Welcome to Seattle Bubble

Since I was on KING 5 News last night and KOMO 1000 radio this morning*, I thought it would be good to write up a slightly more detailed post aimed at answering the question: “What is Seattle Bubble about?” So, here’s a summary of the important points.

The Bottom Line: Now is not a good time to buy a home in Seattle.

Here’s why:

  • Irresponsible, loose lending drove prices to artificial highs, pricing out responsible individuals and families that just want to make a decent down payment and get a traditional loan on a reasonably priced house.
  • We are presently seeing a return to responsible lending standards, as the banks experience the consequences of writing loans to people who did not have the ability to pay them off. As lending standards continue to tighten, further downward pressure will be placed on home prices.
  • Macro-economic factors drove home prices up, and will in turn bring prices back down (yes, even in Seattle).
  • Home prices in Seattle did not rise as fast or as far as other places in the US, and likely will not fall as far. However, they will most likely fall.
  • Why will prices fall? Because the current level of local home prices is not supported by any of the fundamentals that drive a healthy housing market:
    • Incomes (1, 2, 3, 4)
    • Employment (1, 2, 3)
    • Population (1, 2, 3)
    • Rents (1, 2)

    All of these factors are indeed positive for the Seattle area, but prices began to rise out of control while Seattle was still recovering from being hit particularly hard by the dot-com recession. Thanks to the aforementioned easy lending, home prices during and since Seattle’s economic recovery have risen much faster and higher than these positive fundamentals support.

There are lots of people (like myself) who have little to no debt, great credit, and a good down payment, but are not willing to buy into an inflated housing market. We are not against home ownership. We are against taking out massive, dangerous loans to finance an otherwise unaffordable and overpriced asset. We are perfectly content to wait out the declining market, and will not be suckered by real estate salespeople who perpetually repeat claims that “now is a great time to buy.” They said that about the national housing market, and they were wrong. Once the home price drops were irrefutable, they began declaring that “the market has hit bottom” every three to four months.

Don’t take anyone’s word when it comes to what will likely be the largest financial decision of your life. Do the research, and determine if the market is right for you. That’s what Seattle Bubble is for: providing a resource where regular people can assess the local housing market on their own.

P.S. (I’d like to improve / refine this post and make a copy to link at the top next to “Home” and “Forum” as an “About” page. If anyone has any suggestions for improving this post with that end in mind, such as additional posts that should be linked or main points that I left out, please share your ideas in the comments. Thanks!)

* I tried to record the interview through the online stream of KOMO 1000, but halfway through they cut into the feed with an ad for a casino that ran for the entire remainder of the call. KOMO host Nancy Barrick is going to email me the audio tomorrow morning, and I will post it here sometime thereafter.)

Update: Here’s the audio from the interview on KOMO today:


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

99 comments:

  1. 1
    mikey says:

    great site you got going here. we’re in hawaii and been watching seattle real estate. haven’t been able to figure out why the decline didn’t hit your city yet. honolulu is not on the case-shiller index, but seems like we havent dropped like CA or the east coast. our fundamentals do not support condo/residential prices either. nevertheless, anecdotal evidence suggests we’re about 5-7%down YTD.

  2. 2
    Ichiro Vader says:

    Congrats on the coverage Tim. I highly encourage anyone new to this site to check out the linked articles. I’ve learned a lot since I first discovered this site back in March. If you’re a rational open-minded person, you will see the logic in Tim & Friend’s posts.

  3. 3
    Sniglet says:

    Some people could take Tim’s comments about how there are lots of people with savings and good credit who are renting as PROOF that there is a lot more strength in the housing market. If we really have hit a peak then there shouldn’t be ANYONE who has the financial wherewithall to buy a home sitting on the sidelines, right?

  4. 4
    jon says:

    Tim, I disagree with what you are trying to do here. You are not helping the current real estate market by simply making a blanket statment which says it is not a good time to buy.
    People are constantly moving to NW (Seattle) due to strong job market…and if they can afford it then they are better off buying a property, getting tax credit, and saving toward their future than renting.
    I am not an agent, but to be fair, no agent can force anyone to go to a bank, get a mortgage and buy a property. Most people buy b/c they need to or b/c they are greedy (flippers).
    As we all know Seattle has not seen the housing price bubble like in the rest of the country…therefore the buyers shouldn’t be greedy and wait around for a large price drops like in the rest of the country, especially considering most sellers in Seattle bought their property at a fair market value and not as an investment.

    even though people might lower their price to get a sale finalized that doesn’t mean every seller out there is trying to rip others off. People need to sell their homes for various reasons (job move, divorce, downsizing, upsizing, etc). by simply stalling the buyers from participating…you’ll only create more economic downtown in the NW (less home improvement spending, negative job impact in all housing related services)
    Buying a real estate is a personal choice and should be made wisely with one’s personal goals & finances in mind.

  5. 5
    Orion says:

    Sniglet,
    Your argument seems to be:

    The market hasn’t peaked until everyone who can buy a home has bought one.
    Until the market has peaked prices will continue to rise
    Not everyone who can has bought.
    Therefore the market hasn’t peaked.
    Therefore prices will continue to rise.

    Your first premise is where your argument breaks down. There are many who have looked at the prices who could have bought, but recognized the fundamental problems with the market and realized they would be buying an overpriced asset. Potential buyers don’t “have” to buy, they can rent (and at discount to buying). So it doesn’t make sense that everyone who could possibly buy while prices are high will buy. They will simply opt out and wait for prices to fall.

  6. 6
    Lukasz says:

    Tim,

    I think you can improve this post by adding the following information:

    1. mention that other markets with strong fundamentals are already experiencing price declines in housing

    2. address “they aren’t making any more land” argument

    3. discuss inventory/numbers and their dynamics in the last year (especially after the credit issues in August)

  7. 7
    The Tim says:

    Hi Jon, thanks for the comment.

    You are not helping the current real estate market by simply making a blanket statment which says it is not a good time to buy.

    I didn’t know it was my job to “help the current real estate market.” I consider it my “job” to educate people about the reality of the real estate market.

    People are constantly moving to NW (Seattle) due to strong job market…

    Yes, we know. Please check out a few of the numbered links in the bulletted list in the post to find out why the argument that this will prop up home prices doesn’t hold any water.

    …and if they can afford it then they are better off buying a property, getting tax credit, and saving toward their future than renting.

    Sorry, but the tax credit and “savings” benefits of buying a home are nowhere near large enough to offset the huge savings to be had by renting right now. For a more thorough proof of what I’m saying see this post and this post.

    As we all know Seattle has not seen the housing price bubble like in the rest of the country…

    We’ve established this many times over. Just because we won’t fall as hard doesn’t mean it won’t hurt.

    …that doesn’t mean every seller out there is trying to rip others off.

    It’s not about a seller trying to “rip others off,” it’s about me, as a buyer, not wasting my money on an overpriced asset.

    by simply stalling the buyers from participating…you’ll only create more economic downtown [sic] in the NW

    So let me get this straight… Unless we all spend our money irresponsibly, don’t save at all, and run up as much debt as possible, the economy is doomed?

    Buying a real estate is a personal choice and should be made wisely with one’s personal goals & finances in mind.

    We’re in complete agreement here. It’s just that buying real estate is not a wise choice right now, any way you slice it.

  8. 8
    Sniglet says:

    Jon,

    If the Puget Sound real-estate market is as sound as you claim, then it shouldn’t matter one iota what Tim (or anyone) else says: house prices will continue to appreciate indefinitely. I very much doubt that Tim has all that much of an impact on the local market. In fact, I am certain that the lending policies/standards of national institutions has a FAR bigger impact on Seattle area real-estate than anything some happless bloggers get up to on the ether.

    By the way, if you did have a crystal ball, and KNEW that Puget Sound house prices were going to decline substantially in the next 5 years do you believe it would be your duty to inform others? Or would you just sit on the knowledge of such a depressing future, doing your duty to help keep our spirits up?

  9. 9
    Old Dog says:

    So what if an old dog needs a place to live and is moving to Seattle? What does he do? Is there enough rental housing available? And how long should I rent? Can you tell me when to buy? I thought a house was a place to live not an investment like the stock market. Am I wrong. Please tell me how to ride the Bubble to the best time to buy if not now….

  10. 10

    I AGREE TIM

    There’s one reason to buy now that I can think of:

    You have lots of money to throw around and don’t care about bottom line.

  11. 11
    Chris says:

    Tim,

    You asked about potential improvements. I think it might be interesting, somewhere in the overview, to include some annotated links to other analysis on the web. I am not affiliated with any of these sites, but I have enjoyed these posts:

    1. http://www.irvinehousingblog.com/2007/10/01/what-caused-the-bubble-rally/

    The great thing about this one is that it clearly shows how subprime loans, particularly interest only and option arm loans, drove up prices. As long as people were only paying attention to their current monthly payment, they were often purchasing houses at a reasonable 28% DTI. The problem was that the payment was interest-only or negative amortization.

    There are many other great posts in the analysis section of this site.

    2. All these:

    http://piggington.com/the_san_diego_housing_bubble
    http://piggington.com/historical_home_prices_payments_rents_rates
    http://piggington.com/bubble
    http://piggington.com/risks

    I think these sites have solid, interesting analysis in their own right, but I think it is particularly interesting because these markets are running several months ahead of Seattle in terms of price declines.

  12. 12
    TJ_98370 says:

    Jon,

    I am sitting on the equivalent of a very healthy down payment. These funds are invested and generating returns averaging 23% of my gross income. Why would I invest these funds in an asset that is very likely to depreciate?

    Everyone has their own unique personal and financial situation. To me, now is NOT a good time to buy real estate because it makes little financial sense to buy at the top of the market and I am convinced we are at or near the peak.

  13. 13
    LotharBot says:

    Old Dog,

    There’s plenty of rental housing available in Seattle. If you keep reading Seattle Bubble, it will become apparent when to buy — when the “price” and “value” numbers get closer together. In the mean time, rent and invest the difference in something other than real estate.

    A house is a place to live, and (normally) not an investment. But you shouldn’t pay more than it’s worth. Why pay $350,000 for a place to live if it’s only actually worth $220,000? You’re better off paying $1500 a month for the next 36 months (total of $48,000) renting someplace and then buying the house at its actual value than you are paying $130,000 too much for it right now.

    That’s the fundamental calculation we each must do. Given the fact that housing prices are sky-high right now due to bizarre lending practices, is it worth the extra money to us to get into the house we want right now, or would we rather save money by waiting?

  14. 14
    Alan says:

    Old Dog,

    Is there enough rental housing available?

    http://seattle.craigslist.org/see/apa/

    And how long should I rent? Can you tell me when to buy?

    Who knows. Can’t say. Read Tim’s arguments on why prices are out of whack now. When those arguments no longer apply it is probably a good time to buy (may not be a great time, but that is okay).

    I thought a house was a place to live not an investment like the stock market. Am I wrong.

    That is a good fiscally conservative attitude. Think about this another way. Food is just something to eat. Grocery store A charges twice as much as grocery store B. Where do you want to buy your food.

    Renting housing is most likely much less expensive for you right now than buying housing. Which do you want to do? Granted, you may not be in the same situation as Tim. I am pretty sure one of those articles talks about online calculators or spreadsheets that can help you answer that question for yourself.

  15. 15
    Orion says:

    Sniglet,
    I suspect after your second post that you were being sarcastic in your first. If that’s the case then I guess I didn’t need to disprove your argument. Maybe use [sarcasm] tags [/sarcasm] or something similar next time so we know.

  16. 16
    Joel says:

    People are constantly moving to NW (Seattle) due to strong job market…and if they can afford it then they are better off buying a property, getting tax credit, and saving toward their future than renting.

    Where I live on the Eastside the payment (principal + interest), insurance and maintenance on a house is over 2x what equivalent rent is and the tax savings is canceled out by having to pay property taxes so I don’t see how one could save more by buying.

  17. 17
    NotaBull says:

    Jon said: “People are constantly moving to NW (Seattle) due to strong job market…and if they can afford it then they are better off buying a property, getting tax credit, and saving toward their future than renting.”

    Jon, your statement is highly applicable conventional wisdom, which is best applied in conventional times. We are not in conventional times and so this does not currently apply.

    I’m saving a LOT MORE MONEY right now by not renting money (interest payments) from the bank, and instead renting a house from a landlord. Please, make up a spreadsheet and calculate the tax deduction you’ll get on a property (don’t forget that if you don’t itemize, you *still* get the standard deduction) and compare how much money you’re saving being in a rental house. With current price/rent ratios, it doesn’t make sense to buy *especially* with the strong likelihood of a reduction in prices in the near term. Renting is not a long term strategy for me, but saving cash for another year or two while I watch prices come down is about the best strategy you can have right now.

    In addition, there are too many people out there that no longer contribute to their 401Ks because their house payment means they can no longer afford it. So all they did was trade one deduction for another! My wife and I are contributing $30K a year to our 401Ks, which by the way is up about 10% this year (if you ignore yesterday and today. :) )

  18. 18
    NotaBull says:

    “Where I live on the Eastside the payment (principal + interest), insurance and maintenance on a house is over 2x what equivalent rent is and the tax savings is canceled out by having to pay property taxes so I don’t see how one could save more by buying.”

    But the property taxes are deductible too! That’s more savings!!!!! ;)

    Another excellent savings plan: Send all the money you earn to charity. It’s deductible and means you come out ahead!!

    Seriously, this whole tax deduction thing is driving me nuts.

  19. 19
    Shawn says:

    It is great to see Tim getting some press. If this exposure sends one poor sap to this web site, which in turn saves that sap from getting burned, then great.

    The irony is that now that it is getting real hard to sell houses (in of all places Seattle!!!) and the houses are selling for less, that Realtors can now charge more! Somewhere the devil is smiling.

  20. 20
    Shawn says:

    http://tinyurl.com/27w3b2

    Seattle
    5-yr home price forecast: -19.5%
    Home price/rent ratio: 38
    15-yr average: 23.3

    Note: People typically won’t spend more in monthly costs to own a home than they would to rent. While prices soar from time to time, sending the ratio to exceptional heights, the relationship eventually should return to its historical average.

  21. 21
    Angie says:

    IMO, the irony is that if that Fortune article that came out the other day is correct—if Seattle’s housing prices decline by 20%—then they’ll be back at the level they were in summer of 2005. Which, by the looks of the sidebar to the right, was the same time that this blog began decrying how expensive Seattle real estate was. Now those prices will look like absolute bargains. ;)

  22. 22
    Sea_Realty says:

    You should do a feature on the house originally listed in the Redfin Sweet Digs blog as Future Retro Real Estate – in many ways this overpriced, overbuilt monstrosity – over two years on the market – is an ideal mascot / poster child for the Seattle bubble.

  23. 23
    b says:

    Angie –

    The difference is 7 years of wage inflation.

  24. 24
    topdog says:

    Yeah – assuming 3% inflation (which is likely on the low side given the way things are headed, but we’ll keep it conservative), a nominal drop of 20% from 2007 prices over 5 years will be a 31% drop in real prices from 2007. (If my math is right…)

  25. 25
    [troll] says:

    BRV Tm!!

  26. 26
    S-Crow says:

    I believe that just modest decreases in housing prices is going to spell trouble for a lot of people. For purchase/sale transactions, short sales are now cropping up (sometimes escrow is successful in assisting with this, sometimes the lender will not budge) and, going forward, I expect that we will bump into transactions where people will have to bring money to close.

    The whole environment over residential real estate is different. No longer are we working into the wee hours of the night and I suspect others in escrow are in the same boat.

    I would like to ad that people are still buying out in the market. It’s just that the pool of buyers probably meet a different profile and are buying for reasons other than “investment.”

    As a side note, my wife recently spoke with a former customer who called our office recently asking about refinancing. My understanding was that the customer indicated that they were told by their loan consultant that they would be able to refinance their loan to change their terms for a more favorable rate. Obviously, the customer was not happy. Unfortunately, they were not able to refinance.

  27. 27
    s says:

    When do you anticipate will be a good time to buy?

  28. 28
    AndyMiami says:

    jon said,

    on November 8th, 2007 at 2:42 pm

    Tim, I disagree with what you are trying to do here. You are not helping the current real estate market by simply making a blanket statment which says it is not a good time to buy.
    People are constantly moving to NW (Seattle) due to strong job market…and if they can afford it then they are better off buying a property, getting tax credit, and saving toward their future than renting.
    I am not an agent, but to be fair, no agent can force anyone to go to a bank, get a mortgage and buy a property. Most people buy b/c they need to or b/c they are greedy (flippers).
    As we all know Seattle has not seen the housing price bubble like in the rest of the country…therefore the buyers shouldn’t be greedy and wait around for a large price drops like in the rest of the country, especially considering most sellers in Seattle bought their property at a fair market value and not as an investment.

    even though people might lower their price to get a sale finalized that doesn’t mean every seller out there is trying to rip others off. People need to sell their homes for various reasons (job move, divorce, downsizing, upsizing, etc). by simply stalling the buyers from participating…you’ll only create more economic downtown in the NW (less home improvement spending, negative job impact in all housing related services)
    Buying a real estate is a personal choice and should be made wisely with one’s personal goals & finances in mind.

    Jon…methinks that you are smoking crack again…take a look at WAMU dropping from 40 billion market cap to 20 billion in one month…

    Tim’s predictions are actually quite conservative, in real terms, when measured by EUROS and GOLD, prices here have already dropped by 10%…get globalized dude and open your mind outside this sloppy weather city full of heroin addicts on the downtown streets

  29. 29
    laxtosnoco says:

    I just had a chance to listen to the radio broadcast, and I thought you did a nice job Tim. You gave a balanced, well thought-out opinion without being wishy-washy.

  30. 30
    John says:

    WaMu is hurting big time. It is a dramatic fall for one of the country’s largest banks. If you think all is well, you are kidding yourself. Retailers are crossig their fingers this holiday season. Gas, heating bill, no more home equity piggy bank. Many are tapped out.

  31. 31
    Sauce for the goose says:

    “when measured by EUROS and GOLD, prices here have already dropped by 10%…”

    Just like your wages

  32. 32
    NostraDamnUs says:

    It’s never a good time to buy property – why buy when you can rent and retain your mobility? Stay single too – life’s a bitch enough – why marry one? Just work, eat, jerk off, and be revel in good website like this one! Oh, and max out your 401k since you aren’t spending it on a house.

    So to answer your question – when is a good time to buy a house? NEVER. The USA is going to hell in a handbasket.

    And you’ve come to the right place to find out about that inconvenient truth – seattlebubble.com – the home of the overweight, sexuallly frustrated, get-busy-dying, workaholic, frightened, curry-loving, individuals!

    The slump will be over, and you’ll still be reading this website looking for answers … I had a hard time remembering what this site reminded me of- it was exactly like f**kedcompany.com.

    Happy truth-seeking!

  33. 33
    squidier says:

    What’s wrong with curry? :(

    (lol!)

  34. 34
    John says:

    Nostradumass, I bet you were on f**kedcompany.com telling people there is no dot-com bubble and they should all be buying JDSU at 300, 200, 100…

  35. 35
    squidier says:

    In NostraDamnUs’ defense, I think (s)he’s trying to say that in order to live one’s life fully and without regret, one must take risks.

    Perhaps NostraDamnUs’ gambles haven’t borne great fruit in recent times and, as a result, (s)he is somewhat angry and resentful. Understandably so. This is speculation on my part, completely: could be wrong. Don’t lynch me.

    Regardless, however angrily it might be presented, the message is correct. Walking carefully and safely to one’s grave will just make one look back at the end and say, “what the hell was I thinking?”

    That said, taking stupid risks is… well, stupid. Buying a house in Seattle at the moment fits that bill.

    Long live The Tim.

  36. 36
    what goes up comes down says:

    NostraDamnUs you have some serious issues, stay away from the gun shop.

  37. 37
    Eleua says:

    Tim,

    Watching and listening to your interviews really made my day. Thanks for being a rational voice in this insane market.

    I wonder how a magazine can call a housing bust to the tenth of a percentage point. -19.5%? How do you measure something as ephemeral as “peak housing values” to the exactness of 1/1000?

    Oh, well…I still stand by my prediction of property in the PNW going for 60.3% to 81.7% off the peak by December 17, 2010 at 3:39pm PST.

  38. 38
    Affluent Bitter Renter says:

    NostraDamnUs’ over-the-top rhetoric is highly reminiscent of a couple of recent RE agents posting to this blog. Now, if only he’d call us all “scrubs”.

    P.S. Despite NDU’s belittling rhetoric, maxing out one’s 401-K contribution has been a very smart thing to do over the last decade or two. Granted, a Realtor doesn’t get 6% of 401K contributions, so it must be a stupid idea…

  39. 39
    Lake Hills Renter says:

    “NostraDamnUs’ over-the-top rhetoric is highly reminiscent of a couple of recent RE agents posting to this blog. Now, if only he’d call us all “scrubs”.”

    I would be surprised if that’s him — he’s at least somewhat witty, which is a feat Nostra has yet to accomplish. My suspicion is that it’s Tweedle-dum not Tweedle-dee. I’m just waiting for him to call us all children.

  40. 40
    Affluent Bitter Renter says:

    Lake Hills Renter,

    You’re right NDU is singularly lacking in wit, unlike other, more amusing RE agents. Not that there’s any shortage of RE agents with time on their hands…

  41. 41
    squidier says:

    As a relative newcomer, I take it you guys don’t like these RE types too much.

  42. 42
    Affluent Bitter Renter says:

    Squidier,

    There are some decent RE types, however, there are others who attack anyone not inclined to buy what they are currently selling – with varying degrees of wit and erudition.

  43. 43
    economist says:

    “I thought a house was a place to live not an investment like the stock market”

    People who say stuff like this don’t understand what an investment is. An investment is an asset that generates revenue. A house is an investment precisely BECAUSE it provides a place to live. That’s worth something, i.e. it’s revenue, and its value is the market rent, whether you live in it yourself or rent it out.

    Yes a house is an investment just like a stock. Like a company it has revenue and expenses.

    But would you buy a stock in a company that loses money, and has no hope in making money in the foreseeable future? That’s like buying a house when the costs of ownership are substantially higher than renting. It’s an investment all right, just a very bad one. What happens to the share prices of companies that keep losing money? That’s right, they go down.

    An investment is not “something I know I can sell for more than I paid for it”. That’s not true for housing any more than it’s true for stocks – there is no such thing anywhere.

  44. 44
    Homowner says:

    A few questions/comments:

    So what range of market drop are you predicting? How will it be measured? Not median prices, surely. If the numbers are 5 percentage points off is that a victory for your Bubbliness? 10? What will happen when the market starts to rise again? Will this website become the Seattle Beanstalk? The Seattle Erection? (As in, erect a building.) Will you be so forthcoming with optimistic predictions, or are those never realistic?

    It was not only irresponsible individuals who took out risky loans. Most of the loans are NOT in foreclosure, so how can you dismiss everyone who got one as irresponsible? I had one, and before it ballooned I refinanced to a fixed-rate that yes, I can still afford. I was a “responsible individual… that just want[ed] to make a decent down payment and get a traditional loan on a reasonably priced house,” but that wasn’t an option if I wanted to live in Seattle and feed my child. So I did what I had to do, responsibly, and we are doing very well, thanks.

    Finally, the garden of rently delights is a little bit of a myth as I see it. First, try to find a rental with a toddler and two large dogs. Then try to walk a toddler and two large dogs, every day, three times a day, not for exercise, but because Butch won’t wear Maddy’s diapers, no matter what kind of treats you feed him.

    In my neighborhood, my house would rent for hundreds of dollars more than my mortgage payment. And it’s just three years since I bought it. You say those rent increases won’t be as steep in the future, and maybe you’re right. But I’m already ahead, and my mortgage is steady as she goes.

    One final question. If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords. Also known as, yes, property owners. People who bought instead of renting, then bought again.

    Only this one’s on you.

  45. 45
    seattlerenter says:

    In referrence to NostraDamnUs, I find it very strange people take offense to our position of not wanting to buy a house. Why do you care really, I run into this alot, as if you are personally taking there meal ticket away and not justifying what they think in the back of there mind was a bad decision.

  46. 46
    notabull says:

    “One final question. If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords. Also known as, yes, property owners. People who bought instead of renting, then bought again.”

    Sigh.

    There are not just two choices:

    1) Buy a house NOW.
    2) Rent a house(s) FOREVER.

    I wish people could get over this whole rent vs buy thing. There are some that will likely always rent due to money or credit situation, or due to lifestyle/career choice. However, most on this blog that are renting are taking the 3rd option:

    3) Rent for a while, save downpayment/retirement funds and wait for a time when the market looks more sane. Then, buy.

    Some are waiting for small price drops and some are waiting for a large one. But the majority are looking to buy, which is why they’re on this site in the first place.

    You obviously bought at a time when it made sense to buy. Great! Nobody is suggesting you sell your place and rent FOREVER. However, try a little empathy. Imagine you were looking to buy right now. Would you buy NOW? Or would you wait for a little while, then buy?

    Other people.. Ya know?

  47. 47
    george says:

    It makes no sense to blame blogs like this for the bad news. The bubble is here because real estate industry agents, real estate industry economists, and lenders convinced people to keep gambling.

    The media didn’t help. The local press here pumped lots of air into our real estate balloon this year even after the writing was on the wall. Here’s what the Seattle Times was saying back in May…

    “Rhodes said the idea for today’s story was “based on the concern people have that the housing market is cooling, and the ‘bubble’ bursting. National stories are saying this. But all real estate is local, so it made sense to explain to readers what’s happening here. And economists say Seattle doesn’t have a ‘bubble.’

    http://seattletimes.nwsource.com/html/localnews/2003714421_fancher20.html

  48. 48
    Shawn says:

    the important thing about Nostra is that he is handling it well and not letting any bitterness take hold of his soul. On the one hand you have the normal people, they get caught up in bubbles, dot.com, housing, then you got the nuts, those who question the irrationality. Always been that way and always will.

    My questions is: what is the next bubble?

  49. 49
    what goes up comes down says:

    To follow up on what notabull said — Homeowner — maybe you just don’t get it — it is not about “IF” buying is bad, it is “When” buying is bad. Seems like pretty simple logic, apparently you bought long enough ago that a drop in the market won’t affect you — good for you. But as most people here have pointed buying now would be a very poor financial decision, just as I assume you thought a little about it when you bought and determined it was a good financial decision people should do the same thing NOW.

  50. 50
    greg says:

    All through 2000-2001 Wall Street said it was a good time to buy stocks.
    All through this “housing correction” real estate agents will say it’s a good time to buy, or that the bottom is here and you better buy now! They are just glorified used car salesmen.

    Websites like this are great to teach people that there are alternative ways to learn from and find the true facts without listening to mass media news and sound bytes that usually spin the statistics.

    The real estate bottom will be here when you find out many real estate agents are finding new careers because they finally throw in the towel and give up on making a quick buck.

  51. 51
    stephen says:

    “A house is a place to live, and (normally) not an investment. But you shouldn’t pay more than it’s worth. Why pay $350,000 for a place to live if it’s only actually worth $220,000? You’re better off paying $1500 a month for the next 36 months (total of $48,000) renting someplace and then buying the house at its actual value than you are paying $130,000 too much for it right now.”

    The real numbers may well be 350 now and 280 in 5 years, when you do all the math it works as a home (not as an investment) if it’s worth it to you to pay more to own.

  52. 52
    wreckingbull says:

    “My questions is: what is the next bubble?”

    I think green energy will be the next bubble. History is littered with the carcasses of green energy hucksters, and I can smell the greed in the air right now.

    Secondly, if you are just now becoming a gold-bug, I think you are a bit late to the party. Yes, it has performed well compared to the dollar recently, but I would be a bit cautious now….in “Manias, Panics and Crashes” Kindleberger does a pretty good job of showing what happens to commodities in a severe recession. It should be a part of a portfolio, but a balanced part.

  53. 53
    Northseattlerenter says:

    In referrence to NostraDamnUs, I find it very strange people take offense to our position of not wanting to buy a house. Why do you care really, I run into this alot, as if you are personally taking there meal ticket away and not justifying what they think in the back of there mind was a bad decision.

    I run into people in all areas of life who are insecure about their own personal decisions, and express it by attacking other people who make different decisions. It’s much easier to do that than to admit to one’s self that one isn’t sure about the decisions they made.

  54. 54
    TJ_98370 says:

    Oh, well…I still stand by my prediction of property in the PNW going for 60.3% to 81.7% off the peak by December 17, 2010 at 3:39pm PST.

    Eleua – I think your digital microvalumeter needs to be recalibrated. I measure 60.5% to 81.9% off peak. :)

  55. 55
    Joel says:

    Finally, the garden of rently delights is a little bit of a myth as I see it. First, try to find a rental with a toddler and two large dogs.

    You’re right, very few rentals come with a free child and two large dogs. However if you really want a child, I can let you in a little secret on how to make one yourself. As for 2 large dogs, you could can get those for free at the humane society. Also, I’ve never heard of home seller’s throwing in a kid and 2 dogs as an incentive, so why would buying be better than renting in this case?

  56. 56
    deejayoh says:

    You’re right, very few rentals come with a free child and two large dogs. However if you really want a child, I can let you in a little secret on how to make one yourself. As for 2 large dogs, you could can get those for free at the humane society. Also, I’ve never heard of home seller’s throwing in a kid and 2 dogs as an incentive, so why would buying be better than renting in this case?

    OK, that one really cracked me up. Thanks for brightening my morning.

  57. 57
    The Tim says:

    No kidding. That was hilarious.

  58. 58
    old timer says:

    Kids and dogs are hard on the property.
    That’s why it’s hard to find a rental when you have them.

    When you buy your own home, it will be your yard that has no plantings and your walls that have bathtub rings around them at toddler reach height.

    Unintended and unforseen consequences of actions taken.

    Go ahead and spend your hard earned on some overpriced POS. With all those mouths to feed, you won’t have much left for things like plumbing repairs, paint, roof maintenance, landscape materials, etc.

    It won’t matter will it.
    The thing will be yours.
    I understand and sympathise.

  59. 59
    Angie says:

    Personally, I would hold out for the pink pony over two dogs anyday. Dog shit is dog shit, but those pink ponies crap pure gold, my friend, pure gold!

  60. 60
    Angie says:

    Old timer, I’m curious what you would consider to be the unintended and unforeseen consequences of not having kids?

    Someone’s got to perpetuate the species.

  61. 61
    biliruben says:

    Angie – I think you’ve accidentally hit on the solution to unfordable housing!

    Kids are what make housing prices go up.

    Think how many houses would be available, and how cheap they’d be if there were no people!

    Traffic might improve a bit too.

  62. 62
    settlerenter says:

    Old timer I totally agree having 2 little boys I am happy to have them terrorize (I say this in the most loving way) someone elses house than one I am paying twice as much for, to call my own and have to repair. Just what I have seen them do to a carpet alone is enough to keep us renting for awhile longer.

  63. 63
    The Whores of the Media says:

    (champing on cigar) Welcome to the establishment, Tim! (big hearty pat on back)

  64. 64
    squidier says:

    “Someone’s got to perpetuate the species.”

    Unfortunately, these “someones” are usually the ones who shouldn’t.

    Hey you! Out of the gene pool!

  65. 65
    biliruben says:

    “Okay. But not until after I pee in it!”

    I gotta watch idiocracy again.

  66. 66
    Dave says:

    I’d like to comment on the kids thing. Having recently had a child I will be the first to admit it changes your outlook on alot of things. We bought a house in July, about 2 weeks before the credit market tanked (my tanking point was the jumbo loan rates going up 1.5% overnight). Did we buy at the top of the bubble? Probably. Do we plan on staying 10+ years – yes. Am I glad that no-one (other than the bank) has any control or influence over where I live and can say how to do things in my house? Absolutely.

    Having rented for the past 15 years before buying the house the fact that nobody can tell me I have to move, and that I can do what I want to the property, has value to me. Also providing the stability to my family that owning vs. renting is a great benefit to my psyche.

    I guess what i am saying is that i am with you on the bubble – I very well may be underwater on the house. I think that will correct itself eventually – and no I do not have an ARM. 30 year fixed and we can handle the payments. What I am saying is that there are benefits to owning a home that go way beyond the financial. Trying to break it down to being just about the numbers kind of misses the point in a lot of ways, doesn’t it?

    Dave

  67. 67
    explorer says:

    There was actually an underlying assuption that has been stated by Homowner, that was addressed here in the past: That the majority are not in default, and those who were able to refi at a fixed rate that they can still afford. Therefore, the situation is being hyped as worse than it is.

    The stats on the number ARM’s, Alt-A’s, and ATM refi’s that frittered away the equity that is itself being eroded is the big picture that those who think are unaffected miss. One may be OK on the mortgage payments, but taxes are still high are they not? The tax valuations will not adjust signifcantly for awhile, and that is not a guarantee that your property taxes will be reduced on a one to one basis.

    This represents the fallacy that since you are unaffected in one or more areas, that the reality for many others is not in fact, real. It ignores how those who are NOT responsible, even if they are a minority, can bring down everyone.

  68. 68
    Angie says:

    “Think how many houses would be available, and how cheap they’d be if there were no people!”

    You know, I think we could help put the housing market back in balance *and* capitalize on the trend for locally-grown food…Soylent Green turkey for Thanksgiving, anyone???

    Dave, you’re absolutely right—it’s not only about numbers. Control and stability, stake in a community, lots of other things go along with buying a house.

  69. 69
    settlerenter says:

    I understand about having kids and wanting the stability of staying in one place for years. For us though the transition from renting to buying financially would be a larger burden than what it would be worth it to me. Thats great if the vast difference between rent and own does not affect you financially, but too many it does and would that is why there is an explosion of foreclosures across the country. To us we would rather feel fianancially secure by living well within our means saving money and still have the things we want. So you may feel more secure but for us knowing what we know now that security would not be there plus the burden of a huge monthly payment would not have me feeling so cozy at night.

  70. 70
    Eleua says:

    One final question. If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords. Also known as, yes, property owners. People who bought instead of renting, then bought again.

    Only this one’s on you.

    Really?

    My LL pays out $4500+ every month for my place. She gets $1700 (less 10% management fee) from me. She also pays all maintenance costs and tax hikes. This year, maintenance will probably consume 25% of her gross revenues on this place.

    From my perspective, it looks like I’m being subsidized somewhere in the $3500/mo range to live on 2 acres of waterfront. Also, as property values go down, she eats all the depreciation. I don’t have my balance sheet imparied one bit.

    One check a month and someone else takes all the headaches, cost overruns, risk, and speculative carrying costs.

    Yep. This one is “on me.”

    Too bad the housing bubble has to end.

  71. 71
    Tsuru says:

    Really great article in the P-I about John Keister and how it would be impossible to do “Almost Live!” in Seattle these days.

    http://seattlepi.nwsource.com/local/338963_needle09.html

    Pithy quote:

    [i]Or as Keister put it: “Ballard was old Scandinavians. Fremont was hippies. Capitol Hill was gay. Kent was where whites of modest means moved to escape Seattle school busing. Bellevue was the same for the rich.

    “Today, you can make a joke about Ballard but it’s a bunch of wealthy people who work in the information industry. You make a joke about Wallingford and it’s a bunch of wealthy people who work in the information industry. Fremont? That would be a bunch of wealthy people who work in the information industry.

    “And Belltown is a bunch of wealthy people who live in luxury condos … who work in the information industry.”[/i]

  72. 72
    wreckingbull says:

    Like Eleua, I too feel a little wistful about our bubble finally starting to unwind.

    One of the reasons my landlard is always is in such a bad mood is that she purchased the place in 2004. My rent covers about 1/2 of her expenses.

    I feel a little guilty, especially when I call her to repair things. Oh yeah, she’s a Realtor too. That also might have something to do with her current salty disposition.

  73. 73
    deejayoh says:

    One final question. If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords. Also known as, yes, property owners. People who bought instead of renting, then bought again.

    Only this one’s on you.

    Yeah, I’m really getting taken too. My landlord bought my place in Nov ’05 for $587k. 30yr jumbos were going for about 6.44% then, so if they put down 20% their carrying cost is $2950 + taxes of $400/month. They pay $3350, less a ~$950 tax shield. – so say $2400/month.

    I rent for $2000. And in the year I’ve been there – they’ve replaced the washer, the dryer, and had a leak that caused about $10k worth of damage.

    Wishes for making up the difference in equity are tempered by the neighbor next door’s inability to sell an identical unit for $650k – on the market for 3+ months a very good capitol hill location. After transaction costs, I bet they’d be lucky to break even right now – but are waiting to sell until next July to get capital gains treatment. Not sure what gains they’ll be shielding by then.

    I feel so used.

  74. 74
    The Clizz says:

    I’m thinking about buying a place in Belltown. What is everyones opinion about the value of condo’s downtown. I know that everyone talks about the 500k + condos but I’ve been able to find quite a few in my price range. 250k to 300k for a large studion or 1 bed. My thinking is that so many people from seattle or from out of town want to buy in the city that the prices will be shielded from what may come to the outlying area’s of seattle like north of 45th and south of beacon hill.

  75. 75
    Angie says:

    Dang. Those are some bizarro numbers, Eleua and DJO. I wonder what the deal is—tax shelter? hoping that appreciation will make it all worthwhile when they sell it? Negative amortization loans, that give some cash flow in the present (but will of course require paying the piper later on)?

    I have some friends who took the negative-am route when they bought an apartment building about two years ago. When I learned that’s how they’d financed it, I worried that they’d lose their shirts. Now that the market is stalling out, we’ll see how events unfold. They’re good folks and I hope they don’t get burned, but hey, they’re grown-ups and they chose to take those risks.

    Our rental pays for itself (including the 15 year note) and then some. Making the leap to landlordhood was weird enough already when the numbers all penciled out. I can’t imagine doing it with some freaky fragile financing, too. Too risky for the likes of me.

  76. 76
    Alan says:

    hoping that appreciation will make it all worthwhile when they sell it

    I’d give 2:1 odds that this is the reason.

  77. 77

    The Clizz,
    I don’t think downtown Seattle will be shielded from price drops. There is both new condos being built downtown and conversions of apartments going on downtown , so I don’t think Belltown will be spared. That said, I do think a less expensive condo will fare better than a much more expensive one.

  78. 78
    Ubersalad says:

    Condos are essentially screwed. Traditionally prior to condo attaining fannie mae approval or certain occupany rate, borrowers have to resort to in-house lending from retail banks like Wells Fargo and Washington Mutual. Now with the exposures these banks are taking, slow market and overall consumer confidence level…selling condo is about as hard as getting them financed to buy.

    I think condos owners/investors are pretty damn screwed.

  79. 79
    economist says:

    Eleua: “From my perspective, it looks like I’m being subsidized somewhere in the $3500/mo range to live on 2 acres of waterfront”

    Actually you’re not. You’re paying the market price, i.e. exactly what the place is worth. There is no subsidy.

    It’s the previous owner who was subsidized by your landlady when she bought the place, because she paid way more than was justified by the rental income she is now receiving.

  80. 80
    deejayoh says:

    Actually you’re not. You’re paying the market price, i.e. exactly what the place is worth. There is no subsidy.

    It’s the previous owner who was subsidized by your landlady when she bought the place, because she paid way more than was justified by the rental income she is now receiving.

    So his landlady subsidized the previous owner, or in other words, paid too much. Then I guess you’d have to agree it’s Eleua’s landlord that is getting screwed, not him? That was pretty much his point – that this statement was wrong
    If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords.

  81. 81
    Matthew says:

    Why would people believe anyone with any ties to RE at this point?

    Eleua predicted a banking crisis with alarming accuracy MORE THAN 1 YEAR AGO! Now look at what is happening to our financial industry.

    Wachovia = huge mark downs
    WAMU = collapsing
    Countryslide = collapsed
    Bear Sterns = in a world of hurt
    Citi = world’s largest bank just fired CEO Chucky Prince amidst major mark downs

    etc etc etc

    This subprime filth has been spread throughout the world’s financial system. Our whole system is going to have to be MARKED TO MARKET, not MARKED TO MODEL. Writedowns have just begun people, this is going to get much worse.

    Has anyone seen how well tech has been doing the last week? The NASDAQ has been getting slaughtered. Do you realize how tech laden the Seattle area is? Do you remember 2001???

    And yet the entire RE world is promoting this time as a “GREAT TIME TO BUY”.

    Yeah its a great time to buy if you like buying things at 50-75 percent over appreciated prices right before a major market correction. Myself, I prefer to buy low sell high.

    This game has just gotten started. WAMU’s major problem is not going to the subprime issues currently facing the market, it’s going to be the MASSIVE option ARM resets in 2008.

    Buy hey, buy now!

  82. 82
    cow cat says:

    For all the people claiming we “rent-wait-and-savers” are dooming the economy, consider this:

    Our country recently entered negative savings territory FOR THE FIRST TIME IN HISTORY. Everyone is in debt, and we’re having to borrow money from all over world to keep our economy afloat. This weakens us and benefits a lot of regimes we despise.

    Prudence and saving is patriotic, as it will replenish the country’s capital base the right way and reduce our dependence on not-so-friendly neighbors.

  83. 83

    C’mon Matthew,
    Why would people believe anyone with ties to the RE industry? Because a few of us aren’t out to fool people and lie to them. I’ve been telling folks for the last year that prices locally were going to drop, and I sell real estate.
    Yes, many folks with ties to the industry ( agents, lenders, etc.) are totally not trustworthy, but not every single one of us.

  84. 84

    …and I still tell people that now is not a good time to buy.

  85. 85
    Matthew says:

    Ira,

    You are right. There are a few decent RE pros out there like S-Crow and Jillayne. They are few and far between, however.

  86. 86
    IgorOfTheFabLane says:

    Matthew said:

    Wachovia = huge mark downs
    WAMU = collapsing
    Countryslide = collapsed
    Bear Sterns = in a world of hurt
    Citi = world’s largest bank just fired CEO Chucky Prince amidst major mark downs

    While the recent market turmoil has been pretty dramatic, I certainly wouldn’t say that WaMu is collapsing.

    These banks have been hit by mark-to-market accounting of assets for which there isn’t any current market, and they don’t quite know how to value them. The assets (some of which are highly-rated bonds) are still generating cash-flows.

    This is analgous to owning a house that generates cash-flows in a down housing market; you still own the house, and you still get the cash flow, but the “market” says the house isn’t worth as much today as it was six months ago. Since these are public companies, they have to account for this “paper loss”, even though the cash flows haven’t materially changed. (okay, the RE fallout is going to affect these bonds somewhat, but the degree to which they are affected remains to be seen, particulary for the senior tranches that Citigroup had to write down).

    WaMu’s stock is tanking because of the NY AG’s lawsuit, and the fear that WaMu will be cut off from reselling mortgages to fannie & freddie. There is also fear around profits on neg-am loans that are booked but not received. And that future income from mortgage related activities is going to fall. But “collapsing”? I would be very surprised if WaMu collapsed.

    If you’ve got some cojones, some extra dollars, can stand the short-term volatility, and have a long-term horizon, these banks aren’t bad bets right now. OK, I wouldn’t touch CFC, but WaMu, Citigroup & others that have diversified incomes, positive cash flows and access to capitol will be around for years to come.

    My $.02,

    IgorOfTheFabLane

  87. 87
    Eleua says:

    DJO,

    Exactly! I rent to take advantage of the difference between renting directly and renting indirectly through the bank and the REIC. Right now, that is somewhere between $30-$40K per year, and all that is tax free (IRS doesn’t tax savings – yet). My LL is a vehicle for me to extract that form of income.

    Why do they do it? Why rent out a house for less than it costs to carry? Simple – APPRECIATION!

    The way the game was played back in the middle portion of the decade was to buy a home, rent it out for a loss, and when the bank account ran dry, you refinanced or sold and took a huge cap-gain that (in theory) made up for the negative cash flow.

    This worked when homes would go up 20% per year. Now, that they are flatlining or declining, we will see the fallout in this business model.

    Obviously, raw speculators will be the first hit, and then those who bought in recent years. Once the banks break wide open, and the FED hikes rates to save the US Peso, the foreclosures will really come fast and furious.

    Right now, the housing ATM is out of cash. Mr. and Mrs. Debt-bomb are running up the plastic to keep things going. They are also not paying their mortgage. Look at the amount of vacant homes that have not yet hit the market. Banks are going to run up against their REO limits in a few months, and then be forced to sell.

    I appreciate the notation that I called the banking crisis over a year ago. Honestly, it wasn’t that tough of a call. You can’t base an economy on speculation, consmption, debt, and leverage. At some point, someone has to produce something.

    The fact the banks oriented their entire business model to servicing the “can’t lose” real estate bubble made the current situation inevitable. Back in the Great Depression, we installed a law that prevented banks from putting too much of their assets into equities. This was to keep the banks from losing everything in the event they got caught offsides on an equity bubble. That’s why we didn’t lose the banks in ’01-02.

    Instead, the banks went “all-in” on real estate speculation.

    My guess is when Great Depression 2.0 gets underway, we will have a new law limiting bank exposure to real estate.

    This means fewer loans at higher loan standards in the future. This means more savings will be required (less consumption) and fewer people will be able to buy homes (lower prices).

  88. 88
    Ubersalad says:

    You’re all screwed one way or another…you just don’t see it yet.

  89. 89
    economist my ass says:

    “Actually you’re not. You’re paying the market price, i.e. exactly what the place is worth. There is no subsidy.”

    The guy is paying $1700/month for two acres of waterfront. It might be a nice place in a remote area, away from jobs-for-renters, It might be a teardown. (Maybe it’s his mom’s house.) But it is also 2 acres of waterfront. This might be the right rent, (so no subsidy), but there is easily more to the property value than the rent for today’s improvements – (which is what you clearly imply.)

    Eleua is helping somebody to offset part of their land play, 2nd home, future residence or whatever. I’ll bet they are as happy with this deal as he is.

  90. 90
    Matthew says:

    Igor,

    You are assuming that Citi, WAMU, and others have already marked down every liability on their books. This is far from the case. The situation is going to get much worse before it gets better.

    The housing situation in America is far from reaching the bottom. Are you arguing that Citi is a buy right now? Even if they had marked all their subprime crap to market, why would you argue it’s a buy at 31? A huge chunk of their revenue streams are gone and never coming back.

    The reality is that most financial companies have grown fat the last few years by engaging in VERY risky business. They have been highly leveraged, and marked to model not to market. This financial behavior is never coming back, and they revenue streams that they have been feeding off of are essentially cut off.

    Buying these companies right now is crazy. The bleeding is just starting.

  91. 91
    Eleua says:

    Eleua is helping somebody to offset part of their land play, 2nd home, future residence or whatever. I’ll bet they are as happy with this deal as he is.

    Not for long. If I am taking a (-$36K) annual cash flow on my investment, but it is appreciating $100K per year, then it works. If I am flat on appreciation, I need to hold long enough for appreciation to come back and liquefy my investment. If I take a $100K hit on appreciation and couple that with a (-$36K) cashflow, I’m really sucking wind.

    If I hold 8 properties that all have similar financials (because I’m a dumb Californian that bought at the top of the market), it won’t be long before I’m insolvent.

    If the house EBITs for 2.2%+/-, with a (-$36K) annual cashflow, that’s a crappy investment. It might make sense to speculate, but once the fever breaks, it’s a crappy investment no matter how you slice it.

    To get EBIT at US debt + 4%, and cashflow positive, that home is going to have to come down in price a substantial amount. Having your “investment” at a 200bp discount to Treasurys and bleeding cash is just plain stupid – even for a real estate agent.

  92. 92
    Eleua says:

    Buying these companies right now is crazy. The bleeding is just starting.

    So true. There is NO WAY this ends with all our banks intact. Many of the big NY money centers are going to teeter on the brink of insolvency, and more banks are going to be taken over by the FED than most can comprehend.

    Their accounting is like ENRON’s, and their fate will be the same.

    Buying banks at this juncture may be good for a bounce, but you are juggling a worthless asset. The last one holding the bag eats a big fat ZERO.

    Good luck.

  93. 93
    IgorOfTheFabLane says:

    Mathew said Are you arguing that Citi is a buy right now?

    I personally don’t see too much downside left in Citigroup. C shares have lost 40% of their value in the last month because they wrote down a massive paper-loss. The cash flows on these assets are still intact however. They have a monster dividend, that even if it gets cut in half, is still impressive. They are currently trading at ~8 times cash flow for the trailing twelve months, (the industry average is about 13 times cash flow).

    WaMu is trading around 6.5 times cash flow, and is trading under book value. The stock tanked in a large part because of fear of the NY state lawsuit.

    In my opinion, the market has over-reacted on both of these stocks.

    Eleua said Their accounting is like ENRON’s

    Not quite like Enron’s. Enron’s accounting fabricated cash flow by selling assets with the agreement to rebuy them a short time later. They also used their stock as collateral for cash loans to fund operations. When they could no longer do accounting tricks to generate cash for operations, they were done.

    On the contrary, these banks have real cash flows based on real business. And the cash flows aren’t going anywhere. Sure, they’re in for a rough year or two, and sure, mortgages will be a small portion of what they were during the housing boom, but 5 years from now, 10 years from, these banks will still be around. And they’ll likely have found new financial products to sell.

  94. 94
    Eleua says:

    Citi has a truck-load of off-balance sheet holdings that will likely experience substantial write-down in the next 12 months.

    The reason they create these vehicles is to hide from the shareholders much of their insolvent paper. You can hold it until you are forced to repatriate it to the BS. That happens when it goes to 0.

    This isn’t over – not even close.

  95. 95
    economist my ass says:

    “Not for long. If I am taking a (-$36K) annual cash flow on my investment, but …………..Having your “investment” at a 200bp discount to Treasurys and bleeding cash is just plain stupid – even for a real estate agent.”

    That’s a whole lot of “if’s. You really got a dumb Californian with 8 properties, or is an illustrative example? After all, you know the real specifics, and that could be the case. On the other hand, good develpment property will easily sustain much bigger negative cash flows for a long period, and two acres of waterfront ain’t a crackerbox in Ballard. Or maybe the Indians on Manhattan made a good deal suckering the Dutch out of some fine beads and trade goods?

    btw, I’m no real estate agent. I don’t think it’s a particularly good time to buy. I’m just put off by braying.

  96. 96
    S-Crow says:

    And what happens to all those customers of WAMU or Countrywide that are so ticked off about their circumstances or that of others that they know and they decide to refinance or move assets ‘just because.’ It’s happening.

    There is a lot of ill will out there for some of the major lending players. And, within the industry (loan officers and others) a lot of people are vocal about their displeasure of these players.

    I know some local old timers are frustrated with WAMU too. ‘Not what they used to be’ is common theme.

  97. 97
    Alan says:

    If I hold 8 properties that all have similar financials (because I’m a dumb Californian that bought at the top of the market), it won’t be long before I’m insolvent.

    Are we speaking hypothetically here?

  98. 98
    Eleua says:

    Neither confirm nor deny. Actually, some properties were purchased in the 03-04 time frame, so there is equity to burn. Unfortunately, there have been a bunch of cash-out refis that have likely drained what equity there is.

    When I call for a repair, I have to pull teeth to get them to pony up the money. Little birdie says the owners are experiencing cash flow difficulties (ya think!).

    That’s the problem with getting high on your own supply. If you are a RE agent, and your investments are nothing but RE and RE has behaved in a very one-sided fashion for your entire career, you are blind to how your “investment” can go bad on you. There is no feedback that tells you to look for danger, because you don’t know what danger looks like.

    The sweep account for my brokerage is FDIC insured and makes 2X what my house caps-out for. We are talking a brainless, riskless sweep account outperforming real estate by 225bp. I don’t have vacancies, maintenance, cap-depreciation (aside from US Peso devaluation), bad renters, advertising, management fees, tax hikes, insurance, etc… If I need to redeem, I get free checking and can have all my cash within the business day, whereas my house has a 7% redemption fee (assuming I get full price) and it will likely take 90-270 days to get the cash.

    I don’t get it. Californians have had real estate appreciation as a fundamental tenant of their religion for my entire lifetime. As they moved to other states, they took that paradigm with them, and it doesn’t necessarily play as well in other areas.

    I’d have an ounce of compassion if they weren’t so condescending to a lowly renter. You should hear how they talk to me. It’s pleasant, but littered with condecending comments along the line of “one day you may hit the lottery and you can own your own house.” I just act the part and play dumb. Pride is an ugly thing, so I try not to personalize it, but it is very difficult.

    What little I know about them tells me they are juggling debt to carry on an appearance of wealth. Why go “all in” when you hit your retirement years? You should be preserving capital and living off interest and dividends.

    You only go “all in” if you have to,or you are stupid.

  99. 99
    NotaBull says:

    “I’d have an ounce of compassion if they weren’t so condescending to a lowly renter. You should hear how they talk to me. It’s pleasant, but littered with condecending comments along the line of “one day you may hit the lottery and you can own your own house.” I just act the part and play dumb. Pride is an ugly thing, so I try not to personalize it, but it is very difficult.”

    What is amazing to me is that the condescending attitude seems to come mainly from those that bought YEARS ago. These people are sitting on houses that there is absolutely NO WAY they could afford to buy, even on their current salaries. Their uppence will come, though, as this paper equity will be reduced when they need to sell to cash in for their retirement, as the house is all a lot of them have.

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