Cocktail Party Primer

I’d like to open this thread up to a conversation on the health of the Seattle market…

but there is a catch. I will not allow it to dissolve into a conversation about racism, liberals, RCG, or faith. If you’d like to have a reasonable intellectual conversation, you are more than welcome to participate. If you attack me, RCG, or any contributor, then I’ll happily delete your comment.

By the way, please consider this post the “anti-linkbating” post. Not only will I quickly delete any off topic comments, but more importantly, I will mark those comments as “spam”. That will allow me to ban your email, name, IP, etc. from the site after only a few off-topic comments.

Two days ago, Michael Lindekugel of Team Reba made a very interesting comment. No one ever challenged him on the merits of his argument, so I think it makes an appropriate starting point into a discussion on the health of the Seattle market:

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

76 thoughts on “Cocktail Party Primer

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

    Just as a question, what about Microsoft and Boeing? Boeing is going through a great time right now with the Airbus issues, but that may not last forever. What happens if there is a big problem with the regions largest employers? Also, I think we have had some good job growth here, although we have just caught back up to pre-2001 levels. One troubling thing is that other regions in the country are experiencing price declines without job loss as well.

    Here is a quote from a recent article in the Seattle PI “Today’s bust is all about credit” (sept 17 2006, mark trahant)

    “This region ought to be one where we are comfortable with the boom-and-bust cycle. It is inevitable — and it is reflected in our stories. Yet when we are in the cycle (or nearing the end), we think this time it’s different.”

    While we may not have an oil industry, I had always thought of this region as a “boom and bust” area… Doesn’t that ring true?

  2. My cursory understanding of bubbles is this: The moment that everyone believes an investment is a guaranteed money maker and can not be a liability is the moment one should figure out an exit strategy. I can’t quite tell if we’re there on housing.

    One point:
    “Since the depression, this country has not seen a decrease in the national median home price.”
    This country also has not seen property / rent ratios this high since the Great Depression. And, while the US market should not be directly compared with Japan’s, I doubt the Japanese market saw a decrease in the national median home price since world war II, that is until they had huge runup in property values and a nasty fall in the late 80s.

  3. mojonnixon,

    I’m with you that the Seattle area has traditionally been a boom and bust kind of area.

    In the past, the Seattle area economy was obviously dominated by Boeing, but that the tech industry is at least as dominant today if not more so.

    Do you think we’ll see a huge drop-off at Microsoft in the near future? Microsoft management is clearly not acting like they expect this as they are still expanding and have plans for hiring thousands of people.

    You’re also right that Boeing is hot right now and I recently read an article that said Airbus would likely take years to get back on track. Do you see either of the tech industry or the airline industry having major problems in the near future?

    I’m of the opinion that if the tech industry (more than the airline industry) took a major hit, then it would definitely be bad for the local economy (housing included!).

  4. Well, most likely those industries will be fine… I have worried about a terrorist attack that would involve the use of an airplane, but ultimately the war on “terrorism” has been good for Boeing. (Broken Window Fallacy works for them in this instance)

    I think the beating the tech industry took in 2000-2003 should keep it in check for the foreseable future, but one never knows.

    Job loss has always been a key factor in any housing decline in the past. This time we are experiencing a decline of housing prices without job loss or recession. Very strange times indeed.

  5. Galen,

    While I agree that bubbles have a lot to do with public perception, your definition leaves us nothing to go on but faith. Plus, when you say “everyone”, I doubt you really mean that. I’m assuming you mean that a high percent of the home buying public believes their investment is guaranteed to make money, which leads to the obvious question, “how high of a percent?” Your definition implies that as more people turn into believers of the bubble, the lower the chance that we are really in a bubble! My logical mind just can’t go there.

    Also, could you clarify what you mean by “property / rent ratios” and what this has to do with the local market. When you say “property”, do you mean the actual value of the property or the cost of owning the property on a monthly basis. Comparing the total property value to rent feels like apples and oranges to me, but I could see how the ratio of the average cost of ownership (most typically mortgage payments) to the average cost of renting could be an useful indicator. Do you have any data to back up your assertion about this ratio? (I don’t doubt that the trend exists, but I’d be curious how “out of whack” the local market has become.)

    Then again, I’m not sure that the ratio you mentioned (cost of ownership to the cost of rent) would necessarily be correlated with a bubble. I could think of plenty of reasons (like a larger investment class created by the Microsoft phenomena mojonnixon mentioned) that more people would want to own property for both tax and diversification reasons.

  6. Of course the bubble burst; it isn’t rocket sceince, or data, or financial analysis. It’s the experience of those people who have been around.
    Some clients of mine have been selling properties over the past few years because those properties are worth more than they ever expected. My number for the last house I sold was $440,000. It sold for $450,000 something. My original number was $320,000.
    The house before that the number was $175,000, as you can imagine I hit that number quick.
    Real Estate is a commoditiy. It’s dollars in compared to dollars out. What’s happening right now is that interest rates went up. It’s easier to own paper (mortgages) than property. The worst that can happen is that you can end up with property.
    The real problem with houses today is that the commodity market is sliding. Gold or oil reserves may get to be bargains once again. The stock market is looking mighty attractive with elections coming up so houses are being dumped to to free up cash.
    If you lookat housing as mom. dad, and the kids, buying into the American Dream, take it a step further. The American Dream is to be rich. When you’re rich your money makes money. Your money goes where you can get the highest return today. The highest return today is not in the housing market.
    It’s interesting that commercial office space is going like hot cakes and that Bellevue has another record commercial deal. In my opinion the Seattle Tacoma economy will be based more and more on trade with China than anything else. International trade doesn’t take labor.
    To be more clear, we don’t own houses, the banks own houses. With foreclosure rates the highest they have been in many years the banks are dumping houses. If the bank has collected interest for three years they made thier numbers. The problem for us is that when we go to sell we are competing with pricing based on values set two or three years ago. We don’t like the fact that our house today is worth what it was three years ago. Today we want our value at the appreciated rate of, conservatively, ten per cent appreciation per year for those three years. As a matter of fact we need that appreciation to get ourt of our purchase with a profit. It takes ten per cent to sell a property and we have paid those interest payments for three years.
    The bank doesn’t need to care. They collected those interest payments and didn’t have to fix the plumbing or mow the grass. When the bank forecloses in the nicest way they possibly can, so you don’t trash the place before you leave, they get profit based on return of dollars allocated. The banks are dumping, investors are dumping, and it takes a year to clear out building permits for those brand new housing units that are so popular today.
    The builder is another one who has been living a dream. The builder bought his dirt with the idea he or she would get a return on the investment. They calculate the return based on a sales price determined by the cost of the dirt plus construction costs. This past year I’ve noticed a huge increase in pricing for new construction that I have not believed was warranted. Today it’s my opinion that builders can sell the crap they have at a huge discount and come out dollars ahead.
    We don’t see builders snapping up anything that’s cheap to build on later so we see more really cheap houses on the market. Comparatively speaking why would I pay full retail when I can buy a house for the price of the dirt?
    Again, mom, dad, and the kids don’t have the time or money to fix up a house. Young people starting out don’t have the time or money, so they all buy the new crap with the idea it will appreciate at the same rate as a real house. Once a new property is lived in it loses some of the allure of being new construction. That is a discussion for another time.
    The bottom line is that investor who may have bought into the main stream housing market these past few years now see real bargains that they are paying less for. We can all pay less by making low offers on properties that need to be sold for what ever reason.

  7. I would urge everyone in Seattle who thinks “this time is different” or “it can’t happen here” to wake up and realize that no one is immune from a market downturn.
    Last year, many in Boise were echoing those same comments and now we are experiencing a more severe downturn than many of the so-called “hot coastal markets”.
    Such phenomenons have more to do with buyer psychology than reality in many instances.
    Nationally, we are not in a recession and there is nothing wrong with 6.25% mortgage rates, yet real estate markets are collapsing across the country because buyers are afraid to buy until they see a bottom.
    September year-over-year closings for single-family homes in Ada County (Boise) are off 42% from a year ago.
    Hubble Homes, one of our larger builders, will now pay me (I’m a real estate broker) a $10,000 bonus commission in addition to a 3% selling commission to unload their excess inventory.
    Land values have dropped from $140k/acre a year ago to $80k/acre now, yet new subdivisions are still coming online.
    Building permits have plummeted as builders frantically try to unload their spec home inventory.
    The only homes that are selling are those where the sellers are realistic and willing to face reality with attractive pricing.
    It can happen anywhere, guys ~ even in Seattle.

  8. Wow, the fact that both of you (David and Phil) are real estate agents is definitely telling, but you’ve added almost nothing to the discussion and your credibility to with the bubble advocates (due to your current profession) is non existent. I’m not here to say that the Seattle area is not in a bubble or that a bubble couldn’t pop in Seattle, but rather I’m looking for evidence of the bubble which neither of you provide.

    What’s also telling is that neither of you is able to make a coherent argument why it will happen in Seattle. Michael does a wonderful job defining a housing bubble and then making an argument why it won’t happen in Seattle.

    The best David can do is play to faith by saying “it isn’t rocket science, or data, or financial analysis.” That doesn’t cut it for me because I’m pretty sure that most of the advocates of the bubble would tell us that it IS based on science, it IS based on data and it IS based on financial analysis.

    Mojonixon pointed out an obvious hole in Michael’s argument that Seattle is probably much closer to a boom and bust area in terms of job growth. However, I think that we both came to the conclusion that the local job market is likely to remain healthy in the next few years, so this is not an indicator that a crashing bubble is upon us.

    I really do urge people to not get emotional and cite anecdotal evidence (i.e. the experience of home builders in Idaho), but instead provide an argument why Micheal is wrong.

    I trust that there are some intelligent people out there who have thought long and hard about the Seattle market and can provide a coherent response to Michael based on local financial analysis.

  9. “Since the depression this country has not seen…” I find it very hard to buy into Michael’s comments, based on what I personally have seen, in my own adult life.

    In the mid seventies I saw REIT (Real Estate Investment Trust) stocks that had gone down the toilet to $.50 a share. Luckily the portfolios that I inherited at the $.50 level and managed, that contained REIT stocks, were well divesified, ans so were not totally obliterated by the REIT stock’s devastating non-performance. The only ones grossly impacted were those who put too many of their eggs in one basket, much like the divorcee who bought ALL Enron Stock with her modest investment portfolio. Overweighting into real estate investments, vs. simply having them as a PART of your portfolio, is the ultimate danger zone.

    Fifteen years later, when I switched from my Trust and Investment career to becoming a real estate agent, I entered into a market that was falling as fast as I could blink. The only people selling their homes were those who absolutely had to sell.

    People who were transferred had corporate parachutes to soften their landing…we will likely see that become a revived corporate benefit/expense in the future. Who will accept a transfer without a buyout, if companies do not provide this benefit once again? The corporations who want their executives to move from one city to another, will suck up the loss on the sale of the house as part of the transfer package. The homeowner will not be the one taking the loss.

    Even though I have seen drastic declines in housing prices, I have not seen people losing money…almost none. Why? Because people did not HAVE TO sell their houses at the low point. They could stay and ride it out. If your home is worth less in two years, then live in it a little longer. If your job is still secure, who can force you to sell it?

    The only people I saw affected were the ones who were living off their equity. Those who were borrowing out their equity to put food on the table. Those who were borrowing out their equity to buy fancy cars. Those who could’t seem to let their equity BE equity and just had to spend it. It was the their own irresponsible borrowing against their equity, that caused their demise, and not the real estate market downturn.

    “A fool and his money are soon parted” and anyone who believes the liar who says “Real Estate Can ONLY GO UP!”…is a fool.

  10. Dustin,

    You beg for a financial analysis, but truth is, housing prices can defy financial analysis. If everyone is quite happy with where they live right now, and no one is compelled to “move up” or out, the market can become stagnant, without any basis in financial realities.

    If tomorrow, everyone decided not to buy a property, and chose to continue to rent. The fact that they COULD buy because they have great jobs, does not change the fact that the housing market will be impacted by their choice NOT to buy. No financial basis. But a decline all the same.

    If the only people who put their homes on market are those who MUST sell, causing downward pressure on housing prices, the market will go down. If no one who is selling can electively choose to hold out for a better price, than the market will tumble.

    You can have a great economy, you can have all of the financial forecasting saying it CAN go up and up. But if people DON’T react in the way financial forecastings suggest they COULD react…the market will defy the financial analysts’ forecastings.

  11. I think that the point that the bubbleheads are trying to make that this is a national credit bubble, not a traditional housing bubble.

    Traditional housing bubbles are very location-specific – Seattle loses a ton of jobs in the late ’60’s, and housing prices collapse. But that just affects Seattle.

    The problem is, under the old paradigm with 30-year fixed interest mortages, 20% downpayments, and people limited to loans of 3-4 times their income, you did need to have a lot of people losing their jobs in a specific community for housing values to drop.

    That’s not true now – with stated income interest-only and negative amortization loans, a lot of people won’t be able to make the payments once they have to start repaying principal – they were counting on refinancing their house using appreciation. If the house doesn’t appreciate, they can’t make the higher payments.

    You also have a lot of investors (who are highly leveraged) who have bought residences for speculative purposes – half of the purchasers of the massive new condo projects being built near OHSU in Portland (where I live) are from out of state – I don’t think they are all planning on moving to Portland.

    The other side is a major reduction in the pool of buyers – there is obviously going to be a major tightening of credit standards, so a lot of people who could have gotten an 500K IO loan in 2005 won’t be able to get one in 2007, even if their circumstances haven’t changed. More fundamentally, while it may have seemed sensible to a lot of people to devote an enormous chunk of your income to a stated income IO loan when house prices were appreciating rapidly, that no longer seems like a good idea when houses stop appreciating. People are going to be a lot less willing to “stretch” to buy a nonappreciating asset.

    Housing prices (like other market prices) are set at the margin – it doesn’t matter if 75% of the houses in Seattle are owned free and clear, if 25% of the houses are teetering on brink of foreclosure – it is going to be the 25% of houses being sold that set the market price.

    So, bottom line – local conditions in Seattle are considerably less important than the nationwide credit bubble. One of the things you learn from reading the bubble blogs is that every place is “special” and has some reason why the credit bubble won’t affect them – Seattle and Portland may be a bit late to the party, but I don’t think that they are going to be immune from what is happening elsewhere.

  12. Background: My wife and I own and operate a small escrow firm. As I’ve mentioned before, I have nothing to gain (and much to lose as many private e-mails to me have strongly suggested, some threatening to boycott our business)by discussing/commenting on housing struggles as a contrarion. My family income, as all allied real estate professionals depends upon a healthy market. As a contrarion, if my opinions turn out wrong, then, to an extent, it means the market continues on a healthy path and that is good—for everyone. To me a real estate bubble is created by unsustainable upward spiraling of home prices caused primarily by emotional psychology and a vehicle in which to bring it to fruition: easy, easy money (100% deals, Stated Income deals, etc…)with little to no bearing on credit worthiness. We have closed purchase deals where the borrowers have been in foreclosure just 12 mos. prior, etc…

    I’ll comment more on the market in the future, specifically the building & land sector, but here’s some anecdotal evidence of housing market fall out and since many industry insiders argue real estate is local, here is what is going on LOCALLY:

    1) Washington Mutual just recently announced another round (140 positions) of layoffs. It affects their Lynnwood Home Loan Center, mostly for processing support staff. This is indicative of local drop in mortgage demand, not indicative of a robust market.

    2) Washington State local cabinet maker serving local builders and remodeling contractors struggles–

    “Huntwood Industries laid off at least 120 workers this week, cutting costs in the wake of a slowdown in the U.S. wood products industry.

    Officials from the privately held company contacted Washington state officials this week, asking for assistance in giving laid-off workers information for finding new jobs or filing unemployment claims.

    “They told us they were letting the people go immediately and could we bring some packets of material they could hand out, for helping apply for unemployment insurance,

  13. Dustin, I remembered a story in The Economist from a year or so ago that discussed property value (oops, missed a word first time around) / rent ratios. I guess by property value I mean total cost of ownership, so yes, monthly payments plus repairs and taxes is a good measure of this. The Economist has actually been arguing that there is a world wide real estate bubble that has been growing for a few years. It began to “pop” in the most inflated countries (Australia and Ireland as I recall?) well before it started ‘popping’ here.

    These ratios are very important because they reflect the financial value of owning versus renting. If the ratio is highly skewed toward rents being expensive and owning being cheap, no one doubts that buying property is deal – every month you own it you make money – so people tend to buy houses for investment or to avoid high rent and prices go up. The opposite is also true. If renting is cheap and owning is expensive, there is little incentive to buy until rents rise or property prices fall. There could be incentive if you were highly certain the price of housing was going up, but the consesus seems to be growing that the price of housing will not continue to rise at its old rate. As I recall, rents would have to rise at a pretty good clip for a few years to catch up (how I wish I had the article to quote from right here!).

    I would like to add one more point for why flat to small declines in house values could snowball into larger declines. Historically real estate has been a great investment not because of year over year appreciation of house values, but because of the the leverage that consumers have. If you are only 20% into a $500,000 house ($100,000) and it goes up in value by 10% ($50,000), you have essentially reaped a 50% gain on your investment (in a simplified world with no transaction fees, etc). However, the same can be true in reverse. If the price of your house drops by 10%, you have a 50% loss! If this were to happen, and I’m not saying it will, we could hit a nasty downward spiral where those who must sell for a loss then have a downpayment for their next home that’s been reduced by 50% OR, worse, they actually must pay money to sell because they took out a 0 down loan. When some people sell (sometimes you have to sell even if you take a loss) but then can’t buy until prices drop further, others will have to further reduce the asking prices of their homes. All this stops when values drop to meet rents or rents rise to meet values (or more likely both).

    I admit the mental calculus involved in figuring out if most people believe real estate is a sure-fire investment is nearly impossible. It’s more of a rule of thumb or a “gut check” for figuring out what’s going on. My uncle likes to say that when the guy shining his shoes was giving hiim stock tips in the late 90s, he knew the market was in trouble. There is an entire philosophy of investment based on contrarian thinking –

  14. OK, I did a little sleuthing. Here’s the (even more dire than I remember) Economist in June 2005:

    This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history (see article). The bigger the boom, the bigger the eventual bust.

    Throughout history, financial bubbles—whether in houses, equities or tulip bulbs—have continued to inflate for longer than rational folk believed possible. In many countries around the globe, house prices are already at record levels in relation to rents and incomes. But, as demonstrated by dotcom shares at the end of the 1990s, some prices could yet rise even higher. It is impossible to predict when prices will turn. Yet turn they will. Prices are already sliding in Australia and Britain. America’s housing market may be a year or so behind.

    Many people protest that house prices are less vulnerable to a meltdown. Houses, they argue, are not paper wealth like shares; you can live in them. Houses cannot be sold as quickly as shares, making a price crash less likely. It is true that house prices do not plummet like a brick. They tend to drift downwards, more like a brick with a parachute attached. But when they land, it still hurts. And there is a troubling similarity between the house-price boom and the dotcom bubble: investors have been buying houses even though rents will not cover their interest payments, purely in the expectation of large capital gains—just as investors bought shares in profitless firms in the late 1990s, simply because prices were rising.


  15. Banks are buying property with zero down loans. The worst that can happen is that those loans default in less than three years. The bank makes interest, plus appreciation. Hard, tangible assests are a safer investment than Biotech or Intelectual Properties. I don’t need my computer, but I do need shelter from the rain or protection from the elements.
    Let’s say that credit or the value of the Euro all goes to heck in a hand basket. I’d rather have my money in housing than gold, diamonds, or oil futures. The bubble that any one is talking about is the very reason housing has continued to be a good investment.

  16. David (#16) –

    You’re right, of course – housing is less variable in price than stocks and bonds, since there is an underlying rental value to the house – which you can enjoy either by occupying the house or renting it out. So, housing is not going to go the way of

    The problem is that people buy housing on a far more leveraged basis than stocks (where you can only borrow 50% of the value of the stock). It doesn’t help you if housing prices fall “only” 20% if you had only 10% equity in the house to begin with and you can’t keep up with the payments.

    When housing prices double or triple, while rents stay constant, it is because people are paying for the expectation of substantial future appreciation, not because the rental value of the house has risen. If house prices flatten, and people lose the expectation that houses are going to appreciate in the near future, then less expectation of substantial future appreciation is baked into house prices. House prices fall, which of course then only exacerbates the expectations problem.

    This is why markets can change so quickly (as we are currently seeing in the Seattle housing market) – its not that the underlying rental value of houses have changed, but people’s expectations of future appreciation.

    BTW, gold isn’t a “hard, tangible asset”?

  17. Galen – The economist is definately a worthy and credible source of news; very little in the way of advertisements.

    If you are looking for more information about the worldwide credit bubble and contrarians, check out this PDF. The first few pages of this semi-annual report in March 31 2006 spell it out in a straightforward manner.

    >anecdotal bubble evidence

    I think the NorthWest MLS numbers that came out a few days ago are very telling.

    We’ve had a 29% increase in inventory and sales were down around 20% from last year. You can see that the median home price decreased as well – but still up from this time last year.

    The trend of the last 5 months seems to point in a downward direction — but anything is certainly possible.

    I bought in 02′ so I’m pretty confident I won’t go upside down on my home. I’ve got 30% equity with a conventional loan so I’m not worried. I am concerned about many of my friends who purchased after that — most of them have subprime and ARMs — they would most likely be forced into selling (or attempting to sell) as their rates reset and their homes lose equity.

    I hope that doesn’t happen!

  18. Definitely some interesting ideas being passed around today… My take is that there seems to be some consensus that the real danger to the Seattle market is not local conditions, but rather, national conditions due to the prevalence of exotic loans.

    This is obviously a legitimate argument, so I thought I’d present my thoughts.

    First off, Ardell mentioned a few days ago some interesting local statistics. Her numbers are pretty convincing that the people who are leveraging themselves are the people buying medium to low end homes.

    The high-end homes in Seattle “were financed at only 36% of value

  19. As an aside the foreclosure data is at:
    I’m very sorry that I’m as dumb as a post. You were asking for data related to the assertions of Micheal who has done a great job of compiling quotes to support his opinions. They are not, in my opinion, making a compelling argument, but I’m getting the jist of what you are expecting here.
    You don’t want anecdotal information, but here’s a fact. I have the cheapest livable house listed for sale in North Seattle at $259950. I, along with several other agents, have advertised this home over the 109 days the property has been on the market. The starting price was $299950 with steady price decreases.
    I have personally submitted this property to every internet marketing scheme that I have been able to find. We have painted, cleaned, and repaired the house for a total of seventeen thousand dollars.
    I read all of the data. Micheal is right that the data says everything should be just fine, but it’s not. That’s the problem with data.
    BTW I buy gold, not certificates.

  20. [Does someone have long-term foreclosure data that can be sliced and diced by homeowner characteristics, home value and loan type? ]

    Dustin, ask your favorite title rep to run this for you using the full version of Metroscan (not sure if you can go this deep using the Internet version).

    Search by these parameters:

    Zip Code (city of Seattle. They will all be grouped together.)
    Date Range (as you specify)
    Assessed value (give them a range)
    and then add a DEED TYPE search: Trustees Deed.

    Give that a shot.

    If the number of homes is manageable, then a Metroscan Sales History Report will show you the previous type of mortgage on the home.

  21. Tim,

    Maybe Ardell can shed some more light on her sample sizes, but I do know that she is only taking a random sampling for the different areas. I probably should not have quoted those numbers as “facts” as much as ballpark figures because I think that is all they are intended to be.

    Did you look over Ardell’s post? Do the numbers seem wrong to you?

  22. Dustin, I don’t think you would see forclosure rates rocketing until well after you were convinced that the bubble had popped or at least until those who bought with fancy loans get into them without the value of their property rising.

    Dustin, you also know people who are your age. There have been tons of first time home buyers over the previous few years and those who just bought don’t have that savings. There are also many people who just plain aren’t great with money and spend that money they should be saving.

    I’m sticking with the rent to value ratio as a clear indicator of the future of property values. Property prices have to flatten or drop until rents catch up.

  23. David,

    Thanks for the link to the RealtyTrac data. It is definitely interesting stuff… From a quick glance, it looks like the usual suspects (places like Las Vegas, Dallas, Denver, and Jacksonville) make the top 10. By ranking #58 with 419 foreclosures / household, I think it is safe to say that the Seattle area MSA did not experience an alarmingly high level of foreclosures in Q1 of ‘06.

    In terms of the house you are having trouble selling, I just don’t see how it is relevant. I imagine it would be no trouble at all to find a home in the Seattle area that was originally listed at $300K, but dropped to $250K over a few months in the year 2000, 2001, 2002, 2003, 2004 and 2005. As a matter of fact, I almost bought a house in Ballard in 2003 that was originally listed at $330K, but after a few months of being on the market, the price had dropped to $290K.

    The main reason I can’t follow the logic of most of the posts on the bubble blogs is that they spend a lot of time citing individual homes as proof of the bubble. The nauseating part is that I’ve seen people cite the fact that the value of a local home has increased tremendously as a sign of the bubble (as “just_checking

  24. Jillayne,

    Thanks for the good info on Metroscan… I don’t know a good title person, (If I did they’d probably be featured as a contributor on this site! LOL!) but I’ll see if Anna knows anyone that can help!

  25. Galen,

    I must be missing something… I thought that the bubble was going to pop because of high foreclosure rates due to exotic loans (i.e. bad national trend). Now you’re telling me that we will only notice the foreclosure rates after the bubble has popped. If not for more forced sellers (i.e. foreclosures), what is going to cause the local Seattle market to pop?

    I picked the “canary in the coalmine” example on purpose. I’m willing to entertain a snowball effect, but we’ve got to start somewhere, so I attempted to find the most vulnerable group to foreclosures. Is there a different group of people who are more vulnerable and therefore more likely to start the snowball effect?

    I’m also willing to entertain your idea of an imbalanced ratio of cost of ownership to cost of rent, but there are still so many outstanding questions. How imbalanced are we in Seattle (I have no numbers at all)? What has the trend been? What is the proper balance? Should the cost of ownership be identical to the cost of rent or is there some intrinsic value that enough people place on owning that equilibrium in the marketplace skews toward ownership? If housing prices stagnate, but rents continue to rise until they are at equilibrium, does that mean we were in a housing bubble or that rents were too cheap?

    Please feel free to drop the whole discussion on this ratio… At the moment, I’m much more interested in trying to understand what I am missing on foreclosure rates!

  26. >trying to understand what I am missing on foreclosure rates!

    Seattle is late to the bubble party, so it would stand to reason that it would be one of the last areas to see massive foreclosures. The numbers for California are out and foreclosure reates in San Diego are up 320% and Riverside 240% comparing this quarter 2006 to last quarter 2005.

    We’re following the normal progression in this correction.

    The heaviest activity in Cali started in mid 2002, went nuts in 2003 and started to level off in 2004. I don’t think the party got started here until late 2003 and didn’t peak until late 2005.

    So it stands to reason that it’ll take at least a year until we see a 320% increase in foreclosure rates here in Seattle.

    Foreclosures are kind of an interesting phenomenon in terms of where they’re happening. One might think that the areas with the most speculation and activity would have seen the greatest number of foreclosures.

    So why are they so high in Denver or Atlanta? The reason is that when the FED lowered rates, it affected the entire USA, not just states with “high desirability”. Now a $120,000 home in Indianapolis is now available to the $35,000/yr factory worker because of liquidity situation.

    I believe massive foreclosures hit these areas heavily because people simply got in over their heads. Job growth isn’t nearly as strong in places like Michigan when compared to San Diego or Seattle.

    Now we see foreclosures spiking out of control in California, Florida, Arizona, New England, etc…

    I’d like to see some actual data on just how many “toxic” type loans have been issued in King County in the last 3 years. I have heard reports that the numbers are as high as 60-70% in the last 2 years but for some reason the data doesn’t seem to be available.

  27. mojonixon,

    I have no reason to doubt that you’re right about the foreclosures in California being so high, but do you have any links to this data? The best I could find on the RealtyTrac website (which wasn’t working so smoothly) was from Q1 ’06 at which point, California still looked relatively healthy compared to other areas of the country.

  28. Here are some links, sorry for not including above:

    San Diego County had 4,069 properties in some stage of foreclosure for the quarter that ended in September, compared with 970 properties for the same quarter in 2005, an increase of 319 percent. Riverside had 4,403 such properties for the most recent quarter, versus 1,297 for the same quarter in 2005, an increase of 239 percent.

    Another site with foreclosure data

    “the Federal Reserve had raised interest rates 17 straight times since June 2004, which caused ARMs to increase. For some homeowners, this resulted in a mortgage payment that they can no longer afford—with the possibility, or reality, of foreclosure.”

    …the premise being that, bubble market or not, people all across the nation got funny money loans and found themselves underwater… and this supposedly happened faster in the midwest due to lower incomes and poor job growth/layoffs, etc.

  29. mojonixon,

    It’s a given that both San Diego County and Riverside County are seeing major growth in their number of foreclosures. However, I think it was a stretch for you to extrapolate this to the entire state of California considering the article mentions that “foreclosure activity has shown a dramatic increase in San Diego and Riverside Counties, far outpacing most of California” and the raw data doesn’t back up such a huge increase for the entire state. (The RealtyTrac website is working for me now!)

    This last point seems important because just about all of California has seen substantially more growth than King County over the past five years. Here is the five-year annualized growth in the Zindex for some selected counties:
    San Diego, CA: 18.2%
    Riverside, CA: 23.7%
    Los Angeles, CA: 24.5%
    Alameda, CA: 17.9%
    King, WA: 11.1%

    I checked a few other counties in CA (Ventura, Sacramento, Napa, and Sonoma) and they all showed a similar pattern, which was anywhere from 50% to 150% greater annualized growth than King County.

    All this tells me that most Counties in California are probably in even more danger of increased foreclosure than the Seattle area (King County).

    However, mojonixon, we’ve digressed substantially.

    When I said “I’m trying to understand what I am missing on foreclosure rates” I was referring to why Galen thought I was wrong in my hypothesis that foreclosure rates would be the first step in a popping bubble.

    From your emphasis on foreclosure rates, I’m going to assume that you agree with me that increased foreclosure rates (and in particular increased foreclosure rates on the most vulnerable people) would be a good indicator of the beginnings of a popping bubble! Please let me know if that is a bad assumption!

  30. I think that a good summary statistic for Seattle would be the fraction of houses purchased over the last couple of years with a negative amortization, IO, or other exotic loans – that would at least give you a ballpark estimate of people who are potentially at risk for foreclosure or other forced sale. (I think the figure for the SF Bay Area for 2005 was 70%.)

    I don’t think that Seattle will fall as much as some other markets – but I do think that a lot of houses were purchased with exotic loans, and I think the house cost/rent ratio is considerably higher than historical averages.

    The worst place is likely to be Florida – which not only has the national credit bubble; but also has a traditional housing bubble, between huge increases in hurricane insurance and a tax system that throws most of the increases in local government cost onto purchasers of new homes.

  31. I fall on the housing bubble side of the equation for the Seattle region. For me it boils down to 3 things:
    – Rents are far below carrying costs. I can’t recall the numbers, but I have seen numerous articles talking about this, and have talked with several land-lords who are frustrated with the weak rental market.
    – Over 15% of all new and refinanced mortgages in the Seattle area are of the “exotic” variety (i.e. 100% interest, negative amortization, etc). This number was less than 1% in 2000. The only reason someone gets one of these exotic loads is because they don’t have sufficient financial resources to own a home. Most of the homes with these kinds of mortgages will wind up in a world of hurt. You can see stats here:
    – The Seattle area businesses are not immune from effects of a possible nation-wide recession. Back in 2002/2003 Microsoft had hiring freezes and was cutting costs everywhere it could. If there was a recession again, Microsoft would be right back to cutting again. The same with Boeing. History shows that airlines will cut orders in short order when the economies turn down.

  32. Tim and Dustin,

    To answer your questions, the timeframe I used was sold in the last six months and sold via NWMLS. For “high end” Seattle I used single family and not condos, and used ALL sales, and not just a sample. For high end Eastside, I stopped when I reached the same total dollar of sales as Seattle, to keep it more apples to apples, and so did not include all sales for Eastside.

    As to the lower end, I find it odd that people are calling 100% financing “exotic” mortgages. Historically many, many first time buyers have put little to no money down using a 3% down FHA or a zero down VA loan. So why is it “exotic” simply because conventional lenders are now doing, what government programs have done for many years?

    If the buyer truly qualifies for the payment, the zero downpayment is not what makes a loan “exotic”. From Tim’s vantage point at the closing table, he cannot really draw conclusions regarding stability of the loan. Rather than comment here, I will write a post on what constitutes an “exotic” loan and where eventual foreclosure can be predetermined.

    It has more to do with predatory lending practices, than amount of downpayment. It has more to do with the inflation of the ratios, than allowing purchases with little to no downpayment.

  33. >would be a good indicator of the beginnings of a popping bubble! Please let me know if that is a bad assumption!

    foreclosures are generally not the beginning of a popping bubble. A bubble begins to unravel when there are less and less buyers that are willing to pay the higher price for the product (stock, house, mortgage loan product, etc). This is known as the greater fool theory.

    Early evidence of a shift in a housing market is generally an increase in supply (inventory) followed by a drop in activity (sales). While buyers are in control of the market, it takes longer to see a drop in prices because sellers don’t accept the new paradigm right away.

    This marked seems unique because it appears to be national – in fact, global; a direct result of the cost of money. During my lifetime I can’t remember a time when ARMs and interest only loans were so popular. If you couldn’t put 10-20% down on a house, you just didn’t do it.

    I agree that the housing situation won’t be as bad here in PNW because there has been less investor activity and we’re maybe #5 or #6 in toxic loan activity; not nearly as extreme as AZ, FL or CA. There has been quite a bit of equity though – as an example a typical Ballard home in 1997 would be about $150-175K, fast forwarding to today is worth $475-525K.

    Another market with similar price appreciation has been Boston. Boston is later in the cycle and as a result has been through the high inventory, lower sales and now price declines.

    You mention that the article shows SD and Riverside has being much worse than other areas of California. That is true, however, San Diego entered the housing boom sooner than other parts of california and as a result is later down in the cycle. It is a bit of a concern when you notice that sunny San Diego’s median home price creepin downward and coming within range of Seattle’s.

  34. I think the magic eight ball, if asked “Is there a housing bubble” would say “outlook hazy, ask again later”

    I think this whole thread, and the inability to solidly point in any direction except anecdotes (sorry Tim, even your experience at one firm is an anecdote, in the larger scheme of things) is really illustrative. The same people who cite anecdotes of “price reduced” houses or localized foreclosures as bubble-indicators, will dismiss every article about rents increasing with a “not in my experience”. To me, this means there is a lot of conflicting data, pointing to a new reality, one where decreasing housing prices will have numerous impacts (not one economy wide great depression-esque impact), felt mostly by the poor and middle class.

    For example, The big housing + loan firms, for example, are preparing for lower housing activity/prices with all the layoffs that Tim pointed out. This isn’t really a disaster for the firms themselves (decreased profits do not equal firms going out of business), but what will all the laid off people do?

    It’s clear to me that there has been an increase in people buying into homes that can barely afford them, no matter what kind of loan they used (yes, this includes some upper middle class people). Even if these people are not foreclosed on, they will continue to put a disproportionate amount of their income into housing, reducing their retirement savings and safety net (if they ever had one). This will exacerbate the existing trend of the increasing economic insecurity for most people except the rich.

    So the question isn’t “Housing bubble or no”? “Credit bubble or no”? That’s too simplistic. It’s “What will the ongoing impact be of the increasing economic insecurity on the poor and middle class?” And “What will the ripple impact be on economy at large?” So far the answer to the first question is a seemingly small increase in bankrupcties, a continued lack of personal savings, but the answer to the second question is “not much” (i.e. the rich continue to get richer).

    It’s not clear what the long term impact is of this economic schism, but I did reference this issue in another post, and it’s specifically discussed in Jacob Hacker’s “The Great Risk Shift” book.

  35. Hi Ardell,

    Here’s a quote and a link for your longer post, which I look forward to reading:

    “Nontraditional,” “alternative,” or “exotic” mortgage loans include “interest-only” mortgages and “payment option” adjustable-rate mortgages. These products allow borrowers to exchange lower payments during an initial period for higher payments later.

    The combination of the above, along with subprime rates and fees for someone with a lower credit score, ALSO combined with zero down are, how shall I put it….risky.

    FWIW, I just zillowed my own home in Edmonds. They report a one week change of -$8,879. in my home’s value. I purchased in 2001 with no need to sell.

    People who must sell, who purchased with zero down over the past few years might end up having to negotiate a short sale with their lender.

    Lenders are not required to report the number of short sales they negotiate. It might be interesting to run a search on the NWMLS for the words “short sale” which will appear in the agent remarks, and then maybe monitor that search parameter over several months.

    Aggressive lending practices might be a contributor but it likely be more than just one factor if we see a major correction.

  36. Today is Sunday and the newspaper is full of data that looks pretty good to me. The MLS shows a smaller per centage of new listings to pendings and solds on a daily basis, but the ratio looks pretty constant within the past year.
    The inventory is growing, mortgage rates are coming down, some real estate agents are still pricing properties low to watch them go. The data looks extremely good for Seattle.
    The point about my little house is that I listed under $300K when the data said the list price should have been over $320K. The price has been reduced, and the selling office commission is 4%. I keep seeing better deals than my listing coming onto the market. Really good deals under $300K have been hard to come by in these past few years.
    The data is that buyers can choose today, or wait because prices keep coming down. No matter what you call that, it’s a fact born out by the Sunday paper. Look at the house for sale ads for houses that are actually on the market today and will be available over the course of the week. A buyer does not have to choose a house today because it may be gone tomarrow.

  37. Mikhail,Galen,Dustin
    I ask the same question as Dustin, why is there any correlation between rent and price and bubble. If you rent a new home in Texas, you can have positive cash flow with nothing down, does that mean that Texas has a healtheir economy or less chance of a bubble burst than Seattle and houses are a better investment there?. Doesn’t it have more to do with the fact that there are fewer jobs that pay enough to afford to buy a home so there is more demand on renting and less on buying?. Not to mention there’s just so much land to build on that new construction doesn’t push prices as much as in Seattle. With our new Critical Area Ordinances, land is getting even more scarce and expensive to develop.Our land is also pricier to develope because of the hills, mountains, sound, lakes, etc.I don’t know the %, but I firmly believe alot of our housing price gain is the demand for new housing which has a much higher price tag than it used to have and thus the resale market follows.
    Regarding a potential burst, I agree with JCricket, “outlook hazy, ask again later”. Every summer-fall for as many years as I can remember, there’s a rundown of activity and pricing.I see prices going up their annual amount all in the spring.Everything is in a flurry. The builders raise prices because they negotiate new sub contracts in the spring and as usual, resale follows. All the homeowners who entertained over the holidays and just didn’t have enough room for company decide to buy a house in the new year. By summer, the vacations start and real estate slows down. Yes, there are anomolies, but the trend is more to slow down and level out in the summer. Then in the fall, if we climbed too high in the spring, prices will start softening.Less demand, longer market time, lowering of prices. Builders always give great incentives in the fall and winter because they drove prices up as high as possible in the spring and now they let them settle back down in the fall and winter, only to gear up another years worth of increases in the late January to May months.Over and over year after year. Last year a house that just couldn’t sell in October at 640 so got reduced 25000, sold, flipped in January and had 3 offers and sold at 650 in February. Similar example year before and year before that. I do remember one year going backwards and losing more than the spring gain and that was in 1993 but that was unusual.Even through our recession we grew at 6%/yr.
    So I don’t think we should be drawing a whole lot of conclusions from our current situation of higher market time and lower prices until we see what happens in the spring. If it’s flat, then we have something to worry about.

  38. mojonixon
    Only agents and affiliates that have access to the mls have access to “agent remarks” that Jillayne referred to. Sometimes these remarks appear in the marketing remarks which is what the public sees, but usually not.

  39. Mikhail
    your comment “the only reason someone gets one of these exotic loads is because they don’t have sufficient financial resources to own a home” is not true. Even negative am loans make great financial sense.
    Many active investors consider home interest rates ridiculously low and will finance with as much leverage as possible in a very financially sound business practice. It’s hard not to find an investment that yields higher than 6.5-8% interest, isn’t it? As long as there’s a sound investment portfolio to counteract any borrowed funds in real estate, where can you access cheaper equity?

  40. “ridiculously low and will finance with as much leverage as possible in a very financially sound business practice”

    During a market upswing, you are indeed correct. During a market downturn, which we are now experience, it can be disasterous (and has already been shown to have been so)

  41. Jillayne,

    Thanks for the link. I can easily see a short sale by quickly comparing the sold price with the mortgage taken out by the owner at time of purchase. I am not seeing those types of shortsales, yet. Nor am I getting anyone from other markets seeing those either.

    The “short sales” that are more prevalent, are those where the seller pulled equity each and every time some equity became available, and found an appraiser willing to inflate the price to do so. The loan at time of purchase was fine. The appraisal at time of cash out refi, being the culprit that led to the owner being top heavy.

  42. Eileen (#40)

    “I ask the same question as Dustin, why is there any correlation between rent and price and bubble.”

    Because if want to have a roof over your head, you have a choice between renting and buying. If you rent, you enjoy the benefit of the house; and if you buy, you additionally get whatever the change is in the value of the house over time. If the house sells for more than the capitalized rental value (maybe 100-150x monthly rent), then you are paying for future expected appreciation in the price of the house.

    This isn’t necessarily a bad thing – given the Seattle economy, geographic constraints, etc., over the long term it is probably reasonable to think that a Seattle house will appreciate more than one in Texas, so you should be willing to pay an expected appreciation premium for a house in Seattle, where you might not be willing to pay that premium in Texas. (For example, the house price/rent ratio has always been higher in California than the national average.)

    The problem is that people’s expectations of appreciation are volatile and can change very quickly – in a market where the typical house in Ballard has tripled in price in ten years, while rents have stayed relatively flat, that means that most of the house price now represents expected future appreciation. This means that there is a much larger speculative component to buying a house now over than ten years ago, and making that investment is a lot riskier now.

  43. Wow! I go to bed at 3am on a Saturday night and by noon on Sunday I’m already too far behind to catch up! 🙂

    However, before getting online I spent some time with the print version of the LA Times this morning and couldn’t help but notice that they had an entire section devoted to recent sales activity in San Diego County. The high foreclosure rate in August in San Diego County that Mojonixon mentions makes a good jumping off point into my theory about how different income levels will be affected by the bubble. But I’m afraid the data in San Diego is just not bleak enough yet to be called a popping bubble.

    (NOTE: The column headers on the web-version of the table are missing. The print version lists the column headers as: (1) Community, (2) Zip Code, (3) # of homes sold, (4) Median House price), (5) % Price Change from Aug. 2005, (6) Number of condos sold, (7) Median condo price, (8) % Price change from Aug. 2005, and (9) Home price per sq. ft.)

    Also, note that the overall % Change from Aug. 2005 for the entire county was 0.00%. (talk about stagnant!!!).

    Because of this very interesting data point, 0.0%, I decided to see if the lower end people are getting squeezed (which would be indicative of foreclosures playing a large role in home prices) or if the high end was getting squeeze. So I sorted all the zipcodes by price per square foot and this is what I found on both the low and high end:

    Low end:
    Zipcode: Price/sq.ft, % Price Change since Aug 2005
    91934: $172/sq.ft, +8.8%
    92036: $240/sq.ft, +64.2%
    92004: $258/sq.ft, -26.3%
    91962: $273/sq.ft, +8.4%
    92065: $274/sq.ft, -4.4%
    92082: $285/sq.ft, -4.2%

    High end:
    Zipcode: Price/sq.ft, % Price change since Aug 2005
    92037: $729/sq.ft, -4.3%
    32101: $718/sq.ft, +11.1%
    92109: $705/sq.ft, -10.5%
    92107: $679/sq.ft, -4.3%
    92106: $620/sq.ft, -9.3%
    92118: $619/sq.ft, -10.2%

    Interestingly, it looks like the zip codes with higher end homes are currently getting hit harder than the lower end homes, but there are exceptions on both ends. This tells me that even a 319% increase in foreclosures did not have the expected effect of fermenting a popping bubble in low end homes.

    I probably wouldn’t have continued down this road focusing on San Diego, but the LA Times made it irresistible by giving me some solid data to work with!

  44. “not getting anyone from other markets seeing those either”

    Here is a whole bunch of short sale properties listed in San Diego.

    This entry validates a what is becoming a clear trend, once again the MLS listing markets this property as a “Short Sale”, this means the owner of the property is selling at a loss.

    A quick check on SD Craiglist shows 49 properties that are “short sale”.

    Nothin’ for Seattle yet.

    Here are some other CL results for “short sale” under “real estate for sale”. The first number are short sales, second number is “reduced”

    Chicago 14/192
    Seattle 0/157
    Portland 0/239
    Phoenix 7/1061
    Miami 7/727
    Vegas 19/296
    Denver 74/480
    Atlanta 55/462
    San Diego 49/315
    Dallas 15/230

    So, even without access to the MLS it would appear that they are happening. Anyone know where one could find a list of all properties that are “short sale” in a given area?

  45. You want data-

    I have some information on house price/rental price ratios from the New York Times, May 27, 2005 (now in the pay archive).

    For Seattle-Bellevue-Everett, in 2000, the home price/rental price was 12.8 (i.e. you’d have to rent the median house out for 12.8 years to recover the purchase price). In 2005, the ratio was 19.0 – an increase of 52% in five years. (House prices in Seattle escalated at 8.2% a year from 2000-2005, while rents fell -0.4% per year.)

    San Diego went from 13.5 to 28.9, an increase of 114%. (Houses up 20.5% per year, rents up 4.2% per year.)

    Nationally, the ratio went from 11.6 to 17.1, an increase of 67%. (Houses up 7.7% a year, rents up 2.1% per year.)

    I hadn’t looked at this table in awhile – the six areas with the highest home price/rental price ratio in 2005 were:

    San Francisco
    San Jose
    West Palm Beach – Boca Raton
    San Diego
    Orange County, CA

    Hmmm… not a bad guide as to where the bubble hit first.

    Seattle was 20th out of 54 metro areas in home price/rental price in 2005. So, this seems to indicate that Seattle may get hit slightly more than the national average – not an incredibly speculative market, but more speculative than average.

  46. SwingDancer,

    The first link didn’t work. That short sales exist, doesn’t answer if the owner is “short” because he did a cash out refi and funded the purchase of a car and a boat and a trip to Vegas, sometime after purchase. If he bought for $300,000 and borrowed all of his equity out based on a refi appraisal at $600,000 and then sold for $500,000, in my book that would be a gain of $200,000. But still could be a “short sale” as there is not enough equity left to pay for the boat and car and trip to Vegas.

    Short sales in and of themselves are not market indicators, unless they are short of the original loan to purchase.

  47. kpom,

    A property built out to its maximum potential used to rent for 1% of value. An $80,000 condo rented for $800 a month. A $159,000 townhome rented for $1,590 per month. A $250,000 home would rent for $2,500 a month. It was a standard rule of thumb for residential rentals for many years.

    Take the major exception of an 890 square foot bungalow here in Kirkland sitting on a lot with potential view considerations. The profit on the tear down and sale of new construction on that lot, is more of a factor than “future value considerations” of the existing structure. Same with a house in Ballard that could become new townhomes or a new and much larger single family home.

    For many properties your “future expected appreciation of the house” doesn’t fit, as the value of “the” house that sits on the property is in many cases, not the highest and best use of the lot. The house becomes worthless and the price rises to the point where the value of the lot becomes total value. A bungalow that at one time sold for $250,000 is now with $650,000 and that is the value of the lot alone, the house now being a “tear down”.

    If you just looked at the 890 sf bungalow, it would be grossly overvalued. But if you look at the 3,000 sf brand new home that could be built there and sold for $1.5 million, the price of the bungalow starts to make more sense. Same with a property in Ballard that is a potential site of new townhomes.

    Everytime a consumer asks “Who would pay that much money for that piece of crap”, the answer is…the builders. The 890 square foot bungalow may rent for $1,000 a month, but the owner will eventually cash it in for lot value, and a builder will cash in on the profit of the new construction, which will defy rental ratios.

  48. kpom,

    Thanks for the info… To put some numbers to the ratio you mentioned, a house that would rent for $2000/month, or $24,000/year, would have likely sold for $307K in 2000 and $456K in 2005.

    How much of this is related to the huge increase in local investment money, such as the $33 billion that microsoft gave out in dividends during that time period? Even if only a small percent of that money (1%) stayed in the local economy, that’s a lot of money and some of it surely ended up in investment properties in the local market. In other words, a lot of people likely view real estate as a “safe” investment and a good place to diversify some of their investment even if they could make more money elsewhere.

    This isn’t just hypothetical either, as a friend of mine who works for a Seattle area tech company (not MIcrosoft) made this exact argument to me as to why he was buying local investment properties.

    Out of curiosity, do you have any data to back up your assertion that the bubble has already hit San Francisco, San Jose, West Palm Beach, San Diego, Sacramento and Orange County?

    The RealtyTrac data we looked earlier didn’t indicate that foreclosures were widespread in California and the data from San Diego County (arguably the county in California with the most in danger of a popping bubble) says that the price of homes has stagnated (i.e. 0% year of year growth), but that is not indicative of a bubble that has popped. (See comment 46). In particular, the numbers don’t indicate an outright deflation on those most vulnerable to foreclosure (the low income zip codes), but barely even indicate a hissing sound in terms of price.

    I’m not saying this won’t change in the future, but I think it is premature to say the bubble has popped in California.

  49. ardell:

    it’s – not sure why the link didn’t work, but there are plenty of short sales on there you can read about.

    “short sales in and of themselves are not market indications”

    you are correct, neither are temporary down blips in local inventory or temporary up blips in national sales figures for example.

    some examples of real estate market indicators: supply (up), demand (down), housing starts (down), permits (down), foreclosures (up), builder stocks (down), media attention (gloomy), consumer spending (still going!), loan activity (down), bank lending standards (strengthening)

  50. swingdancer,

    In addition to the reason Ardell mentioned (short sales would only matter if they are short of the original loan amount), I would argue that the term is not all that useful as it is fundamentally a marketing term.

    At least on Craigslist, I’d argue that it has come to be another way to say “priced to sell”. In other words, if the text “short sale” becomes code for “this house is a bargain”, then of course you will see more people use this term to attract attention to a listing. I would argue that “short sale” has already taken on this meaning in some stagnant markets (like Denver: 74/480) and not in others (like Phoenix 7/1061).

    Getting at the data to find out how many people are selling at below their original loan amount would definitely be a useful statistic, but relying on the phrase “short sale” seems unreliable at best.

  51. Dustin (#51) –

    I agree that we will have to wait a few months to see if house prices come down – house prices are notoriously slow to adjust downwards in a down market, since you have a lot of sellers trying to hold out for peak prices. It is just my impressionistic view from reading (which has a lot of regional housing news roundups) that West Palm, San Diego, Sacramento, and Orange County are getting a lot of ink for lack of sales recently. San Francisco and San Jose seem slow, but not as slow as the other four.

    I agree that Microsofties may well be helping support the Seattle housing market (of course, Microsoft money was going into Seattle real estate prior to 2000 as well), but that doesn’t mean that they are immune from changing their expectations of future housing appreciation. As I noted, it is reasonable to think that the Seattle house price/rental price ratio should reflect a premium relative to the rest of the country (like California) – the question is whether that is enough to insulate Seattle from a national credit problem.

  52. swingdancer,

    My argument is not that people are going to start lying and listing properties as “short sales” when they are not, but rather the converse that short sellers will acknowledge their situation only if they think it will help market their property. My guess is that in Phoenix, the number of people who *could* list their property as a short sale is probably much larger, but they either haven’t realized this is a selling point, or they think it will actually hurt them in negotiations.

    If the situation was to change and people were led to *believe* that acknowledging they are a short seller would benefit the marketing of their property, then I could see an order of magnitude more people in Phoenix (i.e. 70 out of 1061 instead of 7 out of 1061) including the text “short seller” in the description field without any additional “short sellers” in the market.

  53. kpom,

    I know that it probably seems that I sometimes take things slow (I like to think methodical 🙂 ), but I’m still working on getting a better understanding of the national credit problem…

    I’ve argued above that the national credit problem is likely to manifest itself in the low-end markets in areas with the highest rates of foreclosures. To date, the only numbers I’ve been able to get my hands on are in San Diego County, where, despite stagnant growth, we are not yet seeing a national credit problem turn into a consistent and substantial decrease in the sale price of homes in this vulnerable price range (comment #46).

    Should I be looking somewhere else for the early manifestations of a national credit problem?

  54. re: short selling

    I just went through and clicked a ton of those Craigslist links, and they all, without exception state “short sale”, as in, a state in which they are forced to sell at a lower price than they paid.

    I don’t know why there aren’t as many in Phoenix or Vegas — what I *do* know is that both of those markets experienced tremendous investor activity – mostly investors from California.

    Maybe they have deeper pockets than those in Atlanta or Denver. I bet if you did some digging you’d find more “short sales” going on in states that are not connected (physically or financially) to any states along the east or west border of the united states.

  55. Swingdance,

    The Wikipedia page you linked to regarding the stock market definition of “selling short”, is not the definition of a “short sale” in real estate. Nor does the link to the San Diego sales, fall into the category of “short sales”, as they don’t show the payoffs.

    Before we get to what a “short sale” is, let me say that I think anyone who is selling for less than they paid for the property, without regard to costs in and out, has a legitimate concern. If someone paid $565,000 and is now listed at $499,000 and not selling, while that is not a short sale, that is a real concern. Sometimes even more of a concern than an actual “short sale”.

    A short sale, this one not in quotes since it is the actual accepted definition of a short sale as it applies to real estate, is any sale where the lender’s approval is needed for the owner to sell. Let’s say someone buys a property for $500,000 and finances $400,000. The loan payoff is $382,000 at time of sale and the owner sells the property for $450,000. The owner is selling at $50,000 less than he paid, but it is not a short sale. There is enough money on the table at closing to pay off the loan.

    For there to be a short sale, the lender must be accepting less than what he is due. In fact often “the lender” who is shorted at the short sale is not the original lender at all. The sale may be high enough to pay the first mortgage holder. The sale may be high enough to pay the second mortgage holder. But the sale is “short” as to a third position lien or even a judgment lien.

    Whenever there is not enough money on the table at time of close to pay off all of the liens against the property, there is a short sale. The liens could be tax liens as a result of the owner not paying his real estate taxes. The liens could be monthly condo dues not paid for a long period of time. When one of the lienholders is “shorted” as to the amount they are receiving vs. the amount owed to them, it is a “short sale” requiring the approval of the person being shorted, for the sale to close. In a true short sale, the seller loses the authority to sell, as he cannot clear all of his liens. The sale fails or there is a short sale where one or more of the lenders agrees to accept less than is owed them.

    I found the San Diego statistics very revealing. Does anyone know if they were all purchased as new construction? I could see that happening here, both in Seattle and in Kirkland for sure, given the extremely high prices people have been willing to pay for new condos over the last 12 months. I think they are all potentially dangerous purchases. New construction clearly has far more room to drop than resale. Always has; always will.

  56. You’re right, I totally blew that one. Either way, it doesn’t invalidate my point — sellers aren’t going to start adding “short sale” to their CL listing just so it’ll move faster.

    Heck, I didn’t even know what “short sale” was until recently. It’s been awhile since the last correction – I guess we have a tendency to forget past events and sometimes repeat them.

    I just thought of something. Today is Sunday… don’t you guys have open houses to be attending?

    Looks like there is plenty of info about short selling via google.

  57. Mojonixon,

    I totally agree with your take on the market. The only exception is that we in the industry always say we will not know until April or May. Every last quarter produces a bunch of houses hanging on market that no one seems to want to buy. By January everyone wants the next one out the gate. There are a slew of buyers waiting for new inventory.

    For as long as I have been in the business, October, November and December produces fewer sales and sellers on market pulling their hair out. Then three newer townhomes come on the market in January and 18 people pounce on them in multiple bid and the market runs up through June or July. The 12% increase in value in a year’s time almost always happens between January and August, and is not spread out equally over 12 months of the year.

    Until many “prime properties” come on the market after the first of the year and into the second quarter, no one knows where the market is headed. And we clearly never know in the last quarter which is historically the lowest sale quarter of the year. I’ll take some time to run stats on that for five years running, and see if anything has changed.

    I do know that I do not see a bunch of great looking, good floorplan, priced well listings on market. The market looks to me to be the same as it always looks in October. A whole lot of what no one wants to buy. Awkward floor plans, awkward lots, half finished bad remodels, flip projects where investors put too many expensive upgrades for the location of the house…same old October stuff from my vantage point.

    We won’t be able to call this a buyer’s market until and unless prime properties are lingering on market. While I am still seeing bidding wars and property selling within 24 hours of being listed, it is still a seller’s market, for some sellers.

  58. Dustin (#58)-

    Obviously, it depends on what numbers you use, but I’m not so sure San Diego prices aren’t declining.

    This is from Bob Casagrand, a realtor reporting on the San Diego market a week ago in Realty Times:

    “The typical detached home sold was 2,050 sq ft with an average selling price of $626,296, this is down about 9% versus last years average of $691,608 for the same home. We see the same trend with attached homes, with this year’s average of $395,936 down about 6.5% from last year. One has to be very careful with prices since you will see a lot of variance in the price changes from neighborhood to neighborhood, house style to house style, etc. However, one can conclude that in general prices are declining.”

  59. Jillayne, Jcricket, Ardell, others….

    Our office has closed ‘short sales’ this year. Short sales are created when the outstanding encumbrances and closing costs on a property exceed market value. The short sale is generated in many cases by a default of the borrower, who elects to sell the home, but can only obtain an offer that is less than what is owed to the lender. The best way to know if a transaction is a short sale is to have in hand or know of the existing loan payoffs by a lender on a subject property. What a person paid for a home is arguably moot. What matters is what the existing loans are and what the seller can get in a sale in today’s market. Looking up the last loan amount on a Deed of Trust tells us only what the original loan amount was—it could conceivably be paid down or even be paid off before the loan shows as being reconveyed. Unfortunately, King Co. Recording office has now shut down the option for people to view existing DOT’s.

    My best guess is that the lenders would beg to differ that a short sale is a “marketing” term. Lenders are losing large sums of money and it’s not treated as a cavalier business-as-usual occurance. They take losing money very seriously and it can trigger an audit to answer the question of “why?” Borrowers who feel as if the debt is wiped away for good may be mistaken. The IRS may also say otherwise.

    To answer JCrickets suggestion that our small business offers merely anectdotal market observations in the larger scheme of things: I respectfully disagree that it is anecdotal, they are facts. Call any independant escrow firm in the Puget Sound area I would guess they would have similar statistics. Title firm escrow dept.’s know what they are closing and have the resources to track it as I do, but you will unlikely get them to share what is coming through their doors. It’s not all doom and gloom mind you, but I think many would be as surprised as I am as to the quantity of so called exotic loans in our communities.

    Being on ground zero of the market affords quite a vantage point and I pull most information directly from the transactions our office closes. Certainly our office closes far less than the title companies that dominate the market throughout the US. I would bet our closings are statistically not far off the mark from other escrow firms.

    I agree with Jcricket’s suggestion that some upper tier borrowers may have gotten in over their heads. Many of these 100% financed loan borrowers were from many of our finest local employers. A sample of the borrowers employers we have closed for: Evergreen Med. Ctr in Kirkland, Infospace, Boeing, Intermec, BF Goodrich Aerospace, Zymogenetics, F5 Networks, Seattle Pacific University Staff, Amazon, SBUX, MSFT, Costco, Military (Navy mostly), Fred Hutch., Univ. of Wash. Med. Ctr., among others including agents and loan officers with whom we closed personal transactions.

    Jillayne, I totally agree with your previous posts.

    Escrow is uniquely positioned to see all aspects of a transaction. We see borrowers financial snapshots including FICO scores when provided as part of the lender packages, sellers loan encumbrances and transaction details. There are very few transactions where we are NOT instructed to pay off consumer debt (Cars, Boats, Credit Cards, IRS & DSHS leins, etc) as a condition of the transaction. I agree with Ardell in that I have no way of knowing whether a borrower will end up in default. But, I can guess who will be back refinancing again based upon their loan product—eerily predictable.

    The 100% nothing down loans and I/O products our office closes are really not “exotic,” per se. Today, these loans ARE THE 30 yr fixed product of the day.

  60. Tim,

    I definitely don’t doubt that your on-the-ground experiences can provide some extremely valuable observations, but I’m trying my best to not confuse anecdotal stories with verifiable data points.

    Nonetheless, I happen to completely agree with you that lenders would not view “short sales” as a marketing term. Short sales are definitely a real thing and would provide another useful barometer about the health of the local market. Do you have access to a good data source that lists short sales in King County? What do the trends look like? There’s no point in digging up the total number today unless we can also dig up some type of historical data to know how “out of whack” we are with relation to short sales. Does such a data source even exist?

    The point I was making is that when an agent or FSBO writes a piece for Craigslist and mentions that a property is a short sale, then they are doing this for a clear marketing purpose because it will send a signal to prospective buyers. Unless a home seller is required by law (or the loan terms) to advertise that a home is a short sale (which would be news to me), then I can’t see how the mentioning of a “short sale” on a listing description is anything other than a marketing push. As a matter of fact, I’m not even sure how you could know it would be a short sale at the time of listing since the final accepted price (and the associated conditions) have not been yet determined.

  61. kpom,

    Obviously, I can’t verify the data that Bob Casagrand is using, but his median house price numbers seem to high when compared to the LA Times data published created by DQNews.

    Where you mention (quoting Bob) these numbers
    * detached home: average selling price of $626K
    * attached home: average selling price of $396K

    DQNews’ numbers were:
    * Homes: average selling price of $555K
    * Condos: average selling price of $380K

    The 6.9% difference in the year-over-year estimates seems remarkably high to me, so I’d like to learn more about Bob’s methodology. For the most part, DQNew’s data is all out in public and they would have a lot more to lose than Bob by publishing sloopy data, so I’m tempted to stick with their data for the time being. (BTW, I uploaded the excel file for the entire set of San Diego data by zip code so that you can play with the numbers yourself if you are interested!)

    In digging through DQNews’ website, I noticed an interesting article that discusses foreclosure rates in California from August of this year. They start the article by noting that Foreclosure rates are at a three year high and rising quickly, but the foreclosure rate is still only 63% of the 14-year average.

    Despite the second quarter surge, defaults remained below historically normal levels. On average, lenders filed 32,762 notices of default each quarter over the past 14 years. Last quarter’s 20,752 total was the highest since 25,511 were filed in first quarter 2003.

    No wonder I’m having a hard time detecting the effect of foreclosures on sales price in San Diego. Today’s foreclosure rates (for all of California) aren’t even near the 14-year average, let alone above average (or at catastrophic levels)! Obviously, if we’re in the midst of a nationwide credit problem it hasn’t began to show up in the form of foreclosure rates yet.

    All of this brings me back to short sales as the next best avenue to uncover the manifestation of a nationwide credit problem in action since foreclosure rates don’t appear to be supporting this hypothesis.

  62. Dustin- I understand your point regarding short sale language in listings. I would guess that those folks that have the home listed and have the agent remarking a short sale have probably already received NOD’s.

    I’m unaware of any source that would willingly disclose the short sales that are taking place. Unless you took the time to call escrow companies and asked how many they have closed YTD, it would be difficult to find out (assuming they go as far as I do in tracking and follow the market as closely as I do). Lenders would be a prime source obviously, but reporting loan problems would not be in the interest of the lender, for a variety of reasons. The “asset recovery” units of lenders may be a source, but I’m skeptical they would tell us numbers.

    It’s a darn shame that the title companies have been mostly mum regarding what they are closing. I’ll call a couple contacts and see what I can drum up.

    PS. Lynlee says a good borometer is the “people stressed out meter,” similar to the Fire Danger dial you see at campgrounds and National Forest Park entrances. Today, she says, it’s “high,” but not “extreme danger.” But, she adds (while devouring our Root Beer Floats before the kids get ready for bed) “that would mostly be in the refinance category because of financial strain many are encountering.” That’s anecdotal, I digress.

  63. Tim and Dustin,

    Some mls rules require that the agent remarks note the “possible short sale”. Often in a short sale there really is no money to pay the 3% Buyer Agent Fee they are offering in the mls. Consequently the commission being offered is “subject to approval by the lender in the short sale”. In markets where there are a lot of short sales, and the lender reduces the agent commission as part of the agreement to close at less than full loan payoff, a warning is required on the listing in the agent remarks section.

    Also, since the seller doesn’t have the authority to sell the property without lender approval during escrow, the buyer should be warned that the sale could fail or be delayed. It could be a matter of disclosure if the sale price is less than the total liens on the property.

  64. Seeing as how we are likely not going to get good regional information on short sales, I have another approach that would help shed some light on our local housing situation.

    What is the long-term supply of housing on the market?

    I read the other day that there was a year-over-year increase in listings in the Seattle area, but I’m wondering about the longer trend… Is the number of listings akin to foreclosure rates in San Diego, where things are rising at rapid rates (300+ increases) and yet still less than 2/3 the average rate over the past 14 years? (see comment #66). I’m definitely interested in learning that the supply issue is more indicative of a long-term housing bubble, but I’d like some data to back it up!

    If someone could provide a table or chart of average number of listings in the Seattle area (preferably normalized to account for new housing stock!), I think it would add some value to the conversation and give me a new avenue to uncovering evidence of a bursting bubble as it begins to happen.

    The only problem I see is that if we focus too much on the aggregate listings, then we might overlook the fact that there has been a substantial growth in market activity and that trend is not likely to change. In other words, over the past few decades, my impression is that the number of times that the average home owner has moved has increased substantially.

    Some numbers are clearly needed to explain my logic… Let’s assume that the average home owner moved every 21 years in the 1950s and that today, the average homeowner moved every 7 years. I would expect that when normalized for the housing stock, the number of listings would be three times greater today. Taken over the past 10 or 15 years, even if that time between moves dropped 25% (from something like 10 years between moves to 7.5 years between moves), then I would expect to see a 25% corresponding increase in listings, everything else being equal.

    Even with that caveat, I’m still interested in the long-term numbers because I think they could help shed light on the health of the local market. Can this total listings at any given time (going back at least 15 years!) be pulled from Discover?

  65. “Our economy is not based on a boom or bust economy dependent on oil or a similar industry like Houston.”
    Yes, I will agree the Puget Sound has had ups and downs and some may call it boom and bust. In the context of comparing the Puget Sound to Houston and MSAs with similar economic activity as Houston, the peaks and valleys of the Puget Sound economy are not nearly as pronounced as Houston or other similar boom/boost local economies. When the Puget Sound does have a downer, it isn’t nearly as bad as compared to other MSAs. During the last recession, the Puget Sound had the highest unemployment in the country yet our economy limped along wounded, but not down for the count. Simultaneously, our real estate market experienced good capital asset growth. We did not see the hyper capital growth of other MSAs such as San Diego, Boston, etc. Part of the reason our economy did as well as it did, is because the economy was financed with homeowner equity credit until business investment sprang back.

    “This time we are experiencing a decline of housing prices without job loss or recession. Very strange times indeed.”
    Yes, it is interesting. Many buyers are concerned about interest rates. There concerns are complicated with the inverted yield curve that has been popping up. IYC is when short term interest rates are higher than long term interest rates. The Fed has influence over short term interest rates. The long term interest rates are influenced by investor perceptions of future inflation and their trading in the bond market. While The Fed has been raising short term interest rates to keep inflation in check (and cut down on the real estate froth), but bond investors were not forecasting inflation. Some potential sellers have decided to stay put and remodel or add additions to their homes. The work is being financed with a second fixed rate mortgage, fixed rate refinance, or converting adjustable rate HELOCs into fixed rate mortgages.

    “Since the depression, this country has not seen a decrease in the national median home price.”
    This is very easy to verify from many sources such as the OFHEO at the Bureau of Labor and Statistics for the Federal Government and many non government academic research studies such as the one conducted by Liang and McLemore.

    REITs are a different animal. The Fed’s definition of a “bubble” is single family home based. Generally, REITs are institutional investment with 40%-50% debt leverage for multifamily and commercial property invested on a national scale. I have not read a study correlating a local real estate economy of single family homes to REIT performance. If a REIT was only locally invested I would imagine there would be a distinct correlation to single family homes as jobs are a large driver of the local single family home market and secondarily commercial property.

    “”A fool and his money are soon parted” and anyone who believes the liar who says “Real Estate Can ONLY GO UP!”…is a fool.” I would agree. Real estate is just another asset class. The same investment rules apply and the same finance theory applies. Fortunately, the Puget Sound tends to experience capital asset growth followed by flattening and then a repeat of the cycle. It is rare the Puget Sound experiences a decline Yes, this can be verified easily with any of the local real estate economists in Seattle and the Guvment.

    I can certainly appreciate the personal experiences that were posted, but that doesn’t indicate a bubble or anything but your personal experience. Research is based on broad general what ifs, analysis, interpretation, probability. Financial forecasting is broad what ifs. Economic forecasting is broad what ifs. Yes, some tragic personal experiences contradicting the forecasts are certainly going to happen, but that doesn’t indicate a change in the market indicators or economy. All the research I have cited could miss the mark completely. It is not a singular analysis of one component such as MLS data. It is an analysis and interpretation of the historical performance of many drivers and the current state of those drivers. Take the PMI study I cited. PMI has been doing their thing for a long long time. Have they been wrong? Or course they have been wrong. They have been right many many more times than they have been wrong. PMI reports Seattle has a 15.3% chance of a capital asset decline. That leaves a 74% chance of stagnation or continued capital asset growth. If we do experience a decline does that mean we experienced a bubble? I would say no unless we turn out to be another San Diego in economic terms.

    “And there is a troubling similarity between the house-price boom and the dotcom bubble: investors have been buying houses even though rents will not cover their interest payments, purely in the expectation of large capital gains – just as investors bought shares in profitless firms in the late 1990s, simply because prices were rising.”
    The Economist is a very a good news organization. I have read a few research reports indicate that Seattle had a lot less speculative investment than the hot MSAs like San Diego which is one reason we are not seeing a market flooded with supply putting downward pressures on prices. I believe the reports came from The Fed, MBA and PMI. Investors have to understand that asset yield is comprised of many components and capital asset growth is only part of the yield. Betting on capital asset growth three years from now is inherently more risky than receiving rent next month. Yes, I can post a formula for discounted cash flow analysis.

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

  66. I can do property sold on a smaller scale, say a zip code, going back 15 years. “listings” are not identifiable as listings after they expire or cancel or sell, as one house could expire twice and then sell, so that same house would appear to be 4. Once as active, twice as expired and once as sold. Try to come up with a theory based on property sold vs. listed.

  67. Ardell,

    Solds could be interesting in-and-of themselves, but not nearly as helpful as a long-term snapshot of local listings. Without a long-term understanding of the listing number, I have a hard time putting the 28% year-over-year increase (I think that is the number I read on the Seattle Bubble blog) into perspective.

    I know how to use the NWMLS backend to get solds, but I’m definitely more interested in some type of listing information… (Even if it was only the number of listings at the beginning or end of each quarter!).

    All of a sudden, I’m reminded of the back-and-forth analysis that Tom Dozier and I were doing almost a year ago in trying to figure out seasonal variation of real estate trends because that was the last time I dug into the data. I only wish I could get into similar analytical discussion with a solid , but the majority of the current crop of bubble advocates are such “believers” that they shy away from any arguments that can’t be taken on faith.

    Total and complete aside: Does anyone (besides Joe) remember back when Tom Dozier was writing the Seattle Property News blog? Tom did such a great job describing local market conditions and I think set the standard for an analytical real estate blog. I wish he hadn’t quit blogging and if he is out there reading RCG, he’d be welcome as a contributor to RCG at any time! 🙂

  68. I have been teaching a real estate continuing ed clock hour class on Short Sales for over 5 years. When booked, this class sells out 92% of the time. Demand for this class dropped this past spring and summer but now I am being asked to teach this class by all my current clients. Last week’s class sold out with a waiting list.

    The problem in tracking any increase in short sales is the method by which the data is collected. Not all short sales are in preforeclosure. Not all preforeclosures are short sales.

    You can once again ask your favorite customer service rep at your favorite title company (previous post suggested asking your title rep. He/she would probably refer you to customer service) to run this Metroscan report:

    Geographic parameter
    Like, say, King County or City of Seattle

    Sale Date
    Do a month range.
    So, order the months of Jan, Feb, March, etc. through September, as single reports, so that the customer service rep only gives you the end number for each month.

    Deed Type
    Ask for a trustee’s deed search

    So you’ll get
    City of Seattle
    Trustee’s Sale Deeds

    City of Seattle
    Trustee’s Sale Deeds

    and so forth, and then you will be able to see any trends in preforeclosure/foreclosure stats in your chosen area. Rarely is there a trustee’s sale when the homeowner had massive equity. More often the homeowner has little or zero equity and might have tried to sell short before going all the way down the road to losing the American dream.

    There’s another statistic we could measure. The top two reasons why people default on their mortgage are……what are your guesses?

    No fair googling for the answer.

  69. I’m looking to buy my first home in the Seattle area. While obviously the market has been going up, I’ve been reading a number of articles (including this blog) about how the housing market is starting to slow down. However, these tend to be based on general statistics over all of king county, or even the entire country. I’m specifically interested in low end condos (180k-220k) near downtown. While broad general statistics are interesting, I don’t think it’s safe to make assumptions about a specific type of property in a specific area, because the housing market of the entire country is taking a turn for the worst.

    Here are a couple things I’ve been considering, most of which have already been mentioned in previous comments, but I’d like to hear what other people have to say about the way

    There is a significant gap between the costs of renting vs. buying. Buying and living in a $200,000 1 br condo costs around $1600/month (mortgage, association fee, insurance, maintenance, tax) whereas the same condo would rent for $800-$1000.

    This means that people are paying more to buy, because they are expecting the property to appreciate a lot. Or maybe rents are just taking a while to catch up to the increase in cost to buy. The lease in my apartment just ended, and my rent was raised from $765 to $860, which is the most I’ve ever seen my 7 years in Seattle. Also in looking for a new apartment, it’s obvious that rents are going up. It doesn’t surprise me that the rental market may be slow to change, as rental prices can not change until people reach the end of their leases (usually 12 months). In addition, the landlord tenant laws prevent rents from increasing to fast.

    I’m still not clear on how wages/salaries play into all this. I seems to me that it would take even longer for the increase in housing prices we are experiencing to result in salaries increasing. What is the incentive for companies to increase wages? Do companies only raise wages when people start moving away because of the high cost of living? If people keep moving to Seattle, why should we expect wages to increase?

    Another thing I’m considering is that there is quite a bit of development around the area, both new construction and apartments being converted to condos. This makes me think it would be a good time to buy soon, as with an increase in supply there is a decrease in demand and thus lower prices. However, no-one is building anything that is in my price range except for tiny studios. So how would this new construction affect the market for low end 1 bedrooms?

    The market may be going up so much that single family homes become unaffordable in Seattle, but wouldn’t that increase the demand for cheaper properties as people are force into buying less then they wanted because that’s all they could afford?

    Personally I’m still trying to decide if it makes sense to buy something soon (6 months or so), or wait a year or more and see where the market goes.

  70. Hi Eric,

    Two questions. What is the square footage of what you are renting and where is it? Just trying to keep apples to apples.

    Some of the better condos in that price range are really small. Comparing the $860 in rent you would have to pay to stay where you are, I would need to know if you would be trading down in square footage of living space, if you purchased. And if so, by how much.

    Paying almost double to purchase is one thing. Paying almost double for half the living space, would affect my response.

    The highest appreciation in downtown condos have been the older ones that are being remodeled by the owners. Also, ones where there has been a special assesment to upgrade the old lobby and common areas. Best buy is one where the improvements have not yet been made, but the seller is paying the special assessment on the way out.

    That way you get the benefit of the lower price of the “ugly” condo and lobby and the seller pays for the upgraded lobby and you can make some improvements to the condo before you sell.

    But this only works if it is one of the buildings where people will soon be making improvemnts. So look for the ones that say “Special Assessment: YES” and then check to see that the special assessment is being used for upgrades and not just repairs. Then make sure your contract calls for the seller to pay the special assessment at closing.

  71. My current place is 550 sq ft. Was renting for 765, now for 860 with a 12 month lease, or 910 if I would have gone month to month. It’s in wallingford. It’s really not that great of a deal though, as I’ve seen other places that are 650+ for the same price, no much though. I just rember a year ago when I had just gotten out of school there were a number of apartments I was looking at that were 800-900/month that were very nice. Stainless apliances, view, granite countertops etc..

    That’s a good tip about special assessment though. I’ll definitely look into it.

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