Wednesday Open Thread
This is your open thread for today. Please post random links and off-topic discussions here.
Off-topic comment? Interesting link?
Head over to the forums, or click here for open threads.
Head over to the forums, or click here for open threads.
29 comments:
I just received a phone call from a local realtor. A house that the wife likes has just posted its 4th price reduction in 3 months. This was a $30,000 drop to the high $600s.
The house is wildly overpriced, and is in a nice area of Poulsbo.
We saw it at an open house a few weeks back. We got there at the end, and were the 7th party to see the place.
Two years ago, open houses didn't exist. If a house went on the market, you would have 7 qualified offers by the end of the first week. Realtors were pretty smug and never returned your messages.
Now, I'm getting phone calls based upon a passing interest of a few weeks ago.
If I'm a "hot lead," this market is going to get hammered.
Despite the rise in inventory, it still seems like we're still far below normal.
Home sales decline in 28 states
The service reported that King County had about 2.3 months of inventory -- up from 1.7 months a year ago but below the national average of five to six months.
A 6 month supply of houses is considered normal...we're only at a 2.3 month supply, which means inventory needs to triple before we have a truly balanced market. And then needs to shoot up to a years supply before prices really come down. We're still a long way from that. It'll be interesting to see how this plays out over the next 6 months,
I thought I'd post this graph of Total Sales volumes for King County Residential (2000-2006).
It's interesting, as it shows the total closed sales multiplied by the average home value to come up with the total amount of home sales in dollars. Sales volumes are more or less flat prior to July 2002, then they trend up sharply until it doubles (if you follow the yearly rolling average). Then, in fall of 2005, they flatten again, and have been flat for the following 9-10 months.
Basically, prices are going up, but reduced sales is limitting the amount of money being spent on houses in the area. If sales continue to drop (as is the norm during fall), and prices stagnate, the total amount of RE money will begin to slip.
I feel that this indicator of overall market activity will be critical in determining how the economy is affected by the coming housing decline, since it tracks how much ancillary economic activity is being generated (mortgages, RE sales, title insurance, etc.).
As this graph trends down, expect more widespread losses in the RE industry as a whole, followed by the Housing-led recession that is expected by some in 2007.
A 6 month supply of houses is considered normal...we're only at a 2.3 month supply, which means inventory needs to triple before we have a truly balanced market.
Inventory doesn't have to increase as long as sales volume is decreasing. But we're seeing both currently.
If house prices really do start dramatically declining in the next couple years, would there be ANYONE who wants to buy at all? Once we are in a confirmed price downtrend, who in their right mind would want to stump up a lot of cash if the asset stands a good chance of losing another 10% of value in the next 10 months?
The irony is that the more prices fall, the less attractive it is to buy.
I am curious to hear from other participants on this blog as to when they would decide to actually buy. Would you buy once prices dropped 30%, 50%, 80%? Or would your decision to wade back into real-estate be more a factor of waiting to see that the market had “bottomed”, with no further depreciation for a year or two?
Would you want to buy once rents covered the full cost of ownership, even if there was a good chance the house prices would decline even more (i.e. would you want a depreciating asset even if it was covering expenses)?
Top 10 areas at risk for mortgage-rate shock
Mikhail,
You bring up a very important point.
I think you are talking about, what I call, "Reverse Speculative Premium." Right now, everyone is treating their home as their primary retirement vehicle, so they pony up even more money than they would if they were just buying shelter. Perhaps you can look at the difference between rent and PITI as the speculative premium.
So, if you take that out, and then make people scared, they will probably remove even more. SFH may actually sell at a discount to rent.
When I was in the early parts of my Navy career, I would move around a bunch. Rent was ALWAYS more attractive than housing, even though PITI would have been less. I couldn't justify real estate fees amortized over the 6 to 12 months I would be at any given duty station. Also, it was the early '90s, so property was flat to dropping in many parts of the country.
Picture what property values would be if they were at a discount to rent, and interest rates pushing double digits. Factor in an oppressive job market, and people will watch their pennies even more.
It ain't pretty.
If rent covered the cost of ownership (PITI+maintenance) and you don't plan on moving for a while (5-7 years), there's no reason not to own. The problem now is that rent covers only half (in some cases, less than half) of the expenses (ITI+maintenance).
This is just a thumbnail, of course. Ideally, you should take into account investment returns, rental inflation (or deflation), home appreciation before making a final decision.
"If rent covered the cost of ownership (PITI+maintenance) and you don't plan on moving for a while (5-7 years), there's no reason not to own."
But what if rent actually covered all these costs? Would it still make sense to buy if there is a long-term established down-trend of price depreciation? Would you want to buy a house that stood a good chance of losing another 20% in value in the coming year even if it could be rented for a price that covered all expenses?
Or would you just not care how much further the housing market might fall when making a purchase decision, and just look at the rent/own ratio exclusively?
Mikhail,
I think you would have to look at the entire market.
Supply:
Is inventory still growing? How much REO are banks carrying? Are foreclosures still climbing, or are they abating? Are builders still building? Just how many rentals are in the neighborhood? What are the specuvestors doing/
Demand:
Are people losing their homes because they can't sell? What is the employment picture? Who are your buyers, and what does their market look like? Have prices stabilized? Are people leaving the RE business in droves?
Contrarian:
Do all your neighbors curse their houses? (buy 'em when there is blood in the streets)
Personal:
Is this house temporary, semi-permanent, or are you leaving with a toe tag?
If I saw:
-all the speculation wringed out of the market
-builders going belly-up
-Realtors selling NuSkin or Amway
-employment sufficient to float the median
-banks charging 20% or higher for down payments
-interest rates cresting
-potential borrowers cleaning the KY jelly out of every orifice in their bodies after the bank verified their creditworthiness
-and I found a nice house in Agate, Seabold, or Manzanita that I could buy out my liberal neighbors, dig a moat, and still have sufficient peace and solitude
I would buy without hesitation. Even if the market still went down, the path of least resistance would not be so.
Portland and Oregon real-estate markets are starting to feel some pain. Maybe Seattle is next...
It kind of makes sense that the regions closest to California would feel the impact of the golden state's slow-down first. But the ripples keep going out farther and farther.
http://thehousingbubbleblog.com/?p=1266
"Would you want to buy a house that stood a good chance of losing another 20% in value in the coming year even if it could be rented for a price that covered all expenses?"
If it could be rented at a price that could cover all expenses then I believe the chance that it's value would fall another 20% to be VERY LOW.
I thought inventory had to shoot up to a years supply before prices come down Mesh...lol.
referring to portland -- "The area's median home price dropped to $274,700 in July, from $280,000 in June, according to data released Tuesday by the Regional Multiple Listing Service. Coming during the seasonally strong summer housing market, last month's decline marked the first time since 2002 that the June-to-July period recorded a median price decrease.
Adding to the changing housing picture, the inventory of houses for sale rose in July to 3.5 months' supply, up from 2.6 months in June. That was the Portland area's highest inventory since January 2005, and it was the highest figure for a summer month in three years. "
http://www.oregonlive.com/business/oregonian/index.ssf?/base/business/1155696905214750.xml&coll=7
The inventory in the metro area of Seattle is now at 22,253. It’s higher than San Diego, Las Vegas and Orange County.
Something is seriously wrong with that #. Depends what they consider Seattle...but even if you combine all of King and Snohomish, inventory comes to 13,345.
THESE PEOPLE HAVE NOT THOUGHT THIS THROUGH.
Unfortunately, I think this is why I have to agree with Dave WRT prices falling below rents. The RE propaganda machine is a very powerful thing. It empowers people to ignore expense, liability, and lifestyle while lining other's pockets with gold. Unless people get out the spreadsheet and start tracking real expenses and counting them in their inaccurate sale price - purchase price assessment of profit, this is unlikely to change.
This comment also is why I take the "only $300 more than I pay for rent" anecdotal, yet presumed factual, statements such as the ones quoting people's reasons for getting into the hot Ballard condo market with a grain of salt.
I think that it will be interesting to watch as many of these 'best-case scenario' financial plans are tested in the real world.
Thanks for your blog, Tim!
I have been watching the 'comps' and would-be 'comps' for my Cap. Hill. house since I sold 8/05. The original comps from summer '05 sold, with half making small price reductions ($1M price range); recently, I'm seeing similar houses listing for about 15-18% less, which is a steeper drop than the median Cap Hill decline mentioned by Zillow this week. I'm also seeing similar houses on the MLS listings now for months, which certainly wasn't the case last summer..... I wonder if the market in this 'hood is squeezing into a narrower range--affordable houses still appreciating a little but the higher end losing more? Marksparky
Here's a new listing waiting for the "Greater Fool" to come along. I've driven by this house a couple of times, looked good, but didn't "wow" me. Even in this crazy market, this one is 200K overpriced, min.
http://johnlscott.com/PropertyDetail.aspx?GroupID=29755512&ListingID=26265297&Sort=0
Here's a clickable link for that home above.
Pink overload!
Here's the whole "Rate Shock" report from ACORN:
THE IMPENDING RATE SHOCK A STUDY OF HOME MORTGAGES IN 130 AMERICAN CITIES
Seattle is rated 11th in CITIES WITH THE LOWEST INCIDENCE OF HIGH-COST REFINANCE LOANS 2005.
And Seattle was rated 9th in METROPOLITAN AREAS WITH THE LOWEST LEVELS OF HIGH-COST
HOME PURCHASE LENDING.
According to the report, that puts Seattle at a very low risk of rate shock.
would buy without hesitation. Even if the market still went down, the path of least resistance would not be so.
Wed Aug 16, 01:17:44 PM PDT
Elua, around your parts life expectancy is what, about 120?
The Dave,
In North Texas PITI is very often cheaper than the rent of the very same house. Add in maintenance and a perception that the market still has some more work on the downside, and you have a discount.
When you go to sell, subtract at least 7% off the sales price. If you are renting, the biggest risk is the dirtbag LL keeps your deposit.
Yes, PITI dipping below rent is a major leg in the fundamentals of the housing market. However, it is not an absolute barrier by any means.
Take Kitsap for example. Military is our industry and right now, every swinging dick in uniform is buying property. This is not the norm, even for this area. I can understand Captains, Commanders, and Lt Commanders buying a house, but when every Lt.jg, Chief, and even Second Class PO are buying houses at 5 to 10x income, you have the makings of a serious problem
Right now, rapidly rising prices are liquifying the unbridled stupidity in chasing real estate. When the tide goes out, we will see just how many military are going to get slammed in the ass on their home.
When I was in the Navy, I was in an aviation squadron with 78 officers. Pilots make more than submariners or surface dorks. We had three officers that owned a home (Commanding Officer, and two Lieutenants). We didn't find that it penciled out to pay PITI, down payment, real estate fees, maintenance, and the prospect that we will get ordered out of the area, but will have to carry a vacant house.
Renting was more expensive month-to-month, but was cheaper in the whole package.
Factor in a belief that home ownership is a guaranteed loser, and PITI can be cheaper.
anon 905,
I enjoy a good slam at my expense as much as the next guy, but WTF are you talking about?
How does anything I have posted on this thread indicitive the need for me to live another 80 years?
Unless you think this housing cycle has another 4 generations left in it, I have a hard time discerning what you are talking about.
Seattle 11th in lowest incidence of potential rate shock?
Yes, if that solely relates to specific addresses in Queen Anne, Cap.Hill & Madison Park/Montlake.
Otherwise it is absolute GARBAGE. The Seattle Metro area has one of the highest number of i/o and other potentially dangerous loans in the country. Further, this is confirmed by all the refinance and purchase transactions we close. It is almost comically lopsided in favor of I/O loans of a variety of flavors.
Sure we close transactions with 30 yr fixed rates with people putting down 5-20%, but it is nowhere near the quantity you would hope to see.
Here is your homework friends---
please attend an open house this weekend and look at the mortgage rate sheet the agent has (some may not, but most do)provided from their local mortgage broker. If you find a 30 yr fixed rate on that sheet you should personally commend the agent. But, I'll bet you that there will be virtally no mention of a 30 yr fixed rate.
Report your findings on Sunday eve.
Thanks.
Otherwise it is absolute GARBAGE.
Crow,
It seems like a very thorough academic report without an industry bias. Why would they fudge the #s for Seattle? They don't seem shy about proclaiming other areas as having rate shock potential.
Otherwise it is absolute GARBAGE. The Seattle Metro area has one of the highest number of i/o and other potentially dangerous loans in the country.
What? No, that's clearly impossible. The national media never gets its numbers wildly wrong.
Seattle 11th in lowest incidence of potential rate shock?
Yeah Meshugy, those stats are seriously flawed... you look at the top 10? Almost all of them are in the crazy bubble frenzied California markets with San Diego ranking even higher in the lowest...hmmm...
What does "incidence" mean anyway? How come Seattle ranks in the top 5 for ARM/i.o type loans?
Devil's in the details with that stat...
They don't seem shy about proclaiming other areas as having rate shock potential.
No Meshugy, they're talking about HIGH COST RE-FI LOANS!! Re-fi's not home purchases loans themselves. I'm sure out of all the re-fi's a lot of wise Seattle homeowners re-fi'd into a low fixed rate but this captures nothing about first-time buyers and specuvestor purchases.
San Diego, ranked at number five on your list, is seeing depreciation already and surging inventory. This is a poor indicator of a healthy market. In fact it might be working as the opposite.
What? No, that's clearly impossible. The national media never gets its numbers wildly wrong.
I wouldn't characterized ACORN as the national media. They seem to be anything but...a non profit group advocating for affordable housing. Here is their mission statement:
ACORN works in more than 75 cities across the United States to improve housing conditions for the economically disadvantaged, increase community safety, secure living wages for all workers and improve the quality of local schools.
ACORN members participate in local meetings and actively work on campaigns, elect leadership from the neighborhood level up, and pay the organizations core expenses through membership dues and grassroots fundraisers.
Neighborhood ACORN chapters grow closer when they rally together on campaigns such Better Schools, Predatory Lending, Healthcare and other unique issues that affect their community.
For more info see: http://acorn.org
Additionally, the report cites tons of academic research on housing. Their research seems to be backed up very well.
How come Seattle ranks in the top 5 for ARM/i.o type loans?
Well, we are the "most educated" city! From talking to my escrow friend, the IO's he sees are split between established homeowners tapping equity for investment purposes, and subprime suckers squeaking into homes outside their price range.
Given that King county has seen roughly 0 wage growth over the past 5 years, I'd bet the IO's are largely being used for affordability.
I personally only know 3 people that have them. 1 is an investor with more than a dozen properties in North Seattle. The other 2 did it because that was what they needed to make payments affordable. All 3 are in their late 20's.
Post a Comment