Rather than place a lengthy remark, I thought I’d place it as a post. Hope you don’t mind. I’m going to type as I think, so I get a free pass on typo’s.
Regarding the Steve Tytler’s Everett Herald piece:
Steve & fellow bubble believers,
In the spirit of your article, I don’t disagree with your observations. But, as one of the folks that you reference as working in the marketplace or real world, I believe that if the Puget Sound area and Snohomish Co. where our office is located, experiences a 10-20% drop in housing prices, many clients of ours in which we closed their purchase transactions are going to be in a world of hurt. Many people in general will be in a world of hurt. I think of all the folks with piggyback/100% transactions and the countless “serial refinance” people who closed their transactions all across the country. It’s staggering to be honest.
A 10-20% drop in housing prices will put people into a major pickle to say the least. A less severe drop in the single digits will reach out and touch many as well. My belief is that homeowners who are selling need to hear that the market has changed in a meaningful way.
The key element that is absent in the comments from those in real estate leadership positions locally is this:
Our local region and more broadly, the country as a whole, has NEVER experienced the rate, scale and level of housing price inflation as we have over the last three years or so. There is no benchmark. The previous local correction in Spring of 1990 forward does not compare. In my opinion, those who suggest that this current correction will mimic corrections in the past may be underestimating the euphoria that drove our market to unbelievable heights. The recent lending absurdity was not present in our last correction. There was no better seat in the house to experience the market than being in the escrow business.
Look, I’m not in favor of the market changing gears as it affects our small business too, but it tires me to no end in hearing and reading local and national professionals in leadership positions (Lawrence Yun among many others) continually spin the “rates are great, economy is doing well and job growth is good.” Tell that to the thousands who will lose their homes across the country, the scores of people who can’t refinance because lenders are gone or standards have tightened enough that refinacing is not an option. Tell that to the thousands of honest, ethical loan officers who have no jobs because of the bull crap lending and behavior that enabled this market frenzy and subsequent and inevitable correction.
The idea of the “normal market” garbage rhetoric is meaningless to markets across the country experiencing severe corrections. What happened mid-August was not a “normal” event in the financial markets. I humbly ask as a small business owner in the real estate business that the real estate community start building their credibility back in a positive manner by discussing the market for what it is. True, currently the local market is not crashing and the sky is not falling, but housing prices are softening. We only started to hear no-nonsense analysis after the evidence was so obvious that those in leadership positions were seen publicly as foolish or worse.
The sooner everyone calls the market as it is, the sooner our correction will be over. People will continue to buy and sell homes in any market, but they won’t be buying because “real estate always” goes up. They will buy because it’s a place to call home, establish roots in and become part of the fabric of a community.
When people sitting across the table from me signing their paperwork to buy a home talk about everything BUT how much money they will make in “perceived equity”, I’ll let you know we are back to a “normal” market. When loan officers sitting across the table from escrow staff in offices across the country stop telling their clients “we can just refinance you again after your pre-payment penalty expires” in a year or three, then I’ll tell you we are back to a “normal” market.
Tim Kane
Co-owner
Legacy Escrow Service, Inc.
Blog Handle, “S-Crow”
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33 responses so far ↓
1
rafael
// Oct 10, 2007 at 10:35 pm
Tim, you are so right in your writing. We have to put it in context of what has happened in a global sense. As the experts like Satyajit Das point out “There are good booms…and then there are bad booms. A good boom is like the one following WWII. Real money was invested. Production increased. Wages increased. Profits increased. At the end of the boom, people were wealthier than they were at the beginning of it.
“A bad boom is based on bad money,” Bonner continued. “When
the United States Treasury prints up an extra dollar bill,
the gesture lacks sincerity; like a duelist who first
smiles and shakes your hand, then walks back twenty paces
and pulls a trigger; you know he didn’t really mean it.
Instead of being built on real savings, the faux boom is
built on monetary inflation and credit. And when it comes
to an end, people are no better off. Their money is worth
less than it used to be. And the average fellow has dug
himself deeper into debt in order to enjoy the boom years.”
2
Katie of Germany
// Oct 10, 2007 at 11:34 pm
Very nicely put. We have rentals in Bremerton, but no way I’d buy anything until at least 2009.
Reading all the blogs I do about the real estate market, I’m still amazed that sellers still are asking what they do. Here’s one of my favorites in Bremerton….We watched the rehab back in 2005-2006 and were astonished at the price. Well, I guess what goes up, must come down.
http://redfin.com/stingray/do/printable-listing?listing-id=1033682
Keep up the great work!
3
Sniglet
// Oct 11, 2007 at 6:45 am
One additional point I would add to S-Crow’s excellent missive is that the explosive growth in exotic financing (e.g. option ARM, negative amortization, 100% interest, etc)which we have seen in the last decade is historically unprecedented. Thus, comparisons to previous Puget Sound real-estate downturns aren’t very helpful in predicting the outcome of the current retrenchment.
A far higher percentage of Puget Sound home-owners have a good cushion of equity to help them weather out a tough patch. This leaves our local market much more susceptible to any hiccups that might occur.
4
Pegasus
// Oct 11, 2007 at 7:46 am
Good article which mentions Tacoma shows why the Northwest is not immune:
The United States of Subprime
Data Show Bad Loans
Permeate the Nation;
Pain Could Last Years
By RICK BROOKS and CONSTANCE MITCHELL FORD
October 11, 2007; Page A1
As America’s mortgage markets began unraveling this year, economists seeking explanations pointed to “subprime” mortgages issued to low-income, minority and urban borrowers. But an analysis of more than 130 million home loans made over the past decade reveals that risky mortgages were made in nearly every corner of the nation, from small towns in the middle of nowhere to inner cities to affluent suburbs.
The analysis of loan data by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined $1.5 trillion in high-interest-rate loans. Most subprime loans, which are extended to borrowers with sketchy credit or stretched finances, fall into this basket.
About 10.3 million high-rate loans were made in the past three years, out of a total of 43.6 million mortgages. High-rate lending jumped by an even larger percentage in 68 metropolitan areas, from Lewiston, Maine, to Ocala, Fla., to Tacoma, Wash.
http://online.wsj.com/article/SB119205925519455321.html?mod=googlenews_wsj
5
S-Crow
// Oct 11, 2007 at 7:54 am
Sniglet,
Yes, “unprecedented.” That’s the word I wanted to convey. There may very well be homeowners with a good cushion, but it’s the overall household debt load that is the burden for so many. I’ve done a lot of research over the last couple years and there are a lot of people that owe more than what they paid for the home initially.
6
Brian
// Oct 11, 2007 at 7:58 am
And people wonder why the market is in the state it is currently in. When my alarm clock went off this morning the adverstisement on the radio was for Equity Condos. They were saying people could own today with 0% financing and a $5,000 buyer bonus. Great, more people “buying” condos that they can’t afford and will eventually lose to the bank.
7
Ira Sacharoff
// Oct 11, 2007 at 8:14 am
Great post, s-crow. I think what makes this bursting bubble so unprecedented is the various levels of fraud which kept the unsustainable bubble going for so long.
The fallout will include lots of unemployed loan officers real estate agents, appraisers, etc, many of them just trying to make an honest living. It wouldn’t shock me to see comments like “well, they chose to get involved in a crooked industry.”
I feel very bad for the people losing their homes, lured by either the hype/hysteria or by swindlers and charlatans. And also for the decent people in the industry who likewise are being victimized by the cheats.
It’s like the difference between a recession and a depression. If you’ve lost your job, it’s a depression. But if it’s your neighbor, it’s a recession..And if it’s some nameless loan officer you don’t know in an industry that’s lost respect , is it just a “correction”?
8
TheDexter
// Oct 11, 2007 at 8:14 am
Bottomline, buy the home you really want AND can afford. Or, sell your Seattle home and take a little less than the average 160k increase in two year equity. The rest is simply emotional, armchair analysis, tavern/bar fly quarterbacking. Will we ever learn? I doubt it.
9
Sniglet
// Oct 11, 2007 at 8:17 am
S-Crow,
Yes, debt levels are an important factor in determining the strength of the real-estate market. However, I think it is even more critical to look at equity levels. People with little equity in their homes have little incentive to tough things out if the market turns south — even if they have adequate income and/or savings to keep making payments.
Why would you keep making payments on a home that was worth substantially less than the mortgage? Particularly if you thought there was a good chance it would depreciate even more…
10
S-Crow
// Oct 11, 2007 at 8:43 am
Sniglet,
If borrowers do leave and a home is sold via short sale or foreclosure, then the neighborhood fallout speaks for itself. These properties with dizzying escalation of prices were being used against each other as “comps” justifying yet another list price when the market was full throttle. The same will go for home prices in the opposite direction. And therein lies a large problem. I’ve got a couple homes around my neck of the woods I’ve been watching carefully. They are struggling and if they sell for quite a bit less than asking, short sale or otherwise, in theory there goes the perceived value of my place. In some communities across the country, this is what really hacks off neighbors, especially if builders start to undercut even resales.
Some of the stuff I’m watching makes me believe that people are chasing the market and they don’t know what to do. Some are increasing the prices (logically flawed), some are taking off the market only to go back on as FSBO, some are dropping prices by pennies, some are dropping prices by the tens of thousands. The market is trying to find it’s legs, for better or for worse.
Gotta run!
11
wreckingbull
// Oct 11, 2007 at 9:22 am
What sniglet noted is exactly why any sort of federal or state bailout will be wee wee on a bonfire.
People will just walk. They will have no interest in restructuring their mortgage on a home which is now worth 30% less than what they paid and continuing to depreciate. Idiots like Senator Dodd are either too stupid or too detached from real life to understand this.
Tim…great post. I think you have won quite a few future customers from your posts on this blog.
12
rose-colored-coolaid
// Oct 11, 2007 at 10:27 am
Let’s not forget one very important and completely unpredictable aspect of this bubble. Sniglet brought up exotic mortgages, which we all know surged during the bubble. But what will happen to them? Will they all go away permanently? Go away for a while and then come back later? Will some go away but others remain?
I think this will be a very very significant aspect to where prices go. If next spring only fixed rate mortgages with at least 20% down still remain, things would get desperate indeed. If you can still get a 5% down fixed rate however, that would create a very different picture.
13
Brian
// Oct 11, 2007 at 10:56 am
RCC,
If you read my post above you’d see that exotic mortgages are still being hocked in today’s market. 100% financing deals with $5,000 buyer’s bonuses does not equal a return to reality.
14
TJ_98370
// Oct 11, 2007 at 11:10 am
Hey Katie,
I know exactly where that place is (605 Shore).
Did you notice that it apparently sold in Sept 06 for $830,280 and now it’s on the market for $700,000! Am I missing something here?
15
rose-colored-coolaid
// Oct 11, 2007 at 11:42 am
Brian,
I’m with you. I never said we’re back to reality, just that some tomorrow there will be a different reality than today. I think that lending reality will be significant and it’s a wildcard right now.
16
Beth
// Oct 11, 2007 at 12:26 pm
>A 10-20% drop in housing prices will put people into a major
>pickle to say the least. A less severe drop in the single digits will reach out and touch many as well.
I’m kind of curious what people who can afford their mortgage payments and who are happy with their houses will do if they go underwater. I could do a straw poll on my friends, but they generally consider the question nonsense, so it doesn’t yield much information. :-)
17
off topic
// Oct 11, 2007 at 1:22 pm
if I were happy and secure in my job, the family was happy here, good schools, etc and the house didn’t require any expensive repairs, I’d eat the loss.
just count on inflation to make things seem ok. so long as you don’t consider what else you could have done with the money, it will seem like buying was a good enough decision.
but if everyone in the family is ok and everything is going fine, giving the house to the bank (assuming they’ll take it without payment to cover the difference between loan value and house value) would be too disruptive to be worthwhile.
most people don’t live strictly according to economic benefit.
18
Ubersalad
// Oct 11, 2007 at 4:10 pm
Escrow agents are culprit of all things evil in Real Estate. We should sack that industry altogether…those floating fee structure base on purchase price…sucking the hard earn money from us future buyers…
See you in hell, escrow agents!
19
TJ_98370
// Oct 11, 2007 at 4:16 pm
Ubersalad,
You do know that you are dissing S Crow with your generalizations, right?
20
Ubersalad
// Oct 11, 2007 at 4:19 pm
yes, nothing but love for him.
21
Dandy Agent
// Oct 11, 2007 at 4:26 pm
Ubersalad: why so upset at escrow agents? Are they not just following the terms of an Agreement and coordinating the loan package, title, and other facets of a transaction into a closing package for the buyer? In this industry I have nothing but good thoughts about the work they do. You would think the few hundred dollars they charge pales in comparison to that of what us Realtors make. And closers handle legal documents.
22
Sniglet
// Oct 11, 2007 at 4:28 pm
off topic said,
You said that “if I were happy and secure in my job, the family was happy here, good schools, etc and the house didn’t require any expensive repairs, I’d eat the loss.” Is this really true if your house was worth less than the mortgage, and all indications were that prices were going to keep declining?
I really wonder how many people are going to bother to keep up their mortgage payments once their homes are deeply under-water (i.e. worth much less than the mortgage), particularly if there are similar residences available for rent at far cheaper rates.
23
Ubersalad
// Oct 11, 2007 at 4:31 pm
I was poking fun of things.
Here is a serious question though, why is escrow fee based on sliding scale when it’s purchase, but not when it’s refinance?
It’s the same work.
24
Dandy Agent
// Oct 11, 2007 at 4:44 pm
Ubersalad: Oh! I must have come late into the discussion.
Actually, a RE purchase/sale is more involved and more time consuming. If I am not mistaken there is also additional liabilty should something go amiss. Keep in mind when a property is transferred from one person to another there is a state excise tax. All in all….more reporting, disclosure, paperwork, liabilty, etc in a purchase/sale transaction.
Iam sure an escrow expert here can better explain.
25
Ubersalad
// Oct 11, 2007 at 4:53 pm
I wasn’t very clear on my initial question. I meant to compare a purchase deal of 300k to 1 million, which involves relatively the same amount of work, but the fees are base on the price of house.
This has nothing to do with the topic…but what the heck.
26
wreckingbull
// Oct 11, 2007 at 4:53 pm
I don’t think that anyone with a sane mortgage payment would walk from a house when it goes underwater.
It is those who are facing an increased, reset payment or who are struggling already with a suicidal mortgage who will.
As far as the idea that inflation will make everything OK on the long run for those who bought more house than they could afford, doesn’t that assumption mean that wages need to inflate too? I just don’t see that happening in today’s global economy. If anything, inflation in the areas of fuel, food, consumer goods, durable goods (which I agree is rampant) puts deflationary pressure on home prices when wages are stagnant. There is simply less left over for the mortgage payment. I know I go against the grain on this, but I yet to hear a reasonable argument otherwise.
27
Ira Sacharoff
// Oct 11, 2007 at 5:28 pm
Ubersalad,
I know of a few escrow companies that charge a flat fee, no matter what the purchase price…not sure if s-crow’s is one of them or not. I like to suggest to clients that they use a flat fee escrow company, it just seems fairer…and if it were up to me ( and it isn’t) I’d like to receive a flat fee for real estate agent services. I’m going to work as hard finding someone a 300,000 dollar house as a 2 million dollar house, and no doubt I’ll enjoy the company of the 330k house people more.
28
stephen
// Oct 11, 2007 at 9:54 pm
Wouldn’t cross my mind to not pay my mortgage. I pay my bills, always. As long as I can I I will. When did it become OK to not do so?
29
Sniglet
// Oct 11, 2007 at 11:42 pm
Wreckingbull,
I suppose it all depends on your definition of “sane” when people are deciding whether to walk away from a home that is under-water. If your monthly payment is considerably more than the cost of renting an equivalent home (in the same area) and there is a strong prospect that your home will lose even more value (e.g. because there notices of default are spiking in your area, indicating that foreclosure rates will be rising soon), then it would be INSANE to keep making payments.
Where is the logic in sitting in a home, continuing to make payments, as it drops to 50% or less of the value of the mortgage? There has got to be SOME point at which a person would decide they can’t take it anymore.
30
stephen
// Oct 12, 2007 at 7:45 am
Because you bought the house.
Don’t buy things you can’t afford and pay for the things that you do.
31
Ubersalad
// Oct 12, 2007 at 11:04 am
Stephen,
Would you continue to pay your mortgage if you find out your house depreciated 150k and your ARM just reset,and your monthly payment went up $300, and you may have only put down 50k for downpayment?
Keep paying and pray that house will appreciate back up?
32
stephen
// Oct 12, 2007 at 11:22 pm
Absolutely. A no brainer. I bought the house. Why would I pass off my loss? Why would you think otherwise?
33
Ubersalad
// Oct 13, 2007 at 12:03 am
you’re indeed a nobrain-er.
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