Seattle Bubble

I want to talk about Snohomish Co., not that there’s anything wrong with King Co. (hey, I grew up on 23rd and Prospect on Capitol Hill, so I know the area). Not everyone in Snohomish Co. drives Ford trucks, has big hair/mullet and listens to Cinderella or Quiet Riot. Yeah, cheap shot. Moving on…

The question most interesting to me is that of “who understood the path we were on during the last three years or so and who did not? And, why? What shaped their perceptions?” I’m an amateur enthusiast of the markets with a small wrinkle, so you can take what I discuss with a grain of salt if you wish. The wrinkle is that I have no credentials whatsoever other than being on the front lines, per se. I have no interest in a slowing market, as it translates into lower revenue, but I do have in interest in assisting readers in garnering sensible market knowledge. And I’m very keen on strategies to keep money in consumers pockets, but that is for another day and another blog.

In escrow you see what the majority of those outside can’t and to a scale (conservatively) of roughly 50:1— meaning that your average allied real estate professional is closing one transaction for every 50+ in a busy escrow office. It is an interesting perch to be on, looking at the frenzy below like an Eagle in wait. The simple graph below show steady price increases in Snohomish Co. in 2006 up from 2004 and 2005 levels. During 2007 you can see that the market bounced around and was “trying to find its legs.”

In late 2006, something very interesting occurred. Agents started to see very small downward pricing adjustments appear in the NWMLS. Why did it catch my interest? Because downward price adjustments were virtually non-existent during all of 2005 and much of 2006. As we moved along into the 4th quarter of 2006 and beyond, the downward price adjustments for listed property picked up a steam and continued in earnest throughout 2007. As inventory began to increase, houses taking longer to sell, other characteristics started to come into play as well. Sales incentives started showing up— in commissions paid to agents and in other forms such as cars, trips or upgrades in new construction. These distinctive signs were the beginning of the “winds of change.”

Today, the one common denominator everyone can agree on is that the market has changed. One of the changes I’ve noticed is the pool of entrants into the market are meaningfully healthier, at least in closings our office has performed. For example, the credit worthiness and down payments of recent clients are of higher caliber. Also, casual interactions (with people who don’t know I’m in the business) over the past month or so lead me to believe that housing is really on the forefront of minds, perhaps superseding that of our election year festivities. There are not many places you can frequent without somebody discussing housing. Much of this is attributed to news and the mortgage and credit market dysfunction that came to a head in August, just a few months ago.

I thought I would tap a few of my resources to find out how 2007 ended the year compared to the market of 2006 in Snohomish County. My interest is in single family home data, so the simple chart below exclude condominiums. The focus on single family homes really is two-fold in my mind. First, the majority of housing inventory is single family homes, both resale and new construction. Second, I am of the belief that the inventory of resale homes is a bellwether for the general sales activity of the market and is most easily understood as it impacts and triggers sales activity of other segments of the market.

As 2007 came to a close and I had some time to look through files and reflect over the differences of 2006 and 2007 transactions, I came away with a few things:

• the transactions our company closed in the 2nd half of 2007 involved more price negotiations
• there were more inspection related work orders (just about non-existent in 2005-06.)
• more commission credit being allocated to a buyer or seller from agents
• started to see more repeat clients in the refinance arena
• started seeing distress sales and distress refinance transactions (must refi or must sell)
• anecdotal pricing confusion was evident as the market tried to get it “legs” back. Seller confusion about the direction of the market started to become noticeable in wide pricing swings.
• some sellers today are probably still unrealistic about what the market will bear in today’s credit environment and are not necessarily prepared for expectations of buyers who believe they are now in the drivers seat.

In Snohomish County, we have gone from a median single family home (SFH) price of about $382,500 in March of 2007 to close out the year at $358,000, a meaningful adjustment. Sales of SFH’s finished the year in December 2007 at 570 units sold vs. 950 in December of 2006 (excluding the for sale by owner market). To give you a scale of price increase the county experienced since Jan of 2004 to the median price peak in 2007: the median price in January 2004 was $232,433 and at the peak in March of 2007 it reached $382,500.

Looking back, there is absolutely no question in my mind that one of the largest triggers of the price increases was due to the type of financing available: 100% loans with sellers increasing prices over and above the list price to offset buyer closing costs paid by the seller to fulfill that type of loan program. It was artificial appreciation at its core, not based upon traditional fundamentals. And that is the biggest story nobody covers. Today, the removal of many of these products (or heavily pared down with many strings attached such as low LTV, large down payment, can afford the loan and 700+ FICO scores), has led to the opposite market movement.

Click to enlarge

My best assessment of the market moving forward is that we will see sustained inventory, probably increasing, (after one week of 2008, we are already off to a swift start) which will lead to further price pressure even in the realm of what I would consider exceptionally good interest rates on mortgages. As of today, a few resources have indicated that 30 yr fixed rates have been as low as 5.375 paying 1/8th of a point to 5.5 at par. For those that have decided that buying is right for them, it is hard to argue against locking in 30 yr rates at these levels. Just a few weeks ago they were over 6%. In light of the recent drop in 30 yr fixed rates, I expect to see a tick up in mortgage refinance activity and perhaps some sales as well. Overall, I’m bearish on the market in aggregate. I hope I’m mistaken.

Once again, thanks for those that have supported our small business during 2007 and have corresponded with me during the last couple years or so.

S-Crow

“Debt is real, equity is a matter of opinion.”

I’ve been gone a couple weeks on vacation, out of the country - where I was blissfully disconnected from the internet and all news of the US economy. In the course of catching up on goings on, I surfed over to Altos Research to see what they were reporting. I clicked through a number of the key population centers in King County and found the following:

Click to enlarge

Anyone notice a trend here? Now, these charts are based on median asking prices for properties that have been pulled off of publicly available sources of listings (e.g. REALTOR.com, Windermere). They do not represent homes closing. However, there does seem to be pretty similar trend across these cities. Asking prices have dropped fairly consistently since the late-April/early-May. As a matter of fact, through a set of random clicks - I only noted two communities (Sammamish and Medina) that seemed to be bucking the trend. I don’t claim this is scientific analysis - but it’s pretty interesting nonetheless. My buddy who runs Altos told me once that changes in asking prices were over 95% percent correlated with changes in closing prices. So if you think about homes taking 60-90 days to close, then shouldn’t we start seeing the same trend in closing prices in August and September? (and when do we get those August numbers, anyway?)

Addendum from The Tim

Speaking of trends, here’s a plot of the weekly “unique visitors” at Seattle Bubble over the same timeframe as the graphs above:

Click to enlarge

We were getting an average of 1,159 visitors per day back in October of last year, then 1,711 in March, and we reached 2,565 last month. Looks like the word is getting out…

Just for kicks, let’s take another look at the home price YOY change graph that I posted on Wednesday.

Click to enlarge

I noted that the downward curve on the right that represents the last nine months looks fairly steep. But just how steep is it, compared to the rest of the graph?

In order to get a feel for the “cyclic nature of the market” I ran some calculations. Since things were slowing down at the beginning of the available data (1993), I defined a complete cycle as a slowdown, trough, speedup, plateau. I calculated the average month-to-month change in year-over-year home prices for each slowdown, trough, speedup, and plateau.

In other words, when “appreciation” was on the rise, how quickly was it rising? When it was declining, how quickly was that? I did a little number-crunching, and here are the results.

Cycle #1: January 1994 — June 1998
Slowdown: January 1994 — March 1995
Median YOY Start: +5.33%
Median YOY End: -1.77%
Total Change: -7.10 points
Time Elapsed: 14 months
Average Monthly Change: -0.51 points

Trough: March 1995 — September 1995
Median YOY Start: -1.77%
Median YOY End: -1.82%
Total Change: -0.05 points
Time Elapsed: 6 months
Average Monthly Change: -0.01 points

Speedup: September 1995 — February 1998
Median YOY Start: -1.82%
Median YOY End: +15.10%
Total Change: +16.92 points
Time Elapsed: 29 months
Average Monthly Change: +0.58 points

Plateau: February 1998 — June 1998
Median YOY Start: +15.10%
Median YOY End: +14.67%
Total Change: -0.43 points
Time Elapsed: 4 months
Average Monthly Change: -0.11 points

Cycle #2: June 1998 — April 2006
Slowdown: June 1998 — March 2001
Median YOY Start: +14.67%
Median YOY End: +0.35%
Total Change: -14.32 points
Time Elapsed: 33 months
Average Monthly Change: -0.43 points

Trough: March 2001 — June 2003
Median YOY Start: +0.35%
Median YOY End: +1.72%
Total Change: +1.37 points
Time Elapsed: 27 months
Average Monthly Change: +0.05 points

Speedup: June 2003 — October 2005
Median YOY Start: +1.72%
Median YOY End: +20.00%
Total Change: +18.28 points
Time Elapsed: 28 months
Average Monthly Change: +0.65 points

Plateau: October 2005 — April 2006
Median YOY Start: +20.00%
Median YOY End: +18.17%
Total Change: -1.83 points
Time Elapsed: 6 months
Average Monthly Change: -0.31 points

Cycle #3: April 2006 — ???
Slowdown: April 2006 — Present
Median YOY Start: +18.17%
Median YOY Present: +10.13%
Total Change: -8.04 points
Time Elapsed: 9 months
Average Monthly Change: -0.89 points

As you can see, the slowdown we are currently experiencing is nearly twice as rapid as either of the two previous slowdowns since 1994. Clearly this does not tell us anything about what is going to happen in the near future, but it’s definitely an interesting point to note, and one that you’re not likely to read in the local newspaper or the blogs by those in “the industry.”

Down and down it goes, where it stops… nobody knows.

Last Wednesday there was some great conversation about what people are experiencing as they are out there right now trying to find a home. I think it’s worth re-posting these comments on the front page, since they give a good feel for what the housing market is really like right now that you can’t get just by looking at graphs and spreadsheets.

Peter:

I’ve actually started looking seriously at homes in the $400k-$500k range and have toured probably at least a dozen from the Kennydale Area up to Juanita/Kirkland. Here’s what I’ve noticed:

1) Pretty much everything you’ve heard about flipper renovations is true. These people are morons. I’ve seen some work so shoddy that it would blow your mind. We toured a home in Newport Hills and the owners were still there - he pointed at the electrical plates and said, “we upgraded to the latest style!” Um, yeah. You went to Home Depot and dropped a hundred bucks and spent the afternoon with a flathead screwdriver. No.

2) The $400k-$500k unrenovated properties are bottom of the barrel garbage. Borderline unliveable. Most of these are in such a state of disrepair they will probably need to be torn down. We saw a house in Finn Hill that had been vacant for quite some time. It smelled like death. My wife said, “this place is haunted!” I saw something - I’m not sure what - but it was brown, papery, and slightly organic looking in the fireplace. I asked our agent what it was and she just said, “let’s get out of here!” And a steal at only $450k.

3) Prices are all over the board and don’t appear to be based on recent nearby sales or appraised value + whatever. People are just asking whatever they feel like and seeing if they can get any bites.

4) The increase of inventory is definitely accelerating. It’s all crap though.

5) Most builders are idiots. They will shoehorn a house into just about any space, regardless if the front door of one house is directly facing the house next door. Yeah, I want to look out of my living room window and see my neighbor reading the newspaper in his bathroom. Most are still not offering concessions.

6) I’m not seeing any of these houses move. No one is buying them. However, if a decent house at a decent price does get listed, it is snapped up immediately. The crap is sitting forever though.

7) This has been one of the worst and most depressing experiences of my life. I’ve seen more than one house that *could* have been nice but had been ravaged by a flipper and had the price jacked up $100k from the purchase price a year ago. It seems every flipper runs out of money and you can tell exactly where they did - 4 out of 5 rooms will have hardwood floors, for example. The last one will have 30 year old filthy carpeting in it. 3 out of 5 closets will have been redone - the last two look like something like the meat locker from Texas Chainsaw Massacre.

Anyone who thinks this is a “healthy market” is certifiably insane.

Alan:

I know what you mean, Peter. My wife and I went to an open house a few weekends ago. We could tell that the owner had done some shoddy renovations, but we thought we would have to redo it and so we would have wanted a discount *because* of the renovations (if we had even wanted the house — which we didn’t because the floorplan was horrible).

I enjoy messing with the realtors. They ask if I am in the market and I say, “No, I’m currently priced out of this market. I only make $X per year.” (where X is significantly above the mean income for the area). The last realtor I said this too got excited and started telling me that the owners would probably sell for less than the asking price and that he could get me a good deal on the house.

B:

Peter:

Wow, I haven’t been looking as hard at as many properties as you have, but your observations exactly parallel my own. What a strange twilight-zone of inventory and comps we’re looking at right now.

I came back from the last place we walked through (SFH in Greenlake listed at $699, which was absolute junk inside) with a resolve to renew my apartment lease through 2007 - let the flippers flop.

The only thing worth less than a “fixer” is a house where someone did a crappy remodel/flip on a fixer. Now I have to tear out all your shoddy garbage and re-do it. Honestly!

stephen:

If you are going to buy (like we are) it is extremely important to do loads of homework and tons of driving. We’ve been looking since the first and still haven’t set foot in a house. One passed the drive by sniff test but fell out due to the flood report.

So have any other readers been out there looking at homes? What have you experienced? Is the market as strong as local real estate agents would have us believe? Let’s hear your tales.

I’ve received a few e-mails over the past holiday season, some asking if I disappeared. Yes, I read this and many other Blogs every week. I’m not hibernating. So here’s what’s up:

When people decide it’s time to buy in the market this is a cool tool to use.

May I introduce the HouseMath 2.0 website. Last week, I e-mailed Kerill Sheynkman, the wizard behind this tool, if I could get his permission to blog about it. Some may have already seen the introduction to this over at Zillow Blog, but for those who haven’t seen it I would encourage you to spend a few minutes to familiarize yourself with this great resource.

When you hit the “Analzye ” button, your presumptions come to life. Please don’t make fun of the $315,000 sales price for a home in Seattle that I used, it’s for illustration only.

Below is a screenshot of financial analysis tools such as creating your reports in .PDF format.

Interestingly, Kerill Shenkyman resides in New York and has previous working relationship ties to Glenn Kelman over at RedFin. Small world. 2007 is going to be a great year in the innovation of real estate tools and Web 2.0 blog arena.

Lenders are scrutinizing loans

One of the perks of being in real estate is that I enjoy discussing issues with the people who are actually conducting business. It encompasses a large sphere: from builders, to Ardell and loan officers.

A lot of discussion is taking place about lending right now and the struggles of the sub-prime market. Seems like the tune out there is changing quite a bit. Inman News has a lot on the plate this morning (check it out quickly before the articles go subscription).

From Inman News:

Bernice Ross on “The demise of the housing ATM”
Bradley Inman on “The subprime tsunami”
Mortgage Lenders Network being shut down (evidently failing to fund on 1,409 loans across the country)

I spoke with a couple loan officers early this week and the responses were that lenders were scrutinizing transactions more. For example, one broker mentioned that an underwriter actually dropped the value of an appraisal from x amount to x amount and required that interior photos be taken along with obtaining two new comp’s (comparable homes). In another example, funding conditions came back with more hoops to jump through in terms of actually verifying borrower deposits and funds to close.

Stuff

Before I forget, check out ShackPrices new mapping tools. Packed with innovative features. I had the pleasure of briefly meeting Galen Ward, the wizard behind this great tool at a function a few weeks ago. I look forward to them rolling out some new features that are coming soon.

- S-Crow