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.

58 responses to “Bottom-Calling Checkup: No Bottom In Sight Yet”

  1. Indy

    I’m inclined to go with that affordability index estimate of -40% from peak in about 16-18 months or so. That would leave the Case-Shiller Seasonally Adjusted index score “only” about 20% down from what they just reported for May 2009. The key to affordability is not just incomes – but peak unemployment, and I’m guessing it will take another year and a half for the local economy to start adding net jobs.

    Net employment losses have tended to continue for at least two quarters after the last two recessions – and this one is quite severe with huge amounts of slack hours among existing workers and no obvious “jobs engine” to replace lost positions. We probably have at least a year from now until people start to think that the jobs picture has turned the corner, and another 6 months until they’re confident enough to make big purchases again.

    The good news is that banks will start to get much more frisky about making new loans because they’ll be insulated from any further losses. The time at which the banks become increasingly interested in providing financing for prime mortgages with these down payments will probably be a great way to call the “less than 20% from the bottom” point.

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  2. Tsuru

    I have an interesting anecdote. I work for a large local software company (you figure it out) and I was at a meeting and two participants showed up who hadn’t seen each other for a while. One asked the other if he had bought the property they were discussing earlier. The other said, yes, he did, and not only that he was snapping up undeveloped lots in the same development from the developer who had gone bankrupt for a steep discount. The first participant asked if he could get in on these seemingly great deals, and the other said he’d email the details.

    My first thought upon hearing all this was, “here we go again!”

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  3. Sniglet

    The “bottom” predictions of each of Tim’s (well thought out) models were always on the optimistic side in my view. I continue to stick with my prediction for an 80% (or more) decline from peak. The (well thought out) models used by Tim to determine possible end-points are interesting, but I don’t think they are useful when one is in the midst of a deflationary depression. There is just no precedent in modern times to look to for guidance (except maybe Japan, or the great depression).

    All the old measures of affordability, and pricing, just aren’t relevant when faced with a the onset of a global depression, which is just getting started. We are merely in the midst of a short-term bear-market rally right now, which has a lot of people seeing “green shoots”. Late this year, or early next, we will see the great bear grip the economy and drive prices down even further than we’ve seen yet.

    Of course, I don’t expect us reach the “bottom” in 2010, or even 2011. This period of deflation is liable to last for 5 to 10 years.

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  4. deejayoh

    I think with 2 years of additional data since I made that post, it would probably make sense to update the algorithm for an inventory based forecast. I’m not saying I’m going to (because it took a lot of time!), but you can’t really treat a model like that as a static relationship – their usefullness declines over time so you need to go back and retweak.

    that said (and I’ll probably get lit up for this) the shape of the curve from the inventory forecast looks surprisingly similar to the data through May. Where the model would have put you 14 months ago is off by a couple points, but in the scheme of things that is not a big deal. Will be interesting to watch the last half of the year.

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  5. softwarengineer

    IS THE MONTH TO MONTH STOCK MARKET SURGE SINCE MARCH 2009 A BOTTOM OF THE SEATTLE REAL ESTATE MARKET?

    Its a good question, isn’t it?

    Rather than hash out the unknowns of stock investing; I’m inclined to say anything that runs on bad/good news psychology in a random manner, day to day, is no better than betting on a roulette wheel. Now, the year to year trends were 25-30% loss June 08-June 09; albeit I expect that to improve a few percentage points for July 08-July 09. I’d also agree that if you pulled your 401K money out of stock investments at DOW 6000 last March, you most likely made a terrible mistake [pulling stock investments out after a crash is generally always a dumb move].

    Same thing with RE mates, the financial house of cards of RE [especially 1st time buyers] is far more reliant on the current horrifying and chronically worsening unemployment rate’s mitigation of personal debt. than stocks are. When your house crashes in price, it may bare some similarity to stocks, like don’t sell right now…..albeit, finding buyers with wage mitigation and possible hyper inflation with dollar devaluation [interest rates spikes] at today’s prices may likely be a complete joke.

    Have you noticed the MSM spin on the economy lately is the patient is dead on the floor, but the bleeding isn’t as bad. Pure garbage thinking to justify bottoming of RE IMO. When we see more JOBS and shops and restaurants full again; then talk to me about a possible bottom of RE. But I also want to see the wage data per capita too, because if its still stagnant or on a downward spiral, its still doom and gloom. Growth makes wage mitigation even worse with more competition for a horrifyingly scarce job market.

    Here’s a good blog from Roubini on less bleeding from the dying patient means clear gloom, not false optimism, in part:

    :…And so it goes…

    Joe Saluzzi of Themis Trading, who is an institutional trader for large mutual funds and hedges and basically bearish, warns: “The volume that you see during the day right now, some days as high as 12 billion through all three exchanges, is fictitious. It’s not real… 60 to 70 percent of this volume…is done by what you call high frequency traders. These are machines. And the trick to the market here is that the high frequency guy does not add liquidity, he adds volume. There’s a big difference between liquidity and volume. Okay, volume is 12 billion shares. Who cares? Warns Saluzzi, if a contrary news event occurs that’s politically or economically climate changing, and there’s no liquidity, the trap door opens and no one’s left there to buy…

    “There’s a problem of structure in the equity markets that nobody wants to talk about,” says Saluzzi. “There’s intervention, there’s manipulation going on… And the real liquidity has been gone for a while.. People don’t understand. Liquidity’s not back…”

    And so it goes…

    The stock market is not going up on profit reports. The stock market is going up on manipulation and Fed money pumping and HFT. The stock market is rising on itself: the DOW is going up on itself. The FED has become the market of last resort; the government the whore of last resort. Wall Street’s leveraged risk takers have cost the government’s cuckold, John Q. Public, $23.7 in bailout money, not counting the billions (trillions) Bernanke hands his Goldman boys and their friends under the table.

    Companies are shells, running on bad news, that’s “better than expected.”

    Invest if you like: but be aware of timing and where you’re investing. Goldman’s profits come from somebody: make sure it isn’t you.

    “If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?” –Alice, in Wonderland.

    Goldman’s world.

    * Saluzzi quotes from YouTube interview on iTulip: “Liquidity Is Gone. Basically all machine volume…”
    http://www.itulip.com/forums/showthread.php?t=10883…”

    The rest of the URL:

    http://www.rgemonitor.com/roubini-monitor/257386/rge_monitor_-_europe_economic_outlook_q2_2009_update#readcomments

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  6. Kary L. Krismer

    The two biggest factors for me are volume and spring bounce.

    Volume has recovered from the post-Paulson comments disaster levels, which is good, but they’ve only recovered to levels that before then were considered bad. And they’re undoubtedly helped along by the $8k tax credit.

    The spring bounce has been anemic, which isn’t good, but it is being held down somewhat by increasing numbers of short sales and REOs. Unfortunately we don’t have the data for prior years excluding those sales, but I think it’s safe to say that for prior years the effect was most likely nominal. Excluding such things the difference has been at times as much as $30,000, but I’m only showing at as about $20,000 for July (whose overall number will likely be significantly down from June, btw). So you could argue that the Spring bounce isn’t that weak, but at best that would probably get you to a flat market.

    The thing is though, you never know when it will turn around, and I continue to believe you won’t know until about two years after it’s happened.

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  7. demo kid

    Sniglet… an 80% drop? Even in the midst of the nastiness Japan went through in the 1990s, real estate dropped only about 50% off peak. But having $1m homes in Seattle fall to $200k, though? That’s Detroit kinda nasty. Unless you had a very good reason as to why someone would even bother selling in that market, I would think that the housing market would seize up before it managed to drop to that point. Not to mention that even if deflation and a massive collapse in the local economy triggered such a catastrophic fall, real estate would probably be a secondary concern next to… well… a complete fiscal and economic apocalypse in the region.

    I think that Kary’s far closer in his statements. With short sales and banks looking to unload REOs at a reasonable discount, volume is the key here. If the bucket starts to get a little empty and prices begin to rise, the banks are going to open up the spigot to unload properties and that increased supply will suppress prices again. And vice versa… lather, rinse, repeat. In total, it’s probably just going to lead to a flat recovery with some seasonal variation and a fair amount of noise around a mean, and not a continued death spiral.

    Unless, of course, Boeing and Microsoft collapse. Then all bets are off, and everyone is pretty much screwed.

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  8. Lake Hills Renter

    They are certainly starting to call the bottom for the recession already:

    Recession eases; GDP dip smaller than expected

    “The recession looks to have largely bottomed in the spring,” said Joel Naroff, president of Naroff Economic Advisors. “Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer,” he predicted.

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  9. patient

    With demand being propped by unprecedented measures as the lowest mortgage rates in history and additonal tax credits, very favourable refi programs etc, etc and supply being held back on an equally unprecedented way with foreclosure maratoriums, banks and sellers holding off listings etc and the best we can muster is flat pricing during the peak season we can be pretty sure that we have a long way to go still. Add to that the predicted alt-A vawe of resets/recasts and things look even weaker for future prices.

    It takes a certain drop in prices and an additional delay after that drop until foreclosure really start to materialize, I think we could be entering the beginning of that phase right now. It also takes a while before home owners/sellers start to accept the new prices and understand that prices will not recover within a year or two or five. When they do, we’ll see more listings again, now at more realistic/lower prices. We are not there yet, in my hood homes are still sitting with their 2006 pricing for months and months without any takers or price reductions. I also see new listings coming up at peak pricing. It will probably take at least another year before sellers start to accept that prices are significantly down and are only getting lower.

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  10. bk

    Several of the methods for bottom-calling were based upon projecting historical trends into the future.

    For instance:
    The Dollars per Square Foot Linear Forecast is based upon ‘prices on a $/sqft basis will continue falling at present rate’

    The Affordability Index Forecast is based on ‘Affordability will continue to recover at roughly the same rate it has since bottoming out in August 2007′.

    Others are based on assumptions that may not still be valid. For instance, The San Diego Lag Forecast assumes that Seattle’s peak YOY drop will be 14.7%.

    It would be interesting to see what these methods would predict now given the new data since February, and with perhaps some tweaked assumptions. While Tim’s aggregate prediction of 36% off peak in December 2010 doesn’t sound too out of line, would this re-evaluation change it in any way?

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  11. Cris

    http://money.cnn.com/2009/07/30/real_estate/worst_hit_foreclosure_cities/index.htm?postversion=patrick.net

    That shows the picture for Seattle. Bottom is not near yet.

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  12. patient

    I also think employment is a price pressure wildcard in all these prediction models. I heard on CNN yesterday that ~70% of all new foreclosures are now driven by loss of income. That’s only the supply side of the equation but there is of course a similar impact on demand. I.e you are much less likely to buy a home when you loose your job and when you find a new one, it takes a year or so of stable income before you qualify for a reasonable mortgage again.

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  13. see it clearly

    RE: Cris @ 11

    Kary pointed out a very plausible explanation for that spike in FCs. There was a change in the law that going forward will require more hoop jumping on the part of the lender prior to foreclosure. The next months report will be one to watch with interest. .

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  14. patient

    RE: see it clearly @ 13 – Does that really matter? There must be an underlying reason other than a law change that make you file for foreclosure. I.e either you can’t make your payments or you don’t want to and Kary is the one that always tells us that the “not want to” is an insignificant number. So if you can’t make the payments I can’t see how this law chnages that one way or another.

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  15. see it clearly

    RE: patient @ 14

    Yes it matters …. for now … if next month the number drops back down then the banks were getting a bunch in under the wire under the old rules. Will the number drop back down? I don’t know. I’m not close enough to the data to know or guess it is just a matter of being, well, patient to see next months numbers.

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  16. patient

    RE: The Tim @ 15 – Thanks for clarifying Tim, so it doesn’t impact the volume of foreclosures much if anything just the timing of the filings. So next months filings needs to be almost zero for this not to indicate a significant increase in filings, right?

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  17. softwarengineer

    THEY LIED TO US

    Recession [I call it a depression] twice as bad as MSM reports, see today’s report:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aNivTjr852TI

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  18. Flying Ape

    I wouldn’t be surprised if house prices stabilize or even rise for the remainder of the year. As you can discern from the equity markets and housing speculators (Ugh…i know at least 4 now who purchased “investment” houses this spring/summer) investors are ignoring all signs of fundamental weakness. We as a society simply love risk so much they that we buy at rock bottom prices without thinking of the consequence. When government accommodation (e.g. inflated treasury prices, stimulus programs, liquid credit markets, unemployment benefits) is removed and investors dont realize their returns, contraction should accelerate again. Japan and Great Depression both had moderate growth or stabilization before crashing again. Another 15-20% of prolonged deflation shouldn’t be out of the question. If you are a trader this is a great time to buy. If you are a long term investor buyer beware.

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  19. Kary L. Krismer

    RE: demo kid @ 7 – I was actually only speaking of current REO and short sale inventory, but if that increased significantly, that would clearly be a factor.

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  20. Kary L. Krismer

    By Lake Hills Renter @ 8:

    They are certainly starting to call the bottom for the recession already:

    Recession eases; GDP dip smaller than expected

    “The recession looks to have largely bottomed in the spring,” said Joel Naroff, president of Naroff Economic Advisors. “Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer,” he predicted.

    Newsweek apparently had a cover page last week saying the recession was over. When asked about it, Krugman (sp?–the NYT Nobel Prize winner) suggested that this might be the time when retrospectively the recession is declared to have ended.

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  21. Kary L. Krismer

    By Cris @ 11:

    http://money.cnn.com/2009/07/30/real_estate/worst_hit_foreclosure_cities/index.htm?postversion=patrick.net

    That shows the picture for Seattle. Bottom is not near yet.

    It doesn’t say what period their data is from, but if it’s from the last 2-3 months it’s likely the rate of increase is due to the change in the foreclosure laws. We’ll know soon enough, since the law just went into effect this week.

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  22. Kary L. Krismer

    By patient @ 14:

    RE: see it clearly @ 13 – Does that really matter? There must be an underlying reason other than a law change that make you file for foreclosure. I.e either you can’t make your payments or you don’t want to and Kary is the one that always tells us that the “not want to” is an insignificant number. So if you can’t make the payments I can’t see how this law chnages that one way or another.

    Lenders don’t typically start foreclosure as soon as they can. What I’m suggesting is that the lenders moved out the backlog of properties they could foreclose on, not that the owner behavior changed in any way.

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  23. Kary L. Krismer

    By The Tim @ 15:

    Of course, even if true, that just means that the real number of foreclosures was already higher than was evident before, and the banks’ reaction to the new law is just bringing previously under-the-radar problems to the forefront.

    Only to a slight extent. There’s always been a backlog because banks wait, not really wanting to foreclose. But if there are more defaults than last year, yes that backlog would be higher. Think of the defaulted foreclosures as being pending short sales–lots of them could fall out, and their numbers don’t really tell you all that much. ;-)

    At any given month I’d guess that the banks could file 3-4x the number of foreclosures as they do, if they really wanted to, and that’s always been true.

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  24. Kary L. Krismer

    RE: The Tim @ 25 – Those are notice of trustee sales? If so, can you tell if there were less filed this week?

    Edit: I’m showing 58 Notices of Trustee Sale filed in King County this week.

    BTW, I’m not entirely sure when the law kicks in. I know it was July 26, 2009, but I don’t know if that’s for Notices of Default sent after that date or Notices of Trustee’s Sale filed after that date. If the former, we could still see another month of high Notice of Trustee’s Sale, because that’s sent 30 days after the Notice of Default.

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  25. DrShort

    RE: The Tim @ 25

    Yes, Notice Of Trustee Sales are down a little this month over last, but still the second highest on record.

    However, actual foreclosures (Trustee Deeds) are close to 450 this month. Waay above recent levels.

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  26. Kary L. Krismer

    RE: DrShort @ 27 – That would put them at close to 20% of all sales.

    Do you have any way to determine what percentage were sales to third parties, as opposed to the bank bidding in?

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  27. Scotsman

    We’re just catching our breath before taking the next dive down. And I wouldn’t even be surprised to see strong claims of a recovery underway by this coming fall/winter. Most of what folks are claiming as improvements are nothing more than quirks in the way statistics, especially unemployment (U-6 is closing on 18%) and GNP are calculated. The primary fundamentals continue to deteriorate- total unemployment, revenues, and real capital losses. The only thing keeping hundreds of banks alive right now is last spring’s change in accounting standards that allows them carry real estate assets on their books at their stated value, not their market value. In reality those losses continue to accelerate while as an accounting feature they appear stable. The math may not lie, but it doesn’t always tell the whole story.

    Forclosures, inventory, interest rates, all are nothing but noise at this time. Who cares which fish is the biggest, or if there will be adequate food in the pond, if the pond is being drained?

    I was for 50% off based on the symmetry argument in bubble deflation. Now I’m looking at 60-75% depending on the price range. Eventually fundamentals and not media and political hype will come to rule the day. There’s an excellent chance we’ll be facing a pandemic this next flu season, another major economic disruption. And as soon as the treasury is done “repatriating” via bond purchases those U.S. dollars currently held over seas, interest rates will ramp up, and that will be the beginning of the end.

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  28. Kary L. Krismer

    RE: Scotsman @ 29 – That’s one thing we can agree on–that a pandemic could be very damaging for the economy, especially it is of the type I consider a pandemic–one with a lot of fatalities.

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  29. Kary L. Krismer

    On the volume issue, as of 5:00 p.m. there are just over 1,400 sales reported as closed, and I think the recorder’s office is now closed. Let’s see how much that number goes up–how long it takes agents to report the sales.

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  30. DrShort

    By Kary L. Krismer @ 28:

    RE: DrShort @ 27 – That would put them at close to 20% of all sales.

    Do you have any way to determine what percentage were sales to third parties, as opposed to the bank bidding in?

    Just roughly looking at the filings, I’d say about 70% went back to the bank. 20% went to investors (Such and Such Investment Group LLC) and 10% look like ordinary buyers.

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  31. Sniggy

    I have to ask the question, when the bottom is in sight, is anyone going to see it?

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  32. Scotsman

    RE: Sniggy @ 33

    Of course! Some see it now… ;-)

    I think there will be a consensus within 6 months or less of the true bottom having come and gone. When price movements, rents, and supporting fundamentals are all in sync we’ll have a bottom. And since the bottom is most likely going to be relatively flat with no “v” recovery, missing the absolute bottom by a couple of quarters, or calling it late will have very little lost opportunity associated with it.

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  33. Jonnny

    RE: Tsuru @ 2 – we may be half way then. when these two idiots have sold again at a massive loss, we’ll be at the bottom.

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  34. Jonnny

    RE: demo kid @ 7 – yeah, i don’t agree with sniglet about 80%, but more than 50% is very possible. i think losses of around 40-60% from peak value are actually quite probable.

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  35. Jonnny

    RE: Flying Ape @ 19 – bingo! but i think your figures are a bit optimistic. while it’s true that the US is better off in some ways this time, facts and figures make it pretty clear that this is the mother of all deleveragings and it is FAR from over…

    i personally believe we will discover a whole second layer of very serious corruption regarding certain practices in the stock market (things that will make the last few years of financial scandals look like a grade school prank) before this is over and investor confidence may be so badly burned that your average person will no longer own stocks or mutual funds… the fact remains that wall street is cheating on a massive scale still. they think they will get away with it, but i have my doubts that it is possible for them to.

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  36. Alan

    RE: The Tim @ 25

    Well FWIW, this month’s foreclosures look like they’ll be about 350 lower than last month, but still the 2nd highest on record.

    I think NOTs are being recycled every three months.

    1089 in March lead to 1616 in June
    938 in April lead to 1246 in July
    992 in May will lead to1200 to 1500 in August

    I think September is going to be another record when June’s NOTs are recycled. Maybe 2100?

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  37. Kary L. Krismer

    RE: Alan @ 38 – I’m not really following. It is possible for a NOT sale to be filed more than once on a property. But doing it every three months would be a bit much. The waiting period from execution to sale is 90 days, but they can continue the sale for up to 120 more days. There’s no reason that a foreclosing bank would start all over again after 90 days, absent a defect in the original NOT sale.

    Also, the numbers don’t make sense–I think you’re forcing them. Why would August be possibly less than July when May was higher than April?

    BTW, there were apparently only 60 filed this last week. That’s a monthly rate of about 260. I’m not sure how much variation there is from week to week, but that’s very significant and would suggest that the new law applies to NOT sale filed after July 26, 2009.

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  38. Lake Hills Renter

    Welcome to the bottom: Housing begins slow rebound

    It was — note the past tense — the worst housing recession anyone but survivors of the Great Depression can remember.

    Now take a deep breath and exhale. The worst is over.

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  39. Alan

    RE: Kary L. Krismer @ 39

    The waiting period from execution to sale is 90 days, but they can continue the sale for up to 120 more days.

    I wasn’t aware of that. Maybe my theory isn’t any good. I thought that if the bank didn’t go through with the auction sale, then they had to start the process over.

    Why would August be possibly less than July when May was higher than April?

    Because the percentage of NOTs that are recycled varies from month to month and the number of new NOTs also varies from month to month. I put in a range based on a short historical sequence (which probably isn’t very accurate anyway).

    but that’s very significant and would suggest that the new law applies to NOT sale filed after July 26, 2009

    Which new law are you talking about?

    I agree that may be telling. I think the last week of the month usually has more filings than the previous weeks (similarly, Friday usually has more filing than the other days.)

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  40. pfft

    “My first thought upon hearing all this was, “here we go again!”

    remember though we are a ways off from the frenzy of the height of the bubble.

    it could be worse.

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  41. demo kid

    @19, 36: Yeah, this is definitely a period of deleveraging, and you can see that in the increase in savings rates too. I still believe that a devaluation of 50% is much more likely than 80%, though, as it has historical support with the crisis in Japan in the 1990s. I can see SOME places dropping to the 80% mark, like California, Phoenix, Las Vegas, and Miami where real estate was so inflated that the peak was insanely unrepresentative of the fundamentals, or Detroit, where the economic is absolutely in the toilet and not looking to recover anytime soon.

    But an 80% aggregate decline across the entire country (or even in Seattle)? Not likely unless things get MUCH worse. That assumes a large number of people would be willing to let go of a home in the Seattle suburbs priced at $1m at its peak for $200k (or a $400k 1-br Seattle condo for $80k), which is just not realistic. Half off? Maybe… but you’d eventually get to a certain price point and the market just won’t function. Volume is just as important to controlling price in this case.

    Even if the real estate market manages to flatten out, though, as I’d expect it would, there are a lot of people that are probably going to be staying in their homes for a LOT longer than they expected.

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  42. Ira Sacharoff
  43. Hector

    By Alan @ 38:

    RE: The Tim @ 25

    Well FWIW, this month�s foreclosures look like they�ll be about 350 lower than last month, but still the 2nd highest on record.

    I think NOTs are being recycled every three months.

    1089 in March lead to 1616 in June
    938 in April lead to 1246 in July
    992 in May will lead to1200 to 1500 in August

    I think September is going to be another record when June’s NOTs are recycled. Maybe 2100?

    I have multiple houses on my list that are on their 2nd and 3rd rounds of NOTs.

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  44. eadg

    Bottom is a cultural concept. I come from a country where people stopped talking about bottom years ago. They found that everytime somebody told that we were at the bottom, a few months later they were proved wrong. It’s a basic corolary of Murphy’s Law: nothing is so bad that cannot get worse. It will eventually get better, but it will eventually get worse again.

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  45. Softwarengineer

    RE: eadg @ 46

    YOU GOT IT NAILED WELL

    The best economic advice I could have given anyone the last 10 [probably the last 20-30 years, etc, too]; when MSM tells you to go north, go south. Remember the movie where the floating cruise ship went upside down and most all the passengers headed downward to their deaths, thinking the boat would right itself again? The smart ones headed upwards to the waiting rescue helicopters torching a hole through the bottom hull, then right after the smart few were saved, the ship quickly sank killing most of the majority, the stupid media driven lemmings.

    Its the same with stocks and RE; when everyone buys, the selling crash isn’t far off. After the crash is the safest time to buy…..although will the cruise ship right itself this time or just sit upside down forever, hopefully not sinking into the mother of all depressions?

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  46. Groundhogday

    I agree with Kary that we won’t know the bottom until a couple of years after it happens. The nice thing about the housing market is that when it hits bottom, it will stay there for years. So just wait until housing prices are flat for a couple of years and you can be fairly confident that the bottom is in.

    You could also just purchase when it makes sense to do so compared to renting alternatives, but prices will quite likely fall beyond this point… overshooting on the down side.

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  47. Sniglet

    But an 80% aggregate decline across the entire country (or even in Seattle)? Not likely unless things get MUCH worse. That assumes a large number of people would be willing to let go of a home in the Seattle suburbs priced at $1m at its peak for $200k (or a $400k 1-br Seattle condo for $80k), which is just not realistic.

    Markets are made at the margins. It only takes a handful of people willing (or desperate) to sell for very low prices to set the price level for everyone. I fully expect that the only people willing to sell in such a deflationary environment will be those who HAVE to, due to finacial problems, job relocation, etc. Volumes might be VERY low indeed.

    Like I said earlier, we are heading into a global deflationary depression, and there really isn’t any precedent for such a thing in the post WW II era. In fact, there is NO precedent at all for what is happening, since there has NEVER been a time when consumer and corporate credit had expanded to be such a massive portion of the money supply.

    The explosion in credit that was enabled through modern fiat currencies, and central banking, have set us up for a deflationary experience the likes of which have never been seen before. Thus, examinations of various statistics to look for a “bottom” based on historical norms won’t be very helpful.

    One of the best explanations of why deflation lies ahead is here: http://www.elliottwave.com/deflation/.

    Of course, there is always my classic podcast that explains the case for deflation.

    http://surkanstance.blogspot.com/2009/01/deflation-101-podcast.html

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  48. David Losh

    RE: Sniglet @ 49

    Sorry, but the correction is taking a turn for the worse. Debt is what has created the illusion of deflation the same as it gave a false sense of prosperity.

    We can take global debt out of the equation and be fine.

    China sells real goods for real dollars. The market place in China for Chinese goods is over a billion people. If we think Chinese goods are cheap so do other consumers.

    Japan is a perfect example. A million dollars condo sells for $600K. The 40 year loan has been amortized down. The value has been struck, the transaction is for cash.

    Once economies are based on cash, once we begin trading in cash, a whole new world of finance happens.

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  49. Kary L. Krismer

    By Ira Sacharoff @ 44:

    Alan,
    Here’s the info on the new foreclosure law, written by Seattle Bubble pal Jillayne Schlike:

    http://www.raincityguide.com/2009/06/19/longer-waiting-period-to-evict-tenants-after-foreclosure-in-wa-state-effective-july-26-2009-and-free-legal-aid-for-wa-homeowners-facing-foreclosure/

    And to be clear, I’m only referencing the law regarding having to contact the owner. I’m not sure the banks would care all that much about the tenancy situation.

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  50. Groundhogday

    RE: Sniglet @ 49

    Deflation is well and good, but 80% off is hyper deflation. The Fed and Treasury have tools to prevent that from happening, and have demonstrated a willingness to deploy them. My guess is a more normal reversion to the long-term inflation-adjusted mean with a certain degree of overshoot (5-10%). 40% peak to trough is my worst case scenario for the PNW (though Oregon might do a bit worse), barring a collapse of Boeing.

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  51. David Losh

    RE: Kary L. Krismer @ 51

    They care very much. A leasehold estate can be for a life time. Let’s not even go down that road and stick with the money. If your property has been leased out and you are not paying the mortgage who gets the rent money?
    One year at $1300 per month is $15600, at $2000, $24000.

    We disagree, but in my opinion banks will be going after every nickle and dime. I’m hazey about the law, but seem to remember that collecting rent while not paying the mortgage is fraud. I think you are suppose to escrow the money.

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  52. Kary L. Krismer

    RE: David Losh @ 53 – I think the state law only gives tenants a limited time, and the federal law might be the term of the lease–I’m not certain though on which is which, so I might have that reversed. Interestingly, some attorneys are advising clients not to accept the rent under the state law, but perhaps to do so under under the federal law. Accepting the money would convert the relationship into landlord-tenant, which has some adverse effects.

    But my point was that a bank might not care about all that, as long as they get the rent money. It might have an affect on what a third party would pay, however, so they might care about it for that reason.

    I’m not sure of the effective date of the federal law regarding rents and tenancies. I think it’s already in effect, but I’m not sure when it went into effect. But it would only apply to houses that were rented out, and I’d guess if the banks are interested in that law, it would only be because they wouldn’t be entirely certain which properties were rented out. I sort of doubt it’s that high of a percentage of foreclosures.

    And as I mentioned before, this is really only an issue with SFR properties. For multi-family, the banks, or whoever buys, is likely to want the tenants to stay.

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  53. Scott Weitz

    Sniglet-

    80% seems a bit absurd. Groundhog makes a good point. The Fed has and will utilize deflationary fighting measures.

    I think we’ll see an inflationary economy (but it won’t be unviersal). Commodities being used on a global scale will go up in price as developing countries like India and China utilize more and will have a stronger currency. All the while, the dollar will be falling as Congress continues to be reckless. Unfortunately, assets like real estate will continue to fall (unless we get huge foreign buying which I don’t envision). Essentially, it will be a worst case scenario of inflating prices for goods, but depreciating prices for the assets we own…. Think stagflation (but worse).

    Overall fall in NW Real Estate – 50%- 60% after capitulation (when the bounce doesn’t come). Timeframe – depending on the govt intervention (2011 if no intervention; 2020+ if intervention (ie. Japan).

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  54. nutterbutter

    RE: Ira Sacharoff @ 44 – Thanks for posting this link. My question is about Jillayne’s statement:

    “Today, any tenant renting a home or condo must wise up fast and do a thorough check on the landlord so their first, last, and damage doesn’t end up taking a walk with the seller. ”

    How do we check up on the landlord? We’ve looked at the King County parcel viewer and can see when they bought the home and how much they paid, but how could we ever tell in they were in financial distress and/or headed toward foreclosure? And could we make them put the first, last, and cleaning/pet deposit money in an escrow account or similar for the duration of the lease period? Any advice would be appreciated. We will be signing a lease early this month.

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  55. Kary L. Krismer

    RE: nutterbutter @ 56 – The landlord is supposed to put the deposit into a separate account, but that’s a toothless law, with no penalties for violations. But you could easily simply ask them where the money is going. I’m not sure whether the deposit needs to go in there.

    You could periodically check for foreclosure notices (Notice of Trustee’s Sale) on the King County Recorder’s site (assuming you’re in King County).

    With the law recently changing to allow the tenant to stay for at least a time after the foreclosure, the concerns are a lot less than what they were before when you had to be out 14 days after a foreclosure.

    If there ever were a problem in this regard, you should consult an attorney.

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  56. posthoc

    RE: Sniglet @ 49 “Markets are made at the margins. It only takes a handful of people willing (or desperate) to sell for very low prices to set the price level for everyone. I fully expect that the only people willing to sell in such a deflationary environment will be those who HAVE to, due to finacial problems, job relocation, etc. Volumes might be VERY low indeed.”

    “Markets are made at the margins” is a statement based on classic market theory, which I’m sure you are aware requires certain assumptions. To focus on three, in no particular order:

    1) Minimal barriers to “entry” (new construction). I would say the barriers are substantial, both in terms of expertise and capital.
    2) Minimal transaction costs. This is manifestly untrue.
    3) Housing is an undifferentiated good in effectively limitless supply. This implies that your few desperate sellers have a large supply of similar inventory they will sell at similar cut-rate prices. I am hard-pressed to think of a housing market with these characteristics–maybe large exurban developments?

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