Big Picture Week: Case-Shiller HPI Rate of Increase

We spend a lot of time on here talking about month-to-month changes in this or that index, looking for signs of what’s coming next in the housing market. This close scrutiny certainly has its place, but sometimes it’s helpful to take a step back and look at things in more of a long-term historical context.

This week we’ll spend some time looking at a handful of metrics related to Seattle-area home prices and local economic fundamentals to see if we can get a feel for where we stand right now, and where we might be headed over the next few years.

First up, let’s have a look Seattle’s Case-Shiller Home Price Index, compared to a variety of steady rates of annual price increases.

Case-Shiller Home Price Index

Despite the little mini-bubble that local home prices experienced in 1990, through about 1996, Seattle home prices were tracking at a rate of about 4% annual increases. From 1997 through 2003, things began to get a little detached, then the train wreck really picked up steam in 2004.

The dotted purple line in the chart above shows what the bursting bubble would have looked like if prices declined in the same pattern they rose. As you can see, even with the interference of the tax credit, Seattle’s decline is still fairly close to a mirror image of the increase.

Seattle’s Case-Shiller Home Price Index currently sits at a level that represents 4.6% annual increases since 1990. For comparison, if a family earning the median household income in 1990 in King County of $38,676 were to have received 4.6% annual increases since then, they would currently be earning $97,524. Here in the real world, OFM’s latest estimate (2009) puts the median household income in King County at $62,810 (equivalent to an annual increase of 2.6%).

So, where does that put us today? Seattle home prices certainly are not as insanely out of whack as they were 2005-2007, but have they reached an equilibrium yet? Based on this analysis, I’m inclined to say “not quite.” What about you?

Big Picture Week on Seattle Bubble

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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.

71 comments:

  1. 1
    Hugh Dominic says:

    Not sure. Maybe.

    Household income is a major way that money makes it’s way into our RE market. But I think that within this study period, a large amount of transplanted cash was brought in by migration from e.g. California. If Californians brought a few billion dollars into Seattle over those years, by selling their high priced property and bringing the equity here, then I could understand an increase in prices that exceeds median raises.

  2. 2
    HappyRenter says:

    “So, where does that put us today? Seattle home prices certainly are not as insanely out of whack as they were 2005-2007, but have they reached an equilibrium yet? Based on this analysis, I’m inclined to say “not quite.” What about you?”

    I think it’s hard to tell because there are many other factors to be considered. On one side you have the fact that people might be moving to Seattle for work because it is a comparatively large city offering employment opportunities. That drives prices up because it creates demand for housing. On the other side, you have a still high unemployment and that drives prices down because less people can afford to buy a home. These two things might be balancing each other out at the moment.

  3. 3
    HappyRenter says:

    One problem I see in Seattle in the long term is the increase in traffic if more and more people move here. Many people might prefer living in the city to avoid the commute through traffic (unless public transportation to the suburbs gets massively improved). This might cause real estate prices to go up in the city limits and down in the suburbs.

  4. 4
    Lurker says:

    I agree, not quite. Not with the unemployment numbers and falling wages.

    Also, considering that things overshoot on the way down after a bubble, I think we still have some further falling to do.

  5. 5
    BillE says:

    These are the topics I really like. Looking forward to the others this week.

  6. 6
    pfft says:

    By Lurker @ 4:

    I agree, not quite. Not with the unemployment numbers and falling wages.

    Also, considering that things overshoot on the way down after a bubble, I think we still have some further falling to do.

    when the housing bubble bubbled though the economy wasn’t that great either. nobody would have predicted housing prices going up that much based on incomes. incomes have been relatively stagnant. nobody could have foreseen the drop in lending standards. there would be no case in 2002 for home prices to sky-rocket in the ensuing years. we had a recession, a terrorist attack, the war in afghanistan and then the Iraq War. no reason to think if you had a crystal ball and knew about those events beforehand that you would think housing would bubble so much. the fundamentals of anything is an inexact science.

    wages are going up btw and the unemployment rate topped out in the 10% range.

  7. 7
    Brandon Adams says:

    RE: HappyRenter @ 3

    Light rail is now planned to roll out to Bellevue by 2021!

    Meanwhile, Shanghai can build a 19 mile stretch of mag-lev in two and a half years. More than half a decade ago!

  8. 8
    Ben says:

    Reply to pfft….

    Funny one. Could anyone have foreseen the tightening of lending standards in the bubble aftermath? Of course.

  9. 9
    pfft says:

    By Ben @ 8:

    Reply to pfft….

    Funny one. Could anyone have foreseen the tightening of lending standards in the bubble aftermath? Of course.

    I am not following you.

  10. 10
    hoary says:

    By Brandon Adams @ 7:

    RE: HappyRenter @ 3

    Light rail is now planned to roll out to Bellevue by 2021!

    Meanwhile, Shanghai can build a 19 mile stretch of mag-lev in two and a half years. More than half a decade ago!

    Quoted from your wiki link:

    “Following the opening, overall maglev train ridership levels were at 20% of capacity. The levels were attributed to limited operating hours, the short length of the line, high ticket prices and that it “virtually goes nowhere”, terminating at Longyang Road in Pudong another 20 min by subway from the city center.”

    Sounds about right for commuter rail design. This train just happens to go no where at 300 mph which is impressive!

    P.S. Like the topic Tim. Everyone makes the mistake of looking too closely at recent data and not spending enough time looking at historical trends both economically and demographically.

  11. 11
    Ben says:

    RE: pfft @ 9

    You said: “nobody could have foreseen the drop in lending standards. there would be no case in 2002 for home prices to sky-rocket in the ensuing years”.

    I said: “Funny one. Could anyone have foreseen the tightening of lending standards in the bubble aftermath? Of course.”

    Hope that helps….

  12. 12
    Ross Peterson says:

    “Seattle’s Case-Shiller Home Price Index currently sits at a level that represents 4.6% annual increases since 1990. For comparison, if a family earning the median household income in 1990 in King County of $38,676 were to have received 4.6% annual increases since then, they would currently be earning $97,524. Here in the real world, OFM’s latest estimate (2009) puts the median household income in King County at $62,810 (equivalent to an annual increase of 2.6%).”

    So equivalent annual income increase did not keep up with the housing prices increase but did the buying power keep up with the increase? I think the interests rates have fallen in the same time frame giving the a household more buying power.

  13. 13
    HappyRenter says:

    RE: hoary @ 10

    But then if you read further:

    “The extension to Hangzhou was finally approved in March 2010, with construction to start in 2010 [5]. The new link will be 199.5 km (124 mi) long, 24 km (15 mi) longer than the original plan. The top speed is expected to be 450 km/h (280 mph) but limited to 200 km/h (120 mph) in built-up areas.”

  14. 14
    Lurker says:

    RE: pfft @ 6

    You are right, it looks like wages are rising slowly again. I guess I was mis-translating something I read the other day about how the nation lost a decade of wage increases. Wages at the moment are going back up (which is good) but back to median wages from 10 years ago (not good)

    http://s.wsj.net/public/resources/documents/US-Income-and-Poverty-in-2009.html

    And yes, unemployment numbers may have peaked but it also appears that they will remain elevated for some time.

    I think I see what you are saying in your first paragraph but I don’t believe bubbles are necessarily born from economic prosperity. It really goes to show how out of whack things became. I will agree that the fundamentals are not an exact science when you deal with an emotional market.

  15. 15
    ARDELL says:

    The Tim asks: “So, where does that put us today? Seattle home prices certainly are not as insanely out of whack as they were 2005-2007”

    Home prices are still at 2005 levels in most places in and around Seattle. If 2005 was “insanely” out of whack…then today is similarly out of whack.

    Home prices started moving into totally out of whack territory in May of 2005. Being at late 2004 to early 2005 is better than 3rd or 4th quarter 2005. Maybe the answer is out of whack…but not “insanely” out of whack.

    We are ok ONLY if you buy into the underlying premise that prior to exotic loans was OK. But for the most part, that is not the case as is evidenced by the volume difference between today and even the last twelve rolling months, as compared to 2001 and 2002 volume. Sub-prime, zero down and exotics were not being widely used prior to late 2003 in this area (as opposed to some of CA)

    I am using 2001 as a baseline as to volume:

    http://www.realtown.com/Ardell/blog/tracking-the-market/home-prices-and-volume-sold

    I believe it is more important to focus on the inadequacies of volume vs price, before becoming complacent in any thinking that prices have stabilized. A small % of the market was always involved in exotics and local only financing, which has now disappeared almost entirely. So getting back to before the insanity is not good enough until we reach the volume levels as noted in the link that were sustainable back in 2001.

  16. 16

    For years, I’ve been preaching that Seattle’s historic home price to rent and home price to income ratios were out of whack, and would at some point “revert to the mean”.
    But not exactly. There are variables that can affect things over a long period. A few years ago, my beliefs were being summarily dismissed in most quarters, with the belief that ” things are different now.” And so they are. Median income influences home prices, but maybe so do the amount of folks around at the top of the food chain. The median income in Seattle hasn’t gone up that much, but there are a lot more rich people, and as they say: the rich get richer.
    My theory is that when there’s a lot of rich people around, it may not affect the median income much, but it affects housing prices. So maybe I was wrong, and we won’t revert to the mean. I still maintain that home prices are probably going to fall some more locally and we’ll get closer to the mean.
    Also: looking back at the past will certainly give us a clue, but predictions are hard to make, especially about the future. What if Microsoft decided to move their headquarters and operations to Hattiesburg, Mississippi? No, not at all likely, but you never know. That would certainly result in lower home prices locally, and higher home prices in Hattiesburg.
    What if a series of major earthquakes and aftershocks destroyed the Microsoft campus and downtown Bellevue? Sure, unlikely, but possible, and would have an effect on the housing market.
    Plus things nationally and globally affect Seattle. That was certainly proven in the last few years. They said our housing market was immune, bla bla bla, but it wasn’t.

  17. 17
    Tim Mcb says:

    RE: Ross Peterson @ 12

    Good point. That often gets lost in this type of conversation. Usually the rebuttal to this argument goes like this: “I don’t care about interest rates because I’d rather buy a house at a low price with a high interest rate than a high price at a low interest rate.” You personally might, but tens of thousands of people how have purchased over the last two decades seem to disagree with that line of thought, which is why we are here now. Even with really low interest rates though I tend to agree with the Tim that there’s a little more air left to be let out, but interest rates are preventing a larger drop that would look like the bubble mirror trajectory.

    Now if rates were to go up more than nominally….

  18. 18
    One Eyed Man says:

    RE: Ira Sacharoff @ 16

    If MS moves to Hattiesberg, I’m not going. I’m sure most of the people are nice, but I saw Easy Rider. My tin foil helmut probably can’t even protect me there.

  19. 19
    Urban Artist says:

    What would Seattle look like if in the next couple of years prices fall to 2002-2003 prices. Would home owners that bought in the past year to the present unload their houses or just stay put? Most people I know don’t track the value of their houses they just sort of assume it is the same or more than when they bought it.

  20. 20
    Kary L. Krismer says:

    RE: Tim Mcb @ 17 – Most people want to buy a house at a particular time because they want to buy a house at that time. Interest rates and prices might sway that decision, but the decision is typically based on something else.

    This site is sort of bi-polar in that the line is buying a house is not a good investment, but then the decision factors touted are ones that would be use if the decision was an investment decision.

  21. 21
    Tim Mcb says:

    RE: Ira Sacharoff @ 16

    “Plus things nationally and globally affect Seattle. That was certainly proven in the last few years.”

    I agree with most of what you say Ira, but external influences can be both bad and good. For instance since we’re playing the what if game, how might the rise of China influence the economy (imports/ exports, real estate investments, etc.) in Washington in the future. It might be bad for the US, but could be a boon for Washington. Perhaps Google decides it doesn’t like California’s new economic situation and is upset with the choices their politicians have to make and decides to move its campus to Kirkland to more directly compete with Microsoft. It goes both ways, good and bad. I look at Boeing today as an example. When Boeing decided on South Carolina for its next 787 assembly line people said that was the end of Boeing in Washington. We’ll see, but a couple weeks ago they announced the creation of a research facility that will employ almost another 1,000. Some see it as insourcing back to the core of Boeing (ie the PNW). If Boeing does want to leave the area and outsource to high heaven they have a funny way of showing it.
    We want black and white, but all too often its gray around here (pun fully intended).

  22. 22
    One Eyed Man says:

    RE: Tim Mcb @ 17

    Probably the best argument against The Tim’s prediction isn’t based upon logic. It’s based upon the unpredictable insanity of the market place and it can be depicted in one word. California.

    SF and LA are still probably more inflated than Seattle and probably have higher unemployment, yet they’ve both posted close to double digit increases on the CS in the last 12 months (with SF in the high teens).

    I still think we’re headed moderately down in Seattle for the next 6 months. But anything can happen. Its not entirely out of the realm of possiblility that employment could suddenly pick up for what seems like no reason and housing would move modestly upward. Or on the other hand Isreal could strike the Iranian nuclear enrichment facilities and buyers would scatter like roaches when you turn on the lights.

  23. 23
    ARDELL says:

    RE: Kary L. Krismer @ 20

    That is generally true Kary, except that more people buy when homes are expected to go up and fewer people buy when they are expected to go down. So their decision to purchase regardless of reason to buy is altered accordingly.

  24. 24
    Mr. Underwater says:

    I think its near impossible to provide a forcast based on average incomes alone. There are other variables that make up the demand for housing. Ease of obtaining a home loan is a major variable. Also, sentiment is another major variable. No one wants to buy a home if they think the housing markets going to tank. Population is another one to consider when making projections based on historical data.

    I think, actually more like hope, that the housing market is going to show some major signs of improvement over the next year. The housing market will increase following an increase in jobs (yes they will eventually increase, the sky is not falling) and local economic output. I don’t really know how to factor in the over supply issue. Thats obviously a very important factor i’ve over looked.

  25. 25
    Tim Mcb says:

    RE: Kary L. Krismer @ 20

    Good points.

  26. 26
    Kary L. Krismer says:

    RE: ARDELL @ 23 – Well, the “herd mentality” is still something different than interest rates and prices! ;-)

    (In fact, it’s inverse to prices typically.)

  27. 27
    2kt says:

    You can chart just about anything.

    Due to a very low annual inventory turnover and big gaps in income distribution between bottom two deciles and the rest of the earners there is very little correclation between median incomes and home prices. The bottom 20% of income earners have been out of the housing market since the beginning of time.

  28. 28

    By One Eyed Man @ 18:

    RE: Ira Sacharoff @ 16

    If MS moves to Hattiesberg, I’m not going. I’m sure most of the people are nice, but I saw Easy Rider. My tin foil helmut probably can’t even protect me there.

    But it has a good ring to it, MS in MS.
    I spent a few days in Hattiesburg a couple of years ago. It’s a college town with cool old brick buildings, kind of artsy, with bike trails. And the best BBQ I’ve ever tasted.

  29. 29
    hoary says:

    RE: Ira Sacharoff @ 16

    Ira, not all black swams bring gloom and doom! I like this topic because it makes me wonder what innovations are headed our way in the years to come (come on flying cars!) and who the next Microsoft will be in my childrens generation.

    Routinely at work (I kid you not) I am asked to provide forecasts 20-30 years from now for this or that market/index. In my head I’m like “uhhh, well if there’s an America in 30 years I’ll be happy”, but then I just tell them to “assume 3% and call it good.”

  30. 30
    ARDELL says:

    RE: Kary L. Krismer @ 26

    My clients are generally and have always been apart from “the herd”, but I still have had some wait when the market was positioned at the top of a downturn, regardless of “reason to purchase”. More often I have to find a better than average deal at that point. Just got appraisal back on one I’m doing where the purchase price is almost 15% under current value. That’s what I’m talking about…w00t!

  31. 31
    esquivaliant says:

    some major housekeeping:
    1. case-shiller data is in nominal dollars, so this graph should be inflation adjusted, no? it is poor form to look at things over this span of time without making that adjustment.
    2. after that, it should be on a log scale, since we are principally asking about what is a reasonable annual percentage growth rate
    3. after the graph is corrected, it is still going up, start asking big historical questions: was seattle a 3rd tier berg 20 years ago, and now it is a different and more sophisticated animal? or is it’s place in the global economy basically comparable to what it used to be, a boom/bust city port city in a global economy, driven by immigration, based on extraction and global trade of timber, then shipbuilding, then airplanes, now tech. i’d argue that graph ‘ought’ to be flat, in the long run.
    4. an anecdote: in 1974 an acquaintance graduated with masters in social work, got a full time starting job for $12k/year, saved up and bought 3+ bedroom house in good condition on a prime neighborhood street on capitol hill for the going rate, $27k, which many at the time considered very expensive and a poor investment. yes, that is correct: it was priced at under 2.5x his starting salary in social services. his wife also worked in a typical full time social work position, at $7k/year, so the house was priced at 1.9x combined family income. you work out the numbers, but i expect at 1.9 times early career family income a typical house value in seattle would get us to a valuation a lot closer to $200k… not $450k. that particular house is now valued at over $950k.
    5.we are now in a protracted house value multiple contraction following 30 years of multiple expansion. the foreclosure crisis is not even half over. fiscal and monetary policy will try and probably succeed in capping the wagearners pain at about 10% unemployment, which will act to stretch the reset into many years. anyone who buys a house now should be prepared to be a holder for a long time.

  32. 32
    ARDELL says:

    RE: Mr. Underwater @ 24

    I’m not seeing an oversupply at all, not of homes people want that are priced even close to “fairly”. Those that are good and priced well are selling fairly quickly. And I am seeing more homes getting more real in the last couple of weeks. More homes coming on at “right” prices and more stale overpriced inventory getting to realistic pricing.

    That has nothing to do with home prices going up, but the market is generally better now than it has been for the last six months as to finding and getting a decent home at a decent price.

  33. 33
    The Tim says:

    By esquivaliant @ 31:

    some major housekeeping:
    1. case-shiller data is in nominal dollars, so this graph should be inflation adjusted, no? it is poor form to look at things over this span of time without making that adjustment.
    2. after that, it should be on a log scale, since we are principally asking about what is a reasonable annual percentage growth rate

    1. Case-Shiller data isn’t in dollars at all. It’s an index. It’s useful for measuring the rate of change, which is exactly what we are doing here.
    2. The growth over the 20-year period in question isn’t dramatic enough to warrant a log scale, IMO.

  34. 34
    Fran Tarkenton says:

    By esquivaliant @ 31:

    4. an anecdote: in 1974 an acquaintance graduated with masters in social work, got a full time starting job for $12k/year, saved up and bought 3+ bedroom house in good condition on a prime neighborhood street on capitol hill for the going rate, $27k, which many at the time considered very expensive and a poor investment. yes, that is correct: it was priced at under 2.5x his starting salary in social services. his wife also worked in a typical full time social work position, at $7k/year, so the house was priced at 1.9x combined family income. you work out the numbers, but i expect at 1.9 times early career family income a typical house value in seattle would get us to a valuation a lot closer to $200k… not $450k. that particular house is now valued at over $950k.

    Similar anecdote: circa 1976, my mother bought a house in Montlake for $39,000. She decided she was in a position to buy because she could afford it easily on her university salary, and could even afford it if she decided to go part-time somewhere down the line.

  35. 35
    drshort says:

    By Ira Sacharoff @ 16:

    Median income influences home prices, but maybe so do the amount of folks around at the top of the food chain. The median income in Seattle hasn’t gone up that much, but there are a lot more rich people, and as they say: the rich get richer.
    My theory is that when there’s a lot of rich people around, it may not affect the median income much, but it affects housing prices.

    I’ve argued this every time we talk about median income to median home price (with little success). I believe Snohomish County has the same or higher median income than King. But, at the 75th percentile, King County’s income is much higher. And that drives up the housing prices in King relative to Snohomish.

  36. 36
    buystocks says:

    RE: ARDELL @ 30
    Wouldn’t believe that appraisal. We’ve encountered two following situations during our home shopping:
    1) We liked a house but the seller would not drop below their appraisal (obtained for a recent refinance), which was easily 15% over the fair value of the house. Because seller wouldn’t cross that line, we had to walk from negotiations.
    2) We just purchased a house for a price that is 27% below the appraised value (per the mortgage appraisal), and it’s outright wrong. Much better houses are available on the market for this “appraised” value.
    If banks are pricing their foreclosures/short-sales based on appraisals, then good luck to them.

  37. 37
    ARDELL says:

    RE: buystocks @ 36

    I agree and often say DO NOT rely on appraisals. But being in the investment and real estate markets for 40 years, I know when they are right and when they are wrong. This one is right :) The house was once tax assessed for 55% over this sale price, and I’ve been working with this property and 3 appraisers for about a year.

    Totally agree that buyers should not make offers based on appraisals…though it wouldn’t hurt if every seller got one to maybe help with the so very many priced at $100,000 or more over where they should be listed.

  38. 38
    ray pepper says:

    ” I’m inclined to say “not quite.” What about you?”

    My opinion…………………..Which I value more then anyones…..We remain overpriced……….Its trend-line down down down until the short sales and foreclosures return to historic norms…..Rent-to-own ratio remains way out of whack.

    However, going forward, GEMS will present themselves…..Always Look Bubble Heads…………..Always Look!

  39. 39
    David Losh says:

    First, you would be surprised by the number of $100k jobs Seattle has. Second is that the purchasing power of that $100K isn’t even close to what it was in the 1960s, or 1970s.

    In my opinion, rather than looking at sales statistics you should be answering the two anecdotal stories of why some one could buy a house on a University salary, or that of a social worker.

    Based on the Kary two income assertions housing should be easier to finance, and easier to afford. Historically something went wrong with Real Estate before 1990. In my opinion it is that banks are more involved in mortgages than I can remember.

    I look at what is going on now as propping up mortgages, and mortgage backed securities more than the price of housing units. The closer we get to cash the lower the purchase price of property.

    Let me put in my story of in 1984 I bought my first house, on my own, for $34K, two blocks from where I grew up in a nice neighborhood. I put $10K down, and the owner carried the $24K at 7%.

    BTW that sold for $400K in 2007.

  40. 40
    C says:

    “would currently be earning $97,524”

    The math on that is grossly off. That is the current value based on a 4.6% annual increase. So the “earning” would be the $97,524 – $38,676 + $58,858. The net gain is $58,858. Now lets look at what inflation was for that period. According to the bls.gov (http://data.bls.gov/cgi-bin/cpicalc.pl) the simple rate of inflation was 164.94%. That means that $38,676 in 1990 would be worth $102,469 today. Holding that house would cause a loss of $4,935 vs inflation. And…that doesn’t include the outlay for taxes, insurance and repairs, mortgage points and fees and agent commissions on both ends of the transaction and the biggest of them all, interest on the loan amount. Granted you need a place to live and would have to rent otherwise but you still come out ahead if you rent.

    Houses are terrible investments. You can get poor returns in other vehicles and still come out ahead of holding a house.

    http://dailybail.com/home/the-great-housing-bamboozle-a-look-behind-the-numbers-shows.html

  41. 41
    Jonness says:

    In a hot market with unemployment at 3%, prices could perhaps be thought of as justifiable. In a collapsing market with unemployment at 10%, there is no way to justify prices outgrowing wages by almost 50%.

    Homeownership grew to an unsustainable percentage, and it is now declining to historically sustainable levels. The govt. and the bankers have done everything in their power to keep prices above historically affordable levels. They can slow the rate of decline, but eventually, the homeownership rate will decline back to where it started. Those who buy in the meantime are being used as pawns to offset the banks’ losses.

    I don’t know a single person right now who is underwater and not sick about it. My advice is to be very careful about trading hard-earned cash for this sick horrific feeling. That “new house” excitement lasts about two months. After that, you are stuck with the consequences of your decisions.

  42. 42
    pfft says:

    By Jonness @ 41:

    In a hot market with unemployment at 3%, prices could perhaps be thought of as justifiable. In a collapsing market with unemployment at 10%, there is no way to justify prices outgrowing wages by almost 50%.

    unemployment is lower than 10%, the market isn’t collapsing and prices can outgrow wages if borrowing standards are low and/or people decide to devote more of their incomes than normal to housing for whatever reason.

  43. 43
    robotslave says:

    tim @33:

    I’m not sure you understand the problem equivaliant is trying to point out (and overcorrect for, but more on that below).

    1. The CSI index isn’t in dollars, but it’s either an index of nominal value, or an index of inflation-adjusted value; the fact that it’s an index doesn’t magically make the distinction go away. Just from the shape of the fixed-rate curves, I’d say esqivaliant is correct to say that this is an index of nominal value, not inflation-adjusted value.

    2. When you *do* adjust for inflation, you are making a change that is log-like; you are (sort of) taking the log of the nominal value using a base that varies; this base is the historical inflation curve. To do this correction and then apply another log function would be wrong; when you’ve adjusted for inflation, you’ll have flattened out the housing price curve to some extent, and also the fixed-rate curves (which in addition to being more linear, will also be bumpier, not nice and smooth as they are for the nominal value).

    The nominal index is helpful, but the change in the graph, and particularly in the predictive value of the “mirror” curve, will not be trivial at all. If you use 1990 as your base year with an inflation index value of 100 (not 100 dollars, just 100), then the inflation index value for 2009 will be 162 (again, not dollars).

    You could just stick inflation on the nominal graph for comparison with the fixed-rate curves, but that wouldn’t fix the issue with the “mirror” curve; for that to be meaningful, you need to adjust for inflation (and also predict inflation for as far out as you draw your mirror– not too problematic as long as you’re only going out 4 months, but a big problem if you want to “mirror” the whole enchilada from 1990, and project out to 2030).

  44. 44
    robotslave says:

    After another glance at the graph, I’d plot the inflation index starting in 1990 with a value of 59, which the other curves seem to arbitrarily start with, and end with a value of about 96, just under the lowest of the fixed-rate curves (3%).

    Plotting an inflation index would show something interesting about Case-Schiller’s chart. To wit, they don’t offer any curve for comparison that doesn’t beat inflation; their graphical floor, the visual “worst possible case”, is one in which housing *never stops rising* in real value. I do think it’s completely possible that housing will stay above inflation, but in the aftermath of a bubble, I can certainly imagine a worse, erm, “worst possible case”.

  45. 45
    One Eyed Man says:

    RE: C @ 40

    Your conclusion may be right on a probability basis, but your methodology is at best weak C. If you want to model a real estate investment, you can’t just throw out BS like “Granted you need a place to live and would have to rent otherwise but you still come out ahead if you rent.” That sentence ignores a complex set of variables and assumptions and as much or more math than the paragraph you wrote or the link you cited. Back in 1980, the gross rent multiplier was probably also half what it is today so the rental income would have been a much higher percentage. If your not going to model the rental income stream and associated costs, don’t tell me you’ve got any idea what the rate of return is on the investment.

    If you want to talk about owner occupied real estate as an “investment” then do a legitimate rent v. own analysis. To make some gross generalizations, if you get much over a GRM of about 250 (approx the current Seattle GRM), your conclusion is probably right and with a reasonable set of assumptions for other variables, you probably never break even. If you get the GRM under 200 and keep your maintenance costs down, and use historic norms for certain other variables like home price inflation and the rate of return on alternative investments, you might break even in about 10 yrs. If you think I’m telling you that a 200 GRM is a buy signal on residential real estate, guess again. I don’t know anybody who has a 10 yr horizon for breaking even on their investments. That’s a hell of a front end load.

    But don’t throw out the example you did and say categorically that home ownership has been a bad investment without accepting that you are including a lot of assumptions in your analysis. If you get 10% inflation, the rate of return on a leveraged investment can become extremely attractive very quickly. Any housing bear will respond that you can’t have home price inflation without an improved employment picture. Maybe, but we hit 10% unemployment in about 1974 and again in about 1980 and had economic turn arounds within a couple of years. Obviously the bond market isn’t betting on 10% inflation right now. But if the Fed eventually has to go to big time QE because the government can’t pay its debts, the market might demand 10% pretty quick.

    All I’m really saying is that your conclusion has a lot of assumptions built into it that might not come true. That’s one of Taleb’s main points isn’t it? Probability analysis might say the chances are that your right, but then again the quants said Long Term Capital would make money too.

  46. 46
    One Eyed Man says:

    RE: Jonness @ 41

    “In a collapsing market with unemployment at 10%, there is no way to justify prices outgrowing wages by almost 50%.”

    Welcome to the Hotel California! Isn’t SF up about 17% YOY with over 10% unemployment? Last winter my cousin tried to talk me into fronting him the money to buy a rehab to flip in SD. I told him he was an idiot. I was right, he’s an idiot. But in hind sight, I think he’s an idiot that would have made a profit on the flip. As they say, its better to be lucky than good.

  47. 47
    Jonness says:

    By 2kt @ 27:

    You can chart just about anything.

    Due to a very low annual inventory turnover and big gaps in income distribution between bottom two deciles and the rest of the earners there is very little correclation between median incomes and home prices. The bottom 20% of income earners have been out of the housing market since the beginning of time.

    Price to income is typically as good of an indicator as rent to own. Pay particular attention to Germany and Japan in the chart, which had sufficient timeline to correct.

    http://www.housingcorrection.com/images/PriceToRentAndIncomes.jpg

  48. 48
    2kt says:

    Every earner is potential tenant. It’s not the same for the ownership. Only about 80% of the earners are in the market for ownership at any given point in time. What you refer to as “typically” has ceased to exist since about 1970s when income distribution went to the top deciles. Look at the income distribution. It is a societal issue, but that’s another matter.

    You can just as well consider 10-year olds when charting smoking population.

  49. 49
    2kt says:

    BTW,

    Both Japan and Germany have population declines, so their problems are significantly impacted by that.

  50. 50
    robotslave says:

    2kt, I think your argument against using median income to price only holds water if the pool of potential owners is shrinking at some more or less steady rate, and not if it’s stable at the 80% you cite.

    Mind you, I’m not saying the percentage of households in the US who can afford homes isn’t shrinking, or that it didn’t take a permanent loss in the Reagan revolution, but Japan and Germany do have poor people, too.

    Oh, and Germany and Japan both have declining *rates* of population increase; they’ve been projected, by some models, to have actual declining populations some time down the road, but their populations are both increasing at the present, and more importantly, were increasing in the ’80s and ’90s, respectively.

  51. 51
    Hugh Dominic says:

    The smart guys are out in force for this thread. I like it.

    Anecdotally, it looks to me like salaries in high-tech/software are down ~10-15% versus a few years ago. That accounts for a good portion of the Seattle $100k club.

    I think it’s (1) global competition, the Internet doesn’t care if you’re in India or Seattle, and (2) the end of paid-for software. Packaged software is totally dead for all but the big-enterprise stuff, and even that won’t last.

    Seattle entrepreneurs had better get fired up and get back in the game. This town does not resemble what it once did. On this trajectory we could see an outflow of high tech workers, and the DINK lifestyles and salaries will be headed off to wherever $85k(x2) can still put them in their expected lifestyle.

  52. 52
    Macro Investor says:

    Tim, I’m not accusing you of curve fitting, but the trend is nothing like the tiny fraction of history you chose. Take a look at the long term combined case-shiller chart. It is almost a flat line for the past 100 years:

    http://www.ritholtz.com/blog/wp-content/uploads/2009/06/case-shiller-updated.png

    I hate to keep bringing up interest rates, but the only way to understand this is by understanding the financing. I would argue the current market traces it’s roots to the 1984 peak in interest rates (14% fed funds to 17% 30-year). As equivalent rates have steadily ratcheted down to 0-3% we have seen the stampede into real estate and competition for loan market share (complete ignoring of credit standards). Do the math. This accounts for roughly 75% of the appreciation of houses.

    Now consider what lies ahead as rates and credit criteria normalize. A 7% mortgage rate is about a 20-25% drop in buying power at a given income level.

  53. 53
    robotslave says:

    Please note that the graph MI@52 links to, the national index going back to 1890, is inflation-adjusted and normalized to a value of 100 in 1890. The chart Tim linked to, one of 20 municipal-area indices, is quite different; it is *not* inflation-adjusted, and is normalized to have a value of 100 in January 2000.

    Macro Investor, in the future you might want to double-check to make sure you’re comparing apples to apples before you accuse anyone of “curve fitting”, particularly when the curve is provided by a third party (if Tim did generate that graph himself, he used the dataset provided by S&P — they include the trailing 20 years of data when they update the municipal indices).

    Your point about interest rates seems valid, though I admit to a bit of bafflement as to where one would account for the appreciation in housing due to inflation if 75% were already attributed to interest rate spikes.

  54. 54
    Kary L. Krismer says:

    RE: Jonness @ 41 – When was the last time unemployment was at 3%?

  55. 55
    Mr. Underwater says:

    Ardell: “That has nothing to do with home prices going up, but the market is generally better now than it has been for the last six months as to finding and getting a decent home at a decent price.”

    Supply has everything to do with the current drop in house prices. Since the start of the great recession various factors have led to a decrease in the demand for houses (impossible loans, sky is falling mentality, etc). Although the demand for houses has decreased the supply of houses for sale has remained constant if not increased (seller to buyer ratio). Because the supply of houses for sale has been constant we now have an oversupply or surplus which leads to a market adjustment (price decrease). The Houses that are selling with correct prices today have adjusted their prices to the market equilibrium. Its basic economics. You cannot estimate future home prices without also factoring in supply.

    When I mentioned leaving out supply variables I was mainly thinking of the bank repos that banks are sitting on. As someone sitting on the sidelines with an underwater mortgage, I am very fearfull of the amount of bank repos that might flood the market in the near future.

  56. 56
    Cheap South says:

    Please keep in mind the RE situation might never revert back to what it was. Many of the issues have been discussed by different people in this thread.

    – Inflow of Californians has died down.
    – Many of the jobs lost are not coming back. Seattle has a lot to lose when it comes to employment.
    – Home prices that grossly outpaced salaries (canceled out by easy financing).
    – Many realizing that counting on 2 incomes for basic needs is not smart.

    I still believe we have at least another 20% down to go.

  57. 57
    David Losh says:

    It makes no difference about inflation rate adjustment because inflation has been kept in check since the 1980s. The interest rates, or cost of money could be a factor, I guess, but that is irrelevant. Two incomes are irrelevant, because the goal is to own the property free, and clear.

    Free, and clear is the only way to look at Real Estate. You buy it on a 30 year Note, but you want to pay it off in 15 years or less. You can use the 30 year money, if you choose, but it should be a small per cent of your income after 10 years.

    What I think is, that way too many amateur investors became Real Estate experts, and got way away from Real Estate Fundamentals. Leverage is a term for short term investment, rather than the family home, or any type of residential Real Estate.

    Mortgages have promoted things like this ridiculous residential housing index as a feel good method of robbing the public. The bank is the enemy. The bank is a drain on the economy. Come to think of it, wasn’t it the margin calls that really collapse the stock market in the Great Depression? Aren’t we seeing the same thing today?

  58. 58

    […] responses to yesterday’s look at Seattle’s long-term Case-Shiller Home Price Index Ross Peterson brought up a good point:So equivalent annual income increase did not keep up with the housing prices increase but did the […]

  59. 59
    2kt says:

    RE: robotslave @ 50

    .
    Germany and Japan populations ARE in decline since 2005.

    http://data.worldbank.org/indicator/SP.POP.GROW?cid=GPD_2

    When top 20% of earners receive 62% of nation’s income, the correlation between so-called median income to median house price is practically non-existent, especially considering that only 2% of all inventory is actually on a market at any given point in time.

  60. 60
    pfft says:

    By Cheap South @ 56:

    Please keep in mind the RE situation might never revert back to what it was. Many of the issues have been discussed by different people in this thread.

    – Inflow of Californians has died down.
    – Many of the jobs lost are not coming back. Seattle has a lot to lose when it comes to employment.
    – Home prices that grossly outpaced salaries (canceled out by easy financing).
    – Many realizing that counting on 2 incomes for basic needs is not smart.

    I still believe we have at least another 20% down to go.

    YOY numbers are trending dangerously close to postive. another 20% down at this rate(low single digit YOY price decreases) would take years.

  61. 61
    chcuk says:

    I’d like to make a case for Detriot or Cleavland etc that are wacked in the last decade. We all know GM, Crysler are distroyed in the last few years and income level followed and income deterioration started before housing deflation. I’m assuming that median income far exceeds median home price there. By how much I don’t know but I would think that when 2 bed house sells for $5000 its undervalued by 95%, Right?

  62. 62
    robotslave says:

    2kt:

    I think you mean that the World Bank thought Japan and Germany had populations in decline in 2008. Both have rebounded, and according to some other data-gathering methods (in this case, those used by the CIA world factbook), were never in decline:

    http://www.indexmundi.com/g/g.aspx?v=24&c=gm&l=en
    http://www.indexmundi.com/g/g.aspx?v=24&c=ja&l=en

    And of course, most importantly, both had increasing populations during the relevant periods on the graphs you originally tried to cast doubt on with the population canard.

    The rest of your reply seems to strongly suggest that you don’t understand the difference between average and median (not scare-quoted “so-called median”– it’s a straightforward statistical calculation, not a conspiracy).

    Given your apparent mistrust of numbers, I don’t think I have any hope of convincing you of the importance of the distinction between a population that has a steady percentage of poor people on the one hand, and population with a contracting pool of potential home buyers on the other.

  63. 63
    robotslave says:

    By David Losh @ 57:

    It makes no difference about inflation rate adjustment because inflation has been kept in check since the 1980s.

    This is rather astonishing gibberish.

    Whether or not inflation has been “kept in check” has absolutely nothing to do with whether or not inflation has been *present*. And thus whether or not it should be adjusted for.

    Unless, I suppose, one is entertaining the notion that housing prices are simply not subject to inflation at all…!?

  64. 64
    Tim Mcb says:

    RE: pfft @ 60

    Actually, home prices are positive YOY for Seattle (proper):

    http://seattletimes.nwsource.com/html/businesstechnology/2012804060_homesales04.html

  65. 65
    The Tim says:

    RE: Tim Mcb @ 64 – If you dig a little deeper (via Redfin’s data release) you’ll notice that the raw median of sold homes in Seattle proper is up 7.5% YOY, but the median $/SqFt is down 1.8%. Clearly the mix of homes sold is changing pretty dramatically in Seattle.

  66. 66
    Macro Investor says:

    RE: robotslave @ 53

    “I admit to a bit of bafflement”

    Yes, you certainly seem baffled. I’ll give you one more chance, though I seriously doubt you’ll understand anything as long you are focused on minutia and being a jerk.

    The price trend from 1990 to 2006 is a blip in history. It started out with sky high interest rates that almost nobody could afford. It ended with money so loose they weren’t even checking if you had an income. What good is extrapolating this to the future?

    Most people think real estate always goes up because that’s what it did during their lifetimes. The long term chart shows what a fallacy that is. Of course prices went up. They made everyone a buyer. But that is over. Eventually loans will only go to those with good credit, and enough income. And an honest appraisal. Like it was in the 80’s.

    This is still the silly season. They’re trying to sucker us in with super low rate so the banks don’t have to take losses. But as soon as the banks unload all their garbage they’ll normalize the rates and tighten standards, so they don’t get stuck again. That will remove the marginal buyers… and force prices down.

  67. 67

    […] back up with the economic fundamentals. What’s your take?Big Picture Week on Seattle BubbleCase-Shiller HPI Rate of IncreaseExamining Home AffordabilityPrice to Rent RatioPosted in Features, Statistics | Tagged big-picture, […]

  68. 68

    […] of the remaining correction suggested by the price to rent ratio.Big Picture Week on Seattle BubbleCase-Shiller HPI Rate of IncreaseExamining Home AffordabilityPrice to Rent RatioPrice to Income RatioPosted in Features, Statistics | […]

  69. 69

    […] any real housing recovery here is at least a year or two away.Big Picture Week on Seattle BubbleCase-Shiller HPI Rate of IncreaseExamining Home AffordabilityPrice to Rent RatioPrice to Income RatioUnemployment and […]

  70. 70

    […] an update of our interactive Consumer Confidence chart, and I thought in light of our series of big picture week posts last month it might be nice to see how people are feeling about the economy in general. Consumer […]

  71. 71

    […] we discussed a few months back during Big Picture Week, when you compare Seattle-area home prices to local economic fundamentals, it’s pretty […]

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