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Monday, July 31, 2006

Interest Rate Change Misconceptions: Cap rates

"The interest rate on their mortgage had risen to 9.5 percent, from 3.5 percent three years ago. They didn’t have the equity or good credit to qualify for refinancing at a lower rate.”
This quote was from Ben's 'the housing bubble' blog this morning and it perfectly illustrates the misconception that I hear all the time: "my interest rate is adjusting soon, but can only go up or down by the 2 % cap." Sort of. Keep reading your promissory note!

The error in understanding is due to focusing on just one cap rate. But there are two. One cap rate is the maximum rate the loan can achieve, the ceiling--usually 5-6% over the start interest rate. The other cape rate centers on how much it can adjust each adjustment period, typically no more than 2% up or down. But here's the kicker: the 2% cap rate is triggered ONLY AFTER the 1st adjustment period. Thus, your interest rate can skyrocket at the first adjustment all the way to the maximum full interest rate cap (ceiling) on the note.

In the above scenario you can see the borrowers recently hit their 1st adjustment period and were shocked that the rate adjusted up to the full 9.5% ceiling, which was 6% over their initial starting interest rate.

Head up to the attic and find the box where your closing papers are and start reviewing your promissory notes so you can plan accordingly. Loan programs vary and the above scenario may or may not apply to your situation.
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Sunday, July 30, 2006

Pity for those with no "PITI"?

I've commented on this before at Inman News and other blogs, but it deserves it's own post. Here is an exerpt from my letter to the editor:

To help borrowers qualify for a home loan and to get payments in line with a lenders loan program, it is necessary for the taxes and insurance to be dropped as a portion of the monthly payment. The term PITI (Principle, Interest, Taxes & Insurance) does not apply to throngs of borrowers across the country. For many today, the term is "I". They only pay the interest, literally.

For borrowers that could not qualify under the lowered standard of just Interest only(but still pays taxes and insurance as part of the monthly payment) , some lenders dropped it lower and eliminated the taxes as part of the payment. The line in the sand was drawn: either qualify this way, or, no new home.

The lending standards of "low, lower, lowest" gave me a chuckle. It reminded me of the Seattle Mariner vetaran pitcher Jamie Moyer who baffles batters with his slow, slower and slowest wizardry of pitches.

But where does this leave the borrower? Obviously, they must budget for paying property taxes on their own. Taxes are not cheap. If a borrower is stretched to the limit without property taxes included in their mortgage payment what is the probability of budgeting and paying property taxes when due? Many probably won't, or can't.
Today, in the Orange County Register, county officials announced that property tax delinquencies have reached an 8 yr high while sending out bills to the sweet tune of $3.8 Billion in tax revenue, the largest bill for property owners in 15 yrs. Well, it's not a big deal in Organge County. You can skip payments for 5 yrs before they can take your home—if the lender doesn't beat them to it.
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Saturday, July 29, 2006

More Editorial Truth Spotted In The P-I

Last week when Bill Virgin snuck an uncomfortable Seattle real estate truth into a sports opinion column, I was surprised. Today, when I read a P-I editorial titled 'Easy credit driving housing prices?' I just about fell out of my seat.

Deep in the Commerce Department's report are even more troubling concerns: The personal savings rate of Americans continues to decline; we essentially are spending $141 billion more than we earn. (For those who care, the personal savings rate is now a minus 1.5 percent, dropping from minus 1 percent last quarter.)

Our lack of savings has been a big deal for a while, but we've been able to mask that problem because the housing market has been so strong. But that is changing, too.

Mark Zandi, chief economist at Moody's, told The Associated Press last week that the housing peak was a year ago and we are now seeing a slow decline.

The routine spin on the housing slowdown is that there will be a moderate weakening in prices, returning housing costs to more normal levels.
Yeah, my friends say, but not in Seattle. We're different. The thinking goes like this: The cost of single-family houses in King County continues to increase at double-digit rates and as long as the housing supply remains tight, our investments will be safe.

And may it always be so.

But what if the driving factor in housing prices is not land, new jobs or even an extraordinary community? What if the key element in housing prices is the ease of access to credit?
Yes, 'what if' indeed. But don't worry your little head. While all the other big coastal cities around the country had their prices driven up by speculation, suicide loans, and general mania, Seattle is different. We've reached a new plateau. Right? Right?
The [New York] Times said the areas of the country most at risk are California, Denver, Washington, Phoenix and Seattle, where a variety of new creative financing packages range from interest-only to adjustable mortgages.
Although the real estate reporters still may not be capable of seeing anything beyond what is right in front of their noses, let alone the storm looming on the horizon, at least the opinion columnists are finally coming around.

(Mark Trahant, Seattle P-I, 07.30.2006)
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Friday, July 28, 2006

Majority Of New WA Mortgages "Nontraditional"

A perceptive reader pointed out a post at Calculated Risk that pointed to a 29-page report by the Federal Deposit Insurance Corporation (pdf). The interesting piece of information is contained on page 25, in Chart 4, reproduced below.

And here's the money quote from the write-up:
Nontraditional loan products can be appropriate for financially savvy borrowers with low credit risk. Indeed, many of these products have been offered for years to such borrowers, and credit quality generally has been good. What has changed, however, is how these loans have been marketed and used in recent years. Lenders have targeted a wider spectrum of consumers, who may not fully understand the embedded risks but use the loans to close the affordability gap.

The degree to which mortgage market innovation, fueled by significant MBS liquidity, boosted home sales last year is unknown. Anecdotal evidence suggests that affordability and financing played a strong role in extending the volume component of the mortgage credit cycle last year. For example, there is a correlation between nontraditional mortgage loans and home price growth. An analysis of state-level data from LoanPerformance Corporation shows the penetration of IOs and pay-option ARMs for nonprime borrowers into areas with strong price appreciation and reveals a strong positive relationship between the concentration of such loans and home price growth (see Chart 4). This analysis illustrates the recent development of borrowers increasingly using IOs and pay-option ARMs to purchase homes they might not otherwise have been able to afford. A June 2006 study by Harvard’s Joint Center for Housing Studies also confirms this trend.

Analysts are concerned that higher-risk borrowers are more likely to be affected by a major payment shock during the life of their mortgage and may be more likely to default. Compounding this possibility is the fact that the increasing availability of mortgage credit is occurring at a time when mitigating controls on credit exposures have weakened.
A number of readers agreed with the FDIC's statement. You would expect that more "nontraditional" mortgages would mean more defaults (and therefore more foreclosures). However, that hasn't really panned out in Washington State (yet). Although we're 6th-highest on the graph above, with around 55% of mortgage originations being nontraditional, we are down at number 18 for foreclosure rates, with 1 for every 1,460 households. Not only that, but as reader Christina pointed out, many of the states with the fewest nontraditional mortgages have surprisingly high foreclosure rates. (For example, Texas, Indiana, Ohio, Oklahoma, and Tennessee all have less than 30% nontraditional mortgages, but higher foreclosure rates than Washington.) Christina asks:
I want to know why on the chart of negatively amortizing loans, the states on the low end of the line have the highest percentage of foreclosures.
Sarah gives a possible explanation:
Christina- here's my guess, those areas did not appreciate as wildly as some others, so people were not able to unload as quickly and for ever greater amounts of $ and wound up in foreclosure.

CA foreclosure rates have only recently been starting to go up, now that the market has finally turned there.

It's the areas with the greatest amounts of appreciation that were forced into using the neg am loans as houses became increasingly unaffordable.

But the flip side of that is that those same areas, for a time anyway, were able to sell homes quickly and at a profit to avoid foreclosure. Since everyone was on the mania train and there were buyers aplenty.

As the market turns, my guess is they'll be plenty of foreclosures in the most egregiously overpriced markets, Seattle included.
I agree with Sarah's analysis. The big question is what will happen if/when appreciation levels off (or heads into negative territory), while interest rates continue to climb. I'll leave that as an exercise for the reader.

(FDIC, Summer 2006)
(Press Release, RealtyTrac™, 05.16.2006)
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Thursday, July 27, 2006

"Stated Income" Loans = Liar Loans?

And Paul Moulo has this from National Mortgage News:

"According to a new report by the Mortgage Asset Research Institute, "stated-income loans" deserve their nickname of the "liar's loan." MARI says that almost 60% of the stated-income amounts are exaggerated by more than 50%."

Is this for real? Does this suggest that nearly 60% of those borrowers who "stated" that their income was $8000/mo., really made $4000/mo.?
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Wednesday, July 26, 2006

Blog Format Notes

A few notes about some style changes I'm making to Seattle Bubble. The most noticable change is that there is now a more obvious differentiation between posts written by myself and those written by Seattle Bubble team member S Crow. As you can see, posts submitted by S Crow will have a dark blue dashed border around them. Also, the "posted by..." bit at the bottom of each post now contains a link to the profile of the person that submitted it, making their name pop out a bit more. Lastly, the title of each post is now a link to that post's individual page.

There have been a few comments recently requesting additional features on Seattle Bubble, such as something similar to "Flippers in Trouble" or "Lowball!" seen on other blogs. While I would love to add such content to Seattle Bubble, my time is limited (it's not like I'm getting paid for this). However, my invitation still stands for anyone who would like to join up as a contributor to Seattle Bubble. So far S Crow is the only person to take me up on the offer. Just shoot me an email if you'd like to become a team member of Seattle Bubble.

Of course, I will be maintaining a certain standard for posts on this blog, so I reserve the right to revoke posting privileges of anyone if I don't feel that they're meeting those standards.

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"I've never seen a 'soft-landing' in 53 yrs"

From the Wall Street Journal:

“‘I’ve never seen a soft-landing in 53 years, so we have a ways to go before this levels out,’ Countrywide CEO Angelo Mozilo said on a Tuesday conference call. ‘I have to prepare the company for the worst that can happen.’”
Of course, we all learned that Washington Mutual announced late last week that it sold it's entire government mortgage servicing business and a portion of conventional portfolio to Wells Fargo.

How else can you comment on that? Speaks for itself. We all can take MSM for what it is, but the proof-n-the-puddin' is not what is said (except for a transparent CEO at Countrywide), but rather watch what the CEO's and Corporations do!
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Sue hates me: not really, but she and others want the dirt.

My reponse was too long in the thread so I thought I'd throw it here for people to debate.

Well, Sue hates me. Actually, just teasing. But, she thinks that my picture of Mt. Rainier is rather boring and may not add to this blog. Geez, who couldn't take a shot of Mt. Rainier with a warm and clear evening like we enjoyed. It was staring me right in the face and I have a good interest in photography even though I'm a beginner.

Sue and others would like to bring up actual cases of problematic loans, days on market, price reductions etc....and cases where people have a probability to go delinquent. I'll tap more into this discussion as the blog evolves.

Two key points to internalize:

1) The first is that a change in market psychology is well underway here locally. For example, just months ago, as late as Fall of 2005, our market had virtually no price reductions at all. It wasn't on the radar. The very fact that we have price reductions in listing prices confirms that the real estate community understands this. Price reductions are now common place, incentives from builders are common place and there are some instances where sellers are offering more of a sales commission than normal. For example, a listing may give notice that there is a sales commission bonus of $1000, if a full price offer is accepted by a specific date.

The market change is being felt by Realtors and allied real estate professionals we work with out in the market place. It is being talked about. It is being addressed in staff meetings and is being discussed by various national r.e. speakers that cater to the Realtor community.

One of the very first clues of this was the title of seminar put on in Seattle from national real estate sales trainer, Brian Buffini, earlier this year: "how to survive in a changing market." While I'm not a licensed agent, it was telling that a sought after sales trainer was even discussing the market change to those he serves.

2) My gut feeling is that there is a large pool of potential buyers that have no idea of the realities of the market. This is just an observation and no fault of their own. The world (and I'll have tomatoes thrown at me about this from our friends in the business) does not revolve around me, real estate and sales folks. People have lives to live, work to do, family to tend to, people to visit, and real estate is NOT on the radar in the manner in which many believe.

People are worried about other things: car payments, vacations, a sick family member, world events (I'm concerned about the impact of middle east turmoil for one), sporting events, school, etc...

The take away here is that the psychology is changing, and there is a new medium, called blogging, that when real estate is on the radar for consumers, they can get information that they did not have readily available during the last bona fide market change in our area. And this new medium will continue to have a major impact on the scale and swiftness of the unraveling of the markets across the country.
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More "FairValue" Malarkey

Why this is in the news again is beyond me, but apparently CNN/Money is really keen on some dude that uses a secret formula to determine which housing markets are overpriced. We talked about this same guy's babblings just three short months ago, and very little has changed since then.

After years of local home markets getting more and more overvalued, the trend has reversed, according to an analyis (sic) published this week.

Each quarter, Local Market Monitor, which provides research to the real estate industry, assesses 100 markets, comparing selling prices to "equilibrium" values. Company president Ingo Winzer bases those values on local economic and population growth, construction costs, vacancy rates, household income in the area and interest rates.
Winzer says that 56 of the 100 markets he covers are now fairly priced, up from 54 last quarter.
As I pointed out last time, this dude's "analysis" of the "Seattle/Tacoma" region covers so broad an area as to be completely and utterly useless. June median home prices (residential & condo) across the area in question were as "low" as $275,250 in Pierce County, and as high as $415,000 in Seattle. To take such a broad range of data and make a determination that it is all a "FairValue" is ludicrous.

Furthermore, I'm calling BS on the numbers given in the report. Take a look at the first quarter report. The home price listed for Seattle-Tacoma is $311,000. Now notice that in the second quarter report, that number went down, to $308,700. Excuse me? Last I checked, median prices were still going up in King, Pierce, and Snohomish counties. This report has zero credibility. I wish I could say that I'm shocked (or even a little surprised) that it was unquestioningly parroted by CNN.

(Les Christie, CNN Money, 07.25.2006)
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Tuesday, July 25, 2006

Topic Previews

One of the benefits of homeownership (ok it's only a few days of the year this clear, but when Mt. Rainier shows her majesty, it speaks for itself)
Looking South over Snohomish Valley past Monroe.
Photo: Tim Kane -July 25th, 2007, 8:30pm.

Hello Bloggers. Gosh, I have a bunch of topics to discuss. No time this evening but here's a quick sneak preview of what's on my mind:
1) Today's above the fold front page headliner in today's Herald:
"DIG DEEP: New Homes Top $500,000K" (emphasis Herald).

2) This evening in south Everett I had the unique pleasure of discussing housing with Banner Banks' Chairman, President & CEO (including mingling with Bank Directors & VP's.) It was quite a fun discussion. Oh, and their stock hit a 52 week high today. Full disclosure: Our company, Legacy Escrow Service, Inc., trust account is with Banner Bank but I hold no stock in Banner Bank.

My topic is: "Suits vs. a guy in shorts (me): Puget Sound Real Estate is poised for more growth."

3) "Appraisers sound off & it's not pretty."

4) Artificial Appreciation Revisited & Confirmed: Closing cost contributions offset by seller price escalation.

5) Affiliated Business Relationships in Real Estate: it's costing consumers a bundle.

6) Title Insurance: Why one state banned Title Companies, issues its own state backed insurance for its citizens who are taking the savings to the bank.
Any one of these topics you would like me to address sooner than later? Or, you can tell me, "I don't give a rip."

I'm game for other topic suggestions on insider questions anyone may have. Both selling or purchasing for that matter.
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Memories: Stale Listings & Low-Ball Offers

Here are a couple of blasts from the past for you, courtesy of the Seattle Times archives and real estate Q&A columnist Bob Bruss. Our first question is from November 1993:

Q: Our home has been listed for sale with several different realtors for almost two years. We have reduced the asking price by about $35,000. It still hasn't sold. All the realtors who inspect our home say how nice it is. But we have received only two purchase offers and they both involved taking other houses in trade. We want to sell for cash and move to a better climate. However, we're not going to give our beautiful home away. Any suggestions how to get our home sold?
Wow. It's pretty hard to imagine that same column being written in 2006. Even if a home listed in 2004 was overpriced, it probably would have looked like a bargain by late 2005, without any reduction in price. When was the last time you saw a nice, relatively well-priced house sitting on the market for more than a few weeks? I don't think it used to be such a rare occurrence, and it seems likely that it will soon be common again...

The second question is even better, coming at you from August 1991:
Q: How much below the asking price should we offer for a home which we want to buy? Last week we saw a home which will be perfect for us. We are now in the process of pre-qualifying with a mortgage lender to be sure we can afford to buy it. If we decide to make an offer, how much below the asking price should we offer? The real-estate agent says it is a bargain at its full asking price. We agree. Once this house hits the multiple listing book in a week or so I'm sure it will sell quickly. Should we offer the full price to be sure we get the house?

A: Never offer the full asking price. Well, almost never. Unless you offer less, you will never know at what price the house could be purchased. Please believe me there is no worse feeling than to have the seller accept your first offer. If that happens, you know you probably could have bought for less if you had offered less.
It's almost funny to imagine that there was a time when "always offer under the asking price" was considered sound advice. Of course, real estate enthusiasts would have us believe that we'll never see such a time again—that double-digit appreciation will slow to 4-6% appreciation, demand will be strong, and prices will keep going up, up, up, forever and ever, amen!

I predict we'll be reading columns that bear a striking resemblance to those above within the next five years.

(Bob Bruss, Seattle Times, 11.14.1993)
(Bob Bruss, Seattle Times, 08.11.1991)
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Monday, July 24, 2006

The Insatiable Homebuyer Appetite

Marlow Harris of the P-I blog Seattle Real Estate Professionals had a great post last week about the insatiable appetite of the American home buyer:

I am generalizing from the 100's of homebuyers I've met, plus the watercooler talk from the many agents I've known, and I know that buyers list of "wants" quickly become "needs" and color their entire search.

Granite countertops, restaurant-quality stainless steel appliances, custom tile and other finishes, hardwood or bamboo floors, perhaps some skylights, high ceilings, designer fixtures, a master suite with a separate bath, 2000, 3000, 4000 or more square feet, a two or three-car garage, huge yards, the list goes on and on. Larger homes, larger lots, further and further away from the city.

There is still plenty of room right in the city limits to build attached homes, cottage homes, townhomes, cozy, sustainable homes, yet many people don't want them, and they'll drive 50 miles away from the city and mortgage themselves to the hilt to get them.
Are Americans spoiled?
What is this about? With increased concerns about the environment, why this consumer-driven drive toward conspicuous consumption and wealth? Why this sense of entitlement? Why is the Street of Dreams one of the most highly attended events of the year?

Obviously, this is a huge topic best addressed by sociologists, but it's my observation that these attitudes are pandemic in our society and cannot be sustained for much longer. Hence the upward spiral of prices and increasing anxiety on the part of buyers, builders and politicians.
Marlow raises some interesting points and poses some good questions. Are American's spoiled? I say heck yes—it's not even a question. Personally, I'd like to own a home, but I don't have any sense that I deserve to. The reason I'm sitting out of "the market" right now isn't that I can't afford to buy the home I want or that I think I deserve, it is because I'm of the opinion that even modest homes are ridiculously overpriced. But I digress.

I definitely agree with Marlow that the prevailing attitude of entitlement cannot be sustained for much longer. What is it going to take to collectively snap us out of it? It seems to me that a painful bubble burst might do the trick, but what if the real estate talking heads are right, and that never happens?

(Marlow Harris, Seattle Real Estate Professionals, 07.19.2006)
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Dry Rot: Rot from housing spreading to financial sector

Back to work Monday has arrived and my normal routine is to find Bill Fleckenstein musings on the financial markets. I'm fairly sure he coined the term "housing ATM," among other gems, and he's at it again with this morning's take on the markets.

Perhaps as a sign that folks are starting to care, the shares of mortgage-insurance underwriter MGIC Investment (MTG, news, msgs) sank 5% on July 18, despite its win at "beat the number." This is a bit of the linkage I've been looking for, in terms of potential rot from the housing sector spilling into the financial sector.

In other words, some folks are beginning to rethink the notion of loans against homes as impregnable assets. In my opinion, any company that has profited by aiding and abetting the housing ATM is in trouble — and at serious risk, if it has a leveraged balance sheet with its assets being loans to houses.

I make those comments based on what I can see has gone on, and I'm sure that lots of unusual business practices have gone on that we have no knowledge of. Just as we didn't find out about Enron, WorldCom, options-backdating, etc. until the tide went out, we have yet to discover what borderline, if not outright criminal, behavior occurred in the housing mania.

When the stock market begins to connect the dots and that recession looms, all hell is going to break loose. Exactly when that occurs, I do not know, but it's coming.
Large financial players have been doing a lot of hedging behind the scenes. Last week Seattle's Washington Mutual announced it sold $140 Billion worth of it's entire government and part of it's conforming loan servicing portfolio to Wells Fargo.

Remember the old saying, "watch what people do, not what they say" —about the markets. I regularly get reports from my brother who lives in Massachusetts and travels around New England regularly—said over the weekend his wife's co-worker's house has been on the market for months and now has gone into default. In his classic accent, "the maaaaket is wicked bad. No one is buying."

I get the feeling the Seattle area R.E. markets are really going to do much better than I initially expected. Will this S-Crow be eating crow or are we lagging far behind other markets around the country?
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Saturday, July 22, 2006

NewsFlash: Living Close To Work Not A Priority

Here's a shocker for you: most people in the Seattle area don't live all that close to where they work.

David Wilson lives in Fremont, Dan Griffiths and Mary Anne Lyman in Tacoma. Andrew Chen's home is in Newcastle, Roxann Harr's in Auburn, Nancy Andersen's in Federal Way.

They all work for the same insurance company — in Enumclaw.

They're living, breathing examples of a demographic reality the U.S. Census Bureau has quantified for the first time:

Despite the dramatic surge of new jobs in suburbia over the past three decades, most people in this and other metropolitan areas don't work in the same communities in which they live.
Lack of affordable housing in some of the region's job centers is a factor. But there's much more at play.
More than 70 percent of Enumclaw's working residents commute to out-of-town jobs. And more than 70 percent of the people who work in Enumclaw live somewhere else.
Some say they don't live in Enumclaw in part because housing there is too expensive. Nancy Andersen, who commutes from Federal Way, talks of a dumpy rental house near the insurance company's office that's on the market for $900 a month.

"That's outrageous to me," she says.

Randy Bannecker, housing specialist with the Seattle-King County Association of Realtors, says lack of affordable housing prevents many people from living where their jobs are.

"Typically, people want to live closer to work," Bannecker says.
I know that living close to work is a high priority for me, but I'm actually not convinced that's the case for most people. Maybe I'm off-base here, but I think most people base their idea of a desirable neighborhood primarily on touchy-feely things, with logical considerations like proximity to employment (and even affordability) being more of an afterthought.

People want to live in a neighborhood that "feels safe," "feels friendly," and looks nice. If they have kids, the reputation of the schools is a big consideration. Well-manicured lawns and smiling friendly neighbors (but not too friendly, we value our privacy after all) make a neighborhood "desirable," and if it's affordable and/or close to work that's just a bonus.

...which is why people will pay through the nose to live in Ballard, even though they may work in Redmond.

(Eric Pryne, Seattle Times, 07.22.2006)
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Thursday, July 20, 2006

Contrarions guilty of the FUD factor: fear, uncertainty, doubt

Craig King of Real Blogging, the official real estate industry blog, says it's a great time to be buying or selling real estate.

"No matter what you're selling, conventional wisdom is that the FUD Factor (fear, uncertainty and doubt) tends to freeze buyers in their tracks." He goes on to say that,"If we do a good job of telling our story, I think prospects will realize it's a time to buy, not a time to stall."
Certainly real estate will be purchased and sold in any market. Does he have a good point?
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Real Estate Insight Hiding In Sports Talk

Don't miss Bill Virgin's latest column in the Seattle P-I today. The subject is the Sonics' sale, but check out the reference to Seattle real estate that he managed to slip in there:

Owning a sports franchise is like buying a Monet painting. The immediate payoff is psychological, not financial; in fact, ownership is likely to be a financial drain. A work of art doesn't pay interest; it does generate expenses for security, insurance and preservation. The financial payoff comes when it's sold — if a buyer can be found who is willing to pay more than the original purchase price and accumulated losses.

In other words, the Greater Fool Theory — which is what the Seattle real estate market is based on these days. People are paying outrageous prices for homes, even properties they know they'll have to pour money into for renovation or upkeep, with the expectation that when it's time to sell, they'll be able to recoup their purchase price and those remodeling and maintenance expenses by finding a Greater Fool who will pay enough.

As long as an owner has confidence the pool of Greater Fools has not been drained, the issue becomes whether there's enough psychological benefit from owning a team, a house, or a Monet to put up with the losses — and the wallet is thick enough to endure them. The former Sonics ownership group decided the trade-off wasn't worth it, especially when a live one showed up on the doorstep, checkbook in hand.
I think Bill may well be the first person in the "mainstream media" in Seattle to actually openly admit that. Kudos, Bill.

(Bill Virgin, Seattle P-I, 07.20.2006)
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Wednesday, July 19, 2006

Job Growth: 71% Shave From 1st Quarter

It's that time of the month again... time for the latest state job statistics, and time for everyone's favorite cliché, good news / bad news. The good news is more jobs were added in June than in May. The bad news is that job growth is still significantly slower than it was just six months ago.

Not that long ago, when the Pacific Northwest was the nation's economic wallflower, adding 9,200 jobs in Washington over a three-month period would have been cause for celebration — or at least hopeful smiles.

But Tuesday's jobs report, which showed payrolls in the state grew by 3,800 jobs in June and closed out the second quarter with a 9,200-job net increase, was more evidence that Washington's economic engine has shifted into lower gear.
In the fourth quarter of 2005, Washington's jobs base jumped by 41,100; in the first quarter of this year, it grew by another 32,200 jobs.

In contrast, the 9,200 jobs added in the second quarter seemed a bit, well, underwhelming.

The reasons aren't hard to find. Rising mortgage rates have made the region's homes even less affordable, which has cut into housing demand and in turn slowed hiring in construction trades.

Each month from September 2005 to March, the construction sector added more than 1,000 jobs; from April to June, by contrast, construction added just 300 net new jobs.
Underwhelming, but certainly not unpredictable... As real estate continues to slow, the jobs market is likely to slow as well. 3,800 new jobs created across the state last month is decent, and it would be nice if that rate of economic growth continues. I just don't think that it will. If the number of home sales continues to drop, we will soon find out just how much of our economy is based on selling each other homes.

(Drew DeSilver, Seattle Times, 07.19.2006)
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Probably Not A Minority Opinion

I just know you'll love this opinion piece in today's Seattle Times:

Rising interest rates have cooled the housing explosion around much of the country, but in the Puget Sound region, real estate remains king.

And the queen is the over-the-top but never disappointing model home.

I'm not referring to the minipalaces laid out in the Seattle Street of Dreams — although a step through the annual event's custom doors begs the question of whether affordable housing exists anymore.

I'm talking about the model homes showcasing the miles and miles of new housing developments springing up along the Interstate 90 and Interstate 5 corridors. From Seattle to Puyallup to North Bend and back, developers are building for the hordes to come.

And they're coming. This region remains desirable for jobs and livability. And despite the jaw-dropping housing prices, on sunny weekends throngs of home shoppers wander in and out of model homes like they're touring art galleries.

Expect this trend to continue as Sound Transit and the possibility of light rail turns the suburbs into attractive urban-like enclaves.
If cars evoke who we are today — SUV's for the hip and fertile, Buicks for the conservatives and mini-Coopers for the aspiring gazillionaires — houses are being built to reflect who we aspire to be. We hope someday to be the hobbyist puttering around the hobby room or the fitness buff splayed on a yoga mat in the garden room. We want to be the grande dame gliding down the winding staircase to greet a guest in the two-story foyer.

And thanks to the miracle growth of real estate, many of us can. The aphorism that a rising tide lifts all boats is a principle at work here. People are using equity in existing homes to move up. Median home prices in King County shot up 16 percent last year. Try to mimic that on Wall Street.

There are drawbacks. Any gold rush inevitably leaves someone in the dust. The future may be rosy for some but for others it may consist of laboring underneath zero-down, interest-only, short-term ARMs, one of many creative and scary mortgage packages out there.
I'm just going to let that one speak for itself.

(Lynne Varner, Seattle Times, 07.19.2006)
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Tuesday, July 18, 2006

Real Estate Kickback Schemes Marches On

Today, the U.S. Dept. of Housing and Urban Development (HUD) announced that it reached yet another settlement with a large national lender and two large builders for violating the Real Estate Settlement and Procedures Act (RESPA). One of RESPA's functions is to protect consumers by prohibiting kickbacks in real estate that artificially increase the premiums consumers pay for title insurance or other costs related to purchasing a home. The settlement was for $1.6 Million. A drop in the bucket in a billion dollar real estate market.

Title insurance is big business and exceptionally lucrative. Real estate online news source, Inman news, reported earlier this year that in comparison to homeowners insurance or medical insurance where two-thirds or more of the premium actually goes to pays claims, title insurance claims are under 10% of premiums collected.

Title companies, builders, lenders and real estate brokers have been under scrutiny this year by HUD and several states (Washington, California, Colorado, New Mexico among others) due to the proliferation of setting up what are called captive reinsurance companies or other affiliated business fronts created to skim referral fees off the backs of consumers.

Earlier this year several of the most prominant title companies and parent companies that operate around the country and in our market have settled these alleged cases without admitting any wrong doing. Naturally.

It pays to shop and discern fees for title, escrow and lenders when buying AND selling a home.

Ethics in real estate. Is it an oxymoron?

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Land Use Regulations To Loosen?

Given that one alleged reason for skyrocketing housing prices is government land use regulation, it is worth mentioning that land use restrictions in King County and across Washington State may be loosening in the coming year. In what may be an attempt to stave off the state-wide property rights initiative, the King County Executive is considering easing restrictions on rural businesses.

After years of perceived slights, King County Executive Ron Sims is extending an olive branch to the county's rural population: a three-part proposal to give rural businesses a regulatory break.

The legislation is still in its infancy, but after citizen comment and one or two rewrites, it could result in small but helpful code revisions that would make operating home-based businesses and animal-care services a lot easier in rural King County, executive staff members said Monday.

The proposal is the result of a series of meetings with rural residents, many of whom were upset with the 2004 regulation known as the "critical area ordinance," which required rural property owners to leave up to two-thirds of their land in a natural state.
"We've been reluctant to increase the kind of housing we allow, but this strikes a good balance," said Sims' senior policy adviser, Karen Wolf. "We'll get some public input on this, but we think it does the trick."
"The trick" likely being to appease the populous just enough that they perhaps do not vote for Initiative 933, which is intended to:
...protect the use and value of private property while providing for a healthy environment and ensuring that government agencies do not damage the use or value of private property, except if necessary to prevent threats to human health and safety.
I doubt the paltry efforts of Mr. Sims are likely to affect the success of the initiative, but I also don't know whether the initiative will really affect home values. What do you think?

(Amy Rolph, Seattle P-I, 07.18.2006)
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Monday, July 17, 2006

New Enonomy: selling each other houses

Rich Toscano, author and founder of Piggington's Almanac for the Landed Poor, was interviewed by the LA Times in today's piece. He is quoted on page 2 of the article.

"We've built an entire economy on selling each other homes." - Rich Toscano

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King County To Middle Class: Rent Or Leave

As I've said here before, I think renting right now is a no-brainer for people that don't already own a home. That being said, for those in the middle-income bracket like myself that do insist on stretching their finances to afford an overpriced home in King County, the options are fewer and fewer.

Throughout the county, buyers earning solidly middle-class wages have been increasingly unable to find what are traditionally thought of as middle-class houses because escalating prices mean the pool has been shrinking dramatically.

King County's median household income in 2003 was $57,857, which allowed buyers easy accessibility to 28 areas — seven within Seattle city limits — whose median home prices were $256,000 or less, a Seattle Times home-price analysis showed. Median means half are more; half are less.

Fast forward to last year: House prices shot up, but incomes barely rose, so median-income buyers found even fewer neighborhoods where they could afford the median-priced home — just nine in the county, including one in the city.
It's nice to actually see an article from Ms. Rhodes about the ever-increasing home prices that isn't completely laden with the gung-ho, "isn't this the greatest thing ever" kind of cheerleading. Although I still get the feeling that the given analysis is a bit on the rosy side. According to the Census figures released last August, King County's median household income was/is even lower than they claim, coming in at just $55,114 for 2004. Plus, since (as far as I'm aware) the 2004 "median household income" data is the most recent data available, Ms. Rhodes and Mr. Mayo based their "which areas are affordable" scenarios on home prices and wage information (estimations?) from last year.

Of course, it apparently isn't possible for Ms. Rhodes to have her hand in a real estate article without slipping in at least a little cheerleading...
"Superstar" Seattle market has grown faster than U.S. market for decades.

Of course, if moderate-income buyers instead choose a condominium or less-expensive house (often a fixer-upper), the possibilities are greater.

But for how long? King County's single-family-home prices shot up 19.7 percent in the first six months of this year, compared with the same period in 2005, according to The Times analysis. It's based on price per square foot, considered the truest measure of housing cost.

As the residential real-estate market cools in other parts of the nation, one question is why Seattle's market remains robust. Money magazine predicts homes in the Seattle-Bellevue-Everett area will appreciate 10.5 percent between this June and next. That's twice the rate predicted for the country overall.
"Twice the rate" kind of depends on whether you choose Money Magazine's May 1st prediction (1.9%) or their May 18th prediction (10.5%). (I'm shocked, shocked I tell you that Ms. Rhodes selected the May 18th prediction.) They never did explain the wild discrepancy. But I digress. Why does the Seattle market remain so "robust?" We've discussed this question before, but it's still a relevant one. I'm of the belief that we're simply a year or two behind the curve. As I have said (probably too many times), only time will tell.

(Elizabeth Rhodes & Justin Mayo, Seattle Times, 07.16.2006)
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Saturday, July 15, 2006

Pinpoint Stats: Snohomish Co.

Snohomish Co. Residential sales only (only houses, no condo's, no land)
Source: NWMLS
April 1283 (Median $283,250)

May 1165 (Median $287,000)

June 1473 (Median $295,000)

April 1134 (Median $331,254)

May 1133 (Median $339,950)

June 1347 (Median $350,000)

The rise in median prices are remarkable YOY & MOM and that's with less sales and rising inventory in 2006. That is one whale of an increase in median price any way you look at it.

To bears, is this a clear sign of irrational appreciation? To bulls, is this a sign of or result of continual economic health? Some experts are predicting a more modest single digit appreciation for the remainder of 2006 in our Puget Sound area market.
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Friday, July 14, 2006

Sweat Equity: money in the bank

(May 2006 - that's me removing old patio to prepare for above grade deck.)

It's Summer.

Lot of projects are underway for many homeowners. For those considering homeownership, perhaps one of the strategies for buying a home is to consider a fixer.

Sweat equity is one way to produce equity the old fashioned way. It requires time, hard work, a creative mind, tools, money and some know how. If you end up doing a good portion of the work yourself vs. hiring contractors you will save a lot of money and gain equity in the value of your home.

Consider buying a fixer.

I've never purchased real estate other than a fixer. Initially it was by necessity. I had to buy piece of junk in Ballard or we were going to continue to rent. After our second fixer in Edmonds, we purhased the fixer we currently reside in out in Snohomish and it's been a very long haul. I'm still working on the house, but have saved over $100,000 in bona fide labor costs by doing it ourselves. Two years running has taken a toll. To be brutally honest, you can get burned out. Further, I'm cheap. I hate to spend money. I still drive a 12 yr old minivan. I also have three very easy ways to destroy things: kids.

My introduction to housing was by accident. The start was participating in a renovation of a home my college roommate purchased on Queen Anne Hill in Seattle back in 1989. At the time I really didn't know how he bought it. As a punk kid fresh out of college thinking I knew-it-all, I admit I was envious of his good fortune. The market was hot. Fast forward to today with my experience, I now know how he did it and didn't do it, but that will be saved for another posting. I had no experience in home improvement whatsoever. Since then I've gained skills little by little until having a well rounded background in most everything. I'm still weak in framing, but then again I don't build homes for a living.

I won in Las Vegas. (this really deserves it's own post)

Do you have friends who always say this, but they don't tell you the amount they lost? Real Estate can be the same. It's so funny, because I have a friend who's wife always spills the beans about how much they really made (code for lost) weeks after they come back from Vegas. And lose they did. We'll, I've made many mistakes in fixing a home that have cost me plenty. No bones about it. For example, see the photo below.

One of the best screw up's on record, at least that I'll admit to on a public blog is the following: every square inch of our home's interior walls (except for baths) were covered in dark paneling. No probelm I thought. Just peel them off, touch up the drywall, texture and paint. Nope didn't happen. The previous owner glued them all down with stuff they must use on the Space Shuttle. Destroyed the drywall taking the paneling off. Retail cost: $8500 error.

For some people, they don't mind sore muscles, running all over town for supplies, and being constantly filthy---it's starting to get to me now, never mind that I'm not 25 yrs old anymore. The satisfaction of making a house your home is clearly a highlight. It's not for everybody and it does cost hard earned money. If you can't afford to buy a home that is "move-in-ready" or new construction, consider buying a home that needs improvement. You can save on the purchase price and build equity the old fashioned way while enjoying the satisfaction of being a do-it-yourselfer.

How about you? Would you consider a fixer if you were a first time buyer? I did and it has paid dividends every time.

Just a liiiiittttle too far down my driveway. Plus a few choice words and $800 pain.



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Real Estate Market "Magic"

This article in the Mercer Island Reporter cracked me up, if only because of the headline: Island real estate market still magic.

Fewer homes have been on the market on the Island over the past six months and slightly fewer homes sold as compared to last year. Prices for those that did sell were up 15 percent over last year.

"The market in the first half of this year has remained strong," said John Deely, broker of the Mercer Island Coldwell Banker Bain office. "Again, this year we have seen an increase in both the average and median prices for active, pending and sold properties, however the rate of increase has slowed from previous years."

Island sellers have waited longer this year. The average time on the market for sold properties was 86 days as compared to 59 days in 2005 — nearly four weeks longer.

June, however, has been a good month. Sixty Island homes sold — more than double the number last June. And some properties have had a lot of action.
While interest rates have been rising as of late, [Mercer Island John L. Scott broker D'Ann] Jackson believes home prices will continue to appreciate in King County, although not necessarily at the present pace.

"We live in a vibrant area that continues to attract new residents, thanks to the region's improving economy, Jackson said.

"I think we'll see good steady growth (in home prices) in the months ahead," she said.
Home prices continuing to appreciate at a "good steady" rate while wages continue to stagnate would indeed be magic.

(Reporter Staff, Mercer Island Reporter, 07.13.2006)
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Thursday, July 13, 2006

Wharton's Conclusion: Soft Landing

In case you haven't noticed, Gregory Wharton has posted the final chapter in his series on Seattle real estate prices. If you thought my response to his previous post was long, you're in for a shock. Find a comfy chair and make sure you have a good-sized block of time to tackle his 3,500-word thesis on what the future has in store for Seattle real estate.

Here are a few highlights from the beginning and the end:

First off, let's get this out of the way: if you're expecting the real estate market to continue with double-digit price gains at the mean while wages are stagnant and interest rates are rising, you're dreaming. It's not going to happen. We've seen some great gains in the market over the last five years, but they are historically atypical. It is also not true that "real estate prices always go up." Sometimes they go down, and anybody who tells you otherwise is ignorant of history.

However, if you're predicting a large decline in real estate prices while inflation is rising, regulation is propping up land values, and other markets remain volatile and risky, you're going to be disappointed. That's not going to happen either.
What I've been talking about here is probabilities and expected values. There is a probability that Seattle is experiencing a real estate bubble. I don't mean to suggest that it's zero. In fact, the probability is higher than it has been for a while, but is still quite low: low enough that the widespread angst about it overstates the danger significantly (in fact, the angst itself is an indicator of just how low the actual probability is). Bubbles are rare in all markets, but especially so in real estate due the unique characteristics of that market. I don't say this in an attempt to gloss the possibility, but to be realistic in the analysis. I do know what bubbles look like, and have even had some success trading them (It may have been dumb luck, but I predicted the stock market bubble years beforehand, and got out well before the decline started in March 2000).

The bulls should also be aware that the probability that the bull market we've been seeing is going to continue at anything like the recent pace is also comparatively low. For every unrealistic bear expectation, there is an unrealistic bull out there right now.

The probability that the market is going through and is near the end of one of its typical bull cycles is much, much higher. That bull cycle is showing some signs of exhausting itself, so the expected value of the probability of stagnation that might result must be factored into any investment decision.

The Seattle real estate market is historically cyclical. Seattle has experienced other periods of price appreciation similar to what we've seen in the last five years. They've all been followed by decade-long plateaus before the next cycle gets going. My parents bought a house in Bellevue near the peak of the last major upswing, in 1979. It was eight years before it began to appreciate in price, but its nominal value never actually fell. That is typical of this market when it goes soft.
In my (uneducated in real estate) opinion, his prediction that Seattle's real estate market is in for a soft landing seems to be based on four main factors:
  • his argument that the price run-up was based on "solid economic" foundations
  • Seattle's historical real estate pattern of boom-then-flatten
  • government and the banks won't allow real estate to go down (much)
  • when real estate softens, people just won't sell
Obviously I'm over-simplifying his argument here, as there is no way I could do it justice in a short summary like this. At the very least, those are among the major underpinnings of his forecast.

I'm still not convinced that the future will at all resemble the picture Mr. Wharton has painted, since I fundamentally disagree with at least 3 out of the 4 above-listed supporting arguments. I highly encourage you to go read it for yourself, and make up your own mind.

(Gregory Wharton, Seattle Real Estate Professionals, 07.12.2006)
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Wednesday, July 12, 2006

Housing Appreciation: the dirty little secret

First, I'd like to thank Tim Ellis for inviting me to discuss housing and escrow topics on this blog as a guest. Being that many readers of this blog want to demystify home ownership and aspire to become homeowners in a meaningful way, my hope is that our collective experience (wife and I) will be a resource of good, relevant and neutral information regarding buying, selling, fixing up property and escrow issues, our profession. We do not sell property or earn commissions, not that there's anything wrong with that. The bulk of work sent our way is from Realtors and FSBO transactions.

About us: We have purchased three homes together since we were married, all fixers of various degrees. (ok, our first in Ballard was a tear down the size of a garage, but we had to start somewhere) We also have had the perspective of selling homes both as licensed Realtors a long long time ago and currently own Legacy Escrow Service, Inc. located in south Everett. My wife Lynlee and I met just after college where we attended at Seattle Pacific University. We have three kids and live way out in the sticks at a place the locals call Snohomish. There are a lot of trucks around here and cows and horses. My wife is much smarter than I am, but at least I don't do silly things like pick Cherries on the 2nd- to- top rung of a ladder and break ribs because the ladder kicks out and she falls down on the ladder, like she did this past Friday evening. She reminds me that she's really not talking in a sultry manner, it's just that she's having a tough time breathing.

Moving along, we were discussing today's work this evening at dinner and my wife reminded me of this oft forgotton but important topic. So, if you don't like it then throw tomatoes at her. On a serious note, this is a very interesting topic and does have serious implications. So let's get to it and debate it.

Housing Appreciation: the dirty little secret

We'll it's not really a dirty little secret, but like my mother-in-law says about certain things taboo, "we just don't talk about that." One of the least talked about facets of home price appreciation and what we see on the majority of the purchase transactions we close that were 100% financed, is this little secret: It's simply sellers jacking up the sales price to cover the buyers request for paying closing costs. The cause and effect: artificial appreciation and compounding that spirals house prices upward absent of fundamental economic drivers.

Ok, fine you say. What's the big deal. What's the big deal??? Let's discuss the ramifications of this because it is quite remarkable. In a recent transaction at our office a home (numbers are for example only) was listed for $450,000. It was sold for $458,000. The seller was quite happy with just accepting a full price offer, but here comes a very enthusiastic buyer that is qualified to purchase the home, but like many buyers, is cash poor. So the buyer and seller agree to artificially increase the appreciation of the home via a sales price increase that covers the closing costs for the buyer. While this appears to be somewhat routine, the inertia from compounding price appreciation from this sale and others identical to it, creates a domino affect that is hard to stop. Think about this. If our firm has closed 75 of these transactions (and we have) in 2006 alone, imagine what the title companies who dominate the market must be closing, in each county (King, Pierce, Snohomish etc...). Now think all across the state. Now think all across the country. The numbers could be staggering.

Was the true market price of the home really nearly $460,000? The seller boasts that he got over the asking price and the neighbor down the street named Ted, says, "boy, since Roy got $460,000, I'm going to ask $465,000. The appraiser and/or comparative market analysis (CMA) from the local Realtor shows only the sold prices, not how they achieved the price. And, there we have it. All those homes that sold for over asking or were they? Not exactly.

When Ted the excited neighbor lists his house with Mary, the local Realtor, for $465,000, they expect a quick sale. Just as they thought, here comes Joe & Jill Buyer, and they do the same thing and ask for the seller to pay closing costs and they increase the sales price to $475,000. Tongue-in- cheek, VoilĂ ! the appraisal comes in at exactly $475,000. And this cycle goes on and on.

A recent comment I placed on a post at the Seattle P-I Real Estate professionals blog discussed this very scenario and the reasoning why my wife and I pulled out of a multiple bid situation in the late Summer/early Fall of 2004.


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Yet Another Condo Conversion Article

Here's yet another article in the Times focusing in on condo conversions:

In the first six months of this year, 1,162 Seattle apartments have become condos or are headed for conversion, a pace that would far exceed last year's total of 1,551 conversions.

The trend is happening outside Seattle, as well. Last year saw about 4,000 units converted to condos in the Puget Sound area, according to Dupre+Scott Apartment Advisors. Those conversions resulted in a net loss of apartments because they exceeded the number of new rental units built.
John Fox, coordinator of the Seattle Displacement Coalition, a group of low-income-housing advocates, said the city's response to conversions has been weak. Fox recalls a similar condo surge in the late 1970s that led then-Mayor Charles Royer to impose a temporary moratorium on conversions. Fox said city officials should consider another moratorium.

"It should be a subject of grave concern, but we're sitting on our hands, by and large," he said.

Others, such as Ring and Adrienne Quinn, the city's housing director, say more information would be helpful before Seattle acts. It's not clear, they say, how many low-income renters are losing apartments to conversions. And, on the positive side, they say conversions are increasing home-ownership opportunities, particularly in the $250,000 range.

"It isn't peachy and good. But it's more complicated than it usually looks," Ring said. "One of the things I don't know, and I'd like to know, is who exactly is being affected by condo conversion."

City Councilman Tom Rasmussen wants the same answers, so he's created a committee that he hopes will provide recommendations about Seattle's apartment market to the City Council.

"For the most part, the people I hear from are not able to buy their units, and we don't want people to have to leave the city," he said.

The bottom line, according to real-estate experts and developers, is that conversions are being driven by Seattle's job growth and hot housing market, which has shown a strong appetite for condos, making it lucrative for apartment building owners to sell.
Still not even a passing mention of converted condos going back onto the rental market. I'm not saying that is happening en masse, but I know that it is happening, and I am disappointed that it isn't even mentioned in an article like this.

I certainly can't say that I blame apartment building owners for jumping on the condo conversion bandwagon. With rents having been virtually stagnant the last few years while real estate prices have shot through the roof, converting your apartment building into condos is like winning the lottery—for those that get in before the market stagnates/drops, that is. Or do we all really believe that people will continue to happily fork over $250,000+ for a tiny studio apartment in a run-down building from now until eternity?

(Bob Young, Seattle Times , 07.12.2006)
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Tuesday, July 11, 2006

RE: There Is No Bubble In Seattle

Last week, Gregory Wharton posted the grand culmination of his 15-part Seattle real estate bubble extravaganza. I wanted to wait until he posted the last chapter, but it's been over a week, and I think the points he made in his most recent posts should be addressed sooner rather than later. I said in my first post about his series that "I may not agree with all of the conclusions he comes to, but at least he is giving the subject a genuinely thoughtful analysis." I stand by that statement. I appreciate Mr. Wharton's thoughtful approach, but I do of course disagree with his primary conclusion that Seattle is not currently in a bubble market. In this post I will lay out the reasons that I am not convinced by Mr. Wharton's argument. I'm not going to spend time (right now) making the case why I do believe that Seattle is in a bubble, but rather the scope of this post will be limited to refuting Mr. Wharton's argument that we are not.

This is a pretty lengthy post, so let's get right to the point. Here's Mr. Wharton's money quote (emphasis mine):

So, even though prices have been increasing, sometimes at breathtaking rates, in Seattle there have been solid economic reasons for them to have done so. That doesn't necessarily mean that prices will continue to rise at their recent rates (an issue I will address in the final chapter to come), but it also means that a bubble-deflating crash to fundamentals isn't impending. For those who have been priced out of the market, now facing still-stagnant wages and rising interest rates, that will likely be unwelcome news.
Let me stop right there. I want to take this argument one piece at a time. Clearly I agree that prices have been rapidly increasing. No argument there. Obviously prices don't go up unless there's some reason, but are the reasons for the price increases truly "solid economic" ones? These are the four "solid economic reasons" that Mr. Wharton claims are driving Seattle real estate prices up at a "breathtaking" rate:
  • The reduction of risk in real estate compared other markets
  • The inherent value of improved property versus the increasing cost of new construction
  • The restricted supply of permission to build versus steadily increasing demand for real estate assets
  • The reduced cost of money increased the purchasing power of capital when leveraged
I'll address each one, slightly out of order.

The reduction of risk in real estate compared other markets
"Reduction in risk" is a canard, and is more a psychological reason than a "solid economic" one. Even the title of the post where he explained that bullet point was titled Swooping Buzzards: The Fickle Flight of Capital (emphasis mine). In it, he said:
Following the collapse of the Tech Stock Bubble beginning in early 2001, a substantial amount of investment capital fled from the equities markets and into U.S. real estate. Some of this was institutional investment funds, but by far the most important portion of it was money committed by individual investors. As the stock market fell and individual Americans felt the bite on their 401(k) plans and mutual fund statements, they began withdrawing their money and investing it first in their homes, then later in real estate generally. The perception that "home values never go down" and "you always need a roof over your head" combined with uncertainty in the equity markets to generate a flight of capital toward real estate.
So the "reduction of risk" basically comes from the fact that everyone believes there is a reduction of risk. I fail to see how that is either "solid" or "economic."

The restricted supply of permission to build versus steadily increasing demand for real estate assets
He claims that there is a "restricted supply of permission to build:"
In Seattle, there are large cost premiums on real estate associated with land-use regulation. At least a quarter of the price paid for the median home in Seattle is directly associated with this cost.
I don't doubt that regulation is a primary contributing factor that makes Seattle homes more expensive than those in say, Duluth. However, what Mr. Wharton does not explain is why this factor would contribute to the surge in prices that we have seen since 2001-2002. Have Seattle building regulations become more restrictive in the last 5 years? The 2002 study he refers to throughout his post is based on data from 1999, when the median priced home sold for less than 54% what it does today. So how can regulatory issues be a "solid economic factor" driving prices so high so fast in the last 5 years?

The reduced cost of money increased the purchasing power of capital when leveraged
Translation: low interest rates, baby! Yes, interest rates have been at historic lows, and no one I know has attempted to argue that this is not one of the primary driving forces behind the drastic price increases we have seen across much of the country, including Seattle. This reason is at least "economic," although considering that interest rates are on their way back up, I'd hardly call it "solid." As Mr. Wharton points out, looser lending standards are also largely to blame for skyrocketing prices.
Low interest rates also encouraged lenders to come up with new ways to keep up their profit margins. The simplest way to do that was to expand the pool of people they were willing to loan money to. Another issue was that, even though the monthly payments were getting more affordable, higher prices in the housing market meant higher down payments to meet conventional equity requirements (20% of purchase price). Americans were able to buy more financing with their monthly payment amounts, but they didn't have a proportionately higher reserve of cash to cover the higher down payments. Lenders obliged by offered a wide new range of options for buyers to enter the market without having to raise a lot of cash for equity. Hard money seconds, promissory notes, home equity loans, and a wide variety of other financing methods proliferated in response.
However, for this to be used as evidence that we are not in a bubble, it would have to be unlikely to reverse course. Interest rates are already on the rise. So far, banks are still broadening the pool of suicide loan packages, but does anyone seriously believe that trend will continue? When the financing industry inevitably begins the return to tighter lending standards, won't that drive prices down the same way the opposite trend drove them up?

The inherent value of improved property versus the increasing cost of new construction
I left this for last because I believe it is really the best thing Mr. Wharton has going to support his conclusion. Unfortunately, "the best" just isn't good enough, in my opinion. Here's the crux of his argument:
The size of a median home in Seattle is currently 1,720 square feet. In 1999, average construction cost for market-rate homes targeted at the median range was about $110 per square foot. Right now, construction cost in the same segment is running, on average, at about $160-$170 per square foot. Some houses are built for more, some for less, but a majority are now falling into that price range.
Doing a quick calculation, I see that the median home of 1,720 square feet has a construction hard cost replacement value of about $284,000. Adding in 15% soft cost, the comparative value of new construction for the median Seattle home is $326,600 not including land. That is certainly less than the median home sale price of $427K, but not by so much that we should immediately think we're seeing a bubble in real estate prices.
I already addressed the fact that I'm not convinced his construction cost figures are entirely accurate, but for the sake of this post, let's just assume that they are. I believe that even if those figures are accurate, it still doesn't mean that we aren't in a bubble—prices are still likely to go down in the future.

The easiest way to explain my argument is by way of analogy. It's a pretty cheesy one, but I think it gets the point across nicely.

Let's say there's some portable consumer electronics device that plays digitally-stored music, costs $200 to produce, and sells for $400. Let's call it an iHip. Thanks to some great press and a word-of-mouth frenzy, the iHip is a huge success, and it is on everyone's "must have" list. Despite the fact that portable music can be had in any number of ways, iHips are the preferred choice. Well, say that the cost to produce iHips goes up to $250, and the sales price follows suit, increasing to $450. No big deal, people still buy iHips because they're so darn hip and popular. Plus now existing iHip owners can sell their used iHips for that much more—if they wanted to get rid of their iHip, that is—which most of them don't, because it's so gosh darn cool.

Five years later, 65% of the population owns an iHip, in spite of the fact that the cost to produce iHips has shot up to $800, and they now sell retail for $1,200. One day a prominent tech writer points out that portable music can be had for a fraction of what people are spending on iHips, and really iHips aren't all that cool to begin with. Most people poo-poo him publicly, but privately they realize that he may have a point. People who bought their iHips start thinking about how much they could make if they sold theirs at today's prices, and how far that money would go toward other portable music options like a simple CD player or even satellite radio. Slowly but surely, demand for iHips decreases, while the supply of used iHips increases. Eventually, there are so many used iHips on the market, that they no longer command top dollar. In fact, despite the fact that brand new iHips still cost $800 to produce, used iHips are selling regularly for $400-$500. Production of iHips slows to a trickle, but as people switch to other portable music options in droves, the inventory of iHips for sale keeps going up.

Replace "iHips" with purchased homes, and "CD players or satellite radio" with renting (or simply selling, in the case of "investment" properties), and you can see why I don't buy the argument that high construction costs = sustainable high prices for all homes. When the other three bullet points begin to turn around (as they most certainly will and in some cases already are), the above-described scenario seems to me not only possible, but probable.

In Mr. Wharton's first post in the series, he said the following:
It turns out that Seattle real estate prices are unsustainably high in many cases, maybe even ripe for a serious correction, but outside of the condo-flipper market there is no bubble...yet.
Obviously Mr. Wharton and I have differing definitions of a real estate bubble. To me, "unsustainably high" prices is the definition of a bubble. I find myself confused about just what he means by "unsustainably high" when in his conclusion he plainly stated that he believes "a bubble-deflating crash to fundamentals isn't impending." How can prices be "ripe for a serious correction," if he believes that there are "solid economic reasons" for prices to be as high as they are? What is there to correct?

All in all, I believe Mr. Wharton's series uses good research and rational thinking to lay a solid foundation, only to come to a conclusion that is not supported by the very arguments he has laid out.

So let's hear from you. Do you agree or disagree with me? Are my arguments sound and reasonable, or did I miss a crucial piece of the puzzle? Has the bubble been debunked, or is it still hanging over our heads? Inquiring minds want to know.

(Gregory Wharton, Seattle Real Estate Professionals, 07.03.2006)
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Sunday, July 09, 2006

Rents Predicted To Rise... Still

A number of readers pointed out an article in yesterday's Seattle Times about "multifamily housing" (apartments) that's full of the usual pep-talk and rah-rah-speak claiming that prices have nowhere to go but up, up, up, and isn't that just wonderful!

With apartment vacancy rates declining and job growth increasing, real-estate investors are snapping up properties in anticipation of a three-year boom in the multifamily market around Seattle.

Local investors are beefing up holdings, and out-of-state investors are buying large buildings, even as developers take more apartments off the rental market and convert them to condominiums.
Dupre + Scott Apartment Advisors, a research firm in Seattle, reports apartment vacancies were 4.6 percent as of April, down from 6.5 percent a year ago. This is the first time the rate has fallen below 5 percent since 2001, the firm said.

Starting next spring, rates are predicted to dip below 4 percent and stay there through the end of 2008. Dupre + Scott expects rents will rise about 5.2 percent a year.

Condo conversions play into the dipping vacancy rate, Bosl said.

He cited Dupre + Scott data that indicate that in 2005, more apartments were converted to condos and taken off the rental market than new apartments were built and added to the market.

"Seattle is a favorite of the investment community now," said Peter Larsen, a principal with Paragon Real Estate Advisors in Seattle, a firm that sells buildings with 10 to 100 units and typically priced from $1 million to $12 million. "People's expectation of rising rents is outpacing their fear of rising interest rates."

Larsen said mid-sized buildings his firm represents are selling faster, with some properties moving in only 30 days.
Of course, one thing this article doesn't mention is how many condo conversion apartments have come back on the market as rentals as the "investors" try to turn a buck... That's the kind of real investigative reporting I can only dream about in Seattle.

However, even if the claims made in this article are 100% true, I would still be convinced that renting is by far the better deal right now. You can get a pretty darn nice apartment for $1,250 per month—far less than even most interest-only mortgages on condos around here. Even if rents go up 5%, you're only looking at an increase of $62.50 per month, barely pushing you over the $1,300 mark, and still a far cry from the cost of a mortgage.

So maybe mildly rents really is a win-win situation for everyone. Renters still pay far less than they would owning, and apartment owners turn a greater profit.

(Jane Hodges, Seattle Times, 07.08.2006)
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Saturday, July 08, 2006

A More User Friendly Seattle Bubble

As I have mentioned before, each and every comment that is posted to Seattle Bubble arrives in my inbox. This is both a blessing and a curse. A blessing because I can read every single comment as it comes in, and a curse because I can read every single comment as it comes in. As Seattle Bubble has grown (now reaching nearly 1,000 visitors per day), the comments have grown as well. This has resulted in a growing volume of insightful and interesting comments by a host of new users, but it has also unfortunately resulted in a growing volume of emotionally-charged, petty, and just plain rude comments. Up to now, my comment policy has been almost 100% permissive. However, because of the rapid increase in the number of comments, I feel that it is time for that policy to change.

No one comes to Seattle Bubble to see anonymous people hurling insults back and forth. The "forum full of children trying to one-up each other" market is a pretty saturated one on the internet, and I have no desire to compete there. Therefore, in order to form a more perfect Seattle Bubble, it's time to make some improvements around here. Here are the new rules for commenting:

  • No personal attacks.
  • No intentional antagonism.
  • No excessive swearing.
To start, I will enforce these rules by deleting posts that are in violation. Keep in mind that this is a dictatorship, not a democracy. It is solely at my discretion whether a comment is in violation of these rules. I also reserve the right to add to these rules at any time. I am not opposed to people offering different viewpoints, in fact I highly encourage it, but I am getting just as tired as you all are of the incessant bickering. If petty emotional comments continue to be posted on a regular basis, I will be forced to move to a pre-approval moderation system, where comments do not post to the site until after I have specifically approved them. I don't want to go to that extreme (since it would slow down the pace of discussions and also be more work for me), but if that's what I have to do to provide an interesting and engaging comments space, I will.

In addition to the hard rules, I would like to outline a few strong suggestions:
  • No "anonymous" posting. [Update 09.24.2006: This is now a hard rule.]
  • Keep comments on the subject of the post.
I understand that people don't want to post under their real name, and that they may not want to sign up for a Blogger account. Just do us all a favor and instead of clicking "Anonymous," click "Other" and choose some sort of nickname. It will make the discussions a lot easier to follow. As far as keeping comments on-topic, I'm going to start making an "open thread" post every morning. If you want to post your own links or talk about something random, post it in there, not in the specific news posts.

Lastly, I've been pondering the idea of inviting some of the more insightful commenters to be "team members" of this blog, allowing them to make posts to the main page. This would not only highlight a greater diversity of writing, but it would also allow the blog to remain interesting when I'm out on vacation or whatnot. If you're interested in perhaps becoming a team member, email me (be sure to include the name that you use when you post in the comments, so I have some idea who you are).

I want Seattle Bubble to be a useful, interesting, and insightful resource for anyone interested in its subject matter. Hopefully these changes will bring us closer to that idea.