On the Horizon: A New Bubble or a Long Flat Bottom?

CNN Money asks: Is a housing shortage coming? (Short answer: No.)

As the nation struggles to shrug off the worst housing crash since the Great Depression, it may be hard to believe a housing shortage could be on its way.

The nation is simply not building enough homes to keep up with potential demand. Just 672,000 new homes were started in April, less than half the long-term run rate needed to meet the nation’s natural population growth.

It’s the more constrained markets, where it’s particularly hard to build — such as New York, San Francisco and Seattle — that will field the bulk of the new bubble problems, according to [Director of Harvard’s Joint Center for Housing Studies Nicolas] Retsinas.

We have discussed this nonsense here in the Seattle market extensively over the last few years. Our latest look at the data suggested a local housing oversupply of 36,000 housing units.

Although it has been quite a while since we updated our collaborative stalled developments map, I still see many hundreds of plots ready to be developed whenever local homebuilders perceive that there is a demand for them, and in fact building at a few of these developments has even resumed in recent months (albeit at a very slow pace).

Meanwhile, Zillow’s Stan Humphries checks in with a dose of reality: Four Myths of the Housing Market

  1. The housing recession is over
  2. We’ll see a return to historical appreciation rates after we hit a bottom in prices
  3. The worst of the foreclosure crisis is over
  4. The homebuyer tax credits saved our bacon

The thing I love about Zillow is that since they’re not actually in the business of selling houses, they tell it like it is.

The housing bottom is likely to be long and flat, and it is highly likely that we will not return to historical appreciation rates for another three to five years.

The rate of foreclosures is actually INCREASING nationally.

The homebuyer tax credits did stimulate sales, especially during the first wave of the credit in 2009 when it was exclusive to first-time homebuyers. … In its second incarnation, however, most stimulated demand was likely pulled forward from future months versus being incremental new sales that would not have occurred otherwise.

So let’s see, who should we believe? The “news” website that bolstered the nonsense claim in 2006 that skyrocketing home prices around Seattle were “not outstripping the economic fundamentals,” and continued to boost those mythical “positive fundamentals” even into June 2007, or the guy whose job is to analyze and understand housing data, and whose entire company is built around collecting and processing as much housing data as they can?

Tough call.

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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

    Is Zillow in any kind of a business? ;-)

  2. 2
    Scotsman says:

    RE: Kary L. Krismer @ 1

    They used to generate random numbers for the old housing lottery. ;-)

  3. 3
    MacroInvestor says:

    Home builders only know how to do one thing. I’m sure they hate sitting around year after year, generating no new business. But you sure have to be nuts to be building more supply right now. And I’d sure hate to have a used house for sale within a few miles of a new development.

  4. 4
    deejayoh says:

    Nicolas Retsinas is in the palm of the MBA and the NAR

  5. 5
    hoary says:

    I just pulled NTS data from the county website. There’s a lot of duplication I don’t feel like parsing at the moment, but looking at the data I would NOT say foreclosures are abating. It’s likely they are increasing as the Zillow guy said (assuming a 5% duplication rate).

    From the data I pulled a NTS parcel from just last week, just out of curiosity.


    Home sells for $270k at peak, currently assessed at $200k. What are the odds?

  6. 6

    By MacroInvestor @ 3:

    And I’d sure hate to have a used house for sale within a few miles of a new development.

    What’s bad is having a new development in your area where the lender is pressuring the builder to sell.

    IMHO, buying such new properties often doesn’t make sense due to small lots, low end construction, etc. What’s new and shiny now compared to the house that is 10 years old, could very well look like hell in 10 years compared to the older house at that time. I’ve seen new development go to “golly” in about 5 years.

  7. 7
    whatever says:

    “The housing bottom is likely to be long and flat, and it is highly likely that we will not return to historical appreciation rates for another three to five years.”

    3-5 yrs is being pretty optimistic!

  8. 8
    Sniglet says:

    When you look at just how completely unbalanced the real-estate market is these days, it’s difficult to see how we’ve turned the corner, or even come close to bottom. A third of all US mortgages are insured by FHA! Over 90% of all US mortgages are backed by the US government (i.e. Fannie Mae, Freddie Mac, FHA, etc)!

    This is INSANE!!! Anyone who tries to point to historical price trends to try and argue that we have hit some sort of bottom hasn’t realized that this is a whole knew ball-game, and that past comparisons are completely irrelevant when you consider that the financial system itself has imploded. The reality is this: the only thing keeping US house prices from tanking further is the de-facto nationalization of the mortgage market. Unfortunately, such a model just isn’t going to last, and will have to break down at some point.

    If all this isn’t enough to scare you, listen to what the the FHA commissioner recently told Congress.

    he acknowledged that some 20 percent of F.H.A. loans insured last year faced serious problems including foreclosure


    The fact that NEW mortgages that have been issued in a post-bubble world are experiencing such massive default rates should have everyone feeling heart palpitations. All this government subsidy of the mortgage market is simply digging a deeper hole, leading to greater foreclosures, write-downs, and bail-outs.

    This real-estate cycle is NOTHING like anything anyone alive has ever experienced, and the eventual outcome will not be pretty…

  9. 9
    Ross Jordan says:

    Even if there won’t be a shortage of homes for the significant future — there may be a shortage of *new homes* — which is a requirement for a non trivial subset of buyers. How that plays out for the overall market and pricing remains to be seen.

  10. 10
    David Losh says:

    RE: Sniglet @ 8

    I enjoy your point of view. What I think is that you are stuck in an old pattern of believing that lending is an economic factor. We can do without interest. We can pay cash, and barter.

    Of course I hear the scoffs, and of course that will never happen, but it’s possible.

    What is going to happen with housing is that people will suck it up and pay off the house. Commercial Properties will come to some deal where they take the losses as a cost of doing business. Prices will come down while dollars are sucked out of consumer spending.

    That’s here in the United States. Markets in Europe, Africa, Asia, and South America have harder transitions to make, but here we will pay from our vast wealth.

  11. 11
    Jillayne says:

    Here is my very un-scientific approach: It took about 7 years to run up the bubble and it will take at least 7 years to unwind all the bad loans. Check back w/me in 2014. We’re going to be bouncing around the bottom for a long time. BTW when I said this in 2007 I had all kinds of people throwing tomatoes at me. Now, not so much.

    Different parts of the country will bottom out at different times. Same for the greater Puget Sound area: Different neighborhoods will bottom out at different times.

  12. 12
    Scotsman says:

    RE: Jillayne @ 11

    Yup, historically bubbles have a clear symmetry to them, so a start in 2000 with a 2007 peak means a 2014 bottom is a very reasonable call. But all of this assumes a generally stable macro economic environment, something we’re missing. So in my book 2014 is the earliest for a bottom, but it could just as easily be 2020.

  13. 13
    corncob says:

    Some people are drinking this koolaid. The I-thought-abandoned development by me on the Sammamish plateau recently started slapping back up houses again. It had been about two houses completed in a maybe 12-15 house subdivision for a couple of years, the builder was so broke they didn’t even landscape the entrance which was all grass patches, mud and rocks. Two months ago they started on one house, that is almost done and they have started on at least two more, possibly more in the back of the development. These are your standard 2 story, no lot, very cheaply built box houses. Not sure how prices compare to the original houses they built.

  14. 14
    Scotsman says:

    Anopther slow summer for the constructiuon industry with housing starts “unexpectedly” down. Looks like maybe the spring bounce ended early this year:

    “The Commerce Department said housing starts dropped 10 percent to a seasonally adjusted annual rate of 593,000 units, the lowest level since December. The percentage decline was the biggest in 14 months. April’s housing starts were revised down to show a 3.9 percent increase, which was previously reported as a 5.8 percent rise.
    Analysts polled by Reuters had expected housing starts to fall to 650,000 units. Compared to May last year, starts were up 7.8 percent.
    New building permits, which give a sense of future home construction, dropped 5.9 percent to a 574,000-unit pace in May, the lowest in a year. That followed a 10.9 percent drop in April and compared to analysts’ forecasts for a rise to 630,000 units.”


  15. 15
    Teacher_Greg says:

    I have a perhaps naive question about Sniglet’s perspective on the government’s 90% share of the home loan business…If the new lending standards are indeed tougher and more responsible is it possible that the tax payers end up making money off of the loans it is purchasing? If so, how is that unsustainable? Furthermore, won’t the profit motive inspire banks to stop selling their loans to the government at time goes on?

    I dont know what impact this has on the price of homes, but it seems to me that it was irresponsible lending/greed that got us into this mess and that responsible lending (while not a panacea) is one important aspect of getting us out.

    What am I missing?

  16. 16

    RE: Teacher_Greg @ 15 – Yes it is possible that the government could make money, just as they made money off of some of the bank bailout activity.

    Second, you can’t necessarily assume that because they’re government initiated that the government will continue to hold them. That has been largely the case for the last year or two, but historically most of them have been sold. The F&F acted more as a packager of loans in the past.

  17. 17
    Hugh Dominic says:

    RE: Teacher_Greg @ 15 – the assumption is that the loans that the government is buying are not worth what we’re paying for them. We taxpayers are overpaying by undercharging the interest as compared to the number of loans that will default (default risk > interest rate).

    The taxpayers are doing this to try to juice the market for mortgages, and therefore for home sales. This largely benefits the banks, who can initiate the loans at a low interest rate and yet can still sell them to the taxpayers for a profit. But the theory goes that this also supports the housing market, and thus trickles down to the homeowners, mortgage holders, and the general economy.

    This is sort of heinous. But it’s not as heinous as when taxpayers bought older, pre-crash junk mortgages that the banks were holding and paid inflated prices. Those distressed mortgages have been predictably failing, now at the taxpayers loss instead of the banks’.

    This is sort of heinous.

  18. 18
    Sniglet says:

    it’s not as heinous as when taxpayers bought older, pre-crash junk mortgages that the banks were holding and paid inflated prices

    I am not so sure. Whether the loan is a 2007 or 2009 vintage, if it goes into default it is still junk. The government agencies (i.e. Fannie, Freddie, FHA) have been bending over backwards to create even greater quantities of non-performing mortgage paper (i.e. through imprudent lending to people that are unlikely to pay) in the last 2 years. Uncle Sam may not be buying more pre-existing toxic debt, but it is furiously working to generate entirely new toxic assets. I fail to see the distinction between the two.

  19. 19

    RE: Sniglet @ 18 – The distinction is new toxic assets are not held by banks, and thus do not threaten banks. Remember the original proposal was to buy existing toxic assets from banks, but when Congress objected to that, this was the work-around.

  20. 20
    mukoh says:

    Tim you would be surprised that the stalled developments map is 90% built out and a lot of it sold out in the Snoco North King. That is what majority of the people referring as supply of new units. There is approximately 5 months of new construction inventory left in the north King south Snohomish county.

  21. 21
    The Tim says:

    By mukoh @ 20:

    Tim you would be surprised that the stalled developments map is 90% built out and a lot of it sold out in the Snoco North King.

    No way. I drive by many of these developments on a weekly basis and only a small handful have actually begun building in the last few months. Most of them are still sitting completely untouched and empty.

  22. 22
    mukoh says:

    Tim. Here you go.
    Shelton Estates. SOLD 80th/Meridian
    Erin Estates. SOLD 3rd Ave
    Boulder Estates SOLD 80th/Meridian
    Clear Water SOLD, Built, Homes sold 80th/Meridian
    Gun range plat by Kenmore. SOLD Building right now
    Parmenter homes plat SOLD Building right now.
    7614 NE 192nd Built/SOLD That is what I heard though have not verified.
    9th Dr SE 98021 Homes Build SOLD OUT
    424 203rd St SE 98012 SOLD Under construction.
    31st Ave Dust Pit SOLD homes are 80% sold at $500s Both of the plats on that street.
    1929 Atlas Rd 98021 Under contract
    20270 62nd Ave NE Building and Selling at 2 per week.
    Himmelman/Applewood on your map is 16 units off 61 Built and SOLD OUT.
    Belmark Homes SOLD to about 85%

    You can update your map. Or take a drive to confirm.

    Stalled development in my opinion at least is a guy who is stuck, who can’t build, who can’t sell. Thus stalled.

    All of the plats listed above with quite a few GEMs that are not on your list have sold and are in hands of buyers who have extreme amounts of cash to build them as fast or as slow. Just the Shelton Aquisition as you can see was all cash. Just check recording office.

    The plat that I called out as Clearwater sold in one week. Just FYI.

  23. 23

    RE: The Tim @ 21 – There’s one right on the Renton/Kent border that was stalled for a long time, but then they started building about a year ago. It’s all built out now, but I’m not sure about how many remain to be sold.

    There’s another further south in Kent that was going to be a huge development. No houses ever built, and I’m not even sure they got all the utilities in. Still sitting there.

  24. 24
    David Losh says:

    OK, as much as I would like to object, it’s true, many, maybe not most, but many stalled projects have moved ahead.

    There is a sucker born every minute.

  25. 25
    mukoh says:

    I have seen proforma on the returns. And there were no suckers on those at least.

  26. 26
    MacroInvestor says:

    RE: Kary L. Krismer @ 16

    “RE: Teacher_Greg @ 15 – Yes it is possible that the government could make money, just as they made money off of some of the bank bailout activity.

    Second, you can’t necessarily assume that because they’re government initiated that the government will continue to hold them. That has been largely the case for the last year or two, but historically most of them have been sold. The F&F acted more as a packager of loans in the past.”

    What you both may be missing is this. Private companies would be financing housing if they thought it was profitable. They are not doing it because there is no way to make money in the current economic conditions without significantly raising interest rates/fees, and making lending standards much tougher. Only the gov, which has no profit motive and doesn’t care about losses, can maintain the status quo. They primarily do that because the real estate industry spreads around campaign contributions and lobbies very hard.

  27. 27

    RE: MacroInvestor @ 26 – Actually, they also aren’t doing it because they’re concerned about survival and preservation of capital. Their individual self-interest while a good thing, is not good for the collective whole. Banks do a lot of things that might make sense for them individually, but not for bank entities collectively.

    Rather than focusing in banks though, I’d focus perhaps more on the entities that buy loans. For them to use their capital elsewhere is also good.

  28. 28
    redfin-reader says:

    I’ve been reading here for a while now and just now decided to pipe up with a few comments of my own.

    I really like all the good data that this site provides, and that’s why I like reading here.

    What I think most people miss is the optimism. In my view, this site has a very pessimistic and negative attitude toward the housing market. I think there’s a lot to be said about what the optimists bring to the table.

    We all want stability right? What brings stability? Confidence. If people don’t want to see an end to this crazy market, we’ll never see it. If people keep reporting that it’s horrible and nobody should buy, nobody will. My point is, aside from actual cost of materials and labor to build, a house is worth just that and what people are willing to pay for location.

    Let’s restore some confidence in the housing market instead of tearing it down, maybe a few more light-hearted blog posts would be nice.

  29. 29

    Most of the mainstream real estate sites are optimistic, and there have been very few sites that weren’t tainted with that industry optimism/delusion. Seattle Bubble doesn’t need to have an optimistic spin, because so many other real estate sites still tell you that we’ve hit bottom, that now is a great time to buy, etc.
    But there is some diversity of opinion amongst commenters here.
    Very few here are wildly optimistic, but I’d say the range is from somewhat optimistic to impending cataclysm.

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