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Thursday, August 10, 2006

Slowing Housing Market? NIMBY!

The real estate writers for the Seattle P-I apparently aren't capable of leaving well enough alone. Even when they print an Associated Press wire report about the serious housing slowdown underway across the nation, they just have to slip in a "but not in Seattle" clause (P-I addition italicized).

The "For Sale" signs are staying out longer. House prices are easing as sellers try to lure in buyers.

The big question now: Will the nation's five-year housing boom turn into a devastating bust that could derail the overall economy?

"We recognize the risk ... and we are watching it very carefully," Federal Reserve Chairman Ben Bernanke told Congress recently.
...
"So far, the correction in housing has been orderly, but there is a significant risk that this orderly correction could become more chaotic," said Mark Zandi, chief economist at Moody's Economy.com.

"The housing market has been driven by euphoric optimism about future house price growth. That could quickly change to dark pessimism, and we could see sales and prices fall much more than expected," Zandi said.

That may be true nationally, but Seattle and the rest of Washington area continue to see double-digit growth in home prices, although there are more homes on the market than a year ago, according to the latest data from the Northwest Multiple Listing Service.
I wouldn't mind so much if the talking points were something like "...but Seattle has not yet seen as much slowing as elsewhere." It would get a little old after a while, but at least it would be an accurate statement of fact. But instead, the local media's line is almost uniformly "Seattle isn't slowing now, and we're completely immune to any serious slowdown, ever." Prices may fall significantly, but not in Seattle. It's just not possible.

Really what it boils down to is a local manifestation of the prevailing national sentiment reported on back in April.
...71% of consumers say it is likely that a housing bubble and collapse of prices could occur in the United States within the next year. Twenty-four percent say such a housing bubble is not likely. In contrast, a much smaller number of consumers, 32%, expect the collapse of a housing bubble within their own area in the next year, and 65% say it is not likely.
You'd like to think that the people that bring us our news would be more objective than the obviously fickle American public, or that they would at least set their biases aside and just report the facts, but clearly that just isn't the case.

(Martin Crutsinger, Associated Press, 08.10.2006)
(additions by: Aubrey Cohen, Seattle P-I)
Please read the rules before posting a comment.

31 comments:

Balanced said...

Okay, I am beginning to stress just a little. I live on Bainbridge and have decided to sell our home solely based on the possibility of a flattening or decline in values. My neighbors think I am crazy to think this way, but my value went up almost 200K in 1.5 years to over 600K, which is unbelievable for our old 1970's house. We sunk our entire life savings, retirement to buy this home, and even if all the market does is flatten or stay at the same prices we are losing money against inflation. So we take our earnings and put it into the safe bank with it's constantly raising interest rates until things even out.

It really seems historically unwise to live house-poor in unsure economic times, but we love our house, our property- not waterfront or view, and the mortgage cost- a 5 percent fixed on a 15 year loan- is the same as we could rent a similar place on the island and I am losing my confidence that we are doing the right thing.

No one talks about Bainbridge much and I was wondering if any of you think it is a Mercer Island want'ta be- such as my neighbors believe and the assessor who came out for the bank believes -or should I be glad we got a buyer and walk away glad into the world of renting for the next 2 years.

STRESSED OUT

Anonymous said...

5 percent fixed on a 15 year loan-

I think I'd stay put if I were you.

biliruben said...

Balanced - That's awfully cautious, but if you really are as undiversified as you claim, and aren't likely to be able to begin to diversify with your mortgage payment, it isn't completely unreasonable to sell.

Check out "Clearcut Bainbridge" on the right margin if you want to see an over-the-top opinion of doom and gloom with supports your decision.

I bought two years ago, but for much less than you, and am staying put.

My guess of the most likely result (which means little or nothing) is that your house will be worth 450K-550K in 2010, unadjusted for inflation (lose maybe 20-30% in 2006 dollars).

It could be worth 300K or 800K as well, however. Or if you believe Eleua, it could be worth 120K.

Everyone has a different comfort level for risk. If you really are relying on that 200K for your retirement and selling will help you sleep better at night, then selling sounds like a decent plan.

Dukes said...

What could you do with the 200K profit, that is IF you get a profit of that much? That is the question.

I think you are much better off cashing out your "gain" and playing it safe. "House poor" is beginning to become a term recognized by many as what they DO NOT want to be.

All was fine with rising prices, but that game is over, yes, I know the median price crap that some spew here but that game can only last so long.

"You never go broke taking profits", that is one of the best investment sayings that I live by.

Anonymous said...

balanced, if you like your house and you didn't take on a suicide loan to buy it, and you haven't been using it as an ATM, I can't see being worried about a housing downturn.

uptown said...

Do a search on craigslist for "price reduced" to see how those sales are moving (not). Summer is about over and inventory will sit and the desperate will cut their prices to make a sale, especially if they bought years ago and are still going to make a great tax-free profit.

Hyperbola said...

On a somewhat unrelated note: has anybody else noticed the constant use of the phrase there will/won't be a bubble followed by a collapse? This seems to miss the whole fricking point that we're already in a bubble.

Eleua said...

balanced,

I'll try to refrain from being "over-the-top, doom and gloom" (billrubin, thank you very much - LOL).

What are your goals? If your goals are to live in a house you like with a payment that lets you sleep very well at night, you might want to stay.

If you think the BI market may just drift a bit lower, stay. If you think it will tank by 40% or more, you might want to rent.

Booking a $200K profit is always a good thing, especially on a $400K base, which was probably an $80K down payment. Doing so over 1.5 years is beyond fantastic. In very rough terms, that's an 84% annual ROI. $200K in a Kitsap Bank 9 month CD (not that you can't do better, but it is a brainless investment) will generate almost $1000/mo in interest. That $1000 goes a long way to paying your rent.

What are the downside risks to selling and renting?

-Bainbridge home prices keep on marching onward and upward. I think this is highly unlikely, but I am in the small minority. You can see some of my insane rants on my blog, that specifically deals with Bainbridge Island. It is nowhere as detailed as Tim's Blog, but as data piles up that BI's goose is cooked, I'll post more.

-Your rental will suck. That is possible, but if you want to spend $1800 or more, it will likely be nicer than where you presently live.

-Your LL may be flakey (my situation). Well written leases can ameliorate this risk.

What are the downside risks of staying put?

-Home prices tank. You lose your $200K profit, and could possibly be upsidedown. How comfortable are you with owing more on a house than it is worth? If home prices tank hard enough, you might not be able to sell at any price, as your neighbors and developers will be able to undercut you on price and amenities. That's not a problem if you wish to stay put. I think there are too many people that BELIEVE they will never move.

Keeping all your investment eggs in one real estate basket, especially in this environment, is a very risky endeavor.

Is Bainbridge Island a Mercer Island wanna be? Yes, but it has some catching up to do.

A real shocker for most (especially Islanders) is that the median household income on Bainbridge is just a hair over $71K. These incomes cannot float median homes in the $600K range. What is keeping our market up is an unending torrent of X-Cal equity. Ask any of the 280 Realtors that move BI property, and you will get a consistant picture of 60% of buyers are out-of-state, with 1/2 to 3/4 of those being X-Cal.

If X-Cals almost exclusively buy houses at or above your price, and if their market suddenly went Tango-Uniform, that's a whole lot of inventory that will be competing with your house for the remaining buyer that can afford your home.

I sold out last year, and booked a profit similar to yours. I have 3 kids (they don't attend BI schools).

It comes down to how bearish you are on BI housing, and how comfortable you can be watching your $200K dwindle to $0 or even negative.

I'll add another investment maxim that I try to live by:

Never let your winners become losers.

You will be amazed how expensive the last 10% can be. I've lost tens of thousands in investments trying to squeeze a bit more out of a winner, ultimately to watch it become a loser.

BTW, what part of the island are you on? I'm north of Day Road.

Anonymous said...

One thing i noticed on the new zillow heat map for seattle is the color of bainbridge island...it does look like it is getting very expensive and is starting to look the same as mercer island, seattle and bellevue.

http://www.zillow.com/heatmaps/Seattle.htm

keep it ..especially if you got a good loan

Eleua said...

To paraphrase Gen. G. Patton:

You don't win wars by dying for your country. You win wars by making some other SOB die for his country.


Well, put in investment terms...

You don't become rich by holding expensive assets as they devalue. You become rich by dropping expensive assets into some other SOB's account and watching them devalue.

For me, selling a $600K house, renting and buying it back for $250K seems to be a great idea.

Let some Californian ride it down.

The Dave said...

Balanced...

Bainbridge is overpriced. It's "trendy" but it is not seattle and you still have to take a friggin ferry to get to seattle and there is only one road off the island. (or does that make it "exclusive"?)

It is not going to come back to $250 as eleua thinks, but I could see coming back closer to $400 if things get bad.

Whether you want to sell or not depends on how close to the financial edge you are. If the money is really important to you, then selling now guarantees a "sell high", even if there is only a moderate drop in price. Hanging on gets you closer to trying to time the market.

On the other hand your family may get a little pissed if you sell their dream home on a short sell bet.

If it is an investment, then seriously consider selling. If it is your home, and you can afford to live there and won't be more than "disappointed" if you see a drop back into the $500 or $400's then hang on to it. Have a barbecue and stop reading housing blogs. They will only make you insane.

mercer_island_guy said...

I find it amusing that this whole thread is about selling high and then buying low. This is the same kind of "investment-oriented" thinking that posters here have derided as the root cause of this housing bubble.

balanced, I think you should keep the house if you don't plan to sell for 5-15 years. If your life plan is to sell in the next 3 years, you should sell now and take advantage of the opportunity to get top dollar. Housing is shelter, and it sounds like you are paying a reasonable monthly rate while also building both your prinicpal and equity. In 15 years, you'll have a nice nest egg no matter what. That sounds like a great long-term plan. Don't sweat the ups and downs in the middle and possibly leaving a little money on the table. Find peace of mind and enjoy life.

btw, Mercer Island could learn a thing or two from BI. The BI downtown area is tres chic. MI seriously lacks good restaurants and cool little shops. Hard to beat the location and schools though. Good luck!

Balanced said...

Thanks all for comments and ideas. You have reminded me that we ARE doing the right thing for us, as it was said, not good to have all our eggs in one basket, and it is always good to take a profit, even though our investment was our home... We would not sleep well knowing that our retirement is not growing for years at a time. Eleua thanks for your input, wise to live by not trying to get that last 10 percent. BTW, we live on the south part of the island and off Baker Hill.

Back to balanced...

Anonymous said...

Wow, Bainbridge is 'tres chic', now I remember why I can't stand the smugness of many in Seattle.

Tres chic...holy cow...I should move there right now...maybe I too can be "chic".

This is exactly the type of wannabe foolishness that I expected someone to post here. There are way too many RE apologists on this board.

Dukes said...

Balanced: I think you are making the right decision to sell. There are many people who have their retirement riding in the fool's bubble of real estate. These people don't feel the need to save because their savings are "in the house." Foolish.

Take the money, invest wisely, have piece of mind. Like Elua said, let some fool from CA ride the market down. Good call.

Dukes said...

Nice little quote from the end of Bill Fleckenstein's Daily Rap today...enjoy:

"Of course, those folks who didn't learn anything from the equity mania, and who will turn out to have gotten themselves trapped in the housing mania, really have only themselves to blame. As I have been warning for at least a couple of years now, all of this was going to be wonderful until it wasn't. That moment in time is upon us.

Eleua said...

Dukes,

That quote from Fleckenstein brings tears to my eyes. It is such a beautiful thing.

The Dave,

You may be right about a $600K Bainbridge house bottoming out at $400K, but you might want to consider that would only bring us back to late '03/early '04 prices. You would have to presume the bubble would have been a gigantic case of "just kidding," and have no collateral damage, whatsoever.

Why did we get the housing bubble?

It was to bail out the drunken stock speculation of Greenie's last bubble, which was the biggest bubble in world history - at the time. The wheels were just about to come off the bus, as it related to the housing runup of the late '90s, as a result of the tech bust, but Al.com saved us with the housing bubble, just in the nick of time.

If we were to take prices back to the beginning of the stock bubble ('97 era), and not have any associated economic dislocation with a dual bubble hangover, that $600K house would easily be $250K.

It's my opinion, and I may be wrong. I have yet to have anyone show me how housing losses are capped at 30%, other than some SWAG, wishful thinking, and staring in the rear-view mirror.

E

john_law_the_II said...

HPI for Seattle

when did SEA suddenly detach from it's own normal cycle of ups and down? WHICH, by the way, just happen to coincide PERFECTLY with the last 2 national RE busts

Eleua said...

Tres chic?

I prefer hip-n-trendy, uber-chic, see-and-be-seen or the pretension superhighway.

Proverbs 16:18

Anonymous said...

Looks like our "flat" appreciation , as some like to call it , has finally turned into "negative" appreciation.

Oh wait!! That's really "depreciation", isn't it?

Check it out at Benengebreth housing tracker. Down 0.2%.

Anonymous said...

It sounds like you have a reasonable note, love where you are at...I don't get it? why would you go through all that upheaval based on market speculation? A home is first a place to live and you seem very happy with where you are... Live your life, pay your mortgage, and keel over outside playing in your dirt - let the other folks sweat the market and clearcut bainbridge...

Eleua said...

anon 851,

I think his point was that all his investment eggs were in one overpriced basket, and that didn't set well with him.

If he can take a cool $200K, collect $1000/mo in interest and rent a nice place, that isn't much of an upheaval.

If he thinks BI will experience a mild correction, he should stay, as he is comfortable.

Booking a $200K profit at an obvious market top is a no-brainer. The only way he gets burned is if the market rages on, while inflation eats up his $200K. Inflation will eventually eat the nest egg, but the only way inflation will make his house more expensive is if inflation finds its way to wages.

Two words: India, China, Mexico.

Wages have been flat during this "recovery." It's the thing that Sean Hannity and Rush Limbaugh don't talk about when they pimp the Bush Economy.

If his house is only that, and if he is totally comfortable with his payment (no suicide loan, ARM, or gigantic HELOC), and the wife/kiddies love the house, and he has other assets to invest, then he should stay.

Other than that...$200K tax free, debt free, and $1000/mo in a no-brainer CD, and absolutely no heartburn when the market "corrects" 10% or 75%, is a wonderful thing.

Put another way...

When the water heater bursts and requires professional cleanup and replacement: $0

Roof replacement: $0

Real Estate fees associated with moving: $0

Massive property tax hike: $0

Sleeping like a baby when your house loses $5000/mo in value: Priceless


There are some things in life you shouldn't worry about about, for everything else there are land lords.

Anonymous said...

Everyones situation is different.. and everyone also has a different threshold for risk.

I can risk the moon NOT the stars when it comes to what I currently have.. meaning if I have 300,000. I can risk 150,000 and loose it loose no sleep... how do I know Ive done it!.

My risk threshold doesnt go very far on Guarantees on future earnings. I dont make a good Credit Card.. highly leveraged person against future earnings...I LOOSE A LOT OF SLEEP.. I get even a car payment I scramble to pay it off in halve the time so I dont have it hanging over my head.

It took me a while to realize this risk tendency inside myself. I was driving down the road and it just dawned on me.

I would highly recommend you guys here on this blog start learning creative real estate methods. Why? because with the downturn in real estate prices you will be in a postition in about 2009 to purchase that home.. whether you like it or not the professionals have a tremendous amount of knowledge and understanding of different techniques.

Believe me Garage Sale Economics: I being someone that has probably done several thousand Garage sales have come to realize that almost 100% of the courses purchased for self improvement are purchased on a whelm. I have bought so many courses: audio and cd.. and have really think hard to when I discovered one with any proof of ever been listened to or used.

People are People.. I had a lady friend that bought real esate investment after listening to only 2 audio tapes. She ended up with a negitive cash flow property that appreciated 100,000. dollars in a year.. she was lucky I Give her that.

Anonymous said...

The reason it that this first poster is getting Caught up in the mortgage and the terms of his contract.

Anyone That Understands Creative Real Estate would know that there are many ways to do a deal. Contracts are bound in language..

Real Estate is simply about control...
You can do lease purchase deals? one of many.. By changing the language you control the property with basically the same rights.

The interest rates in 2003 were Great time to refinance existing mortgages. In the next several years the chances are pretty great Some of those people will be placed in high-risk.

That might be pretty sweet deal getting terms fixed on 4.5% interest and about 1990 prices? don't scoff this time might indeed be very different~!! I wish I had a Crystal Ball.

Anonymous said...

I had some Broken Thoughts in 2 Paragraphs ABOVE..

I apoligizzze.. after several glasses of Wine.

The Dave said...

eleua-

My guess on the house on BI bottoming out at $400 may turn out to be wrong. In some ways I am just shooting at the middle.

But I figure that it would be another year or two before it made it back down that far. And I also factor in a little "real" appreciation, which I believe there is some, and also a bit of latent demand.

I talk to alot of people, and there are also many here on the post, that say that they are "waiting for the market to come back down" to buy a house. Which does not make a whole lot of sense. But it does indicate that there are plenty of buyers out there who would buy a house if the price were more reasonable.

Now is $400K reasonable? I am assuming the house discussed at length in this thread is pretty nice on it's own merit. I may be way off on that. I thought BI was way over priced when the median there was $400K, and that was a couple years ago. If you asked me in 2003 if it would be possible to correct back down to $250K, then I might have agreed. I know it is bullish, but I just don't see it going back that far.

Anonymous said...

What I was saying last night is that "I thought that Balanced from reading his Blog statement was thinking about how great the terms of his mortgage is.

Also Emotionally he is attached to his property with his 5% fixed on `5 year mortgage.

What I was saying before the wine kicked in, is that there is many ways to do the deal.
That just because you might not be able to directly go to a mortgage company and get that mortgage for 5% at this point in the game. There are ways you can if you understand the real estate game, like the professionals.

When I mentioned Garage Sale Economics, I like to sum it up as learning the true tendencies of Consumers..
I used to do a heck of lot of selling on ebay and one of the hot items was the carlton Sheets- Ron Legrand- John Burley type courses.
Ive probably bought and resold 40 of these courses and honestly maybe 1 course out of the lot even looked like someone even took the effort to complete the course. I remember 1 time purchasing a 3000, dollar course for 20 bucks on mercer island.. not even cracked open except for the first case. The Truth is self help along with day planners and exercise equipment have about a 90% chance or greater of ending up in the closet.

Many/Most of the people in the Real Estate Game are definatly not professionals and not striving to be anything other than Lazy Investors. Expecting Great Returns on Negitive Cash Flow Properties.

Eleua said...

The Dave,

Obviously, I have no idea how far BI will rollback. I only have guesses, which are based upon what I think is important. In the end, it is still a guess.

The house in question is at $600K, which is just about the BI median. If the median home rolls back 33%, that would be catastrophic for the bulk of the island. I just don't see how the brakes get applied at that point, and not another.

If I'm a potential BI buyer (and I am), and I see the panic in sellers' eyes as their median house has rolled back to $400K, why wouldn't I wait just a bit longer? We would have the opposite of what the sign in today's top post was touting. That sign might read:

"Your home will never be worth more than it is today."

If so, the buyers could really punish the sellers.

Keep in mind, that my theories have two prongs:

First - home financing returns to sanity (20% down payments, fixed rates, complete borrower vetting, and higher interest rates)

Second - the biggest chunk of the BI buyers get trapped in their OC, Brady-bunch tri-level, and can't liquify the top half of the BI market.

With both of those, we could sail through $400K like an anvil through rice paper, (IMHO).

This is a scenario that has not been played out in several generations. To me, all the conventional rules are out.

This time IT REALLY IS DIFFERENT!

The Dave said...

eleua -

Whether $400K or $250K there will be alot of very sad people. Very sad people (except you). I may be a little sad, but not in trouble, and will be interested to see how this all plays out.

As a side note, if it were true that the sign would read "your house will never be worth more than it is today", then why would even you buy? Assuming that you could still rent a similar house equal to mortgage payments. Obviously if it is cheaper to buy, then fundamentals would support buying a house, but then the same fundamentals would also support balanced housing prices (not what we have now).

I do agree that once the market begins to pivot and if we see a large price decrease then there may be a very high degree of volatility. However, if Balanced were $400K into their now $600K house and maybe future $400 or $250K house, would you be in any better position to negotiate them down further once the value is at $400 or $250? Those are sunken losses. Gone and gone. (I think that is the sticky down argument?).

The real factor will be if owners/sellers end up in a position where they need to sell such as a job loss, default, or relocation. Then it will be not so much a problem that their house is worth less than what they paid, so much as if they need the house to be worth more in order to stay financially afloat (dumb position).

The speculators and investers are the wild cannons (such as tony in P.O. w/ 10 units). They are the ones who will choose to take what they can at what may be the top (as tony is), be forced to cut and run or will be faced with default on crazy loan schemes.

I would love to think that in a year or two you could buy a nice BI or similar house for $250K. But at that price there will be lots of buyers again. Even I would buy another house at $250K if were nice or could be rented to cover costs.

Either way cash will king in 2007-2008. Especially if interest rates are way up.

Eleua said...

The Dave,

It sounds like we are 95% in agreement, with only the magnitude of the pain as the only difference.

I think the market will reset itself under a new paradigm, and that will mean substantially lower prices.

There will be lots of competition for the shrinking, or stagnant, US household budget, and it is my belief that housing will take the bulk of the adjustment.

As far as negotiation goes...

If someone takes a small loss, but thinks the market is "just about to turn" and will take him back to the glory days of rapid appreciation, the seller will not budge.

If someone has abandoned the idea that their house is their piggybank, and see it as a huge millstone around their neck, they will likely default. When the banks get filled up on REO property, they will sell it just to get it off their books. The previous owner is out of the picture, and was wiped out.

My guess is the same banks that own tons of REO, will be the same banks that just got religion when it comes to borrower vetting, down payments, and more stable loan products. All of this will wash out huge swaths of the American home buyers.

Even today, excluding transported equity, how much money does the average Bainbridge household have in savings? $40K? Doubtful. $20K? Possible. If they need that to put 20% or even 30% down on a home, how much home could they buy?

Prices WILL NEVER sink to my predicted levels under the present paradigm. I am forcasting a new reality for the US real estate market.

Anonymous said...

Are ye?

You have been reading too many Frankenstein, err... Fleckenstein columns, Eleua.