Seattle’s “Seller’s Market” Status Rapidly Eroding

Forbes has come out with yet another real estate “Top 10” list, this time gabbing on about the “Top Home Sellers’ Markets.” Interestingly, Seattle is conspicuously absent from the list. They explain:

The Methodology
To measure inventory glut, we used Moody’s Economy.com and National Association of Realtors data that tracked a market’s current sales rate by projecting the amount of time it would take to sell off the excess housing stock at the current rate of sales.

We also looked at the change in sales rate over the last year to measure the relative tightening or loosening of the market. Finally, a measure of price stability was applied so as to prevent the list from being a rundown of upstart markets.

The measurements left out a few cities that lacked comprehensive data. Seattle, for example, has incredibly strong market fundamentals—the lowest vacancy rate of major metros at 0.9% and is a small geographic area not conducive to overproduction. It is a good seller’s market, but for tracking what we were after, Seattle data was incomplete for our analysis.

I’m not sure why their data was “incomplete” for Seattle, and I imagine that if they had access to everything they were looking for, it probably would have been on their list. However, while Seattle might be a better sellers’ market than most of the country, all indications are that we have been granted only a temporary reprieve.

While the language in the article makes their calculations sound fancy and complicated, it would appear that their primary measure of whether a city has a good “sellers’ market” comes by dividing the total monthly sales by the current number of homes for sale. This is commonly referred to as “months of supply” (MOS), but they are referring to it as the “rate of sales.” Here’s a graph of King County’s SFH from 2005 to the present:

Forbes mentions that they “also looked at the change in sales rate over the last year to measure the relative tightening or loosening of the market.” As you can see, the Seattle market can only be described as “loosening.” At the end of May, MOS stood at 3.02, up 59% from last May’s value of 1.89, which was itself up 18% from the May 2005 value of 1.61.

Sales have been declining at an average rate of 10% year-to-year for the past 19 months:

While inventory has been increasing by over 24% year-to-year for over a year:

Is Seattle presently a seller’s market? Probably. Will it still be a seller’s market by the end of the year?

“Outlook not so good.”

(Matt Woolsey, Forbes.com, 06.22.2007)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

69 comments:

  1. 1
    deejayoh says:

    One thing to note, the definition of a tight vs. loose market varies widely when you are using the MOS measure. Dallas may be considered tight with 6 months of inventory, where if you look at the stats for the Seattle MSA it’s never gone much over 5 months.

    Every way that I have looked at it suggests the same thing – our inventory growth will take us into a negative price trend by the end of the summer – on a month to month basis.

    By the way – we are sitting at 9,390 SFR on the market today. I think we’ll hit 9,500 by the end of June. Way back in April I predicted we wouldn’t hit the record until the end of July. I guess I was too conservative. I’m guessing we’ll be over 10,000 units by then. And that isn’t even counting all the condos – which are growing much faster.

    ugly

  2. 2
    Buceri says:

    Deejayoh;

    Why don’t you count for condos? what is the number if condos are included and what is the comparison with last year’s numbers?
    Thank you

  3. 3
    The Tim says:

    Buceri,

    The difficult thing about including condos in any kind of inventory measurement is that the builders tend to only put one of each type of unit on the MLS. So, when a new condo opens (for sale), there may be 100 units available to buy, but only 6 listed on the MLS. This skews the MOS measurement considerably, since the sales are still recorded.

    That’s the way I understand it anyway.

  4. 4
    deejayoh says:

    Buceri –
    I excluded condos because Tim’s historical stats are for KC SFR – so I’ve kind of adopted that measure of inventory as well.

    I don’ t have great dat on this, so forgive the non std comparison – but condo inventory for KC in april 06 was 1,276. Today it stands at 2,782. And that doesn’t count pocket listings (e.g. for sale but not on MLS, mostly new construction). There are probably hundreds of those just in downtown Seattle.

  5. 5
    Buceri says:

    Thank you Tim. It makes sense; that’s what builders do. And there is probably no stat on “existing condos”.
    I might be wrong; but the way I see it, there’s more condo/twhome owners struggling trying to sell ($200-$300K mortgage with creative loan) than SFH owners.
    Thanks again

  6. 6
    deejayoh says:

    but the way I see it, there’s more condo/twhome owners struggling trying to sell ($200-$300K mortgage with creative loan) than SFH owners.

    I think you are spot on. I think we’ll see a 5-8% correction on SFH prices. Condos will probably get hit with twice that.

  7. 7
    rose-colored-coolaid says:

    Great charts Tim. The dead-cat bounce in chart #2 is good to see. It’s so pronounced, and yet every spring we hear how sales are increasing compared to the winter. It’s like the previous years dead-cat bounce never happened.

  8. 8
    EconE says:

    DJ…when you talk about a 5-8% correction for single family homes, what kind of a time frame are you looking at? Is it just over the next year or where you see prices ultimately ending up. I don’t follow the SFR market like you guys do but have checked time to time. When I see 600sf 1BR houses in Rainier Valley going for 300k it just makes me think that it will get hit harder than that ultimately. When I would read the L.A. Times RE sections they would list what the prices were around the city and had places like Watts and Inglewood closing in on $500k. Just seeing those numbers gives me a “gut feeling” that something really ugly is around the corner. I’m almost thinking that L.A. may eventually see something like the Rodney King riots again if too many homes go into foreclosure in those areas within a short time frame.

  9. 9
    deejayoh says:

    I guess I’m not as bearish as many. Barring total economic meltdown, I think it’s unlikely that the SFH market for the 3 county area will be off more than 10% at the bottom – and I think that will all run it’s course in the next ~30 months. Inventory growth can’t go too much further. It’s already starting to slow.

    In terms of the broader economy, remember we went through a stockmarket meltdown only 7 years ago, without even denting our market – so I’m just not ready to hunker down with a bunch of gold bars in my basement. Sorry, that’s just no fun!

    Now – my forecast is on average, of course. I am sure there are outlying or marginal areas will be worse – in addition to condos. I lived in LA after the riots too. Santa Monica and Pacific Palisades did just fine, as I recall!

  10. 10
    Crashcadia says:

    Hindenburg Omen

  11. 11
    S-crow says:

    deejayoh-

    You mentioned above that SFH inventory is over 9K. Are you referring to King Co? Please advise. Thanks.

  12. 12
    deejayoh says:

    You mentioned above that SFH inventory is over 9K. Are you referring to King Co? Please advise. Thanks.

    Yup, that is KingCo SFH inventory from Windermere, which now sits at 9,421 as I type this. Less than four hours after my first post, we are up another 31 houses!

  13. 13
    Alan says:

    I am amazed at how similar those curves are across time periods. It is neat how consistent statistical behavior is.

  14. 14
    EconE says:

    There was a huge increase in condo listings today also just for Seattle.

  15. 15
    Lionel says:

    Deejoyah, when you say that the Palisades and SM did okay after the riots, are you referring to pricing or actual physical threat? The Palisades is my home town (lived there for 30 some years), so I’m curious. If you’re talking about prices, of course there was a significant downturn in the 90’s (not directly related to the riots). I have a good friend who lost 400K when he bought the house next door before he managed to sell his own home. Pretty much wiped him out. My mom’s home in the Palisades has fluctuated wildly over the years. I’m betting houses in her neighborhood drop by half over the next four, five years.

    I have trouble believing Seattle will drop so little. The house I’m renting now for under 1700 is much, much nicer than a house down the street on the market for 450K. Assuming the house I’m in would be priced a little higher, the rent/own numbers are awful. 10% seems quite sanguine to me.

  16. 16
    deejayoh says:

    Lionel –
    I am sure you are correct that there were some horror stories about SM and PP in the early nineties. My point was more that those neighborhoods did well compared to those further out or more marginal.

    As far as 10% seeming sanguine – I guess it depends on your frame of reference. You lived through the LA decline of the early 90’s. Seemed pretty horrific, right? That slump was driven by a whole raft of industries just up and leaving, practically overnight. I did a study as part of my job back then. LA lost something like 15 Fortune 500 HQs in the span of 5 years.

    The impact on housing? The LA index was down 10.6% at the worst. I think people who are talking about 40-50% drops in home prices are a) prone to hyperbole and b) have no sense of how bad a 10% drop in home prices hurts. It means some houses DO drop 40-50% and nothing goes up.

    At the end of the day, I guess I also have a different view of how the psychology will play out than others do. The “you gotta live somewhere” mantra does come in to play here. Unlike a stock, when the investment goes south on a house – it still provides shelter. People faced with ponying $50 or $100k up to the bank for the right to move generally will decide it’s worthwhile to stay put for just a bit longer. So it’s not like you’ll see panicked selling like you do in more liquid markets. A little at first, as you clean out the infestors – but then the velocity of sales goes to nothing, and the few people who have to sell either do it because they have plenty of equity or they have no choice. Plus I’m not just pulling these numbers out of my @ss because they sound nice. I’ve modeled this six-ways to Sunday and every way I look at it the results come out the same – and they are consistent with historical market behavior (try to find an example of a 50% real-estate market haircut outside of the great depression).

    Of course, all this goes out the window in the event of a cataclysmic economic meltdown and I know that many have the opinion we are on the cusp of that today. I don’t happen to be in that camp. I think we’re looking more at 1979 than 1929.

  17. 17
    The Tim says:

    Deejayoh,

    What?!? You don’t think prices are going to plummet by at least 50%?

    That’s it, you’re fired.

    ;^)

  18. 18
    Lionel says:

    Deejayoh:

    You might very well be correct (and I don’t doubt you understand RE markets better than I do). I’m just not sure math models of the past are very useful here. I really believe that we’re in uncharted territory. When people pay 900K for a house in Gardena, it’s easy for me to imagine a 50% haircut. Or for those who have run up prices in Compton to a median of 440K, it’s easy for me to envision a 50% cut. The street I grew up on in PP, the cheapest house for sale at the moment is at just under 4M. It’s a beautiful area, but holy crap, 12 years ago you could buy a house there for 6-700K. The list is endless: 900K condos in Brentwood?! As I said, you might be right, I just have a very strong feeling that this game we’ve been playing for the last 4-5 years is entirely false and housing will not only fall, but will lead us into a recession that will take prices down even further. I think it’s just easier to see in LA because of the absurdity of the situation.

  19. 19
    deejayoh says:

    Well, I should correct my statement about LA – 10.6% was the max Y2Y decline – but the index fell from 100 to 73 – or 27% from 1990-1996.

    Just to put it in context, this was in the face of:
    1) a fairly significant recession on a national level
    2) Rodney King riots
    3) The 1994 Loma Prieta earthquake
    4) Losing the entire aerospace industry, all of their major bank HQ’s, and oil companies
    5) Huge fires in the valley, malibu
    6) Followed by huge floods and mudslides

    I remember living there. We were just waiting for the locusts to descend.

    Not surprisingly, LA in that period showed the worst performance ever for any market tracked by Case Shiller. It’s probably 2x worse than any other market

    I just don’t see it happening here. Heck, I don’t even see it happening there!

  20. 20
    BanteringBear says:

    “I think people who are talking about 40-50% drops in home prices are a) prone to hyperbole and b) have no sense of how bad a 10% drop in home prices hurts. It means some houses DO drop 40-50% and nothing goes up.”

    I disagree with your hyperbole. A 40-50% drop in home prices in the PNW would put many homes back to their 2000 prices. This isn’t much of a stretch given the current level of unaffordability. I think you underestimate how unhealthy the current market is, and how dire the situation has become. It is quite obvious that the hyperinflation in prices was due to speculation enabled by loose lending. How can you have a speculative bubble with nary a correction? To say that prices might correct a paltry 10%, in essence, retaining most of the gains after such a gargantuan run-up, is to not believe there is a speculative bubble to begin with. Look at what’s happening with Bear Stearns right now. This baby’s just warming up. When the real wealth destruction takes hold, who’s going to be buying those Ipod’s and XBOX’s and PC’s and on and on and on? Part of why I believe there will be massive corrections nationwide has a lot to do with the economic repercussions of a financial system run amok. While I haven’t called for a 50% correction in the Seattle area, it wouldn’t surprise me in the least.

    “The “you gotta live somewhere” mantra does come in to play here. Unlike a stock, when the investment goes south on a house – it still provides shelter. People faced with ponying $50 or $100k up to the bank for the right to move generally will decide it’s worthwhile to stay put for just a bit longer. So it’s not like you’ll see panicked selling like you do in more liquid markets. A little at first, as you clean out the infestors – but then the velocity of sales goes to nothing, and the few people who have to sell either do it because they have plenty of equity or they have no choice.”

    The few people? You are grossly underestimating the number of people who are in over their heads. The majority of the homes purchased at ridiculous prices over the course of the past several years were intended to be short term, and financially lucrative. People can’t afford these prices, plain and simple. Short term, yes, long term, no way in hell. This isn’t conjecture. People don’t use ARM’s and ALT-A products because they like them. They had to mask the fact that they couldn’t afford the beast to begin with.

    You are coming off as a bull in bears clothing. Stay away from those Kool Aid parties.

  21. 21
    deejayoh says:

    BB –
    wow. If you are saying that predicting a 10% drop in house prices is “bullish”…Lets put it in perspective. I am saying that housing prices performance will be the worst it has ever been in this market over the next 2-3 years.

    Kool-aid? Really?

    I am reminded of a story about a pot and a kettle…

  22. 22
    EconE says:

    Oh…let me tell you guys…house prices are dropping drastically in all those oh so special areas in L.A.

    I was sooooo hated at the multitude of open houses that I went to…hahahahahaha!

  23. 23
    rose-colored-coolaid says:

    deejayoh is likely very close to what will actually happen.

    Anyone suggesting a 40% decline to get back to Y2K affordability, needs to include inflation in their math. Assume the bubble plays out by the end of 2010 (ten years of craziness). That’s ten years of inflation since 2000 prices. If you assume 3% inflation over those ten years(likely low), then everything costs 34% more than it did in 2000…including housing.

    So here’s some off the cuff math. A $100 house would be $134 adjusted for inflation. I seem to recall our bubble had something like 10%, 15%, 14%, and 10%…about a 58% bubble related gain. $134/$158 is about a 16% loss.

    So back to what deejayoh said, a 10% loss is actually quite likely. I would actually pick a range…8%-13%, but that’s just me.

  24. 24
    uptown says:

    deejayoh makes some good points, but leaves out the fact the housing downturn was not limited to the LA area. The SF Bay area was hard hit too.

    Bubbles deflate, it’s basic market theory. Unless you have something to keep the price up (plenty of willing buyers) prices will go back to norm, and usually overshoot. Not every homeowner bought at the peak, and those that didn’t are very willing to adjust to the current market norm because it is still higher than what they paid. Add in all those who put nothing down and have no assets invested in “their” house. How long will they stick it out as the values drop?

  25. 25
    BanteringBear says:

    I agree that inflation has to be considered in the equation. However, I’m not ruling out 2000 pricing in nominal dollars if/when the economy tanks. The only way around substantially lower home prices, is a massive wage inflation, and I don’t see that happening. Quite the opposite, actually. People like to talk about some new paradigm where house prices find support at a permanently high plateau. That’s all a bunch of wishful BS. Ultimately, prices will represent what local wages afford, and nothing else.

  26. 26
    BanteringBear says:

    “Kool-aid? Really?…I am reminded of a story about a pot and a kettle…”

    Me? Kool-Aid? HAH!

  27. 27
    deejayoh says:

    deejayoh makes some good points, but leaves out the fact the housing downturn was not limited to the LA area. The SF Bay area was hard hit too.

    Oh, I didn’t forget SF. But the impact there was very different. it was hit about 12% in that period. Seatle was off about 6%. The ten city composite was off 8%, so those are so far off of the average.

    Here’s something to ponder on how “grossly” I am underestimating the number of people who are in over their heads…

    In my best Dwight Schrute ;^)

    Fact: There are roughly 500,000 owner occupied housing units in King County. Fact: Roughly 6-8% of these change hands every year.

    So our “exposure” is those owners who have taken bad loans, and who have bought recently enough that they have no equity. How many is this? maybe the last 2 years of purchases? I’m gonna say yes, so about 15%.

    And sub-prime was used, off the top of my head – maybe 8% of the time in Seattle, and Alt-A about 20% of the time. So if I am incredibly bearish, and I decide that 20% of the Sub-Primes and 10% of the Alt-A’s will default – then I have (8% x 20%) =1.6% of the 15% in trouble because of sub-prime, and (20% x 10%) = 2% of the 15% in trouble with alt-A

    Whew. Lets add this up… (1.6%+ 2.0%) = 3.6% x 15% = 0.54% of 500,000, or about (drum roll…….) 2,700 homes in King County that are going to tube the market. A quarter of our current inventory, spread over 2 years of resets.

    big whoopedy sh!t.

    That’s back of the envelope, but IMHO, you have to make some pretty whacky assumptions to make the numbers work for you. Even if they ALL go bad you are talking about 5%. Even if it is for 4 years instead of two, you are talking about 10%. Those are, in my mind, extreme assumptions. Yeah there are refis and helocs, and yadda yadda – but there are also multiple sales of the same homes in that two years that work the other way.

    Interested to hear how others do the math.

  28. 28
    deejayoh says:

    so those are so far off of the average

    Oops. That was sposta be “not so far off the average”

    Ah, I do miss being able to preview my posts

  29. 29
    MisterBubble says:

    “Fact: There are roughly 500,000 owner occupied housing units in King County. Fact: Roughly 6-8% of these change hands every year.”

    Assuming that I believe these facts, you might want to tell me why I should assume that owner-occupied housing units represent the relevant market. Moreover, you might want to tell me why the small percentage of these that change hands in a single year are the interesting segment of that market.

    In case you’ve forgotten, there are currently many hundreds of “luxury” housing units that are sitting vacant, or waiting to be completed. These will add to inventory as well.

  30. 30
    MisterBubble says:

    Bah.

    Edit the last line: these will add to inventory, adding downward pressure on prices, as well.

    I was trying to make two separate points:

    1) I think your estimate of future defaults is flawed, because you’re too focused on owner-occupied homes that change hands.

    2) Future defaults aren’t the only relevant data. Skyrocketing inventory is going to play a big role in downward price pressure, too.

  31. 31
    deejayoh says:

    well, um
    a) source is the census
    b) Owner occupied, because people aren’t in “over their heads” on rental housing in any way that I can see is going to affect real estate prices. mortgages aren’t used for other then owner occupied, at least they aren’t supposed to be
    c) the ones that change hands matter because bought more than a few years ago, you are sitting on boatloads of equity and so probably are not in any imminent danger of eviction – and this whole “bubble” discussion is really not that interesting
    d) Luxury units. Right. What’s your point? Are you really going to try to tell me something about inventory?
    Really, if you are going to get all snarky, ask better questions.

  32. 32
    deejayoh says:

    on d) luxury units – if you are referring to all those downtown condos. I agree. those people are screwed. See comment #6

  33. 33
    BanteringBear says:

    deejayoh posted:

    “And sub-prime was used, off the top of my head – maybe 8% of the time in Seattle, and Alt-A about 20% of the time. So if I am incredibly bearish, and I decide that 20% of the Sub-Primes and 10% of the Alt-A’s will default – then I have (8% x 20%) =1.6% of the 15% in trouble because of sub-prime, and (20% x 10%) = 2% of the 15% in trouble with alt-A…”

    Simply pulling numbers out of a dark smelly area and passing them off as accurate statistical data is faulty. I could argue that well more than 50% of Alt-A and subprime loans will default. As there is no historical precedent by which to compare, only time will tell how many of these loans will go bad.

    You might want to take a look at MEW’s over the past several years, since you seem to completely disregard them. I’ve included a link below. It’s important to note that a sizeable number of foreclosures (nationwide) are not recent purchases, but rather, people ATM’ing their houses to death.

    http://tinyurl.com/24z78r

  34. 34
    MisterBubble says:

    “Really, if you are going to get all snarky, ask better questions.”

    You need to calm down. One regression analysis doesn’t make you infallible.

    1) Owner-occupied homes that change hands are certainly part of the market, but there’s also “investment” purchases and second homes (which are not necessarily owner-occupied). Furthermore, new construction is not “owner-occupied”, and unlikely to be reflected in your analysis.

    2) You’re too attached to the notion of sub-dividing the housing market. If condos and townhomes crater, SFH sales will be affected. Many people want to buy SFH, but will likely settle for a brand new condo if the price is right. Thus, it isn’t a purely intellectual exercise to observe that condos and townhomes are overbuilt in Seattle — these are going to push down prices for all property.

    Another obvious problem: most of the census data you’ve cited is from 2000. I don’t know how this affects things, but it doesn’t give me confidence in your conclusions.

  35. 35
    deejayoh says:

    BB, you just keep digging the hole deeper…

    Simply pulling numbers out of a dark smelly area and passing them off as accurate statistical data is faulty. I could argue that well more than 50% of Alt-A and subprime loans will default. As there is no historical precedent by which to compare, only time will tell how many of these loans will go bad

    Now THERES a statement that defines irony! Perhaps it would be good for you to read this, the definititve report on the subprime problem… In it, you’ll see delinquencies on sub-prime maxing out historically at about 13-14%. How are you going to get to 50% default on these, again? when only about 1/3 of deliquencies proceed to default? And what about Alt-A, which has delinquencies at about a third the rate of sub-prime?

    Check any one of my numbers and tell me where I am off. 50% foreclosure rate? Puleeeaze. Your estimate is off by an order of magnitude.

    You might want to take a look at MEW’s over the past several years, since you seem to completely disregard them

    Actually, I didn’t disregard them. I put them in the category of “yadda yadda”, which is where I am filing the rest of your post as well. “MEW” is not a type of mortgage. It’s a use of funds from a mortgage. The mortgages we are referring to, are included in my numbers above – Seattle is around 8% sub-prime, and 20% Alt-A. (Check the CS report, charts 11 and 16. You’ll note Washington doesn’t even show up as a problem market) So any “MEW” that comes out of those mortgages could indeed be toxic. So what’s your estimate of % of residences that are levered up with refis? Add it to the number. It’s not that hard. Given that 1/3 of homes are owned outright, and I’ve already applied the factor to another 15% – that leaves about 50% of the homes to play with. So lets just say it’s half of them – well that’s 25% x 28% with bad mortgages – or 7% of homes that MIGHT have a problem – and then apply your foreclosure factor to that. Using my bearish numbers above, I get (8% x 25% x 20% FC) = 0.4% for subprime and (20% x 25% x 10%) = 0.5% for Alt-A.

    Now I think that is huge overstatement of the impact of MEW, but I’ll humor you. That’s another 4500 home owners – if you believe the bulk of Seattle is levering up like drunken sailors.

    The point is, you need to look at the numbers. You are making baseless assertions that don’t even make sense.

  36. 36
    deejayoh says:

    Mr B –
    Sorry, perhaps I let my emotions get the best of me. At least I put my thinking out there for others to comment on. I mean, you can say – I think this number should be X, not Y for the following reasons. Fine. But you can’t just pull a number of of your @ss.

    so –
    To your point 1 – the number of homes isn’t really that critical. The point is that given the structure of financing, the % at risk is pretty small, no matter how many homes we have. So add 2nd homes, fine. New construction – 1% per year. Doesn’t change the picture w/r/t financing.

    Point 2 – The numbers are for all owner occupied, not just SFH. So condos are included

    Re source: Actually, I used the AMR number from 2005 and grossed it up for 2 years at 1% – but as I said above, the percentage is more important. The only thing I used the base for is to calculate turnover. Annual Sales/total properties. Everything you point out is tweaks at the edges which are still going to fall into the 6-8% per year range. The more important question is what vintages of mortgages do you think are at risk. I used two years. Feel free to disagree. The numbers don’t get that much bigger.

    The page I pointed to had 2005 data as well based on AMR. It’s not going to be off by that much, and even so – it’s the percentage that matters,

  37. 37
    BanteringBear says:

    deejayoh posted:

    “And sub-prime was used, off the top of my head – maybe 8% of the time in Seattle, and Alt-A about 20% of the time. So if I am incredibly bearish, and I decide that 20% of the Sub-Primes and 10% of the Alt-A’s will default – then I have (8% x 20%) =1.6% of the 15% in trouble because of sub-prime, and (20% x 10%) = 2% of the 15% in trouble with alt-A…”

    “The point is, you need to look at the numbers. You are making baseless assertions that don’t even make sense.”

    Excuse me? Who is making baseless assertions? I am asserting that your numbers are flawed. I said that I “could argue that well more than 50% of Alt-A and subprime loans will default.” It would be no different than what you are doing, conjecturing. Again, we’re in uncharted territory here. I don’t think that historical default rates are even applicable to the current situation. The biggest problem is the debt as it pertains to the borrowers income. People used creative financing (speculators included) because they could not qualify for the houses, otherwise. Why? Because they couldn’t afford them! If I told you that 10 people earning $35k dollars per year, each bought a $350k home, how many of them would you guess would default? It could be all of them. And, your numbers don’t even take into account prime borrowers who will default. You know, the DINK’s who decided to go on a speculative homebuying spree, and will lose it all including their primary residence. I just think your numbers are way too optimistic. Perhaps you should start your own blog. You could call it the “Seattle’s More Special Than Any Other Area So We Will Hold Onto Most Of Our Bubble Gains When Our Souffle Gently Settles Blog”.

  38. 38
    deejayoh says:

    BB –
    We’ll have to agree to disagree on this one.

    I thought I was being bearish just to make my point, by making my estimates for defaults 4 to 5 times higher than any historical norm.

    I guess there is just no getting bearish enough for you.

  39. 39
    BanteringBear says:

    I’m just ruffling your feathers deejayoh. I’ve enjoyed a lot of your posts. No hard feelings. We’ll have to see how this thing plays out.

  40. 40
    50%off says:

    I’m thinking that the real problem here is exactly that all this current inventory/price reduction issues are occurring WITHOUT a recession, without job weakness and without a major change in the current lending environment. Once this starts, the job losses WILL come, the Inventory WILL further increase and lending standards WILL change significantly further in the direction that will make purchasing (at any price) significantly more difficult. The current affordability issues are abominable and once the masses begin to understand that home ownership in and of itself is neither worth the necessary ‘financial sacrifices’, nor a ‘good’ investment and we’ll see significant changes below DJoh’s modest projections. Add in the usual overcorrections that occur with a reversion to the mean and I don’t think 50% is fundamentally very far off. Of course, we will have to wait for it to play out before anyone can claim vindication of their foresight.

    I’m just following my intuition since actual numbers can be used to prove just about anything. I apologize that it doesn’t add to the ‘facts’ of the discussion. Just call it one man’s ‘gut’ feeling….sometimes found to be just a cramp after all.

  41. 41
    deejayoh says:

    BB –
    nope. no hard feelings here either. I just couldn’t see where I was coming off like Jim Cramer :)

  42. 42
    rose-colored-coolaid says:

    50%off is correct to bring up that we are not yet in a recession. And further more, in the last month we have started to see the bond markets meltdown. I disagree that such statements suggest in any terms that a 50% decline is imminent.

    Does anyone want to weigh in on these pressures in addition to the pressures of foreclosures and excess building meantioned above?

  43. 43
    Buceri says:

    Affordability (lack of) is the key. Has it ever been so out of whack as it is today??
    And to the sub-prime stats, throw an economic slow down with the increases in mortgage rates we are seeing…..
    Rates are still at historic lows; but sure, back then your loan was for $60K-$80K, not $200-$300 as they are today. 7% might not be affordable for some borrowers anymore.

  44. 44
    mike2 says:

    deejayoh, I’m not sure that “subprime delinquencies” at around 14% are a good indicator of how many loans are in trouble. There are 2 ways to “resolve” a delinquency. 1) Catch up on payments/re-fi 2) Foreclosure.

    Delinquency rates don’t include the number of homes that are already in foreclosure. The delinquency rate can stay at 15% indefinitely, meanwhile the total number of subprime defaults can reach close to 100%!

    Given the continued deterioration of the subprime market over the past 3 weeks with the ABX indicies hitting new lows below the February crash, there is no sign that we’ve reached a bottom.

  45. 45
    deejayoh says:

    OK, if anyone wants to bet me we will see 20% foreclosure rates, I will take all that action I can get. I am happy to take your money…

    Foreclosure Rate Hits Historic High
    Those borrowers entered foreclosure at a rate of 2.43 percent, up from 2 percent the previous quarter. The percentages seem small, but they are far above norms, particularly in a healthy economy. The concern is that the mortgage industry’s troubles could damage the economy if they are not contained.

    For more credit-worthy, prime borrowers, foreclosures rose slightly, to 0.25 percent, in the first quarter from 0.24 percent in the previous one.

  46. 46
    uptown says:

    Oh, I didn’t forget SF. But the impact there was very different. it was hit about 12% in that period.

    Well if the SF area was only down 12%, I would hate to see what 30% looked like.

  47. 47
    mike2 says:

    deejayoh, the question is “20% of what?”

    20% foreclosure rates on subprime loans issued in 2006-2007 is a low estimate over the life of the loans.

    Some tranches are already seeing 20% default rates.

    This has nothing to do with housing in particular, just really god awful poor underwriting standards on the part of the banks. If you look at the deterioration in credit rating bewteen loans securitized in early 06 vs early 07, the difference is dramatic.

    Comparing a historical average default rate to loans issued in the past 18 months is going to give a severe underestimate of the probability of default.

  48. 48
    deejayoh says:

    First off, sorry for the multiple posts…
    I was over helping dad and on his computer, for some reason they weren’t showing up so I figured I was either having logon or html code problems. guess it was neither

    I don’t know what you are referring to as a “tranche” of mortgages. Do you mean issued in a single year? I’d love to see any source that shows default rates at 20%.

  49. 49
    The Tim says:

    Sorry, your comments weren’t showing up because the WordPress spam filter flagged them as spam (maybe because of the different IP address). I pulled them out of the spam filter, and since they weren’t identical, I just left them all.

  50. 50
    deejayoh says:

    ah – so now I’m the second coming of Jim Cramer AND a spammer ;^).

    can you delete the first two? – they all have the same link. Thx

  51. 51
    wreckingbull says:

    I applaud all the research that went into the posts here. I guess I take a much simpler approach to the ‘correction factor.’ If we are at the top right now (a reasonable assumption), 10% off puts us back to mid-year 2006 prices, right? To me, 2006 prices are nowhere near equilibruim when one factors in comparable rents and incomes.

    Add to this, the fact that credit has now tightened up and investors are fleeing.

    This is, of course, a gut analysis, so I don’t intend to start or win any arguments. I do think it will take almost as long to unwind as it did to wind up. I doubt we will see the bottom before 2010.

  52. 52
    rose-colored-coolaid says:

    wreckingbull,

    First, that is not true. Prices gained 10% YOY, so a 10% decline would actually make them lower than they were this time last year.

    Quick example. 10% gain on $100 -> $100 * 110% = $110. 10% decline on $110 -> $110 * 90% = $99

    Second, as I posted above is that it’s easy to ignore inflation. Continuing the simple example, let a $100 appreciate 10% over one year, then depreciate 10% the next year, and assume 3% inflation a year (this doesn’t even have to be about housing).

    A) ($100 * 1.1) * .9 = $99 ($$$ value in Y2)
    B) 103% * 103% = 106% (inflation since Y0)
    C) $100 * 106% = $106 (inflation adjusted Y0)
    D) $106 – $99 = $7 (net loss in Y2 dollars)

    Results:
    From Y0 (year zero) to Y2, the dollar value of investment dropped $1. The real value dropped $7 Y2 dollars (approximately 6.6 Y0 dollars). In short, a loss of 3.5% this coming year would return us to June 2006 affordability (assuming mortgage rates don’t change). At least, that’s my off the cuff calculation.

  53. 53
    softwarengineer says:

    GREETINGS:

    Today’s market is driven by hotair. In 1978 I worked at Boeing and they brought in guestworkers at 70% pay; but these foreign workers gladly bought in to inflated Seattle markets with 75% of their net pay. They didn’t mind living on beans and rice with a junk car to get to work.

    Real Americans have more lifestyle expectations than foreign guest workers and at least got two incomes to buy the house; one for the mortgage payment and the other for food, cars and insurances.

    Will our upper middle class two income households buy Seattle real estate? They already have, they might be in the foreclosure moarket later when the subprimes collapse in this year and coming years it should get much worse.

    I’d add the average income in Seattle is 1.2 workers per household ($45K); good luck realitors getting these subprimes in a Seattle house, your best bet is Bill Gates can get you more foreign workers H-1Bs that you might get squeezed into the market anyway and live like welfare people after buying a house. Real Americans have more BRAINS.

  54. 54
    Buceri says:

    WINDERMERE SFH inventory count at 9520 as of this morning at 8:30am. A 99 unit increase since deejayoh’s post last Friday at 4PM.
    We do need to keep in mind that some townhomes (and trailers) do get listed (and sneak in) as SFH. Even when you filter them out.

  55. 55
    deejayoh says:

    We do need to keep in mind that some townhomes (and trailers) do get listed (and sneak in) as SFH. Even when you filter them out

    I don’t try to filter them out. MLS always treats TH’s as SFH, so it’s apples to apples to leave them in.

    I’ve noticed that the numbers usually drop back by 50-100 on Mondays – presumably as sales from the weekend get processed? But of course, June ends on a Saturday…

  56. 56
    rentonite says:

    I just noticed a comment way up near the top about condos only being partially listed (6 of 100 available units, for example) in the MLS. Isn’t this also a tactic of new home builders? They know what is available but they only list a few homes in the neighborhood?

  57. 57
    Finance says:

    Another factor we have to take into account is the increase in Commercial Real Estate in Bellevue & Seattle over the past few years…and what will be coming online in the next two years.

    The job growth over the past several years in the greater Seattle region has been epic, as vacancy rates are currently in the mid to upper single digits (when they are typically in the mid teens, or twice as high as today). Thus, as the density of jobs increase, the DEMAND for housing increases in the same region, which would at least blunt the impact of an increased SUPPY in housing (to some degree, which has to be taken into account).

    Rental rates for commercial office space has been increasing at double digit rates, thus as the market comes into equilibrium rents will gradually moderate. However, the SUPPY of office space will attract companies to set up shop in Downtown Seattle (& Bellevue). As more people work downtown the traffic during commutes will increase dramatically and people will be willing to pay a premium (at least to some degree) to live closer to work. Which is why I chose to buy a condo at the edge of Downtown Seattle (98101) and a 5 to 10 minute walk to the core Downtown Office Buildings (could hit the WA State Convention Center with a golf ball from our rooftop deck).

    Do I believe the RE market may decline in the Seattle Region, yes it has a good possibility of happening across the board…however Im in Deejoyoh’s camp that prices would not likely decline by more than 10%. My prediction is ~5% to 10% decline at worst, as Seattle’s worst decline was back in ~1991ish at 6%. The population in the region has grown in the past few years and “people have to live somewhere”, whether that be an apt, condo, townhouse, or SFR…it drives up rents and increases DEMAND.

    As shown on this and prior posts the Seattle area had much less appreciation over the past 7 years and would most likely have less of a decline than those overheated regions as well.

  58. 58
    george says:

    Finance:

    Why would the percentage drop in past declines forecast future downturns? Past performance is no guarantee of future results, correct? I’ve read this same comment about past declines in the Seattle Times (I think). I just don’t get the point.

  59. 59
    softwarengineer says:

    EPIC JOB GROWTH IN SEATTLE?

    Please show me in writing where this true?

    Verbal MSM allegations don’t count, I go to Boeing’s employee websites and see stagnation since 1999, same with Microsoft….ya got other leads????

  60. 60
    Finance says:

    george – Past declines dont predict the future, but over the long term they are generally a damn good indicator how they will react in comparison to other markets.

    For example I believe Deejoyoh showed that in the early 1990’s the SF area declined 12% when Seattle Declined 6%…which would mean they are twice as volitile (Beta = 2.0). Over the past 5 years the SF (& other bubble mkts) increased by about twice as much as we have, thus our decline shouldnt be as dramatic as SD, LV, Miami…just common sense.

    From the data we have the largest decline the Seattle area has had was in the early 1990’s (from what I have seen posted on this blog, unless someone can show otherwise I will use this #).

  61. 61
    sniglet says:

    Does anyone know how the prevalence of exotic mortgages (e.g. option ARM, 100% finance, 100% interest, negative amortization, etc) during previous real-estate downturns compare to today?

    From what I’ve heard it sounds as if these exotic loans are much more widely used today than ever. If so, I would think that tends to indicate that our downturn could be far more severe than anything in recent memory.

  62. 62
    50%off says:

    If you want to use past performance then you might want to consider that for the last 150 years real estate as averaged an increase of 1% in value (inflation adjusted or not doesn’t really matter here). In order to maintain that average rate of increase there must have been periods which were well BELOW that average. This is handled by the ole ‘reversion to the mean’ concept where things drop well below the average to compensate for the good times when RE is above the average.

    So judging by what I’m seeing here with 10-15-20+ % annual increases during the last few years, we’ll need to see some pretty serious below average years where RE drops OR we will have years of stagnant growth just to get back to the ‘mean’. Now when you want to talk about ‘long term’ being a pretty good indicator let’s look at really long term, t’ain’t so pretty for a while now is it? 10-15 years hardly a real trend makes!

  63. 63
    sniglet says:

    Here’s a thought experiment to consider: what will happen if credit standards tighten to the point where the ONLY mortgage a person can get is with full documentation, 20% down, and an 800 credit score?

    What impact would these tougher credit standards have on the market? Over half the buyers would vanish overnight. In such an environment a 10% average price reduction would be nothing.

    I think it is quite reasonable to expect that credit requirements will be as tight as this example suggests by the time we have hit bottom.

  64. 64
    deejayoh says:

    I think it is quite reasonable to expect that credit requirements will be as tight as this example suggests by the time we have hit bottom.

    So…. 13% of people have credit scores over 800. The change in credit approvals over the last few years let about 10% more buyers into the market. What possible rationale would lenders have for limiting their buyer pool to just to top 13%? In order to exclude the bottom 10%? I am baffled as to how this is “reasonable”. Sounds more like a wishful fantasy.

  65. 65
    Buceri says:

    Deejayoh:

    You always hear mortgage co. and banks take a huge hit when they foreclose. So tightening of credit (serious old fashion type), like good credit score, 20% downpayment, and most important, 25% max. of your gross monthly income for housing, would do the trick. Most people should not be able to get a $200K-$300 loan, period!
    And for whatever it’s worth, you can put me down on the “wishful fantasy” column (I admit it).

  66. 66
    sniglet says:

    deejayoh said: “The change in credit approvals over the last few years let about 10% more buyers into the market.”

    Interesting… Are you saying that 90% of the current buyers have 20% (or more) down-payments? I find it hard to believe that loosened credit standards have only brought “10%” more buyers into the market, especially considering how no-doc loans were over 40% of the total in 2006.

    Maybe if you look at only the credit scores that lenders are willing to work with the pool of buyers has increased only by 10%. However, if you consider all the loosening of standards (e.g. allowing lower down-payments, no documentation, qualifying only for “teaser” payments, etc), I think the pool of buyers has been increased far more than 10% from 1995.

    It’s not that lenders are eager to push away customers. Rather, the demand in the secondary market for any kind of mortgage that doesn’t have a substantial down-payment, full documentation and a stellar credit score of the customer. Just ask New Century if they “wanted” to stop lending? They just didn’t have a choice when the secondary market stopped buying their paper.

    Let’s put it another way. How many of the current buyers would have been able to get a mortgage with 1995 standards? Frankly, by the time we hit bottom I suspect the credit standards (e.g. downpayment requirements, credit score, documentation requirements, etc) will be HIGHER than we’ve seen for at least 20 years. Things always over-shoot both on the way up and on the way down.

  67. 67
    deejayoh says:

    Sniglet,
    you completely ignored my point. You said it is “reasonable” that lenders will require an 800 credit score. That is not a reasonable assumption. It’s a ridiculous statement.

    As to the impact of subprime – it’s 20% of mortgages. In 2001, it was 7%. My math says, that’s 13% increase in buyers using subprime during the boom. A bit more than top of the head estimate of 10% – but a reasonably close estimate. Exhibit 15 in the pdf I sent you the link for yesterday…

    In terms of # of buyers enabled – you also need to put that in context. Home ownership in 2000 was 67.4% of the population. Home ownership in 2005 was 68.9%. That increase of 1.5 points of ownership means that the pool expanded by 2.2%. So no, I don’t agree that the loosening of standards has increased the pool of buyers by more than 10%… it’s simply not mathematically possible.

    Are lenders tightening standards? Absolutely. I don’t disagree. But in 1995, securitization of mortgages barely existed. Quasi-governmental entities controlled the market. Now ~50% of the market is MBS. They’ll tighten controls on that, but you are never going to stuff the genie back in the bottle.

  68. 68
    deejayoh says:

    Buceri –
    W/r/t impact on banks from foreclosures – that is true. But the potential scale of foreclosure activity has been wildly exaggerated on threads in this blog. Foreclosure rate sits at 0.58% today, and that is a ~30 year record. If it goes to 1%, it would be so out of scale to what we have ever experienced that it is unfathomable. Like someone running a 3 minute mile. Even for subprime – the rate is only 2.4%. People are forecasting that will more than double, based on I don’t know what expertise or experience. To me, knowing the rates kind of puts in context the impact of bad underwriting. The number of loans on the margin is not as enormous as some statements might lead you to believe.

  69. 69
    sniglet says:

    deejayoh said: “you completely ignored my point. You said it is “reasonable” that lenders will require an 800 credit score.

    Quasi-governmental entities controlled the market. Now ~50% of the market is MBS. They’ll tighten controls on that, but you are never going to stuff the genie back in the bottle.”

    I didn’t ignore your point, I simply meant to say that even if they don’t require 800 credit scores, it is reasonable to assume that there could be a need for higher scores than currently allowed. Further, I think that the actual credit score itself is only a small part of the credit tightening that will occur. Regardless of your credit I think it will be hard to get loans that don’t require large down-payments, allow no-docs, etc.

    This not a “sub-prime” issue. I think there are plenty of prime loans where the borrowers are stretching themselves which simply won’t be allowed as the downturn progresses.

    As far as putting the genie back in the bottle goes, I think we are already seeing the sub-prime genie go back in the bottle, and I don’t see why we won’t see even more tightening of the secondary mortgage market. We are just now discovering that many of the instruments used to manage the risk of mortgage securities might not work as advertised.

    I strongly believe that while the secondary market won’t vanish, it’s appetite for any kind of risk with mortgages will go out the window when the fall-out settles from debacles at places like Bear Stearns.

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