The local papers ran some new stories yesterday about the 2008 full-year report from the NWMLS (pdf). I thought the story would be better conveyed through a few simple charts.
Recent Comments
- ray pepper to Weekend Open Thread (2010-03-12): RE: The_Dude_Abides @ 35 – no no no…I must eat at the...
- David Losh to Weekend Open Thread (2010-03-12): RE: Confused Renter @ 40 – The bank will either modify or not....
- Mikal to Friday Flashback: “The last spaceship flight off a planet that’s about to explode”: RE:...
- Ira Sacharoff to Friday Flashback: “The last spaceship flight off a planet that’s about to explode”: ...
- Jonness to Friday Flashback: “The last spaceship flight off a planet that’s about to explode”: RE:...
Sponsors
Recent On-Topic Forum Posts
- Nell Plotts to Betting on the Blind Side: Hats off to the Oregonion's Front Porch...
- The Tim to Detrimental Listing Photos: *snip*...
- The Tim to Detrimental Listing Photos: ....
- Dave0 to Detrimental Listing Photos: going to be $5,000. Come on, would you bother...
- BillE to Detrimental Listing Photos: One photo listings? Not getting out of the car...
A picture is worth a thousand words…
The trends speak for themselves – and the news from MS this week will not help.
Also from Reuters:
Microsoft leaves many sleepless in Seattle
http://uk.reuters.com/article/burningIssues/idUKTRE50M0SO20090123?sp=true
These charts really show how much prices still have to fall.
Ten years of unsustainable increases can’t be reversed in a single year (2008) of declines.
I’m moving into a rental house this weekend, and it looks like I will be there for awhile.
More layoffs from Starbucks.
http://seattletimes.nwsource.com/html/businesstechnology/2008663708_webstarbucks23.html
Question and suggestion for “The Tim” and pseudo-response to #2 Interloper.
Where is a good place to look for homes for rent? It seems that there is no single source that is good for the region. Maybe that could be part of this website?
Thomas B. –
Where to Search for Rentals in Seattle
and
How To: Use Craigslist & RSS to Find a Great Rental
They’re not featured prominently on the front page, but they are both listed on the Important Posts page linked on the sidebar.
P.S. (I like my new 1st grade comment pic.)
Got it… Thanks.
Here is a related link to David’s Starbucks link. Layoff Ledger
Interesting. I didn’t know Group Health laid-off 363 people.
Wow… this thread is quiet. I guess the news states the obvious. But here is an idea for increasing housing prices. Regulation.
Let’s introduce legislation that requires not only green products, but also higher quality in construction in housing. And make it a requirement that homes already built be retrofitted or reconstructed.
This would employ workers, increase the quality of the homes, reduce home power consumption, and most importantly increase home prices because it will be more expensive to build a home and retrofitting will increase the cost of the home.
Of course, all this is my attempt at sarcasm.
The pictures tell the story alright. I’m just surprised we haven’t seem some more dramatic price drops yet.
Isn’t it amazing that we are JUST starting down the slide, but the state is already $6billion in the hole?
Try zilpy.com
we are currently renting a nice house in kirkland, patiently waiting for prices to drop back to affordable for our small family.
we are surrounded by homes for sale including many new homes that are vacant, and new homes under construction.
In the 5 months we have been there, nothing has sold but prices have barely budged. A 10% drop is nothing.
How long can that last? Somebody is paying money to carry all those vacant properties…
I cant quiet visualize what is going to happen to clear the market. Bankruptcies? Bank foreclosures? Auctions?
For prices to drop significantly someone has to take a big financial loss. Any insight on who it will be and when it will happen?
I am seeing price movement in the houses I’m tracking in central Seattle. Not enough, but there’s some. I’m guessing the Microsoft layoffs are going to put a chink in the denial armor.
GREETINGS SILVER9
Great questions.
Watch the stocks, as long as the DOW is trending downward [it is] RE will too.
When will stocks and RE recover?
Maybe not at all, but timing today’s RE price recovery in the future is a subjective dart game.
Personally, I’m losing my tail in RE and stocks…..so are a lot of Americans. Should they bail me out? Hades no.
We don’t have enough money to put a dent in it anyway and even Obama admits America’s credit limit may already have expired. Besides, like many on SB have alleged, why is good when plasma TVs , rib steaks, etc. go on sale; but horrifying if homes go on sale?
“I cant quiet visualize what is going to happen to clear the market. Bankruptcies? Bank foreclosures? Auctions? ”
If a developer was to drop their prices to clear inventory, it would put themselves out of business. They would rather keep paying the mortgages on the empty houses than be out of business when things turn around. With the Fed backstopping the banks, their cost of capital to have the houses sit there is relatively low.
Sales of new homes in King County in December was 1/4 of what it was at the peak, but it is still not zero. There are a lot of people who are holding off on buying now not because of the price, but because they are waiting for a lower price in the future. Dropping the price enough to sell at a loss now to such a customer would be more expensive than just waiting them out and selling at full price later.
I’m guessing the run-down in RE prices will take just as long as the run-up did; still got some years to go.
Jon @16
Interesting. Let me see if I get this straight. If a developer sells a home now, assuming that it is underwater, the developer realizes a loss, but if the developer holds, then all he has to do is pay on the mortgage and delay any gain/loss into the future. But at some point, the maintenance of the loans will exceed their available capital. At what point, we don’t know, but if the choice is between sell now for a loss and foreclosing later for zero gain/loss, then the obvious choice is having the house foreclosed on later.
The second part, the battle of wits between buyer and seller. Again, the developer probably would hold on to a property. If the property is underwater now, and the developer pays the mortgage, each payment increases the price at which the developer needs to sell in order to break-even because it’s a sunk cost. My guess is that the profit margin on the house is still in the positive territory, even with the 10% drop in prices, so it is still to the advantage to the developers to wait out buyers. But again, at some point the sunk costs and the profit margin will cancel each other out, and at that point, the houses would go into foreclosure. Staying in a home past foreclosure point would be speculative; they would be betting on an increase in price.
So to sum up, I doubt I got the math right or the marginal economics right, a developer will wait out a buyer until he runs out of capital to pay the mortgages, or until sunk costs offsets profit margin. I have a feeling that if the economy keeps up the way it is for too long, many developers will reach the tipping point and we will see an acceleration of foreclosures and price declines. If on the other hand, prices stabilize and move sideways, developers may be able to sell at a profit, however big or small that may be.
Developers only make a 10% profit on houses? I is that accurate?
“I’m guessing the run-down in RE prices will take just as long as the run-up did; still got some years to go.”
If the $800 B stimulus gets approved in one month, it will take a lot less than that. Figure people spend about 1/3 their income on housing, so $800B will yield $266B in housing, which is over one million units. That would just about bring national inventory back down to its normal level, and perhaps create some spot shortages depending on where the money goes. After that first round of spending, the money will be in other people’s hands and they will spend it again, and that will create a national housing shortage and rising prices. The extra money will be spent and re-spent, reverberating through the economy until rising prices has consumed all the money. At that point we will have high interest rates because of inflation and high taxes to payoff the cost of the stimulus. The high interest rates will prevent new construction.
This is a good thread.
The term developer is very subjective. You could be talking about a large corporation or a carpenter on a shoe string who can’t actually make the payments. Also I think demand has cratered. Sure there are always folk buying, but demand has constricted about 75% from the peak. We still have a long way to go.
I still see a lot of speculators trying to dump their projects at inflated prices. Look no further than craigslist or redfin. The inflection point in the marketplace is still a year or two out.
Nobody is in a rush to get into a house or condo. Let me restate that, nobody is in a rush to get into a house or a condo mortgage. And the banks are uber picky. Sorry 6%’ers, there’s not much pie to divvy up.
“If the $800 B stimulus gets approved in one month, it will take a lot less than that. ”
Your wishful thinking is a perfect example why it will take years for run-down in RE prices… (ie sellers hoping the same way as you)
“The House is expected to consider the stimulus plan on Wednesday. In the Senate, a full floor debate is expected to begin Feb. 2, leaving two more weeks for approval and a reconciliation of differences between the two chambers’ bills to meet the mid-February goal for passage. ”
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/24/AR2009012400661_2.html
It won’t all be spent at once, but people will see what is happening and start spending their own money accordingly.
The housing inflation that will be caused by this would not occur if the money being added to the system by all this borrowing and spending canceled out money being destroyed. But the stimulus money is being spread over the whole population, whereas the lost money was focused on the top few percent of wealth, most of whome own their houses outright and so are not a factor in the housing market.
Jon, you have more faith in the governments ability to “restart” the economy than anybody I have seen.
Not sure why this $800B is going to be more effective than the $160B tax rebate, or $750B TARP program, or anything else.
Look at what has been lost in principle: US Equities have trimmed about $10 trillion off their peak; US Housing stock has trimmed maybe $5 trillion off it’s peak. Roubini estimates US originated loans have lost $3.6 trillion in value.
So how exactly is $850 billion suddenly going to set everything right? I realize it is going to go “directly into the economy” but you roads and dams and magically-ecologically correct technologies take a few years to build out. So that’s going to be a slow drip IV of that money.
Yes, the CBO report showed that all the worthwhile stuff would take too long. So only 25% will go for that stuff. The bulk of the money is funding things like Pell Grants, more health care, and tax cuts that will start reducing withholding right away.
The difference between this and TARP is most of TARP was to prevent a collapse, which it did, supposedly. This program is being spent on a different philosophy, which is to spread the money around and put an early an stop to the normal recessionary cycle. It will kick off inflation, which will have to be broken just like it was in the early 80s by an intentionally creating another recession, which will be easy to do when the Fed asks for their money back and pulls the rug out from under the banks.
@ groundhogday:
The state isn’t 6 billion in the hole. If they cotinue with all the projects, services, etc that are planned, we WILL be 6 billion in the red. Both sides of the aisle are annoying me in the way they are describing our current budgetary state.
I don’t recall – are these numbers adjusted for inflation? If not, $290,000 in 1997 is the equiv of $370,000 in 2007. That suggests houses may only be overpriced by 20% in 2007 relative to 1997. Given the drop we already experienced, reverting to inflation adjusted ‘97 prices may be happen quickly.
I’m not arguing that this is the end or that 97 is magic or that inflation is simple to account for, but ignoring it entirely seems dangerous.
Tim is usually on top of this and probably hs this covered already.
Early stop?!?! The recession officially started in December 2007. So we are now 12+ months into the peak to trough cycle. That is 2 months longer than the average peak to trough of the last 10 cycles.
How does pumping $800B into the economy replace $18.6T in losses? Inflation wasn’t a problem when the economy was booming, and now somehow putting back less than 5 cents for every dollar that has disappeared is going to put us back into the days of huge inflation. And that doesn’t even account for the drop in the Velocity of money
Sorry , I’m not getting it. Sounds more like wishful thinking than anything
The $1.5T (included the TARP) won’t replace the $18T. I’m not claiming housing and stock prices will go back to 2007 levels. It will only stop the decline and fire up inflation from there.
The recession we are in is pulling back from an unusually large excess inventory of housing, so would take longer than usual to work out, but the process is mostly the usual one. There is the added complexity of the severity of impact on banking, but TARP and Fed actions are taking care of that.
The $800B is a wealth distribution scheme, and the fact that it is going to distributions instead of production makes it inflationary. If it was spent on infrastructure, it would not be inflationary because the infrastructure would make industry more efficient.
I think part of the principle is that $1.5T of spend can restore multiples of that in lost paper wealth. For example, if the actual losses on subprime were <$1T but that had the effect of causing $18T in paper losses. Perhaps $1.5T of stimulus can have an equally restorative effect on paper.
Personally, I am against this government-led recovery but it is a gift in Obama’s lap that he can’t refuse. Partly on moral grounds and partly because I think it won’t work.
WILL IT WORK?
The key is to get prudent (now cautious) investors to take their money out of their mattresses and spend or invest it. There are $Trillions sitting on the sidelines now, and the real recovery begins when these people start to put it back to work.
But will government-led stimulus cause this? Unlikely. The people with the most cash now are the ones who were most prudent and intelligent and didn’t overextend during the bubble days. These are the people that should be rising to power and leading the recovery, and they won’t be fooled by another magic government fix.
IS IT MORALLY RIGHT?
These are value investors and they will come in for bargains. And by wisdom of the masses they will make the RIGHT decisions about where to put their stimulus. And they deserve to. The way to get them into the game and rely on their leadership would be to let prices crash down to their true, depressed market values.
It’s short term pain, but it’s a revolution that puts the readers of this blog in power.
The government will make decisions driven by its self-interest. For all Obama’s efforts, he will be unable to prevent $800B turning into largely a government pork-and-bailout-fest.
So who do you think should lead the recovery? People and industries that made big mistakes and now need help? Industries with connections to government? Or the people who wisely navigated the past 20 years and have real assets today?
“The recession we are in is pulling back from an unusually large excess inventory of housing, so would take longer than usual to work out, but the process is mostly the usual one.”
The usual one? Do you have the manual on once in a lifetime recessions. Anytime you rely on big government to solve your problems, your in real trouble. I think its time to create support groups for those unlucky people that bought in 2007 to work through this denial. A good analogy for this bailout is trying to stop an avalanche with a toothpick.
Let’s review:
A technically insolvent federal government grabs power by nationalizing bankrupt core industries under the guise of a “stimulus program” while running 30%+ deficits in the face of declining revenues.
Fully a third of the nation’s $60 trillion net worth is expected to be destroyed by the end of 2009.
NO ONE at the federal or state level is even talking about cutting spending to lessen deficits, or reducing taxes to increase spendable consumer income- this in an economy where consumer spending is 70% of GDP.
Did it ever occur to anyone that an income transfer does not involve a net gain for the economy? It is purely a political ploy.
What to watch for: When the bond market decides there is too much debt and not enough income to service corporate, state, and federal requirements it will implode, and we will be truly XXXked. Even a slight increase in interest rates and borrowing cost will push us over the edge. Credit crisis, indeed! My money is on mid to late 2009.
I agree that the collapse was averted. It took on overwhelming proportions quickly and gloablly.
The watch word is global.
We exported an American way of doing business. That included debt to fuel consumer spending. 70% of our GDP is consumer spending. If we lack the wages to pay for our debts it must be ten times worse in other countries.
All of the Third World does business in cash. I have a friend who has been taking “investors” to Peru to invest in large commercial projects. They have invested $200 million dollars buying “assets.” I’m sure it all looks good on paper, but no one in Peru today is buying with a mortgage.
Once you take the paper out of the Real Estate transaction there is very little profit. Real Estate prices may inflate by foriegners buying into the country with the value of foriegn currency, but there is very little way of “selling” it for a profit beyond that initial purchase unless it’s to another foriegn investor.
The securities market is far reaching. I would rather have mortgage backed securities from the United States rather than Shaingai. In that regard for all the trillions lost we may see more investment here than in “emerging markets.”
“I cant quiet visualize what is going to happen to clear the market. Bankruptcies? Bank foreclosures? Auctions? ”
The answer: foreclosures. Massive amounts of foreclosures. Look for them to rise more than 1000% from today’s levels. That’s what will set the new prices. Chintzy price cuts by greedy owners, builders, etc. don’t cut it. The sales of distressed properties will. When a foreclosed home sells for $200k, previously purchased for $700k at the peak, it will absolutely destroy demand for like properties at higher prices. The homes parading around on the mls at fantasy prices will never sell.
Foreclosures are controlled by banks. I don’t see them rushing to lower prices.
Then I’d suggest you look at other markets, because you’re not seeing what’s happening.
Banks don’t care, they don’t need to care.
As funny as that sounds they have your money. You give banks, financial institutions, and credit markets money every day. Bank deposits, insurance payments, pensions, consumer spending, and the list goes on.
Foreclosures are a write down or charge off. If they rent, which I think they will, they keep full mortgage vaue and collect income.
You have absolutely no idea what you are talking about. Banks are NOT set up to manage properties. They are unloading houses at fire sale prices in CA, NV, AZ, FL, GA, etc.. Is your argument that Seattle is “special”, so the banks will not do the same here? You are delusional, if you think that way. They are the SAME banks. They do not discriminate when it comes to location.
That was last year.
The speculation this year is that with bail out money there isn’t as much of a panic.
Yes banks do manage properties, they always have.
I used to work for B of A. They hate REOs and any kind of work-out situation for failed/delinquent loans, as they really aren’t set up to handle all the related issues. The rule used to be to clear them out as quickly as possible for any kind of remotely reasonable settlement.
There are two issues now. The first is that many banks are overwhelmed with REOs and foreclosures. They don’t have adequate staff , both in terms of numbers and skills, to handle the workload. The second, as David suggests, is that they think there may be a bailout in the future, either for the homeowner or for the bank, that will mitigate the potential losses.
As long as banks, homeowners, and sellers think there may be a “pink pony” solution just over the horizon their economic behavior will reflect hopes, not reality. When this same groups realizes there won’t be an effective rescue, and that they don’t have other potential escape routes, everyone will head for the exit and the market will truly crash.
Here’s a nice chart that shows the loss of bank wealth in the last year. Pretty soon they’re going to have to clear out those REOs. Note, BOA is missing.
http://alphaville.ftdata.co.uk/lib/inc/getfile/4156.jpg
David,
You are out of your mind; why then are banks collapsing if they can rent
I worked on Wall Street for nearly a decade, and let me tell you that the distressed asset divisions at nearly all banks do not have the capacity to manage their Real Estate portfolios (if they default) – they are just not set up for it!
Now I am restructuring these very same institutions, and I see a fundamental collapse of our banking system – no longer can these banks loan out Jumbo Loans, ARM’s etc – most Americans just dont have the character, cashflow or collateral to pay off what they owe
Its getting worse; I’d think that another 15-30% decline in Seattle area prices will devestate Timberland, Sterling, U.S. Bank, and the rest of these “small-time” banks. Begging for TARP money pls……
This area is going to see a catastrophe (layoffs), WaMu, Amazon, Starbucks, Real
Networks, Microsoft, Boeing, The Tacoma Industrial Base, and the list goes on…
I’d think that the 100K+ jobs “recently” lost in the Puget Sound will collapse this real estate bubble….
Say goodbye to the current prices; thats all i am saying here
6000 SQ Foot home, by the water, in Bellevue, for $200K – yeah, its coming folks…
This market is going back to 1997…
And by the way, the foreclosure market is the “REAL MARKET”