Greetings Bubbleheads.
I am humbled to be in the good company of many excellent folks from all walks of life and professional backgrounds! My wife went off to a “purse party” (whatever that is, please don’t ask) last night. So, my two sons and I had a BBQ and listened to Dave Neihaus call the Mariner’s game and I thought I might take a moment by checking in with all my “secret friends” on Seattle Bubble, as my wife says all too often. Whether it’s a post here or at Rain City Guide, she says the same thing: “Are you talking to all your secret friends again?”
It has been a couple months since my last post. For those unfamiliar with “S-Crow”, my wife and I own and manage Legacy Escrow Service, Inc. And thanks to those who have inquired and/or used our service.
My topic is influenced by the question posed on the forum “will this market be similar to the last downturn?” How will it be different? The other question asked earlier this week was to dicuss a counterpoint or talking point (s) on why the Puget Sound region may weather the downturn much better than in other areas across the country.
First, a few points centered on employment to counter the idea of a deep downturn locally:
- Job strength is hard to argue against. In 1990, Microsoft was not nearly as robust as it is today and had a fraction of employment base it does today.
- Newer employers have attracted good wage earning professionals from within and outside our region, even worldwide. Some of these companies have grown significantly since the last downturn. For example:
- Amazon.com (Nasdaq in May of 1997)
- Starbucks (Nasdaq in 1992)
- Costco (Nasdaq in 1985)
- Established companies and employers provide a solid local foundation of employment which is the perceived cornerstone of housing strength. For example, we have Boeing, Nordstrom, REI, Fred Hutchison Cancer Research Center and many other high tech medical employers and hospitals; mid to large Universities such as Seattle University, Seattle Pacific University, University of Washington & Medical Center; Government, County and City services, and finally several significant military bases and support services for the US. Navy and Ft. Lewis all providing a solid foundation of economic drive.These larger businesses and corporate giants have thousands of employees that are all consumers, many of which decide to purchase housing rather than rent.It is important to remember that Seattle enjoys one of the largest Ports in country serving the Pacific Rim.
- The last downturn began in earnest in Spring of 90’, with a robust increase in inventory and slowing sales. During the year or so prior, Seattle real estate was in a FRENZY of buying and flipping homes. I recall this fondly as I participated as a laborer fixing homes on Queen Anne and Ballard—just after getting out of college in 1989. While unpleasant and a lot of individuals did lose money, it did not result in the major decrease in home prices that people expect today. Interest rates were much higher during this time than today
- Market research and information, unless you were an insider, really was word of mouth and print media. Intuition leads me to believe that information regarding a slowing market was not nearly as robust then as today—stickier prices.
Side note: at that time many within the real estate business left and companies consolidated or folded altogether.
Thoughts on why this downturn will be different
The first thing that comes to mind is debt. Just because one may be employed and have a good paying job, does not necessarily give you a free pass towards fiscal responsibility. There are examples that come through our escrow office that indicate otherwise. Some may have high incomes, but also spend at or way above their means. The net worth may be nil. Nice house, nice wheels and nice bling, but no savings and very little is owned outright (I’m sure everyone may know of someone in a similar situation).
- The war of the mind: information battlefield
Today, information, spin and analysis can overload your head. It’s too much. Blogs were nowhere to be found in the last downturn. Talking points can be easily countered with in-the-trenches reporting from those inside and outside the business to give a balanced report, nearly instantaneously. This was absent during the last downturn. I think the information battlefield will play a larger role than any single impetus that I can think of when comparing and contrasting this period of time vs. 1989-90. It would not surprise me if it also led to the market bottoming out quicker and starting the next cycle.
- People are going to be jammed financially
- The Fed had a lot of room to move rates DOWNWARD during the last downturn, not necessarily the case today.
- Since I’ve been in housing I’ve never seen funny money available like we’ve encountered over the last few years.
- In general the savings rate in our country is dismal. The spending rate with unearned income is spectacular.
- As the market slows there will be less and less of a chance for those with highly encumbered homes to sell at break even points.
- As the market slows there will a more likelihood that cash strapped sellers will move towards ‘have to sell’ status.
- Those that procrastinate about resets may find themselves in worse shape than if they anticipated and did something vs. react after the fact. Why?
- Because credit standards are much tighter than before.
- Because interest rates have risen enough that even if they move laterally into a new I/O ARM the program may not reduce the monthly payment to relieve any pain.
- Many homeowners abused the housing ATM machine to purchase cars, boats, trips to Vegas, home improvements, etc…
- Homeowners that have refinanced over the last three years or so have overwhelmingly increased their housing encumbrance by a minimum of 5% or more (I’d say a LOT more) over their initial loan amount. This is unprecedented and I can confirm this through many examples of “refinance refugees” (those that refi over and over) that closed transactions through our office, particularly in 2005.
- When I realized that 71% of all the purchases our escrow office closed in 2005 were 100% financed, I became “concerned” about what was driving our market and the market nationally. If all these borrowers try to sell in a flat market, it spells trouble.
- Interest rates have more impact on housing when they rise, especially in an environment where we have enjoyed very sharp spikes in appreciation and prices are high. You can’t have increasing housing values and increasing interest rates work together in harmony without incomes doing the same. This is one of the reasons we hear those at NAR and the National Mortgage Brokers assn. discussing keeping rates where they are. It begs the question why?
- Couple interest rate increases with tighter lending standards and Wall Street removing some liquidity with consumer debt at break point and you have a recipe for serious problems.
- Some would argue that the Stock Market is also in a bubble.
- Why are markets around the country experiencing defaults, foreclosures, and dismal sales when the economy is doing well?
The market: it is not running the mile in under 5 minutes anymore.
- While comparing year over year statistics are yielding respectable gains, the metric falls short of telling the whole story. For example, King Co. showed healthy YOY gains in median price but if you look closer and focus on Residential sales as the sole sample in a specific area, such as greater Ballard area (area 705) we find that the median has gone from about $500,000 in March to $475,000 in April and then up a bit for May at $478,000 this year. This is prime selling season mind you. So the market is clearly trying to find its legs.
- Incentives for sales agents are now frequent and list price reductions are very common. Many homes are sitting on the market for quite some time.
- Inventory is continuing to rise.
The secret ARM nobody talks about: Property Taxes.
Many locals, including yours truly, are experiencing increases in mortgage payments due to sharp increases in property taxes. My increase is 55% for 2008. So those with ARM’s have adjustments occurring before the resets. This is an extreme bummer, although my homeowner colleagues in Pierce county, appear to be experiencing some relief as reported in the Tacoma News Tribune.
From Inman News this Friday
Lou Barnes has this regarding the financial and real estate markets:
“The forecasters have run out of metaphors. I’m waiting for these headlines: “Canary Found Dead in Iceberg,” followed by “Tip of Coal Mine Feared.” Meanwhile, the cover-uppers are selling a variety of urban legends and Tales of The West.
Legend Number One: Loosened standards in late 2005 and 2006 are responsible for the subprime damage, which will be limited to those loans. This is nonsense. We (and all other retailers) were offered the first suicide loans back in 2000, which then and now fall into two generic groups: 100 percent loan-to-value ratio in any form, with or without borrower documentation, and adjustable-rate mortgages with last-cigarette adjustment structure. The roll-out of these loans coincided exactly with Wall Street’s discovery of “credit derivatives.”
The ultimate foreclosure damage was masked by a decline in interest rates to a 50-year low, and a roaring, self-reinforcing run-up in home prices.
Legend Number Two: Fraud by Main Street lenders has been the main problem. It is a problem; it has always been a problem, and its depth is always discovered when home prices go flat. In today’s parade of mortgage horrors, fraud is not even a secondary cause. Rather, the authentic causes (back to those two generic loan types) are: if you have no equity at purchase, and prices go flat, and anything goes wrong in your household, you’re cooked. Prices went flat in 2005; that’s the problem in ’05-’06 loans, not easier credit.
Then there are the ARM-structure effects. In 2006, the Fed took short-term rates from the 1 perent bottom in 2002-2004 to 5.25 percent. ARM indices follow the Fed: in 2002-2004 a subprime borrower adjusting to 5 percent over Libor at the end of year two or three (the despicable “2/28s and 3/27s”) only went to a 6 percent or 7 percent pay rate. Now, it’s to 10 percent or 11 percent, a disaster having nothing to do with “eased standards” in 2005 and 2006 originations.”