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Monday, July 24, 2006

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?
Please read the rules before posting a comment.


matt said...

My predicition is that as soon as the California RE market goes into freefall (which it already has in some places, especially Sacremento), the stream of equity migrants from the south will dry-up and cause our current market to slow (and possibly crash). I believe this is what's giving Seattle its facade of 'invincibility'. Its actually not 'invincibility', but a delayed response to California's market.

So much for the 'Seattle's diffrent' lament. Seattle's not 'different', its just 'slow'... When you turn the water off upstream, it just takes some time downstream for things to dry up.

This happned in the late 80's, it will happen again.

meshugy said...

This happened in the late 80's, it will happen again.

What are you talking about? The Seattle market was booming the late 80s:


For the first time ever, home prices in the area are appreciating at the fastest pace in the nation, eclipsing even overheated housing markets in California, according to a study by the National Association of Realtors.

This all sounds very familiar:

And unless the price run-up abates, Seattle faces a crisis in housing afford ability that will dash hopes of home ownership for thousands and add to the growing ranks of the homeless, said representatives of the Seattle-King County Association of Realtors.

Home prices have "gone ballistic," said Michael Spence, director of governmental affairs for the local real estate agent association.

The national study showed that median cost of a single-family home in Seattle, outlying suburbs and parts of South Snohomish County increased 23.7 percent - to $110,000 - in the 12 months prior to Sept. 30.

I bet you there were people back in 89 holding out for a crash....what did they get? Around 92 the market flattened and by mid 90s was growing rapidly again. So they ended up having to pay more in the end. My guess is that that's what we're in for. A flat market in 1-2 years.

Anonymous said...

"Around 92 the market flattened and by mid 90s was growing rapidly again."

Falling Home Prices Hit Eastside Hardest

Michele Matassa Flores

Home prices on the Eastside have slid 12 percent since last summer and are expected to fall that much more before heading back up.

The drop from Bothell to Coal Creek has been more severe than elsewhere in the Puget Sound region. The phenomenon that caused the slump was the same force behind the area's boom of 1988-89: new-home construction.

When home sales dropped regionally last spring, builders were forced to cut prices faster and farther than many homeowners selling existing homes. Many homeowners can wait - or choose not to sell in a slow market - while builders must sell to pay off construction loans. Interest on those loans totals $2,000 to $3,000 a month per home.

``(The builder) is in the business of providing homes, and he has to go with the market,'' said industry analyst Steve Beck of New Construction Services.

High prices, again tied to new construction, compounded the problem.

Generally, real-estate slumps affect expensive homes most. Most people who buy expensive houses already own nice homes and can delay their move. They also rely on the sale of their current home for a

down payment.

People at the other end of the market are often first-time buyers who have saved money and are determined to buy. They might be new to the area or starting a family.

Jim Hebert of Hebert Research said homes in 1989 appreciated 30 percent on the Eastside compared with 18 percent in Seattle and 22

percent in all of King County.

On the Eastside, palatial new homes pushed the average sales price up to about $250,000 last summer, according to TRW Real Estate Information Services. It has now fallen to $217,000 - about $60,000 more than the average for King, Pierce and Snohomish counties.

One Eastside builder, Newhall Jones, slashed prices by nearly $60,000. The homes, at The Villages east of Lake Sammamish, were reduced from $296,950 to $239,950 between March and September. Other builders cut their prices and offered free landscaping, furniture and low-interest financing.

Still, sales agents sat alone in their empty model homes. Soon, framers and carpenters found themselves out of work.

``I'd say 80 percent of these builders have not started any new homes for six to eight months,'' Beck said.

The slump affected real-estate offices too. Coldwell Banker and Bruch and Vedrich Better Homes and Gardens Realty both closed their Issaquah offices. Wallace and Wheeler real estate, specializing in high-priced Eastside homes, was sold in November.

Agents, builders and lenders say now is a good time for people to buy. Interest rates are between 9 percent and 9.5 percent - lower than they've been in four years.

But some agreed with analysts who say the price-cutting isn't over. Hebert predicted another 12 percent drop on the Eastside.

``Our inventory is still very high,'' said Kathy Hodge, associate broker with John L. Scott real estate in Bellevue. ``It's a case of supply and demand. The sellers who have to sell, reduce their price.''

Hebert and Beck said when construction resumes, new homes likely will be smaller and more basic, designed for the still-healthy lower end of the real-estate market.

For now, no foundations are being laid. Too many new homes remain unsold.

``We had a few sales, but it's still a buyer's market,'' said Rick Burnstead, president of Burnstead Construction. ``Builders are willing to talk.''

-- Scott Williams, East bureau business reporter, contributed to this report.

Copyright (c) 1991 Seattle Times Company, All Rights Reserved.

jcricket said...

Interesting tidbit hidden in the article from '91:

Interest rates are between 9 percent and 9.5 percent - lower than they've been in four years.

One wild card is the interest rate. If it keeps going up, I think even the most optimistic bulls would understand the RE market will slow to a crawl and prices will drop. If the interest rates drop, I think the doom-and-gloom (massive spike in foreclosures, massive price drops) that's forecast will not come to pass. If it stays where it is now, who knows? I'm pretty uncomfortable making predictions about the housing market given the vast array of conflicting data.

Tim is definitely right about the big institutions hedging being something to watch. However, even if we do get the big construction and lending slowdown, it's not clear that immediately leads to the kinds of price reductions that would make eula buy a house. It's equaly possible that builders, lenders and speculators get hurt a lot more than the 70% of the public who hasn't moved up/over/out in the last 5 years, and the other % of people who are content to sit tight on their new places.

I do wonder if there will ever be a true crackdown on lending practices, especially in the sub-prime arena. The only crackdown lately has been to restrict an individual's abililty to declare bankrupcty - not in a creditors ability to offer credit at usurious rates.

meshugy said...

There wasn't crash in the early 90s....take a look at the data from the mls:

King County Median Price (Residential)

July 1989: $126,472
July 1990: $166,844
July 1991: $180,434
July 1992: $182,647
July 1993: $188,798
July 1994: $192,242
July 1995: $201,268
July 1996: $211,898

Etc...up and up to the current median of July 2006: $434,950

It just slowed a bit around 92.

All the data is here:

90s Data

seattle price drop said...

Are they ever going to get serious about cracking down on flaky loans? Will we ever go back to 20% DP's?

S Crow, I'm hoping that if you get news about this you'll let us kow ASAP.

matt said...

Meshugy, if you weren't so reactionary you would have read my comment more carefully.... I never said there was a 'crash' in the early 90's

And as I recall the early 90's was not a fun time for real-estate so I guess it all depends on your definition of the word crash . A lot of people lost their shirts playing greater fool back then.

The Tim said...

All the data is here: 90s Data

Whoa, whoa, whoa... hold the phone. Where'd you find that link? I've been looking all over for pre-2000 data! I was able to find 1990-1999 in the directory you linked to, but nothing pre 1990... do you have a link to anything 1989 or older? This is great, thanks.

meshugy said...

Your welcome Tim....I did some snooping and found all sorts of hidden data.

They don't have anything archived from before 1990. You can get some #s by looking at old articles in the PI.

meshugy said...

I never said there was a 'crash' in the early 90's said freefall. My bad....

Eleua said...


Matt used the term "freefall" as an adjective of some future event, not the '80s.

His point was that the late '80s (actually it was '90-91) had a dramatic dearth of X-Cal equity locusts, and that is true. '89 was a breathtaking year (I only watch Kitsap - especially Bainbridge), and during that time the beach properties were white hot. When the X-Cal bust came, there was a tremendous rollback in the pricier beach properties (the very properties that X-Cals buy). By the mid-90s, that had stabilized.

In the mid-90s (prior to the runup), the "most popular price range" on BI was in the low to mid-$300Ks, with many quality homes available in the high $200Ks.

Now, I realize that BI is not the Eastside, and things are different, but I'm pretty sure Mercer Isl, Bellevue, and Redmond showed similar patterns.

Finally, I will agree with many that "this time it is different." It is. Most will interpret that as the New Paradigm of RE valuation, but I see it as the 77,000,000 Mouseketeers taking strike three at their last trip to the plate.

BTW, I do enjoy your stats. They make this forum more interesting.

matt said...

Thanks eleau... my point wasn't that the Cal-Seattle numbers were on par in the late 80's/90's boom/slowdown (i.e. median home sales/inventory/etcetera...) but that the same dynamic is at work right now as it was back then. Folks fleeing the California RE boom for more affordable west-coast environs such as Seattle, thus inflating our local market... the California boom/bust cycle is integrally connected to ours, canary in the coal mine if you will...

Eleua said...

I prefer "when California sneezes, Washington catches the flu."

In this case, California catches African Hemorrhagic Fever...

BN said...

Now that we are close to the end of
the prime buying season and
there has been no slowdown here ,
I am starting to believe that seattle may have truly
dodged the bullet especially since
the slowing economy will slow the
interest hikes as well.

As a seller in midwest (house still
on the market after 3 months) and a
potential buyer here this is not
good for me personally. But it is
what it is.

As for Tim's observation about WAMU
unloading their portfolio, the flip side is that it was bought by Wells Fargo. So it appears both the banks
are not thinking the same.

sue said...

Just don't buy in Seattle til you've sold in the midwest.

Unless you've got buckets of money of course!

Seriously though, be sure to follow the price reductions on zip before you go out and buy.

Anonymous said...

How do you see the price reductions on Zip? I created an account, maybe I'm "special", but I don't see where I can see price reductions per listing.

dash_point said...

You might find this report interesting, which puts WA state's share of interest-only/ pay-option share of mortages at over 50% Look at the third chart.

marin_explorer said...

"In this case, California catches African Hemorrhagic Fever..."

That's a nice image. I'm sure you have WA locals, E.Coasters, foreigners, and yes (sigh) Californians contributing to the situation. Every stump-head with some extra money read the articles trumpeting coastal RE, and they went bonkers. So I agree w/you Eleua: those inflated coastal areas could get hit hardest. If it's any indication, I'm noticing a disproportionate number of high-end waterfront homes for sale in the Seattle area.

Anonymous said...

Oh man, only Co,Ca,DC,VA,and NV ahead of us with regard to IO/option suicide loans rates... that is not good and those markets are tanking, Seattle's the best of worst. The vultures are coming home to roost.

jcricket said...

The extremely bearish remind me, in more ways than one, of those that view the current increase in turmoil in the Middle East as "exciting" because it means the Rapture is about to come.

When the Rapture (housing crash) doesn't happen, they'll make like Jack Van Impe, who always finds some new prediction to string along his true believers...

I'm just saying, that's all :-)

Eleua said...


Yes, just about everyone has their fingers in the pie. The bulk of those fingers, as far as the PNW is concerned, belong to Californians.

During the last bust-ette, the beach homes were the hardest hit. I expect the very same to happen again. They will probably try to hold on, until it is too late. At that point, you will likely see a bunch hit the market at once. This will be timed with the trapping of Californians in their Brady-Bunch tri-levels.

That is one of the signs I am watching for to know when the bottom is about to drop out.

marin_explorer said...

The bulk of those fingers, as far as the PNW is concerned, belong to Californians.

Before I jump to that conclusion, I want to see data that proves this, so I can better determine market and investor exposure. Growing up in WA, I heard about "Californication" a little too often, so I'm naturally skeptical. I do recall a couple flipper homes featured on this blog held by Seattle area investors.

seattle price drop said...

re Zip reductions:

If you've got an account, then for sure you can see reductions and DOM's.

Search by zip code and when the big list of specs comes up (price range, # of bdrms, etc.) there's a box to check that says "show price reduced only" or something like that.

Keep looking! It's there and it's fascinating!

seattle price drop said...

Dash Point-

Yes. that was *extremely* interesting.

Certainly deserves it's own post.

Looks like there's something besides "fundamentals" holding up the Seattle market.

We're right up there with the best of them- CA, NV, DC, VA...we even beat out AZ and FLA!

bn: Check that chart out before you buy in Seattle. Might want to wait until some of these loans start "adjusting".

Anonymous said...

Anybody know anything about the tightening of lending rules that's supposed to happen in Sept?

Anonymous said...

Here's how I see the scenario playing out:

Interest rates top out at 5.25 - 5.5% as fed becomes concerned about slowing economy and lag effect of prior hikes in rates.

Economy enters recession early to mid 2007. Unimployment rises (including RE jobs), consumption slows, housing market and equity markets hit hard. Even China slows due to reduced US consumption.

Fed begins to ease interest rates to prevent a deflationary spiral.

A combination of increased unemployment, stagnant and falling housing prices, and new psychology that it pays to wait to buy (with prices falling and interest rates dropping affordability will only increase if one waits) the demand for housing stalls further adding pressure to the struggling market.

All told, this process unfolds between 2007 and 2010-2011. Historically, housing prices have plateaued during recessions ON AVERAGE. The reality is that there were lots of major markdowns on inidividual properties during these periods due to many distressed sellers. This time around I think it is likely that prices will in fact fall ON AVERAGE since this cycle is far from typical of the garden variety previous cycles. In this cycle, the distressed sellers will provide some SCREAMING DEALS even if the average markdown is only 15-20%. You can take that to the bank!

Anonymous said...

I'm not saying it is financially healthy, but doesn't the gov't have a vested interest in keeping the housing market from crashing? They also happen to pull the strings that could artificially keep this afloat if they wanted to. I'm not saying we should, but a nation-wide housing crash could be disastrous for the US economy, the approval rating for the administration in office when it happens, decrease in desirable immigration. You guys talk about pulling the money out from under your bed and buy a McMansion for pennies on the dollar, but if housing markets drop 50% I think, as a nation-wide economy, we are going to have much bigger issues to worry about.

Eleua said...

Anon 1218,

Yes, a bursting housing bubble would just knock the crap out of the economy. When I say "knock the crap," I mean a thorough beating. I am referring to an ass kicking that would make Jack Bauer cry like a little baby.

This is why you don't blow bubbles in the first place.

The fact that anyone can sit on the FED and not know bubbles are always best avoided rather than blown is truly a wonderment.

Fortunately for us, the US does not have the command-control economy that the Soviets wish they had. The government can't solve this. If they prop up the market, it will not clear and will remain unhealthy for a generation.

The gov't has every incentive to try to get the Boomers into retirement, but then what? GenX gets left holding the bag? How does the gov't get enough money into GenX's hands to liquify the Mouseketeers, while making good on Social Security, Medicare, the Prescription Drug Bennies, the GWOT, and being the nanny-state for all of Western Civ?

What will come of this? Easy. After we get through the lows, there will be an adversity to debt and bubbles that will likely last for decades. The big, free-wheeling, consequence-free consumption economy will be just a painful part of history.

Nope. The gov't will not be able to do much, other than make it worse.

The Tim said...


If you're still reading this thread, would you mind sending me an email with any interesting NWMLS links you have uncovered? I'd love to have more pre-2000 data if at all possible.


meshugy said...

Hi Tim,

Unfortunately that's all the pre-2000 Data there is.


biliruben said...

Well... That's not precisely true, Shugy.

I assume you've figured out to modify the URL for years 1990-1999.

I've culled some basic information from each of those years and graphed inventory and mean prices. I need to combine it with the more recent data, however.

My main interest is how inventory is related to price, and how that differs in low-end vs higher-end areas. I should probably look at mean vs. median too, but that info isn't available for early years.

The Tim said...

I'm interested in three figures, all for the "Residential only" category: Median sales price (which I now have back through 1993...oddly 1990-1992 only tracks "average" sales price), "pending sales," and "active listings." The 1990-1999 pdfs located in the directory Meshugy pointed to only appear to contain the median sales price piece of the puzzle. I'd have a hard time believing they didn't keep track of pending sales and active listings, but maybe they just didn't...

What's the best way to search old news stories for reports of the figures?

meshugy said...

I assume you've figured out to modify the URL for years 1990-1999.

I (and Tim) meant other then the 1990-1999 files...we already figured that one out.

I'd like to see your graph!

meshugy said...

to search old PI articles go here:

3 ways to search the archives

Let's go back to 1988:


People buying homes in 1987 were more likely than their 1977 counterparts to depend on two incomes to pay the mortgage, while the national median price of a home more than doubled in the period, according to a survey released yesterday.

but the Seattle-Everett Real-Estate Research Committee reported the average price of a single-family home in Seattle was $36,021 in 1977 and $97,061 in 1987, an increase of 169 percent, while the average price in King County jumped from $40,311 to $102,084, up 153 percent.

biliruben said...

Yeah. The early years don't seem all that reliable either. I see significant inventory "revisions."

The graph shows what you would expect - prices jumped and inventory cratered in 1990.

If I had a full acrobat package, I'd convert them all to excel (and then to Stata), then I could easily graph temporal changes, and maybe perform some time series analysis, adding in population changes, inflation and interest rates into the model.

Anonymous said...

Wow. The above is a great example of the inflation we've been experiencing for the past 30 years.

Time to bring on the deflation.

biliruben said...

What are the links to the 2000-2006 data, similarly formated?

Meshugy: 1977-1987 - you must adjust for inflation, which was running 20% some years, if you report price changes. Doing anything else is just NAR nonesense.

jcricket said...

1977-1987 - you must adjust for inflation, which was running 20% some year

Which means rents were likely going up dramatically in those years, making housing a good buy over those 10 years. IIRC, the CPI uses the cost of renting a home, not purchasing one, as a factor in inflation rates.

The fact that RE "only" going up slightly higher than the rate of inflation is one of the "traditional" reasons used for owning a home (as a hedge against inflation vs. renting. And for those with a fixed rate mortgage, this usually lowers your housing costs, over time.

Of course, signs for both of factors point towards renting now :-)

biliruben said...

Median rent (adj) in Seattle was $360 in 1977 and $571 in 1987, so you are correct, unless you found a better way to invest the money you would have put down as equity or spent on interest payments - say buying IBM. ;)

jcricket said...

Or you could have bought Xerox.

I love the infallability of everyone who's on the opposite side of whatever your chosen path is :-)

I know you were just being sarcastic. My only point is that while it's possible those who do now plow their money into housing will plow it into good investments, it is equally possible they will not.

I'm totally on-board with the idea that if you completely sacrifice your ability to save for retirement in actual investment vehicles (401k, IRA) to buy housing, that's not a good course of action. I just think there are many good reasons for also purchasing a house with your money. There are tons of downsides to renting that seem easily overlooked if one's only concerned about the expense this month or this year.

Also, having watched many stock market bubble believers end up no richer despite their predictions being right bandits back in 2000, I'm a little skeptical of any claims of impending financial success on a blog/message board from RE bears

Market timing's more difficult than it appears, right?

biliruben said...

I think we agree more than we disagree, JC superstar.

I own a house, but it's a modest house well below my means. That allows for the diversity of investments I need to feel comfortable financially in this rather scary market.

I'm not a bear by nature, actually. I take many risks. I just try to make sure I'm getting well compensated for those risks.

If it were purely a financial decision, I would sell my house because the risk reward potential doesn't measure out right now.

If I were offered the right price by an "investor" and he provided me with a 5 year lease at the same price as my mortgage payment, I would do it.

Any takers out there?

biliruben said...

Market timing's more difficult than it appears, right?

True enough, though this market's about as obvious as you can imagine. I did just cover my last short on housing builders right before the rally, but that was certainly more lucky than good, and if I wanted to really take risks, I'm sure I could have followed them further down.

jcricket said...

I own a house, but it's a modest house well below my means. That allows for the diversity of investments I need to feel comfortable financially in this rather scary market.

I'm with you on that. We own a nice (not necessarily modest) house that's under the classical 28% limits (PITI/gross income) that fits our families needs for the next 15-30 years (i.e. we'll only move if we suddenly go crazy). We invest significant (although never enough) percents of our incomes in 401ks and IRAs.

If all I cared about was retiring early, I'd sell the house and move the family into a 2-bedroom shack 30 miles outside of Seattle. Then we'd sock away money for the next 15 years and be done with it.

I just don't feel the living for tomorrow only strategy's a good one.

biliruben said...

Agreed. Our house is comfortable now and convenient to our jobs (I ride my bike to work), but I'm waiting out the decline, be it soft or hard, to upgrade after I've stashed enough money to allow me to continue to stuff our retirement accts. and still make our mortgage payments.