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Saturday, May 20, 2006

Seattle: Froth Or No Froth?

As amazing as it may seem to readers here, there are in fact many people that are completely convinced that Seattle is not in a housing / real estate bubble of any kind. Not that our bubble is less extreme than Florida or California, but that all of Seattle's home price gains have been 100% justified, and furthermore that we are likely to see continued strong gains in home prices. With that in mind, I present the following two reports (both in PDF format), which come to very different conclusions about the future of real estate in Seattle. Neither of these are new, but they're quite interesting when compared side-to-side like this.

Our first report is from none other than our favorite organization, the National Association of Realtors®. Surely you already know who the NAR is, but I want to quote from their NAR Overview page anyway: "The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful." This is what their 10 page report, Home Price Analysis for Seattle-Tacoma-Bellevue (published during the third quarter of 2005), pruports to prove:

With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the Seattle-Tacoma-Bellevue metro market, as detailed below, reveals that there is little danger of this. In fact, the local housing market is in excellent shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run.
Furthermore, in a section called "Stress Test," they claim that:
  • Price declines in the local market are unlikely according to our stress test.
  • The local housing market will experience a price decline of 5% only under extreme unlikely scenarios. For example, mortgage rates rising to 10.5% in combination with 3,000 job losses could lead to a price decline.
  • Such scenarios are highly unlikely. Most credible forecasts predict the region will create 60,000 to 100,000 jobs over the next 24 months and mortgage rates will hover around 7% by the end of 2006, which bodes well for future price gains.
  • Even in the unlikely event of prices declining by 5%, most homeowners will maintain sizable equity build-up in their homes.
But I think my favorite part of their report is the "Additional Discussion Points" section. I believe in political circles they are known as "talking points."
  • Home price declines are very rare. In fact, the national median home price has not declined since the Great Depression of the 1930s. Stock market collapses, the OPEC oil crunch, economic recessions, and even wars have not negatively impacted national home prices since the 1930s.
  • There have been few times when local prices declined. In nearly all these cases, the price declines were accompanied by sharp prolonged job losses. It is difficult to foresee a price decline in a job creating economy.
  • Homes trade far less frequently than financial assets (about one home sale every 7 to 10 years for most homeowners). There are also larger transaction costs associated with selling a home due to the lengthy careful examination demanded by home buyers and sellers. Therefore, home prices are not prone to fluctuations as in the stock market. There are neither panic sells nor margin calls associated with homes.
  • Many non-quantifiable factors could be important for this metro market in determining home prices. Access to cultural life, the quality of museums, nearby local and national parks, water views, exclusive neighborhoods, weather, the international airport, city vibrancy, restaurants, and a host of other non-quantifiable factors could have an important influence on the overall pricing.
  • There are immense tax benefits to owning a home.
If all of this sounds strangely familiar, it's probably because the local media has been dutifully repeating it nearly every chance they get. Or maybe it's because you spend a lot of time over at the Rain City Guide (I kid, I kid).

Our second report is from HSBC, which in their own words is "one of the largest banking and financial services organisations in the world." Here is the summary paragraph from their 110 page report, A Froth-Finding Mission - Detecting US housing bubbles (published January 2006):
We suggest that about half of the US housing market is frothy and that this 'bubble zone' may be overvalued by as much as 35-40%, after taking into account low interest rates and tax advantages. Current valuations imply a large permanent reduction in the risk premium and/or a sizable step up in future capital gains, not all of which, we think, is justified. The 'bubble zone' accounts for 50% of US GDP, or over USD6trn, nearly the size of the German, French, and UK economies put together. In other words, it’s big. Therefore, when these housing bubbles begin to deflate, it is likely to have substantial macroeconomic consequences.
As you can see, HSBC's report is not focused specifically on our area. However, Seattle does show up rather prominently in their table of "Potential over/undervaluation: cities" (page 6). Coming in at the 12th-most overvalued market, Seattle is rated as 34% overvalued. Doing a little quick math, taking 34% off the 2005 year-end median price for King County of $393,000 comes to $259,380. Along with their (very) detailed report, HSBC has released an incredibly fancy Excel spreadsheet, HomePulse, that allows you to choose specific cities across the country and see a plethora of graphs detailing all the facts and figures that the report was based on.

In stark contrast to the NAR report, HSBC found that
Using HomePulse, we find evidence that about half the housing market is 'frothy', even after taking into account the benefits of low mortgage rates and tax advantages. We suspect around 40% of US housing units are frothy, but by value, that proportion rises to about 60%. Annual homeowner costs relative to rent or income are higher than in the late 1980s for the US as a whole and as high as the early 1980s (when mortgage rates were over 16%) for the ‘bubble zone’. As a result, the required capital gains to financially justify buying versus renting have never been higher for many areas.
So there you have it. The heavy hitters come out and argue both sides of the bubble debate, each supposedly analyzing the facts, but coming to completely opposite conclusions. Are both (or either) of these sources trustworthy? I guess that's for you to decide.

(National Association of Realtors®, Q3.2005)
(HSBC, 01.2006)


The Tim said...

I sleep in on Saturdays. Especially when that Saturday is my birthday.

Anonymous said...

I do not know what HSBC's track record is .

I DO know about the NAR's track record. It has been wrong (erring on the side of wild optimism) all year, for every single city it has spoken about.

So until I can see evidence otherwise, I'm going with the HSBC report.

Thanks for providing the PDF's Tim.

dalas said...

It's easy to look for biase evidences to support your opinions and refute those that do not.

All you read is the number they are coming up with but without questioning their source.

I'll say this again, lenders don't make money from defaults.

Anonymous said...

In the Seattle bubble it's definitely come to the Dow 36,000 point. This city is very expensive and is considered by Forbes to have the highest cost of living. It's one of the most expensive metro areas, and has a median home price well into the $400,000's. This is clearly a city in denial about its relative costs and value.

I would say read this article and determine if this doesn't articulate exactly where we are with respect to the bubble here.

People would be crazy to assume that the bubble won't pop here and that somehow Seattle will just breezily sail past current records and is on track for further double digit growth. That's just insane.

Things are different this time.

dalas said...

"People would be crazy to assume that the bubble won't pop here and that somehow Seattle will just breezily sail past current records and is on track for further double digit growth. That's just insane."

Single digit growth does not mean the bubble bursted. Even at 2% appreciation for next 5 years, that isn't bursting. If you are trying to argue whether the market will sustain itself at current growth, don't bother, everyone already agreed that it can't. But that's not bubble.

dalas said...


I want to bring up what you said. Actually your analysis of buying in 520 area and re-building is not exactly accurate. The reader who posted the link regarding Vancouver condos is perhaps more similar. $850,000 for a 50 years old house with 9000 ft lot in 98004 is the going rate. Nobody is buying these homes to live in them, thus the reason why these houses are still going on the market is because investors are buying them and driving up their price. But if you really look around, what is the price for these newly constructed houses, somewhere between 1.4 to 2 million dollars. That is about double the cost of land. Subtract some costs here and there, you're probably left with about 700k to build if not less. These houses take a year to build, thus builders are expecting decent return of at least 150k and drive down the cost to build even further.

I don't know buyers' aspects personally, but I am coming from the other side. I don't think I'll buy a home for 2 million that costs 600k to build.

seattle price drop said...

Just saw the most interesting, I can only call it a "Public Service Announcement", on CNBC.

It was presnted as a "CNN Home Tip".

A pleasant-looking woman comes on and says: "Looking for your dream house? Here's some tips":

1) "Get to know the neighborhood first. Check for WIDE PRICE SWINGS in the past 1-5 years."

2) "Avoid zip codes with wide price swings. Price rises could be a sign of bidding wars."

This week, Greenspan and Bernanke have both warned/declared, whatever you want to call it, that housing is cooling. Now comes a direct warning to prospective buyers to not overpay for homes and to even avoid those neighborhoods which saw the most appreciation in the past FIVE YEARS.

People are getting plenty of warning about what's ahead. Whether or not they want to listen is up to them.

Thanks for the PDF's Tim.

seattle price drop said...

Happy Birthday!

Anonymous said...

I live in Bellingham WA, I picked up a free real estate listing magazine from the 7/11 today. It was about twice as big as last month and last month there were almost no price reductions. This month there were almost 2 on every page. D R Horton is now advertising "buy now and get last year's rates!!". This is all of a sudden, don't suppose there is an coincidence with the statements made by the FED and by Greenspan this week do you?

dalas said...

seattle price drop and anon,

if you are living in questionable zones, such as areas that appreciated 50% but below 350k, of course you should worry. These people are less likely to be able to sustain financial stability and they are more likely to bought houses with interest-only and 0 down.

You can't compare apple to orange, if you want to talk about certain range of housing having possible price drop, you can't apply that same view on housing overall. 520 and 530 area isn't the same as other parts of King county like Renton and Kent. Overgeneralization is the fallacy that most of you are using right now.

As far as the RE books getting larger, perhaps it's just your misconception. You need some real MLS numbers for that perception to stand ground. Plus Bellingham isn't Seattle, houses up there aren't worth nearly as much. $250k house with 50% appreciation and you are still buying an $175k house. Again, overgeneralization.

Well off people will protect their asset.

Dukes said...

Well Tim, of the two sources cited, only one is really a "heavy hitter."

NAR, is really like a cheerleading service. Nothing they do has any credibility with any serious minded person as we know. But posting what they say is important because lemming like behavior feeds off of this stuff.

It is amazing to me how LITTLE research people do on what will utlimately be the largest purchase of their lives, NAR propaganda is aimed at these folks.

HSBC on the other hand is a very well respected multi national bank, investing firm. I myself have a decent amount of money parked in their online savings acct awaiting usage elsewhere.

If we look at this rationally, all, and I mean all of the analysts who have real credibility: Bill Fleckenstein, Paul Kasriel, John Mauldin, Buffet, Bill Gross, Paul McCulley etc...are on record warning of a serious downturn in real estate.

So, who you gonna believe? David (pom-pom) Lereah of NAR, or the guys I cite money is where my mouth is - out of real estate.

dalas said...

you also have to be careful where you are setting the marker for comparison. if a house was put on the market expecting a 30% appreciation and priced it so, and the market is cooling down, of course they'll have to reduce the price. if you're a seller, there's no reason to sell at modest price right now, thus if you put your house on the market the first month at 30% appreciation tag, it didn't sell. Next month you drop it to 20%, and it finally sold. to those who are only comparing the months that the house is listed, it would appear that the house has dropped 10% in price.

can we post some actual numbers in the Seattle market and we can all anlalyze it, instead of keep on quoting big name players over at Wallstreet and articles that don't explain their source.

dalas said...

dukes is using a huge fallacy, appeal to authority. again I'll stress this, you want to look at the numbers or come up with these conclusions base on some inconclusive evidences because HSBC is involved with these big players?

quit citing fallacies.

Dukes said...

Happy B-Day Tim, I missed that - I was trying to figure out what the hell dalas was talking about :-)

dalas said...

let's play a game.

you cite someone, I cite someone. then we'll base our arguments on the merits of those we cited, and score their opinions base on their merit. highest point wins the arguments.

Dukes said...

Why is listening to the smartest investors in the world a fallacy?

I think I have heard it all now. I see dalas, maybe we should listen to you right?

Look, these guys are giving solid opinions based on evidence that they see. What planet are you on that you don't understand this?

dalas said...

what evidences? have any of them present the evidences or are they just convincing base on their merits? if today HSBC cuts back their lending practice because they believe that the housing will collapse, then that tells me something. but they have not, and nobody has.

again, lenders don't profit from defaults.

dalas said...

oh btw, you are using another fallacy, ad hominem.

you are full of fallacies dukes.

Dukes said...

Maybe you don't read much dalas, that is not my fault.

Each of the gentleman I cited has put out reports on housing. Go find them.

I don't know what your daily reading list consists of, but if you have been paying attention there are quite detailed studies available.

It is not my job to dig them up for you.

dalas said...

so explain why lenders are expanding mortgage products if all these smart investors are saying there will be a huge downfall.

AGAIN, lenders don't profit from default.

Dukes said...

Oh, the old ad hominem fallacy, I see. Do you really feel attacked poor old dalas.

What a joke.

dalas said...

you are the one that should be taking some reading class or maybe go back to school.

"I think I have heard it all now. I see dalas, maybe we should listen to you right?"

clear case of ad hominem.

Dukes said...

dalas, do you seriously not know the answer to the question you posed?

Many of these loans are packaged up or collateralized into pools of bonds that are then sold off.

Many to Fannie and Freddie, many to foreigners. Are you really that naive? This isn't the old days where the lender actually knew who the borrowers were. This is a new ballgame.

Then these loans get insured, then there are derivatives sold against the insurance. It is one lovely, large incomprehensible ball of leverage. These loans can be 4 or 5 times removed from the original lender. Come on, you should know that. That is why there are so many warnings about systemic rot in the financial system.

I wish the scenario were are simple minded as you are insinuating it is, sadly it is NOT.

Dukes said...

Yes dalas, that was a horrific attack on you. We are a might thin skinned aren't we?

dalas said...

you obviously don't know? HSBC services most of their loans as well as WAMU and Countrywide. If housing is so scary, why aren't they tightening up their lending practice?

dalas said...

warnings in the subprime market genius, again don't confuse subprime with prime.

yes they are sold, capitol commerce fell because they had to buy back all the bad loans! they come back! if they're all bad loans, who would continue to buy from the same lender?

Dukes said...

dalas,...HSBC and WAMU will service some loans ofcourse.

There are very highly paid people who figure out who is a good risk and who isn't.

Major portions of these loans are packaged and sold. If not, how do we have massive pools of mortgages that are sold as CDO's? You tell me...

If everyone was servicing their own loans there wouldn't be a TRILLION dollar mortgage bond market now would there?

Your argument belies the facts. You can't have a market (the mortgage bond market) that happens to be one of the largest collateralized markets in the world if lenders are keeping all those loans on their books now can you?

Anonymous said...

dalas "servicing" a loan just means they still collect the interest and principal payments and forwarding them onto the buyer (i.e. Fannie Mae etc.) It doesnt mean they are on the hook in the case of a default. They have no incentive to tighten lending standards.

Dukes said...

How did prime and subprime get entered into this? Are you speaking of good and bad risks?

You might have noticed, or then again, you probably haven't, that recently bankruptcies and defaults have shot up.

The reason for this is slowing to zero to negative appreciation in the housing markets. In the good old days (last year and the year before) people could "refi" themselves out of trouble.

That is no longer possible for many. Why do you think that the OFHEO has been trying to get stricter lending standards passed?

Why do you think the former and now existing heads of the FED are warning against aggressive lending. Do you think this industry that has gone sheer insane is capable of policing itself.

Go over to and read Doug Noland's Credit Bubble Bulletin, it comes out new each Friday, this will give you a CLUE as to what you are talking about.

Do you think that lenders are all that careful right now? They rode the bonanza and now some of them are still trying to milk it.

Go on over to Ben's blog: he posts quite a bit about lenders how are in trouble, or closing up shop. Gee, why do you think that is?

dalas said...

I won't continue the debate of how much these portfolio lenders service their own loans. I'll just drop that side of the argument for this, since none of us have the numbers anyway.

dalas said...

what you talking about, servicing means you own the loan, how else can you sell it?

Dukes said...

Well you should drop it because you don't know what you are talking about.

Like I said, the mortgage debt market is one of the biggest markets in the world. This doesn't happen if your corner lender is holding the paper on these loans.

So, people lend, they then sell the paper to another holder who tries to either resell it or buy some kind of insurance on it.

This is why you are wrong when you say "why would people lend if they knew they would lose money" which I think is what you meant when you said "lenders don't profit from defaults".

Sadly, this industry has morphed into a LENDING MACHINE, it is sad, it shouldn't have happened, but it did.

I have said before, this is about a credit bubble of massive proportions, and all credit bubbles in the past have not been dealt kindly with, as history has shown. That is why I am very pessimistic on real estate.

seattle long term buyer said...

not to burst anybody's private bubble... but mortgage companies make money off a loan irregardless of it's performance...

all these loans are serviced around... WAMU, etc cannot afford to keep all the loans they originate... they re-sell the loan to third parties and it hits the bonds market... the money is in the fees...

why then would somebody buy housing bonds when it's likely to be unstable? because it's not... even subprime loans don't always default, anybody who has equity will cash out by selling and walk away before defaulting... in the trillion dollar scheme of things... a 500K default mortgage isn't even a blip on the radar...

Who's buying these anyway? Foreigners who need to park their money outside their restrictive countries... even with the risk of their money losing 20% in the bonds market, it's still better than holding it locally in a communist country where the government might wonder why you have such money and decide to seize it...

For those who think foreclosures are what will burst this bubble, that's not exactly true... it's the massive sell-off that's going to make it a buyer's market... why damage your credit if you can still sell (and if you bought in 2002, unless you HELOC'd you're not underwater)...

I take no sides but for dalas to keep repeating that lenders don't make money off default loans is just a very simplistic statement that is like saying always or never... you never say either. (did I just say never??)

To the TIM, happy B-day to both of us... what a coincidence

Anonymous said...

One more time! Servicing a loan does not necessarily mean the bank owns it. It just means that the bank collects monthly mortgage payments, handles customer service inquiries, and manages the loan on a day-to-day basis. These loans are almost always sold and the bank gets a fee for servicing it. Your argument is weakened by the fact that you dont get this.

Anonymous said...

Love the CNN tip to stay clear of neighborhoods that went through bidding wars.

Looks like that pretty much eliminates all of Seattle as a prudent place to buy a home this year.

What the realtors have been bragging about for years may just come back to bite them.

Maybe we'll finally stop hearing about the one house out of 200 that's still being bidded up.

ker said...

Anon from Bellingham:

Bellingham has been outrageously overbuilt. It's a picture perfect example of what happens from overbuilding.

I've been watching this market closely since winter. We started out with 10% reduced, now it's up to 30% and climbing weekly.

Inventory has doubled in the past few months.

Bellingham was listed as 46% overvalued on a list where Seattle was listed as 26% overvalued.

Something like 20% of our "great economy" is related to construction.

These homes are absolutely going to plummet in value once the downward slide takes off.

When we get to the bottom, I'm buying a house.

Check the zip listings and you'll see how buying has stalled. Even the realtors know and admit that "the top was last winter".

PepeDaniels said...

Regarding the many layers of buying and lending RE, there's an excellent article (great illustrations) in the latest Harper's magazine. I don't claim to understand it all but it's obvious that an individual buying or selling a house is only the tip of a much larger financial equation.

You might get great deal on a used car but you could hardly trust a used car salesman's pitch about it right?

Anonymous said...

Dukes and Seattle Long Term Buyer :

thankyou for trying to explain a little about the mortgage industry to Dalas.

It was getting exhausting reading those "everythings fine" posts and I couldn't bring myself to address it. Thanks.

S Crow said...

Some lenders are tightening. One area we are keenly aware of is that some lenders are exercising "Chain of Title" searches. For those new to purchasing a home or selling, "chain of title" searches enable a lender to reduce fraud by seeing how many times a home has sold and for what amount during the previous 24 mos. time period.

In tracking the refinance business we closed, lately, we have seen more fixed rates than ARM's. In purchase business, we have closed a healthy amount of multiple offer transactions taking place in Snohomish County. Not all, but many.

It's my opinion that we could be seeing some folks locking in rates on purchases or refinances out of urgency during the last 6 weeks or so. Still seeing lots of interest only products but FIXED for 10yrs. This is a great loan product for certain buyers, and is a good alternative to the 40 & 50yr loans that are now being offered.

Event: A friendly reminder to motorcycle enthusiasts--City of Snohomish is having their annual 'third Sunday of May' motorcycle show tomorrow which is one of the largest & best events on west coast. Lot's of custom's and chrome. Thousands attend. Come on out.

dalas said...

I'll start off by apologizing for being rude.

Few things, I know that lenders sell off loans on the market associating with bonds. But WAMU and Countrywide keeps a huge portfolio of loans they fund, they bought them thus they service them. They make money not because they get paid a fee, they make money because they bought the loan or funded the loan and they get paid every month from the payments. It works just like bonds.

WAMU and Countrywide are portfolio lenders, they sell some of their loans only they service. of course they can still sell them, but the initial goal was to service them.

Where did you get the idea that WAMU profits by servicing through fees?

My point is this, there are a lot of shady lenders out there, but they are bought by other shady investors. I still can't see WAMU participating in such practice even if there is a market that they can sell these loans, maybe dukes can connect the dots for me. Something more specific, other than that they sell to an open market and people buy them.

I am here to learn more, please share.

dalas said...

chain of titles has always been required, last 24 months minimum. there's no need for title search if they don't do minimum 24 months search. besides, the title companies I know do that as mandantory practice and disclose them on title reports.

dalas said...

I just did some random googling.

explains portfolio lending.

says that they are a portfolio lender.

Following link talks about this:

Portfolio Lenders

Any institution that lends its own money and originates loans for themselves is called a "portfolio lender". This is because they are lending from their own portfolio of loans and are not worried about being able to immediately sell them on the secondary market. By doing this, these institutions can establish their own guidelines for approving or rejecting loan applications, otherwise they would have to follow guidelines suggested by the mortgage bankers and providers (i.e. Fannie Mae, Freddie Mac).

Like mortgage bankers, portfolio lenders may offer fixed-rate loans and government loans. Once a borrower has made the payments on a portfolio loan for over a year without any late payments, the loan is then considered to be "seasoned". A seasoned loan becomes more marketable, even if it does not meet Freddie/Fannie guidelines, and can then be saleable on the secondary market. Selling these "seasoned" loans frees up more money for the "portfolio" lender to make more loans, which is another way that portfolio lenders engage in mortgage banking. If the loans are sold, they are packaged into pools and sold on the secondary market. You will probably not even realize your loan is sold because, quite likely, you will still make your loan payments to the same lender, which has now become your "servicer."

dalas said...

So going back to my initial statement that WAMU is expanding their programs. They might not be selling these new alt-a loans as portfolio loans, but they could as well.

As far as what you guys are saying that lenders have low risk because of whatever reasons, I mentioned capitol commerce, but here's the link about how they closed down. I remember them because they were huge during the refi boom and just close door one day.

S Crow said...

Dalas, no ill-will intended, but how long have you been in the business? Do you work as a mortgage broker locally? Just curious.

dalas said...

6 years in the business with mortgage broker and real estate license.

BN said...

I have given up....
on housing prices stabilizing/coming down for this year in the eastside area :(

With the added publicty of the CNN
report claiming no bubble here, looks
like we just have grin it and bear yet another 10% increase with people/investors coming from other parts (think bainbridge circa 2005)

dalas said...

scrow, didn't realize ur were an escrow agent. as far as I know, old republic title always search for 24 months and disclose them on the report. i know that because once lender specifically request that as a condition, and the title officer told me so.

Anonymous said...

But WAMU and Countrywide keeps a huge portfolio of loans they fund

And after several years of an up market, people assume things will continue up forever and fail to adequately account for the actual risk in such loans. Especially when they're rewarded for making those loans, when they would be castigated for not making them, and when the risk is corporate, not personal.

lesserseattle said...

Rolling out 40 and 50 year products is probably a smart move for the lenders. So long as rates on these products do not dip too low, this will offer a section of the market to lock in a monthly payment that is not too painful as the ARMs reset. If rates on longer term mortgages go too low though, it will exacerbate the existing problem.

I am not saying that I agree with this, but offering a product like this might actually insulate the industry a bit from what they surely see coming.

Anonymous said...

HSBC....old Hong Kong Bank. Very international, strong presence in Europe, Asia, Canada, etc. Also, great rate on my savings that will stay there until blood is on the street.

Anonymous said...

With the Fed announcing that they're releasing guidelines on the use of risky mortgage products, i.e. option ARMS, IO ARMS, etc. you'll see the bottom drop out of the mortgage market, i.e. the sub-prime market. Currently, it is estimated that approx. 20-30% of all mortgages went to sub-prime borrowers.

This event will be like the tsunami that is the nail in the coffin of the market. It will mean that a huge number of buyers, usually with poor credit or first time, won't be able to get loans to afford the riduculous prices out there.

If you've sold a house recently, the one thought that you realize instantly when you're waiting for a bid, is that the whole housing market is fed by first time buyers. Who can be the contigent buyer unless someone who doesn't have to sell comes in and buys your home? At some point in the chain there is always a new buyer, and this is the bottom layer of the so-called "housing Ponzi scheme".

Well, with the fed putting the screws to this market we can kiss this segment of the market goodbye in the coming months. Now I tell you, it doesn't matter what CNN or anyone else predicts or writes, the fact of the matter is, once the markets bottom out in other locales, they'll bottom out here too. Investment dollars will cease, because investors know the risks outweigh the rewards in housing. No one in their right mind will make an investment in housing for the next 12-48 months as the market finally demonstrates stability (it's currently destabilizing, and hasn't yet entered the free-fall period...but the 400% + inventory increases in much of the country will definitely ensure that a free-fall happens...I predict around fall it begins).

The analogy is the dot-com boom. Nobody could argue that certain stocks weren't good buys during the time, i.e. cyclical durables, low risk stuff unrelated to technology, yet the entire market fell...not just the dot bombs. Although the NASDAQ fell by >80% the DOW and S&P also fell by >30%.

The same phenomena will play out in houses...classic bubble cities, i.e. Phoenix, Miami, San Diego, etc. will fall by close to 50%, but other areas, including "Danger" cities like Seattle will easily fall 20%.

I know it sucks to face reality and accept the looming crisis, but this will happen thanks to the easy credit market that allowed a huge number of buyers to purchase a home essentially 100% on margin (i.e. no money down loan). In some cases, it can be argued that the housing market is even more ripe for a disaster due to this fact stocks the most you could borrow was 50% for margin.

Wait and see. We'll soon know who is right and who is wrong on the debate of housing.

dalas said...

"With the Fed announcing that they're releasing guidelines on the use of risky mortgage products, i.e. option ARMS, IO ARMS, etc. you'll see the bottom drop out of the mortgage market, i.e. the sub-prime market."

So far what you listed, Option ARMS, IO ARM, none of which are subprime loans. Longbeach, WAMU's subprime division has just tightening up their bankruptcy guideline in response to certain default rate. Subprime market is debatable, but of course none of us really know what is going on behind the trading doors, so there's little reason why we are speculating this. However in Seattle, it's still hard for me to see a collapse in the financing market, since majority of Eastside and many parts of Seattle aren't part of the subprime market. Again my argument will come back to what I know of Seattle lending market, it is perhaps the top 3 highest rated stable market for mortgage lenders. Its low default rate in past history speaks for itself. Yes the time is different, and it's logical to assume with all these I/O and option arm, there has to be huge defaults. So far if you check up King county, there has not been an increase in trustee sales. Time will tell, but Seattle is truly unique compare to other places like East Coast and California. I am not sure about other places, but people here buy their 600k home to live in, and they'll put up a damn good fight before they'll default or sell it for less than what they paid for.

Anonymous said...

Wow. lovely scenario, having to put up a "damn good fight" to keep your home.

Sadly, that is exactly what a lot of buyers will be up against in the next fw years.

That's the problem with overinflated home prices in a nutshell.

And precisely why there is no worse time to buy a home than right now in Seattle, or anywhere in the Us for that matter.

Jackson Wallace said...

Dalas believes that the people that run the banking system are responsible individuals in stead of the greedy, corporate sheeple that they are, believing, as he does, in the infallible wisdom of the moneyed classes. I suppose the elites thought they were pretty smart before the Great Depression, as well.
This country has stretched its place in history and wealth to the limit.
Wisdom teaches you leave a cushion for yourself, and dont rely on your
supposed god-like powers.

Yeah, ok, Yarrow point is gonna stay 5 million and Interbay is gonna stay at 600k, while Renton and Shoreline decline precipitously. Dream on..Go on the MLS and see how many houses over 400k are for sale in the Seattle area. TOO LATE, DREAMERS...

Look at the wealth destruction happening in the stock and commodities markets. It'll be hilarious if the markets see the writing on the wall of the housing market before it actually shows up IN the housing market. Then we'll have economic troubles, and housing will drop off a cliff. Or maybe we'll be all right.....whatever. I laugh at people and their slavish love of the oh-so-intelligent wealthy, most of whom in this country inherited it and didnt make it. There's some class hatred in this country. Never forget it. Buyers are gonna be so ruthless, and sellers so desperate. I'm actually starting to feel sorry for them, and it hasnt even started.

I finally called it right. My money is saved. Hope my credit unions stay solvent.

Anonymous said...


You keep your savings in a credit union?? Have you looked at INGDirect? ;-)

dalas said...

what's the point of arguing "opinions".

Jackson Wallace said...

INGDirect huh? I've heard of them but I havent checked in depth.
I take it they do better on the CD rates? I get pretty good cd rates
as it is. Wonder if they are FDIC insured.

Jackson Wallace said...

ok, yeah checked ING, they're savings rates are good, but CD rates are no better. They are FDIC insured, too, and come with a giant blinding bouncing orange ball.