Case-Shiller: Seattle’s Summer of Stalled Prices Stretches On

Let’s have a look at the latest data from the Case-Shiller Home Price Index. According to October data,

Up 0.2% September to October.
Up 0.4% September to October (seasonally adjusted)
Down 12.4% YOY.
Down 22.4% from the July 2007 peak

Last year prices fell 1.4% from September to October (not seasonally adjusted) and year-over-year prices were down 10.2%.

Here’s our offset graph, with L.A. & San Diego time-shifted from Seattle & Portland by 17 months. SoCal’s year-over-year is still shooting up toward zero. Portland came in at -9.9%, Los Angeles at -6.3%, and San Diego at -2.4%, all better than Seattle.

Case-Shiller HPI: West Coast

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

In September, fourteen of the twenty Case-Shiller-tracked cities experienced smaller year-over-year drops than Seattle (same as August and September). Denver at -0.1%, Dallas at -0.6%, San Diego at -2.4%, San Francisco at -2.6, Washington, DC at -2.8%, Boston at -2.8%, Cleveland at -3.5%, Los Angeles at -6.3%, Charlotte at -7.0%, New York at -7.7%, Atlanta at -8.1%, Minneapolis at -8.4%, Portland at -9.9%, and Chicago at -10.1%. Vegas still holds the #1 spot for the largest year-over-year drop, falling 26.6% in the year.

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

In the twenty-six months since the price peak in Seattle prices have declined 22.4%.

Here’s a complementary chart to that last one. This one shows the total change in the index since March for the same twelve markets as the peak decline chart.

Case-Shiller HPI: Bounce Since March 2009

Back above 100 slightly at 100.15, which is higher than March, May, and September’s readings, but lower than June through August. Basically this summer has been the summer of incredibly flat home prices in Seattle. I guess anybody who came to “regret their decision to delay buying a home” from last fall to early this year got to spend the whole summer wallowing in their regret. Or something.

The following chart takes the post-bubble years of 2007, 2008, and 2009 and indexes each January’s Case-Shiller HPI to 100 so we can get a picture of how this year’s declines compare to last year:

Post-Bubble Seattle Case-Shiller HPI by Year

It definitely looks as though the tax credit demand seems to have held out Seattle’s spring price plateau for much longer than last year. It will be interesting to see if the effect continues beyond next month, when the giveaway was originally set to expire.

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

(Home Price Indices, Standard & Poor’s, 12.29.2009)

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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.

143 comments:

  1. 1
    Hugh Dominic says:

    Flat is the new up.

  2. 2

    RE: Hugh Dominic @ 1 – Why do you think much of the discussion here has turned to the economy? It’s hard to discuss a lot about prices when not much has changed over the past six months. ;-)

  3. 3
    Marc says:

    I agree, flat is the new up. It won’t make me popular on this blog but things like this Case-Shiller report cause me to be optimistic for 2010. As for my business, the level of new clients signing up this December is shockingly better than last year and it points to a very active January/February period. Admittedly we’re a very small player in Seattle residential real estate and my optimism could be naivete. Nonetheless, you can put me down as someone expecting good things next year (which explains our plan to sign a personally guaranteed lease for new office space). Nothing quite like burning the ship to motivate the troops.

  4. 4
    patient says:

    This looks like a chance to get the market moving again. As in increased volume of supply and demand, not as in higher prices. A period of flat prices should give sellers/agents a chance to align listing prices with selling prices. I.e if you list 20-25% below peak you have a decent chance of selling and you currently do not need to chase the market with constant price reductions. I understand that when we had 3% declines each month early last year it’s frustrating for sellers and almost impossible to time the pricing right and many choose to pull existing listings or not list at all. Now it should be easier for agents to make price recommendations and back it up with data. Who knows how long it will last though ( Sell now or be priced in forever :-)

  5. 5
    Marc says:

    I should qualify my concurrence with Hugh. I’m optimistic for residential real estate but like many of the other folks here I advocate being conservative with offers. Some might call it low balling but I think it’s the only reasonable approach given the continuing uncertainty in the economy (notwithstanding my personal optimism). Plus, the local market has just about reached the point where seller’s expect low ball offers which means you can be quite aggressive without offending the seller. And the goal of a low ball offer is not to get accepted because if it gets accepted, it wasn’t low enough. The goal is to induce a counteroffer and to start the real horse trading.

  6. 6
    AMS says:

    RE: Marc @ 5 – FWIW, as a buyer I really don’t care if I “offend” the seller. It’s not like the seller is my best friend or family member.

    Let’s see should I offer an extra $10,000 to reduce the probability of offending the seller?

    “And the goal of a low ball offer is not to get accepted because if it gets accepted, it wasn’t low enough. The goal is to induce a counteroffer and to start the real horse trading.”

    I guess the other side is that if your full asking price is offered right away you didn’t ask enough?

  7. 7
    PhinneyDawg says:

    As a homeowner, I’ll take flat prices. At least they aren’t declining. The pragmatist in me also likes to see the stalled prices because it simply lets the economy catch up to home prices (eventually) while homeowners don’t lose too much value during the recession.

    I think this points to a long and prolonged recession in the Puget Sound area compared to the rest of the nation, which isn’t surprising based on past recessions.

  8. 8
    softwarengineer says:

    Comparing the Dead Yellow Growth from 2008 to YOY 2009?

    One of the problems I have with overly optimistic trends analyses is taking the horrifying Q4 2008 with no stimulus economy as a base comparison YOY to debt ridden 2009, all it may tell us is the initial 2008 shock of the banks collapsing on the social safety debt net is now not as bad.

    We should be comparing now to boom years, like 2006 and even as late as 2007, before the collapse.

    Let’s be realistic, we haven’t even began to gain ground until we recapture the 2006 job market size again.

    I believe VP Biden totally agrees with me too.

  9. 9
    AMS says:

    This is the basic claim: “Prices in Seattle were up 0.2 percent month-over-month, reversing a downward trend. Seattle home prices were down 12.4 percent from a year earlier.”

    This is the headline:

    “Report: Housing prices up, but for how long?”

    http://blog.seattlepi.com/realestatenews/archives/189450.asp

    Up for 1 month, down for the last 12 months, so the headline is up, but for how long?

    Why is it that the short, very small 0.2% MOM rate is more important than the much longer, larger negative 12.4% YOY rate?

  10. 10
    DrShort says:

    I think December closed activity will be surprisingly strong. Anyone with MLS access have any info on the closed sales and median?

  11. 11
    patient says:

    I think it will ultimately boil down to the foreclosure situation here. How many are underwater now? How many home owners have lost their job? How many i/o loans have recently and are soon to be to be reset to monthly payments that the owners can’t handle? Some economists believs that 10y tresuries will hit 5.5% next year driving mortgage rates up to above 7%, if that happens how resilient are the Seattle borrowers to such an increase? I still see much more downward risks than upward chances for home prices for the foreseeable future.

  12. 12
    Marc says:

    RE: AMS @ 6

    The reason I think you should try to avoid offending the seller is the old truism, people like to do business with people they like and not with people they don’t like. If you offend the seller there’s a good chance they will not counter you and they may even flatly refuse to negotiate with you at all. The same goes for the listing agent who, for better or worse, has the seller’s ear. An offensive offer can be especially repulsive to a listing agent because this is the person who assured the seller that they could sell the property for a certain price and now they’ve got an offer that totally flies in the face of that claim. If the listing agent hates you this does you no good. Sure, you might not care if they hate you but you should care about whether you’re cutting off your nose to smite your face.

    I find that a “more flies with honey than with vinegar” approach works much better than being confrontational and “in your face.” Even when presenting a low ball offer. Accordingly, I try to find a way to convey that we know our offer is low but there’s a logical explanation why. The reason we provide might not persuade them to accept the offer but that’s not the point. The point is to help the seller understand that we’re not being an a__hole, we’re just trying to make a prudent investment decision. It’s not as easy to begrudge someone who’s simply trying to make a good decision. Thus, sellers and their agent will usually respond in a constructive manner rather than telling us to go jump off the nearest cliff.

  13. 13
    AMS says:

    RE: Marc @ 12 – “If you offend the seller there’s a good chance they will not counter you and they may even flatly refuse to negotiate with you at all.”

    My reply is that if they really think they will find a better buyer, so be it. I’d rather not have the seller send me an “offensive” counter offer, lol.

  14. 14
    Marc says:

    RE: AMS @ 6

    “I guess the other side is that if your full asking price is offered right away you didn’t ask enough? ”

    Bingo.

  15. 15
    HappyRenter says:

    RE: AMS @ 9

    I think a better title would have been: “Housing prices steady, but for how long?” Or: “Nothing new, but for how long?”

  16. 16

    By DrShort @ 10:

    I think December closed activity will be surprisingly strong. Anyone with MLS access have any info on the closed sales and median?

    We will beat the volume of December 2008, but December 2007 will be a stretch, and December 2006 not a chance.

  17. 17

    RE: AMS @ 9 – The thing is though, by January or February we could have positive YOY comparisons on the median, assuming the median stays relatively flat. Most that YOY drop was late last year, early this year.

    Stated differently, the YOY drop is really old news.

  18. 18
    AMS says:

    RE: Kary L. Krismer @ 16 – How much of the December 2009 sales are delayed November 2009 sales based on the tax credit extension?

  19. 19
    Marc says:

    RE: AMS @ 13

    “My reply is that if they really think they will find a better buyer, so be it. I’d rather not have the seller send me an “offensive” counter offer, lol. ”

    Actually, I don’t mind an offensive counteroffer at all. In fact, on the flip side, I tell my seller clients that any offer is a good offer even ones so low that we will never, ever accept. It’s all in how you respond to it. Getting mutual acceptance today is not the goal for every offer that comes in. Sometimes an offer (or counteroffer) is too low and the parties are simply not in the right place for a deal to come together. However, that may change as time passes and I strongly believe it’s a mistake to burn a bridge with anyone who has taken the time to make a formal written offer (or counteroffer). That fact alone means, on some level, they’re interested and that’s the key.

    Time and again I’ve seen a deal come together days, weeks or months later. So why foreclose that possibility by being a jerk? Personally, my ego is not so big that I have to “win” every encounter I have with another person (not to say your’s is either)

  20. 20
    HappyRenter says:

    RE: Marc @ 12

    I start thinking that maybe it’s better to not have an agent at all. Just go out and buy by myself. I want to buy a house I like at an unbeatable price. If the seller is offended, I can’t help it.

  21. 21
    AMS says:

    RE: Kary L. Krismer @ 17 – I understand, and considering how flat the prices have remained, it won’t take much of a change one way or the other.

    How about a headline, “Tax credit extended; prices remain flat.”

  22. 22
    AMS says:

    RE: Marc @ 19 – An offensive counter offer is one that’s too high, not too low. If the counter offer is too low, as a buyer, I simply accept. That’s not offensive at all.

  23. 23
    AMS says:

    RE: HappyRenter @ 20 – I have not done it in some time, but I have been known to organize low offers and then I come in with a higher one hoping the seller will accept.

  24. 24
    ray pepper says:

    RE: HappyRenter @ 20

    Greetings from Reno! Market here has definitely bounced but I know…who cares about Reno?…Well, I’m here to tell you its all about the buffets!

    Happyrenter..You maybe right. !! Focus on the SOC and do your due diligence! Then EXTRACT!

    Happy New Year Bubbleheads!

  25. 25
    Marc says:

    RE: HappyRenter @ 20

    I couldn’t agree more. I’m an attorney first. I picked up the real estate license just so we can more expediently rebate the buyer’s agent commission to our buyer clients. And for seller’s we can provide a way to get on the MLS without paying a listing commission.

    But even more to your point, buying and selling a home is not rocket science and an advanced degree is not an absolute prerequisite. If you have the time, energy, and gumption to go it alone, then go for it. I wouldn’t recommend it for everybody because there are so many misunderstandings out there about the process, risks and benefits of buying and selling real estate. But, I definitely would not make a blanket statement that a person must always have an agent or an attorney represent them for a straight forward home purchase.

  26. 26
    patient says:

    An offended seller, now that’s funny. Why would a seller ever get offended by an offer? And why would a buyer ever want to do business with a seller that gets all emotional? Business is for grown ups, if you don’t like the offer make a counter offer that’s how easy it is, keep your emotions in check or let someone competent handle your transaction.

  27. 27
    The Tim says:

    RE: patient @ 26 – Seriously. If anyone should be worried about offending someone, it should be the seller being cautious not to offend the potential buyer. After all, who is coming to the closing table with a check?

  28. 28
    Marc says:

    RE: AMS @ 22

    Excellent parsing. Hopefully my larger point came across.

  29. 29
    AMS says:

    RE: The Tim @ 27 – As a seller, I have declined some offers I considered low to sell even lower. I have declined some offers I have considered low to sell higher. As a seller, I’ve never declined an offer that I thought was high, even if the buyer was going to resell at an even higher price.

  30. 30

    By AMS @ 18:

    – How much of the December 2009 sales are delayed November 2009 sales based on the tax credit extension?

    I’d have no way of knowing that, but I’d guess very few. I think the peak for the tax credit was a month or two before just due to logistical reasons. Buying a house is not like buying a TV, because although both require some research, with the house the products vary a lot and once you find one you want you still need to get someone to accept your offer.

  31. 31
    HappyRenter says:

    RE: ray pepper @ 24

    Sorry, what is SOC?

  32. 32
    AMS says:

    RE: Marc @ 28 – Yes, I understand the larger issue, but…

    When I put forward an offer that I consider to be fair, but the seller considers it to be “low balling,” it’s game over. We value the property at different prices. If I value the item highly, and put forward a low offer, then I am simply reducing the chances of the purchase.

    We don’t know what case we have here. How much does the buyer really value the property? How much does the seller really value the property?

  33. 33

    RE: HappyRenter @ 31 – The buyer’s agent’s commission. Selling Office Commission.

  34. 34
    AMS says:

    RE: Kary L. Krismer @ 30 – Unfortunately my unscientific sampling suggests otherwise. I have found a couple of delayed sales. The original contract called for closing by November 30, but as soon as the tax credit was extended, the contract was amended to allow a December closing. Who knows, maybe this is just chance.

    We also have not agreed as to the peak of the tax credit induced sales. It’s still my claim that the peak is the deadline month, November, with some cracks, since the deadline was extended near the end.

  35. 35

    RE: AMS @ 34 – How would you know when the original contract called for a closing? Only the agents involved (as well as escrow and mortgage people) would know that.

  36. 36
    AMS says:

    RE: Kary L. Krismer @ 35 – Are you suggesting that people just lie about the tax credit deadline? If someone tells you, “I put forward an offer that requires a November 30 closing so I could get the tax credit,” and that person comes back and says, “We agreed to extended the closing into December,” that it’s all a lie?

    Please.

    (Also the November 30 day was discussed in September in one case, but the other case it was in December)

  37. 37

    RE: AMS @ 36 – No, I’m merely asking how you would know that? Just from a couple of personal contacts? I’m saying I don’t think there’s any way to have an idea of how many were continued, because that information isn’t publicly available.

  38. 38
    AMS says:

    RE: Kary L. Krismer @ 37 – I admitted that my unscientific convenience based sampling might not represent the larger market (See #34). All I know is that there are at least two, and I am not even sure that those closed. The basic idea that some November sales have been shifted into December based on the hard income tax credit deadline being extended is an issue. Normally December is not a very busy month, but some of the November rush to the tax credit could have been pushed into December. I have no idea as to how much of an impact this might have.

  39. 39
    HappyRenter says:

    RE: AMS @ 32

    Last summer we were looking around for houses in NE Seattle. We saw a lot of dumps in the range 400-500K. We saw however a really cute house near Mapleleaf, 3 bedroom, rambler style with basement for 500K. They had just done some remodeling and put a new kitchen. The roof was at least 30 years old and we thought it might have to be replaced soon. 500K is beyond our range. Would it have been ok to offer 400K because we think that’s what the house is worth? The house is from the 40s. Or would that have been offensive to the seller?

  40. 40
    Marc says:

    RE: AMS @ 32

    I like your style, a little strong but good nonetheless. I take a slightly different approach than “game over” in the circumstance you describe. Again the reason being is that while it’s game over today, the game may start anew next week, next month, next listing agent, who knows when. So, when a deal is not going to happen I thank the listing agent and seller for “even considering our offer” and I ask them to “ please keep us in mind if anything changes.” In negotiation there’s probably nothing as powerful as walking away and if you do it right (i.e., if you leave the door open and don’t tell the guy to go screw himself) it’s amazing how often the other guy may come around to your way of thinking.

    We all have experience with human psychology and sellers of houses, on balance, tend to be emotionally involved in the product they’re selling (e.g., family home, major flip investment that everything is riding on, etc.). People have pride and trying to make someone do something that hurts their pride is a recipe for failure. I try, whenever possible, to set things up so pride is not an issue or is minimized as much as possible. Is it the best negotiating strategy, I can’t say. But I can say it has worked quite well for me.

  41. 41
    AMS says:

    RE: HappyRenter @ 39 – If I only have $400,000 and I find something I like, I would offer $400,000. When the counter offer comes back, if it comes back, at $410,000, it’s a no-go. I’d much rather have made an offer than to wonder later. I’ve made a lot of fair deals offering what I can afford.

    The other day I went out on a Craigslist adventure. I never carry a significant amount of cash. I file a flight plan. I don’t deviate from the flight plan, and I have other safety precautions in place. In any event, the seller wanted a little more than I wanted to pay, but it was reasonable, so I paid the price. If the seller wanted more than I was able or willing to pay, then I would not have purchased.

    Part of the problem with housing is that so many buyers value the item based on “low monthly payments,” or “affordability.” How many people do you know that have ended up with a bad automobile purchased based on this sort of pricing?

    I should mention, however, the type of game is critical. The strategy for single-shot (non repeat) games is much different than for repeat games. This gets to the whole idea of the Prisoner’s Dilemma. If you are in a gang, and you expect the game to last your lifetime, then you will not defect. On the other hand, if you are involved in a single-shot game, you will always defect on your accomplice. In the former case, there is a future penalty to defecting, which might be your life. In the later case, there is no future penalty.

  42. 42
    AMS says:

    RE: Marc @ 40 – Yes, the difference between single-shot and repeat play. I prefer to use the Prisoner’s Dilemma-see #41.

  43. 43
    The Tim says:

    By AMS @ 41:

    Part of the problem with housing is that so many buyers value the item based on “low monthly payments,” or “affordability.” How many people do you know that have ended up with a bad automobile purchased based on this sort of pricing?

    That is exactly the point I made on here three years ago.

    In my opinion, it’s no wonder that home prices have gotten so out of whack with true fundamentals, when the first question someone asks in the home buying process is not “Is this house worth $XXX,000?” but rather “Can I afford $X,000 per month (no matter what kind of financing it takes)?” Obviously a monthly payment must be affordable, but should that really be the sole determining factor in whether a house is worth buying?

    I find it interesting that Ardell seems to have changed her tune on that subject lately. 2006, in Beginning the Home Buying Process:

    STEP 1: The first step is the most extensive one, as it combines many factors. Home Price, which is determined by monthly payment affordability, cash needed to close, and commission to be paid to the Buyer’s Agent.

    Note no mention of determining the target price based on your actual needs or how much you value homes in different neighborhoods, etc. It’s all about the monthly payment. Fast-forward to 2009, in An Alternative Approach To Home Buying:

    When you need a new coat, do you calculate how much coat you can afford? Sometimes, yes, if you are on a limited budget. But more often you simply buy one you like at a reasonable cost. Why isn’t home buying more like that?

    Maybe because agents like you pushed the “determine the price based on the monthly payment you can afford” model for years and years? Nah, that couldn’t be it.

  44. 44

    RE: The Tim @ 43 – There’s another difference between then and today. Back then the banks would loan you a lot more money. We had to warn clients not to borrow all that a bank would loan them. Now that advice is not as necessary, but it’s still probably prudent.

  45. 45
    Marc says:

    RE: The Tim @ 43

    Tim,

    Of course, your point is correct but, in Ardell’s defense, she has come a long way in the past few years. My very first blogging experience was on Rain City Guide and I (like my partner Craig, another RCG contributor) took a fairly confrontational approach about the problems with the traditional real estate commission model. She strenuously defended the model at the time but has since become much more relaxed, if not somewhat favorably inclined, towards alternative models like Redfin, Findwell, Ray’s gem $500 Realty, and if I may humbly add, WaLaw.

    She’s as strongly opinionated a person as you’re going to find but she seems willing to consider other people’s opinions and to give them a chance. You’ll never win, but she’ll hear you out! :-)

  46. 46
    patient says:

    RE: Kary L. Krismer @ 44
    ” We had to warn clients not to borrow all that a bank would loan them.” Really, really?! Agents had to warn their clients not to over extend themselves? You should have but “you” as a profession didn’t . What I remember it was was more like, buy as much as you can get funding to, it’s the best investment EVER.

  47. 47
    Dave0 says:

    Assuming the YOY change continues on it’s linear path to 0 like it looks like it’s going, Seattle housing prices look like they will bottom out in March 2010, at a CS index value of 137.39, 71.4% off the July ’07 peak. The peak for 2010 looks like it will be in Oct at 147.25 (76.6 % of peak) but will drop back down to 143.95 (74.9 % of peak) in Dec ’10 due to seasonal price shifts.

    Again this is just my guess based on the latest data out there and I reserve to right to adjust it as new data comes out. :)

  48. 48
  49. 49
    waitingforseattletocool says:

    RE: The Tim @ 27

    All this talk about offending the seller is just silly. Plain and simple, it is a negotiation. In a seller’s market, the seller is going to give up less in negotiation, in a buyer’s market, the seller is going to give up more.

  50. 50
    D. in Ballard says:

    RE: waitingforseattletocool @ 49
    We made on offer of 730k on a house selling for 790k. They countered with 780K. Maybe they were offended. Who knows? Their aggressive counter made us walk. If they had countered with 750k or even 760k we could have negotiated, but they made it really easy to say no.

    8 months later they closed at 700k. That’s 8 mortgage payments later. I’m really glad we didn’t get the house, but I do wonder if their pride prevented them from coming back to us later. If I were the one selling the house, I would certainly have contacted an interested buyer to say that I was more willing to negotiate now. What’s there to lose? I really don’t get it.

    But man we dodged a bullet. We’re looking at 600k places now.

  51. 51
    DrShort says:

    RE: waitingforseattletocool @ 49

    It’s not that simple. People are emotional and view their homes as a reflection of themselves. When you “low ball” the seller, you are devaluing what they’ve created.

    What you really want to be is the second person to low ball. The first low baller broke the ice and got the seller to second guess their pricing. Sellers don’t generally move big chunks on price overnight — it takes time (weeks, months?) probably similar to the grieving cycle.

    Use rational thought and analysis to value a house you’re interested in, but be very emotionally smart and aware when it comes to moving the seller to your price.

  52. 52
    The Tim says:

    RE: DrShort @ 51 – I wonder if there’s a devious strategy that could be employed there… What if you intentionally had 2 or 3 friends “soften up” the seller by submitting a series of seriously under asking low-ball offers, then a week or two later you come in and make your offer that, while much lower than asking price, still just happens to be above the offers of your decoys.

    Sort of the complementary strategy to shill bidding by a seller…

  53. 53
    AMS says:

    RE: The Tim @ 52 – Like #23?

    (I don’t consider it devious, by the way)

  54. 54
    DrShort says:

    RE: The Tim @ 52 – I bet that would work on some sellers (if they are truly overpriced).

    One problem that is going on right now is the on the cusp short sale. For instance, someone has their home listed for $500K, but owes $450K. It’s not a short sale if they get full price, but any offer much below turns them into a short sale. It might be harder to move this buyer.

  55. 55
    patient says:

    RE: DrShort @ 54 – I don’t think it just turns into a short sale since I think you need to be behind on your payments for the lender to accept a short sale. No doubt though that the mortgage is the bottom level that will be accepted for most. That’s what we call being “priced in” or it can of course turn into a foreclosure if the owner can not/will not make payments.

  56. 56
    AMS says:

    RE: DrShort @ 54 – Clearly below asking price offers don’t get much attention when the seller has a stack of above asking price offers.

  57. 57
    Marc says:

    RE: The Tim @ 52

    I’m sure this probably happens and I would argue (if I represented the seller) that, at a minimum, it violates the duty of good faith and fair dealing implied into all contracts in the state of Washington. It arguably amounts to fraud as well. Obviously, the hard part is for the seller to discover the conduct. However, if it was discovered and reasonably good evidence was available, you would not want to be the buyer or one of his shills (this could be deemed a civil conspiracy) as a jury would not likely sympathize with you. I think I would seek to unwind the sale (rescission) and to recover any other money damages I can prove, plus an award of attorney’s fees and costs.

    If you could prove the buyer did it with any sort of frequency it probably violates the Consumer Protection Act. I don’t do criminal law so I have no idea what sort of criminal ramifications there might be.

    So, in short, don’t do it. If you do it anyways, be prepared to pay the fiddler should he come calling.

    [This is not intended as legal advice and should not be relied on as such. No attorney-client relationship is implied or intended.]

  58. 58
    The Tim says:

    RE: Marc @ 57 – Yeah, there’s a good reason I described it as a “devious strategy.” ;^)

  59. 59
    AMS says:

    RE: Marc @ 57 – I would not suggest that any agent organize this sort of behavior, and I wonder if there is an anti-trust issue.

    But here we go back to the discussion at lunch. Did you see XXX for $$$? Sooner or later you have everyone interested…

    As always, the offers are made independently, though different agents, and each actor would love to buy at the offered price. Also the seller was under no obligation to accept any of the offers!

  60. 60
    AMS says:

    RE: Marc @ 57 – Also I’ve gone to auctions with multiple people, we agree to bid in a certain way. Maybe that’s illegal?

  61. 61
    Marc says:

    RE: AMS @ 59

    Any good attorney can find a way to defend just about anything so there’s little doubt that this merry band of low ballers can come up with a defense. The one you describe being one such argument (i.e., we actually did want to buy the house if he’d sell it). That’s not implausible but the surrounding facts would need to be taken into account. For instance, if the seller were a large national bank, then the jury may not care at all. If it was a little old lady with a cat, no family of her own, but an entire church community who loves her and consider’s her grandma, I wouldn’t want to be the defendant.

    I think the prisoner’s dilemma you mentioned earlier may be the downfall. Sooner or later one of the low ballers may grow a conscience or get tired of never getting a sweet deal (or sweet enough deal) and maybe he decides to bust his comrades to get even (now that’s a hypothetical to make a law professor proud). His damning testimony in exchange for a settlement may be all it takes to win the seller’s case.

    So, choose your accomplices, err, business partners well.

    [This is not intended as legal advice and should not be relied on as such. No attorney-client relationship is implied or intended.]

  62. 62
    Marc says:

    I know it’s lame but I’ve got to put a disclaimer on my comments above about the collusive bidding (comments 57 and 61) – this is not intended as legal advice and should not be relied on as such. No attorney-client relatiohsip is implied or intended.

  63. 63
    AMS says:

    RE: Marc @ 61 – I’ve never done this without an actual willingness to buy. In other words, every offer that I’ve made I was willing to follow through. Generally it’s not too difficult to sort out the willingness of buyers, from low to high. What’s being organized is the order in which the offers are made. Everyone is willing to buy at some price… This clearly only works when the asking price is significantly too high. If the asking price is low, then there will be other buyers (bidders).

    This strategy also works best, so I have found, when there is some major problem, so the buyers who are willing to pay the most are discouraged.

    I am not sure, however, that there isn’t an anti-trust issue in discussing buying prices. The idea of good faith and fair dealing would definitely apply if all the offers will shills. That’s not the case that I have been involved in. It’s more like I suggest that I will pay $X, but will the seller sell? If someone else is willing to pay more, then that offer is delayed until after my offer is declined.

    Using the PD, as a group we allow the person with the lowest price to go first. It’s quite simple to bid lower, but the chances of success go down.

    One strategy at auction is to limit the bidding activity to bands of prices. If it sell for less than $X, I am in, but over $X, you go ahead and bid. The second bidder thinks that it will sell for more than $X, but if it does not, then clearly the seller did not realize the full value, had this organized bidding not taken place. I do suspect that there is an anti-trust issue here. A conspiracy to keep selling prices lower. Seller damages, on the other hand, are going to be another issue.

    As far as the little old lady goes, I guess it’s a good thing that Juries resolve issues of fact more than issues of law.

  64. 64

    This has been a great discussion, and I’d like agree with something Marc said earlier. There’s no reason to have any negotiation be anything but friendly, even if it’s a lowball offer. One should not be out there to “beat” somebody, but to make a deal in which every party feels okay. Sometimes it’s not the listing agent who’s deluded, but the seller. So if I’m presenting a low offer, and provide justification for it, that can be seen as helpful and educational rather than hostile.
    At the same time, most sellers aren’t going to be insulted by a low offer, they’ll just say no. By the same token, it’s wise to ascertain which sellers are more likely to entertain a lowball offer. Simply throwing lowball offers at a wall and seeing if anything sticks is a waste of time and energy. A bit of strategy goes a long way.

  65. 65
    AMS says:

    RE: Ira Sacharoff @ 64 – Ira, I think we are generally in agreement here. I am not into wasting time with low offers, but at the same time, I am not into worrying about what the seller thinks about my personal valuation of his property. Delusional sellers are the ones who are at the greatest risk of having “low ball” offers. Under no circumstance is it necessary to get nasty.

    One man’s trash is another man’s treasure.

    Just ask a divorced guy who has remarried.

  66. 66
    gomannypacquaio says:

    A year ago, There were approximately 12,000 or more houses for sale in King County and now there are 7,700 houses for sale. Whoa, that’s a big change. Less inventory means less choices and higher prices! Keep renting bubbleheads that’s the way i like it.

  67. 67
    WestSeattleDave says:

    RE: gomannypacquaio @ 66 – gomanny…If less inventory meant higher prices, then why have prices continued on a relentless trend downward over the past year? According to your “theory”, prices should have climbed as inventory shrank. But it didn’t. Why not?

  68. 68
    patient says:

    RE: gomannypacquaio @ 66 – Trolling.
    From the inventory tracker history:

    12.29.2008 16:00 10491 9836 9170

    12000 or more? No, not really. More like 9000.

  69. 69
    Scott Weitz says:

    RE: Marc @ 3

    Don’t signt the PG!! Are you nuts?! You have all the leverage right now!

  70. 70
    Scott Weitz says:

    RE: gomannypacquaio @ 66

    Ever person that can afford to waste their money on their mortgage is of the mindset ‘don’t sell now, the market is terrible’. Simply put, they are misguided. Better to sell down than at another 30% down.

    This problem is just getting started. The bankrtupcy court is SWAMPED right now! Foreclosures are imminent. It will be many, many years before we ‘recover’.

  71. 71
    softwarengineer says:

    RE: Scott Weitz @ 70

    Exactly Scott

    The smart sellers today unload at 20% off this year’s prices…..they’ll give Scott and I a big hug for our advice next year. Add in commercial loan delinquencies and chronic empty commercial space….and it gets impossible to avoid even modest degradation in 2010 home prices.

    The big problem is Scott and I have given good advice that won’t work on low equity investments, let alone hopeless upside down loan flippers. That’s the gasoline to the foreclosure fires that, no amount of $8000 tax credits can fix.

    The system will reset itself, but rewarding bad loan management and greedy buyers with more safety net debt just piles more loose mud to make the leaky Green River dam higher for now, that’s slamdunk going to burst and flood later, that much worse.

  72. 72
    ARDELL says:

    Thanks for the charts, Tim. Looks like my “bottom call” is holding. After May 1, all bets are off :)

  73. 73
    patient says:

    Bottom? I really doubt it.

  74. 74
    David Losh says:

    RE: ARDELL @ 72

    “After May 1, all bets are off :)”

    What does that mean? A bottom is constant, the bed rock. It sounds as though you think prices will drop when the tax credit is over, or the fed stops buying mortgages, or the Census data starts coming in.

    If that’s the case, your call sounds hollow.

  75. 75
    Scotsman says:

    RE: Marc @ 57

    I’m not so sure. What is the damage suffered? The seller, supposedly the damaged party, is always in control and can accept or reject any offer made. It seems to me by accepting an offer they agree, everything considered, that is the current market price. Is the seller dependent of the offers of buyers for market pricing information, or are they responsible for doing their own research and coming to their own conclusions about a reasonable value? There will always be buyers looking for a screaming deal, making very low offers on the off chance that once in a while one will be accepted. But the seller is never required to accept any of them. While we may not see the strategy as “fair play” it doesn’t necessarily strike me as illegal behavior.

  76. 76
    shawn says:

    I sure would not want to offend a seller, but if that means I need to pay thousands more for their property than I need to, well I think I am going to choose to offend the seller.

  77. 77
    corncob says:

    By gomannypacquaio @ 66:

    A year ago, There were approximately 12,000 or more houses for sale in King County and now there are 7,700 houses for sale. Whoa, that’s a big change. Less inventory means less choices and higher prices! Keep renting bubbleheads that’s the way i like it.

    Did those homes disappear? What you are pointing out is that a massive flood of inventory is likely to crush any signs of price stabilization or growth in the market. If enough sellers think it has turned next spring, watch out as it might be a rush for the exits before the next leg down. The economy and pulled forward sales guarantee demand will be weak for years to come, and foreclosures and money bleeding mean sellers will continue to be weaker and weaker in their ability to hold out.

  78. 78
    Ray Pepper says:

    If I may chime in with the voice of reason in/re to low ball offers:

    A Pre Approved Buyer will advise his competent Agent on what he is willing to pay for a specific property.

    That competent agent will hopefully call the equally competent listing agent and advise the offer amount.

    I don’t care if its 5k less or 500k less. There is no such verbage as “low-ball” in real estate negotiation.

    I contact the listing agent VERBALLY and advise of my impending transaction prior to submission.

    If the offer is lower then the asking price I usually get back one of these responses:

    “Ray we already had an offer 50k above that and it was rejected.”
    “Ray just submit like everyone else.”
    “Ray PLEASE submit your offer!”

    I advise my client of what was stated by the listing agent and the TONE of the conversation. It is more then obvious we WILL NOT submit if a higher offer was already rejected. The fact is WE owe it to our clients to submit their offer and I will unless I’m specifically told otherwise.

    The fact is this…………… NOBODY sets the value of the property other then the Buyer! Its the Agent who’s incompetence wastes time, energy, and offends people.

    The SELLER should NEVER be offended unless their listing Agent is incompetent and does not know their client!

    Just needed to clear the air……………..Now back to the Buffet!

  79. 79
    ARDELL says:

    ” It is more then obvious we WILL NOT submit if a higher offer was already rejected.”

    Why not, Ray. Many, many people end up selling for less than a higher offer than they previously rejected.

  80. 80
    ARDELL says:

    Ray,

    Looked at a property today and the listing said “Call and we will tell you what the bank wants.” I almost fell over laughing. If there are no other buyers in the room, what do we care what the bank “wants”. They’ll want something different eventually, if they don’t get what they want today.

  81. 81
    ARDELL says:

    David,

    If it holds for 15 months 2/09 to 5/10…I’ll be happy. Never say Never or Forever, David. I just hope they don’t extend the credit again.

  82. 82
    David Losh says:

    RE: ARDELL @ 81

    It doesn’t work that way.

    As we discussed, it’s my opinion, right now, if you own it, and want out, sell for whatever you can get. There is no dance, just get out, and be grateful.

    Next March through August the market will be more stable and prices will decline at least 10%.

    Real Estate, the core value of Real Estate, never changes, it’s constant, and predictive. The people who do well follow the numbers rather than the sales statistics.

    Now when you put it like, “if it holds for 15 months you’ll be happy,” what does that mean? Is that 15 months of sales, or listings, or both? Is it how many deals that can be done? Is this a true bottom or a false bottom, and if it’s false what’s the purpose of the discussion?

  83. 83
    Gilly says:

    Re #10. NWMLS gives 1091 solds in King Co for 12/1/09 to 12/29/09. Median sale price $380,000.
    Seattle (city) is 368 solds, median sale price $395,000.

    Here are number of solds & expireds in previous Decembers (12/1 to 12/29) for Seattle.

    YR #SOLD #EXPIRED
    2009 368 135
    2008 303 231
    2007 421 199
    2006 618 119
    2005 619 66

    ie. volume up approx 20% over last December.

  84. 84
    AMS says:

    RE: ARDELL @ 80 – I’ll tell you what the bank wants. The bank wants to be out of the real estate owned business and back in the loan business.

  85. 85
    Jonness says:

    I compared all 20 Case-Shiller cities to median household income by setting the price to Jan 2000 levels, and then adjusting according to the Case-Shiller index. I used U.S. Census county data for median household income. The results are extremely interesting. You can run the charts at this link:

    http://housingcorrection.com/medianpricechart/CaseShillerAbsoluteVsMHICensus.aspx

    Since there is so much info in the x-axis description, you have to mouse over the data points in order to get dates and values.

    Here is a screenshot of Las Vegas:

    http://housingcorrection.com/misc/LasVegasCSPToMHI.jpg

    In short, prices in Vegas are very low compared to incomes. The other 19 Case-Shiller cities are available at the link and are very interesting.

    You can easily see the effect of credit expansion and contraction raising and lowering the money available in the system available to chase assets.

  86. 86
    Jonness says:

    By WestSeattleDave @ 67:

    RE: gomannypacquaio @ 66 – gomanny…If less inventory meant higher prices, then why have prices continued on a relentless trend downward over the past year? According to your “theory”, prices should have climbed as inventory shrank. But it didn’t. Why not?

    IMO, a lot of people won’t list their homes in a market like this unless they feel some distress. IOW, most potential sellers are still deluded by what the home was worth in 2007 and can’t stand to sell cheap. This decreases inventory.

    The unprecedented amount of gov. money thrown at the problem helps support the “I’ll sell when the market comes back” mentality, as does the “Why should I sell now and move up when my job is at risk?”

    I’ve heard, “now is a great time to buy because interest rates are low” for years on end. Are these same RE agents going to say, “now is a terrible time to buy because interest rates are high” once rates go up?

    Not a chance. It will be “High interest rates have reduced house prices; thus, for the same monthly payment, you get a bigger tax write off. Now is a great time to buy!”

    IMO, the key to future house prices is the amount of credit money in the system.

  87. 87
    Anon. says:

    RE: Marc @ 57
    I don’t understand.
    There’s no way for anyone to prove beyond a reasonable doubt (this is criminal trial we’re talking) that your “friends” weren’t actually interested in purchasing the home. Then they called you about the home that they submitted offers on, and you thought you would have a go as well!

  88. 88
    Ross says:

    By PhinneyDawg @ 7:

    As a homeowner, I’ll take flat prices. At least they aren’t declining.

    Flat = decline, after inflation (which appears to be ticking up (see wholesale inflation numbers))

  89. 89
    Cheap South says:

    By Ross @ 86:

    By PhinneyDawg @ 7:

    As a homeowner, I’ll take flat prices. At least they aren’t declining.

    Flat = decline, after inflation (which appears to be ticking up (see wholesale inflation numbers))

    Then again, if a house is a roof over your head and NOT an investment, the price movement does not matter. It will only matter when you need to move. If you stick around your area, all prices would have moved in the same direction. Now, if you move someplace else, then you are hopefully comparing Seattle to Vegas, Miami or Tampa and winning big (like the now 4 WA plates I have seen in my ‘hood in the last 3 weeks). Your salary will be about 30% lower; but your home will be about 50% lower.

  90. 90

    By Ira Sacharoff @ 64:

    This has been a great discussion, and I’d like agree with something Marc said earlier. There’s no reason to have any negotiation be anything but friendly, even if it’s a lowball offer..

    I’ve seen low ball offers go from there to near list price. If the seller had not countered, they wouldn’t have sold.

  91. 91

    By WestSeattleDave @ 67:

    RE: gomannypacquaio @ 66 – gomanny…If less inventory meant higher prices, then why have prices continued on a relentless trend downward over the past year? According to your “theory”, prices should have climbed as inventory shrank. But it didn’t. Why not?

    The number of listings is misleading. Back in 2007 there were more listings simply because some people wanted to sell just because of the high values. Prices didn’t drop because of that increased supply, but instead due to larger macroeconomic issues. Today prices won’t go up because of the limited “official” supply.

    Also I’d note that I’m not even sure that the smaller numbers mean buyers have less selection. Today buyers don’t have to rush to see listings the first day they are on the market, AND the average listing is in far better condition because sellers have largely learned they need to prepare a house for listing.

  92. 92
    AMS says:

    RE: Kary L. Krismer @ 91 – I’m far more interested in total volume = average price * number of sales.

    Sure there might be a 20% increase in the number of sales, but if the average price is down 25%, what does this suggest?

  93. 93

    RE: Jonness @ 85 – Your chart for Seattle doesn’t make sense to me. Why do you need a separate line for median income x 3? Also, it would be nice if the chart indicated whether they are in inflation adjusted numbers. I suspect they are since the median price tops out at only just over $400,000.

  94. 94

    RE: AMS @ 92 – I was only addressing active listing inventory, not sales.

  95. 95
    Jaye says:

    By Jonness @ 86:

    By WestSeattleDave @ 67:

    RE: gomannypacquaio @ 66Not a chance. It will be “High interest rates have reduced house prices; thus, for the same monthly payment, you get a bigger tax write off. Now is a great time to buy!”

    Actually, unless the term of the loan is extended, the percentage of each payment that is allocated to interest and principal will be exactly what it is now. The amount you’re able to borrow will, however, be much smaller.

  96. 96
    Gilly says:

    By Kary L. Krismer @ 93:

    RE: Jonness @ 85 – Your chart for Seattle doesn’t make sense to me. Why do you need a separate line for median income x 3? Also, it would be nice if the chart indicated whether they are in inflation adjusted numbers. I suspect they are since the median price tops out at only just over $400,000.

    Median income * 3 is for the often-quoted “rule of thumb” that people should buy a house costing three times their annual income. That chart suggests that for Seattle, 1990 – 1997 the ratio is consistently between 3 and 4 times income. Afterwards it takes off into the bubble…

  97. 97

    RE: Gilly @ 96 – Oh, okay. That raises the other issue recently discussed that median income has nothing to do with the population that buys houses, because not all income earners are in the market to buy a house.

    Stated differently, that makes that line I was asking about irrelevant. ;-)

  98. 98
    AMS says:

    RE: Kary L. Krismer @ 97 – As you know, you are in the minority in this view, and you still have not addressed the high home ownership rate. Finally we are yet to determine if there really is a difference between the two groups. You claim the two are “different” but offer no proof.

  99. 99
    AMS says:

    RE: Kary L. Krismer @ 97 – Also with such a high home ownership rate, I would guess that the average income of homeowners approximates that of the general population, but average income is not very meaningful in this case because of the income distribution.

  100. 100
    The Tim says:

    By Kary L. Krismer @ 97:

    …median income has nothing to do with the population that buys houses, because not all income earners are in the market to buy a house.

    True. According to a recent survey, just 1.9% of Americans are currently in the market to buy a house, a 27-year low.

  101. 101
    AMS says:

    RE: The Tim @ 100 – What’s the median income of that 1.6%?

  102. 102

    By AMS @ 98:

    RE: Kary L. Krismer @ 97 – As you know, you are in the minority in this view, and you still have not addressed the high home ownership rate. Finally we are yet to determine if there really is a difference between the two groups. You claim the two are “different” but offer no proof.

    I’m not sure what majority/minority has to do with it. At one point a majority of the people thought that the world was flat. More recently a majority of the people thought Iraq had WMD.

    Even with the high ownership rate of say 66%, the statistic would still be irrelevant because 34% of the households in the sample would not be part of the market.

    At 66% you could very easily have every household in the group have not purchased for more than 3x their income. Then again, you could have had none of them do that. The problem is there don’t seem to be any stats on the income of homeowners.

  103. 103

    By AMS @ 99:

    RE: Kary L. Krismer @ 97 – Also with such a high home ownership rate, I would guess that the average income of homeowners approximates that of the general population, but average income is not very meaningful in this case because of the income distribution.

    I don’t see how you get there at all, especially when we’re dealing with median income. You think the home-ownership rate of people earning less than the median is the same as the rate of those above the median? I would think that is very unlikely.

  104. 104
    AMS says:

    RE: Kary L. Krismer @ 102 – You made it sound like the issue has been resolved. Beyond that, most scientific work is peer reviewed. Yes, it can be wrong.

  105. 105

    RE: The Tim @ 100 – Do you have any idea how many housing units there are in King County? Preferably SFR, but condo too would do. I would like to figure out what percentage of houses turned over during the “good” years.

  106. 106

    RE: AMS @ 104 – No, I’m not trying to say it’s been resolved. I’m saying it is 99.9999% likely irrelevant! ;-)

  107. 107
    AMS says:

    RE: Kary L. Krismer @ 103 – Average, not median.

  108. 108
    AMS says:

    RE: Kary L. Krismer @ 106 – I’m suggesting that you are in the 0.0001% that thinks so. :-)

  109. 109

    RE: AMS @ 107 – But the stats we’re discussing are median.

  110. 110
    AMS says:

    RE: Kary L. Krismer @ 109 – Re-read #99. In that message, which you replied to in #103, it’s all about average, not median.

  111. 111

    In 97 we were discussing median. “Average” can mean mean, median or mode, so because you didn’t specify something different I was assuming we were still discussing median.

  112. 112
    AMS says:

    RE: Kary L. Krismer @ 111 – “Average” usually is mean, but “average” is also used as a measure of central tendency.

    Rather than mince words around, what do you think about average=mean?

  113. 113

    Well, going back to your post 99, I would think that the difference of mean income in homeowners compared to the mean income of the total population would be even greater than the the difference of those groups in median income.

    What would be interesting to see is if 3x the mean income is anywhere closer to the mean price of houses.

  114. 114
    AMS says:

    RE: Kary L. Krismer @ 113 – “What would be interesting to see is if 3x the mean income is anywhere closer to the mean price of houses. ”

    The problem is that it only takes a few very high income earners to skew the data, and thus, I am suggesting that the mean income is of no use (meaningless).

  115. 115

    RE: AMS @ 114 – I guess the question is whether the wealthy/high income people skew the mean of house prices more than they skew the mean of household incomes. I don’t even want to venture a guess on that, although my initial reaction was the same as yours.

  116. 116
    AMS says:

    RE: Kary L. Krismer @ 115 – Similarly, is there a large group of low income non-owners who skew the median income of the general population (both owners & non-owners) lower? Of course we have the problem that some owners have very low income, such as those who are retired.

  117. 117
    AMS says:

    RE: Kary L. Krismer @ 115 – One more thing:

    There is the issue of current owners versus those who are in the market to buy. We are going to have to be careful here with the definitions of the groups. A current homeowner might be looking to buy a new place, or could be looking to sell and rent. Then there are those who exit by death and others who enter the market for the first time.

    If we could do this carefully we could set up a stochastic matrix, including entry and exit rates. We could also set up a stochastic matrix for incomes. Then, and I am not so sure how right now, we might be able to combine the two to answer many questions. Matrices represent some discrete transitional states nicely.

    Unfortunately, I am not sure where we are going to get the initial data, and I am far less sure that we would be able to agree to growth models relative to who is entering/exiting the market, much less income levels.

    I wish I had the ambition to think about this a bit more.

  118. 118
    Rohit says:

    The decline from peak graph is really interesting. However, the magnitude of the bubble was different in different cities. It would be great to have this populated with data of about 10 years before peak.

  119. 119
    Jonness says:

    By Kary L. Krismer @ 93:

    RE: Jonness @ 85 – Your chart for Seattle doesn’t make sense to me. Why do you need a separate line for median income x 3? Also, it would be nice if the chart indicated whether they are in inflation adjusted numbers. I suspect they are since the median price tops out at only just over $400,000.

    The 3x line allows you to get a better look at incomes in relationship to house prices. If left at 1x, the line is rather flat and doesn’t seem very meaningful to me. If it’s seen as cumbersome, I could delete it.

    The charts are in current dollars (non-inflation adjusted). I used the starting Jan2000 price from a popular chart on the Internet that tracks Case-Shiller house prices. I then used Case-Shiller percentages per month to track the price from there. Thus, the price could have been a little low for Seattle? Keep in mind though, that price given is for the entire metro area–not just Seattle city limits. Thus, the price shown appears reasonably accurate to me. For instance, the Global Insight estimate of median house price at the peak in the Seattle metro area is $408K. Thus, the two data sources are quite close. Are you thinking in terms of Seattle only house prices, or entire metro area house prices? Seattle only house prices are, of course, higher than the figures shown. Case-Shiller tracks metro areas.

    I just finished building the charts and haven’t had a chance to accurately describe the data used or how to use the charts to their best advantage. That’s still on my to do list.

  120. 120
    Jonness says:

    By Jaye @ 95:

    Actually, unless the term of the loan is extended, the percentage of each payment that is allocated to interest and principal will be exactly what it is now. The amount you’re able to borrow will, however, be much smaller.

    And since people judge affordability by what they can afford to pay per month, the argument is, house prices will have to go down in order to compensate for the decreased overall amount (interest + the amount you’re able to borrow). Thus, if you make the same payment amount per month either way, you are better off paying higher interest and lower house price amount.

    IMO, the only way house prices can go up in a sustainable manner is if the banks start lending their excess reserves. This is because m/r*v=pq. As long as wages decline and credit contracts, there is less money in the system available to compete for assets. If I recall properly, credit contracted at 3.6% in the 3rd quarter. The jury is still out on Q4, but from what I’ve seen so far, it appears to be more of the same pattern. Keep in mind, when money is released from r, it goes to M and V. Thus, holding money in r can be thought of as far more destructive to asset prices than one might normally imagine.

  121. 121
    Jonness says:

    By Kary L. Krismer @ 97:

    RE: Gilly @ 96 – Oh, okay. That raises the other issue recently discussed that median income has nothing to do with the population that buys houses, because not all income earners are in the market to buy a house.

    Stated differently, that makes that line I was asking about irrelevant. ;-)

    Unfortunately you’ve failed to provide any data to prove your claim is relevant. With all due respect, I could claim 3x income is irrelevant because my brother ate too many apples last month. Unless I supply a data driven analysis that supports my claim, it’s meaningless.

    Until I see the data that supports your claim Kary, it’s just noise blowing in the wind. I’m not saying you don’t have a point. I’m saying you haven’t supplied a single shred of verifiable evidence to back up your claim.

    Stated differently, the homeownership rate is 67%, mv=pq, and incomes don’t exist in a vacuum separate from the influence of all other income brackets. That makes your claim irrelevant. If I’m wrong, show me the data and/or work the math.

    What happens to your beloved ratio when 10% of those who would have chose to buy a house can no longer afford to buy because they lost their job? Unless you represent the entire population, you are using a dynamic subset, which would flaw your study.

  122. 122
    Jonness says:

    By Ross @ 88:

    Flat = decline, after inflation (which appears to be ticking up (see wholesale inflation numbers))

    Which is exactly what you are seeing in the house price/income graphs. A common pattern is a bit of a bubble at 1990 after which house prices go flat to declining. Seattle actually kept appreciating at a low rate through this period. Yet, when compared to incomes, you see that wage inflation was occuring faster than house price appreciation, thus the price/income ratio moved down. When it got back to reasonable levels, it began to go up again. Then, of course, all the excess credit money was flooded into the system, and house prices shot through the roof as the increased money chased a limited number of assets. Then the bubble popped, and the excess credit money was pulled from the system. As is predictable, house prices adjusted downward.

    Prices would have went way further downward, but the government flooded the housing market with money in order to artificially inflate the prices. Unfortunately, this is an unsustainable fix in areas where the price/income ratio is still relatively high. Other areas have over-corrected; thus, their prices might prove to be sustainable after the government shuts off the money faucets.

    Copernicus said it best. MV=PQ, which is still the basis of mainstream economics today.

    2008 and 2009 have proven to be the best period in history to have held off buying a house and continued saving a downpayment. Seattle area house prices have appreciated at an annual rate of roughly 6.5% from 1985 to present. It is extremely difficult to save in such and environment. If you started saving in 2008, you have been saving at about 5x the normal down payment savings rate. Roll that into credit and a 30 year loan, and you have probably been saving at 15-20x the normal rate. It has proven to be perhaps the best time in history to not buy a house…and it’s not over yet.

  123. 123
    David Losh says:

    RE: Jonness @ 122

    All well and good, but the formula is much more simple. These are housing units. It’s always cheaper to rent. Owning has the cost of upkeep. Banks lent money on Real Estate to generate mortgage backed securities. They sold the securities and did debt swapping to push up paper profits that allowed them to pull in significant amounts of cash.

    Cash is King when you crash the credit markets.

    The price of a housing unit is based on Location, Price, and Condition. People will pay five times their income for a house in the right location, or if it’s the right price, in a condition that’s pleasing to the buyer. That’s why formulas don’t work.

    The only formula you can use is the market rents for a given area, I mean location. What are people willing to pay to live in a given location? The mortgage payment can be slightly higher, but usually not that much more. Like I said, it’s spendy to be buying a home.

    Banks were well aware of this fact of value. They have done extremely well in the process. The only question is where the next set of profits will come from.

  124. 124
    David Losh says:

    My objection is this talk about credit.

    The price of the mortgage is a leverage against an asset. That’s the credit. That money we are keeping by not paying cash for a housing unit needs to be working some place else. Any financial plan has you paying off the family home.

    How fast can you pay off the family home? That’s it. What is your plan for owning the home free and clear? If you intend on paying interest for thirty years then give the house back to the lender and rent. You’ll be many dollars ahead.

  125. 125

    By Jonness @ 121:

    By Kary L. Krismer @ 97:

    RE: Gilly @ 96 – Oh, okay. That raises the other issue recently discussed that median income has nothing to do with the population that buys houses, because not all income earners are in the market to buy a house.

    Stated differently, that makes that line I was asking about irrelevant. ;-)

    Unfortunately you’ve failed to provide any data to prove your claim is relevant. With all due respect, I could claim 3x income is irrelevant because my brother ate too many apples last month. Unless I supply a data driven analysis that supports my claim, it’s meaningless.

    I agree on needing data to support the claim, but it’s you who needs to provide the data, not me. You are the one claiming 3x median is somehow relevant. In doing so, you’re just expecting everyone to accept the fact that median income of an entire population should somehow be related to home prices, when in reality if it were that would be mere happenstance because your two populations (total population and homeowner population) are not the same. It’s no different than arguing that the median income of people in Portland should relate to housing prices in Seattle. When your populations are different, there’s no reason the numbers should be anything more than somewhat correlated, not perfectly correlated, which is what you would need for the 3x median income analysis to mean anything at all.

    It’s simple logic, and the fact that many people don’t understand that means that people apparently are not that logical.

  126. 126
    Jonness says:

    By David Losh @ 123:

    RE: Jonness @ 122
    The only formula you can use is the market rents for a given area, I mean location. What are people willing to pay to live in a given location? The mortgage payment can be slightly higher, but usually not that much more. Like I said, it’s spendy to be buying a home.
    .

    I believe that’s a strong argument against Kary’s theory that the only incomes that matter are those who choose to buy houses, and median incomes have absolutely no relation to median house prices. IOW, investors buying houses can’t afford to pay high prices if the incomes of the people renting the houses cannot sustain the high prices. Home cost vs rent cost is a commonly used measure as is price to income. Thus, the burden of proving otherwise lies squarely on whomever makes such claims.

    IMO, it is a mistake to attempt to solve metro-area sized problems using solutions that rely on small dynamically occurring subsets that don’t represent the area population as a whole. Excluding the incomes of renters is not necessarily a mistake, but it leads to answering a completely different question than the question I believe is being put forth.

    I disagree that studying a metro area is a non-useful analysis. When you study large environments, you are studying at a more abstract level. You can’t expect to come up with a median level per metro area and have it fit all situations in the sample space. That’s not the point of such a study. The goal is to study the sample space as a whole without claiming that every house in the sample space will cost exactly the same amount and every person will make exactly the same amount of money, or, for that matter, that every neighborhood included will be exactly the same. Case-Shiller offer data per metro-area because it offers a general solution, not because it offers a detailed breakdown. Metro-area studies are useful for what they are but shouldn’t be used to attempt to explain drilldown-related questions at the non-metro level of aggregation.

    I get the idea there are those here who don’t understand data aggregation and its usage. The main argument appears to be, higher level aggregation is not useful in analysis because detailed drilldowns are unknown. I emphatically disagree. Median price: median income works because you are comparing the asset prices in a metro area to a similar measure of the available money supply. (wages do not exist in a vacuum; they increase in unison.) Case-Shiller provide a specific aggregation level that is useful in generalized analysis. Perhaps if they decide further drilldown is necessary, they will supply the data, and we can perform a drilldown analysis.

    Price:Income is not the holy grail of affordability measures (it’s one of many factors). Income is one of the main factors of money available to chase assets in the system. The other main factor is credit, which directly competes with cash for assets. In the heyday of the bubble, the unemployed strawberry picker could directly compete with you and I to buy the homes. This drove up asset prices. Once the strawberry pickers could no longer get loans, the demand or homes decreased. This is measurable through the amount of credit contraction in the system (credit contracted 3.6% in the 3rd quarter). Once again, CA is not WA, and Ballard is not Tacoma. The goal of higher level aggregate data is to study whole trends in large areas–not to explain specific affordability in exact neighborhoods. This is a basic premise few would argue with.

    In short, the bubble bursting and the subsequent economic downturn has resulted in less money in the system available to chase assets. This can be measured by price:income ratio, price to credit availability ratio, and other measures in order to obtain a general idea of affordability of particular metro areas now compared to past periods. This is not meant to be an exact predictor of future price as it does not account for other factors, such as the amount of money the govt. has thrown into the system to offset the amount of money that has been lost. Economic tools and indicators should not be used in a vacuum separate from other factors.

  127. 127
    AMS says:

    RE: Jonness @ 126 – “The other main factor is credit, which directly competes with cash for assets. In the heyday of the bubble, the unemployed strawberry picker could directly compete with you and I to buy the homes.”

    Income is a large part of creditworthiness. There clearly is a tug between the “Cs” of credit and which factor is more important:

    1. Capacity
    2. Collateral

    At this point, both those are under pressure–Conditions are not good.

  128. 128
    Jonness says:

    By Kary L. Krismer @ 125:

    it’s you who needs to provide the data, not me. You are the one claiming 3x median is somehow relevant.

    It’s simple logic, and the fact that many people don’t understand that means that people apparently are not that logical.

    Why would you exclude the incomes of renters in your study? It’s not that I believe you lack the intelligence to perform a meaningful analysis. It’s that I believe you lack the professional experience of ever having done so. As I stated in my reply to David Losh, you are not necessarily getting a meaningless answer through your solution; you are answering a much different question that that which is proposed.

    I see a generalized mistake you tend to make in the majority of your real estate analysis. You have a pet theory that the only thing that matters to price is that rich people exist in a community, so house prices can go up without being tied to underlying economic fundamentals. You can’t seem to get past the simple understanding that 67% of the population are homeowners, and the rest are paying rent to those who use the rent to purchase the homes. In short, everybody in the population requires a place to live; yet, you are stuck on this idea that the only portion of the population that matters is a relatively small subset that you run into during your everyday business pursuits. This is a common mistake among laymen and can be termed “local bias.” (or bias toward the subset of the population you are directly familiar with)

    We all need a place to live Kary, and according to general economic theory, the homes we live in can’t cost more than we can afford to pay. This understanding is ubiquitous. The burden of proving otherwise rests solely on those who make claims contrary to the general consensus.

  129. 129
    David Losh says:

    RE: Jonness @ 126

    Happy New Year!

    You’re making this extremely complicated.

    I’m going to use Boeing and Renton, back in the day, as an example. You had labor and management. Two income levels, two different housing units, all in the same proximity to the Boeing plant.

    Did you live in Renton Highlands or closer to the plant?

    Now this example can prove your 3X the income, how ever the base would be skewed towards the people who worked in the plant because there are more of them.

    The land lord can charge more for a Renton Highlands property and there will be people willing to pay it.

    Rents didn’t shoot up and that should have been an indication that something was wrong.

    You really are making excellent points which I think more people should pay attention too.

  130. 130

    By Jonness @ 126:

    By David Losh @ 123:

    RE: Jonness @ 122
    The only formula you can use is the market rents for a given area, I mean location. What are people willing to pay to live in a given location? The mortgage payment can be slightly higher, but usually not that much more. Like I said, it’s spendy to be buying a home.
    .

    I believe that’s a strong argument against Kary’s theory that the only incomes that matter are those who choose to buy houses, and median incomes have absolutely no relation to median house prices. IOW, investors buying houses can’t afford to pay high prices if the incomes of the people renting the houses cannot sustain the high prices. Home cost vs rent cost is a commonly used measure as is price to income. Thus, the burden of proving otherwise lies squarely on whomever makes such claims.

    A large percentage, but still a minority of people live in multi-family apartments.

    So let’s turn this around. Should the median rent for an apartment in King County be some fraction of the median monthly income of the entire population?

  131. 131

    RE: Jonness @ 128 – I think you’re confusing my arguments on the pricing of $1,000,000 plus houses with this argument. For that I’m saying that wealth is more important than income, but that is another reason why the median income argument lacks any kind of merit.

    Why would you include the income of an out of state student at the UW who lives in a dorm?
    Why would you include the income of someone with a 100% disability living on SSI?

    You might as well include the income of feral cats, because they are just as likely to affect the market for housing.

  132. 132
    AMS says:

    RE: Kary L. Krismer @ 131 – ” For that I’m saying that wealth is more important than income, but that is another reason why the median income argument lacks any kind of merit.

    Why would you include the income of an out of state student at the UW who lives in a dorm?
    Why would you include the income of someone with a 100% disability living on SSI?”

    Yes, include them all, but using median income takes care of all these problems.

  133. 133

    RE: AMS @ 132 – It doesn’t take care of any problems at all. It merely skews the income median down. And the wealth factor I mentioned skews the median house price up.

    But perhaps I need to clarify what I’m saying. I’m saying it would be mere happenstance that the 3x median income equaled the median house price in a given area. That’s because of the many reasons already discussed.

    I’m not saying is that an area with a lower median income isn’t likely to have a lower median house price, or that if the median income in an area falls that the house prices in that area would not be more likely to fall. There are correlations, but there’s no reason it should be 3x median income, even if you accept 3x median income being a good gauge for individuals.

  134. 134
    David Losh says:

    RE: Kary L. Krismer @ 131

    Wealth has a price, a rental price. $20K a month, $40 a month? Maybe $16K, maybe $9K, but the wealthy also rent.

    In terms of the dorm room or apartment rentals there is a price. A dorm room is extremely expensive. You take the house and divide the rooms. An apartment building, as you say, is a different animal that can be converted to the price of condos.

    I’ve made this mistake with you before, so let me see if I can get this right. The 3X the income to qualify a buyer for a purchase price has been around for a long time. So even though it would be hard to make a broad statement of income to sales price, it looks like a good tool.

  135. 135

    By David Losh @ 134:

    Wealth has a price, a rental price. $20K a month, $40 a month? Maybe $16K, maybe $9K, but the wealthy also rent. l.

    Well if you assume that someone buying a 1.4 million dollar house would typically put down $1,000,000, the price of doing so would be their opportunity cost. If that opportunity cost was $20,000 a month, that would mean they had an opportunity to invest their money at 24% interest!

  136. 136
    David Losh says:

    As a seperate comment, the whole Case Schiller Index bothers me. It is based on sales data. That’s been a problem with escalating prices and will continue to be a problem as prices decline. Just like the tax credit had people paying way too much because of some sales hype, we had the hype of being priced out forever.

    To me the Index is just a way of establishing a group think that proves Doctor Schiller’s theory. Two years ago you never heard of these guys and today this Index is quoted in every Real Estate article.

    I think Real Estate is very common sense and basic investment and people should be making decisions based on very basic principles, like rents, or what you can afford to pay off within ten years.

  137. 137
    David Losh says:

    RE: Kary L. Krismer @ 135

    The return on a cash investment is a negotiation. Prime Real Estate can be an opportunity. If you pay $1.4M cash for an apartment building or a house, there is a return that is negotiated with the lease price.

  138. 138
    AMS says:

    RE: Kary L. Krismer @ 133 – As far as the multiple goes, is it reasonable to conclude that 1x median is an affordable area whereas 10x median is unaffordable?

    (Median home price : median income)

  139. 139
    Jonness says:

    By Kary L. Krismer @ 131:

    RE: Jonness @ 128

    Why would you include the income of an out of state student at the UW who lives in a dorm?
    Why would you include the income of someone with a 100% disability living on SSI?

    The student has to pay money to live in that dorm. It matters whether this cost is lower or higher than renting a room in a private residence nearby. And that matters to the person thinking of buying the house and renting out the room to an out of state college student in order to aid the monthly mortgage payments.

    I know a person living on 100% SSI. She exists on very little money per month. Yet, she is a homeowner. The cost of living in a home and paying property taxes matters to whether she is ultimately forced to sell the home and live in a government assisted apt. or continue to live in the home. Her decision affects the supply of homes in her area and needs to be accounted for.

    IMO, breaking out a subset of the population in order to determine housing affordability leads to an apples to oranges comparison. Certainly the study is not without value, but it answers a different question than what I’m proposing by including a median income line in my charts.

    If we compare the population of people who purchased homes in 2006 with the population of those who purchased in 2009, we are not comparing similar groups of people. The population type in 2009 is a subset of the 2006 population type. Remember, in 2006, the unemployed strawberry pickers existed in the population because they easily qualified for no doc loans. So how does including their incomes one year and not including them the next relate relevant to income to a person looking to purchase a home in 2010?

    IMO, your analysis is a more useful measure of credit availability between the years mixed in a confusing manner with incomes. IOW, your chart would not show affordability for the typical person in the society, and it would not allow one to account for and be able to measure other factors that drive and influence house prices. Unless, perhaps you use the charts in conjunction with credit availability charts in order to subtract its influence in your measure.

    By including the entire population, I am able to account for incomes and begin to look deeper at other factors, such as credit availability, to further explain the fluctuations between years.

    When Copernicus invented the original version of the economic formula MV=PQ, he did not attempt to exclude the money owned by the subset of the economy who is indigent and freeloading off the people purchasing the goods. Nor did he exclude those who are on fixed incomes and are unable to make speculative purchases that could drive up prices. Instead, he realized all people in the economy need food, shelter, and clothing, and at some level, they factor in to the equation. Thus, he included every person in the economy by comparing the entire amount of money available to the price of goods and services. In the same manner, every person in the economy requires a place to live and factors into the equation of housing affordability.

    The 3x line included in my chart is arbitrary. But the implication that prices are relevant to the incomes of all people in the system is not.

  140. 140
    David Losh says:

    Sorry, but you lost me. The value of a housing unit is set in stone. Whether people can afford it or not the value is there. The price of a home, on the water, with a view, and 4000 square feet of high quality new construction is not going to change based on people’s income. I think, though I’m not sure, is Kary’s point.

    The same goes for a one bedroom condo built in 1968 close to the University. Many people may be able to afford to buy it, but few people would want to.

    My point is that both properties have a value determined by how much people are willing to pay to live in either place.

  141. 141
    David Losh says:

    Again, the thing about credit bothers me. I know from experience that many an unemployed strawberry picker are current with the mortgage payments. They are grateful for the opportunity. I also know many very well employed individuals who are walking away from a home.

    Banks should be lending on the value of the asset. They always should have.

  142. 142

    By David Losh @ 140:

    Sorry, but you lost me. The value of a housing unit is set in stone.

    Hardly. Value is dependent on demand and demand is dependent on income. There’s no other way to explain the price of a condo in Manhattan being more expensive than the price of a condo in downtown Seattle, being more expensive than a condo in downtown Des Moines, Iowa.

    You’ll probably point to rent, but that too is also dependent on demand, which is also dependent on income.

  143. 143
    cheapseats says:

    Ref Kary,

    “You think the home-ownership rate of people earning less than the median is the same as the rate of those above the median?”

    I am not sure how this is relevant in the 3X Income rule of thumb, unless you think that the ratio between the two groups varies significantly year to year.

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