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IREM Breakfast Forecast: Not Good!

December 5th, 2008 · Comments · By Matt

I woke up early today to a dead car battery on my way to the IREM Forecast Breakfast at Qwest Field. I’m kicking myself for not taking a photo of the empty football field in the dawn light but I was late both arriving and in a rush to get back to work when it was done.

Overall the outlook was grim but the feeling was up beat as everyone tried to make light of the situation with a lot of humor.

I was going to go into detail about what we heard but I’m surprised how quickly the Seattle PI got a story up about the breakfast, Real estate a sore point in Seattle economy, and did a good job capturing the highlights.

My take away from David Legeay’s (SVP at Key bank) keynote was that while things nationwide may be in the final stages of bottoming Seattle is currently not so bad relative to other areas but things will get worse as a large part of our local GDP has been made up of construction and real estate both of which are in or moving into an oversupply condition in residential, multi-family and commercial (though not industrial.) He had many graphs that show we’re okay now but looking at other boom-bust cycles we will see a decline. And that it will take a decade for residential construction to stabilize. The upside is that Seattle has a very educated population, that our population is increasing and that we have less old people than other cities.

It’s interesting to note which indicators he pointed out – national & global savings rates, GDP, payroll, architecture billings, CPI.

As for the panel discussion…

Some notes that stood out, that are not in the above article, are that Matthew Gardner felt we’d have a V shape recovery as we aren’t that over built relative to other markets though I don’t understand why he’s saying that as he pointed out the over supply we have coming in apartments (6600 units in 2009, 8000 units in 2010 and 8000 more in planning) and the current over supply in condos (though currently no units will come online in 2010.) Many of the other folks talked about the unsustainable high construction costs we’ve had that are now coming down. Some said that in the last 90 days prices on some materials have been coming down 15-20%. Many also lamented the lengthy process of getting buildings approved and permitted here relative to other areas (though this likely prevented over building.)

The collective outlook for 2009 was not positive; instead wait for the opportunities to arise late in 2009 before getting back in.

Earlier in the week I meet with an investment manager for a local development firm. Unfortunately they didn’t want to go on record but I did get some insight into what they look at.

The drivers for development that they look at are job growth and in migration. In terms of jobs they look at Microsoft, Amazon, Expedia, Gates Foundation and Boeing (they had looked at Wamu.) They also follow transportation trends (light rail), capital investments by other firms and Case-Shiller. Some of their sources for data include the Urban Land Institute (Emerging Trends in Real Estate is supposed to be a good publication), Conway Pedersen, Bureau of Labor, and Impresa (here’s a Williams Marketing deck, the last half is from Impresa.)

What does this mean for Seattle condos? There is an end in sight for new supply, 2010, now through then and beyond we’ll need to work through that supply. Supply will move quickest for places priced below the conforming loan limit ($567,500.) It will move quicker as mortgage rates fall. That said, the number of transactions completed per month has hit an all time low in Seattle (down 50% from last November which was down from the November before that) establishing a new floor. This winter will likely set the new floor for transaction volume with prices declining more in the coming months as sellers realize that much less is selling than before.

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Tags: Economics

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  • Mark W
    MD writes "I do have to admit it does seem almost unbelievable that home prices could REALLY return to 3 times of the average household income".

    The article focused on national figures. I'd assume that local differences still apply. Houses are dirt cheap in Dayton, OH, vs Seattle. Wage differences alone don't come close to accounting for that difference.
  • The MD
    Mark W, very good information. Thanks, and I'll check it out.

    I do have to admit it does seem almost unbelievable that home prices could REALLY return to 3 times of the average household income, but only because I believe we've all forgotten the true value of a dollar through an inflationary period.

    I do believe prices will drop another 20% in Seattle before we are at the bottom, which will seem like a bargain to those that still have jobs, a good credit score, and liquidity. To those that don't, it will still keep them out of the market and seemingly prices will still be too high.
  • Mark W
    Re Matthew vs. Jon... Today's USA Today today featured an article, "Why Home Values May Take Decades To Recover" (http://www.usatoday.com/money/economy/housing/2...) that provides several stats re how far out of wack home prices got during the bubble compared to 1950-2000.

    Adjusted for inflation, the typical existing home was worth the same in 2000 as it was in 1950. But by 2006 it was worth 1.9 times more. Now it's 1.45 times more. If we continue going back down to historic norms, there's still a lot to wring out of today's prices.

    Home values 1950-2000 averaged about 3 times average household income. But in 2006, avg household income was $66K, but houses sold for $301K rather than about $200K.

    Homes have traditionally sold for about 20 times what it would have cost to rent them for a year. But in 2006 it was 32 times.

    Adjusted for inflation, home prices increased an average of 0.5% above inflation from 1950-2000, but 8.2% above inflaction from 2000-2006.

    If you think we're heading back to the historical norms of 1950-2000, then there's a chunk of price dropping left to occur. If you think we're near bottom now, then you're breaking with 50 years of housing history.


    From a basic supply and demand argument, the relaxation of lending rules in 2000-2006 really opened the pool of potential buyers. We've gone back towards pre-2000 rules, which narrows the pool a lot when inventory is especially high. (A significant rise in unemployment will further shrink the pool of able - and perhaps even willing - buyers.) On the other hand, total population continues to grow.

    But...

    The article mostly focuses on the national picture - local situations of course can vary a lot. A table in the article does show that Seattle had below average appreciation during the boom and (so far) much lower depreciation during the bust.
  • Matthew
    If you think asset prices are going to hold up when faced with the largest deflationary pressures facing this economy since the 1930's. Sold to you.

    We will see. I've been far more right about how this scenario has played out than I have been wrong.

    I was calling for oil to hit 50 dollars a barrel when Goldman Sachs was saying it was going to 200. We are in the midst of a deflationary spiral that the government is powerless to do anything about. Asset prices across the board will get massacred, and housing is one of them.
  • Jon
    Matthew, if that be the case, then we are looking at a median price of $280k, which just won't happen.

    I feel like I am posting on Seattle Bubble.

    I would argue that every year there is appreciation... and if you accounted for 3-5% a year since 2000, you should be getting close to the bottom...

    But, I have no evidence to back that up, except to say that we seem to be finding the bottom... and the biggest fear in people is the fears you express... when the market starts to recover, though long and arduous, people will be thinking they should have bought...

    Of course, that is the wonderful vision brought to you by Hindsight.
  • Matthew
    2001-2002 is when interest rates were dropped to almost nothing and this credit bubble began.

    Prices will return to historical norms, aka median prices will be approximately 3-4 times that of median household wages.

    The correction in King Co. has just begun, choose to ignore the inevitable at your own risk, the writing is clearly on the wall.

    Government intervention is merely delaying the decline (ala Japan 90's), we could see a decade in which housing does not make any substantial gains.

    And yes the historical evidence is on my side.
  • Ross
    Prices have already fallen to 2004 or 2005 levels. There's only another 10-15% or so to reach 2002 levels.
  • Jon
    Matthew - If they go to 2002 levels, then you are talking about dropping another 40% of value... Do you have any evidence, historical or otherwise, to back that claim up?
  • Matthew
    It's not a good time to buy because prices are headed to 2002 levels or earlier.

    Period.
  • Jon
    Dan C - I have advised client's not to sell, and not to buy... every situation is different... and frankly, one can't judge from the sidelines. Sometimes, you have to roll up your sleeves and get a little dirty.
  • Dan C
    This thread isn't going anywhere.

    I was saying that it is an agent's responsibility to provide sound financial advice to a client and they are not doing so.

    "I would hope that if there were real estate agents that knew how much the market was going to go down they would advise their clients to wait."

    That is exactly what bothers me...there are no agents who are telling their clients not to buy.

    Anyway...I hope everyone has a great weekend. Let's hope it snows!
  • Steve S.
    Jon - I 100% agree with you.

    Dan C. - You really aren’t talking about reality. It sounds like you are saying that a real estate agent is breaking their fiduciary responsibly by not predicting the future. I would like to see how fast that lawsuit would get thrown out in court.

    I would hope that if there were real estate agents that knew how much the market was going to go down they would advise their clients to wait.

    The buyers that bought at the top of the market have to be held responsible too. They can do their homework and try to predict what will happen as well, just because you are working with an agent doesn’t mean they have to stop thinking for themselves.
  • Affluent Bitter Renter
    "So has your family member bought now?

    When will you advise her to buy?"

    Another year. Sales are already starting to pick up in the far exurbs of California cities, but the closer-in stuff still has a ways to drop.

    "Will you be able to get exactly the home you are looking for at the bottom or will you have to settle for your second or third choice because the one you wanted sold?"

    This market will bottom out when the average person is perfectly convinced that real estate is a terrible investment - real estate history shows that prices stagnate near the bottom for quite a while - it's not like prices go up 2%, and hordes of buyers go back into the market.
  • Jon
    Full Disclosure: I am a real estate broker, who is an avid fan of this site, and I do post on here from time to time. I also tend to go to meet-ups, though I missed this last one.

    Dan C: First off, agents are required by state law to provide agency responsibility to their clients. We used to have to provide Fiduciary responsibilities, but no longer. However, you bring up a good question. When is it a bad time to buy?

    Of course, this depends on your situation. If you are a short term flipper, this may not be the best time.

    Generally speaking, you wouldn’t want to buy real estate as an investment vehicle when you are looking for a short term profit margin. You probably don’t to invest in real estate when you are skeptical of the market.

    Further, in hindsight, you shouldn’t have bought real estate after 2005… prices are back to 2005 levels.. and you can justify that you can write off enough between then and now to make it worth owning, if it is the right home.

    Further, you shouldn’t buy real estate when you can obtain loans with 0 down, with a stated income of $500k, and hoping that the house appreciates faster than the money out of your pocket on a monthly basis.

    Why is now a great time to buy?

    Inventory levels through the roof… pick and chose your home based on LOCATION, not because it’s the only home available in the neighborhood you want to live in.

    Interest Rates: 4.75% for a 30 year fixed with 20% down. 5.25% with 3.5% down, and possibly dropping, but no guarantee.

    Change in Life: Marriage, Divorce, Relocation, etc.

    Move Up: Your house will get less than you want, but the house you buy will get at least that much off their price and more… you may lose 40k off your 400k home, but you are getting 100k off your 800k home.

    Negotiation: You can negotiate to your heart’s desire. Not many multiple offer situations going on right now, but there are a few.

    Appreciation: While we expect to lose another 3-5% off the #’s now… we are about to begin the next great cycle… real estate is all about cycles… and we (economists, analysts) expect that the curve will be more of an L shape, with some rockiness along the way, but the lower portion of the L being more like a 1-7% appreciation scale over the next five years (seattle bubble, Tim)

    Tax Shelter: Still the biggest tax shelter known to the IRS tax code. This isn’t about the change.
    $7500 tax loan: to be paid back over the next 15 years at $500 a year, at ZERO interest, and no risk of a lien if you sell for the same or less than you purchased it for as a new buyer (first time or a buyer out of the market for the last 3 years).

    Pride of Ownership: There is really no monetary value associated with this, but people that own homes tend to take better care of their surroundings than those that don’t. Generalization, I know.

    That’s all folks. Bring on the criticisms!
  • Steve S.
    Yes, I have stated at times that it is a bad time to buy. But I don’t think now is one of those times.

    Any person even slightly interested in real estate could have told your family member not to buy a year ago in California. It was basically stated in the headlines "California is a soft market and prices are going to fall further" but good for you for opening her eyes.

    So has your family member bought now?

    When will you advise her to buy?

    I agree that prices could likely fall in Seattle in the next 6 to 9 months but they have already fallen quite a bit and I don’t think the bottom is far away. If you wait for the bottom how much money will you really save?

    How much competition for the best homes will there be when we are at the "Bottom?"

    Will you be able to get exactly the home you are looking for at the bottom or will you have to settle for your second or third choice because the one you wanted sold? The real question is; are you buying a home or an investment? I understand that they are two in the same but for most people it is a home first and investment second. I would rather pay more for a home that I really liked versus pay less to live in something that I didn’t really love for the next 5 years.
  • Affluent Bitter Renter
    "Steve S. // Dec 11, 2008 at 10:39 am

    I am with BlueSkyGUy, I think now is a great time to buy. I will disclose that I am a RE Agent and yes I do benefit from people buying and selling real estate."

    Steve S., have you ever stated that it is a bad time to buy?

    "Yes, there is a risk of prices going down further but how much further will they go down?"

    A family member desperately wanted to buy a house in California a year ago (one of her friends was a RE agent and was using all the usual pitches: "throwing away money on rent", etc). I talked her out of it - prices have dropped in California 40% since then. I don't think that Seattle will crash that badly, but I think there is still a lot of potential downside.
  • voight-kampff
    now could be a good time to buy. Prices will go lower no doubt, but there is something called "making an offer". you can make an offer based on what you think prices will be at the bottom, 06,05 even 2000 prices. There are uber-desperate folks out there. Make offers. Offers are free! Most of those offers will be rejected ( patience ), but one might get accepted, and that would make it a good time to buy.

    thank you, I'll be here all week.
  • Dan C
    Doesn't matter to me one bit if people buy or not.

    RE Agents are tasked with providing a fiduciary duty to clients, same as Insurance Agents and Financial Advisors. This is written into Washington State Law. If the latter two provide false or misleading information, they can be sued or prosecuted. This has not happened in the RE Industry, although it may on the way out of this mess. Although I don't condone it.

    All I am trying to understand is both sides of the arguement. Why try to steer someone into the biggest purchase of their lives when you know that your advice is wrong or flawed?
  • Steve S.
    I am with BlueSkyGUy, I think now is a great time to buy. I will disclose that I am a RE Agent and yes I do benefit from people buying and selling real estate.

    What I see in the marketplace right now is a lot of choices for buyers and time to make those choices and find exactly the right home that fits their needs. Yes, there is a risk of prices going down further but how much further will they go down? If you plan on buying a HOME and not just an investment for the short term you will be fine even if prices do go down. Interest rates are at all time lows right now and say you’ll wait till the "bottom" to buy but interest rates have gone back to what they were a month ago all that money you saved by waiting was lost in buying power. How will you know when we have hit bottom? I don’t think you will really know where the bottom is until it has passed and prices start creeping back up. When that happens all the buyers that are on the fence like many of the readers here will be back in the market creating more competition and giving you less time to find the perfect home for you. Do you really think you will be the only one in the market that realizes we have hit bottom?

    Dan C. - The reason that no one wants to answer your question is because all you are trying to do is make real estate agents look stupid. Hindsight is 20/20, obviously if you bought at the top of the market it wasn’t a good time to buy but if you plan on living in your home for some time (5 years+) then most likely when you go to sell it will be worth more than you bought it for. Not everyone can sell at the top and buy at the bottom, there have to be buyers and sellers at both points. The funny thing is the top of the market is not necessarily a bad time to buy if you are selling a house or condo yourself - sell at the top buy at the top. A bad time to buy is when you are not ready and cannot afford whatever you are getting into and are just speculating that prices are going to continue to go up. Yes, I will admit my argument is biased to encourage people to buy now but if every real estate agent told their clients to wait to buy we would never see the bottom and our system would crumble.

    Also, I have been honest that I am a real estate agent and most other people on this site have been as well, don’t you think you should be honest with people with the fact that you work in the RE industry as well and benefit from people renting instead of buying? What do you have against real estate agents anyway? Did some real estate agent give you bad advice and talk you into buying something at the top of the market? You slam real estate agents and marketers in multiple posts and I am just wondering what the reason for it is?
  • Dan C
    Guy,

    You didn't answer my question. If Realtors sincerely believe that now is a better time than ever to buy, when should somebody NOT buy a house? I have never heard an RE agent say that...but I hear them regurgitating NAR B*ll all day long.
  • The MD
    B.S.Guy, guess what? I'm not a doom and gloomer. I buy and sell real estate when the time is right. There are times I feel great about the market, and times I feel not-so-great about the market, depending which side of the fence I am on as either a buyer or a seller. All things are relative.

    That said, I'm a realist, and we've had this conversation before. Now is not a good time to buy as we all know the market will deteriorate further from today's prices.... PERIOD. "Guys like [me]," as you say, are the guys that did the following:
    1. I timed the right time to buy back in early 2003 on pre sale, prior to the surge of prices in Seattle, knowing the market was going to spin out of contorl
    2. I timed the right time to sell back in August of 2007, the peak of the market, knowing the market was ready to take a quick and serious downturn, despite what the realtors and marketers were saying
    3. I still haven't bought, knowing the market is going to continue to deteriorate
    4. As of today, the bottom of our market in Seattle will be around 3rd quarter of 2009. This can vaselate given rate and other contributing factors, but right now, this is a pretty good guess. As we get closer, I can shorten or extend that time for my own buying purposes. The fact is, though, we all know that NOW is NOT a good time to buy.

    I agree with you that blood is in the streets and fear is high right now, but try having patience (remember, that's a virtue), and see what is going on after 1st quarter of 2009. Trust me on this one too... you're going to see it get crazy.

    You know, crazy like me when I timed the market and acted appropriately. The market is ALL ABOUT TIMING, and you better go into it armed with a little bit of knowledge and information. Don't blindly go into it feeling pressured that NOW is the time to buy. Remember, folks, that's what got us all in this mess in the first place.

    B.S. Guy, I sincerely doubt your intentions on this blog, but that's my opinion. Also, I need to call you out on this one.... 1. No one ever asked you if you were an RE Agent in this string. 2. Unless you're over 100 years old, you couldn't have made a fortune in "these kinds of times" as none of us have ever seen these kinds of times. 3. If you're truly a smart investor, you wouldn't be giving the world your strategy and information as it would deplete from your own buying opportunities. 4. You say buy now, but then you say to have patience (contradiction of terms) and buy in the right location, view, and price. Well, I agree with you about location, view, and price, but the PRICE is still too high and will go lower. So, would that make a person pretty DUMB to buy right now? 5. Of course the market will come back - it always does. But it isn't coming back anytime soon in the near future as credit lending practices are forever changed due to recent measures taken by regulation, the Fed, and banks' own will. It will take years for prices of 2007 to be realized again.

    If you honestly believe now is a good time to buy, then by all means I encourage you to go out and buy right now, B.S. Guy. In fact, I'm BEGGING you to go out and buy right now.
  • BlueSkyGuy
    Dan C -
    Since no one else has taken the bait, I will jump in here. NOW {yes, now, when FEAR is in the air, and BLOOD is in the streets} is a great time to buy. Yes, I said it and you can quote me. But let me qualify just a bit. Finding those killer, stellar, extraordinary locations [location x 3] is a challenge in good times, it is not only easier in times like these, it is almost taking candy from a baby if you are patient and persistent. Great locations purchased from distressed sellers that must liquidate ... that would be called an opportunity in my book. Guy like MD who are nothing but doom and gloom will try and time the bottom, but guess what? They will miss the buying opp of our lifetime. What part of BUH-BYE did you not get. Then again...I bought a great piece of property in 2003 - that was an even better buying opp because there were a lot more buyers in the market and it was possible to be an investor flipper in those days. Now its a different scene, but the market will come back - not as quickly as we had hoped thanks to recent events - but it will. Location, boyz and girlz. Views. Buying at the right price. Pretty basic stuff. This is a great time to buy if you buy very, very carefully. There are some extraordinary deals out there if you have the cash and some patience. The world is not coming to an end. This is not GREAT DEPRESSION II. It is a nasty recession. Cash is King, but if you dont have reserves, stay on the sidelines. If you do have a little investment stash, be smart, find the value in a great location and you will be proud of yourself a few years from now for snagging a great piece of the pie that would not normally be available - when it was on sale. Just a reminder to you doom and gloomers - I am not a real estate agent, just a dumb investor dweeb that has made a fortune in these kinds of times, when no one else is buying. Peace out.
  • Mark W
    I'm not a realtor nor a cheerleader - in fact, I think prices will likely drop another 15%+ before the shakeout finishes.

    But in response to Dan C., unlike a lot of investments, for most folks I don't think you can separate out the "personal situation" aspect. For a lot of people, there's a satisfaction that comes from owning their own place, to do it up any way they want, in putting down roots, etc. And there is the practical aspect that it does in fact provide a function - shelter. Those are perhaps less tangible benefits that come with home ownership. How much are they worth? That's highly personal.

    As for an economic-centered argument.... In my 401(k), I recently transferred money from a cash fund to a stock-based fund. I'm not convinced the market has hit bottom, but I suspect that it's a lot closer to the bottom than the top, and perhaps I'll benefit from the ride back up - I'm only 47, so I've got time on my side.

    If someone's looking for a home for the long term, they could rent for now and hope to purchase at the bottom, to be sure, or they could start living the homeowner lifestyle they want now even if they'll won't come out as far ahead in the long haul.

    Freshly minted retirees, for example, might want to buy now. Young singles who may get married or start families in a few years and will need more space might want to hold off. Again, personal situations are a consideration.
  • FWIW, only a few real estate agents have ever left comments on a post here. The vast majority of commenters here are not real estate agents as much as everyone likes to think that all the cheerleaders are real estate agents...
  • The MD
    Dan C, although I think your question deserves an answer, I'm afraid all you're going to hear are crickets chirping. The sudden lack of response from the RE Agents that are typically bombarding this site is testament enough that none of them want to touch your question with a 10-foot pole. So, I let their silence speak for itself because most of them do not use economic reasoning whatsoever. Most RE Agents are driven by placating to human emotion and manipulating feelings to create a sense of urgency to purchase immediately and at higher prices. Hey, its what keeps them in business. This is why I TYPICALLY lend no credibility to an RE Agent when he/she tries to speak to me about the market. Instead, I will do just about the opposite of their recommendations, and I've found it keeps me successful in the RE market.
  • Dan C
    There has got to be a realtor on here who will answer my question...we the public want to know!

    When is it a bad time to buy? When should I not be buying a house?

    I am not looking to flame anyone, I just want an intelligent answer. And I don't want to hear "dependant on your personal situation", I want economic reasoning.

    Proceed...
  • Joel
    I agree with Mike2 on the V shaped recovery overhype. Why risk a 10-60% downside by buying right now just because you might miss out on a 3-4% upside by buying a year after the bottom.
  • Mike2
    V shaped recoveries are usually a mid cycle phenomenon. They're exceptionally rare at the end of a cycle.

    Most economists are predicting an L shaped recession, so a V shaped recovery in the RE market is either unlikely, or some kind of false bottom.

    Real estate sales people tend to favor the V hypothesis because it creates a false sense of urgency as buyers fear they'll miss the bottom as prices skyrocket back up. However, looking at past market cycles the V recovery almost never happens.
  • Ross
    The conforming loan limit for king county is shortly going *down* to $506,000. http://www.hud.gov/offices/adm/hudclips/letters.... More downward pressure on pricing.
  • Dan C
    If NOW is a good time to buy, when is it a bad time to buy?

    Regardless of my personal feelings, this is the new "buzz-line" in all marketing campaigns. They even have the righttimetobuy.org webpage!

    I mean this in all seriousness. If a Real Estate agent truly and honestly feels like it is a good time to buy right now, when is it a bad time?
  • Matthew Gardner
    Matt - Sorry for the confusion. My intent was to suggest that it is my contention our economic growth will be "V" shaped. Declining through the second quarter and then picking up later in 2009. I hope that clears up any misunderstanding.
  • voight-kampff
    vanderleun, did you read the report from williams marketing? I didnt see really any spin. I was actually impressed that they showed many negative aspects of consumer confidence etc, and put no spin on it ( well very little ). I actually participated in the survey and was wondering to my self " how are they going to spin this into pink ponies... but they didnt!... I say bravo Williams Marketing.
  • Slide deck isn't up from this year but here is last year's: http://www.irem27.org/pdfs/news43/IREM%20Foreca...
  • vanderleun
    From this we can conclude not whether or not the glass is half empty or full, but how much BS there is the glass.
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