Friday, March 7, 2008

Puget Sound Housing: What's the Sound a Bubble Popping?

I've been following housing in the Puget Sound area for about a year now. In fact, my recent obsession with economics and finance all started with digging into the itty gritty details of the real estate market in the area.

Last spring, Seattle denizens deluded themselves into thinking that our little neck of the woods was a real estate paradise. A magical land where every homeowner rides a pretty, pink pony on streets made of crystal. A land where gooey, gooey gumdrops fall from the sky. A land where housing appreciates 10%+ per year forever.

Seattle was the last holdout (except for the research triangle in NC), the last large metropolitan area that hadn't yet seen its housing bubble burst. Even though last spring markets in So CA, AZ, Las Vegas, and Miami were imploding, there were plenty of entrenched business interests in Seattle that were arguing that our market would be immune to the troubles spreading across the land. The enablers in the local media only made things worse, ignoring data that ran contrary to the interests of the real estate / industrial complex.

Yet, a harbor of rationality gleamed as a beacon through the real estate fog. I started reading SeattleBubble blog every single day. Then I started responding in comments and on the forum. It was fun, because there were a bunch of fools (Mashugana in particular) claiming that there was no bubble. People who could look at the data objectively knew the writing was on the wall, but the bubble hadn't blown yet. But by the time it all started to unwind and the Seattle bubble started to burst in the fall of 07, I found Calculated Risk and other finance blogs which showed that a bigger problem loomed than Seattle Real Estate, the potential collapse of the financial system in the US. Let's just say the gravity of that situation drew me in, and I spent less time at Seattle Bubble.

But I still pay attention to Puget Sound housing. Here's an update. The Tim has given a recap of the most recent data released by NWMLS for the month of Feb. He has been doing this for a long time and has very good stats and charts. I'll try to fill in a couple of gaps, especially Snohomish and Pierce Counties.

NWLS reports various data for counties in WA every month. There are two categories of data I've been following for some time: median price for a single-family home (SFH) and median price for a condo per month. I've been following three counties: 1) King, which includes Seattle and most of the urban density around Seattle. 2) Snohomish, which includes urban areas north of Seattle, of note is Everett. 3) Pierce, which includes urban areas south of Seattle, of note is Tacoma.


For Feb, median price for a SFH in King Co was $429,900, down -0.01% year-over-year (YOY). Essentially flat YOY. Here is a figure that shows YOY for median SFH in King Co since Jan 2003:

You can see that peak appreciation was in Oct 05, when the median price for a SFH increased nearly 20% in one year.

Median price for a SFH in Snohomish Co was $355,000, down -2.74% YOY. Here is the figure for YOY data since Jan 2003:

Peak appreciation in SnoCo was in Aug 05, when the median price for a SFH increased 23.6% in one year.

Median price for a SFH in Pierce Co was $265,750, down -7.40% YOY. Here is the figure for YOY data since Jan 2003:

Peak appreciation in Pierce Co was in Oct 05, when the median price for a SFH increased 25.4% in one year.

Median price for a condo in King Co was $189,000, up 1.31% YOY. Here is the figure for YOY data since Jan 2003:

In general, appreciation in the condo market has lagged the SFH market. I guess this isn't too much of a surprise, given that as people were priced out of SFHs, only condos were left in their price range. Peak appreciation in King Co was in Feb 07, cresting at 24.58% in one year.

Median price for condos in Snohomish Co was $245,000, up 9.87% YOY. It jumped significantly from last month, which came in at only $224,999. Here is the figure for YOY data since Jan 2003:

Peak appreciation in SnoCo was in Aug 05, when the median price for a condo increased 26.22% in one year.

Median price for a condo in Pierce Co was weak, only $198,950, down -14.15% YOY. Here is the figure for YOY data since Jan 2003:

Peak appreciation in Pierce Co was in Apr 06, when the median price for a SFH increased 25.12% in one year.

YOY has a number of drawbacks which I described in an earlier post. Most important is that it's retrospective in 12 month increments and will miss dynamics that are more recent. Another way to look at price changes is to normalize them to a particular date. Here is a figure that shows median price for a SFH in each of the three counties since Jan 2002.

You can see that if you look YOY, the data look basically flat. But if you look from the peak at ~ July 2007, things have tanked. Hard.

Here are the condo data:Pierce Co appreciated more quickly, which interesting because if you look at the normalized SFH data, all three counties look basically the same. I decided to look at how far off each category of home (SFH and Condo) for each county is off from the peak.

For King and Sno, SFH have fallen more than condos. For Pierce, SFH have fallen about the same as King Co, but condos in Pierce are WAY worse than Sno and King. Obviously this is because of what I mentioned earlier; that Pierce Co condos appreciated much faster than the other two counties.

Looking ahead, things are only going to get worse. SFH and condos for all three counties are much higher than they were last year, and the number of sales is about half. The mortgage crisis just gets worse and worse, with lenders tightening their standards. And with hints that many very large banks are, at the very least, teetering on the verge of insolvency, means that banks can't lend money they don't have. And with a significant recession looming, things will only get worse as people who don't have jobs won't be able to pay their mortgages. This will also make the foreclosure situation even worse, further deteriorating the market.

Things are ugly right now. Prospects do not look good.


rdan said...

I like the way you play with looking at stats and graphs...I do not know how to post them at AB directly, but will provide a link, or you might want to post with a synopsis of how to look in your backyard.

Anonymous said...

Thanks for this. I look at SHB occasionally but get so tired of the mindless cheerleading and success-story cherrypicking there, it's always an onerous chore.

I've lived many places in this nation, and none has had such a bad case of Terminal Exceptionalism as Seattle. Maybe San Francisco. In fact I think many people in Seattle cultivate their TE, to feel as good as or superior to SF.

The simplest fact is that there is a huge contraction underway, and timing will be everything--who can wait it out, and from what position of strength or weakness, and what will be left when the shredder stops running. I'm writing from Olympia, a city/culture I detest (mindless ideological and cultural conformity and raging politics); my wife's career brought us here.

We thought the crash would hit in '04. In 2001 we chose a modest house close in hoping that its value wouldn't inflate crazily. In five years the house across the street--half the size of ours--sold for twice what we paid for our place. We expect all that "value" to disappear, which isn't a problem, since we never took it seriously on the run-up side.

I suppose we were fools for not "cleaning up" and flipping the place. But we chose it for things other than investment. Like walking to work. And besides, where would we have put the money? Stock market? Pull the other one. Now today the Fed announces holding the rate at 2 effing percent, yet again sending the message that this is an economy of debtors, not savers. They won't stop till all of us who've lived prudently and frugally have our life savings emptied out through inflation.

Sorry to run on. I just wanted to say thanks for your perspectives, and share one of my own that I hope you can add to your thoughtscape.


Afferent Input said...


Thanks for stopping by. I too share your despair for the current economic situation in the US, especially for savers. We've always been told that such prudence pays off in the end. Well, when I converted the dollars I've saved over the years to euros recently, just how far US currency has fallen is quite obvious.

Anyway, I agree that there haven't been very good investment options in recent years. Following a bubble on the way up can easily turn into catching a falling knife. I am somewhat lucky in shorting some of the finance and housing sector staring last summer. But even so, shorts get squeezed eventually. Ugh.

A house is supposed to be, first and foremost, a place to live. Given the competitive environment for building and selling homes, one would not have expected the insane profits seen in this sector in 2002-2006. But that's the nature of bubbles.