Seattle Bubble

Quick Note: If you are thinking long in this real estate market, this is an exceptional time to consider a purchase or refinance with rates this sweet. The motivation level is rising among many selling. Contact your loan officer or me for suggestions for lending professionals (no obligation of course). I have no ownership stake in any financial services company (mortgage).

S-Crow

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.”

The Sun Sentinal article:

“In an effort to halt what one official called ‘an investment world version of a run on the bank,’ state officials froze withdrawals Thursday from a $27 billion investment fund that local governments drained by almost half during the past two weeks.” (bold type by me for emphasis)

“‘It is certainly unprecedented, and there is a nervousness out there that we’ve never seen before,’ Broward County Commissioner John Rodstrom said.”

This is nuts. What say you King County? Did I not read a few weeks ago about some of the investments King Co. made were possibly suspect and tied to mortgage securities?

The mortgage securities problems are reaching out and touching everyone. What happens to government municipalities that go broke? What happens to these municipalities when those folks (and there are many) in suspect loans that have no “escrow reserve acct.” do not pay property taxes. Traditional mortgages have “escrow accounts” which are in place to pay property taxes.

The Mortgage Queen Spider has evidently spun her web much more broadly and intricately than anticipated—many more objects are getting caught. Perhaps the Mortgage Queen Spider likes warmer climates, thus sparing Seattle and vicinity. Time will tell us, I suppose.

Update: This is exactly what I’m talking about regarding property taxes.

“Treasurer’s offices all over the country are bracing for the day when lenders stop paying the taxes on many properties in the worst hit neighborhoods.”

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!

Here’s S-Crow’s Avatar/mug. Yep, sweater season.

Regarding Inventory

Although I have noticed homes dropping off the market in my neck of the woods in Snohomish Co, generally speaking, for semi-serious sellers, early and mid-October is a bit soon to pull the property off the market. I can understand if it was during the full holiday season from a few days prior to Thanksgiving through New Years. But, if you pull out this soon, the potential for back-firing increases if the thought process is “I’ll try again after the Holidays.” Many others will do the same. Maybe a Realtor can chime in on the efficacy of this reasoning.

I have a sense though that some of these homes going off the market today, either by expiring, Realtors giving back the listing, or mutually taking the home off the market, are being replaced by others. No hard Data, but maybe a Realtor can confirm this.

That being said, one of the things I’ll be curious to follow is if inventory as a whole (system wide) drops without replenishment. If we maintain the current inventory levels going forward, then I would guess the region will be in for quite an increase after Jan. 1, 2008. If that happens, then we will see further downward pressure on prices. It is also important to not forget about the underground market of FSBO’s. I read somewhere that this market is roughly 10% of the inventory/sales that are not accounted for by regional MLS statistics across the country. So in theory, there are a lot more homes on the market than reported.

Remember, many agents suggest to their clients that they can try again after the New Year. All these homes that expired or were mutally taken off-market will come back on the market with the same agent or another real estate company. And, all those reading about market struggles across the country who are holding off until after the first of the year are going to be competing with like-minded-soon-to-be sellers. On balance, my sense is that we are going to see a lot more inventory come on the market after the year.

The list price reductions appears to be on cruise control right now, along with incentives for closing cost contributions, rate buy downs, etc..

Over at Rain City Guide, Rhonda Porter mentioned that 30 yr fixed rates are now under 6% again. That is probably going to move some folks to write earnest money checks for a purchase or refinance.

Musings

• I went to the Everett Silvertips game last week with Steve Hatloe of very long time Everett business institution Hatloe’s Interiors/Carpet One. Naturally his business is also dependant upon housing and household improving. Prior to the game he asked me about if he was the only one ‘out there’ who thought to himself, “how are people doing it?” I looked back and said, “gosh, that makes two of us. But, since you asked………”

• Someone asked me a while ago what it’s like to be in escrow? I said, “like a referee.” We try to make sure everyones obligations are met, but sometimes the referee get’s the ire of one’s temper.

Here’s a good example:

Rather than place a lengthy remark, I thought I’d place it as a post. Hope you don’t mind. I’m going to type as I think, so I get a free pass on typo’s.

Regarding the Steve Tytler’s Everett Herald piece:

Steve & fellow bubble believers,

In the spirit of your article, I don’t disagree with your observations. But, as one of the folks that you reference as working in the marketplace or real world, I believe that if the Puget Sound area and Snohomish Co. where our office is located, experiences a 10-20% drop in housing prices, many clients of ours in which we closed their purchase transactions are going to be in a world of hurt. Many people in general will be in a world of hurt. I think of all the folks with piggyback/100% transactions and the countless “serial refinance” people who closed their transactions all across the country. It’s staggering to be honest.

A 10-20% drop in housing prices will put people into a major pickle to say the least. A less severe drop in the single digits will reach out and touch many as well. My belief is that homeowners who are selling need to hear that the market has changed in a meaningful way.

The key element that is absent in the comments from those in real estate leadership positions locally is this:

Our local region and more broadly, the country as a whole, has NEVER experienced the rate, scale and level of housing price inflation as we have over the last three years or so. There is no benchmark. The previous local correction in Spring of 1990 forward does not compare. In my opinion, those who suggest that this current correction will mimic corrections in the past may be underestimating the euphoria that drove our market to unbelievable heights. The recent lending absurdity was not present in our last correction. There was no better seat in the house to experience the market than being in the escrow business.

Look, I’m not in favor of the market changing gears as it affects our small business too, but it tires me to no end in hearing and reading local and national professionals in leadership positions (Lawrence Yun among many others) continually spin the “rates are great, economy is doing well and job growth is good.” Tell that to the thousands who will lose their homes across the country, the scores of people who can’t refinance because lenders are gone or standards have tightened enough that refinacing is not an option. Tell that to the thousands of honest, ethical loan officers who have no jobs because of the bull crap lending and behavior that enabled this market frenzy and subsequent and inevitable correction.

The idea of the “normal market” garbage rhetoric is meaningless to markets across the country experiencing severe corrections. What happened mid-August was not a “normal” event in the financial markets. I humbly ask as a small business owner in the real estate business that the real estate community start building their credibility back in a positive manner by discussing the market for what it is. True, currently the local market is not crashing and the sky is not falling, but housing prices are softening. We only started to hear no-nonsense analysis after the evidence was so obvious that those in leadership positions were seen publicly as foolish or worse.

The sooner everyone calls the market as it is, the sooner our correction will be over. People will continue to buy and sell homes in any market, but they won’t be buying because “real estate always” goes up. They will buy because it’s a place to call home, establish roots in and become part of the fabric of a community.

When people sitting across the table from me signing their paperwork to buy a home talk about everything BUT how much money they will make in “perceived equity”, I’ll let you know we are back to a “normal” market. When loan officers sitting across the table from escrow staff in offices across the country stop telling their clients “we can just refinance you again after your pre-payment penalty expires” in a year or three, then I’ll tell you we are back to a “normal” market.

Tim Kane
Co-owner
Legacy Escrow Service, Inc.
Blog Handle, “S-Crow”