Some Perspective on the Housing Bubble

This morning I came across an article on the financial troubles facing publicly-traded companies that build new homes. It inspired me to talk a little about the housing “bubble” and hopefully convey some perspective on what’s happening with real estate both nationally and locally.

Written by Oxford-educated financial analyst Judith Levy, the article cited rising foreclosures ”particularly among sub-prime borrowers…and a corresponding tightening of credit standards among [mortgage] lenders” as the reasons for the rise in unsold inventory and decline in new home sales nationwide.

Unfortunately, the consequences of this scenario effect more than just these companies’ bottom lines – some consumers also suffer. When new homes don’t sell quickly, downward pressure is put on resale home prices as builders offer deep discounts to get their homes sold. This means the average seller gets less money for their home. Buyers fare better however – they pay less for a home and can sometimes negotiate concessions like seller-paid closing costs.  

Looking at the national real estate market, things aren’t pretty in some areas. Las Vegas, parts of Southern California and Florida have been among the hardest hit by negative price changes. Many who bought homes in these areas over the last 4 years or so are having trouble selling for what they paid. It’s generally agreed that the two main contributing factors to this “bubble” were/are easy money and rampant speculation. 

Around 2003, it became much easier for those with marginal credit and income to get a mortgage. Unfortunately many of these mortgages had a short-term fixed “teaser” rate which changed to an adjustable rate 1-3 years later. (Imagine a mortgage payment of $1200-1500 the first 1-3 years in your new home, followed by payments that jumped to $1700-2000 or more as rates increased. Frightening, eh?) It’s now obvious to many that this money was irresponsibly (or even unethically) lended.

Speculation is also to blame. It’s my impression that many so called ”investors” with little or no property investment experience and perhaps at the prodding of unscrupulous real estate agents made some (very) bad decisions. The statement, “there’s no way this property will ever go down in value – get it now, make a bundle on appreciation, then sell it” was likely said in many ways on occasions too numerous to count.

Late last year I had a listing appointment with a seller in West Seattle who purchased a home in May 2006 for 270k. She paid a contractor to completely renovate it and put it on the market 4 months later for $465k. 2 different agents, an attempt to sell it herself, and price drops totaling more than $100k haven’t accomplished much - it’s still on the market! When I entered the picture she was interviewing her second round of agents. She didn’t like what she heard when I told her what it was likely to sell for, and listed with someone else. It was my impression that she financed the renovations and continues to borrow to make the monthly mortgage payment.  She’s an unfortunate example of a speculator who got burned – badly.

What does all this mean for the Seattle-area market, and specifically for the Bothell micro-market? According to the article Getting Real About Real Estate in Fortune magazine’s 2007 Investor Guide, not much. In fact, it predicted 3 of the 5 strongest western markets during 2007 and 2008 would be right here in the Northwest – Tacoma, Seattle/Bellevue, and Portland (in that order). And as for whether new home sales are slumping in the Bothell market area, the answer is a resounding no. Quadrant Homes, the state’s largest builder, reported stronger-than-expected sales last month, and the stats support their claim – February’s new home sales were up 9% over the same time last year in our immediate area. As Quadrant Homes president Peter Orser noted in the comments section of this post, housing affordability poses a much bigger challenge to our market then any “bubble.”

More Jobs, Shorter Commutes for Bothell?

In an article printed by the Everett Herald yesterday, Eric Fetters reported a sharp decrease in Snohomish county’s available industrial space.

Commercial real estate firm Cushman & Wakefield reports a 9% industrial vacancy rate locally – 3% less than last year and 8% less than in 2004. Businesses contributing to the decrease include moving and storage company PODS, as well as print news industry’s Sound Publishing in Everett. 

Conversely, the vacancy rate for office space remains high – in the neighborhood of 18%. Gary Bullington at Cushman & Wakefield expects this rate to decrease in the near future, however. With office space in Seattle and Bellevue becoming increasingly hard to find, businesses are moving north along the I-5 corridor to Snohomish county. Bullington expects Bothell to benefit from this influx first - something commercial developers knew awhile ago, evidenced by the abundance of new office buildings currently under construction. 

The bottom line for Bothell and the rest of Snohomish County? As more industrial and commercial space is leased, the availability of local jobs increases and commute times for local residents decrease.