Seattle Bubble

Over at the P-I earlier this week, Bill Virgin chimed in on the housing mess again with yet another well-reasoned column: Homes are good investments, not slot machines or ATMs.

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)

Sorry no stats or graphs from me, just in the trenches reporting.

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

I apologize for not making a more timely post on this subject, but it’s taken me a while to wrap my head around everything that’s really going on, and rather than spit out an uninformed piece full of quotes from equally uninformed newspaper reporters, I thought I’d do some actual research first.

So here’s what just happened, as I understand it. Formerly, $417,000 was the maximum loan that you could get and still be considered “conforming” (as in, backed by the government-run Fannie Mae and Freddie Mac). According to yesterday’s release (pdf), retroactively back to July 1 last year, this limit is being raised for a number of specific areas around the country. In King, Pierce, and Snohomish counties, the limit is being increased to $567,500.

However, it’s not as simple as “now you can get a conforming loan for 36% more house.”

The first matter that complicates things is that these new loans made for amounts between $417,000 and $567,500 (known as “temporary jumbo conforming loans,” or TJCs) will apparently not be traded in the same pool as conforming loans on the secondary bond market. After being burned by the sub-prime fiasco, it would appear that traders have wised up a bit, and insisted that the higher-value (and higher-risk) TJCs not be pooled with conforming mortages in mortgage-backed securities. Instead, these TJCs will be packaged for trading in a separate pool all their own. What this means to the person obtaining a TJC is that the interest rate will not necessarily be all that different from jumbo loans. It all depends on what kind of market there ends up being for the mortgage-backed securities full of TJCs.

Secondly, if you think that simply raising the conforming loan limit suddenly makes it a piece of cake to get a loan up to $567,500 in Seattle, you’ve got a surprise coming. The loan guidelines for these TJCs are rather stringent. Here’s a good summary of the new guidelines, and here’s a direct link to the full details (pdf). A few of the more noteworthy details (from CR):

• For principal residences, fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value) for a purchase, and 75% LTV/95% CLTV for a no-cash-out refi.
• Minimum FICO for any loan is 660.
• Minimum FICO for LTVs greater than 80% is 700.
• No late mortgage payments in the preceding 12 months.
• Full doc only.

How many people do you suppose can qualify for a TJC with lending standards like that? It’s certainly a far cry from the “anyone that can fog a mirror” guidelines we were seeing in 2005 and 2006.

So are these new TJCs going to be “a big dose of first aid” or the “shot in the arm” that the Seattle Times front page headline is touting? It doesn’t look like it to me.

I’m not an expert in complicated matters like these, and it’s definitely possible that I’ve misunderstood something here. If I’ve gotten something wrong, please point it out so I can correct it.

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The inspiration for this post is from the existing homeowners, prospective homeowners and allied real estate professionals that have corresponded with me and commented on this blog over months past to the present.

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

What I’m seeing:

• 30 yr fixed rates at 5.25%.
• 15 yr fixed at 4.75%

If you are considering refinancing, call your loan officer. Although our office is in escrow, not lending, we work with many resources for lending. If you don’t have a resource or would like to at least do shopping comparisons, please let me know. You can contact me offline.