Golly, this housing slump sure isn’t much fun (for never-ending appreciation-believers and real estate agents), is it? But hey, at least it’s almost over, right? Wait, what’s that you say? It’s not going to get better soon? Pfft. You’re just some doom-and-gloom blogger, why should we listen to you?
Except, that outlook isn’t coming from the bloggers. It’s coming from our very own Washington Mutual:
Almost the only good news for WaMu shareholders Wednesday was that the company’s bad news wasn’t quite as bad as outlined earlier this month.
More borrowers are falling behind on their payments, foreclosures are rising, home prices are down in much of the country, and the mortgage markets that seized up earlier this summer still are closed to nearly all but the safest loans.
And none of it, WaMu executives say, is likely to get better any time soon.
“This is perhaps the most challenging cycle for housing that we’ve seen in many decades,” WaMu Chief Executive Kerry Killinger said in an interview. He and other WaMu executives said they don’t see any improvement in the near term.
You know what though? If you want to turn a blind eye to reality and believe that the turning of the seasons will wave a magic wand over the housing market and make it all better come spring, you go ahead and believe that. Just try not to read the news or spend any time researching actual facts.
Because it’s easier to believe in what you wish to be true when you don’t bother looking up the facts.
But hey everybody, get out there and buy a home, because there’s never been a better time to buy!
(Drew DeSilver, Seattle Times, 10.18.2007)
I’m just going to pile on here. Notice the nose-dive at the tail of that chart? A lot of that is probably interest rates, and not prices. So guess what’s likely to happen given our high inflation rate? Interest rates will go up, and that dive in affordability will likely continue.
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I am not sure how useful affordability calculations are in predicting the direction of the real-estate market. I am sure there is some correlation (i.e. that affordability gets worse in a bubble), but I suspect there could be lots of other factors that could impact affordability rather than over-priced homes.
I think the WaMu executives were hitting the nail on the head as to what is causing the real-estate downturn: the tightening of credit. The credit contraction is (and will continue to be) the single biggest factor in breaking the back of the Puget Sound real-estate market.
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can we stop calling it a subprime mortgage problem now?
e*trade says:
“A lot of people think that subprime loans is where the problems center,” he said. “But that’s not our problem. Our issue is that the value of high-quality loans is underperforming.”
http://www.tiny.cc/notjustsubprime
seriously, though. calling it subprime implies that our problems are caused by a few buyers with poor credit. in fact, it was caused by an entire industry and mentality
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do we have historical housing affordability data showing previous bubbles and economic cycles?
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You know what though? If you want to turn a blind eye to reality and believe that the turning of the seasons will wave a magic wand over the housing market and make it all better come spring, you go ahead and believe that. Just try not to read the news or spend any time researching actual facts….
Tim. Stop being such a negative Nellie. You do realize that slowing sales are a result of your comments, right?
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Affordability data could always be calculated, even if we don’t have historical affordability information already available. However, I don’t think it will be that useful in showing how our current real-estate bubble compares to the past. What would be far more insightful is to look at how the prevalence of various exotic mortgage types (e.g. intereso only, 100% finance, negative amortization, no-doc) compare at various market tops and bottoms. I suspect that the percent change in the use of these loan types is of a far greater than any deltas in affordability.
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And Jim Cramer weighs in-
Cramer on WaMu
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The irrelevance of these affordability indexes is that “real world” affordability at any given time is all about the 1-year ARM rate or whatever other short term payment reducing product is out there.
In reality, the affordability for a low payment seeking buyer improved all through 2005, 2006 and 2007 untill hitting a massive wall as subprime,100+% financing and low teaser rate loans became difficult to qualify for.
Just looking at the affordability index, one could conclude “sure, things are a little tighter than they were 1 year ago” but that hardly explains why so many people have decided not to buy homes this fall.
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oh, i assumed that affordability calcs would have taken predominant loan types into account.
the disappearance of exotic loans and re-emergence of cash down-payments means houses are drastically less affordable, given the sames prices and interest rates.
i mean, six months ago, i could “buy” a $400k house with no money down and at a 2% intro rate for $Xs/month
now, lets say i need at least $40k down and a 6.5% fixed rate for $2X.
wouldn’t that suggest that affordability has dropped by much more than 50%?
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Housing Affordability Index(Composite)- Measures the degree to which a typical family can afford the monthly mortgage payments on a typical home.
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Formula: (MEDINC/QINC)*100
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MEDINC – Median Family Income
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QINC – Qualifying Income
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Median Family Income – Derived from income data from the Census Bureau Decennial Survey.
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Qualifying Income – Income necessary to qualify for a loan for the median priced home.
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WASHINGTON MUTUAL APPROVED A CALIFORNIA $615K HOME LOAN TO $9/HR WORKER
Let’s not Alienate ourselves from Washington Mutual.
But is this bank a complete moron?
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THE URL PROOF TO MY BLOG ABOVE
http://www.diggersrealm.com/mt/archives/002512.html
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For the Housing Affordability Index, the interest rate used in the Qualifying Income calculation is the 30-year conventional mortgage rate (FRM) as reported by the Federal Reserve Bank of St. Louis.
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“I think the WaMu executives were hitting the nail on the head as to what is causing the real-estate downturn: the tightening of credit.”
Seeing as the rapid appreciation was kicked off due to a loosening of credit standards, thus getting buyers into market that should have never been, that would make sense.
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so, a Weighted Housing Affordability Index might be more helpful
a WHAI being defined as HAI / Loan Factor
Loan Factor = fraction of new mortgages that are traditional 30 yr fixed + cash down
if only traditional loans exist, the HAI = WHAI. if 10% of loans are traditional, WHAI = 10*HAI
something like this would be illuminating
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It is correct that the affordability value graphed above is calculated using income, home price, and 30-year fixed rates.
However, I’m liking the idea of creating another graph, let’s call it “Imaginary Affordability.” I just need to figure out exactly how all the risky loans worked, and determine the ratio between income and loan size that was possible.
The difficult thing then is to figure out the timeline of when such loans came into existence, and when they disappeared.
Anybody got any ideas on where I could go to find such information?
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It is correct that the affordability value graphed above is calculated using income, home price, and 30-year fixed rates.
… and a 20% down payment is also assumed according to various sources.
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Right. That too.
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The Tim asked “Anybody got any ideas on where I could go to find such information?”
You’d probably need access to a huge database of mortgages similar to the one Wall Street Journal used for their spiffy maps. Doubt you’d be able to get ahold of that without some major cash outlay.
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Let’s not forget that 20 percent down on an overpriced property to begin with is not chump change. Interest rate levels don’t really make that part any better. In fact, it tends to increasingly obscure the traditional “affordability” measure the more the price goes up.
The term “affordability” is also begining to be used as a cover for “I can’t get something for nothing,” and make quick, easy, money on appreciating liquid equity that I cash out ATM on. That was/is the mentailty of the reptilian brain…
Not saying that is the case here, but I sense that in the tone elsewhere.
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Tim,
I think the best way to show the change in affordibility in Seattle would be to look at possible payments on a median value home under various scenarios. Irvine Renter did a similar analysis about a month ago (30 year fixed 20% down, 10% down, Interest only and Negative Amt) See the link below:
http://www.irvinehousingblog.com/wp-content/uploads/2007/05/amortization-table.jpg
Using this kind of analysis you can derive the price of an afforable home relative to the median income at any point in time under a given loan type. It would still not account for the change in loan mix, but would at least illustrate the change in affordability to a large segment of potential buyers.
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Contrary to some opinions on this thread, I believe the Housing Affordability Index is a useful tool as a standard gage to measure housing prices relative to income / interest rates. You can take one look at the graph and see that real estate was approximately twice as “affordable” in 1993 as it is today, relative to household income and taking mortgage interest rates into account.
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Now that creative financing is becoming less common, with the result that conventional financing will become more the norm, you can point to the Housing Affordability Index of Seattle and see with great graphic clarity why housing prices are definitely going to decrease in the near future. Without creative financing, people will no longer be able to purchase real estate they cannot really afford, thusly putting a downward pressure on prices.
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What are you talking about? This is great for the best real estate agents. A declining market just means it’s harder than ever to sell, which means you need a good agent to sell into that bad market, which means they can charge very high rates. The marginal and poor real estate agents probably do okay too. After all, it’s the sellers that will become desperate to unload now. The only market bad for real estate agents is one that’s stable.
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Now that creative financing is becoming less common
Don’t kid yourself. We haven’t seen any evidence yet that current lending standards are well represented by modeling 20% down 30 year fixed purchases.
If you use 20% down, you’d also need to take into account how difficult it is for the average buyer to cobble together $100K in after tax income. On a median income this could take 3-5 years minimum. Most never could.
I think it was a California based organization that late in the bubble changed their affordability index from the 20% 30yr fixed to a 80/15/5 where the primary was a 5/1 arm and a 15% piggyback w/ 5% down because the number was so low as to be meaningless.
It’s not an easy thing to model, especially when you take into account that people were artificially decreasing their effective monthly payment by using equity to pay interest.
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Slightly offtopic…I have to vent….
I’m sitting in a coffeehouse, and next to me is a pair of Real Estate “Professionals”, sinking their teeth into a young, naive couple.
Right now, Mr. Too-Tan-Professional is laying out a line of UTTER BULLchocolate to these poor people, explaining how the “number of sub-prime loans in the state of Washington is the lowest in the nation…” and Mrs. Mary-Kay-Professional is nodding sincerely, and stating that she would be “shocked” (SHOCKED!) if prices were to drop in Seattle….
…and oh dear god….now Mrs. Mary-Kay is talking about how this lucky couple will be able to get stainless steel appliances and bamboo floors, because of the “surprising” number of available units….
Ugh. Real estate agents are worse than used-car salesmen. I’m going to try to slip this couple the seattlebubble.com URL….
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Mike2
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Indications are that lending standards are moving away from the creative toward the conventional …….
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From 8 August 2007 article:
WaMu Tightens Rules
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….Washington Mutual told brokers Friday that it will no longer accept mortgages unaccompanied by traditional documentation of income or assets if the loan exceeds 65 percent of the home’s value and the borrower’s credit score is below 680, said Sara Gaugl, a spokeswoman for the Seattle-based bank…..
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In the above situation, the borrower would have to come up with a 35% down, if I am doing the math right.
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Tim,
In terms of the mortgage data you’re looking for, you ought to consider pricing out a subscription to one of the products offered by Firstam CoreLogic. They have so many databases available now, I can’t begin to guess which one is the best, but if you call and explain the historical data you need, they’ll tell you the name of the product. I think it’s Market trac, but I’m not 100% sure. They use to sell this as a monthly CDRom product, but it was pretty expensive; something like $500/month. Now many of their database search features are available online and the monthly fee is much lower.
The cheap way to get the historical data is to become friends with a customer service representative at any title insurance company.
They have what you’re looking for on a database called Metroscan. There’s about 500 different ways to search the data including loan type and it goes back to the early 1990s.
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Link to Firstam Corelogic:
http://www.facorelogic.com/
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Half ass story on that WAMU article. It’s always half ass story, never the full story…
Only fools would believe in these sensationalist stories.
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check our the way the seattle office of housing models affordability. I believe its 30-year fixed, 5% down
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I’m really getting lonely and don’t have anything to smile about…. Where’s Meshugy and Econ 101?????
Oh wait. I think I hear someone talking to Ralph in the other room. :-)
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You guys noticed this footnote in the 8-K, right?
(3) Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $345 million, $344 million and $296 million for the three months ended September 30, 2007, June 30, 2007 and September 30, 2006.
When you pay the minimum on your pay-option kamikaze loan, the delta gets tacked on to your balance, and WaMu counts it as GAAP income! They rang up over $1B of this fake revenue last year, and look like they’re on a pace to challenge $1.5B this year.
Of course, they will never see a fraction of this as real income. The vast majority of the option-ARMs are toast, and so is WaMu! LOLOLOL
Got puts? I do. Yay. Die die die evil WaMu!!!
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WM down another 5% today. Down from $42 three months ago to $28 today. Yippee!! Now’s a great time to buy! Buy before you get priced out forever.
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Too bad about WaMu.
They used to be a cool bank.
Back in the 70′s, they were innovators;
developed a ‘Step-Rate’ mortgage loan product.
Low down, (5% I think, maybe 10%), and a low initial rate, around 7.25%, I think, that stepped up in .75% increments, over several years, topping off at 9.5%.
It was a radical mortgage move at the time, and these loans were made for their own portfolio. They correctly saw the huge inflation surge that was in the future, and the step rate loan was great.
My salary was escalating at the time, as were all things priced in dollars.
They got me into a home, and I stayed with it, paying it off early. They were a neat bank, with a lot of bright people working there.
They still have cool people, just the senior management has a severe case of Napoleonitis. Or maybe just the current ‘eat or be eaten’ environment.. Whatever it is, it’s something that has nothing to do with good business.
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WaMu’s OK as far as banks go generally …
… but they had their hands deep in the cookie jar in this sub-prime business. They were one of the largest institutions encouraging people to take on irresponsible/potentially-life-damaging debt.
For that, let them suffer the same fate as the rest of the large debt peddlers.
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Are salaries rising? I know of many people (mostly in engineering) who make considerably more than they did a few years ago (like 20-30%). A lot of people that move here from areas with higher salaries (i.e. bay area) push up the average here, as they demand the same they made down there.
What’s the average increase though?
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Hopefully that sense of entitlement will die soon.
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