Undervalued to Overvalued in Less Than a Year

Local home prices gone from undervalued to overvalued in just a year.

In January 2013, Seattle-area home prices as measured by the Case-Shiller Home Price Index were four or five percent below where local per capita incomes would suggest they should have been and one percent below where rents suggested.

By December 2013, massive gains in home prices flipped things around completely, and now homes are three to eight percent overvalued compared to incomes and six percent overvalued compared to rents.

Here’s a look at the prices and incomes chart:

Seattle-Area Home Prices and Incomes

Other than during the bubble years, home prices have tracked fairly closely with average incomes in the Seattle area. However, as prices fell during the bust, they actually dropped below the income trend in early 2011, staying undervalued with respect to incomes all the way through 2012.

Since the latest income data is from 2012, the chart above shows two scenarios for income levels over the past year. The solid line shows incomes flat since 2012, while the semi-transparent line shows incomes increasing at the same rate as the average annual increase 2009-2012. Even under the optimistic assumption that incomes have continued to increase, home prices are still three percent overvalued as of the end of 2013.

Next, let’s look at prices and rents:

Seattle-Area Home Prices and Rents

When compared to rents, home prices were undervalued late 2011 through early 2012, then again last winter. As of December though they were six percent overvalued.

Does this mean that we’re in for another bust? Not hardly. At the peak of the housing bubble, home prices were a whopping 39 percent overvalued compared to incomes and 57 percent overvalued compared to rents. Last year was crazy, and the home price gains we saw were not sustainable, but it would take a lot more of the same before we are likely to see another big home price collapse.

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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
    Seattle_Al says:

    Is there a good way to measure the pressure that outside investors (aka “all cash buyers”) put on the different price tiers? That variable seems like it wouldn’t have to track with the local Per Capita Income, but still influence the variance between overvalued vs. undervalued.

  2. 2
    sam says:

    Welcome to the new stock market. Do we have a real estate VIX?

  3. 3
    ARDELL says:

    RE: Seattle_Al @ 1

    I think it is a misnomer to assume that investors are pushing the prices. Investors need to “pencil out” and typically are not the ones who overpay. The multiple offers that I see that are pushing prices up beyond even the seller’s wildest expectations are owner occupant buyers, and not all cash either.

  4. 4
    wreckingbull says:

    RE: ARDELL @ 3 – You sure about that? I know plenty of investors who initially think they are penciling out, until they learn some hard realities about long-term occupancy rates, maintenance costs, and opportunity costs.

    You may be right, assuming this type of investor does not make up a large percentage of the all-cash investor.

  5. 5
    Al says:

    The changing composition of repeat sales, away from distressed transactions, and mismatches between homes sold portfolios and median income/rent, means that “overvalued” is a term of art. It doesn’t literally mean that Seattle homes can be characterized as being disconnected from fundamentals. That is why the overvaluation/undervaluation doesn’t predict price movements until the swings are large enough to steamroll the composition and mismatching issues.

  6. 6
    ARDELL says:

    RE: wreckingbull @ 4
    I don’t include investor “wannabes” in the investor category. Not sure where you put them. :) But I have seen tons of multiple offers ending in la la land price wise with none of the bidders being investors…or at least none of the winners being investors.

  7. 7
  8. 8
    Eastsider says:

    I assume San Francisco and New York have been “overvalued” for decades, even through the Great Recession. Since Seattle is becoming more like San Franciso, this may be the new normal!

  9. 9

    I don’t usually pay attention to over-under valued nonsense, but today my coffee is not kicking in, so I came back to it.

    I don’t understand the first chart. Is it saying that the (median, mean, mode???) per-capita income is over $250,000? Is this a chart from the future, after Seattle enacts a $125 minimum wage?

  10. 10
    Yaj says:

    We have a thin supply of homes on the market, super-low rates, an unprecedented influx of highly compensated employees flooding into the market courtesy of Amazon, and horrific/chaotic traffic that motivates/forces people to buy as close to work as possible.

    The thin supply of homes and low rates is the prime driver of increased prices nationally/regionally, but it’s the additive effects of the tech-hiring influx and nightmarish commuting conditions that have driven home values in Capitol Hill, Queen Anne, Ballard, Phinney Ridge, and basically everything else between I-90 and 104/Ballinger Way (with the possible exception of the Central District and the International District) back up into the stratosphere.

    Inspection-contingency-free bidding wars on dry-rot and asbestos laden POS’s from the 1940s with uninsulated knob-and-tube wiring and no parking are once again staples of the close-in market. Thanks Fed!

  11. 11

    RE: Yaj @ 10 – Don’t exaggerate!

    (They didn’t use knob and tube in the 40s.) ;-)

  12. 12
    redmondjp says:

    RE: Yaj @ 10 – Hey Yaj,

    You can badmouth knob-and-tube all you want to, but it is the safest electrical wiring type ever designed. The wires are routed separately from each other in free space and thus can radiate heat much more effectively (30A fuse on a 12GA wire was common and safe, now code only allows 20A), and even if all the insulation falls off the wires the system will still work and won’t short out (without external interference, anyways). And all the wire-to-wire connections are SOLDERED which is far superior to using wirenuts (which have higher resistance, lower reliability, and are subject to corrosion and heat-cycling-induced failure).

    If you want to talk potential hazards, look at the asphalt-insulated ‘romex’ wiring that came just after knob-and-tube. Lots of 1940s-early 1950s houses are still wired with this stuff. The conductors are in close proximity to each other and don’t dissipate heat as well, with dry, brittle insulation that will disintegrate when exposed to light (kidding, almost).

    Just because something is newer doesn’t mean that it is better . . .

  13. 13
    Erik says:

    RE: redmondjp @ 12
    Soldering is not allowed in the National electric code for good reason. It creates heat and can cause fires. I have been scolded by electricians for this. They made me feel the heat and then said to stop it and I read the code.
    My problem with knob and tube is firstly that there isn’t a ground. Only power and neutral. That can be problematic by destroying appliances and catching them on fire.
    The knob and tube jobs I have seen are way overloaded. Too many lights and outlets on one circuit.
    I trust the published data on this one and not your opinion. I have never seen a healthy knob and tube job in north Everett atlteast.

  14. 14

    By Erik @ 13:

    RE: redmondjp @ 12
    Soldering is not allowed in the National electric code for good reason. It creates heat and can cause fires..

    I suspect after 70 years, most of the heat has dissipated, greatly reducing the risk of a current fire. ;-)

    As to the rest, I don’t know that a ground line would do anything to prevent a device attached from catching fire. The purpose of a ground is safety (preventing electrical shock), and apparently (per code) you can substitute GFCI, although I suspect ground is probably safer.

    As to circuits being overloaded, that was a problem with houses built as late as the 60s or maybe even the 70s. They didn’t require as many circuits back then, and since then they’ve invented more power sucking devices (although others have become more efficient).

  15. 15
    wreckingbull says:

    RE: ARDELL @ 6 – Yes. I work with a crowd of investor wannabees. Their money would be serving them better in a portfolio of properly-selected index funds or ETFs. The word ‘net’ does not mean much too them.

    RE investment seems to be a popular topic when we are shooting the breeze. This is likely a small subset of the investor crowd, but I don’t have any data to back that up.

  16. 16
    Lo Ball Jones says:

    Want a real Bubble Blaster?

    How about this, all you “want to live in a real city types”:

    What $1,600/Month Can Rent You Around New York City


    Quite a lot…quite a lot…

  17. 17
    Yaj says:

    Knob and tube is an indicator. Homes with the original wiring tend to have both wiring, panels, and outlet coverage that were adequate for the electrical loads at the time they were built, but are totally inadequate for today’s needs.

    They typically also have original plumbing, ancient water heaters, furnaces, sewer-lines that are collapsed or have major root intrusions, crappy/absent insulation, neglegted/failing roofing, etc, etc, etc, etc, etc, etc, etc, etc,etc, etc, etc. And no parking. And no yards. All starting at $500K.

    They do have great dimensional lumber in them, though – which the buyers can savor gazing at while they are stripping the interior to the studs and replacing all of the major systems to the tune of $100K or more.

    No thanks.

  18. 18
    wreckingbull says:

    RE: Yaj @ 17 – Wait a second. I don’t understand. My real estate agent called that “original charm”.

  19. 19
    Erik says:

    RE: Yaj @ 17
    You are describing 90% of the homes in north Everett. They call it the all American city since it is filled with laborers that are addicted to drugs. They describe the low quality construction as old world charm. They tell people that Broadway and the waterfront are about to be restored. You are correct that knob and tube is an indicator of many other problems.

    The most expensive fixes are electrical and plumbing. I replaced every piece of electrical from the power line coming in to the grounding rods. I replaced all plumbing from the city inlet to the city sewer main. If you see knob and tube, run the other direction. You can’t just fix part of it, you gotta replace the entire thing. With plumbing it is the same thing. Old world charm means money pit and lots of hassle. I hope when Tim bought his, he got all new plumbing including the piping in and the sewer main. Same for electric. Otherwise the price he paid will increase rapidly as he pumps money into his charming house. I will never buy something older than 1970’s unless it is a condo. Too much risk.

    JpRedmond is a programmer parroting what someone told him. I have heard this same argument from other academics that really don’t have first hand experience with knob and tube. I have read his same argument online and from electricians. Knob and tube is a sound idea and can work, but it doesn’t work. There are too many other flaws that don’t even have to do with whether or not it can carry electricity. Knob and tube will be overloaded and have a bad panel with no ground. Yes, it can theoretically carry electricity.

  20. 20
    ARDELL says:

    RE: Yaj @ 17

    You forgot underground oil tanks both abandoned and still in use.

  21. 21
    Carol says:

    RE: ARDELL @ 20 – I remember you wrote a comment on Redfin that you helped a client to purchase a house from the owner directly. You said that you could check a property that is a rental or not. May I ask you how you did that? Also, do you still help people buy houses from owners. I’m interested in a few houses that are not listed, but I’m too afraid to contact the residents. So I would like to look up if they are owner or tenant occupied. Thanks.

  22. 22
    ARDELL says:

    RE: Carol @ 21

    Generally all agents have the ability to find “accidental landlords” if you know about where you want to live. They can also find all of the properties where the owner gets the tax bill at an address that is different than the property address.

    The simple process is to run a search of all property in the desired area of expired and cancelled listings from 2008 through 2011. If those were rented after the expiration or cancel of the listing, the market is likely up enough now for the sale to go forward as long as you can wait until the lease is up.

    It’s not hard to do, but whether or not I’d do it for you I don’t know. You would have to contact me off of this blog. The main reason agents don’t like to do it is there is no vehicle for the agent to get paid. If the seller wants to sell and you want to buy but neither of you wants to pay a commission, that puts the agent in a spot without the house being for sale “in the mls”.

    I didn’t have that problem because there was no commission on the purchase at all to be paid by the buyer or the seller. Those arrangements were made outside of the transaction on the house the buyers were leaving. But it is no small consideration, and why it is not common for agents to do that. It also can be difficult for the agent to decide if they want to represent the seller or you or both, or even if they represent you it is hard for the seller to understand that he has no agent in that transaction.

    Not a simple issue…but doable, and worked out very well for my clients last year. Less conflict because it turned out the owner was an agent. We got lucky. No cloudy agency issues. I did have to get needles in my face to pull it off…but that’s another story. :)

  23. 23
    boater says:

    I won’t argue that older homes w knob and tube generally have some or all the repairs suggested about $50-100k sounds reasonable. However you all are also talking about homes that have not burned down in roughly 80+ years. Knob and tube isn’t the greatest but it’s not the nightmare it’s made out to be.

  24. 24
    boater says:

    Actually to add to my previous comment. Amperage usage is going down in most homes. Incandescent lights replaced by led or cf drops amps by 5x per light. Where folks used to buy a second computer now they buy a tablet or smart phone. Every appliance is more energy efficient than it’s been for most of history.

    I wouldn’t be afraid at all these days to have knob and tube.

  25. 25

    RE: boater @ 24 – With the exception of things that make heat (including laser printers), microwaves and possibly amplifiers, electronic devices are using a lot less power. LCD TVs use less power than CRT and even Plasma. Computing devices use a lot less power–Moore’s Law affects power consumption too!

  26. 26
    meadows says:

    Our 1910 bungalow/mission had knob and tube (still some in the ceilings) when we bought it in 1992, no insulation, buried oil tank, etc. The boiler, which was original, had run wood, coal, oil then gas. There was one full bathroom.

    But plaster walls, 10 ft ceilings, big old drafty sash windows w/the wavy glass… We love our home and are retiring in it after raising sons and sending them forth. The best part is our hot water radiators that are now over 100 and wonderful.

    Sure it was spendy to upgrade but worth it completely to us even if the $ doesn’t pencil out. Gimme old any day.

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