A hot market, an exotic means of exchange — what could go wrong...

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When I read my colleague Mike Rosenberg’s story about bitcoin being used to buy a three-bedroom rambler in Tukwila, my first reaction was: We’re officially in a bubble. Last time the exotic, cutting-edge “advance” was the subprime mortgage. This time it’s a “currency” with no central control, no Federal Reserve, existing only on computers and faith.

“Officially” in my premonition lumbago ache, at least. I’m one of the journalists who “called” the housing crash more than a decade ago, “called” the run on Washington Mutual. But I don’t have all the answers. I hate question mark headlines (readers could be excused for reacting “Why are you asking me?”), but in this case a little hedging is necessary.

Still, fears of a bubble in the Seattle area have been around for awhile, as price appreciation has led the nation month after month.

Until now, I’ve been skeptical. Population, jobs, wages and household income were rising smartly, above the national average. Unlike the Sunbelt epicenters of the 2007 meltdown, we’re not overbuilding and basing our economy on real-estate speculation right down to house-flipping. The economy here is robust, diverse and among the biggest beneficiaries of the peculiar characteristics of this recovery and expansion. The issue of foreign buyers purchasing on spec is real, but difficult to quantify.

One could also argue that the Tukwila transaction was fairly routine, once the parties involved were willing to accept the decentralized cryptocurrency, converted to dollars. This kind of deal isn’t out of the ordinary with other conversions, say, selling stocks. The buyer apparently intends to live there, too.

But not every bubble is a repeat of the 2000s. Let’s not be the French General Staff, fully prepared to fight World War I just as World War II changes the paradigm. Bubbles happen when assets become untethered to their real underlying value. The upward bidding can go on for months or years, fueled by promoters. Savvy investors bet against the Greater Fool who will be left standing when the music stops. Many economists and analysts are worried about a worldwide “omnibubble” of stocks, bonds and real estate.

A bubble here isn’t characterized by whirlwind spec building. But it may be revealed by large capital flows, including from overseas, seeking a return from real estate. Capital flows can suddenly reverse. The housing market is already distorted. For example, little new inventory is coming onto the market (officially, at least) because owners are afraid they couldn’t afford another house here if they sold. Several indicators show that the regional economy’s growth started slowing last year. Such fundamentals can cause a sudden shock. Also, there’s the arrival of bitcoin, an unstable asset whose troubles might reveal unrealized systemic risks — attention should be paid.

If it pops — barring a cataclysm — such a bubble wouldn’t make Seattle suddenly “affordable.” If part of a recession, it would hurt lower-income people the worst. And this remains a highly desirable area, a major economic center. So, as with the Bay Area and coastal Southern California, prices would drop — but still be relatively high. And they would soon rebound.


Today’s Econ Haiku:

Rat walked on a plane

Must have lost his boarding pass

Seat width is right, though