Seattle Bubble

• Poll: Is it ethical for a home debtor to “walk away” from a mortgage?
• Poll: What do you want more of on Seattle Bubble?
• Poll: What do you think of the Hope Now “mortgage freeze”?
• Poll: How often do you visit Seattle Bubble?
• Poll: Do you think the Dow will drop below 10,000 in the next 11 months?

Jump to the bottom to add your comment. ↓

59 responses so far ↓

• 1 [troll] // Jul 27, 2008 at 12:28 am

  thnk y nd t gt nw hbby Tm. Prdctng th ftr sn’t gng s wll fr y. Wht hppnd t rnmng th wbst t smthng lss nl?

• 2 what goes up comes down // Jul 27, 2008 at 1:37 am

  hey, nostradumbass — good to see you are back — looking to get bailed out?

• 3 SeattleMoose // Jul 27, 2008 at 8:53 am

  Prices will continue to fall until they are in line with incomes. Now that lenders are being forced back to traditional lending standards, affordability equilibrium will determine price points.

  As far as the “bailout”:

  The “bailout” was never about helping “the little people”.

  The winners - Big finance and The FED. The FED now has more say over where and how much of our tax money goes for “bailouts” of the folks they golf with. If you were a big wig banker sweating that you may lose your Cape Cod mansion and your jaguar, sweat no more.

  The losers - The dollar and the U.S. taxpayers. By being forced to reward the irresponsible, greedy, and unethical practices of big finance we have laid the grounds for “anything goes”. Instead of hearings and jail time for those who steered the ship on the rocks….they are given a new ship.

  Our elected officials have shamed themselves.

  Accountability is in full retreat.

• 4 EconE // Jul 27, 2008 at 8:58 am

  I predict that…

  1. It won’t help RAL sell his house.

  2. Nostra"golly"Us will get angrier and angrier as will the up-n-coming trolls/homesellers who stumble upon the site.

  3. RAL still won’t sell his house and will raise the asking price in spite of it’s plummeting value.

  4. Someone will start a “Flippers Losing Money” blog for Downtown Condos (not me, too lazy)

  5. RAL house still not sold will not only rant here on SB but will be yelling at people as they walk by his house, hurling empty PBR cans at them and then walk inside muttering something about the “loser” renters and how he’s not gonna give it away.

  6. Well spoken trolls will still show up presenting their fallacious arguments. However, the more “polite and PC” bubbleheads will still waste their time responding to them thanking them for their contributions.

  7. RAL will be seen wandering around his neighborhood yelling profanities at “invisible renters”….house still not sold, but needing a new coat of paint by now.

  8. Bubbleheads will no longer be considered “whiners” but will be labeled as “mean people” . Ballard homedebtors will get a second “Mean People Suck” sticker to go next to their “Visualize Whirled Peas” sticker on their Volvo Wagons. They will cross out “People” and replace it with “Renters” however. The sticker will be made of 98% post consumer recycled paper.

  9. RAL will live out his retirement in Seattle (with the occasional vacation to Lancaster), forever cursing Tim and the SB crew.

• 5 Garth // Jul 27, 2008 at 9:33 am

  There may be a reversion to more conventional financing, but there is nothing that takes the banks back to their previous business model which was to carry a much higher percentage of their loans on their balance sheets. 0% has become 3-5%, but that is still nowhere near 20%.

• 6 [troll] // Jul 27, 2008 at 9:39 am

  cn,

  Thnks fr th gd wshs.

  Yr pl,

  RL

• 7 Captain Kirkland // Jul 27, 2008 at 9:41 am

  EconE- hilarious.

  If you read this bill, its a total joke. Seattle Mouse summed it up nicely. I’d like to add some facts to his analysis.

  1) the only thing encouraging non-owners to buy a property is a $7500 tax credit which is….get this….a LOAN that has to be paid back!! ….Great tax incentive.

  2) lenders don’t have to abide by the terms of this legislation…and they won’t because there are much easier ways to get themselves off the hook for less money (ie. Short sales).

  Inventory just passed 13,500 for King County SFH!!! Yikes!

• 8 Scotsman // Jul 27, 2008 at 11:13 am

  LOL, EconE!!

  The tax credit for first time buyers was one of my favorite parts. What a farce. But it illustrates perfectly much of the bill where things look great until you read on. There are so many restrictions and voluntary aspects that very little will end up having any impact.

  What will have an impact, and is very bad news, is granting authority to the treasury to invest directly in Fannie/Freddie and an $800 billion increase in the federal debt limit to make it all possible. That money will get spent and not do a thing to save housing.

  Next disaster? Bailing out the FDIC which only has half the capital reserves needed to bail out WAMU, let alone the hundreds of other banks that will probably fail.

• 9 TJ_98370 // Jul 27, 2008 at 12:09 pm

  Off Topic –

  What does this say about the real estate industry and / or the printed media?

  LA Times Real Estate Section - the end of an era

  …….”In case you missed the announcement today in Real Estate, because of reductions in staff and space, the Sunday Real Estate section has printed its final edition…..

• 10 [troll] // Jul 27, 2008 at 12:42 pm

  Wht ds ths sy bt th rl stt ndstry nd / r th prntd md?
  ………….

  t sys prnt md s t. (hs bn dyng fr yrs)
  ntrnt s n.

  Ds t sy smthng dffrnt t y? Cn y spn t ? C’mn gv t g. Rd smthng nt t tht rlly sn’t thr.

• 11 rose-colored-coolaid // Jul 27, 2008 at 2:31 pm

  I picked “slow the bust”. But I want to add a caveat to that. The slowing will not be very noticeable due to the fact that the bust was accelerating.

  Think of it like dropping a sheet of paper. It should keep accelerating until it hits the bottom, but due to large surface area and low mass, air resistance is able to prevent it from speeding up the whole way. It’s still going to fall until it hits the bottom though.

  That’s what this bailout will do (IMO).

• 12 Eleua // Jul 27, 2008 at 2:33 pm

  EconE,

  The reason your post (#4) is funny is because it is true.

• 13 Groundhogday // Jul 27, 2008 at 4:07 pm

  “2) lenders don’t have to abide by the terms of this legislation…and they won’t because there are much easier ways to get themselves off the hook for less money (ie. Short sales).”

  Really key point. If the appraisal is accurate, then what lender would willingly take 87% of appraised value when they could just force a short sale for 90% of appraised value (100% less realtor fees and transfer tax).. The only way this program works is if there is rampant appraisal fraud.

• 14 [troll] // Jul 27, 2008 at 6:25 pm

  l - wh sys t’s tr?

• 15 Everett_Tom // Jul 27, 2008 at 6:32 pm

  6. Well spoken trolls will still show up presenting their fallacious arguments. However, the more “polite and PC” bubbleheads will still waste their time responding to them thanking them for their contributions.

  You never know.. when I first started posting, my comments could certainly have fit under the “troll” categorie.. (I have to buy a house because my wife wants one, and I have to because I have a bunch of pets, it’s not an investment it’s a home, holding on for the long term will fix all ills, What about my lost tax break? etc..).

  The well reasoned and polite arguments showed me the error of my ways, and allowed me to look at where I was coming from objectively..

  Today’s Troll my be tomorrows bubble evangelist. (or an even angrier troll.. ya never know:)

  Regardless of item #6, I still had a good laugh from your post.

• 16 Alan // Jul 27, 2008 at 6:38 pm

  Everett_Tom,

  You know that this is all just a big conspiracy to talk other people out of buying homes so that we bubblers can get a good deal without any competition, right?

  I guess you do now. Welcome to the club.

• 17 [troll] // Jul 27, 2008 at 6:42 pm

  cn - s d y hv th crg t dmt tht y cld ls b cnstrd s trll by sm bsrvrs? r bcs y mstly gr wth th tn f th psts - y rn’t trllng - y’r tllng ‘th trth’?

• 18 Sniglet // Jul 27, 2008 at 6:43 pm

  As we’ve been discussing in the forum, I suspect that many lenders are too broke to even consider offering significant loan modifications. A reduction of loan principal, or short-sale, require an IMMEDIATE write down in a lender’s books.

  It is far better to let a home go to foreclosure and let the REO languish indefinitely on the market with an unrealistic price, or just never bother bringing proceedings against delinquent borrowers (letting them live rent-free), rather than having to make write-downs on the loan value that will then put the lender in violation of regulatory reserve requirements.

  http://seattlebubble.com/forum/viewtopic.php?f=2&t=1498&sid=6cbb1649664daacdfdf9ae034d536efc

  The legislation just passed doesn’t change this equation at all. The irony is that many struggling borrowers will likely have to wait until the FDIC places their lender under conservatorship before they will be able to work out a reasonable loan modification. Just look at how the FDIC is being much more cooperative with IndyMac borrowers.

• 19 Everett_Tom // Jul 27, 2008 at 6:43 pm

  Alan,

  ah HA! so it IS a conspiracy! I’d better call my Real Estate agent and apologize for stopping our home search about 7 months ago. And tell our landlord we’re breaking lease, and buying a home RIGHT NOW.

  err.. wait.

  If I join can I get a house with any competition too? please? please?

• 20 Lake Hills Renter // Jul 27, 2008 at 7:03 pm

  “However, the more “polite and PC” bubbleheads will still waste their time responding to them thanking them for their contributions.”

  I think I’ve been insulted.

• 21 EconE // Jul 27, 2008 at 7:15 pm

  Nostra….of course I like to stir the pot…BTW…do you sell condos?

  LHR…it was tongue in cheek.

• 22 Scotsman // Jul 27, 2008 at 7:22 pm

  With credit to Hedgie over on the TickerForum, here’s a list of just some of the problems with the recent bill:

  -FHA dumping grounds will lead to massive tax payer hit
  -subprime Mods to FHA been tried already. Vulture funds buy deeply discounted subprime loans then discount notes, clean borrower up and refi through FHA. They still default.
  -Fha default rate at 19%
  -50% default after modifications
  -45% of subprime and 83% of Alt-A were stated and likely will not qualify.
  -Round 2 subprime/Alt-A implosion coming. Fitch values to fall big in non-conforming states so what happens when they reduce note now and values fall 30% more.
  -If we were at bottom and market was DONE this plan may help
  -artificially trying to support house prices will lead to longer pain
  -$350k 2/28 or 3/27, pay option arm, 5/1 interest only is better monthly payment than a new $250k 30-yr fixed FHA at 6.95% with a 1.5% MIP annually. Why would borrowers want to get out of their loan into a new loan where they give up equity.
  -renters society - monthly payment is all that matters. Bailout is NOT cheaper than renting
  -banks will have to discount too much to get ratios to work. They would rather foreclose.

• 23 Lake Hills Renter // Jul 27, 2008 at 7:55 pm

  “LHR…it was tongue in cheek.”

  I know — as was mine. =)

• 24 Brian // Jul 27, 2008 at 8:12 pm

  I wouldn’t so much call it “slow the housing meltdown” as preventing a housing collapse. I hate parts of the provision, but allowing the GSEs to fail would have created a Great Depression.

• 25 darth_z // Jul 27, 2008 at 9:42 pm

  Notradamus,

  I’m surprised that you cannot see through the crystal ball. The prediction of EconE in #4 seems quite accurate. If you fail to see it, you should change your name.

• 26 Garth // Jul 27, 2008 at 9:47 pm

  The only way this program works is if there is rampant appraisal fraud.

  Maybe some of the realtors know the mechanics of what is and is not fraud in the context of an appraisal better than me, but I do know that several mortgage brokers I spoke with before buying my house encouraged me to take the difference between the appraisal and the selling price out it cash to “do improvements” in our case on a below median house in seattle this was over $50,000 pretty easy to see how this might start to lead to some fraud. The broker that the FBI busted locally made over 700 grand on one transaction.

• 27 Eleua // Jul 27, 2008 at 10:15 pm

  Brian,

  I would argue that the GD 2.0 is in the cards and the viability of the GSEs are irrelevant as to the outcome. All this did was shift the imbalance further to the side that will create the next GD.

  This was inevitable at the time of the creation of the GSEs. The end goal was to try to obviate the market mechanism for the prudent use of captial (in this case: the lending of money to buy homes). This created an upward bias in home prices that eventually fed on itself (bubble)).

  We are now going to pay for that in a very grotesque and merciless fashion.

  There is a very good chance we don’t make it out of 2008 with the GSEs intact. It would have been better to let it go several months ago.

  Yours truly,
  Ernst Stavro Bloviator - Senior Fellow, Institute for Economic Reality.

  Economic reality is not an option. It is mandatory - even in Seattle.

• 28 Robert Wojciechowski // Jul 28, 2008 at 4:21 am

  I am not sure there is so much harm in the near term done if all the foreclosure people get a bailout or at least some of them and I do not see where people will have to pay in taxes.

  The FED has unlimited supply of money. Normally printing too much money or increasing too much supply is not a great thing because of inflation and inflation I guess could be seen as a type of tax because it makes people poorer because not everybody will get a raise.

  So let’s analyze if bailing out a family facing foreclosure will add to inflationary pressure:
  1) By helping pay for the loan of a person facing foreclosure the govt is not increasing the residual income of this family. In fact the residual income probably has dropped significantly after ARM adjustment. So this family will not be contributing to inflation.
  2) By giving a bailout to irresponsible bank the FED also does not contribute to inflation. The bank spending will not increase from the levels seen in the past because the bank counted on the person who faces foreclosure to pay off the loan. Now instead of the family paying off the loan it is the FED that is paying off the loan.

  Now people who are financially responsible probably feel that they are getting screwed. Maybe. But nobody cares about them anyways. The FED has to look at the big picture and the economy as a whole. And it is better to bail out banks and people facing foreclosure.

  Now this can obviously encourage banks and people to take even more risks in the future and thus creating even more ugly bubbles in the future. Yes - this is the risk that the FED is taking and we will have to see in the long term if this happens. For now people who are irresponsible financially get rewarded the most and it is in the interest of American people.

  Another thing is whether inflation is such a bad thing. Well it does get rid of US debt. For example Chinese banks which hold US currency would get the value of their holdings wiped out. Which is partially good for America in the near term because there is less liability. Long term this can back fire because nobody will trus the US - but who is trustworthy anyways. The bad side of inflation is ofcourse the issue that some people will get poorer but even those people can get some bailouts if the FED is creative enough. The IRS for example started giving people rebates and people were all happy about this.

  So that’s that. I think this is all not a big deal. People take things too seriously and the FED is at least laid back and just looks at this from a different angle. Irresponsible people just need bailouts and they will potentially need more of them as time goes on.

• 29 what goes up comes down // Jul 28, 2008 at 7:31 am

  RW: So that’s that. I think this is all not a big deal. People take things too seriously and the FED is at least laid back and just looks at this from a different angle. Irresponsible people just need bailouts and they will potentially need more of them as time goes on.

  LMFAO

• 30 Herman // Jul 28, 2008 at 7:40 am

  The Chinese own something like 20% of US debt. Americans own something like 60% of it. Inflation screws our own more than the Chinese.

• 31 Dave0 // Jul 28, 2008 at 8:17 am

  This has nothing to do with this post, but just a general question… Isn’t it time for the May Case-Shiller numbers? Did I miss that post? I’ve been looking forward to seeing what those look like.

• 32 Dave0 // Jul 28, 2008 at 8:21 am

  Nevermind, I just googled it and noticed the May Case-Shiller numbers are supposed to come out tomorrow.

• 33 The Tim // Jul 28, 2008 at 8:41 am

  That’s correct, Dave0. Case-Shiller data always comes out on the last Tuesday of the month.

• 34 Matthew // Jul 28, 2008 at 8:42 am

  Robert,

  The Fed does not have an unlimited money supply. They have a balance sheet that consists of about 800 billion dollars. Normally the majority of that balance sheet consists of over 700 billion in Treasuries. However, if you look at what what was on its balance sheet as of May 08, the number of treasuries has slipped to 358 billion. Their term auction lending program takes up over 100 billion, credit facility another 100 billion, dealer credit facility another 20 billion, repurchase agreements another 100 billion, etc, etc.

  The U.S. Treasury does in fact have an unlimited money supply and they are the ones that have the ability to “print” money. The FED merely sets the target rate at which money is loaned from the fed. As we can see, despite the FED dropping rates substantially, this may in fact have no impact on REAL interest rates. Mortgage rates are actually increasing despite the FED lowering their target rate.

  The problem with the Treasury simply printing more money is inflation. You cannot inflate your way our of this bubble. If you print twice as many dollars, the value of the dollar immediately drops by half. It is in the best interest of this nation to maintain a strong dollar. Attempting to purge this bubble through inflating the money supply is an absolute horrible idea. It doesn’t rid you of the debt (because your money you are attempting to pay down your debt is worthless) and it also causes massive price inflation that cripples the consumer.

• 35 Eleua // Jul 28, 2008 at 10:43 am

  Matthew,

  Thanks for explaining how the FED isn’t an endless cash machine. You are so correct in this and most people get this completely wrong.

  I would only modify one part of your posting, and it would only be for clarification purposes as you are factually correct in the statement.

  The FED merely sets the target rate at which money is loaned from the fed.

  True. Very true. The FED sets the “Discount Window,” which is where money can be borrowed directly from the FED at a predetermined rate. This is a somewhat obscure rating that is not normally tracked by the retail trading market.

  The interest rate that most people track is the “Federal Funds Target.” This is the rate that CNBC venerates with a religious fervor every 6 weeks and is the one that generates all the headlines. The misunderstood point is that the FED sets that rate. It does not.

  The FED monitors the daily transactions between member banks and publishes an “Effective Federal Funds” rate. This rate tends to hover around the “target” (which is why it is called a target). As the EFF trends above the FFT, the FED will inject money into the banks to bring the interest rate down, and when the EFF trends below target, the FED will withdraw money to bring the rate up. This is for stability purposes for the member banks to be able to balance their end-of-day cash reserves and nothing else.

  Should the EFF trend enough above the target that FED injections/withdrawls become excessive, the FED will move the FFT to alleviate the amount of daily intervention.

  This is what gets CNBC all wet. Why? Nobody knows.

  The EFF moves with the amount of credit that is generated by the member banks. The more they loan, the more reserves they need to balance them. As their loan portfolio swells, their thirst for cash also swells, and that moves the EFF upward. The same also works in reverse. This is why the FED “cuts rates” when the economy is in the dumper. They are not trying to stimuate the economy, but are following it down. CNBC gets it wrong (as usual).

  Mortgage rates are not keyed off the FFT, which is why the massive drops in the FFT have not budged mortgage rates. The ability to sell mortgages into the secondary market moves the mortgage rates.

  Matthew, I know you already know this, but I thought I would use the occasion of your posting to help expand how the FED works for those that are unaware. I realize that some brainiac like RAL already knows everything, but for the rest of us in the Great Unwashed, I thought a discussion of the basics of the FED was in order.

• 36 [troll] // Jul 28, 2008 at 12:53 pm

  “Nstr….f crs lk t str th pt…BTW…d y sll cnds?”

  cn - strrng th pt wth prdctns s n thng. Prtndng t knw th ftr, r vn thnkng yr prdctns r ctlly rl, .g. “tr” - s ftn sgn f dlsnl mnd.

  Y wll ntc t “str th pt” (t pt t mldly, by dlbrtly ppsng smn’s “hly pnt f vw”), bt dn’t ctlly clm t knw th trth.

  s y cn s, y’v gt prtty gd fllwng hr wth yr wn slf-crtd trths, bcs sm ppl ctlly blv y :). nd tht’s wht m tlkng bt - th mnt y strt t drnk yr wn Kl-d, t’s gm vr fr y…

  thnk y cn rlt t wht ’m syng.

• 37 [troll] // Jul 28, 2008 at 12:55 pm

  cn - n, bt cn pnt y t smn wh slls cnds (srry, frgt t nswr yr thr qstn). Cnds r prtty nxpnsv rght nw, dpndng n wht y nd/hw mch mny y wnn pt dwn.

  nd dnt wrry bt th ’slmp’…. f y r rdy t by.

• 38 david losh // Jul 28, 2008 at 2:18 pm

  Finally some pertinent information on the supply of money.
  It is the secondary mortgage market that is the concern. The government pumping money directly towards mortgages or propping up loans in place is simply a cash infusion. More cash, I think, is more liquidity.

• 39 Eleua // Jul 28, 2008 at 2:30 pm

  David,

  If the secondary market for US mortgage dreck is incapable of absorbing the loans that were written during the go-go days, the US.gov is only going to make matters worse by putting a “guarantee” on mortgages. This will likely freeze the non-gov guaranteed mortgages into the next ice age. The US.gov guaranteed crap will not be of sufficient volume to get things moving. The price of homes will continue to decline (due to lack of mortgage opportunities), which will strain the last beacon of hope in the securitization of mortgages (Uncle Sugar.)

  The #1 reason people are defaulting is because they have lost hope of selling their homes for more than they paid, and the banks have to eat the loss. This is what happens in the aftermath of bubbles.

  Go revisit the 86% decline in the NAZ earlier this decade. The only reason people were buying that crap was because they always thought someone dumber than they would come along and pay even more for worthless stock.

  JNPR: $244 at the peak. 18mos later - $5.

  The .gov didn’t pump money into mortgages. They capped the capital gain for anyone seeking a workout, which eliminates the biggest reason people even buy homes at these insane prices. The US.gov pumped more money into our rancid banking system to keep the commercial paper rolling. It was due for renewal after the “all clear” was sounded after the BSC takeunder. (BSC aftermath + 91days = July banking swoon). You will notice that the money the FED burned in keeping our rancid banks afloat in the TAF/TSLF was replenished by the taxpayer. All this did was buy time. The outcome did not improve.

  I would argue that a deflationary collapse was guaranteed by this action.

• 40 Matthew // Jul 28, 2008 at 10:58 pm

  E,

  I’ve talked about the EFF and FFT on this forum before, but I think half of the people just skip the messages or start falling asleep. They would rather rehash many of the same arguments such as “Seattle has lots of jobs, they aren’t building any more land, everyone wants to live here, etc” rather than attempt to understand the financial peril our credit markets are facing. Oh well. You and I both know what is coming, I won’t be surprised when the wheels fall off!

• 41 Robert Wojciechowski // Jul 29, 2008 at 2:33 am

  Great discussion. Matthew - maybe some people fall asleep during discussions about money supply and banking system - but it is not possible to understand anything about this situation without familiarity with those basic concepts.

  Eluea - you sya that:
  “The #1 reason people are defaulting is because they have lost hope of selling their homes for more than they paid, and the banks have to eat the loss”
  So did anybody come up with statistics what percentage of houses or apartments were bought for speculation purposes in the Seattle area? What is the supply of those houses now? Also - do you think that people who bought at the peak but for living will actually try to default because their mortgage is more than the value of their house?

  Eluea - you seem to push the theory that at this point printing more money starts inflation. Inflation is when too much money is chasing the same product. I would agree in general. But let’s look at genuinely distressed home buyer and an irresponsible bank.

  If the govt decided to help this distressed homebuyer who over extended himself - then the govt would not actually contribute to inflation. The distressed homebuyer bought the house on ARM and even if the govt bails him out the income he has left for buying cars or food does not change. However what can change is that this person then starts relying on govt bailouts and engages in risky behaviors. Same goes for the banks.

  So I see that in the short term a govt bailout prevents the houses from depreciating as much. But long term benefits are not as clear.

• 42 Matthew // Jul 29, 2008 at 7:58 am

  Robert,

  A reversion to the mean in home prices is inevitable. Look at Robert’s Shiller’s graph of home prices over the last 100 years and you will see that they follow a fairly straight horizontal line when adjusted for inflation. A government bailout may slow declining prices, but it will not create a false bottom. Look at Japan in the 90’s as a perfect example of this. They cut their interest rates to 0%, but yet home prices were still crushed it just took a decade to revert to the mean, rather than a few years.

  The bottom line is that home prices in this country will return to 3-4 times income. You may see a slightly higher number than that in more desirable areas, but long gone are the days when people are buying houses at 6-7 times their median income like you saw in this area.

• 43 Eleua // Jul 29, 2008 at 2:51 pm

  Bainbridge Isl. median house price - $845K
  Bainbridge Isl. median household income - $75K

  Historical norms for sustainable debt in normal economy 2.5X - 4X income.

  Gotta plan on an overshoot with high interest rates, credit crunch, and job losses.

  Do the math.

• 44 jon // Jul 29, 2008 at 3:29 pm

  $850K is the average listing price for Bainbridge, but other sources have the average value at $625.

  Since the bulk of the existing population bought before the recent run up in prices, their mortgage will be considerable lower, half not even having a mortgage at all. So the real question is can Bainbridge attract new buyers with who can afford $625K after cashing out of their existing home. I’m assuming Bainbridge is not the selling to many first time buyers, and most people contemplating a move the Bainbridge would have bought their previous home prior to its run up in value.

  Seems ok to me.

• 45 Eleua // Jul 29, 2008 at 3:56 pm

  Jon,

  I don’t know where the $625K price comes from. All my sources say that the transaction median is in the mid $800s.

  Even so, your numbers still present a problem.

  So the real question is can Bainbridge attract new buyers with who can afford $625K after cashing out of their existing home.

  You are assuming that people will have equity to transport. I seriously doubt it. The bulk of off-island buyers come from California, and it has been in the tank for 9 months. There is very, very little California equity money coming up here. The bulk of the equity buy downs have come from King County, and that has been very small compared to what the Californians were bringing, and it has been shrinking.

  Even so, assuming 4X income, that’s only $300K, which is about half of what you are saying is the transaction median. I believe 4X is too high and Bainbridge will experience the inevitable crunch down to the 2X-2.5X, with a declining income on top of that.

  Equity buy-downs, insane lending, and unrealistic resale expectations drove BI real estate to the 12X income that it currently experiences. Reality is looming and I am confident that the newer generation of sales will start to reflect that reality as soon as the property bust hits hard with a stock market crunch on top of that.

• 46 Eleua // Jul 29, 2008 at 4:12 pm

  As far as attracting incomes capable of justifying a $625K house goes, I think we need to get some perspective.

  My stats might be a year or two old, but they are good enough for this purpose.

  The highest income in the state is Medina with an median in the $150K range.
  Mercer Isl. is in the mid-$90K range.
  Bainbridge Isl. ranks #24 in the state with $75K/household (not per capita).

  Bainbridge is pretty cool, but it is quite a haul to Redmond and Bellevue. It rocks if you work right in Downtown, or sell real estate on the island. If you work out of your home, that also works. Mercer and Medina have far greater opportunities to be close to higher incomes than Bainbridge.

  You have to love the ferry or it sucks bananas. The nearest shopping is almost an hour away in Silverdale. Ferry tolls go directly against what you have left over to put toward a house payment. If you don’t work right in DT Seattle, your car (even a Toyota Pious with “Obama ‘08″ bumpersticker) will become very expensive very quickly.

  If the WSDOT raises ferry tolls, that is going to hurt. Their diesel fuel is just as expensive as yours and mine.

  If WaMu gets taken under, employment in the urban core is going to get pounded.

• 47 TJ_98370 // Jul 29, 2008 at 4:21 pm

  Jon,

  I cannot find any current news links but Bainbridge does have significant housing affordability issues. I remember reading about how key public service providers such as police officers, fire-fighters, and teachers could not afford to live on the island because of housing costs, which resulted in shortages of qualified individuals in these type professions.

• 48 jon // Jul 29, 2008 at 4:26 pm

  My source was http://bainbridgenotes.wordpress.com/2008/04/30/island-home-prices-down-10-in-six-months/

  That links to here, http://realestate.yahoo.com/Washington/Bainbridge_Island, which gives the asking price and the zillow data. So basically Zillow. I wouldn’t trust Zillow on individual houses, but for the average for a city I would lend it more credence.

  The figure is $770K at http://www.ziprealty.com/neighborhood/t-903/Bainbridge_Island.html, but that was as of the peak.

  Often times the median of people who already live somewhere cannot not afford to buy there, because they bought when prices where lower. That doesn’t automatically mean that prices will go down. It can stay at that price provided the area is attractive enough to sell houses to new people moving in. I don’t have data for the median income of new Bainbridge residents, but I expect it is well above 75K.

  The figure $866K is listed here,
  http://bainbridgeislandferrytails.com/docs/kah%20-%20residential%20prices%20june%202008.pdf, but that is all transactions, not all homes. The fact the new transactions are so far above the median suggests that Bainbridge indeed has no problem attracting well heeling new residents.

• 49 jon // Jul 29, 2008 at 4:30 pm

  TJ_98370,

  That is an entirely different matter. If they can’t get enough municipal workers, they have to raise their offering salary or some such adjustment. Living on an island is not without its downsides.

• 50 Eleua // Jul 29, 2008 at 6:44 pm

  Median household income for 98110 2005 is $75,449. In 1999 it was $70,110. (census data - don’t ask how they got 2005 data for a census taken in 2000)

  Either way, it still portends Price/Income problems, no matter how you slice it.

• 51 mikal // Jul 29, 2008 at 6:58 pm

  I love it when Eleua takes a break from building his apocalypse bunker and contributes his wonderful opinion.

• 52 whats my name // Jul 29, 2008 at 7:42 pm

  “Should the EFF trend enough above the target that FED injections/withdrawls become excessive, the FED will move the FFT to alleviate the amount of daily intervention.
  This is what gets CNBC all wet. Why? Nobody knows.”

  The banks key their prime rate to the FFT. Perhaps CNBC thinks this will be of interest to that portion of their viewers with credit cards, heloc’s or business loans.

• 53 whats my name // Jul 29, 2008 at 8:22 pm

  “As we can see, despite the FED dropping rates substantially, this may in fact have no impact on REAL interest rates. ”

  Depends on the loan. If you have credit cards, heloc or business loan, it did affect your rate.

  “If you print twice as many dollars, the value of the dollar immediately drops by half.”

  Inflationary, but not inflation itself. Nobody is talking about printing double $. You are also offsetting destroyed dollars.

  ” It is in the best interest of this nation to maintain a strong dollar. ”

  Purely personal viewpoint. Do you think Boeing agrees?

  “Attempting to purge this bubble through inflating the money supply is an absolute horrible idea. It doesn’t rid you of the debt (because your money you are attempting to pay down your debt is worthless) ”

  Hyperbole aside, the obligation is in nominal dollars, regardless of the value of your currency today. Yes, rates will adjust where people perceive a loss in purchasing power - to the degree that it can be done. Rates are likely to go up, but hold the panic and check the 1 year TCM history on the Fed site. People haven’t been willing to take a yield like this since the great depression of 2004.

• 54 Eleua // Jul 29, 2008 at 8:25 pm

  @ What’s My Name,

  The banks key their prime rate to the FFT.

  No. You have it backwards. The FED sets the “target” based upon how the banks are lending overnight money to one another to balance reserves. The banks charge various interest rates based upon what the market conditions for their products allow.

  If the banks were keying their interest rates off the FED, please ’splain how mortgage interest has not dropped with the FED lowering the target from 5.25 to 2.00. Interest rates on cards are up, but overnight lending between banks is at a lower rate.

  FED follows. FED does not set.

  @Mikal,

  I’m glad I can take time out of my paranoia to make your day. It is the little things in life that make it worth living.

• 55 whats my name // Jul 29, 2008 at 9:21 pm

  “The banks key their prime rate to the FFT.

  No. You have it backwards”

  You are kidding me right? You do not know what the prime rate is? That bunker is deep indeed. Ignoring LIBOR based loans for the moment, most floating rate bank debt, (which is most bank debt by the way), accrues interest at the bank’s “prime rate” plus a spread. The banks announce separately, but generally move their prime to the FFT +3% within 24 hours of a Fed announcement. If you have a prime based loan, the rate moves the day the prime does.

  Mortgage loans are primarily made by mortgage companies. A relative few are made by banks as loans (yes, poor WAMU). Even bank originated mortgage loans are usually made as a for sale product for the secondary market because banks don’t like to hold long term assets against short term liabilities.

  I’ll repeat myself: “Perhaps CNBC thinks this will be of interest to that portion of their viewers with credit cards, heloc’s or business loans”. There’s more to credit than mortgages.

• 56 Cheapseats // Jul 29, 2008 at 10:25 pm

  From Wikipedia

  http://en.wikipedia.org/wiki/Federal_reserve#Interbank_lending_is_the_basis_of_policy

  “The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed.”

• 57 Eleua // Jul 29, 2008 at 10:34 pm

  Whats my name,

  I suggest you go to the NYFED site and spend some quality time learning about the FED.

  The FED follows. CNBC is a bunch of idiots.

• 58 whats my name // Jul 30, 2008 at 7:14 pm

  Eleua,
  Now I know you’re pulling my leg. I specifically avoided addressing your nearly correct mechanics for FFT changes because how the FFT gets to where it goes is completely beside the point vis a vis CNBC. It is after the FFT changes are announced that the banks change their prime rates. Perhaps less erudite than tracking interbank lending, but far more compelling to the tens of millions of Americans whose borrowing rates are immediately impacted by prime rate changes. The CNBC idiots get that. It’s their business.

• 59 Eleua // Jul 30, 2008 at 11:49 pm

  WMN,

  My point is that the market determines rates, not the FED. The FED is reacting to what the market produces, not the other way around.

  The FFT is a thermometer not a thermostat.

  Believe what you wish.

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