why the next Seattle RE downturn won't be like the others
Posted: Mon May 28, 2007 6:52 pmMore and more I am hearing people in our area agree that the incredible run-up in housing prices can't go on forever. However, the majority of people seem to believe that the worst we will see is a period of slow appreciation.
Tim even posted a chat with a local expert proclaiming that Seattle has never experienced wrenching declines, just long periods of doll-drums while wages caught up with home prices. Unfortunately, this time the downturn is going to be different for one simple reason: the explosion in crazy finance over the last five years.
The big factor that most local experts fail to take into account when talking about real-estate is the fact that we now have a substantial number of homes with exotic mortgages such as 100% finance and option ARM (much of which isn't even "sub-prime"). Well over 15% of all Seattle area mortgages are now of this variety.
Why does this matter? It matters because the VAST majority of people with these kinds of mortgages can't really afford their homes and are simply gambling that appreciation will bail them out. If the appreciation motor sputters for even a couple years, it will throw a great many of these folks into dire financial straights, and lead to a massive wave of foreclosures.
Yes, this downturn will be different because the financial structure of our local real-estate market is so precarious. To give some perspective, these exotic mortgages barely even registered above 1% of the total prior to 2000. Sure, people could ride out the troubles in the '70s and '80s, because they had secure mortgages with fixed costs. The new crowd, however, will lose their shirts in a downturn when their rates adjust, and their monthly payments go through the roof.
Tim even posted a chat with a local expert proclaiming that Seattle has never experienced wrenching declines, just long periods of doll-drums while wages caught up with home prices. Unfortunately, this time the downturn is going to be different for one simple reason: the explosion in crazy finance over the last five years.
The big factor that most local experts fail to take into account when talking about real-estate is the fact that we now have a substantial number of homes with exotic mortgages such as 100% finance and option ARM (much of which isn't even "sub-prime"). Well over 15% of all Seattle area mortgages are now of this variety.
Why does this matter? It matters because the VAST majority of people with these kinds of mortgages can't really afford their homes and are simply gambling that appreciation will bail them out. If the appreciation motor sputters for even a couple years, it will throw a great many of these folks into dire financial straights, and lead to a massive wave of foreclosures.
Yes, this downturn will be different because the financial structure of our local real-estate market is so precarious. To give some perspective, these exotic mortgages barely even registered above 1% of the total prior to 2000. Sure, people could ride out the troubles in the '70s and '80s, because they had secure mortgages with fixed costs. The new crowd, however, will lose their shirts in a downturn when their rates adjust, and their monthly payments go through the roof.