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.

22 responses to “Mid-Week Open Thread (2010-12-22)”

  1. Mel J.

    How about the other side of real estate – commercial? Too little is being written. I don’t have a clear idea about what is happening locally and would appreciate your input?

    Where are all the distressed sales that were supposed to materialize?
    Does anything cap out as a reasonable return for investors or are sales only being made to owner occupiers?
    Are local properties quietly defaulting and we just aren’t hearing about them?
    Is anyone lending at acceptable terms that allow investors reasonable rates of return?
    Is anyone quoting realistic vacancy rates that actually reflect the past 3 years?

    As a long term (30 years) investor in small buildings (under 10,000 s.f.) I’m stymied by the lack of properties for sale at prices that make any sense for an investor. This is the the best site around to receive a well thought out response to real estate questions, whether I agree with the answers or not. I’d love to hear your opinions.

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  2. Scotsman

    Looks like the slight bump up in rates and some seasonality is killing the mortgage market:

    “WASHINGTON, D.C. (December 22, 2010)  The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending December 17, 2010. The Market Composite Index, a measure of mortgage loan application volume, decreased 18.6 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 20.0 percent compared with the previous week.

    The Refinance Index decreased 24.6 percent from the previous week. The Refinance Index has declined six straight weeks and is at its lowest level since the week ending April 30, 2010. The seasonally adjusted Purchase Index decreased 2.5 percent from one week earlier. The unadjusted Purchase Index decreased 4.9 percent compared with the previous week and was 8.4 percent lower than the same week one year ago.”

    http://www.mortgagebankers.org/NewsandMedia/PressCenter/75085.htm

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  3. softwarengineer

    RE: Scotsman @ 2

    It Was On Life Support Before the Rate Increases

    Any sizable rate increase is like pulling the life support tubes out.

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  4. Pegasus

    RE: softwarengineer @ 3 – Yuppers and that is one of the reasons why rates will drop once again.

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  5. EconE

    Does anybody here know how “sales price” as a % of “listing price” is calculated?

    Is it Sales Price/ Original Listing Price

    or

    Sales Price / Listing Price AFTER Reductions?

    Simplified Example:

    House listed for $100k

    Price later reduced to $80k

    House sells for $80k

    How will the REIC/MLS/etc. report it for the monthly statistics?

    Will consumers be informed that it sold for 100% of list price or that it sold for 80% of list price?

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  6. Scotsman

    CHS addresses the possible timing or a major correction along with the causes:

    http://www.oftwominds.com/blogdec10/2011-scenario12-10.html

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  7. Pegasus

    RE: EconE @ 5 – What the last listing price was at the time the offer was accepted and the final sales price.

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  8. One Eyed Man

    RE: Scotsman @ 6

    So Scotsman, this question probably belongs on the global thread and relates to your affinity for CHS. Are you a believer in heirloom (non-hybrid) seed based agriculture? I assume CHS is, based upon the sale of heirloom wheat seeds on his site. If so, how do you square that belief with what I believe to be you’re general preference for the determination of economic success by free market forces? Although the risks related to hybrids (and their lack of genetic diversity) are apparently too infrequent and long term for the market place to apply a significant risk premium, its my understanding that the risks to such non-diverse eco-systems are in all probability real.

    I also assume that CHS believes there is significant long term risk in reliance on genetically non-diverse seed strains. But market forces say CHS wears a tin foil hat and heirloom seeds are for overly cautious, gutless subsistence farmers who won’t normally be able to compete on price and quality in the market place. Do you respect the wisdom of the market and shop at Safeway (ironic name, eh)? Or do you invest in the inefficiencies of a genetically diverse subsistence farm and grow your own or buy from those who do?

    I assume that you and CHS would both probably agree that the decisions of a free market are sometimes just a reflection of the collective wisdom of the ill-informed fools in the market place. In the case of hybrid agriculture, they choose short term low price over long term sustainability thru bio-diversity without applying any risk premium. In effect, the market ignores the risk and its cost is externalized as a threat to the food supply system which isn’t effectively hedged.

    Just for the record, I have somewhat remote personal ties to both heirloom agriculture and hybrid agriculture.

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  9. Equity

    RE: Mel J. @ 1
    I’ve been flipping foreclosures and also see the smaller offices you mention come to the county steps albeit slowly. There are two seperate markets for commercial. The primary A locations which are selling before they go into foreclosure and the tertiary locations which come to market but then get bought up at the auction for prices that compare to retail prices.

    I recently almost bought one these properties for 880K at the auction but the numbers didn’t work out. Gladly I waited because the bank then put it out on the retail market for 639K and I snapped it up. I saved over 1/4 of a million by waiting when considering some of the hard money fees I would have had to pay.

    I’m not sure the prices will be where we want them to be until interest rates rise. CAP rates will get hit hard when the rates rise which will be the time to buy more. The effect of a 1% interest rate has an exponential effect on the cap rate. When interest rates rise will be the time to buy more investment properties.

    In the mean time, if an opportunity comes up grab it and ride it out. The bottom in prices is only one piece of the puzzle.

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  10. Equity

    RE: Mel J. @ 1
    There are two sides to commercial real estate right now. Banks not willing to let the properties go because of the mark to market rules and those that are willing to let them go albeit slowly.

    I’ve been buying foreclosed properties at the auction with some fairly good success. One commercial property I almost bought came up at the auction for 880K. I couldn’t make the numbers work so let it revert to the lender. 6 months later they brough it back to the market at 639K. I bought it full price and saved a heafty chunk for a property I plan on holding for a long time.

    The properties that the banks are willing to let go of often follow this path from what I’ve seen or they sell the note before it gets to the market. There are a lot of properties still on the banks books that they don’t want to let go of as they’d have to assume the loss and mark it to market. There are a lot of these properties to come mid next year when they get FDIC pressure.

    They’re trying to kick the can down the road and save thier jobs as long as possible. Interest rates are the real difference here. As a one percent interest rate has an equal pressure on CAP rates.

    If you see a property that’s a good deal buy it and don’t try to pick the bottom. If it works for you and satisfies your criteria its probably a good bet. Price is only one piece of the puzzle. A rise in interest rates will keep things flat for some time and keep a continual flow of good properties coming to market.

    Be selective and pick the ones that work.

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  11. Scotsman

    RE: One Eyed Man @ 8

    The whole heirloom seeds issue is interesting but currently off my radar. You state the issues well. I’d guess I lean toward letting the market sort it out. Sure, some of the long term costs are externalized, but we can’t just forget the benefits. The long term can be corrected, if that is the proper term. Who decides what’s best? Hybrids have certainly helped overcome some issues and increased efficiency and production at lower prices. But there have also been some failures from my perspective- strawberries the size of baseballs but devoid of flavor, tomatoes made of rubber, etc. Personally I’m not too concerned about eating modified or even irradiated foods. While there may be potential health issues it seems they pale in comparison to the everyday risks we deal with just living our lives. I decided some time ago that the risks from stress are more real than the supposed risks of everything from deodorants to plastic bottles. I’m glad others pay attention and bring about positive change but I’m never going to lead those efforts.

    I like CHS for the same reason I like Karl D- they do their own thinking, synthesize original ideas, and generally have the facts/data to back up what they say. Their conclusions are consistent with the reality I know. That doesn’t mean I’m a disciple. Karl especially has a somewhat swooned following, even when he (in my opinion) wanders off into the foggy woods. It’s good to know who you are and exercise discernment when reading some of his stuff. CHS seems much more balanced. I’ve seen the advertisements for the seeds, as well as for gold, survival foods, etc. I think he’d tell you there’s value in all of them, but might rank their importance differently than some assume. After all, we’re talking about the potential for financial confusion and inconvenience with some most likely orderly political upheaval, not nuclear destruction. At least I think so.

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  12. One Eyed Man

    RE: Scotsman @ 9

    Thanks! I know it takes time to respond to a question like that and I appreciate it.

    Changing the subject back to CHS’s article, I don’t disagree with the scenario as one possible outcome. The more optomistic outcome would be to view the US economy as a business entity that’s running in the red. Congress and the President are a little like the board of directors and the CEO. The Fed is to some degree an independent lender who is inextricably tied to the business entity due to existing lending relationships and outstanding loan obligations.

    Clearly, the business entity will go bankrupt if it continues to run in the red. The question is how to restructure. The powers that be can’t just immediately decrease costs without huge economic dislocation and the loss of their own jobs. They need to restructure without cannibalizing their constituents (their shareholders) who are in effect also their customer base and source of revenue.

    So how do they do a workout, or a chapt 11, without causing major dislocation that’s going to cost them their jobs? They need interim financing which is always hard to get without paying a huge risk premium. That’s where QE comes in. Perhaps the major benefit of QE is the ability of the US to use it as interim financing during a cost cutting workout. QE can provide reasonable rate interim financing during a government restructuring. In effect, the Fed’s current policy is buying the US government the time it needs to restructure its spending over a several year time period so that the negative GDP effect of decreased government spending can be absorbed without causing a huge economic contraction and deflationary spiral.

    The needed interim finance lender appears to be lined up. The CEO has hired consultants to put together recommendations for restructuring. Now the question is whether the CEO and the Board will put a realistic restructuring plan in place.

    Past Fed mistakes and what one thinks of Bernanke are irrelevant. QE is holding open the door for the Federal government to revise its cost structure without doing huge near term damage to the economy. Cost cuts at the rate of 150B to 200B per year for 5 years would decrease GDP directly by about 1% to 1.3% per year. But they would likely allow growth to remain positive and perhaps even robust if deficit cuts trigger private investment.

    The above is effectively what the government did for the auto industry and the banks as the provider of interim financing. It’s a compromise for all the delineated interest groups on the left and the right. To Pfft’s dismay, there will be some austerity. To the dismay of the teaparty there may be some tax increases. There may be some income redistribution. There will be some job loss and economic dislocation. But there will also be the potential for overall job growth, continued economic growth and economic sustainability.

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  13. softwarengineer

    RE: Pegasus @ 4

    Are You Gonna Help Keep Interest Rates Down By Buying More Federal Treasuries Debt Bonds?

    The $600B bailout is inadequate, the feds need your help to print more money.

    The only hope for interest rates going down or staying stable is for more treasury purchases at dinky interest rates and right now, the stocks/equities are grabbing all the rich elite investment funds….that increases interest rates, by diverting from safe low interest fed treasury bond purchases. Then subsequently, the treasury debt bonds’ interest rates must go up to attract investors.

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  14. softwarengineer

    RE: softwarengineer @ 13

    To Quote Today’s News on Mortgage Rates

    “…Still, they remain more than a half-point higher than last month and are at the highest level since late spring….”

    http://finance.yahoo.com/news/Mortgage-rates-edge-down-apf-1273761914.html?x=0&sec=topStories&pos=3&asset=&ccode=

    I’d add, 10 year bonds went back up today [they went down a tiny bit when the fed bought $18B worth a couple days ago]. They need Pegasus’ help.

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  15. Pegasus

    RE: softwarengineer @ 14 – As I stated the long term trend is still down. You are taking a five week blip and assuming it is a trend change. We will see who is correct in 2011. I am not worried whether the 10 year bonds went up or down yesterday and today. You are starting to sound like pfft.

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  16. Bizzyrne

    The Tim,

    I’ve been reading this website for years and it seems like recently, judging from your posts, that you’re starting to consider the possibility of buying a house. Its just the “feel” I get from reading them. Back in the day, you were pretty militant against buying a house (for good reason). Anyways, so my question is, is the data available to make a comparison between interest rates and home prices during the 70s and 80s when there was high interest rates? I’ve been talking to my parents about it and they were saying that homes held their values when there was high interest rates. They didn’t increase a lot, but they held their value. I’m starting to feel like even tho there may be another 5 to 10 percent drop, that with the lower interest rates, right now is a good time to buy with high interest rates looming ahead to reign in inflation from all the stimulus. Btw, Im not an economist, so be easy on me if my logic is way off base here.

    Thanks

    James

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  17. Scotsman

    RE: One Eyed Man @ 12

    I like your analogy, makes it easier for others to understand. A couple of comments though. I’m not convinced that the system is set up to reward the necessary behavior and changes. In a corporation profit both rewards good decisions and moderates or constrains future investment and planning. The need for profit sets limits on compensation, charity donations, investment, risk, all the stuff you’re familiar with. In government that one critical element is missing. Generosity, largess, any “investment, whether effective of not, is seen as a positive and rewarded with re-election, seniority, more power, more remoteness and isolation from consequences. The idea of not burdening future generations with unmanageable debt was one constraint, albeit not a very effective one as future consequences are always discounted when compared to today’s needs. As many philosophers have noted over the years all democracies eventually reach the point where they self destruct when the people figure out they can continually vote themselves more benefits at the expense of future generations and the rich. I think we’re past that point.

    The other comment is that when you really sit down and look at the math it’s extremely difficult to grow our way out of the current imbalance, especially without severe cuts to military and entitlement programs. Your suggestion that there will be cuts and higher taxes but still somewhat positive growth is probably where we’re headed, as that is the most politically expedient. But it will lead to decades of stagnation as investment suffers, trapping us in a downward spiral of low productivity. What’s different this time around is the working reality of true globalization. For the first time ever we have real competition in technology, innovation, and even more importantly political freedom (i.e. reduced regulation, lower taxes, political support). Not just China, but also India can now do much of what we do at lower cost, and others are coming along.

    In some ways I think a major reset would be more beneficial in the long run than the protracted slump we’re probably going to get. We are on our way to becoming Great Britain- over taxed, over regulated, a welfare society shackled by political correctness and a false compassion that only entraps the population for decades to come.

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  18. Kary L. Krismer

    RE: Bizzyrne @ 16 – One difference back then was that most loans were assumable. That chanced with the Garn Act, which overrides state law. I’ve written two pieces you might find of interest on the topic.

    http://www.trulia.com/blog/kary_l_krismer/2008/09/is_it_time_to_repeal_the
    (Garn Act)

    and

    http://blog.seattlepi.com/realestate/archives/208550.asp (Benefits of an assumable loan.)

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  19. One Eyed Man

    RE: Scotsman @ 17

    As unpalatable as it might sound, I suppose there are worse things than finding out we’ve turned into Brits.

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  20. Macro Investor

    RE: Scotsman @ 17

    From One Eyed Man — “Cost cuts at the rate of 150B to 200B per year for 5 years would decrease GDP directly by about 1% to 1.3% per year. But they would likely allow growth to remain positive and perhaps even robust if deficit cuts trigger private investment.”

    Cutting that amount would permanently destroy 10′s of millions of jobs that depend on that spending. There would be a feedback loop from that… houses in foreclosure, retail sales, tax receipts. The cities and states would have to cut millions more jobs to make up for the lowered taxes. And don’t forget unemployed people draw from the entitlement accounts, so your $200 billion “target” really needs to be $300 billion.

    But the alternative is a painful one time “bandage ripping off” event, as we see in Europe right now. Eventually we will be forced to live on a budget, and say “so long” to the jobs that never should have existed.

    Don’t buy a house before this “event”, because unless it can be avoided the economy is in for a world of hurt.

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  21. ChrisM

    RE: Scotsman @ 11 – I think Karl has a such a devoted following because he bans those who disagree with him. At least, that’s the consensus on ZH.

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  22. EconE

    Denninger cracks me up.

    Can you imagine what it would have been like if he was blogging when Diet Coke came out?

    I imagine it would go something like this…

    “So look what the ****wits at Coca Cola decided to do.

    They took the ****ing sugar out!? WHAT IN THE **** WERE THEY THINKING!?

    You take the sugar out and what do you have? Well, I’ll tell you what you’ve got. You’ve got BUPKIS, and if someone doesn’t get their act together over there, the company won’t be around long enough to see me (insert skull and p*nis x-ray here) them into everlasting da*nation. I’ll blog about them daily while their stock price sinks into the depths of H*LL!!!

    There’s no righting this sinking ship!

    It’s over for them. Coke is finished. Kaput. Say hello to the new king of colas…RC.

    If I wanted a Coke without sugar, I WOULD HAVE BOUGHT A ****ING TAB!

    -disclosure– long pork rinds and cheetos.”

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