A thread on the Seattlebubble forum outlines how 33% of all Seattle area loans issued in 2006 were of and interest-only or negative amortization variety. This would seem to indicate that quite a few people are stretching themselves beyond what they can afford. If credit tightens what will happen if 80% of these buyers (i.e. people who have been relying on interest only and neg-am loans) vanish from the market?

scariest data ever: 33% of Seattle mortgages are IT/neg-am

LIVING THE AMERICAN NIGHTMARE
FORECLOSURES ON THE RISE: As the housing market softens, a combination of consumer naivete and aggressive lending means owners with subprime loans are increasingly getting sucked down a financial black hole

It points out that the Bay Area has only seen 2,200 foreclosures in the 2nd quarter – in a market that must be 4-5x as large as ours, this is not too material – but the author digs quite a bit deeper into the underlying trends rather than brushing them off as not mattering.

A household making $120k is around the top 1% of incomes. The median incomes we state are for household income — which already accounts for dual incomes. You do not get to take the median household income and double it. Every new person here makes that same mistake.

A household income of $120 should, according to traditional metric, be buying around a $360k house. Maybe $480k if they stretch. One out of a hundred families in Seattle (which includes 1 person families) can afford this.

Making about ~$60,000 a year each and renting.

I’m just a simple software developer and don’t understand these fancy real estate terms. What does “renting at the median income” mean?

The boeing jobs here related to the dreamliner are either $12.50 assembly or expensive engineering and IT jobs.

You can’t find parking at microsoft, and they drive a lot of business for local vendors as well.

If you are an individual in this market and you want to buy housing, in most cases you can only afford a condo. A couple renting at the median income can buy a house with some lifestyle adjustments. I don’t know the eastside that well anymore, except thinking that the prices are high.

Most financial bubbles are pretty easy to spot: An asset class climbs way beyond what old-fashioned valuation measures used to define as reasonable, market participants start acting like idiots, and pundits rationalize the madness with learned “new era” theories.

I would like to add that 81% of people living in Seattle WA make less than 75k. So 80% of the hard-working people of Seattle cannot afford anything but a 300 sf studio or a crackerbox in King County.

Doesn’t seem sustainable to me…

Yes! The business cycle has been defeated!

I also wanted to mention that over half (50.39%) of the homes in Seattle are rented, not owner-occupied (according to Sperlings). If it is not investors/speculators who own these homes, who is it then?

Third.

For KIng county, Boeing is less of a factor, since most of the jobs are in Snohomish County. The MEDIAN income in King Co. is around $68-70K based upon the last stats reported. So, using that as a base, NO ONE can afford anything but a 300+ sq. ft studio condo, or at BEST a dinky 1 BD conversion in King Co. That also makes BIG assumptions that they are not using ARM’s and have a big chunk of cash for the down payment.

If you qualify your assumptions by anectdotal evidence from your immedated circle, that can be worse than misleading, especially when you don’t take into account the median wage. I could also say that, based upon some folks and overheard and read conversations, the a few Microsoftes have made MULTIPLE speculative purchases that have skewed the stats….

Renting, even with the recent spike, STILL makes more sense to most who have watched the madness of crowds flock to the tulips for some years now.

*yawn*

Well as a Boeing drone getting paid ~100K/yr, I am priced out of this market… actually let me put it this way, I am priced out of this market using a traditional fixed product.

Sure I could buy a one bedroom condo in Ballard’s neverending condo construction (No Ma(n) Ballard?), but that’s not what I want, I’m have no fear of being priced out forever and seeing what I would have to do to ‘buy in’ to the ‘dream’ currenlty is a lifestyle hit I want no part of.

Instead, I’m taking my folks to Hawaii for the 50th, upgrading my ski/scuba gear and not worrying about that tab when I go out to eat… oh yeah, I’m also living comfortably in Seattle.

I’m sure I’m not alone.

You’ll find that there are an awful lot of supposedly “well paid employees” that frequent this blog, and presumably would not agree with your assertion that billions in revenue for two large area companies = ever-increasing home prices.

I’m a Microsoft employee and am priced out of this market. Don’t count on us to keep the prices up.

Seconding this.

The upside to this is that while the carnage will come faster, it might end sooner. My 2cts

The hourly updates are now also grabbing John L. Scott listings data to add to the logs in a new column. So far I haven’t yet had time to change what’s being displayed yet though, nor have I decided exactly what to display, so I’m sticking with displaying Windermere figures for now.

Empirical data leads me to believe that there are far fewer cash poor overextended individual real estate investors in Seattle as the mortgage to rent numbers don’t allow for the cash flow to keep extending and speculating. I went to Western, 90% of my friends from school live in Seattle and the rest live in southwest Washington. A couple of them living in Vancouver have purchased several properties each refinancing and renting along the way for mortgage payment cash flow. Of those in Seattle nobody has purchased anything other than a primary residence, you just can’t do it.

I’m inclined to agree, at least for the buyers who did not get into other debt/HELOC trouble during the last 5 years (HELOC defaults are a big nationwide problem, I’ve been reading), and who have a reasonable DTI. Of course, even a slight recession affecting the region could throw predictions way off.

I think you make a good point about “not making money”. Not making a mint (on paper) from a house is perfectly fine, and is in fact the normal case. However, I think there were quite a number of people who bought on exactly that assumption. When this all washes out, I think a protracted period of no-appreciation (e.g. loss in real terms) and the friction of loan/transaction/property tax/maintenance costs will erase any and all potential gains for most buyers.

If a place was bought for the standard (and valid) emotional reasons, as a shelter and a place to live over a period of years, then 0% to slightly negative appreciation shouldn’t matter much. Let’s hope these are all high-income professionals with little financial risk. However, for those who speculated, I think it will be shown that they would have done far, far better to invest in something more productive than real estate.

Now, I have to get back to watching my landlord clean the gutters and mow the lawn..

Fair enough.

I think people who bought five years ago may see no loss. People who bought six months ago may see a signficant loss (where significant might be 30k-200k depending on purchase price and location).

Joint Center for Housing Studies of Harvard University, Table W-9 Affordability Product Market Shares by State: 2006

Washington State: 30% Interest Only, 12% Payment Option.

There are maybe five counties in Washington that can support a housing bubble King, Snohomish, Pierce, Spokane, Skagit. I have doubts that Garfield County pop. 2,451 will bring much to the table.

I didn’t really mean you needed a years worth of data, rather that july 2006 should be compared to july 2007 to look for an increase, not march 2007 through july 2007.

There are too many factors in the recession in Japan to compare well to Seattle, and California and Florida residents took out a far greater percentage of subprime and assorted ARM mortgages over the last few years and their default rates more than double that of Seattle.

I think for people in Seattle with houses bought within the last five years using an ARM, the biggest potential risk is not making money or generating a small loss instead of the free down payment they were hoping for, but not foreclosure and bankruptcy.

Yes, we are not experiencing the forclosure crisis of the rest of the country.

Here is why this does not really say much:

1. A local forclosure crisis cannot really happen until appreciation stops. As Mike2 pointed out, I don’t understand how there were any forclosures in the last year. Will appreciation stop? Pierce County votes yes. I vote yes too, although we are not quite there yet.

2. Even if forclosures continue to rise here, I don’t see that putting real pressure on prices. I argued this point with long-lost Baby-Blue a long time ago. It is tight credit, (a result from the national forclosure crisis) that will put downward price pressure on Seattle real estate. We have not yet seen the effects of this, but will shortly.

Easy credit fueled the boom, tight credit will smother it.

I lived in Japan twenty years ago. I have a friend with a home there. He tells me he was quite excited when his property finally returned to his original purchase price – 16 years after he bought it. The trouble is, with inflation, he’s still not there, yet. Not by a long shot.

I lived in Japan in the mid 1980s and have a friend with a home he bought that year. He tells me he was quite excited when his property

Although they may just have more stale listings.

With the type of appreciation this area was experiencing and the banks willingness to lend to anyone it is amazing that foreclosures weren’t at 0 last year.

Aside from death or complete mental incapacity ANYONE could have sold or re-fi’d out of foreclosure in 2006.

The mortgage companies (Countrywide in particular) have made it no secret that they expected owners to use their equity to make interest payments. Predictably, the kink in this cunning plan was that house prices don’t always go up.

Having independent sources of information is useful. When you look at inventory on a real estate site you are really looking at a sample of the inventory that is based on the listings hosted by that agency. Plus, if you are only looking at a single source your data is subject to manipulation by the owner of that data source.

Windermere is one of the largest RE companies in the area. John L Scott is another.

John L Scott says that there are 11091 SHF for sale in King County.

http://johnlscott.com/PropertyList.aspx?GroupID=48687785

Something funny is going on at Windermere. I bet our new forum contributor ’sid’ works with Windermere and I also bet that Windermere shows KC-SFH dropping below 10k on Monday.

It’s easy to get all worked up when someone suggests that prices may not come down to a level at which one *already* decided was overpriced at the time. I get the impression that some people on this forum REQUIRE prices to go down hugely so they don’t feel so foolish that they didn’t buy back in 2002/2003.

Me? I’ll be fine if the prices stay at current levels or if they go down. I’d prefer the latter of course…

MisterBubble said,
on July 26th, 2007 at 12:58 pm

Oh….by the way? Those feisty, Realtor(tm) brand Real-Estate professionals sold another big chunk of homes between 4 and 5 AM this morning.

Either that, or someone has set up a computer to flush stale entries automatically at the same time each day.

(Wanna guess which one it is?)

I’ve been watching this with some interested. Not hourly, but just the trend of falling inventory since Monday.

I checked back against Tim’s spreadsheet and see that in more “normal” years (2002-04) inventory seemed to fall between June and July. In the bubbliest years (2005-06) it grew 6% each year. Given typical seasonality, it’s not outside of norms that Kingco SFH might fall. Still a long way to go to hit ~9500 – so I’m reasonably certain it won’t, but if it did I don’t thing it wouldn’t mean much. July 06 inventory was 6,900 units – so it will still be up 40-50% Y2Y no matter what.

(The assumption is that foreclosures are the result of some sort of underlying statistical process, and that our month-to-month observations of the number of foreclosures is a sample.)

I don’t think this is an argument about statistical significance, is it? We aren’t talking about samples. We know the entire population. So according to my freshman statistics (do they teach statistics to freshmen these days?) the number is significant. But the real question is one of materiality – is 0.3% a significant figure when it is applied to foreclosures as a percent of total mortgages. That’s a matter of opinion. I don’t think it is, based on comparisons to other markets. Others may have arguments as to why it is – which it would be nice to be seen put forth…

Unless the seasonal fluctuation in the number of foreclosures is very large in this part of the country, it is unlikely that a 400% change in foreclosures is insignificant.

Less than 5% of what, Garth?

C’mon, man…this is freshman statistics. You’re making some pretty bold statements…surely you know freshman statistics, right?

The live preview below the comment box should show you if it’s working or not.

Garth, I would agree that so far, the number of foreclosures in the Seattle area is fairly insignificant. However, what I took issue with in the post is Mr. Gardner’s absolute statement that mortgage problems are “not happening in Seattle to any degree whatsoever.” That’s a pretty bold statement, and one that just doesn’t match up with the facts.

It is true that for now, appreciation is preventing most people from ending up in foreclosure. However, the point I’m making is that appreciation is rapidly dwindling, and that won’t stay the case for long.

As far as your comment about sub-prime goes, I don’t think that the mortgage problems will be contained to sub-prime, and in fact it is already becoming evident that they are not, as Grivetti points out above.