A month or two ago I was walking the dog in my neighborhood and I ran into a real estate agent who was about to list a home around the corner from me. The owners were moving out. She was surprisingly chipper and upbeat. It was all I could do not to laugh at her. They initially listed the three-bedroom two-bath house for $680,000. They’ve already come down to $630k. Up the street, another 3/2 is for sale for about the same price. Apparently these people are all smoking crack.
I recently was discussing the question of how much farther prices can fall around here and a friend made the argument that houses like those above (i.e. 3 bedroom houses in Bellevue) were over $700k last year. I think they can probably still lose another 15-20%, maybe more. Here are some reasons:
- Since I’ve been here, people have been showing the same retarded optimism about local housing that we saw in the rest of the country just before it started crashing. Everyone was trying to find reasons why Seattle was exceptional, but the prices are totally irrational. I read recently that transactions in the Seattle area in September were down 42% from the previous September. This means that the bid-ask spread for houses has gotten too wide: sellers are still clinging to the hope of high prices but buyers are unwilling to pay. The spread will have to close eventually, and its pretty obvious in this economy that it’s not the buyers who are going to move.
- The economic fundamentals of homebuying haven’t changed. The old rule of thumb has always been that you shouldn’t buy a home for more than three times your annual income. That means that the homes above would require buyers making more than $200k/year. These are not big homes. I just don’t see it.
- Seattle is overvalued compared to California. In the past, Seattle was always cheaper than Cali. Now housing is currently more expensive in here than in San Diego. Remember, in the winter it can rain continuously for days here. Just in the past week we’ve had multi-day rain spells, and at most a couple of hours of sunshine. Wait til January.
- People don’t seem to believe how bad it can get. In the spring of 2006 I had an interview for a job at HRL in Malibu. The closest place that seemed like it might be affordable was Thousand Oaks, CA. I drove up there and took a look. It was a nice suburban community. Pleasant, with an area with sidwalks and shops, and nice looking housing. Not big McMansions, but normal suburban split-levels and ranches. At the time, the cheapest three-bedroom detached house listed on realtor.com in Thousand Oaks was $525k, and there were very few under $600k. When I asked one of my potential co-workers at HRL how anyone who worked there could afford to own a home, he suggested that I could get an ARM. The guy telling me this had a PhD in computer science or some kind of engineering. Smoking Crack. Anyway, how is Thousand Oaks faring today? Right now, the cheapest three bedroom listed there on realtor.com is $240k, and there are 32 homes listed under $400k. And remember, these are asking prices, not closing prices.
I would not be surprised if a 3/2 around here comes down close to $500k. In fact, I think the only thing that can stop an enormous loss in nominal home values is massive inflation, which could bring down the actual values of the homes without bringing down the nominal values. This situation could actually be good for the sellers because it would allow them to pay off their debt even as the value of their home has fallen.
[Update 8/2009: I walked by that house in my neighborhood again. It’s still for sale, 10 months later, with a new realtor, listed at $498,000.]