Those things are symptoms, not causes. When it comes to residential real estate, the first thing people must realize is that turnover is slow. The average dwelling turns over every 7 years. The second thing to know is that the market is inefficient. You’re not trading identical units, and friction is high due to sales commissions and the multi-step mechanics of trading dwellings (i.e., inspections, offers, financing, legal documents).

As a result, directions don’t change fast. It’s clear that the residential market is in a downturn and has been (depending on the city) for one to two years. That’s not going to change soon, no matter what.

Seattle has always been an economic laggard, owing to its heavier than average reliance on manufacturing. The real estate crash started later here, and it’s going to end later than it does in San Diego, which is typically a trend leader. As for how low it goes, I think all of the home price appreciation since about 1996 or 1997 is going to be erased. Not just here, but everywhere else.

The real issue with that is whether completely erasing the bubble (and then some) will trigger a depression. To me, that is the question of the hour. There are no quick fixes. Check my blog for more commentary.

a lower dollar means more jobs here.

more jobs here equals higher salaries – which the current Fed hates (that’s what they mean when they say “inflation” – wage inflation), so probably higher interest rates.

a Democratic Pres. and Congress will mean more investment in infrastructure, paid for with higher taxes on the upper classes. That will help long term growth and employment.

people who get out from under heavy home-borrrowing debt loads (via foreclosure or just selling) will have more disposable income to spend.

I was saying it will probably much worse than it looks because besides stupid high house prices and stupid high leverage and debt and stupid low savings, we have even more stupid debt, leverage, skirting capital requirements, fraudulent ratings, conflict of interest, etc going on in our banks, investment banks, and ratings agencies which has great potential to create a confidence crisis. This is not a good thing at a time when we are so dependent on foreigners to buy our debt, when our currency is on the brink, and when global disinflationary forces are reversing. Talk about the perfect storm for real estate. And did I mention political forces about to massively increase taxes in general including severly curtailing the tax exemption on real estate appreciation? Yikes.

I agree with you but the sad part is we are possibly underestimating how bad things will get for real estate because ultimately this is not just a real estate problem, it probably even much worse off the

the thing that makes housing different from most other markets is the fact that housing is far less liquid and there is far greater transaction time. a bubble is a bubble is a bubble. ALL bubbles are basically the same, and sell-side analysts (like these idiot brokers) that say it can’t happen here are drinking the same kool-aid as mayor schell was before the WTO when he claimed riots (that had happened other places where the WTO met) couldn’t happen here – “seattle is different”. no, it’s not.

ALL markets are collections of people. people trade, and invest based on herd mentality, and the concepts of greed, fear, panic, euphoria, apply to all bubbles.

the sentiment is already shifting. heavily. sellers are extremely uneasy but they are sitll in denial mode where if they just put their offer out there, somebody will lift it (sorry for my trader terminology). it doesn’t work that way.

by any metric, we are in a bubble. it WILL pop. it has to. they always do – tulips, stocks, real estate, etc.

the cascading effect is in some ways greater in real estate than in stocks or futures, because of the delay (it takes me 10 milliseconds to sell a futures contract, but days to weeks to months to sell a house).

the fed should have kept its powder dry. the fed cannot prevent the pop. it can only (at best) delay it.

people overleveraged and the carnage will be ugly (for them). it will be great for buyers. give it time.

I agree the Fed fund futures can and do turn on a dime – still, the trend is your friend (until it’s not). I also agree the Fed is data dependent and doesn’t yet know for sure what it will do, but the minutes showed it is reluctant to lower rates again unless forced to do so. I suspect they will stand pat for the rest of the year. I still think the odds of increases next year are greater than most people think. Yes, recessionary forces could prevent that. But the reversal of global disinflationary pressures is likely to overwhelm other factors. I think the most likely scenario is stagflation (recession in housing, retail sales, some manufacturing, but not all industries due to growing exports and healthcare etc) combined with inflation due to currency and global factors. Given that scenario, I think the Fed will at some point be forced to raise rates, as a falling dollar will create a vicious cycle. It will be highly unpopular. When faced with stagflation previously, indeed the fed has been forced to raise and Volker is considered a hero for having done so. There are times the Fed comes to the conclusion that a recession is the “least bad” way out of a bad situation. Who ever said we would never have a recession again? Who ever said the Fed could prevent every recession? It will be intereting to see how this turns out. Regardless, housing is screwed.

I guess I have subprime, too.

“I was trying to infer this would be because the Fed is likely to raise rates going forward to control inflation and support the dollar. It will take a while for the market consensus come to this conclusion. However, Fed fund futures have recently priced out additional rate cuts for the rest of this year so we’re already moving in that direction.”

I see what you’re saying – sorry for the correction. :)

Not sure I agree though. Partially because fed funds futures turn on a dime. Helicopter Ben just has to sneeze slightly differently and the market can change from 100% chance of a cut, to 0% chance. It’s happened so many times over the past few months.

Also, if you take the housing market popping to mean slower growth, whether you believe in outright recession or not, this does not seem to indicate an environment in which the fed could raise rates. They’d be way too scared of pushing the country into a recession.

IMO, I think they’ll take a bit of high inflation for a few years over a recession. Prices AND the labor markets are the two major things they’re supposed to be taking care of (although some include Wall Street in that equation). So in a slowing economy, which one do you take? A declining dollar (with associated good exports and trade deficit assistance) and some inflation, or a recession and job losses?

I don’t think the fed knows what it’s doing next, let alone the fed futures. They’ve stated recently that more “timely” measures will be used instead of older stats, due to the credit crunch. I think they’ve got an awesome poker face, and when they meet to make the decision, they just make it up as they go along. IMO, there is no “master plan”.

The implication is that if you didn’t have bad credit, were underwater or had a ridiculous DTI why would you take a high rate loan?

For most borrowers, it’s because the high rate loan is either all they can get or better than what they have (IE: tons of CC debt piling up at 20%)

No, I wasn’t confusing HELOC with ARMs , but I admit my wording could have been a bit clearer. What I said is that HELOC payments would be rising. I was trying to infer this would be because the Fed is likely to raise rates going forward to control inflation and support the dollar. It will take a while for the market consensus come to this conclusion. However, Fed fund futures have recently priced out addtional rate cuts for the rest of this year so we’re already moving in that direction. Sorry for the confusion.

ROFLMAO

yeah, i heard Las Vegas became a much nastier place to live right before their RE market started declining. same goes for Florida, and SoCal. the market fundamentals all went to crap first, then the market started to fall. the jobs disappeared, the mountains crumbled and the oceans dried up.

/sarcasm

oh, no, that’s right. none of that actually happened. the cities didn’t change. only the psychology did.

Jay, I think you’re confusing HELOC rates with ARM rates (and Fixed rate, for that matter). HELOC rates are almost always tied to the prime rate, just like a credit card. If the fed drops the funds rate, the prime rate drops, and the HELOC rate drops.

ARM rates POST reset are usually tied to the LIBOR or some other rate like a 10 year T-Bill, or something like that – not sure on all the possibilities. These are likely, as you say, to go up over time.

I don’t disagree with the majority of your points, just thought you might want to be 100% accurate while debunking misconceptions. :)

maybe that is the Fed’s strategy: boost consumer spending based on fear rather than confidence.

of course, it depends on people having actual money actually saved and liquid. something we don’t see much in this country.

Can we get a “I lived within my means” tax and disburse it to myself and others like me?

But you’re not a victim. Get victimized first and then we’ll talk.

I’ve never been much for mixing religion and politics, in my opinion the religious right are the religious wrong too.

Issues are a poor way to pick a Presidential candidate in my opinion too; its one bad issue can ruin our whole future and country [i.e., wage degradation, overpopulation, ignored environmental degradation and phony unions], rather than wedge issues that go away in a couple years or don’t matter, like gay marriage or abortion rights.

This subprime bankruptcy issue can turn into the biggest economy sinker since the Great Depression, it scares me and bailing it out with debt is a hopeless solution [we're broke, GWB and Congress already saddled us with a $10 Trillion federal debt].

Why throw any money to rich bankrupt mortgage companies and fraudulant home buyers who caused this mess? The Democrats want a Mortgage Czar expense, its like re-arranging the chairs on the Titanic.

See the Washington Times business news:

http://www.washingtontimes.com/article/20071004/BUSINESS/110040019

Washington Post and Washington Times are on opposite ends of the political spectrum on the subprime issue.

I read Old Ballard’s article above and yes, oh yes, Washington Post referenced bail ‘em out.

Who picks up the tabs? We all do, remember the savings and loan fiasco?

Now we’ll need an additional war tax for Iraq and an additional subprime fraud tax going to the rich investors too? Pathetic!!!

If this happens, welcome to the New Great Depression.

Subsription is free.

http://www.washingtonpost.com/wp-dyn/content/article/2007/09/28/AR2007092801331.html?sub=AR

It’s more than just numbers.

Misconceptions:

1) There aren’t that many subprime borrowers out there – this WSJ article shows that’s just not true.

2) Only people who bought in the last two years will be underwater and in trouble – also not true – you have to include all those people who bought earlier than that, even with substantial equity built up, who subsequently MEW’d to support their lifestyle. These folks will be underwater as their house price declines AND they will face increasing HELOC payments as interest rates rise going forward (falling dollar is inflationary – rates already up despite recent fed rate cuts).

3) The government will bail out borrowers and support prices – wishfull thinking. Only 1% of loan volume recently has been worked out. This is largely because people who commited fraud on their loan apps will not be eligable for workouts – they will eat the losses. How prevalent is loan app fraud? How about up to 70%:

Up to 70 Percent of Defaults Linked to Misrepresentation in Mortgage Applications

http://efinancedirectory.com/articles/Up_to_70_Percent_of_Defaults_Linked_to_Misrepresentation_in_Mortgage_Applications.html

Your views on the Yankee Lira need some modification, IMHO.

If the FED cuts, the dollar problems continue to tighten. They need to HIKE rates to save the dollar. It puts us instantly in a recession (which is good in the longer term), but it saves the US Peso.

Cutting is what got us to the present situation. Inflation is running double digits and the dollar is selling off against just about everything.

Falling US dollar is good for exports but crappy for imports. Since most of what we do is consume, that instantly puts us in an inflationary environment. I don’t want my currency debased so a bunch of Hosers can come to the US and buy trinkets; I want to go to their country and buy trinkets.

A weak dollar is nothing more than a paycut for American workers. It is graft to the corporate chieftans like a traditional paycut would be.

When oil, steel, rubber, food, and various finished goods gets real expensive in terms of the Yankee Lira, you may not think a weak currency is so sexy.

Yes, then Americans can use their dollars to buy all of those American made products sold in stores in the cars they drive on American oil. I am sure consumer spending, 70% of our GDP, will not be harmed in the slightest by a weak dollar since we import practically nothing at all. I am sure increased tourism will make up for the shortfall.

What are you going to do with a dollar?

If the dollar is low compared to other currencies, it is _good_ for the country’s exports. Canadians and Europeans can actually go on vacation to the United States now for much less.

The US is killing the EU…

CYCLE #2:
War spending increases, therefore…
US dollar dilution continues, therefore…
US businesses spend more on goods bought from overseas, therefore…
US business cut back on salaries and hiring, therefore…
few can afford to buy a home, therefore…
home equity drops…
REPEAT CYCLE #1.

Normally, the Federal Reserve could stop these endless death spirals by cutting the borrowing rate on the US dollar. However, since the rate is already very low, reducing it more will do very little to ignite the economy.

Since foreign investors have been buying Yen and Swiss Francs and investing that money into US dollars at a higher rate of return, now that the Fed is cutting rates, these investors are getting out of the US dollar in full force.

This weakens demand for the US dollar and the dollar drops in value even more. That’s cycle #3, but I won’t scare the hell out of you by adding another death spiral to the pile of death spirals.

From what I’m hearing, people with (future) resetting subprime ARMs are trying to figure out what to do. They’re not likely to “out” themselves around the coffee pot in the break room and ask for suggestions from co-workers due to the scarlett letter subprime has become.

I am also hearing that the phones at local mortgage broker shops are not ringing; these homeowners are not calling the broker who put them into that loan product. Instead, they’re trying to quietly do research into all their options, without the help of those who called themselves “professionals.”

Sniglet offers one suggestion: they could just decide to walk. There are many other options. For example, they could find an FHA-approved mortgage company and see about becoming approved for the new, (just in time for the 2008 election) FHASecure loan program, designed just for these people…..BUT they have to have been current on their mortgage up until the ARM reset.

All I’m hearing out there from my vantage point is that these folks are trying to figure out their options besides just a deed-in-lieu of foreclosure (also known as handing over the keys and walking away.)

County Comparison 2000-06.
– San Diego County, + 4.5%
– King county, + 5.1%.
City comparison 2000-06
– Seattle = -0.3% (that’s right, it shrunk… remember 2001-02, Boeing cut something like 30,000 jobs)
– San Diego = +3%.

If you need a fact checker, go here
And the loan numbers are the same, pressure or not.

There is one other small difference. San Diego has grown 2% since 2000 and the growth was already slowing down. King county grew by 5.2% from 2000 to 2006. Washington state grew by 8.5%. That will make a huge difference in how the price responds to an increase in inventory. San Diego had a population boom in the 90’s and the financing kept construction going after the boom ended. Since Seattle has had steadier growth, there might have been less pressure to push unaffordable loans.

I think the choice for sub-prime borrowers is pretty simple: if you home is worth substantially less than your mortgage you should just walk away and turn the keys back to the bank. Actually, this is likely the same choice any borrower who finds their home substantially under-water (i.e. worth less than the mortgage) will make. Of course, people would have to investigate their particular mortgage contract and state law to ensure that the lender can’t pursue other assets (like wages), but other than that, it’s a simple choice.

Frankly, I think this is EXACTLY the choice most sub-prime borrowers will be facing by the time their mortgages reset. Home prices are declining nation-wide, and just beginning to slide in the Puget Sound. For those sub-prime borrowers who still have some equity left, they can try and re-finance with a more palatable loan or sell before they are forced to default. But the choices are straight-forward, it all just depends on how much equity you have.

I want to know what people who are in that situation actually plan to do. Yes, I know it’s just anecdotal and not conclusive of anything…but it might offers some insights.

Your neighbors are bailing, neighborhood price is dumping…what options do you really have?