Mark Trahant is definitely my favorite writer for any of the local papers. If we ever get around to having a Seattle Bubble meet-up, he’s definitely invited, and his drink is on me.
His latest piece continues to hammer home the reality of the world we live in today: mortgage / housing market is a mess and not likely to get better and no, we’re not immune in Seattle.
“Unfortunately,” says the Congressional Joint Economic Committee, “conditions in the housing market indicate that house price appreciation will no longer be able to disguise the financial precariousness of millions of borrowers whose subprime adjustable rate mortgages are about to be reset.”
The report released Thursday said the mortgage mess is going to get a lot worse — and will last for at least the next two years. “We estimate that subprime foreclosures alone will total approximately 2 million,” the report said.
But in bold typeface the committee points out: “However, it is quite possible that the house price declines will be substantially larger.”
The reason for that is simple: Many of the people trying to negotiate with their lenders for a better deal owe more than the house is worth.
Washington state has 156,810 outstanding subprime loans — and the committee estimates that 21,282 of those homes will go into foreclosure proceedings between now and 2009.
That is bad news across the board. “A glut of foreclosed homes for sale depresses home market values for other owners,” the report said. Most homes will be worth less — especially in neighborhoods where there is a concentration of foreclosures. “Moreover, the homes left vacant by foreclosure lower the desirability of the neighborhood since there is often an increase in crime associated with a vacant house.”
Washington’s mantra for a long time is that the state is protected by its strong job market. But a crashing housing market means less construction activity, fewer jobs and generally less consumer wealth.
Local and state governments already are starting to see the impact on revenues — and that, too, will get worse to the tune of nearly $1 billion between now and 2009. The report estimates Washington counties will lose at least $15.4 million in property taxes.
But all of this assumes we know what we know. And that’s precisely the problem: We don’t.
I rarely have much to add to Mark’s pieces, since he puts it so well himself. I just wanted to make sure this wasn’t missed by any of the readers here. Keep up the good work, Mark!
(Mark Trahant, Seattle P-I, 10.26.2007)
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30 responses so far ↓
1
softwarengineer
// Oct 27, 2007 at 6:57 am
DR. ROUBINI ATTENDED THE IMF CONFERENCE LATE LAST WEEK
This past economic advisor of President Clinton was welcomed with “right ons” this week, re: his totally pessimistic longterm severe 2008 recession mess America is in, due to on-going organised crime in home mortgages they’ll want taxpayer bailout money for.
He’s no longer the 2006 chicken screaming the “sky is falling”, the giant astroid already hit in 2007.
2
meadows
// Oct 27, 2007 at 7:59 am
Here in Bellingham we’re still special, due to Loonie $ parity and lots of other Pink Ponies. In my neighborhood, South Hill, some houses are selling while others have sat for nearly a year with now “New Price!” stickers.
I still say that the future for RE here is a 4 stage process:
For Sale
For Sale (Price Reduced!)
For Rent
Foreclosed
3
david losh
// Oct 27, 2007 at 8:23 am
The giant asteroid missed and went on it’s way to the next looming economic disaster. Don’t any of you get tired of this? Huge corporations losing billions of dollars has never made sense to me. These are supposed to be the really smart guys.
Does it seem strange to any one that the bankruptcy laws changed dramatically before these large, corporate, lending institutions began losing all of these billions of dollars? Where do these billions of dollars get lost? Is it in the forest, dropped under a bush? Could these billions of dollars be in the sofa cushions? For sure housing is a little different from stocks, or bonds. These bundled mortgages must have some producers in them and when the non producers default there is some thing left standing, this time.
The fact that consumers refused to see a government, at war, in a foriegn country, needed to generate revenue is the fault of the consumer.
Most true Real Estate professionals will tell you that we routinely counseled people against an unwise purchase. My wife has hounded me for these past few years about telling people they are foolish to buy. My focus has been on sellers. I sold every property I had an interest in. I have told every one I know to sell off inventory and wait.
Since 2005 the bubble grew. When did you guys start here? For me it started when George Bush made that fateful speach praising the vast number of home owners in this country. It really hit home in early 2006 when a town house in my neighborhood sold for a half a million dollars. WTF?
My question is: what’s next? We had the stock thing, oil crisis, housing, and collapse of the bond market(?). What’s going to be the next financial disaster? Where will our poor, huge, global, corporations lose money next, that we can all pay for?
4
Morbit
// Oct 27, 2007 at 10:42 am
Losh, your ramblings make some sense, but your cohesion of thought seems difficult to maintain. What do you mean it “missed and went on”? It’s looming right over our heads, now TODAY! We’ve got kids in their 20s being duped into buying condos overprices by hundreds of thousands of dollars. Many other condo projects are stalling and some have even gone apartment before being completed due to slow pre-sales. Inventory is rising, sales are dropping off a cliff and the money supply is drying up quite fast. So, it hasn’t missed us at all, it’s still falling down upon us.
5
jon
// Oct 27, 2007 at 12:01 pm
“Could these billions of dollars be in the sofa cushions?”
The money was paid to the sellers.
The is a comment on housingpanic.com from someone inheriting an underwater property from their mother. The only reason there was a mortgage was that the mother bought out the half interest of her brother when they inherited it. So now the grandkids have to dispose of this mess while the uncle is sitting on $150K free and clear. That illustrates this market perfectly.
It’s not as bad as the tech bubble, because then people imagined that they were billionaires because they sold 1% of their company for $10M (anyone from Facebook here?). In real estate, the whole property is sold, so the money went somewhere. The money will come back into the market when the price is right.
6
rose-colored-ghoulaid
// Oct 27, 2007 at 4:33 pm
I don’t know if it’s fair to say the the housing bubble is less bad than the bubbles of lore (Y2K). The total dollar value in this bubble is bigger, and as many as 70% of Americans are vested in some way. I don’t have figures, but I believe this is significantly larger than the number in of people in stocks in 2000. I’m not sure how pensions/401ks affect this analysis.
7
biliruben
// Oct 27, 2007 at 4:48 pm
“In real estate, the whole property is sold, so the money went somewhere. The money will come back into the market when the price is right.”
The estimates I hear are between 2-8 Trillion in housing value gone. The optimists suggest only 2 trillion. Poof. Gone. Not coming back.
8
bitterowner
// Oct 27, 2007 at 7:01 pm
Losh for President
9
B&W Nikes
// Oct 27, 2007 at 7:51 pm
Re: …It’s not as bad as the tech bubble …so the money went somewhere.
Consumers who speculated and lost their a$$es in the tech bubble did not owe the amount of their loss to any entity with a variable interest rate added on top of the loss for half of their adult lives. This new invocation of the invisible hand is much riskier and could make the nasdaq run up seem like a parlor game by comparison.
10
Angie
// Oct 27, 2007 at 8:41 pm
Bilirubin, I hear you on the “Poof. Gone.” That’s the crazy thing about “market value”– by and large it’s money “on paper”. The majority of homeowers I know intend to be in their houses more or less for good, and have not used their houses as ATMs. The run up in “market value” of their houses is a freaky artifact that they have no intention of cashing in on any time soon—it’s all “on paper”. So if market values to t*ts up, it’s just further evidence of how flaky and weird values “on paper” are. You still owe what you own, you still pay your nut each month, and, significantly, you still have a roof over your head.
That’s the key difference in my eyes between real estate (there’s a reason why it’s called “real”) and investing in the stock market. I know that some people receive cash dividends from stock ownership, but most I wager are like my family—the money we have invested in the market is through mutual funds, and fund prices rise and fall on the trading value of the stocks. When buyers evaporate, those prices go through the floor, and then you’re really left with nothing except a piece of paper in your hand.
A few days ago a couple of bearish participants here accused me of Seattle boosterism in hopes of propping up prices. I’m flattered to think that my opinion might ever be considered to have that much weight—I’m sure it doesn’t, even though I actually do think Seattle’s a great place. The only way I could remotely influence “market values” is to buy a house. But I’m not in the market for a new house right now, and even if I were, my one measly transaction wouldn’t have much influence in the grand scheme of things. So, as a stick-in-the-mud homeowner, I too take “market values” with a big old grain of salt. Lord willin’ and the creek don’t rise, we won’t face circumstances (extended job loss, death of a spouse) that might force us to need to sell. And in the meantime, no matter what Zillow or its ilk have to say, we still have a roof over our heads. If all that paper value goes “Poof. Gone.”, well, we didn’t really have it in the first place, did we?
Hey, I thought all you true-blue blue-staters would love liberal economist Paul Krugman’s column from the New York Times yesterday:
http://www.nytimes.com/2007/10/26/opinion/26krugman.html
11
christiangustafson
// Oct 27, 2007 at 9:23 pm
ghoulaid –
401Ks, pensions, and even university endowments get to enjoy the fruits of the RE implosion. It’s not just the Communist Chinese who are exposed to the rot of worthless CDOs.
12
rose-colored-ghoulaid
// Oct 27, 2007 at 10:18 pm
Angie, we’ve gone through this before, and I’m glad to see you coming around a little bit, but owning a stock grants you a small small piece of the company. The company is a real thing.
The main difference is that in real estate you typically subdivide the property to grant multiple owners rather than splitting up ownership.
A better comparison is that stock ownership is like owning a time share. You are given a piece of paper which states you have partial ownership of the asset (business or condo), and you receive some benefit from this ownership (vacation time or dividends). Can we at least agree that these two things are essentially the same?
On another note, Angie mentioned that most people buy to live and not to HELOC. I tend to agree, but has anyone seen hard numbers on this? Most could mean 99% or it could mean 60%. I think we all would agree if 99% aren’t pulling REFIs, we’re all good wherease if 60% are then things are really really bad.
Cheers.
13
rose-colored-ghoulaid
// Oct 27, 2007 at 10:21 pm
christiangustafson,
Sorry, that came out wrong. I didn’t mean that I was unaware that many American investment vehicles will be damaged. What I meant was 70% of Americans own their home, and some additional amount (% unknown to me) also have other investment vehicles which will be hit. I don’t really know how to compare that to stock ownership, but it seems like the average American is more likely to be vested in real estate than M$FT.
14
B&W Nikes
// Oct 28, 2007 at 2:12 am
Surely not to gripe at details but 70% of Americans owe a mortgage. Not their homes. Count on your fingers the number of people you know by name who are free and clear and own property outright. They are few if any.
15
B&W Nikes
// Oct 28, 2007 at 2:15 am
Sorry meant “…70% of Americans owe a mortgage. Not own their homes”
16
Matthew
// Oct 28, 2007 at 6:12 am
Keep in mind that if you invested the same amount of money on the S&P 500 average that you invested in real estate 80 years ago, your return on the money you invested in the stock market would more than double your return in real estate.
17
Angie
// Oct 28, 2007 at 8:07 am
Rose, yep, we’ve talked about stock ownership before…My disinclination also stems from having truly no control over the value of those investments.
Regarding the other questions here, Wikipedia says that ca. 70% of US homes are “owner occupied”–references lead back to US census bureau data for 2005 and earlier:
http://en.wikipedia.org/wiki/Homeownership_in_the_United_States
A bit of googling turns up this discussion where several sources are invoked (including 2003 Census Bureau data) to claim that 35- 40% of owner-occupied homes are owned free and clear (nearly 80% of homes by older Americans!)
http://answers.google.com/answers/threadview?id=468043
So:
About 30% of households rent
About 25% of households (.35 of .70) own free and clear
Leaving 45% of all households owe some mortgage money
What fraction of that 45% is in hot water, I leave as an exercise to the rest of you…my husband just cooked up some pancakes for breakfast, and I’m gonna get while the gettin’s good!
18
S-Crow
// Oct 28, 2007 at 9:23 am
B & W,
My parents owe house free n clear, my wife’s folks owe free n clear. My Dad lived as a 9 year old kid during the Depression in Newark, NJ and NYC. The stories are fascinating. Funny thought crossed my mind as I was reading this whole thread, my in- laws have invested over the years in the market (not real estate) and were long in everything. Their investment advisor (as of only about two years ago) came up to visit them to discuss portfolio etc..Their investment advisor talked about the real estate market and woes and so on and it finally came out that the advisor was purchasing homes recently. Long story short, advisor is getting whacked. Where does the advisor live and doing all the purchasing? Arizona.
My takeaway is that there were so many people that jumped on the train, even those shelving out advise. My dad-in-law is financially secure. Sounds like he should be the one on the other side of the table. He has no securities licenses, no fancy degrees, is not an economist. I would characterize him as a very smart Elmer Fud. He drove a fuel tanker truck for 35 years for Phillps, ARCO & BP Oil before he retired just a couple years ago. He was delivering gas to stations all across our state.
Put his son through Law School at Pepperdine and my wife through school at SPU. All on a trucker’s salary and a lot of overtime.
In our industry, there is nothing more vile to me, personally, than to witness industry insiders giving advice, who’s backgrounds show bankruptcy, Foreclosure or advising clients on sound borrowing or buying strategies when the advisor is financially insolvent.
19
S-Crow
// Oct 28, 2007 at 9:28 am
sorry, wife folks and my folks “own” free & clear. Not “owe”. LOL.
20
Mama
// Oct 28, 2007 at 9:59 am
“Put his son through Law School … All on a trucker’s salary and a lot of overtime.”
Sounds like a great guy. Do you think a trucker today can put his children through law school and buy a house in King County free and clear on a trucker’s salary though? Cause if so, I’m definitely in the wrong profession… :(
21
Chris
// Oct 28, 2007 at 10:26 am
Billiruben said: “The estimates I hear are between 2-8 Trillion in housing value gone.”
I know what you mean by this, but I think its better phrased “between 2-8 Trillion in housing price” or “perceived housing wealth.”
I read somewhere that during the stock market crash of 1987, Buffett only checked the market once. He did so because he knew that although the pricing of the assets he owned was changing, their intrinsic value was not. At the end of the day, Coca-Cola still did the same thing, with the same margins, that it did at the beginning of the day.
Similarly, the intrinsic value of a house has remained fairly constant over time. It can be a place to live. Or, it can generate a cash flow through rentals. Neither the value of having a roof over your head, nor the cash flow generated by rentals, have fluctuated wildly in the past few years.
What has fluctuated is the pricing of that value. Due to easy credit and mass psychology, people were willing to pay a higher price for the same value. It is true that as prices decline, existing owners will perceive a loss of wealth. But in reality, the intrinsic value of the asset hasn’t changed (unless they viewed it exclusively as a mechanism for speculation based on the pricing multiple relative to intrinsic value).
As I think about housing prices, I think Buffett’s “Mr. Market” idea is very helpful (just as it is in stocks). “Mr. Market” shows up every day and quotes you a price for your assets (house, stocks). In some periods he is wildly optimistic, and willing to pay you far more than the asset is worth. On other days, he is depressed, and willing to unload the same asset at far less than it is worth. Your task is to take advantage of Mr. Market without being influenced by him. In order to do so, you must focus on the intrinsic value of the asset, not the mood of Mr. Market. Am I receiving a good value if I pay X for this roof over my head? Am I receiving a good value if I pay X for this stream of rental income? If the answer to those questions is yes when you purchase, then you will be happy with the amount you paid for the asset, even as Mr Market under or over prices the asset in the short term.
Unfortunately, I think many home buyers were influenced by Mr Market, and now find that they paid too high a price for the intrinsic value they received.
22
Perplexed
// Oct 28, 2007 at 12:12 pm
While some folks commenting elsewhere noted that the recent fires in CA burned off excess housing I think they haven’t thought it through… Consider the possibility that for many their insurance may not be sufficient to pay off the mortgage. With a huge demand for construction in a small area the cost of re-construction will sky-rocket. This could get ugly and complicate any potential housing recovery in SO CA.
23
The Tim
// Oct 28, 2007 at 5:13 pm
My parents actually own their home, too. It’s their first home (the home my brothers and I grew up in) and they paid it off completely in 20 years. None of this “equity ladder” nonsense, and no funny-money “withdrawals.” Just saving up, getting a reasonable loan, refinancing once to a lower interest rate, and paying it off.
Crazy, I know.
24
Angie
// Oct 28, 2007 at 7:00 pm
OK, Rosie asked for some hard numbers. Here’s the latest (2005) info available from the US Census Bureau, link is:
http://www.census.gov/hhes/www/housing/ahs/05dtchrt/05adtchrt/tab3-15.html
These pertain to owner-occupied households, which again, are just under 70% of total US households.
108,871,000 total households in US
74,931,000 total owner-occupied households (OOH) == 68.8% of total households
24,776,000 owned free and clear== 33% OOH == 23% of total
31,992,000 have “regular” mortgage and no lump-sum Home Equity loan and no HELOC == 42% of OOH == 29% of total
2,958,000 + 6,385,000 = 9,343,000 have a regular mortgage and also a lump-sum HEL, a HELOC, or both home-equity products = 12.4% of OOH == 8.5% of total
1,427,000 + 2,313,000 = 3,740,000 have no regular mortgage but have a lump sum HEL and/or a HELOC = 5% of OOH == 3.4% of total
There are further breakdowns in that source page (lump sum HEL vs HELOC) and a few categories I didn’t include (lines where info was not reported). But we can say that 17% of owner-occupants have tapped their home’s equity.
The same link also breaks down payment plan of primary mortgage:
About 46,000,000 mortgages in those OOHs
37,392,000 fixed payment, self amortizing == 49% of OOH = 34% of total
2,441,000 have adjustable rate == 3.2% OOH = 2.2% of total
Other possible payment plans were “adjustable term”, graduated payment, balloon, other, combination of above–each of these options numbered 520,000 or less, so ca. 1,700,000 households had one of these ==2.2% of OOH ==1.6% of total.
Positively tons more numbers in there. (Did you know there are 14,000 housholds out there with mortgage interest rates of 20 percent or more? Like buying on a credit card!)
Enjoy…
25
Rob Jellinghaus
// Oct 29, 2007 at 9:22 am
Hmm, actually I’m happy to hear that 81% of mortgages are fixed rate. I didn’t think it was that high what with all the bubble talk. Makes me hopeful that we won’t see 50% nationwide drops :-) (We personally could survive a 40% drop without losing too much cash, but not a 50% drop….)
26
B&W Nikes
// Oct 29, 2007 at 10:50 am
Good things come from here, my attitude corrected … according to gov sample stats about 23% of all Americans own their own home, and about 55% owe their own home (it’s a keeper!), and the remaining 22% rent their own home.
My own point of reference from childhood to present falls into the owing parents, but that reflects the cost of mobility and the affects of unique events.
27
TJ_98370
// Oct 29, 2007 at 10:51 am
Great post S-Crow!
.
Mama said:
Do you think a trucker today can put his children through law school and buy a house in King County free and clear on a trucker’s salary though?
.
IMHO - Nope. It’s different now. The middle clas is under siege.
28
david losh
// Oct 29, 2007 at 9:46 pm
You see, at the end of the day this blog makes more sense to me than the blogging by Real Estate professionals.
I’d never thought of the fact, the real fact, that in owning a property you own the whole thing, not just a small part, like with a stock. Interesting concept, I’m just not sure how it fits.
29
finance
// Oct 29, 2007 at 10:52 pm
However, if you took leverage into account and the mortgage deduction (which is offset by housing expenses) would produce a REAL Rate of Return in excess of the stock market over the past 10, 15, or 20 years.
If you put 10% down (10X multiplier) and Real Estate appreciated at 4% (low over the past 15 years) you would have ~40% ROR. If you did put down 20% that would translate into approx ~20% per year ROR…
30
Alan
// Oct 29, 2007 at 11:23 pm
And if you put zero down you can get an infinite ROR.
You can also lose your principal more quickly with leverage. We are going to see that in action in the upcoming months.
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