The Mother of all Weekend News

Refinancing & Purchasing may have just become a bit tougher

In my opinion, of all the pieces written on the market, this one by syndicated columnist Ken Harney has the potential to really put the hammer down on mortgage qualifying under no-doc, low-doc or 'stated-income' loan products ('oft referred to as liar loans). The impact and ramifications of this little change initiated by the IRS is surely going to, at minimum, put concern into borrowers who have purchased a year or so ago and are looking to refinance again in the near future (read: those with ARM's and HELOC's).

There has been much discussion about the impact of non-traditional loan products that are driving the market, including the article The Tim refers to in the prior post. To pass the muster test, one should really ask the question, "if you take away the stated-income and 100% nothing down purchase loans used to purchase scores of homes across the country, where would the market be?" It would be a much different market and my income including many allied real estate professionals would be, well, less.

On Monday the IRS will be initiating an electronic mechanism to speed up audits on Form
4506 -T, which every borrower signs just prior to closing (and of which I am very familiar with in assisting clients with signing closing and lending paperwork).

The form authorizes the lender or the investor providing the money for the mortgage to obtain transcripts from the IRS summarizing the borrowers income and tax data for four years. The form must be signed by the borrower and can be used only during the 60-day period following the date of signing.

This development is huge.

By electronically (via secure internet I presume) allowing lenders to obtain IRS tax data on the borrower in only a business day or two will dramatically speed up audits and could potentially stop refinance and purchase closings dead in their tracks BEFORE the transaction closes—if data from the IRS is "curiously" different from what the borrower claims as income. This is huge. And, it is huge in that it will reduce F-R-A-U-D.

And it is big news for the following observations:

1) I think back on all the 100% borrowers that closed purchase transactions through our own office and across the country. Many will be refinancing again.

2) I think back on all the refinance business closed over the last three years, 2005 in particular. Many refinanced into other ARM products and increased their base loan amounts higher than that of their original mortgage Note (for debt consolidation, among other things of bling bling nature).

3) Forget about market conditions for the moment: If these borrowers refinance again, they will no longer be able to go 'no-doc or stated-income' without the potential for scrutiny by a quick IRS electronic audit, prior to closing. In other words, many will not be able to refinance, due to income discrepancies--including the potential to see prior IRS 1040 income which may not have jived with the EXISTING loan in which the borrower is trying to refinance again. In other words, it could trigger the potential to see earlier fraud.

If that's not enough,lending standards, outside of the IRS audit conduit, may make it difficult enough. Read below!

Federal Banking Regulators are poised to tighten lending standards as guidelines were published last week by the Office of the Comptroller of the Currency.

From Inman News: Testifying before members of the Senate Banking Committee last week, Kathryn E. Dick, deputy comptroller of the Office of the Comptroller of the Currency, said, "Underwriting standards that do not include a credible analysis of a borrower's capacity to repay their entire debt violate a fundamental principle of sound lending and elevate risks to both the lender and the borrower.

That could mean fewer borrowers will qualify for nontraditional loans that many in the banking and real estate industry say have helped buyers purchase homes they would not have been able to afford using a traditional mortgage.

Obviously I'm no fan of a difficult market, but it appears that the "perfect storm" analysis just might have more merit than I'd like to believe. This is one call where I really hope to be wrong.

Elizabeth Rhodes: Master Of Misdirection

Wow, Elizabeth Rhodes is on a real anti-bubble roll this weekend. Did one of you submit this letter to her "Home Forum" Q & A?

Q: I keep reading that home prices aren't expected to decline in the Seattle area. Aren't you overlooking the possible effect of "suicide loans" — those adjustable-rate mortgages that are common and dangerous? I think the interest rates on those loans will go so high that many will be forced into foreclosure. Won't that produce a glut of for-sale homes that will force prices down?

A: Let's start with the basics on those adjustable-rate loans.

The riskiest are teaser-rate loans. These start at an exceptionally low interest rate (like 2 to 4 percent), then reset upward later to a higher rate that can double the borrower's monthly payment. Obviously borrowers who can't refinance out of these loans are at great peril — particularly if their loan has allowed them to make interest-only payments, their home hasn't appreciated much and they have little equity to work with.

However, it's not a given that foreclosure is in their future. If the local economy is robust, jobs are plentiful and housing demand is strong about the time their loan resets, holders of teaser-rate loans have options. They may be able to increase their income and keep the house or find a buyer and escape foreclosure.

Okay I have to stop right there. "They may be able to increase their income"?!? Did she really just say that? Yeah, it's that easy Ms. Rhodes... When Mr. & Mrs. Too Much Homebuyer find that they can't afford to make their payments, why they'll just get new jobs that pay more!

Maybe I'm confused, but aren't there cities right now (San Diego, Sacramento) that have "robust economies" with "plentiful jobs" and yet are still experiencing a decline in prices? It seems to me that the one and only component that matters is that "housing demand is strong." Oh, and incidentally, housing demand is weakening across the nation, and even here in Seattle.

Moving on.

These loans can reset more than once, from one to 10 years after origination — meaning there's no one point at which distressed sellers will flood the market. Obviously, it's impossible to forecast whether the economy will be good years from now, allowing them to ride it out. Maybe it will. Maybe it won't.

Okay, so we admit that basically "who knows" if it'll be a problem or not...

Loan Performance, a San Francisco-based mortgage-information provider, calculates that teaser-rate loans comprise 13 percent of mortgages in the Seattle-Bellevue-Everett area. Since January 2005, teaser-rate foreclosures have consistently been lower than 1 percent a month.

Did you catch what she did there? The question was about adjustable-rate and "suicide" loans in general. However, Ms. Rhodes decided to shift the focus to solely "teaser-rate" loans, and then provided a statistic that shows "only" 13 percent of local mortgages fall under that specific category. What about non-teaser-rate loans such as plain old ARMs, negative amortizing, payment-option, etc.? Excellent use of misdirection, Elizabeth.

Furthermore, of course foreclosures are still going to be low for our area. As long as we're still experiencing double-digit year-over-year appreciation, it's easy to sell or refinance your way out of a risky loan. It's as though Elizabeth forgot the question (or more likely, just didn't feel like answering it), which was about where we're going, not where we've been or are.

I'm not going to bother quoting and responding to the rest of her answer here, because she's obviously chosen to answer a completely different question than what was asked. Go read it for yourself, and if you're convinced that her answer is sufficient, I guess you should go out and buy a house for 10 times your yearly income on a negative-amortizing, payment-option, no-money-down, adjustable-rate loan.

(Elizabeth Rhodes, Seattle Times, 09.30.2006)

Seattle Light On 'Flipping'

An oft-cited argument by those who believe prices in Seattle are totally justified is that the number of "investors" here is not at the level of other, more obviously bubbly cities. However, no one ever seems to be able to provide any actual statistics to back up this assertion. While it does not actually answer the question of "how many local purchases are by investors" a new study at least provides a little insight into the investment situation in Seattle.

Why have home prices risen so dramatically in many parts of the country?

One of the reasons often cited is flipping — investors buying homes they never intend to live in, sometimes freshening them up, then selling months later for many thousands more than they paid.
...
However, it's been hard to know exactly where flipping is frequent enough to be a factor — and whether flippers are really on a gravy train to riches.

A new national analysis has begun to answer those questions. It shows that flipping in the Seattle-Tacoma-Bellevue area has increased over the past five years but is still below the national average. The only Washington city that does mirror the national average is Spokane.

The analysis — by HomeSmartReports.com, a California firm that tracks housing data — examines flipping in 147 metropolitan areas across the U.S.

A home is considered flipped if it sells twice within a nine-month period, said Michael Ela, the firm's president.
...
The latest numbers, reflecting transactions that occurred this spring, show that 4.7 percent of national home sales were properties that were flipped. This is down from the previous six months. Sales include houses and condominiums.
...
In the Seattle-Tacoma-Bellevue area, some 3.5 percent of spring home sales were flips, Ela said. This is down from 4 to 4.5 percent in the preceding six months but above the five-year average of 2.4 percent.

I don't doubt that many anti-bubble types will latch on to this story as "proof" that Seattle real estate prices are justified, and not propped up by investors. However, I don't think that this study should offer much comfort to those with that viewpoint. Seattle's rate of flipping is only slightly below the national numbers, and as recently as late last year was right up there with the rest of the nation.

Also, remember that the oft-repeated argument is that Seattle doesn't have as many investors as other cities. Since the study was limited to 9-month flipping, it really doesn't provide a complete picture of amount of investment that's going on in our area. Even our local blogging real estate investor Eric has rarely (if at all) closed a deal in nine months or less.

Does Seattle have less flipping than other bubble cities? Yes, slightly. Does Seattle have less investment purchases than other bubble cities? Who knows?

(Elizabeth Rhodes, Seattle Times, 09.30.2006)

A Glimmer Of Hope?

Do you think demand for commercial space will result in a continued rise in property values in King County?

Evidently, Susan Ryan at the P-I Real Estate Blog thinks so...

An article in today's PI on the institutional investor interest in Seattle, highlights one of the reasons the local residential real estate remains strong.

Low office vacancy rates and investor/retailer interest in commercial property means more people working dowtown and wanting to live near where they work. If you're not one of them — as in you can't afford a home or condo close in — it seems hard to believe that there are enough folks who can afford to live in town to sustain the prices. But there are.

The problem is that there aren't enough houses to buy. It's kind of a weird point in the market cycle. There are both more buyers actively seeking homes that are still in short supply with other buyers afraid to buy right now, scared by what's happened in other parts of the country and the unrelenting news coverage of the real estate downturn in those places. They don't want to get stuck with a property bought at the top of the cycle.

But with the strong Seattle economy, in order for there to be a downturn, there has to be a flurry of homes coming on the market — like when sellers trying to cash out before prices drop. It is that glut of homes for sale that that makes them get cheaper. So far there's no flurry, no glut.

It's like a collective holding of breath with buyers and sellers both waiting to see who will blink first.

Blink. Blink.

(Susan Ryan, Seattle Real Estate Professionals, 09.29.2006)
(Andrea James, Seattle P-I, 09.29.2006)

More Homes Than They Could Afford

Seattle was mentioned today in this piece from CNNMoney.

NEW YORK (CNNMoney.com) — Home price increases have slowed nationwide and even reversed in many markets. Inventories are up and new home builders are cutting back. More and more sellers are having difficulty selling their properties.
...
For some sellers selling their old home quickly is critical: They've already made other plans.

Tom Shipp, Seattle: "My partner and I purchased a new home in Seattle, before we listed our current home on the Eastside. Our agents were confident that our current home would sell in 2 weeks and advised that we not make a contingent offer on the new house. . . . [the bid] was quickly accepted.

Ninety plus days, a second mortgage, and a bridge loan later we are still trying to sell our Eastside property! We just made our first double mortgage payment and are feeling desperate and depressed. We are supposedly still in a "hot" market and our property has what the agent's say are the three mandatory factors for a quick sale; price, location, and condition."

(Les Christie, CNNMoney.com, 09.28.2006)

Failure to Launch

Thanks to msrelo for pointing out today's article in the PI.

"...living with mom and dad, or mom and dad-in-law, is just practical. The Gwinns are using would-be rent money to pay off debts and save up to buy into Seattle's out-of-reach housing market. And they are not alone.

While moving home with a spouse has been common in many cultures, now it seems to be hitting the U.S. mainstream for economic purposes — at least in pricey cities such as Seattle.

More than 22 million adult sons and daughters were living in a household maintained by one or both parents in 2005, compared with 15 million in 1970, according to Census Bureau statistics. Fourteen percent of all U.S. families included at least one adult child in 2005 — up 3 percentage points since 1970; a Census analysis attributed the increase to delayed marriage and increasing costs to set up and maintain a household.

Kate Gwinn, 26, said some of her friends moved back in with their parents for a while before they bought houses, and these are young people with good jobs.
"It's like what all the cool kids are doing," she joked.

"The problem is, home prices outpaced income growth," center Director Nicolas Retsinas said. "Moving in with mom and dad gives you that sort of breathing room to catch up."

This USA Today article provides slightly different statistics.

"Since 1970, the percentage of people ages 18 to 34 who live at home with their family increased 48%, from 12.5 million to 18.6 million, the Census Bureau says."

Peronally, I could never move back in with my parents. My dad watches Fox News 24/7 and my mother would insist on washing my underwear... ew.

(Aubrey Cohen, Seattle P-I, 09.28.2006)

Redfin Is Pornographic

Fast Company Article regarding how digital maps are enhancing the user experience.

"Traditionally, in real estate, you'd have to go to the county records office or the police station, and pore through dusty file cabinets, to get the information that a Web site such as Redfin.com can display in a couple of clicks. "We want to organize information geospatially," says Redfin CEO Glenn Kelman, "so people seeking a home can capture the gestalt of the neighborhood." For example, the home seeker can ask why a house is more expensive than others in the rest of the neighborhood, and the seller can respond by adding information to the map about recent renovations, even posting before-and-after pictures. Such features keep the average user on Redfin for an impressive 72 minutes a week. "The map is basically a centerfold--it's pornographic," Kelman says."

This -is- pretty cool, but does the geospatial gestalt image capture all the neighbors with toxic loans, or provide a ratio of the likelyhood your suburb will become the next shantyhood?

"From 15,000 feet, the $2.5 million house at 123 Highland Drive in the Queen Anne district of Seattle doesn't look like much. The roof is a nondescript gray square; the yard, a tiny patch of fuzzy space. This doesn't bother Matt Bell, a 33-year-old sales executive in the market for a new home. He is focused on the numbers flickering at the bottom of the Web browser two feet in front of him, the constantly refreshed statistics such as average property value, county tax records, local schools, and previous selling prices. "Eh," he sighs. "It's $538 per square foot, but the neighborhood average is only $420." Opting not to leave a comment on the house's open blog, Bell abandons 123 Highland and zooms back out over the city, the neighborhood numbers blurring to keep up with him."

Only $420 per square foot! You've got to be smoking something.

I have two questions. One, how does a 33 year old "sales executive" purchase a 2.5M home, and two, how do you think this crash will impact Redfin? Personally, I like Redfin. Any company that seeks to simplify the home buying process and rid of us realtors deserves respect.

Apartment Market Tightens: Panic, Ye Renters!

Yet another study was released this week that allegedly shows the local rental scene "tightening."

The apartment market continues to tighten in King and Snohomish counties, thanks to robust job growth and a trend toward converting units into condominiums, according to a new report from Seattle-based Dupre + Scott Apartment Advisors Inc.
...
Overall, landlords are optimistic, the research firm said, with three in four surveyed planning to raise rents by 4.7 percent over the next six months. Buoyed by the economy, the average rent for the Puget Sound area is rising, up 5.6 percent to $856 from $811 a year ago.

In preparing its apartment vacancy report, the research firm surveyed roughly 80 percent of properties with 20 or more units. Results do not include new apartments or properties undergoing extensive renovation.

I find it quite interesting that this study only focuses on complexes of 20 or more rental units. What this means is that it totally fails to account for individual condos or homes being rented out. As flippers become unable to sell, and 100%-financed families find themselves unable to afford their homes, it would seem that individual units are likely to come onto the rental market in greater numbers. Also, as I've said before, a 5% increase in rent is hardly going to break the bank for most people.

In my opinion, one of two things will have to happen to make owning a better choice than renting once again (the way things should be).

• 15-20 years of 5% rent increases, while home prices stay flat
• a few years of 5-10% home price declines

Or some combination of the two, which is what I believe is most likely.

(Puget Sound Business Journal, 09.25.2006)

PMI: Seattle Increasingly Risky

Mercer Island Guy pointed out that I haven't yet posted on the latest PMI report that was released last week.

Rapidly slowing appreciation and declining affordability contributed to a marked increase in the risk of home price declines in cities across the country, PMI Mortgage Insurance Co., the U.S. subsidiary of The PMI Group, Inc. reported today, but strong economic fundamentals continue to underpin many areas.
...
[Chief Risk Officer of PMI Mortgage Insurance Co. Mark F.] Milner commented, "Over the past five years, house prices in the United States have appreciated more than 56 percent, on average, and much more in some areas. In the same time period, incomes increased just 25 percent. That's why affordability has decreased so much in many areas. Going forward, house prices and incomes need to come back into balance so that more Americans can afford to buy homes without resorting to loans that expose them to interest rate risk and the risk of payment shock."

For those that don't know, PMI stands for Private Mortgage Insurance, and the PMI group is "one of the largest private mortgage insurers in the United States." Although Seattle's latest Risk Index of 153 is low compared to most PMI-tracked cities in California, it is worth noting that it has more than doubled from its Summer 2005 low of just 64.

Taking info from past PMI quarterly reports, I produced the following graph that shows Seattle's Risk Index as well as Affordability Index for the last two years as calculated by PMI.

Just like I have been saying about inventory and sales, what I find most interesting is the trend. Decreasing affordability and increasing risk are not trends that I find particularly comforting.

(Press Release, PMI Group, Inc., 09.19.2006)

Bubblicious Q and A

It seems to be a slow news day today, as far as real estate in the Seattle area goes. So, I'll share this "Home Forum" that appeared in the Seattle Times a few weeks back. If you haven't seen it before, it's a short Q & A column where Elizabeth Rhodes answers reader questions about real estate. I thought that the questions that were asked in the September 9th column were an interesting and amusing mix:

Q: My Edmonds condo is in a building with six units. One recently sold for $760,000, which I think is well above what that unit or any other in the building is worth.

What effect will the sale of this unit have on the property taxes the rest of us pay?
...
Q: The condo I just bought had a termite problem that was successfully treated before the sale closed. My plan is to update the unit and sell it soon.

This is an investment property I don't intend to live in. Am I legally required to disclose the termite situation to potential buyers?
...
Q: I am downsizing by moving into my mother-in-law apartment and renting out my four-bedroom main house. How does one figure the cost of shared utilities?

It's a 'trifecta' of bubble queries. We've got one homeowner that's worried about their budget being ruined by the bubble, an "investor" (a.k.a. a flipper) that hopes to sneak potential problems past some poor sap buyer, and a homeowner that can't afford to live in their own home. What a wonderful time we are living in!

(Elizabeth Rhodes, Seattle Times, 09.09.2006)

Seattle Bubble Announcements

I'd like to welcome Chad (aka synthetik) as the latest to join the Seattle Bubble team. He brings a unique perspective to the blog, and I'm looking forward to some of the posts he has in the works.

Additionally, I'd like to announce that for at least the short-term future, I'm turning off anonymous commenting. If you want to post a comment, you're now going to need to go through the minimal effort of creating an account on Blogger. You're not required to in any way associate your real name with a Blogger account, or even make your email address public. I just want the conversations to be easier to follow, and for people to have at least some minimal accountability for what they say.

Lastly, with the addition of a third regular poster, I've made some slight style changes in how the posts are presented. Specifically, I moved the "posted by" part from the bottom of the post up to the top, just underneath the headline. I'd appreciate feedback on whether this design provides an obvious enough differentiation between the different post authors.

I hope that you find these changes to be beneficial, but I welcome both positive and negative feedback. Feel free to email me (you'll find the address in my profile) if you'd like to make your comments off the record. Thanks!

Friends Don't Let Friends Buy Sub Prime

Have you ever wanted to ask a friend or co-worker, "So... how much did you pay for this baby?"

Of course, it's really none of your business, but inquiring minds want to know.

That's one of the great (or not so great) things about Zillow. You can pry into someone's life and be as rude as you please. After all, it's public information right?

If you wanted to take it one step further, you might already know that you can view the actual deed of purchase online at the King County Recorder's Office at no charge.

It's possible to see what type of loan they have, what interest rate and the actual terms.

Do you know anyone that may have bitten off more than they can chew? Who knows, maybe you'll be able to save them from financial ruin.

Post the story here, sans any personal info of course.

Global Insight: Seattle Overvalued By 33.8%

While Economy.com's secret formula based on "an econometric model" forecasts Seattle home prices to increase 59% over the next 10 years, economic and financial research company Global Insight begs to differ. According to their own non-secret formula, Seattle home prices are overvalued by 33.8%, up from 22.3% overvalued at this time last year. Check out the full report and details of their methodology.

Taking off the top 33.8% of the current King County median single family home price of $435,000 would translate to a new median of $287,970. That would be a roll-back to 2002-2003 prices, which is about when I thought homes were expensive, but priced fairly for the area.

The "Most Overvalued Market in Washington State" prize gets awarded to Bellingham, coming in at 54.3%, followed by Mount Vernon at 45.5%. On the opposite end of the spectrum are Kennewick and Yakima, overvalued by 5.9% and 9.1% respectively.

(Global Insight, 09.20.2006)

Update: Two comments were made regarding my remarks above that I wanted to take a moment to address. I apologize for not getting to this sooner, but this is literally the first time I have been in front of a computer for longer than 2 minutes since making this post.

First, JohnS pointed out that 33.8% "overvalued" is not the same as "take 33.8% off the top." Indeed, rather than subtracting 33.8%, I should have divided the current median by 133.8% to arrive at $325,112 (25.3% less than today's median) as Global Insight's fair value for Seattle. If a $325,112 home were 33.8% overvalued, it would come in at $435,000. $325k is a bit more than I think the median King County home should be selling for, but it's still a heck of a lot more reasonable than $435k.

Second, Meshugy brought up the following bits from the methodology pdf:

Users sometimes misinterpret the valuation metrics by assuming that a particular degree of overvaluation implies that house prices are destined to decline by that amount.
...
This would not necessarily be correct for the following reasons. First, housing markets tend to adjust very gradually and price declines, when they occur, have historically averaged 14 quarters in duration. Because house prices determinants generally improve over that time (especially population density and incomes) we observe that price declines are about one-half the initial degree of overvaluation (see Appendix C in House Prices in America: Valuation Update). Secondly, we caution against over interpreting the metrics since the historically normal dispersion of valuations is quite wide. Specifically, our model has a standard deviation in house price valuations of +/-13 percent, meaning that any valuation between 13 percent overvalued and 13 percent undervalued should be considered statistically normal.

If you read what I said above, you will notice that I did not say (nor did I claim the study was saying) that home prices would drop 33.8% (or 25.3%, as the case may be). I simply pointed out what home prices would be if they were not 33.8% overvalued. Furthermore, if home prices in Seattle declined by 16.9% (one-half the degree of overvaluation) over the course of the next three and a half years, the median home price in the summer of 2010 would be $361,485, roughly where it was last summer. If you want to derive some comfort from that, be my guest. I think most people would define that as a pretty hard landing.

Also you should note that as per the standard deviation mentioned above, the Seattle market could be anywhere between 20.8% overvalued and 46.8% overvalued. According to Appendix C of the study, historically:

The more severe the overvaluation, the greater the subsequent declines tended to be.

The more severe the overvaluation, the shorter the duration tended to be.

Personally, I think the possibility that Seattle is overvalued by 46.8% is pretty severe, and something we should be paying serious attention to.

Housing Continues To Buoy State Budget

Here's the latest news on the state revenue front. Housing continues to be the life vest keeping the state budget afloat.

The state budget picture got even brighter Wednesday when its chief economist predicted the state would close out its books for the current two-year spending cycle with a surplus of more than $1.8 billion.

ChangMook Sohn, executive director of the state Revenue Forecast Council, said tax collections for the 2005-07 budget period will be $350 million higher than expected, now reaching $27.3 billion.

Collections for the following two-year period will be $62 million higher than previously thought. High employment, strong home sales and more business spending are fueling the growth of tax collections, he said. Although the national housing market is starting to slow down, it’s still strong in Washington, Sohn said.

That means that state is collecting more real estate excise taxes, which are paid on the sale of homes. It also means the construction industry is still producing a lot of jobs. In addition, the kinds of jobs being created in Washington are the higher-paying variety, such as those in construction and aerospace.

On the other hand, consumers are still spending a lot more than they’re earning and that can¹t continue indefinitely, Sohn cautioned. Consumers are tapping into their home equity, credit cards and loans to pay for their spending spree, he said.

Mr. Sohn has been has been warning for a good while now that the pleasant budget picture is unlikely to continue once the housing market in the state really slows down. One would hope that those in Olympia are listening, but personally I'm not going to hold my breath.

Interestingly, the Seattle Times has a different take on the matter. Business reporter Alwyn Scott claims that:

Washington's growth is being fueled by strong aerospace, software and construction employment, and people moving to the state, which helps underpin demand for houses.

Saying that strong construction employment is (indirectly) fueling demand for houses seems like circular logic to me. But let me take a moment to ponder a few facts about aerospace and software, which are really just code words for Boeing and Microsoft. Together, those two companies provide just under 100,000 jobs in Washington State (Microsoft: 33,000, Boeing: 66,000). I don't have the totals for all the smaller companies, but if you assume that together they double the total number of jobs in those fields, you're talking about roughly 200,000 jobs. According to the Office of Financial Management, annual migration is currently at 81,000 people per year. Unless the aerospace and software industries are growing at a rate of 20% per year (40,000 new jobs), it seems like a stretch to me to claim that they are the primary fuel of Washington's growth. For reference, Microsoft had an unusually high jump in its local workforce last year, increasing their ranks by 13%.

That being said, way down at the end of the article, Alwyn does manage to admit that housing might slow down, and bring the state economy with it:

The biggest risk to the economy is the possibility that house prices will stop climbing, economists said. Washington is the nation's sixth-hottest housing market, with prices rising 17.4 percent in the year through June. However, high prices and rising mortgage rates are making homes tougher to afford, [Dick]Conway said.

Washington's home sales already are slowing. Now, with prices slowing down nationally, the question is, "Will Washington state be far behind?" in seeing price gains slow down or decline, Longbrake said.

That's the question of the hour, isn't it? Are we super special and magically immune to the housing ills afflicting other cities & states around the country, or are we just the last ones to catch the housing bubble flu?

(Joe Turner, Tacoma News Tribune, 09.20.2006)
(Alwyn Scott, Seattle Times, 09.21.2006)

Update Zillow—Pay More Taxes?

With the crazy run-up in home prices of the last few years, homeowners (as a collective whole) have become somewhat two-faced when it comes to the value of their homes. On the one hand, they proudly tout how much value the granite countertops and other home upgrades have added to their home. They nestle all snug in their beds, while visions of Zestimates dance in their heads. Conversely, when the latest tax assessment arrives in the mail, they are shocked, shocked I tell you, that their tax bill has gone up so high. Now, thanks to Zillow, those two worlds may be on a collision course:

Zillow.com hopes that homeowners will help improve the valuations on its site by voluntarily offering details about their homes that are not found in county property records.

Some homeowners, however, expressed concerns that those facts could lead to deeper analysis by tax assessors, a fear that King County Assessor Scott Noble said is not completely unfounded.

"In today's market, most people wisely don't let the assessor inside if they come knocking," said David Ruble, 45, a principal at Olympic Consulting Group.

"Posting home-improvement information on Zillow would effectively let the assessor in your front door to discover such goodies like granite countertops, premium appliances, marble baths and other improvements."

That could lead to a higher tax bill, he said.

How delicious. The homeowner updates Zillow's information, gets a new, higher Zestimate for their home, and then later receives a higher tax bill as well. Of course, on the way down I imagine that Zestimates will fall a lot more quickly than tax assessments, but that's neither here nor there, really...

The end of the article had a bit of information that I thought was interesting:

However, Bill High — a licensed appraiser in the state — says Zillow may be crossing the line between collecting housing information and providing an appraisal.

"One of the problems facing appraisers is the position taken by the (Appraisal) Institute and the state that merely giving an opinion of value, even 'off the cuff' and to a friend, constitutes the making of an appraisal and requires compliance with the relevant state laws and Institute regulations," High said.

"Zillow, meanwhile, does the same thing, using the same tools and techniques, but takes no responsibility for the accuracy of its work nor the havoc their mistakes might create."

In his view, Zillow should be held to the same standards as appraisers who are liable for their estimates.

Is it just me, or is something is really screwed up with our laws when offering an off the cuff opinion of value legally constitutes an appraisal? Shouldn't the standard be a bit higher than that? If that's how low the requirements are for a legal appraisal, it's no wonder the cash-out re-fi train has been chugging along so fast.

(John Cook, Seattle P-I, 09.21.2006)

Foreclosure Scams Prey On Suicidal Loans

Thanks to a few commenters in today's open thread for pointing out this article in today's P-I about foreclosure scams. Most of the article is dedicated to telling the tales of local homeowners that were scammed out of their homes, but there are a few quotes that are of specific interest to the bubble subject.

As rising interest rates and growing consumer debt push more families into financial trouble, consumer advocates and state investigators warn that people on the brink of foreclosure are increasingly falling victim to scams aimed at squeezing them out of their homes.
...
Foreclosure-rescue scams are on the rise as "a collision of events" force more people into foreclosure, said Chuck Cross, division director of the state Department of Financial Institutions, which investigates such fraud. Homeowners who took out mortgages they could barely afford or borrowed too much against their equity are prime targets.

If foreclosure scams are truly already an issue in our area despite the supposedly still robust housing market, imagine what it will look like when things really slow down. Yikes.

(Phuong Cat Le, Seattle P-I, 09.21.2006)

Seattle's Tenuous Smartness

Yo ho, mateys. This be a fairly long article from the weekend, but considerin' that it be about Seattle's smartness 'n high tech jobs, I be findin' it worthy of postin' here.</pirate>

A once-proud hub of innovation left to languish as brilliant people, new ideas and dazzling products bubble up elsewhere. An urban wasteland that's left wondering — as Detroit was with cars — how it lost its mojo with software and the Internet.

That's the dire message Microsoft's top executives are sending to legislators, educators and anyone else who will listen. And nobody is arguing with this simple truth: The state is doing a terrible job producing computer scientists. Those whiz kids who will make computers smarter, faster and more useful for everyone.

"At a certain level, it's simply a tragedy," says Brad Smith, Microsoft's general counsel. "It's a lost opportunity for the next generation of people growing up in Washington state."

Microsoft's warning may sound strange in a region that has thrived from the technology boom of the past 15 years. But Smith says there's no such thing as stability in his business: You're either innovating or falling behind. The industry can turn faster than a Detroit SUV.

The sometimes-bumpy boom has created more than 300,000 high-tech jobs statewide, and the big money flowing from those jobs employs hundreds of thousands more in traditional industries. The state estimates there will be nearly 30,000 openings for computer specialists in the next decade, and the technology they create is needed in every industry from fishing to aircraft manufacture.
...
Yet consider this: Just 160 seniors graduate in computer science or computer engineering each year from the University of Washington, home to the state's most respected program. Another 90 finish graduate degrees.
...
By contrast, Seattle has, almost by accident, become the most educated city in the U.S. Engineers and computer specialists make up a higher proportion of the workforce here than just about anywhere else.

That's because fresh graduates are flooding into Microsoft, Amazon.com, Google and other companies with operations here. But they're not from Magnolia or Mukilteo. They're coming from Boston, California, India.
...
But the fact that the state is not coming close to producing even its fair share of computer scientists has many worried.

With other states and countries — think India and China — leaping ahead in the technology race, Seattle may find it harder to continue luring top talent here, and companies may decide to take their toys elsewhere. Seattle's boom-and-bust history could repeat itself.

The shortcomings of public schools and universities here may already be discouraging some talented people from coming, Smith argues, because smart people want to live somewhere they can send their kids to great schools. There may be an unfounded complacency that Seattle's natural assets will continue to draw people.
...
Meanwhile, Microsoft continues to add workers locally at the rate of 4,000 a year.

In this year's record class of 5,400 UW freshmen, 300 say they're hoping to graduate in computer science or engineering. Even if none dropped out or changed majors, the class of 2010 wouldn't amount to a month's supply of new workers needed just at Microsoft's Redmond campus.

I found the assertion at the end of the article to be somewhat dubious. Where does that 4,000 per year number come from? Reporter Nick Perry doesn't say. Did he pull it out of his... hat? Who knows?

You may recall that back in May I looked at the subject of how many jobs Microsoft is really adding to the Puget Sound. Taking the statements of official company spokesman Lou Gellos and applying some relatively generous assumptions, I came to the conclusion that Microsoft is adding roughly 1,350 new jobs per year to the Puget Sound.

Furthermore, if you take a look at the official State labor data for employment totals in the "Software Publishers" industry, you can see that state-wide, the number of employees is not even growing at 4,000 jobs per year. The numbers are more like 2,500 to 3,500, across all "Software Publishers" in the state (xls).

So what's the deal, Mr. Perry? Do you care to back up that 4,000 per year figure?

[Update: I located this article in the Seattle P-I that sort-of confirms Mr. Perry's claim. Microsoft did indeed "boost its employee ranks by 3,938" in the Puget Sound during their previous fiscal year. I stand corrected on that.

I say "sort-of" because it should be noted that: "Explaining the increase, Microsoft spokesman Mark Murray cited factors including upcoming product launches." So it definitely seems like a stretch to say that "Microsoft continues to add workers locally at the rate of 4,000 a year." "Continues" implies something that has happened in the past, and will keep happening in the future. From '04 to '05 they added just 1,388 jobs to the Seattle area, and judging by the statements of the company spokesman, last year's jump is just a spike due to the imminent launch of upcoming products. Mr. Perry is using a single accurate statistic to paint an inaccurate complete picture.]

Leaving aside the possibly bogus Microsoft growth data, basically the jist of the article seems to be that thanks to a few high-tech companies (Microsoft, Amazon, and—to a lesser extent—Google), Seattle is drawing in far more smart workers than it produces, but unless we shape up, we could easily lose that draw, and be left behind in the high-tech industry.

Although these companies are big, and they may be paying handsomely to attract talent from around the country & world, I still don't personally think that will be enough to keep Seattle's outrageous home prices afloat. Honestly, you're talking about tens of thousands of jobs—maybe a few hundred thousand—in a region of over 3.4 million people. If you think Microsoft and kin are enough to keep Seattle's bubble from bursting, I think you may be in for a bit of a letdown.

(Nick Perry, Seattle Times, 09.17.2006)

How people do it

Meshugy presents good facts on recent sales. Other bloggers have asked me about financing statistics. Let's take some of Meshugy's recent sales and find out how people are financing the home purchases. This will shed light on the fuel that drives this market. Money.

My opinion is that if people did have a significant down payment or ability to get a fixed rate, they would. And, as I research Meshugy's sales findings, we do find the potential for a couple cash buyers. I did not post whether people had a fixed rate or ARM or whether or not it was a short term ARM at 6 mos, 1yr or longer. The majority were ARM's.

You can bore yourself to death researching this stuff by going to the public records site of King County. Since I do this type of work all day and have tools to do it quickly, I'll save you the trouble by showing my findings below. I find no particular pleasure or fascination with researching this stuff. It's kind of like asking "Eleua" if it's cool flying 737's, 757's or other aircraft all day. Probably excruciatingly routine, save for the occasional bumbling drunk who talks non-stop to anyone who care's to listen during the fly-over-country flight in which Eleua is at the controls.

The following are recent sales Meshugy discusses in his comments today. Note some of the recent back to back sales and selling prices.

8348 24th Ave NW 499,950 487,500 --

No Deed of Trust recorded yet or none which would indicate a possible cash deal.

3258 NW 56th St 699,000 684,000 --

existing loan at $547K; sold previously at $375K 10/13/05

6528 26th Ave NW 475,000 379,000

Meshugy may have this wrong by accident. It was listed for $379K and sold for $379K (940 sq ft home on a 2550 sq ft lot—now that’s small!

8016 20th Ave NW 419,950 425,000

100% financed nothing down (notice price increase in this scenario? Artificial appreciation? Now this sales price will be used as a comp for another home. Existing loans: $318,750 & $106,250, Sold previous $360K on 12/3/04


5807 17th Ave NW 394,500 375,000—

basically fully encumbered at $300K 1st mtg/$56,250 2nd mtg. , Sold previous on 7/28/2000 for $184K

7310 23rd Ave NW 575,000 573,000 --

$417K 1st mtg./$98,700 2nd Mtg.

6513 Jones AveNW 429,950 429,950 –

100% financed @ $343,5501st /$85,850 2nd; Sold previous on 8/30/2004 @ $319K

2835 NW 73rd St, 409,950 409,950—

it previously sold 9/10/2004 and was 100% financed at $325,000 back then.

8346 29th Ave NW 439,000 440,000—

existing $352K 1st mtg/ $66K 2nd mtg. and previously sold 100% financed 7/8/2005 for $318,000

7524 30th Ave NW 410,000 425,000—

existing 1st at $340K & $63,750 2nd .

7302 23RD AVE NW 450,000 450,000--

$211,096 due in one year (interesting) as it is a junior lien position, which could mean many different things.

----------------------

Have a good night. My wife is yelling at me that Million dollar listing is on TV. Bravo Channel. Gotta go have some laughs. Bye.

S-Crow

Trahant: Wake Up and Smell the Credit Bubble

There were a lot of interesting stories in the news this weekend, but the one that deserves attention before the rest is the latest editorial gem from Mark Trahant.

This region ought to be one where we are comfortable with the boom-and-bust cycle. It is inevitable — and it is reflected in our stories. Yet when we are in the cycle (or nearing the end), we think this time it's different.

I certainly thought that in 2000 and 2001. I couldn't see the end of the cycle — and even when it started to turn I kept thinking that any losses would be temporary. The boom was just in a temporary interruption, soon to return.

Last week the U.S. Senate heard testimony on "The Housing Bubble and Its Implication for the Economy."
...
But what if it's not a housing bubble at all? What if we've been living through a credit bubble? I would define the credit bubble as an era when slick mortgage packages make the unaffordable home seem within reach no matter how much we've saved or how much we earn. (And savings is a twisted word here -- since Americans have a negative savings rate right now.)
...
What stands out in this housing boom is that average U.S. housing prices grew three times faster than disposable incomes.

How could that be? It became easier to tap into loans with adjustable rate mortgages or ARMS.
...
The FDIC economist [Richard Brown] says there are only two possible outcomes: A period of stagnation and weak housing prices or a sharp decline in housing prices "with severe adverse consequences for homeowners, lenders and the real estate sector as a whole."

Brown testified that the second alternative is "unlikely" for a variety of reasons. But before you celebrate, consider that a long period of price stagnation will be painful, too.

I believe Mr. Trahant has hit the nail on the head yet again. With the ridiculous financing that many people have resorted to in this housing mania, even stagnant prices could lead to serious trouble. If people are unable to refinance their way out payments that have adjusted out of the reach of their budget, they won't have the option of waiting until the next boom.

(Mark Trahant, Seattle P-I, 09.17.2006)

Correction: Income Decline Map

I'd like to make a correction to an earlier post. It was pointed out to me by the ever-vigilant Richard that the income map I posted earlier this week used data sets from two different sources for the two years they compared. The discrepancy was discovered by a pair of reporters at The Examiner.

More surprisingly, these figures didn't match those in the Census Bureau's Current Population Survey, or CPS, which showed that median household income in the US had fallen only 2.8 percent — and had risen in around 20 states, not four. Where, we wondered, had they gotten their figures?

An e-mail exchange with the journalists gave us the answer: They had taken their 2005 numbers not from the CPS, but from the American Community Survey, a new research product that is scheduled to replace the detailed “long form” census collected every decade. But they hadn't taken the 1999 figures from the ACS — in fact, the ACS is so new that it didn't even publish nationwide data for 1999. Instead, the journalists had taken the 1999 income figures from the official 2000 census.

Whoops. So what was Washington State's actual change in median household income from 1999 to 2005? According to the US Census Bureau's inflation adjusted household income table, incomes in Washington State fell only 7.0% from 1999 to 2005, not the 8.4% reported by the Detroit Free Press.

Bad news for Michigan residents, though. Not only is their income drop still the worst, but it's actually worse than reported by the Detroit Free Press. Here's the entire map, corrected by yours truly using the same data source for both years.

Click to enlarge

Overall it is a less grim picture than the bogus map, but Washington still sticks out as a loser among the western states. It should be noted that this does not change the point of my original post. Incomes have gone down in Washington, and thanks in large part to risky loans, during the same time period home prices have gone up. That's just not healthy.

(Stuart Buck & Megan McArdle, The Examiner, 09.14.2006)

A Gold Star For Times Cartoonist Eric Devericks

The latest editorial cartoon from the Seattle Times:

Thanks to jpsfranks for pointing it out.

Drive By Commenting

I just love it when random people drop by this blog and get the feeling that they need to set me straight. Here's a recent example of this phenomenon that I found particularly amusing.

The discssion (sic) is really lame for those who have a choice between buying a home or renting a home. For many there is no choice, they will rent all their lives as my mother did because she was far too poor to buy anything. For those with a choice the decision is to pay-off the landlord's mortgage or to pay-off your own. Millions of old people have some security because they own their own home free and clear. As for prices, they will go up, supply and demand ditcate (sic) this. No they will not come down. Population grows geometrically and land does not grow, there is a finite amount. People need to be in cities, that's where the jobs are and they by their numbers will drive up the price of homes.

If you can buy without overextending you should. If you think you will make more money in the future and you are wiating (sic) to buy consider housing has gone up consistantly (sic) at about 7% per year. That is 7% of the average priced home today of $350,000 or $24,500/year. Wait long enough and you will not be able to buy. I should say no one can guarantee that homes will continue to go up, but baring (sic) a nuclear war and major distruction (sic), I think we have to go with the numbers.

Have a great day...

Let's see how many of the boilerplate pro-real estate, anti-bubble arguments Mr./Ms. anonymous managed to cram in there:

• paying the landlord's mortgage
• home ownership = security
• population growth
• not making any more land
• job creation
• home prices never go down
• buy now or be priced out forever!

Excellent work anonymous—seven real estate truisms in just two short paragraphs. I also really enjoyed the declaration that "If you can buy without overextending you should." Because you just know that nobody that's been buying lately has been overextending.

At any rate, I hate to disappoint you anonymous, but I'm going to go ahead and continue this "really lame discssion" for a while longer. Maybe we'll see you again in about a year.

(anonymous comment, About the Blogger, 09.12.2006)

Update: An anonymous commenter below brings up a very good point:

The thing is, most of those arguments are ORDINARILY true. That's what makes the bubble so dangerous, people understand that homeownership is usually better than renting. What they don't understand is that there are some situations where buying is suicide.

I totally agree that under ordinary circumstances, some of the above sentiments are true. I suppose that would make it conventional wisdom. The problem is that people are blindly accepting conventional wisdom in a very unconventional time, when critical thinking is called for.

Inman Weighs In On Latest Washington Stats

Even Inman News is having a hard time denying the Nortwest's housing slowdown (link becomes subscription-only after today):

Home sales in western Washington declined for the sixth straight month in August amid surging inventory, while home prices maintained double-digit annual growth, according to the latest report from the Northwest Multiple Listing Service.
...
In Pierce County, the "biggest story is the multitude of choices buyers are enjoying," according to NWMLS director Dick Beeson. "Many buyers feel empowered and are waiting to see if prices will start to fall," said Beeson, the broker/owner of Windermere Real Estate/Commencement Associates.

What these buyers might not realize is even though inventory has expanded, prices have continued to climb, so their indecision can be both costly and frustrating when the house they're considering gets sold to someone else, NWMLS reported.

Beeson expects prices will continue to climb, but at a more modest rate, probably in the range of 4 percent to 7 percent annually. Interest rates will remain very reasonable, he believes, and may even drop slightly.

It's an interesting implied assertion that prices will continue to climb indefinitely at a faster rate than wages. I suppose eventually only Bill Gates and Paul Allen will be able to afford homes, and anyone that allows themselves to be overtaken with costly indecision, not buying a home before they are priced out forever will just have to rent from the new upper class—the homeowners. Say, that sounds familiar...

(Inman News, 09.14.2006)

August Report Roundup

As expected, all the local dead-tree press are reporting today on August's NWMLS numbers. There's a lot to check out, and nothing really new, so I'm just going to give a quick overview of each report, Ben Jones style. (And this post is still going to be ridiculously long.)

First up, King5 News:

There's been talk nationwide that we are in a housing slowdown, and at any moment the bubble could burst. But the numbers in Washington State may not be so bad.
...
Many homes are still selling quickly, but in general sellers aren't bombarded with buyers like they may have been last year.
...
Some real-estate brokers are pointing to the sun as the reason it was a slower August. It was an exceptionally warm and dry month and many believe people were more focused on vacations than buying and selling homes.

None of this has translated into a downturn in price. In fact, home prices in Western and Central Washington were up 14.3 percent from August of last year.

Mike Benbow at the Everett Herald writes:

Home prices continued to climb in Snohomish County in August, defying simple logic and bucking a national trend.

Last month, the number of available homes rose 24 percent, pending sales fell by 16.6 percent and closed sales dipped by 5.6 percent, according to the Northwest Multiple Listing Service. All are indicators that the record home prices now existing in the county would start to fall.

Instead, they went up.
...
Listing service director Ken Bacon, a Windermere broker in Redmond, said buyers on the east side of King County are running short of homes in the $400,000 to $500,000 price range and may need to look in such Snohomish County areas as Monroe to find a home they can afford.

He also said lingering concern about affordability and rising gasoline prices may force more people to buy condos near job centers.

...or maybe they just, oh I don't know... won't buy? Nah...

Although my favorite area real estate reporter Barbara Clements has moved on to bigger and better things, her replacement at the Tacoma News Tribune does a decent job of telling it like it is in Pierce County:

The days of bidding wars, 20 percent annual price increases and ridiculously short periods between listing and closing might be over in Pierce County.

In short, it's become work to sell a house in these parts again.

Sellers are being forced to reduce prices, make repairs and keep their houses on the market longer, real estate professionals said Tuesday.
...
"Last year, when I worked with buyers and was showing them a house, it was kind of a place where they had to put in an offer right then and there," [Windermere Agent Richard Herron] said. "Now, they're looking and evaluating more and trying to make a more educated decision."

Part of the increase in inventory comes from people thinking they need to try to cash in on the recent boom, Herron said.

"Some people may be in a bit of a rush to maximize their equity," he said.

But [John L. Scott broker Lisa] Dreyer called the slowdown "healthy," giving first-time buyers a hope of getting into a house, and she pointed out that most homes still aren't languishing on the market for months.

Over at the King County Journal, Clayton Park focused his report this month on condo sales, which are not yet experiencing year on year sales declines:

For King County as a whole, the number of condos sold in August rose to 1,052, up from 891 in July, said Cheri Brennan, a spokeswoman for the Kirkland-based organization, which tracks home sales throughout Western Washington on a monthly basis.

Ken Bacon, managing broker for the Windermere Real Estate office in Redmond, said he has noticed a considerable increase in demand for condos on the Eastside, particularly in areas close to major employment hubs, such as Microsoft campus.

"Thirty percent of all our sales in the Redmond area are condominiums," said Bacon. "Two years ago, you were looking at (condos comprising) 10 percent" of his office's sales.

The reason, said Bacon, may have to do with condos presenting buyers with a more affordable alternative to single-family homes.

That just leaves the big guns. Over at the P-I, Aubrey Cohen took me by surprise by opening her article with some of the worst numbers in the reports, and even giving the bubble some serious mention—balanced, of course with the usual talk of the "strong job market" and the alleged lack of speculators.

Seattle home prices fell last month from their July level and posted the lowest year-to-year increase in 18 months, according to new statistics released Tuesday.

August prices fell 3.8 percent from July and were up 8 percent from August 2005, according to the Northwest Multiple Listing Service. Prices have dipped month to month several times in the past year, but the year-to-year increase was the first in the single digits since April 2005 and the lowest since February 2005.

The numbers also showed a continued increase in inventory and slight decline in sales in August, compared with the same month last year.
...
Talk of a housing bubble has prompted some prospective buyers to wait.

"I'm a firm believer that there's a bubble nationally and there's a bubble in Seattle as well," recent New York City-transplant John Bitzer said Sunday after looking at a $1.05 million Seward Park home.

"I think that prices are going to fall quite substantially," he said, adding that he planned to wait.

Gardner said some homes and areas locally might see price declines, but he and other local observers do not expect citywide prices to go down year over year. They point to strong job growth and low interest rates and say Seattle hasn't attracted as many speculators or seen prices shoot as high as some other places.

"It's still a strong market," Gardner said.

And finally, we return to the Times, where for some reason Elizabeth Rhodes did not spin her wordcraft. Instead, Drew DeSilver simply expanded on yesterday's blurb:

The slowdown is coming after a record 2005. Total sales activity in the four-county region this year is still predicted to be the second-best on record, said J. Lennox Scott, chairman and chief executive of John L. Scott Real Estate.

"We're off a frenzied market to a strong market," he said.

But the decelerating pace mirrors the national trend.
...
"Effectively, a buyer this year is buying a house at about 25 percent more than they would have last year," [Mike Skahen, owner and broker of Lake & Co.] said. "At some point they have to take a little bit of a rest. Even though we have a lot of buyers out there, they're running out of money."

Generally, the feeling that I get is that the local media is running out of fuel for their denial. Things have been turning for months, but it's become so obvious now that instead of ignoring it, they're just hoping that it will taper off.

However, since we're on the topic of denial, I may as well throw in a mention of Ardell's latest post on Rain City Guide, which I found to be both confusing and amusing at the same time:

No Bubbles Bursting — It was only August

I can’t give an official report with stats until September’s sales are closed, but based on my experience out there in the trenches...It was only August! aka "The Dog days of Summer"

Even the Open House I held on Sunday was sold to a fella who walked in and said, "I was looking before, but I took August off!" August has long been known as "Agent Takes Vacation Month".
...
So NO BUBBLES BURSTING. It was only August...again, here in the Seattle area.

She seems to be making excuses for a month of slow sales, but sales in August were actually up compared to July (which is normal, see this graph), so I guess I don't get her point. The indications I'm seeing that trend toward (but do not yet outright describe) what may be described as the bubble "bursting" are steadily increasing inventory (both month to month and year over year), declining sales (year over year), and prices that are beginning to flatten. None of that has anything to do with whether agents are or are not taking a vacation...

(Jane McCarthy, King5 News, 09.12.2006)
(Mike Benbow, Everett Herald, 09.13.2006)
(Adam Lynn, Tacoma News Tribune, 09.13.2006)
(Clayton Park, King County Journal, 09.13.2006)
(Aubrey Cohen, Seattle P-I, 09.13.2006)
(Drew DeSilver, Seattle Times, 09.13.2006)
(Ardell DellaLoggia, Rain City Guide, 09.12.2006)

Times' August Blurb Gets It Right

Here are a few interesting quotes from the Seattle Times' pre-article blurb about the August NWMLS figures:

The Puget Sound housing market is still stronger than most of the rest of the country, but signs of slowing are clear.

Last month, the third month in a row, median home prices were nearly flat — up just 0.5 percent compared with July in King County, 1.5 percent in Snohomish County and 0.2 percent in Pierce County. Prices in Kitsap County slipped 0.2 percent.
...
The decelerating pace locally mirrors the trend nationally.

You can probably already tell that this piece wasn't written by Elizabeth Rhodes. No, it was penned by business reporter Drew DeSilver. Stay tuned tomorrow for the inevitable "Everything is fine. Nothing is ruined." report from Ms. Rhodes.

I realized why the papers have waited this long to report on the August numbers. It's not that they are waiting for the recap sheet, so much as it is they are waiting on the NWMLS press release. I guess they just can't bring themselves to tackle the raw data on their own. They need the guiding hand of the press release to show them the way... or something.

(Drew DeSilver, Seattle Times, 09.12.2006)

P-I August Numbers Pre-Report Report

It looks like the local rags are finally going to get around to reporting on the August NWMLS figures. In preparation, the P-I is already practicing their anti-bubble spin with the pre-report report.

Real estate experts expect to see slowing sales and price gains and increased inventory, but nothing resembling a bursting bubble, when the Northwest Multiple Listing Service releases its August numbers today.

"I'm eager to see what the statistics are going to show," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

Windermere Real Estate President Jill Jacobi Wood said she is looking forward to having local numbers to balance the grim news from areas such as California.

"It's kind of dismal in some of these places," she said Monday.
...
There are still a lot of buyers out there, Jacobi Wood said. "Our prices are still below the cities that are as desirable as ours."

I guess Glenn Crellin should be reading Seattle Bubble, where we've known for nearly a week now what the statistics show. Although, I wouldn't exactly call the numbers all that much of a "balance" to what's going on in parts California. To me the local numbers appear to be neutral and trending down.

Apparently they wait until the "recap" sheet is released to write their stories. If there are any significant differences in the numbers between the summary sheet I reported on last week and the recap sheet, I'll let you know.

Update: The August recap sheet has been posted. There are no significant differences as far as I can tell.

(Aubrey Cohen, Seattle P-I, 09.12.2006)

Mapping Housing Market Health

A pair of maps containing interesting statistics surfaced in the past few weeks that are worth sharing here. First is the "Map of Misery" from BusinessWeek, showing "the percentage of new and refinanced mortgages into loans with payment options." This is important to note, because as BusinessWeek explains:

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

Click to enlarge

As you can see, the Seattle area is right up at the top, with only portions of California, Nevada, and Florida having a larger percentage of option ARM loans. Note that this only includes option ARM, and does not include interest-only loans or other ARM products. Who knows how high that number would be if it did.

The second map comes courtesy of the Detroit Free Press, and shows the difference in inflation-adjusted median household income from 1999 to 2005. (Correction: The Detroit Free Press used inappropriate statistical methods, leading to incorrect values on the original map. The below map is a corrected version generated by yours truly. See this post for details.)

Click to enlarge

So, during a time when wages have decreased 7.0%, home prices have doubled, defying all logic. How is this possible? Sure, low interest rates were a factor, but they only dropped about two points from 1999 to 2003. That does not explain 100% home price appreciation. No, the primary culprit is certainly the ready availability of adjustable-rate mortgages, including a large number of option ARMs. Too many people have been swept up in home ownership psychosis, and have been all-too-willing to jump head-first into dangerous financing.

And yet there are still those that insist that our housing market is 100% healthy.

(Cover Story, Business Week, 09.01.2006)
(John W. Fleming, Detroit Free Press, 08.30.2006)

Bubble Link Roundup

Time for another inbox-clearing bubble link roundup.

• Try to hold down your lunch while you delve into the flashy world of downtown condo marketing.
• But condo's aren't just the rage in downtown Seattle, they're cropping up everywhere, even on Bainbridge Island.
• Do you hear that? That's the world's smallest violin playing a song of pity for the real estate agents that have to make the terrible sacrifice of filling their SUVs with *gasp* regular gasoline rather than premium.
• We all know that Seattle is populated with more than its share of educated minds, but if you think that justifies outrageously high home prices, you should probably think again. Guy Kawasaki reviews a book that explains why even smart people often do dumb things (like overpaying for real estate, maybe?).
• Have a little real estate fun with the free web game Mansion Impossible.

I would also like to point out the addition of two more local real estate blogs to the sidebar: Seattle Housing Buzz and Tacoma Real Estate Market. Welcome.

Economy.com: Seattle Definitely Special

Commenter MIDan pointed out a downright funny article over at Forbes.com in which they publish graphs predicting the next ten years of real estate prices in 15 metro areas around the country, including Seattle. Here's their graph for Seattle:

You just know it has to be correct, because I mean listen to this terribly convincing gobbledygook that explains their secret formula:

The company bases its forecasts on an econometric model that looks at the relationship between prices and various factors that have historically driven supply and demand in these markets. The intricate formula was proved to work when compared with actual house-price performance through the early 1990s, a period when home prices rose and then fell sharply.

Ooooo, their "intricate formula was proved to work." I guess we should all just take it at face value then. And why wouldn't we want to? Seattle comes out far better than pretty much every other metro area they applied their secret sauce to. Here are the full results, sorted by highest forecasted appreciation first:

Metro Area	2006	2016 Frcst	Total %	% / Yr.
Seattle, WA	$384,543	$612,383	59.25%	4.76%
Dallas, TX	$162,461	$245,725	51.25%	4.22%
Houston, TX	$147,496	$214,370	45.34%	3.81%
San Diego, CA	$624,987	$856,067	36.97%	3.20%
Phoenix, AZ	$284,727	$378,914	33.08%	2.90%
St. Louis, MO	$147,359	$195,607	32.74%	2.87%
Atlanta, GA	$172,722	$227,488	31.71%	2.80%
Miami, FL	$399,348	$498,564	24.84%	2.24%
Los Angeles, CA	$538,477	$667,048	23.88%	2.16%
Chicago, IL	$290,953	$360,018	23.74%	2.15%
Minn.-St. Paul, MN	$244,186	$286,397	17.29%	1.61%
Philadelphia, PA	$230,495	$269,818	17.06%	1.59%
Boston, MA	$416,911	$481,184	15.42%	1.45%
New York, NY	$558,853	$611,045	9.34%	0.90%
Washington, DC	$435,899	$450,747	3.41%	0.34%

Woo! Go Seattle, right? An average 4.76% per year appreciation for the next ten years! Sanity check: According to Moody's Economy.com, in the next ten years, home prices in Seattle will overtake Miami, Boston, Washington, and New York?!? Okay I don't care how intricate your formula is, if you think home prices in Seattle will be higher than in New York City, I think you've intricate-ed yourself right off your rocker.

But that's just my ignorant, non-economist opinion. I don't have any intricate formulas to back it up. This concludes your excessively sarcastic post for today.

(Lacey Rose, Forbes.com, 09.08.2006)

"An abundance of homes" in Thurston County

Usually the Olympian beats the Seattle rags by a day with their report on the latest monthly housing figures. For some reason, this month the Times, P-I, and everyone else seems to be sitting on their hands, allowing the Olympian to beat them by no fewer than three days with their report of the continued slowdown in Thurston County.

An abundance of homes on the market has turned the once white-hot seller's market into one that is more buyer-friendly, according to South Sound real estate professionals.

Home sales fell 11 percent in August, according to preliminary data released Tuesday by the Olympic Multiple Listing Service.

Higher inventory levels also meant that homes spent more time on the market, according to the MLS.
...
Comparing August-to-August home sales is bound to reflect a significant drop because last year was so robust, said Olympic MLS Manager Jerry Wilkins.

He acknowledged that the housing market is stabilizing.
...
Another factor is the construction of new homes coming on the market that might not be reflected in the Olympic MLS data, said Jim Greene, owner of Greene Realty Group.

Many new homes are sold before they are even listed, he said.

"What's happening is there is an abundance of new construction," Greene said.

Although they don't provide the actual number in the article, listings have increased 94.7% in Thurston, topping 2,000 in August, compared to 1,031 in August 2005. Regarding new construction, they bring up a good point that has been mentioned on this blog a few times recently. With the number of building permits up 43% in King County, it seems that the Seattle area is poised to experience a continued increase in inventory (listed and not) for the forseeable future.

(Rolf Boone, The Olympian, 09.06.2006)

11pm News: Fiscal responsibility is waning

It's 11pm. After my spouse wrote a piece over at Rain City Guide earlier this evening, I decided to write about something on my mind here at Seattle Bubble.

The blame rests on me

I've made some stupid financial decisions in my life. I blame me. And, my ignorance in financial matters.

When I do filing of closed transactions, I usually spend some time quickly browsing some details of the transactions. When the two large file cabinets we have in the office are full, it is usually my cue to move'em out into storage to make room for deals closed within the last month or two.

I've noticed on bubble blogs that lots of blame for the real estate bubble is directed at Realtors and Loan Officers. But, you know what? I've come to realize that over the last two years, we have had a healthy number of customers, who I've coined "refinance refugees," for lack of a better term (like repeat customers), who return to our office to close their 2nd or 3rd refinance transaction.

I don't say this in a condescending manner at all. It's just --that's what it is. I've had several after work dinner conversations with my spouse regarding the probability of borrowers in our market and elsewhere clearly in over their head. I know this sounds terrible, but the truth of the matter is that I do think that some of our clients will be refinancing again or selling to get out of financial problems. Some will return to our office and some will close their transactions elsewhere. But, they will do it.

After meeting with another client today who had refinanced and closed their transaction a short time ago with us, it became apparent that people are in control of their financial lives, for better or for worse. Certainly, to a LARGE extent, we are in a credit bubble caused by easy money, reduced credit standards and fiscal irresponsibility in lending. But, that does not excuse people sitting across the table from me, and scores of other escrow firms across the country, who sign on the signature line. In general, when borrowers refinance over and over and just shift consumer debt onto a home, you can't blame the loan officers and Realtors for other people's decision making. Yes, I understand that loan officers profit from other peoples fiscal irresponsibility. And, I understand that people blame the loan officers for "putting" them in that predicament. But, I just don't think that you can relieve the responsibility (or lack thereof) of the consumer.

This does not excuse some loan officers that gain a financial windfall by preying on the elderly, or who participate in fraudulent loans or some Realtors who participate in unethical or fraudulent behavior.

Escalating home prices due to easy money. People financing purchases that don't prepare for rainy days and don't live within or UNDER their means. Folks who refinance out of trouble and tap out the housing ATM. These are all part of the game to ruin. When people only prepare and live for today and not 5yrs. or 20 yrs. from now, that's what creates bubbles.

"If you strive for mediocrity, that's what you get." - Ken Foreman, Ph.D, U.S. Olympic Track & Field Coach (Seoul Korea 1988 Olympic Games) & former Seattle Pacific University Track & Field Coach.

This is what he literally screamed at me and my class at SPU in 1985 during a lackluster and non-participatory day in class. And after that tirade, he slammed his text book down on the podium and slammed the classroom door and walked away from us all. After he left the classroom I don't think anyone moved for at least 2 minutes. The statement can be used for most anything, including financial responsibility. I'll never forget that day.

It's fun analyzing the markets and discussing how the Puget Sound market will do. It's easy to blame other people and professions. But at the end of the day, if I can't make my payment after my ARM adjusts in Dec. of 2009, I have nobody to blame but the guy in the mirror.