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Sunday, December 31, 2006

Always Trust The 'Experts'

What's the point about worrying about global warming when we're getting all this hot air from Elizabeth Rhodes?

Please enjoy this year end feel good article about our robust housing market here in Rain City.

One of this year's biggest residential real-estate topics was the anticipated slowdown in sales and appreciation.

Would the Puget Sound market tank?

Would prices deflate?

Neither of those things occurred locally, although other parts of the country have seen moderate-to-severe downturns this year.

What happened here was a gentler transition in housing activity, from its record 2005 levels to a slower pace by this year's end.

What will 2007 bring? Here's what Seattle real-estate experts are saying.

First, let me introduce the "experts".

Elizabeth Rhodes (The Seattle Times and her job depend on a steady stream of advertising dollars from local Real Estate)

Matthew Gardner (Gardner Johnson, a Seattle land-use economics firm; "regularly retained by the region's most prominent developers")

Bill Riss (CEO of Coldwell Banker)

Frank Nothaft (Chief Economist, Freddie Mac)

Mike Scott (Dupre+Scott Apartment Advisors)

Suzanne Britsch (Senior Analyst, New Home Trends)
"This bubble lunacy is still prevalent, but not in Seattle, and I'll keep saying that," said Gardner, of the land-use economics firm Gardner Johnson.

The closer homes are to the major job hubs of Seattle and Bellevue, "the higher appreciation you'll get," Gardner said. "That's because there's intrinsically a value to our time."
What did we have in 2006?
"A more balanced market," said Bill Riss, CEO of Coldwell Banker Bain. That's giving buyers "a little more time to think, plan and write good offers."

Riss wouldn't be surprised if spring sales roar to life, causing another feeding frenzy, albeit not at record levels of past years.

A rise in inflation could drive rates up, but that's not a concern now, Frank Nothaft, chief economist for mortgage-money provider Freddie Mac, recently told the Washington Association of Mortgage Brokers.

"Inflation will be tame, and interest rates will not change much in the next six months," Nothaft said. "They may drop after that. We don't see mortgage rates even getting up to 7 percent [by the end of 2007]."

He also anticipates the number of nontraditional loans, such as negative amortization and interest-only, will drop as borrowers choose other mortgage products instead.
Sure, no problem affording that $699,000 charmer with your conventional loan: $140K down payment and $4,800 monthly payment!
The same strong regional economics sustaining the local home-sales market are also fueling apartment demand, said analyst Mike Scott, of Seattle's Dupre + Scott Apartment Advisors.

Logically, strong demand should ramp up apartment construction, but it hasn't worked out that way, Scott said.

A year ago, he forecast 3,600 new units would be built in King, Pierce and Snohomish counties this year. Instead, just under 3,100 opened.

In 2007 Scott anticipates even fewer: just 2,600 new apartments.

...apartment rents to jump about 8 percent next year, Scott predicted. Vacancies will fall from their current 4.7 percent to roughly 3.5 percent, he said.
Buy now or be priced out forever! I don't know about you, but even if he's correct I would gladly pay an additional 8% in rent rather than 50% more in mortgage costs while facing the inevitable repossession, bankruptcy and anxiety disorder.

My prediction: Rents will remain flat through 2007 and drop in 2008 as additional housing becomes available. Desperate FB's will have no choice but to rent out properties that do not sell. Condos and condo conversions will face a serious slowdown in sales and many will convert into apartments.
The national news has been full of stories about homebuilders cutting production and prices as the real-estate market cools. In November, for example, building permits nationwide fell to a nine-year low, according to a government report.

"But that's the national news, not the local news," said Suzanne Britsch, senior analyst for New Home Trends, a construction-analysis and consulting firm in Mill Creek. "We still have job growth and a shortage of lots here, so we have just not had a problem with standing inventory."
We're different. Special. A breed apart.
In King County, the average price of a new house will be $750,000, she predicted. A big chunk of that expense is the land. The rock-bottom price for a lot in a new King County subdivision is now $250,000.

In Snohomish County, new single-family homes will start at $400,000. And they'll likely be on 3,500-square-foot lots, rather than 6,000 square feet, the norm there until recently.
OMG that is so affordable! Isn't it nice to have all these objective opinions?

Happy New Year ;)

(Elizabeth Rhodes, Seattle Times, 12.30.2006)

15 comments:

Lisa said...

"He also anticipates the number of nontraditional loans, such as negative amortization and interest-only, will drop as borrowers choose other mortgage products instead."

This is the nail in the coffin and he doesn't even know it. Federal lending guidelines kick in at the end of January, just in time for the "Spring Rebound." Borrowers will now have to qualify at the fully indexed, fully amortizing payment as well at the initial teaser payment. How many people will qualify for a 50%+ higher payment when so many are at maxed out debt levels at the teaser level?

And if foreclosures really start to take off, you bet banks will go back to requiring down payments so the buyer has some skin in the game. Again, who will have this kind of money sitting around?

They've put "spenders" into homes when it used to be you had to prove you were a "saver" before anyone would come near you for a mortgage.

Grivetti said...

He also anticipates the number of nontraditional loans, such as negative amortization and interest-only, will drop as borrowers choose other mortgage products instead.

hahahahah!!! Wishful thinking if I ever saw it, the delusional optimism here is delicious!!!

Oh yes, yes, all those bad bad loans will just disappear with the winter's snow, replaced by sound healthy loans because like somekind of 'Wizard of Oz' miracle, the oppressed of the Emerald City will see their epiphany, and immediately switch over to sustainable products! Neg-am's, I/O's all history!

Money will fall out of the skies and mana from heaven will show up in the form a of a spry leprechaun that graces the weary mortgaged with pots of gold to float their 4K monthly loan payments!

There'll be world peace and global warming will reverse, fields of flowers and puppy dogs will reign over our weary land.... its a new era, a utopia!!!

...Good grief, again my prediction, recession Q2 2007.

christiangustafson said...

Credit was expanded ... and now with the dollar in jeopardy, it will contract. It must contract, or the dollar will be lost.

Loose credit created money out of thin air. Now we must celebrate each episode of monetary destruction on the way down, every BK, every foreclosure, every default. Of course it will be painful, but it is much needed medicine. The only alternative is to keep fueling the fire with more credit, which will end with the complete collapse of our monetary system, what von Mises called a "crack-up boom" (after having witnessed one).

There is no shortage of houses. There is instead a surfeit of temporary owners, who did not have the thrift nor the income to afford the inflated purchase price. With the shift in market psychology and the reining in of loose lending, nothing will save these people.

I visited my hometown of Chicago over Labor Day, and was appalled at was I saw in the Loop, where I lived 45 floors up for many years. So many former office buildings being converted to condos, including, incredibly, 55 East Monroe. I was so sad to see the proud home of so many corporate HQs transitioning to a California-style RE economy. Who needs an industrial or a even a service economy, when with asset-inflation we can just flip houses every 2 years!

Happy 2007, renter/savers! May your humble dollars still be worth something in 2008. Live debt-free, and keep your Schadenfreude dry. You'll need it soon.

$750K median in King County ... hillarious. OMG, I better buy before I'm priced out forever.

stephen said...

"if he's correct I would gladly pay an additional 8% in rent rather than 50% more in mortgage costs while facing the inevitable repossession, bankruptcy and anxiety disorder."

How exactly does buying a house you can afford on 30 year fixed rate to inevitable repossession and bankruptcy?

The Tim said...

What caught my eye as I read the whole article was that the phrase "job growth" was used four times. Ms. Rhodes is really trying hard to drive that point home, isn't she?

plymster said...

How exactly does buying a house you can afford on 30 year fixed rate to inevitable repossession and bankruptcy?

It doesn't, but a 30-year fixed mortgage hasn't been the norm for the past 3 years.

More in line with synthetik's point, it would be foolish to spend nearly $3,000/month (What it would cost to borrow the $400K you'd need to buy a house at 6%, plus the opportunity cost of $100K you could have tied up in a 5% CD) for a house you can rent for less than $2,000/month. (Admittedly, I'm leaving out the $500/month you'd be putting towards your home's equity, but I'm also not talking about maintenance, taxes, or closing costs.)

Of course, burning $1,000 a month doesn't guarantee that you'll go bankrupt, it just makes it a lot more likely.

If on the other hand, you were like the financial wizards I work with, you might get an Interest Only loan for 5 years ($2,500/month), and only lose $500 per month, and then go bankrupt as your payment (based on no increase in interest rate) bounces up a grand a month.

So in a nutshell, your home-buying options now are:

* Buy on a 30-year fixed, and lose 1,000 a month until rental prices finally catch up.

* Buy on an exotic mortgage, and only lose about $500 a month until your loan adjusts, and you go bankrupt.

Jon said...

Renter's Unite

I love you all!!! There is a reason why there are books out there that stress, "The Rich get Richer."

First off, more people, especially younger kids, are able to afford a higher down payment (borrowed from wealthy Baby Boomer parents) and pay a higher mortgage becuase they have no debt coming out of college (thank the BB mom/pop).

Secondly, those who still have a I/O or ARM are rethinking their investment, and are switching to a 30 year fixed mortgage. (BTW, if you do have an I/O or ARM, refinance!)

Thirdly, the job market in Seattle is fabulous! Lower unemployment, greater possibilities, and companies willing to take on payroll to increase production. Vacancy rates downtown for retails spaces are less than 1%.

Fourthly, owning a home is the biggest savings plan and tax shelter you can have. Huge tax benefits offset the cost of the mortgage for the most part, and you get something called an ROI... or appreciation of your home.

Frankly... you renters out there continue to pay my mortgage payment, increasing my tax deductions, and ability to purchase another property... after all, you are not only giving my pocketbook a nice reprieve, but you are guaranteeing my retirement will be fun, lucrative and filled with travel without worrying about money.

Go ahead... take your 5% CD and enjoy the interest you earn off that $100k... I will enjoy the 3-5% (conservatively) I gain with a $600k home!

Cheers!

sash said...

I dont see prices falling in the microsoft area at all. At best I see them remaining flat over a couple of years. Any one disagrees?

Grivetti said...

Fourthly, owning a home is the biggest savings plan and tax shelter you can have.

Historically true... not anymore. Recession's looming and Seattle takes those sort of economic hits harder than the rest of the country...

All worthy advice Jon... historically speaking. The popping of the Greenspan credit bubble will undo the 'buy now or get priced out forever' mantra just as quickly as the 'I got some swampland in Florida I'd like to sell ya' went out with the Great Depression...

Renting = no Real Estate exposure

(safe as houses)

Grivetti said...

Looking ahead: The sky isn't falling for the Puget Sound market

I think the article title says it all... last year it would have been "Red Hot Sizzling Chipotle Burn of local housing market reaches new unstoppable plateau!!!!"

Can't stop the bum-rush Rhodester, even though your arsenal of well placed buzz-words provides the delusional fuel to keep the fires roaring... Gravity has a way of catching up

wreckingbull said...

Jon,

I can't thank you, the honorable homeowner, enough. You allow me to sock away 75% of my salary becuase you only charge me 1/3 of the true ownership cost in rent.

You keep the economy strong by spending every last HELOC dime at Home Depot, Circuit City, and Applebees.

When all of the baby boomers try to cash out their 401Ks (oops I mean homes) in about 5 years, we shall see who lives the comfy retirement.

synthetik said...

>bankruptcy and anxiety disorder

Even if you can afford a $4800/mo payment on your $700K home using a conventional mortgage you still are facing a potential foreclosure.

Why?

1. The value of your home goes from 700K to 500K after 2 years causing you to be "upside down" when you attempt to sell.

2. Job loss or sickness which is a very likely scenario. You then cannot afford your payment and you are unable to sell

As far as the $4800/mo, I arrived at that figure this way:

$560,000 loan amount (after 20% dn)
7% interest @ 30 years = $ 3,726

Taxes $4000 / year (estimated)
Maintenance $ 5000 / year
Homeowners Insurance $ 2500/ year

I'm sure I'm a bit off on those numbers, but it's a heck of a lot more than $3K month. Even with tax savings factored in, I think you're saving a lot more than $1K a month by renting.

This house will rent for $1750/mo easily.

sash said...

synthetik,

Where can you rent a DECENT house for about 1750$ a month? Please let me know :) I am paying 1400$ in rent in Redmond for an apartment (pretty new though) with just 1100sqft space! My lease is up for renewal and I dont see rates coming down!!!

Dont get me wrong. I do think both rents and real estate is WAY too high here. Consider for example a property added recently to the market:MLS #26201809. But I am curios about the following:

1. Land value in East Side esp redmond is very high. Do you see that also going down? Esp. given the scarcity of land?

2. Real estate is in a mess and is the falling US dollar. So suddenly your CD may not be worth so much. So now we are screwed both ways right? So why not enjoy the space of your own house?

wreckingbull said...

2. Real estate is in a mess and is the falling US dollar. So suddenly your CD may not be worth so much. So now we are screwed both ways right? So why not enjoy the space of your own house?

Where did you ever get the idea that residential real estate and U.S. denominated securities are your only two investment choices?

Contrary to your belief, there are much better hedges against a falling dollar than residential real estate....linkie

synthetik said...

>1. Land value in East Side esp redmond is very high. Do you see that also going down? Esp. given the scarcity of land?

Um, YAH!

318 properties on Craiglist between $1600 and $2000 3+ bedrooms