Where is the Seattle bubble hiding?
I'm getting confused... just where is the big housing bubble in Seattle, in the data? The closer I look at the numbers, I just don't see it.
For example, Where housing is headed by Fortune Magazine tells us that the (house price) / (annual rent) ratio in the Seattle metro area is currently 38, whereas the 15-year historical average is 23. To revert to the mean the site predicts that Seattle real house prices will fall by 20%.
But let's check that price/rent ratio of 38. The first rental I see on craiglist is a 4 br 1.5 ba 1970s-style Rose Hill (Kirkland) rambler for $1650 / month. It has an old kitchen and blue & green (i.e. yuck) carpets. (Take a look at the house if the link is still good.) That's a $450K house at the most, so the price/rent ratio is 23, the 15-year historical average. No bubble for this house!
According to the site, the house should be salable at $752K. But never was this house worth that much, not even close. It's a typical rental at a typical rental price. So where in the heck is Fortune getting its figures from?
The median figures so often reported look bogus too. Seattle median house prices have jumped 18% since the end of 2005? Well whatever, because the price of a typical 3 br house has not risen that much since then. Maybe half that much, if that.
What I'd like to see is 30 unremodeled Seattle area houses chosen, and let's find out for ourselves what the actual increase in prices has been since the beginning of 1997, the supposed start of the bubble. Not what is being reported based on seemingly bogus data. The number of houses, 30, should give us a result with a good confidence level. More houses = higher confidence level.
The result should be of interest to most on this site. I'm hoping that we can all pitch in. Here's how:
Using Redfin's past sales search feature, find a typical 3-4 br unremodeled, maintained SFR that recently sold and also sold around Jan. 1997 (plus or minus a year should be okay). Input the previous sale date and previous sale price into a spreadsheet. Input the recent sale date and the recent sale price. Divide the recent sale price by the previous sale price; we'll call the result the gain factor. Subtract the previous sale date from the recent sale date; we'll call the result the number of days. Take the gain factor to the (1 / number of days) power (in Excel, = gain factor ^ (1 / number of days)); we'll call the result the daily factor. Take the daily factor to the power of 365.25, the number of days in a year, and subtract 1 (in Excel, = (daily factor ^ 365.25) - 1); we'll call the result the annualized rate of return. Post it here. Or avoid all the math by just posting the raw data (past & recent dates & prices) and I'll crunch the numbers in one swoop.
I think it's a safe bet that the average annualized rate of return for 30 houses in the Seattle area since about the beginning of 1997 is about 7%, which is a little more than a doubling of prices since then. Zillow thinks the rate is 9.7% for King county for the past 10 years. At that rate a house that sold for $250K in Nov. 1997 would be worth $630K today. I highly doubt that, for an unremodeled house.
For example, Where housing is headed by Fortune Magazine tells us that the (house price) / (annual rent) ratio in the Seattle metro area is currently 38, whereas the 15-year historical average is 23. To revert to the mean the site predicts that Seattle real house prices will fall by 20%.
But let's check that price/rent ratio of 38. The first rental I see on craiglist is a 4 br 1.5 ba 1970s-style Rose Hill (Kirkland) rambler for $1650 / month. It has an old kitchen and blue & green (i.e. yuck) carpets. (Take a look at the house if the link is still good.) That's a $450K house at the most, so the price/rent ratio is 23, the 15-year historical average. No bubble for this house!
According to the site, the house should be salable at $752K. But never was this house worth that much, not even close. It's a typical rental at a typical rental price. So where in the heck is Fortune getting its figures from?
The median figures so often reported look bogus too. Seattle median house prices have jumped 18% since the end of 2005? Well whatever, because the price of a typical 3 br house has not risen that much since then. Maybe half that much, if that.
What I'd like to see is 30 unremodeled Seattle area houses chosen, and let's find out for ourselves what the actual increase in prices has been since the beginning of 1997, the supposed start of the bubble. Not what is being reported based on seemingly bogus data. The number of houses, 30, should give us a result with a good confidence level. More houses = higher confidence level.
The result should be of interest to most on this site. I'm hoping that we can all pitch in. Here's how:
Using Redfin's past sales search feature, find a typical 3-4 br unremodeled, maintained SFR that recently sold and also sold around Jan. 1997 (plus or minus a year should be okay). Input the previous sale date and previous sale price into a spreadsheet. Input the recent sale date and the recent sale price. Divide the recent sale price by the previous sale price; we'll call the result the gain factor. Subtract the previous sale date from the recent sale date; we'll call the result the number of days. Take the gain factor to the (1 / number of days) power (in Excel, = gain factor ^ (1 / number of days)); we'll call the result the daily factor. Take the daily factor to the power of 365.25, the number of days in a year, and subtract 1 (in Excel, = (daily factor ^ 365.25) - 1); we'll call the result the annualized rate of return. Post it here. Or avoid all the math by just posting the raw data (past & recent dates & prices) and I'll crunch the numbers in one swoop.
I think it's a safe bet that the average annualized rate of return for 30 houses in the Seattle area since about the beginning of 1997 is about 7%, which is a little more than a doubling of prices since then. Zillow thinks the rate is 9.7% for King county for the past 10 years. At that rate a house that sold for $250K in Nov. 1997 would be worth $630K today. I highly doubt that, for an unremodeled house.
Comments
From what I've seen, $1400 would be more appropriate for the home you cite. That would put it's value at $386 by Fortune's standards, still well out of reach for the median income for the area. One point might be that despite "historical" multiples if 23 for the Seattle area, 17 seems to be a more readily acknowledged multiplier. Is Seattle really that much higher than the rest of the country in the long run? Or does their number reflect more recent constrictions in rental markets as everyone bought, without regard for long term affordability?
As far as your suggestion of tracking 30 houses, it sounds like what you are describing is essentially exactly what the Case-Shiller index (which is frequently reported on here) does.
According to the Case-Shiller index, home prices from January 1997 to January 2007 went up an average of 9.4% per year. From January 2002 to January 2007 the average was approximately 10.5% per year. Considering that a "normal," "healthy" market really shouldn't have housing prices increasing more than 3-5% per year, I'd say that's a bubble.
Also consider that from January 1999 to January 2002, Seattle was in the midst of the dot-com / 9-11 economic fallout, having been hit harder than many other parts of the country. In a normal situation like that, prices would decline. However, prices still went up by roughly 6.8% per year over that time period. Thank you Alan Greenspan and ridiculously loose, standards-free lending.
Even at $1400 it would have a price/rent ratio of 27, a far cry from 38 that Fortune thinks is the norm in the Seattle area. And I doubt the house would sell for as much as $450K; I was being conservative.
I could pull up a lot of other houses whose price/rent ratio is around 23, without cherry picking. There's plenty of ~$450K houses on the Eastside renting for ~$1600 month. I doubt they are all overpriced. I don't see them languishing on craiglist.
Any data for that? I don't know myself, but judging by the few rentals I have memory of over the last 20 years, I think 17 is too low.
Certainly Seattle has been more popular than most US cities, and I think it will be for the foreseeable future.
That's my point here. I'm finding that when I look at the data myself, the widely reported figures are highly suspect. I do not see a 9.4% average during that time when I look at the numbers myself. More like 7% is what I see, almost everywhere I look.
House prices track with inflation in the long run; that's been very true in the past. So if inflation is 7%, house prices should increase by 7%, and that would still be a healthy market.
In this thread I'd like to ignore whether the price increases are justified and focus on what those increases actually are. I don't think it's been 9.4% annually since 1997. If we pitched in and crunched the numbers on 30 houses, we'd know whether Case-Schiller is accurate or whether it's off base like Fortune seems to be.
Price to rent ratios are, over the course of a cycle very different between extremely desirable neighborhoods, ok neighborhoods and undesirable neighborhoods (and every variation in between of which there are many). The bubble messed this up a bit since anyone with a pulse could pay top dollar for homes in the ghetto.
It's more meaningful to compare the price to rent ratio of a particular home over the years. For this Kirkland home (which I'd add 4br 1 bath is functionally obsolete) it probably rented for $1300/month in 2002 and cost $250K for a price to rent ratio of 192 (or 16 using the monthly scale). Now presumably it rents for $1650 (doubtful) and sells for $450K for ratios of 272 and 23.
Does that mean the ratio was way below average 5 years ago when it was 16? No. Does it mean that the home is not overpriced because it is "average" now? No.
See below. Any way you measure the market, the measure shows the same trend. Case Shiller, OFHEO, Median price all track.
I was going to do a post on the blog on comparing indices, so I happened to have this Y2Y comparison handy
If you want to tilt against this one, have at it - but I doubt it will be worth the time.
I think we are looking at a case of truthiness here. Seriously. All three major indices, which use thousands of observations and are created independently by professional organizations (ok, maybe that's a stretch for NWMLS) show the same trend and are highly correlated (the worst is NWMLS<->C/S, which is ~85% because median price is so "noisy"). What possible insights can you get from a sample of thirty homes? Even if it contradicted these indices, it would call the methods and conclusions from that sample far more into question than the other sources.
Parcel# | Sale Date | Sale Price | Sale Date | Sale Price | Years Between | Average Appreciation
9525100070 | 06/13/1994 | $202,500 | 10/23/2007 | $606,000 | 13.4 | 8.54%
2028700315 | 11/15/1996 | $179,000 | 10/09/2007 | $625,000 | 10.9 | 12.15%
2028700360 | 10/21/1999 | $230,000 | 10/23/2007 | $630,500 | 8.0 | 13.41%
2001700010 | 03/03/2000 | $322,050 | 09/17/2007 | $604,000 | 7.5 | 8.69%
7519000145 | 06/12/2002 | $306,000 | 10/01/2007 | $620,000 | 5.3 | 14.23%
7979900885 | 05/20/2002 | $389,000 | 08/29/2007 | $636,400 | 5.3 | 9.77%
Not really interested in continuing this exercise. If the random sampling of data I pulled up even remotely supported suspicions in the Case-Shiller data, maybe I would, but it doesn't.
I don't think you have any clue what you are talking about. I can find example after example, without working too hard at all, of exactly this sort of gain, or more. Spend some time on Redfin. I just sampled 5 properties in QA, and all of them had more than tripled since the 1990s.
Perhaps you are looking at properties that were new in the 1990s? New homes don't appreciate nearly as much in this market for some reason. Perhaps that's your problem. If you focus on ugly 1980s and 1990s Eastside crapshacks where you are greeted by giant, ugly 3-car garages and didn't get maintained, then perhaps you are right. Any house I am looking at, i.e. I would actually like to purchase, has tripled in the last 10 years.
You also need to realize that some remodels are basically just maintenance.
You need to update some to just keep the house at the quality at which you bought it. Otherwise it depreciates. Contrary to popular belief, if you don't continuously throw about 1% of the house's value in it every year, it's worth falls rather rapidly.
so if you are going to try to find examples, they should at least be consistent with the data you are trying to disprove. In redmond, that would be something like a $1.4mm home renting for $3000. not sure that animal exists either.
not saying I trust that research in any way. It comes from Moody's, which pretty much says it all.
yeah, it was up to date except for Oct NWMLS data. C/S for Sept comes out last tuesday of the month, and OFHEO is quarterly - so nothing to update there.
The picture is so beautiful it's the Mona Lisa of Seattle RE.
While other areas spent the early part of the decade building up equity, people here were still collecting unemployment (literally and figuratively speaking). When the loose lending took hold with a vengance, people here had to have been in their homes much longer to pull out equity and double and tripple down their bets.
Are we actually arguing whether or not Seattle real estate has been behaving like a bubble? Did someone just time-warp from 1940, not notice that prices now have an extra zero on the end of them?
In my mind, there is no value in arguing if a bubble exists, it's obvious one does. There is no value in arguing how excessive the bubble was, as that is history. The only value is if one can predicting how much prices will drop or when they will reach the bottom.
I would agree that there's a significant bubble in the neighborhood that Tim referenced above. House values there seem to be 3X what they were in 1996. But I don't see such a big gain in many places on the Eastside, where I've been looking.
I'm in escrow now, as a buyer, on a house in Bellevue. The price/sq. ft. was ~20% less than the ~Sept. '07 selling prices of two very comparable houses on the same street. I'm convinced that the asking price was already in the bottom 5% for comparable houses on the market in the Bellevue area, and I got a good discount off that. The price was so relatively low that I wouldn't look at the house initially. Then I drove by, saw how nice it was, and wondered why it wasn't selling. The inspection came back pretty clean, FWIW. Because it's dated, the house has a lot of potential for upgrading that returns 80+% of the real cost when I sell. Based on my purchase price the houses in the neighborhood have "only" doubled in value since the supposed start of the bubble in 1997.
My feeling is that the credit crunch and other gloom-and-doom housing news since Aug. has already popped a big chunk of the bubble, at least on the Eastside. Many houses have been on the market for 3+ months. The sellers that really want to sell have already lowered their prices. Prices may well fall further, but with each drop there is less chance of that, hence less chance that renting will be a better investment in the long run. If I can get 20% off Sept. prices, I'd rather buy and renovate to my liking now (there's an opportunity cost to enduring your landlord's choices). Also, had the market been heated or even average, I doubt I would have been the only bidder on the house I bought, with a seller made amenable to a further price cut by how long the house had sat on the market.
The other big factor in my decision to buy rather than rent was the explosive growth of office buildings in the Seattle metro area. Those buildings are going to be filled even at a loss to their owners (they won't lose as much as if they left them empty). The flag seems to be up for tech employers to put branch offices here and poach talent from Microsoft. If you add enough $70K/year jobs to Seattle, even the prices of houses unaffordable to those making $70K/year will rise, or at least their fall will be cushioned. I'm not afraid of lots of condos being built; if my SFR was an island in a sea of high-rises, how much would it be worth?
One thing's for sure: they aren't making less babies. It's a matter only of where the bottom is, and whether it's worth waiting for.
I was always under the impression that Seattle wasn't very good at making babies.
Um...actually they are making less babies. The global population boom is not because people are making more babies, it's because people are dying less! Well, living longer technically. Most of the first world has a birthrate which is not even replacement.
Much of the world is still having babies with abandon, and US corporations want as many foreigners here as possible, to reduce wages. Microsoft is one the biggest proponents. A big percentage of the immigrants will eventually bring their extended family here.
I don't understand how she is connected to this?
I would make babies with her.