Seattle: A Needle in a Haystack

New York, London, and Los Angeles–all have felt the tremor of the sub-prime housing fiasco over the past few months, as evident by the decline in home values in these major cities. Homeowners have lost substantial amounts of home equity, while at the same time seen their adjustable mortgage rates rise, making their monthly payments greater, sometimes beyond their means. This led to a larger amount of foreclosures and subsequently a greater amount of houses entering the 'for sale' marketplace, creating an excess of inventory amidst wary home buyers. How then, in a time of such excess, can any major city boast appreciation in home values? Just ask home sellers in Seattle (one of only five major cities in the U.S. still seeing home prices grow) and they might say it is because Seattle is a hidden gem, or maybe because of all the rain; either way, there are undeniable economic factors of supply and demand keeping this lucky city afloat in the midst of the sub-prime storm.

For starters, Seattle is a desirable place to live. Located between water and mountains and geographically spread out amidst lakes and hills (downtown Seattle left, Bill Gates' home below), its scenery is naturalistic and unequaled in beauty. Not to mention, it boasts a top seat among America’s fittest cities (1st in 2005 and 8th in 2006) as well as the number one spot on the most educated (52% of Seattleites have college degrees). In other words, Seattle benefits from what is known as the “knowledge economy,” which draws highly educated individuals to live and work in the city.

So how does this translate over to the housing market? Well, in an area geographically dense with water and mountains, livable land is scarce, making homes a relatively valuable commodity (simple economics of scarcity). This creates a greater demand for homes than there is supply, causing housing prices to be greater than average ($439,000–median home price in Seattle as compared to the average U.S. median home price of $213,900). Additionally, the city has a below average public transportation system that, when compared to the likes of San Francisco's BART or London's Tube systems, is plain embarrassing (see image below). The disdain for public transit, though heavily used, keeps the city's housing market up due to the desire to live close to one's work.

Geographic availability, however, is not the only thing working in favor of Seattle's robust real estate market. The positive synergy created by Seattle's intelligent populace earning relatively high incomes is the amount of bad-debt loans is substantially below average. As of September 2007, 5.12% of all loans held in the United States are delinquent, verses 2.6% in the state of Washington during the same period. The outlook is even better for Seattle. According to economist Matthew Gardner, “[Mortgage delinquencies and foreclosures are] not happening to Seattle to any degree whatsoever…we’re not seeing any fallouts.” Furthermore, of the 40,000 prime-loans in Washington, only 167 are at risk. So with significantly less foreclosures, local lenders can afford to issue mortgages with lower yields than elsewhere in the country, enabling borrowers to remain present in the marketplace, and keeping the housing market in afloat.

What about Seattle's future? With the Bill and Melinda Gates Foundation's recent donation of $105 million to the University of Washington's Medical Research Center, which is part of the Cancer Care Alliance, Seattle instantly became the most funded cancer-research city in the country. This, along with the prosperity of Starbucks, Microsoft, and Boeing, lead city-planners to believe that Seattle's population will double by 2011 (currently 2.8 million, expected 5.6 million). If this becomes reality, not only will there be more traffic jams, but residential real estate within the city will become more precious as well-and Seattle will continue to defy the country's real estate crisis.

The Aftermath of September 18th: Interest Rates Down, Housing Market Down, What's Up?

The Federal Reserve, chaired by Ben Bernanke, made a bold move this past Tuesday in its decision to lower interest rates by half of a percent. This was a highly speculated decision that sent stocks through the roof on Tuesday, but the market quickly recovered and, by Thursday, the outlook was dreary. So, begs the question, do the long-term ramifications of a deflating dollar and an increased chance of recession merit the decision to reduce interest rates? To analyze this question, I looked to the world of blogs. My search took two different routes; first, I pursued how the decline in interest rates was received by the real estate and finance industries. I did this at Ben Jones’ blog, known as, “The Housing Bubble Blog.” Second, through the Boston Real Estate Blog, written by John A. Keith, I responded to how the man behind the scenes, Mr. Bernanke, was addressing the credit-crunch.

Article 1: Fed Cutting Interest Rates: Is there an upside?

Who are we kidding? By lowering interest rates last week, the Fed torpedoed hopes that this credit crunch currently strangling the U.S. housing market will somehow go away. This thing created by the “greedy investors and irresponsible borrowers” has stumped even our brightest economists. Our battleship is sunk. The signs are everywhere – Bear Stearns declaring its largest profit decline in over a decade; the cost of obtaining a home loan has gone up; Europe’s largest bank – HSBC – will shut down its sub-prime sector and cut 770 jobs; and worst of all, current Fed Chair Ben Bernanke (on the right) and recumbent Fed Chair, Alan Greenspan (on the left), don’t even agree with a recovery plan. Who on Earth (and I literally mean Earth) thought this was a good decision? Surely not the thousands of employees being laid off by the HSBCs or CITs of the world. Surely not the average American homeowner, whose home’s value has already declined 3% and will likely continue. Surely not the Aussie hedge funds or German banks that were so deeply entrenched in the American sub-prime mortgages that they’re now facing record losses. Even the poor schmuck who thinks he’s got it made by refinancing at a lower rate will see his home’s equity value take a hit far in excess of his meager refinanced gain. I see no rhyme or reason to any of this – it feels like this decision was a clueless stab at an unknown monster.

I do know this, however, the one in three odds Greenspan gave the U.S. economy for entering a recession is starting to look like a mighty small number.

Article 2: Bernanke to Congress: Butt Out

Ben Bernanke, the Federal Reserve’s Chairman, has testified before Congress that U.S. legislation needs to reflect tighter regulations regarding home-mortgage consumer disclosure. While, at the same time, declaring that, “any new regulations to raise mortgage-lending standards should be careful to avoid limiting the availability of loans in ‘legitimate transactions.'" Hold on just one second! Isn’t this the source of the credit-crunch nightmare in the first place? Indeed it is, and this, coming from the same guy who punished the dollar a week ago by reducing interest rates? Give me a break. Mr. Bernanke, I realize that historically it’s been the Fed’s de jure policy to ride the fence, and embrace the myriad of ways one might issue and resell a loan, but times have changed, and the more is no longer the merrier. If the mortgage crisis is as severe as the Fed believes it is (and indeed it appears it is – default loans last year exceeded any historical figure since they emerged in the 1980s), then the Fed needs to stick to the task at hand, and firmly enforce the issuance of loans, specifically sub-prime loans, to credit-worthy buyers.