State’s Chief Economist: Real Estate to Rebound… in 2011

Washington State’s Chief Economist Arun Raha has been speaking this week about his expectations for Washington’s economy in 2010 and beyond, including his outlook for the local real estate market.

Raha said the nation’s big banks are in better shape and are mostly back to normal in terms of lending money to customers with good credit. But he said regional banks continue to struggle because they had so much invested in real estate and other sectors that were seriously hurt by the recession.

He noted that small businesses get their money from regional banks, so when they hurt, so do small businesses. That’s important, he said, because small businesses account for 64 percent of the new jobs in this country.

“Credit remains particularly tight for small businesses because they depend mostly on community banks,” Raha said, adding, “For growth we need private business spending to drive the recovery.”

He noted that if we don’t get private job growth we might get a second recession. “We’re not out of the woods yet,” he said. “We could get a double dip in the fourth quarter.”

We have been following the growing problem with Washington-based banks for a while now. This is definitely one of the biggest issues to watch for the state’s economy in the coming year.

The economist noted the federal tax credit for home buyers has been a help, something he referred to as incentivized growth. But he said there are a lot of homes and a lot of commercial buildings that are vacant now.

It will take at least a year for homes and longer for commercial buildings to be sold to the extent that they promote self-sustaining construction growth, he said.

Raha expanded on his outlook for real estate in a speech to the Washington Realtors yesterday in Olympia.

Raha said he expects the residential housing market to improve in 2011, while the commercial real estate market could take until 2012 to recover. Helping both will depend on the pace of economic recovery and some areas of the economy that still need to show improvement, he said.

This includes the easing of credit from community banks, consumer confidence and the absorption of excess housing, Raha said.

Although large, national banks have started lending again, credit still is tight at state-chartered community banks because they are “disproportionately” exposed to the slower commercial real estate market, he said. Consumer confidence also hasn’t improved because consumers are largely influenced by unemployment rates and the price of gasoline, Raha said. Washington’s jobless rate hit 9.5 percent in December, according to state Employment Security Department data.

Here’s a look at consumer confidence via the Conference Board:

I find it interesting that the disparity between the Present Situation Index and the Expectations Index continues to grow. The Present Situation Index hit a new low of 18.8 in December, while the Expectations Index has increased dramatically from a low of 27.3 in February to 75.6 in December.

So I guess the big question for the real estate market is whether people will be willing to (or if they are able to) buy homes on expectations alone.

(Mike Benbow, Everett Herald, 2010.01.21)
(Rolf Boone, Olympian, 2010.01.22)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    WestSideBilly says:

    So I guess the big question for the real estate market is whether people will be willing to buy homes on expectations alone.

    That is exactly what people did for several years, which created the housing bubble. Only now the easy money spigot is closed.

  2. 2
    HappyRenter says:

    Sorry, how are the three indexes calculated?

  3. 3
    The Tim says:

    RE: HappyRenter @ 2 – The methodology is linked right on the Conference Board link in the post.

    Also worth noting: The disparity between the present situation index and the expectations index has never been as large as it has been for the last 8 months going all the way back to 1998 (the start of the data I have available).

  4. 4
    Researcher says:

    RE markets tend to flatline for about 7 years after a bust like we just had. Even a high 3% growth YOY won’t be enough to lure buyers. It will be a stagnant market. One would be better off investing in more liquid investments at that level of growth, since liquidity equals far less risk. In other words, my generation won’t be retiring from RE in the US. We will have to find something else. Maybe foreign RE. There are some analyst projections that it will take about 20 years for our RE market to recover. That is, if the US dollar doesn’t collapse along the way, which is most surely will.

    Green technology and energy will be the next wave, but it may take another 15 years for this to hit. We have nothing in-between to prop up our economy. That’s what scares me most. Nanotech within healthcare is too far off… who will be able to afford it, anyhow?

    A $100 trillion shortfall from social security and Medicare alone, over the next 20 years, is enough to tank the dollar on its own — nevermind all the other issues going on besides this. Unemployment insurance has been depleted in many states and the Fed is diluting the dollar to subsidize the states. The Fed is now purchasing 80% of the new debt is releases, and you know that can’t last forever. And on and on and on…

  5. 5
    AMS says:

    RE: Researcher @ 4 – “RE markets tend to flatline for about 7 years after a bust like we just had.”


  6. 6
    scott says:

    We’ve never seen a RE bust like this ever — so a flatline of 7 yrs is highly underestimated.

  7. 7
    AMS says:

    RE: scott @ 6 – …and I thought flatline might be overestimating. lol

  8. 8
    The Tim says:

    Note that I have updated the post with an interactive chart of the Conference Board’s Consumer Confidence Index, including all the data all the way back to 1998. Just drag the date slider at the bottom to adjust your date range.

  9. 9
    Tim McB says:

    RE: AMS @ 5

    I think this is what he means:

    Inflation adjusted it looks like 7-10 years of flat prices after a decline in prices. Not inflated (nominal) prices we’re in pretty new territory. I suppose in relative terms as well.

  10. 10
    HappyRenter says:

    Just a general question. Even if the prices are flat (adjusted for inflation), isn’t it still better to put the money into a property rather than leaving them in a savings account? Or is it better to keep renting and invest the savings into stocks/bonds or mutual funds?

    I understand, the take home message is: do not consider your home an investment. But until you have made the commitment to buy a home, what do you do with your savings?

  11. 11
    David Losh says:

    It’s kind of funny that the States Chief Economist is telling Real Estate agents what they want to hear. At the same time his analysis has a lot of ifs in it about banks.

    Did you read today that Beirut Lebanon has massive Real Estate development and 100% appreciation in pricing in nine years? It’s the new hot spot. Did you read at the beginning of this week that construction permit applications are way up?

    Does any one really believe that the financial markets will stabilize as long as the same stuff keeps floating around, and around, the porcelain bowl as it drains out the black hole at the bottom?

  12. 12
    singliac says:

    RE: Researcher @ 4

    This sounds like Steve Tytler’s infamous stairstep theory. I’d suggest watching that next step carefully. It could be a doozy.

  13. 13
    Scotsman says:

    Sorry, no sale. He’s pretty careful to cover all the bases with lots of qualifiers and cautions. And in fact when you read the whole article it comes across as fairly negative to me. This part is true though:

    “Raha noted that 20 percent of state retail sales tax revenues come from construction. “That’s why we love people who build something,” he added.”

    Plus, you’ll note he never really says what he expects to come back- sales volume, pricing, new construction permits, etc. It’s all just vague enough to cover his butt while giving the realtors some hope. I think he has a pretty good understanding of the difficulties ahead but knows this is not the time or the place to come out with the truth.

    Let’s look at what we know for sure- new unemployment claims are headed up again and the Dow has dropped 550 points in the last three days.

  14. 14
    Snigliastic says:

    RE: Scotsman @ 13 – Where is Pffft?

  15. 15
    The Tim says:

    RE: Snigliastic @ 14 – Positioned firmly at the top of the green line in that chart I included in the post.

  16. 16
    patient says:

    Real estate is still extremely overvalued compared to economic realities. Appreciation next year, sorry but no, I don’t belive in it.

  17. 17
    The Tim says:

    RE: Scotsman @ 13 – I definitely miss ChangMook Sohn. He was a straightforward, honest Chief Economist that consistently warned of the bubble as it was inflating. Too bad he was basically ignored.

  18. 18
    David Losh says:

    Beirut Lebanon, new Real Estate investment hot spot. Get those Mortgage Backed Securities from the emerging market sector.

    Didn’t some one here say that Dubai was just a blip on the screen?

    I feel pretty confident in predicting a crash of Real Estate prices in Beirut, Greece, Spain, Istanbul, Ubakistan,……..

    Bank profits to follow.

  19. 19
    HappyRenter says:

    RE: The Tim @ 8

    The plot is difficult to follow because the y-axis keeps changing when you slide the bar. Is there a way to look at the entire plot?

  20. 20
    Scotsman says:

    RE: The Tim @ 17

    Agreed, he was both competent and as apolitical as the position allowed. His major strength was a willingness to look first at the global/national picture for context and setting, then focus down on specific issues within the state. Too many now look at smaller localized data sets and try to predict the future without really understanding the more generalized environment in which it all takes place. Raha seems to be more focused on political implications and less on impartial analysis.

    A trend that’s caught my attention for the last decade or so is the bifurcation of political and policy leadership into different camps. There are those who see reality and start from it, and those who just proclaim what reality will be and move forward, sort of a variant on the old internal/external locus of control debate. I’m all for PMA and a take-charge approach, but I can’t just leave the facts at the door. What’s funny is that over the course of the last decade with its unprecedented growth too many of the “claim it and take it” crowd came to believe their own talk and that they could create a prosperous reality out of thin air and strong thoughts. More and more are coming around to a more “balanced’ perspective after finding themselves financially “grounded.” But there’s still an active contingent striving to get the masses to believe and see the rosy future ahead. Politicians and realtors are heavily represented.

  21. 21

    RE: David Losh @ 18
    When people talk about the market blowing up in Beirut, you have to wonder whether they mean the real estate market crashing, or a market blowing up?

  22. 22
    The Tim says:

    RE: HappyRenter @ 19 – Yeah you click the left side of the date range brackets and drag it all the way to the left. Or, you type in 1/1/1998 into the box on the left.

  23. 23
    AMS says:

    RE: Tim McB @ 9 – I don’t see too many flat lines in those charts, but a wheelchair ramp is flat, but it slopes relative to gravity. Put an ice cube at the top, and watch the water run down that flat surface, much like home prices might do, melt and run away.

    In any event, no changes in prices might be too optimistic.

  24. 24
    AMS says:

    RE: HappyRenter @ 10 – “money into a property rather than leaving them in a savings account?”

    Housing is one of the most illiquid assets. Unregulated securities are even less liquid.

  25. 25
    EconE says:

    So anyhow…

    At about 10:38…AM… Green Gene, Blue Lou and Red Fred walked into a bar for their pre-breakfast bloody mary.

    Inside, half a dozen freshly laid off widget makers were drinking silently while Depeche Mode played mournfully in the background. Surprised that their morning haunt wasn’t empty as usual, Lou unenthusiastically muttered “Hey, there appears to be some signs of life in the economy after all. This place is usually dead at these hours.”

    “Of course the economy is getting better you negative nellie!” replied Gene “That’s the power of positive thinking!! I told you that hike would do you wonders!!! Isn’t that right Fred?”

    Fred unable to believe his own ears could only whisper under his breath…

    “Freakin hopeless idiots.”

    The End

  26. 26
    David Losh says:

    A lot happened today with the drop of the Dow. It’s another warning shot at the global economy. Obama says he wants to curb risky bank activity, and the Dow drops 500 points.

    Here’s what needs to happen. Obama needs to attack the banks, regulate the heck out of them, and stop government support of the mortgage industry.

    Banks are out of control.

    I used the Beirut example because it is so far fetched that in a country, that is Muslim, controlled by Hezbollah, none of whom believe in Usury, but do abide by the forgiveness of debt. there would be speculation in Real Estate. No one owns the land of Islam, the land belongs to Allah.

    Banks, investing in Beirut? You bet. Why not? They are gambling with your money.

  27. 27
    mukoh says:

    RE: Researcher @ 4 – Have to agree on your outlook. Stagnant for 5-7 years at least, no more hops of 01-07 repeats please.

  28. 28
    mukoh says:

    RE: David Losh @ 26 – Dave, you might have been gone somewhere banks have always gambled with YOUR money. They borrow it at 1% from you and lend it back to you at 5%. That is that. Stop pounding sand in an empty desert. Regulate promogulate delegate are all beautiful words to liberals, earthies, and etc… but in reality banks/loaning has been around for hundreds of years in the same shape.

    Attack banks? You read it before you post it? Bet your cleaning operations spanning the whole puget sound would collapse if it wasn’t for banks.

  29. 29
    Eleua says:

    Good luck with that. The FHA is the only thing keeping this mess from going down the pipe, and they are starting to tighten up (it’s a start).

    There was no mention of how we got here, what has happened, what the current situation is (FED buying the entire float through accounting subterfuge), and what the conditions would be for expansion.

    Prices will continue to drop until equilibrium is established with incomes and no spec money involved. Excess will have to be worked off with high unemployment and tight credit.

    I know I sound like a broken record (scratched CD for you punks), but NOTHING has been fixed over the past two years, so the same problems persist. Denial is not a viable recovery strategy; price discovery is. Price discovery is the one thing we have yet to face.

    Working off excess inventory of homes and CRE is laughable in the face of rising unemployment and tightening credit.

  30. 30
    David Losh says:

    RE: mukoh @ 28

    Well you did make a complete thought.

    Banks borrowing at 1% to lend at 5% is a long forgotten concept. There’s more money out there to be made.

    Let’s take the Beneficial Finance concept, or consumer credit in general. The interest rate is high, the borrower has a need. Hopefully the borrower pays back the loan, but there is an Actuarial science that calculates the risk and comes up with a profit.

    That became the norm. Risk became the norm. The greater the risk the higher the profit potential.

    Right now banks are using Fed dollars, even tax dollars, to “invest” in risk. People are defaulting. Financial markets kept looking for further and further areas to invest in.

    Shanghai, OK, I can buy that. Beirut? Kind of a stretch.

  31. 31
    Researcher says:

    My prior comment about a 7-year flatline following the current bust in RE was attributed to an analyst, not sure of her name. I did not save the Web link, unfortunately. Since I first read this quote, however, I have stumbled into several other analysts who predict housing for most the US will not return to 2004 levels for another 20 years (inflation adjusted). CA was forecast at 30 years. The 7-year flatline resonates with me most, which is why I quoted it.

    We are currently in a deflationary period with the US dollar, but this is expected to turn hyperinflationary within one to five years, due to ongoing Fed bailouts and spending while GDP and tax revenue slip. If our bond ratings slip, or we see the Fed deny several bankrupt states their bailouts — which would lead to muni bonds collapsing, either of these could trigger a bank holiday and overnight dollar devaluation. The expectation is for at least a 50% haircut (probably more) and this would ultimately lead to the creation of local currencies (as the dollar continues to slide) as well as a new global reserve currency, similar to the current SDR. The new reserve currency is expected to be 50% backed by gold (current rumor).

    As you can probably tell, I am far more concerned about the US dollar, as this impacts everything from housing to food prices to travel.

    Here are some other articles I have saved recently — – Economists from J.P. Morgan Chase & Co. said Monday they didn’t expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply. – (Dec. 4 with Tim Wood). Expect depressed prices into early 2010, then a rebound in early 2010. Whether this rebound signals a real recovery in housing will depend on the Philadelphia Housing Index and the Dow Jones Home Construction Index. If the most recent low is broken, RE will continue to slide. – Policy makers after a Nov. 3-4 meeting repeated that they will keep interest rates near zero for “an extended period” while saying policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline. Federal Reserve Bank of St. Louis President James Bullard said past experience suggests policy makers may not start to raise rates until early 2012.

  32. 32
    Researcher says:

    RE: David Losh @ 26
    I have been trading the market swings lately and this market drop was not unexpected, from a technical standpoint. I am waiting for my market breadth indicators (which are highly predictive) to signal a new “buy” signal, and then I will be loading up on ultra-bull index ETFs in my portfolio again, in addition to a few CEFs that are trading at discount with annual yields at or above 9%.

  33. 33
    Researcher says:

    RE: HappyRenter @ 10

    “Even if the prices are flat (adjusted for inflation), isn’t it still better to put the money into a property rather than leaving them in a savings account? Or is it better to keep renting and invest the savings into stocks/bonds or mutual funds? I understand, the take home message is: do not consider your home an investment. But until you have made the commitment to buy a home, what do you do with your savings?”

    I don;t recommend buying property (a house) until the market becomes more clear. Until then, assume you will be a renter for several years. My advice is to diversify your savings into three areas, for protection and hopefully, some profit —

    1) Precious metals. Purchase bullion in small fractional coin values (1/10 oz, 1/4 oz, etc.) and purchase well-known, modern coins. Silver and palladium are hot. Gold and platinum are good, too, for the long-term. You may want to wait for these prices to bottom out again, before purchasing.

    2) Other currencies, such as the Chinese yuan, Canadian dollar (due to Canada’s rich resources), and Australian dollar. You may purchase these directly from your local bank, or invest in a multicurrency CD such as from Evergreen Bank or our local branch of Cathay Bank. These CD minimums tend to be around $20K. I expect all currencies to drop when the US dollar collapses, but some may survive better than others.

    3) Land for growing crops. Once the US dollar crashes, food shortages will prevail and food prices will skyrocket. Farmland will be at a premium. Now is the time to begin purchasing this. You can take a chance and wait for the market to crash further, but there are too many variables. If the dollar crashes, we could see crop land explode in value very quickly.

    4) I am adding this because it does qualify, but for most people it is still out of reach. Invest in long-term “green” infrastructure. This is where the big money is investing right now, for the long term. Expect wind and solar energy to be big.

  34. 34
    AMS says:

    RE: Researcher @ 31 – I am not sure about your theory that both hyperinflation and “7-year flatline” will both happen.

    Also, if hyperinflation is on the way, why not buy a house?

    “I have been trading the market swings lately and this market drop was not unexpected, from a technical standpoint.”

    Aren’t you the same guy who suggested that there is no successful technical system?

  35. 35
    David Losh says:

    RE: Researcher @ 32

    You are very correct, the market should be at about 9000. Actually the Dow should be much lower, but there is a ton of cash to prop up the market that will remain even if the Dow tanks completely.

    It’s like gambling with the money you have already won after taking your original bank roll and putting it in a safe place. It’s all up side.

    So, I think the smart money is telling you to watch the big players and the moves they make. The Google partners are cashing in. Even Warren is making caution statements.

  36. 36
    Scotsman says:

    RE: EconE @ 25

    Perfect! It’a all about perception, nothing more. Exercise your will, make it happen. Heh.

  37. 37
    Scotsman says:

    Eleua- Barney Frank wants to completely eliminate Fannie and Freddie and start over. He is the guy in charge. But start over with what?

    Sounds like BF might have a case of the “MA. Shakes” after Brown’s wake-up call.

  38. 38
    AMS says:

    RE: EconE @ 25 – Is this what is meant about “relax and enjoy the hikes?”

    Relax and enjoy the hike in unemployment.

  39. 39
    HappyRenter says:

    I wonder why the consumer confidence index dropped right before 9/11. Any idea what happened? (I moved to the US in 2006, so I’m not familiar with the happenings at that time.)

  40. 40
    AMS says:

    RE: HappyRenter @ 39 – The other bubble…

  41. 41
    Eleua says:

    @Scotsman 37,

    I saw that. I had to go rub my eyes and drop the beer when I read that Bonnie Fwank wants to reboot the entire mess. Yes, I think he realizes that he is safe in November, but if they don’t change their tune, and quick, the entire House Dem Caucus will carpool in a single Westfalia.

    When MAObama is advocating banking reform the day after Brown wins in Massataxes, one has to scratch their head. Goldman Sachs was a HUUUUUUGE contributor to BarryX’s campaign and many of his far-Left pals on The Hill. Blankfein doesn’t spend that kind of scratch unless he gets something for it.

    Personally, I think they are baiting the GOP into taking the sides of big banks, as the GOP has been on the opposite side for many, many years.

    I don’t see how they get FNM/FRE out of the picture. By doing so, they put the average Bainbridgeislanddreamhome in the $150-$200K range, and that presumes we don’t take a hit on employment or wages – both false presumptions in that scenario.

  42. 42
    CCG says:

    “I don’t see how they get FNM/FRE out of the picture. By doing so, they put the average Bainbridgeislanddreamhome in the $150-$200K range”

    Imagine…sane house prices.

  43. 43
    Scotsman says:

    RE: Eleua @ 41

    Given their track record my guess is they intend to bring the Freddie/Fannie games completely onto the federal balance sheet. It will give them complete control of home finance without having to work through an awkward semi arm’s length structure. I can only begin to imagine what a corrupt political mess that will become. Should it happen, I see the 2-2-2 plan on the horizon- 2% down, 2% annual rate, 2% non default.

  44. 44
    AMS says:

    RE: Scotsman @ 43 – 2% annual rate? Why not a double-aught plan?

    0% down, 0% annual rate

    The money will be free for all!

  45. 45
    David Losh says:

    Let’s just talk residential housing, just for a minute. You buy it, you pay it off, and you move on.

    That’s the way it was until 1998. The interets rate you paid was only a hedge on the payment schedule. It really made no difference because, at the time, if rates were high prices were low. There was enough property with equity positions to make a deal no matter what the mortgage market was doing.

    Today you have people paying a large per centage of thier income on servicing the mortgage. They have no hope of paying down the principle balance. Thay have a long haul of fifteen years befor the principle has a chance to be paid down.

    The inflation argument is just a hope that there will be inflated future dollars to pay that debt down. Watching Real Estate prices go down is a hard fact to come to grips with. This economist is feeding that hope, with provisions.

    However, here is a simple fact. Even if I can afford my mortgage payment there is no gaurantee that when i pay the house off it will be worth the price I paid.

  46. 46
    EconE says:

    RE: Scotsman @ 36

    Yeah…LOL…those new age weekend seminar types crack me up. They should study the genealogy of their “workshops”.

  47. 47
    EconE says:

    RE: AMS @ 38

    I’m actually glad more people aren’t hiking.

    Mt. Hollywood is the only place here in L.A. that I can go to get away from people.

  48. 48
    patient says:

    RE: Scotsman @ 43 – I bet this is an attempt by Barrney Frank to cover up the massive losses FHA is running up. Somekind of reset to not have to take responsibility for the craziness of 3.5% down in a national market that dropped that much in a couple of months. Hopefully he will not get away with it now when filabuster is in play again.

  49. 49
    Yaj says:

    Glad to see Elua back…

    Since you’re here – do you see this crisis presenting an opportunity to defuse the public sector compensation/pension/healthcare bomb before it detonates, at least at the state level?

    Funny how we’re told that in order to balance the budgets the only options we’re presented are either abandoning widows, orphans, and puppies and ditching public safety or tax hikes – but the 90K a year assistant deputy vice chair for equality never has to ponder financing his own retirement or funding the increasing cost of his healthcare out of his own pocket – much less taking a significant paycut until the revenue picture improves.

  50. 50
    buystocks says:

    RE: Yaj @ 49
    puppies? those are edible when the time comes…

  51. 51
    Tom Marie says:

    Nice graph. I attribute the recent gap between present situation and expectations to “hard times fatigue” – people are sick of hard times and even though times may continue, they keep thinking “things just gotta get better because I can’t take it any more!”

  52. 52
    Eleua says:


    I see this entire crack up finally reigning in the explosive growth of the public sector. My reasons for this descend from the .gov’s thesis that it can Keynesian spend us back to the good life. At some point, that becomes the focus, or the new “sub prime,” and the detonation begins there as politically people are not going to support 20 different layers of .gov for services that were nice when we had money, but now are just unsustainable.

    When our unemployment is 25%, and the private sector earnings are cratering, there just won’t be the political will to support six figure .gov jobs.

    The .gov can’t borrow indefinitely and the tax returns are cratering. Raising tax rates will only exacerbate the problem as we can empirically show that we are on the back side of the Laffer Curve. The top 1% is carrying 40% of the .gov and they can’t do it anymore.

    I predict that we will paint ourselves into a corner where Medicare and SS will be cut or eliminated.

  53. 53

    […] interesting that he brings up confidence. The problem of confidence is something that seems to be coming up a lot lately…In another article posted today by the Bellevue Reporter, Seattle economists predict slow […]

  54. 54

    […] all influence his perspective on the Seattle-area real estate market. Possibly Related Posts:State’s Chief Economist: Real Estate to Rebound… in 2011Foreclosures Still Slowly Climbing Around SeattleJanuary Seasonally-Adjusted Active Supply by […]

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