Seattle Bubble

Warning: Mild sarcasm ahead

Look what happens when you let someone other than a seasoned real estate reporter write articles about the market. You get the frightening truth—Washington State and the Seattle area are not exempt from feeling the effects of the national lending meltdown. Go figure.

Ongoing turmoil in the subprime mortgage industry could wipe out many Washington-based mortgage brokers, and it will dramatically narrow the choices available to homeowners seeking loans or refinancing, mortgage and real estate experts said Thursday.

Also hurt could be home builders, home inspectors, title insurance companies and appraisers.

“It will have a broad impact over the next year,” said Adam Stein, president of the Washington Association of Mortgage Brokers.

Washington state had about 1,200 independent mortgage brokers as of last summer. Of those, “30 percent may not survive the year,” he said.

Yowch. Bad news for mortgage brokers. Actually, bad news for people looking for mortgages, too. Hope you have a down payment, and don’t need a mortgage larger than $417,000…

Loan seekers with solid credit ratings seeking agency loans shouldn’t be affected by the subprime brouhaha, [mortgage broker Jason] Bloom said.

Those with worse ratings, or those seeking Alt-A or subprime mortgages, will have a tougher time getting money. Even those seeking jumbo loans — 30-year fixed-rate mortgages with a balance of more than $417,000 — may find interest rates up and eligibility criteria tightened.

“Consumer choice in Washington right now is being dramatically restricted,” said Stein, head of the mortgage brokers’ group. “For alternatives for someone with less than perfect credit, the rate has gone through the roof — if they’re available at all.”

But of course, there’s still room for some optimism because, you know, the real estate salespeople say so.

Real estate giants John L. Scott and Windermere said they have seen no downturn in sales because of the subprime-mortgage crunch.

“We’re not turning buyers away in droves. A few loan programs have gone away.”

Possibly the most interesting part of the article was this little tidbit of information nestled near the end:

As of mid-June, 6 percent of Washington mortgages were subprime adjustable-rate loans, compared with 6.6 percent for the country as a whole, according to the Mortgage Bankers Association in Washington, D.C.

Ooooh. We’re 0.6 points less exposed to sub-prime than the rest of the nation. Go us!

(Dan Richman, Seattle P-I, 08.16.2007)

Dang, my inbox has been flooded with stories lately. Here’s a recap of some of the more interesting ones related to the local housing market. Click below to read tales of rising rents, flaming hot office markets, expensive and stale listings, virtual property tours, disappearing mortgage options, booming condos, and more!

[Read more →]

In the months since the unexplained disappearance of the Tales of a Seattle Real Estate Investor blog, and the complete radio silence of its author Seattle Eric, many have wondered what ever happened to the one-time Rain City Guide contributor. Since he was arguably Seattle’s most public real estate flipper, openly discussing the ups and downs of his wild ride on the equity spaceship, it was rather strange for him to just up and disappear like he did.

Well, it would seem that my most recent mention of him was finally enough to bring him out of the shadows. Eric emailed me shortly after that post, and gave me the rest of the story. Here it is in his own words, reprinted with permission (with identifying details removed and with silly doctored versions of his avatar added for amusing effect).

After a couple of successful flips in the first half of last year, I quit my job (partially to do real estate, but mostly because after nine years, I felt that I ran out of opportunities to grow) at [anonymous small tech company] where I joined as the 6th employee back in 1998. For the second half of last year, I dabbled in residential real estate sales, and put the last two flips on the market. Here’s what happened:

1) I realized that I’m not a sales person, and I really didn’t like the real estate agent culture. There was lots of back stabbing and lots of uneducated idiots looking for a quick buck. Hey, I admit that all of that save for being uneducated and a back stabber described me.

2) Our last two flips (if you remember, West Seattle 2 and Seaview) took six miserable months to sell, and we lost a combined $80K on them. Blah. Though we learned from those mistakes, we decided not to continue doing flips. Too much stress, and too much of a need to be detail oriented… I’m a big picture guy, not a details guy.

At a party in December, I met a former boss who’s a bigwig at [anonymous large tech company]. At this point, I was over real estate (I think I had retired my blog at this point), and gave her the rundown on it (see points 1 & 2 above). She thought my skills and experience would be very useful. I applied, and started there in January.

This year, we’ve been selling off our rental properties in the Puget Sound. We have two left on the market, and hope to be rid of them soon. I also dropped my real estate license, and no longer have access to the MLS.

There you have it. The long and short of it. I’ve been away long enough to take a very objective look at our experience. After buying and holding and/or selling twelve homes in the Puget Sound, we’ll have realized a net profit of around $100K. Would we have done this again? Probably not. Did this kill us on real estate investing? Nope, but I did come to realize that I don’t want the stress of managing the details. Currently, we are investing in syndicates that are buying up apartment complexes (mostly in Texas). This provides cash flow (average is 10%) and an estimated appreciation of 70% over two and five years (two different projects).

Also, we still have four houses in Tulsa, which continue to be a nightmare. The property managers turned out to be downright criminals - stealing our rent money and tenants deposits. I’m working with a new PM company, trying to get traction and tenants. I’ve had to make $1,250 mortgage payments three times with no rental income (that’s $1,250 for all four houses… real estate is cheap there). Once income is stabilized, I’ll have a healthy cash flow (16%). Still, hard to do from so far away.

The biggest unexpected boon by far has been the acquisition by [anonymous big tech company] of my old company, [anonymous small tech company]. The purchase price is in the billions. Since I had a ton of stock I held onto (much of it purchased pre-IPO with option prices < 1$), we finally have the financial security that we always wanted, and was one of the reasons we got involved in real estate in the first place.

Now that I’m spending my working time learning about credit card payment fraud and click fraud as part of my new role, I don’t find myself drawn to the local real estate world (i.e. blogs, news, etc.). However, having just returned from a week in Chelan, I am researching possible income producing real estate investments over there.

Regardless of position, I always enjoyed the viewpoints of those looking at the real estate world. The Tim and the bubble folks (non-pejorative) have made some keen observations and backed it with good data. On the flip side, Ardell’s opinions are backed by her lengthy experience and intuition.

Both sides are probably correct in chalking up my (financially) successful experience in real estate to luck. I like this definition of luck, that fits my experience well: Luck is probability taken personally. I was in the right place at the right time, and had the dollars to weather the lengthy holding periods before selling my last two flips. When I started flipping the market was still strong, and the probability of success followed. As the market dipped in areas, my results reflected that.

All in all, a great experience.

Sorry about that extended outage there. My web host (Dreamhost) had a system-wide outage. Ick. Anybody have any experience with a reliable web host? I’ve heard good things about AN Hosting. Any other recommendations? These outages are becoming way too common.

When July’s housing stats came out last week, the most confusing piece of data was that despite skyrocketing local inventory and tightening lending across the nation, the median price still jumped up 2.3% from June, bouncing back into double-digit YOY territory at a 10.6% increase since July 2006.

While the local press has their own theories—apparently based on whimsical fantasies and proud pink ponies—I’ve been doing some actual investigating into the more detailed reports from the NWMLS and have come up with a theory of my own.

The shortcomings of the median price as an indicator of actual price changes have been discussed here before, but typically in a hypothetical sense. For instance, we know that if low-end home buyers stop buying homes, while middle and high-end buyers keep buying, the median will increase. However, in the past we have not been able to observe this happening in King County via the data we have available to us. As you are about to see, I believe that is no longer the case.

The last time we investigated this topic we looked at actual price breakdowns. This data is not generally available to the public though, so I came up with a reasonable alternative: regional breakdowns within King County. This data is publicly available in the KCBreakout pdf files that are released by the NWMLS every month. Furthermore, it serves more or less the same purpose as price breakdowns, since the county can be split into three general regions:

• low end: South County (areas 100-130 & 300-360)
• mid range: Seattle / North County (areas 140, 380-390, & 700-800)
• high end: Eastside (areas 500-600)

The areas’ approximate June 2006 median price was:

• South County: $360,000
• Seattle / North County: $480,000
• Eastside: $640,000

So, if we were to see (for example) a drop in sales in South King County coupled with an increase in sales on the Eastside while the median value of homes sold in each of those areas remained unchanged, the net effect on the county-wide median would be an increase. Let’s see what has actually happened in the King County single-family house market since January of last year:

thin dashed line: 6 month rolling average | Click to enlarge

From January of last year through about January of this year, the Eastside region averaged around 30% of the total closed sales, Seattle / North County averaged roughly 33%, and South County come in at about 37%. However, look what started to happen in February. The Eastside held pretty steady, but the percentage of sales in Seattle vs. South County began to converge, and essentially swap. This was followed up last month with a relatively large jump in sales on the Eastside, from 29.8% of the county-wide total in June to 33.5% in July.

In fact, I believe that almost all of last month’s increase in the county-wide median can be attributed to this spike in sales on the Eastside. To get a better idea of the magnitude of this change, take a look at this graph, which shows the monthly deviation from the six-month rolling average for each area:

Click to enlarge

In July, the Eastside had a 15% larger portion of the total closed sales in the county than it had averaged over the January-June period, while the South County came in 11% lower. Seattle held mostly steady in July (just 1% lower), having had its large spike in April (up 11%), also primarily at the expense of sales in the South County.

What happens when the sales breakdown goes from 30-35-35 to 33-32-35 in one month, shifting sales from the least expensive area to the most expensive? Ta-da, you get a higher county-wide median.

So how much of the increase in King County’s SFH median can be explained by shifting sales patterns, rather than actual rising home prices? Before February of this year, I would have said “none.” But with Seattle’s share of the total homes sold in the county showing a steady increase, South County sales experiencing a steady decrease, and Eastside sales taking a sudden spike in July, I am now much more inclined to say “quite a bit.”

I don’t think this explains away all of the median price increase over the last few months, but I do think it accounts for a good portion of it, especially last month. In theory, if sales distributions are indeed skewing the median, we should see the YOY change in the Case-Shiller Index begin to diverge from the YOY change in the median, since the Case-Shiller method avoids this particular shortcoming. I’ll keep you posted when July Case-Shiller data is released.

Update: Guess what? My prediction about the July Case-Shiller data was dead-on. MoM change was just 0.2%, YoY was 6.86%. That’s quite a bit different from the median’s 10.6% YoY increase.

Sorry about the light posting since late last week.  I was out cavorting about the Peninsula over the weekend, and am in Moses Lake for work today (and therefore away from the Internet most of the day).

I’ll be working on a post during the ride back to Seattle, and hope to post it when I get back (between 5:00 and 6:00).  Stay tuned…

For now, consider this an open thread.  How about that stock market?