IREM Breakfast Forecast: Not Good!

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.

About Matt

Matt , Urbnlivn's publisher, has a love for lofts with industrial features and new construction condos that is only eclipsed by his passion for outdoor sports and urban living. Phrases such as “polished concrete” and “exposed brick” are music to his ears. You can also find Matt on Twitter or skiing.

  • 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.

  • 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.

  • Matthew

    It’s not a good time to buy because prices are headed to 2002 levels or earlier.

    Period.

  • Matthew

    It’s not a good time to buy because prices are headed to 2002 levels or earlier.

    Period.

  • 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?

  • 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?

  • Ross

    Prices have already fallen to 2004 or 2005 levels. There’s only another 10-15% or so to reach 2002 levels.

  • Ross

    Prices have already fallen to 2004 or 2005 levels. There’s only another 10-15% or so to reach 2002 levels.

  • 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.

  • 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.

  • 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.

  • 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

    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.

  • 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.

  • 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/2008-12-12-homeprices_N.htm) 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.

  • 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/2008-12-12-homeprices_N.htm) 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.

  • 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.

  • 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

    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.

  • 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.