Interesting story from Kirsten Grind over at the Puget Sound Business Journal: Experts see more subprime-loan pain ahead
Another big wave of subprime mortgages will see interest rates reset to a much higher rate over the next six months in the Seattle area, an indication that the Puget Sound region might still be facing further economic trouble.
The large number of resets mean it’s possible that foreclosure rates could continue to rise across the state as homeowners struggle to make higher payments. Banks, already weighed down by bad loans, could face an even more hefty load of troubled mortgages on their books, according to experts.
The result could be a damper on some sectors of Washington’s economy — including the housing market — which has so far fared better than many states in recent months.
About 12,600 subprime loans are scheduled to reset in the Seattle-Tacoma-Bellevue area over the next six months, or about 52 percent of the subprime loans left to reset in the area…
In addition, a large chunk of Alt-A loans — known for little or no income documentation — will start resetting with the possibility of higher rates in about a year, a trend that mortgage experts are watching warily because less is known about their loan performance.
Reading the entire article, I can’t help but see an eerie similarity to what has already happened down in California. The “experts” quoted in the article claim that since home prices are only down 5-10% here, loan resets won’t be as big of a deal as they have been in the Golden State. But when most people put 0-3% down, it seems to me that a 5-10% drop in prices is more than enough to send those people into foreclosure.
I don’t think the Seattle-area will see as many foreclosures as San Diego or Sacramento, but I do think we’ll have our fair share, which will probably be more than any point in Seattle history.
(Kirsten Grind, Puget Sound Business Journal, 08.22.2008)
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53 responses so far ↓
1
EconE
// Aug 25, 2008 at 11:05 am
I see that they have fairly concrete number of subprime loans. Any information on the number of Alt-A loans? Especially stated income and option ARMs?
2
vboring
// Aug 25, 2008 at 11:12 am
12,600 subprime loans resetting in the next six months for an area with a population of 4 million people.
is that a big number or a small one?
if they all get put on the market, they’ll increase the inventory by about 50%. so it sounds like a big number.
3
patient
// Aug 25, 2008 at 11:20 am
It woud be interresting to know volume and reset distribution for all ARMs, subprime, ALt-As and prime bulked together. I don’t think it matters that much what flavour they are. If the borrower are underwater when the ARM resets I wonder how strong the motivation is to either make the much higher monthly payments or refi to a fixed loan and make payments on a loan significantly bigger than what they can buy a similar home for. That is if they even can make the higher ARM payments or qualify for a fixed loan. I bet many counted on equity growth to bail them out when it came to reset time, even many prime borrowers.
4
Birdie Num Nums
// Aug 25, 2008 at 11:57 am
On a related note, see this article on “Liar Loans” or so-called “Ninja Loans.”
5
Seattle Landlord
// Aug 25, 2008 at 12:30 pm
Seattle is rank 176th in foreclosure out of 230 metropolitan areas according to Realty trac. Tim, you keep referring Seattle will be the same as San Diego. It is like comparing from apples to oranges. Remember, 70% of Alt-A loans had originated in CA and FL.
6
softwarengineer
// Aug 25, 2008 at 12:48 pm
IF YOU’RE SELLING GROCERIES DO YOU COUNT FARMERS THAT GROW THEIR OWN FOOD AS CUSTOMERS?
No, you eliminate them from your analyses.
Same thing with the top 10% of the household incomes, that mostly bought in to the Seattle RE market many years ago. They have their vegetable garden at home and they don’t need another RE farm [they're simply not in the market].
So, if the top 10% of the bottom 90% of household incomes in Seattle theoretically may qualify to buy, what percentage of them too already have a farm?
I’d say almost all of them too…..which brings me to the $10,000 question….who needs food at the RE grocery store?
A very small percentage of us, especially when hardly none of the bottom 80% of household incomes qualifies for these Seattle jumbo loans anyway.
No. I disagree, approx 13,000 units needing subprime replacement buyers equates to about $5 Billion in unsold stock, just in Seattle alone. Ask a Seattle banker if that isn’t a massive number. Do you want to bail ‘em out with a tax increase?
7
mike
// Aug 25, 2008 at 1:04 pm
The subprime bubble is finnally about to burst in Seattle…. This is part 1 of what happend in CA. Part 2 is the Alt-O’s…..
The simple reality is that most houses in Seattle aren’t worth 500k to 1Mil…. more like 200k-400k. Reality will set in. Household incomes ultimately drive home prices. Last time I checked middle class incomes haven’t gone up in 10 years…. guess where that puts the true value of RE? Take a look at seattle home prices in 1998 that’s close to where the bottom will be.
8
b
// Aug 25, 2008 at 1:06 pm
Seattle Landlord -
Foreclosures do not start to happen on a large scale until home values decline, not vice versa. Until your house is underwater, you have a lot of other options other than foreclosure (like selling). Also, please keep in mind that WA has about 1/3 the population of FL, and about 1/6 the population of CA. So saying that 70% of bad loans were originated in those two states is meaningless unless you compare it against the size of those states.
Here is data at the state level for Alt-A and other information, like % non-owner occupied and such:
http://www.newyorkfed.org/regional/States_AltA_2008_07.xls
9
Ray Pepper
// Aug 25, 2008 at 1:16 pm
3 words that will prove to be heaven, in the years to come, for many here!
non-recourse state!….Life is too important…
10
being patient
// Aug 25, 2008 at 1:17 pm
Seattle Landlord,
I agree with comparing Seattle to California, I really don’t see the comparison.
What % of the people will not be able to afford their loan when it adjusts or what % will just walk away? I think that those numbers are hard to predict.
Also what % of the resets will the homeowner be able to afford their home.
Also look at the areas that have been hardest hit by the foreclosures in California and the other areas.
Just like it has been stated on this site certain areas will not be hit as hard as others.
11
vboring
// Aug 25, 2008 at 1:35 pm
“certain areas will not be hit as hard as others”
my understanding is that within a given metro area, everything will eventually be hit.
the areas with high concentrations of subprime lending see the foreclosures build up first, this forces prices in those areas down first, but it doesn’t stop there.
eventually, the price pressure from these areas pull down the prices in the surrounding areas until the prices across the whole metro area have reverted to their normal state relative to each other and to incomes in the area.
so, the newest most overpriced areas will crash first, but even established middle class neighborhoods must eventually be affordable to middle class folks using normal financing. otherwise, there will be nobody to buy.
12
sunsplint
// Aug 25, 2008 at 1:43 pm
Is there any way to split the forecasted foreclosures to the type of property they are linked to? For example, are the majority of the loans linked to condos that can be rented easily as compared to single family houses which have thier own inherent problems.
13
John
// Aug 25, 2008 at 1:49 pm
It is funny that the housing crash has chased away the flippers/investors, now we have a bunch of landlords telling us how they bought gazillion years ago and rents are only going to go up. I can’t wait to see who will show up after these landlords are proven wrong and disappear. Probably Bill from Queen “no bubble here” Anne.
14
being patient
// Aug 25, 2008 at 1:58 pm
there will be nobody to buy.
When prices hit a certain There are still people buying houses today. When levels get to point buyers will reenter the market and investors will come back on board. At point that is I am not sure.
Don’t you think at some point at the banks will lighten up on lending restrictions? Also I am not referring to the sub prime loans.
level and inventory levels off there will be people to buy.
15
being patient
// Aug 25, 2008 at 2:05 pm
I am sorry if that post was hard to understand, I was trying to edit and then accidently posted.
There are still people buying houses today.
When inventory levels and prices get to point buyers will reenter the market and investors will come back on board. At point that is I am not sure.
Don’t you think at some point at the banks will lighten up on lending restrictions? Also I am not referring to the sub prime loans and risky loans.
16
cheapseats
// Aug 25, 2008 at 2:12 pm
Thanks for that link b, I was mucking around their site looking for the breakout.
It is very interesting how Wa matches up.
17
Scotsman
// Aug 25, 2008 at 2:13 pm
I wouldn’t expect lenders to “lighten up” on lending standards for some time. There is no seconary market left to buy the loans, so banks will only make loans that they are willing to hold in their portfolios. That means interest returns must be higher than in the past, and expected default rates lower. In a market with falling home/collateral prices, that means higher down payments and better credit scores.
The .gov is now trying to decide how far it can go to backstop Freddie/Fannie without causing even more significant problems for its own bonds. The trend seems to be away from offering any meaningful support. A further tightening of the mortgage market will result.
18
Garth
// Aug 25, 2008 at 2:28 pm
Rate resets don’t seem to be a good indicator, as in some areas foreclosures have come well ahead of rate resets.
I have been looking for a way to extract the “speculative” building portion, from the normal housing services (rent and maintenance) cost that is a part of the GSP for various states using census data and some construction reports.
The bottom line seems to be that if > 10% your state’s GSP has been coming from building residential housing, you are very much more at risk in this downturn, since it means the real estate bubble is hitting both jobs and home values hard at the same time in those states.
My data is still kind of a mess, but I show these states as having the building portion over 10%
Nevada
Florida
Arizona
Washington is a little under 6%
19
Fremontian
// Aug 25, 2008 at 2:48 pm
Tim,
I noticed you took the ticker of # of units for sale, etc. off the sidebar. Why?
20
been there
// Aug 25, 2008 at 3:06 pm
Fremontian @19
I still see it …..
21
Richie
// Aug 25, 2008 at 3:06 pm
WaMu is one of the leading lenders of subprime and AltA loans. Wall Street has priced the stock for insolvency. It is trading like a speculative option. It behaves like Indy Mac before the fed put the nails on Indy’s coffin. If WaMu went down, what would the real estate market in King’s County be?
22
victorchai
// Aug 25, 2008 at 4:34 pm
not in Seattle… we are different…
23
Silver9
// Aug 25, 2008 at 4:39 pm
64.8k Alt-A loans with an average balance of $265k and an average loan age of 28months…
If Im reading that right, it seems like a very low loan value. How many homes can you purchase here for under $300k? Does that imply these are mostly refinances?
24
a person
// Aug 25, 2008 at 4:57 pm
likely to include condos. those don’t appear to be broken out separately.
25
unearthly
// Aug 25, 2008 at 5:49 pm
IMO those Fed numbers significantly underestimate the number of borderline Prime loans that would have been classified as either subprime or Alt-A in the past. Alt-A is basically reasonably high FICO (> 700), with limited down payment and limited assets; basically someone who has paid CC on time but has limited savings. In many ways
As lending standards declined Alt-A loans were being processed as prime loans to entice more buyers in the MBS market.
26
Jonny
// Aug 25, 2008 at 5:50 pm
None of the things that have happened already could ever happen. Therefore, we should continue to recognize that none of this is happening. Make sense?
27
Mike2
// Aug 25, 2008 at 7:20 pm
Also look at the areas that have been hardest hit by the foreclosures in California and the other areas.
Just like it has been stated on this site certain areas will not be hit as hard as others.
The richest ares won’t be hit. Unfortunately, most of Seattle is not a rich area. NY, SF, DC will see large areas go relatively unscathed - outlying areas (anywhere outside of the major metro areas) will be skinned alive.
Start shopping in Medina if you can. The areas populated by wage earners are all in trouble.
28
being patient
// Aug 25, 2008 at 7:50 pm
outlying areas (anywhere outside of the major metro areas) will be skinned alive.
Again it depends on the area. It is so hard to generalize for the whole US. There are other things that factor into this.
Seattle will probably see prices fall down even more. How much more? That is the big question.
29
Jillayne Schlicke
// Aug 25, 2008 at 8:57 pm
CR says WaMu is offering 5% on a 12 month CD.
Ruh Roh.
https://online.wamu.com/apply/startapplication.aspx?appType=CD
30
Richie
// Aug 25, 2008 at 9:25 pm
Jillayne
That’s one percentage plus point above the prevailing market rate. WuMu is a mirror of Indy Mac. WaMu is very shaky. If it went under, one would only get one’s principal up to $100,000 back from taxpayers. Fannie and Freddie have higher ratings than WaMu’s. In fact, the rating for WaMu is the lowest in the financial sector. I am concerned how WaMu will affect the employment and the real estate market in King’s County when it goes under.
31
jonness
// Aug 25, 2008 at 11:49 pm
2006 subprime levels are relevant to this discussion because subprime loans typically reset a few years after origination.
high-interest loans as % of all 2006 mortgages
Sacramento: 26.9%
San Diego: 22.7%
Santa Barbara: 19.5%
Seattle: 21.5%
Tacoma: 31.0%
http://online.wsj.com/public/resources/documents/retro-SUBPRIME07.html
The Seattle area has about the same level of 2006 subprime loan exposure as San Diego. IMO, what forced San Diego down was much higher price appreciation than Seattle coupled with high subprime exposed neighboring cities like Riverside.
California started heading down due to pressure from extraordinary overpricing but the economy was very good when this began to occur. IMO, it is not going to matter what pushes prices down in Seattle and sets off a foreclosure feeding cycle. What matters is that houses bought for more than they are worth compared to rents, incomes, and historical appreciation rates decline in price to where people begin to go under water by a significant margin.
What will trigger WA? High resets in the middle of a recession in the dead of winter during a time when credit has contracted, unemployment rates have soared, and house supply has skyrocketed. The fear end of the greed/fear cycle is nearing Seattle. Once prices hit the critical point, the high subprime exposure present in the NW market will ensure a significant correction takes place.
32
being patient
// Aug 26, 2008 at 3:31 am
what forced San Diego down was much higher price appreciation than Seattle coupled with high subprime exposed neighboring cities like Riverside.
Riverside is not even near San Diego, unless you are comparing San Diego County and Riverside County. In fact I think that Riverside is in much worse shape then San Diego. In Southern California Riverside is one the last areas to go up in price and one of the first to fall in price.
Acutally what California saw in the summer of 2006 was high inventory levels. Then it took awhile for all the extra inventory to be sold off. The pressure on prices was starting to hedge slowly down. Then in 2007 in major credit problems started to hit.
Rents in many parts of Southern California are not and have not been comparable to many peoples mortgage payments for many years. The rents are much lower.
Seattle: 21.5%
From that 21.5% many of those people will stay in their homes or figure something else out?
It shows that Santa Barbara has a 19.5%, I read somewhere, not sure where, that Santa Barbara is starting to turn the corner. Also they were not as hard hit as The Inland Empire and other areas up toward Northern California.
33
Buceri
// Aug 26, 2008 at 5:04 am
Jonny -
“None of the things that have happened already could ever happen. Therefore, we should continue to recognize that none of this is happening. Make sense?”
Absolutely!! And in 1999 MSFT stock would never, ever, ever, lose half its value.
34
What goes up must come down
// Aug 26, 2008 at 6:36 am
being patient: “Seattle: 21.5%
From that 21.5% many of those people will stay in their homes or figure something else out?”
How do you know this??? Crystal ball or is it — JUST BECAUSE I SAID SO.
35
being patient
// Aug 26, 2008 at 6:56 am
How do you know this??? Crystal ball or is it — JUST BECAUSE I SAID SO.
Do you have the numbers from this 21.5% that WILL actually default on their loans?
You have missed my point
36
The MD
// Aug 26, 2008 at 7:53 am
he Market Bust…. Coming soon to a city near you! I think the overall opinion here (and most other Seattle blogs) is that the market is going to pop…. and it is. We can “what if” this and “what if” that (and that’s fun! don’t get me wrong), but the bottom line is one thing - prices must correct themselves to income levels. That IS what creates a truly healthy market.
A point in the blog made earlier was that prices on homes are actually driven by BANKS. That is an excellent point, and so VERY VERY true. Banks had loose credit standards and low rates just a couple years ago, and prices went way up. Money was cheap, easy, and fast. Developers and sellers knew this, so they could easily push their prices up. After all, cheap money = a lower monthly payment, regardless of the principal amount being financed.
Now, credit is difficult to get (and will only get more difficult as more banks fold), rates are pushing up and will continue in an inflationary environment, so prices have to come down. Simple as that.
I’ve been saying for a couple years now the developers and marketers were taking great advantage of the market (who wouldn’t) and basically “stretching the truth” to potential buyers as to what their true costs were to develop. Yeah, they were lying. They felt like they had to justify the ridiculous prices to potential buyers with quotes like “our cost of building has gone up over 40% in two years!” Well, cost of building did indeed go up, but it was really like 16-18%. So, why did prices well over double? Because they could, that’s why.
37
jonness
// Aug 26, 2008 at 9:44 pm
being patient:
The housing meltdown is happening on a regional basis as opposed to a city by city basis. All cities in CA roughly track each other in price history (%) as do all cities in WA, but WA city bubble price history lags CA by about 17 Mo. IOW, CA is crumbling as a region, not as a particular city. Riverside and Santa Barbara are within the same region. They’re only a county away. Thus the micro-environment of one is affecting the other. This phenomenon is evident in your statement about Riverside having ignited later and burned earlier. On the way up, the housing bubble tended to fan from the inside out. On the way down, its tendency is to fan from the outside in.
Here is the high-rate loan exposure for WA and CA:
……….. 2004…….2005……….2006
CA…..11.80%…..25.80%……..29.40%
WA…..12.30%…..22.70%……24.30%
Notice there is not a lot of difference in high-rate loan exposure between CA and WA as of 2006 (roughly today’s resets). The biggest difference in the numbers comes from looking within each state:
………………..….2004….…..2005………2006
Riverside………17.10%…..34.50%…..38.70%
Santa Barbara…8.00%……18.60%…..19.50%
Tacoma……….16.30%…..29.90%…..31.00%
Seattle…………10.00%…..19.90%…..21.50%
If we went by subprime exposure alone, Seattle would be dropping faster than Santa Barbara, and Tacoma would be approaching Riverside. Here are actual price declines as of quarter 1 2008:
Riverside | 25.60%
Santa Barbara CA | 31.50%
San Diego CA | 25.60%
Tacoma WA | 3.70%
Olympia WA | 3.10%
Seattle WA | 3.90%
Santa Barbara was leading the pack in price declines that quarter–despite having the lowest subprime exposure of all. It’s not just subprime exposure that causes downward pressure. Another major factor is percentage of appreciation from normal to peak. Thus, I devised a pressure indicator derived by multiplying price appreciation by subprime exposure. The higher the number, the more foreclosure pressure the city has.
Appreciation * Subprime Exposure:
Riverside-San Bernadino CA 72.8
Santa Barbara CA 40.2
San Diego CA 37.6
Tacoma WA 29.8
Olympia WA 21.9
Seattle WA 18.7
Notice, according to my indicator, Santa Barbara has much higher foreclosure pressure than Seattle despite having less subprime exposure. This is because Santa Barbara had much higher price appreciation than Seattle.
Heres how the indicator stacks up to actual foreclosures:
July 2008 Forclosure Filings by County | Downward Pressure Indicator
1 in 90 housing units Riverside | 72.8
1 in 187 housing units San Diego County | 37.6
1 in 229 housing units Santa Barbara County | 40.2
1 in 527 housing units Pierce County | 29.8
1 in 1125 housing units King County | 18.7
1 in 1133 housing units Thurston County | 21.9
The Tim notes Seattle is lagging CA by 17 mo. in price declines. Washington delinquencies have also tracked CA, and WA has now caught up to about where CA was in the first quarter of 2007. In fact, many of the fundamentals in CA are being tracked by WA. The one glaring difference is overall price appreciation. IOW, CA’s earlier runup and collapse probably saved Seattle a great deal of suffering.
However, when it comes to foreclosures, IMO, it doesn’t matter what kind of pressure causes homes to go under water. If they go there, and you have a large number of zero-downpayment homes exposed, the chain reaction is going to take off until it pushes prices down to where people can afford them.
“Acutally what California saw in the summer of 2006 was high inventory levels. Then it took awhile for all the extra inventory to be sold off. The pressure on prices was starting to hedge slowly down. Then in 2007 in major credit problems started to hit.”
That sounds like a good description of what is happening now in the NW, except the pressure from those factors here and now is stronger than it was there and then.
IMO, we are witnessing a price collapse, not just a minor 7% correction. Even Global Insight’s conservative estimates put Seattle at nearly 25% over-valued at Q1 2008. By contrast, they put most of CA into the fairly value range in the same quarter. Yet CA prices continued to plummet past fair value.
I know there are a lot of people who believe there is something magical about Seattle and its house prices. I would like to remind these people that Seattle is tracking Tacoma, Yakima, Longview, Wenatchee, Bellingham, and Olympia. We are experiencing a regional phenomenon. Differences certainly exist, but the overall trend is a mirror image from city to city within each region.
38
being patient
// Aug 27, 2008 at 7:52 am
Joneses,
July 2008 Forclosure Filings by County | Downward Pressure Indicator
1 in 90 housing units Riverside | 72.8
1 in 187 housing units San Diego County | 37.6
1 in 229 housing units Santa Barbara County | 40.2
I think that your stats are great. Why don’t you give stats for Orange County? In location it falls between Riverside and San Diego Counties.
Also the default rates are much higher for these parts of California compared to Seattle.
Notice there is not a lot of difference in high-rate loan exposure between CA and WA as of 2006 (roughly today’s resets). The biggest difference in the numbers comes from looking within each state:
Doesn’t each major housing that has shown a decline price have a high-rate loan exposure?
I am just curious.
One more thing, How much of the declining values in Seattle has to do with the credit crunch and the higher inventory levels? It looks like the credit crunch added to the building inventory of homes.
It is still hard to compare Seattle with California, the Seattle market will continue to be weak. California is its own beast in RE cycles. In the past, I am talking about Southern California, they have fallen hard and then had a great rebound several years later.
However Seattle did not have the full impact of high prices that Southern California .So to comparing the 2 areas is not comparing apples to apples , I think that someone said that earlier.
I am not sure if people think there is something magical about Seattle. Seattle has some great employers which will keep the area anchored. The area has a lot to offer as far as family and outdoor activities. For these reasons people will continue to move to this area.
39
being patient
// Aug 27, 2008 at 7:53 am
Joneses- Jonness I am sorry that I misspelled your name.
40
Civil Servant
// Aug 27, 2008 at 8:09 am
Being Patient: you wrote, “Seattle has some great employers which will keep the area anchored.”
Um, like Washington Mutual? As early as a year or so ago, when I was finishing grad school, WaMu was always on the list of stable, build-your-career-here Seattle employers that recruiters and the careers office were pitching. Things can change.
41
being patient
// Aug 27, 2008 at 9:02 am
Um, like Washington Mutual?
I was not thinking of them. There are several other companies here.
42
mikal
// Aug 27, 2008 at 10:08 am
being patient, you are correct.
43
b
// Aug 27, 2008 at 10:19 am
being patent,
There are no employers in southern california? you might want to let the people there know that. what about silicon valley? I heard there are no employers there either, which is why prices are falling. in fact, Seattle is the only metropolitan area with any employers in the entire country, its pretty crazy but thats just how it works out in magic land I guess. I mean, california might have the GDP of many large nations just by itself, but I think thats all just from unemployment checks and farms.
44
being patient
// Aug 27, 2008 at 11:07 am
being patent,
There are no employers in southern california? you might want to let the people there know that. what about silicon valley? I heard there are no employers there either, which is why prices are falling. in fact, Seattle is the only metropolitan area with any employers in the entire country, its pretty crazy but thats just how it works out in magic land I guess. I mean, california might have the GDP of many large nations just by itself, but I think thats all just from unemployment checks and farms.
B, Seattle is well diversed in the employment sector. However I believe that I should be able to give an opinion without getting such a comment from your side.
I am not sure what you are talking about. I never said anyhting about California I was speaking about Seattle.
45
b
// Aug 27, 2008 at 11:32 am
being patient,
you seemed to imply that seattle’s employers will keep prices here relatively stable compared to california, please correct me if I am wrong. my snide remarks were to point out that california has great amount of business in both south/north and yet prices in each area are going into the toilet.
46
being patient
// Aug 27, 2008 at 1:18 pm
you seemed to imply that seattle’s employers will keep prices here relatively stable compared to california, please correct me if I am wrong. my snide remarks were to point out that california has great amount of business in both south/north and yet prices in each area are going into the toilet.
That is one difficulty of posting on a blog sometimes. When a comment is made without seeing the person or hearing it can be difficult to understand what they are trying to say.
I was merely pointing out that Seattle has some large companies and seems to have a decent economy. I was not implying that this will be the only thing that will help stablize prices. The area is not directly tied to one any large employer or industry and relying soley on that employer to help out the area. There are several large companied headquarted in this area. For example how parts of Michigan are tied in with the auto industry. Then when auto sales start to fall the area is directly impacted.
47
patient
// Aug 27, 2008 at 1:44 pm
I think employment is still not a factor in most areas including some of the hardest hit. It’s lurking in the background though. These are some of the blows to the home prices we’ve seen so far:
1: Unaffordability with loose lending standards.
2: Tigthening of lending standards
3: Bank crisis and credit crunch.
4: Spike in cost of living.
5: Foreclosure avalanche
6: Recession
7: Unemployment?
So, I don’t think employment is a factor in “preventing” the return to pre-bubble prices but it could help stabilizing at a historic mean if employment is strong but it could just as well help pushing prices far below the historic mean should it weaken.
48
being patient
// Aug 27, 2008 at 1:51 pm
It is a combination of all of those things and probably more. Employment or unemployment ((wages) is part of the big picture.
49
jonness
// Aug 27, 2008 at 9:50 pm
IMO, the main two factors in recent price appreciation/deprecation has been the affordability of homes and the ability to get loans. CA appreciated almost 2x as much as WA; yet, even at the outrageous prices, loans were available to buy the houses. I measure both subprime exposure and price appreciation from 7 years prior to peak to peak in my indicator. This provides a good down and dirty look at how easy loans were to get in conjunction with how much homes cost compared to incomes. Other factors exist like monthly interest rates etc., but I believe my two factors are the major factors, and they naturally account for many other subfactors.
Can people afford their monthly payments, and if so, can they get loans for the houses? Since WA only appreciated about 50% as much as CA and has somewhat less subprime exposure, it obviously has not been under as much foreclosure pressure as CA, so there are much less foreclosures here. The question for the future is, are upcoming factors other than home appreciation on the horizon that are going to make affordability an issue with homes in Seattle? Or are there upcoming issues with obtaining home loans that were not present a short while ago? If the answer to either of these questions is yes, then, IMO, Seattle house prices will correct.
The issue with jobs, surprisingly, doesn’t appear to have been as much of a factor in the regional runups and subsequent crashes as many of us would expect. The reason I say this is because high unemployment areas like Longview and Spokane have maintained a similar trend line to Seattle on a percentage-wise basis. I think this is because of the nature of the trendlines–they are percentage-based. IOW, Spokane doesn’t have the jobs Seattle does, but house prices started out lower there and tracked Seattle on a percentage-wise basis. We tend to look at it from the point of view that Seattle appreciated $x dollars and Spokane only appreciated $y dollars, so Seattle must have something magical like good jobs that will hold house prices higher. But I think it’s important to keep in mind that those good jobs were already factored into the trend-lines prior to the appreciation escalation that took place over the last 7 years. I.E. Seattle started higher than Spokane because Seattle was more desirable. From there, both places appreciated similarly based on new economic fundamentals that were common to both cities. Thus, we shouldn’t be putting too much added emphasis on the jobs difference between Seattle and Spokane at a time when houses are correcting as a result of the newly introduced economic fundamentals no longer being a factor in house appreciation.
IMO, the best way to understand what has already happened and what will happen in the future is to take a good long look at the data and then try to imagine how upcoming changes to economic fundamentals will further influence the most volatile areas we have identified.
50
jonness
// Aug 28, 2008 at 12:53 am
“I think that your stats are great. Why don’t you give stats for Orange County? In location it falls between Riverside and San Diego Counties.”
July 2008 Forclosure Filings by County | Downward Pressure Indicator
1 in 90 housing units Riverside | 72.8
1 in 187 housing units San Diego County | 37.6
1 in 229 housing units Santa Barbara County | 40.2
1 in 239 housing units Orange County | 41.76
As you can see, it’s not an exact measure, but it’s a good approximation. San Diego, Santa Barbara, and Orange are roughly in the same ball park. Riverside had much higher subprime exposure than the others, so it’s foreclosures are worse.
“Doesn’t each major housing that has shown a decline price have a high-rate loan exposure?”
I believe the answer is yes. But it appears the high-rate loans are not necessarily more important than house price appreciation. From what I am seeing in the data, both factors work with synergy to cause house price declines. It is one thing to be exposed to a high-rate loan and quite another to be exposed to that loan and and also be making monthly payments well beyond what you can afford to pay. For instance, Santa Barbara had less high-rate loan exposure than Seattle, but prices in Santa Barbara went up 206% compared to only 87% in Seattle. That makes a huge difference when it comes time to pay your monthly mortgage payment.
Here are some more appreciation numbers from (7 years prior to peak) to peak:
Santa Barbara CA 206%
San Diego CA 196%
Riverside 188%
Tacoma WA 96%
Olympia WA 91%
Seattle WA 87%
“One more thing, How much of the declining values in Seattle has to do with the credit crunch and the higher inventory levels? It looks like the credit crunch added to the building inventory of homes.”
I would think this is currently driving down values in all areas, Seattle included. My indicator uses price appreciation as a rough measure of affordability and high-rate loan exposure as a rough measure of loan availability at the downturn. As we continue to move forward, the credit crunch becomes of increasing importance to the loan availability factor, and the recession, inflation, mortgage rates etc. become increasingly important to affordability.
“However Seattle did not have the full impact of high prices that Southern California .So to comparing the 2 areas is not comparing apples to apples , I think that someone said that earlier.”
San Diego and Seattle are an interesting comparison in particular. They tracked very closely from 1985 until mid 2000 when San Diego began to pull away and spike. Seattle didn’t start its runup until later. However, before it had a chance to reach San Diego, the bubble burst. My indicator captures this very price run up era and factors it into foreclosure pressure.
You can check out all of this info at my website http://www.housingcorrection.com . There are a plethora of maps and tools there. To check out prices in CA cities compared to WA, use the Median Home Price Charting Tool. It provides a good comparative look at one states cities compared to another. When comparing CA to WA, you’ll notice a miniature bubble occurred between 1987 and 1990 that could be somewhat foretelling of what’s occurring now. IOW, WA will not be beaten down as hard as CA.
51
being patient
// Aug 28, 2008 at 2:54 am
Thanks for the link, interesting to see all the data.
A side note question what do you do for a living? I am just curious.
How much traffic does your site see? There is some great stuff here and I think people in other cities would be interested.
52
being patient
// Aug 28, 2008 at 3:17 am
Can people afford their monthly payments, and if so, can they get loans for the houses?
That is the simple point that I have been trying to make about employment (ie jobs or wages) People who took out the ARMS and other loan options, how many will be able to afford the increase in payment or will figure another out of the risky loan? That is an unknown at this point and the government is trying to help with its housing program bill. It will be interesting to see if or how that
housing bill will help.
IMO, the main two factors in recent price appreciation/deprecation has been the affordability of homes and the ability to get loans.
There have been buyers during these times that have purchased homes with a 20% down payment. The homeowners stay in their home for 2+ years and then sell and move up to the next house. Then they would get the loan that provided them with the cheapest payment. At some point they would try to get another more solid loan. However they could afford to make the payment once their loan changed into a less risky loan.
Maybe the example I used above is a small amount of people.
I am just wondering from the 24.3% of high risk loans in WA in 2006, which I got from your earlier post, what % of these loans will go into foreclosure? The foreclosure numbers seem to change all the time and vary from quarter to quarter.
Time will tell what happens.
53
jonness
// Aug 28, 2008 at 9:17 pm
————-”A side note question what do you do for a living? I am just curious.”————–
I’m a database programmer in a data warehouse.
—————”How much traffic does your site see? There is some great stuff here and I think people in other cities would be interested.”—————–
Thanks :) It doesn’t see a lot of traffic. I haven’t tried to steer much traffic there. I mostly built it because I am thinking of buying a house and became interested in what is happening. For the most part, I didn’t want to make the mistake of buying in a peak and losing a lot of money over the next few years if house prices depreciate. I’m considering beefing up the site a little and steering more traffic there. For anyone who is interested in this stuff, it makes a good central point to access the data.
—————”There have been buyers during these times that have purchased homes with a 20% down payment. The homeowners stay in their home for 2+ years and then sell and move up to the next house. Then they would get the loan that provided them with the cheapest payment. At some point they would try to get another more solid loan. However they could afford to make the payment once their loan changed into a less risky loan.”—————-
It would be nice to know how many people have done that. I imagine, whomever they are, they are really kicking themselves right now. Personally, I don’t feel the need to time the absolute bottom of the market. But I don’t want to end up kicking myself by buying at an incredibly poor time.
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