Improvement in Seattle Home Prices vs. Economic Fundamentals

Here’s an update to the area-wide price-to-income and price-to-rent ratio charts we first posted back in April.

These charts are based on per capita income, “Median Contract Rent” (from 2005 adjusted using the “rent of primary residence” component of the CPI), and Case-Shiller home prices indexed to the county-wide median. They are not intended to be used as a valuation tool for any specific home or neighborhood, but rather as a broad measure of the local housing market as a whole.

First up, the home price to income ratio:

Seattle-Area Home Price to Income Ratio

There has been a little bit of improvement since our last update, with the ratio falling another 0.19 points (3%). As of May (the latest Case-Shiller data presently available) the price to income ratio sits roughly 5% above the 1990-2001 average (an improvement from 8% in January).

Here’s the home price to rent ratio:

Seattle-Area Home Price to Rent Ratio

Improvement on that front as well, with the ratio dropping 12.7 points (3%) since the April update. The price to rent ratio is still 19% above its 1990-2001 average (an improvement from 23% in January).

Since incomes and rents are currently falling along with prices, neither ratio has improved as much as we might expect. In the five months between January and May this year, Seattle-area home prices fell 3.5%, but since income also fell 0.6% and rents dropped slightly as well (0.3%), neither ratio has fallen quite as much as the raw drop in home prices.

The mini-plateaus over the last few months in both of the above charts closely resemble the same spring “bounce” that was seen last year. Following last year’s spring plateau from May to December, the price to rent ratio fell 14%, while the the price to income ratio fell 11%. It will be interesting to see where each ratio sits at the end of this year.

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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.

59 comments:

  1. 1
    deejayoh says:

    hmmm – so the index os off 36% vs. incomes and 44% vs. rents. Interesting to to see the updated stats. I might see what I can dig up for just King County.

  2. 2
    Justin Louie says:

    Thanks for the update on this article, Tim. It’s not only interesting to see how far we’ve come but cool, too.

    Personally, I feel this is really good to see the market correcting itself with people borrowing and those lending at much safer DTI ratios. When it started to get out of control in 2005, there was no money behind those loans (as we all know), just lots of freely printing money (creating loans) with collateral that was based in the same overvalued and speculated properties. Now that we’re back in the 2002 range, I’d agree with Tim, we’ll most likely dip a bit further. This isn’t based in any data except when corrections happen; they tend to over-correct a bit and finally settle later on.

    If you were gambling, this might be one of the best times to throw money into a home.

  3. 3
    Kary L. Krismer says:

    What’s the math here? How do you divide an index number by income?

    Also, how hard would it be in the first graph to compare NWMLS King County SFR median to income?

  4. 4
    The Tim says:

    RE: Kary L. Krismer @ 3 – I guess I wasn’t clear in the post when I said that I was using “Case-Shiller home prices indexed to the county-wide median.” What I meant by that is that I took a point at which the Case-Shiller line and the SFH county-wide median crossed, then used the Case-Shiller index to project the dollar-amount home price forward and back from there.

    Not interested in using the raw median for this purpose because it is far too noisy due to changes in sales mix and so forth.

  5. 5
    Kary L. Krismer says:

    My interest in that relates to a “debate” I had with I think maybe Joness (sp?) that Case-Shiller doesn’t account for the change in mix over time, and thus the median would rise relative to Case-Shiller over time. 1990 goes back far enough to test that.

  6. 6
    deejayoh says:

    RE: Kary L. Krismer @ 5

    I don’t think that would affect this analysis – because in any meaningful period (say 10 years) the two indices track each other quite closely at an absolute level. But as Tim points out, the median is so noisy that it’s not really reliable for this sort of view. Maybe if you did a 3 month rolling average of the median you could use it.

  7. 7
    Scotsman says:

    I’m not sure what the methodology is to arrive at per capita income- what happens when we have a U-6 of 18% verses the more commonly reported numbers?

    Folks need to be careful when looking at these graphs given they only capture a very specific data set. When both the numerator and divisor are declining, giving a constant ratio, it’s easy to assume some sort of stability or bottom has been achieved when in reality we could be going over the cliff. A classic example of the importance of the greater context.

  8. 8
    Kary L. Krismer says:

    RE: deejayoh @ 6 – But this goes back 19 years, and over that time the mix of houses has changed considerably. For one things, a much higher percentage of houses built after 1990 sell now than 19 years ago! ;-)

  9. 9
    deejayoh says:

    RE: Kary L. Krismer @ 8 – Case Shiller is zero based to 2000. If you chart the two with that as the basis, they are almost identical. nine years forward, ten years back. 99.8% correlated.

    actually, MLS median is only available back to 1993 (at least what I have) but I am sure you get the idea.

    http://img29.imageshack.us/img29/7896/karyschart.png

  10. 10
    Kary L. Krismer says:

    Thanks for the chart.

  11. 11
    Indy says:

    The analysis, as Tim warns, is fairly rudimentary, but it’s only attempting to give us a rough indication of how far the current market dynamic remains from a long-term sustainable equilibrium. The basic implication here is that, eventually, the distribution of the prices of housing will more-or-less reflect the distribution of incomes.

    Especially when large amounts of recent equity has been wiped out, and lender underwriting becomes more strict – the ratio between incomes and prices tends to fall in a narrower band, and comparing that ratio to historical data from the more stable past gives at least some indication of the nearness of that elusive “housing bottom”.

    Excess vacant inventory, foreclosures, massive underemployment, and other effects of this recession could exacerbate the corrective trend, but these are probably short-term phenomena.

    The median-income is admittedly a clumsy measure, but it’s probably decent enough for this purpose. For a more accurate analysis, one could break down the regional household income distribution. Here’s the data I’ve found.

    Each of the 3.6 million households has, on average, 2.6 people, 1.25 of whom have an income. Of those 1.4 million earners (in percentiles).

    0-10%: make less than 20K/year
    10-25%: 20 to 27K/year
    25-50%: 27K to 40K/year
    50-75%: 40K to 64K/year
    75-90%: 64K to 93K/year
    90%-100: make more than 93K/year

    Now, I don’t know the details of whether 90K earners marry other 90K earners or prefer, 20K earners, but for simplicity’s sake, I’m going to multiply those incomes by 1.25 to get the household income distribution, and I can roughly guess that 90% of Seattle-Tacoma-Bellevue Metro households make less than $115K/year – with the bulk (about 2/3) of them earning between $25K and $85K.

    I don’t have similar distributional data for the metro-area housing stock, and Case-Shiller tiers are inadequate for this purpose – maybe one of you can help me with that. So the question remains, given the housing stock and the current pricing and income distributions – can these people actually reasonably and safely afford these houses without further price declines? To me, the above data and Tim’s chart suggests “we’re getting closer, but we’re not there yet – expect further declines”.

  12. 12
    Rally dude says:

    RE: Scotsman @ 7 – Scotsman – you are betting that Seattle real estate prices will go down another 80%. Can you explain the logic and support it with numbers? Thanks.

  13. 13
    Scotsman says:

    RE: Rally dude @ 12

    What? Where have I said they will fall another 80%?

    I believe my prediction is for 60-70% off peak values, assuming the national economy continues to deteriorate, reaching depression status. But if I’ve recently (i.e. sometime this year) called for an additional 80% from where we are now, I was probably drinking, and should be ignored. ;-)

  14. 14
    Silver9 says:

    Hmmm. I continue to shop for a house and use rental income as a basic barometer of prices. If I had to move, could I rent the house with positive cash flow?

    These charts imply that prices are back to 2003 levels.

    It sure does not feel like that when looking at properties for sale around Kirkland… Asking prices are dropping but they are still higher than 2004 and 2005. And they are still much higher than what I would consider affordable for 2x the median income (est $100k/yr).

    confusing.

  15. 15
    pfft says:

    almost there…

  16. 16
    Andy says:

    Offering 30 – 40% below short sale asking prices ~
    And I almost won 2 ~ soon my friends, homes will be cheap (as they should be)

  17. 17
    Softwarengineer says:

    The immaculant, completely remodeled inside and out 1500 SF house and lot next door to me finally sold for $139K [I think the bank lost lots of money selling it]

    It was not a FHA loan [thank God they don’t allow them in my HOA] and the buyers drive two well kept cars [Ford SUV and a Honda sedan]; not overpriced newer models either…let’s put it this way, they look mainstream American to me, with likely jobs and credit ratings, with a down payment or cash to buy the place with common sense.

    When I bought in my community in 1999 I imagined the RE collapse [I estimated a 2003-2004 depression , a bit off, but a good guess anyway] with wage collapse and uncontrolled growth; so figured I would have a chance of selling, if I had to anyway and not lose much money on my unit, when the manure hit the fan [it has].

  18. 18
    Markor says:

    The price-to-rent ratio seems high. When I look around Bellevue, the ratio is more like 250; a house renting for $2K/month might sell for $500K, not $750K. Seattle did get more heated though.

  19. 19
    wreckingbull says:

    RE: Andy @ 16 – I think end of summer is going to be a good time to dust of the ‘insulting’ offers (as Realtors would call them) and see what happens. Should be fun. You are right to balk at current asking prices, even in a short-sale situation.

  20. 20
    cheapseats says:

    RE: Silver9 @ 14 – My understanding of the chart is not that it demonstrates pricing at the 2004/5 level, but the resepctive ratios have retreated,

  21. 21
    Kary L. Krismer says:

    RE: Softwarengineer @ 17 – How can your HOA not allow FHA? Some condo associations don’t qualify for reasons that aren’t good (e.g. too many tenants, not enough reserves, etc.), but as far as I know, you can go FHA on any house. What could a HOA do to control who makes a loan on the property?

  22. 22
    Jonness says:

    Judging from the true (non-media hyped) state of the economy and Tim’s chart above, I expect the correction to go below the 1997 level of price to income.

    http://www.forbes.com/feeds/ap/2009/08/14/ap6781925.html

  23. 23
    mukoh says:

    RE: Kary L. Krismer @ 21 – Kary, Engineer is in a mobile home community, as far as I know. There is no FHA financing for mobiles, only stick builts thanks god.

  24. 24
    Lamont says:

    I think the price-to-income is probably going to overshoot to the downside. Housing is going to come under pressure given the large oversupply, and the pressure caused by peak oil and resource issues with BRIC demand for commodities. We simply aren’t going to have as much of a %age of our incomes available for housing in the near future (plus we’re going to need to be paying down debt).

    The spring/summer bounce should be ending soon and we should start getting some good information again on where the housing market really is. It’ll be interesting to see if regions like San Diego really start to show signs of true bottoming and that we’re passed the steepest part of the decline or not.

  25. 25
    Markor says:

    RE: Kary L. Krismer @ 21

    Don’t you know that HOA rules supersede the law? Seems like it anyway…

  26. 26
    posthoc says:

    Very nice chart, Tim. Thanks. This from Piggington isn’t quite recent, but does show just how much more wacky areas like San Diego got than Seattle did.

    http://piggington.com/this_just_in_san_diego_homes_are_overpriced

    I also note that the 1990-2001 “baseline” you’ve drawn seems closer to 8 for San Diego, making our 5.77 look like a bargain in comparison. I’d estimate that the price/income ratio is not dropping much lower–probably not below 5, is my guess–which predicts another 15-20% drop from current values, ASSUMING no changes in income or unemployment. Which is a terrible assumption, of course, and leaves the door open for larger drops if the job picture here in the Sound really does deteriorate as much as some people fear.

    RE: Markor @ 18 – Your estimate of a 250:1 price:rent ratio sounds roughly like mine, and I do live in Seattle. Is it possible there is a composition effect at work here: the average rent includes apartments, condos, TH, etc., while the average SFH price is just what it says?

  27. 27
    Cheap South says:

    RE: Silver9 @ 14

    Even though I agree 2 is a healthy multiplier, on this site it was shown that Seattle prices were never 2x median income in the last 30-40 years – unlike many other parts of the country where it has already reached that point.

  28. 28
    posthoc says:

    RE: Cheap South @ 27 – I happen to think that different multipliers for different regions can be justifiable: zoning regulations being more or less tight, perceptions about the local job market, and general desirability. I grew up in San Diego, but have spent most of my adult life elsewhere: Seattle, DC, and Boston. I can see why people might be willing to pay a higher multiple of their salary to live in San Diego, honestly, even if I personally prefer Seattle. Anyway, by nationwide median, your 2x figure seems rather low: median household income in this country is around 50K, the median home price is north of 200K.

  29. 29
    Kary L. Krismer says:

    By mukoh @ 23:

    RE: Kary L. Krismer @ 21 – Kary, Engineer is in a mobile home community, as far as I know. There is no FHA financing for mobiles, only stick builts thanks god.

    That’s not correct. They’ll do modulars in such communities, if the community qualifies. But again, it wouldn’t be the HOA preventing it by decree, it would be by being deficient in some manner.

  30. 30
    Rack says:

    By Kary L. Krismer @ 29:

    That’s not correct. They’ll do modulars in such communities, if the community qualifies. But again, it wouldn’t be the HOA preventing it by decree, it would be by being deficient in some manner.

    Correct, if you own the land underneath it.

    Also how would a HOA know or care what type of loan the buyers use? It’s none of their business….

    I think softy went off the reservation again.

    How does the age, or quality of their cars have anything to do w/ their financial stability?

  31. 31
    deejayoh says:

    By Cheap South @ 27:

    RE: Silver9 @ 14

    Even though I agree 2 is a healthy multiplier, on this site it was shown that Seattle prices were never 2x median income in the last 30-40 years – unlike many other parts of the country where it has already reached that point.

    Good observation. Income multiples have been more like 4-5X in the cheapest time periods over the past 40 years. 2-3X income is a lending rule (e.g. mortgage should not be over 3x income) that can’t be applied to market level as Median price /= 2-3x median income in modern history

  32. 32
    Rally dude says:

    If I remember correctly in 2002 you could still buy a decent house for 350K in the Kirkland area. If you look at http://www.realtor.com – decent places start at 600-700K. Am I getting sthg wrong?

  33. 33
    laterite says:

    RE: Rally dude @ 32

    Long-time lurker, first-time poster here. Rally dude, I don’t think you’re wrong at all. I’ve been browsing Redfin for properties in south Snohomish County and north King County for a couple of months now, and watching the falling prices (I own/live in Marysville and work in Redmond, which is quickly becoming a frustrating commute). I consider a $275-$325k price range to be “reasonable” for my wants and needs. What I’m seeing is a lot of decent places starting to crop up in Mill Creek/Bothell/Lynnwood, but basically that cuts off around the county line along 228th and the price points skyrocket the further south into the Eastside you go. I think a lot of folks in the marginal neighborhoods of Kirkland and Redmond are kidding themselves with what they’re asking currently.

  34. 34
    George says:

    Looks like a few more years of paying down debt and hopefully incomes will start growing so the buy ratio can get down to a “sustainable” 4.

  35. 35
    Cheap South says:

    RE: posthoc @ 28

    Oh, I agree. I was responding to another post (14). Certainly all the factors you mention come to play; but salaries were never that much higher in those higher priced markets (Seattle salaries are not 2.5 times what they are in the Cheap South). As it has been discussed before here, easy financing went crazy in the past 10 years (out of control in the last 7) and that allowed people to take unacceptable loans.

    By the way; I agree the nationwide median household income is (still) about $50K; but, last I read, the country’s median home price is now in the $180Ks. Also, historically, the multiplier nationwide is 2-3; so the median home should be selling for $100K-150K; unthinkable in King County, but very normal in a lot of places.

    I still believe we are facing unprecedented economic conditions with unprecedented global competition, that will put huge pressure on employment and home prices. We’ll see.

  36. 36
    mukoh says:

    RE: Kary L. Krismer @ 29 – Kary, I just haven’t heard of FHA mobile homes even on owned land period. USDA yes.

  37. 37
    Racket says:

    By mukoh @ 36:

    RE: Kary L. Krismer @ 29 – Kary, I just haven’t heard of FHA mobile homes even on owned land period. USDA yes.

    I was wrong, you dont need to buy land w/ it.

    A Title I loan may be used for the purchase or refinancing of a manufactured home, a developed lot on which to place a manufactured home, or a manufactured home and lot in combination. The home must be used as the principal residence of the borrower.

    Maximum Loan Amount

    * Manufactured home only – $69,678
    * Manufactured home lot – $23,226
    * Manufactured home & lot – $92,904 ”

    Source: http://www.hud.gov/offices/hsg/sfh/title/repair.cfm

    The hard part isn’t getting FHA to approve it, but getting the bank to approve it.

    I doubt you run in circles with people looking to get FHA loans on a mobile home.

  38. 38
    Jonness says:

    RE: deejayoh @ 31

    At the national level, the percentage of income Americans have been paying for houses has been steadily rising. It gets way out of whack and adjusts down for a number of years, but then it starts climbing again.

    I put this data together when I was thinking about Kary saying houses have gotten bigger over the years because the number of 2-income households have increased. From my perspective, the houses are getting bigger, the land is getting smaller, and Americans are paying an increasingly larger percentage of their income to buy a home. I’m not making any claims about the data. I need to look at some other factors in an attempt to understand it better.

    The numbers resulting from the 1991 correction are perhaps indicative of what could happen during the current correction.

    —-MedIncome—MedPrice—–Price/Income
    2007 50,233 —-246,500 ———-4.91
    2006 48,201 —-240,900 ———-5.00
    2005 46,326 —-221,000 ———-4.77
    2004 44,334 —-195,000 ———-4.40
    2003 43,318 —-187,600 ———-4.33
    2002 42,409 —-175,200 ———-4.13
    2001 42,228 —-169,000 ———-4.00
    2000 41,990 —-161,000 ———-3.83
    1999 40,696 —-152,500 ———-3.75
    1998 38,885 —-146,000 ———-3.75
    1997 37,005 —-140,000 ———-3.78
    1996 35,492 —-133,900 ———-3.77
    1995 34,076 —-130,000 ———-3.82
    1994 32,264 —-126,500 ———-3.92
    1993 31,241 —-121,500 ———-3.89
    1992 30,636 —-120,000 ———-3.92
    1991 30,126 —-122,900 ———-4.08
    1990 29,943 —-120,000 ———-4.01
    1989 28,906 —-112,500 ———-3.89
    1988 27,225 —-104,500 ———-3.84
    1987 26,061 —-92,000 ———-3.53
    1986 24,897 —-84,300 ———-3.39
    1985 23,618 —-79,900 ———-3.38
    1984 22,415 —-75,300 ———-3.36
    1983 20,885 —-69,300 ———-3.32
    1982 20,171 —-68,900 ———-3.42
    1981 19,074 —-64,600 ———-3.39
    1980 17,710 —-62,900 ———-3.55
    1979 16,461 —-55,700 ———-3.38
    1978 15,064 —-48,800 ———-3.24
    1977 13,572 —-44,200 ———-3.26
    1976 12,686 —-39,300 ———-3.10
    1975 11,800 —-35,900 ———-3.04
    1974 11,197 —-32,500 ———-2.90
    1973 10,512 —-27,600 ———-2.63
    1972 9,697 —–25,200 ———-2.60
    1971 9,028 —–23,400 ———-2.59
    1970 8,734 —–25,600 ———-2.93
    1969 8,389 —–24,700 ———-2.94
    1968 7,743 —–22,700 ———-2.93
    1967 7,143 —–22,200 ———-3.11

    http://www.census.gov/hhes/www/income/histinc/h05.html

    http://www.census.gov/const/uspriceann.pdf

  39. 39
    Jonness says:

    I thought I would ask, in relationship to my above data, how do you think lending standards have influenced the percentage of income Americans are paying for homes? At what point did lending standards begin to weaken (no longer need 20% down etc.)?

  40. 40

    Good questions, Jonness.
    What comes to mind is, in addition to lending standards, how do interest rates play out in all this?
    For example, in 1979, in only took 3.38x the median income to buy a house, but 30 yr fixed interest rates were about double what they are now. Would that be a factor? I don’t know the answer, I’m better at coming up with questions.

  41. 41
    Jonness says:

    That’s a good point Ira. In the past, I made some charts of historical house prices compared to interest rates, but I never thought to plot interest rates against the rising price/income ratio.

    Something else interesting that comes to mind is, in inflation adjusted dollars, median household income has declined since 1999. Thus, the massive runup of house prices/incomes during the current housing bubble had nothing to do with rising incomes.

    Year —-MedianHouseholdIncomeIn2007Dollars
    2007 ———-50,233
    2006 ———-49,568
    2005 ———-49,202
    2004 ———-48,665
    2003 ———-48,835
    2002 ———-48,878
    2001 ———-49,455
    2000 ———-50,577
    1999 ———-50,641

  42. 42
    Jonness says:

    By Silver9 @ 14:

    It sure does not feel like that when looking at properties for sale around Kirkland… Asking prices are dropping but they are still higher than 2004 and 2005. And they are still much higher than what I would consider affordable for 2x the median income (est $100k/yr).

    confusing.

    What gets me is I’ve been seeing REO’s listed higher than the prices the previous owners bought them for in 2005. Do the banks believe we’ve reached the bottom; thus, they are jacking their prices? I wouldn’t exactly call these cases fire sale prices that necessitate the need to jump in before it’s too late. We’ll see how this strategy pans out for them this coming winter.

    If you look at my numbers above showing median incomes were declining while the house prices were skyrocketing, I think it’s important to consider this was a time of massively low unemployment and wealth fueled by the bubble. However, we are continuing to bleed manufacturing jobs, and many of the bubble-created jobs are being lost and are not likely to come back this decade.

    IMO, incomes will continue to decline along with the house price:income ratio. Thus, it will be a double-edged sword when thinking in inflation-adjusted terms.

  43. 43
    Jonness says:

    By Rally dude @ 12:

    RE: Scotsman @ 7 – Scotsman – you are betting that Seattle real estate prices will go down another 80%. Can you explain the logic and support it with numbers? Thanks.

    Although I believe his prediction was based on what would happen if we had a depression, I think a lot of the predictions of house price declines that people made a year or two ago were based upon the Japanese model. IMO, it is way too early in this game to declare victory in the U.S. from what happened to Japan.

    As many have pointed out, house prices take years to adjust because sellers are reluctant to lower their prices. Meanwhile buyers are reluctant to pay the obvious high prices. Had we had a depression (according to Bernanke, we barely averted this reality), house prices would have rapidly plunged. However, we do not need to have a depression in order for house prices to massively adjust in the downward direction. In fact, I believe most “bears” have argued from the beginning that the correction would take many years to play out.

    Look at my data above for the period between 1991 and 1999 in order to get a feel for how long it takes for housing spikes to correct. Of course, the Japan model is a better indicator of how high runups can cause very prolonged price drops.

    https://seattlebubble.com/blog/wp-content/uploads/2008/10/japanes-and-us-housing-bubbles.png

    (chart made by deejayoh)

  44. 44
    Jonness says:

    Look at my data above for the period between 1991 and 1999 in order to get a feel for how long it takes for housing spikes to correct.

    U.S. national data shows the adjustment period it in terms of price:income ratio, but looking at local markets with particularly high runups provides a better indicator of actual price corrections. For instance, see the following chart for the period between 1990 and 1999:

    http://housingcorrection.com/sandiego.gif

  45. 45
    Jonness says:

    Buying a house in San Diego in 1990 and selling in 1997 meant disaster–especially when adjusting for inflation and adding in the additional 8% it cost to sell a home.

    Even though we’ve had a large correction during the current bubble, prices have not corrected enough in Seattle to rule out the possibility of a similar fate of buying now and needing to sell 7-10 years down the road. We are only a year or two into the current correction, and prices are not yet affordable by historical economic standards.

    1990 U.S. Median household income = $29,943
    1990 Q1 San Diego Median house price = $170,159

    1997 U.S. Median household income = $37,005
    1997 Q1 San Diego Median house price = $148,594

    1999 U.S. Median household income = $40,696
    1999 Q1 San Diego Median house price = $174,066

  46. 46
    Scotsman says:

    RE: Jonness @ 42

    “IMO, incomes will continue to decline along with the house price:income ratio. Thus, it will be a double-edged sword when thinking in inflation-adjusted terms.”

    I think this is key- incomes in inflation adjusted dollars have been flat for some time, and I don’t see anything on the horizon that will be working to change that. I would expect foreign competition and their lower wage rates to keep a lid on domestic wages for a long time.

    I would also expect rising taxes and fees on local, state, and federal levels to take a bigger bite out of incomes for all, even the poor. We’ve over spent in the past, and higher taxes will be required to service, let alone pay off, those debts. While the poorest may not pay income taxes, FICA hits them hard, as do gas taxes and other indirect taxes and fees built into the cost of production. The new cap-and-trade energy taxes are a prime example of “hidden” taxes we’ll all pay. The net result is less disposable income for housing and all other forms of consumption.

    If, as many expect, the dollar loses value relative to other currencies then everything we import, especially oil and energy, will become more expensive overnight, again reducing the income for housing. I would expect that housing values will continue to fall and the percentage of income spent on housing will fall. It won’t matter if the houses are larger or not- if the income isn’t there, the prices will have to decline. Higher energy cost for heating/cooling, maintenance, commuting, etc. will all play a role too.

  47. 47
    deejayoh says:

    RE: Jonness @ 38 – I don’t find looking at national median income vs. national median home price to be a useful comparison. The median home may be in Tulsa and the median income in Minneapolis. Apples vs. Oranges. I was referring to a comparison of King county figures – which is IMO more useful and for which my statement holds true.

    https://seattlebubble.com/blog/wp-content/uploads/2009/05/pci-multiple.png

    BTW, I covered this issue pretty extensively in a previous post (which I know you read because you commented :^))

    https://seattlebubble.com/blog/2009/06/01/what-does-personal-income-tell-us-about-near-future-home-prices/

  48. 48
    Scotsman says:

    RE: Rally dude @ 12

    RD, in case you missed my post in the weekend thread, here’s a good summary of why we won’t be seeing a recovery anytime soon, along with a pretty solid case for further significant declines:

    http://economicedge.blogspot.com/2009/08/week-in-charts-buckle-heck-up.html

  49. 49
    Kary L. Krismer says:

    By Jonness @ 38:

    I put this data together when I was thinking about Kary saying houses have gotten bigger over the years because the number of 2-income households have increased. From my perspective, the houses are getting bigger, the land is getting smaller, and Americans are paying an increasingly larger percentage of their income to buy a home.

    Yes, lots are getting smaller. That’s why in Seattle you’ll see houses built behind other houses. They’ll short-plat the lot into two. Or in Kent one lot becomes several.

    Most people don’t seem to value the size of a lot as much as you (or at least I) would think they should. I’ve seen situations where being 1 acre or 2 made no appreciable difference in the value of a house.

  50. 50
    Jonness says:

    By deejayoh @ 47:

    I was referring to a comparison of King county figures – which is IMO more useful and for which my statement holds true.

    My posts were not an effort to disprove your statement about multiples specific to King County. They were to demonstrate that, on average, Americans are paying an increasing percentage of their incomes for homes and to demonstrate periods of corrections take place that involve long periods of time. I also find it interesting that the bubble apparently had little, if nothing, to do with rising incomes and appears to be more the result of cheap and easy credit. I don’t see how your King County chart conflicts with these viewpoints. It’s a given that different areas will have different multiples of house prices to incomes.

    Why is my data useful? Because macro economics affects micro-environments. National home prices vs. national incomes are apples to apples when discussing the macro-economic picture of our nation. As Scotsman points out, incomes are flat, and house prices are up. If you take a look at our ballooning national debt, it becomes apparent that we will either have to raise taxes or default on the debt. When changes like this happen at the national level, they do indeed affect local areas. Seattle will not be immune to these affects.

    http://www.youtube.com/watch?v=O_TjBNjc9Bo

  51. 51
    Jonness says:

    I think what the video above demonstrates is that we post and discuss a lot of historical data and charts, such as Tim’s home price to income chart and the data I posted. But when analyzing what these mean, it’s important to factor in how much real money people have to spend now as compared to past periods. If our entire economy is based on credit, it means a portion of people’s incomes go toward servicing that credit. Thus, for instance, income:home price ratios in 1970 aren’t really the same as they were in 2006. If we enter a period where we legitimately need to pay down our debt, then the ratios are going to head toward the downside.

    For now, govt. is borrowing more than ever in an effort to allow people to continue to borrow money they can’t afford to borrow; yet, consumers have actually begun to save. This savings mentality is having an affect on the overall economy and is partly responsible for the latest slide in stocks. The decreased July consumer spending surprised analysts. Whether this trend will hold or not is anybody’s guess, but I think it demonstrates that, so far, the government efforts to artificially raise house prices and pump up the economy are not working as well as they would like.

    A person in the video claimed, “we’re not going to be willing to take this pain [of paying down the debt] until it gets to be a real problem.” We have since learned is that it became a real problem that nearly caused another great depression, and this simply caused us to borrow more. So it’s looking like we’re not going to be willing to take the pain caused by paying back the debt until it’s too late. Judging from our current liabilities of well over 50 trillion dollars, it appears “too late” is not all that far down the road.

    IMO, America is in extreme danger; yet, our mainstream media is hyping the economy as if nothing is wrong. And I notice some of the opinion at Seattle Bubble has changed to reflect this. “Oh, it was pretty bad, but the worst is over. We’ll have a few tough years, and then everything will go back to normal.” I simply cannot buy into that. Our nation is headed down a very bad road. Sure we recently borrowed a bunch of money, and it makes us feel like everything is OK again. But borrowing money has severe long-term consequences. We cannot run from these consequences forever. We can manipulate the short-term so that a particular 4-year election cycle looks as good as possible, but in doing so, we are increasingly destroying our future outlook.

    Part of the problem is most Americans don’t care about time-lines greater than a year or two. If this were not the case, a 4-year election cycle could actually work, because politicians would be judged by how fiscally responsible they were as opposed to how much credit they made available.

    In short, increased credit availability has caused house price: income ratios to increase during the bubble years (and perhaps longer). The current credit crisis is causing the ratios to go down. When we reach a point of needing to pay down our debts, house price to income ratios will continue to decrease. From a consumer standpoint, we appear to have already reached this point. When/if we reach this point from a government standpoint, the affects could prove to be catastrophic.

  52. 52
    Scotsman says:

    RE: Jonness @ 51

    “IMO, America is in extreme danger; yet, our mainstream media is hyping the economy as if nothing is wrong. ”

    Agreed. And while I understand that confidence in the future is one key to getting the economy moving again, the media and government have irresponsibly overplayed their role as cheerleaders. Like anyone with an addiction, in this case to credit and short term gratification, it’s really best to face the problem head-on and work to eliminate it, not just paper it over with hollow declarations and false hopes. By any measure the amount of debt in the system is at historic highs and must be reduced, the economy rebalanced, and a sustainable foundation for the future established. Unfortunately, very few see the real issues and are working to put forth workable solutions. But circumstances will force that change soon enough. And as in the case of addiction, the sooner it happens the less pain all involved will have to endure.

  53. 53
    MacroInvestor says:

    RE: Jonness @ 51

    A lot of great points Jonness and others make…

    About the local market. I heard this at a dinner party and can’t document it. 50% of local biotech companies have lost their funding. I don’t find that surprising. They are largely venture capital/credit-based and have little to no income. So much for biotech riding us through the storm.

    Whether or not Boeing actually moves makes no difference. They clearly are committed to outsourcing and breaking free from the machinist union. It’s sad, but that is the state of American business. Substitute cheaper foreign labor. Eventually they will work the bugs out of this. As the dreamliner replaces older, more labor-intensive jets, jobs in Puget Sound will contract.

    Microsoft, as we all know peaked 10 years ago. Now they are being assaulted head on by free operating systems, free online software and free mobile phone software. Plus their inability to compete with Apple’s consumer iPod line. Microsoft is not in any danger, but as a growth engine, that ship has sailed as well.

    The banks are hiding massive problems. They are swamped with REO’s. They will sell them someday and that will further depress prices.

    The government IS the entire economy right now. Even with massive bailouts and stimulus, consumers are cutting spending. Imagine what would happen to housing prices if the government stopped (even a little bit) forcing rates down, or providing a secondary market for mortgages. Now imagine where dot gov is going to get $60 trillion for social security.

    The housing news will sound positive for the next couple of months. The $8000 credit for first time buyers is jacking up demand on the low end. But once that expires, what will bring in more buyers on the margin?

    Conclusion — Rates cannot go down any more. Job growth won’t be pulling in many newcomers. Banks are holding back supply. Prices are being artificially supported by gov stimulus. The risk is very high for someone buying a house now.

  54. 54
    Kary L. Krismer says:

    RE: MacroInvestor @ 53 – Lots of different companies have lost funding. In the past I’ve commented on the technological advancements that won’t be occurring because of the credit crisis. I’d meant electronics, computers, etc., but you could easily apply that to biotech.

    As to Microsoft, I don’t really see open source as being a significant problem as much as the fact that stock price was based on growth and once they got to a certain size, growth had to slow.

  55. 55
    Rack says:

    Not to mention that even if they can’t compete with ipod, they have items like the Xbox360 that are doing really well.

  56. 56

    […] being said, the rent-vs-home-price analysis is a generally sound concept, and our latest update on this metric does show the ratio 19% above its 1990-2001 average. Unless there is some reason that Seattle is a […]

  57. 57
    gns100 says:

    RE: Jonness @ 42 – Just a thought, maybe banks report a higher listing price to prop up their balance sheets. Of course it only works if they have no real intention of selling. My friend worked for an attorney back in the mid 90s whose house was perpetually on the market, but never sold. The attorney kept raising his asking price so he could pull more “equity” out. It was funny but it got to the point where the monthly mortgage payment was about a $150K.

    Anyway, maybe banks are just dumping the lower quality assets which they would take a hit on anyway, and hoping the market will come back, and allow them to sell the “higher” quality assets at a profit…

  58. 58

    […] Price to Rent RatioBy The Tim on September 22, 2010 | 15 ResponsesIt’s been over a year since we last checked in on Seattle’s price to rent ratio. Let’s see how that metric looks over the last twenty […]

  59. 59

    […] The Tim on September 23, 2010 | Leave a responseLike the price to rent ratio, it’s been over a year since we visited the subject of Seattle’s home price to income ratio, so let’s take […]

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