Posted by: Timothy Ellis (The Tim)

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

65 responses to “Bottom-Calling: Affordability Index Forecast”

  1. blueskitten

    Personally, I think this has the strongest basis in reality of all the bottom-calling projections this week. Affordability is the number-one thing that influences housing prices — barring excessive speculation like was seen in the past few years. My gut feeling tells me that prices will settle out at about 2003-2004 levels, though, so maybe I’m just gravitating toward the projection that agrees with my preconceived assumptions. Most economists are doing that in today’s uncharted economic territory, anyway.

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  2. Interloper

    It would be fun/informative to see all the forecast curves on the same chart, also the % fall from most recently available prices.

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  3. Sniglet

    I still think that tracking per-capita debt, and the percentage of home-owners without equity, may be good ways to predict a “bottom”.

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  4. softwarengineer

    STIMULUS BILL TO HELP 9 MILLION DISTRESSED HOMEOWNERS?

    Gee, my fuzzy math is overwhelmed. If a distressed homeowner is in foreclosure or about to be, and about 1/600th the homes are in foreclosure, that means there’s about 500M homes in a nation with 300M people?

    What the Hades does 9 million distressed homeowners mean?

    Or does it mean 1/10th of America’s homes are close to foreclosure? MSM and government has a way of giving us facts and statistics that are completely meaningless.

    Will $85 billion be enough to give 9M distressed homeowners [whatever the Hades it means] like $6000 each? Yes, and that’s about it too…..little good that will do when your home’s worth $100s of thousands less than your loan principle.

    Everytime I hear government talk bailing out waves of reset loans; I think of a pyrammid scheme; the folks at the beginning have a chance at affordability [getting the bail out money] with government socialistic welfare, yet the follow-on groups are screwed when our credit dries up and/or loan rates sky-rocket from a falling dollar and all government services must be butcher axed like California..

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  5. old ballard

    ■Interest rates will hold roughly steady at ~5%.
    ■Incomes will be more or less flat.

    These two assumptions seem a little dubious all though I agree that the “Affordability Index” is the best possible method for projecting the bottom.

    As banks make fewer loans they will attempt to raise interest rates to maintain profits. I know this seems irrational, but as I have said before there are no rational actors in a capitalist system. Raising rates to maintain profits will have the perverse effect of lowering the rate of lending thus lowering profits. But Wall Street will have it’ s way.

    Also, it’s hard to see incomes not falling through the floor with unemployment sky rocketing. The U-3 unemployment rate is 7.7% and the U-6 is at 13+%. I think it’s possible that Western Washington could shed between 100,000 and 250,000 jobs in the next two years.

    I would push the bottom out to 2015. At any rate, we’ll need to see pre-1999 prices before we see real affordability for a broad range of incomes.

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  6. softwarengineer

    UPDATE TO BLOG ABOVE

    Replace 500M homes in America with 5 Billion homes in America:

    600 x 9M= 5 Billion

    Pardon for my fuzzy math….lol

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  7. David Losh

    As the system continues to deteriorate, even if wages stay flat, I don’t see how this will improve affordability.

    Even if houses get cheaper who wants them? You point out all the time rent is cheaper and the land lord is responsible for maintaining the property. So why own or pay for an asset of extremely dubious value?

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  8. tomtom

    By David Losh @ 7:

    Even if houses get cheaper who wants them? You point out all the time rent is cheaper and the land lord is responsible for maintaining the property. So why own or pay for an asset of extremely dubious value?

    Because

    1) Home Ownership is the American Dream!

    2) Your Home is your Best Investment!

    3) Buy Now or Be Priced Out of the Market – Forever!

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  9. old ballard

    ■Incomes will be more or less flat.

    With the Dow below 8000 and likely to go much lower, how many people are under water? People were told not to save their money, but to invest. We’re past the day when “income” was limited to a pay check.

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  10. tomtom

    By softwarengineer @ 4:

    STIMULUS BILL TO HELP 9 MILLION DISTRESSED REAL ESTATE “PROFESSIONALS”
    .

    Fixed that for ya.

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  11. alex

    If every single buyer simply holds on to their money until they can buy something 40% off peak, then we’ll force this to happen earlier and be done with the RE crisis sooner!

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  12. aman

    I’m excitedly waiting for the conclusion when The Tim tells us where he personally believes the bottom to be….

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  13. patient

    I also think affordability is key but I do not think the historic mean will predict this bottom since we are going to have a once in a lifetime economic collapse. The bottom should be far below the historic mean.

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  14. Magnolia44

    How about in these times no indexes or past predictors will tell us whata going to happen.

    It is like us at work trying to forecast sales, we can’t do it because the past means nothing in these times. Good luck with all these charts and data, in the end its licking your finger and sticking it in the air and seeing which way the wind or economy blows in this case.

    The good news is govt intervention has arrived and there will be even more coming, before seattle saw a bloodbath like other states. Whether it prevents the 40% off some here hope and pray for has yet to be seen. I welcome the help, something had to be done so its better than nothing. The programs won’t do us any good, maybe we refi but I don’t understand everyone whining and crying… Get over it economic collapse is almost here so what’s the alternative?
    We pay a crap load in taxes, and I am fine with the govt rolling out the programs, such is life.

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  15. jon

    If affordability is the problem, then why aren’t high end houses doing much worse in the market than low price houses? Their MOS is very high, but that it because buyers are just waiting for the market to stop falling, and sellers are waiting for the recovery.

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  16. Chris

    RE: Magnolia44 @ 14

    No something does not have to be done and this is not good news. Just because your house is worth less than your mortgage does not entitle you to compensation. When you finance a car you are already under water the moment you drive it off the lot. Forcing me through the use of my tax dollars to compensate someone for buying an overpriced asset is an absolutely ludicrous proposision. Are you willing to donate 25% of your earnings, 2 hours of every 8 hour day, to Mr Jones down the street just because his house is worth less?

    I don’t have a problem with allowing someone to refi to a lower rate, but a reduction in principal goes completely against almost everything that has made this country so successful – personal responsibility and the sanctity of contract.

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  17. Magnolia44

    We live in america, take a look at third world countries life is not always fair. I just want to see us get out of the recession ok, if that means my house is 25% less so be it, but these job losses and business closeures are bad news. Something needs to stop the bleeding.

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  18. old ballard

    RE: jon @ 15 -

    Because, it wasn’t just high end housing that was over priced. The Bubble effected all housing. Houses south of Seattle were selling at multiples of four and five times what they should.

    It’s important to remember that a healthy housing market needs to include people with incomes at 50-60% of medium as well as 125% of medium income.

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  19. Ray Pepper

    Here in lies the problem!

    http://www.cnbc.com/id/15840232?video=1039849853&play=1

    Anarchy!

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  20. old ballard

    RE: Chris @ 16

    what if the principal was a lie?

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  21. PublicEnemy#1

    RE: Magnolia44 @ 17

    So what if your house needs to be worth 40% less in order to get us out of the recession, is that ok too?

    How about 50% less, 60% less?

    If your home drops 60% in value in order to get people buying again and stem the tide of job losses and business closures, are you willing to accept that?

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  22. 98115_Renter

    By Magnolia44 @ 14:

    We pay a crap load in taxes, and I am fine with the govt rolling out the programs, such is life.

    Although I agree with you let’s not forget that WA has one of the lowest total income tax burdens in the country.

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  23. old ballard

    RE: Ray Pepper @ 19

    rick’s rants? you listen to that guy? moralism coming from wall street? isn’t that like putting the pedophiles in charge of the children?

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  24. Magnolia44

    Public Enemy,

    If that was the case I guess I could not say until we hit that point. We bought the house because it was good for us, long term its perfect in what I feel is the idea neighborhood. The pmt was based on 25% of our incomes which I estimated will go up over time with career tracks at the time bringing that percentage even lower. Will the incomes rise now, no we both had freezes which I am more than fine with keeping the percentage at 25%.

    50% would be hard to swallow and I think there would be much worse to worry about in the overall economy than my house, If incomes were the same maybe we stay and ride it out. I bought knowing there was going to be a downturn but we were in it for the long haul, I didn’t predict 20% off and economic collapse in that analysis, so that’s where I was off. Other than that as long as we are employed or one of us is employed life is good, I don’t get too caught up in my house value the economy and jobs are my concern.

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  25. DaveyDave

    RE: Magnolia44 @ 14
    I will stop the whining if we go all the way socialist, and not just half way. So if we all bail out homebuyers that are losing money, then let’s pool all the gains from homeowners that make money over time and equally distribute those profits back to taxpayers. If the banks that made the loans are a source of the problem, then let’s nationalize them, fix the books and then reprivatize them. The profits from the reprivatization can help pay for the bailout. This is no more stoopid than what is currently being enacted.

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  26. Magnolia44

    Let me fix my whining comment. Yes renters waiting for a bottom and falling prices have a right to look down on the actions taking place.

    I have seen a few interviews where homeowners are whining, saying why help them we get no help etc… Renters by all means this is a road block in the ultimate goal of truly low prices. Not a nail in the coffin but a road block.

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  27. old ballard

    RE: DaveyDave @ 25

    sounds like a good start to me.

    here’s an idea.

    if the government (a.k.a. you and me) are going to bailout the credit card companies (the banks,) why don’t we give them the option of settling their debt to the tax payer, either:

    1) by making payments to the fed,

    2) or forgiving debt held by their card holders.

    at least that way actual people would get help.

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  28. Ray Pepper

    RE: old ballard @ 23

    I’m not a Rick Santelli fan but what he said is what will continue to ring in homeowners heads. Whew …we have ALOT of work ahead of us.

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  29. old ballard

    RE: Ray Pepper @ 28

    “will continue to ring in homeowners heads,” can’t argue with that. unfortunately it’s true.

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  30. 98115_Renter

    By old ballard @ 23:

    RE: Ray Pepper @ 19

    rick’s rants? you listen to that guy? moralism coming from wall street? isn’t that like putting the pedophiles in charge of the children?

    Yes it’s a little ridiculous isn’t it. I didn’t hear him criticising TARP. Of course corporate welfare is fine but not aid to individuals.

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  31. PublicEnemy#1

    RE: Magnolia44 @ 24

    So, without getting too personal, if one of the two of you loses their job, will it be tight making the payments?

    If so, then this is why some people could be in a world of hurt in this country VERY SOON.

    As job losses mount, more foreclosures will happen on people who only qualified on both salaries, causing lower prices.

    If a couple couldn’t qualify on just one salary, perhaps they should not have been buying as much home as they did.

    It’s easy to state that the US is a two income family environment now, but that’s really only true on the Coasts.

    I know far too many people that signed on for a large mortgage always assuming both jobs were going to remain secure, only to find they weren’t.

    This is why every house we ever applied for a mortgage on was always only qualified on ONE salary.

    So if someone gets sick, hurt, dead, etc. the other person can still safely make the payments.

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  32. DavidB

    I expect we’ll continue to see home prices drop in Seattle. Home inventory remains high and sales volume is very low. The refinancing requirements will prevent many from refinancing their homes unless they have the ability to put more money in.

    With so many homes underwater now people will need to decide if it’s worthwhile to work with their lender in hope of decreasing their payments, filing bankruptcy, or just mailing the keys back to the lender.

    For homes in the higher prices I doubt if many used Fanny or Freddie to finance them so they have fewer options. There seems to be little demand for homes priced above $500K (based on homes I see selling on my John L Scott watchlist) so I think we’ll see the largest % price adjustments on these homes. I think that’s the case also because first time home buyers aren’t typically buying homes that are that expensive so the $8K tax credit won’t be available to those buyers.

    People like me that have owned a home within the past 3 years and have money to buy another one aren’t able to take advantage of the tax credit so there’s little incentive for us to jump into this falling market.

    The default rate on reworked mortgages is 55% so I think the government’s intervention in the free market may at best slow the price declines but I expect home prices will continue to trend down for quite a while.

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  33. Chris

    RE: old ballard @ 20

    The principal is the balance on a note payable, cash loaned out less cash paid back. Cash doesn’t lie.

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  34. Pndscm

    By 98115_Renter @ 30:

    By old ballard @ 23:
    RE: Ray Pepper @ 19

    rick’s rants? you listen to that guy? moralism coming from wall street? isn’t that like putting the pedophiles in charge of the children?

    Yes it’s a little ridiculous isn’t it. I didn’t hear him criticising TARP. Of course corporate welfare is fine but not aid to individuals.

    Just google it. Here was his commentary:

    http://www.godlikeproductions.com/sm/custom/jrltrheq.jpeg

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  35. DaveyDave

    By DavidB @ 32:

    The default rate on reworked mortgages is 55% so I think the government’s intervention in the free market may at best slow the price declines but I expect home prices will continue to trend down for quite a while.

    Here’s a NYT article on redefault rates:
    http://www.nytimes.com/2009/02/19/us/19loans.html?hp
    And here is a quote. Concentrate hard to see if you can follow the complex logic:

    Rod Dubitsky, a mortgage analyst at Credit Suisse, found that modifications that result in lower payments tended to re-default at half the rate as plans under which payments were higher or remained roughly the same.

    Actually, it’s not a bad article and points to the obvious difficulties facing banks today about acting on defaulting borrowers. Large banks, like Wells Fargo are looking at around 50% redefault rate. Apparently according to this article, smaller banks often use a different approach and are looking at around a 25% redefault rate.

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  36. Magnolia44

    PE

    Think about what you asked, if 2 of us lose our job yeah we pretty much will have a hard time making payments. If one of us loses our job depending on the person, we can either be just fine or have a tough time making payments depending on who. We have reserves easily covering 8 months of mortgage payments if it got real ugly, both losing our jobs.

    Too many what if’s to cover, but we feel fine with the main income covering the home which would be the case for most conservative purchases. We however are in the minority, I am pretty conservative financially made sure all ratios and bases were covered before jumping in. We would be classified as making an affordable purchase for our situation.

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  37. old ballard

    RE: Chris @ 33 -

    yes, cash doesn’t lie, but assessors and mortgage brokers do. misrepresentation of fact and omissin of fact are both lying.

    i don’t see any “personal responsiblity, or sanctity of contract” by the people who sold mortgages they should have reasonably known could not be sustained by the people buying those mortgages.

    lying and cheating people out of their money may have made this country great, but that doesn’t mean we’re doomed to be our father’s sons.

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  38. wanting to buy!

    6. softwarengineer
    I want to thank you for saving my ass! I was going to buy a house and reading this bog and your posts made me do a double take. You were right on when others were calling you a nut job! Sincere thanks!

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  39. Chris

    By Magnolia44 @ 17:

    We live in america, take a look at third world countries life is not always fair. I just want to see us get out of the recession ok, if that means my house is 25% less so be it, but these job losses and business closeures are bad news. Something needs to stop the bleeding.

    Never did I mention the word “fair”. I’m not looking for fairness, I’m looking for what is just. Those third world countries remain depressed partially because there is no adequate system of justice. Nulifying valid contracts (which is escentially what this is) entered into by reasonably competant parties only takes away incentive to enter into such contracts in the future without a much higher risk premium.

    Besides this bill will have no impact on saving the economy or home values. If the Congress wants to stimulate the economy, invest where there is a meaningful return.

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  40. PublicEnemy#1

    RE: Magnolia44 @ 36

    Smart thinking…

    I just know far too many couples who don’t realize just how close they are to being broke in weeks when the day care, car, home and other payments start adding up after one part of the equation loses the job they thought was so secure a year ago.

    It’s going to be ugly on the Coasts, make no mistake….

    It’s easier for flyover country because the homes there, by and large, never went out of control.

    It’s far easier to absorb a $1000 a month housing cost than a $3000 a month housing cost when tapping into a savings cushion.

    Of course, I am of the school of thought that people paying half a mil for regular 3 bedroom older homes in West Seattle in 2007 were crazy when they really were worth maybe $200K at best.

    But then, I subscribe to the 50%-60% drop coming to Seattle.

    As job losses mount in Redmond, Seattle, Bellevue, etc. Seattle won’t be so “special” anymore and lots of people will be leaving to go back to their hometowns.

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  41. DavidB

    Thanks for the article link Daveydave @35.

    Most of these people who want their loan terms changed shouldn’t have bought a house in the first place and they’re likely to just default on the modified loan too!

    I think all this government intervention is being done by politicians so it will appear like they’re doing something to help the “average” person instead of just Wall Street.

    Unfortunately, it’s not likely to help and I think the negative consequences of spending this much money and interfering with the free market do much more harm than good.

    In markets like CA where prices have been allowed to fall, home inventories have decreased and home sales have increased. The free market works!

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  42. Chris

    RE: old ballard @ 37

    There was just as much lying going on by borowers. The desire to own a home is no excuse for not reading the documents you are signing. No one person, group or industry can take the blame for this. The easiest, most prudent and just way to resolve is to make those who participated in the fun pay for it.

    Contracts entered into based on known to be false information can be nullified. Tim made a simple suggestion for this the other day. Mandate review of all outstanding mortgages issued since 2003, any that are shown to be made based on falsified documentation are nullified and the home goes on the selling block.

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  43. EconE

    Hey folks…at least give Magnolia44 the benefit of the doubt. He was responsible to keep his Mortgage payment at 25% of income and has a reserve cushion.

    Can that be said for most other purchasers?

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  44. old ballard

    RE: Chris @ 42

    there are no excuses, not even profit.

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  45. 98115_Renter

    RE: Chris @ 42

    If this is the case the banks should be on the hook also. They agreed to bubble appraisals and therefore knowingly falsified their own contracts.

    Anyway, if those who participated in the fun need to pay the price, anyone who profited from the whole mess (banks, mortgage brokers, RE agents) need to also hand back all of those handsome profits/commissions/bonuses that they made during the bubble. Why should homeowners and the public be the only ones paying the price?

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  46. DaveyDave

    By DavidB @ 41:

    I think all this government intervention is being done by politicians so it will appear like they’re doing something to help the “average” person instead of just Wall Street.

    Continuing with more articles, this one from CNBC addresses a number of different angles on the housing plan:
    http://www.cnbc.com/id/29281438
    Here’s a quote, DavidB, that addresses the political aspect you brought up:

    “What I believe it will do more than anything is stimulate sentiment, and the emotions of the investor are at a very fragile and critical juncture right now,” says Gary Hager, CEO at Integrated Wealth Management. “The more (the government is) able to do the more confident people will get. The spillover of that will be more spending.”

    And amongst the many points made in the article, this seems to be the bottom line:

    “I empathize with the borrower …. but I think we’re making a bad situation worse,” Widner says. “Not that foreclosure is a great option for the banks, but it seems we may end up foreclosing on that borrower anyway. The general practice is, don’t postpone the inevitable.”

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  47. 98115_Renter

    RE: DaveyDave @ 46

    The problem with CNBC and it’s articles is that it has very little besides “expert” testimony to back up any of its claims. For example

    “The consensus on a recovery is that banks will have to lead the way”.

    What consensus? Who made this decision? It’s basically crap journalism.

    Just like the Santelli rant, nobody challenged him to explain why wall street should get bailouts while he is indignant about the moral hazard of a housing bailout.

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  48. DaveyDave

    RE: 98115_Renter @ 47
    They are a bit like the Fox news of the biz world – heavy on the biased sensationalism. But the odd thing is that article had more information and perspective than the previous article cited from ‘the old gray lady’, NYT.

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  49. b

    Magnolia44 -

    If most homebuyers were setup like you are, we wouldn’t be in this mess in the first place. I think that is why people (myself included) are so outraged at the new handouts to in trouble homeowners. If you are in trouble because you lost your job or got sick, etc, then I have sympathy. However, I do believe that if you are going to buy a huge leveraged asset with a big payment you should have reserves (like you do) before ever going through with it so you can ride out tougher times like right now. The big problem is that you are in the 5% of people who bought recently and did not overextend themselves or blow all of their savings on a house. For everyone else they acted like dumbchocolates and now we get to pay for their lack of savings, planning and rational thinking.

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  50. Magnolia44

    I’m not here to pat myself on the back, and I understand the plight of both sides. My point now is the mess is huge, and of course I will be skewed towards owner side.

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  51. Chris

    By 98115_Renter @ 45:

    RE: Chris @ 42

    If this is the case the banks should be on the hook also. They agreed to bubble appraisals and therefore knowingly falsified their own contracts.

    … Why should homeowners and the public be the only ones paying the price?

    I agree with you. Banks should be on the hook by loosing the money on worthless loans. Unfortunately govenment believes in rewarding failure. This, unfortunately, does not bring back all of the cash that was made by individuals.
    Through review of mortgage contracts, the blatent fraud could be found and those committing it held accountable, although they probably have blown everything they made.

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  52. mark

    chocolate

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  53. jon

    Maybe I missed something, but I haven’t seen anything in this latest proposal about the government taking equity in the bailed out house. All the previous bailouts had that. Seems to be a major omission if that is true.

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  54. Herman

    Magnolia – you said you have an 8 month cushion. Out of curiosity, have you been adding to that cushion recently?

    Meaning, are you saving more of your disposable income out of concern for the economic conditions, like the economists suggest.

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  55. patient

    Speaking of affordability, apparently we are the 10th least affordable city in the US compared to our local incomes:

    http://money.cnn.com/2009/02/19/real_estate/housing_affordability_improves/index.htm?postversion=2009021916

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  56. Magnolia44

    Herman,

    We save at minimum 35 % of our take home, that’s plus or minus depending if we have a spending month on some stuff but that’s the average. Am I tighter now then before, yes I even cancelled hbo even though its 18 bucks a month but that might have been usage based not just the money.

    That being said I did have some renovation stuff done in the last month and will have some more done, yes I am not getting equity back now but I need to have home be comfortable and to our liking. Initially we were going to d a kitchen remodel but that project for sure is on the back burner for easily a while until things turn around economy wise, not necessarily housing price wise.

    Like I mentioned before we will be in this home a while, barring catastrophe so we are not concerned on dumping a few thousand here and there on the home, yes I know it can backfire but it is all within reason.

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  57. mukoh

    RE: softwarengineer @ 4 – You are once again using that overanalyzing machine you engineered in 1971 before IBM did. DISTRESSED does not mean in foreclosure.

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  58. Scotsman

    By patient @ 55:

    Speaking of affordability, apparently we are the 10th least affordable city in the US compared to our local incomes:

    http://money.cnn.com/2009/02/19/real_estate/housing_affordability_improves/index.htm?postversion=2009021916

    This can’t be good as we go forward. I don’t generally see Seattle as being in the same position as New York and its suburbs with regard to income potential.

    Tid-Bit Time: I heard today that only 40,000 people pay HALF the total tax revenue in New York. I wonder what that number will look like next year now that the financials have collapsed.

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  59. Jonness

    “We have reserves easily covering 8 months of mortgage payments if it got real ugly, both losing our jobs.”

    Keep in mind the laid off person in your situation could collect over $2k/mo. in unemployment benefits for well over a year (unless self employed), That would help fluff up the cushion a bit. Hopefully, within the year, you would find another job bringing in more than the govt. check. If not, you would still have your 8 mo. cushion to help rough it while you continued to look for a way to bring in some cash.

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  60. Jonness

    Oh yeah, I should have said, if you lost both jobs, hopefully there would be an offset of 6 mo. to a year between layoffs. IOW, even in a very bad scenario, you could still potentially make it out the other side depending on how hard-core your mortgage is. If your taxes aren’t tied to the payment, maybe you could let them lapse for awhile as well.

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  61. MarkM

    Looks like rents are dropping now as well, which more than likely will continue to put pressure on existing home prices (ie if it’s that much cheaper to rent than own….)

    http://finance.yahoo.com/real-estate/article/106480/Rents-Drop-Nationwide-as-Vacancies-Spike

    Guess which city made the top 10 list?

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  62. Herman

    RE: Magnolia44 @ 56
    Interesting, so you are cutting back spending in some ways.

    This is not what the government wants you to do. It seems like you should not have an 8 month cushion. You should spend all that money on things that you want and leave a 0 month cushion. If you get into trouble, don’t worry about it, ‘bama’s got your back.

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  63. 98115_Renter

    By Herman @ 62:

    RE: Magnolia44 @ 56
    If you get into trouble, don’t worry about it, ‘bama’s got your back.

    Your attitude assumes that everyone who is in trouble is in that situation because of poor financial management on their part. While it is certainly true in many cases, it is not universal. Your smug comment will not help anyone. Why don’t you try to be constructive?

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  64. Herman

    I am being constructive. I’m offering good advice that is consistent with the government’s incentives for behavior. It has nothing to do with judging people who are in financial trouble. Try not to get so emotional.

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  65. More Unfounded Starry-Eyed Nonsense from Lawrence Yun | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.

    [...] home prices and local incomes—is still well below its historical level. As I explained in Bottom-Calling: Affordability Index Forecast, home prices will have to fall roughly 40% from their peak to get us back in line with a level that [...]

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