As for the standard deduction, if the couple you know is self-employed, then they have plenty of deductions already to blow through that.

Nope. We work at the same company doing the same job. He started a year earlier, so he makes a little more (not much more by his own admission). We had our first children a month apart. Our situations are almost identical so I know basically how much he can deduct. I tend to think of them as us if we had bought into the hype and trapped ourselves in a condo.
Also, even if they could blow through the standard deduction due to self-employment, that would make the situation even more in favor of renting.

RE: Kary L. Krismer @ 34 – The point is I don’t understand why the NWMLS figures are used as a means of determining today’s value. If we know property pricing is going down, and if we know that the economy is contracting, why would we use this years sales to determine future pricing for loans?.

I don’t know that you ever did. About six months is as far back as I think they’d typically go. Three months is more like it now, if possible (e.g. not an unusual property).

BTW, you need to discover the Starbucks card. ;-)

Japan waited 10 years to fix its banking crisis and bring about quantitative easing so its hard to believe we will muddle in a 10 year deflationary trap like them. US will probably see a more violent yet quicker recovery, or just introduce another problem we will have to face later.

RE: deejayoh @ 30 – CR has talked about that a lot for the last couple of years. It is the reason why prime and alt-a loans are now defaulting at incredible (for their credit “quality”) rates. It is too bad our policy response to this is to turn the FHA into Countrywide and continue the no-down gravy-train so that more families can ruin their finances.

Talked about, yes – but this is the first analysis of any data set I have seen that provides other than anectdotal evidence of the phenomenon. IMO this is proof that “walking away” is a driving much of the foreclosure volume. IIRC, there has been a fair bit of blog-blog-blah about this the on this very forum for the past few days.

Washington State did get horrifyingly dinged for its huge state deficit by the MSM lately, but since its budget deficit is about three times worse than California per capita, why haven’t we seen the dire news about us yet?

Its the 3 year property tax lag and our home price collapse lag IMO; the manure hasn’t hit the Washington State fan yet. 2010 is a completely different story, especially as our state’s unemployment disappears [the unemployment compensation runs out for them and we no longer count them as unemployed]….if you’re a local government worker or State worker, worry.

Wow that logic is great. Maybe it was the most stable (relatively speaking of course).

The fallout from the banking industry mess was nationwide, not unique to areas like Phoenix, or Las Vegas.

http://realestate.yahoo.com/promo/5-housing-markets-that-have-further-to-fall.html;_ylc=X3oDMTFuNTBiYnQ0BF9TAzI3MTYxNDkEX3MDOTc2MjA0NjUEc2VjA2ZwLXRvZGF5BHNsawNmdXJ0aGVyLXRvLWZhbGw-

Moot is the a debatable term, but it does seem to fit.

The point is I don’t understand why the NWMLS figures are used as a means of determining today’s value. If we know property pricing is going down, and if we know that the economy is contracting, why would we use this years sales to determine future pricing for loans?

Starbucks is my very best example. It’s a cup of coffee. My daughter wants a frapacino (sp?) and it is $4. One day the price goes up to $5. Do you think I can turn around and say that’s too much? The price is $5. If I make more money that $5 is a small luxury and I will do what I can to get the kids what they want. If I start making less money my daughter and I are going to fight about a $5 cup of coffee.

Starbucks isn’t going to sell me a $5 cup of coffee for $4 because I make less money. As more and more people have less money and sales decrease Starbucks might start lowering the price. The price will decline slowly to maintain profit. Eventually it may reach $4 the way it was, but it is still a cup of coffee.

Let’s take Starbucks with the granite counter tops, fancy machines, fresh faced barristas, and gleaming muffin case, along with the merchandise out of the picture. What would you pay for a cup of coffee at McDonald’s, 7 Eleven, or the local diner? The prices for coffee there were pushed up by Starbucks ability to charge $5, but as those prices fall all prices fall according to the demand. After all I can make Folger’s at home.

Now I can see you shaking your head because you don’t get it. Let me finish. The point is that if the frapacino were $1 I would take a dollar out of my pocket and pay. For $4 I’m more inclined to use a debit or credit card. I’m much more inclined to involve a bank in the purchase. $4 isn’t much, but in a series of purchases in a day when everything is $4 here, and there a debit or credit card makes sense. Rather than walking around with a wad of cash the card is a convenience. We just get used to that.

Now what if the bank charges us a $1 a day for the use of the card? $30 a month isn’t much, but it adds up. The credit card interest goes up, banking fees, and transaction fees go up and are added into the cost of making that purchase. Will you pay those fees and interest?

No. You will stop using the card to make the purchase because the card is costing you more than the frapacino. You stop buying the frapacino and make coffee at home. I yell at my daughter because she still wants the frapacino. My point to her is that the $4 cost combined with the bank, which is everywhere, is costing us more than the frapacino is worth to me. I am now trying to convince her that the frapacino is way too expensive because it is, and always was.

As for Case Schiller they are selling a report and he gives lectures about herd mentality. I think NWMLS is a good fit there.

Come to think of it, what if the bank were to actually sell my purchase of a frapacino, plus interest, penalties, and fees as a mortgage backed security? Uh Oh, it’s another problem.

I hear contradictory reports about mortgage lending these days. On the one hand I hear lots of complaints about how difficult it is to get financing, and that lenders are hugely tightening criteria, and delaying funding. On the other hand I hear that not only is the use of FHA backed loans growing beyond all reckoning, but that 0 day delinquencies are rising at an astronomical rate.

The former is the press trying to create some hype.

If borrower A with a 720 credit score can no only get a loan for $300,000, when previously they could get a loan for $310,000, the press will report that as 80% of banks have tightened their lending standards, without explanation.

Unless your credit scores are really bad, or you’ve got 1099 income, the loans are still widely available, but just in reduced amounts. FHA goes down to a credit score of 620. There are other situations that can make it difficult, for example being in a low end condo that doesn’t have FHA approval will cut off most your buyers.

RE: David Losh @ 17 –

EXACTLY DAVID

We can go to the wolf in sheep’s clothing preaching to the sheep with wolf statistics; or throw it out as moot.

Well first, it wouldn’t be moot–wrong term. But second, if the NWMLS numbers are so bad, then why are they so highly correlated to C-S numbers?

But banks don’t necessarily bid in all their debt. I was just looking at an REO where they only bid in about $169k, and now have it listed for just over $200k, and that will not pay them off. They too didn’t know the condition of the property at the time, and would have been happy getting $169k for it. I don’t know how much trash was left in the property, but otherwise it was seemingly in pretty good condition, which is why it’s listed where it is.

The out sourcing debate is moot and has been for many years, probably over a decade now.

I can have any number of things manufactured in South America and import them. The problem is the system of tariffs and the lobby of American Corporations who whine about market share. At the same time these American Corporations lobby to get products they want into this country.

When people blame the government for interfering with business I know it is those very same businesses that will lie, cheat, and steal whatever they can to show a profit to the stock holders. That is how they get paid.

Never mind producing a good product for sale at a fair price, it’s the corporate swindles that make the big dollars. We are seeing it in Enron, Merrill Lynch, Bank of America, World Com, WalMart, McDonalds, Starbucks, and General Motors. General Electric is my favorite because I think they want to rule the world.

You can blame the consumer, but the economy is so contrived it’s ridiculous. We’re talking about deflation as though we are talking about real dollars. There is in fact very real dollars on the “sidelines” looking for the next investment opportunity, or creating it. The money is there, in cash, and American Corporations want to Financially Engineer the next crisis to capitalize on.

What do we get? We get low wage jobs, substandard education, no health care, crowded prisons, fear for our lives with crime run rampant, and a far flung military that went into urban combat without basic body armor. We get chaos that needs more tax dollars before some one will promise to fix it.

The economy can be corrected if American business would do business. The way our system is set up business is in charge. Business is refusing to do anything to correct itself. Our government once again is stepping in to make things right so business can go back to normal. Normal isn’t working.

The government in California needs to stop. They need to shut down. They need to stop catering to every whiney corporate cause and let them work it out. People blame social welfare programs. In fact if we are only talking about food, housing, and health care for the very poor, the very poor don’t need much. I think we can handle that.

The rest of you all need to start taking care of your selves.

A budget short fall in Washington? Moth ball Light Rail. I’m sure if we look at the budget there is several billion that we can cut.

Jobs? we need help in every field. Number one we need to stop these on line classes and get teachers. Automation, and computer generated labor saving is good for three years tops before you need to buy new. In the mean time costs go up and the consumer gets less. I suspect robotics killed the auto industry.

Business can do business and pay fair taxes to get fair service. It starts with you. You made good head way here on a blog. If we each look at what we can do to improve the systems we have then it’s a start.

New Evidence on the Foreclosure Crisis
Zero money down, not subprime loans, led to the mortgage meltdown.

the takeaway:

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

interesting stuff

Deflation hasn’t hit medical/college costs yet

Deflation is certainly hitting colleges. The percentage of students getting financial aid has risen substantially (i.e. effectively lowering tuition prices) and faculty wages are under tremendous pressure. Few college teachers have seen a wage increase in recent years, and new hires are often getting less compensation than they were even a year ago.

Interestingly, my wife is going back to college to get her teaching certification, and a lot of her courses are completely on-line. Talk about reducing labour costs for teaching staff!

Actually, this gets me thinking about the whole debate about how much of a negative impact “outsourcing” has on the economy. Forget replacing high-cost domestic engineers with cheap programmers in the third world when jobs are being cut left and right through automatation. The community colleges (such as the ones my wife is attending) can now hire a single math teacher to handle on-line students across the whole Puget Sound rather than each campus being required to hire staff to provide in-person lectures. This type of automation is likely “destroying” jobs more than all the outsourcing put together.

I’m with the Japanese, when I’m on vacation I want to bring home nice souvenirs, not just i.e., tee shirts saying, “All I got was this crummy tee shirt”. I heard on the news that Obama’s $787B stimulus is only 5% spent so far, albeit it seemed like the corporate welfare on Paulson’s first $800B, last year, all went to the bankster whiners per David’s response. Where’s the beef [jobs]?

At least the first 5% of the $787B went to like nuclear waste cleanup and medicaid to disabled in this state; worthy causes for Obama. I’m wondering if the other 95% isn’t spent yet, because we’re broke?

Yes Sniglet, wages are coming down all over the world. Deflation hasn’t hit medical/college costs yet, but medical patient load is approximately 30% down and I predict, students going to college will drastically reduce too, if they haven’t already [especially with college entree jobs almost non-existant in Seattle and elsewhere]. Its supply and demand. Money is tight, so demand to spend it is diminished.

Oil consumtion is down 42% from 2006, so excuses to raise gas prices are almost non-existant too. Doesn’t sound like a good time to pitch cap and trade taxes or hybrids…we’ve essentially solved global warming by doing nothing except capping population growth spending [depression]….what we should have environmentally planned in decades ago. Nothing else will work in my book.

A thought that I have had is that the money the Fed is handing out is essentially covering corporate losses. Even the Freddie mac, Fannie may loans are only absorbing investor debt rather than creating anything of substance. Real estate prices are going down and have come down. The value of the asset is still over priced compared to the loan amounts.

By all consideration in residential real estate today’s loans are tomorrow’s problem.

A specific question that I have has to do with Japan. My family and i just returned from Oahu, Hawaii. There are thousands of Japanese buying very high end luxury items. If Japan has had a lost decade it doesn’t show in the shopping patterns in Hawaii.

My thought is that deflation makes no difference really. There will be adjustments to the way we do business and I think there will be a shadow cash economy. The Japanese have a different work and business philosophy. Business is War. Debt is a thing of honor and luck.

What I’m asking is, what will our lost decade look like? It is here. No matter what the Fed does our corporate business structure is being run by a bunch of welfare wanting whiners. Our corporations refuse to do business, they just want to have small print scams work their way through the court system. It’s embarrassing.

So if we lack the business innovation to move forward, where would that leave us?

From my personal consumption experience it feels like we are in major deflation. I seem to be able to buy almost anything at 30-50% off now a days.

I am not sure about that, I’ve always been cheap, so I have always found deals on everything. I personally cannot say that I am getting a whole lot of items for less than 2 years ago.

Maybe labor, but even that has a long way to go before I yell out “deflation”.

The excuse that somehow the insourcing provides better talent has no proof and the recent actuals to date disprove ths allegation

I don’t think there is anything inherently supperior about either “in” or “out” sourced talent. The development issues with Vista or the 787 were related to deeper management and planning failures rather than the use of internal or external resources.

In any event, the wages paid to either outsourced or internal resources have been coming down substantially, so there is deflation all round. Even my Indian friends in Bangalore tell me that wages are dropping like a rock in their neck of the woods.

No one (or place) is immune.

I AGREE WITH YOU SNIGLET

I’d add this too: both M/S and Boeing brainlessly insource way too many replacement workers during economic layoff messes; and although some local “insourced positions” pay well at M/S, the i.e., equivalent laid off domestic contractor for the job, most likely made far more or why else would M/S insource?

The excuse that somehow the insourcing provides better talent has no proof and the recent actuals to date disprove ths allegation [VISTA and 787].

The development of the Boeing 767 in the late 70s was a rousing developmental success, hiring mostly local domestic kids for training/mentoring from our local Seattle area community colleges, who quickly made good pay and did also great technical work….but insourcing is cheaper [albeit, the 787 and VISTA products are subpar in quality and schedules to date]. Sniglet, its win/win for the company and the domestic job market to hire local kids [who are already assimilated to our culture and communicate much better, let's be honest too] and train them, why would M/S and Boeing ignore this common sense after their recent clear insource/outsource failures?

If you need the documentation for “average pay decreases using insource replacements” at M/S and Boeing, I can provide the websites, but assuming my logical assumption is correct; higher domestic worker pay means more income taxes and less tax increases.

There’s also a recent IRS investigation going on over companies insourcing, but paying no income tax for its cheap replacement workers. Its against the law, but we’ve already caught a few organised crime companies doing it [likely tip of the iceberg?].

Does anyone have any insight as to what is really happening? How can I reconcile the stories about how lending is getting tighter with the other stories about how GSE, or FHA backed, loans are getting looser in their issuing standards? Perhaps it is only certain types of loans that are getting harder to come by (e.g. Jumbo)?

EXACTLY DAVID

We can go to the wolf in sheep’s clothing preaching to the sheep with wolf statistics; or throw it out as moot.

The real estate industry needs an independent General Accounting Office or Inspector General doing its predictions and statistical trends in a neutral fair manner, as all companies/agencies need this type of oversight, or all we get is Orwellian Newspeak, like “priceup” [meaning the prices are trending downward, but we'll pretend they're going up anyway] or “assessmentscience” [meaning the assessor works for the seller or county and prices everything way too high].

I have heard so many stories about how lenders just buy back their own properties if no one bids for more than the price of the outstanding mortgage that I figured foreclosure auctions were a waste of time. Is this true in King County?

All indications are that this time around the response of the Fed is such that there won’t be any significant deflation this time.

Really? You must be looking at a different set of information than I am. I see wages under pressure all over, and stealth price reductions are rampant (just go look for a job in almost any field and see how much lower the wages on offer are than 2 years ago). The private middle-school where my brother teaches, for example, is now offering “financial” aid to over 60% of pupils up from less than 20% in 2007, while still keeping the list price of the tuitions constant.

On top of that, policymakers have “printed” very little money, and are instead borrowing like mad in order to fund their stimulus efforts (i.e. “borrowed” money is deflationary).

Sure, we’ve had a bit of a rally this year, but these whip-saw retracements are normal for bear markets (which see the most violent rallies) and will almost certainly be undone late this year or next.

Deflation is the order of the day, and will be with us for years to come.

If you are interested in seeing more about the case for deflation, check our my in-depth podcast on the subject.
http://surkanstance.blogspot.com/2009/01/deflation-101-podcast.html

Going to the NWMLS for statistics is like going to the National Association of REALTORS for news.

A Comparative Market Analysis at this point is absolutely worthless for determining property value.

Looking at the closed sales that have happened this year indicate exactly that every year a certain number of people have to move, for work, schools, divorce, or growing families. This is no indication of a free market place.

Looking at what a property sold for six months ago, or three months ago will only show what some one paid for a property. We should all be able to figure out that prices will go down this year.

There are no trends in any of the NWMLS statistics.

Statistics are like silly putty. One can stretch it to make it look the way you want it to.
For example, as of this morning, with a few stragglers left to report, the number for June 2009 SFR in King County is 1591, and that’s higher than any month in 2008. The real estate industry machine will proclaim that sales are increasing, prices are bound to follow, and you’d better get in now while you can.
But looking at June closed sales for the last ten years, SFR King County, 2009 will turn out to be the second worst year, only better than 2008, and not by much…Here are June closed sales by year, numbers from NWMLS, not guaranteed or verified:

2000 2211
2001 2300
2002 2267
2003 2803
2004 3429
2005 3300
2006 3095
2007 2699
2008 1583
2009 1591+
Note: The price peak of the market was July, 2007, although the sales peak was three years earlier.
I think it may be subject to debate whether sales are on a true upswing, or whether we’re going to wallow in bottom land for a while. I truly have no idea which one it is.

I looked a this article: http://finance.yahoo.com/family-home/article/107263/consumer-electronics-teardowns.html

All European firms are just not able to compete with this because they will be subject to huge revenue taxes. So American firms like Microsoft can innovate and compete with products like XBox where you earn a small margin but your sales are huge – so you end up becoming rich eventually.

It seems that the fallout from real estate seems pretty painful but the system of having companies innovate is really the right thing. Putting in red tape will just kill them. Only very limited regulations should be put in place so that things like this bubble do not happen again very soon.

The volume for June (King County SFR) will most likely come in higher than any month in 2008, but at roughly 10% less value YOY. That will be a big help for the counties’ excise tax collections, and also probably sales tax at places like Home Depot.

It will probably help[ out you evil Real Estate agents bring the lemmings to the cliff.

=)

As for the standard deduction, if the couple you know is self-employed, then they have plenty of deductions already to blow through that.

Nope. Business expenses aren’t subject to the standard deduction threshold, and thus the couple would still need the same amount of other personal deductions for the interest deduction to be beneficial.

By Racket @ 5:

What alot of people fail to factor in to real estate holding and carrying costs is the fact we can still write off interest on a home purchase.

I don’t think I’ve ever seen anybody fail to factor that in. A much bigger problem I see is people overestimating the tax savings. I know of one couple paying 2600 P&I on a condo where an identical unit is asking 1385 for rent and yet they believe that they wouldn’t really save any money renting because of the “tax savings”. Their tax rate would have to be 74% for that to be true (assuming $11400 standard deduction for renting and no property taxes, insurance, or condo association dues for owning).

It takes a few years of inflation for rent to catch up the mortgage payments on a new property. There isn’t much deflation now even though we are in the midst of a once a generation recession. All indications are that this time around the response of the Fed is such that there won’t be any significant deflation this time. The last non-trivial deflation was during the gold standard.The proposed trillion dollar annual deficits going forward will provide plenty of inflationary excess demand from the government to drive up prices even if we peons have little after tax cash.

The increasing cost of materials caused by unrestrained government spending (such as the $400 million rental car garage at Seatax) , over-zealous cap and trade building regulations, and lots of government jobs for construction workers will make new construction very expensive.

As for the standard deduction, if the couple you know is self-employed, then they have plenty of deductions already to blow through that.

What alot of people fail to factor in to real estate holding and carrying costs is the fact we can still write off interest on a home purchase.

I don’t think I’ve ever seen anybody fail to factor that in. A much bigger problem I see is people overestimating the tax savings. I know of one couple paying 2600 P&I on a condo where an identical unit is asking 1385 for rent and yet they believe that they wouldn’t really save any money renting because of the “tax savings”. Their tax rate would have to be 74% for that to be true (assuming $11400 standard deduction for renting and no property taxes, insurance, or condo association dues for owning).

The last time there was a real estate downturn this deep was during the depression, and mortgages as we know them today didn’t even exist back then.

That’s a good point. I think the non-deficiency non-judicial foreclosure processes are mainly post 1930s.

Exactly right, the very concept of mortgages for a half a million dollars is a very new phenomenon. Every body, or just about everybody, owes a quarter up to half a million dollars. Every two to four home owners are paying interest on a million dollars every month.

At some point any one would look at thier debt of a quarter million dollars as being a bit high. If the value of the property should drop to say $150K and you are paying on a quarter of a million dollars of debt, you would really have to think about what you are doing.

Real Estate is becoming a multi faceted issue.

In my opinion the housing unit discussion is done. Residential real estate as a place to build your life is a personal choice. Buy something that works for you with the idea you will keep it.

Rural communities, in my opinion, can go back to the important task of growing and raising food. There is a lot to be done in community development, but the days of slicing a farm into housing units is really a stupid concept. We need food more than boxes to keep our carp.

That leaves us with commercial Real Estate. Commercial Real Estate is any property that generates a return. In most cases it’s rental income. Whether it’s retail. warehouse, or residential, Commercial Real Estate is the current bubble.

The commenter mukoh keeps claiming these big investment groups are swooping in and buying commercial Real Estate for cash and a long term hold. I checked with a buddy and yes even Trammell Crow is still buying. In my opinion this is exactly the next bubble.

I don’t want to pretend that I understand the credit markets. It does seem to me that credit was a bubble that has burst. The next place for investor dollars to go would be bonds, commodities, or Real Estate.

How wise would it be to invest cash into commercial Real Estate? How much of a return could you expect to get, today. Over at Trammell Crow they are seeing more competition from condos being converted to apartments. The apartment buildings they have bought, fixed, and rented are losing tenants to cheaper units and units that now have condo finishes.

Let’s skip apartments and look at retail spaces. With a contracting economy how much demand is there for cafés, boutique clothing, jewelery, and even coffee? As the global economy contracts will industrial, warehouse, and office park space still be in demand? Along with that are the contractors, employees, and planners that may lose jobs.

To me it looks like a continuing downward spiral.

So up to $1 Million dollars of debt you can get A percentage of your tax burden relieved. This really is a tangible factor that people tend to ignore, especially to doom campaign.

It’s not terribly well written either….

Kary, dont mistake “well written” for lack of brevity. The Economist is widely recognized as one of the best written magazines in the world (and one that called the housing bubble a long, long time ago…). Just because they didnt explore the issue in the depth you would like doesnt mean the article is poorly written.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=13905502