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!

Despite what some of my readers in the real estate industry may think, I’m a generally upbeat, optimistic kind of guy. I like to believe that things will be better tomorrow than they are today; that American ingenuity and hard work can overcome any obstacle in our path.

That being said, it has been difficult recently to maintain a positive outlook on the future, and not just because of the inevitable mathematical conclusion of ever-increasing debt.

How is it even possible for so many people to be this disgustingly, colossally lazy?

Bear with me for a moment while I attempt to explain where I’m coming from here. Consider the photo at right. What you see pictured here is the shoe section of the Nordstrom Rack on Alderwood Parkway at about 8:30 last night. This is not the aftermath of some sort of blowout sale—it’s is just the end of the day on a regular weekday at this mid-range retail outlet (the shoes I looked at were priced $50-$100). Throughout the course of the day dozens and dozens of people pulled a shoe off the shelf, tried it on, and just left it on the ground.

If your average American is so colossally lazy that they won’t even expend the near-zero effort required to put the shoe back on the shelf where they found it, is it any surprise that so many people failed to read their mortgage documents before signing and are now honestly surprised that their teaser rate interest-only mortgage payment has skyrocketed? Is there any hope that these same Americans that are leaving messes like the one pictured at right in their wake every day will be able to pull together and clean up the mess created by twenty years of drunken economic partying?

Will Americans finally buckle down, stop spending more than they earn, give up on get rich quick pyramid schemes, and learn to live within their means on a sustainable path to long-term prosperity? So far I haven’t seen any evidence to suggest that this is in our future.

Consider the latest data from an annual home-buyer survey administered by Robert Shiller and Karl Case:

In our survey, we ask, “On average over the next 10 years, how much do you expect the value of your property to change each year?” The average answer among 311 respondents in 2009 was an increase of 11.2 percent. The median response — with half above, half below — was 5 percent, also high.
…
In our survey data from one year earlier, when prices were falling at an annual rate of nearly 20 percent, buyers were still expressing long-term optimism. Then, the average answer to the question about expected yearly increases in home values was 9.5 percent a year, with a median of 5 percent — high figures indeed for that time. The bubble thinking is not new.

Even with the biggest housing bust in pretty much anyone’s memory, people still think that buying a home will be a magical path to 10% yearly returns—no effort required. Unbelievable.

I truly hope that we can somehow escape this economic death spiral of ever-increasing debt, destroy the prevailing sense of entitlement, and return to a time when financial responsibility is admired and hard work is rewarded. I just have a hard time finding any evidence that we’re headed in that direction.

Here’s the latest news on the status of a possible extension: Democrats May Extend Tax Credit for Homes

Democratic Congressional leaders are working with the White House to extend an expiring $8,000 tax credit for first-time home buyers, and aides said Wednesday that they were considering making it available to current homeowners who purchase a new residence.
…
The Democratic leaders met with the president to discuss a broad range of options to combat persistent high unemployment, officials say.
…
Keeping the home-buyers credit and broadening it has been a priority for real estate agents and the home builders lobbies, and for [Senator Harry] Reid, who faces a tough re-election race next year in a state [Nevada] that has been among the hardest hit by the housing crisis since mid-2007.

Okay first off, let’s drop the nonsense notion that somehow propping up home prices will “combat persistent high unemployment.” That’s a complete non sequitur. Now, before we really talk about extending the credit for another year, let’s have a look at its effectiveness and cost this year.

In February, when the “$787 billion” stimulus plan was passed into law, the CBO estimated that the $8,000 first-time homebuyer tax credit would cost around $6.6 billion (source, source). That would have been 825,000 first-time buyers claiming the $8,000 credit. As of September, the NAR is estimating that “1.8 to 2.0 million” first-time buyers will claim the credit, with a mere 350,000 of those being sales that “would not have taken place without the credit.” That would be a total cost of about $15.2 billion. Here’s a visual of those numbers:

To me, that looks like a program that has been pretty poor at actually “stimulating” people to do something, and pretty good at giving a nice fat $8,000 handout to people who were planning to buy a house anyway, at a cost well over double the original estimate.

However, apparently to organizations like NAR and NAHB, that looks like a rousing success story that should be both extended and expanded. According to Calculated Risk the NAHB is pushing to up the credit to $15,000, expand it to all homebuyers, and extend it another year. Because, you know, We The People can afford it, right? It’s not like the federal government is facing a massive budget deficit and a mind-blowingly enormous debt.

If we’re going to use the kind of anti-logic that NAR and NAHB are apparently high on, I like the plan that (ironically) was suggested by a Georgia Realtor: Let’s increase the tax credit to $100,000! Heck, why not make it permanent, and up it to $500,000, or even a cool $1 million? Apparently cost and effectiveness are not factors in this decision, we should just do whatever it takes to get those pesky homebuyers “off the fence,” right?

The constant argument that is raised in favor of extending the tax credit is that because home sales are a major driving force in our economy, stimulating the real estate market is a critical ingredient to economic recovery. Is it just me, or does that way looking at the problem seem obviously inherently flawed?

Allow me to explain by way of analogy. Let’s say I decide to quit my job as an engineer and instead get into a full-time Ponzi scheme that has me selling “business secrets” to an ever-growing pyramid of underlings, who themselves re-sell the “business secrets” to their own underlings, passing on a commission to me. Eventually the scheme collapses (as all Ponzi schemes inevitably do), and my income drops to zero. Now, I could go back and get a new engineering job again, but instead I decide to focus all my effort on figuring out ways to get people buying “business secrets” again so I can get my income back to where it was at the peak.

Sounds insane, right? Yet that is exactly what the government is attempting to do with the various “stimulus” plans directed at the real estate market.

Meanwhile, as Calculated Risk points out, “stimulating” people to move out of rentals and buy their own homes has some rather unpleasant unintended consequences:

And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

What I don’t understand is why aren’t major REITs that own rental units across the country (e.g. Equity Residential) lobbying congress just as hard as NAR and NAHB against extending the tax credit? You would think they would have a pretty strong interest in not defaulting on their loans due to too-low occupancy rates.

So basically what we’re looking at in the $8,000 tax credit is an inefficient, massively expensive, and quite probably economically damaging program. I can’t imagine why Congress hasn’t expanded it already.

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.

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?

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 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

One thing you don’t hear many people talking about with these “successful” programs is where are all these buyers coming from?

The people buying cars and houses because of these programs are almost certainly not individuals that were previously not in the market for a new house or car to begin with. Neither the $8,000 first-time homebuyer tax credit nor the $3,500-$4,500 would make any sense as a strictly financial proposition for someone who was not previously interested in buying.

As we have discussed on these pages before, an $8,000 credit is barely over 2% of the price of the median King County home. The chance that comparable homes will be more than 2% cheaper next year is extremely high at this point, meaning it is a better value proposition for the first-time buyer to wait for prices to fall on their own much more than the piddly $8,000 of your money the government is offering to give back to you.

As far as $4,500 toward a new car goes, most people buying into this program would probably save far more money by either buying a 2 or 3-year-old car or simply keeping their so-called “clunker.” This is especially true in light of the reports of widespread dealer mark-ups of cars since this program began, in amounts that are suspiciously close to the “CARS” rebate amount (e.g. – a car that was being offered for $20,000 three weeks ago now has a sticker price of $24,500).

So if they’re not being pulled completely off the sidelines into the new car and new home markets by these tax giveaways, where are the people taking advantage of these programs coming from?

My theory: All the government is succeeding in doing with these programs is to borrow even more demand from the future.

This is exactly what caused real estate demand (i.e. sales) to spike so high during the heyday of the real estate bubble: low interest rates and lending with fog-a-mirror standards drew buyers out of the woodwork—buyers that otherwise would have waited a few years until they were in a better financial position to take on the responsibility of a massive mortgage.

The same thing happened with demand for cars. People were withdrawing equity from their homes at never-before-seen levels and spending it on cars, TVs, and vacations. Dealers were offering 0% here and no-payments-for-36-months there, driving people who would have otherwise made do with their perfectly good car to trade it in for a brand new ride that they didn’t really need.

Today’s sagging demand for houses and cars is merely the demand debt from the boom years being paid back. Of course, debt repayment is never enjoyable, and big daddy government seems hell-bent on doing whatever it takes to prevent individuals, corporations, and the government itself from having to feel the inevitable pain.

So what do we do? We create nonsense tax credit programs to borrow even more demand from the future, compacting thousands of sales that would have taken place spread out over the next year or two into just a couple of weeks or months.

Does anyone truly believe that this path is sustainable, or are our politicians merely attempting to delay the real fallout of this mess until they have secured their own personal fortunes and pushed through their pet projects and agendas?

We cannot keep borrowing demand (or money) from the future forever. Eventually the bill comes due.

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.

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.

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

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.

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 Great Reset

A recent New York Times headline read:

“Consumers Increase Savings While Spending Less”

That sounds like a GOOD thing doesn’t it?

It used to be that savings and thrift were basic, core, American values. Check out Tom Brokaw’s the Greatest Generation if you can’t remember a time when Americans valued thrift and savings. The media is so focused on “reviving” the economy that it is now seen as a negative sign when saving increases and spending declines. I know the economy as we have known it over the last 10-20 years depended on consumer spending, but the problem was THAT WAS MONEY WE DID NOT HAVE!

Part of the problem is that we are still viewing this as a recession. Hopefully this is not a recession. Hopefully this is the GREAT RESET.

The word recession implies that it is a temporary decline and that things will return to “normal.” If we define normal as the last 10-20 years, “reviving” that version of the economy would be the definition of insanity (doing the same thing and expecting a different result). That version of of the economy was not REAL. That version was on the wicked, performance-enhancing drug LEVERAGE. That version was not sustainable.
…
Now in real life this GREAT RESET is a very painful process, but to ignore the reality won’t help. We can’t go back to the levered up version because it is not REAL. As Thomas Friedman said recently, “…there is no easy escape here, except taking our medicine, getting our fundamentals right again and working our way out of this, brick by brick…”

Carl hits the nail on the head.

Over the last few decades, we have constructed a sham economy that was not sustainable.

When the pyramid scheme failed (as all such schemes are destined to do eventually), rather than the healthy response of “whoops that was stupid, now let’s rebuild a sustainable, sound economy,” we’re hearing nonsense like “we need to prop up housing prices” and “we need to spur more consumer spending.”

Let’s put a stop to the delusion that things can just magically go back to the way they were when everybody (individuals and corporations alike) was hopped up on leverage. It’s not going to happen, nor should it.

Falling home prices and consumer spending are the necessary medicine that must be taken to return to a fundamentally sound and sustainable economy.

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.

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

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.

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?

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

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!!

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

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!

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

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)

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

Do yourself a favor. Just because someone was referred to you by a close friend, someone at Church, someone at work, school or wherever, it does not mean you will be getting a fair shake.

When today’s rates are around 5.375% and your Note indicates a rate at 6.25-6.5% for a thirty year fixed rate, it should raise a question—you’d think? And people wonder why so much consternation for the lending industry?

Once your transaction is placed in escrow and we are ready to have you sign your documents, escrow is a neutral party and cannot give advice about your loan or whether or not you are getting the best deal you can. That’s the fact, Jack! But, as a fellow blogger and dude who genuinely wants people to get a fair shake, this is the best I can do for you.

Please excuse me as I’m going to my basement to use some fresh bales of hay as a punching bag and listen to some Foo Fighters.

Discuss amongst yourselves.

Agency (who is representing who in a purchase and sale transaction for those new to buying) is a tough thing to sort out for some consumers. In Washington State, agency law has gone through several variations and changes throughout the years.

But, when an agent is actually representing a buyer in a fiduciary capacity and then places their loan officer hat on, with no fiduciary duty as of today (could be changing), it makes for some potentially serious complications when things go sideways during a transaction.

Speaking solely for myself, if I were an agent, knowing what I know about the challenges they encounter, there is no way I would ever want to put myself, livelihood or assets at risk by playing a dual role.

I’ve never played with a live grenade before…..but, sheesh, acting as a buyer’s agent and arranging their financing is just not my recipe for fun. It’s exciting enough working in the escrow business thank you very much.

PS. If any of you have not had a chance yet this season to grab your boards out of the basement, do so, because the snow has been superb this season.

I’ve learned and received much more than I’ve provided on this blog I assure you, but the common theme I’ve come away with is that consumers want authentic advice and to trust the people who are assisting them with their real estate endeavors. They want value and to know how real estate professionals will earn their business. The following is what consumers want:

Dear Real Estate Professional,

• I want to be treated like a partner, not a “lead” or a means to an end.

• I want relevant information, fast and accurate.

• I want to know why I shouldn’t buy a particular home and why I should.

• If my objective is to build equity, I want solid advice based upon my ownership horizon.

• I want to know exactly how my agent is being paid and by whom.

• I want to know if my mortgage broker’s company or my agent’s brokerage firm has any financial interests in the referrals they give me for third party providers (mortgage, escrow, title, insurance, etc….). I want to know these disclosures at the start of our working relationship, not when I’m signing my loan or closing papers.

• I want to know how my mortgage broker is being paid or if any of the associated fees are duplicate in nature or unnecessary.

• I want my best financial and personal interests to be looked after in my transaction.

• I want to know exactly what the market conditions are. I don’t want to learn about the market conditions from other sources after the fact……

…..Three factors caused this decade’s housing boom to spiral upwards: 1) a run-up in home price valuations that spurred a high sense of urgency in home buying and selling; 2) poor lending practices, which caused many homebuyers to secure loans that they ultimately couldn’t afford over the long term; and 3) speculative purchases of homes also increased, with buyers investing in real estate with the hope of a quick return-on-investment.

• I want to know what the benefits and detriments are of entering into a multiple offer situation.

• I want to trust you.

• I want to know if there is an incentive of any kind, financial or other benefit, from a seller to you (my agent) and how it impacts me.

• I want my agent to be responsive, authentic and collaborative with everyone in my transaction.

• I want to work with a professional.

• I want you to anticipate potential problems before they occur, not react to them as they are upon us.

• I don’t want to receive my loan documents to sign at the very last possible moment.

• I don’t want to pay for inexperience at the same rate as I do for an experienced professional.

Comment Add on’s:

• I would like choices in the service levels I would like to receive/purchase.

If you do this you for me you will have my business for life and I won’t have to go here when I decide to sell, buy or refinance again.

Sincerely,

Consumer

Reality:

Conclusion: Er… Um… Jobs! Population Growth! Mountains! Lakes! Pretty Pretty Pink Ponies!

We now return you to your regularly scheduled programming.

My own guesses as well as predictions from most of the frequently-quoted local real estate insiders were covered in this post from last January, save for Steve Tytler, whose predictions are covered here. Let’s see how we all did.

The Contenders:

• Bill Riss, chief executive of Coldwell Banker Bain
• Randy Bannecker, consultant housing specialist for the Seattle-King County Association of Realtors
• Glenn Crellin, director of the Washington Center for Real Estate Research
• Matthew Gardner, local land-use economist
• Steve Tytler, owner, Best Mortgage
• Tim Ellis, editor-in-chief, Seattle Bubble

You can go back to the post to see the full context of all of our predictions. However, for this post, I have condensed everyone’s predictions into a convenient table format for your convenience:

And the person whose predictions most closely matched the 2007 outcome was… Tim Ellis of Seattle Bubble! Steve Tytler gets the honor of being the only other person to be at all accurate, with his generic prediction of a “big increase” in inventory and a general reduction of buyers.

Note that the final reported median price change was almost exactly in the middle of my estimated range of -5% to +3%. And although my inventory and sales forecasts were the closest of the bunch, reality was unbelievably even more extreme than my predictions. So I either got pretty darn lucky, or after one year of following the market in my spare time, I had a better sense of where it was headed than the majority of those whose very livelihood is the market.

2008 Prognosticated
So that brings us to the 2008 forecast. First up, let’s check out what some of the same local real estate insiders are guessing this year:

Glenn Crellin:

Year-to-year drops should continue “for a little while,” said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. “I think that the next several months are still going to be challenging, but it’s a little hard to tell,” he said, adding that he also expects interest rates to increase during most of the year, potentially wiping out any savings gained by waiting.

Glenn also made some more specific predictions for the Pierce County market in a Q&A with the Tacoma News Tribune.

Matthew Gardner:

For 2008, Gardner is predicting anywhere from zero appreciation to home prices falling as much as 5 percent. “Do I think we’re going to see pain next year? Yes, I do. If there’s some glimmer of hope, it’s the fact we didn’t get terribly overbuilt because of the expense of land,” Gardner says.

Steve Tytler:

I expect home prices to drop about 10 percent to 20 percent over the next year or so, and then the housing market will flatten out with very little appreciation or depreciation for a few years.

Dick Conway:

Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008. “Given that we had a pretty good run-up in prices, some downward adjustment shouldn’t be surprising,” he says.

It would appear that after being so off base with last year’s optimistic forecasts, most of this year’s predictions are a bit more down to earth. The general concensus seems to be price declines of up to five percent. As with last year, Mr. Tytler is the most bearish of the bunch, and will probably be the most accurate as well.

The Tim’s Predictions
Personally, I’m expecting to see a continued surge in inventory, with year-over-year increases between 10% and 25% throughout much of the year. As prices stagnate and drop, the number of “must-sell” homes will only increase. Furthermore, when public sentiment shifts from “buy now or be priced out forever” to “sell now or be stuck there forever,” listings will continue to increase further.

Sales will probably continue their slide as lending standards continue to tighten (regardless of which direction interest rates go). I would guess that sales will be down at least 5% to 15%. Think of it this way: The record sales that we saw in 2005 and 2006 were basically just the housing market borrowing sales from the future. Well, the future is here, and the debt must be repaid.

I do not expect prices to drop like a rock, but I think that 5% is the minimum drop we’ll see in the median, not the maximum. I’d put the range at -5% to -10%.

So there you have it. Your doom and gloom for 2008. I may be way off base, but at least I’m willing to stick my neck out there and give it a guess. I have yet to see any signs that the market is “bottoming out” or at any kind of turning point. 2007 was the turning point, and we’re pretty plainly headed down into 2008. I don’t expect this mess to work itself out before the year is out.

What say you, the readers?

Let’s have a look inside.

Three factors caused this decade’s housing boom to spiral upwards: 1) a run-up in home price valuations that spurred a high sense of urgency in home buying and selling; 2) poor lending practices, which caused many homebuyers to secure loans that they ultimately couldn’t afford over the long term; and 3) speculative purchases of homes also increased, with buyers investing in real estate with the hope of a quick return-on-investment.

Actually it doesn’t start off too bad. That’s an accurate assessment of the boom, with a rare admission that speculative purchases played a part, implying that this is even the case in our area (since Seattle is where JLS is based).

Like the dot com bust, the housing market has begun to correct itself after a number of years of unwise purchasing, but unlike what the media would have us believe, a correction in the housing market doesn’t equate to a crash. Unfortunately, the ongoing negative news about the troubled areas in the U.S. has caused a ripple effect, with home buyers and sellers on a national level exercising caution before making a decision.

Ok hold on. Did you catch what they said just there? “Unfortunately… buyers and sellers [are] exercising caution…” (emphasis mine). Huh?!? How is it “unfortunate” that people are being more cautious? Oh, right. John L. Scott sells real estate, so they would prefer it if all caution was thrown to the wind. Also, they’re blaming the downturn on “negative news.” That is so laughable it’s not even worth a detailed rebuttal. Here’s a hint though guys: it’s the other way around—the downturn is real, so the news is negative.

The rest of the paper focuses on superficial points that are unlikely to sway any but the most gullible (page numbers refer to the number printed on the page, not the actual pdf page number):

• We’re not as bad as Arizona and California! (p. 2)
• High inventory means more choices for buyers! (p. 2)
• Mortgage rates are low! (pp. 2-3)
• Did we mention we’re not as bad as California? (pp. 3-4)
• Subprime is like practically non-existent. For reals. (p. 5)
• We are so much better than other places in the US like, say… California. (p. 6)
• Never mind the fact that you could wait a year and buy at a lower price—real estate is a long-term investment. (p. 7)
• Here, look at some historical price drops in which the factors of the preceding booms were nothing like they were recently. Those weren’t so bad, so this drop won’t be bad either! (p. 8)
• In summary: Buy, buy, buy! (p. 9)
  

Take a few minutes to read through the pdf. It’s not that any of the things they’re saying are necessarily untrue, it’s just that this is definitely not an “objective assessment.” It’s quite clearly a marketing document intended to dupe cautious home buyers into throwing their money into a freshly-declining market. I hope nobody takes this document seriously.

I’ve added this paper to the library for future reference.

Regarding consumers capacity to understand loan documents, Peckhammer remarked :

“The loan documents they signed could have been reviewed by an attorney and explained if there were questions.”

Here’s the problem when looking under the hood at the transaction work flow. May I present you the true world of real estate and high finance:

The facts

• It is Friday, January 11th, at 4:00 pm, about 1hour prior to the escrow office closing.
• Escrow has been promised loan documents on a transaction since early in the week.
• By law, borrowers refinancing have a three day right of rescission (meaning 3 days, not including holidays or Sundays) after signing loan documents to cancel prior to closing.
• The wrinkle: loan documents can be time sensitive. For example, if you are refinancing, you may have an interest rate lock (a term used in the industry where a borrower is guaranteed a specific loan interest rate for a specific loan program) that may expire very soon. Therefore, the loan documents must be signed within the 3 day rescission period and the transaction must close prior to the interest rate lock expiring.
• Escrow receives loan documents at 4:30pm. What in the world?!…..says escrow staff.
• Escrow is “expected” to drop all other transaction work (escrow is very time stressed due to a lot of other things going on “under the hood” for other people) and work up the loan documents, prepare a settlement statement (HUD-1 Form for those unfamiliar which is a detailed itemization of fees and credits associated with the transaction) and schedule the clients to sign their paperwork.
• Are the clients at work? Have an evening planned? Guess who gets to call the clients with the urgent message which will more than likely put the borrowers into a, how shall I say, grumpy mood. And yes, it’s escrow’s fault; after all, escrow just pays the water bills (sacrcasm & humor on).
• To escrow, this is a frequent and absurd scenario that plays out all too commonly.

How does it impact you as a borrower?

• It is inconvenient as !#!*%!! for the borrower to be called at 5:30pm on a Friday to tell the borrower they MUST sign their loan docs or…. dominoes start falling.
• Or, worse, if this is a purchase, you have the pressure of signing because this little thing called losing earnest money is eating you up in the back of your mind, never mind the fact your belongings are in boxes and the seller is nearly moved out, and your newborn child has started crying in the office where you are trying to sign loan papers.
• Call an attorney to review your loan documents? Not going to happen.
• How can you have time to digest the loan docs when the only time you’ve seen them is when I show up with them? Remember, escrow tells you the facts, we don’t dispense legal advice or advice about how the loan will impact you financially.
• Thankfully, in a refinance transaction you have a 3-day right of rescission. For purchases, you get NOTHING. Zippo.

Solution?

• Enforce RESPA (Real Estate Settlement & Procedures Act) to include a provision for a borrower to receive loan documents 3-5 full business days prior to closing when PURCHASING. If they don’t, fine the lender. Currently, as it stands, borrowers are required to have 24hrs review of their Settlement Statement (HUD -1 Form) prior to closing. That’s a joke IMHO. In Washington State, generally, closing occurs when funds are available for disbursement and recording of documents (Deed of Trust, Statutory Warranty Deed) have been completed.

• Ask your loan officer that you would like a full week prior to closing to review loan documents and your Settlement Statement. This puts the transaction management squarely where it should be, on the “Conductor of your Orchestra:” loan officer and or agent. If the loan officer waffles at getting loan documents to escrow to prepare for you well before closing you should ask them, why not?
• Also, never forget to go shopping, even for third party providers such as escrow.

Is this scenario based upon a real transaction (s) ?

True or False. I’ll give you a hint. It starts with a “T.”

S-Crow

PS. I’ve seen rates today at 5.375% for a 30 yr fixed.

#1) Buy something that you can improve.

Not a disaster, but a home that is priced right for the condition of the home.

If you are a do-it-yourselfer, have some home improvement skills and don’t necessarily mind some effort and sore muscles, locate a home that may need some improving.

Benefits of improving a home:

• saving tens of thousands of dollars over time
• gaining more skills
• obtaining pride of ownership
• realizing sweat equity
• making improvements that suit your style and tastes

Challenges:

• dedicating enough time to do it right (been there)
• costly mistakes (been there)
• poor budgeting & planning (no comment)
• marital tension (been there, been there again, and will in the future).
• it costs more than you think (can’t discuss this on a public blog due to potential for more marital fireworks, please forgive).
• throwing in the towel and hiring contractors (never done this, but have threatened so by yelling curses out towards the sky or at snickering neighbors peering through their kitchen window as I work in the mud and rain; cursing particularly after nearly cutting off my left forefinger and middle finger (Dr. said very important to save that finger for I-5 freeway discussions with other motorists). Note to self: place blade onto drywall, not human flesh. Props to Swedish Med. Ctr. in Ballard. I digress.)

The advantages of sweat equity really do outweigh the challenges. Patience and perseverance will pay off.

#2) Buy the right location with the end game in mind (ie, life happens, so you may have to move).

Because housing is not necessarily a quick sale, as many are finding today, it is important to never lose “location” in the midst of your search.

Although location has been an cliche for so long, it really has lasted the test of time. Location means a lot of different things to people. It could mean reasonably close to employment, school or school district. Perhaps you prefer a newer development.

So, when the time is right for you to buy your first home or move up to a home that meets your needs today, then don’t be afraid of being patient enough to find the right house in the right location and getting your hands a little dirty. It can pay off handsomely and may put you in the drivers seat through market ups and downs.

Bonus: #3) Invest in Case-Shiller Index Hedge Fund

Bonus #4) Rent

-S-Crow

Seattle Bubble was started in August 2005, during a time when the “common knowledge” among those following Seattle-area real estate was that the Seattle market was hot (which it was), and that it would continue to be hot for a good long while, only possibly slowing down slightly sometime down the road. This blog began with a bias toward the notion that the market was in a bubble and a goal to collect as much information as possible to test that theory.

Throughout 2006 this and other housing bubble sites grew in popularity and the Seattle market (mostly) continued its hot streak. During this time, when local real estate agents commented or mentioned Seattle Bubble in their own blogs it was primarily with a tone of amusement. The general sentiment came across as something like: “Oh, that silly bubble blogger. He doesn’t know what he’s talking about. There is no real estate bubble in Seattle, and the market will only slow to 5-10% appreciation.”

These days though, the tone of the remarks is a little… different. Instead of “Seattle Bubble is wrong,” now it has turned to “Seattle Bubble is only right because they are like a stopped clock. If you keep saying the same thing all the time, eventually you’ll be right.” Here are a few recent examples:

With respect to the Seattle Bubble blog site my guess is that like a broken clock you can be right at least 2x a day.
- Reba

You have to chuckle though. Isn’t it like standing outside and saying it’s 42 degrees day in and day out for three years? One day you are bound to be more right than others. And for a few moments here and there you are bound to be spot on.
- Ardell

Keep in mind that Seattle Bubble (and most other bubble blogs out there) has only been in existence for a little over two years. Given the slow-moving nature of the real estate market, is it really that unreasonable that we should be making the same point–that the market is overheated and ripe for a correction–for two years?

Let’s also not misrepresent what Seattle Bubble and other bubble blogs have been saying during the past few years.

What we haven’t been saying:

The housing market is tanking right now! By the end of [insert current year here], prices will be down by 30 percent! Homeowners, get out now while you still can!

If we had been saying those sorts of things then yeah, the “broken clock” analogy would make some sense. However, that’s not what we’ve been saying at all.

What we have been saying:

The housing market is overheated. A slowdown is coming, and not just to 5% appreciation. Home prices will most likely drop, quite possibly by a significant amount. It might not happen tomorrow, but it will happen.

If we are right now, we were right two years ago. The only way broken clock type comments make any sense is if our perspective was unchanging and based on clichés and gut feelings. We’re not perma-bears here, we’re realists. When the market returns to sanity and healthy appreciation is on the horizon again, you’ll probably hear it here first. If anything is broken, it is the broken record of real estate agents that continue to claim the present market is not in trouble.

Doom and Gloom Apocalypse Fun Time

First up is the incessant refrain that anyone predicting a decline in house prices is forecasting “doom and gloom” and/or a “housing apocalypse.” How do lower prices translate to “doom and gloom”? Isn’t it a good thing that people will actually be able to afford to buy a house without entering into a self-destructive financial death trap? Are falling gas prices “doom and gloom”? What about falling flat-screen TV prices?

When the cost of something falls, it is a good thing that leads to greater affordability and frees up money for people to spend on other things. Apparently I’ve got it backward. To me, a rapid escalation of prices leading people to make extremely risky financial decisions and putting them in a situation where all they can afford to do is pay the mortgage (if that) is “doom and gloom.”

Convenient Opinion Boxes
This is one I see a lot on blogs, and I’m sure I’m even guilty of it as well: stereotyping opinions. For example, someone comments that they don’t think prices will fall 20% next year, so someone else labels them as a “housing cheerleader” that doesn’t think prices will fall at all, ever. Or on the other side, someone remarks that they expect prices will continue to drop for the next year and therefore don’t intend to buy right now, and the response is something to the effect of “renting forever is stupid.”

The fact is, you can’t put people’s opinions into convenient boxes. The fact that I don’t intend to buy a house right now does not imply that I think nobody should ever buy a house. Likewise, someone who doesn’t have a problem buying now doesn’t necessarily think prices will keep going up.

Let’s try to avoid making assumptions about people’s opinions based on one or two comments. The discussion is much more productive when we actually address what people are really saying, not what we imagine they might say if they were a certain “type of person” that we assume them to be.

“Won’t you feel silly…”
Lastly, it has been said that if prices “only fall 20%,” won’t I feel so silly, because that would put them back at 2005 levels, which is when I started the blog, tee hee hee.

Of course I won’t feel silly. First off, what did I say when I started the blog? Did I claim that prices were going to plummet from their current levels? Did I predict fifty cents on the 2005 dollar? Nope.

Here’s what I did say:

One thing I do know for certain is that the recent trend of rapidly increasing property values (double-digit increases year-on-year) cannot possibly continue indefinitely. If it did, eventually everyone would be priced out of real estate. There has to be a slow-down sometime, and I think it’s coming fairly soon (within the next 3-5 years). I don’t know if it will take the form of a leveling off of values, or a slow decrease, or a sudden decrease (bubble bursting), but I know it is coming.

By not buying a home in 2005, I have been able to pay all my debt (which was 90%+ school loans), purchase two cars with cash, give generously to charity, and build up a decent amount of savings—retirement, stocks, and enough liquid cash to live over a year with zero income. Why would I feel silly about that?

Furthermore, prices retracting to their 2005 levels in 2008 does not really mean that prices were “flat.” When you account for inflation, it’s actually a decline. In fact, according to the Bureau of Labor Statistics inflation calculator, just to keep up with inflation, a home in 2007 would have to sell for 7.6% more than it did in 2005. You can’t ignore three years of wage increases and savings built up by renting.

That being said, my guess is that prices will fall by at least 20%. I suspect that they will fall further, but even if 20% off the peak is the lowest they go, it still makes far more sense to buy at 20% off the peak with sound financing in 2008 than it would have to buy for the same price with a shaky loan in 2005.

Back to Business
So there you go. Now that I’ve gotten those things off my chest, we can get back to the business of bashing real estate agents and mocking home sellers. (It’s a joke, people.)

Nowadays, it’s impossible to watch the 1946 holiday movie “It’s a Wonderful Life” and not feel a twinge of respect for Henry F. Potter, the villainous banker played by Lionel Barrymore. Potter was not above drawing the last drop of blood, but at least borrowers knew whom to hate. And if they were late paying, they knew where to crawl.

That’s not necessarily the case today. Mortgage companies often ship the loans to Wall Street, which repackages them into securities sold around the globe.

So if you’re a borrower in trouble, and your loan is diced up into some mortgage-backed security, you’d be hard-pressed to find a lender’s ear. How’s your Chinese?
…
Remember the scene where Potter chews out Bailey for giving a mortgage to Ernie the cab driver? He accuses Bailey of lending money to any pal he shoots pool with.

Bailey responds, “I can personally vouch for his character,” but also notes that Potter had the papers documenting Ernie’s salary and life insurance benefits. That established his friend as creditworthy.

In other words, Ernie did not have a “no-doc” loan, a modern invention that doesn’t require borrowers to provide proof of their financials. Because applicants could put any income number they wanted on the forms, these mortgages soon became known as “liar loans.”
…
…Bedford Falls turns into Pottersville, an evil place full of bad people and good jazz.

Fewer residents owned their home in Pottersville, but that nightmare town had some things over today’s Greenspan City. Pottersville didn’t have block after block of boarded-up houses lost to foreclosure, as is currently seen in many American communities.

Former Fed Chairman Alan Greenspan had cheered on the housing bubble that raised home prices to ridiculous levels. And despite the warnings, he ignored the recklessness and downright cons that would inevitably push mortgage market into crisis.

The weak borrowers who couldn’t get a mortgage from the sourpuss Potter — and probably not Bailey — were better off than the moderns lured by the happy dancing figures. The latter were sucked into paying inflated house prices and fleeced by stiff fees and punishing interest rates. Then they lost their homes.

Which is less attractive, Pottersville or Greenspan City? It’s a real tossup.

Crazy things happen when people buy things that they cannot afford. Go figure.

(Froma Harrop, Seattle Times, 12.19.2007)

I am in the process of relocating to the Seattle area from the Midwest and have been monitoring your blog in an attempt to get some insight into the local real estate scene.

First, thank you for your highly interesting and informative blog. Knowledge is power and you certainly are providing some interesting information for the consumer.

Here are my questions for you. What is with the psyche of local home buyers and sellers in the Seattle market that they are willing to overpay for housing (at least that is my impression)? Am I crazy to pay what people are asking for a home?

Let me elaborate. I have been scouring every information source I can for real estate information in order to become the most informed consumer I can. Here is what I have learned in a nut shell. Nationwide housing is in a slump (to put it lightly). For example the recent announcement that U.S. median sales price of a new home fell 13 percent in October, compared with a year ago. There are some markets however (Seattle, Salt Lake City, San Jose) whose home prices actually rose YOY. I get that Seattle is somewhat special in terms of real estate markets.

An additional piece of information is that I’m one of those people that wants to be a home owner. I appreciate that home ownership may not be the smartest financial move when compared to renting (especially at this time) but I put a great deal of value on the intangibles. I have two small children and the concept of “home” is very important to me so I accept the potential financial downside of home ownership.

BUT as you have stated on your blog, Seattle prices rose 4.69% YOY as of September. So here is my conundrum. I have been monitoring housing prices on the internet using various real estate tools. I have been specifically monitoring a few houses to see if their asking prices are dropping, how long they stay on the market and what the actually sell for. I have noticed a disturbing trend that I simply can’t figure out and would like your insight. I have monitored a couple of houses (in Issaquah and Bellevue for example) that were purchased in September of 2006 for around $600,000. They were put on the market in the fall (September-ish) and the asking prices were about $720,000. My calculations show that these people were expecting a 20% increase in the value of their property in one year. Is that realistic for Seattle regardless of the market – prior to 2007 were people really getting 20% annual growth. The interesting thing is that I have seen the asking price for these properties now drop to about $695,000. This is still a 16% increase. If the numbers show that Seattle prices rose 4.69% YOY as of September, why would anyone pay more than $628,140 for a house that was previously purchased in 2006 for $600,000? Furthermore, I’m thinking for that house that was purchased in 2006 for $600,000 I would pay about $610,000 right now because even though it gained 4.69% in 2007 it will probably lose value in 2008. Are Seattle home purchasers crazy enough to pay $700,000 for a house that was just purchased a year ago for only $600,000?

Andy seems to have three basic questions: Do you have to be crazy to pay today’s home prices in Seattle? Is an asking price 20% over last year’s purchase price realistic? And lastly, how does the median home price relate to specific houses?

To address the last two questions, I will point out the statistics only tell part of the story. We primarily focus on the median single-family home price in King County when discussing prices here, but that number is useful only in gaining an overall picture of market direction, and is fairly useless when trying to determine a reasonable price for a specific home. There are a few reasons for this. First, as has been discussed here a couple of times before, the median price can easily be (and has been) skewed by a change in the demographic mix of homes sold.

Secondly, while the market in general tends to build momentum and move together in the same general direction, every neighborhood has its own unique considerations that will result in larger or smaller changes in price. For example, looking at the county-wide statistics (or even the more local NWMLS areas within a county) won’t tell you that a particular neighborhood just had a big box store approved to build two blocks from a home you’re looking at, causing its value to drop like a rock. When you are seriously interested in a particular home or neighborhood, you really need to look at all the factors that affect that particular location.

That being said, if the county-wide median is flat year-over-year (which it is), it’s a pretty safe bet that someone asking 20% over last year’s price has got their head in the clouds (to put it politely). Maybe that neighborhood has had some significant improvements in the last year, making them more desirable relative to other choices in the Seattle area, and a 5% would be realistic. You can’t tell just by looking at median prices though. Statistics are useful for gaining a high-level view, but to know whether a particular house should be appreciating and by how much, you have to look at that particular house.

As far as the more general question about the sanity of those that would shell out $600,000 for a run-of-the-mill house in Seattle, my personal opinion is that most people paying these prices have been caught up in the “bubble mentality.” It’s the little voice that says:

Look how fast prices are going up! Don’t you want to get in on that action? You know, if you don’t take advantage of it and buy now, you’re going to be priced out forever! You don’t want to be the only one of your peer group that doesn’t get a ride on the equity train, do you? Buy now before it’s too late!

For a great example of this mentality in action, check out this article I highlighted in 2006. It’s that mentality coupled with the easy, standards-free lending we saw 2004-2006 that pushed prices up to their present ridiculous highs.

However, as I’ve said many times before, if you have the finances, place a high value on the “intangibles,” and can tolerate the downside risk of buying now, more power to you. I’d at least hope that you will take your time home shopping and not pay full asking price for whatever place you end up selecting.

You were the careful, responsible sort of home buyer. You took out a plain-vanilla, fixed-rate, 30-year mortgage, shunning exotic loans with low teaser rates, coupled it with a substantial down payment, bought only as much house as you could afford with monthly payments that were within your income. Maybe you’re even paying a little extra each month or have converted to a biweekly schedule to get the loan paid off in advance.

Silly you.

Or perhaps you were the careful, responsible sort of banker, one who got nervous over loans in which borrowers put nothing down, or paid so little that the principal owed grew every month, or signed up for loans whose payments they could never afford once the low teaser rates reset. Maybe you even shied away from making such loans, much less buying paper backed by them.

Silly you, too.

Because you, Ms. Prudent Home Buyer, and you, too, Mr. Cautious Banker, sure missed out on the party. While you were playing the role of the ant, everyone else was enjoying the life of the grasshopper.

And now you, directly or indirectly, will get to help pay to rescue those who had the fun — without getting any break as a reward for your frugalness.

As I have made abundantly clear here in the past, I couldn’t be much more strongly against bailouts. The fallout from the housing/credit bubble is not going to be pretty for anyone, including those of us that did not participate in the irresponsible run-up, but the best way to discourage something similar from happening again in a decade or two is to, as Bill says (but doesn’t necessarily advocate) “let people feel, however painfully, the consequences of their screw-ups.”

That being said, I can’t bring myself to be especially concerned about this latest plan. Many other people in the real estate blogging scene have spent far more time than I can afford to studying the plan, and the general consensus seems to be that it amounts to little more than a publicity stunt, designed to give the appearance that something is “being done” about the “housing crisis.”

Relatively few people will qualify for the freeze, and even fewer will bother taking advantage of it. Why would you lock in your payments on a house in which you have little to no equity, and is now worth 20% less than what you paid? Why would an ARM freeze be more appealing than just walking away? (Actually, according to Deejayoh’s forum post, someone in that situation wouldn’t even qualify, so I guess that just reiterates my point that few will qualify at all.)

Here are some good write-ups on the plan from around the web:

• Housing Doom – Most ARMs Not Likely To Be Affected By Reset Freeze
• Bubble Markets Inventory Tracking – Uncle W’s Subprime Freeze: Actual Results May Vary Among Users
• Calculated Risk – The Plan: My Initial Reaction

Also be sure to check out the Seattle Bubble Forum discussions:

• Could industry-wide work-out of subprime mortgages help?
• Banks/Fed Swing to the Rescue.
• Analyzing the Bailout

So is there something wrong with me, that I can’t seem to muster up any rage about this apparently-just-for-show bailout? I’m just not feeling it.

(Bill Virgin, Seattle P-I, 12.05.2007)

I guess you could look at the flying party as being either the national (or worldwide?) economy, or more specifically the Seattle real estate market. Either one could work (if your mind is as twisted as mine is, anyway).

The longest and most destructive party ever held is now into its fourth generation, and still no one shows any signs of leaving. Somebody did once look at his watch, but that was eleven years ago, and there has been no follow-up.

The mess is extraordinary, and has to be seen to be believed, but if you don’t have any particular need to believe it, then don’t go and look, because you won’t enjoy it.
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One of the problems, and it’s one which is obviously going to get worse, is that all the people at the party are either the children or the grandchildren or the great-grandchildren of the people who wouldn’t leave in the first place, and because of all the business about selective breeding and regressive genes and so on, it means that all the people now at the party are either absolutely fanatical partygoers, or gibbering idiots, or, more and more frequently, both.

Either way, it means that, genetically speaking, each succeeding generation is now less likely to leave than the preceding one.

So other factors come into operation, like when the drink is going to run out.

Now, because of certain things which have happened which seemed like a good idea at the time (and one of the problems with a party which never stops is that all the things which only seem like a good idea at parties continue to seem like good ideas), that point seems still to be a long way off.

One of the things which seemed like a good idea at the time was that the party should fly — not in the normal sense that parties are meant to fly, but literally.

One night, long ago, a band of drunken astro-engineers of the first generation clambered round the building digging this, fixing that, banging very hard on the other and when the sun rose the following morning, it was startled to find itself shining on a building full of happy drunken people which was now floating like a young and uncertain bird over the treetops.

Not only that, but the flying party had also managed to arm itself rather heavily. If they were going to get involved in any petty arguments with wine merchants, they wanted to make sure they had might on their side.

The transition from full-time cocktail party to part-time raiding party came with ease, and did much to add that extra bit of zest and swing to the whole affair which was badly needed at this point because of the enormous number of times that the band had already played all the numbers it knew over the years.

They looted, they raided, they held whole cities for ransom for fresh supplies of cheese crackers, avocado dip, spare ribs and wine and spirits, which would now get piped aboard from floating tankers.

The problem of when the drink is going to run out is, however, going to have to be faced one day.

The planet over which they are floating is no longer the planet it was when they first started floating over it.

It is in bad shape.

“Floating over the treetops” = magical growth, unsupported by fundamentals.
“Looting and raiding” = ever-increasing, crushing personal debt (followed now by increasing foreclosures).
The time “when the drink is going to run out” = the point at which debt (both personal and national) reaches critical mass.

I admit, it’s not a perfect analogy, but I think it works.

In a lot of ways, the artificial economic high we have been on the last ten years (the dot-com bubble followed by the housing bubble) could indeed be described as “the longest and most destructive party ever held.”

I will be getting married next August and am beginning to look at buying my first home that we could be in for 5-7 years before children would demand a bigger home. My fiancée and I have a combined income in the ballpark of $90,000 and have 50k available if needed to down payment and closing cost. However, I would like to keep the 50k invested where it will make me 8% annually but at the same time keep my monthly down. I have found that zero down and a low monthly can be conflicting goals. However, in my research I came across a fixed 30 year interest only loan with 100% financed and lender payed PMI. This would allow me to keep my 50k invested and take the saving from the interest only loan and pump back into the same or new investments where my money is working for me to prepare for the future. Also, I know that interest only loans are not for everyone and can be risky and have thoroughly researched the pros and cons. I am looking for unbiased feedback from someone completely unrelated to my situation. Now that I have explained my situation I have three questions.

1. From the the above description do I sound like a good candidate for an interest only loan? I should also mention that I am fortunate to have significant upside for compensation in the years to come.
2. From your knowledge do you feel that the Seattle real estate market will hold for 5 to 7 years when I look to sell or refinance my interest only loan? Obviously, my fears are depreciation and significantly higher interest rates at the time of sale or refinancing. I know that I don’t want to take the interest only into the 11 year but I want to be comfortable that I can refinance or sell at that time even though I will be carrying the original principal amount after 5 year of interest only payments.
3. Do you think it would be a good idea to make the extra payment every other month on principal to decrease the amount of risk I carry?

First off, I should point out that while I obviously do not have an emotional attachment to Malcolm’s decision, I’m certainly not “unbiased.” Everyone has biases to one direction or another. The best I can do is try to give rational advice based on my own perspective. Here is a slightly condensed version of my response to Malcolm’s questions:

From the scenario you describe, it sounds like you and your future spouse have made the decision that buying a home is the way to go, and the advice you are looking for is about what kind of mortgage to get. Personally, I would look into renting a nice house for at least a few years (see this post for a strictly financial comparison between renting and buying similar homes in the Seattle area). However, if you have the funds, the “intangibles” of buying are more important, and you can stomach the financial downsides of buying in today’s market, then buying would be your best bet.

That said, I’m afraid I can’t offer much specific advice about loan types, except to offer a general warning to stay away from adjustable rates if at all possible. For the best advice on mortgages, I would have to recommend that you talk about your situation with a mortgage professional. I highly recommend Rhonda Porter, who has a website here that contains information on how to contact her. I’ve met with her a couple of times, and she is both knowledgeable and personable.

To address your second question, a lot can happen in 5-7 years. My “gut feeling” is that we’re going to see 3-5 years of 5-10% price drops, followed by another 3-5 years of stagnation. It could be better than that, or it could be worse. Alternatively, you can believe those in the real estate industry, who are much more optimistic, and are not expecting price declines to last beyond next year, followed by a return to 3-5% yearly appreciation. Personally I have a hard time accepting their predictions, given that they have been calling the “bottom” since December of last year.

As for your third question, my personal financial inclinations are decidedly anti-debt. I will most likely be taking on a home mortgage some day, but I will be making every reasonable effort I can to start with a large down payment and pay the debt off early. I highly recommend making extra payments whenever possible, as long as it’s not at the expense of a prudent retirement savings plan, and whatever other savings plans your personal budget entails (e.g. – emergency fund, stock investing, etc.).

Malcolm replied with a few more thoughts:

It sounds like you feel as if the Seattle housing market will slow and depreciate or stay flat in the coming years. That being said am I correct to think that interest-only loans may not be the best idea in a depreciating housing market? For example, if I buy at home at $370,000 and prices drop 20% over 3-5 years I am left owing $370,000 while my home may be worth considerably less. Is that the correct thinking? It seems that interest only loans are only advantageous if you are in a strong market that is on the up swing where you can be confident in the home’s appreciation. Anyway, I am curious to see what comments we get on the blog after Monday.

He also pointed out a few upbeat articles in the Seattle Times as possible reason to believe that “Seattle will continue to be stable riding a strong economy.” In order to keep the comments on this post more focused, I will address those in a separate post. For now, let’s hear your advice for Malcolm’s situation.

Personally, I’m of the mind that you really can’t lose right now by renting for at least a year or two while all this nasty stuff plays out. 2007 was really just the beginning of the unwinding, and things seem likely to get worse throughout 2008, before they get better. What advice do you have for Malcolm?

rose-colored-ghoulaid:

I for one don’t want misfortune to shine on others. At least not indiscriminately. But I do think a return to rationality will mean some particularly vocal cheerleaders will receive their comeupance. But in my mind, this is more akin to hoping the heads of Enron become felons, or that history books correctly cite Greenspan as the source of more economic problems than he ’solved’.When a single mother is foreclosed out of a house (she had no business buying), I still feel sorry for her. But when a serial flipper loses his home due to gambling on the market, I feel no pity. Nor am I happy he lost the house, it is just how markets work, and that person played a game they didn’t understand. At that point I remember I’m in the catbird seat, and I might derive some joy out of that.

Jonny:

My main feeling about hoping for a market decline is simply that I will be happy to see affordable housing again. In the unlikely event that a decline doesn’t happen, it is extremely remote that I will ever own a home in this lifetime. I am, BTW, over 40 and well-employed. Think about that.
…
However, if you must insist on seeing things this way, it seems to me that the logic works in reverse: people who currently own overpriced homes have been enjoying a feeling of schadenfreude with respect to those without them for years. So, when we return to a normal market and those with overpriced assets are forced to sell them, just don’t forget all those years that these unfortunate sellers enjoyed those assets while the rest of us have been forced to rent and endure this idiotic bubble. There will be casualties on all sides of this before it is over. Just don’t forget that the real villain is Greenspan.

disbelief:

I want to chime in and say that “schadenfreude” is not a fair term based on what I feel, and what the majority here have written. This seems to also be the main accusation of the RE cheerleaders who visit this blog. The only motive I have is to be able to own a house again without sacrificing virtually everything else.

Angie:

Schadenfreude is enjoyment of the misery of others. Despite the protestations today, there is a wide streak of that running through this blog.
…
I think that if housing prices in this area get to the point that they’d be affordable by traditional standards, the economy in general will be in the toilet. So, be careful what you wish for.
…
About being 40, well-employed, and never able to buy a house—there’s a lot more there to think about. My first thought is, unless there’s more going on in the background ($100K in law school debt, four kids and a disabled wife, whatever), there is no reason why you couldn’t sock away a big down payment and buy a modest place.I’m going to presume that you’re single and without those major encumbrances, and that “well-employed” means “over median income”, which is ~$54K for a single head of household in Seattle. (If it’s not true for you, Jonny, I gather that it applies to not a few other people who frequent this site.) People in this situation should easily be able to put together a substantial down payment (say $30-40K) in two to three years, even while shoveling away 10-15% for retirement. Just grow a backbone, show a little restraint, and start being fiscally responsible.

notabull:

Angie, there are not just two choices:a) Buy a house immediately.
b) Never buy a house, and continue to rent forever

You seem to think that most on this board are choosing (b), hence your stupid comment about being fiscally responsible. Ultimately, it *would* be fiscally irresponsible for most people to never buy a house.

However, and please try to understand, there is a THIRD choice:

c) Save a down-payment, wait for prices to return to fundamental levels (whatever you deem them to be), and then buy a house.

Sure, I could go out and buy a house right NOW. I have a ton of money in the bank earning decent interest, but I’m not going to. Why? Because I’m being fiscally responsible, am saving $6000 in CASH a month (after tax) by TEMPORARILY renting, and then I will buy once the market softens some more, which I fully expect it to.

If it doesn’t soften more, I’ll just shrug my shoulders and buy a house anyway. But I’m not about to do so when all indications are that prices are heading down and about to head down some more. I didn’t get my big bank balance by being stupid.

Notabull accurately summarizes most of my sentiments quite succinctly. When prices are higher than any logical and sane measure indicates they should be (as they are now), and all signs point to an extended period of price declines (as they do now), the best way to “show a little restraint, and start being fiscally responsible” is by not buying, rent for a massive discount, and save the difference. That’s what I’m doing, and what many others who frequent this blog are doing as well.

I would also like to address Angie’s comment that prolonged and/or large home price declines will result in an economy that is “in the toilet.” In my opinion, the source of the problem is that the prosperous economic times that we have enjoyed for the last 5-10 years have been largely (not entirely, but largely) funded by a massive, unprecedented accumulation of debt. A large portion of that debt was the result of the housing bubble, which allowed people to “extract equity” from their homes (i.e. – take on more debt) to fund spending on vacations, plasma TVs, cars, and other non-necessary purchases. This was great for the “economy,” but the problem is that you can’t just keep borrowing your way to prosperity forever. Unfortunately, we (as a nation) borrowed prosperity from the future so we could enjoy ourselves in the here and now.

Eventually the bill will come due, and it will indeed be painful; even for those that did not participate in the irresponsible run-up in any way. That sucks. But when everything does shake out, and eventually homes are priced reasonably* again, is it “schadenfreude” to be grateful that insanity no longer reigns?

Is it schadenfreude to point out that while others were accumulating more and more debt, I was eliminating debt and accumulating liquid assets? Is it schadenfreude to point out the inevitable result of our nation’s debt-fueled spending spree? Is it schadenfreude to look forward to a time when people who have been and continue to be financially responsible—who didn’t buy things they couldn’t afford and actually regularly saved money—will receive the economic rewards they deserve?

If that is schadenfreude, then I guess the bubble blogs are schadenfreude central. To me, schadenfreude is what I felt when I watched the Yankees blow a three game lead and get beat in New York by the Red Sox in Game 7 of the 2004 ALCS (also when they blew a 9th-inning lead in Game 7 of the 2001 World Series). I derive no such pleasure from seeing poor people that should never have bought a house in the first place being foreclosed on and forced to go back to renting again. Watching people that bought at an inflated price who are now unable to sell because they are upside-down on their loan does not make me happy. I feel that these are the unfortunate, inevitable, and expected results of the mess we have gotten ourselves into.

* By “priced reasonably,” I of course mean relative to their location. I don’t think anyone ever expects homes in Seattle to sell for the same price as homes in Fargo.

Can we please stop all of the doom and gloom?

As you have probably have seen in the news, the real estate market has been going through some big changes, good and bad. Our local market had years of double digit growth that became unsustainable. At the same time as the slow down, lenders were getting hit hard with record foreclosure rates. The driving force behind the problem was a meltdown of the sub prime mortgage market that had been making risky loans.

While many other areas of the country are reeling from all of this, Washington State has held strong with low unemployment and economic growth. Although, the pool of real estate buyers in our area has dried up, buyers from California with all cash offers and high risk loans for buyers with questionable credit scores have gone away the home values are NOT in a free fall as has been reported in some of our local papers. The high inventory is a direct result of the scarcity of buyers due to the stricter lender guidelines, seller’s high expectations and public opinion. Recently a story was printed that the average sales price in Pierce County had slipped twelve thousand dollars yet, in reality, last summer and fall, it was difficult to find a jumbo loan. A jumbo loan is a purchase price over $417,000. The average reported on did not include many of the upper end properties we normally see selling in the late summer, thus greatly pushing down the average. I believe that the average prices on homes under $417,000. have been steady increasing, though not at the double digit rate that sellers have come to expect.

On a positive note, this situation has created new opportunities for investors looking to purchase rental properties that can cash flow now. The rental market is hotter than it’s been in years and the reality is people are working and everyone needs somewhere to live.

Buyers looking to move up from a starter home to a jumbo type property have lots of good properties out there to choose from. Mortgage interest rates have remained low and available for those with good credit and the jumbo programs have started to make a comeback. Analysts are saying that the market is poised to come storming back this spring.

Remember when the high tech stocks crashed, I still scratch my head and wonder why I didn’t buy, buy, buy!

Gregory Loe
Better Properties North Proctor
Tacoma, WA

I think Mr. Loe’s letter speaks for itself.

“It’s not quite indentured servitude, because you can quit, but when you look at the mortgages and car payments, especially in Seattle, you’re not exactly free,” said the surveilled former employee.

Real estate salespeople are always talking about the “intangible” benefits of home buying, especially since today’s market makes it impossible to argue for the financial benefits. What they obviously won’t talk about are the intangible detriments that come from jumping head-first into a ridiculously large loan on an overpriced home. Detriments such as being trapped in a spirit-crushing job.

(Andrea James, Seattle P-I, 11.16.2007)

I enjoy discussions here because it’s where consumers are. It is like a laboratory of information. One area that is of interest to me, in a large way, is what makes people do what they do. I’m speaking of three groups primarily: consumers and the two primary players in our business, the loan officers and agents.

2007 has been quite a year in the real estate world. Blogging and transparency has been one of the hottest focal points in the business. Because of the obvious turmoil in the real estate industry as a whole, being that the market is in correction mode and the mortgage/credit markets are stressed due to “writing down” Billions (code for losses) and continues to unfold, many industry-wide issues are at the forefront.

In lending, the recent issue of licensing (both locally and nationally) and the hot potato YSP (yield spread premium or equivalent terminology) topic has been debated heavily. Locally, loan originators have to take a competency exam and go through a background check. Agents have their exam and clock-hour classes to obtain and maintain licensing as well. But, should it stop there? Ok, fine, you say. Where are you going with this? What I’m suggesting is this: is the licensing at it’s face value all you would be satisfied with to work with a real estate professional or allied pro’s such as loan officers, title, escrow, etc…?

“Why not ask them to disclose whether they have had a bankruptcy, or foreclosure or heaven forbid, ask them to disclose their own FICO score? Do you really want people who have a history of making poor financial decisions assisting you with advice on buying, selling or refinancing? Or, is it more complicated than that and therefore is not fair?” – me, S-Crow

For example, over the course of the past four years, our small business has bumped into an opportunity or two or three to expand the business. In all the cases, we were approached by mortgage brokers or agents or both. In each circumstance we passed. Why? A bit of due dilligence revealing situations we were uncomfortable with led us to our decisions. Plus, what was the rush? Get rich, lol?!! (eyes rolling.)

I think the thing that caused the most pause for our counterparts was a question I posed to those who wanted to enter in a business capacity with our small business: “If you want to enter into a business relationship with us then reveal your entire financial lives, personal and professional and we’ll do the same.” As you can imagine, that type of transparency is what I’m after if people want to do business with me in opening other offices in a partnership. And, as you can imagine, it is quite the turn off. Someday, we’ll bump into like minded business people. So far, that hasn’t happened as people don’t want us to see the “naked” financials. You see, in escrow, you deal with money all day long, not quite like a bank, but loosely in the same framework. Therefore, you don’t want people who are in financial hardship running an escrow company or having access to trust accounts. Not a good recipe.

Escrow is highly complicated with lots of moving parts. There is a reason escrow firms follow banking hours, so to speak. There is a reason mortgage funders and escrow staff look at the clock all day long as we have to meet very tight deadlines. Because escrow is a regulated business and actually has audits from the Dept. of Financial Institutions that we have to pay for (thank you not very much), it is an arena where many of our colleagues who wish to open an escrow company find themselves wondering why they even tried. Some days we ask ourselves the same thing, but for other reasons I’ll keep to myself. :)

Anyway, back to my point(s). A few things to consider:

• Wouldn’t you as a consumer (existing homeowners in midst of refinancing, first time buyers, etc..) having to divulge most of your financial lives to the loan officer or agent want to know that you are being represented by those parties in a fiduciary capacity? In other words, wouldn’t it be a good thing to know that they are working in your best interests?

• This is the crux of the consumer driven push resulting in an issue Congress is meeting about. It is to get lenders & brokers to work on consumers behalf and address the hot potato issue of compensation in the form of YSP (yield spread premiums). One of the questions being asked is when or how is it appropriate to use YSP’s? For those that don’t know, YSP is a compensation mechanism that the lender/investor pays to the broker for originating the loan or loan program at a specified interest rate, or with terms such as pre-payment penalties. Generally, to trigger this additional compensation in the form of a yield spread premium (YSP), the borrower is sold an interest rate higher than would be if there were no YSP. Again, this is a general definition.

I ask tough questions of those wanting to do business with me in a partnership and sometimes the answers received either by my own investigation or their disclosure reveals information that helps me make an informed decision.

So, all that mumbling to say this: will you interview the professionals that are assisting you in your real estate endeavors? Do you have it in you to ask the tough questions? Can you imagine the fallout if, say, a 700 FICO score, was the low end benchmark to qualify for licensing as an agent, loan officer or other professionals involved in your transaction? Now that would have some teeth!

How’s that for a softball pitch to our industry!

While I strongly sympathize with the difficulty that middle-class people have buying homes in King County, subsidizing middle-income housing just makes no sense…

…the tax burden for subsidizing middle-class housing would be borne mostly by the middle class.

In addition, subsidizing middle-class housing will not help the market readjust. The fact is, if middle-class people cannot afford middle-class homes, [it's because] they are overpriced. This is the result of deregulation of the mortgage industry, which allowed people to pay more for homes than they could actually afford.

If we subsidize the cost of homes, this will mean that the value of homes will never readjust, and the portion of the cost of the home that is subsidized will be invisible to the market. (This is what happened to the cost of college when students could borrow unlimited money.)

Finally, subsidizing middle-class homes will not force wages to adjust to the real needs of working-class people. This is the real issue. Working-class people need to earn a decent living to afford a home, health care, saving for retirement and college for their kids.

While I don’t necessarily agree with everything Ms. Orth suggests, her point that subsidizing the purchase of overpriced homes is counter-productive is 100% correct, in my opinion. The fact that the middle class in Seattle has been priced out of prudent home ownership is unfortunate and unpleasant, but it’s a problem that most government intervention will only exacerbate.

(Maggie Orth, Seattle Times, 11.10.2007)

Gov. Chris Gregoire and top legislative leaders on Tuesday authorized a study of ways to promote affordable housing in Washington.

The governor, House Speaker Frank Chopp, D-Seattle, and Senate Majority Leader Lisa Brown, D-Spokane, asked the state Affordable Housing Advisory Board to convene a bipartisan group to recommend legislation for the 2007 session.

"In some communities, even middle-income working families are finding it difficult to find affordable homes," the leaders said in a joint letter to the Washington Realtors, which requested the task force.

"A balanced approach is necessary to develop an effective response to this growing social and economic problem."

The Realtors said recently that housing affordability has fallen to the lowest point in 12 years*, with median home prices in some Puget Sound communities topping $500,000. Statewide, home prices increased 19 percent in the past year, the group said.

So let me see if I have the Realtor™ logic/strategy straight… 20% year on year gains are a good great thing as long as the population continues to willingly jump into the market feet first. 6% x (expensive houses) x (loads of buyers) = Gold Rush. If inventory begins to build and sales slow, first try to deny it, explain it away, and keep everyone convinced that everything is golden with slogans like "Home Prices Never Go Down!©" and "Get On The Equity Ladder!©" However, eventually when your tactics start to fail and the sales slowdown becomes undeniable, you realize that 6% x (extremely expensive houses) x (very few buyers) = Trade In The BMW For A Saturn. So, now it’s time to run to the government, claiming that you care deeply about how unaffordable housing has become, when really you desperately hope that prices stay high and the trickle of buyers turns back into a raging river.

That might be a bit abstract, but I think it’s a fairly accurate portrayal. What do you think? The whole thing seems like an exercise in futility to me though, because it’s not as if the government can somehow force housing to become more affordable—and even if they could, I highly doubt that they would since it would mean a dramatic reduction in the "value" of homes that people suicide-financed their way into in the last few years.

Basically what you have here is the Realtors trying to look good by appearing to care about "affordable housing" (when really all they want is more buyers), and the government trying to look good by appearing to "do something" (when they are really unable to and wouldn’t even if they could).

*Fun fact: Housing in Seattle was not less affordable 12 years ago than it is today. Rather, the WCRER’s data on affordability only goes back 12 years. A more accurate statement would have been "…housing affordability has fallen to the lowest point in the 12 year span that such data has been collected."

(Associated Press, Seattle P-I , 08.08.2006)