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One Third of Seattle Homebuyers Have Unaffordable Mortgages

Aubrey Cohen reports on a recently-released report out of Harvard. The report isn’t your usual rah-rah, go housing type of fluff, and actually shows Washington State as being among the markets with a larger percentage of risky loans. I don’t imagine it’s a coincidence that there’s not even a passing mention of the report in the Seattle Times…

The U.S. housing market will struggle with too much supply and falling prices for a while yet, but its biggest problem is that homes are too expensive for too many families, according to a report released Monday.

“It is too early to determine when the housing slump will end,” the 2007 State of the Nation’s Housing report from the Harvard University Joint Center for Housing Studies says. “House prices are only beginning to soften, loans most at risk are just starting to hit their reset dates, and credit standards have tightened.”

Home prices in and around Seattle are holding up, but the area faces some of the same challenges as other parts of the country, according to the report.

What?!? I thought Seattle was special! Completely and totally insulated from any ills that affect the rest of the country. Say it ain’t so.

The report calls overbuilding and job losses “far greater threats” to house prices than rapid appreciation. Local experts pinned Seattle’s continued increases in house prices on its strong job growth and growth management’s constraints on supply.

“As much as the builders tend to dislike the Growth Management Act, it has probably prevented them from their own excesses in the most recent cycle,” said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

Overbuilding, you say? Good thing we don’t have any of that here. And I’ll agree that job losses would tend to exhert downward pressure on prices, but just as prices can continue to rise in spite of job losses, they can also drop in the face of “strong job growth.”

I also haven’t yet seen an explanation as to why the Seattle area housing market is only just now experiencing a tightening due to Growth Management, when it was in place 10 years before the current run-up. The only thing I’ve seen that comes even close to an explanation is a weak argument that Growth Management policies are “constantly changing.” If that’s the reason, then what specific change led to the sudden supposed limit on supply?

And, although Seattle’s prices have increased rapidly in the past few years, those increases did not meet the Harvard center’s definition for “severe overheating” — at least a 15-percent increase per year for three consecutive years.

Let’s take a look at King County’s SFH price increases for the last few years:

2003-2004: ~10%
2004-2005: ~15%
2005-2006: ~14%
2006-2007: ~10% (so far)

Phew! Looks like we just barely dodged the bullet on that one.

According to the center, 7.8 percent of Seattle-area mortgages were for investors last year — good for 125th place among the 332 areas in the report.

That’s relatively low, but still well above the 50th percentile. I wonder how they define “investors.” Curious that this little detail was left out of the article. Anyone have the time to dig up that information?

The report also broke out state percentages of loans where buyers only pay interest or can even pay less than their interest charge, meaning their balance increases. Washington had a 30 percent rate of interest-only loans — sixth among states and higher than the national rate of 22 percent — and a 12 percent rate for payment-option loans, fifth among states and more than the U.S. rate of 11 percent.

In the Seattle area, 33.3 percent of homeowners and 47 percent of renters spend more than 30 percent of their pretax income on housing. That’s 13th among the nation’s largest 50 metro areas for burdened homeowners and 38th for renters.

Yow! Even with 30% of loans being interest-only (state-wide, I’ll bet it’s higher for King County), a full third of home-buyers (in the Seattle area) are still spending more than 30% of their income on their home loans. That sounds like a stellar, healthy market to me, yes sir.

Wait, no. That sounds like a market ripe for correction.

(Aubrey Cohen, Seattle P-I, 06.11.2007)


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

27 comments:

  1. 1
    Lake Hills Renter says:

    But as long as “local experts” say we’re ok, then it doesn’t matter what happens nationally, right??

    Homes cited as too costly for too many

    Local experts pinned Seattle’s continued increases in house prices on its strong job growth and growth management’s constraints on supply.

  2. 2
    tlw says:

    From the article that LHR posted above:
    According to the center, 7.8 percent of Seattle-area mortgages were for investors last year — good for 125th place among the 332 areas in the report.
    The report also broke out state percentages of loans where buyers only pay interest or can even pay less than their interest charge, meaning their balance increases. Washington had a 30 percent rate of interest-only loans — sixth among states and higher than the national rate of 22 percent — and a 12 percent rate for payment-option loans, fifth among states and more than the U.S. rate of 11 percent.

    (emphasis is mine)

  3. 3
    Confusa says:

    So breaking down that PI article, roughly 50% of housing is being sold to investors and people that can’t afford it….nice.

  4. 4
    housing-bull-dozer says:

    Read the article again. It’s actually a thinly veiled plea to legislatures that they remove the Growth Management Act. The summary at the end says it all.

  5. 5
    Onlooker says:

    I thought the Joint Center on Housing Studies was a bunch of industry shills?

  6. 6
    The Tim says:

    FYI, I moved the above comments from the previous post to this one after posting it since they were more relevant here. That’s one of the many cool things I can do now that we’re on WordPress. :^)

  7. 7
    TJ_98370 says:

    …but its biggest problem is that homes are too expensive for too many families, according to a report released Monday….

    These guys have a firm grasp of the obvious.

  8. 8
    Alan says:

    I thought we came to the conclusion months ago that the GMA did not create a shortage of housing, but instead prevented builders from creating a large surplus. It is called “growth management” and not “growth termination” for a reason.

    I suspect the percent of investors varies greatly by area. I classify anyone who owns more than one property as an investor.

  9. 9
    Eleua says:

    The Ten Year Bond is up 65bp in one month. That is huge.

    Today it popped up to 5.25%, which was the highest since Clinton was in office. In after hours trading, we have hit 5.3%

    This is a meltdown. Mortgages tend to track the 10 year bond, so things are going to be ugly for anyone trying to sell or anyone with an adjustable mortgage.

    KABOOM!

    Where is Ballard Bob when you need him?

  10. 10
    Ballard Bob says:

    We will defeat the infidels on the steps of their townhomes! Do not listen to their lies!

  11. 11
    Ballard Bob says:

    You foolish prognositicators and your technical indicators. Downtown condos are hot! hot! hot!

  12. 12
    Pegasus says:

    It’s over guys. Seattle area homes are going DOWN. I have been tracking listings on Craigs List for months. Every couple of days I search for “reduced” on the listings. That number that appears is up about 30 percent from three months ago. The local press will have to start reporting this trend within several months because it has become so prevalent and the lies will have to stop. Once the public sees this they will add to the decline and increase the amount of homes on the market.

  13. 13
    Eleua says:

    I posted this in the forums.

    How much does a 65bp rise in interest rates chop off a $600K house?

    $40K, or 7%.

    How would you like to lose $40K in one month? That’s ONE MONTH!! We still are not done with the interest rate revival. What happens if we hit 6%? At this rate, we will be there by the mid-July.

    What happens if we get to 8%?

    You get the idea.

    I’d like to get Ballard Bob’s take on this.

  14. 14
    Matthew says:

    Regarding interest rates:

    It’s going to take a little while before people realize that rates are going up. Most people don’t follow this stuff and rely on the “good faith estimate” provided by their lender when they have that initial conversation about their mortgage options.

    I know a mortgage broker, and her company recently went from using a flat 6% estimate to a flat 6.5% estimate. The difference between that and the actual 30 year rate is tiny right now so the estimate will stand and it’s still “low”.

    HOWEVER, once that estimate goes to the magic 7%, which it likely will if the real rate heads up to 6.8-6.9, then the public will take notice.

  15. 15
    biliruben says:

    There is historically a very strong correlation between 10 year yields and 30 year fixed interest rates, with a spread of 1.5 to 2.

    So we are essentially almost certainly going to at least 7 in the near future.

  16. 16
    CCG says:

    What’s hilarious is how they keep referring to the bubble in the past tense. As you listen to the boo hoo stories from the rest of the country (and the world), keep in mind that the ONLY thing that has affected the bubble so far is sheer oversupply. Rising mortgage rates and tightening lending standards have barely begun to bite. The party is just getting started.

  17. 17
    Eleua says:

    I had to post this.

    From some Kitsap RE agent named Jacobson:

    “The doom and gloom really doesn’t apply in the Pacific Northwest,” Jacobson said, adding that it’s particularly true in Kitsap County, because of the stable military presence and the housing prices compared with the market closer to Seattle. “We’re still a great value over here.”

    WOW! What a version of “we are special.” I can understand if Ballard Bob is saying that about King County, as it is where job creation is happening. I would still disagree with him, but at least there is some ephemeral tether to reality.

    Over here in the hinterlands, you have to be on serious drugs to say something like that.

  18. 18
    Joel says:

    Nice post over at paper-money about the bias of the Harvard report. No matter what the facts are, real estate is always poised to go UP!

  19. 19
    Shawn says:

    Re is going to go up? Okay then, the question is “is it going to go up at a rate that makes it worth less over time than other investments?”

  20. 20
    Shawn says:

    Florida 2005 equals Seattle 2007
    While there is a fine line between boom and bubble, we still believe that most of the rise in Florida’s housing values can be explained by basic economic and demographic forces. Quite simply, prices are rising rapidly throughout most parts of Florida because the demand for single-family homes is vastly outpacing supply.

  21. 21
    Shawn says:

    Florida 2005 equals Seattle 2007
    Florida has also enjoyed exceptionally strong job growth throughout recent years. With job and income growth handily outpacing the rest of the country, Florida has tended to pull job seekers in from other states.

  22. 22
    Shawn says:

    Florida 2005 equals Seattle 2007
    Supply Has Been Constrained By Growth Management Initiatives.

    For all the talk about speculators, there is at least one surprising statistic that tends to downplay some concerns. The latest data from LoanPerformance.com show that just 14.3 percent of the mortgage loans made in Dade County were interest-only loans. By contrast, the national average in 2004 was 22.9 percent.

  23. 23
    Shawn says:

    Florida 2005 equals Seattle 2007
    Overall sales will remain strong through the end of the decade.
    Higher home prices will not snuff out Florida’s housing boom.

  24. 24
  25. 25
  26. 26
    Dade says:

    One in five U.S. homes entering the foreclosure process last month were located in Florida. It’s not the sort of ranking that makes you want to shout, “We’re No. 1!”

  27. 27
    Ravenor says:

    The Growth Management Act did not mean that fewer houses could be built; its primary effect is that houses have to be built on smaller lots.

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