Seattle Bubble

And the understatement of the week goes to… Aubrey Cohen of the Seattle P-I, for his sub-headline gem: “As market slows, buyers may find they paid too much“.

Moss blankets the house’s roof. The siding is rotting off. And mold has spread through the interior.

But the home’s condition is “average,” according to an appraisal.

It’s one clear example of how many appraisers hide problems and affirm inflated prices willingly or under pressure from the mortgage brokers and bankers who give them business — calling into question whether home buyers are getting what they pay for.

“We’re pressured to hit the value every time, every single sale,” said appraiser Richard Hagar, who showed pictures of the mossy house while teaching a class on mortgage fraud earlier this month for 25 appraisers, mortgage brokers and real estate agents.

It’s a problem that is more common as buyers vie to outbid each other in recent go-go markets such as Seattle’s. And increasingly buyers may find in coming months that they paid too much, as slowing appreciation and rising mortgage interest rates force them to sell at a loss.

“I think we’ll see it come to a head here in the next year or so,” said Ralph Birkedahl, manager of the state’s appraisal program. “We may see more foreclosures than we’re seeing now.”

I don’t really understand why the appraisal process works the way it does. Wouldn’t it remove most of the opportunity for corruption like this if the lender was only allowed to work through a neutral third party to hire an appraiser? It could be “appraisal escrow.” The process I’m imagining would go something like this:

1. Buyer makes offer on home.
2. Buyer submits offer and house details to lender.
3. Lender sends house details to appraisal escrow.
   • Appraisal escrow agency is not permitted to access any information about pending offer or listing price, etc.
4. Appraisal escrow sends house details to appraiser.
5. House is appraised in an unbiased fashion, since the appraiser has no prior knowledge of listing price, offer details, or even who the lender is at all.
6. Appraisal is sent back to appraisal escrow, who then forwards it to the lender.

So where is the flaw in my logic? Other than the fact that this process would result in yet another layer of fees in the closing process, I don’t see why it wouldn’t work. Since lenders are the problem, a law implementing such a system could dictate that the appraisal escrow service be paid for solely by the lender, with fees not permitted to be (directly) passed on to the buyer. Obviously it isn’t perfect, but it seems like it would mostly eliminate the trouble of appraisers being pressured by the lenders to hit a certain dollar amount.

Of course, the entire conversation about appraisals completely ignores the fact that $470,000 for the “median” home in King County is insane to begin with… But hey, whatever.

(Aubrey Cohen, Seattle P-I, 07.31.2007)

More words of wisdom from the P-I’s Mark Trahant, who seems increasingly out of place in the stubborn, denial-prone local media.

I’ve been on vacation and had a chance to travel around the West. In many of the places I visited, concerns about a real estate crisis are growing. People are starting to fear what this means for them personally. The interesting thing about coming home is the narrative in Seattle remains “we’re different.”

I continue to be skeptical. I think the region’s housing market is playing a regional version of the “Prisoner’s Dilemma.”

…

The game is the same if it’s about money — or really anything else. If players cooperate, they maximize their potential. When they don’t cooperate — someone loses big time (and someone else wins).

The Seattle real estate version of the game is a bit more complicated, but it starts with a huge supply of housing inventory. Everyone trying to sell a house is competing with other people trying to sell houses.

Folks want to sell their house for as much as they can. So they keep it on the market, looking for that one buyer. (Although Seattle’s prices remain strong, the indicator to watch is the inventory of unsold houses and condos.)

As long as everyone plays together — and sticks roughly to the price they want (even if it means staying on the market forever), Seattle’s prices will continue to be fine.

But if I am selling a house — and see my neighbors sticking to their prices — I have an advantage by selling at a discount. If I am early enough, I can play the Prisoner’s Dilemma to my advantage.

On top of that, there is another twist. Some home sellers cannot afford to drop their price because that would result in negative equity. They’d have to come up with cash to close. (I did that once and is it ever painful.) That notion is an additional incentive for those who decide to get out early and discount; they know their competitors cannot match their price.

Mark is spot-on here (although he gets one detail of the Prisoner’s Dilemma incorrect—the best outcome is if neither confesses, not both), and does a good job of explaining why Seattle is in fact notspecial. Take the time to read the entire article.

(Mark Trahant, Seattle P-I, 07.27.2007)

Are prices in Seattle based on strong fundamentals or speculation? While we can certainly look at the data and draw conclusions for ourselves, there is little to no hard information out there about how many people are buying merely to turn a quick buck.

There are those that treat the lack of hard data regarding speculative buying as evidence that there is little to none of it occurring in Seattle. I highly doubt that is the case (for reasons discussed here numerous times before), but even if we assume that it were true up to this point, I’m inclined to think that speculation in Seattle is on the rise.

Exhibit A: Thursday’s Seattle P-I front-page story about a local flip:

The last time Al Johnson was inside the house at 4425 Cascadia Ave. S. in Columbia City, there were no walls.

“You’ve done a nice job,” Johnson told owner Thomas Loeser after touring the rehabilitated 1911 Craftsman house Monday.

Johnson, an associate broker with Windermere Real Estate, was the listing agent who sold the “extreme fixer” in February to Loeser and his brother, Derek — lawyers when they’re not fixing up houses.

In recent years, many developers have fixed up run-down houses and then put them right back on the market. The Loesers’ house offers an extreme example.

They paid $315,000 for the run-down abode Feb. 20 and put it back on the market for $549,000 last weekend. Thomas Loeser wouldn’t say how much they spent on renovations, but acknowledged that one agent who said back in February the house would take $150,000 in work wasn’t far off.

Johnson speculated just before the sale that the house, once fixed up, could fetch $150,000 over the sales price in the current market — at most.

So, $549,000?

“Let’s see what happens,” Johnson, who is not representing the house this time, said Monday.

Exhibit B: #1 on Forbes’ latest list, “Best Places to Flip a Home“? You guessed it… Seattle!

Flipping—in which an investor buys a home, makes quick improvements and resells at a higher price—”was a rage in the housing market surge,” says Anthony Sanders, a professor of real estate finance at Arizona State University. “But it is not as popular in this flat housing market.”

It’s easy to understand why. With prices falling quarter after quarter, the prospect of buying low and selling lower doesn’t sound nearly as appealing as buying low and selling high.

However, those looking to make a quick buck may do so in a number of markets ripe for a well-spotted flip.

Best among them is Seattle. It landed atop our list based on a number of measures.

I’m not a violent person by nature, but part of me would really like to gut-punch these reporters that are encouraging people to go out there and jump into Seattle’s already-stalling housing market to try to turn a quick buck. The days of easy money from flipping real estate in Seattle are over (if they were ever even here to begin with).

Exhibit C: Anyone seen or heard from “Seattle Eric” lately?

(Aubrey Cohen, Seattle P-I, 07.25.2007)
(Matt Woolsey, Forbes, 07.26.2007)

P.S. (For those not in the know, Seattle Eric was the proprietor of a blog titled Tales of a Seattle Real Estate Investor (formerly located at this address), where he chronicled his quest to flip houses in Seattle for fun and profit. He was also a contributor over at Rain City Guide for a short while. The last time anyone heard from him, he had gotten out of the flipping business to become a real estate agent, and was still having trouble unloading a few of his houses.)

Addendum: Be sure to check out a relatively new Seattle-area blog that focuses specifically on local flips: ReMuddle. I have added a link to them on the sidebar under Bubble Sites -> Regionals. Thanks to RedmondJP for pointing them out in the forum. Speaking of the forum, also be sure to check out the long-running thread on this very subject: Audacious Flips and Renovations.

As the nation’s home lending situation continues to deteriorate before our eyes, you can count on the local press to keep pushing the “we’re completely immune here” line. (Emphasis mine)

Nationwide, Americans are finding themselves unable to make their mortgage payments. Those folks share common traits: They’ve borrowed too much, they’ve lost their jobs or they hold an adjustable rate mortgage — and rates are soaring.

They also share this — for the most part, they don’t live in the Puget Sound region.

“It’s not happening in Seattle to any degree whatsoever,” local land-use economist Matthew Gardner said Wednesday. “We’re not really seeing any fallouts.”

As home prices in other cities have soared, people have relied on exotic loans to enter the housing market. But now, those decisions are looking suspect.

If anyone had any misconceptions about Mr. Gardner being anything other than a salesman, an overarching, absolute statement like that should clear up any doubt. Not happening to any degree whatsoever? Really?

Is that why foreclosures have quadrupled since March?

Chart complied by Deejayoh

Of course we’re not seeing people falling behind on mortgage payments to the same degree as elsewhere in the country, since so far, anyone that starts to have trouble can just sell the house for more than they paid. Those days are rapidly coming to an end though, even in Seattle. Remember this chart?

Click to enlarge

When that line makes its way down to zero, as it’s likely to do in the next 6-9 months (not certain, but likely), the Seattle area will see just as many mortgage problems as other parts of the country. As CKT pointed out in the forums, it’s coming up on us faster than you may think, with Pierce County already flirting with 0% YOY price changes.

Keep in mind that the exact same pie-in-the-sky, no problems here talk was common in other markets, right up until the problem became undeniable.

(P-I Staff & News Services, Seattle P-I, 07.25.2007)

Update: Matthew Gardner pays us a visit to defend himself in the comments:

I continue to find your site interesting for in part, but amusing for the greater part. Two points that I would make are that the statement concerning foreclosure rates was applicable to the city of Seattle and not the MSA. Even if we were discussing King and Snohomish counties, one might suggest that 1,400 or so foreclosures in a 596,000 unit market is actually statistically insignificant (0.2%) and pre-forclosures in decline!

While I am fairly satisfied with the present design of Seattle Bubble’s website, I readily admit that there are aspects that need work. For example, it would be nice if the format of the forums matched the format of the blog. Also, I think it would help the be more engaging if I could incorporate pictures and graphics a bit more often. Not in every post just for the sake of adding graphics, and not just chart after chart, but just a little color to supplement what can become large blocks of intimidating text.

Along those lines, I think something that Seattle Bubble needs is a logo. Unfortunately, my skills of an artist are somewhat lacking (to put it lightly). I’ve got some concepts that I think would make a cool logo, but very little ability to translate the images in my head into images on paper (or computer).

That’s where you, the readers of Seattle Bubble come in. I’d like to solicit your assistance in coming up with a great logo for Seattle Bubble. Here are the qualities I’m looking for:

• Succinct - Gets across the purpose of the site in a plain manner.
• Simple - Would look equally good in a website header, on a business card, or on a t-shirt.
• Clever - This ain’t no accounting firm letterhead.
• Polished - Looks sharp. Something you’d be proud to display.
• Original - Should be obvious, but taking some existing work and tweaking it is a no-go.

Now, I’m fully aware that logo design is something that big businesses pay hojillions of bucks for, and I’m probably coming across like some kind of street corner bum begging for money. Not surprisingly, I don’t really care how it comes across, I just thought it would be something fun we could discuss together and maybe come up with a great result. Obviously if we come up with a cool enough logo, I’d be more than happy to offer it on a t-shirt, and whoever designed the logo would get at least a free shirt out of the deal.

Even if (like me) you don’t have any real artistic skills, feel free to comment with your ideas of what could be put into a logo. I’ll kick things off with a few of my own ideas. One would have simple black sketches of various Seattle landmarks such as the Space Needle, the Smith Tower, and the Pike Place sign, inside a soap bubble that’s about to be popped by a needle. Another one is to have a simplistic but recognizable Seattle skyline inside of one of those snow-globe things.

P.S. (If you like, you can email your submissions to me at TimothyEllis ~at~ gmail ~dot~ com.)

Looks like the market for developers of multi-unit buildings in Tacoma is coming to a grinding halt, much like the area’s housing appreciation.

After seemingly countless delays, extensions, redesigns, reconfigurations and rethinkings, a proposed boutique hotel on downtown Tacoma’s Foss Waterway faces a deadline Monday.

The hotel’s Seattle developers must produce all the permits, designs and financial commitments to the Thea Foss Waterway Development Authority or face the prospect that after more than four years of trying, the hotel simply won’t fly.

The authority, which wants to sell the land on which the hotel project would be built, and Tacoma civic leaders pray the project is a go, but the hotel has been a tough deal since its conception.

The 50-month gestation period for the 100-room hotel that also includes 22 condo units illustrates how emerging competition, changing market conditions and national trends can make what seems like a sure thing into a difficult project.

In recent months, those same factors plus tighter financing, a deflating national housing market, a local oversupply of condominiums and new caution even among high-flying developers put the brakes on what was a kind of gold-rush development market in Tacoma.

“A couple of extra points on the interest rates, slower sales and more cautious bankers can make it a much harder task for developers,” said Bob Levin, whose job with the City of Tacoma is to encourage new development in the city.

The article goes on to list a handful of projects (mostly condos) that are described as “dead or dying,” “in an induced coma,” or undergoing an “extreme makeover.” I thought that the market for condos in the Seattle-Tacoma-Everett area was severely under-tapped. I thought that we learned from the mistakes of markets like those in Florida. With all the unsatiated demand out there, how can there possibly be an “oversupply” and “slower sales”?

When the housing slowdown hit Southern California, they said “that’s 1,000 miles away, it won’t happen here.” When the housing slowdown hit Northern California, they said “that’s still 750 miles away, we’re safe up here in Seattle.” When the housing slowdown hit Portland, they said “they’re 200 miles away, our economy will keep us safe.” When the housing slowdown hit Tacoma, they said “heh heh, well, that’s getting a little too close for comfort… but it’s still 30 miles away, and totally unrelated to Seattle. Seriously. I hope?”

(John Gillie, Tacoma News Tribune, 07.22.2007)