The Spin Cycle: Then vs. today

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?
      1. Because credit standards are much tighter than before.
      2. 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.
      3. 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.”

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About S-Crow

"S-Crow" (Tim Kane) is co-owner (with spouse Lynlee, LPO-Designated escrow Officer) of Legacy Escrow Service, Inc., an authentic independent escrow firm closing residential purchase/sale and refinance transactions.


  1. 1
    rose-colored-coolaid says:

    Great article. I appreciate that you didn’t attempt to make any predictions about the direction our market will go, but rather focused on describing exactly what state the market is in today.

  2. 2
    S-crow says:

    Sorry this post is ridiculously long. I type away as I think.

  3. 3
    geon says:

    It may be long, but I read through it with ease–and that’s saying something.

  4. 4
    pat says:

    Interesting article with great facts. Thanks for posting. I’m not predicting anything, although ARM loans that are resetting are going to cause some problems in the next year.

  5. 5
    Sniglet says:

    I know this is likely sounding a little repetitive (since I’ve been spouting off on the subject in other threads), but I think the key to understanding how this bubble is different than previous booms is to examine how much more extended people are with new exotic forms of credit.

    From what I hear we have never had the same prevalence of dodgy financing (e.g. negative amortization, 100% finance, no down payment, etc) as we do now. This is the primary reason I believe our downturn will be far more severe than anything we’ve seen in a LONG while.

    As far as jobs go, I think it is hard to appreciate how quickly things can change. Many of the businesses the Puget Sound depends heavily on are very sensitive to recessions and can see their fortunes change very quickly. Just watch how quickly the employment environment changes when several of the regions largest employers announce hiring freezes. We saw this for a brief period in 2002/2003, and it won’t take much for these trends to resurface.

    I lived in Silicon Valley during the ’90s and remember how unthinkable it was for people to consider than big name firms like Sun and Cisco could ever contract or lay people off. But this is exactly happened almost overnight when the .com bubble imploded.

    This time round, things are liable to be even nastier when the general credit bubble contracts.

  6. 6
    mike2 says:

    Excellent post S-Crow. It’s always good to hear reports from the (local) front lines. Thanks.

  7. 7
    NoFate says:

    Regarding the jobs and housing connection …in Shiller’s paper regarding the housing bubble, he has a graph that shows both the C-S Index and the unemployment rate. There are two previous US housing price spikes, which peak around 1980 and 1990 at 125 (up from around 110). Both spikes reveal similar pattterns:

    – At the exact same point in time that housing peaks, unemployment is at it’s lowest.
    – Also, at the same time a recession starts.
    – Then UE peaks 2-3 years later.
    – In both of these cases the index returns from 125 back to 110 (which has been kind of the modern norm).

    This time the index went from 110 to 185 …totally uncharted territory!!

    To Sniglet’s point …if people lose their jobs they tend to buy less coffee, books and software. Seattle is certainly not immune to slowdown …though would we be a year behind everyone else?? Hmmmmm…

    Anyway, we will see if it plays out this way. I can’t get a bead on the current economy though. Stocks are up based on strong profits/ And UE is still low across the US even though we are past the price peak in most places. Is it the lull before the Level 5 Hurricane finds landfall …or will the economy shrug it off and leave housing prices mostly to deflate due to inflation for the next 10+ years?

    I’m thinking the hurricane is coming …but it’s still too early to tell.

  8. 8
    NoFate says:

    And I agree with the consensus …great article S-Crow!

  9. 9
    EconE says:

    Great post…but…really…you let your wife go to a “purse party”?

    Dude…talk about another bubble…purses/handbags are worse if not as bad as Escada jeans.

    just hope that she doesn’t come home with any of these…



  10. 10
    Buceri says:

    Great post!!! I generally share them with my wife. The “purse party” gives the post a WR rating (wife restricted).

    Thanks for the great insides.

  11. 11
    Lake Hills Renter says:

    WTF is a purse party?

  12. 12
    B says:

    I’m just glad that my wife doesn’t really do hand-bags, isn’t a big shopper, and is very skeptical of the “Suzanne-factor” in real estate. What a gal!

  13. 13

    Everyone is talking about foreclosures. I did an interesting analysis of where these properties are in California, but reviewing what is the MLS databases. I listed what percentage of listings are foreclosure-related among the major metropolitan areas in California, and then I looked the specific zip codes. It is surprising that in some areas, almost 40% of the homes are foreclosure-related. The article:

    – Henry

  14. 14
    BelRenter says:

    Great post!

    LakeHills, an “X party” where X == purses, or jewelry, or tupperware is a party thrown for the purpose of selling X in a relaxed atmosphere. It’s like shopping but in someone’s living room with friends, food, alcohol, etc.

  15. 15
    Lake Hills Renter says:

    Wow, what a consumer culture we are.

  16. 16
    Matt says:

    I admit, those who spend beyond their means are doomed. That’s common sense.

    However, for the “I can’t buy unless I have 20% down and the payment does not exceed 1/3 gross income” . .. which, according to the posters stats, is about a quarter of the market (I’d bet, those on the higher end of home price). I imagine that the worst that will happen to this folks (should they HAVE to relocate) is to . . . hold it . . . they’ll have to rent their property to you guys (who are frozen in fear to buy).

    That bay area home you could’ve bought in 1998, moments before the .com bust, would have easily return you OVER a double, today.

    Bottom line is people are ALWAYS going to buy and own their own home. The worst thing that should happen to the sensible buyers, should they have to move and the market is down, is to rent to you guys; who make great equity builders for the “nutty” home-buyers of today. :)

  17. 17
    mesathinks says:

    There is absolutely nothing wrong with 100% financing. The lender should not allow it but I am completely stumped as to why the inteligent and educated folks on this board continue to espose this. I wrote another couple of paras but blew it off, you guys are impossible to debate on core issues. I do by the way have a 30 fixed, no PMI loan and 61/2 that I’m paying enough monthly to amortise in 22 year.

  18. 18
    Matthew says:

    “There is absolutely nothing wrong with 100% financing.”

    “The lender should not allow it.”


    The issue with 100% financing is that it’s MORE RISKY for all involved. That’s fine for the lender as long as the interest rate on the 2nd mortgage reflects that, and in recent times this has not been the case.

    The issue for the borrower is that if you HAVE to sell (divorce, job loss, relocation, neighbor) then there’s a good chance you’ll have zero equity and will be hit with an additional 6% commission and taxes when you sell. That money comes out of your pocket and it’s likely that most people just don’t have it. If they did, they probably would have put it down as down-payment.

    During times of high appreciation, 100% financing is fine as you end up with equity just by sitting on your ass. I bought with 5% down in 2003 and it didn’t take long until I was sitting on 20%. HOWEVER, if prices flatten or even just return to historic norms (3-4%) then you could be screwed and have to foreclose.

    100% equity = no buffer = no safety net

  19. 19
    TJ_98370 says:

    In general the savings rate in our country is dismal. The spending rate with unearned income is spectacular.

    Interesting to note that Newsweek published an article indicating saving is bad for the economy!

    What’s the Biggest Threat to the U.S. Economy?

    July 2-9, 2007 issue – If you picked savings, go to the head of the class. For 25 years, Americans have been on a collective shopping spree, aided by a historic collapse of the personal-saving rate. In the early 1980s, U.S. consumers saved about 10 percent of their after-tax income; in 2005, the saving rate hit zero. A rapid rebound in savings could be devastating. Consider: Americans spend about $10 trillion a year. A jump in the saving rate to 5 percent would cut that by a massive $500 billion….

  20. 20
    sniglet says:

    I certainly don’t think 100% financing is necessarily wrong for all home-owners. There are certainly cases where it can be a great deal for a particular owner.

    On the other hand, a high prevalence of 100% financing is an indication of a fragile market. The greater the proportion of owners who have little, or no, skin in the game can lead to significant volatility.

    In fact, I will go so far as to say that on an individual basis, many of these exotic and/or sub-prime loans might make sense. But collectively, the endemic use of such financing schemes is a red flag that a given market has a foundation of quick sand.

  21. 21
    mhays says:

    Very interesting article with many good points.

    I’d add more about population growth vs. supply to the discussion. Metro Seattle’s population is growing pretty quickly again in contrast to a couple years ago. But the number of housing units getting built isn’t really very high by historical standards, even if the new units do tend to be in prominent locations.

    The result is a quickly-tightening rental market, also due to conversions and offset a little by condos rented out. Rental prices are growing quickly. Yet they’re still too low compared to construction costs for many developers to pull the trigger on new apartment complexes.

    Renting is losing its status as a safe, cheap alternative to buying.

    (disclosure: I work for a general contractor that builds both condos and apartments. But I’m speaking for myself, as someone who’s buying a condo to close in 2008, and selling another one right after that. Hoping for stability at least!)

  22. 22
    deejayoh says:

    I’d add more about population growth vs. supply to the discussion. Metro Seattle’s population is growing pretty quickly again in contrast to a couple years ago. But the number of housing units getting built isn’t really very high by historical standards, even if the new units do tend to be in prominent locations

    I think that one is urban myth. Population for King county grew 7.2% from 00-07, housing units grew 9.4% during the sam3 period. Data courtesy of the State of Wa Office of Financial Management

  23. 23
    Newbie says:

    I have been reading here for the past couple of months, my purpose being to understand if it is worth buying a house/townhome in seattle.
    Now, landlord just increased my rent by 15%. This is pushing me towards seriously considering buying. What do you suggest?

  24. 24
    The Bruce says:

    Rent’s ‘safe’ status has quite a long life ahead of it in this market.. My home is $2000 to rent, and 20% down PITI if we purchased at a fixed rate would be close to $3600 after King County taxs.. There is still quite a large gap there, even taking into account the tax benefits of paying a bank to own my house..

  25. 25

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