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Wednesday, August 23, 2006

My heated argument & bombshell shocker

I got into a great argument with one of my allied real estate professional hate mail fans recently. It was good. Educational and revealing too. Not too much spit exchanged. Not like an in your face Lou Piniella type tirade, but quite animated. Man, can you imagine the comments from Lou over the past couple weeks if he was still the Mariners manager? It would have been really funny seeing him explode in the clubhouse after this dismal road trip. Anyway...

We agreed on one issue. I was early thinking that our market was exibiting bubble like tendencies. Mostly because of witnessing first hand the type of financing making it possible for consumers to purchase homes that in markets of past, there was no way the borrower would qualify. But the other reason was due to being personally involved in multiple offer situations back in the fall of 2004. I knew right then that the buyer of the home that successfully out bid ours and two other parties, probably paid more than they should have. But who am I to judge. Maybe for reasons unknown to me, the property was worth it to them. You can never fault someone for that. I would also guess that the other buyers were not armed like me with the mortgage information about the existing seller, nor armed with information that the home had just been purchased three months earlier.

The question of whether the Seattle market will follow the footsteps of other markets that have had sales drop off significantly is what our argument was really about. In localized areas of our market, multiple offers still continue. Sales levels are dropping off ( I know I know, the "median" thing...). I can tell you that our summer business was less than that of '05. Bummer.

In escrow, from my perspective, there is no other position in real estate where you see the good and bad in a real estate transaction. You see and hear it all. Almost without question, 95% of the comments excited buyers make at the signing table relate to the home as an "investment," and a good portion of those words are from first time home buyers. These comments from buyers really contradict other real estate agents who have only recently blogged about telling their clients they should treat their home as a place to live, first, and as an investment later. It seems to me the tune is changing. The clients we have seen over the past 2 yrs. seem to have that glossy-eyed-equity look in their eyes. Recently I've read many comments from agents on real estate blogs both locally and nationally, who say they are telling clients to stay away from ARM's and not get in over their heads, along with the "buy the home to live in vs. investment" talk-- I understand agents who say this in a genuine manner and spirit, but it just doesn't jive with the conversations I have with many of their clients, nor the financing that the buyers are still receiving. Although ARM's are falling off in favor, they are still THE 30 yr fixed program of the day. In other words, ARM's are still King. Don't believe me? Go to any open house and check out the financing sheet provided by the agent's favorite mortgage broker. I'll bet more often than not you'll see only ARM programs and no 30 yr fixed rate quoted on the rate sheet. Many of the clients at the signing table openly talk about the equity gravy train. Don't get me wrong, I don't believe that buying for investment purposes is a wrong analysis. It depends upon the property and the reasons of the purchase. My best guess is that buyers have learned this 'real estate only goes up in price' thinking through conversations with agents, friends, relatives, business associates etc.

Then the bombshell

I have never heard of an agent ever tell a client that they should not buy. I'm sure there are cases out there, but, generally, I have never heard of it. Recently, I had the pleasure of signing some clients who were sellers. I asked the sellers in casual chit-chat conversation where they were headed or moving to. They said, " no where, we are staying put, but our agent suggested that we wait to buy until the market settles down." I was stunned. I almost asked them to repeat what they said, but decided it was innapropriate given my position. Apparently there are Realtors out there in our Seattle market, perhaps experienced and seasoned, that believe we are in fact in a bubble. Perhaps there are more than we know of. Any experienced agents want to chime in? Both bearish and bullish invited.

The argument wraps up

So, in continuing with our argument, we eventually settled with a psuedo question: What is a "normal" market for our area. What is not normal? Moreso, for all the bubble believers on this blog who rent, how can you determine the bottom? It's tough enough to predict market tops, so when will you make a determination to buy? If prices do fall, yet inflationary pressures continue, interest rates will rise to counter it; your price drop advantage may or may not be helpful to you in that situation. What if the Seattle market and vicinity DOES NOT experience the hard sales price drops that other markets are experiencing and will continue to experience as this conundrum unfolds.

Your transparent escrow friend,



Anonymous said...

>yet inflationary pressures continue, interest rates will rise to counter it; your price drop advantage may or may not be helpful to you in that situation

I would much prefer to wait on the sidelines with cash, for the right moment to buy. At least I have options. I can choose to buy, or not to buy, whichever is more favorable at the time. If interest rates are a little high, chances are the home purchase price is lower, or I have more cash to put down -- or my other investments are earning enough to offset that.

Plus, I may be able to refinance.

darth_s said...

When will be the bottom? It’s the same question as in any asset market – be it stock, bond, or housing – when there is blood on the street, when no one wants to talk or think about it any more. Until then, buy at your own risk.

How can it happen? In the same manner – the market is driven by liquidity and greed. The only way the banks got the money to lend out in such a reckless manner is because there is too much liquidity. The banks securitize these mortgage as MBS and sell them to investors - FCB, pension funds, hedge funds,etc. As the liquidity being reduced via global tightening to combat inflation, there will be less money to buy these MBS. In addition to that, as the housing bubble being deflating, create massive amount of foreclosures, short sales, etc. These investors will be less willing to buy and hold these MBS, especially sub prime ones (IO, high LTV, stated income, etc.). As the banks are left to hold on to these risky loans, they have no other way but to raise lending standards, and thus wipe a whole class of subprime speculative buyers.

Greed/Fear is another factor – As housing price is going up, every one wants to jump on the band wagon for FEAR of being left out or “priced out”. As housing price stays flat or going down, no one wants to jump on it for FEAR of losing money or get upside down.

The housing cycle is a very long cycle. It takes years to run up and peak, it will take years to ramp down and bottom.

Anonymous said...

>how can you determine the bottom? It's tough enough to predict market tops, so when will you make a determination to buy?

Peaks are much harder to time than bottoms. Also, many times more critical.

You can't ever determine that exact bottom, but at least it's a lot less riskier than trying to find the top.

Some clues when Real Estate will be an -actual- buyers market again:

1. Mortgage financing is hard to get because banks have a ton of bad loans.

2. All MSM media stories are 24/7 gloom and doom.

3. New home starts are at all-time lows or near lows of the last down cycle. Newer builders have gone bankrupt.

4. Just about everyone percieves RE to be a bad investment and thinks the market will continue to go even further south.

5. There are almost no buyers or sellers of existing homes.

Then, throw in a rececession or heavy job loss -- and it could be a good time to buy.

Essentially, you just have some patience and keep your eyes peeled.

Anonymous said...

Great overview, synthetik. One problem though. If conditions are so bad as you describe, few people have jobs that pay enough to buy a home and monthly payments are high because rates are high.

It ain't free lunch, big fella.

Anonymous said...

Whether or not people can buy is not the question. The question was WHEN is a good time to buy.

Prices will drop in line with the market and affordability.

I didn't say a recession or job loss was a necessary indication, in fact I added it as a possible "bonus".

Usually job loss and lower economic growth are factors in bringing a RE market lower.

This time the reverse will likely happen -- the RE market may cause the economy to collapse.

I'd give it 2-3 years for a bottom based on past history. This time it's been a nationwide runup, so who can say for sure?

Anonymous said...

The question: will you have the patience to wait and the cash available to buy at the right time?

Won't it be fun to make 30 lowball offers and take your pick of what comes back? -- taking another 20-30% off the already depressed prices?

Sounds like fun no?

Anonymous said...

When is a good time to buy? It depends. Can you wait five years with your life?

Anonymous said...

Seattle area's median income of $55,000 supports around $250,000 median home price with about 5.75% mortgage. You can find such paper with a couple of points even today.

This puts the downside to about 30%. You and Eluea can argue about 80% declines and nuclear winter, but it's just not in the cards.

And what if it does not happen because Fed cuts rates in 07 every 1.5 months? In the long run we are all dead. How long is yours?

Anonymous said...

I usually don't give out that information, but I'm told it's pretty long.

Anonymous said...

Can Swear that in the last Week.. I watched Suzie Orman tell a couple they were nuts to take a 300,000. mortgage with a just over 100,000. income.

Your talking 55,000. for a 250,000. mortgage.. What You Smoking?????
... 55,000 and your renting Baby.. Theres no place you should be signing on any mortgage line in my opinion with 55,000. dollar income except on the low income rental agreement.

Anonymous said...

In fact with home prices where they sit you are low-income with 55,000. dollars income.

Only if you purchased over 10 years ago can you consider yourself in affordable position with todays housing price reality.

Anonymous said...

"Normal" is when your common-sense-o-meter tells you that you are getting good value for your money.

"Normal" is when sellers and buyers both take time to do their due-diligence before a sale, whether it is looking at tax records of other homes for pricing purposes or doing a home inspection before buying.

The Tim said...

Almost without question, 95% of the comments excited buyers make at the signing table relate to the home as an "investment," and a good portion of those words are from first time home buyers. These comments from buyers really contradict other real estate agents who have only recently blogged about telling their clients they should treat their home as a place to live, first, and as an investment later. It seems to me the tune is changing.

How amusing and almost sage-like that a mere hours after S-Crow made this post, the following should appear on the Seattle Real Estate Professionals blog:

And more importantly, buying a house (unless you are specifically buying investment property) is about where and how you want to live, not whether you'll be able to sell in six months and make a profit.

Eleua said...

anon 1117,

I don't think 5.75% mortgages will be available at the bottom of this market. One of the big parts of the "nuclear winter" thesis is rising interest rates, as the dollar crumbles.

Let's look at what that $55K median has to spend every month.

$55K/12 = $4583/mo. That has to pay for the following:

food: 400 (if you kill most of what you eat)
electricity: 150 (assume no gas heat)
cable: 60 (assume this is your amusement/internet)
auto insurance: 100
auto gas: 240 (@3/gal)
auto pay: 300
medical: 140 (absolutely no health problems)
water/sewer/trash: 50
phone: 60
fed tax: 370 (0% fed, SS, disability)
retail: 500

back out $300 for tax, and $75 for insurance, and you have $2233 for P&I.

At 10% (that will be a gift in 3 years), you can take out a mortgage of $211,664, which grabs a $264,581 house (assuming you have $53K for a down payment - HUGE, MEGA ASSUMPTION!!!!)

You would essentially be a hunter/gatherer, complete tightwad, and have absolutely no savings, life insurance, or any life whatsoever. No travelling, no splurges, and you could not afford anything to go wrong with with your house. That was a pretty spartan budget.

If you have a more realistic budget:

food: 500
cable: 100
auto pay: 500
medical: 300
phone: 100
retail: 1000

If you only have a $200/mo property tax bill, and the same $75 for insurance, you would have $898/mo for P&I, which at 10% is a $102,320 mortgage, and a $127,900 house.

Inflation in a stagnating job market sucks, huh?

Eleua said...

Oh, BTW, since we are the most educated, and erudite city in world history, you might want to factor in student loans and continuing education into the mix.

S Crow said...

I have a hunch that two things are going to have to happen.

1) prices will have to fall or..
2) lenders will have to offer entirely new products with eye-popping terms that makes it affordable (payment wise) to purchase and keep the housing market afloat. My guess is that this new lending would have to have blessings from the likes of Fan or Fred who will buy these mortgages.

The Dave said...

at $55,000 household income you are never buying in Seattle, ever... Nuclear winter or not. At least not if you want to eat.

It is interesting in the poll portion to see that there are so many on this blog with $100K+ household incomes, but who either can't reasonabley afford to or can't see the sense in buying in todays market.

$55K median is SOL.

As a side, how much do the college students, interns, youngin's and bike messengers who are just living cheap or on credit and hanging in here for a good time while they are young affect the median. $55k seems pretty low for a household income of say two people in their thirtys with jobs.

I have to think that there is a large gap between the haves and have nots here in Seattle.

Not to be unsympathetic, but are there really couples/families making $55K who are realistically looking to buy in Seattle? Seems like financial suicide (as eleua mathed out).

Eleua said...

Keep in mind that in order for the median household to keep affording the median home, EVERYONE around the median would have to have +3 sigma budgetary dicipline.

Once the middle fell into economic hard times, the median would have to drop.

It's not just one family stretching a $55K income - it's thousands of families doing the very same.


Surkanstance said...

Interestingly, I don't think we need to see rising interest rates to have a housing bust. In fact, I suspect we will see LOWER interest rates by the time we hit bottom.

As more and more loan defaults occur (not just real-estate, but 3rd world debt, new Chinese factories, etc) credit standards will tighten, and lending will dry up. Instead of buying junk-bonds, or tranches of sub-prime mortgages, investors will put their money in treasuries.

In fact, we could see treasury rates DROP, as demand for them increases (as capital flees to safety).

In the end, I think it's quite concievable to have a housing bust, but still have very low priced loans for people with incredible credit and 50% to 70% down-payments. High rate loans just won't be available at all since no lenders will take the risk on someone who isn't putting down a massive chunk of cash.

Eleua said...


I respectfully disagree.

Your projection assumes a massive liquidity environment, a stable dollar, and everyone wanting US government debt (which they owe $46T and control the printing press).

While it could happen, I seriously don't see how that is a possibility. Also, I fail to see how you can have massive chunks of down payments if you have massive defaults and a nation-wide destruction of equity. Anyone with that kind of money would be incredibly difficult to find, and they wouldn't be able to float much of the market.

I think rates will be higher, as well as lending standards. The market will adjust at dramatically lower prices.

Back in '00, prior to the current madness, my own bank of 10 years wouldn't loan me a dime to buy a house in suburban Dallas. I had enough cash IN THEIR BANK to buy the house outright, and offered any down payment they desired. I also had flawless credit.

I had to take my case to the senior underwriter, and he said "no dice." The reason was my income ratio was outside of their comfort zone. They also said I had "changed careers." Changing careers was going from Naval Aviator to Airline Pilot, and my '00 income on the union scale was $26K.

I doubt there will be any special cases for massive down payments, other than getting a loan. Down payments may be 25 to 30% or real cash (not a second loan).

It will be interesting to see what the interest rate environment will be in the next 3 years. My bet is on higher rates, as the FED can't control the longer end of the yield curve.

Surkanstance said...

eleua said: "I fail to see how you can have massive chunks of down payments if you have massive defaults and a nation-wide destruction of equity"

I completely agree there would be very few people able to buy if the scenario I described came to pass. You would have to have lots of ready cash piled up. The example of how hard it was to get loans in texas because of job changes is exactly the kind of thing I expect purchasers to face. The lending requirements will be ABSURD. But, for those people who qualify (i.e. meet whatever bars the lenders put in place), I think they might get pretty good rates on the loans.

As far as the dollar goes, I think people might be surprised at how resilient it is when people become frightened of putting money in developing nations, and the EU goes into political chaos.

Eleua said...

I can only assume the EU will be in political chaos due to the immigration problem they have.

Why wouldn't we have the same problem?

Surkanstance said...

Eleua said: "I can only assume the EU will be in political chaos due to the immigration problem they have"

No. I think the EU problems are going to stem from frictions between their member states during a severe recession, mainly over the EURO. Some Euro countries will go way over the stability pact requirements (i.e. increasing public spending) which will upset the other members who are better at tightening their belts (i.e. because the profligate members will impact bond prices/borrowing costs for everyone). I would be very surprised if we don't see some countries withdraw, or be jetisoned, from the Euro altogether.

This will create huge strains within the EU. The other big fracture point in the EU will be increased nationalism during a deep recession, where countries become hostile to other EU citizens coming to their country "stealing" jobs (i.e. I am NOT talking about immigrants from outside the EU). Moreover, we would see EU countries want to protect their own industries from other EU nations. We already see this in Europe now (e.g. with France giving illegal subsidies to state firms, etc), but this will become much more acute, leading to crisis, during a deep recession.

No, the EU is NOT going to be a fun place to be when a deep recession hits. A lot of those new-fangled surpa-national institutions are going to show their cracks, and we will discover that Irishmen and Frenchmen don't REALLY consider Poles and Slovaks as being "equal" citizens.

Eleua said...

For the very same reasons, I think the US is going to be just as fun as the EU.

When the pie shrinks (and it will), don't you think all the (insert racial identity here)-Americans will all be clamoring for "their fair share?"

My guess is that in a declining job market, the Central Americans will become persona-non-grata, the poor urbanites will look to the suburbian dwellers as a pigeon to be plucked, government will scramble for increased revenues to feed the gaping maw of social welfare, crime, and unemployment.

Who will be square in the sights of just about everyone? Upper-middle class, suburban, white home owners.

Their economic reality won't be much better.

Eleua said...

To continue with my drawing out of just how rediculous a soft landing is, when you factor in wages vs. mortgages...

If Bainbridge Isl has a median income of, let's be generous, $75K, what would the median house price have to be to keep the median family in the game?

With BI, you have pretty steep taxes (it is where Kitsap Cty goes for assessment cash), and you also have $600/mo ferry tolls. In addition, you have to drive to Poulsbo/Silverdale/Bremerton to buy just about anything.

Anonymous said...

When inventories have gone down for 3 months in a row, I'll consider getting back in. I sold at the end of July, money's in the bank and I'm in a nice rental for the next year at least.