It’s time for another Big Picture Week on Seattle Bubble, in which we’ll examine a number of local home price factors and economic fundamentals from a higher level than we usually do. By eschewing our usual focus on month to month changes and taking a step back to look at trends over the last few decades, we’ll try to 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 and the Seattle-area’s Consumer Price Index (re-indexed to match the CS-HPI in January 1990):
Lots of improvement here compared to when we last looked at this chart in September 2010. After diverging from the 4% annual appreciation line back in 1997, we finally came back in 2011.
Seattle’s Case-Shiller Home Price Index currently sits at a level that represents 3.96% annual increases since 1990. Home price gains on the whole have still outpaced local inflation by a fairly large margin, with a total increase of 133% since January 1990 for home prices versus an increase of just 92% for Seattle’s CPI.
One exercise I liked to do when I was looking at homes was to compare the rate of price increase from the last time the home sold pre-bubble (ideally 1996 or earlier) to the rate of growth in Seattle’s CPI over the same period. For the home I ended up buying, the annual price growth between its last pre-bubble sale in 1980 and my purchase price averaged out to 3.6%, compared to 3.4% annual growth in inflation over the same period. Quite a bit better than the chart above indicates for the market as a whole.
So, where does that put us today? Is 4% annual increases a reasonable baseline for home prices, or are we going to see another major leg all the way down to the 3% trendline? My take is that we’re pretty close to a sustainable long-term trend, but if we end up seeing another major economic meltdown (Europe contagion, etc.), all bets are off.
Big Picture 2011 on Seattle Bubble
- Case-Shiller HPI Rate of Increase
- Examining Home Affordability
- Price to Rent Ratio
- Price to Income Ratio
- Unemployment and Foreclosures
I assume you only charted back to 1990 because there’s no per-city Case-Shiller data available before then?
I ask because when I look at the CS chart for the entire country going back to 1950 or 1900, 4% seems like a pretty high assumption for “normal” appreciation.
I also wonder if it’s reasonable to expect “normal” appreciation in the present economy (and I’m not saying it isn’t) but that’s an unrelated question.
RE: robotslave @ 1 – Yes, Seattle’s Case-Shiller HPI does’t go back beyond 1990. To go further back than that you have to start piecing together a variety of home price sources.
I don’t think we’ll probably start to see the 4% growth again anytime in the next few years. In fact, we may be flat long enough that we don’t need “another major leg all the way down” to get to the 3% trendline, as the 3% line comes up to meet the flat home price line.
I would think long term appreciation would be around inflation and then adjusted for income & population changes in a particular market, so 3-4% sounds reasonable.
I really like it tracked against the appreciation curves. That helps put things in context.
Tim, how hard would it be to do that chart (minus the CPI stuff) for one of the bubble cities like Phoenix or Los Vegas?
Assuming the Longterm Trends Going Up Will be Mirrored Going Down
Weve got at least another 10-15 years of decreasing HPI on the horizon.
And don’t expect the Middle Class to come flying in like Superman to rescue the prices….eliminate the top 10% incomes [basically not in the real estate game, especially as 1st time home buyers anyway and without 1st time home buyers there is no Seattle real estate market] and you’re left with $31K per year on the average.
There is no hope to sell in Seattle to this Middle Class [the real one], let’s be honest.
Remember when Clinton said $200K was Middle Class? What planet does he live on?
RE: softwarengineer @ 5 – Why stop at 10-15 years?
I had clients recently by a house where the covenants require that if they tear down and rebuild, the new house has to cost more than $3,000. The covenants were recorded sometime in the 1920s.
RE: The Tim @ 2 – RE: robotslave @ 1 –
4% appreciation is based on assumed inflation, or an average of inflation.
It’s now proving to be meaningless, if sniglet is right, and we have had false inflation, and are in fact a period of deflation.
By Kary L. Krismer @ 4:
Ask and ye shall receive:
Note that I changed the reference lines to give better context for Phoenix’s more dramatic climb and subsequent bust.
Many people argue that CPI inflation has been under-reported for several years (ie not including certain elements that should be included like gasoline and food… who needs those?) If the real inflation is actually closer to 5%+, then housing hasn’t actually kept up and could soon be considered undervalued.
The big issue is that wages have not kept up with real inflation either. Tough to envision companies starting to give out increases of 5-6% in perpetuity any time soon. So here we are.
RE: The Tim @ 8 – Thanks! I’m a bit surprised it only almost-touched 8%, but I guess that’s because their early years weren’t so hot.
I am surprised that they’re down to 2% since 1990. I guess that’s what massive building followed by massive REOs and short sales does.
RE: softwarengineer @ 5 – I think your source is a bit off. The US Census estimates the Seattle metro area median income for 2010 at $63,088 and the mean (average) at $80,998. The total number of households is estimated at 1,353,765 and of those, only 26.5% have household income below $35K, only 39.4% of households have income less than $50K.
Hey Tim, how about setting the facts straight on this blog as to distribution of income, employment, etc. in the greater Seattle area. How about an assessment of the number of households with housebuying income potential? There is a lot of misinformation being repeated and while it may be satisfying to be “conservative” with estimates, as my econ prof told us “it is still WRONG”.
http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ACS_10_1YR_DP03&prodType=table
RE: johnnybigspenda @ 9 –
Which brings us to debt.
There is nothing in the CPI, or a rise in the price of goods that takes debt into consideration. Debt is a net drain on the economy.
So if wages don’t increase then inflation, the rise in the price of goods needs to be off set. The off set has been by debt. http://grandfather-economic-report.com/debt-nat.htm
When you look at debt, then look at the debt a housing unit now carries, you can see that this income ratio or rent to mortgage ratio is nothing. A housing unit is a part of an over all debt package.
Then let’s add up the debts that people take on once they buy a housing unit, like a car, furniture, kichen upgrade, kids, school, college. All together it is a burden rather than an asset.
RE: NESeattleSeller @ 11 –
I agree. It seems like I’ve heard the median salary quoted on this blog (by those commenting, not the Tim) anywhere from 35k to 80+k a year. My guess why the Tim doesn’t look at it as a specific issue is because there’s too many sources besides census.gov that give competing and sometimes conflicting info. My guess for this is because using terms like “Seattle-Tacoma-Bellevue, WA Metro Area”, “King, Snohomish, and Pierce County”, “Seattle Proper” etc. can yield very different data depending on boundaries. Throw in gross household income vs. per capita income and it gets even murkier. But I generally agree its using (false) statistics to prove a point.
RE: Kary L. Krismer @ 4 –
Tim, please do Phoenix, for the rest of U.S.
We promise not to love you more…
or to love you less.
RE: Kary L. Krismer @ 10 –
First, thanks, Tim.
But we misspoke, we DO love you more.
Sorry.
Second, KLK, according to Phoenix reports the “average” assessed value of a Maricopa County/Phoenix home is down by 62% – half not quite that, and half a Hell of lot more. And, we are told that prices in the last year have fallen another 10%. And, they are still falling.
What is also misleading is that homes priced above the “foreclosure minimums” are simply not selling – unless they have to due to death, divorce, health problems or job losses.
Half of all mortgages are still underwater, even after 4 + years of foreclosures, and those people must come to the table with “cash” – usually half of their original mortgage balances – to sell.
While “short sales” have recently gone up, about equal to the decline in REO sales, there is NO evidence that those short sale prices are trending up, or still down. They are all over the map – literally and figuratively. The truth is that nobody really knows what the “appraisal value” is for most home in upper priced communities. There are few, if any, sales.
The dogs aren’t barking.
By JGBellHimself @ 14:
Not sure what your point is, but if I’d wanted the rest of the US I would have asked for the 20 city index to be plotted. I asked for the two cities I did because they are in two of the real estate markets most overtaken by a buyers’ panic.
“if we end up seeing another major economic meltdown (Europe contagion, etc.), all bets are off.”
Well, OK.
CS Seattle against median wage? Wage quartiles?
Inflation estimates have certainly become a moving target full of changing definitions and manipulations. It might be better for folks to think more along the line of rates of return or simply compound growth.
By NESeattleSeller @ 11:
The median household income of Seattle city house buyers was $94K in 2009. However, I think the days of the 50% backend ratio lending standards are winding down. In order to get back to 1991 house price to income ratios, we’d have to see about another 20% or so decline in area home prices.
This tells me, if nothing else, buying a home in this environment is risky. Maybe the unemployment rate can get down to 7% or so in the next 3 years, but even that is everyday recession level unemployment. But with the greatest of fortunes, perhaps that would be enough to stabilize the falling prices. In the meantime, an onslaught of foreclosures awaits us on the horizon as the world continues upon a pathway of debt deleveraging in an attempt to diffuse a ticking timebomb.
RE: The Tim @ 2 – Tim can you put this on a log4 scale? Reason being – the natural incline of a 4% looks like a big swoop up, but it’s really just constant appreciation, so it makes the trends in past years hard to see and the trends in current years look more pronounced.
In other words, I’d like a “normal” appreciation to look like a straight line.
By David Losh @ 12:
That’s half true.
An increase in debt in an economy is generally an increase in money supply, and generally causes an increase in economic activity. Easy credit and easy money powered our economy for years, but since it was going into nonproductive sectors of the economy (banking, housing, crony politics, wars, and consumer goods), the result is a “sugar high” rather than sustainable growth.
The hammering the economy is taking right now arises from deleveraging, i.e., the process of shedding debt. This is required on the basis stated above, namely, because there is not enough productivity in the economy compared to the debt obligations.
Paying off (or bailing out on) loans destroys money and pulls it out of the economy. Thus the deflation. Plus the lack of investment and job growth. Plus the Ben Bernak. And the Goldman Sachs. This process will continue and is unstoppable until the economy is allowed to readjust into a balance of debt-to-productivity. That can only happen by reducing overall debt or increasing productivity (such as by more RE agents leaving the middleman business and becoming useful engineers instead).
Unfortunately our government is intentionally slowing this process. They are interfering with deleveraging by blocking foreclosures and propping up creditors and banks rather than letting them take their losses and debt write offs. They are transferring debt from insolvent banks to the public and driving up our public debt almost as fast as the deleveraging could reduce it. On the productivity side they continue to drive money into unproductive sectors of our economy: transfer payments (i.e. unemployment benefits), government, centrally-managed investments, and elderly care to name a few. This is an absolutely terrible course that has turned a sharp, painful correction into a long, agonizing erosion of the economy – probably to be followed by a sharp correction anyway.
tl;dr Obama is incompetent, and the Republicans are thieves.
If you need some brushing up on how a fiat money system and fractional reserve banking work, you should check out the video called Money As Debt.
RE: NESeattleSeller @ 11 –
Go Back to Your Pink Pony TV, MAD TV Comes to Mind
Ya probably went into debt and now you have Seattle floodded with imaginary high incomes that are 1st time home buyers. You probably agreed with Clinton in the 90s that $200K was Middle Class….did you agree with Bush that $10/hr was great pay?????
RE: Scotsman @ 17 –
No Scotsman
All the Pink Pony enthusiasts were convinced that America could go down the tubes but foreigners, like Canadians, would scoop up high priced Seattle real estate on a dime….I see Vancouver’s ports are shutdown with raging OWS demonstrators too….well the Pink Pony allegations were wild after all….the whole world is doing worse than America.
Christians 1
Lions 0
RE: Scotsman @ 18 –
Don’t Be Harsh On the Number Cruncher Monkeys
They’re just trying to put lipstick on the pig, hades, gas and food are only like 5% of our household expenditures in America they wildly allege….they have a bridge they can sell SWE too.
RE: Hugh Dominic @ 21 –
A better video for today would be debt is money.
We are way, way past discussion about fiat money. We are in a debt spiral. The debt we have here in the United States is horrendous, but nothing compared to the emerging markets, who, by the way, are driving the global stock markets. All your bets on the future are based on promises to pay from people who have no money.
Germany, China, and Japan are buying United States debt because they have a chance, a slight chance, of getting thier money back. They won’t.
It is a matter of deflating an over heated global market place. If some one sees some room for growth it would be great to see. All we have is a broadening of the consumer base, but if we couple that with interest payments it is a net loss.
The housing unit debt is just the beginning. People keep perfect credit when they go to refinance, or to buy, after the secured debt is in place they buy cars, furniture, and durable goods along with clothes and vacations. The debt is compounded.
Going to school, the same. Starting a business, the same, meeting pay roll, or taxes, the same. It’s all debt.
RE: David Losh @ 25 – Its all debt.
That’s a nice sound bite, and totally wrongheaded. The US Consumers as a group have been reducing their debts since the economic downturn.
http://www.forbes.com/sites/afontevecchia/2011/06/06/no-recovery-possible-while-u-s-consumer-continues-deleveraging/
RE: Hugh Dominic @ 26 –
That deleveraging is foreclosures, and bankruptcies. Bankruptcy is a five to seven year cycle, and foreclosures will keep people from buying again.
RE: David Losh @ 27 – Part of it is, but that has nothing to do with your assertion that growing consumer debt is impairing the economy. It isn’t growing, and you’re wrong.
RE: Hugh Dominic @ 28 –
I’d need to see that.
The way this post is written, the way all of the “Big Picture” is written is as if people can, or will live a life of less stress, and less debt. It also projects the myth that residential housing units are an asset, when they are debt.
In the past you could buy a place for your family that was going up in price according to those trend lines. The assertion here is that these properties will continue to appreciate. My assertion is that they will continue to decline in price.
My contention is that these housing units have become a part of an over all “debt package.” All the really smart people today who are relying on the myth of home ownership will be caught in the debt spiral.
The life people now are looking at, is student loan, 401(k), IRA, savings plan, down payment, mortgage, college fund, car payment, consumer credit, health care insurance, car insurance, life insurance, and long term care. It’s all debt, and the American Way.
Just because people are turning in more foreclosures doesn’t change the pattern.
By David Losh @ 27:
You’re right that part of the reason for declining debt is foreclosures, short sales and bankruptcies.
Foreclosures, however, do not keep people from ever buying again.
RE: Kary L. Krismer @ 30 –
The people buying today are buying into a declining market place based in part on foreclosures. The people who have been through the process will be twice as shy about jumping back in.
If they do they will only be paying on a mortgage without appreciation. That’s what changed home ownership from an asset to a debt liability.
By David Losh @ 31:
I sort of agree with that. People who jumped into the market at the wrong time won’t likely know the right time to jump back in. That assumes, of course, that they are treating buying a house as an investment, and that you are only looking at that one attribute of their behavior.
Thanks. This week of graphs are tremendously helpful. I credit these graphs from several years ago — the economic fundamentals — with my decision to delay buying. These fundamentals look like they are now more reasonable for jumping in, if other personal reasons (why one want a house, affordability based on personal income/savings) are positive. On the other hand, for folks who are happy with their rental situation, there’s certainly no compelling reason for jumping in either. I count myself in the former, so I feel more comfortable now getting on market to look for the right house.
[…] Big Picture Week 2011 – I like taking a step back and looking at a variety of local real estate charts spread back over the last two decades to get an idea of where we’re at today. Probably the biggest surprise this year was affordability, which thanks to ridiculously low interest rates, soared to a 30+year high in 2011. […]