Seattle Bubble

News & discussion about real estate & the housing bubble in the Seattle area.

Seattle Bubble - News & discussion about real estate & the housing bubble in the Seattle area.

Entries Tagged as 'Features'

Rent vs. Buy Comparisons: Have the excesses been removed?

By The Tim on October 14th, 2009 at 6:00 AM · 102 Comments

Let’s try another rent vs. buy exercise to see if “all the excesses have already been removed” as some have claimed. Rather than delve into depth on a specific randomly-selected Seattle-area neighborhood, let’s instead look at what a specific type of house might cost you in multiple Seattle-area neighborhoods to rent vs. how much it would cost to buy.

Methodology
The prices quoted below are for a 3-bed, 2-bath single-family homes with 1,750 to 2,000 square feet. For the rentals, these are based on actual houses I found currently on the rental market. For the sales, I used sale records of actual prices that people have paid in the last three months. Where possible, I have located multiple samples that match the description above and taken the average price.

To calculate the monthly payment (principal + interest only), I’ll be using a 5.15% interest rate (roughly the average over the last three months), (generously) assuming 20% down on a 30-year mortgage. Keep in mind that the true cost of buying also includes insurance, taxes, maintenance, and a host of other costs generally not paid by a renter. For a more detailed breakdown of the total costs (and tax benefits) of buying, hit up this 2007 post.

I have also indicated the price to rent ratio, which is simply the home price divided by the total rent paid in a year.

Area For Rent P + I Home Price Ratio
Ballard $1,595 $2,070 $473,661 24.7
Queen Anne $2,000 $2,686 $615,000 25.6
Shoreline $1,415 $1,609 $368,379 21.7
Kirkland* $1,511 $2,040 $466,916 25.8
Redmond $1,450 $1,877 $429,625 24.7
Renton $1,250 $1,428 $326,938 21.8
West Seattle $1,650 $2,271 $520,000 26.3

According to a table of data from Fortune Magazine, Seattle’s price-to-rent ratio just before the local peak in prices was at 38.0, compared to a 15-year average of 23.3. In our table above, the average price-to-rent ratio for a 3-bed, 2-bath home in a handful of Seattle-area neighborhoods comes out to 24.3. Unfortunately, the two are not directly comparable since Forbes’ calculation included houses, condos, and apartments all among the rentals (which would drive the rental prices lower and the long-term average price-to-rent ratio higher), while my data was drawn only from single-family homes.

While home prices have come down some since I first researched the rent vs. buy discussion in detail back in 2007, a growing oversupply of repartmenting condos and accidental landlords is also pushing down rents recently, so the price-to-rent ratio hasn’t actually changed as much as one might expect.

Overall, price-to-rent ratios in the low-to-mid 20s still seems a bit high. Not crazy out of control bubble high, but it still looks like there is room for a bit more correction. Especially when you consider that the current prices are being artificially propped up by unnaturally low interest rates and the $8,000 tax credit in the midst of nearly 10% unemployment and a local economic scene that has yet to show any clear signs of turning the corner.

* [Updated, see comment #71 below.]

→ 102 CommentsCategories: Features
Tags: , , ,

The Mythical Teeming Hordes of “Pent-Up Buyers”

By The Tim on October 7th, 2009 at 10:45 AM · 54 Comments

We’ve been hearing a lot of speculation recently that goes something along these lines:

There is basically this enormous teeming horde of potential home buyers out there lurking on the sidelines for no good reason. All we need to do is come up with the right concoction of incentives to get these pent-up buyers off the fence and the housing market will recover!

Here’s just one example of that kind of reasoning from an article yesterday’s Tacoma News Tribune:

According to Dick Beeson, a Windermere broker and a director of Northwest MLS, the latest numbers reflect “a lot of pent-up demand. A lot more people are realizing closed sales.”

As regular readers of these pages will recall, I do not buy the claim that there is a large mass of “pent-up demand.” In fact, I believe quite the opposite is true: that during the bubble (thanks to virtually non-existant lending standards and a mass get-rich-quick hysteria) and now post-bubble (thanks to various bailouts, tax incentives, and artificially low interest rates) a significant amount of demand has been borrowed from the future.

Let’s take a few moments to visualize the concept of borrowed demand using data on closed sales and population. Here are our working assumptions:

  • The number of closed sales in the year 2000 is a reasonable baseline for a healthy market.
  • In a normal market, closed sales will grow linearly as a function of households.
  • Household size since the 2000 Census has remained steady at 2.39 people per household.
  • For 2009, fourth quarter closed sales will come in 10% above 2008.

Based on these assumptions, here’s a view of the cumulative “borrowed demand” by year since 2000.

Cumulative Borrowed Demand

While sales in 2001 and 2002 were fairly close to what our assumptions would have predicted (slightly lower, probably due to the dot-com bubble fallout), as the housing bubble began to inflate in 2003 the number of borrowed sales started to pile up at an alarming pace, peaking at over 23,000 in 2006.

Since 2005 when closed sales peaked at 31,939 (vs. a forecast “normal” level of 24,118), the number of closed sales has dropped significantly, falling to roughly half the peak level in 2008 at 15,991. To real estate agents, these declining sales numbers indicate that there must be a building volume of “pent-up demand.” However, as the chart above demonstrates, this is merely what it looks like when the market is forced to pay back the demand that was borrowed from the future.

If sales had been allowed to continue correcting at the natural rate we were seeing in the first few months of the year, the entire borrowed demand debt would likely have been paid in full in 2009, allowing sales volumes to begin to recover to a more normal level in 2010. Instead, the market has been innundated with misguided attempts to bring out the non-existant “pent-up demand,” and the way things are shaping up right now it looks like last-ditch borrowing of future demand will leave us with a few thousand sales still to be paid back sometime in the future, likely resulting in a continued drag on demand in 2010 and 2011.

“Pent-up demand” is a myth. That’s not to say that there aren’t some legitimate potential buyers out there with the ability to purchase who are sitting on the sidelines waiting for a better market opportunity. However, they are most certainly far outnumbered by the buyers who purchased prematurely in 2003-2006 that would otherwise have waited a few years to buy once their finances were more in order.

→ 54 CommentsCategories: Features
Tags: , , , , ,

What’s Behind Rising FHA Defaults?

By Jillayne Schlicke on September 21st, 2009 at 9:00 AM · 60 Comments

Note from The Tim: Jillayne Schlicke has been a valued member of the Seattle Bubble community for quite some time, and I’m happy to welcome her as a guest poster. Jillayne has many years experience in the lending industry and offers some great insights. She currently provides continuing education for real estate professionals through her company CE Forward.

I’d like to thank The Tim for inviting me to create occasional guest posts for Seattle Bubble readers. SB’s bloggers and commenters have taught me how to critically analyze local real estate statistics. SB was a safe place I could go on a Friday night when my kids were elsewhere and I was craving an understanding of what was happening during the 2007-08 meltdown. I am honored to give back to the SB community.

The rising default rate on FHA loans is concerning but I’m not terribly surprised. It’s really no secret that the government is using Fannie, Freddie and FHA to help keep the banks afloat by allowing zombie banks to pawn off their toxic crap to the agencies. Ultimately the taxpayer is paying the price as we see Fannie and Freddie continuing to run a red balance sheet and FHA headed down the same path.

FHA originations were all but dead during the real estate bubble because so many LOs favored subprime lending where underwriting guidelines were non-existent. But long ago, in a land far, far away, when we were rocking out to Duran Duran, Echo and the Bunnyman, and Joy Division, I was processing FHA loans for a mortgage banker in Seattle. When rates came down to a low of 13% I had about 100 files in process. I was trained to pre-underwrite my files so underwriting recruited me and I became a young underwriter at age 23, just old enough to go drinking after work with the crew. I’ll never forget Barbie Owens who had the entire FHA underwriting manual embedded into her brain Matrix-style (I know Jujitsu!) She could recite entire paragraphs from the manual verbatim. Imagine 20 female underwriters, all of us smoked, and none of the windows opened. That was mortgage banking in the 80s. But I digress.

Back in the 1980s, underwriting was serious business. We were treated like gods by the loan originators who worked in fear of us declining their deal. Only David Korch knew how to play it. He brought us ice cream bars on hot, sunny days. New underwriters were given bunny files; easy conventional refinances, to cut our teeth. Then we were sent to FHA training. FHA had a field office in Seattle with real humans who would actually answer the phone and our questions. At least once a year a representative from FHA would take new underwriters through a six week FHA underwriting course called Direct Endorsement 101. After we finished we could underwrite FHA credit only (on all FHA loans the appraisal goes through a separate underwriting process) as long as a senior FHA underwriter signed our files.

If an FHA loan went into default, it was presented as a case study in meetings so that all of us could learn from our mistakes. If an FHA underwriter had too many defaults against her identifying number, she was put on probation.

This all changed during the subprime days when FHA’s business went down to literally nothing. Today, FHA allows the FHA-approved lenders to appoint and train their own underwriters! Does anyone see the problem with that policy?

Let’s revisit early 2008. Wholesale lenders are dropping like flies, and six figure income mortgage brokers are sweating bullets trying to figure out how to make their next boat, BMW, second home, first home, and condo-in-Hawaii payment month after month. They see the writing on the wall and the future, as far as they could see, was FHA. Thousands of mortgage brokers rushed to become approved to originate FHA loans and hundreds of wholesale lenders and banks had to quick beef up their underwriting departments to handle the onslaught of FHA loans being hurriedly thrown at them.

Many of those underwriters only knew subprime loans and had never seen an FHA file, never read the FHA Single Family Mortgage Insurance Manual for 203b loans and suddenly lenders were making folks FHA underwriters overnight.

And now we’re wondering why default rates are so high.

FHA doesn’t make subprime loans. They will allow loans to people with less than perfect credit but this is definitely not subprime territory.

We have three main problems leading to this dramatic rise in FHA defaults:

  1. Pressure from government to use FHA for purposes of taking toxic loans off the bank’s balance sheets;
  2. Lack of education, training, and mentoring of new underwriters during the recent, dramatic rise in FHA originations; and,
  3. Lack of a large enough down payment from the homeowner to insure against falling home prices.

Negative equity combined with job loss, business failure, or other financial distress means higher FHA defaults are in our future as long as home values continue to drop, we allow banks to put underwriters into service with no training, and we let the politicians use FHA as a toxic waste dump.

→ 60 CommentsCategories: Features
Tags: , , , ,

Local Real Estate Search iPhone App Smackdown

By The Tim on September 8th, 2009 at 1:29 PM · 17 Comments

This is a guest post from Kevin Lisota of Findwell Real Estate. The Bay Area may still have more tech companies than Seattle, but we definitely seem to be leading the way in real estate tech, with four local companies now offering iPhone apps for real estate search. Unfortunately I don’t have an iPhone, so Kevin generously offered to write a comparison of the various iPhone apps available for Seattle real estate searchers.

Seattle has suddenly become a hotbed of real estate apps for the iPhone, now with four major competitors: Zillow, John L Scott, Coldwell Banker, and the newest entrant, Redfin. Since The Tim doesn’t have an iPhone, I offered to jump in and and provide a head-to-head SMACKDOWN between these four heavyweights of the Seattle real estate world. (Full Disclosure: I run findwell, a competitor to all of these companies and an advertiser on Seattle Bubble. We don’t have our own iPhone app at the moment, so I can be objective in this comparison.)

Click below to read the full SMACKDOWN.

[Read more →]

→ 17 CommentsCategories: Features
Tags: , , , , ,

Cheapest Seattle Homes: September Edition

By The Tim on September 4th, 2009 at 6:00 AM · 31 Comments

Let’s check in again on the cheapest homes around Seattle proper. For methodology and a brief explanation of the reasoning behind this series, hit the April post.

Please note: These posts should not be construed to be an advertisement or endorsement of any specific home for sale. We are merely taking a brief snapshot of the market at a given time. Also, just because a home makes it onto the “cheapest” list, that does not indicate that it is a good value.

Here are this month’s three cheapest single-family homes in the city limits of Seattle (according to Redfin):

Address Price Beds Baths SqFt Lot Size Neighborhood $ / SqFt Notes
8523 Dallas Ave S $115,000 2 1 900 3,480 sqft South Park $134 Bank-Owned
9444 15th Ave SW $149,000 2 1 830 2,145 sqft Delridge $180 Probable Short Sale
526 S Concord St $154,950 1 1 530 6,000 sqft South Park $292 -

The #1 home from July’s post retained its top spot, with another $6,000 reduction in price. July’s #2 home went off the market, while #3 is still on the market at the same price ($160k).

Stats snapshot for Seattle Single-Family Homes Under $200,000
Total on market: 48
Average number of beds: 2.3
Average number of baths: 1.2
Average square footage: 1,042
Average days on market: 73

Here are the three cheapest homes in terms of dollars per square foot:

Address $ / SqFt Price Beds Baths SqFt Lot Size Neighborhood Notes
9345 7th Ave S. $74 $404,988 4 2.5 5,463 2,283 sqft South Park Short Sale
5926 S Eastwood Dr $74 $205,000 4 2.75 2,760 6,000 sqft Rainier View -
9021 10th Ave SW $97 $285,000 5 3 2,950 7,140 sqft Highland Park New Construction

July’s #3 in terms of $/sqft is still on the market, but for some reason the listing now does not mention the structure, so I removed it from the list. Also, the Eastwood Dr listing seems to have mysteriously gained 310 sqft since we last noticed it. Hmm…

Here’s the last bonus: The lowest dollars per square foot on a house priced above $500,000: 9457 10th Ave SW at $137 $/sqft. $549,888, 7 beds, 4 baths, 4,000 square feet. New construction, first listed in August of last year.

→ 31 CommentsCategories: Features
Tags:

Checking Up on the “Forced Savings Plan” Myth

By The Tim on August 31st, 2009 at 6:00 AM · 101 Comments

Please consider the following excerpt from a post I wrote that was originally published on the personal finance blog Get Rich Slowly (and later here):

…if home buying is like a savings plan, it’s probably the worst savings plan on Earth. Would you voluntarily sign up for a savings plan where well over half of the money you deposit in the first 20 years simply vanishes, and from which you can only withdraw money by relocating and paying a 6-9% fee (not on the amount you have “saved” mind you, but on the total sale price of the home)? Of course not. That doesn’t sound anything like a savings plan.

If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home.

In the post, I described a pair of examples using real-world homes that I had located on both the rental and for sale markets at the time: comparable 3-bed, 2.5-bath, 1,800 sqft houses in nearby neighborhoods in the Kirkland / Juanita area. The rental was $1,495 a month, and the home for sale had an asking price of $425,000.

It just so happens that I wrote this post in July 2007, the peak month for Seattle home prices according to both the Case-Shiller home price index and the NWMLS King County SFH median. As such, I thought it might be instructive to run a little comparison of how things would have turned out for the hypothetical buyer and renter / stock investor described in the original post. With home prices off over 20% from their peak, and stocks down 34%, who would currently have more equity?

Following is a chart that shows the monthly equity in each scenario. Note that the buyer adds to their equity by paying $322-$367 in principal each month (it increases slightly each month), while the renter / stock investor increases their equity is assumed to be adding the $1,161-$964 (it decreases slightly due to rent increases) they are saving each month to their investment. The value of the home is based on Seattle’s Case-Shiller index, with a slight increase in value assumed for July and August. The value of the stock investment is based on the S&P 500 index, and rent increases are based on the “rent of primary residence” portion of the CPI for the Seattle area.

Peak Buyer Equity Comparison: $85,000 Down on a $425,000 House

As of the end of August, just over two years into their respective “investments,” our hypothetical homebuyer is left with $537, while the renter / stock investor currently has $84,690 in equity. Here’s a visual of the total amount of money each would have put into their respective investments, and the total amount they have lost in the crash:

Peak Buyer Equity Comparison: $85,000 Down on a $425,000 House

At 25%, the stock investor’s loss is nothing to sneeze at for sure, but it pales in comparison to the 99% loss suffered by the peak homebuyer. Ouch.

But what if we tweak the scenario slightly, in order to stack the deck as much as we can against the renter / stock buyer? Let’s say we set the start date to October 2007, the peak of the stock market, and only run the numbers through February 2009, the low point when stocks were over 50% off their peak. The stock buyer’s losses double to 50%, but as it turns out, the home buyer is still far worse off with a 93% loss.

Of course, the $85,000 down scenario isn’t really very realistic compared to what most people were really doing in 2007. Let’s modify the situation a bit into something more reflective of reality.

Instead of comparing 20% down on a $425,000 house, let’s say the hypothetical potential buyer and renter had just $8,750, which would be a 3.5% down payment on a $250,000 house. Again, to stack the deck against the renter / stock buyer in this scenario, we’ll assume they’re still paying $1,495 a month in rent, even though that would rent a far nicer house in 2007 than $250k would buy.

Here’s the equity matchup for our more realistic scenario:

Peak Buyer Equity Comparison: $8,750 Down on a $250,000 House

Wow. The homebuyer in this scenario presently has negative $39,847 in equity, while the stock buyer has $12,820. Take a look at the invested / lost chart:

Peak Buyer Equity Comparison: $8,750 Down on a $250,000 House

The homebuyer has lost 364% of what they have put in, vs. 22% for the stock buyer.

I think this is an appropriate time to repeat the point I quoted at the beginning of this post. If home buying is like a savings plan, it’s probably the worst savings plan on Earth.

When you actually look at the present equity situation for the people who jumped into the housing market near the peak, stretching their budgets to buy a house that they didn’t even intend to live in long-term, the current record foreclosures start to make some sense.

If you bought a house near the peak thinking that it would be a great “forced savings plan,” you would probably be pretty tempted to hand over the keys, walk away, get yourself into a nice affordable rental, and get yourself started on an actual savings plan—like actually saving money every month. And who could blame you, really.

P.S. – I should add that at this particular moment, I don’t think the stock market is a very good place to put your money. With a P/E ratio on the S&P 500 somewhere in the ballpark of 150, I think stocks are primed to drop back down in the not-too-distant future, possibly by a considerable amount. That’s not investment advice, just my personal opinion.

→ 101 CommentsCategories: Features
Tags: , , , , , ,