Friday Flashback: Expect prices to “go quite a bit higher.”

Here’a a great gem that was posted on Rain City Guide in April 2006 by Chuck Reiling: Are We Brewing A Bubble In Seattle?

Probably the most frequent single question I get as a realtor from my friends and clients and contacts is “Are we in a real estate bubble?”

Chuck Reiling…there are two kinds of residential real estate bubbles. One appears to be driven by investors speculating on a continuing rapid rise in prices, and buying multiple properties to (hopefully) rent, and then flip in a year or so. Examples are the Florida coast and Las Vegas . Builders build because buyers will buy, both as fast as they can until the buyers finally get too stretched, or the prices get too high, or both. Then it crashes. That has happened lots of times, and we’ve all heard the stories. Let’s call that a Type I bubble.

The second kind of bubble, let’s call it Type II, seems to occur when there is a limited supply of homes relative to demand, and people start bidding up the prices, i.e. being willing to pay more, in order to get the home they want in the place they want. Jobs and commute times and schools seem to be the big drivers in this. These forces are at work in San Francisco and Los Angeles and San Diego, and they are at work here. In our greater Seattle and east side area, we are blessed with a very strong economy, and continue to enjoy relatively low mortgage interest rates. But we have very restrictive state and local growth management laws and land use ordinances, and building is not keeping up with demand.

The great thing about being a salesperson is that you can just make stuff up and write statements like “building is not keeping up with demand” as if it is a fact even when readily available data proves exactly the opposite of what you’re saying.

So what should we expect now? First, prices will probably go quite a bit higher. The competition for good houses is intense, and the good economy is feeding good incomes – people are willing to stretch to get the home they want. Second, this ‘bubble’ will probably not burst. Type I speculative bubbles do seem to burst, and they make great news stories. Type II demand-driven bubbles don’t seem to burst, they just seem to pause while the world catches up. Ours doesn’t seem ready to pause yet.

I had been researching and writing about real estate for less than a year when this was posted, but I already knew enough to call out Chuck’s screed as total nonsense:

…it still amazes me that some people really truly believe that Seattle’s current prices are actually justified and sustainable in the long term. The claim that “prices will probably go quite a bit higher” was especially flabbergasting to me. Even with the suicidal financing options out there right now, people are still stretching themselves to the max to afford current prices. What could possibly drive them “quite a bit higher”?

Interestingly, Chuck’s original post has been mostly erased from Rain City Guide (the link above is to a cached copy on the Internet Archive Wayback Machine). It also seems that Chuck has fled Seattle for the greener pastures of Medford, Oregon, gotten out of the real estate sales business, and now spends his time doing marketing consulting.

The purpose of our Friday Flashback series is to remind people why it’s never a good idea to base your home purchase decisions on the word of someone with a vested financial interest in selling as many homes as possible for as much as possible, no matter what. If you’ve got a good example of local home salespeople or other industry shills on record making fools of themselves in the years before the bubble burst, shoot me an email.

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.

16 comments:

  1. 1

    April 2006 King County SFR median was $419,500. Last month’s non-distressed median, per your prior post was $430,000, and it’s been mainly over $400,000 since January, 2010. Maybe this isn’t the best example of someone being wrong?

    I would argue that Seattle wasn’t facing extreme bubble type action until 2007, when median prices rose $50,000 between January and June. Unlike today’s increases, that wasn’t driven by any change in mix that I’m aware of, and was instead the result of people getting overly hyped on local real estate. We hadn’t reached the point of say Las Vegas or Phoenix, but it was starting. And IMHO it would have likely gone much higher but for the mortgage crisis of 2007.

  2. 2
    Erik Muller says:

    Ha ha ha. This was a good post. I like how you post the persons face right next to their comment. All he is missing is a dunce cap which could be sketched in for more fun.

    I wonder if the people Tim puts on blast look at their pictures with their blatantly wrong comments?

  3. 3
    greg says:

    i love this. i remember having a discussion with one of my wifes friends in 2005. I was selling my house in San Diego and moving up here. He was saying the same $H1t about demand and there not being enough housing available and that prices will never go down. I was at that time making the argument that one of the great things about selling the house and heading up north was a good choice because:
    1. Pacific NW kicks butt.
    2. I didn’t want to be left holding a 500K bag of peanuts. I was predicting a burst in housing prices.
    3. I could be closer to my brother, be in a healthier local economy and get a home in what i thought was a much more sane market.

    He was an investor so i’m pretty sure he wishes he got out when i did.

    Sure the home I bought in 2005 up here is probably not worth what I bought it for, but I have good equity in it and it isn’t an investment. Its my home. So I’m happy. Now that condo I bought last year…

  4. 4
    ray pepper says:

    blast me…blast me!!…………..blast some of your regulars…Me, Kary, Ardell, Ira, Dave, Steve, Marc, and so many others that contribute…We got thick skin…Dont we????????…because after all you state: “why it’s never a good idea to base your home purchase decisions on the word of someone with a vested financial interest in selling as many homes as possible for as much as possible, no matter what.”…..I would further add..not just a house….ANYTHING that someone has a financial vested interest in selling, YOU should be VERY skeptical and do your DD.

    Come on….I’m sure I got a few sparklers of my own…Probably a few homes we still have on the “hamster wheel” going through an endless loan mod process or some we let go! I wanna look back too and kick my own ass!…………

    Other then “Find Your Gem” ramblings I know of only a few posts that I think you could rip me a new one. But, I won’t help you find it……..However, most of my earlier brilliance was termed “TROLL-LIKE” and I think I was more concerned about people trying to BUY with a brain and use 500 Realty and not buy through conventional brick and mortar. I don’t think I gave a crap WHAT people were buying because I learned long ago, and reminded again on these 3 newest closings this month, that people WILL NOT listen to you anyway! They spend as they want and justify it in their own mind to make themselves happy!

    Dig Tim…Dig!

  5. 5
    ray pepper says:

    I would also like to add because I guess I was “timed out”.

    Gambling in life with investing, stock market, home buying, etc…anything………….is never a problem……………UNLESS YOU LOSE!! and when you do people must divert the pain..

    Point fingers at yourself people because its IMPOSSIBLE to stop anyone from doing anything they desire to. But, the one thing people need, UNIVERSALLY, is someone to point fingers at and blame for their mistakes…

    Going back to my nursing knowledge at UW in late 90’s era I think its under Maslow, Kubler-Ross, Yung, Fromm or whoever we lessen the pain by diversion and deflecting our miseries to others in an effort to qualm our misgivings…Something like that…

  6. 6
    Dweezil says:

    By his bubble definitions, it looks like we had a type I bubble, then moved into the current type II bubble. That’s great that he specifically mentioned Las Vegas and Florida, all he was missing was Detroit for the tri-fecta.

    Always love the Flashbacks, Tim. Keep ’em coming.

  7. 7

    By Dweezil @ 6:

    By his bubble definitions, it looks like we had a type I bubble, then moved into the current type II bubble.

    Using his definitions, that’s what I was trying to say in my first post. I don’t think we had the type 1 in April, 2006.

  8. 8
    Al says:

    RE: Kary L. Krismer @ 1

    We’ve had almost 11% cumulative inflation since then. A 7% real decline in housing, while paying maintenance/taxes/interest, is no picnic. Perhaps not the BEST example of the bubble, but hardly an example of purchasers being “right”.

  9. 9
    mdgouda says:

    RE: Kary L. Krismer @ 7

    Or, we deliberately ignored the type 1 bubble!

  10. 10

    By Al @ 8:

    RE: Kary L. Krismer @ 1

    We’ve had almost 11% cumulative inflation since then. A 7% real decline in housing, while paying maintenance/taxes/interest, is no picnic. Perhaps not the BEST example of the bubble, but hardly an example of purchasers being “right”.

    I would agree. And of course depending on where and what you bought, your situation could be much worse than the median numbers would indicate.

    I’m just saying what he wrote isn’t all that bad, and that but for the mortgage crisis of 2007, he probably would have been right about prices going much higher (assuming going from $419,500 to $481,000 isn’t considered going much higher).

  11. 11

    By mdgouda @ 9:

    RE: Kary L. Krismer @ 7

    Or, we deliberately ignored the type 1 bubble!

    I’m not sure what you mean by that, but when you look at some of the buying activity in downtown Seattle and Bellevue condos, I think it’s hard to say it wasn’t at least starting.

  12. 12

    So here we are in July of 2012, inside of yet another mini real estate bubble. In 2015 it will be interesting to see how things turn out and read the quotes from 2012.

  13. 13
    Carl says:

    Hindsight is of course 20/20. And even a broken clock is right twice a day (or in the case of real estate, twice a century). Wish we could be right all the time though.

  14. 14
    Brad says:

    RE: Dweezil @ 6

    Detriot drop was not due to a bubble, no flippers or investors, the world financial crisis imploded the manufacturing economy, resulting in mass unemployment, loss of tax base and huge population declines.

  15. 15
    ESS says:

    All markets, whether it is real estate, stocks, bonds, precious metals, art or anything else fluctuate up and down over time, but in a generally in an upward direction as a result of inflation. Hopefully in three to five years this website will reproduce the negative articles about the real estate market when we are in the middle of another major price increase in the real estate market.

  16. 16
    Matthew says:

    I love how these charlatans have fled like rats on a sinking ship!!!!

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