Fleckenstein: Seattle "Just a Little Less Dark"

Wow, Aubrey Cohen over at the P-I is really slipping lately. First he prints the prediction that Seattle will see "slight year-over-year price declines this spring or summer," and now he has penned an entire article about Bill Fleckenstein's "not-so-rosy" outlook for local real estate.

Like many economists and real estate professionals, hedge fund manager Bill Fleckenstein thinks Seattle's housing market is, relatively speaking, in decent shape. But, while others see Seattle as a bright spot, he describes it more as just a little less dark.

The national market is going through "probably one of the biggest, most dangerous bubbles we've had in this country," said Fleckenstein, president of Seattle's Fleckenstein Capital, MSN columnist and a panelist Tuesday at a forum on housing trends sponsored by the Greater Seattle Chamber of Commerce.

Although Seattle is in better shape, its home prices will go down, Fleckenstein said after the meeting. Asked if he would buy a home in Seattle now, his response was an immediate, definitive "no."
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"I really think it was more of a lending bubble and an abdication of responsibility by the lending institutions," he said. "Anybody with a pulse could borrow any amount of money."

Meanwhile, the rising home values created equity, which homeowners cashed in to live beyond their means, Fleckenstein said. He said the [national] market peaked in mid-2005 and has serious potential for prolonged trouble.

Real estate prices declined for a decade after Japan's equity bubble burst in 1989, with commercial property values falling 90 percent and home values down 70 to 80 percent, Fleckenstein said. "You can look to see what happened in Japan as where things could go."

The ultimate depth of the fall is not yet knowable, he said. "When the tide starts to go out, then you start to find out all the crazy stuff that's gone on."

Fleckenstein said the recent tightening of lending standards could affect the lower end of Seattle's home market, while the national fallout would hit the city's higher-end buyers.

I don't really have much to add. I've been reading Bill's stuff over at MSN Money for a while now. He's a sharp guy, and was accurately warning of a national slowdown and credit tightening well before it all began. I'd think carefully before dismissing his local predictions just because they don't reflect your preferred version of the future.

(Aubrey Cohen, Seattle P-I, 01.31.2007)

Notes From the Trenches

Last Wednesday there was some great conversation about what people are experiencing as they are out there right now trying to find a home. I think it's worth re-posting these comments on the front page, since they give a good feel for what the housing market is really like right now that you can't get just by looking at graphs and spreadsheets.

Peter:

I've actually started looking seriously at homes in the $400k-$500k range and have toured probably at least a dozen from the Kennydale Area up to Juanita/Kirkland. Here's what I've noticed:

1) Pretty much everything you've heard about flipper renovations is true. These people are morons. I've seen some work so shoddy that it would blow your mind. We toured a home in Newport Hills and the owners were still there - he pointed at the electrical plates and said, "we upgraded to the latest style!" Um, yeah. You went to Home Depot and dropped a hundred bucks and spent the afternoon with a flathead screwdriver. No.

2) The $400k-$500k unrenovated properties are bottom of the barrel garbage. Borderline unliveable. Most of these are in such a state of disrepair they will probably need to be torn down. We saw a house in Finn Hill that had been vacant for quite some time. It smelled like death. My wife said, "this place is haunted!" I saw something - I'm not sure what - but it was brown, papery, and slightly organic looking in the fireplace. I asked our agent what it was and she just said, "let's get out of here!" And a steal at only $450k.

3) Prices are all over the board and don't appear to be based on recent nearby sales or appraised value + whatever. People are just asking whatever they feel like and seeing if they can get any bites.

4) The increase of inventory is definitely accelerating. It's all crap though.

5) Most builders are idiots. They will shoehorn a house into just about any space, regardless if the front door of one house is directly facing the house next door. Yeah, I want to look out of my living room window and see my neighbor reading the newspaper in his bathroom. Most are still not offering concessions.

6) I'm not seeing any of these houses move. No one is buying them. However, if a decent house at a decent price does get listed, it is snapped up immediately. The crap is sitting forever though.

7) This has been one of the worst and most depressing experiences of my life. I've seen more than one house that *could* have been nice but had been ravaged by a flipper and had the price jacked up $100k from the purchase price a year ago. It seems every flipper runs out of money and you can tell exactly where they did - 4 out of 5 rooms will have hardwood floors, for example. The last one will have 30 year old filthy carpeting in it. 3 out of 5 closets will have been redone - the last two look like something like the meat locker from Texas Chainsaw Massacre.

Anyone who thinks this is a "healthy market" is certifiably insane.

Alan:

I know what you mean, Peter. My wife and I went to an open house a few weekends ago. We could tell that the owner had done some shoddy renovations, but we thought we would have to redo it and so we would have wanted a discount *because* of the renovations (if we had even wanted the house -- which we didn't because the floorplan was horrible).

I enjoy messing with the realtors. They ask if I am in the market and I say, "No, I'm currently priced out of this market. I only make $X per year." (where X is significantly above the mean income for the area). The last realtor I said this too got excited and started telling me that the owners would probably sell for less than the asking price and that he could get me a good deal on the house.

B:

Peter:

Wow, I haven't been looking as hard at as many properties as you have, but your observations exactly parallel my own. What a strange twilight-zone of inventory and comps we're looking at right now.

I came back from the last place we walked through (SFH in Greenlake listed at $699, which was absolute junk inside) with a resolve to renew my apartment lease through 2007 - let the flippers flop.

The only thing worth less than a "fixer" is a house where someone did a crappy remodel/flip on a fixer. Now I have to tear out all your shoddy garbage and re-do it. Honestly!

stephen:

If you are going to buy (like we are) it is extremely important to do loads of homework and tons of driving. We've been looking since the first and still haven't set foot in a house. One passed the drive by sniff test but fell out due to the flood report.

So have any other readers been out there looking at homes? What have you experienced? Is the market as strong as local real estate agents would have us believe? Let's hear your tales.

Seattle's PMI Risk Index Continues Climb

The latest PMI report (pdf) is out, and much to no one's surprise, Seattle's risk index has increased yet again.

Click to enlarge

Jumping 14 points from the fall to a total of 167, Seattle now boasts a PMI that is 2.6 times its Summer 2005 low of 64. Although Seattle's Risk Index is still a good margin below regions such as San Diego or Sacramento, it is certainly interesting to note that it has now increased in five of the last six PMI reports.

But don't you worry, Seattle is special and all that. Surely price growth will simply stabilize, and the Risk Index will head back down.

(PMI Mortgage Insurance Co., Winter 2007 Report (pdf), 01.2007)

Foreclosures On The Rise, Even In Seattle

Here's some interesting news. Apparently even double-digit appreciation isn't enough to keep foreclosures from rising around here, much like they are across the country:

Following a national trend, Washington state's mortgage foreclosures increased significantly last year, claiming 18,527 homes.

In the Seattle/Bellevue/Everett area, one in every 136 homeowners was displaced by foreclosure, as was one in every 75 Tacoma owners.

Still, the state and the Seattle area faired better than the nation as a whole, according to RealtyTrac, a California-based foreclosure-information provider. It released its 2006 annual report late last week.

Washington state foreclosures grew 25 percent last year compared with a year earlier — far below the national increase of 42 percent.

Phew! Thankfully we're safe because we're "far below the national increase."

However, since Ms. Rhodes mentioned that we are "following a national trend," and given the assumption that the Seattle housing market lags most of the nation by six months to a year, I wonder how much foreclosures increased nationally in 2005?

Let's see... Ah, here we go:

January 23, 2006 – RealtyTrac™ ... today released year-end data from its 2005 U.S. Foreclosure Market Report, which showed that 846,982 properties nationwide entered some stage of foreclosure in 2005, and a 25 percent increase in the number of new foreclosures from the first quarter to the fourth quarter.

Hmm, interesting.

(Elizabeth Rhodes, Seattle Times, 01.27.2007)

Kirkland-Based HouseValues Continues Slide

More bad news for local real estate lead-generation company HouseValues:

Amid a slumping real estate market, HouseValues Inc. is cutting 12 percent of its work force and closing its online lead generation business for mortgages.

Sixty employees are losing their jobs, all at the company's Kirkland headquarters.
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In a memo to employees, HouseValues Chief Executive Ian Morris said that the company has encountered a number of challenges because of a "steep decline in transaction volume in many local real estate markets."
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A HouseValues employee, who was not involved in the layoffs and asked not to be identified, said that "morale has been very low and a lot of people have been quitting from all departments." As of September, the company employed 590 people. But the employee count has drifted lower in recent months as people have left for other jobs.

Also, HouseValues stock is down another 46% since I last mentioned them nine months ago. Maybe it's just me, but now doesn't exactly seem like the best of times to be building a business centered around real estate sales.

(John Cook, Seattle P-I, 01.25.2007)

"This is a great time to buy a home."

Check out this absolutely delightful paid advertisement masquerading as a "guest editorial" in today's Seattle Times. It's penned by Mr. Samuel L. Anderson, the executive officer of the Master Builders Association of King and Snohomish Counties.

The media have been all abuzz over the past year about the softening in the housing market.
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At the same time, local analysts point out that even though home sales in the greater Puget Sound region have slowed, now is still a good time to buy a home, particularly in our area.

What does this slowdown really mean for consumers? Is it wise to sit back and wait for a home in the hopes that prices may drop? Most real-estate experts in our region say don't bet on it.

Oh really? Okay, well why is that exactly, Mr. Executive Builder Man?

One reason we have not experienced the steep decline seen in other markets is that while other parts of the country face an oversupply of housing, we do not.

So you're saying that supply is not growing faster than demand, so we're not headed for an oversupply? Interesting... very interesting.

Here in Washington state, the Growth Management Act (GMA) actually limits the supply of new housing entering the market by directing where new development can occur. As long as GMA is in place, we are very unlikely to find ourselves in a housing glut.

Growth management act, huh? You don't say.

Another key factor is that the area in and around Seattle has a healthy supply of jobs and a strong regional economy — factors most experts agree help keep prices from falling.

What a compelling argument.

Sitting on the fence waiting for the absolute best deal is a gamble that prevents consumers from taking advantage of buying a home, while prices are moderating.
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In today's housing market, the real risk is in waiting to buy a home.
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Unlike some cities where the real-estate market is in a slump, the Seattle area is healthy and analysts feel certain it will stay that way. As a result, the deep discounted prices some consumers have been hoping for simply won't be happening here.

For consumers sitting on the sidelines, the bottom line is simple. Homeownership is always attractive. Besides being a stepping-stone to a future of financial security, homeownership provides a sense of community and personal satisfaction. In fact, studies show that homeowners are more content with their lives, enjoying a stronger sense of belonging and increased activity in community groups.

The equation is simple: Since housing is always a smart investment and interest rates are still near 40-year lows, savvy consumers know this is a great time to buy a home.

Well dang, I'm convinced. Now is a great time to buy, and I'd better be quick about it or else I'll be priced out forever, doomed to be a miserable, broke, dissatisfied loner, renting from the man for the rest of my life.

(Samuel L. Anderson, Seattle Times, 01.24.2007)

Listing History

My thoughts on the issue while working hard.

A balanced perspective

The dissemination of data from the NWMLS to the public will be limited for a variety of reasons. Safety and protection of potentially personal information of each seller is paramount.

I am uncertain whether the issue of safety and protection of personal information should fall into the category of “transparency” for everyone to see. Some things should be kept out of the general public view. For example, theft has been an ongoing issue for the membership of the NWMLS—meaning that listings are a target for thieves, including new construction (appliances disappearing, furnishings and even mechanical items such as copper and other equipment).

Most sellers probably would not be pleased if the brokerage posted the time the house was on the market. The implications of a languishing listing means it is probably overpriced or there is some other problem such as poor location, poor condition or a combination of factors.

Market Time & Re-listing

There may be companies such as Zip Realty or others that will indicate if a home was re-listed or will post the total time on market. I have not researched this. The idea of disclosing this information, particularly in a slowing market or correcting market as one may define it, has the potential to have a negative affect on the value of a home if you are a seller. As a buyer, this information allows for a more level playing field. Buyers certainly had little to grasp on during the past couple years when the market was so hot. Realtors recommended removing as many contingencies as possible when making an offer or consumers would have little chance to buy the home. For many buyers, this exacerbated an already difficult buying experience. I heard about it first hand from many who sat across from me while going over their closing documents.

From a consumer’s perspective, many want the Realtor community to shape up. Many want full transparency, but the matter is complicated. The issue of agency and representation does not allow for certain facts to be transparent. Agency and representation does have merit.

Tim Ellis is correct. Much of the market time data and re-listing that goes on is manipulated. It is manipulated to assist the seller in having a sound market position. So, the agent representing the seller is doing their job. However, the interesting phenomenon to see is how this issue is being dealt with through the in-house NWMLS membership. The agents were tiring of this routine themselves. Today, we have the cumulative days on market (CDOM) being recently introduced to hopefully reduce the manipulation within the membership of the NWMLS.

As Ardell DellaLoggia and others suggested, there are some techniques that agents utilize to work around the days on market issue—also re-list the same property having the CDOM counter show zero. Sometimes there are good explanations for this. Sometimes it is clear market manipulation.

If I were buying, I would want to know how long a home has been on the market and how many times the home has been re-listed. In addition, I would want my agent to confirm the sales history (which is now publicized on various web sites) and underlying financing (King Co. shut this down via website, but Snohomish Co. is still available via web). In a swift moving market, much of the information gathered could save a buyer from making a costly decision. Buyers are able to discern if the home was recently flipped and whether the improvements merit the asking price.

The benefit of providing a true picture of time on market or re-list history is that it would put pressure on the sellers to market and price the home in an authentic competitive manner. For Realtors, I would think this would be helpful. That type of transparency may trigger phone calls from sellers indicating that they need to make a change—either make it worth what they are asking or drop the price to a level that is more reasonable. Rather than the Realtor initiating the delicate conversation of dropping the asking price, the seller is opening up the door for that conversation first, based upon what the market is dictating.

-S-Crow, your consumer driven Sentinel.

Hello Again, Condo Anecdote

This is at least worth a brief mention. Another unit has come up for sale in the condo complex in my neighborhood that was the subject of my first anecdotal post. Actually, it's not "another unit" but rather the same unit that sold just over a year ago.

In December 2005 Unit #6 was bought for $300,000. It is now on the market for $350,000, a 16.7% price increase. Given that the most recent county-wide data (pdf) shows condos up 21% from a year ago, perhaps the asking price is too low?

Since county-wide data is based on an ever-changing data set of new homes, remodeled homes, sub-divided lots, condo conversions, and so on, same-unit sales are the best way to gauge the actual appreciation in the market. It will be interesting to see how long it takes to sell this condo, and what the eventual sales price is.

If the MLS is an advertisement...

At the risk of beating a dead horse, I'd like to continue Friday's conversation about the re-listed house on Avondale.

Thanks to yet another reply by Ms. Reed as well as a series of replies from Ardell, it has finally gotten through my thick skull that "cancel and relist" is different from "let expire and relist." Ms. Reed is guilty only of the latter, which is technically not a violation of NWMLS rules.

Although I now understand the difference, it seems to me like a trivial distinction. Ardell claims that a seller's agent that uses a short listing agreement in order to be able to re-list an unsold property "takes the risk of being replaced as the seller's agent by having short contracts." However, it seems to me that once the benefits of re-listing (falsely appearing to be a "fresh" listing) are explained to the seller, they would be more than happy to keep the agent on board, knowing that this is an agent that is willing to pull whatever kind of tricks are necessary to sell their house.

In fact, Ardell had an awful lot to say on the matter. Here are a few quotes that I found most interesting:

The general public's perception [of the MLS], the one most focused on here...is really the least of our concerns.

I am sorry that no one wants to understand that the mls system is not meant for the public to use as a means for purchasing property without an agent.

The public's view [of the MLS] is an "advertisement" for the most part, and not a "sharing of the agent tool". ... It is just a small view of the big picture and one to give the public an "idea" of what is out there...not the whole story.

If the publicly-accessible portion of the MLS is an "advertisement," shouldn't it be held to truth in advertising standards? When a property appears as "new on market" despite having languished non-stop on the market for months upon months, how is that not a deceptive practice? To simply brush off such concerns by saying that the MLS is "not meant for the public" seems a bit cavalier to me.

Ms. Reed's tactic, which Ardell describes as both something that "we [agents] hate" and "an excellent job" appears to have paid off. As Ardell pointed out, the listing has gone to "subject to inspection," presumably meaning a twenty-five to thirty-five thousand dollar payday is in the beleaguered Ms. Reed's near future. When the transaction shows up in the public records, I'll post the last update on this house.

Update: Anecdote: Reloaded

Sarah Reed, the listing agent of the still-unsold $1.275 million-dollar home left a comment on my recent post about her listing. I feel it is only fair to reprint her comment here on the front page so that more people are able to read her defense.

So here it is, word for word.

Regarding my listing on Avondale-I wanted to set the record straight about my intentional relisting of the property. I try to always write a shorter listing agreement than the average agent as it better serves the client/seller. I do not "cancel and relist", or intend to deceive the consumer or other agents. I wanted the listing to expire contractually, and be relisted after the first of the year so that it would have an MLS # starting with 270. Largely because so many agents only search the new listings for their clients, overlooking perfectly fine homes with a bit of market time. Buyers always ask how long a property has been on the market, and I am always honest with my clients in every way. The Days On Market is clearly available to all agents, though the MLS does not print it to the consumer. My sellers always get a detailed explaination of my reasons for writing a shorter listing contract, and the benefits it gives them. Ultimately, the descision is theirs.

Certainly, I have had a few issues to overcome with this property, as the last agent blantantly overpriced it since he does not live in or do much business in the area. Also, he had it in the zip code for the city of Sammamish. Finally, the school district was wrong, and the photos were lack luster. The former agent really SHOULD have relisted the home with each of the massive price drops he was forced to do by his lack of accurate info and pricing, and did the sellers a huge disservice by not. He was likely afraid that they might cancel his service, which they were eager to do in the end. The home is very well constructed and finished nicely, and is finally appropriately priced. There was an appraisal done this summer for value only, and it came in at $1,550,000.

The current listing contract is written to expire the first week of March. I did this to appeal to the lazier agents out there that only search for "new listings". More paperwork for me, but I'm not lazy.

One more thing. I agree that there are alot of unprofessional agents out there harming the public. It would be valuable to the industry and the safety of the consumer if we had stricter regulations surrounding the obtaining of a real estate license in this state. If you ever get the chance to vote for stricter guidlines and laws for real estate professionals, PLEASE DO! We try to be a self-policing industry, but not everyone shares the high ethics that we all should subscribe to. Unfortunately, there are alot of people that get in the business to take advantage of the public.

I'm not really sure what point Ms. Reed is trying to make here. Again, I'm no real estate professional, but the rule seems pretty clear-cut to me: "You may not cancel and relist a property, even with a new listing agreement and new listing input sheets, unless there is a material change to the listing" (emphasis mine).

I don't understand how "I try to always write a shorter listing agreement than the average agent" excuses Ms. Reed from the rules.

Perhaps one of our readers from Rain City Guide can enlighten me?

P.S. (Please refrain from making personal attacks on Ms. Reed in the comments. Thank you.)