There will never be a real estate bubble

When Susan Ryan posted Just Say No To Bubble Talk, where she states “There is no real estate bubble and never will be” (emphasis mine), she probably wasn’t thinking of the traffic and links she would bring in through such blatant link baiting. But in one crazy statement, she swung for the fences and brought in over dozens and dozens of angry replies.

In a sort of a reverse of the Greg vs. Ardell 100-posts-in-24-hours contest, I propose a link baiting contest. Can you write the most outlandish post that warrants over 88 angry replies (current count) in the shortest period of time? Extra credit if you hit 100 in a day. The prize: an autographed photo of Jerry Falwell, a man who understood link baiting before the internet even existed.

The fine print: If a Rain City Guide member takes up the gauntlet, other co-bloggers (or “cloggers”) can only count for one angry reply (that means both of you Russ and Ardell!). You’re on your honor not to comment on your own posts or ask friends to do so. Any single angry responder can count for up to 5 comments, but after that you get no credit for making them angry.

I will take myself out of the running right now, as I don’t know enough about the gold standard to argue on its behalf or enough about the illegality of the IRS to argue against it.

Update: OK Folks, we’re done. Unless you have something to say that hasn’t been said, which includes almost all points of view on the real estate market, views on the writers of Rain City Guide or the writers and commenters at Seattle Bubble, and views on the intelligence or lack thereof of nearly everyone in the United States, lets move on. Do someting that makes you happy (and please, no comments about duking it out on a blog making you happy!). Please, no cheers, no jeers. Seriously. Move on.

109 thoughts on “There will never be a real estate bubble

  1. Most of those comments weren’t purely hate/flame speak. I propose you guys stop posting articles that incite people to anger.

    What purpose does your blog serve at this point? How many newbie home buyers will you lure to purchase properties on the way down?

    Btw, seattleeric… unload your properties before it’s too late!

  2. Sorry the link is now there so you can see the post in question.

    The Tim, links from Housing Panic will obviously be a huge benefit in this contest.

    Synthetik, you are crazy! Those comments were totally angry (which is what I said, not “purely hate/flame speak”, which is what you said) and valid and, well, what the heck are you talking about? Are you saying that the only valid real estate discussion is about the imminent collapse of housing prices?

  3. I love the “Fly Winged Monkeys” line! No takers here, Galen. I’ve had enough “challnenges” to last me at least 60 days. Someone else’s turn to grab the bait.

  4. Why, no, I think it’s perfectly acceptable to talk about which condo will be the tallest, or why you should get your home appraised if you live near the water; or to try to explain why people are moving downtown (when that’s that’s been the obvious trend in all other major metro areas)

    Fluff is fantastic and distracts people from asking valid questions.

    “Can I afford this house?” “What is the likelyhood my home will go up in value in the next 5 years?” “If I rent from an investor, can I be evicted if he goes into foreclosure?” “Would it be better for me to wait a few years for prices to cool off?”

    Whatever is “Valid” depends on your agenda. Anything that creates urgency for the RE professional would be valid.

  5. Synthetik, I don’t believe we posted any of those stories – that’s the PI blog, not us. I think stories about how to maximize your home’s value (up market or down) and negotiating agent commissions are totally valid. I don’t agree with some of the rah-rah-the-market-can’t-fall posts on this blog, but let’s be honest: some people have to sell, even in a down market, and for others, buying makes financial and emotional sense, even in a down-trending market. Those people should know what to look for in a house and an agent.

    We have discussions here – when someone posts something advising 0% down loans, I dissent. You asked what purpose OUR blog has at this point, to which I say our purpose is discussion and education. Your blog serves a purpose too – dissecting media and real estate interests’ statements on the bubble. But why do you show up here saying our blog has no purpose and say that we’re trying to con newbie buyers into buying properties they can’t afford in response to my post about a crazy agent on another blog?

  6. Aren’t we having a discussion? Your post serves to negate and belittle the opinions presented by commenters on the PI blog in regards to a rediculous post. “It’s just a big joke so there’s nothing to see here folks!”

    Maybe I haven’t given you enough credit, however, when I look to the right of the page, all I see are images of industry insiders – and links to advertisements and blogs that do nothing but bolster the idea that RE continues to be a sound investment.

  7. Synthetic,

    With all due respect to the people in the photos, they are not industry insiders. That is a misperception on your part. For instance you recently called Galen “out” with regard it him and “his sellers”.

    Galen is not a real estate agent. Robbie is not a real estate agent. Dustin, the owner of the site, is not a real estate agent. Eric is more of a buyer and seller and investor in real estate, than an agent.

    As for “having a discussion”, if you Synthetik, are willing to concede that there is at least ONE property in the Country worth buying today, then we can have a discussion. If you think view and water considerations, which could impact value by hundreds of thousands of dollars in our marketplace, is a “fluff piece”. If you think what is happening in “other major metro areas” should impact our views with regard to downtown Seattle, and we should give a rat’s a/s what is happening in Atlanta…then what’s to discuss?

  8. I’m curious, Synthetik…what’s your background. If we are all insiders, then clearly you consider yourself an outsider. What are your credentials? What is your objective for your completely anonymous comments and posts?

    Are you in lending, and see first hand the way people are getting into binds with bad loans? Are you a renter who is waiting for the market to bottom out to get the best deal? Are you a homeowner who bought at the top, and regret your choices? Just curious.

    Granted, I post anonymously, but provide enough background info to (at the very least) give you ammo to take shots at me behind your veil of complete anonymity.

    Just curious why you get so aroused at fighting back most comments on this blog. Most open minded people have discussion. I actually respect your last comment. The issue you have with Galen about seeing the comments as a joke is valid. But why defend them at all? You would expect insiders to defend other insider views, but I can’t see why you would waste time on this and other blogs, unless you have something to gain from your position.

    Just curious.


  9. There are 10 pictures up there. 8 of those people are invested in the RE industry. Read the captions.

    >one property

    Sure, it could be argued that there is property in Texas, KY, and NC that can still be had at a decent price. Personally, I wouldn’t live there.

    Are you saying that trends in other cities have no bearing on our market here? Of course, that’s been the local RE cry all along – and now we’ve seen that tactic hasn’t worked. Now you’re just trying to soften and skew the news, hoping to keep everyone calm… praying for the much sought after “soft landing”

    Good luck with that.

  10. I’ve not met Susan Ryan, but I don’t think she’s “crazy”. She just has her own opinion, and it doesn’t seem that outrageous to me. I try to keep up with current events and read all the papers and newsmagazines and real estate blogs and websites and I still don’t know whether or not there’s a “bubble” in the Seattle real estate market. The jury is still out and many professionals and economists are still taking a “wait-and-see” attitude. I would even venture to say that a slow down of a red-hot real estate market is just a natural cyclical movement in the short-term, but probably does not mean the end of a future trend that is still aiming upward, over the long haul, taking a 5-10 year view of the market. Does this make me crazy?

    The name of the P.I. blog is “Seattle Real Estate Professionals” not “Seattle Bubble Blab” or “Seattle Blog for People Who Missed the Real Estate Boat And Are Now Bitter”. Nor is it called “Blog For People Who Just Hate Real Estate Agents”, though most of the comments on the post appear to be from readers exiled from that particular blog….

    What a tempest in a teapot. It appears that most of the posts are from the same handful of people arguing amongst themselves for the pure joy of it over on the bubble blogs, like too many rats in a cage, each nibbling at each others tails before they consume themselves in some sort of real estate bubble-inspired Lord of the Flies scenario.

    Why even mention the supposed “Real Estate Bubble” and bring these kinds of people here? Keep them over on their conspiracy-theory websites and blogs devoted to the End Days, Zionist Global Domination and the New World Order. I’ve always enjoyed RCG for its diversity of subject matter and even-handed intelligent approach to the real estate industry….. don’t sink to their level, please! (Galen, look what you’ve done!)

  11. Synthetic, I say: “But in *one crazy statement*, she swung for the fences and brought in over dozens and dozens of angry replies.” Let me up that: her statement is TOTALLY CRAZY. There will never be a real estate bubble? That’s nutso! In fact, I would go so far as to say that anyone who is absolutely sure that there ISN’T one right now or that there IS one right now is overconfident in their own ability to predict the future. For the record: I believe house prices will go down over the next couple of years, but I believed that 2 years ago and look where I am now. I can’t stand it when people call me for promoting “the bubble.”

    Do you mean to imply that angry replies are necessarily wrong? I believe that you can be both angry and correct. I also believe I was making fun of the poster for writing something so outlandishly crazy that she picked up 88 people telling her, in essence, “you’re crazy.” That’s link baiting – saying something outlandish that you may or may not actually believe in order to get traffic to your site.

  12. I just realized what might have confused you, Synthetik – the title on this post is sort of a link-baiting joke. Never? That’s crazy talk.

  13. >what’s your background.

    Homeowner from 1991-2003. I’ve been self employed most my life in technology and sales related fields. I began studying real estate and economics heavily in 2003. I’m anonymous for obvious reasons – I own a business and discussing politics, religion and a pending economic collapse is not good business.

    I have no agenda other than to help others. This morning I was treated with a wonderful “thank you” e-mail from a reader of (Tim’s blog). Thanks to Tim & the blog, she believes she “got out” at the right time and saved herself from financial ruin.

    There is always a motivation behind everything we do. Even people who give anonymously do so because it makes them feel good. Isn’t that reason enough?

    >give you ammo to take shots at me behind your veil of complete anonymity.

    being late in the flipping game is enough ammo for anyone to take shots at you. Seriously, you need to dump those properties immediately.

    >Most open minded people have discussion. I actually respect your last comment. The issue you have with Galen about seeing the comments as a joke is valid. But why defend them at all?

    How am I not having a discussion? You can follow my thread as I am using a handle.

    The reason I take issue with posts that defy reason; when I moved to Seattle, this was the first website I happened upon. I’m assuming many others do the same. When this discussion becomes completely moot (in mortgage/RE/lawyer/industry eyes anyway) how many peoples’ lives will have been ruined by misleading information? (whether intended or not?)

    Why did you turn off comments on your blog eric? I predict your blog/investor story page will be gone in less than 3 months. Sincerely, I hope the best for you.

  14. I already acknoledged it was a link baiting joke – I could care less if you all are laughing at me. I just hope everyone else keeps an eye on their wallet. 😉

  15. Good call Marlow. I agree – ‘The jury is still out and many professionals and economists are still taking a “wait-and-see

  16. Galen, counting this post, you’re already 16% of the way to meeting your own challenge! 🙂

    I’ll take a pass on this one, since the easiest strategy is to just bait the folks at a “Bubble” blog with an “anti-Bubble” post and wait for them to pile on. 🙂

  17. Greetings All;

    I’m an infrequent poster over, but I felt compelled to leave a comment here. A little public disclosure for “SeattleEric” – I’m currently renting, have savings, and plan on buying with 20% down and a conventional mortgage when Seattle house prices return to normal. No, I’m not expecting a huge crash but what I am expecting is that prices will contract to the point at which they can’t be supported by toxic financing.

    Galen’s call for link baiting really strikes me as…unprofessional? I don’t know if you think you’re helping yourselves, but if you derive some morbid pleasure from trolling you’d be best to do it in an area other than your line of business.

    If Susan Ryan was truly link baiting, well, I have to say that as a potential customer of her services that there is no way in hell I’d ever want her acting as my agent in any manner. Her posts are frequently juvenile and her responses to comments reveal a less than flattering attitude when things get rough. Same with you Eric – your willingness to engage in pointless arguments lead me to believe you’re someone with whom I’d never want to have business dealings. If you get so wound up over the small stuff, what happens when the big stuff goes wrong? Do you retreat into the comfort of ad homimen arguments when that happens also?

    If you people are professionals, act professional. Link baiting is something that 12 year olds do for attention.

  18. Peter, I can’t tell if you’re being sincere or not. I called her statements crazy and most readers think that I’m making fun of her and not the commenters.

    The “contest” was a joke to poke fun of a silly statement – does the prize and the entire concept not make that obvious?

  19. Synthetik,
    My face isn’t on the side and I’ve been a reader for a while too. I’m skeptical of many “insider” claims here as well–though I also recognize that simply because a person is an insider doesn’t make their reasoning wrong. So, when weighing bubble optimism and pessimism, I’m about the reasons underlying the arguments. And I haven’t heard any from you.

    You clearly have decided that there is a bubble about to pop. EVERY good article/argument I can find that addresses this question is based on national trends, not local Seattle factpatterns. There are plausible macroeconomic triggers for the market to burst (collapse of the dollar, massive inflation, etc) that would make Seattle specific data less relevant, but most of those scenarios seem a little distant.

    Is there some aspect of the local economy/market that you find compelling? Such as demographic changes, falling wages, etc. The case for local bubbles is much stronger than one big bubble, and if that’s true why the gloom about Seattle?

    If your agenda is to help others, drop a little knowledge beyond “DUDE, SELL YOUR PROPERTIES PRONTO!” Seriously, you seem self-educated and bright–what about the Seattle market screams sell?

  20. Take a look at the NWMLS numbers yourself. We’re following the same pattern as San Diego and the rest of the country; we’re just late to the party.

    There is nothing special about the market here that will save Seattle from the national credit bubble via Mr. Greenspin. If you think there is, you need to see what people in all the other bubble-popping markets have said… they all sang the same refrain.

    When I was a young kid I asked my grandmother “Why do you and gramps read ‘The Christian Science Monitor’? It’s SO expensive!!?”

    The answer: “because there’s no advertising…. when you get older you’ll understand.”

  21. And when our regions number one real estate cheerleader, Elizabeth Rhodes actually posts a story about a housing slowdown in Seattle… (even with the usual spin); it’s either the apocalypse or that the insurmountable evidence of the last 5 months outweighed any other possible option.

  22. Joe & seattleeric,

    The background of someone giving an opinion is secondary to the substance of that opinion. It is useful to draw what possible motivation someone may have when giving a lopsided view of a balanced subject, but dismissing someone outright because they have a certain background that may color their prejudice is foolish.

    The impending bust of the national bubble will be felt differently across different regions, but the bubble is national in nature. Credit and debt have not been confined to the sexy coastal areas, so the bust will not have the same boundaries. Just the same, in all past bubbles it is the boom that causes the bust. The hip-n-trendy areas of the country have boomed much higher than Flyover Country, thus are more prone to a very damaging bust.

    I believe Synthetik when he says his comments are a form of public service and charity. Some people help old ladies cross the street, some give to their church, and some offer a teensy-weensy counter to the tidle wave of bull arguments that have permeated the market for a basic human need.

    I have yet to hear a cogent argument for why the bubble will continue nationally, or locally in Seattle. Arguments usually come in the form of platitudes, and the study of recent price action. It is not shocking that those offering the weakest arguments have strong ties to the Real Estate Industrial Complex. Perhaps if those in the REIC offered more than platitudes and fearmongering, they would be taken more seriously.

    Additionally, just because someone is a renter, does not dismiss the substance of his arguments. Most in the REIC dismiss bear arguments because someone is a “bitter renter.” If you believed that real estate is poised for an epic drop, why would you buy? Most renters are there by choice. It is not surprising if someone puts their money where their mouth is.

    I wish all of you the best with your continued real estate endeavors. Things happen pretty fast – especially on the downside. Not one of us is as smart as we think we are.

  23. Your argument is that a slowing rate of growth means that the “bubble” is popping? For the bubble to pop, people need to be unable to afford their mortgage payments, no? What evidence is there that Seattle mortgage holders won’t be able to make their payments?

    Why would people in Seattle a) not be able to pay their mortgages b) decide en masse to leave (ala Boeing ’72)?

    I don’t get your CSM analogy. Is it that “the media” are industry hacks? I’m open to that…but its a red herring since my questions do not turn on the general credibility of Elizabeth Rhodes or “the media.”

    I see from your site that you’ve been tracking this for a while. Could you help me out with the internal mechanics of your scenario? Why is a slowdown the same thing as a bursting bubble? Also, could you pass along a link that describes San Diego’s burst that we are immitating? Are people losing their asses in SD?

  24. Eleua,
    I’m a homeowner. I too fear “impending financial ruin.” I follow info from the so-called REIC, though I think much of it is bogus cheerleading. I also keep an ear open to the chicken-little’s, recoginzing that sometimes the sky is indeed falling.

    For me, the useful bases are reasons and proof. This can of course come in many forms.

    Your argument that the coast will be hurt worst when the “impeding national bubble bursts” leaves me wondering what evidence you would point me to? Depopulation is happening throughout the Midwest because people don’t want to live there. People will pay more money to live in Seattle (SFO, PDX, etc.) because it rules.

    Yes, places where property values are the highest could be hurt most, but as a national bubble spreads South Dakota still aint gonna be more desirable (ie higher valued property) than the hip and trendy coast. (Unless maybe there is a terrorist incident at the port of Seattle.)

    Your bubble argument, like Synthetiks, needs to explain why people will need to sell. If I (and the rest of my neighbors) can make our payments and like where we are, what does it mean to have a “bubble burst?”

  25. People will need to sell because they can’t make the payment, or they will not want to make a payment on an asset that is worth less than the liability they carry.

    Just because we have all declared ourselves to live in Shang-ri-la, does not mean that everyone sees it that way. Where is the strongest population growth? The Southeast. Have you ever been there between June and September? It sucks. Is there a bubble in the South (sans Orlando and Miami)? Nope. Where is population shrinking the fastest? Northeast. Where is one of the twin pillars of the RE bubble? Northeast. Whites are leaving California faster, much faster, than the Mexicans can replace them, yet it is the other pillar. Do taquerias and nail salons float $800K homes? I think not.

    The PNW (King County) ranks #5 in pay-option loans. What does that mean? It means that our scenic wonderland has people grasping beyond their reach in order to afford the bucolic Heaven-on-Earth that we so cherish. One problem – that loan will eventually adjust and it will adjust hard. Now, will your neighbors make their payment at that time? What if California inverts and people can’t sell their Brady-bunch tri-level in the OC and move to our pristine oasis and buy a home for cash? It means that the top half of the buyers in the recent market will be absent.


    The recent run in real estate has been a bubble. People want the property as price increases, and are reluctant to sell as that price rises. Classic bubble definition!!!! Bubbles either grow exponentially or crash. There is no middle ground.

    I shake my head when people (primarily those under 35) think this is normal. It isn’t. We are about to be shown what happens when bubbles are thought to be normal.

    If you can afford your house, great! If you will continue to make payments on your house when it goes down in value well below what you owe, even better. Your neighbors will thank you as they default.

    Seattle is not immune. San Diego wasn’t. Boston wasn’t. Florida wasn’t. Arid-zona wasn’t. SF is finding that out. So did Denver.

    Seattle is not immune. Seattle is not special. People will not pay $500K just to live in a community where some people take a ferry to work.

  26. Joe,
    I am working on a paper that shows why bubbles break, and why they always leave us worse off than if they had never occurred.

    Just a preview.

    Homes in the area don’t cashflow, unless they were purchased long, long, long ago. In order to get the typical nice home to cashflow, you would need to drop appx 3/4 off the pricetag. Same with looking at SFHs as investments. EBIT need about the same 75% reduction in price to bring them into historical, pre-speculative norms.

    There are other arguments. All point to the same general levels that SFHs need to descend in order for them to make financial sense.

    We are in a bubble. Expectations get distorted in bubbles. Beanie Babies once sold for $100. So did Pokemon, and the NAZ.

    Homes, like Seattle, are not special. It is an ugly reality that many, too many, will learn the hard way.

    I hope you have an exit plan. If not, the exit plan that your lender has is pretty painful.

  27. BTW, for all of you that think that our s–t doesn’t stink because we live in the coastal areas…

    You need to get out more. I grew up here, and I thought that anyone with any brains whatsoever lived in BOS-WASH, California and the PNW. Then, I moved to the South, and Midwest.

    There are millions of very prosporous, happy people that live in Flyover Country. Mercer Island woldn’t make the top 10 list of wealthy neighborhoods in Dallas. Bainbridge schools would be about average for white schools in the Dallas area.

    Don’t congratulate yourselves too much for living here. Most in Flyover Country don’t give a rat’s ass.

  28. Joe, great question. Eleua, good points, particularly the cashflow argument. I’m not so sure I like how you sign each one with a hostile comment.

  29. Please say some more about “ranking #5 in pay-option loans”…does this mean that people here are overstretched on interest only loans and they’re relying (unsustainably) on appreciation to build equity? Do you know of any numbers?

    I would also also be interested in the data you are using to analyze the default rates in the other cities? Could you site an article for me?

    I don’t necessarily disagree with you Eleua, but these sweeping generalizations about “national markets” and “classic bubble behavior” strike me as a little overblown. I guess I can imagine the plausibility of “soft-landing” scenarios that don’t decimate all areas of the country. I can also imagine reasons that a housing bubble is a little different than a stock bubble (“home” investment v. “pure $” investment, liquidity, etc.)? It seems like you are painting “bubble” characteristics with awfully broad strokes. Will a housing sell-off look anything like a stock market firesale?

    Thanks Eleua.

    (Btw, Seattle is special;) Then again I think most of Cascadia is too.)

  30. Arid-zona … well, now that we’re talking about my backyard:

    August 2006 median sales price per ARMLS: $254,900
    August 2005 median sales price per ARMLS: $255,500

    August 2006 average sales price per ARMLS: $330,900
    August 2005 average sales price per ARMLS: $318,300

    With a $600 drop year-over-year, it’s amazing we’re not all wearing asked and sackcloth.

  31. Ahhh…the wonderful thought of sending my kids to a white school in Dallas!:)

    Have you seen this research that links cultural diversity (specifically gay culture) to the success of the high tech industry? It doesn’t mean that my shit don’t stink, but it does mean that for a place to attract smart, innovative, creative young people (information workers) they need to be diverse. Those are the high wage jobs that sustain higher home values. This is a real challenge for “flyover counties.” It’s also a reason why young people move to the cities in droves–that’s where the life is.

    Dallas might be one of those places. Though not *so* much from what friends tell me. Austin is a world apart from what I hear. My point is not to represent Seattle (the Westside btw, not Bainbridge or MI) but to say that it will take a lot to reverse the relative value people place on living in places where good restaurants, music, clubs, universities, libraries, parks, mountains, oceans, etc. are plentiful.

    I have spent alot of time in South and Midwest and I like the people, though its the urban/rural divide that is most significant. I don’t really want to get into a pissing match over what place is “better”…I’d rather try to understand the bubble argument.

    I’m going to need a little time to go back to your paragraph that explains your paper. (I am not totally familiar with the abbreviations and shorthand.) I look forward to reading it. If you feel like posting a key citation or two I’d appreesh.


  32. The polarity here is akin to the far reaches of the political Left and Right. The bubble believers/defenders are like the Democrats (who feel Iraq will doom the nation), and the non bubble people are like the Republicans, who feel winning the war is necessary for national security.

    Looking at it it this way, there is no middle ground – there is no way to reconcile the two sides. No matter what one side says, no matter how strongly they believe it, the other side doesn’t accept it as ‘the truth’ or even as a relevant fact.

    What will it take for both sides to agree? If the market dips and flattens, and reaches an equilibrium, will there be peace? Or will both sides tell the other ‘I told you so’, and retreat to their echo chambers, awaiting for the next cycle when the interests of each collide so violently.

    Fascinating potential! 😉

  33. Oh…and to Synthetik – I turned off comments on my blog because by sharing my mistakes and what I’ve learned from them, that disseminated across the bubble world like blood in a pool of sharks.

    There are only so many “I told you so”, and ‘too bad you’re going to ruin your family’ comments that I’ll put up with. I enjoy constructive criticism and comments, but when the volume is turned up by the bubble brown shirts, blustering with their schadenfreude, it’s not worth keeping the comments option going.

    What’s ironic is that in my blog, if any of these bubble people actually would read and hear what I’m saying, they would see I’m not blind to what’s going on in the market, and that I’ve made changes to adapt to the changing market. However, most bubble people are so black and white (get out now or lose it all), that they can’t even appreciate what I’ve taken away from many of their more lucid arguments.

    Synthetic – you keep telling me to dump my houses, dump my houses, twice now! I am trying to sell two of my houses…I’m not going to give them away, but I am also not going to be caught just behind the curve that is dipping market right now. I’m guessing that my use of ‘dipping’ instead of ‘crashing’ will continue to bring the bubble people to flame me. Why? Because since I haven’t completely capitulated to their perspective, I must be crushed. Until I admit utter defeat, I will be a target, no matter how honest I am, or how much I actually take away from their point of view.

  34. Joe,

    My point was not that Flyover Country is better than the uber-chic coastal areas, just that we tend to have a very inflated opinion of ourselves and what this place has to offer.

    I’m a multi-generation PNW native. You don’t have to sell me on this place, but there i life east of the Cascades and west of the Hudson.

    I’ve heard the “diversity” argument for years, and it is all eyewash. Seattle Bubble has thoroughly dispelled the myth that Seattle offers economic benefits that can’t be replicated elsewhere. I don’t intend to rehash the entirety of it all, but our industry is just a brainwave away from being relocated to some cheaper cultural, esthetic wasteland.

    There is no way the arbitrage that exists between the coastal areas and Flyover Country will stay this outta-whack for very long. This arbitrage existed between California and the PNW for two decades, and it is closing. Guess what? They can just as easily relocate to Kansas City, Dallas, Houston, Jacksonville, Raleigh, Nashville, etc.

    When Mercer Is. has homes selling for 10X income, and Flower Mound, TX has them selling for 1.8X, and they have the same income, that will eventually be reconciled. The only reason people in the PNW put up with it is due to the belief they will make more money by living in their house. When the jig is up, and they realize that living will COST them money, they will no longer put 50-60% of their income into their home.

    So, cultural diverstiy, especially GAY diversity can push electrons through conductive material? Is that what I’m to believe? If your anus is a multi-purpose tool, that allows you to pound code better? Did I get that right? I’ll look at your article, but the premise sounds like it spent too much time being tortured at some progressive university trolling for funding and leftist legitimacy.

    Sorry, but the big money is in the traditional nuclear family. There just aren’t enough DINKs with dogs to float the entire suburban market. Moms and Dads don’t give a rat’s ass about many of the urban cultural amenities, but they do care about safe neighborhoods, funding college, and passing their values onto their children. If progressive culture appealed to families, California wouldn’t be bleeding them so profusely into the surrounding states, and The Village would have a great elementary school.

  35. With a $600 drop year-over-year, it’s amazing we’re not all wearing asked and sackcloth.


    With inventory up by almost an order of magnitude, I’m surprised you aren’t looking for a clean pair of shorts.

  36. Will a housing sell-off look anything like a stock market firesale?

    No. Houses are not liquid, therefore it will be more difficult to sell. It will look like the mid-80s Texas Oil Bust – only worse.

  37. Eleua, no more euphemisms – give us some numbers. How much do you predict the Seattle area market will drop and by when? I’m not a betting man, but if I had to make a wild guess, I’d go with a net 5-10% drop over the next year. Don’t hold me to that, though.

    Are you short on the housing futures market? There is a lot of money to be made in it if you are correct.

  38. I have not been using what I would call euphemisms, but if you want my general take on the Seattle housing market it goes something like this:

    2007: down 10-15%

    by 2010: down 2/3 to 4/5 depending on the specifics. Higher end will correct more.

    My shorts are in tech, as it is easier to divine imbalances, and the longs are more enthusiastic and dumb. There is money to be made in financials, but I will wait until the downtrend is well established

    Unemployment will skyrocket, especially in the bubbly areas, as so much of the recent economic growth has been in the REIC.

  39. Wow, so you’re seeing a $500,000 house at $166k by 2010 (that’s down 2/3)? That would definitely be an economy killer. That’s also significantly more than most predictions I’ve read, including those in the long-time bubble predictor, the economist.

  40. As long as unemployment is rising, with rising interest rates, and property is thought of in investment terms, I will likely not buy.

    Once property cash-flows, has EBIT (cap rate) at least 7 (more likely 9) and competitive with CDs, and people have a general disdain for real estate (like gold in 1999), then it will be time to seriously consider getting back in.

    There is a lot of ground to plow before then, and quite a bit can happen.

    Either way, there needs to be a lot of pain before this bubble bottoms.

    In case you are wondering… I’m not on drugs with my 20 cents on the dollar prediction. Seattle had two big bubbles ( and housing) – neither of which has been cleansed by the Bear. It is not unreasonable to think that prices can descend to where they were prior to the bubbles starting (1997). If the underpinnings were just vapors, they could very easily crash that much.

  41. Eleua, I don’t think you’re on drugs with that prediction – there are odds for everything. I think my 5 year guess lies somewhere between yours and “the consensus.”

    No doubt they could crash back to prior.

    Thanks for the informative comments – I always like hearing what other people are thinking.

  42. > Once property cash flows

    Eleua – I have recently bought properties in Tulsa and Buffalo. I’ve been ridiculed by the bubbleologists for buying in these depressed areas (well, Buffalo fits that bill anyway). But I bought these properties with 30 year fixed 80% LTV loans, at an average price of $60,000, with an average cash on cash return of 30%! If I use the free cash flow to increase the principle paydown, I’ll own these properties – and have free and clear cash flow – by 2020. Doesn’t that seem like a good real estate investment to you?

    Properties in our area can’t cash flow here unless you can park around 50% of the purchase price in cash. However, even for investors that buy with 100% cash, they’re still getting 5% ROI, and this is the form of income. For the younger generation, this is (obviously) uncommon, but for the baby boomers, this type of investment provides 5% whether or not the price of that home goes up or down. In fact, if prices deflate/crash, rents here that have been lagging will increase as the increase in renters drive up rents, actually increasing the return for these all cash investors. The baby boomers are generally more interested in income than protecting principal as they retire and need money to live.

  43. Galen,

    a $500,000 house at $166k by 2010 (that’s down 2/3)? That would definitely be an economy killer.

    Yes, it would. That is the point. A $500K house at $400K (-20%) would be an economy killer, which would drive the house to $300K, and so on… It’s a bubble, and bubbles work just as well in reverse, only better. That’s the trouble with bubbles – once you start blowing, you can’t stop.

    Thanks for the conversation. I enjoy a spirited discussion to an echo chamber anyday.

    If I bothered you with some of my biting closers, I apologize and hope you weren’t hurt.


  44. Dude,
    If you can get a 30% ROI on cashflow, that is a good deal. It’s the suckers that carry a rental that loses $2500/mo, and think they have it all figured out, that worry me.

    I STRONGLY disagree about your assessment of Boomers’ priorities. They are all about the capital appreciation, not the income stream. That is another reason this will end in a grotesque manner.

    BTW, why would you go through the risk and hassle for 5% ROI on a house, when you can get a brainless 6% in a 9month CD? Once the Lumpeninvestoriat figures this out, kiss the housing market goodnight.

  45. E –

    If you’re correct about a 60-75% reduction in housing prices by 2010, the shockwave to the economy would be devastating, ney, nearly catastrophic. Wouldn’t this look more like the great depression than a recession? And if so, everyone loses – homeowners and renters alike. Unemployment spikes, renters lose their jobs, homeowners lose their jobs. The stock market falls, GDP goes negative. At least homeowners have bankruptcy as the great equalizer. Everyone will be sitting at the bottom of the barrel with a 75% meltdown, and no one will be in the position to buy

    Just sitting on the sidelines won’t seem to protect you (or others) from the impact of the burst. If you believe this, how do you plan to protect yourself from inevitable outcome? I ask this sincerely. What investments would protect you?

  46. You would go through the hassle to get 5% ROI, because adding in tax benefits (e.g. depreciation), you get a greater than 6% return on that investment. Additionally, as I mentioned, that return is pretty stable even as housing prices fall, whereas CD rates will fall much lower, tied to lowering interest rates, that will inevitably follow dramatically falling prices.

    You are probably right about the boomers. Some are forecasting a massive, long term stock market drop due to the boomers having to liquidate – by law – their IRA and 401K holdings as they get older.

    I too have enjoyed this discussion! 🙂

  47. You summarize my concerns very well. Since we are in a bubble economy, and housing IS the economy, when housing tanks, the economy will tank with it.

    Everyone will get hurt. That is what pisses me off. Because the Babyboom didn’t save for retirement, the gov’t has been scared shitless over a recession as they are getting ready to retire. Now, all of us have our livlihoods leveraged for people that have not prepared, and all of us will suffer for it.

    How do you protect yourself? That’s a trillion dollar question. For me, I am trying to diversify away from the US$, and dollar denominated assets. Foreign currencies aren’t much better. Short sales and a general bear portfolio will likely pay-out prior to an all-out dollar collapse. Gold is traditionally safe, so I am going there. Who knows? If your wealth is in electrons, you might be disappointed.

    I don’t think that renting prevents me from getting burned. However, it would shield me from much of the ugliness that will befall overleveraged homeowners, and homeowners that have all their wealth in their one home.

    The Marines have a concept called the 70% plan. You only plan out 70% of what you intend to do, and make up the other 30% as you go along. All plans are valid until initial engagement with the enemy.

  48. I dispute the notion that CD rates will fall as the economy slips. The economy will slip due to inflationary stagnation. Incomes have not kept up, but prices march on.

    Look at the FED in the early 80s, rather than under Greenspan.

  49. Eleua,
    You make it very difficult to track your argument and respond accordingly. It’s vitriollic and disorganized. I don’t mind a good debate, but I like to keep my eyes on the prize. To review, I’m curious about how the bubble applies to Seattle. You are making claims about its national character, how all bubbles are alike, etc. I’m trying to understand your argument.

    1. You have cited zero data beyond “the market is slowing.”
    2. There is a large leap between “slowing” and “bubble bursting” which, if your claim is that we are in imminent danger, you should evidence.
    3. You are apparently one day going to write a paper, perhaps when you begin researching it you will consider sharing a citation or two with us.

    My observation is that bubbles are local phenomena because demand is HIGHLY variable, the ability of a locality’s wage structure to support its house payments is a relevant question. This brings two factors (it seems to me) to bear: do/will people want to live there (will high wage jobs also locate there) and does the mortgage base adequately reflect demand (are there enough people able/willing to pay).

    I cite a study that says cities that embrace cultural diversity are well positioned to attract these workers. You provide zero demographic analysis that says that migration to cities is reversing. (And yes, Denver, Raleigh, St. Louis, Austin, etc. prove my point…Seattle and W Coast urban centers will compete for these knowledge workers. The ‘uber-chic’ cities, your language not mine, have a legup. That’s why ALL the big tech dogs are located in these centers. Universities play a role in this as well.)

    I actually cite a study that says cultural diversity is THE key indicator for attracting knowledge workers. The report CORRELATES it with gay culture and international refugees. The “flyover counties” (your language again, not mine) have not historically been supportive of these groups. (Think Matthew Sheppard and the Wall along the Mexican border.) You think it has something to do with my anus and code writing. I think it has to do with people that have open minds. People that are open to new ideas, culture, food, music, etc. Maybe people that have travelled outside of the US being able to relate/communicate with globalizing markets. It’s not a causal argument. Innovative, creative thinkers don’t thrive in places where social dogma is stifling. They move to the cities.

    Further, Seattle (and other Pacific metropoli) are well positioned to compete in a globalizing trade environment with China and India ascendent. And the West Coast investments in Biotech and IT fundamentally differ from “flyover” natural resource investments. It seems to me that there are good reasons to think that the risk of localized bubbles will be less severe.

    Now I concede again (as I did initially) that I’m NOT assuming a collapse of the dollar, a major terrorist incident in a W Coast port, or other macroeconomic crisis, primarily because *I* think the risk is low and we’re all screwed if that happens anyway. Putting your dough in stocks aint gonna help.

    My question is about how all the gloom and doom bubble bursting analysis squares with my hometown real estate market. Everything I’ve seen is about Vegas, AZ, Fla and highly speculative markets (lots of flipping) that don’t “feel like” seattle. That’s why I crave data, proof, evidence…something for my rational side.

    Now, I (and I may be alone on this, I certainly have been before on RCG) could give a fuck about your “general take” on the Seattle market. I want your evidence. And if your evidence of a bubble burst is -$600 year after year (this is so ridiculous I must be misunderstanding it) then we all can breathe a sigh of relief because the appreciation over the last few years can certainly withstand a few -$600 years.

    From what I can pull out of your shotgun responses, it seems like the assumptions that support this conclusion are highly speculative. I don’t know that they match up with Seattle’s local market.

    As long as unemployment is rising, with rising interest rates, and property is thought of in investment terms, I will likely not buy.

    Unemployment will skyrocket, especially in the bubbly areas,

    Seattle Bubble has thoroughly dispelled the myth that Seattle offers economic benefits that can’t be replicated elsewhere.

    The beauty of hypertext homeboy, is that you don’t have to “rehash” it here necessarily. But some rehashing or at least citation is a nice check on bullshitting.

    Again, I want to emphasize that I don’t necessarily disagree with you, I’ve just been waiting for someone to speak to this because it’s on everyone’s mind. Thanks for contibuting to RCG.

  50. Joe,

    I’m not an encyclopedia, and I’ve been posting between putting the kiddies to bed, and doing the kitchen cleanup. If you don’t believe me, fine. I guarantee I will sleep well tonight knowing that. I don’t have all the answers, as nobody has the answers. Calling the top of a bubble is an extremely low probablility event.

    Whenever I have heard someone put forth the “our diversity is our strength” argument, it has turned out to be absolute BS. I’ve been hearing this for 20 years. Diversity is not our strength – it is our weakness, at least the way we treat it. Diversity means lowering your standards to make your quota. Left alone, society would not be that diverse, as excellence would seek out excellence, and mediocrity the very same. Just about every institution that I have been involved with that had excellence as its hallmark and “diversified” lowered its standards to do so. If diversity was a good thing, the government wouldn’t be so heavy-handed about enforcing it.

    Just about every urban center has a large homosexual component, along with every other social pathology. So what? Just because two things are coincidental does not mean they are related.

    Perhaps homosexuals are attracted to urban areas, as are people setting up large, capital intensive businesses. You don’t put a large business in Artesia, New Mexico. Is Provincetown, Mass a big computer center? How about Key West? Miami Beach?

    I wasn’t aware that Plano/Richardson, Texas had a big homosexual component.

    I’ll read your article. I will be surprised if it isn’t just another hit piece on the traditional part of America. I do find the constant yammering about how wonderful, diverse, open-minded, and successful the liberal, coastal, Blue-State people are to be quite fatiguing.

    Finally, if you think we are not in a bubble, and we will get the soft landing, and then we can speculate ourselves to eternal prosperity, I encourage you to go all-out. Don’t be hampered by naysayers. Listen to CNBC and read the WSJ. They have your best interests in mind. Property is selling for 10-13X income, and there is no reason it can’t sell for 50X.

  51. I think Eleua’s doing a hell of a job in between cooking dinner, cleaning up and putting the kiddies to bed. She’s entitled to her opinion, without having to prove it to Joe or anyone else.

    How people feel about the housing market is very important. We can talk stats…let them talk about perception. We need to know both to get an accurate picture of the housing market. Today’s public perception will be reflected in tomorrow’s stats…or not.

    There is no right or wrong when we are talking about what is going to happen next. Stats are only hindsight. The opinions of Eleua and others like her are signals of what may come next.

    If every would be first time buyer, stood up right now and went home to live at Mom’s…our stats wouldn’t be worth crap 🙂 The naysayers have the power to make us all wrong. Talk about crowd mentality… Heck, when I read a bubble blog, I get the notion to sell my house and run to Mommy’s. Doom and Gloom talk is powerful stuff!

  52. Whew, what’d I miss? 62 posts. Almost there guy.

    You know, eleua is probably the only republican I know that not only understands we are in a housing/credit bubble, but also sees how rediculous and desperate the Bush administration is getting.

    I need to meet more republicans like that. The ones I know all believe terrorists are hiding in behind their humvee, just dying to rape their wives.

  53. Just so I can keep proper score, what do you consider a bubble popping? A slowing increase? No increase? A 5% drop from peak values? 10% drop? 20% drop? 50% drop? 75% drop?

    What some people call bubbles, somebody else might call a correction.

  54. >turned up by the bubble brown shirts, blustering with their schadenfreude, it’s not worth keeping the comments option going.

    I don’t know who’s been reading your blog – I’ve been on the seattle bubble blog (tim’s blog) since March (and lurking on it while I was in San Diego before that) and not seen or heard anyone discussing it until recently (you are linked, I noticed. lol)

    >I’ve made changes to adapt to the changing market. However, most bubble people are so black and white (get out now or lose it all),

    I have to agree at this point. The only change you can make is to drop your price significantly — at a loss if you have to. Now that local MSM has capitulated regarding the bubble, most of the GF’s (Greater Fools) will be completely dried up in a few days/weeks. This is not a joke.

    >Synthetic – you keep telling me to dump my houses, dump my houses, twice now! I am trying to sell two of my houses…I’m not going to give them away, but I am also not going to be caught just behind the curve that is dipping market right now.

    I really hope that from my posts I’m not trying to be an ass. I don’t want to see anyone get hurt in this mess. From my experience with downturns and other natural economic progressions (stock market) is that most investors invariably follow the market down – they get creamed.

    This market has already tipped, meaning (in general) the power has shifted completely away from the seller and is now firmly in the hands of the buyer. Most sellers won’t get it right away and only perform teeny price decreases (look on CL right now, do a search on “reduced” and you’ll see things like “WOW! Reduced $15,000).

    The number of buyers is greatly reduced, almost overnight. The effect begins to snowball but buyers are still reducing in small amounts. Effectively, they “follow” the market down and end up losing 10X that amount – or worse.

    That’s why my short answer is to cut your losses, take your lumps and get out of the market. If you can break even I’ll paypal you $100 – wait, I’ll send you a cashiers’ check. heh.

    And don’t believe the NAR cry that “we’ve hit bottom”. In a normal RE cycle, in general, you have 6 years – peak to peak. That means if we tipped in early 2006, we still have 2.5 years before the bottom. The interesting thing is that we’ve never had a run-up of this magnitude as well as on a national level.

    If head shill David Lereah cannot predict the top, how on earth can you believe he’d predict the bottom? If we’ve never seen a run-up like this before, why would you believe we won’t fall harder than we’ve ever fallen in the past?

    seek out truth. follow the money.

  55. >Synthetic – you keep telling me to dump my houses

    once a RE market has tipped the people who control the market (the buyers) have a completely different view of things. So much to choose from, why be in a hurry? There is a snowball effect from this and each day it gets harder and harder to sell your properties. Also, it doesn’t help that “housing slump” is now front page news in Seattle MSM. (trust me, they waited as long as they could; gotta sell advertising)

    the classic mistake is to follow the market down. (see Nasdaq, 04/00) people follow the RE market down by initially lowering their price by small increments. It’s (do a search on Craigslist right now for “reduced” and see how many small $5-15K reductions there are, then look at S. Florida, Arizona, Boston and San Diego — they cannot give houses away, there is virtually no activity at all) the sellers who need to recognize the change in the market and respond accordingly.

    Too many properties on the market- and counting. What will make your properties stand out? Nothing but a dramatic price decrease. If you were thinking $25K, try $75K. If that means you take a loss, do it. I honestly think you’ll be facing BK if you don’t unload them quickly.

    This isn’t a buyers market either. Don’t believe that liar, David Lereah – we are no where near a bottom. During a “normal” or typical correction it takes at least 3 years to hit bottom. You might agree that this is not a normal RE up cycle. We’ve never seen this much appreciation (and so quickly!) and on a national scale (just because homes in Denver haven’t spiked as much, don’t think they aren’t caught in a bubble too — that’s why they have MOM #1 foreclosure rate… lending rates are relaxed everywhere, so more people overextend and enter the market all over the united states — using funky loans).

    Many people will be burnt trying to “time” the bottom — very similar to the way investors try to find the bottom of a stock. I spend 2-3 hours each day reading RE and economic stuff – yet I could not predict the exact tipping point (maybe within 3 weeks or so). Timing the top is nearly impossible and extremely risky. The bottom is much easier, plus you don’t really even need to be close… i’m too tired to get into it completely now but essentially the bottom is long and flat… and really boring. Everyone has pretty much decided that RE is a horrible investment and there are very few buyers or sellers.

    anyway, the point is… after such an amazing run-up, how can anyone expect a nice, slow softening of a return to normal market?

  56. No data = bullshitting.
    No different than talking heads on MSNBC, FOX, etc.

    Why are people talking about “belief” in this context? Nobody’s “opinion” about the bubble matters. “Faith” applied to market performance is LOONEY. It’s not like I’m saying they aren’t entitled to their “beliefs,” I’m just wondering if a crystal ball is equally valid. (That’s why I live in a community that values science.)

    And don’t try and paint the diversity argument as liberal dogma, some “We shall overcome” faith healing. It doesn’t fit in your box. Creative firms and code depend on good intellects and those people are drawn to cities. It is an argument for upward pressure on demand and wages in places like (greater) Seattle, even amidst a correction.

    No evidence in this entire discussion has distinguished the local, Seattle housing market from the national trends. And that’s a pretty weak set of assumptions, yo.

    I look forward to reading your paper. (And as a person that lived in Winslow for a few years in the 80’s in the frog rock vicinity, I can give Eluea a little Hard Core BI love.) Thanks for chatting.

    Synthetik, do you have any data or articles to recommend to inquisitive skeptics?

  57. i seem to be censored or something… cant post links or even a std post under my handle

  58. synthetik,

    No need to get paranoid, although it might be time for you to put out your tin-foil hat to protect you from from all the evil real estate professionals!

    In reality, you were simply being picked up by my spam filter (Akismet). I don’t know exactly why (the spam filter is a black box, albeit a very effective one) but I think your post with a bunch of links set it off

  59. Once Eleua gets going there’s no stopping her. While I don’t doubt Synthetik is honestly trying to disseminate info or learn more, Eleua characterizes the flip-side of relentless RE cheerleading as presented by Susan Ryan and the NAR.

    From what I’ve read, the downturn in RE will lead to racial strife, divorces and mass hysteria, along with a depression greater than anyone we’ve seen. We’ll all be screwed except Eleua, who has a magic set of investments that will weather that storm. Oh, and since she’s “not PC” she’s more honest than the rest of us.

    The relentless negativity is one of the things that’s made Tim’s Seattle Bubble blog significantly less readable lately. I don’t doubt the trend for RE is negative, but it turns out to be mildly negative, I suspect the economic outcomes will be more muddled than the dire predictions. If the dire predictions come true, I think we all have more pressing things to attend to than listening to Eleua.

  60. “We all have more pressing things to attend to than listening to Eleua”

    Not yet Cricket! Not until we achieve Galen’s desired 88 so we can move on. I will be posting my thoughts on OUR market conditions shortly and bring it back to OUR various realities here in the Seattle Area, by Thursday.

    I don’t think it is fair to ask Synthetik for data, I think we give him data in response. I totally respect Synthetik’s viewpoint. He had a huge stroke of bad luck hit him in 2003, and he was very honest about that. He is trying to forewarn some people, and that’s not a bad thing for SOME people.

    His representation that agents tout “It Is Always a Good Time to Buy a House”, is true of many. Maybe not you, maybe not me…but clearly it is true of many, so no need to shoot the messenger in this case. He is not always right…nor is he always wrong…same as the rest of us.

    If it helps one agent step back and stop the scripting…it’s all worth it.

  61. It’s the hot topic at most cocktail parties. Is Seattle going to experience a bubble and burst? The short answer is no…..the long answer follows:

    We experienced a busy market with a shortage of supply and increasing demand resulting in four or five offers and short “Days On Market” over the last few years. Prices are the highest in history. Despite the market of the past four or five years and the misinformation published in the local news papers and talked about by the “informed” gurus, Seattle is NOT hot compared to the rest of the state of WA and the nation. Most sources touting a hot market do not fully understand fundamental economics and finance and they do no research beyond reviewing statistics from the local Multiple Listing System (MLS) which provides only part of the picture.

    About a year ago, the Seattle Times Sunday Edition published a study about the riskiest Metropolitan Statistical Areas (MSAs) showing Seattle is not hot and a bubble is not likely. Unfortunately, the study was already three months old! I and many other finance and economic professionals read the report soon after it was released. The mainstream media is usually late to the game and poorly researched. Economist and financial analysts have followed the underlying data of the study for many many months prior to the publication of the report. Economist and financial analysts have all been saying Seattle is not hot and a local bubble is highly unlikely.

    OFHEO provides index rankings of States and Metropolitan Statistical Areas (MSAs), including the District of Columbia. In 2005, Washington State and the MSA of Seattle-Bellevue-Everett have moved up in the ranking. WA places near number 17 of the 50 states due to other MSA’s in WA and not Seattle. Bellingham, Olympia, Spokane, and Tacoma carried WA to a higher position in the rankings. Seattle experienced less capital asset growth (appreciation) than Bellingham, Olympia, Spokane, and Tacoma. If not for those cities, WA would be lower on the list. Seattle is expensive compared to income based on affordability indices. Seattle experienced very good capital growth over the last five years, but Seattle is not a hot market. Seattle was not a hot market.

    San Diego, Sacramento, Oakland, Santa Ana, Nassau NY, Boston, Providence, LA, San Jose, SF, Edison NJ, Cambridge, etc. experienced hyper capital growth with no economic drivers indicating a sustained market. Many of these cities saw a large proportion of speculative flipping which is arguably bad for the local economy and community when initiated by the uninformed investors. Those hyper growth markets with a high percentage of speculators have been decimated. The speculators left town flooding the market with supply leaving homeowners with upside down loans.

    Is it possible the mainstream news is creating some of the hysteria over a Seattle “hot” market? Buyers read the news of the “hot” market and begin to think they are going to miss the boat if they don’t act now. That goes for homeowners and investors. The market has a lot of dumb money investors. “Do you think this duplex is pretty?” does not constitute financial due diligence. Analyzing Capitilaztion Rates alone is not enough. Discounted cash flow yield must be calculated and reviewed against investing in all asset classes. Long ago I stopped counting the number of people who called saying they want to invest in real estate. They didn’t know why they should other than every one else is doing it. (Whether real estate is a superior investment over other asset classes is another discussion/argument entirely.)

    What is a bubble? To say option loans will burst the Seattle “bubble” or “high appreciation” will burst the Seattle bubble is short sighted and akin to most of the mainstream news which is half researched garbage reported out of context based on old information. If it bleeds it leads. Many components impact a possible bubble. High appreciating MSAs are not necessarily at risk. Low appreciating MSAs are not necessarily immune. High incidences of Option loans or piggyback lending are not by themselves indicators of a bubble. National level capital asset growth (appreciation) is a function of three components (Liang and McLemore).
    1. Inflation,
    2. interest rates,
    3. homeowner’s propensity to consume more housing with a paycheck.

    Since the depression, this country has not seen a decrease in the national median home price. Some MSAs have experienced local decreases. That can be verified from many government studies and many academic studies. Bubbles do appear locally. Real estate is a local market driven by local economic drivers. The probability of those three components having a simultaneous negative impact severe enough to cause a decrease in the national median price is small. Bubbles and stagnation are always local because of the fundamentals of local economies.

    Inflation is a general rise in the price of all goods and services. As long as wages increase at the same rate or faster than inflation we feel no impact from inflation. Inflation outpacing wages increases the cost of housing and will have a negative impact on demand. Short term interest rates are a function of The Fed. The Fed has very little control over long term interest rates. Long term interest rates are a function of investor speculation about long term inflation through investment in the long term bond markets. The Fed might be saying inflation is a problem short term, but investor’s do not see it long term. We are in a unique time when there is a convergence of short term rates and long term rates resulting in an inverted yield curve several times over the last couple years.

    Several studies suggest a 1% point increase in the 30 year mortgage rate can have a 10% purchasing power hit to first time homebuyers. That can have a trickle up impact on increasingly more expensive homes decreasing over all market demand. Our market consists of quite a bit of move up. Higher interest rates will have a negative impact on demand from a trickle up impact. Most research I have read recently suggests a 30 year mortgage rate of 7%-8% will show signs of an interest rate influence. If the homeowner has room to consume more of their paycheck on housing, then there is room to purchase a more expensive home. In Seattle, inflation is not out of control. Wages are increasing again; we have job growth; and 30 year mortgage rates are still below the historically average. Homeowners could probably consume additional income on housing.

    The bubble study often cited (Van Akkeren and Ogishi) includes data on MSAs for:
    -Appreciation and the acceleration of appreciation between periods reported from the OFHEO
    -Labor market employment growth, unemployment, the difference between current unemployment and historical unemployment averages.
    -Home affordability calculated from the median income, appreciation, 30 year fixed mortgage rates.

    The data is coupled with the concentration of mortgage risk from piggy back loans such as 80/20, 80/10/10 and new loan products that are negative amortization (Option loans) and the high use of interest only loans to create a list of MSAs most likely to experience a correction and the probability of that correction. (The Depression was caused in part by interest only mortgages. Fully amortized loans were introduced after The Depression to create a forced safety net. Interest only loans became popular again in the late 1970s)

    Option arm loan programs are not as inherently risky as the general public believes them to be. The loans have a negative amortization cap of 110% of the loan balance. Since these loans are limited to 80% LTV, then the cap is 88% LTV based on the value at the time the loan is made. Loan characteristics do not appear to be risky at all (MBA & IndyMac, October 2006). The average
    -LTV 73%
    -LTV adjusted for OFHEO HPI is 65%
    -Number of borrow ring for 2nd homes or investment 7%
    Higher defaults rates occur when these loans are used in conjunction with more debt or piggy back lending. Piggyback financing greatly increases the risk of default (Calhoun, hidden risks of piggyback lending).

    While all this may seem very academic, the algorithms and statistical trends are pretty good predictors. In the most recent PMI Group study of all the MSAs, Seattle’s risk index is 158 or a 16% chance of devaluation. Historically, the Puget Sound doesn’t experience a decrease of capital asset values. The Puget Sound’s “down” market is usually a plateau. Seattle has a good economy. Seattle isn’t very volatile. The probability of loss of value is very low. The probability of a decrease in the capital growth rate is most likely resulting in a plateau. During a long holding period the risk is very small.

    Will Seattle be OK? I believe the answer is yes for several reasons.

    Real estate is a local economy driven by local economic fundamentals. Jobs are a big driver. We have good job growth. The Puget Sound is one of the few MSAs with current high tech hiring.

    Our unemployment is still higher than our historical average. We are beginning to experience a job hunters market again. We have room to move toward lower unemployment.

    Our economy is not based on a boom or bust economy dependent on oil or a similar industry like Houston.

    No matter you read in the Seattle Times about Seattle being hot we are not. I haven’t read an economic, academic or government study that arrived at that conclusion. Again, we are expensive with a decreasing affordability index, but not hot.

    The acceleration of capital asset growth or year to year capital asset growth is relatively low compared to the hot MSAs. Our capital growth rate is decreasing, but it is still higher than the national average. If we do fall we don’t have as far to fall.

    Developers are policing themselves to decrease the number of speculative investors flipping property creating artificial demand and artificial supply shortages in the Puget Sound. The developers took note of hyper capital growth markets with a high incidence of speculation in Miami, San Diego, and Las Vegas. Many condo developments limit investor purchases to 10% of the total units for sale which is more restrictive than most lenders. Centex will not sell to investors. Developers are including special addendums. The buyer must sign a document stating the property will be owner occupied, will not be rented, and will not be resold for two years. I have seen a couple cases in which the flipper (and real estate agent) in the Puget Sound did not read the developer addendums. Upon the resale of the property in less than the restricted time period the flipper owes all gain to the developer and the real estate agent must pay back the commission! Bad agent. No martini.

    Michael P. Lindekugel MBA
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  62. SCHNAPP!
    Michael, thank you for the breakdown. Smart. Comprehensive. Useful. It integrates data and actually applies it to a local context. And please, no more blathering about propaganda from the “Real Estate Industrial Complex” without answering the underlying assumptions that MIchael describes. It only stalls community understanding of “the bubble” and our “impending doom.”

    And Ardell,
    >I don’t think it is fair to ask Synthetik for data

    Are you interested in providing your clients with USEFUL information, or is it more about letting everyone air their opinions, regardless of viability? Synthetik STARTED this conversation. Asking him/her to back up the claim is not “unfair.” It’s dialog. It’s the way that people with self-condfidence and curiosity separate blather from actual kernels of wisdom. Everyone’s “opinion” about the state of the housing market is not relevant. As an agent I would think that you would want to help your clients discriminate between good and bad information. I am sympathetik that Synthetik had a bad 2003, but that doesn’t make the diatribes insightful.

    Btw, everyone thinking about the effectiveness of blogging as a marketing tool should take a page from Michael P. Lindekugel and provide ACTUAL information to attract clients. It’s a breath of fresh air.

  63. Michael,

    Have you had a chance to read Moody’s Economic Forcase on home prices? This report does not mention Seattle, but does offer a different viewpoint from your contention that home prices are unlikely to fall at the national level.

    A direct quote from the report: “odds are high that national home prices will decline in 2007; the first decline in nominal national house prices since the Great Depression.”

    Also, how does a decrease in the home affordability index for Seattle jive with your assertion that more Seattle residents will have an ability to use more of their paycheck for housing? Wouldn’t a decrease in the home affordability index indicate that Seattle wage-earners are unable to keep up with current price appreciation and are thus forced to remain on the sidelines?

    A number of your assumptions seem to rely upon historical precendence. Remember the investing mantra: Past performance is not indicative of future results. Has such tremendous price appreciation ever occured over so short a time in Seattle? If yes, what happened afterward? If no, then this caveat needs to be mentioned and taken into account.

    You mention inflation and fail to point to several studies that have shown a decrease in real wages over the last several years (at least on the national level)!

  64. Michael.. you call yourself a financial analyst?

    >Inflation is a general rise in the price of all goods and services.


    Inflation is best described as a net expansion of money supply and credit.

    >The Depression was caused in part by interest only mortgages

    No it was caused by a sharp contraction of credit, not by interest only mortgages…. starting to lose credibility.

    >Real estate is a local economy driven by local economic fundamentals. Jobs are a big driver. We have good job growth. The Puget Sound is one of the few MSAs with current high tech hiring.

    Yes this is true but so what. The price-to-income ratio is 3.6 standard deviations above the mean in the Puget Sound area. How sustainable is that Michael?

  65. For everyone else… A summary of Moody’s Economic forecast that flopfolder describes can be found on CNN.

    Flopfolder is right that you won’t find Seattle on their top 100 markets where they expect to see a price decline. The article seems to support Michael’s assertion that bubbles have traditionally been local and will likely to be local in the future (i.e. only 20 markets in the US are likely to see a “crash”).

    BTW, no community in the state of Washington even makes the list.

  66. —We’ll all be screwed except Eleua, who has a magic set of investments that will weather that storm—

    I think if you look at post #55, paragraph 3, you will see that I don’t have any magic set of investments, and that I am just as unsure about the financial future as anyone. I do believe that the US$ is toast, so I have planned accordingly. If you like the buck, then great.

    —Oh, and since she’s “not PC

  67. Shocking! Careful out there! You might read something SHOCKING!

    That someone might write a column on how liberal race-baiting is actually harmful to race relations is SHOCKING!

    It is SHOCKING that someone might not believe that someone else’s social pathology is not their fault!

    It is SHOCKING that someone rejects the entire Leftist race hustling industry.

    It is SHOCKING to realize that innate differences might account for the bulk of the social pathology, when compared to imposed environmental concerns.

    Careful out there. Someone might actually slip something SHOCKING into the Seattle zeitgeist.

  68. Actually, the only reason I linked there because it seemed relevant to Eleua’s opposition to Joe’s argument regarding diversity. I have no problem with him expressing his opinion. It was simply another data point where he was coming from.

    I do agree that the pressure to be PC has gone overboard in many ways. In Eleua’s other blog, about Bainbridge Island, I think you see a discussion that is much less shocking at first glance, but dives into many of the same issues the Eleua has with a liberal city such as Seattle.

    Also, Eleua…there’s nothing wrong with being shocked. Very different perspectives and viewpoints are shocking to those not used to hearing them. I think judgement is best left to be made on how people respond and react after the shock wears off.

  69. Ardell,
    Is someone impersonating you or do you actually think Eleua is cool? If you wrote that please explain…you’re encouraging the troll.

  70. Oops, so am I.
    In the name of reducing diversity I propose that Eleua take her shocking persona(s) and shockingly bad arguments back to her site.

  71. I have not read the Moody’s Economic Forecast. While in college I thought I wanted to be an economist. Data and the statistical analysis can lead to different people to different conclusions. One of the top NAR economists, Lawrence Yun, predicted Seattle would experience 40% capital growth last year. Personally, I thought he was cracking smoke. His boss, David Lereah, the chief economist for NAR forecasted much closer to actual events. Generally, most of the economic reports I read come to the same conclusion and in hindsight they were close about the capital growth in the region. For me, I read the reports of many economists. I throw out the high and the low and look for consensus. Every investment decision is based on calculating risk and reward and mitigating the risk. Calculating the expected returns based on the probability of different scenarios. If many credible reports said a national decrease in the median home price was expected, then I would be concerned.

    Good question about the affordability index. During this last real estate boom in Seattle we started with one of the worst economies in the nation yet our real estate market experienced good growth. Those folks that had jobs had good paying jobs. A lot of the real estate activity was move up, expansion, and newbie investment from the employed. Also, quite a bit of our economy was fueled by home equity debt to purchase consumer goods which fueled other jobs. The Puget Sound used a HELOC stay afloat. Interestingly, the affordability index did fall because the median wage decreased while the median home price increased from demand. I think the average wage increased for the employed and those folks continued buy for move up, expansion, and newbie investment. At this point our economy is fueled more on business and less consumer purchases from home equity debt.

    I agree past performance is not indication of the future. Analysis is sometimes fuzzy and not exact. Compared to capital market investments, real estate is very fuzzy. I think the Puget Sound has economic components that indicate a decrease is unlikely and stagnation or a plateau is the most likely scenario.

    I did not mention real wages as real wages and the ability to purchase housing are built into the published affordability indices.

    Yes, my title is financial analyst and not economist. That definition of inflation came from Youguo Liang, PhD, CFA and Richard McLemore, CFA who have far more education and more credentials than I. According the Bureau of Labor and Stats the CPI is changes in the prices paid by urban consumers for a representative basket of goods and services. The PPI is average change over time in the selling prices received by domestic producers for their output. The Office of Financial Mgmt for WA State says “Inflation has been defined as a process of continuously rising prices, or equivalently, of a continuously falling value of money. In other words, inflation causes the buying power of a dollar to decrease over time. A 15 cent hamburger in 1966 seems to us a lot cheaper than the 79-cent hamburger of today. But when the price of that 1966 burger is adjusted for inflation, the price is comparable.” I imagine our State Economist agrees with that definition.

    During the sharp contraction of credit, those folks with interest only mortgages did not have any equity cushion to weather the capital asset decline or devaluation of their homes. They were upside down quickly.

    The price to income ratio could very well be 3.6 standard deviations above the mean. I don’t thin the high capital asset growth we experienced is sustainable at that level. A decrease in the capital asset growth rate is not necessarily a bubble. The Puget Sound is likely to see a softening the real estate market which might make the median price more affordable. What is happening is San Diego and Boston is likely close to a bubble….high capital asset growth and no jobs.

    All the data and number crunching could be wrong and Seattle could melt down tomorrow.

    Michael P. Lindekugel MBA
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  72. Joe,

    I’m from the East Coast. I don’t shock very easily. Plus any man who is cleaning up and putting the kiddies to bed, can’t be all that bad, can he?

  73. Nah, he aint all that bad, particularly if we are on the receiving end of an unfortunate event, it’ll be comforting to know who is flying cover over our heads in an Boeing F/A-18E/F Super Hornet. But until then, getting me from SEA to BDL safely will suffice.

  74. Ardell, please explain why you deleted my comments on your recent puff piece “Do the Banks Own Seattle”?

    Can’t handle a differing opinion or possibly being called out of your Shilldom?

    quote “”I was perusing The Tim’s blog while writing something on my blog earlier today, and ran into the comments regarding King County median income and median home prices, again. I never seem to draw the same conclusions as other people.”

    You fail to link “The Tim’s” blog (Seattle Bubble Blog and creatively insert your own real estate non-bubble advertisement link to your own blog.

    For Shame! I’m assuming this post will be deleted too.

  75. Eleua may have some alternative opinions, but I think it’s great that a Republican and a whacko left winger like me can agree on one thing: Seattle and the rest of the bubble markets are primed for a big haircut.

    And you can kiss our economy goodbye as well. (learn about macro economics from a source other than CNBC)

  76. Synthetik,

    I take personal offence to the attitude you’ve displayed on this blog. I take a lot of pride in the fact that I’ve been able to bring together a diverse group of contributors to RCG, and despite the fact that people have asked you multiple times to bring something of value to the conversation, you have only brought your trolling attitude. As far as I can tell, no one from RCG has gone to your home (the Seattle Bubble blog) and called you all nuts, but for some reason you feel comfortable coming to our home and doing that to us. I find it rude, offensive and completely unhelpful.

    Ardell has no need to explain her actions to you. You have been asked multiple times to return with some type of value instead of comments like “you can kiss our economy goodbye as well.”

    I’ll repeat what has been said many times to you already… Please return when you have something of value to add to the conversation. Until then, please don’t be surprised if your comments are moderated.

  77. I would like to point out that synthetik admit that he “failed” to predict the market in 2003:

    “Homeowner from 1991-2003. I’ve been self employed most my life in technology and sales related fields. I began studying real estate and economics heavily in 2003. I’m anonymous for obvious reasons – I own a business and discussing politics, religion and a pending economic collapse is not good business.”

    It isn’t hard to be a naysayer, but perhaps twice is the charm.

  78. Exactly how is getting out of the market in 2003 a bad choice? it’s clear that anyone who purchased from 2003-today is in serious peril.

    By the way, why do you insist on deleting commenters posts that disagree with your view.

  79. dalasone,

    I’m simply tired of his attitude. At one point, I did try to have a dialog with the people at the Seattle Bubble blog, but to give an example, I once tried to open up a dialog with the site by asking what I thought were some rational questions on their site. Tim, who later became a contributor on RCG, gave a reasoned response, but others decided to call me an “irrational brainiac” and give each other virtual high-fives for such a good put down. It is that “better than thou” attitude that has never invaded RCG conversations and I don’t want it to start now.

    To date, he added nothing to the conversation other than to demonstrate he has a really hard time articulating a thought in writing and that he had no ability to get the “joke” of this post. Every one of his comments shows a real hatred for real estate professionals and he has a wonderful forum (seattle bubble blog) where I encourage him to articulate those views.

  80. seattlelouise,

    I’m not deleting his comments because I disagree with his point of view… I’m deleting his comments because he is so far off topic with one and only one agenda: to share his hatred of real estate professionals. He has a wonderful platform for articulating his views on real estate professionals and it is not RCG.

  81. Maybe if you weren’t link baiting and misleading people, he wouldnt’ come here to call you out.

  82. OK Folks, we’re done. Unless you have something to say that hasn’t been said, which includes almost all points of view on the real estate market, views on the writers of Rain City Guide or the writers and commenters at Seattle Bubble, and views on the intelligence or lack thereof of nearly everyone in the United States, lets move on. Do someting that makes you happy (and please, no comments about duking it out on a blog making you happy!).

  83. Synthetik,

    I would not delete your comments here, because it is Galen’s post and his prerogative or Dustin’s. As to my post and my blog, I have the prerogative.

    Calling me a liar just made no sense and was simply mean spirited. So rather than sort through the mean spirited comments trying to find your nuggets, here or on my blog, at midnight I said tomorrow’s another day and cancelled you out. You lose credibility when calling me a liar. Just because you differ with my conclusion, does not make my opinion a lie. Russ differs with my opinion all of the time, and I his. But we don’t resort to calling each other liars to support our position.

    A discussion is a series of opinions and different perspectives and differing opinions helps me see things more clearly. In fact I may change my mind based on your opinion. Opinions are never “lies”. My opinions may be ill founded at times, for sure. My opinions are subject to discussion and change, for sure. So convince me without cursing and coming down hard on anyone who has a different opinion than you. I will treat you with the respect you deserve. I will not say “I never want to hear from Synthetik”. But I will delete you if you curse, call people liars for having a different opinion than you, or pretty much anytime I feel your presence is harmful for any reason. That is on MY posts and MY blog, not other RCG writers.

    So, first of all, get this fact straight. Your perception is that there is an RCG collective that “presents itself” in some uniform position. That is an erroneous assumption. I do not consult with other writers of this blog when I write, when I coment or when I delete. So stop drawing imaginary conclusions regarding Galen and I being in cahoots.

    As to your link questions, I honestly just don’t get it. I link to other articles all the time, so do lots of people. In fact I do it less frequently than most. Why would I write the exact same article here as I did on my blog? In fact I’m told I cannot do that as it is duplicate content. Just trying to follow the rules best I can. But, I will not follow the rule that says I can delete a spam comment and not one that spews forth mean spirited garbage.

    Respect us; we respect you. Curse and call names, flame = delete. Your choice, my prerogative.

  84. This is new
    So, first of all, get this fact straight. Your perception is that there is an RCG collective that “presents itself

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