Obviously, I love a good contrarian argument. Unfortunately, this piece is far from good.

Take the consumer confidence numbers, which are measured every month by the Conference Board and act as one of the more foolish hinges on which to hang our hopes. Consumer confidence in May jumped to 76.2, on a scale of 100.

Just three paragraphs into the article and we’ve already run into the first error. Consumer confidence is not measured “on a scale of 100.” It’s indexed to 1985 = 100. She might know that if she had bothered to look at the Conference Board’s public documentation (pdf).

In the popular interpretation, that indicates that consumers believe the economy is improving.

No, all it means when the consumer confidence index reads 76.2 is that consumers are ~24% less confident than they were in 1985. What’s important is the direction the index is moving, which is definitely up. Less than two years ago the index sat at 40.9. Is she seriously trying to argue that 76.2 is not a dramatic improvement from 40.9?

The May data shows the highest measure of consumer confidence since February 2008. That was a time in which a housing crash was already well underway, and only a month before before Bear Stearns collapsed and confirmed that the country was in a financial crisis. At least six months before that, in August 2007, three major hedge funds invested in subprime real estate had to be bailed out by the French bank BNP Paribas, and the Federal Reserve and other central banks started pumping $300bn into the global banking system. Any collective confidence back in February 2008 was foolish and unwitting of the crisis that had already started in the higher rungs of finance.

Again she completely misses the point. In February 2008, consumer confidence was plummeting, having dropped 35.5 points in just 8 months. The current rising trend is obviously good news. To imply that it isn’t is either dishonest or ignorant. Things aren’t great, but they’re getting better.

Housing prices have risen at the fastest rate in seven years, as the Case-Schiller Index of national housing prices showed today.

Apparently neither she nor her editor knows how to spell Robert Shiller’s name correctly.

The housing recovery, for instance, seems to be just another stage of the foreclosure crisis. Note that the areas where house prices have risen the most – Arizona, Las Vegas and California – are all areas that were hurt most deeply by the housing crash. So pry between the boards of the housing recovery and the termites start crawling out.

Home prices are rising fastest in these areas for a number of reasons. These places are where prices fell the furthest, overcorrecting in some cases, so it’s natural for prices to come up a bit to match local incomes.

Also, foreclosures were a huge share of sales in these markets, but over the last year foreclosures have dramatically declined, so the mix of sales has shifted toward non-distressed inventory, which is naturally higher-priced.

There is evidence that lenders are controlling the housing supply by reducing the number of houses for sale. Last year, AOL Real Estate’s reporting suggested that as many as 90% of available properties were not even really on the market, but just polished for sale and being held back to keep supply low.

Then, last month, three major banks, including Citigroup and Wells Fargo, halted all their sales of homes in foreclosure; this also reduced the supply of homes on the market. The reduction in housing supply, then, is largely artificial, designed by the banks and institutions that hold thousands of houses and thus have the most to gain from higher house prices.

It couldn’t be that the number of foreclosures on the market is decreasing because the number of homes being foreclosed is decreasing, thanks to rising prices and a gradually improving economy. No, there must be a conspiracy by the banks to withhold inventory! Yeah! I’ve looked into this data and found nothing to suggest that banks are doing anything other than putting foreclosures on the market at the same rate that they’re foreclosing on homes.

A recovery allows real estate agents and banks to tell Americans that they can’t borrow money for the home they want, that they can’t participate in the housing market, while wealth private investors scoop up as much as they can.

Um, what? That doesn’t even make any sense.

Anyway, if you’ve read any contrarian arguments recently that aren’t rambling illogical messes full of basic factual errors, I’d love it if you shared them in the comments.

The post The Guardian Needs a New Finance & Economics Editor appeared first on Seattle Bubble.

All of these claims focus on the just-foreclosed home—an empty, run-down shell with an overgrown lawn, missing appliances, and disconnected utilities. But the fact that a home was foreclosed at one point in time doesn’t mean that it will remain vacant and derelict forever. In fact, I contend that foreclosures benefit a neighborhood, and areas that have experienced the most foreclosures are poised to improve the fastest during a recovery.

Before I get into the benefits of foreclosure for a neighborhood, I want to be clear that the personal experience of foreclosure is not positive. Going through a foreclosure is disheartening, and losing your home takes an emotional toll, no matter the circumstances. I have a handful of friends who have been through foreclosure. It was not something any of them enjoyed, and I would not personally wish the experience on anyone.

At the national level, consider the markets that were the hardest-hit by foreclosures after the bubble burst. Las Vegas and Phoenix were both overwhelmed with foreclosures a few years ago, and yet today they are experiencing some of the largest price gains in the nation—15% and 23% year-over-year as of the latest data from Case-Shiller.

Just in the handful of blocks around my home there have been at least half a dozen foreclosures in the last few years. Instead of becoming worse with each new foreclosure, the overall character of the neighborhood has been noticeably improved through these foreclosures.

Some foreclosures are purchased, fixed up, and lived in by the family that bought from the bank. Some are bought by flippers, dramatically refurbished (often after being gutted to the studs), and sold for a decent profit. Others have been bought, fixed up, and are now rentals. In every case, within a year of being repossessed by the bank each the foreclosed homes in my neighborhood has become nicer, as evidenced by the photos throughout this post.

Homes that—even before foreclosure—were the most run-down and neglected in the neighborhood have often become the nicest home on the block. Former homeowners who could not afford even the most basic maintenance have moved on to more affordable rentals, replaced by investors and families who have both the resources and the motivation to keep these homes looking nice.

Here’s a quick rundown of what’s happened with a few of the foreclosures near my home. The homes listed below appear in the same order as their photos in this post.

• 3431 Oakes: Purchased by a family. Since foreclosure they have refurbished the interior, added a railing to the front porch, put in a nice fence, and cleaned up the yard.
• 3609 Wetmore: A small investment group that has fixed and flipped a number of homes in Everett bought this home. After their high quality work was complete, the home sold to the new owner for over double what they paid.
• 3331 Wetmore: Totally gutted, remodeled, and refinished over the course of nine months. Major work includes a whole new front porch, all new windows and doors, a new back porch, and an all new interior. Currently on the market.
• 3616 Rockefeller: The family that bought this home built a matching garage with second floor living space on the back of the lot (not seen in the photo) and is completely renovating the main house.
• 1710 36th: Purchased by a small investor, totally gutted and refurbished with new windows, doors, insulation, floors, all-new kitchen, etc. The finish work was nice enough that he was able to charge above-market rent.

The house directly across the street from mine was foreclosed in January. Rather than causing me concern about the detrimental effect that this will have on the “value” of my home or worrying about how the neighborhood is going downhill, instead I am excited to see how the home will be improved by its eventual new owners.

Foreclosures are not the dark cloud over neighborhoods that they are claimed to be. On the contrary, they are the leading edge of positive changes that improve the character of a neighborhood and lay the groundwork for a sustainable recovery.

The post Foreclosures Benefit a Neighborhood, Not Hurt It appeared first on Seattle Bubble.

Assuming Case-Shiller is posted tomorrow, I’ll be here with your regularly-scheduled post. It just might show up a little later in the day than usual.

The post Merry Christmas! appeared first on Seattle Bubble.

Nick Timiraos noted this in the Wall Street Journal in early September. Here we are in late October, four debates later, and nothing has really changed. Barely a peep about housing from Obama or Romney.

Here’s one possible explanation: Neither wants to have a serious discussion about housing because they would have to talk about the mortgage interest deduction, which more and more is looking like it will need to be severely limited or possibliy even eliminated no matter who gets elected.

The burgeoning federal debt makes it unlikely that the mortgage interest tax deduction will survive in its present form, but any proposed changes to the tax break for homeowners will likely spark a fierce debate over the fundamentals of the U.S. housing market, the value of homeonwership, and consumer behavior.

That’s according to panelists at a housing forum hosted Friday by real estate search and valuation company Zillow Inc. and the University of Southern California’s Lusk Center for Real Estate.

“I think its entirely likely that something big is going to happen (with the MID) starting next year with either administration,” said Jason Gold, director and senior fellow at the Washington, D.C.-based Progressive Policy Institute, an independent think tank.

The idea of eliminating or reducing the mortgage interest deduction has been popping up for the last couple of years. A year ago I said that it was “unlikely that any of the current talk of eliminating the mortgage interest deduction will come to pass,” but the notion seems to be gaining some serious momentum.

MARTIN: Why is it that economists seem to be pretty – I would not say united on this point, but there seems to be a growing consensus among economists that this is bad public policy, this is bad economic policy.

GEEWAX: Well, we have to make choices among different kinds of ways of dealing with the budget deficit and they say this is a good one to go after because it really doesn’t make all that much economic sense in today’s climate to continue to push this. For example, one might argue that, yes, the American dream of the 1950s was to buy a home, but if you talk to young people today, their American dream might be quite different. What they really want is a great education and mobility so that they could pursue the jobs they want.

Could it be that both candidates realize that the mortgage interest deduction’s days are limited, and neither wants to go on record supporting its demise? If I were a political strategist, that would be a good reason to encourage my candidate to avoid housing as a topic.

The post Are Obama & Romney Avoiding Housing to Avoid Talking About Killing the Mortgage Interest Deduction? appeared first on Seattle Bubble.

Dear marketers,

Congratulations. You’ve located a popular, well-read site with frequently updated content and an engaged user base. Unfortunately, while you have demonstrated a basic proficiency in reading a list of popular blogs you found somewhere online, you seem to be incapable of basic reading comprehension. Allow me to explain, using short sentences and small words.

This is a site about real estate. We write about the Seattle area. That is all we do. This means that no matter how great they may be, neither I nor my readers are interested in your products, services, or accomplishments if they are not related to real estate in the Seattle area.

Based on the breathless press releases you incessantly email me—about two a week, usually addressed to “Whom It May Concern,” “FOR IMMEDIATE RELEASE,” or “Editor,” but occasionally “Tim,” as if we’ve been pals for years—I can tell that you are clearly very excited about the company you’re pimping. Great. Good for you. Here’s the thing, though. I do not care.

In what universe is it a good marketing strategy to email the editor of a Seattle real estate news site your press release about idiotic adult onesies, a coffee exhibition, a Houston homebuilder, a spay/neuter clinic, or a comic book art show? How did you think that was going to work?

In closing, I would like to specifically shame the last twenty-five lame press releases I have received.

• HOMETEAM PEST DEFENSE RECEIVES THE RENOWNED “PARTNERS OF CHOICE” AWARD FROM DAVID WEEKLEY HOMES
• News from David Weekley Homes and Boise Cascade
• Temporary Museum for New Design 2013
• UW undergrad company ft. Jon Brockman — “Swagga Suit”
• Coffee Fest First Time Attendee program announced
• Courage Campaign Applauds Brown, Calls Homeowners Bill Rights A Major Victory
• ONCE ENERGY INEFFICIENT, 100-YEAR-OLD PLACENTIA FARMHOUSE, NOW A SHELTER FOR THE HOMELESS, IS HAILED AS A MODEL OF ENVIRONMENTAL SUSTAINABILITY
• DAVID WEEKLEY HOMES CELEBRATES 70,000TH CLOSING
• Mindy becomes the 75,000th cat altered by Lynnwood spay/neuter clinic!
• RAYGUNS & ROBOTS! a Tribute to Classic Science Fiction
• UW undergrad company ft. Jon Brockman — “Swagga Suit”
• UpNext Maps for iPhone
• Luxurious Tuscan villa for auction from Williams & Williams in Barga, Italy
• DAVID WEEKLEY HOMES NAMED ONE OF THE LARGEST PRIVATE HOME BUILDERS IN AMERICA!
• Cross District Three-Day Starets Tomorrow!
• Bored To Death Creators kick off WebVisions Wed
• Webutante Ball After Party + Prom Committee + More!
• You’re Invited to trivago’s Meet Seattle Writers Day on June 6th!
• News Release: 600 home community launch Sunday in Puyallup
• HEY GEEK GIRL! a Tribute to Women and Pop Culture
• CityClub to Host Colin Powell June 6th
• Wonder Northwest May 26th & 27th Portland, Oregon
• Dachis Group Launches Content Insight Functionality on Social Performance Monitor and Facebook Insights API integration
• Greenpod Shipped to Seattle from Port Townsend for Earth Day
• Sneek Peek at New Bachelorette Pad

Unless you want me to start a new blog designed just to shame you and the companies you represent for infesting the internet with such poorly-written, poorly-targeted, junk, you really should stop it.

Sincerely,
-The Tim

The post Dear Marketers: I Don’t Care About Your Press Release appeared first on Seattle Bubble.

The post Merry Christmas! appeared first on Seattle Bubble.

Here’s an example of the rhetoric floating around out there regarding the latest round of budget tightening, with the governor making the case for a “temporary” sales tax increase:

Seattle Times, November 21: Gregoire proposes half-cent sales-tax increase

Gregoire wants lawmakers to put a referendum on the March ballot asking for a temporary half-penny boost in the sales tax, which would bring in nearly $500 million a year. The tax would expire after three years and largely would go toward education, with smaller amounts for public safety and social services.

The governor’s proposal came after she outlined more than 160 proposed budget cuts to fill the gap. The cuts included eliminating state-subsidized health insurance for the working poor; reducing the K-12 school year by four days; and allowing early release of prisoners who are at low to moderate risk of reoffending.

Some reductions would be rescinded if the tax increase is approved.

“I have seen the ramifications of the cuts,” Gregoire said. “I can’t live with it.”

Today, protesters descended on the state Capitol in Olympia to protest these allegedly intolerable cuts.

Here’s a look at Washington’s total budgeted spending for each biennium, with the budget hole that everyone is making a big deal about overlaid in green:

When the total budget is $74 billion, cutting $2 billion doesn’t seem like quite as big of a deal. We’re talking about 2.7% of the budget. It also seems worth noting that even with these annual cuts we keep hearing about, the total budget has still managed to grow 5.2% since the 2007-2009 biennium.

Of course, straight dollars don’t quite tell the whole story, so here’s a chart in which I’ve indexed total state spending to 100 in the 1999-2001 biennium, and plotted it alongside an index of population, multiplied by the growth in national CPI (less shelter):

State spending has managed to grow a total of 61.7% over the last twelve years (after the $2B in cuts), vs. a total growth of 55.5% for population times inflation. So I can’t help but wonder… where exactly is the pressing need to increase state taxes or cut vital services?

The post Washington State Budget Woes: Where’s the Beef? appeared first on Seattle Bubble.

Personally, I would not feel comfortable leveraging into a $360K loan on a $100K income at a time where a significant risk of price declines exists. But, apparently many people have no problem with this. From what I’ve read, many people actually consider 28% of gross annual household income to be a conservative amount.

My question is, how do other Seattle Bubble posters feel about the 28% affordability measure? Is this realistic as an affordability measure?

Because what article isn’t improved by a generic stock photo? (credit: s_falkow)

I’ve always heard it as 30% of gross annual income, which is the number I used for my Simple Affordability Calculator, and the number I use when calculating the Affordability Index.

On the other hand, my personal opinion is that families that take out a mortgage whose payments eat up 30% of the gross of two incomes are putting themselves in a precarious position should either breadwinner lose their job or even take a pay cut.

My family’s threshold is quite a bit more conservative than the “traditional” measure of affordability. When we bought our house this year, we kept our total monthly payments (PITI) at around 15% of gross income—half of what is traditionally considered “affordable” by most. We also only counted one income, and have no other debt whatsoever.

So what does “affordable” mean to you? Would you take out a mortgage that required 30% of your gross income to make the payments, or is your threshold 20% or even lower?

The post What Does “Affordable” Mean to You? appeared first on Seattle Bubble.

LAS VEGAS — President Barack Obama offered mortgage relief on Monday to hundreds of thousands of Americans, his latest attempt to ease the economic and political fallout of a housing crisis that has bedeviled him as he seeks a second term.
…
His jobs bill struggling in Congress, Obama tried a new catchphrase — “We can’t wait” — to highlight his administrative initiatives and to shift blame to congressional Republicans for lack of action to boost employment and stimulate an economic recovery.
…
While Obama has proposed prodding the economy with payroll tax cuts and increased spending on public works and aid to states, he has yet to offer a wholesale overhaul of the nation’s housing programs. Economists point to the burst housing bubble as the main culprit behind the 2008 financial crisis.

Wait, what? No, the main culprit behind the crisis was all the insane financing, derivatives, bogus ratings, leveraging, and all of the other nonsense that went on during the housing bubble run-up. The bust and financial crisis were just the inevitable consequences of the near-universal death of responsibility at both the personal and the corporate level.

Moving on…

Under Obama’s proposal, homeowners who are still current on their mortgages would be able to refinance no matter how much their home value has dropped below what they still owe.

Because there are so many people whose homes are worth half what they owe who just want to refinance to a lower interest rate. Or something.

“Now, over the past two years, we’ve already taken some steps to help folks refinance their mortgages,” Obama said, listing a series of measures. “But we can do more.”

At the same time, Obama acknowledged that his latest proposal will not do all that’s not needed to get the housing market back on its feet. “Given the magnitude of the housing bubble, and the huge inventory of unsold homes in places like Nevada, it will take time to solve these challenges,” he said.

Please, don’t “do more.” Hasn’t the government already done enough? Killing financial oversight, over-promoting “ownership,” over-expanding Fannie & Freddie, bailing out irresponsible banks…

Presidential spokesman Jay Carney criticized Republican presidential candidate Mitt Romney for proposing last week while in Las Vegas that the government not interfere with foreclosures. “Don’t try to stop the foreclosure process,” Romney told the Las Vegas Review-Journal. “Let it run its course and hit the bottom.”

“That is not a solution,” Carney told reporters on Air Force One. He said Romney would tell homeowners, “‘You’re on your own, tough luck.’”

I’m certainly no Romney fan (he’s probably my least favorite potential 2012 challenger), but he’s right on this one, and Mr. Carney has got it backward. Foreclosures are not the problem. The problem is over-inflated values that got completely detached from all sound economic fundamentals. Foreclosures are the solution, not some sort of government-forced refinance plan that helps people to continue throwing good money after bad for decades to come.

[Update]

It seems I was a little unclear on why exactly I think this is a bad plan. The main reason I’m not a fan of this “help people refinance their underwater mortgage” program is what I said just above: It only “helps people to continue throwing good money after bad for decades to come.”

Let me try to explain via an example. Let’s say you bought a 3-bed, 1.75-bath Seattle-area home in 2007 for $419,000. You put down 20% and got a 6.6% rate on a 30-year fixed-rate mortgage. That puts your total monthly PITI payments at about $2,600.

Today your house is worth about $280,000. You still owe about $314,000, so despite putting 20% down, you’re 10% underwater (more if you count the costs of selling). If you refinance into a new 30-year mortgage at today’s rate of 4.2%, you can drop your payments from $2,600 to about $1,900.

Pretty good, right? $700 a month savings!

But what if instead you were able to do a short sale (or default, if the bank won’t play ball), rent for a few years, then buy a home at today’s lower prices?

Going rent for a home like yours in your neighborhood is around $1,400 a month—$500 a month cheaper than what you’d be paying if you refinanced your underwater mortgage. Five years of renting at that price (even allowing for some increases in rent) will cost about $25,000 less than five years of paying the $1,900 a month refinanced mortgage, and $67,000 less than paying your original mortgage.

If you take the $67,000 you save by renting for five years and put it into a $280,000 home comparable to what you used to own, your monthly payment (if rates go back up to 6%) will be just $1,600—$300 less than if you take the government’s deal and refinance today. The numbers work out even worse for you to take the deal if you originally put no money down or have a home that is even further underwater.

Here it is in table form:

That’s what I’m talking about when I say that continuing to pay an underwater mortgage is “throwing good money after bad.” It’s short-sighted and in my opinion a larger drain on the economy than encouraging people to get face the consequences of their poor purchase decisions, get out of these houses and move on with their lives.

The post Obama “Can’t Wait” to Screw with the Market Even More appeared first on Seattle Bubble.

In the comments on the proposal I made yesterday, Doug asked a reasonable question:

Have you figured out what the deduction would be if you did this, and made it deficit neutral? That would be an interesting exercise.

Good question. Let’s do that.

According to various sources, the current cost of the mortgage interest deduction is about $131 billion, so let’s use that as our baseline cost. According to the U.S. Census Bureau, there are about 75 million owner-occupied homes in the country. So, let’s do the math.

$131,000,000,000 divided by 75,000,000 gives us about $1,750 per household to work with. If we assume that the average homeowner is in the 28% tax bracket ($139,350 – $212,300 of income for married filing jointly), that translates to a flat homeowner deduction of $6,250. If the average homeowner is in the 25% tax bracket ($69,000 – $139,350, which seems more likely to be closer to the nationwide average), we can give them a $7,000 deduction.

So, how does that compare to the mortgage interest deduction? According to Q2 data from the NAR the nationwide median price of homes sold in Q2 of this year was $171,900. If a buyer purchased said home with just 3.5% down at a 4.5% interest rate, they would pay approximately $7,410 in interest during the first year of their mortgage. If they put 20% down they pay $6,143 in interest. If you are in the 25% tax bracket and you deduct $6,143 from your income, your tax savings is $1,536—about $200 less than the flat homeowner deduction I am proposing. And don’t forget that the amount of interest you pay decreases every year of your mortgage, consistently shrinking and eventually eliminating your tax savings under the current system.

Obviously people who pay far above the national median price will get a much smaller benefit from this system than they do under today’s policy, but again, so what? If you’ve got the money to pay two or three times more than the average American for a home, why should the government be obligated to subsidize your purchase to a larger degree than for people who can only afford a more modest home?

It looks to me like the numbers work out. A revenue neutral deduction at $7,000 (~$1,750 tax savings) per owner-occupied home would be fair, or we could give the budget a bit of a boost and just make it a $5,000 deduction (~$1,250 tax savings). What do you think? Is my math screwed up, or would this actually work?

The post Running the Numbers on the Flat Homeowner Deduction appeared first on Seattle Bubble.

The Problem
There are numerous problems with the methods the government has used and is using to promote homebuying. One-time homebuyer tax credits just shift demand around, getting people to buy a few months or a year before they would have otherwise bought. The mortgage interest deduction is more of an encouragement for people to borrow money than it is to buy a home. Thankfully the tax credits seem to stand little chance of returning, but given the fact that the National Ass. of Realtors is the fourth-largest buyer of politicians in the nation, it seems unlikely that any of the current talk of eliminating the mortgage interest deduction will come to pass.

The Assumptions
Let’s assume for a moment that the government is never going to get out of the business of social engineering when it comes to the housing market. However, let us also assume that it is possible to replace inefficient policies with more efficient ones that achieve the same social engineering goals.

The Proposal
What if instead of just eliminating the mortgage interest deduction, we replaced it with something more fair that could achieve the goal of encouraging home ownership (thus placating the Realtors and their bought-and-paid-for legislators) without also encouraging massive, ever-increasing debt? Here’s my proposal: Replace the mortgage interest deduction with a single flat deduction for owning your primary residence.

My flat deduction would work the same way the dependent exemption works today. One flat amount applies to the whole nation, available to anyone who owns their primary residence. You can only take it on one home at a time, and it doesn’t matter if you have a mortgage or not, you get the deduction as long as you keep your home.

The Benefits
Having a flat homeowner deduction instead of a deduction based on how much mortgage interest one pays would encourage home ownership without promoting excessive debt. This program would reward people for actual home ownership, not just home indebtedness, as they would continue receiving the deduction even after they have paid off their home.

You could also build additional features into this plan to encourage other aspects of responsible home ownership, such as if you have a foreclosure on your record, you’re not eligible for the deduction for at least seven years. This would discourage people from the “buy and bail” strategy that some have been employing to get out of paying the mortgage on a home they overpaid for.

The Objections
“But what about the fact that homes are more expensive in San Francisco than they are in Topeka? Shouldn’t buyers in more expensive cities get a larger deduction?” – Why should they? If you choose to live in an expensive city, you know what you’re getting into. It also costs a lot less to raise a child in Topeka than it does in San Francisco, but the Dependent Exemption isn’t any different. Why should the home owner deduction get special treatment?

“The mortgage interest deduction is sacred. Any attempt to eliminate or adjust it will destroy the economy, and possibly the entire universe.” – Hmm, it is rather difficult to argue with such impeccable logic. How about we just give it a shot and see what happens?

The Conclusion
So, that’s my proposal. What do you think? What objections come to your mind? The main reason I can think of that it will never happen is that it is just too practical, not complicated enough, and doesn’t result in enough kickbacks to powerful industries. But maybe I’m just too jaded about politics.

[Continue Reading - Part 2: Running the Numbers on the Flat Homeowner Deduction]

The post Proposal: Replace the Mortgage Interest Deduction with a Flat Homeowner Deduction appeared first on Seattle Bubble.

• End (or greatly scale back) the mortgage interest tax deduction.
• Require at least a 20% down payment for purchases.

Here’s a recent article that covers the arguments in favor of ending the deduction: Mortgage-interest tax break in spotlight

Ending tax breaks for oil, corporate jets and hedge-fund managers is nearly every Democrat’s favorite way to reduce the federal debt.

But one of the biggest tax breaks is the mortgage-interest deduction, and its benefits are heavily concentrated in a handful of pricey cities, none of which votes Republican.

As Congress’ new deficit-reduction committee sets about finding up to $1.5 trillion to trim by Thanksgiving, tax breaks of all kinds, including the interest deduction, are getting new scrutiny. Beloved by the public and the real-estate industry, the deduction will cost the government more than $1 trillion over the next decade.

But few homeowners know how skewed it is by region and by income.

Three metro areas — New York, Los Angeles and San Francisco — receive more than 75 percent of the subsidy, according to a 2004 study by economists Todd Sinai and Joseph Gyourko.
…
The bigger the mortgage, and the higher one’s income, the bigger the deduction. A person in the top tax bracket of 35 percent who borrows $1 million can receive a tax break of $17,500. That’s on top of a slew of other subsidies, such as preferential capital-gains taxes on the sale of a primary residence, deduction of local and state property taxes, and subsidies to mortgage giants Fannie Mae and Freddie Mac.

By comparison, those earning less than $75,000 receive less than $200 in savings from the deduction. More than three-fourths of taxpayers do not itemize and so don’t claim the deduction. Those who rent or have paid off their mortgages, most of them seniors, get none.

The chief recipients are younger, well-off households that receive “a big incentive to increase the size of their mortgage or house,” said Eric Toder, co-director of the Tax Policy Center, a joint research group of the Urban Institute and Brookings Institution.

The deduction’s value increases with the cost of a home, suiting pricey real-estate markets such as San Francisco and Manhattan, or hot vacation spots such as Aspen, Colo.

I’m sure you can guess where most real estate salespeople fall in this debate. Here’s a recent piece from the NAR that lays out their position: What We’re Fighting For

“We’re at a turning point,” said Phipps, “not just because our livelihood is at stake, but because home ownership in an absolute sense is at stake. The privileges we’ve had, our parents had, and our grandparents had since World War II are being eroded, and our children face having [those privileges] denied to them.”
…
The ­public policies that enshrine home ownership as part of the American dream, including the mortgage interest deduction and readily available 30-year financing, can’t be counted on unless the nation’s citizens become engaged in the political process.

Wow, that is some thick rhetoric. Nothing like appealing to emotions when you can’t make a rational argument for your position.

The other good idea, requiring 20% down payments from most buyers just makes sense: Don’t buy stuff you cannot afford, right?

From the Wall Street Journal: Regulators Push 20% Down Payments on Homes

Banking regulators are pushing for mortgage-lending rules that require homeowners to make minimum 20% down payments on loans classified as lower-risk, according to people familiar with the matter.

The proposal is being floated as a way to rewrite the rules for mortgage lending to prevent a rerun of the housing bubble and financial crisis that resulted from years of easy credit. The Dodd-Frank financial overhaul law enacted last year enabled regulators to define a so-called gold-standard residential mortgage that would be exempt from costly new rules.

At least three agencies—the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—back a proposal to require home buyers to put down at least 20% of the sales price in order to obtain one of these “qualified residential mortgages.” One proposal would also require borrowers to maintain a 75% loan-to-value ratio for refinances, and a 70% loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.

To hear real estate salespeople tell it, requiring 20% down would be Armageddon for the housing market. From the same REALTOR link above: What We’re Fighting For

[Buyers] hear regulators talking about the need for skin in the game, so they think QRM is great. But when they hear a minimum 20 percent down payment would be required, they say, ‘That’s ridiculous.’ None of them have 20 percent to put down.”

Efforts to limit or eliminate the mortgage interest deduction, do away with the government-sponsored secondary mortgage market, or require 20 percent down for an affordable mortgage are just a few of the ways the financial crisis and today’s federal budget debate are upending the generations-old consensus in Washington about the central place of home ownership in the United States.

I especially enjoyed the headline and some of the quotes this article that popped up in my inbox last week: Get ready to rent: If home buying rules change, more than half can’t afford it

Future homebuyers could have to make a down payment of 20 percent under new rules proposed to prevent another financial meltdown.
…
[Ohio Association of Realtors CEO Robert] Fletcher said the 20 percent rule has the potential of knocking 60 percent of the buying public out of the housing market. Because the housing market is a key part of the economy, eliminating low risk buyers from the housing market will create another severe obstacle for the economic recovery to overcome, Fletcher said.
…
However the potential impact if the rules were to go through on the rest of the economy is less people could afford to buy a house if they have to pay 20 percent down or banks might be less willing to lend to them for less. Then demand for houses will decrease.

That last sentence really gets to the heart of the matter for real estate salespeople. It’s not about what’s good for the economy, homebuyers, or neighborhoods in the long term, it’s all about selling more houses. Who cares if they can actually afford it or not, right? Just move the goods, right?

The post Good Ideas that Home Salespeople Hate appeared first on Seattle Bubble.

Over in the Weekend Open Thread, Pegasus points out a story in yesterday’s New York Times: U.S. Is Set to Sue a Dozen Big Banks Over Mortgages

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

Meanwhile, as seen in the chart at right from American Banker (via Consumerist), big banks are dramatically cutting back on customer-friendly offerings like free checking.

I could go on and on about how evil and anti-consumer the big banks are, and how great credit unions are, but I’m sure you’ve heard it all before. So I’d like to just put a question out there: Are you still banking with a big bank? If so, why? I seriously would like to know, because I literally have no clue why anyone would give their business to one of these institutions.

The post Have You Given Big Banks the Boot Yet? appeared first on Seattle Bubble.

Searching for registered sex offenders is easy with sites like CrimeReports, which puts links to your local law enforcement’s detailed offender info right on a map. However, just because it’s easy doesn’t mean it’s particularly useful.

Before I go on, I want to be very clear that sex crimes are serious business, and I’m not downplaying the seriousness of the crimes in any way. That said, in my opinion it’s silly to fret about the number of registered sex offenders living in an area, and even more ridiculous use it as a major deciding factor in your home search. Here are a few reasons why:

• Most sex offenders assault people they already know.
• They’re registered, so you know exactly who they are.
• If they want to re-offend, they aren’t limited to the neighborhood they live in.
• It’s the unregistered and uncaught criminals that you should really worry about.

Allow me to illustrate some of these points. Using the aforementioned CrimeReports, I pulled up a map of my own neighborhood and started clicking through to the first ten offender detail pages nearest to my home. Here are some excerpts from the descriptions of their crimes:

• …sexually assaulting the unknown 14 year old male victim… grabbed his buttocks…
• …sexually assaulting the known 13 year old female victim… sexually assaulting the known 14 year old female victim…
• …entered a on-line chat room. Once in this chat room he committed his lewd offense by exposing in front of his web cam…
• …sexually assaulting the known six year old male victim…
• …was 21 years of age at the time of the crime molested a 14 year old female. His vehicle was parked in a posted no trespassing area and he and the victim were watching a pornographic DVD inside the vehicle. Both were naked…
• The victim in this crime was a 11 year old female who was molested when the victim was taken on walks… His next victim was a 12 year old female who had gone to his home to play video games…
• …was on line and talking to what he believed to be a 12 year old and in fact was a detective.
• …sexually assaulting the known female victim from her age of one to five years old…
• The victim in these crimes were both 14 year-old females, known to the offender.
• …he harbored the known (he had known her about a month) 14 year old female victim after she had runaway from home.

Again, all of the crimes described above are inexcusable, but do any of these guys really sound like people you should live in fear of just because they happen to live a couple blocks away from you?

The majority of registered sex offenders (and seven of the ten in the list above) commit their crime against someone they already know (a friend or family member). Since a registered sex offender is, well, registered, it’s pretty easy to make sure your wife and kids aren’t spending time with him, even if he lives just down the block.

In the specific examples I pulled up from around my home, two of the three offenders who did not assault people they already knew committed their crimes online. I understand that with this newfangled internet thing you can go anywhere you want right from the comfort of your own home. Do you think that by living in some sterile suburban protective bubble you can avoid these online predators?

Speaking of mobility, you realize that the internet isn’t the only way for a sex predator to find potential victims, right? Sex offenders can drive cars & ride buses just like normal people. Just because you don’t have any living within a mile of your home doesn’t mean that there aren’t any hanging out in your neighborhood or in the parks or businesses you frequent.

But really when it comes down to it, this whole registered sex offender thing is a misdirection anyway. People worry about it because the information is out there and easy to find. But how many registered drunk drivers, registered drug dealers, registered car thieves, registered assaulters, or registered burglars do you have in your neighborhood? Oh right, none, because most of the crimes that home owners should be worried about don’t require offenders to register their location for life. And what about the sexual predators that just haven’t been caught yet? For all you know one could be living right next door to that home you just made an offer on.

Worrying about registered sex offenders is silly. Sure, if everything else is equal, anyone would rather not live in a neighborhood with a handful of known creeps. But everything else is never equal. It’s better to know what you’re getting into than to be ignorant, but if you’re ruling out a neighborhood just because of registered sex offenders, you’re limiting yourself unnecessarily, and possibly missing out on a great home for no good reason.

The post The Sex Offender Bogeyman appeared first on Seattle Bubble.

Timing Closing?

One question that frequently comes up when meeting with clients to sign loan documents is the question of “timing.”   Is it financially beneficial to close earlier in the month or later in the month?  In most cases the answer is that it makes no difference.

Interest is paid on the existing loan through the payoff date and interest is collected or “prepaid” on the new loan from the closing date through the end of the month.  The reason people often think that it is “cheaper” to close at the end of the month is because they are only looking at the “prepaid” interest.  For example, if you’re closing on the 10^th, then the settlement statement would show 21 days of prepaid interest.  If you’re closing on the 20^th then there would only be 11 days of interest.

However, if you’re also selling a home at the same time, you need to remember to look at the number of days of interest being added to the payoff balance of your existing loan. Typically the interest rate on the existing loan is higher than the interest rate on the new loan, so it would be slightly more beneficial to close as soon as possible.

Skipping Payments

Many people like the idea of “skipping” a payment.  Yes, you may not be making a payment directly to your mortgage company for one month (or sometimes 2 months) but interest is still being collected on the old loan until the time of payoff and interest accrues on the new loan from the closing date forward.  You are not getting out of paying interest.

One exception to this rule is if your existing loan is FHA.  FHA does not prorate interest on a daily basis.  The payoff balance will include interest through the end of the month.  Therefore with FHA specifically, it is very beneficial to close your refinance at the end of the month to avoid paying interest on both loans at the same time.

The post Financial Closing Strategy: Is there a better time of month to close on a refinance? appeared first on Seattle Bubble.

2005 through 2008 was definitely a pretty terrible time to buy—the signs were easy to spot: bidding wars, waived inspections, skyrocketing prices… But does dramatic improvement in market conditions for buyers necessarily mean that today is a great time?

Obviously one can make an argument that there are still too many negative macro factors (unemployment, massive national debt/deficits, inflation/deflation, etc.) hanging over the market like the Sword of Damocles to make today a great time to buy, but I would like to make a different argument today. I contend that even if every possible economic and market measure were positive, it still would not be “a great time to buy,” because there is no such thing as a generic, “great time to buy” that applies to every potential homebuyer.

There is never “a great time to buy.” There is only “your time to buy.”

If home prices are at rock-bottom, interest rates are at one percent, the economy is booming, is it a great time to buy? Not if you’ve got a hundred thousand dollars of school debt and you’re working part-time at the Sizzler, it isn’t!

Likewise if some of the macro-economic factors are still in the toilet, but your personal situation is secure and you find a great home that you love, at a price you feel is fair, and can easily afford. Is it “a great time to buy”? Probably not, but it may indeed be your time to buy.

When I’m thinking about whether or not it’s my time to buy, here are a few of the factors I take into consideration:

• income & job stability
• availability of nice, affordable homes
• current & near-future family situation (i.e. – kids, pets, etc.)
• desire for stability
• tolerance for risk (future price declines)

The stuff we spend every day talking about on this site generally falls into that second category, which is only one of the many personal factors that go into determining whether or not it’s my time to buy.

So, what are your factors? Is it your time to buy? I’m especially interested in hearing from readers that have bought in the last year or so. What led you to decide that now was finally the time to jump in?

The post There is no such thing as “a great time to buy.” appeared first on Seattle Bubble.

We coach people who are underwater in their homes.
We don’t do loans, we don’t sell real estate.

We teach our members how to deal with their underwater homes.

If you have to deny a loan for an underwater homeowner, we are the next logical step for them.

Once you deny them, you’re done. You can’t help them. If you can’t close it, you can’t make a commission on it. On top of that, you may never get them back again.

Now you can tell your client that the banks don’t have a solution for them but you do. You can refer them to the only company in the region that specializes in helping underwater homeowners.

Wow, does that ever sound fishy. The email goes on to promote a pair of upcoming events being hosted by this company. One of the events is being presented by “Howard Bono, Founder.”

Howard Bono… Where have I heard that name before… Oh yeah: Friday Flashback: "The Traditional Advice is Outdated"

Many dream of being millionaires, while others work hard toward that goal.

Howard Bono [owner of Old West Mortgage in Everett], on the other hand, wants to help others – 1,000 other people, to be exact – amass that kind of wealth.
…
When it comes to the long-term goal of retirement, Bono doesn’t offer the traditional advice, however. That’s because the traditional advice is outdated, he said.
…
…Bono suggests, in addition to preaching everyday financial fitness, that people use property as a tangible investment for retirement.

His rationale? Real estate values in the Puget Sound region grow, on average, by 7 percent a year. Which means if you buy a second property and hold onto it for a couple of decades, its value is bound to grow to three or four times what you paid. In the meantime, the second home can be rented out for additional income to cover its mortgage.

The key is to hold onto property long enough for it to dramatically rise in value.

So in 2007, when real estate was hot, Howard Bono was operating a mortgage company and telling anyone who would listen that buying real estate is the way to become a millionaire. Now that things have turned around, he’s running a “coaching group” whose website describes its mission as:

Our mission is to coach you through the process of strategically eliminating your burdensome mortgage(s), put cash in your pocket, minimize the damage to your credit and prepare you for the new financial arena.

In other words, if you listened to Howard Bono’s nonsense “non-traditional” advice in 2007 and got your finances into a giant mess, he’d love to give you some advice in 2011 about how you can get out of that mess. What a deal.

I also really love the bold disclaimer at the bottom of every page: “LEGAL INFORMATION IS NOT THE SAME AS LEGAL ADVICE.” Looks to me like these guys are basically trying to charge people money for basic advice er, I mean information on how to walk away from their mortgage or file a deed in lieu (hey guys, someone beat you to that). Hard to say for sure since they’re really not clear anywhere on their site about what exactly they do.

Personally I think if you’re looking for a good financial coach, smarmy hucksters that shift to a new opportunistic business model every couple years might not be the best choice. But that’s just me.

The post You Can’t Keep a Good Huckster Down appeared first on Seattle Bubble.

Note: The opinions expressed in this post are in no way legal advice nor should anyone take any commentary on this topic through this or any other blog as a substitution for legal advice. Sellers who are considering or currently engaging in a short sale should consult with an attorney.

If a lender refuses to forgive a deficiency in a short sale (will not provide letter of forgiveness), can the seller file bankruptcy and name the lender even if the lender does not pursue the deficiency?

Some thoughts:

• Let’s face it: Many sellers file bankruptcy after a short sale is completed to be rid of their debts and start with a clean slate. Can the seller list the “deficiency” as part of their bankruptcy even if the lender is not pursuing the debt? I think many would like to know.
• The banks that are not providing forgiveness of debt letters as part of a routine short sale are in effect reserving the right to pursue the deficiency at some time in the future.
• Would it be prudent for the seller to file bankruptcy right after the short sale when they don’t have assets or wait until they are pursued for the debt (if they ever are)?

The post Short Sales: What happens when the seller’s lender doesn’t provide a forgiveness letter for the deficiency? appeared first on Seattle Bubble.

It is obviously impossible to achieve all three of those goals, so the key to a successful project was to figure out which of those ideals the customer was willing to compromise in order to get the other two. Are the most important goals to have a reliable, feature-packed device with designs delivered in a week? No problem, but it’s going to cost you (a lot). Does the device have to be cheap and delivered fast? We can do that, but we’re going to have to cut features and sacrifice some testing.

The saying we used to describe this process is one you may have heard before: “Fast, good, cheap: pick any two.” This concept is sometimes known as the project triangle. When it comes to real estate, I believe there is a corollary to the project triangle that can help you set more realistic expectations when shopping for your home: “Price, quality, location: pick any two.”

Just $250,000 on Capitol Hill. Hah, just kidding—it’s $8 million. And also in Tacoma.

Everyone would love to buy the $100,000, brand-new, 3,000 square foot home on an acre lot at the top of Queen Anne. Clearly no such home exists, nor will it ever exist. If you are actually serious about buying a home, you are going to have to set appropriate, attainable goals for your search.

Price
Even though lending standards have become more conservative, and banks are unlikely to approve a debt-service-to-income ratio of more than 30%, it is also becoming more common for borrowers to be even more conservative than that. Maybe you can “afford” to take out a loan big enough to buy a $750,000 home, but it is important to you not to go above $400,000. Figuring out whether you are able and (more importantly) willing to compromise on price is usually pretty straight forward.

Quality
Quality can mean many things to many people. Here, I’m using it to mean things like the size of the house, the size of the land, and the finish quality of the house. Is one of your top priorities to have the perfect kitchen the day you move in? Or perhaps your family of six needs no less than 2,000 square feet to fit everyone and their stuff. Maybe quality should be one of the two priorities you pick.

Location
Obviously location is a priority that most people don’t want to—or shouldn’t—compromise. “Drive ’til you qualify” is a trap that all too many people fell into during the bubble, and now they’re stuck commuting from Marysville to Redmond. However, if price and quality are really so important to you, maybe location should be what you give up.

Obviously decisions on price, quality, and location are not a simple yes or no choice, but a give and take. If you’re willing to give up the perfect kitchen, you can pay a little less. If you look in Ballard instead of Queen Anne, you can get a better house for the same price. You get the idea.

The price, quality, location equation is probably the way most people intuitively shop for a home already. With this semi-formal framework, you should be able to make better, more intentional decisions as you search for the home that has just the right combination of factors for your budget and lifestyle.

The post Fast, Good, Cheap: Pick Any Two appeared first on Seattle Bubble.

Here’s their conclusion (emphasis mine):

If governmental policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5). Politically, this cannot happen. Successive modification plans will be attempted until something works. The success rate on mortgage modifications can be raised by making greater use of principal reductions. The moral hazard (strategic default issue) must be addressed by first recognizing it as an economic issue, not a moral one. The costs of default must be made explicit. The 2nd lien issue must also be addressed.

However, supply side actions alone will be insufficient to address the housing crisis. Demand side actions are needed: providing leverage for investors to buy real estate, and increasing credit availability on prudent terms to borrowers with less than pristine credit.

I’d like to briefly discuss the ideas proposed in this paper. Even though it isn’t a Seattle-specific topic, I think that proposals like this are worth some print here. Let’s take the sections I emphasized in their conclusions one at a time.

First, let’s talk about the reasoning that is presented for making the dramatic changes suggested. Here’s an excerpt from the first section of the paper:

There are roughly 80 million homes in the US, 55 million of these have a mortgage.

…we conservatively conclude that 11.57 million borrowers are in danger of losing his/her home. That is about 1 out of every 5 borrowers; an impossible number, and one that is politically unfeasible. Moreover, if the resolution of the currently delinquent loans is not handled well, home prices will drop further thus reinforcing the cycle.

When you throw around phrases like “1 out of every 5″ it sounds like you’re talking about really big numbers, but I contend that the “crisis” is not nearly as dramatic as they make it out to be.

According to 2006-2008 data from the US Census Bureau, there are roughly 115 million households in the USA (there are certainly more today, but we’ll use this number for the sake of discussion). If 11.57 million of those households are in danger of foreclosure, we’re talking about 10% of the population. How is allowing something to happen that affects only 10% of the people “politically unfeasible”?

Furthermore, to even arrive at our 10% number, we must assume that every one of the 11.57 million homes in danger of foreclosure is actually owned by a separate borrower. Many, many people took out crazy mortgages during the bubble to buy “investment” properties that they never have and never do intend to live in. This paper assumes a 1:1 relationship between homes and homeowners that is certain not to exist. In reality, 10% is the maximum amount of the population that would be affected if all of these homes were “lost” to foreclosure.

Since over 90% of the people in the country will not be losing their homes, anyone proposing major changes to the way foreclosures are treated is going to have to do better than “Politically, this cannot happen.”

Obviously I don’t think they have made the case that anything needs to be done about this “crisis,” but let’s briefly address some of their proposed “solutions.”

The costs of default must be made explicit.

Here they are suggesting various penalties for strategic defaults, including taxing missed mortgage payments as income. I doubt this would prevent anyone from defaulting, but it might stop them from living rent-free for a couple years, boosting the economy in other ways as they spend the money that they are no longer paying on their mortgage.

…providing leverage for investors to buy real estate…

This is a suggestion for a sort of Public-Private Investment Program (PPIP) in the real estate sector. Because that plan worked so well when we tried it last year. (Hint: No, it didn’t.)

…increasing credit availability on prudent terms to borrowers with less than pristine credit.

Translation: If you play nice with the bank, you get special super-easy financing to get you into another mortgage immediately after you leave your current underwater home. Extending more easy credit to people who have proven that they are not capable of responsibly handling credit. Sounds like a great plan, doesn’t it?

In summary: The growing number of foreclosures is not a “crisis.” It is a necessary market clearing that should be allowed to take place so home prices and sales volumes are allowed to naturally get back to a sustainable, sane level. Furthermore, the solutions proposed in this paper are misguided at best, and would be counter-productive at worst.

The post 11.5 Million More Foreclosures? Bring Them On! appeared first on Seattle Bubble.

Everyone seems to want to “stick it to the man” and make the banks pay for making false claims about having all the right paperwork and following all the right procedures.

I get that there are legal processes in place for a reason, and I agree that it’s not okay for the banks to just ignore the law when it happens to inconvenience them, but here’s something that’s been bugging me about all this outrage.

How is what the banks are doing today any different from what they did throughout the years that the housing bubble was inflating?

photo by Casey Serin (Remember him?)

Many of the people who are losing “their” homes today are the same people who were only able to get loans that allowed them to overpay for those homes in the first place thanks to the exact same sloppy procedures at the banks. They were more than happy to take advantage of lousy (or often a complete lack of) documentation when it got them into a home, but when the same set of rules are applied to kick them back out, suddenly they are crying foul.

Obviously not everyone fits my description of the typical foreclosure crisis “victim.” Those who are losing homes on which they never missed a payment or that they own outright clearly have every reason to be outraged at the banks. However, people who stopped paying their mortgage and are hoping to take advantage of some technicality to get “their” home back are only kidding themselves.

Here’s my proposed solution to the whole mess. Forget foreclosure freezes. Forget endless reviews of millions of documents. Here’s my 3-point plan:

• Free legal counsel for anyone who is current on their mortgage but has been truly wrongfully foreclosed.
• Every time a bank is found by the courts to have initiated any degree of foreclosure proceedings on someone who was not behind on their mortgage, a $10 million fee is levied against the bank.
• Fees collected pay for the legal representation of future legitimate claimants against the bank.

The basic idea is to make it easy for people who have actually been victimized (not just the victims of documentation technicalities) to obtain appropriate recourse against the banks, and to make it really hurt when the bank actually screws up. This provides a strong incentive for the banks to get things right and a just outcome for the times that they get it wrong.

What do you think? Would something like this be reasonable, or have I yet again displayed my ignorance of complex legal and economic issues?

The post A Simple Solution to the Foreclosure Paperwork Mess appeared first on Seattle Bubble.

The Bubble Sitter
Thought about buying during the housing bubble, but realized that prices were severly detached from the underlying economic fundamentals and decided to hold off. Saved a lot of money by renting during the housing bubble, often at half the cost of a mortgage on a comparable home.

Pros and cons for bubble sitters today:

• Pro: Large down payment saved up
• Pro: Home prices fallen and still falling to reasonable levels
• Con: Crazy low interest rates makes it hard to grow savings
• Con: Tax money being spent by government to bail out individuals and institutions that took irresponsible risks during the bubble

The Earnest Bubble Buyer
Bought a home during the housing bubble. Didn’t really realize that homes were overpriced, possibly because they believed real estate agents and the media when they were told that home prices never go down, housing is always a great investment, a home is a forced savings account, etc. Got a mortgage they could afford, but probably didn’t buy the home they really wanted or in the neighborhood they really wanted.

Pros and cons for earnest bubble buyers today:

• Pro: Able to enjoy the benefits of home ownership with a mortgage payment that is still affordable
• Con: Mortgage payments much higher than people buying the same homes today
• Con: Still paying high mortgage while strategically-defaulting neighbors live rent-free
• Con: Tax money being spent by government to bail out individuals and institutions that took irresponsible risks during the bubble

The Opportunistic Bubble Buyer
Bought a home during the bubble despite having no money saved for a down payment and not really having an income high enough to pay back the loan under any sane amortization schedule. Basically bought a home as a get rich quick scheme, fully believing the bubble hype about the riches waiting to be made through home appreciation.

Pros and cons for opportunistic bubble buyers today:

• Pro: No money down means nothing to lose by walking away
• Pro: Overwhelmed banks taking so long to process foreclosures allows rent-free living for a year or more
• Con: Black mark on credit after walking away
• Con: Foreclosure on record may make renting harder

The Equity Addict
Bought before the bubble at a reasonable price. Proceeded to refinance every year or two, extracting tens of thousands in home equity each time. Eventually ended up with a mortgage twice as large as when the home was originally purchased, and probably now has a mortgage payment that is no longer affordable.

Pros and cons for equity addicts today:

• Pro: Able to spend hundreds of thousands of dollars cash with no strings attached
• Pro: Nothing to lose by walking away since all possible equity has already been extracted
• Con: Black mark on credit after walking away
• Con: Foreclosure on record may make renting harder

Winners and Losers
By my accounting, despite making the more responsible decisions during the bubble, the bubble sitters and earnest bubble buyers don’t feel much like big winners today. The opportunistic bubble buyers and the equity addicts were able to live it up during the bubble, and hardly seem to be experiencing any negative consequences during the bust.

As a bubble sitter myself, I definitely empathize with other bubble sitters and with earnest bubble buyers who lament the way things are panning out during this bust. Maybe it’s just my bias showing through, but it does seem pretty screwed up that our system is basically rewarding irresponsibility and punishing prudence. Screwed up, but unfortunately not unexpected.

It turns out my parents were right. Life isn’t fair. Go figure.

The post Housing Bubble Winners and Losers appeared first on Seattle Bubble.

From Reuters: No Decision on Reviving Homebuyer Credit: Donovan

“It’s too early to say whether the tax credit will be revived,” Donovan said in an interview on CNN’s “State of the Union” program. He said the administration would “do everything we can” to stabilize the shaky U.S. housing market.

…
It would be far better for housing and the economy to announce “There will be no further housing tax credits.”

I could not agree more. Enough with the credits, subsidies, and stimulus already. And I say this as someone who is seriously considering buying a home within the next year. I would much rather have a rationally-functioning market than a few grand in my pocket.

To me, the homebuyer tax credit was like an invasive species that was introduced to an ecosystem to try to control a different invasive species that was introduced earlier.

I think I’ll name them Fannie & Freddie.

Pardon my pop culture reference, but I can’t help thinking of the Simpsons episode “Bart the Mother,” in which Bart released a pair of “Bolivian tree lizards,” which destroy the town’s pigeon population. In order to eradicate the lizards, the people of Springfield plan to release “Chinese Needle Snakes,” followed by “snake-eating gorillas.”

In the real world, the government wanted to encourage home ownership, so they beefed up Fannie and Freddie, loosened lending regulations, and held interest rates low. Things got overheated, so they began jacking up interest rates. High interest rates cooled things off, but that exposed the underlying weakness in the economy. Of course, when people realized how weak the economy was, the housing market crashed. In order to combat the crashing housing market, they dropped rates to the floor and introduced tax credits. Once the credits disappeared, sales fell hard, sending the housing market back to the gutter.

Yes, I realize that I am oversimplifying and leaving out a lot of steps, but I think that at its core, the invasive species analogy really works well.

It’s time to stop screwing with the ecosystem by introducing one invasive species after another.

The post Time to Let the Snake-Eating Gorillas Freeze to Death appeared first on Seattle Bubble.

First, a little background on my perspective. My parents bought their first house in 1987, when they were about 30 years old. They paid $45,000 for the modest 1,288 square foot, 3-bedroom, 1.75-bath house pictured below.

They refinanced once in the ’90s to get their ~10% rate down to around 7%, payed extra on the mortgage whenever they could, and paid the house off entirely in 2007. They would still live there today if Clark County hadn’t bought them out in 2008 to re-route the neighboring high school’s driveway and put in a retention pond. With the money the county paid them for their house they found another house that they could pay cash for.

By their early 50s, my parents were completely mortgage free. Their only housing expenses are property taxes, utilities, and maintenance. In my mind, this is one of the biggest benefits of buying a home—the ability to eventually pay off the mortgage and dramatically reduce your cost of living.

However, today it seems that everyone I know or hear about has little to no intention of ever actually paying off their mortgage. The typical home buyer’s process seems to look something like this:

1. Buy a home.
2. Live there for 3-10 years.
3. Get the urge to move up the “equity ladder” to something bigger.
4. Go to step 1 (and get a whole new 30-year mortgage in the process).

By the time someone has finally “settled down” and stopped moving to a new home and starting a new 30-year mortgage every few years, they’re probably as old as my parents were when they paid off their mortgage.

If you’re stuck in this loop, can that really even be called home ownership? Aren’t you just perpetually renting money from the bank and paying 6% to the real estate industry every few years to support your nomadic lifestyle? How is constantly resetting to a new 30-year mortgage any less “throwing away money” than renting (especially when, during the first five years, nearly 80% of your mortgage payments are applied to interest, not principal)?

Does anyone pursue actual home ownership anymore, or are most people just interested in home buying and perpetual debt? I’m genuinely curious. Do you or the people you know think of home ownership in terms of buying a home and eventually paying it off, or are you more focused on climbing the equity ladder until you retire?

The post Does anyone pursue actual home ownership anymore? appeared first on Seattle Bubble.

The Cycle of Market Emotions

Last time, in late 2007 as prices just began to decline here in the Seattle area, I pegged our location on the curve at somewhere between anxiety and denial. Today I’d guess that we’re holding fairly steady between fear and desperation.

Here’s a quick highlight of where the market is at today:

• foreclosures still increasing
• prices declining slowly
• sales boosted through the spring
• Post-tax credit, mortgage purchase applications have dropped to a 13-year low
• interest rates still at record lows
• banks failing at an increasing rate

While there may be signs of a bounce-back off the bottom for the economy as a whole, I have a hard time believing that the Seattle-area housing market has really “hit bottom” yet, either in terms of home prices or with respect to the cycle of market emotions.

What do you think? Have we hit capitulation or despondency yet, or are we still treading water somewhere between fear and desperation?

The post Treading Water Between Fear and Desperation appeared first on Seattle Bubble.

As is often the case, I find that I am learning the most from the people that disagree with me and present their opinions in a well-thought-out, rational manner. Specifically, the best argument that I read in yesterday’s discussion that makes the case for walking away being an unethical choice is that when you sign a mortgage contract, it is assumed that both parties are “acting in good faith,” and have an obligation to do so for the entire term of the contract.

While there are definitely buyers out there who were not acting in good faith from the beginning, I believe that most people probably were. I’m not sold on the idea that when circumstances dramatically change and continuing to make payments no longer makes sense, deciding to walk away means you are no longer acting in good faith, but let’s set the buyer’s position aside for a moment.

A rather detailed story popped up on ABC News yesterday that I think has some bearing on this discussion. Here is an excerpt from Mortgage Meltdown: How Banks Silenced Whistleblowers

In early 2006, Darcy Parmer began to worry about her job. She was a mortgage fraud investigator at Wells Fargo Bank. Her managers weren’t happy with her. It wasn’t that she wasn’t doing a good job of sniffing out questionable loans in the bank’s massive home-loan program. The problem, she said, was that she was doing too good a job.

The bank’s executives and mortgage salesmen didn’t like it, Parmer later claimed in a lawsuit, when she tried to block loans that she suspected were underpinned by paperwork that exaggerated borrowers’ incomes and inflated their home values. One manager, she said, accused her of launching “witch hunts” against the bank’s loan officers.
…
Amid the frenzy of the nation’s mortgage boom, the back-of-the-hand treatment that Parmer describes wasn’t out of the ordinary. Parmer was one of a small band of in-house gumshoes at various financial institutions who uncovered evidence of corruption in the mortgage business—including made-up addresses, pyramid schemes, and organized criminal rings—and tried to warn their employers that this wave of fraud threatened consumers as well as the stability of the financial system. Instead of heeding their warnings, they say, company officials ignored them, harassed them, demoted them, or fired them.

In interviews and in court records, 10 former fraud investigators at seven of the nation’s biggest banks and lenders—including Wells Fargo (WFC), IndyMac Bank, and Countrywide Financial—describe corporate cultures that allowed fraud to thrive in the pursuit of loan volume and market share.

Were the banks acting in good faith during the housing bubble when they handed out mortgages to anyone and everyone, regardless of qualifications? If the systemic problems described in this article are accurate, doesn’t that indicate that the banks were the ones not acting in good faith when the mortgage was written?

Consider this hypothetical. It is the summer of 2006 and you are a naïve first-time homebuyer. You have watched home prices skyrocket over the last few years and are genuinely concerned that if you don’t buy a home soon, you will be priced out forever. You go to your bank, get pre-qualified for a loan, and buy your first home. None of your paperwork was falsified, and you got a loan you can afford that you have every intention of paying back.

However, unbeknownst to you, the bank couldn’t have cared less about whether you could really afford the loan payments or if you intended to pay. All they cared about was originating the loan so they could collect the fee before repackaging and selling your loan into the secondary market.

I am not claiming that this scenario describes 100% of loan transactions during the housing bubble, but as the above-linked article demonstrates, it was certainly not uncommon.

So here is my question for the readers making the “good faith” argument. If you were acting in good faith when you obtained your mortgage, but the bank was not, are you ethically bound to continue making payments even if it makes no financial sense to continue doing so? I contend that the answer is no.

The post Did Banks Act in Good Faith During the Bubble? appeared first on Seattle Bubble.

With the subject of “walking away” finally hitting the mainstream media in full force this weekend with a dedicated segment on Sunday’s 60 Minutes, it would appear that the idea of giving the keys back to the bank to get out of a financial death spiral continues to gain some serious traction.

Of course, even though walking away would massively improve their financial situation and should be a no-brainer for many people (several such people are profiled in the 60 Minutes segment), strategic default (choosing not to pay your mortgage even though you can afford to) still carries something of a social stigma in many people’s minds.

For example, “walking out on a mortgage” was recently listed among “8 money missteps” by USA Today, which was then repeated without question and escalated to a “financial deadly sin” by my favorite personal finance blog, Get Rich Slowly (P.S. – buy J.D.’s book). Here in my neck of the woods, Kenmore real estate agent James Lupori called the notion “disturbing” in a recent post.

However, while some individuals may still be fretting about their “moral obligation” to pay their mortgage, a growing number of recent high profile examples have demonstrated that strategic default is really nothing more than a smart business decision.

In January, the owners of the massive 11,227-unit Stuyvesant Town and Peter Cooper Village apartment complex in Manhattan announced they would be handing the property over to their creditors. Closer to home, Boston-based Beacon Capital Partners announced last month that they will be intentionally defaulting on the $2.7 billion loan that they used to buy the Columbia Center—Seattle’s tallest skyscraper—and 8 other towers in the Seattle area (as well as 11 in the DC area).

“We’re seeing a lot of these ‘strategic defaults,’” said Ben Thypin, senior market analyst with Real Capital Analytics, a commercial real-estate research firm in New York. “Beacon could probably pay the mortgage, but the properties are worth less now, and they don’t want to make payments based on outdated values.”

If you’re one of the people that is still not convinced that walking away is a strictly business decision in which ethics and morals should not even enter the conversation, allow me to point you toward an excellent pair of recent papers by Brent T. White, legal professor at the University of Arizona: “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” and “Beyond Guilt in the Housing Crisis: The Morality of Strategic Default.”

Here’s a particularly compelling passage from the second paper that specifically addresses the lack of any moral component in the decision to walk away:

Think of it this way: when you got your cell phone, you likely signed a contract with your carrier in which you “promised” to pay a set monthly payment for two years. Let’s say, though, that two months after you sign your contract, the price of cell phone service drops by half – meaning that the same cell phone service you pay $100 a month for could be had for half of that with another carrier. You decide that you would be financially better off paying the early termination fee of $300, rather $100 a month for another 22 months for the same service that you can now get for $50.

Would it be immoral for you to break your contractual “promise” to pay $100 for two years, and elect instead to pay the early termination fee? Of course not. The option to breach your “promise” to pay is part of the contract, as is the consequence of breach – a $300 early termination fee. There is absolutely nothing immoral about exercising your option to breach, and you’d be financially wise to do so.

Though a mortgage contract is more substantial, and involves a home, it is simply a contract, just like a cell phone contract. Like a cell phone contract, a mortgage contract explicitly sets out the consequences of breach.

In other words, the lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. The lender then wrote that compensation into the contract. Specifically, the lender probably included clauses in the contract providing that the lender may foreclose on the property, keep any payments that have been made, and may opt to pursue a deficiency judgment against the mortgagor, if state law so allows.

By writing this penalty into the contract, and then signing the contract, the lender has agreed to accept the property, and (in most states) the option to pursue a deficiency judgment, in lieu of payment. Of course, even in states where they can, lenders frequently don’t pursue borrowers for deficiency judgments because it’s often not economically worthwhile to do so.

Nevertheless, that’s the agreement. No one forced the lender to sign that contract. Indeed, they wrote it. And, to be sure, the lender wouldn’t hesitate to exercise their right to take a person’s house if it was in their financial interest to do so. Concerns of morality or social responsibility wouldn’t be part of the equation.

In short, as far as the law is concerned, choosing to exercise the default option in a mortgage contract is no more immoral than choosing to cancel a cell phone contract. The borrower just has to be willing to accept the consequences – which, in the case of a mortgage contract, typically include being subject to foreclosure and, in most states, the risk of a deficiency judgment.

Banks and corporations like Beacon Capital Partners understand what Mr. White is talking about here, that a mortgage is merely a legal contract, not some sort of sacred vow. They will continue to do what is in their best financial interests, and you should too.

If you find yourself in a situation where you have run the numbers every way you can and the best decision for your family’s financial future is to walk away from your mortgage, don’t let a misguided sense of ethics lead you to the wrong decision. Continuing to pay a mortgage that is hopelessly underwater is throwing good money after bad. If you already made the mistake of buying a massively overpriced house, that doesn’t mean you need to continue paying for that mistake for the next twenty years when there exists a way out.

Please note that this post is absolutely not intended to be legal advice. If you are considering walking away, it is imperative that you seek experienced legal council that can fully explain the legal ramifications of strategic default in your specific state or municipality.

It has been a couple of years since we last ran a poll on this subject, so here’s a new poll:
Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

[Continue Reading - Part 2: Did Banks Act in Good Faith During the Bubble?]

The post On Misguided Ethics and Walking Away from a Mortgage appeared first on Seattle Bubble.

Christine Gregoire, January 2008:

“The only thing we have to fear is fear itself,” Gregoire said, quoting former President Franklin Roosevelt and referring to national recession fears. “It is a very frustrating time, I know, for you, and it is for me. … I’m struggling to get the message out to Washingtonians. The economy is strong. Buy your home.” (The Olympian, 01.25.2008)

“There is no good reason for a slowing of home purchasing in the state of Washington today” (Associated Press, 01.25.2008)

In the twenty-two months between the Governor’s declaration that “there is no good reason for a slowing of home purchasing” and the latest data on Seattle’s Case-Shiller home price index (November 2009), home prices have fallen 18%. Some “strong economy,” huh?

Just eight months later… Christine Gregoire, September 2008:

“This is the worst economic situation we’ve faced since the Depression.”
…
“When you’ve got tough economic times, it’s not the time to raise taxes,” she said. “Nobody is talking about taxes but [Dino Rossi].” (Seattle Times, 09.19.2008)

Gregoire was quickly proven dead wrong about how strong the economy was and how we should all go out and buy overpriced houses. In January 2008 she was obviously either lying or oblivious to the growing problem. Neither option seems like a quality we would want in a Governor.

But hey, at least she promised not to raise taxes in these suddenly “tough economic times.” Note that at the time of the above quote, Washington’s state-wide unemployment rate was 5.5% (seasonally-adjusted).

Wait now, what’s this?

Democrats in Olympia are getting ready to play right into their stereotype as lovers of taxes.

They are preparing for a final vote to overturn initiative 960, the initiative which requires a 2/3rds vote of both houses to raise taxes or in fact ANY additional revenue.

And which ALSO requires the legislature to send out an e-mail anytime a bill is proposed that even MIGHT raise revenue.

Those of us who subscribe to that list have received a steady stream of e-mails in the past month warning us of bills that will raise revenue, most of them sponsored exclusively by democrats.

By voting to suspend the 2/3rds requirement and to stop those e-mails, it looks like they’re not only are they hell-bent on raising taxes in a recession, but hell bent on keeping it secret. (Dave Ross, 02.10.2010)

So now, with the state unemployment rate at 9.5% (as of December), not only are Gregoire’s comrades in the state legislature planning “a steady stream” of bills to raise taxes, but they’re also taking measures to make sure that it is more difficult for the public to keep track of such actions. Again, Mrs. Gregoire was either lying or completely oblivious.

The important thing to note in this most recent development is that as Dave Ross (a former Democrat candidate for the US House) points out, the legislature could have suspended only the 2/3rds requirement portion of I-960. In fact that was what the state Senate originally did on Tuesday. However, that was not enough for them. They have instead decided to go the extra mile to spite the people of Washington and eliminate the legislative transparency portions as well.

I-960 has other provisions the people want. One is that Office of Financial Management must calculate the 10-year cost of every revenue-raising bill introduced. For every such bill, OFM must send out an e-mail to interested members of the public and the press of the costs, hearing dates, legislative votes and contact information for lawmakers. (Seattle Times, 01.13.2010)

Not only that, but the state Senate and House are pushing these votes through the Legislature in late-night and weekend votes, seemingly to keep things as under-the-radar as possible. The House takes up the bill tomorrow morning (Saturday), during the weekend break in the news cycle.

I will grant that this is only tangentially related to real estate—some of the tax proposals floating around Olympia include expanding the sales tax to include services, such as those provided by a real estate agent. However, the Governor has been so two-faced, and the state legislature so underhanded on this matter that this deserves to be mentioned.

If those in charge down in Olympia want to raise taxes on real estate services, soda, chocolate, or whatever—fine, let’s have that discussion. But why all the sneaking around and lying? Why not be forthright about your intentions and hold an open dialogue on the issue?

The post Olympia on the Economy: Liars, Fools, or Malefactors? appeared first on Seattle Bubble.

The post Merry Christmas! appeared first on Seattle Bubble.

Here’s an update to the post-WWII job loss chart, courtesy of Calculated Risk, in which I’ve added a mark so you can see where the “stimulus” was passed.

Wow, good thing we changed direction to the tune of $787 billion*, huh?

*(Actual cost: much, much more)

If there is any doubt about who the stimulus was really directed at saving, just take a look at an update to the stock market crash comparison:

Woo, go Wall Street!

Finally, speaking of bailouts for Wall Street and the banks: Congress Poised to Keep Homebuyers’ Tax Credit

The Senate and House are poised to agree on a compromise measure to extend unemployment benefits that also would expand a popular $8,000 tax credit for homebuyers, despite a recent government report on extensive mistakes and suspected fraud in the program.

The Senate might pass its version as early as Wednesday, and aides to Congressional leaders say the House could accept it this week, sending the bill to President Obama to sign into law. After weeks of partisan delay in the Senate, Democrats are eager to show progress before Friday, when the October jobless report is again expected to show high unemployment.

Super! So while people continue to lose their jobs, and absolutely zero of the underlying problems in the economy have been fixed, let’s pour another ten or twenty billion dollars into the housing market to try to keep prices propped up (i.e. – keep homes as unaffordable as possible) a little longer so our buddies in the big banks that got us into this mess can avoid taking losses.

Sounds like a plan to me!

The post Job Loss Crash Comparison Update / Stimulus Rant appeared first on Seattle Bubble.

In news first broken by local REALTOR® Marlow Harris, the NWMLS will apparently be adding two new ways to fine their members via a pair of new fields on the listing input sheets. In essence, new checkboxes have been added to the listing sheet: “buzz off Zillow” and “beat it bloggers.”

What this means is that sellers are now given the option of whether or not Zillow estimates will be allowed to appear on their listings that are posted on NWMLS member sites, and also the option of whether or not NWMLS members are permitted to blog about their listing. For the full official description of the two new listing parameters hit Marlow’s September 25th post for an excerpt from the NWMLS bulletin.

Obviously the point of the first one is obvious. Giving the potential seller an option to prevent Zillow and other “automatic valuation model” price estimates from appearing next to their listing is no doubt something that some sellers and agents have wished for for some time. Despite the fact that Zillow is a completely automated system based on sometimes incorrect inputs, and the company openly admits that their estimates should not be treated as a gold standard, some sellers and seller’s agents have convinced themselves that if a Zillow estimate displayed on the same page as their listing is lower than their asking price, it’s Zillow’s fault if nobody wants to buy their house.

The second option is actually opening up their rules just slightly, as they previously had a blanket prohibition on NWMLS member agents blogging about any listings that were not your own. That’s what the $50,000 fine slapped on Redfin in 2007 was all about. With this new checkbox, sellers will now be able to “opt-in” to blogging.

Not surprisingly, the anti-Zillow move has stirred up some in the industry, especially among those that have had it in for Zillow since day one. Since Zillow is not a member of the NWMLS themselves, insiders there insist that the new rule will have little effect on their business. I have pointed this out when people have asked in the past, but this is a prime example of why I have no interest in Seattle Bubble becoming a member of the NWMLS, even though it would gain me direct access to their database for some prime number-crunching.

In an amusing twist on the whole thing, Marlow followed up her post on these new rules with another angle on the subject yesterday: Can new technology make some MLS rules unenforceable?

It could be that technology will trump all of these new NWMLS rules, and blogging/comments/AVM restrictions will become ineffective and impossible to enforce with the new Google Toolbar application called Sidewiki.

…anyone who installs the Sidewiki will be able to add comments to your real estate webpage, including individual property pages that you may have created to help market your properties.

There is no “opt-out” tab, no way to eliminate the sidebar comments, no way to edit out objectionable material, porn, spam links, comments on the personal character of the sellers or the agent or the home or the neighborhood.

It seems to me that the NWMLS rules are set up to attempt to restrict and stifle as much conversation about listings as possible in a misguided attempt to give the seller absolute control over how their home is “marketed.” Unfortunately for the NWMLS, fancy technology or not, people are free to talk about home listings in real life in whatever way they choose.

If I wanted to start a weekly tour of the most overpriced homes in Seattle, where we drive around town and gather outside homes for sale through the NWMLS and mock the granite countertops and other such faux-luxury “upgrades,” the NWMLS can’t stop me. And once you move the conversation online, it becomes even less possible to control it.

If I wanted to start a website that provided a searchable map of every house for sale on the market, linked to open forum threads on every house where people could say whatever they want about the agent or the home or the neighborhood—again, the NWMLS couldn’t do a thing about it.

The NWMLS can certainly exert control over their members by levying ridiculously large fines for seemingly innocuous conversations, but in my opinion, the more they attempt to stifle and restrict the free flow of information and ideas relating to their precious listings, the more they will encourage another, more open competitor to step up and make their entire system obsolete.

The post Can the NWMLS Control Online Conversations About Listings? appeared first on Seattle Bubble.

First up, we’ve got the National Ass. of Realtors pushing hard on their members to “Write Congress Now”:

The National Association of REALTORS® is calling upon its 1.2 million members to urge Congress to extend the successful homebuyer tax credit into next year.

Since its inception earlier this year, the $8,000 first-time homebuyer tax credit has brought 1.2 million new buyers into the market—350,000 of whom would not have purchased a home without the credit, according to NAR. The credit is due to expire November 30.

As Calculated Risk has been pointing out, if the NAR’s numbers are accurate, that translates into a cost to (future) taxpayers of over $43,000 per additional sale (that would not have happened anyway). What a deal, right? Plus, how many of these “additional sales” are sales that would have taken place anyway in 2010 or 2011 (i.e. – borrowed demand)? I’d bet quite a few.

Here’s some more from Calculated Risk:

…if we actually look at the numbers, this is a poor choice for a second stimulus package.

…the program cost is about $43,000 per additional buyer. Very expensive.

Now the National Association of Home Builders estimates that expanding and extending the credit through 2010 would generate 500,000 additional sales at a cost of about $30 billion. So this is approximately $60,000 per additional house sold. And I think the cost will be much higher.

REMEMBER: Many homes will be sold to buyers who would have bought anyway without the credit. These buyers will still receive the credit. This year almost 2 million home buyers will claim the tax credit, but only 350,000 were additional buyers. That means this was a poorly targeted tax credit since so many people receive it who would have bought anyway.

Meanwhile, even as the NAR is urging their members to encourage Congress to extend the credit, rank-and-file members seem to have reservations. Check out this post from a Realtor on ActiveRain (basically MySpace for real estate agents):

While I am glad that the tax credit has probably helped stimulate the real estate market and the economy some, I also wonder about the longer-term effects of this so-called “stimulus” money on this nation’s deficit and national debt.

I would rather see the money in the hands of the people as opposed to Wall Street fat cats or failing banks though. However I also hear stories on the news and elsewhere of people using the $8,000 to pay for frivolous items. Kind of a windfall shopping spree. I also don’t like mortgaging the future of this country by giving free money to people while increasing massive debt that may end up crushing our nation one day (if it hasn’t already). Kind of “socialized” real estate buying if you can call it that. Take from my pocket and put it in yours.

The comments to that post (pretty much entirely left by real estate agents) are also an interesting read.

At this point, I’m not even convinced that extending the existing credit will even have much of an effect. Everyone knows that the current credit expires at the end of November. People who were “on the fence” about buying for whom the tax credit was enough to spur them to action are already dashing to get their purchase in before the deadline. How many people are really out there thinking, “you know, I wasn’t planning on buying a house at all, and the 2009 tax credit was not enough of an incentive, but if they would just extended it into 2010, I would definitely jump in there and buy!” Probably not very many.

So what do you think? Should the tax credit be extended? Is it likely to be extended? Why or why not?

The post $8,000 Tax Credit: To Extend or Not to Extend? appeared first on Seattle Bubble.

Jane Kim of the Wall Street Journal wrote an excellent article in this past weekend’s issue regarding Wall Street brokers (selling investments) being placed under Fiduciary standards in dealing with customers.

Currently, Wall Street brokers are held to what is termed “suitability standard,” which is a more lenient standard than that of a fiduciary.  In contrast, Registered Investment Advisers have operated for a long time under the more stringent “fiduciary” standard—a legal standard that compelled them to act in the best interests of customers.  The proposed higher standard forces disclosure of potential conflicts of interest (i.e., if they make more money off of an investment offered vs. others) and promotes recommendations of investments that may be less costly to the consumer and more tax-efficient.

While Wall Street struggles with reform as part of its regulatory overhaul, the mortgage industry has also implemented reform by introducing a similar “fiduciary standard” for mortgage brokers and loan officers.  Prior to this reform in the mortgage industry, those who originated loans had no obligation to work in the best interest of their customers.

“In most states, mortgage loan originators still have no fiduciary obligation to work on behalf of their client’s best interests. The state of California mandated fiduciary duties for only mortgage brokers even during the height of the real estate bubble and Washington State added fiduciary duties for mortgage brokers and loan originators in 2008 but this still leaves consumer loan company loan officers (LO’s) and bank loan officers with more of a salesperson’s status.  I’m sure there are some LOs who work at a bank, credit union, or consumer loan company (they like to say “mortgage banker” or “correspondent lender”
because it sounds better) who do regularly look after their clients’ best interests but this is just mere subjectivism.”

– Jillayne Schlicke,  Founder of the National Assn. of Mortgage Fiduciaries

[post continues, click below]
Much of today’s economic problems are directly associated with lending-gone-wild.   Countless cases of fraud both locally and throughout the country have been exposed resulting in massive losses for lenders and consumers, even those caught innocently in its wake.

One of the questions unanswered: How can the mortgage community effectively work the way a fiduciary standard is intended when the current lending structure is one in which incentives provided to the loan originators seem to undermine their ability to work in the best interest of their client?

For example, if you have two perfectly credit worthy borrowers, gainfully employed and with similar financial resources that are purchasing a home, it is common that you can have one borrower obtain a loan interest rate at about 1/4 to 1/2 percent less than that of the other borrower.  Sometimes the spread may be larger.  Why?  It may have to do with incentives commonly called yield spread premiums or rebates from the lender paid directly to the mortgage broker/loan officer for originating the loan at a specific interest rate.  This is retail lending. There was nothing wrong with this system when it operated under the prior “salesperson” framework where a Fiduciary duty was absent.  Today, the Washington State licensed loan originators, working under a Fiduciary standard with the incentives at hand, may have an inherent conflict that didn’t exist before.  I find this terribly ironic.

A loan sold to the consumer at 5.0% interest rate may provide a payout/rebate to the loan originator of only .125% (1/8^th of one percent) of the loan amount but a loan sold to the consumer at 5.25% may bump that paid incentive to the loan originator up to .5% (1/2 of one percent) of the loan amount (note:  the rebates are earned fees over and above the commonly standard 1% fee charged).   If the interest rate is sold at 5.5%, the incentive provided for the loan originator may be even greater.  The checks and balances to this scenario is that consumers shop and therefore a loan officer must compete in fees and rate or they will have little chance of making the loan.  In addition, there is no way of knowing what rate will be offered to the consumer at loan application including any rebate back to the loan originator until the loan program and rate is locked.  Rates can and do change daily and even several times within the day.

“During the bubble run up and predatory lending days, loan originators would routinely lowball their Good Faith Estimates or simply not disclose this rebate existed. At closing the consumer would see the higher fees but have no time to object.” – Jillayne Schlicke

What is the solution?

It could be that a loan originator could guarantee their rate and fees (subject to restrictions and conditions) on the new Good Faith Estimate or GFE (coming this January 2010) that has been recently overhauled by HUD to provide a clearer understanding of the fees and loan program that is being offered.   There has been push-back resistance of this new Good Faith Estimate by the lending industry, and some of it for arguably good reason.   According to Jillayne Schlicke, the National Association of Mortgage Brokers (NAMB) has lost this round to influence a change in the newly proposed GFE.

Many in the lending industry have elected to avoid the disclosure of yield spread premiums (shown on a Settlement Statement) by working at a company that is licensed as a consumer loan company or by working at a bank.  In other cases, the loan officer may work under a correspondent lending company or other similarly structured business model.  Under these business models the loan is originated and closed in the name of the lending firm where the loan officer works and shortly after closing (almost simultaneously) the loan is sold to an investor such as Wells Fargo or Chase Bank.  This business structure avoids disclosure of any rebates or yield spread premiums and, if the loan was brokered and not closed in the name of the correspondent or consumer loan company name, the awkward situation when a consumer may ask (while signing their closing papers) what the separate figure or YSP disclosure is on their Settlement Statement.

Working within a framework of a “Fiduciary Standard” is not an easy task because of so many competing interests, potential conflicts of interest and regulatory standards that may or may not be practical in all situations.   Jane Kim, in the article she writes in this weekend’s edition of the Wall Street Journal summed up the problem facing Wall Street brokers well:

“Trying to define what constitutes a fiduciary duty is like trying to define the duty to not commit fraud—any application of it depends on the client’s particular facts and circumstances.”

New Era?

On January 1^st of 2010 (the date that HUD begins requiring use of the newly updated Good Faith Estimate document), it could be new era when a loan officer says to their client, “I charge “x” amount to make your loan and when I lock your rate if there is a rebate or yield spread premium excess beyond what I charge in aggregate, you will receive the benefit of that money in the form of a credit or partial credit to reduce your closing costs.  We won’t know that that amount is until your loan is locked.   I don’t control what those rates and rebates offered will be.  The ability for you to float your lock and play the market may also work in your favor and also work against you if rates rise.  Together we will communicate to make sure we obtain the very best terms for you.”  That would foster long-term business relationships like no other.

To conclude, I don’t think there has to be over-concern in the lending community with regards to the new Good Faith Estimate and properly disclosing earned fees.  From my perspective, a lot of the uproar and concern by the mortgage broker community is energy misplaced.  Consumers have no qualms about paying for services provided they know what to expect and can appropriately budget for their expenses if they are informed in a transparent way.  Since late 2003, when our escrow office opened, there have been only a select few cases where clients have chosen not to close a loan because of confusion over fees or under disclosed matters that have come to light after receiving their Settlement Statement.  I would argue that in those few cases, had the consumer been communicated with properly and all earned fees were explained in a manner that made sense, the loans would have closed and everyone would have been happy, including the escrow and title firms that are paid only if a loan closes.  There is nothing more frustrating for title firms and escrow companies closing transactions than to have a client across the table walk away because of rates, fees or “unknowns” that take the consumer by surprise.

(thanks goes to Jillayne Schlicke for collaborating with me and editing this post)

The post Fiduciary Standards in Lending and on Wall Street: Can it Work? appeared first on Seattle Bubble.

The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an “ownership society” and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities.

The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.

Analysts say the approach takes a wrecking ball to Bush’s heavy emphasis on encouraging homeownership as a way to create national wealth and provide upward mobility for low- and working-class families, especially minorities. Housing and Urban Development Secretary Shaun Donovan’s recalibration of federal housing policy, they said, shows that the Obama White House has acknowledged that not everyone can or should own a home.

So far, so good. I’m not personally a big fan of most of Obama’s policies to date, but this is a concept I can get behind (in principle, at least). The federal government played no small part in the inflation of the bubble with policies that encouraged home ownership above all else, even well before the Bush administration.

One quote in the article really grated on me, however:

“I’ve always said the American dream should be a home – not homeownership,” said Representative Barney Frank, chairman of the House Financial Services Committee and one of the earliest critics of the Bush administration’s push to put mortgages in the hands of low- and moderate-income people.

Pardon me? I don’t think so.

Barney Frank in 2003:

So let me make it clear, I am a strong supporter of the role that Fannie Mae and Freddie Mac play in housing… I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals.

Barney Frank in 2005:

You’re not going to see the collapse that you see when people talk about a bubble and so those of us on our committee in particular will continue to push for home ownership.

So please, spare us the “I’ve always said” BS, Barney.

Hat tip: Market Ticker

The post Federal Government Shifting Focus to Rentals appeared first on Seattle Bubble.

I’m not convinced, but rather than just dismissing these predictions out of hand, I thought I’d try to compile a list of factors for and against the notion that local home price drops are over.

Seattle-area home price drops are probably over because:

• King County’s single-family median price rose over $30,000 from March to June
• Pending sales are up around 25% from a year ago.
• Closed sales are up slightly from a year ago.
• Inventory is down around 20% from a year ago.
• There’s a lot of wealth in the Seattle area.
• Mass psychology could suddenly turn and drive up prices again (i.e. – Robert Shiller’s Animal Spirits)

Seattle-area home price drops are probably not over because:

• Median prices can be a poor indication of actual short-term home price movement.
• Foreclosures are through the roof and still rising.
• Vacancy rates are still climbing.
• Many pending sales are turning out to be illusory.
• On-market NWMLS inventory excludes large amounts of new construction and bank-owned inventory.
• Sales have been rising in San Diego for over a year, but prices still fell another 20%.
• Local employers are cutting thousands of jobs.
• Financing requirements are tightening.
• Interest rates are rising.
• Thousands of empty lots sit ready to build on the slightest hint of a recovery.
• Virtually none of the excess debt in the system has been cleared.
• The $8,000 tax credit expires in November.

Personally I’m not convinced that home price drops are over, despite the slight upticks we’ve seen this spring and early summer. There are just too many factors at play that continue to put downward pressure on home prices, and too few factors pushing them up.

Of course, it’s entirely possible that I may have missed something, so let’s hear from some of you who believe that price drops are mostly over. What am I not considering? What’s your best argument for the claim that the bottom is in? What about those of you that think prices will continue to fall even further—have I left anything out of that side of the argument?

Let’s hear the best comprehensive arguments from both sides, so we can come to an informed conclusion.

The post Are Home Price Drops Around Seattle Mostly Over? appeared first on Seattle Bubble.

Reuters, June 22:

Two U.S. Democratic lawmakers want Fannie Mae and Freddie Mac to relax recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery, the Wall Street Journal said.

SeattlePI.com, June 25:

Are new appraisal rules holding back the nation’s real estate markets?

Lawrence Yun, chief economist for the National Association of Realtors, sure seems to think so.
…
“Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” Yun said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

What do you suppose folks like Laurence Yun mean when they use the phrase “housing market recovery”? Given the types of things they are objecting to, I’m inclined to conclude that what they really mean by “housing market recovery” is a return to the days of double-digit appreciation, frenzied buyers engaging in bidding wars and waiving inspections, and flippers snatching up pre-sales to turn a huge profit once construction completes.

Newsflash folks: It ain’t gonna happen.

You can cry all you want about the new tighter standards that are slowly but surely coming online in lending, appraisals, and other aspects of the home-buying process that were allowed to get wildly out of control during the bubble, but even without these new standards, we’re not likely to see a return of a real estate bubble in our lifetimes.

Too many people have been burned—and continue to be burned—by the rampant dangerous excesses of the housing bubble for things to just ramp right back up into an out-of-control mania again after just a few years of contraction.

Tighter regulation is just one of the necessary consequences of the housing bubble. Real estate professionals need to spend less time complaining and more time finding ways for their businesses to thrive within the framework of a housing market in which people buy reasonable homes, for a reasonable amount of money, as a place to live not a super-leveraged jackpot mega-investment.

The post Boo-Hoo: Tighter Standards Help Kill Chances of Bubble Returning appeared first on Seattle Bubble.

Debt is not a good product

I just had a great hour-long phone conversation with an old friend, Will Dana (now editor of Rolling Stone), who has strongly encouraged me to come up with one-liners that tell the truth about the economic/banking fiasco – but that do it in almost zen-koan fashion. He thinks this might be the only way to penetrate ongoing confusion and resistance to moving beyond our falsely held assumptions about money and business.

So, I figured I’d start with the generally unrecognized fact that finance is America’s biggest industry – our biggest business sector. How does banking make its money? In short – over-simplified, yes, but ultimately true – interest. It sells debt. And, like I’m arguing in my book, this whole scheme was arranged by 14th Century monarchs as a way of making money by having money, rather than providing value. So “Debt is not a good product” helps encourage that line of thinking, sound-byte style.

I like this idea. Let’s apply it to real estate. Here are my entries:

• Your house is not an investment.
• Falling home prices are not abnormal.
• House debt is not wealth.

I’m sure some of the commenters here can do better. Let’s hear it.

[Update]
Great comments, everyone! My favorite one-liners from the comments (so far):

• If you can’t pay cash, you can’t afford it. – Scotsman @ 17
• Debt and interest steal choices from a future that is uncertain. – Scotsman @ 17
• A recession is a terrible thing to waste. – Greg Perry @ 25
• Declining home prices creates affordable housing. – Dave0 @ 32

The post Economic and Real Estate Truth One-Liners appeared first on Seattle Bubble.

San Diego, CA
Central San Diego County SFH resale median: $300,000
Central San Diego County SFH new construction median: $355,000
Central San Diego County SFH + condo median: $270,000
March ’09 San Diego metro area unemployment rate: 9.3%

Notes: All King County home price info via NWMLS, San Diego home price info via DQNews. All home price info for March 2009. Unemployment data for Seattle via Workforce Explorer, San Diego via Workforce Partnership. No, I don’t want to move to San Diego—I personally like the rain. This post is an attempt at humor, intended to lighten up the mood on a rainy day.

The post Public Service Announcement: Seattle vs. San Diego appeared first on Seattle Bubble.

Today the Fed announced a significant plan to purchase an additional $750 Billion in mortgage backed securities from agencies Freddie Mac and Fannie Mae. The proposal is hopeful in that it will stimulate the housing market and refinance business by producing exceptional mortgage rates lower than where they are today.

Will this impact the markets in a meaningful manner that will stimulate home sales and refinance activity? I believe it may and one reason is this:

A stumbling block to overcome in refinancing relates to the challenge of finding viable sold comps to support favorable LTV’s (loan to values) needed to move forward with the refinance. An enormous number of existing homeowners have two mortgages that encumber their homes. I’m told of appraisals that have comments from the appraiser indicating specific market areas have essentially stalled in home sales along with falling home values. This produces LTV problems and can derail a refinance transaction. One alternative is for high LTV households to consider FHA which has higher LTV guidelines.

With that in mind, the additional $750 Billion in stimulus is meant to drop the rates to such attractive levels that it will encourage home sales and refinance activity. The sales going forward will theoretically place a building block or foundation for holding values at a point that will at least slow or level off further declines. This is a positive development for those both refinancing and for sellers, if it can take root. Whether or not it will take root remains to be seen due to many other factors.

Have a great day,

S-Crow

The post Today: Fed announces $750 Billion to purchase Freddie & Fannie MBS. appeared first on Seattle Bubble.

I’m really not convinced Marlow Harris of Coldwell Banker Bain feels that Seattle Bubble is all about fear mongering and scaring the public away from buying a home.  I know she mentioned it, but I don’t believe it.   Marlow and many other agents and loan officers have not had a chance yet to meet several of the commentator’s and readers as I have.  I think most agents and brokers would find that the readership at Seattle Bubble and those active in looking to buy, sell or refinance are very similar to, well, any other client they’ve ever had—pretty well rounded in housing issues.

You see, I have tangible evidence to the contrary that Seattle Bubble is fear mongering.  In fact, I have referred numerous Seattle Bubble readers to loan officers and agents.  Some have worked out, some have not.   When is the last time an agent or loan officer generated business from title and escrow referrals?   They do at Legacy Escrow Service.    As I recall, we even had one transaction where a referred Seattle Bubble reader obtained financing from Rain City Guide’s Rhonda Porter, who was gracious to turn around and have our office close the transaction.  This is what goes on behind the scenes. One client who bought a home remarked on the way out of my office that he really enjoyed the discussions at Seattle Bubble, but felt it was the right time for his family to purchase.  You can’t argue with that.  It is a very personal decision to buy.

Why does Seattle Bubble inherently rub the real estate community the wrong way?

• Gives a counterpoint to claims by NAR and others in the real estate community both nationally and locally.
• Provides open data, opinions and …open for criticism.
• From time to time points out miscues, miscalls, and gaffs from local professionals  and economists.
• An amateur citizen is providing data in a meaningful manner, more comprehensive than much of what I’ve ever read by agents and local brokerages.
• Key:  Tim Ellis was sounding the alarm, among other minions, myself included that we were in a Bubble.   When 2/3rd of your purchase business was financed 100%, it was pretty obvious to me.  For example, many in the real estate business remarked that Seattle was not in a real estate bubble.   We keep hearing, for example, that all real estate is local.  We’ll, tell that to the several thousand local WaMu employees that will lose their jobs by year’s end.  Where were most of WaMu’s loan’s originated?  Outside of Washington State.
• Blogging was not around during the last major correction.  Information is now instantly available for dissemination.

How has Seattle Bubble helped consumers?

• Tim Ellis has built his community where consumers are residing.  And it’s growing as he evolves the blog.
• This blog has, at minimum, given consumers pause prior to entering into a purchase.  For some, it may have saved them tens of thousands in possible financial losses if they are buying with a short ownership horizon or were to suddenly have to move for whatever reason.  In a declining market, you can’t put a price tag on that.

• Likewise, the blog has warned sellers, to their benefit, that they should not sell if they don’t have to—this has to be a tremendous gift to the local real estate establishment in keeping inventory somewhat stable. We’ll see how inventory goes after the Holidays are over.
• Earlier this year I warned about the advantage of reduced interest rates.  It helped several save money by refinancing.   A few even sent me thank you’s.  One even sent me a gift certificate (thanks Angie!)

There are probably countless examples from the readership where Seattle Bubble has been helpful.  We are all rascals at Seattle Bubble, myself included, but my commentary and others here and at Rain City Guide is never intended to hinder the real estate community, put off sellers who believe the website is hurting their chances at selling,  but to shine a light on what goes on in the business in a public way, so that professionals in the business can become better agents, better loan officers and better escrow owners.  Much of this is to help build a foundation on solid ground as opposed to the dry-rot we have now discovered was under our feet.

Those frustrated at this blog, the market or their listing agent, should direct their frustrations at those who perpetrated fraudulent transactions that impact communities across the country.  Perhaps they should look in the mirror themselves.  They should direct their frustration at those loan officers and lenders who engaged in putting people into toxic loans, many times because the yield spread premiums “were so good.”   Direct your frustration at the ratings agencies, Freddie and Fannie and their corrupt leadership in recent past years or the excessive greed that had a choke hold of CEO’s souls.

Nobody wanted this result, but collectively, we are all responsible for this mess.   A frank conversation I had with a very long standing managing Sno. Co. real estate Broker this past Friday was almost therapeutic for me and the Broker—the Broker spoke of the real estate market correction as a “crash.”  That Broker get’s it.

Nothing discourages me more than seeing the financially destructive (self inflicted or not) nature of this correction destroy families and marraiges of those whom we have worked with over the past 5 yrs.  It really sucks…and I’m constantly trying to think of ways to get title and escrow people back to work, even part-time.   Perhaps I’m naïve.

The post Seattle Bubble: Hindering the Market? appeared first on Seattle Bubble.

Tales of homeownership:

If you are on a septic system, don’t drive over a waste line with a 10 ton truck loaded with gravel.  I did and just learned that PVC waste lines will indeed pancake.  The result is rather disgusting.  – SCrow

No one is lending money:  that is false.

Although the pace of transactions is meaningfully lower than what we have seen, the idea that no-one is lending money is not the case.   Our office is closing routine sales, closing short sales and refinance transactions.  The difference is that closings are taking longer, authentic underwriting is taking place and FHA is appearing to be very much the type of financing people are using.   And, yes, borrowers are asking for and receiving concessions.

Some of the loan officers (still in business) we have worked with during the last 4-5 yrs. have jumped from one firm to the other that is FHA approved.  FHA is the name of the game right now.

In the area in which I live (Snohomish and vicinity), we have had several sales take place over the last month  or so, and, among those, a couple properties closer to where I live sold for $750K and up.   So, there are some people who are snooping around and finding very good values for the current market we are in.  My guess is that if you asked, “why in the world would they buy in this market”, they would reply, “talk to me in 15 -20 yrs.”  And that is one of the primary real estate mindset shifts I’m discovering:  few are those who are not looking at a long-term horizon in their purchase.

There are some absurd decisions being made

The unique view from the escrow seat allows for a lot of discussion in the S-Crow household, some of it funny and some of it just remarking about how foolish some people have been.

For example, a seller purchased a home within the last year to flip it.   The seller made improvements and put it back on the market.  The seller then obtained an offer and the transaction moved towards closing.   Once escrow disclosed proceeds, the seller evidently did not like the net proceeds after expenses:  not enough (code for potential paper loss).  Buyer is ready to close and the seller refused to sign closing documents.  You’d think that a seller would know within a small range what the proceeds would be before putting the home on the market and wasting everyone’s time and money.  Result: highly probable legal action moved the seller to sign.

There are a number of people in our society (save the politics for another blog) that just refuse to take personal responsibility for stupid personal financial decisions.  This is an issue that Mrs. S-Crow and I argued a lot over in months past.  I’m starting to come to the conclusion that her analysis has more merit than my “it’s not all the borrower’s” fault mentality circulating in my head.  Some borrowers did put too much trust in the people guiding them along the way.  But, in the end, their signature is on the Note and Deed of Trust.

We are at the bottom, locally:  I don’t think so.

I have no data to back this up, but my anecdotal evidence of closings is the best I can come up with.   Based upon what I see in the refinancing realm over the last three quarters of this year,  I see some existing homeowners delaying the inevitable.   Refinancing costs thousands of dollars and there is a pervasive thought (I don’t know where some people get their information…either they are terribly not paying attention or someone is giving them false hope, which in many cases is more dangerous and damaging than being honest about where the chips are falling) that the market will turnaround within the next year or two.  Possible?  Anything is I suppose.  Likely?  Nope.

Real scenario:  It is not realistic that a borrower can purchase a home late in 2006 for $500K+,  now owes in the realm of $540K on the property and think that in two years time (2009-2010) they can have an equity gain to pay routine closing costs.   And this is in a development that was birthed in 2005 that has already experienced a foreclosure and another distress sale (as so disclosed by the very borrowers that were signing their closing documents!).   It is a classic example of a potential, not to distant, distress sale staring at me in the face.

Are the closed sales-price-to-list-price ratios accurate?:  a question for local agents.

For example, if you have a listed price at the time of the sale of $100K and the sale closed at a price of $95K, you would have a 95% list-to-sales-price ratio.  This is used a lot by agents to gauge how well priced a home was and another metric to show that homes in an area are selling on average, for example, about 97-99% of the list price.   Does the NWMLS use the ORIGINAL list price in this metric or the last posted list price?

What’s up with all the Steve Tytler negativity?

Steve was was of the severely few locals in the business of lending that was reporting publicly that we were going to experience lower housing prices.   Straight shooting integrity is what we need in this industry.

Questions about transactional things?:   Just drop me an e-mail as many recently have and in the past.  I may not have all the answers, but I’ll do what I can.

- S Crow

The post In the trenches update appeared first on Seattle Bubble.

I’m not personally obsessed with catching the very bottom, but I also am not interested in buying something less than ideal that I can barely afford based solely on a false notion that prices will keep rising, only to have them drop another 10-20%. I outlined one possible strategy in this post, where one would wait for three years or 6 consecutive months of price increases, whichever comes first.

Reader Sniglet pointed out a possible flaw with this strategy in yesterday’s comments:

Personally, I would suggest waiting for more than 6 months of consecutive price increases before buying, as Tim suggested (if you are trying to time the market, and buy at the bottom). If you look at Japan’s price decline in the ’90s there were some periods where prices seemed to have stopped dropping for about a year, but yet the decline continued anyway.

One thing that is consistent at all housing downturns is that it takes years for prices to really pick up significantly. My advice would be to wait until it looks as if prices haven’t declined anymore for a couple years. There is certainly no rush to jump in once a market has hit bottom, so patience is the best policy.

There certainly exists the possibility that there will be “false bottoms” that last longer than six months. How long you set the horizon is really a matter of your personal assessment of the risk.

What it really comes down to for me is this: “can I afford a decent house that I will be happy with long-term at today’s price?” If the answer to that is yes and I am comfortable paying today’s price knowing that I could possibly get a better deal by waiting, then I’ll probably buy anyway—bottom or not.  For my family, I expect that time will probably come around 2010, even if prices are still declining.

So what is your strategy? Are you waiting for a specific price point, or are you more interested the overall direction of prices? Or perhaps something else entirely? Let’s hear your suggestions.

The post What’s Your Housing Bust Strategy? appeared first on Seattle Bubble.

Financially speaking, I have to say I can’t really buy that. I’ll use a somewhat extreme scenario to illustrate why. Let’s say you’ve got a 30-mile commute from Sultan to Redmond (one of my former coworkers did that—yuk), and that your car gets a decent but not great 25 miles to the gallon. At $2.50 per gallon, you were spending $30 a week (~$120 a month) on gas for the commute. At today’s $4.00 per gallon, that is up to $48 a week (~$192 a month), a difference of $72 per month, or $900 more per year.

So lets say you decide to move in closer, to Kirkland or Woodinville. Now your commute is just 6 miles, and a week’s worth of commuting costs you just $10, saving you a grand total of $1,900 per year.

That doesn’t seem like nearly enough of a price difference to make up for the much more expensive cost of living close-in. It’s certainly possible that most people don’t actually do the math, and make irrational decisions based on their gut and that “pain at the pump” feeling, but mathematically the decision to move closer just because of higher gas prices doesn’t really make sense.

To me, what’s far more important than gas prices is commute time. I personally would never want to live much further away than about a half hour from my place of work. Time with my family is more important than having a huge house that I never get to spend any time in.

What about you? Do gas prices really figure into your decision about where to buy, or are things like commute time, neighborhood, schools, etc. more important?

The post Gas Prices & Home Buying appeared first on Seattle Bubble.

I spoke recently with a client of ours who is an electrician and the individual mentioned that there were recent incidences of builders either not paying or delaying payment for services.

• How are fuel prices influencing your small business?
• Has work dropped off in a noticeable manner?
• Are bid requests still robust?
• Have you been asked by builders or Gen. contractors to drop your prices as a sub?
• Are you getting paid in 30, 60, 90 days or longer?

For homeowners that are doing remodeling or home improvements this Spring/Summer season:

• Are you scaling back your projects?
• Are you going to do more work yourself?
• Are you receiving more bids, more promptly?
• How far out are contractors scheduling your projects?

Thanks,

S-Crow

The post Contractors & Tradesmen APB: what’s going on in the trenches? appeared first on Seattle Bubble.

Last night, I pulled into Top Foods to get some milk and other things for my kids lunch. On the way, adjacent to the store are a Chevron and Shell gas station. One gas price sign was illuminated, the other darkened, but both stations were open. Both stations increased their prices to a $4.03 9/1Oth. per gallon for regular unleaded. We finally hit over $4. in Snohomish. Diesel? $4.89/gal! I have a John Deere tractor to help mow my lawn and do other yard work. Takes Diesel. Does anyone know the per capita ownership of trucks in Snohomish Co? It is fairly high. A lot of F-250′s, SUV’s, Chevrolet Duramax Diesel’s. Lot’s of big rigs. I recently read that Ford was ramping down their SUV and Truck lines this July for a period longer than normal due to poor sales (evidently they stop the production each July for re-tooling purposes).

Ok , I’m now a bit grumpy pulling into Top Foods. I pick out four Gala Apples, my two gallons of milk and a couple other things.

I look over at what a gallon of Minute Maid Juice is going to cost. I do a double-take. I can’t believe it. $7.30! Seven dollars and thirty-cents!

I still can’t believe it when I’m typing this. I said outloud, to be overheard by two other patrons in the isle, “this is insanity!” For a basic fruit tray, they want $24.99! Do you think an agent in their right mind is going to buy a basic fruit tray at that price for their broker’s open? No chance.

Lawrence Yun, I have a message for you: the idea of your recent comment suggesting we are not in a recession is beyond me. Soon, you will be parody on Saturday Night Live. I’m still waiting for our 30-40% increase in median prices for 2007.

My father-in-law put his two kids through college and law school at Pepperdine. He is still working (driving local routes throughout Washington delivering potatoes, hay, apples etc…) although he retired recently from BP-ARCO doing of all things (for 30 plus years), delivering our fuel! I asked him what it takes to fill his big-rig up and he says about 15. That’s $1,500. But, he says he never keeps it full. Why? People are siphoning.

By the way, those Gala Apples….all four of them……a sliver under $4.00!!

The post I finally said it. Twice. And loud enough to be overheard at the grocery strore. appeared first on Seattle Bubble.

So much could be said about this issue. One of the most fascinating developments to see unfold and the one theme I keep coming back to is how powerful blogging has been in shaping the mind-set of the public when it comes to the real estate market, both nationally and locally. Not only is it powerful in the psyche of the buying or selling consumer, but also to those who actively work in real estate.

For example, there has been an enormous effort within the real estate community to combat negative housing sentiment. It is understandable. But, I also think that the effort serves two purposes. First, it is to combat a deteriorating market perception for the public. Second, it is to thwart the potential fallout from within the rank and file who work in the industry.

What’s so different about our market correction today than last time?

• Access to information.
• Bloggers vs. NAR. (real estate industry unable to counter bloggers using both video and blogs)
• Bloggers vs. Newspapers.
• Bloggers breaking down data.
• Bloggers sharing news or breaking news.

Rather than have circa 1990 technology to obtain information regarding all things real estate related, today we have what I consider information overload. I can’t keep up with it myself. It’s overwhelming.

Zillow.com, for my money, was instrumental in removing the price curtain from the real estate machine. This forced an entire industry to change or adapt. While people will argue about current value accuracy or Zestimates, the compelling number of immeasurable value is the disclosure of what a property recently sold for. Armed with this information, consumers can make decisions along with their real estate agent as to how to best position offers or whether or not purchasing is best for them at a given time.

In a classic case of blogging for mind share, I see countless references by real estate agents locally and around the country arguing to “put the market into perspective, only 1 percent of all outstanding mortgages are in default.” Quite swiftly, a contrarian blogger responds, that’s “good news, because if it were more than one percent, I can’t imagine how bad things would be. Bear Stearns would be only one of scores of financial players to collapse, and who knows, maybe we will have more to come?”

To conclude:

If contrarion bloggers on Seattle Bubble find that the market has shifted in a positive direction, it could very well be that those very contrarions will lead the charge to a swift and meaningful recovery, one of which could rival anything we’ve seen to date.

And then, The Tim will have a conundrum on his hands. What then to do with the “bubble” part of the title.

S-Crow

The post The most valuable real estate is that of the mind: bloggers are having an impact. appeared first on Seattle Bubble.

Appraisers, please chime in.

Fake Scenario: A home is sold as a short sale. It was purchased with 100% financing (1st & 2nd) just 13 mos. ago. for $990,000. The short sale is for $610,000. It has now closed.

I would like to ask appraisers what the impact is on immediate neighbors? What is the impact on comparable sales (both purchases and those who may try to refinance)? Here are some possible outcomes:

• No impact on neighboring values.
• Modest impact on neighboring values.
• Will clearly set the bar for sales in the neighborhood.
• Will show the home may have been purchased fraudulently.

Several short sale transactions our office has been involved with are homes that are only three years old or newer. This must have an impact on listings and sales in newer developments. What will this mean to existing homeowners in newer developments where short sales exist?

————–

Thanks and everyone enjoy the great weather! See you down at Safeco Field!

The post Short Sale Impact on neighbors: Appraisers please advise. appeared first on Seattle Bubble.

Stare Down is when you and your brother or sister touch nose-to-nose, staring into each other’s eyes to see who blinks first and loses the game. In real estate, there are times when questions arise that create that same type of tension. I’ve written over at Rain City Guide about a variety of issues that deal with transactional problems. Some topics are based from experiences our office has had, other topics from discussing transactions with other colleagues in the escrow business. The hope is for those real estate professionals to look inward to challenge them on effective ways to create smooth transactions.

How to potentially save hundreds of dollars or more

This discussion is geared towards providing suggestions to the audience at Seattle Bubble which involves mostly consumers who are both homeowners and those who are looking to buy or refinance an existing mortgage.

When selling a home, buying a home or refinancing, you are intimately involved in the process that revolves around money. It is imperative that you check and double check your estimated fees with the Settlement Statement that is provided to you when you are signing your paperwork. The Settlement Statement is the form escrow provides that is a itemization of debits and credits in connection with your transaction.

During the frenzy, much was on the line. Borrowers had little time and leverage on their side when making decisions about a purchase or in questioning fees when at the signing table. Borrowers knew that they had to perform or lose out on the purchase of their home. Any deviation from that could have detrimental consequences both financially and personally. After all, who wants to start the buying process all over again? In that environment, next to zero. There are probably stories from readers here that could empathize with the pressure cooker of signing documents that are foreign and difficult to understand.

For example, last evening my wife signed a client in their comfort of their Windermere neighborhood home at 7:30 pm. Their loan package was just shy of 200 pages. One of the bigger packages we see. How in the world can someone in the scope of an hour or so, have an opportunity to digest and understand all that they are signing?

Recently, a client did reference their GFE (Good Faith Estimate) with the actual broker fees as itemized by the Settlement Statement. A large enough discrepancy was found that it triggered further scrutiny by the borrower. Escrow does not have borrower GFE’s. We are not in a role to advise a client whether to proceed or not or whether a loan is a good program depending upon the borrower’s financial circumstances.

Naturally, the discrepancy for this client created a situation in which the loan officer needed to explain why the overage. In the meantime, the borrower did what many do not know they have the capacity to do. They gave written instructions to escrow to not close the transaction until this issue was resolved.

Thus, the Stare Down game began in earnest. The Loan Officer blinked and the client saved a lot of money. A lot. It pays to shop and it pays to be patient and it pays to be informed.

S-Crow

The post Stare Down: who blinked first? The loan officer or the borrower? appeared first on Seattle Bubble.

In the great American sport of finger pointing and blame shifting, a new villain has emerged to explain the mortgage-finance crisis.

The fault, it turns out, lies not with incompetent, deceptive lenders, naïve, speculating borrowers, greedy, reckless Wall Streeters, slumbering regulators, bubble-creator Alan Greenspan or all of the above.

Instead, the root cause is something far more fundamental: the American belief in the value of homeownership.

Or so says an emerging theory that argues that the attributes of owning a home have been, pardon the phrase, oversold, and had the U.S. not been so hellbent on getting people to buy, much of the current debacle could have been avoided.

So now is probably a useful time to review some basics about American attitudes toward homeownership, and whether they did, in fact, contribute to the economy-shaking mess we’re now in:

1. Homeownership is good. Homeownership — for the individual and for society — works.
2. What’s not so good, and what consequently hasn’t worked, are the methods for encouraging homeownership and the expectations of what ownership would accomplish financially for the buyers.

…
Homeownership was also considered a financial virtue, being one of the few ways average Americans could achieve long-term financial solvency. Once they saved up for a down payment on that starter home, they could use the equity they slowly built up, from their own payments, price appreciation and improvements to the property, to move up to larger or nicer homes, to maybe even — and here’s a novel concept today — to enjoy the income freed up by paying off the mortgage.

Which is about the point in our story where the trouble begins.
…
Eventually the markets will correct, although the price of that correction is likely to be steep in lost jobs, houses, savings and economic health. If our present calamity strips away the excesses and false assumptions, and returns an appreciation of the merits of home ownership, that might be one of the few good things to come out of this.

Bill continues to be one of the few in the local mainstream press that actually seems to get what’s really been going on, and where we’re headed as a result of this mess we’ve gotten ourselves into. As usual, you should read the whole article. Kudos to Bill.

(Bill Virgin, Seattle P-I, 03.24.2008)

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Snohomish Co. Update:

My wife is off providing sterling service tonight in Issaquah for clients who are buying/selling a home, (yes, we do business all over) so I’ve got some free time to do a bit of blogging and research.

There are a quite a few homes both listed and FSBO that are short sale candidates. That means that if the existing homeowner were to get an offer, the lender would have to agree to take an amount less than the sum of their encumbrances.

After researching about 15 properties that were short sale candidates, I stopped. What’s the point. The story kind of repeated itself. Basically, the gist of it is that I see home prices “softening” further. Many short sales are in neighborhoods that were recently built in 2004, 2005, 2006, early 2007. 100% financing was the primary type of mortgage on just about all of these short sale candidates. Lots of sub-prime lenders financed these homes, some of which are no longer around. This really is the story that we are going to have to get used to.

If interest rates continue to stay low and prices continue to have downward pressure, those who can buy will be receiving much more house for their hard earned money. So that is the silver lining if you are on the buyers side of the HUD-1 Settlement Statement.

I would love to report that the market in Snohomish Co. is earnestly in the Spring groove for buying but the truth is that the first quarter of the year is coming to a close with sales volumes down YOY , so unless we have quite a change in the credit markets to get things moving along as we enter the prime selling/buying season of April, May and June, it may not be any better than the existing pace we are on.

As it stands, lending requirements have become stringent enough that it is exposing quite nicely how much of the buying in months past really was a function of consumers obtaining mortgages that were setting many up for financial distress. In other words, eliminating the loose lending (I know everyone has read this ad nauseum) has exposed the frenzied market for what it really was—a foundation of quicksand via toxic financing that could only be rescued by ever escalating housing prices. The unraveling of the credit markets, billions in losses and subsequent bail out of Wall Street superfortresses such as Bear Stearns and others (more to come?) shows that on every dollar lost there was an address somewhere in America tied to it.

In January, refinancing did take a very big jump when rates dropped dramatically to about 5% and many people took advantage (those that could anyway).

My belief is that inventory will continue to increase (outpace sales) as some of those listings that were taken off the market in Fall and Winter of 2007 try again this Spring.

In conclusion, the fallout from the mortgage binge and foolish lending is really disrupting markets across the country. It is not different here in the Puget Sound region and I hope the seriousness and disappointment in my tone comes across. Is this really what was intended when we think of the American Dream? I know, I know, it’s just a natural market cycle and I need to get over it.

S-Crow

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