Seattle Bubble

Mark Trahant is definitely my favorite writer for any of the local papers. If we ever get around to having a Seattle Bubble meet-up, he’s definitely invited, and his drink is on me.

His latest piece continues to hammer home the reality of the world we live in today: mortgage / housing market is a mess and not likely to get better and no, we’re not immune in Seattle.

“Unfortunately,” says the Congressional Joint Economic Committee, “conditions in the housing market indicate that house price appreciation will no longer be able to disguise the financial precariousness of millions of borrowers whose subprime adjustable rate mortgages are about to be reset.”

The report released Thursday said the mortgage mess is going to get a lot worse — and will last for at least the next two years. “We estimate that subprime foreclosures alone will total approximately 2 million,” the report said.

But in bold typeface the committee points out: “However, it is quite possible that the house price declines will be substantially larger.”

The reason for that is simple: Many of the people trying to negotiate with their lenders for a better deal owe more than the house is worth.

Washington state has 156,810 outstanding subprime loans — and the committee estimates that 21,282 of those homes will go into foreclosure proceedings between now and 2009.

That is bad news across the board. “A glut of foreclosed homes for sale depresses home market values for other owners,” the report said. Most homes will be worth less — especially in neighborhoods where there is a concentration of foreclosures. “Moreover, the homes left vacant by foreclosure lower the desirability of the neighborhood since there is often an increase in crime associated with a vacant house.”

Washington’s mantra for a long time is that the state is protected by its strong job market. But a crashing housing market means less construction activity, fewer jobs and generally less consumer wealth.

Local and state governments already are starting to see the impact on revenues — and that, too, will get worse to the tune of nearly $1 billion between now and 2009. The report estimates Washington counties will lose at least $15.4 million in property taxes.

But all of this assumes we know what we know. And that’s precisely the problem: We don’t.

I rarely have much to add to Mark’s pieces, since he puts it so well himself. I just wanted to make sure this wasn’t missed by any of the readers here. Keep up the good work, Mark!

(Mark Trahant, Seattle P-I, 10.26.2007)

More words of wisdom from the P-I’s Mark Trahant, who seems increasingly out of place in the stubborn, denial-prone local media.

I’ve been on vacation and had a chance to travel around the West. In many of the places I visited, concerns about a real estate crisis are growing. People are starting to fear what this means for them personally. The interesting thing about coming home is the narrative in Seattle remains “we’re different.”

I continue to be skeptical. I think the region’s housing market is playing a regional version of the “Prisoner’s Dilemma.”

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The game is the same if it’s about money — or really anything else. If players cooperate, they maximize their potential. When they don’t cooperate — someone loses big time (and someone else wins).

The Seattle real estate version of the game is a bit more complicated, but it starts with a huge supply of housing inventory. Everyone trying to sell a house is competing with other people trying to sell houses.

Folks want to sell their house for as much as they can. So they keep it on the market, looking for that one buyer. (Although Seattle’s prices remain strong, the indicator to watch is the inventory of unsold houses and condos.)

As long as everyone plays together — and sticks roughly to the price they want (even if it means staying on the market forever), Seattle’s prices will continue to be fine.

But if I am selling a house — and see my neighbors sticking to their prices — I have an advantage by selling at a discount. If I am early enough, I can play the Prisoner’s Dilemma to my advantage.

On top of that, there is another twist. Some home sellers cannot afford to drop their price because that would result in negative equity. They’d have to come up with cash to close. (I did that once and is it ever painful.) That notion is an additional incentive for those who decide to get out early and discount; they know their competitors cannot match their price.

Mark is spot-on here (although he gets one detail of the Prisoner’s Dilemma incorrect—the best outcome is if neither confesses, not both), and does a good job of explaining why Seattle is in fact notspecial. Take the time to read the entire article.

(Mark Trahant, Seattle P-I, 07.27.2007)

There have been a lot of real estate articles in the local dead tree outlets the last few days. It’s time for another link roundup before I get too far behind and forget to mention some of them.

First up, it’s Mark Trahant of the P-I with yet another thoughtful, well-reasoned take on Seattle’s housing market.

What if housing prices decline by 20 percent? That would solve Seattle’s affordability problem, right? Most folks would say this is impossible. The data from last week show that house prices keep increasing no matter what. Our boom continues, just slower and steadier. But both our region and our country have boom and bust cycles as predictable as weather. It’s as much of our history as innovation, military might or baseball. One minute we’re panning gold, the next we’re trying to recoup our investment in those nifty machines that pluck gold dust from stream beds.
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Just think about what those higher credit standards will require: A significant down payment, good credit and, in Seattle, a high income.

More than likely, what it will really mean is that the supply of homes will grow — and prices, sooner or later, will fall.

On the opposite end of the spectrum, we have the Seattle Times encouraging first-time homebuyers to “learn the fine art of compromise.”

Rolf Johnson and Kerrie Cooley had different jobs, different priorities and different resources, but on their brave hunt for a $250,000 home in the Seattle area they both learned it came down to what they were willing to give up.

Cooley let go of any notion of buying a house or living in downtown Seattle to find the modern, two-bedroom condo she wanted.

Johnson spent more than a year, bumped up his budget and moved farther from work to find the house, property and studio space he craved.

Compromise is definitely the name of the house-hunting game in the Seattle area, especially for first-time buyers who often can’t come close to the $450,000 or so that it costs for a typical single-family house in Seattle and are looking more realistically at prices around $250,000.

Also worth noting is a pair of articles from the P-I and Times reporting on the recent blatherings of Senator Patty Murray. From the P-I:

The lack of affordable housing in Seattle and other places is a “silent epidemic,” U.S. Sen. Patty Murray, D-Wash., told representatives of housing agencies, developers, labor and environmental groups Friday.

“We all need to work together, whatever hats we wear, to start to address this crisis,” Murray, who chairs the Transportation and housing and urban development subcommittee of the Senate Appropriations Committee, said during a housing forum at Seattle’s Opportunity Place.

Some at Friday’s forum want more federal money, while others support incentives or requirements aimed at local developers. Cities and counties need to allow more homes through zoning, some said.

Here’s what the Times had to say about it:

U.S. Sen. Patty Murray, D-Wash., who was visiting Seattle on Friday during a congressional recess, convened the roundtable with representatives of housing agencies, business, Sound Transit, the Puget Sound Educational Service District and social-service agencies to see what she can do at the federal level to help people with low and moderate incomes find affordable housing.
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Adrienne Quinn, director of Seattle’s Office of Housing, said a recent study by her office reveals that 51 percent of Seattle workers do not live in the city. Households earning between $60,000 and $100,000 a year are the least likely to live within the city limits, she said.

“People are able to buy someplace, but not in the city of Seattle,” Quinn said.

As we all know, you’re less of a person if you rent, so it makes sense that Ms. Murray et. al. would focus only on buying homes when stating that Seattle is in the midst of a “silent epidemic” when it comes to “affordable housing.”

Lastly, here’s the latest paid advertisement masquerading as an opinion piece from a “guest columnist.” Steve Francks just so happens to be the CEO of the Washington Realtors. His editorial is quite transparently nothing more than the latest volley in the Washington Realtors’ It’s A Priority campaign.

Transportation experts are tearing their hair out trying to figure out how to fix Puget Sound gridlock. But if they really want to improve transportation, they should focus on housing.

There are just too many people trying to drive between home and their jobs each day. There isn’t enough tax money in the world to pave our way out of this problem, especially with our population growing by a million each decade.

Instead of trying to deal with the symptoms, I suggest we address the cause: too few affordable home choices near where people work. That’s something that we can fix — with a little help from the Legislature.

Home prices throughout our state continue to rise month after month. Wages, however, do not. The result is a huge gap between typical home prices and what typical families can afford. The Center for Real Estate Research at Washington State University, which tracks the gap with its “Housing Affordability Index,” shows home affordability in Washington at a 15-year low. The gap is particularly wide for first-time home buyers, who, according to the index, could afford the local median-price standard only if they were living in Benton or Adams counties.

What’s a middle-wage family to do? Hit the highway and drive to find an acceptable home you can afford. Between 2000 and 2005, 67,000 people moved from King County to Pierce County. Another 14,720 Pierce residents moved south to Thurston County during the same period.

If I can make some time in the next week or so, I’d like to write essentially a counter-point editorial of my own in response to Mr. Francks’ drivel.

So what other recent local real estate articles have I missed?

(Mark Trahant, Seattle P-I, 04.06.2007)
(Heather Rae Darval, Seattle Times, 04.07.2007)
(Aubrey Cohen, Seattle P-I, 04.06.2007)
(Stuart Eskenazi, Seattle Times, 04.07.2007)
(Steve Francks, Seattle Times, 04.10.2007)

It’s time to clear out all the news alerts in my inbox again. Here’s another round of local real estate links from the past few weeks:

• Seattle definitely appears to be “special” in one area: real estate websites. Ms. Rhodes reports on ForeclosurePoint; the latest to join the fray.
• Bremerton: up and coming? If you say so…
• Steve Tytler of the Everett Herald repeats his prediction that appreciation will be flat this year.
• Mark Trahant points out that the Pacific Northwest isn’t all that special when it comes to consumer spending and the economy.
• Mr. Cohen at the P-I:
  • kicks off a series following a newly-minted real estate agent,
  • reminds us that “Seattle-area houses still are appreciating faster than most,”
  • and gives a few local condo projects some free advertising.
• Up in Bellingham, the housing market may continue to cool.

Did I miss anything else worth noting?

There were a lot of interesting stories in the news this weekend, but the one that deserves attention before the rest is the latest editorial gem from Mark Trahant.

This region ought to be one where we are comfortable with the boom-and-bust cycle. It is inevitable — and it is reflected in our stories. Yet when we are in the cycle (or nearing the end), we think this time it’s different.I certainly thought that in 2000 and 2001. I couldn’t see the end of the cycle — and even when it started to turn I kept thinking that any losses would be temporary. The boom was just in a temporary interruption, soon to return.

Last week the U.S. Senate heard testimony on “The Housing Bubble and Its Implication for the Economy.”
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But what if it’s not a housing bubble at all? What if we’ve been living through a credit bubble? I would define the credit bubble as an era when slick mortgage packages make the unaffordable home seem within reach no matter how much we’ve saved or how much we earn. (And savings is a twisted word here — since Americans have a negative savings rate right now.)
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What stands out in this housing boom is that average U.S. housing prices grew three times faster than disposable incomes.

How could that be? It became easier to tap into loans with adjustable rate mortgages or ARMS.
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The FDIC economist [Richard Brown] says there are only two possible outcomes: A period of stagnation and weak housing prices or a sharp decline in housing prices “with severe adverse consequences for homeowners, lenders and the real estate sector as a whole.”

Brown testified that the second alternative is “unlikely” for a variety of reasons. But before you celebrate, consider that a long period of price stagnation will be painful, too.

I believe Mr. Trahant has hit the nail on the head yet again. With the ridiculous financing that many people have resorted to in this housing mania, even stagnant prices could lead to serious trouble. If people are unable to refinance their way out payments that have adjusted out of the reach of their budget, they won’t have the option of waiting until the next boom.

(Mark Trahant, Seattle P-I, 09.17.2006)

If I didn’t know better, I’d think that someone at the P-I was reading Seattle Bubble. That’s the feeling I get after reading this opinion column by Mark Trahant, titled Age-old, old-age question: Are we unique? (Links added to back up his numbers.)

You’ve probably heard something like this before: “Every child is unique and special.”It is a refrain many kids hear repeatedly while growing up. We all have something to contribute to this world, something that only we can add to the mix. This notion is fundamental to the American character, the essence of our individual-based society.

The Lake Wobegon effect is when everybody considers that they are the ones who are above average. (Below average? Well, that’s somebody else.)

But everyone can’t be that good, that smart or that rich.
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It’s the same for a city’s personality. It’s just as easy to think of Seattle as special; defying the trends ahead. Our regional narrative continues to insist that we remain a red-hot real estate market, ignoring the cautionary data. The rest of the country might be experiencing a pop in the housing bubble, but the “we’re different” idea suits our perception of ourselves.

I would suggest Seattle is riding its wave, too. The real estate numbers reflect the swell in the tsunami ahead: In King County we keep building (a 43 percent increase in housing permits), while home resales are shrinking (down 13.7 percent from a year ago). Our inventory of available homes is huge as we shift into an era when no one wants to be the last person to buy a home at its most expensive price.

On top of that, Seattle is a place where mortgage magic tricks have made the out-of-reach home at least seem affordable.

Unsustainable? Remember, that’s somebody else’s problem. And one reason why the national savings rate grew to a negative $83.5 billion in July, compared with a negative $67.6 billion a month before.

We’re no different in Seattle.

It is both shocking and refreshing to finally be reading this kind of thing in the local papers. A year ago you would have never found an opinion piece like this in your daily dead-tree rag. Listen, I love this area, but to think that we’ll chug along just fine while housing and the general economy in the rest of the country falters is just a bit too rose-tinted for me. I don’t want bad things to happen, but it seems that they are all but inevitable at this point, and shouldn’t people be warned?

(Mark Trahant, Seattle P-I, 09.03.2006)