Quasi-governmental entities controlled the market. Now ~50% of the market is MBS. They’ll tighten controls on that, but you are never going to stuff the genie back in the bottle.”

I didn’t ignore your point, I simply meant to say that even if they don’t require 800 credit scores, it is reasonable to assume that there could be a need for higher scores than currently allowed. Further, I think that the actual credit score itself is only a small part of the credit tightening that will occur. Regardless of your credit I think it will be hard to get loans that don’t require large down-payments, allow no-docs, etc.

This not a “sub-prime” issue. I think there are plenty of prime loans where the borrowers are stretching themselves which simply won’t be allowed as the downturn progresses.

As far as putting the genie back in the bottle goes, I think we are already seeing the sub-prime genie go back in the bottle, and I don’t see why we won’t see even more tightening of the secondary mortgage market. We are just now discovering that many of the instruments used to manage the risk of mortgage securities might not work as advertised.

I strongly believe that while the secondary market won’t vanish, it’s appetite for any kind of risk with mortgages will go out the window when the fall-out settles from debacles at places like Bear Stearns.

As to the impact of subprime – it’s 20% of mortgages. In 2001, it was 7%. My math says, that’s 13% increase in buyers using subprime during the boom. A bit more than top of the head estimate of 10% – but a reasonably close estimate. Exhibit 15 in the pdf I sent you the link for yesterday…

In terms of # of buyers enabled – you also need to put that in context. Home ownership in 2000 was 67.4% of the population. Home ownership in 2005 was 68.9%. That increase of 1.5 points of ownership means that the pool expanded by 2.2%. So no, I don’t agree that the loosening of standards has increased the pool of buyers by more than 10%… it’s simply not mathematically possible.

Are lenders tightening standards? Absolutely. I don’t disagree. But in 1995, securitization of mortgages barely existed. Quasi-governmental entities controlled the market. Now ~50% of the market is MBS. They’ll tighten controls on that, but you are never going to stuff the genie back in the bottle.

Interesting… Are you saying that 90% of the current buyers have 20% (or more) down-payments? I find it hard to believe that loosened credit standards have only brought “10%” more buyers into the market, especially considering how no-doc loans were over 40% of the total in 2006.

Maybe if you look at only the credit scores that lenders are willing to work with the pool of buyers has increased only by 10%. However, if you consider all the loosening of standards (e.g. allowing lower down-payments, no documentation, qualifying only for “teaser” payments, etc), I think the pool of buyers has been increased far more than 10% from 1995.

It’s not that lenders are eager to push away customers. Rather, the demand in the secondary market for any kind of mortgage that doesn’t have a substantial down-payment, full documentation and a stellar credit score of the customer. Just ask New Century if they “wanted” to stop lending? They just didn’t have a choice when the secondary market stopped buying their paper.

Let’s put it another way. How many of the current buyers would have been able to get a mortgage with 1995 standards? Frankly, by the time we hit bottom I suspect the credit standards (e.g. downpayment requirements, credit score, documentation requirements, etc) will be HIGHER than we’ve seen for at least 20 years. Things always over-shoot both on the way up and on the way down.

You always hear mortgage co. and banks take a huge hit when they foreclose. So tightening of credit (serious old fashion type), like good credit score, 20% downpayment, and most important, 25% max. of your gross monthly income for housing, would do the trick. Most people should not be able to get a $200K-$300 loan, period!
And for whatever it’s worth, you can put me down on the “wishful fantasy” column (I admit it).

I think it is quite reasonable to expect that credit requirements will be as tight as this example suggests by the time we have hit bottom.

So…. 13% of people have credit scores over 800. The change in credit approvals over the last few years let about 10% more buyers into the market. What possible rationale would lenders have for limiting their buyer pool to just to top 13%? In order to exclude the bottom 10%? I am baffled as to how this is “reasonable”. Sounds more like a wishful fantasy.

What impact would these tougher credit standards have on the market? Over half the buyers would vanish overnight. In such an environment a 10% average price reduction would be nothing.

I think it is quite reasonable to expect that credit requirements will be as tight as this example suggests by the time we have hit bottom.

So judging by what I’m seeing here with 10-15-20+ % annual increases during the last few years, we’ll need to see some pretty serious below average years where RE drops OR we will have years of stagnant growth just to get back to the ‘mean’. Now when you want to talk about ‘long term’ being a pretty good indicator let’s look at really long term, t’ain’t so pretty for a while now is it? 10-15 years hardly a real trend makes!

From what I’ve heard it sounds as if these exotic loans are much more widely used today than ever. If so, I would think that tends to indicate that our downturn could be far more severe than anything in recent memory.

For example I believe Deejoyoh showed that in the early 1990’s the SF area declined 12% when Seattle Declined 6%…which would mean they are twice as volitile (Beta = 2.0). Over the past 5 years the SF (& other bubble mkts) increased by about twice as much as we have, thus our decline shouldnt be as dramatic as SD, LV, Miami…just common sense.

From the data we have the largest decline the Seattle area has had was in the early 1990’s (from what I have seen posted on this blog, unless someone can show otherwise I will use this #).

Please show me in writing where this true?

Verbal MSM allegations don’t count, I go to Boeing’s employee websites and see stagnation since 1999, same with Microsoft….ya got other leads????

Why would the percentage drop in past declines forecast future downturns? Past performance is no guarantee of future results, correct? I’ve read this same comment about past declines in the Seattle Times (I think). I just don’t get the point.

The job growth over the past several years in the greater Seattle region has been epic, as vacancy rates are currently in the mid to upper single digits (when they are typically in the mid teens, or twice as high as today). Thus, as the density of jobs increase, the DEMAND for housing increases in the same region, which would at least blunt the impact of an increased SUPPY in housing (to some degree, which has to be taken into account).

Rental rates for commercial office space has been increasing at double digit rates, thus as the market comes into equilibrium rents will gradually moderate. However, the SUPPY of office space will attract companies to set up shop in Downtown Seattle (& Bellevue). As more people work downtown the traffic during commutes will increase dramatically and people will be willing to pay a premium (at least to some degree) to live closer to work. Which is why I chose to buy a condo at the edge of Downtown Seattle (98101) and a 5 to 10 minute walk to the core Downtown Office Buildings (could hit the WA State Convention Center with a golf ball from our rooftop deck).

Do I believe the RE market may decline in the Seattle Region, yes it has a good possibility of happening across the board…however Im in Deejoyoh’s camp that prices would not likely decline by more than 10%. My prediction is ~5% to 10% decline at worst, as Seattle’s worst decline was back in ~1991ish at 6%. The population in the region has grown in the past few years and “people have to live somewhere”, whether that be an apt, condo, townhouse, or SFR…it drives up rents and increases DEMAND.

As shown on this and prior posts the Seattle area had much less appreciation over the past 7 years and would most likely have less of a decline than those overheated regions as well.

We do need to keep in mind that some townhomes (and trailers) do get listed (and sneak in) as SFH. Even when you filter them out

I don’t try to filter them out. MLS always treats TH’s as SFH, so it’s apples to apples to leave them in.

I’ve noticed that the numbers usually drop back by 50-100 on Mondays – presumably as sales from the weekend get processed? But of course, June ends on a Saturday…

Today’s market is driven by hotair. In 1978 I worked at Boeing and they brought in guestworkers at 70% pay; but these foreign workers gladly bought in to inflated Seattle markets with 75% of their net pay. They didn’t mind living on beans and rice with a junk car to get to work.

Real Americans have more lifestyle expectations than foreign guest workers and at least got two incomes to buy the house; one for the mortgage payment and the other for food, cars and insurances.

Will our upper middle class two income households buy Seattle real estate? They already have, they might be in the foreclosure moarket later when the subprimes collapse in this year and coming years it should get much worse.

I’d add the average income in Seattle is 1.2 workers per household ($45K); good luck realitors getting these subprimes in a Seattle house, your best bet is Bill Gates can get you more foreign workers H-1Bs that you might get squeezed into the market anyway and live like welfare people after buying a house. Real Americans have more BRAINS.

First, that is not true. Prices gained 10% YOY, so a 10% decline would actually make them lower than they were this time last year.

Quick example. 10% gain on $100 -> $100 * 110% = $110. 10% decline on $110 -> $110 * 90% = $99

Second, as I posted above is that it’s easy to ignore inflation. Continuing the simple example, let a $100 appreciate 10% over one year, then depreciate 10% the next year, and assume 3% inflation a year (this doesn’t even have to be about housing).

A) ($100 * 1.1) * .9 = $99 ($$$ value in Y2)
B) 103% * 103% = 106% (inflation since Y0)
C) $100 * 106% = $106 (inflation adjusted Y0)
D) $106 – $99 = $7 (net loss in Y2 dollars)

Results:
From Y0 (year zero) to Y2, the dollar value of investment dropped $1. The real value dropped $7 Y2 dollars (approximately 6.6 Y0 dollars). In short, a loss of 3.5% this coming year would return us to June 2006 affordability (assuming mortgage rates don’t change). At least, that’s my off the cuff calculation.

Add to this, the fact that credit has now tightened up and investors are fleeing.

This is, of course, a gut analysis, so I don’t intend to start or win any arguments. I do think it will take almost as long to unwind as it did to wind up. I doubt we will see the bottom before 2010.

can you delete the first two? – they all have the same link. Thx

I don’t know what you are referring to as a “tranche” of mortgages. Do you mean issued in a single year? I’d love to see any source that shows default rates at 20%.

20% foreclosure rates on subprime loans issued in 2006-2007 is a low estimate over the life of the loans.

Some tranches are already seeing 20% default rates.

This has nothing to do with housing in particular, just really god awful poor underwriting standards on the part of the banks. If you look at the deterioration in credit rating bewteen loans securitized in early 06 vs early 07, the difference is dramatic.

Comparing a historical average default rate to loans issued in the past 18 months is going to give a severe underestimate of the probability of default.

Oh, I didn’t forget SF. But the impact there was very different. it was hit about 12% in that period.

Well if the SF area was only down 12%, I would hate to see what 30% looked like.

Foreclosure Rate Hits Historic High
Those borrowers entered foreclosure at a rate of 2.43 percent, up from 2 percent the previous quarter. The percentages seem small, but they are far above norms, particularly in a healthy economy. The concern is that the mortgage industry’s troubles could damage the economy if they are not contained.

For more credit-worthy, prime borrowers, foreclosures rose slightly, to 0.25 percent, in the first quarter from 0.24 percent in the previous one.

Delinquency rates don’t include the number of homes that are already in foreclosure. The delinquency rate can stay at 15% indefinitely, meanwhile the total number of subprime defaults can reach close to 100%!

Given the continued deterioration of the subprime market over the past 3 weeks with the ABX indicies hitting new lows below the February crash, there is no sign that we’ve reached a bottom.

Does anyone want to weigh in on these pressures in addition to the pressures of foreclosures and excess building meantioned above?

I’m just following my intuition since actual numbers can be used to prove just about anything. I apologize that it doesn’t add to the ‘facts’ of the discussion. Just call it one man’s ‘gut’ feeling….sometimes found to be just a cramp after all.

I thought I was being bearish just to make my point, by making my estimates for defaults 4 to 5 times higher than any historical norm.

I guess there is just no getting bearish enough for you.

“And sub-prime was used, off the top of my head – maybe 8% of the time in Seattle, and Alt-A about 20% of the time. So if I am incredibly bearish, and I decide that 20% of the Sub-Primes and 10% of the Alt-A’s will default – then I have (8% x 20%) =1.6% of the 15% in trouble because of sub-prime, and (20% x 10%) = 2% of the 15% in trouble with alt-A…”

“The point is, you need to look at the numbers. You are making baseless assertions that don’t even make sense.”

Excuse me? Who is making baseless assertions? I am asserting that your numbers are flawed. I said that I “could argue that well more than 50% of Alt-A and subprime loans will default.” It would be no different than what you are doing, conjecturing. Again, we’re in uncharted territory here. I don’t think that historical default rates are even applicable to the current situation. The biggest problem is the debt as it pertains to the borrowers income. People used creative financing (speculators included) because they could not qualify for the houses, otherwise. Why? Because they couldn’t afford them! If I told you that 10 people earning $35k dollars per year, each bought a $350k home, how many of them would you guess would default? It could be all of them. And, your numbers don’t even take into account prime borrowers who will default. You know, the DINK’s who decided to go on a speculative homebuying spree, and will lose it all including their primary residence. I just think your numbers are way too optimistic. Perhaps you should start your own blog. You could call it the “Seattle’s More Special Than Any Other Area So We Will Hold Onto Most Of Our Bubble Gains When Our Souffle Gently Settles Blog”.

so –
To your point 1 – the number of homes isn’t really that critical. The point is that given the structure of financing, the % at risk is pretty small, no matter how many homes we have. So add 2nd homes, fine. New construction – 1% per year. Doesn’t change the picture w/r/t financing.

Point 2 – The numbers are for all owner occupied, not just SFH. So condos are included

Re source: Actually, I used the AMR number from 2005 and grossed it up for 2 years at 1% – but as I said above, the percentage is more important. The only thing I used the base for is to calculate turnover. Annual Sales/total properties. Everything you point out is tweaks at the edges which are still going to fall into the 6-8% per year range. The more important question is what vintages of mortgages do you think are at risk. I used two years. Feel free to disagree. The numbers don’t get that much bigger.

The page I pointed to had 2005 data as well based on AMR. It’s not going to be off by that much, and even so – it’s the percentage that matters,

Simply pulling numbers out of a dark smelly area and passing them off as accurate statistical data is faulty. I could argue that well more than 50% of Alt-A and subprime loans will default. As there is no historical precedent by which to compare, only time will tell how many of these loans will go bad

Now THERES a statement that defines irony! Perhaps it would be good for you to read this, the definititve report on the subprime problem… In it, you’ll see delinquencies on sub-prime maxing out historically at about 13-14%. How are you going to get to 50% default on these, again? when only about 1/3 of deliquencies proceed to default? And what about Alt-A, which has delinquencies at about a third the rate of sub-prime?

Check any one of my numbers and tell me where I am off. 50% foreclosure rate? Puleeeaze. Your estimate is off by an order of magnitude.

You might want to take a look at MEW’s over the past several years, since you seem to completely disregard them

Actually, I didn’t disregard them. I put them in the category of “yadda yadda”, which is where I am filing the rest of your post as well. “MEW” is not a type of mortgage. It’s a use of funds from a mortgage. The mortgages we are referring to, are included in my numbers above – Seattle is around 8% sub-prime, and 20% Alt-A. (Check the CS report, charts 11 and 16. You’ll note Washington doesn’t even show up as a problem market) So any “MEW” that comes out of those mortgages could indeed be toxic. So what’s your estimate of % of residences that are levered up with refis? Add it to the number. It’s not that hard. Given that 1/3 of homes are owned outright, and I’ve already applied the factor to another 15% – that leaves about 50% of the homes to play with. So lets just say it’s half of them – well that’s 25% x 28% with bad mortgages – or 7% of homes that MIGHT have a problem – and then apply your foreclosure factor to that. Using my bearish numbers above, I get (8% x 25% x 20% FC) = 0.4% for subprime and (20% x 25% x 10%) = 0.5% for Alt-A.

Now I think that is huge overstatement of the impact of MEW, but I’ll humor you. That’s another 4500 home owners – if you believe the bulk of Seattle is levering up like drunken sailors.

The point is, you need to look at the numbers. You are making baseless assertions that don’t even make sense.

You need to calm down. One regression analysis doesn’t make you infallible.

1) Owner-occupied homes that change hands are certainly part of the market, but there’s also “investment” purchases and second homes (which are not necessarily owner-occupied). Furthermore, new construction is not “owner-occupied”, and unlikely to be reflected in your analysis.

2) You’re too attached to the notion of sub-dividing the housing market. If condos and townhomes crater, SFH sales will be affected. Many people want to buy SFH, but will likely settle for a brand new condo if the price is right. Thus, it isn’t a purely intellectual exercise to observe that condos and townhomes are overbuilt in Seattle — these are going to push down prices for all property.

Another obvious problem: most of the census data you’ve cited is from 2000. I don’t know how this affects things, but it doesn’t give me confidence in your conclusions.

“And sub-prime was used, off the top of my head – maybe 8% of the time in Seattle, and Alt-A about 20% of the time. So if I am incredibly bearish, and I decide that 20% of the Sub-Primes and 10% of the Alt-A’s will default – then I have (8% x 20%) =1.6% of the 15% in trouble because of sub-prime, and (20% x 10%) = 2% of the 15% in trouble with alt-A…”

Simply pulling numbers out of a dark smelly area and passing them off as accurate statistical data is faulty. I could argue that well more than 50% of Alt-A and subprime loans will default. As there is no historical precedent by which to compare, only time will tell how many of these loans will go bad.

You might want to take a look at MEW’s over the past several years, since you seem to completely disregard them. I’ve included a link below. It’s important to note that a sizeable number of foreclosures (nationwide) are not recent purchases, but rather, people ATM’ing their houses to death.

http://tinyurl.com/24z78r

Edit the last line: these will add to inventory, adding downward pressure on prices, as well.

I was trying to make two separate points:

1) I think your estimate of future defaults is flawed, because you’re too focused on owner-occupied homes that change hands.

2) Future defaults aren’t the only relevant data. Skyrocketing inventory is going to play a big role in downward price pressure, too.

Assuming that I believe these facts, you might want to tell me why I should assume that owner-occupied housing units represent the relevant market. Moreover, you might want to tell me why the small percentage of these that change hands in a single year are the interesting segment of that market.

In case you’ve forgotten, there are currently many hundreds of “luxury” housing units that are sitting vacant, or waiting to be completed. These will add to inventory as well.

so those are so far off of the average

Oops. That was sposta be “not so far off the average”

Ah, I do miss being able to preview my posts

deejayoh makes some good points, but leaves out the fact the housing downturn was not limited to the LA area. The SF Bay area was hard hit too.

Oh, I didn’t forget SF. But the impact there was very different. it was hit about 12% in that period. Seatle was off about 6%. The ten city composite was off 8%, so those are so far off of the average.

Here’s something to ponder on how “grossly” I am underestimating the number of people who are in over their heads…

In my best Dwight Schrute ;^)

Fact: There are roughly 500,000 owner occupied housing units in King County. Fact: Roughly 6-8% of these change hands every year.

So our “exposure” is those owners who have taken bad loans, and who have bought recently enough that they have no equity. How many is this? maybe the last 2 years of purchases? I’m gonna say yes, so about 15%.

And sub-prime was used, off the top of my head – maybe 8% of the time in Seattle, and Alt-A about 20% of the time. So if I am incredibly bearish, and I decide that 20% of the Sub-Primes and 10% of the Alt-A’s will default – then I have (8% x 20%) =1.6% of the 15% in trouble because of sub-prime, and (20% x 10%) = 2% of the 15% in trouble with alt-A

Whew. Lets add this up… (1.6%+ 2.0%) = 3.6% x 15% = 0.54% of 500,000, or about (drum roll…….) 2,700 homes in King County that are going to tube the market. A quarter of our current inventory, spread over 2 years of resets.

big whoopedy sh!t.

That’s back of the envelope, but IMHO, you have to make some pretty whacky assumptions to make the numbers work for you. Even if they ALL go bad you are talking about 5%. Even if it is for 4 years instead of two, you are talking about 10%. Those are, in my mind, extreme assumptions. Yeah there are refis and helocs, and yadda yadda – but there are also multiple sales of the same homes in that two years that work the other way.

Interested to hear how others do the math.

Me? Kool-Aid? HAH!

Bubbles deflate, it’s basic market theory. Unless you have something to keep the price up (plenty of willing buyers) prices will go back to norm, and usually overshoot. Not every homeowner bought at the peak, and those that didn’t are very willing to adjust to the current market norm because it is still higher than what they paid. Add in all those who put nothing down and have no assets invested in “their” house. How long will they stick it out as the values drop?

Anyone suggesting a 40% decline to get back to Y2K affordability, needs to include inflation in their math. Assume the bubble plays out by the end of 2010 (ten years of craziness). That’s ten years of inflation since 2000 prices. If you assume 3% inflation over those ten years(likely low), then everything costs 34% more than it did in 2000…including housing.

So here’s some off the cuff math. A $100 house would be $134 adjusted for inflation. I seem to recall our bubble had something like 10%, 15%, 14%, and 10%…about a 58% bubble related gain. $134/$158 is about a 16% loss.

So back to what deejayoh said, a 10% loss is actually quite likely. I would actually pick a range…8%-13%, but that’s just me.

I was sooooo hated at the multitude of open houses that I went to…hahahahahaha!

Kool-aid? Really?

I am reminded of a story about a pot and a kettle…

I disagree with your hyperbole. A 40-50% drop in home prices in the PNW would put many homes back to their 2000 prices. This isn’t much of a stretch given the current level of unaffordability. I think you underestimate how unhealthy the current market is, and how dire the situation has become. It is quite obvious that the hyperinflation in prices was due to speculation enabled by loose lending. How can you have a speculative bubble with nary a correction? To say that prices might correct a paltry 10%, in essence, retaining most of the gains after such a gargantuan run-up, is to not believe there is a speculative bubble to begin with. Look at what’s happening with Bear Stearns right now. This baby’s just warming up. When the real wealth destruction takes hold, who’s going to be buying those Ipod’s and XBOX’s and PC’s and on and on and on? Part of why I believe there will be massive corrections nationwide has a lot to do with the economic repercussions of a financial system run amok. While I haven’t called for a 50% correction in the Seattle area, it wouldn’t surprise me in the least.

“The “you gotta live somewhere” mantra does come in to play here. Unlike a stock, when the investment goes south on a house – it still provides shelter. People faced with ponying $50 or $100k up to the bank for the right to move generally will decide it’s worthwhile to stay put for just a bit longer. So it’s not like you’ll see panicked selling like you do in more liquid markets. A little at first, as you clean out the infestors – but then the velocity of sales goes to nothing, and the few people who have to sell either do it because they have plenty of equity or they have no choice.”

The few people? You are grossly underestimating the number of people who are in over their heads. The majority of the homes purchased at ridiculous prices over the course of the past several years were intended to be short term, and financially lucrative. People can’t afford these prices, plain and simple. Short term, yes, long term, no way in hell. This isn’t conjecture. People don’t use ARM’s and ALT-A products because they like them. They had to mask the fact that they couldn’t afford the beast to begin with.

You are coming off as a bull in bears clothing. Stay away from those Kool Aid parties.