Please see Part I of this article, A Cautionary Housing Tale from Japan, here.
As I promised last week, I went next door to check out the house that is for sale, and I also gave my good friend Terry, who is a real estate agent in Seattle, a call to get an idea of what's going on with housing back in my old hometown. What I found was a tale of two cities that reinforces the idea that Mr. Alan "there is no national housing bubble" Greenspan gave us. While there may be no national housing bubble, there are a number of localized bubbles at various stages of development. I mentioned before that it seems like half the country wants housing prices to keep going up, because they're owners, and the other half want prices to come back down, so they can buy! This tale of two cities has some good news for both crowds. But first the bad news:
The chart above has been floating around on the net for a while now, and shows clearly that the stock market follows the NAHB Housing index nearly perfectly, with a one-year lag. The housing index has fallen by over 50% from its 2005 highs, and shows the signature sign of the bear: lower highs and lower lows. So naturally we should expect a general 50% market crash in the next year, right? Well, what the heck is this NAHB Housing Index (NHI) anyway?
Apparently it is:
...derived from a monthly survey of builders that NAHB has been conducting for nearly 20 years. Homebuilders are asked to rate current sales of single-family homes and sales expectations for the next six months as "good," "fair," or "poor." They are also asked to rate traffic of prospective buyers as either "high to very high, "average," or "low to very low." Scores for responses to each component are used to calculate a seasonally adjusted overall index, where any number over 50 indicates that more builders view sales conditions as good than poor. [Source]
So the NAHB Housing Index is a measure of homebuilder sentiment . A key theory behind the new science of Socionomics is that sentiment, or social mood, is the primary driver behind market direction, and not the other way around. The chart thus helps to confirm the Socionomics thesis. The Index is currently around 30, its lowest level since our last real recession back in 1991. As national builders expectations have fallen, look at what has happened to the stock prices of the large publicly traded homebuilders:
Most of them have already declined over 50%. (Interestingly, they are now starting to bounce, just as the news in the media seems to be the worst.) The homebuilders have led the general market up over the past few years, so it is reasonable to expect that, like the tech companies after the 2000 bust, they will lead the market - and the economy - back down. Don't forget that over 3.4 million jobs - home appraisers, inspectors, mortgage lenders, decorators, termite exterminators, real estate agents, furniture makers, etc. - are tied to the residential housing industry. As the mood turns down among these 3.4 million workers, the market is almost a sure bet to follow.
In my neck of the woods, near Boston, pessimism and falling prices are in full bloom. Median house prices in July fell to $361,000, from $375,000 a year earlier - a 3.5% decline. And houses are languishing on the market, suffering price drops and a lack of buyers. A case in point is the house next door to mine, a five bedroom duplex that was originally listed in June at $565,000 and has already seen two price cuts, first to $525,000, and now to $499,000. But judging from the condition of the house (it needs a lot of work), and the sparse crowd at the Sunday open house, there is still plenty of room for the price to fall. A year ago it might have been a canditate for a quick flip, but now buyers are waiting to see how low the price will go. Heck if the price comes down enough, I might even buy it!
Some realtors in the neighborhood have begun running open houses on weekday evenings to entice the neighborhood after-work crowd, because the traffic just isn't there anymore on Sundays. One of the problems with Massachusetts in general, and Boston in particular, is that the economy is stagnating while the general cost of living remains high. The once vibrant Route 128 high-tech economy has slowed considerably, and the state is experiencing a net exodus of young workers who just don't see the point in staying. So where are they all going?
One place that is seeing a net influx of people is Seattle.
Terry Kildal is a real estate agent in Seattle, and a good friend of mine. We met over a decade ago in Seattle as new stockbrokers around the beginning of the great bull market of the 1990's. Today Terry is a successful real estate agent living on Queen Anne Hill, one of Seattle's most exclusive neighborhoods, home to mansions with the best views of the city.
I called him expecting to hear tales of gloom and doom similar to those here in Boston, but was pleasantly surprised to hear otherwise. It is true, he says, that in Seattle there are more properties on the market than last year, and sales have slowed somewhat, but that prices remain firm - at least in his neighborhood. Terry attributes this to a number of specific advantages that Seattle still has over the rest of the country: In contrast to Boston, people are still flocking to Seattle - many from California and other higher priced regions - because the city is still seen as a relative bargain. The general cost of living, and the cost of housing in particular, is still lower than "top tier" US cities such as New York, Boston, San Francisco, etc. The local economy, anchored by new-economy behemoths such as Microsoft, Amazon, and Starbucks - and the old-economy stalwart Boeing - remains robust. People seem generally more optimistic about the future. And Seattle is one of the most physically beautiful cities in the world.
Many long time Seattle residents are pessimistic about the market, only because they can't believe how high prices have risen. But newcomers see the same prices as bargains. Based on prices elsewhere in the country, and Seattle's economy and reputation, higher prices are not out of the question, and it is something Terry does not rule out. He has the cautious optimism of a seasoned professional, but he also knows anything can happen. He also sees danger signs developing: Prices are rising on lower volume, and the number of homes for sale is also rising dramatically, another bad sign. As a result, homes are sitting on the market longer before finding buyers. He also pointed me to this article (great graphic at the end) that says median prices for sales in the city fell last month.
But so far, he says, prices in his territory are holding, because Queen Anne is a special place. It is close to downtown (you can walk), has good shopping and entertainment (also within walking distance), good elementary schools, and there are simply a limited number of large, older, craftsman-type homes on the Hill. They just don't build them like that anymore, and the newer houses in the suburbs are simply no comparison. As a result, Terry expects prices and demand for homes on the Hill to remain more stable than in some of the newer developments. As he put it - "Michael, it is a market of homes, not a housing market."
I tend to agree that specific cities, neighborhoods and even houses will be somewhat immune to price declines simply because they are unique, and will therefore retain their attractiveness. There is simply no place else in the world like Queen Anne Hill, and I for one, hope to move back there someday.
The optimisim on Seattle is shared by Forbes/Economy.com which predicts that prices will nearly double over the next 10 years.
Is such a thing possible? After witnessing the bull market of the 90's, it should be clear than anything is possible!
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If you're looking for an experienced, knowledgeable agent in Seattle to help you sell your house or look for a new one, feel free to drop Terry a line through his website, and tell him I sent you.
Next time I'll write about a disturbing trend that Terry told me about - higher taxes that are straining the budgets of older residents on fixed incomes, and what they are resorting to in order to deal with it. If you would like to be notified please subscribe to my low volume e-mail announcement list.
Some excellent websites that were useful references in putting this article together:
Terry Kildal - Seattle Properties for Sale
Boston Bubble - http://www.bostonbubble.com/
Seattle Bubble - http://seattlebubble.blogspot.com/
Patrick.net - http://www.patrick.net/