justify spending 1.5x more to buy once you include inflation. This analysis also assumes you include PITI + maintainance + taxes + everything in the 1.5x.

    That’s a pretty symmetrical pattern. So it’s not just only looking at at SD and saying Seattle will do the same. It’s the combination of SD being symmetrical and Seattle showing the same tendency for over a year. It’s kind of the same as the 17m lag chart.

    That’s pretty weak evidence in my mind, and the same kind of thinking that said in 2004/5/6 things like “Seattle is increasingly like California, if we just catch up to california you can expect to see 35% appreciation over the next three years.” It is technical analysis used to justify your prejudice.

    I can make just as strong an argument that seattle is like boston (and on the weather front, a better argument). Based on your lag theory we should expect flat prices over the next 12 months (because that’s what happened in boston).

    BackToBasic and deejayoh- thanks for the link/info. That’s exactly the kind of data I’ve wanted.

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    EconE says:

    Mukoh & Mikal…

    I think that it works on a case by case basis when it comes to Rent = Mortgage payments.

    I bought a house in 2001 that an attorney was renting. My mortgage+tax+insurance payments with 10% down was equal to the rent she was paying. I did some remodeling/restoration work and sold the house to an MD in 2005. His Payments were higher than what I could have gotten for rent. He remodeled a bathroom and recently sold the house for 11% less than he paid for it. This was in Missouri.

    On the flip side…I rented a condo on the Kirkland Waterfront from 94-2000. The rent was just barely more than than 75% of the PIT+HOA dues.

    I’m currently paying about 45% of my LL’s monthly outlay if I assume he put 10% down. Rents in my complex (2200 westlake) are down about 5-10%. Even more in Cristalla, Bellora, Concord and Madison Towers.

    I don’t see rent equaling mortgage payments on desirable properties in desirable locations ever…but I’m sure that when it’s all over, depending on where you are in the PNW…renting could be more expensive than buying…however…I probably wouldn’t like the options to choose from.

    FWIW…I’m not an 80% off bubblehead…more like 30% (more for people that bought cookie cutter already overpriced new construction condos from a flipper)…although some sellers are in such fantasy land that 30% off asking really wouldn’t sway me to purchase their house/condo.

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    mukoh says:

    I concur with you. It is on a case by case basis. But in general renting is usually cheaper.

    I myself hate flippers as they are short sighted, but consider themselves to be great investors, for whatever reasons. Yet they put extra strain on the market when it is up as well as when it is down.

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    BackToBasic says:

    Renting should be expensive cause renting provides mobility and liquitity. A house is a stuck asset and can’t be moved if you need to move. But owning house gives your feeling of security if you worry about rent increase. House is a lifestyle but not a good long term investment. And we are now witnessing the lastest downfall of housing price in history which is a good thing from economical point of view.

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    BackToBasic says:

    If you really enjoy the house and could afford to pay the mortgage and tax, assuming you are not flippers, you should not really worry about housing price at all. A house is really a life style and hopefuly not a bad asset if not the worst you could have ever own in your life. At least right now, housing is not dropping so badly like stock. So that provide some kind of safety feeling. But in the long run, housing is not a good investment than equity. We will see. For me, I find an old landlord lady who purchased the condo long before the bubble and offer her the rent=interest+tax+insurance+5% return of her investment for her retirement. Not bad for both parties. For flippers, sorry, it’s bleeding time.

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    TT says:

    BacktoBasics, you are trying to generalize your own preferences and tastes.

    From a strictly financial perspective, whether something is a good investment or not depends on 1) rate of return 2) variability/risk in return 3) covariance with other assets you hold 4) time horizon and 5) individual risk preferences. You are looking only at #1 when you say that housing is a bad investment. Given your #5, it may not be a good investment for you, but you can’t generalize from your own tastes.

    On the topic of the risks, again it is a matter of taste. There are risks born when renting that are not born when buying and vice versa. From an economic perspective, to say which is ‘riskier’ you would have to come up with a method to quantify the different risks. Thus it becomes a question of an individuals tastes.

    Consider the person on a fixed income that doesn’t adjust to inflation and who expects to live 20 or 30 years: for that person, it is highly likely that buying is better than renting even if it is 2x as expensive on a monthly basis.

    Consider a person whose work constantly moves and who doesn’t get compensated for the cost of selling their house; that person would probably be better off renting even if renting was more expensive.

    If historically the monthly cost to buy has been 1.1x the monthly cost to rent, then historically people have seen buying more attractive than renting. Whether they see it as more attractive because it is less risky, or they see it as more attractive because their additional risks are well compensated, or they see it as more attractive because it is less risky and their risks are compensated cannot be judged based on the available information.

    You assertion that “buying is riskier than renting” is flat wrong.

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    mikal says:

    Back to basics. I have bought three house in 96,97, and 01. Two are duplexes and the other is the house I live in. The rents from the duplexes pay their mortgage plus my own and I live four blocks from Greenlake in a 4 bedroom craftsmen. Have I made a bad investment?

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    mikal says:


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    BackToBasic says:

    mikal. you didn’t make a bad investment if not the worst by purchasing before the bubble.what I was trying to say is buying at current level is a terrible investment. over the long run, buying SFH for investment is not the best one I would say. A duplex is different compare to SFH. A wall being shared with two families, more like an apartment. A real estate should be in your portfolio but not all. did you count the vacancy lose on your duplex? I am now paying 50% lower than buying consider 6% interest assuming zero tax, zero appreciation (30-40% loss of equity loss likely in the next couple of years) and worry free. I can move anytime with one month notice. The landlord is begging me to stay to cover her expence if she dare not raise my rent. there are so many rental properties available now and I think they are owned by investors expecting double digit appreciation. But that day is long gone.

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    BackToBasic says:

    TT, I didn’t say “buying is riskier than renting” in generaly. And I do expect a positive return from buying in the long run. But at today’s inflated housing price level, definitely not. It is all about timing. I would say buying today is much risker. Would you buy today fo the 5 year horizon? Definitely not. How about 10 and 15 years. Maybe yes. Because a couple of years down turn may averaged by 10-15 years. If you think buying just living/enjoyment , then you should buy anytime. If you count that house to provide you with retirement, college savings like average person, then you really have to calculate. My strick rule is, housing expense should less than 30% of your income and should be in line with rent expense. The rest being spread among daily living and other investment vehicles.

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    BackToBasic says:

    Actually the droping housing is a good thing not only for potential buyers but also for current owners (not flippers sorry). A house is still a house you live in even though the paper value is dropped. As price droped, people are less likely to treat their house as ATM. The property tax might drop and transition fee and sales tax may drop. As price drops to norm, more buyer may come out so the vacancy rate will drop . So the vancancy lose will decrease. Then the economy will out of housing bubble ditch and start growing again.

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    mikal says:

    Back to basic, I have had exactly 2 months of vacancy for all over 10 plus years. They are both in the Central District. I go month to month and rents have gone up a good 30 percent over the last two years. I never beg anyone to stay. I wouldn’t buy anything right now as it is impossible to know anythings actual value right
    now. I laugh at the people who say that there is no money in real estate. I agree about income percent on living.

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    BackToBasic says:

    mikal, You don’t have to own a physical house. You can buy REIT. Of course, you can’t leverage much on it. Central district population density is very high and you have huge renter pool. It’s hard to tell month to month 30% good or bad increase because that depend on your initial rent and market. Actually, my landlord keeps my rent for three years w/o increase cause she figure out a month vancany equal to 8% decrease of rental income. She bought it in 1980s so I guess she has good income on it and don’t want to loose a good tenant. But she keep complaining that KC raise her property tax and condo association raise her fees for the garbage collector. If she raise rent on me, I will just move next door. The condo is sitting there for almost 18 months with for sale sign on it. And I live in a very nice MI neighborhood. By the time rent to be raised and housing mortgage to be lowered to rent, I would have saved tons of USD cash buy out a nice house without a mortgage. Yes, cash is D King now.

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    TT says:

    Back to Basic –

    If you want to mince words, you should improve your grammar a bit. To interpret what you are saying one has to use more than a little bit of rounding.

    You said “Renting should be expensive cause renting provides mobility and liquitity.” Mobility and Liquidity are potential but not definite upsides/downsides – which is a pretty easy shorthand for risk.

    Where are you getting 6% return tax free? Given the assumptions of no taxes, 6% return on low risk money, and no inflation there is almost no way in hell I would buy, even in the 90s. Unfortunately taxes are 25%+ and inflation exists and they are both going up. 6% is nearly impossible to get right now on lowish risk money.

    On the question of how long you would have to hold, I say 5 to 10 years:
    I did some analysis elsewhere on how long you would have to hold to be ahead if you bought now: These numbers use real assumptions from a house I am looking at: buying is 1.5x renting all in on a monthly basis (including those nasty tax things), you pay 6% commission on sale, no closing costs (use redfin and that’s a pretty good assumption), 5% down, and a 5% discount rate.

    If house prices never go up (not even with inflation) you would have to hold for about 23 years to come out ahead.

    If house prices go up at 3% per year (keeping pace with inflation) you would only have to hold for about 5 years to come out ahead.

    If you assume prices drop 10% next year, then go up at 3% – 11 year holding period. If you assume 2 more years of 10% drops – 15 year holding period.

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    BackToBasic says:

    TT ,

    Thanks for your input. The real question is: No one will can predict how far and how soon the housing will hit the bottom. But there is a PE or cap ratio for any real estate. The market correction is what is happening now. As I said: I treat house as a roof on the top and not a trading vehicle. We will be lucky to gain from it. As far as a safe 6% return, they are plenty. If you owe credit debt, or 6% mortgage, pay them off.

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    […] was noted back in October, graphs of the rise and fall of the Case-Shiller Home Price Index for a number of markets (e.g. San […]

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