Whither home prices? is a question on a lot of people’s minds. I have seen a couple of studies recently which came to radically different conclusions about the future of the Greater Seattle Bellevue real estate market, and I thought I should share them with you.
With the dramatic fall in home values in most major cities (but not all, by the way) over the past three or four years, many people have become very sensitive to what is happening in their local market. Some are the potential buyers thinking about the price they might have to pay, and whether or not their new home will hold its value. Some are the potential sellers thinking about the price they can get, and whether or not they should wait in the hope that prices will get better. And some are just watching the prices and thinking about their equity and how that impacts their retirement plans. So home prices are obviously a hot topic, and there are lots of organizations trying to predict what’s next.
One of those organizations is Goldman-Sachs, who arguably may be one of the lead causes of this mess (if you want the rest of the story, read The Big Short by Michael Lewis). Their report, titled Home Prices Have Not Bottomed Yet (skip past the first page in Japanese unless you can read Kanji) suggests that our Seattle housing market has significantly farther to fall – perhaps as much as another 20% in the next two years. Ouch!
Another organization is MacroMarkets, a firm that sells macroeconomic analysis and reccomendations to major investment firms. Their report, titled U.S. Home Prices Overshoot Down, posits that our Seattle housing market has already over-corrected, and that now, almost three years after the peak, their gap analysis methodology suggests that our current price level may be about 20% below its long term baseline trend, and represents an investment updside opportunity. Hmmm..
What is particularly interesting is that both studies use Case-Shiller data to develop their analyses, and Robert Shiller is in fact the Chief Economist for MacroMarkets
The big difference between these two studies, other than their conclusions, is that the Goldman Sachs version is explicitly short term, and the MacroMarkets may be a longer term view. The basis for the Goldman Sachs strongly negative view seems to be their assessment of our local vacancy rate, and a rising foreclosure rate. I note that we didn’t even make the Top-20 Highest Foreclosure Rate Cities list in 2009, and we have one of the strongest economies in the nation. The vacancy rate factor is a puzzler. Unlike many of the poster-child problem areas, we didn’t have the chance to overbuild so that we had more houses than people, unlike San Diego, Las Vegas and South Florida. Not that we are smarter or nobler, it’s just that the builders couldn’t get permits to build those excess houses – the Growth Management Act and the King County Building Department scotched that. Except for the glut of high-end condos in Bellevue and Belltown. Lots of money being lost there, but it’s being lost by the developers, not individual sellers, and it doesn’t hit the Case Shiller statistics.
The MacroMarkets view is strongly dependent on their estimate of the long-term baseline appreciation rate, which they estimate at 3.58% for the US as a whole and 5.51% for the Seattle area. While I agree and have always believed that Seattle has a long term appreciation rate that is 2 to 3% better than the US overall due to our strong economy and attractive climate and geography, these baseline rates feel a bit high to me.
So I wind up stuck in the middle, still thinking that we are just going to muddle through at about the same price level for the next 3 or 4 years, and then start to recover. That is essentially what I said in my Predicting the Housing Market Recovery post back in March. We shall see…
Best Regards,
Chuck
