Local Housing Oversupply Could Disappear by July 2010…

Good news everyone!

The latest population estimates for King County have been released by the Census Bureau, and at the present rate of population growth, we’ll be able to use up all of our excess housing inventory by July of next year…

if all residential construction across the county completely ceased after July 2008, that is.

Here’s an updated look at our supply and demand situation, indexed to 2000.

King County Housing Supply & Demand

Unfortunately, supply data for 2008 will not be released until August, and in reality construction of new housing units did not come to a complete stop after July 2008, so we will undoubtedly still be sitting on a housing oversupply.

What amazes me is that even in the current economic and lending environment, I am still seeing plenty of in-progress new construction, even including batches of those nasty compact townhomes that have become such a blight on some Seattle neighborhoods.

Running some quick numbers, if the population growth rate holds steady, and the construction of new housing units drops by 25% of the 2000-2007 average, it will take until 2017 before we work through the oversupply.

If new construction drops by 50%, we absorb the oversupply by 2012.

If new construction drops by 75%, we absorb the oversupply by 2010.

Keep in mind, that these figures merely state how long it will take us to get back to roughly the same overall housing vacancy rate we had in 2000, which was by most measures a relatively balanced market. Once we work through this oversupply, it is not likely that double-digit appreciation is going to spring back up out of nowhere, unless new construction has completely halted and stays that way for year after year.

So the big question is, how much has new construction really dropped by in the Seattle area? Are we looking at two years of an oversupplied housing market, or eight?

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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.

39 comments:

  1. 1
    Cheap South says:

    I would be surprised if new construction did not (or will not) go down by a large percentage (50% plus) shortly.

    I think the biggest question is population. My point of view has not changed; nobody moves to Seattle without a job. And many will move out when they lose it. We could be looking at population decrease in the area in the next 18 months.

  2. 2
    EconE says:

    Depends on the price.

    People don’t = $$$’s by definition.

  3. 3
    alex says:

    This is really awesome analysis! It’s no wonder that none of the realtor-owned real-estate info sources ever dig into this information. Way too objective for them :)

  4. 4
    Eric Arrr says:

    How come nobody ever talks about the relationship between population and households?

    Just ’cause population is increasing doesn’t mean households are doing the same. How many people do you know who, facing reduced income / job loss / general uncertainty are taking economic shelter by moving in with roommates or family?

    And are young adults moving out on their own at the same rate these days as they were over the last several years? I doubt it.

    Population may grow, but I’m skeptical that household numbers will necessarily increase at anything resembling the same rate…

  5. 5
    Scotsman says:

    I predict a huge shift down in demand over the next decade as more and more people double up in housing to cut expenses. Its the old dynamic verses static analysis thing ‘come round again.

  6. 6
    Mikal says:

    RE: Cheap South @ 1 – To where? Where are jobs growing? California? Arizona? The Midwest? Maybe Detroit? Maybe to Detroit where one can buy a house for less than $10,000. This area still has more jobs than most others. If Boeing cuts as drastically as the Times article yesterday states then we will be in more trouble. But again, where are job bases growing?

  7. 7
    The Tim says:

    RE: Eric Arrr @ 4 – Here are the average household sizes for King County from the 1960-2000 Census, and from the American Community Survey from 2002 to 2007:

    1960: 3.04
    1970: 2.96
    1980: 2.55
    1990: 2.40
    2000: 2.39

    2002: 2.38
    2003: 2.38
    2004: 2.36
    2005: 2.35
    2006: 2.38
    2007: 2.39

    For the purposes of this post, I assumed a constant average household size at 2.39, but you are correct that the current trend appears to be moving in the direction of larger households.

  8. 8

    GREAT TOPIC SELECTION TIM

    Hmmmmm…..my crystal ball says assuming everything will be static or bottom out to where it was before, requires way too much faith for me.

    We’ve entered a completely New World Order folks and trying to borrow money [like we did before] when we’re out of resources, doesn’t hold water [or willing investors]. I hear Treasury Bills are 0.19% today, that’s right 0.19% [I couldn’t believe it either].

    Printing more money now seems to pull the stock market down, not up, now that stock investors had time to think about it.

    If stocks trend down, so will home prices…..meaning, if stagflation hits us with “mass funny money” in the economy; the Great Depression is going to look like a cake walk. At least prices went down with high unemployment, not up.

    Its just getting worse as time goes on, in my humble opinion. The housing glut will never be absorbed without population [debt] control and a return to American manufacturing.

  9. 9
    Matt says:

    I concur with the above concerns about the uncertainty in the population.

    Those census estimates start with census *data* from 2000, use census *estimates* through 2008, and assume a trend through the data. Does anyone else think that the current economy is something of an inflection point that puts all trend data in question?

  10. 10
    Greg Perry says:

    For all intents, new construction has stopped. Yes, there are new construction homes currently for sale, but those started months ago, many sitting substantially completed for months. Yes, there are few starts, but not enough to count on one hand.

    In the last few weeks, local banks are calling on the builders and partnering with 2/1 buy downs. A couple of (well known) Eastside builders are offer ARM’s as low as 3.75 percent for the first year, capping at 5.75% for the remainder of 30 years. Buyer needs 20% down. Loan limits up to $1,000,000. These builders have also dropped price, let it be known that they will look at any offer and are giving real estate agents up to 5% SOC’s if they have sold their product before.

    New Condos will be much slower. General financing is a problem. I predict that the banks holding the construction loans will financing buyers and strong arming the builder developers to get the inventory off the books.

    We will be looking at a new construction hole when volume picks up.

  11. 11
    jasonwarren says:

    What’s wrong with the compact townhomes? Why are they a blight?

    I don’t live in one, nor have I – but haven’t ruled out buying one, if the price was reasonable and it had the right attributes. I rent a SFH with a pretty large yard now, and in an ideal world would live on a large parcel in a rural area. But I also like the unsettled wilderness, and directing net new development into thousands or tens of thousands of densely packed three-four story townhomes seems like a great way to keep the city urban and the wilderness wild. And because I’m not willing to spend much time/money commuting, living on a large parcel isn’t a viable option. Hence my willingness to consider buying and living in a nice, new, townhome on the city side of the lake.

  12. 12
    Dave says:

    The new townhomes are the 21st century row homes – especially when the shoddy materials and construction starts to affect the hosue in a few years. Have you seen the townhouses at 85th and Aurora? They’ll start to melt in a few years. I agree they are better than anything else on Aurora but still….

    On a differnet subject – anyone following the sulpher contaminated drywall thing on the east coast? The drywall was imported from China after Katrina when there was a shortage of drywall. Well – it was so heavily contaminated with sulphur it is offgassing hydrogen sulphide (I imagine) that is corroding all the copper wiring in appliances/electronics. All these things are breaking down. Cost to repalce all the drywall approached 25% of the home value.

    Yikes!
    Dave

  13. 13

    RE: jasonwarren @ 11
    Why are they a blight?
    Mostly because they are SO ugly and shoddily constructed.
    In theory, I’m a fan of increasing in city density in order to keep the outlying areas rural, but it hasn’t worked out that way so far.
    Instead, they tear town these perfectly nice old houses and put up these shoddily constructed characterless townhomes, seemingly made of cardboard, but with granite countertops and stainless steel appliances, while in the outlying areas 20 miles away they destroy farmland and build ugly characterless tract homes.
    So nowadays there are a lot of empty unsold homes in the middle of nowhere and a lot of empty unsold townhomes in the city.

  14. 14
    JJL says:

    Don’t forget there’s a baby boom going on, which could influence the numbers.

    “A record number of babies were born in the USA in 2007, according to early federal data released Wednesday that some demographers say could signal an impending baby “boomlet.”
    The 4,315,000 births in 2007, reported as “provisional” data by the National Center for Health Statistics, gives just a glimpse of what’s ahead in the nursery.

    The last time the number was this high was in 1957, in the middle of the baby boom years; about 78 million Americans were born from 1946 to 1964. Demographers have been monitoring gradual increases in recent years; data for 2006, which won’t be made final until September, show a 3% increase over 2005. That’s the largest single-year increase since 1989.”

    http://www.usatoday.com/news/nation/2008-07-16-baby-boomlet_N.htm

    Tim: I’m still working on my Snohomish Co. market statistics and I’ll have a firm number for new construction stats done by the end of the month that I will share. This will tell you the reduction of new construction coming on the market.

  15. 15
    anony says:

    Aside from the typical quality of new townhomes notice:
    1)The narrowness of most of them. It may not bother you much in a walk through but annoy you a lot living there. Imagine putting a 47″ TV on the wall in one of those seemingly 10′ wide places. There is no way you will sit on a couch more than 7′ away, and you won’t be able to fit the TV in your field of vision.
    2) The fact that when you look out the kitchen window all you see is your neighbor’s kitchen window.
    3) The parking. Notice that they usually have a very narrow alley with a few 90 degree turns to get you into a garage that can barely stow a midsize sedan. Definitely try to get your car into the garage before you make an offer.

    Not a slight on townhomes in general but the common application here is to maximize cash made out of a plot of land by building the cheapest possible living space and adding enough stainless and granite for some sucker to think it’s worth a few hundred grand. Careful what you think of as a “nice”. They look clean and shiny now, but they might not seem as “nice” a few years from now.

  16. 16
    DaveyDave says:

    By Greg Perry @ 10:

    In the last few weeks, local banks are calling on the builders and partnering with 2/1 buy downs…

    Hypothetical Situation: Let’s say a local bank is seized by FDIC due to non-performance and then sold off to another institution.

    Question: Can this new institution pick and choose which of the existing loans it wants to maintain and which loans it will call in?

    I’m not sure how these bank purchases could rework the books of the seized bank. Looking at the state of many of our local banks, I could see a situation where many don’t make it and I’m curious about the potential implications for troubled developer loans. Or even any troubled loan for that matter.

  17. 17
    Herman says:

    RE: Ira sacharoff @ 13 – Ira is correct.

  18. 18
    b says:

    Ira –

    You are forgetting about all of the ugly, shoddily built townhouses they are making/have made out in the outlying areas. Why someone would move to Issaquah or Snoqualmie to live in a shitty townhouse is beyond me, but they sure have built and sold a ton of them. Personally I think townhouses or small homes 5 feet apart in the outskirts are far more sickening than those in the city.

  19. 19
    jon says:

    RE: b @ 18 – Seattle has 347 assaults per 100,000 while Issaquah has 50.

  20. 20

    RE: b @ 18

    Yeah, there are ugly townhomes in outlying areas, but which is worse? The crappy townhomes or the fake French chateau? With Issaquah and Snoqualmie you’ve got both. To me, those townhouses are just the scourge of Ballard and Fremont and a bunch of other once lovable neighborhoods.

  21. 21
    mukoh says:

    From my sources and thats of course taking only Title company, is that construction is at an all time low at least in Snohomish County. Everything that is going vertical right now has been in process since 3 years or more ago.

    New starts are down since there not a single bank in our state that will lend money for home starts as they are effectively disallowed to do so by the feds.

  22. 22
    BanteringBear says:

    Right on, Ira. It’s about time someone spoke out against these architectural abortions. Builders should be ashamed of themselves. And so should the local officials who approved this revolting crap. I’ve never seen so many hideous structures in my life. The best thing that could happen to a lot of these places would be to tear them down and plant some trees.

  23. 23
    what goes up must come down says:

    hmmm, maybe this is part of the problem………. anony who needs a 47″ TV?

    Americans are worried about their standard of living changing and they should be when this becomes the standard.

  24. 24
    Ben says:

    There are loads of condos being built in Redmond right now – I would estimate at least 1000 units.

    They will probably be made into apartments. But they won’t help the supply / demand equation at all.

  25. 25
  26. 26
    Cheap South says:

    RE: Mikal @ 6

    Move where? To the Cheap South, of course. Where you can buy a home for under $100K. And can make ends meet on a single salary. I understand the obsession of staying west of the Rockies; but you will pay a premium. When you lose your job, you go anywhere where you can eat and have shelter.

  27. 27
    waitingforsanity says:

    Currently there is undersupply, not oversupply. (Undersupply means that it is profitable to expand the housing stock.)
    Prices are basically 60% higher than 8 years ago, and 8 years ago it was profitable to build houses. Therefore, it is much more profitable to build them today. (The fact that it is 20% less profitable than a year ago does not mean it is not profitable today, it just means it is not obscenely profitable.)
    For example, a new 2500 square foot house in issaquah sells today for 500k, but can be produced for 300k or 400k That’s a sign of undersupply and a sends a strong profit signal to builders that we want more of them.
    Eventually we’ll have oversupply (and it might come soon if people suddenly decide that holding extra houses is not such a great investment), but we’re not there yet.

  28. 28
    mukoh says:

    waitingforsanity,
    The only thing that sends signals to builders is how many sell. When a builder used to sell 30 a month now is doing 5. He is not profittable.

  29. 29
    PhinneyDawg says:

    I wouldn’t worry about overpopulation in the United States because of births. As it stands now, the total fertility rate (TFR) in the US is 2.1 children per woman of child-bearing age. That is the minimum needed to replace the population (the mother and father). The US peak TFR was in the 1950s when it was around 3.7. In Italy for example, the TFR is about 1.4 right now, and the population began to decline in the past few years.

    At this point, the only thing driving population growth in the US is immigration and population momentum (which is strong at the moment since the children of baby boomers – Generation Y – are now of child-bearing age).

    Overpopulation within Seattle could be a problem since the amenities of the area are so well- known and loved. That is assuming though that the high-tech jobs and the Boeing jobs stay in Seattle for a long time. I’m not counting on that though.

  30. 30
    Mikal says:

    RE: Cheap South @ 26 – If there is no real work, what is the point? Point out actual stats, not just the “south.” I have lived in Texas and I can honestly say never again. It is the armpit of the world.

  31. 31
    Mikal says:

    RE: mukoh @ 21 – Pierce county is the same. I am working in Spanaway and there are vacant lots all over that will not be built on until the next boom. The plumbing, electrical, and streets are all done and then nothing. They were in the same condition last summer. Then there are the developments with 30 houses in them where only 5 are occupied. Someone is sitting on all that, more than likely banks, but it has to hurt.

  32. 32
    Dave says:

    This looks like a must buy before the supply evaporates!

    http://www.redfin.com/WA/Seattle/2436-S-Irving-St-98144/home/144894

  33. 33
    Cheap South says:

    RE: Mikal @ 30

    Buddy; I own the copyrights to “the south is the armpit of the world”, so you owe me royalties.

    What I was trying to say is that the south is much cheaper to live in. Salaries are lower; but housing is also much lower.

    Statistics?? It shouldn’t take you more than a few seconds to Google the population shift towards the South (old South and the Southwest).

  34. 34
    Mikal says:

    RE: Cheap South @ 33 – It is mostly retirement and housing construction. The housing construction seems to be having some issues. Without jobs it doesn’t matter how cheap it is. And it is cheap precisely because there are NO jobs.

  35. 35

    RE: Mikal @ 34

    Well, there’s the south and there’s the south. I was recently in the south, and Little Rock Arkansas is growing and some corporate headquarters have relocated there. Why? Maybe because state law allows employers to pay their employees a dollar an hour or something, but there were some gorgeous neighborhoods with retail districts that reminded me of North Capitol Hill or Wallingford…And then there was Vicksburg, Mississippi, which had slums that made White Center and Skyway look like Medina….
    House prices in Little Rock are probably 40% of what they are in Seattle, but I don’t think salaries are 60% lower, and I believe their unemployment rate is lower than ours, and the BBQ is far, far better.

  36. 36
    jon says:

    The annual housing number is actually derived from permits for the year before, which is based on the previous years permits, etc.

    http://www.census.gov/popest/topics/methodology/2004_hu_meth.html

    One can assume that the number of permits for 2008 will be in excess of the number of units actually completed.

    Since the gap in the graph above basically reflects something that happened in the year 2003, that could either be a change in methodology for that year, making the comparison to 2000=100 be suspect, or it could reflect a jump in construction. I would expect the permits for a multi-family or subdivision would have a much greater lag than the 6 months assumed by the Census. If it was closer to 2 years, which is not an unreasonable, that alone would account for the discrepancy between the number of permits and the number of actual residences as shown in the graph.

  37. 37
    Lamont says:

    Given how much ‘townhouse blight’ has been built in my neighborhood I’m pretty sure that the growth of units didn’t slack off that much.

    On the other hand, note that it wasn’t until 2003 in the last recession that the population statistics responded to the recession (which began with the stock market bubble popping in early 2000, and was only officially declared a recession in March 2001 by NBER. If it follows a similar pattern of response then with a declared recession in Dec 2007, we shouldn’t see it show up in the population statistics until next year, 2010. So far, the Seattle economy has been lagging every else by at least a year, though, so we might not see it until 2011.

  38. 38

    […] know that it will likely take between two and eight years to work through King County’s housing oversupply. In the mean time, small builders—and […]

  39. 39

    […] total number of households. You may recall the last time we checked in on this data back in March: Local Housing Oversupply Could Disappear by July 2010… Good news […]

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