[Photo Credit: Wall Paper Dev]
We don’t know about other parts of the country, but here in Seattle, in what seems to be the blink of an eye, the free-wheeling real estate times are back. The not-so-long-ago “too much” inventory of housing has suddenly vanished, banks are throwing nearly free money at homebuyers, and people are outbidding each other like it’s cattle day at the livestock auction.
As an example, a friend of ours recently sold his 2 bedroom, 1.75 bath working-class house in a decent neighborhood. Within a week, he had four offers, each arrived with a personal letter from the potential buyers (more on this in a moment) and supplemented with an escalator clause – a written commitment that if another offer comes in higher than theirs, they will automatically beat the higher offer by 5 or 10%. The house was off the market within days at a price well above the asking price. Our friend’s head was spinning with equal parts amazement and apprehension. There is a story similar to this every time we talk with someone who has just sold their house or is in the process of selling in or around Seattle.
With competition this fierce, the escalator clause has become standard practice, and extending an offer without one most likely excludes an offer from even being considered. This has created the all too familiar real estate market known as “the person with the most money wins.” To circumnavigate the plain logic of more money = house, buyers have initiated the personalized letter movement. This involves a letter written (by hand, if you’re sly) from the buyer to the seller expressing how much they love the house, that they picture their kids growing up there, and how great it will be to grow old on that wonderful front porch, etc. These letters are intended to tug at the heart-strings (as extra incentive to the bag-o-money-strings) and apparently, they work often enough that most buyers are including them with their purchase offers.
The takeaway from all of this is that the crazy times are back (already!): The term “foreclosure” has been relegated to the vernacular archives, buyers and sellers are losing their sensibility, and if we close our eyes and focus our hearing, we swear we can hear the faint sound of that bubble inflating again. We’re finding ourselves scratching our heads –Didn’t we just go through this ridiculous cycle?
Being fully entrenched in the architecture and construction industry, we were front and center to witness the havoc wreaked by the last real estate bubble: to the built-environment, to communities, and to individuals. We were all there. It was ugly. Very few people “won” and the fabric that connects our towns and cities suffered immensely. We lost trust in our banks, questioned owning property, and pledged not to do this again. Remember?
Here at BUILD World Headquarters we’re committed to proceeding sensibly. With no intention of going down this road again, we’ve put together our Top 5 List of things we learned from the recession –or at the very least, things we should have learned. Feel free to add yours in the comments section – we always love hearing from you.
1. Real estate bubbles are fueled by greed. The news may focus on stories about sparse inventory, the shady industry of sub-prime loans or the Icelandic banking system but, in our humble opinion, the heart of it all is greed. Limit the bubble by curbing the greed.
2. Behaving like communities puts all of us further ahead than behaving like individuals. If the recession taught us anything, it’s that we’re all in this together.
3. Your home should be an investment in family, lifestyle and community to the same degree that it’s a financial investment. Constantly trading up houses every 2 years to minimize real estate taxes and maximize personal profits at the expense of everything else weakens communities, promotes disposable housing, and inflates the bubble.
4. Most of us are happier with balance. The architecture and construction industries stand to gain a great amount from a real estate bubble. The phone rings off the hook, we get to pick and choose which jobs we take and we’re all crazy busy. But like most people we know, we’d prefer to maintain the sanity of balance in our life and in our work. Even if it means not being swamped with work flooding through the door.
5. Bubbles encourage crappy architecture. In the high-rolling times leading up to the 2007-2012 financial crisis we noticed that the work being produced in the Seattle area was unusually bipolar. New developments were either gratuitous and obscenely expensive, as exemplified by the EMP, or they were disposable 4-packs with short life spans. And a dearth of project types in between.
We’re not trying to be all doom and gloom here, but as the real estate craziness escalates we find it useful to remind ourselves why bubbles (and the actions leading up to them) are unsustainable.
Keep both feet on the ground and cheers from Team BUILD
If I may be sold bold as to quote a bit of Gandhi:
“Earth provides enough to satisfy every man’s needs, but not every man’s greed.”
knudsen – I’ll see your Gandhi and raise you an Edward Abbey “Growth for the sake of growth is the ideology of the cancer cell.”
I always read your blog as I appreciate your design aesthetic and I have referred others to it. However, I take issue with the first part of these statements and note I have no involvement in the real estate nor banking world.
Firstly, using the current low inventory/low mortgage rates situation to attack “greed” is inappropriate. Empathize with those folks who are currently trying to buy a house and who can get low rate mortgages, not because ” banks are throwing nearly free money” at them but because US economic policy is keeping rates low.
So these folks decide they want to live in one of those desirable neighborhoods, using whatever criteria is important to them. Surprise, surprise, such neighborhoods have low inventory of houses for sale. So they make a decision to do whatever they can, within their financial constraints, to get a house. Who can fault them for that? And if other folks, like that friend of yours, end up with more money than they assumed, what’s wrong with that? If they have not bought their next home, they will probably need it to buy their next one in this type of market.
Secondly, I challenge the notion that were a lot of folks constantly trading up houses every 2 years to minimize real estate taxes and maximize personal profits. In states like CA (where I live) real estate taxes are set by the last purchase price. Also, Federal taxes allow one to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return, but generally no more frequently than once every two years. However, very few people gain $500,000 in those two years so there is no Fed tax advantage to them moving at the two year mark.
From what I understand, in many areas, inventory of houses for sale will remain low. Partly, because a lot of houses are still “under water” in that the home owners owe more than the potential sale price. Many of these home owners being those who decided to refinance simply to take advantage of their increased equity and then spend it on things they could have lived without. So its really their greedy behavior that is keeping inventory low. Also, many developers are holding back building large developments as the future of low money rates is uncertain, so the number of truly qualified buyers in a more sane financing culture is somewhat unknown.
Keep up the good work!
6. The profession should finally be honest with itself and prove its value. Recessions happen with regularity every 8 – 10 years (at least since the early 80’s), yet firms are blindsided every time. The profession should stop fooling itself that the public, developers, etc. are in awe of it (they’re not). Start being a business. Demonstrate its worth by looking for problems and proposing solutions (e.g., non-profit work, affordable housing, urban renewal, disaster housing, etc.). But overall, stop with the schizophrenic, self-congratulatory, Architect-as-Superman, we-change-the-world nonsense. Start proving it, like BUILD does.
A former architect.
@ Peter – thanks for the rebuttal, we always appreciate the feedback loop.
@shtrum – wow, thanks and we hope we can live up to that standard.
“simplicity, simplicity, simplicity! we are happy in proportion to the things we can do without” – henry david thoreau
Diggin’ the strain of quotable comments…
Having recently purchased a house in the current market (technically, we bought on the Eastside last January, after seriously starting the search the prior August and bidding/losing on multiple houses before The One came along.)
I take some issue with the premise that this current surge in RE must be exactly the same as “The Bubble”. The Bubble was caused by bankers artificially inflating the pool of homeowner candidates. They did this because they realized that they could package and re-sell home-owner debt and not be left with any risk. If risk is no longer an issue, then vetting out qualified home-owners is no longer an issue. The Bubble was fueled by people who didn’t have the financial means to weather any dips in the market and inflated by the premise that home values will always increase.
People took low or 0% down loans to get into houses. People who weren’t sure if they really needed a house of their own vs. continuing to rent bought houses so they wouldn’t be priced out of the market, and people who already owned their own homes took out second mortgages on the increased values of their homes and lost whatever built up equity they once had.
Once the market crashed, a lot of people had no safety nets and couldn’t afford to continue payments. All of that debt was no longer being repayed, homes were being walked away from by people who had no money invested in them anymore, and investors who had bought up the RE debt packages from banks also lost their shirts.
The Bubble was caused by the need from banks to create an artificial demand from buyers who, were circumstances different, probably should have or would have continued to rent.
What we’re seeing now is Different. The last 4 or 5 years, most homes which were sold were sold due to hardship. Many people had to sell due to shifting employment, not being able to keep up with their house payments, or the feeling that walking away from their investment was a better financial choice than staying. But by now, whoever hasn’t had to sell yet can probably stay where they are fairly indefinitely. This leads to the current low inventory we’re seeing on the market.
My husband and I could have purchased a home any time in the last 5 years, but we chose to rent over that time period because the ratio of cost vs. convenience still held in Renting’s favor. What we saw over the last two years however were fairly dramatic increases in rent, to the point where buying a house with a large down payment would mean a lower monthly cost for us – with the added benefit of slightly more space, a garage workshop, and a garden.
I know we’re not the only people with the traditional financial means to buy their own houses coming back out of the woodwork, and I know this because of the types of offers on houses we were beaten by. The people who are buying houses in this climate are the people who can afford to put down 20%, 40%, or even buy outright with all cash offers.
What we’re seeing now is traditional supply and demand. Until the backlog of people who can easily afford to buy houses is expended, or the amount of houses being offered on the market increases, prices will be going up. And it’s not a bad, or greedy thing.
I’ve always appreciated your insightful entries and must admit that the phone does seem to be ringing more. However, what I have noticed is that as people are resurfacing from the depths and licking their wounds from this latest re(de)pression, I am witnessing a huge priority shift at every turn.
Back in 2007 the trend still seemed to be (at least here in KC) a continuous migration to the southburbs – bigger and more ostentatious. Buying large just to have more space. What I see now is cautious growth and a desire to stay put. People are expanding onto what the currently have and reluctant (perhaps content) to start anew, despite the market’s solidification.
It’s refreshing to see communities growing stronger. It certainly feels like a change in focus on what is really important. It’s no longer the quest for more space, but rather, a shift in perspective.