03.13.2007 - Tuesday Open Thread
This is your open thread for Tuesday, March 13, 2007. You may post random links and off-topic discussions here.
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48 comments:
Doonesbury
Priceless!
I hear the employment growth story all the time and used to believe it. January had the highest emplpoyment growth for a month in the past few years as I recall with 20,200 of which 5,700, the highest amount came form the Retail industry.
Now, what do you think the average pay for the retail trade is?
Will that help buy a 600k house?
First time home buyers are usually about a third of your total market. When you cut them off the market will die. The Microsoft/Boeing guy with the 400k house has to sell to someone to buy his 600k house. If there is no one to buy his house the game stops.
Permits are off 10% or so depending where you look but our total new home market is still up 50% when compared to normal years and that is SF NOT MF. DOn't even get me started on downtown condos. And the average Microsoft employee makes how much? If they have nay optins they have probably been there a while and already own.
I am curious what others have to say on employment. I don't care if we added 100k jobs next month. If they are making 60k a year they won't be buying a house, well not anymore.
Median income is around 62k for King County.
Oh and historically it is best to buy a house when interest rates are at their highest. House prices will be low and you cna refi on the way down.
http://www.realestateconsulting.com/hcb.html
Anyone know what happened to Seattle Eric's webpage? Looks like it has been hijacked.
The DOW is down 154 right now and dropping fast. Looks like the subprime spillover is finally the main fear on Wall St.
SELL SELL SELL!
Where is your goldilocks economy now Bernake?
Like many on here have stated, what if housing IS the economy?
I'm sorry if you guys hate me for this but, I'm posting my response to Mydquin on todays open thread to keep this conversation alive because I think he makes some points that many counter with that specifically discuss Seattle proper.
Mydquin, I have to admit that when it comes to Seattle proper, I have had some of the same thoughts as you as I explore the status of houseing. When Tim first started this blog, his intent was to figure out, for himself, whether there really is a bubble in Seattle. It’s clear now what he's determined. I think that outlying areas of Seattle will be harder hit by the deflating bubble than Seattle proper. As a caveat, I am not an economist or financial analyst. I am, however in public accounting, for what its worth.
1. I don't have exact data on this, but based on what I have seen from walking around and driving around town, I agree.
2. Not to resort to cliche' here, but markets are moved by greed and fear. There are a lot of institutions getting burned by sub-prime and I think those investors will be more gun-shy about buying more mortgage debt. If they do buy it, they will probably demand a higher return. Additionally, if lenders continue to tighten standards and less people are seeking mortgages to purchase houses, there won't be any debt to buy. I also think that capital that is moved out of equity into RE will likely go into REITs that focus on commercial and large multi-family residential properties, not homebuilders or homes/condos. People "investing" in condos and SFHs have been individual speculators for the most part.
3. Again, I think those investors will be looking at "safer" investments than mortgage debt or homebuilders. Anyone who invests seeks a reasonable return related to risk. Right now, mortgage debt is showing a lot of risk, and poor return. If foreign investors are buying debt, it will likely to continue to be in Treasuries, high-rated bonds. The Chinese have been buying treasuries right and left.
4. I agree with you. Properties in Seattle proper, especially SFHs are going to be more resistant to declines in value relative to Pierce and Snohomish counties.
5. There may be job growth (even high-paying job growth) but if the banks are only willing lend someone X amount of money, they can only afford a home for $X no matter how much they want it. As lenders tighten their standards, I think this scenario is likely to play out.
6. People generally will buy the best house they can afford, unless they are speculating. Therefore, no, I don't think you will see people in the $600K market buying a $400K house. UNLESS, lending standards tighten and/or interest rates increase and that's all they can now afford. In that case, they may choose to rent, wait for better prices, or move further out into the suburbs to buy something they can afford that is good condition.
7. Once again, I don't have hard data to support this, but my guess is, a lot. One example I have is my sister-in-law and her boyfriend in Santa Barbara, CA. He has been selling re-fis for WaMu and she just got out of school and is an x-ray tech. I don’t know what they make, but whatever they make certainly CANNOT support the $875K house they bought on a neg-am mortgage last summer. They love talking about their house and showing bling but my wife and I know that disaster cannot be averted. So as far as the 600K+ mkt is concerned, the only people that I know well enough to comment about certainly cannot afford it and will either be forced to sell or default. There are has been a lot of keeping up with the Jones’ all over the country, Seattle included. My guess is that the non-trad mortgages in the $600K market are the same.
I agree with you to an extent about the house of cards, but I do think we will see a correction. How much, I don’t know for sure. I don’t agree with some that post here that the market will go down 80% (maybe in outlying areas like Puyallup, but not in Seattle proper). I think there are a lot of people holding out for better prices that will buy when they feel the time is right or they can afford it with 30 yr fixed mortgages and this will keep things from going down 80%.
I do not think the end is near. Frankly, it concerns me when I see people so giddy about the prospect of a complete collapse. There has been an overall debt bubble globally as investors have lost any risk aversion. But corrections happen, bad capital gets flushed out and eventually the economy recovers. I think we live in a resilient country and a resilient economy but too many people have developed a habit of a leveraged lifestyle. Once people lose their attitudes of entitlement and start to live within their means and we will, once again, be a very strong economy. In the meantime, I think we will have to have a bite of economic reality.
Sorry for such a long post, but you inspired me to get all of my thoughts down in writing.
On a seperate subject: does anyone have any thoughts as to whether the financial industry might not wind up cutting struggling mortgage payers INCREDIBLE deals to prevent foreclosure as the real-estate industry comes off the wheels?
I just find it hard to believe that the owners of mortgage securities will be strict with the mortgage payers if there is any chance they can squeeze at least SOME money out of the owners. Particularly as the downturn spirals, and property prices tank.
If you take the example of a home-owner who is successfully making lowest payments on a subprime option-ARM, then there is incentive for the creditor to write off part of the mortgage and just keep taking the low payment rather than foreclose and take a complete bath.
In fact, I wonder that the willingness of lenders to make INCREDIBLE concessions might not increase the deeper the over-all industry becomes? The urge to foreclose is likely greatest when property values still have some weight, and they might actually be made whole in a sale. But if property values are cratering fast, then maybe lenders would do ANYTHING to avoid foreclosure.
Or am I just missing something? I suppose there could be pressures for lenders to just cleann out the dead-wood, and force foreclosure even if they think they will get nothing back.
Mikhail,
Good points. I keep hearing about how foreclosure is very costly for the bank. And with home values dropping, it makes it unlikely that they would recoup their money through a sale. But, on the other hand, they are accountable on their end as well. If the money isn't moving, they're dying....like sharks.
mikhail-
I am sure some may try but the days of relationship banking at the local bank are over. I don't see how large institutions or countries are going to work out thousands of individual deals across the country or the world. It just isn't plausible IMO. Any amount they would forgive would be taxable as well, adding insult to injury. There are a lot of Sub-prime lenders won't have to worry about it anymore.
I would agree with your thought that laws/rules/restrictions/regulations could be past to mititgate the downturn to some muted degree. I really have no idea.
If Roosevelt could initiate SS to help get us out of a depression anything is possible. Desperation will bring desperate measures, right or wrong.
confused said: "I don't see how large institutions or countries are going to work out thousands of individual deals across the country or the world."
I wonder... I have been reading about how some institutions holding mortgage securities have been getting VERY detail-oriented, sending laywers to court attempting to force the repurchase of a single loan (by the originator).
Further, I could see a situation where investors would be willing to sell their mortgage security portfolios for pennies on the dollar (rather than take an absolute write-off) to collection specialists, who don't mind getting themselves mired in negotiations with individual debtors.
Heck, if there is the possibility of getting even 10 cents on the dollar out of some of these loans, there will be SOMEONE willing to buy up the securities and pursue restructuring.
Looks like the equity mortgages are starting up in Australia:
http://www.smh.com.au/news/national/equity-tradeoff-for-bigger-home-loans/2007/03/13/1173722471210.html
I fear these greatly, because they are even more creative financing - these mortgages are designed to allow people to spend more. Worse case is that this will make property values in already overpriced Australia urban centres keep climbing.
We should hope that this kind of mortgage does not come here to 'save' the market. We need wages to catch up to property prices.
Even if they get 10 cents on the dollar, they still lose the other 90 cents. Someone is the bagholder.
With all the credit default insurance and high levels of leverage, I seriously doubt anyone can "write" their way out of this mess.
Bottom line: For 4 years, lending institutions of every stripe have been loaning huge sums of money, at low rates, to questionable customers, with lousy collateral.
It is a business model that is fundamentally broken. It is no more broken now than it was 4 years ago. We are just reaping what we planted 4 years ago.
Keep in mind that we are not even 10% of the way through all the ARM resets. The ones that are resetting now are from people who bought on the front side of the bubble. Wait until those that bought at the peak reset. The economy can't even handle this teensy-weensy bit of trouble. What happens in another 18 months?
Kaboom!
Honestly. It amazes me that people who run money for a living, and watch the economy for a living, never saw this coming.
How is that possible?
Why is it that "bitter renters" are better prognosticators than those that make their living knowing things like this?
You can't squeeze blood out of a turnip.
For people who run money for a living, sub-prime mortgages were a great deal while property prices were increasing, as the spread over treasuries was very high, and the risk was low. These were very profitable investments.
Current holders of these portoflios will likely start running for cover before they have to mark their portfolios to reflect the plunge in the prices of these securities.
Currently, the market for sub-prime MBS portfolios is tanking (and the as the yield increases). Existing sub-prime loan portofolios will likely be bought up at very low prices by I-banks on wall street, and they will restructure the portfolios, selling the unperforming loans to a "foreclosure agency", and selling the performing loans to other parties.
Want to start a great business right now? Open up a company speciallizing in buying unperforming loan portfolios from across the country, and run the foreclosure process on them.
If anyone is interested, Bubblevision has the CEO of Countrywide Financial being interviewed by the Queen Bingo Caller.
This is tooooooooooooo funny.
The CEO is practically BEGGING for a FED rate cut. It is pathetic. Simply pathetic. He is bringing out all the big guns: the current market conditions are hard on young, first time homebuyers, and minorities.
I'm surprised that he didn't say this threatens motherhood, or promotes terrorism.
You know that BB wants to cut as much as I want to get lucky tonight. The big problem is the YEN is not playing along.
Buckle up. This is going to be interesting.
Mike,
I understand that selling these mortgages was very profitable.
I can sell puts on lending stocks right now, and make a boatload.
The problem comes in closing out the trade.
Actions have consequences. I can't believe people were this reckless.
Eleua - you are hilarious! And very insightful, I look forward to your posts.
What is the Crash-con status outlook?
In our office (we're lawyers) we represent a lot of hard-money lenders and small companies who purchase delinquent debt.
In general we are striking a lot of deals. When individual investors purchase defaulted loan portfolios back from WallStreet you bring the personal level back to the foreclosure market.
With one file on my desk we have now had 3 bounced checks - we still have not assessed any additional late fees.
With another file we just extended the foreclosure date for 2 weeks to attempt and allow the debtor to do a short sale.
I'm seeing a lot of deals being made. The lenders will do what it takes to maximize their return.
Wall Street doesn't want to deal with foreclosures. They just want a clean portfolio that pays $$ every month. Once the portfolio gets shaky, it gets sold out and eventually reaches the scavengers who hire us to foreclose. They in turn will evaluate each file for maximum profitability and in some instances that means giving the borrower a lot of lee way. In any case, I'm seeing a lot of deals to prevent foreclosures.
Its like every time I hit refresh on my browser the DOW drops another 10 pts.!
mikhail-
I completely agree with you. I am sure an entire new industry will crop up. I just think the tidal wave will be so massive it won't matter. It will add to the price "stickiness" that everyone here eludes to so it will be good to slow the decline but I still feel it won't make much difference.
The collections industry will get a boost.
WTF,
Funny you should ask. I'm a brainwave away from upgrading to CRASH-CON 2.
In order for CRASH-CON 2, I need to be absolutely certain that the inflection point is passed. I'm 99% there. I am essentially awaiting all the big Wall Street Dead Fish houses to show they are vulnerable.
The only boogie-man out there is a FED rate cut. It will be ultimately worthless, but it will pop all the financials, builders, and housing markets in the short term.
If the FED cuts too eagerly, it will telegraph a panic atmosphere, and could backfire. Any hike, and you can kiss every market (except Ballard and Bainbridge) goodnight.
Right now, I'm on data overload. My put position is about 5X what it was during the tech bust. I'm a one man think tank, so I'm pretty tapped out. There are more opportunities than I can handle - a first.
Right now, I'm watching the next level of mortgage lenders. Alt-A and the bigger, traditional banks. So far, I like what I see.
CRASH-CON 2 is pending...
Outlook for Seattle WA-
http://tinyurl.com/2l73nx
"The area has experienced increases in jobs (with a strong ratio of job growth to housing permits) and home prices in the past year, says Chris Porter. But affordability's an issue and John Burns Real Estate Consulting identifies Portland and Seattle as communities facing a potential housing bubble. Local Market Monitor also includes both cities on its list of overpriced markets."
We are the only market I have seen listed that does not have a projected 2007 price. Mostly a fluff article but thought it was interesting that finally a fluff piece considers that we "might" be a bubble market.
Bubblevision cracks me up.
After the bell, the Queen Bingo Caller was doing a segment on "Did Wall Street Miss the Subprime Meltdown?"
I was like Obi-Wan feeling a massive distrubance in The Force, where millions of voices were saying the obvious.
Now, they are all saying that it is contained, even though they didn't see it coming.
I don't want to see your basic Joe suffer for this, but those on Wall Street need to be dragged out and shot. I've been waiting for this for almost 9 years.
Let the good times roll links
http://tinyurl.com/2eenle
http://tinyurl.com/2g4q62
Love that even the "pros" are still in the "maybe" stage...
>sub-prime mortgages were a great deal while property prices were increasing, as the spread over treasuries was very high, and the risk was low. These were very profitable investments.
so was shorting the ever-loving bejeezus out of them!
"so was shorting the ever-loving bejeezus out of them! "
Too funny. Too true.
GREAT TAKES, I'D ADD IT WAS IN THE CARDS BUT WE WERE IN DENIAL
Have any of you believed that drinking 8 glasses of water would lengthen your life? Its actually an urban legend [ask your doctor, he'll agree with me] that was started by a non-medical government worker bean counter from the FDA I believe and after a while we all kinda believed it. Yet, its all complete hogwash, you get plenty of water just from the food you eat.
Seattle, the land where $5 cups of coffee were invented, and you ask us NW buffoons what homes are really worth? Ha ha.
When the dust settles on this MONSTER bubble, we're all gonna find out the heart-wrenching Seattle truth; homes go up over the decades, about an average 4% a year, before maintenance and interest costs.
I wonder when the term "soft-crash" will be coined.
I think it's good though that people are waking up to how this affects the economy and not just the RE market.
For anyone familiar with forest fires, the economy has needed a controlled burn for some time now, and since it never got one we're staring at years of fuel loading in the underbrush... and we are going to all burn like Malibu when lightning strikes... or when someone tosses a cigarette out their car window.
One of my good Navy buddies got laid off from United and went to work for one of the big Dead Fish houses. I always asked him what his peers were saying about the economy, and he always maintained that with the exception of one guy, they were all bullish.
They would all have to give presentations about their investment strategies, and the resident bear always had the best show. He would chart up a storm, and go on and on about fundamentals, and the fact that WE HAVE NOT SEEN ENOUGH DAMAGE FROM THE LAST BUST.
All the bulls would laugh it off and go back to pimping stocks and derivitives.
This is one reason I think the entire investment community should be dragged out and shot.
"Elliot Spitzer on line one..."
Speaking of "Elliot Spitzer on line one..."
I think Bear Sterns is in heap-big trouble over their tout of NEW.
Now, if we could only get your garden variety RE broker's nuts in a vise over the very same thing...
Mike said:> sub-prime mortgages were ...very profitable investments.
Synthetik said:> so was shorting the ever-loving bejeezus out of them!
Let's just be clear here: Shorting sub-prime MBSs was profitable in the past 6-12 months. It was not profitable from 2001-2005 while real estate was rising.
I suspect that with the ongoing selloff, there will be great opprotunities in the sub-prime MBS market again.
I wonder if Ardell realized how prophetic it was to title a post on RCG regarding "The longest season ever". Although it will seem long not due to the number of hours of daylight....
Mike,
Thanks for pointing out the obvious.
Eleua, RE broker? I like that. Beacause a Realtor (tm) would never, NEVER EVER, commit any misdeeds. Your Realtor (tm) has only YOUR best interests on her mind.
This meltdown reminds me of Enron, WorldCom, etc. fiascos of 2001. CPAs got their faces completely smeared as a result of the big downfall. As a result, we are no longer self-regulated in the SEC arena and the AICPA has somewhat been invalidated. I think in the end, the same thing will happen to Realtors (tm) and your friendly lenders.
Matthew - I'm glad I could help out.
holy sh&$
nikkei is down hard right now...tomorrow could be even uglier on wall street
I'm usually pretty good about not discussing the housing market a work, cause it's like discussing religion or politics these days. But I was working late tonight and thought the office was empty except for one of my coworkers who was kabitzing with me.
Anyway, we ended up discussing housing quite loudly and at great length. When I finally left I noticed my boss was still in his office and looked like someone just shot his dog. Oops.
hrm, maybe he was heavily invested in NEW, FMT, LEND and NFI.
Next step, WM, CFC, WFC, BKUNA... let the party begin!
Couple random thoughts:
1. I think that the stock market needs a few bad days in a row. It seems like one very bearish day is followed by a slow creep up. That has enabled the bulls to remain optimistic. If the market takes 3 or 4 poor days in a row, it will be hard for the bulls to take back control.
2. I was watching "What is my house worth?" tonight. I was wondering, in 2 or 3 years they should have the same show, but instead of people jumping up and down finding out that they made 200,000 dollar in equity, they found out that their McCraftsman in Ballard is now worth 200,000 less than when they bought it. The camera could then pan in on the horrified look on their faces when they realize they are hosed.
2007 Price = 550,000
2009 Price = 350,000
Equity = -200,000! Congratulations!!!!
Some lady on that show in Florida was hoping she made over 200,000 in equity so that she could take the money right out and upgrade her house and buy a bigger boat.
Hi Guys,
On a short sale, the lender is willing to help the homeowner sell in order to avoid foreclosure....
HOWEVER, the lender also requires the homeowner to sign a brand new unsecured note at closing so the homeowner can begin to pay back the shorted amount.
Some homeowners don't want to do this so they'll just let the loan go into foreclosure. OR they'll think, "hey, I can just file bankruptcy and wipe this away." That's not always the case. Sometimes the lender petitions the BK judge to not discharge the debt.
A short selling homeowner always needs legal counsel throughout the transaction. If they're in financial distress and can't afford an attorney, they can contact their local bar association for a referral to legal aid.
Without requiring the homeowner to pay back the shortage, our banking system wouldn't work. You and I pay for banking losses whether we're talking foreclosure or short sales in the form of higher bank fees and higher interest rates on our loans. Except for Eleua who doesn't use credit at all.
:)
I don't care if we added 100k jobs next month. If they are making 60k a year they won't be buying a house, well not anymore.
I often see this argument, and what I think isn't obvious from the employment numbers is that for every 100 new people that move here, another doctor (or dentist, attorney, insert favorite higher paid job) is employed. So even when thousands of jobs at the lowest pay levels are created, you still get some additional upper income home purchases.
Does anyone else think that the sub-prime fallout is great for owners of rentals? It seems to me that more people that can't buy means more people that have to rent. That means fewer rentals, and combined with increased apartment-to-condo conversions I see lower supply with increased demand, the recipe for making money.
sea-hottie
Unless these renters have higher incomes, it doesn't amount to dinky-doo.
More renters - so what?
More renters with money? - significant.
>Does anyone else think that the sub-prime fallout is great for owners of rentals?
It's great for renters. The subprime fallout is causing the bubble to blow at a much faster rate, which will equal more foreclosures, which means more units available on the market.
There may be a temporary blip in less units available, but you'll see many more units coming on line to rent. Another inevitability: Repartments (condos converting BACK into apartments)
More supply=Cheaper rent
Jilliayne:
you realize we're discussing short options (put options) regarding REIC stocks and not a short sale on a home correct? Or did I miss something?
sea-hottie:
"I see lower supply with increased demand, the recipe for making money."
Even if rents did go up, you wouldn't make money off of it with anything purchased in the past 3-5 years.
In any event, a quick survey of Craigslist suggests to me that rents are actually going *down*, around Bainbridge at least.
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