Posted June 24 2010, 3:21 AM PDT by Matthew Gardner, Chief Economist, Windermere Real Estate

Report's dramatic predictions for home values

Posted in Market News by Matthew Gardner, Chief Economist, Windermere Real Estate

A recent report from Goldman Sachs has many people talking and asking questions about where home prices are headed as we head into the latter half of 2010 and look forward toward the next few years.

Looking at several markets, the report suggests that the metro areas of Las Vegas and Portland will show declines (-12 and -4 percent in 12 months and -6 and -12 percent in a 24-month period) while most of California will show very modest gains (San Diego increasing by 5 percent in 24-month and San Francisco increasing by 3 percent in the same time period).

Perhaps the most dramatic prediction suggested that Seattle real estate values were set to move lower by eight percent in the next year and 22 percent in two years.

These figures are quite extraordinary so I set out to review their methodology and discuss my feelings as to their analysis. These are my cursory thoughts:

  1. The geographic area that Goldman Sachs uses for their analysis is the same as the Case Shiller (CS) Index (a foundation for the historic information that they parsed). My issue here is that the CS Index geography for the Seattle metro area includes King, Pierce as well as Snohomish counties. It is clear to all that follow real estate values locally that we are suffering far more in the counties to the north and south of Seattle, and that to use this geography will likely skew results.

  2. They also consider mortgage delinquencies in their model. It is true that foreclosures are up in our market but not to a level that gives this credence. In fact we are well below all of our west coast neighbors if I look at foreclosures per household.

  3. They add mortgage rates into their model and it is my belief that, although we will see rates increase in the second half of this year, I do not anticipate a move much above 6.5 percent until well into 2011 if not later.

However, I am also not sure that I concur with the philosophy that excessive price declines back in 2008 and 2009 (far more in other markets than were seen in Seattle) will allow for greater stability going forward. If we are in an environment where we are creating jobs and economic growth here, why will we fair so substantially worse than our neighbors everything else being equal?


The analysis is interesting and forecasting is an inherently complex and difficult task, especially when you are looking at real estate where emotion is as strong an influence as logic. Only time will tell who is correct.

This post was written by Matthew Gardner.



  • • Mortgage rates are unbelievably attractive. Remember that when investors buy real estate, they are also essentially “buying”, on time, a boatload of money (and they typically can’t get the money unless it’s secured by… real estate). With the common leveraged weighting of loan to value (mortgage to price), perhaps the “value” of the money becomes as worthy of consideration as the price of the real estate in defining benefit. Let’s do the math on an 80% LTV payment on a $400,000 sales price = $320,000 / 4.375% 30 yr fixed (6/24/10) = $1,600 P&I. Now let’s see what happens if prices decline 20% but interest rates climb 2% to 6.375%, last visited "way" back in Q4 ’08 (19 months ago). Same property, now a sale price of $320,000 with 80% mortgage balance of $256,000 and 30 year fixed rate mortgage payment at the 6.375% of… $1,600 P&I ! Huh. (yes indeed, the down payment would be $16,000 less).
    The same pessimistic reports on declining home prices typically project the probabilities of substantively higher interest rates in order to facilitate future borrowing by the feds... and mortgages have always had to compete.
    I suppose the questions prospective buyers need to answer are…”to own or not to own?”, “what’s at greater risk, these historically low interest rates or home prices?” and “if not now, when?”

    Posted June 25 2010, 6:53 AM by Bob Edwardsen

  • Mike - These are all very valid points and all add further credence to my opinion! Thank you.

    Posted June 24 2010, 6:55 AM by Matthew Gardner

  • Strazz - I completely concur with your statement relative to geography. To consider Seattle as the three county region is clearly erroneous.

    I read the GS report in its entirety and it is unclear as to whether they considered time in a "down market" within their analysis.

    Irrespective of this, I do feel that they have not considered many factors (some mentioned above) in their study that leads me to question the results.

    Posted June 24 2010, 6:54 AM by Matthew Gardner

  • Tonya - I am glad that we agree on "potential" declines. I think that we have to look at this from the perspective that buyers as well as sellers, have been negatively impacted and that they are somewhat "gun-shy". I have always been of the opinion that geographic, topographic as well as regulatory constraints, have allowed us to be a more stable market than many others, although certainly prone to macroeconomic variables.

    I agree that we can expect to see flat line/modestly lower prices through the balance of the year and that we will garner very modest price appreciation, but appreciation none the less, for the following 24-month period.

    Posted June 24 2010, 6:48 AM by Matthew Gardner

  • This is a personal rebuttal to the Goldman-Sachs article which recently appeared on the internet saying in effect that Seattle’s real estate market is 20% inflated. Please see Matthew Gardner’s article on the Windermere blog. He pretty much tears it apart and debunks the nonsense which it spread. I think Matthew Gardner is right. What follows is how a native son (me) sees our region and the employment diversifications which make Washington State, and in particular the “Greater Seattle” business area a region more able to withstand economic downturns.

    1. Education.
    A. The U of W ranks number 1 on the West Coast in Student Population with 40,000+ full time students. It is 1st or 2nd in the nation in receiving US Government research grant dollars of all US public universities, and in the top of 5 of all universities either public or private.
    B. Seattle University has its largest enrollment of incoming freshmen ever.
    C. Seattle Pacific University, though smallish has many “Post Graduate programs.
    D. Seattle CC has 3 branch campuses inside the city limits.
    E. Other higher education schools include U of W Bothell and Tacoma Campuses, Green River CC, Shoreline Community, Edmonds CC, Everett CC Skagit Valley CC, Western Washington University in Bellingham, Renton Vocational Tech.

    2. Manufacturing.
    A. Boeing is hiring and has record setting orders for its 737’s, 747 modified stretch”, and of course the 787’s with the “awarded” Air Force tanker bid (767 modified) still a very viable possibility.
    B. Weyerhaeuser and Plum Creek in Federal Way, and Georgia Pacific in Everett.
    C. Plus, Ken Worth Truck manufacturing Co, Pacific Car and Foundry, Nintendo, Microsoft and many, many high Tech companies, and Todd Shipyards/Harbor Island Seattle

    3. Retail.
    Nordstrom,, Costco, REI, Eddie Bauer, Starbucks, and again Microsoft and Nintendo, all huge “World” retailing companies and all based here.

    4. Bio Tech and Medical R & D.
    ZymoGenetics, Dendreon, The U of W Medical research labs, Fred Hutchinson Cancer Research and many start-up drug research companies. Seattle must rank in the top 5 for bio-med research.

    5. Tourism.
    Tour ship departures equal “clean” dollars to our economic base and much needed tax dollars to the Port of Seattle (SeaTac International, Boeing Field International, and the Seattle waterfront Port infrastructure) and are projected to be up significantly this summer compared to last year, Seattle Sounder, Seattle Mariner, Seattle Storm, and late summer and fall, Seattle Sea Hawk professional sports franchises will bring thousands of people into the city enriching the hotel/motel and restaurant industry, and this fall, Husky football and Basketball seasons begin, all adding up to lots of entertainment dollars.

    6. Infrastructure maintenance and new construction.
    Work is about to begin on the Viaduct tunnel, 520 bridges retro fit, along with City, County and State and ongoing maintenance. Further, Sound Transit expansion, plus seasonal road maintenance programs and other construction approved and budgeted for.

    7. The Arts.
    Seattle’s Arts and entertainment community is no small thing. We have, I’ve heard from people who should know, the 2nd largest live theatre scene in the USA, biggest in the number of independent theatre acting companies, with the Seattle Repertory just garnering a tony award. No small achievement. More than a few new plays have debuted here and move on to be smash hits on Broadway. We have the Pacific NW Ballet, Seattle Symphony, the wonderful Seattle Opera (which puts on Wagner’s Ring every 5 years) and a thriving music industry (think Paul Allen’s EMP). The Seattle Art Museum regularly features wonderful Art exhibits from great artists that tour only the world’s great museums. Each year the Seattle International Film festival (SIFF) debuts new movies and is internationally respected. The City has its own very famous Cuisine and tons of great restaurants’ and Chefs to go along with them.

    8. Natural resources.
    Thanks to the Columbia River and its tributaries we produce more hydro-electric power than anywhere in the USA, benefiting nor only our state, but other neighboring states. This is the main component in allowing a wonderful agricultural diversification which make some of our State’s agricultural products internationally sought after, including apples, potatoes, wheat, hops, and in the last 25 years, we’ve grown to become the 2nd largest producer of wine in the USA. Our sea food industry thrives and is renowned for crab, salmon, halibut, and shell fish. Check the Pike place Market if you doubt it! We have several National Forests, ski areas, and an actual desert, plus the largest rain forest in the contiguous US. The beautiful Archipelago know as the San Juan Islands, served by the Washington State Ferry System, the largest ferry system in the United States a tourism “don’t miss” in and of itself, that serves all of Puget Sounds many islands and the mainland Kitsap peninsula. This beautiful natural setting we are so lucky to live in, with it all close by, is a destination for all of us, and the possibilities are endless. That’s why we are one of the largest “per capita” boat owning cities in the USA. Finally in this category is the Seattle import/ export container facilities which together with Tacoma and Everett are the 2nd or 3rd largest (depending on who’s keeping statistics) facilities of their kind on the West Coast Seattle is geographically the closest port of entry to Asia in the entire USA.

    9. Military Bases.
    A. Joint Army Air Force Base McCord/ Ft. Lewis, in Pierce County.
    B. Everett Naval Carrier Group.
    C. Bangor submarine Base.
    D. US Coast Guard/Seattle.
    E. Bremerton Naval Ship Yards.
    F. NOAA/ Sand Point Facility/ Seattle.

    10. Diversity.
    We are blessed with a rich ethnic diversity only a very few great cities possess. I believe that there are only a very few countries in the world with immigrants not living here and calling it home. This diverse mix is reflected in our architecture, restaurants cuisines, neighborhoods and common values. We are more accepting of other cultures and religions then most cities and we are made better by this rich “stew” of diversity.

    To end, Metropolitan Seattle is a world renowned destination city for really smart people because of our sophistication and many, many opportunities to investigate, invent, and try new things. I believe we are the envy of many other cities not just in the USA, but in the world. I don’t know why you would want to be anywhere else in the world.

    Mike Gannon; Windermere agent and an Optimist, and very happy to be both!

    Posted June 24 2010, 6:29 AM by Mike Gannon

  • Hello Matthew

    I like to say "real estate markets are very local" and it is not fair to label "Seattle" with such a large geographical area, just to grab a headline.

    I was wondering if the Goldman Scacs model used a time horizon value (month in a down market) for their prediction formula. If they compares our downturn to other markets such as LA for a time period in a downturn, then forecasting our depreciation still has many months to go. As most of us know Metro Seattle was over 12-18 months late into this latest down turn.

    Historically Seattle has been late to arrive and early to leave housing market down turns. Do you know if GS had a "X" value for how long we should be in this turmoil. And if so is that not a flawed assumption.

    Posted June 24 2010, 5:38 AM by Strazz

  • Matthew,

    I would agree with the up to 5% decline if a flood of foreclosures come on the market. Just in the homes I've been comping this year it seems they have declined 2-2.5% since the beginning of the year already.

    I know I'm asking almost the impossible but do you expect by the end of this year we bottom out? And see gains in 2-3 years as I've heard in other predictions recently?

    Posted June 24 2010, 5:05 AM by Tonya Brobeck

  • Thanks you for your comment.

    Monthly data shows that the MSA (King and Snohomish counties) added 10,800 jobs in May. You are correct in your statement that government hiring is occurring (+4,000 last month) but we also saw increases in the Leisure & Hospitality sector, gains in Trade, as well as in Construction (who would have though it!)

    State forecasters are also calling for us to emerge slightly ahead of the nation as a whole.

    Posted June 24 2010, 4:49 AM by Matthew Gardner

  • "If we are in an environment where we are creating jobs and economic growth here..."

    And exactly where are we creating these jobs and growth, other than the government?

    Posted June 24 2010, 4:10 AM by Hana

  • Hello Tonya:

    This is, of course, the $64,000,000 question and one that is rather hard to respond to!

    If we look at NWMLS data, we can see that year-over-year prices for resale single family residences that have sold are up by 6.8 percent in King County, but down by 1.6 percent in Pierce County and 3.6 percent in Snohomish County (I look at resales only to match the Case Shiller methodology.) This fits with my comment that all markets are not created equal.

    However, we are still seeing some dramatic downward pressure on list prices (-12.6, -9.5, and -13.5 for the three respective counties) so sellers are certainly feeling pain and that effects our overall psyche.

    Transactional prices in King County will likely remain relatively static for the balance of the year unless we start to see a flood of distressed homes coming to market. If we do, then we could see a decline in sale prices of up to 5 percent. One positive thought is that if we see our local economy improving faster than the nation as a whole, and interest rates remain at or about where they are, this should offset any substantive declines.

    Posted June 24 2010, 4:09 AM by Matthew Gardner

  • In your opinion what do you think Seattle (surrounding counties) will do decline wise then?

    Posted June 24 2010, 3:44 AM by Tonya Brobeck