Seattle Bubble

Here are a few stories from the last week or so that are worth pointing out.

First up a TV report from KOMO News: “Open House” — sign of the times in Snohomish County

Real estate agents in Snohomish County are now resorting to a “shock treatment” for slouching home sales in their area.

Realtors advertised more than 400 open houses over the weekend. Agents say they hope playing the numbers game adds-up to more home sales.

“It’s to get the public excited about all the great listings they can see out here today,” said Rich Williamson, President of the Snohomish County Association of Realtors. “It’s a chance to see more homes than they ever saw in one day or one weekend.”
…
Chris Lamoreaux says the housing market story is more than just numbers.

“We’re going fight the media that’s been negative about the housing market,” he said. “The real estate market in Snohomish County and the Puget Sound is excellent.”

That darn media, always being so negative about the housing market. I wonder if anyone can find me a quote from a real estate agent thanking the media for all the positive press when the housing market was gangbusters? Let me know if you come up with anything.

Moving to the opposite end of the Sound, down in Thurston county the “incentives” are flowing strong. The Olympian reports: Home sellers turn to incentives to draw buyers

A new Honda scooter, a trip to a Caribbean destination and a chance to win free gasoline are just some of the incentives that South Sound real-estate agents are using to entice prospective buyers in a slower housing market.

Some agents, though, are split on whether such incentives and other marketing efforts are worthwhile. Re/Max Four Seasons broker and owner Dean Stohl says the best approach for home sellers in this cooler housing climate is to think carefully about the sale.

“The most important ‘non-gimmick’ are sellers pricing the property competitively and making sure it is in ‘tip-top’ condition before putting it on the market,” he said.

Still, some agents are rolling out increasingly creative hooks to land that next sale because sales have cooled since the piping-hot years of 2005 and 2006.

Sounds like Dean Stohl has it figured out. Good luck to all those salesmen thinking that the prospect of paying 30 years of interest on a scooter will sell houses, though.

Another great column from the P-I’s Bill Virgin popped up last week as well: Economic woes could run deep in the region

As large and influential as those companies [Washington Mutual, Weyerhaeuser, Starbucks, Costco] are, there are less-visible layers of small and medium-sized companies that also keep the region’s economy moving.

Or not.

Those smaller outfits are dealing with the pressures and headaches of a slowing economy, some generated by the same factors plaguing large companies, others the result of cutbacks and retrenchments by larger companies with which those smaller firms do business.
…
“In today’s deteriorating economic climate, the ranks of companies feeling the pinch are growing,” writes Michael Newsome, a principal with Seattle-based investment banking firm Zachary Scott, in a recent newsletter. “Even in a fairly buoyant Northwest economy, we are entering a period of rationalization that will cut across industries. For a number of companies, depressed consumer confidence, ballooning energy costs, restricted credit access and, before long, higher interest rates will trigger sufficient financial distress to mandate restructurings and, in some cases, business sales or outright liquidations.

It’s nice to have at least one voice of realism in the local press. Too bad it seems like nobody is listening. Most people would rather believe that pink ponies will dance through the streets of Seattle forever and ever than consider the possibility that economic slowdown might actually affect us here.

Here’s one a few people pointed out. The latest top-ten list from Forbes’ Matt Woolsey is America’s Most Overpriced ZIP Codes. Guess who gets #3?

3. Seattle, Wash.

Downtown
ZIP code: 98104
Purchase-to-rent spread: 30.3

Until recently, Seattle has been held up as the example of a city immune to price drops as its market posted price increases from 2006 to early 2008. But as transaction volume has slipped and prices have flattened or fallen in many neighborhoods, the downtown area, near Pioneer Square, which experienced some of the most rapid price escalations during the boom, particularly in condos, appears vulnerable to correction.

Hooray for Seattle.

Lastly, here’s one from the national news scene. New York Times: Default rates for “alt-A” loans increasing

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

But I thought subprime was contained.

(Eric Schudiske, KOMO News, 07.28.2008)
(Rolf Boone, The Olympian, 08.04.2008)
(Bill Virgin, Seattle P-I, 07.30.2008)
(Matt Woolsey, Forbes.com, 07.29.2008)
(Vikas Bajaj, New York Times, 08.04.2008)

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)

A lot of people have emailed me and a lot of discussion has been going on in the forums and comments about the new mortgage freeze plan that is being announced today. Even Bill Virgin, one of Seattle Bubble’s favorite local editorialists has a column on the subject today:

You were the careful, responsible sort of home buyer. You took out a plain-vanilla, fixed-rate, 30-year mortgage, shunning exotic loans with low teaser rates, coupled it with a substantial down payment, bought only as much house as you could afford with monthly payments that were within your income. Maybe you’re even paying a little extra each month or have converted to a biweekly schedule to get the loan paid off in advance.

Silly you.

Or perhaps you were the careful, responsible sort of banker, one who got nervous over loans in which borrowers put nothing down, or paid so little that the principal owed grew every month, or signed up for loans whose payments they could never afford once the low teaser rates reset. Maybe you even shied away from making such loans, much less buying paper backed by them.

Silly you, too.

Because you, Ms. Prudent Home Buyer, and you, too, Mr. Cautious Banker, sure missed out on the party. While you were playing the role of the ant, everyone else was enjoying the life of the grasshopper.

And now you, directly or indirectly, will get to help pay to rescue those who had the fun — without getting any break as a reward for your frugalness.

As I have made abundantly clear here in the past, I couldn’t be much more strongly against bailouts. The fallout from the housing/credit bubble is not going to be pretty for anyone, including those of us that did not participate in the irresponsible run-up, but the best way to discourage something similar from happening again in a decade or two is to, as Bill says (but doesn’t necessarily advocate) “let people feel, however painfully, the consequences of their screw-ups.”

That being said, I can’t bring myself to be especially concerned about this latest plan. Many other people in the real estate blogging scene have spent far more time than I can afford to studying the plan, and the general consensus seems to be that it amounts to little more than a publicity stunt, designed to give the appearance that something is “being done” about the “housing crisis.”

Relatively few people will qualify for the freeze, and even fewer will bother taking advantage of it. Why would you lock in your payments on a house in which you have little to no equity, and is now worth 20% less than what you paid? Why would an ARM freeze be more appealing than just walking away? (Actually, according to Deejayoh’s forum post, someone in that situation wouldn’t even qualify, so I guess that just reiterates my point that few will qualify at all.)

Here are some good write-ups on the plan from around the web:

• Housing Doom - Most ARMs Not Likely To Be Affected By Reset Freeze
• Bubble Markets Inventory Tracking - Uncle W’s Subprime Freeze: Actual Results May Vary Among Users
• Calculated Risk - The Plan: My Initial Reaction

Also be sure to check out the Seattle Bubble Forum discussions:

• Could industry-wide work-out of subprime mortgages help?
• Banks/Fed Swing to the Rescue.
• Analyzing the Bailout

So is there something wrong with me, that I can’t seem to muster up any rage about this apparently-just-for-show bailout? I’m just not feeling it.

(Bill Virgin, Seattle P-I, 12.05.2007)

As the mortgage industry begins to crumble and home prices are declining across the nation, the local media and blogging real estate insiders seem to be getting a bit anxious. Maybe it’s just me, but take a look at some of the recent headlines:

Home values here still rising (Elizabeth Rhodes, Seattle Times)
Seattle-area homes are holding value, Zillow says (Aubrey Cohen, Seattle P-I)
No, Chicken Little, the sky isn’t falling… (Reba Haas, Rain City Guide)

Many recent reports such as these seem to have a tone of: “I swear, the housing market in Seattle is still strong! The mortgage mess won’t affect us at all, really!” Who can blame them, really? What else are people whose income depends on the continued strong performance of the local market going to say?

You’ve probably all seen the “Cycle of Market Emotions” on other housing blogs:

The Cycle of Market Emotions

Although it takes an ounce of actual critical thinking to see the cracks in Seattle’s housing market as of now, I believe that those most involved in the market can feel it in their bones. Whether they are consciously aware of it or not, the fear of what’s about to happen is starting to come through in what they write. Based on what I’m reading out there, I would place the general market sentiment in Seattle right now at somewhere between “Anxiety” and “Denial.”

Of course, some people are more willing than others to be frank about the situation facing us today. To her credit, Jillayne Schlicke over at Rain City Guide appears to be one of them, recommending in a frank post about the snowballing troubles at Countrywide, she recommends that employees there “polish your resumes and quietly begin making inquiries.”

And let’s not forget our old friend at the P-I, Bill Virgin, who pipes in on the ongoing mess with his usual wit and insight:

You can’t help reading the accumulating horror stories in the mortgage market… without shaking your head and wondering, “What were they thinking?”

Not the borrowers. The people making the loans.

The borrowers certainly deserve to be asked, “What were you thinking?” The explanations offered in answer range from, “I didn’t read it” to “They didn’t explain this to me” to “Maybe I fudged the numbers a bit” to “I didn’t count on my job/the housing market/ interest rates/the economy going bad on me.”

If ignorance born of laziness is unattractive in consumers, it’s inexcusable for the industry that was generating and selling these loans. Alternative explanations are hardly more absolving: Inexperience (”Housing markets only go up, right?”), hubris (”I know what I’m doing, those other clowns don’t.”) or greed (”As long as I get the loan made and sold, it’s not my problem.”).

The real world is not tolerant of such excuses, and it is a harsh grader on those who ignored, or never learned, the principles of responsible financial management.

Of course, it’s my opinion that anyone who didn’t see this kind of mess coming years ago was either not paying attention or willfully ignorant. I leave it as an exercise to the reader to determine which group of people falls into each category.

Who can say how this is all going to unfold in the coming months and years. All I know for sure is that these are definitely interesting times.

(Elizabeth Rhodes, Seattle Times, 08.18.2007)
(Aubrey Cohen, Source, 08.13.2007)
(Reba Haas, Rain City Guide, 08.18.2007)
(Jillayne Schlicke, Rain City Guide, 08.20.2007)
(Bill Virgin, Seattle P-I, 08.20.2007)

Here’s yet another gem from P-I columnist Bill Virgin: We’re all guilty of speculating in real estate

Greetings, fellow real-estate speculators. How ya’ feeling about your gamble on the real estate market these days?

Who, me? Not us, you protest. Our purchase of a home is meant to provide shelter for our families, not as an investment vehicle. If we do benefit financially from the tax breaks and an eventual gain on sale, so much the better, but that’s not our motivation in buying a home.

Ah, but indeed it is a major motivation, and those who claim to have no participation in real-estate speculation doth protest too much. We are all real-estate speculators to some degree. What we’re quibbling about is how much of a degree.

I think the easiest way to get someone to realize that their home purchase was more about financial speculation than they admit is to ask them how they would feel if tomorrow their home was worth just 25% less (which happened recently in California) than they paid, or heaven forbid, 50% less (which happened in Florida). I imagine that most people would be pretty upset. If it’s just “a place to live,” what’s the big deal? Oh wait, you bought into the “equity ladder” myth.

In a way, it’s difficult to blame people for stretching to buy homes in a speculative fever when every single media outlet has constantly pushed the “buy now or be priced out forever” message at every opportunity.

On the other hand, I’m a pretty old-fashioned kind of guy, in that I believe you are responsible for your own decisions. You bought a house that you could barely afford, using a risky loan, and now the interest rate has been jacked up and you can’t make payments? Well, it’s not like the terms of the loan were a mysterious secret, shrouded from the view of the hapless home buyer. And whose fault is it that you didn’t bother doing critical research, choosing instead to blindly accept the cliché that “real estate always goes up,” fed to you from people whose income depends on you buying what they’re selling?

Nobody’s but yours.

(Bill Virgin, Seattle P-I, 08.06.2007)

P-I columnist Bill Virgin sees the increasing unaffordability of housing in the Puget Sound as just another example of the big squeeze being put on the middle class:

Billboard not yet spotted along state Route 99:

Will the last middle-class family leaving Seattle please turn out the lights?

The future — or lack thereof — of the middle class has been on the minds of a lot of people lately. Escalating housing prices have many worried that the middle class is being priced out of the city. Three locals of the United Food and Commercial Workers union are sponsoring a Town Hall forum Sunday that asks, “Is Puget Sound losing its middle class?”
…
The expectation (more than a hope) was that the upward migration would continue. A lucky few might move up to the status of wealthy. An unlucky few might drop into the category of poor. On the whole, though, the middle class would continue to grow.

That notion is now under attack — from several directions. In Seattle, for example, the worry is that even with a job that pays what most would consider a comfortable wage, only a privileged few will be able to afford a house in the city, transforming the city into a resort community for well-to-do yuppies and empty nesters. (And if they can afford the pricey condos engulfing the city, do they still qualify as middle class?)

I’m not really one to pontificate on the philosophical social issues related to the housing bubble, but I thought the column might interest some of you.

So, does it?

(Bill Virgin, Seattle P-I, 06.05.2007)