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Monday, September 18, 2006

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)

48 comments:

Peter Taylor said...

The Wall Street Journal online has a "Breaking News" headline on their front page right now:

The National Association of Home Builders' index for U.S. sales of new, single-family homes fell in September to the lowest level since February 1991. Full article coming soon.

The "soft landing" crowd is going to have a hard time rationalizing this one away.

richard said...

The underlying credit bubble is why even areas that didn't participate in the price run up will be vulnerable to a housing downturn.

synthetik said...

http://tinyurl.com/lwb34

From MarketWatch

"Housing prices and spending usually only begins to be impacted six to nine months after housing peaks and we believe we are not near the worst yet,"

Meshugy: "But we are 10% YOY!"

Nick said...

I'm a huge bear, but I will say that the "negative savings rate" stats aren't very meaningful. For instance, Larry Ellison of Oracle probably earns a million bucks a year, but he spent over 700million in the past year. That shows up as a savings of $699M. I'd say that isn't very relevant indicator of the average household.

synthetik said...

>negative savings rate

I'm no economist, but isn't this important because as the fed tightens credit where will consumers get the money to pull themselves out of their spending hole?

Where will economic growth come WHEN consumers stop spending? Their house-ATM is gone and they'll be spending every last dime just to keep their heads above water.

Anonymous said...

A negative savings rate for an individual is not important, but when the savings rate for the whole country drops so far down it is very important.

synthetik said...

Why is so much money going overseas? Why did Warren Buffet invest in foreign currencies in 2002 for the first time ever?

Consumer Debt seems to mirror trade deficit - we are a nation of borrowers and spenders.

Buffett Says:

""We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that's the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades. The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary - and because we are so rich.

"Foreign ownership of our assets will grow at about $500 billion per year at the present trade-deficit level, which means that the deficit will be adding about one percentage point annually to foreigners' net ownership of our national wealth. As that ownership grows, so will the annual net investment income flowing out of this country. That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding - goodbye pleasure, hello pain."

Not a rosy outlook to be sure.

deepcgi said...

I just don't see long term stagnant prices without inflation. Many owners are now dependent on rising equity and favorable interest rates because their wages alone don't cover monthly payments. Someone explain to me how prices could remain stagnant without inflation...

seattle price drop said...

Prices won't remain "stagnant", they'll go down.

The reason they went up had nothing to with economic fundamentals, it was all about the credit bubble and mania psychology.

Prices remaining stagnant will be enough to break the mania psychology.

Credit implosion will break the credit bubble.

Even just one of the above factors would be enough to push prices down.

We've got them both at work!

But people need to hold an optomistic scenario for the moment.

In the case of housing, the optomistic scenario WAS "RE never goes down, it'll keep appreciating, just at a slower pace".

Now that we know that's not true, the optomistic scenario is: houses may not appreciate, but they will hold value, they won't go down".

Next step: Everybody accepts the fact that houses go down, no more optomism.

meshugy said...

Now that we know that's not true, the optomistic scenario is: houses may not appreciate, but they will hold value, they won't go down".

Hi Price drop...not sure what you're talking about here. King County is still experiencing double digit appreciation.

Anonymous said...

houses never go down - The sky is not falling

SDtoSEA said...

"Hi Price drop...not sure what you're talking about here. King County is still experiencing double digit appreciation."

If King Co. is still experiencing double digit appreciation, there are 2 things to consider.

First is the way the runup in prices has occured. It began with the low end of the prices (whatever that may be) with new buyers entering the market (perhaps using creative financing). As those homes were purchased the seller then moved up to more expensive homes with their profits. And so on and so on. As this cycle plays out, the low end of the market is the first to cool off as prices move up and eventually there just aren't any cheap homes left for the low end buyer. Meanwhile, sellers continue to move. This means that more high end homes are being purchased and therefore skews the median. So even if prices are flat or started to fall the median can still be going up. This is precisely what happened in San Diego as the percentage of high end homes sold increased substantially and the low end dried up. But it gave the realtors what they wanted = prices only go up.

The second reason that the median has be taken with a grain of salt. Prices can be falling but buyers can be using the same amount of money to purchase more home. If a 400k house last year is now offered at 350k and a 450k house last year is now offered at 400k, then the buyer has more purchasing power. The median can remain strong when in reality individual prices are falling.

seattle price drop said...

sdtosea-

thankyou for explaining.

We need new blood here to explain things the rest of us are tired of talking about after months and months!

Thankyou.

Anonymous said...

Actually, the month-to-month numbers are all negative. The YOY numbers won't reflect it for another 6 months. And now the builders are offering tons of incentives, which props prices up. But the whole house of cards is based on one thing, and one thing only: continued appreciation. Anyone with a brain can see the party's over.

meshugy said...

This means that more high end homes are being purchased and therefore skews the median.

That can happen...however Dataquick's 2Q report shows that the price per Sq/FT in King County is going up. If your theory was right, that # would be going down.

King County $/sqft 1Q 2006: $230
King County $/sqft 2Q 2006: $244

I can also tell you that anything decent in Seattle for less then $500K is sold in a week. There's simply too much demand. I think outlying areas might take a hit...but right now the more desirable inner city areas are very competitve.

It's also worh mentioning that sales were up MOM in August. Just a hair behind August 2005 sales....so activity has been picking up. It should be slowing if the market was crashing.

matt said...

I can also tell you that anything decent in Seattle for less then $500K is sold in a week.

What's decent Meshugy? Can you provide some examples of 'decent' below 500K houses sold in under a week, and some counter examples of 'not decent' below 500K sitting on the market?

Again, when you say stuff like this, nobody's buying it here... its about as provable as a GOP talking point. If you're going to say stuff like this, back it up...

matt said...

I can also tell you that anything decent in Seattle for less then $500K is sold in a week.

What's decent Meshugy? Can you provide some examples of 'decent' below 500K houses sold in under a week, and some counter examples of 'not decent' below 500K sitting on the market?

Again, when you say stuff like this, nobody's buying it here... its about as provable as a GOP talking point. If you're going to say stuff like this, back it up...

SDtoSEA said...

Meshugy,
What in your mind makes Seattle any different than San Diego? What will keep home prices from falling by double digits some time next year? Where are the people left that can afford to pay 450k for a starter home?

cjm said...

without getting into the validity of any other points, buffet lost billions on his currency speculations.

softwarengineer said...

MUSHUGY, I LIVED THROUGH THE 1986-1990 SEATTLE HOUSING BUBBLE AND IT WAS NEW HOUSES THAT WENT DOWN IN PRICE

People that owned used homes in 1986-1990 "just didn't sell 'em", how could they sell 'em for more, when new homes were a lot cheaper (belligerant Seattle home owners kept used prices from collapsing by not selling)?

I think folks that bought in, in the early 80s during the run-up, for a whole beginning professional's net pay (the other income fed the family), couldn't stomache a housing bubble hitting Seattle in 1986. But wage deterioration hit Seattle (Boeing layoffs) and the banks started demanding 30% net maximum to qualify, instaed of 50%.

In 1986 my friend bought a "new home" (3 bdm with 1/2 acre) for $60,000 in N. Seattle, as the price of such a unit in 1980 was about $80,000 used or new. Used homes were still about $80,000, same size and same size lot in 1986.

Here's the New Home Report Today and its gloomy as Hades (don't read it if you think homes will keep on rising in Seattle)

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BBCCD6EE0%2D6110%2D4891%2D866E%2DB6293137966E%7D&siteid=mktw&dist=bnb

I'd watch the new home developments around Seattle, if you see a lot of empty units unsold, wait 6 months, old owners can't just sit on 'em (the contractors and banks will be biting their nails). The price will collapse on these and very soon.

In 1986 there were hardly any ARMs or Hybrids, now the Seattle Real Estate Ocean is mostly adjustable heading for severe panic, big difference today than when 1986 when it was mostly fixed loans.

Have you ever tried to figure out how a bank can pay me 5.5% interest today on a CD and make money lending out homes out at 5.5%? They can't, they know they're desparate avoiding ARM foreclosures and they're cutting their losses today by making home loan interest rates artificially way too low.

meshugy said...

What's decent Meshugy? Can you provide some examples of 'decent' below 500K houses sold in under a week, and some counter examples of 'not decent' below 500K sitting on the market?

See:

7302 23RD AVE NW: $450,000

Sold in 4 days...

just one of many.

As mentioned before...this one is way overpriced so it has been sitting for over a month:

7048 19th Ave NW

Perfect example of a way overpiced house...it would sell in a heart beat at $650.

Anonymous said...

Why don't you walk up the street 3 blocks and tell the a-hole to wake up and smell the equity train running him over then?

meshugy said...

Here's a one at 500K that will never sell at that price....look and you'll see why.

1514 NW 73rd St

Ugly 50s house right next to 15th...forget it. Try $350K

But this nice house was only up for 3 days and is now subject to inspection:

7350 Jones Ave NW

You can see that most of the price reductions are a result of pie in the sky prices on crummy houses. If it's decent and priced right to begin with it'll go...

Anonymous said...

That street is nothing but sh&tboxes from what I've seen.

Anonymous said...

>If it's decent and priced right to begin with it'll go...

Sage advice, direct from NAR

If anything is priced right it will sell. In this market, you have to price it below zillow and be aggressive, and sure, you'll sell. Check back in just a few months from now.

Freefall.

dash_point said...

Sold in 4 days...

just one of many.


Dunno...I could just as easily find many homes with 30, 60, 90 DOM.
Selecting favorable data proves nothing.

Anonymous said...

Riiight, shugy....

Any home that sells is a consequence of "high demand."

Any home that sits on the market was "overpriced."

Do me a favor, man....just once, make an argument that isn't a logical fallacy?

matt said...

Props Meshugy, thanks for the follow up...

Anonymous said...

It's also worh mentioning that sales were up MOM in August. Just a hair behind August 2005 sales....so activity has been picking up. It should be slowing if the market was crashing.

Definitely agree with mesh. here. If you haven't bought yet, there is going to some additional inventory coming on before the November holidays, but folks need to get it together, unless you like paying rent...

heshugy said...

meshugy sez...

It's also worth mentioning that sales were up MOM in August. Just a hair behind August 2005 sales....so activity has been picking up. It should be slowing if the market was crashing.

It's also worth mentioning that new listings were up MOM in August (+5.2%). Just a hair ahead of August 2005 listings (+2.1%)....so activity has been slowing. Listings would be increasing if the market were crashing.

john_law_the_II said...

"buffet lost billions on his currency speculations."

he's been long foreign currencies since around 2002. he's also holds a large US treasury position.

Anonymous said...

the currency bet hasn't paid off.. yet..

john_law_the_II said...

"unless you like paying rent... "

you save $700/month in seattle by renting, it's even more in other areas of the nation.

john_law_the_II said...

"the currency bet hasn't paid off.. yet.."

if he bought in 2002 it has.

Anonymous said...

I LOOOOOOOOOVE paying rent. With the cash from my sale earning 5.35%...

Anonymous said...

>even more in some places

Yeah, I'm renting a high-rise condo that zillows for $829,000 for $2250.

What would the mortgage on that sucker be? $6K a month?

seattle price drop said...

Read somewhere that LL's are starting to advertise their rentals with this catchy phrase:

"Why Buy When You Can Rent for Less?"

Now that's smart.

Cannot wait to watch the property owners, (sellers and LL's that is) duke it out.

Larry Nusbaum said...

Read A CALL TO A.R.M.s:
http://millionairenowbook.blogspot.com/2006/09/call-to-arms.html

Anonymous said...

http://www.whiskeyandgunpowder.com/Archives/2006/20060918.html

Why there won't be a hard landing.

Eleua said...

Well...

You could read Larry's book, and hear about how you can dance in and out of every kinky loan product out there, and hope for the best. You will need to drink heavily just to get to sleep at night.

or,

Read "Don't Outsmart Yourself: A practical guide to navigating the Real Estate Bubble" by Eleua.

(entire text reprinted here with permission)

Ch 1.

Sell your overpriced house to some moron that has read one too many "get rich with real estate" books.

Ch 2.

Pocket the tax free money in an easy interest bearing account, and use that to offset your housing expenses.

Ch 3.

Rent a better house for half of what you were paying. Most of us will do just fine with the standard deduction.

Ch 4.

Get debt free.

Ch 5.

When all the "I just read a book" & "Real Estate always goes up" people get gutted when the bubble pops, save your offers until you see the whites of their eyes, and buy your house back for 1/3 of what you sold it for. You might get a good deal from your FLL on the house you are renting. You don't have to pay cap gains on the short-sale of your abode.

Ch 6.

Pay cash for your house and live debt/stress free and enjoy your good life. Allow all the Boomtime Real Estate sharks to live in all the crappy condo-converts while they hide from debt collectors.

Ch 7.

Dig moat around your house to keep deadbeat friends/relatives at a safe distance.

The end.

copywrite: The Big E, 2006.

Anonymous said...

I don't think the financing situation is as bad as most people think. We are first time home buyers who closed recently on a $480K 4BR/2.5BA in Mill Creek (technically not Seattle, but convenient to Bothell/Everett, and a really nice family-friendly suburban area w/ good schools). We financed with a 80/15/5 (7-yr fixed ARM).
Our total payments are <25% of our gross income.

In 7 years, even if interest rates skyrocket, I have no worries that we'll be able to accomodate our payments.

I don't think our situation is all that unique. We personally know a lot of two-income families with household incomes of $140-170K who can comfortably afford today's (and tomorrow's) prices.

Eleua said...

As long as we are all in stable, two income families that take in $140-170K, we should be just fine.

Median household income:

Medina - $133K
Mercer Is. - 92K
Mill Creek - $72K
Bainbridge Is. - $70K

Anonymous said...

Finished step 4, waiting on 5 now. I figure late 2007 to shake out the weak hands...

Anonymous said...

it's crap like anon 9:15's spew that really makes me mad because he/she/it supposes that household incomes of 140-170K are common, and common enough to support the huge new and incoming inventory of 400K-600K homes that have suddenly become the "norm" for "reasonable" home prices. ridiculous! go on salary.com and see which jobs pay the single 140-170K income or the split 70-85K income that a house like that would require (using anon's number's, and w/o loan exotica). how many vp's of finance or engineering are gonna buy these belltown condos/eastside mcmansions? how many registered nurse couples or engineering couples do you know? not that many, i guess, unless you consistently and only hang around the top 10% people (you snob!). of course, with all the realtors and loan officers out there making a killing in the current market, my rough guesstimate can probably be skewed even more. we should have all been realtors! as far as your 7 year deadline, you sure you can handle a "skyrocket"ing rate? what if your payment raises 2x? 3x (my god!)? heck, even just 1.5x? think your income (with a very conservative 5% ANNUAL raise) can keep up with a rate that adjusts monthly? i hope you bust your ass to earn that 5% consistently every year, if your company can handle it.

Eleua said...

I'm thinking the REIC/FED/Bush Admin can keep things going a bit longer than 2007. We need an absolute panic, and I'm looking to 09-10 for that time frame.

In 2007, people will still be calling the bottom, and faith in the REIC will be strong. Two to three years after that, the REIC/FED will have lost all credibility. Real estate will be for losers (like gold was in '99-00).

20 cents on the dollar by 2010. You heard it here first.

truth said...

Who are you shilling for eleua? Tim, why do you let these trolls continue to post on here? It was humorous at first but I'm sick of it. Always the same rosy head-in-the-sand garbage.
You know perfectly well it will be 5 cents on the dollar and not one penny more!

synthetik said...

Loved the book eleua... can't wait for the movie!

Eleua said...

Coming soon, to a theater near you.