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Saturday, November 12, 2005

Bubble Collapse Imminent: Seattle Still Immune

National economists are waking up to the reality of a housing bubble, stating in a report that a downturn in the housing market could mean a million lost jobs. But what about here in Seattle? The Seattle P-I adds their own reporting to the AP report:

Much of the nation has had a lovely real estate boom for the past five years, but the house party is almost over, and the cleanup won't be pretty.

That's the word from economists and investors who have watched housing prices march ever higher.

"The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession," warned a July report by the Center for Economic and Policy Research.
Oh yes, it's been so lovely, hasn't it? Just so rosy and wonderful. Unless you're a first-time homebuyer trying to get into the market. Then it pretty much sucks. Too bad for you.
The dire warnings aren't region-specific — beyond hitting most places where home values have appreciated most. But many experts on the Seattle-area economy have suggested that the elements of a classic bubble — one in which prices could be expected to suddenly reverse directions — aren't apparent here.

Not that a sudden drag in the national economy wouldn't be felt here, perhaps at least flattening the 10 to 15 percent gains housing prices have shown annually in recent years.
Ah yes, it's my favorite news-reporting tactic: Referring to unnamed "experts" in order to back up the picture you're trying to paint. Don't worry, the worst that will happen is for prices to "flatten." The sky is definitely not and will definitely not be falling.
Others point to simple supply and demand. Bubbles have their own psychology — a neighbor tells you at a party that her house has tripled in value, and you feel like an idiot for renting — but supply and demand operates on logic, which has to kick in at some point.

Such factors could affect the Seattle market, though the region's heavily tech-influenced economy has continued to attract young, well-educated people to the region — keeping market pressure on the limited number of homes available.
And what about that loss of a million jobs? Will none of those be in Seattle? Of course not, the influx of young well-educated people is sure to continue forever! There's never been a better time to buy!
Another indicator of a bubble — unsold homes sitting on the market — also points down nationally. The ratio of inventories to sales has been rising rapidly in recent months and now stands at its highest level since 1996, according to Wachovia Corp.

That's another area where Seattle projects a different picture than the national numbers.

The supply of houses on the market in King and Snohomish counties in October declined by 10.7 percent and 2.7 percent, respectively, compared with October 2004. That drove the median price paid for a house up by 20 percent in the two counties, to $390,000 in King, and to $258,600 in Snohomish.
Maybe I'm just naïve, but isn't that how Boston or New York looked a year ago? Wouldn't that just mean that Seattle is lagging behind the bubble dynamics of the rest of the country, as opposed to not being in a bubble at all?

(Seattle P-I Staff and News Services, Seattle P-I, 11.12.2005)


Dukes said...

Seattle is NOT immune! God damnit I get so tired of hearing that. These assholes who write these articles want everyone to think things are so rosy here. Is this guy seriously trying to say that we didn't have a huge runup in the # of real estate related jobs here? Or that everyone or almost everyone is some high tech, highly paid geek? What a schmuk!

We will suffer, and what's worse is that so many people will not see it coming. At least in other areas people are taking evasive action and getting out while they can. Here the fools are still buying. This is going to be a trainwreck and we all have front row seats.

Anonymous said...

If incomes are stretched, as the 0% national savings rate would indicate, and...

If inflation is creeping up in all the "hard" categories (food, energy, health, cable TV), and...

If the only reason home prices are at historic highs is because interest rates are at historic lows, and...

If desparate, stupid BabyBoomers are dumping their savings into real estate, because they got gutted in the tech stock bust, and...

If Californians are buying property sight-unseen, and renting them out for a massive negative cash flow at rediculous cap rates (lower than 5), while spending $50-$100K to fix them up, and...

If Californians can only do this because they have tons of "equity" in their 2 bedroom rat-trap, located in the middle of or on the frontiers of a multi-ethnic gangland, and...

The macro economy is showing signs of a slowdown/recession/depression/complete financial collapse/dawn of another stone age (depending on whom you read), then...

How can anyone with the brains of a banana slug think that real estate is "bullet proof?"

Think about it...

Anyone who can work the amortization formula can figure their monthly payment, based upon interest rates, principle, down payment, and length of loan. Run the numbers on what people are paying today IN TERMS OF THEIR MONTHLY PAYMENT!!!

(Now the fun part)

Take the payment, and subtract out whatever you think is the "hot" money that is chasing real estate. This is the extra money that Mary and Joe think is a prudent investment in these times, versus a "balanced" housing market. Then back out "scared" money that people would pull out of a housing payment if they thought they would lose money on the house, or would be enticed to rent.

Come up with the new MONTHLY PAYMENT.

Example: If principle, interest, taxes, and insurance comes to $3450/mo in today's market, and you think that Joe and Mary are paying an extra 15% because they just think this is the greatest investment, and they suck at picking stocks, so they justify putting an extra few bucks at a great home, you would subtract out the $450. That leaves you with the $3000/mo in a balanced market.

Now, let's say that the market is taking a headder. Joe and Mary decide that they will, in addition to pulling the "hot" $450 out, they are scared and will pull out an additional $300. That takes us down to $2700/mo. Joe was just informed that their medical co-pay went up, and the his/her Ford Extinctions are guzzling gas at 40% higher prices than when they bought the house, and the grocery bill is getting a little testy, so they pull out another $250/mo. That leaves them, or more importantly their potential buyer of their house, with $2450/mo to spend on housing.

(Now the really fun part)

Joe and Mary really couldn't afford that starter mansion on a 30y fixed, so they listened to their all-knowing FED chairman, and took out a 3/1 ARM at 4%. Interest rates start to creep up and before you know it, the FOREX market has the 10Y Treasury yielding enough to push the 30Y fixed up to 8.5% (where it was in the summer of '00).

Taxes remain constant in dollars, as the county assessed lower than purchase, and the insurance company keeps rates steady.

Recompute and run the amortization formula backwards and find principle (use the =FV() function for Excel users) using $2450/mo (less taxes and insurance) and 8.5% interest.

You will be shocked to see what happens to principle when you do this. It is not pretty.

Also, given the massive defaults in mortgages, the FED institutes Regulation X (yes, it is called that), and sets a minimum down payment. No more, no-docs, piggy-back, wink-wink appraisal loans. Nope. You get an honest appraisal in a crappy market, and you have to come up with cold, hard cash to put down on your new home.

Nowz I ax ya...

How many people can put 20% down on a $100K home? $200K home? $300K home? How many people will be able to put 20% down on your average Puget Sound house? Not many, especially if all the equity has been wiped out in the market correction.

Using the above numbers, I had Joe and Mary buy a house for $580K. Under the new parameters, Joe and Mary need to find someone to pay even more per month than they do, or reduce their price to meet the affordability of the prospective buyers. That price reduction takes the sales price down to $272K.

They lose $308K plus RE fees. If the buyer needs to buy PMI, that makes it all worse. Fuhgetaboutit if the buyers need 20% down.

Isn't this fun?

Ask your friendly RE agent what they think of this. Wear a cup.

Sat Nov 12, 12:08:45 AM PST

Anonymous said...
Just a quick note:

The above example assumes no money down, and no PMI. Let's assume Joe/Mary put 20% down, and their buyers will put 20% down.

Joe/Mary bought the house for $705K. Jose/Maria can only afford $338K (assuming they can get $67K).

Just by moving interest rates back to normal levels, and getting the "hot" money out of the market, and having inflation butt-in on your household budget...


Picture how much you can lose if unemployment/underemployment gets rocking and rolling....

Anonymous said...

Seattle and Portland have historically lagged the market, we boom longer than others and stay down when other places have revived. Personally, I believe prices in the city itself will continue to rise because of the demand of living in close and lack of transit options ( please no stories about BRT ). As for first time homeowners, you'll just have to contend with living in Monroe or further. Oh and those dreams of prices dropping dramatically, if it happens it because the economy tanks and in that case what makes you think you'll get a loan if you are out of a job...

Dukes said...

What is happening to these "investors" will happen here as well...

I think this guy is full of shit from Craigslist in San Diego, sounds to me like he is is his pitch...

>>OFFER RECEIVED THIS WEEKEND, under review, this is your last chance to own a HOUSE at a condo price, and it's beautiful!!

Or how about this from Las Vegas Craigslist...

$199000 - What's Going ON!!! $%#$
I have been pulling my hair out showing my Townhome in Henderson and SFR in GV. I have reduced both of their prices to what we paid for them in EARLY 2004. I dont care anymore to make a profit but I'm getting scared. Anyone else feel this way?? I haven't read these posts. I've read stuff like this and really can't sleep at night.
Here's the link:

Moral of the story on these two, one in SD other in LV is that the nervousness is becoming palpable. Ummm, I love the smell of desperation in the morning....

Anonymous said...

anon "09:26:55 PM PST " said:
"in that case what makes you think you'll get a loan if you are out of a job... "

so what u think is better, a guy without a job, with some savings, and without any loan or guy without a job, a great 500K house(which he bought for 700K) and 600K debt(no savings, since he put all in his great only upward going rathole). I prefer the first one, dont know about you.

marin_explorer said...

That article makes no mention of the investor aspect of the boom--and precisely how much investment has taken place. Seattle papers largely ignore this aspect, but does that mean there's no speculation?

If nobody is investing in Seattle real estate, it must not be a desireable place to live. Look at all those ugly waterfront homes! ;)