Seattle Bubble

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

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

Entries Tagged as 'Opinion'

Desperately Searching for a Truly Positive Sign

By The Tim on October 13th, 2009 at 9:00 AM · 88 Comments

[Warning: The following commentary is only marginally related to real estate / housing.]

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.

A depressing display of extreme laziness at Nordstrom Rack
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.

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The Mythical Teeming Hordes of “Pent-Up Buyers”

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

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

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

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

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

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

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

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

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

Cumulative Borrowed Demand

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

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

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

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

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Tax Giveaways Succeed in Borrowing More Demand from the Future

By The Tim on August 7th, 2009 at 9:00 AM · 119 Comments

Congress agreed to pour an additional $2,000,000,000 into the cash credit toward an overpriced new car for clunkers program this week, with various pundits praising the program as a rousing success. Meanwhile, industry professionals point to the $8,000 tax credit for first-time homebuyers as a major factor behind the recent increase in home sales.

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.

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Are Home Price Drops Around Seattle Mostly Over?

By The Tim on July 27th, 2009 at 8:30 AM · 218 Comments

I was thinking recently about the claim that we’ve been hearing lately from some sources that Seattle home price declines are over. The primary evidence they seem to provide for this hypothesis seems to be the slight bump in some Seattle-area median prices, and the uptick in sales.

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:

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.

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Seattle Bubble: Hindering the Market?

By S-Crow on November 10th, 2008 at 10:15 PM · 49 Comments

Seattle Bubble scaring away buyers, sellers and refinance consumers?

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.

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Housing Crisis Not Over, Just Starting in Seattle

By The Tim on May 7th, 2008 at 10:21 AM · 53 Comments

A couple people pointed out a piece in the Wall Street Journal yesterday titled The Housing Crisis Is Over. I don’t doubt that the mere fact that it was printed in the WSJ makes it gospel to some folks. I am not interested in writing a rebuttal to this piece, as that has already been handled quite well by our friends at Calculated Risk. All I would like to add is to point out that this is an opinion piece, not a news article. In the opinion of a guy that runs a hedge fund and stands to profit healthily from the recovery of the housing market, the crisis is over. Not exactly a shocking revelation.

Meanwhile, Fannie Mae, “the nation’s largest buyer of home mortgages” announced huge losses today, and forecasts “a steeper drop in home prices this year.” Yeah, the crisis is over folks, nothing to see here, move along.

In other news, Les Christie of CNNMoney.com is singing a bit of a different tune than she was in mid-2006, when she was touting our “strong fundamentals” and declaring Washington State to be the “next hot market,” or just last summer, as the local market was hitting its peak, when she declared that in Seattle, “the housing boom goes on.” Her latest headline is not quite as positive: Bulletproof housing markets get hit.

Some of the last, best housing markets – the ones that continued to climb even as the rest of the country cratered – have turned south lately.

Seattle, Portland Ore., Charlotte, NC, and Salt Lake City all posted home price gains during 2007, even as more than half of the 150 markets tracked by the National Association of Realtors registered declines. Now they’ve joined the losers.

Of course, the Seattle market was never “bulletproof,” just late.

Speaking of the local decline, Zillow released their latest Quarterly Home Value Reports this week, which contain some interesting information about our area’s market. Of particular interest is the chart showing the approximate percentage of homeowners who bought each year that now have negative equity:

Seattle Negative Equity

There’s also a corresponding map on the charts page showing how all that negative equity is distributed around the region. Interesting stuff.

I think that’s enough to digest in one post.

(Cyril Moulle-Berteaux, The Wall Street Journal, 05.06.2008)
(CR, Calculated Risk, 05.06.2008)
(Les Christie, CNNMoney, 05.06.2008)
(Quarterly Home Value Reports, Zillow, 05.05.2008)

→ 53 CommentsCategories: News
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