Unemployment Rising Four Times Faster than Previous Recessions, Foreclosures Rising Three Times Faster

By request, here is a chart showing Notices of Trustee Sale and Unemployment. Note that the scale for each data set is different to allow their rates of change to be more easily compared.

Foreclosure and Unemployment Rates

The chart above shows the monthly percentage of households receiving a Notice of Trustee Sale (on the left axis) and the unemployment rate as reported by the Washington State Employment Security Department (on the right axis). Monthly unemployment data for King County is only available back through 1990.

As of January (the most recent data available), King County’s unemployment rate is sitting right at the value it hit at its peak in the early 1990s recession and the dot-com bust—6.7% However, the foreclosure rate is double the maximum point that it reached in 2002.

Both the foreclosure rate and the unemployment rate are currently rising far more rapidly than we have seen at any point in the last two decades.

From July 1990 to January 1993, the unemployment rate rose 3.1 percentage points, or about 0.1 points per month. From December 1999 to February 2003, the unemployment rate rose 3.3 points, or about 0.09 points per month. Since April of last year, King County’s unemployment rate has risen 3.6 points, or about 0.4 points per month. That’s four times faster than it rose during the last two recessions.

Likewise, the foreclosure rate rose 0.0015 points per month in the early ’90s and 0.0012 points per month from ’99 to ’02, but has risen 0.0038 points per month since early ’07, climbing two and a half to three times faster than the previous two recessions.

It is interesting to note that the foreclosure rate began its rapid ascent slightly before the unemployment rate began to shoot up. While I’m certain the unprecedented rate at which unemployment is climbing is a contributing factor in the increased foreclosures, I do not think the data supports the conclusion that it is the primary cause.

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

88 comments:

  1. 1
    JJL says:

    Tim,

    I appreciate the great graphs you do. It would be nice if you could include the actual trustee deed’s filed overlayed with this graph so you can get a sense of how many NTS’s turn into actual forclosures.

    I am preparing the same for Snohomish County. I have found that 55% of the NTS’s do not turn into actual foreclosures.

    By tracking this information we can get a sense of how much banks are doing loan modifications rather than foreclosures. Plus get a more accurate picture of just how many foreclosures are really happening.

    I would be happy to provide you the numbers if you need them.

  2. 2
    David Losh says:

    There are nine guys who have worked with me in the recent years. They are out of work and doing pick up here and there. Guys I talk to in construction who have clients, high end clients, are worried about getting paid.

    Even the people I know who have retired with decent portfolios, are concerned about rental income, the money they have in banks, annuities, bonds, and every type of investment instrument.

    Most of these people who own businesses are talking about cutting expenses. In most of those cases it means cutting jobs.

    What is bothering me is that the banks want to be paid at the same rate, same pace, and same terms as usual.

  3. 3
    patient says:

    You plot any economic indicator with the foreclosure rate this time ( car sales, restaurants visits etc,etc ) and it will show a correlation. It’s meaningless. Foreclosures are increasing since people many people grossly overpaid for homes with mortgages that they can’t afford to pay employeed or not. And when the home value can no longer support the mortgage value, foreclosure. Everything else is secondary and victims of the loss of consumption due to cash strapped home owners.

  4. 4
    Kary L. Krismer says:

    By JJL @ 1:

    I am preparing the same for Snohomish County. I have found that 55% of the NTS’s do not turn into actual foreclosures. .

    Are you actually tracking them, or just comparing the number of notices to sales for each month? I did the latter for the last two months in King County and the actual foreclosures were only 25% of the notices.

  5. 5
    Kary L. Krismer says:

    By patient @ 3:

    Foreclosures are increasing since people many people grossly overpaid for homes with mortgages that they can’t afford to pay employeed or not. And when the home value can no longer support the mortgage value, foreclosure. .

    I would also suggest you read my piece on foreclosures, because the limited sample of foreclosure notices I did failed to support the first claim.

    http://blog.seattlepi.nwsource.com/realestate/archives/163834.asp

    I would agree with the second claim that value is affecting the numbers, and that’s probably the reason why foreclosures started rising before unemployment rose (that and perhaps WARN notices). And it might also be the reason why the historical numbers were better. It wasn’t until about maybe 2006 or 2007 had to pay a really outrageous interest rate(10%+) if your wanted for refinance your way out of a foreclosure situation.

    Oh, and Tim, thanks for the chart and the topic!

  6. 6
    Cheap South says:

    It is clear that more and more foreclosures are tied to unemployment. Two income households that needed both incomes to make ends meet or one high income households where the same salary is hard to come by.

    Unfortunately for many, it will get worse. But, as many have stated before, it will bring back sanity to the pricing.

    Florida is already at pre-boom pricing. In fact, 2001 prices are common (18 months before the climb started).

  7. 7
    Jillayne says:

    JJL,

    65% of loan mods are re-defaulting at the 6 month mark.

  8. 8
    Kary L. Krismer says:

    By Jillayne @ 7:

    65% of loan mods are re-defaulting at the 6 month mark.

    Which is what I would expect. Chapter 13 is a much better remedy because it treats all the debt and forces the debtors to live on a budget for 3-5 years. A loan modification is more akin to doctors only operating below the waste on auto accident victims.

  9. 9
    deejayoh says:

    1991 and 2001 – were those significant recessions locally? IIRC, the state came out fairly well in those

    I would love to see comparison to the 1981 recession or even the early 70’s bust.

    I know that data is tough to come by

  10. 10
    Jeremy says:

    I would also submit that consumers were not as highly leveraged in their homes in previous recessions. With smaller equity bases it doesn’t take as much for the debtor to become either upside-down or have little financial reason to stay in the home and continue making payments.

  11. 11
    JJL says:

    Kary,

    I’m tracking the NTS’s against the Trustee Deeds.

    2005 = 35% converted to foreclosure
    2006 = 25%
    2007 = 43%
    2008 = 44%

    I did take notice that the King County conversion numbers were much lower. This may or may not have to do with the fact that outlining areas have more of the subprime/bad loans. I don’t know how “outlining areas” compare between King & Sno. Co. It would be interesting to compare the numbers by zip code, but I don’t think that is available. There is a way to search by section and township – but I haven’t gotten that detailed yet. But I might just do that.

    Jillayne,

    65% is based on past performance numbers. I think in this new era of modifying loans for 3% interest or less is going to produce some different results (hopefully). The problem with tracking them is that as loan mods are filed there is no way to distinguish between line of credit mods, builders accessing more credit and distressed loan mods.

    Snohomish Co.:
    2008 695 loan mods
    2007 819 loan mods

    Unless there is a clear spike in these numbers it won’t be readily obvious if mods are way up. Perhaps these are numbers that the mortgage industry tracks.

    It will be interesting to see how it shakes out next year once we have a period of time that has been tracked in this new environment.

    In being the glass is 1/2 full gal at least your numbers show that mods help 45% of those people that get them.

    One question I have is if there 900 NTS filed in King County and only 250 Trustee Sales, what is happening with the other 650 loans? I imagine a certain percentage find or borrow the money to stop the sale, some will refiance, some will short sale and another group will modify their loans. We just don’t how many are doing what.

    Julie

  12. 12
    JJL says:

    RE: deejayoh @ 9

    I have the Sno. Co. numbers back to 1976. I haven’t charted them yet.

  13. 13
    Dave says:

    I would suggest that consumers are highly leveraged in ALL of their finances, not just their homes. Today, homeowners have considerable credit card debt, auto debt, student debt and all the other kinds of debt one can pile up. I think this a major reason that homeowners re-default on loan modifications. A loan modification may allow them to pay several hundred dollars a month less, but that is simply overwhelmed by all the other debt that they carry. I believe for most distressed homeowners, the only rational solution is not loan modification, but either foreclosure or bankruptcy.

    But who said there was anything rational about homeownership?

  14. 14
    Ray Pepper says:

    RE: Jillayne @ 7

    Has nothing to do with not being able to pay the new payment. Has EVERYTHING to do with owners not willing to make payments on an upside down asset.

    I will say it for the 20th time. People will NOT stay in their homes when upside down greater then 15%. The only answer ……………..MTG Cram DOWN! Enough with the promise of 2% loans………….or option 2…………

    Foreclose on them all….and rent back to the former homeowner…Then after a period of positive rental history they can have the option of buying back from the bank at the new value and rate!! In essence…….the same as Mtg Cramdown. Should take the Fed another 6 months to figure this out!

    Good LORD!

  15. 15
    Hugh Dominic says:

    This graph – and the numbers behind it – are what have potential buyers like me on the sidelines.

    I am in the market to buy – and have even been going to open houses. But there is no way I am going to take on a mortgage (even one that is less than 3X my income) when the economy is heading in this direction.

    There is a line of thinking that some people espouse along the lines of “if you like a house, and can afford the payments and aren’t thinking of moving in the next 10 years, who cares about the risky market, go ahead and buy it”.

    That may have made sense when we were looking at a normal recession/unemployment cycle (not to me, but hey). What is happening now is clearly NOT normal so all bets are off.

    I can not understand how a rational person would put 20-25% down on a rapidly depreciating asset with no end in sight for the recession and the possibility of a multi-year depression. Who is buying houses now? Compulsive gamblers?

    I am not kidding myself that I can time the market perfectly, but it just doesn’t make sense to put money into RE when the economic indicators are pointing down so strongly. Don’t these people realize that even with 20% off the asking price there is a chance they will be underwater in a year or two? Down payment gone – poof – evaporated. WTF?

    On top of the grim national economic picture, the local RE market is still not making sense. Even with ~20% off in the Seattle area, when I look at the rent/mortgage ratios for most houses I like, they are still way out of line. The numbers are getting better, but it still doesn’t make sense to buy when I can rent for 30-50% less money.

    With layoffs mounting and more homeowners in distress, the downward pressure on prices will only increase. Just as LA/San Diego/Las Vegas/Miami all saw a slow start to their down turn followed by an abrupt drop off as inventory built up, we are likely to see the same thing. The next 6 months will be very interesting….

  16. 16
    Kary L. Krismer says:

    RE: Ray Pepper @ 14 – You’re basically arguing that homeowners make really stupid decisions if you’re arguing they should walk away.

  17. 17
    The Tim says:

    By Hugh Dominic @ 15:

    There is a line of thinking that some people espouse along the lines of “if you like a house, and can afford the payments and aren’t thinking of moving in the next 10 years, who cares about the risky market, go ahead and buy it”.

    That is basically my position, even in this market, but I make one important addition (and one minor one): If you like the house, can afford the payments, feel that the price is a good value, aren’t thinking of moving for at least 10 years, and can both emotionally and financially stomach it if the price continues to drop significantly, then go for it.

    I stand by that position. Of course, for myself (and, I would think, most rational people) we’re still not to the point of meeting those requirements. It’s a lot closer than it was two years ago, but we’ve still got a good ways to go, IMO.

  18. 18
    JJL says:

    Loan modifications can work. Loan modifications have taken a drastic change in our current environment. We had a client who modified their loan last week from a 6.5% 30 year fixed to a 3% 40 year fixed. Her payments went from over $2,000 to $900.

    This client is about $50K upside down and they want to stay in their home for their family, school and work.

    This is substantial. If loan modifications are made like this across the board, I challenge you to find a cheaper rental for a 5 bedroom 3 bath 2800 square foot home.

    Loan modifications can work for the right client.

  19. 19
    Sniglet says:

    can both emotionally and financially stomach it if the price continues to drop significantly

    I whole heartedly agree with this. In fact, I would go so far as to say that you should feel comfortable with a possible 50% decline in the price of a property you are buying today. If such a possible price decline wouldn’t cause you any significant emotional or financial problems, then go right ahead and buy the house.

  20. 20
    b says:

    RE: The Tim @ 17
    I think a better metric these days is what you said, with the caveat that you have about a years worth of mortgage payments stashed away in savings outside of whatever downpayment you are using. If you don’t have that, you should not be buying in this market (unless you are a repo man or bankruptcy attorney). It still amazes me how many of my tech company friends are looking at buying houses that are “good deals” right now, even though I am willing to bet at least one or two of them will be laid off due to no fault of their own within the next year.

  21. 21
    pegasus says:

    JJL. I am curious on that loan modification. Who approved it and who is paying for the obvious losses? The banks, Freddie or Fanny or we the taxpayers? Answer is prolly we the taxpayers because the banks and Freddie or Fanny are getting their money from we the taxpayers also. I think everyone deserves a loan modification at someone else’s expense.

  22. 22
    EconE says:

    Just because they can modify a $500k loan with interest rate/loan term changes in order to make it more “affordable” doesn’t mean that the house is worth $500k.

    I’d be curious to see what exact types of loans are defaulting.

    If a household “qualified” only for a 1% teaser payment on a neg-am loan, when it recasts and resets, they won’t be able to afford it…even if there is no job loss. Unless of course their income more than doubled from the time they took the loan out.

    Don’t even get me started on the over-inflated stated income loans either.

    And how would that chart look if we were using U6 vs U3?

  23. 23
    C says:

    RE: JJL @ 18

    Probably a dumb question, but how does one go about doing a loan modification? Do you need to upside-down by a certain percentage – ie 25% or can you still be above water? Do you go through your current lender to do this?

  24. 24
    patient says:

    My guess is that many people are just sick and tired of the crushing payments, worries and strain from living paycheck to paycheck with no end in sight. The luster of the granite counter tops has since long faded and been replaced with family stress and arguments on how to make end meets and other stress induced fights. Many probably no longer associates their home with happiness and peace but with hardship and stress and wants to turn the chapter, leaveit behind and startup fresh. I think the government mistakingly thinks that everyone want to “stay in their homes” if they can enable a way to do it.

  25. 25
    JJL says:

    Who’s paying for the losses? You Are!

    Come on… haven’t you listened to the news? It’s part of Obama’s Loan Modification Plan.

    It’s part of his stimulous package…. you know…. the one that was announced the other day.

    Who qualifies?

    I suggest you read O’bama’s Plan. Here are some links to guide you.

    http://www.treasury.gov/press/releases/tg33.htm

    http://www.financialstability.gov/makinghomeaffordable/index.html

  26. 26
    David Losh says:

    RE: pegasus @ 21

    The bank needs to keep the asset because there is no other recourse. Foreclosure was great when properties were going up in price and the next sucker, I mean investor, was going to buy it for cash. Today those properties just sit there, banks don’t want to foreclose, even if they do no one wants them for less that 35% up to 50% of the last value.

    People keep talking about tax payers paying home owners. That’s not the deal. Our tax dollars are to make the banks happy to loan at a reduced interest rate. Banks now have these ridiculous requirements to give loans.

    Loan modifications are along the same line. You prove to the bank you are a responsible borrower and they will generously let you give them more money.

    It’s the bank and the borrower, your tax dollars are just flushed down the black hole of our banking system. Home owners are screwed by the bank, the tax payers are screwed by the bank.

    The bank gets money coming and going and yet we are supposed to make the bank feel better about lending money.

    The bank is in the lending business, the bank made bad loan products, then the bank made bad loan decisions on who to give money to. Why are we paying?

  27. 27
    JJL says:

    To keep things in perspective, even if forclosure rates double this year for King County it will still only represent less than .004% of homeowners.

    I agree it’s unfair to bail out the banks because of the bad loans they made… but what are we going to do about it now? I’d rather focus on solutions and give Obama’s plan time to stabilize the economy.

    The good news I’ve read lately is how the government is looking to indict lenders and brokers for fraud. Yeah!

    FDIC: Mortgage Fraud Epidemic Revealed
    Friday, March 6, 2009 11:07 AM

    “To date we’re pursuing well over a hundred home mortgage fraud cases, and investigating some 4,000 more.”

    The agency, now preparing for a surge of civil cases against alleged fraudsters, is going after brokers, appraisers, loan officers, attorneys and closing agents who cheated lenders through schemes involving inflated appraisals, stolen identities, and property flipping.

    Full Story Here: http://moneynews.newsmax.com/streettalk/fdic_mortgage_fraud/2009/03/06/189200.html

    Also: Did you read about the Christopher Warren Story:
    Here:
    http://www.flippingfrenzy.com/category/christopher-warren/

    Mortgage Fraud is investigated by the Federal Bureau of Investigation and is
    punishable by up to 30 years in federal prison or $1,000,000 fine, or both. It is
    illegal for a person to make any false statement regarding income, assets, debt,
    or matters of identification, or to willfully overvalue any land or property, in a
    loan and credit application for the purpose of influencing in any way the
    action of a financial institution.

  28. 28
    Hugh Dominic says:

    By The Tim @ 17:

    can both emotionally and financially stomach it if the price continues to drop significantly

    I guess that rules me out – nearly 100% certain wealth evaporation turns my stomach – so I am staying on the slidelines for a few more quarters.

  29. 29
    Herman says:

    This is a great time to stop paying your mortgage. Banks don’t want your house. They would rather have a productive mortgage at 3% than your house. Stop paying, bring the bank to the table. The bank will make it Obama’s problem, and Obama will make it the taxpayers problem.

  30. 30
    Hugh Dominic says:

    By b @ 20:

    It still amazes me how many of my tech company friends are looking at buying houses that are “good deals” right now, even though I am willing to bet at least one or two of them will be laid off due to no fault of their own within the next year.

    Completely agree – in this market even “safe” jobs in growth industries might not be safe… I think a year’s worth of mortgage payments is a good hedge, but that is really not enough.

    If we are indeed looking at a long painful economic restructuring, people need to ask themselves “could I pay my mortgage if I had to take a 30% pay cut”. Two years ago no one had to ask that themselves that question. But now, in a deflationary environment with rapidly rising unemployment, you would be foolish not to.

  31. 31
    The Tim says:

    By JJL @ 27:

    To keep things in perspective, even if forclosure rates double this year for King County it will still only represent less than .004% of homeowners.

    That can’t be correct. The chart in this post shows foreclosure notices as a percentage of all households (renters and homeowners combined) and that number has already reached 0.11% as of January, which is 28 times the rate you state.

    If we factor in the Census-Bureau’s owner-occupied rate for King County of ~62%, then the percentage of actual home “owners” receiving foreclosure notices is in reality in the ballpark of 0.17%, or 43 times higher than the 0.004% you state.

    0.17% is still a low number, but to give it historical perspective, it’s about four times the average rate from 1979 through 2000.

  32. 32
    JJL says:

    Herman,

    You don’t need to stop paying your mortgage to bring the lender to the negotiating table.

    You don’t need to be behind on your mortgage to do a loan modification.

    You don’t need to ruin your credit for 10 years.

    The banks have already received the money from the stimulous plan to modify the mortgages and have told Obama that they don’t need any more.

    The banks are already starting to post profits.

    To tell people to stop making their house payments is really bad advice.

  33. 33
    Angie says:

    6.5% 30 year fixed to a 3% 40 year fixed

    Is that 3% for the full 40 years? Dayum.

  34. 34
    JJL says:

    Okay Tim, check my math.

    I used the housing unit number of 816,764 from the 2007 census.

    It doesn’t matter if it is owner occupied or not, it’s owned by someone.

    With an estimated number of 4,000 actual foreclosures for 2009… I get .004%

  35. 35
    JJL says:

    Tim,

    If I revise the housing unit number of 816,764 to 68% which represents single family detached and single family attached to 555,399, and estimated 4,000 actual forclosures I get .007.

    Let me know if we are on the same page or not.

    Thanks,

    Julie

  36. 36
    mukoh says:

    Yeah those loan mods are quite real and welcomed by owners. I have seen a few savvy friends around me start poking our common LO for assistance, even though they are not in trouble.

  37. 37
    The Tim says:

    RE: JJL @ 35 – What are you using for the number of foreclosures? There are many ways to define whether a household is “in foreclosure” or whatever. I’ve been sticking with notices of trustee sale, since it is easy to measure and consistent.

  38. 38
    Ray Pepper says:

    RE: JJL @ 18RE: Kary L. Krismer @ 16

    come on Kary..Blanket statements are silly.

    18: Its a band aid over a gaping wound. As the property continues to decline the homeowner will ask over and over why am I still paying on a Mtg I’m upside down on? At first there is relief that the payment has come down (50%) I say thats a stretch..What about taxes? insurance. Across the board I see Well Fargo stretching the terms to 40 years and lowering rates from 6.25+ to 4%. I don’t care if its 2%. If the home is underwater, and in our MOBILE society, it will eventually be a short sale or foreclosure anyway. IT DELAYS THE INEVITABLE!

    As much as it hurts all of you to realize this its the truth. People will not stay in their upside down properties even with 20-30% reduction in payments. Nevada is 2 years ahead of us in this and it is well documented over 1/2 end up in default!

  39. 39
    JJL says:

    Tim,

    When a home goes through an actual foreclosure the bank takes title under a Trustee’s Deed.

    Very easy to look them up and much more reliable that the NTS #s.

    Using the NTS’s for your graphs really only lets us know “how many are late on their mortgage”.

    Trustee’s Deeds are actual forclosures.

  40. 40
    mukoh says:

    RE: Ray Pepper @ 38 – Ray, Nevada had nothing PERIOD. EVER. In the summer of 07 prices dropped 30%.

    If a person who was living in a 2800 sq ft home was paying $2800 for it, and is now able to modify and pay $1500 for it. You think they will go rent for $2000?

  41. 41
    Kary L. Krismer says:

    RE: Ray Pepper @ 38 – Anyone who walks away from their property merely because they are upside down is simply ignorant and foolish. Doing that could potentially affect them the rest of their lives (loan applications can ask have you EVER had a house foreclose, and current lending standards could change). And it is conceivable that waiting will leave them okay, as it did with me when I bought and was upside down for years, but then sold for more than 2x what I paid (which could have been 4x if I’d waited a few more years).

    You need to be upside down and have severe difficulty paying (after wiping out all your credit card debt).

  42. 42
    Kary L. Krismer says:

    RE: JJL @ 39 – I discussed that in last month’s thread on this issue. Some of the trustee’s deeds could be bankruptcy trustees and such, but most would be deed of trust trustees.

    Using notices instead of deeds overstates the problem for a number of reasons. To use notices you really should track them to each property to avoid over counting. That would take a ton of work, especially if done over a period of months. For example, in my piece on foreclosures one of the owners was in a Chapter 13 which was about 6-8 months old. I didn’t look, but I wouldn’t be surprised to see that they had a notice filed prior to that bankruptcy.

  43. 43
    Magnolia44 says:

    Sorry Ray’s theory is off to think everyone who is upside down would walk away is foolish. There are plenty already sitting in CA some personal friends who are upside down, some up to 100k who do not follow his theory. Where will they go? Do you really give up all hope because 24 months turned everything upside down, that is regardless if you think it will come back or not.

    If I was upside down and income does not change and my house is doing just fine as it is now, I stay put. Why would I go from 800 credit score excellent borrower and credit and give it all up because of the value of something I don’t plan to sell. I am here in CA right now and on the street there were a few auction homes, but for the rest it looks like business as usual for now.

  44. 44
    Jonness says:

    Hugh Dominic @15:

    I agree 100%, and I’m in your boat as far as waiting to buy. When I see a house I really like, a good way to get back on the fence is to go to redfin and see what similar houses sold for in the past. I often see homes that sold for 200K in 1999 listed for 650K today. I’m sorry, that is entirely too much appreciation for a ten year period. Wages didn’t go up nearly that far, and we are in the middle of a brutal recession featuring a total lockup of the credit market and skyrocketing unemployment. What are people thinking?

    The BS taxpayer subsidized mortgage bailout can only slow the bleeding. It doesn’t do a thing to make homes more affordable or loans easier to get for the person wanting to buy a home listed for sale. I see homes listed for say 650K and think, that’s a nice home. Then I’ll see the person selling it bought it in 2005 for 500K. Are you kidding me? This person wants 150K profit for being gullible enough to buy an overpriced home 4 years ago when the bubble was raging? I’m not stupid enough to fullfill that arrogant person’s delusions of grandeur. I say let prices continue to fall, continue to save a larger downpayment, and let the person go underwater and learn about the realities of market timing asset purchases and sales.

    I’m sorry to all who might be offended by my post, but I’m sure I speak for a lot of prospective buyers. Oh, we were stupid a few years ago, but we’re rapidly getting an education. As harsh as this sounds, it’s the reality of business, and more and more buyers are starting to realize all the free money available to them for doing absolutely nothing.

    Each year I wait before purchasing, I save 50K in depreciation of the prospective house and 40K in cash from my income. I figure you can safely double that number in interest payments saved over the life of a loan because I don’t have to borrow the money. Hey guys, I’m saving $180K per year here, and I make chicken scratch for a wage. It’s way too good of a deal to pass up for simply doing nothing! Think about it. Where else can you make this kind of money doing nothing? We are living in great times! The phrase “This is a buyers’ market.” is the understatement of the century.

    What’s that? It doesn’t apply to you because you can’t save 40K/yr? Whatever. Save $0/yr, and you still make 100K/yr free money for doing nothing. It’s just too good to pass up.

  45. 45
    Ray Pepper says:

    Mukoh there is nobody that is or was paying 2800 that is now paying 1500.00 Show me some proof. Is it fixed for 40 years? I suggest its a 5 year term. Wells has not dropped 50% on ANYONE. Neither has Wachovia, Countrywide, and WA MU. Show me some proof.

    Kary you are in a DREAM WORLD. You have no clue has to the amount of money people are UPSIDE down in their homes. Until you live in these peoples shoes do NOT call them crazy. I know many many people in Reno, Vegas, Portland, and Gig Harbor alone that are upside down easily 200k-400k. These people must move on with their lives and I guarantee you this. With a foreclosure on their record they WILL still be able to buy a home in the very near future. I don’t think you are up to date on the proposals the FED are tossing around . The latest is loans to people who have the income but had an “instance” in their recent lives involving foreclosure. Bank on these exemptions for Buyers to get all this crap sold.

    Magnolia………come on…………of course not EVERYONE will walk. I assure you foreclosures will continue to rise and rise. Unless Principle reduction occurs. If people get to chop 50% off their Mtg well of course they will stay. Some will even rent their homes and buy another.

    We are a mobile society. People WILL get their loans reworked. They will be happy with their new payment. But, at the 1st sign of a new job, transfer, illness, better deal, virtually anything, the home will again become a short sale/foreclosure at a later date. The vested interest to stay in ANYTHING that you owe more then its worth becomes worthless as time marches on.

    Mukoh give me the name and # of your proof of a 50% reduction. I want to verify. Also the bank. I have a list of people who got extended to 40 years and rates chopped to 4.% Nobody has come down 50% on a fixed rate for 40 years that I have come across and I do believe I’m very well networked in Calif, Nevada, Washington, and Oregon.

    You will have provided an incredible service to hundreds here if its true.

  46. 46
    Andy says:

    Is it not amazing how silly Real Estate has gotten in respect to our lives?
    People consider this some sort of dream..or something that can define you
    At the end of the day, a home is only somewhere to sleep, eat, and crap peacefully
    For all you prospective homeowners, forget buying – a overpriced depreciating liability is no good
    Forget supporting the real estate market, most the professionals in this “industry” need to be washed out
    Too many degenerates make their living by leveraging up others, and destroying their cash flow
    Prices need to get back to around levels seen circa 1987 – that is sustainable
    Lets save, come in with cash; once all the speculators+poor people who got in over their heads are destroyed…
    Might take awhile, the Puget Sound area is very special and full of higher end socially enlightened people

  47. 47
    David Losh says:

    RE: Andy @ 46

    I’m going to address this rather than the others.

    Housing is tied to the Consumer Price Index. The price you pay for housing is in relation to the price you pay for every thing else. Cars, groceries, gasoline, beer, and everything else compared to the wages you get.

    Wages have been stagnant, credit has filled the gap between what people earn and what people spend. Consumer spending is some huge portion of our GDP. Banks were passing out credit cards like candy.

    What we are seeing is the collapse of the credit markets. Housing is one part of the problem.

    Hoping everything collapses around you will make your cash worth less. The consumers still owe the money but will be paying back with hard cash dollars from earned income.

    What you want is higher wages. You want better working conditions and you want your credit terms to be fair.

    What we all want is for American business to work from a fair business practices basis rather than tricky small print loan documents.

  48. 48
    Mikal says:

    RE: Andy @ 46 – You need some therapy. Someone really hurt your feelings.

  49. 49
    Kary L. Krismer says:

    By Ray Pepper @ 45:

    Kary you are in a DREAM WORLD. You have no clue has to the amount of money people are UPSIDE down in their homes. Until you live in these peoples shoes do NOT call them crazy.

    I represented debtors in bankruptcy for about 20 years, so I think I have some idea what these people are going through. There can be reasons to walk away from a home, but merely being underwater is not sufficient. That would be foolish.

  50. 50
    Kary L. Krismer says:

    By Jonness @ 44:

    The BS taxpayer subsidized mortgage bailout can only slow the bleeding. It doesn’t do a thing to make homes more affordable . . …

    That isn’t the goal. In fact, just the opposite is the goal. Government is trying to prop up the housing market.

  51. 51
    Mike2 says:

    JJL

    This is substantial. If loan modifications are made like this across the board, I challenge you to find a cheaper rental for a 5 bedroom 3 bath 2800 square foot home.

    Section 8? Since the owner is receiving public assistance, it only makes sense to compare to assisted rentals. neither the owner in your example or people in S8 rentals are paying market rate.

  52. 52
    JJL says:

    Mike,

    Public assistance? She is not receiving public assistance. She has modified the interest rate on the mortgage of which she is paying to the bank.

    She did not receive a bail out…. the bank received the bailout and offered to lower her interest rate, thereby making her able to continue payments on the debt she incurred with that bank.

    Nice try though…

  53. 53
    Hugh Dominic says:

    By Jonness @ 44:

    Hugh Dominic @15:
    I figure you can safely double that number in interest payments saved over the life of a loan because I don’t have to borrow the money. The phrase “This is a buyers’ market.” is the understatement of the century.

    Thanks Jonness, great post. I am also looking at the dropping prices and my rising downpayment with no small degree of satisfaction. And you are absolutely right, I should add saved interest to the total.

    And to follow on from your point about going from being a “stupid” renter during the boom years, to being on the other side of the divide now. While I am trully not happy about any one person being foreclosed on and would hate to think of my self as gloating in the smallest bit, I AM happy that affordability is rising and house prices are coming down.

    Its a shame someone has to lose for the RE market to come back into equilibrium – just glad its not me. And the fact I will likely have the RE investment opportunity of lifetime in a few years just makes it sweeter….

  54. 54
    BanteringBear says:

    deleted

  55. 55
    David Losh says:

    RE: Mike2 @ 51

    Tax money is going to your local banker who is now a part of the Chase family of Financial Services. The bank is the speculator. Mom, Dad, and the kids are just trying to survive.

    There was no reason to think the entire economy would collapse. Blaming home owners or consumers is a waste of time.

    A more productive use of your time is to figure out why bankers are free to make more loans.

    Banks need to collect the money they already have out. Banks whining about loss of interest income is stupid. Banks should make the deal of low to no interest to get the money they loaned out back.

    The banks need to do something. Banks, lenders, and investors in financial instruments made the mess. The consumer had every right to expect the economy would at least continue rather than just stop because bankers want to do business as usual.

    It’s the banks who made the mess, the banks should fix the mess, and the consumer should catch that break. They are after all paying more than full retail for all the debt they used for purchases.

  56. 56
    David Losh says:

    RE: Hugh Dominic @ 53

    You’re really not tracking here. None of you are. Real Etate is no investment, it’s a place to live, rent, own, and enjoy. Rental property is a job.

    There are no savings by waiting or saving your money. You’re renters. You will continue to be renters whether you carry a mortgage or not. Living in some one elses problem has them keeping the place up.

    The only thing that makes a difference is the amortization schedule. There is no appreciation on Real Estate only amortization of the principle balance.

    Banks are trying to make deals today. next year they will be pulling some other slimey trick that will wipe out your savings one way or the other.

  57. 57
    David Losh says:

    RE: Jonness @ 44

    You’re a smart person, I enjoy what you write. Let me try this out with you.

    In Real Estate you are buying money. That loan. mortgage, represents money in your control. You pay the money back according to the terms set out by the lender.

    The goal is to pay the house off or get rid of the loan. If you know you can not sell the house you have to pay the house off.

    If you get a forty year 4% loan you can apply savings from your mortgage payment to the principle balance to amortize the loan faster.

    For that matter if you put 5% down and apply a remaining 15% to your principle balance right from the start it increases the amortization.

    Is that right? Any one know the numbers? Where’s an amortization schedule in all of this?

  58. 58
  59. 59
    mukoh says:

    RE: Ray Pepper @ 45 – Ray stop living in La La Land a $417k conforming at 6% modded to 3.5% which is what I have seen two loan mods ATM is exactly that. Enjoy the weather.

  60. 60
    Mikal says:

    RE: Kary L. Krismer @ 50 – I really like your outlook and points.

  61. 61
    Jonness says:

    RE: Kary L. Krismer @ 50 – “That isn’t the goal. In fact, just the opposite is the goal. Government is trying to prop up the housing market.”

    That’s what I said. But I believe they won’t succeed. The end result will be to slow the bleeding (depreciation) not arrest it.

  62. 62
    Jonness says:

    Sorry Kary:

    My computer crashed prior to finishing my post, and it appears my post got posted in the process. By the time I got back up, I was unable to edit it. I think we’re saying the same thing. The govt. is doing the opposite of making houses more affordable.

  63. 63
    Jonness says:

    David Losh@57:

    It seems to me the armortization schedule is part of what matters but not all of it due to the depreciation we are experiencing in the market.

    Scenario 1: Let’s say over the rest of my life, I make $2 million income from my work. Say I buy a house now for $500k, finance it all, and pay a total of $1 million including interest (excluding tax, upkeep etc).

    Scenario 2: Say I buy the same house 2 years from now for $400k. Since I waited two additional years, I have a larger downpayment and only have to finance $300K. With such a small loan, I can afford to pay it off in 15 years instead of 30. I get a cheaper interest rate and also skip out on 15 years of interest payments. I end up paying $150K in interest on the loan for a total of $450K. I take the $550K I saved on purchasing the house and invest it doubling it by the time I retire.

    In scenario 1, I pay $1 million to live in the house and have $1,000,000 left to live on over the course of my life.

    In scenario 2, I was paid $650K to live in the house, and had $2,650,000 left to live on over the course of my life. Part of the savings in scenario 2 were due to manipulating the armortization schedule, and part of this manipulation was made possible by other factors the buyer created for himself. The rest of the savings were made possible by conditions the buyer created for himself.

  64. 64
    Jeremy says:

    Jonness@63:
    That is almost exactly what we’re doing. We just refinanced our existing 30-year fixed mortgage into a 15-year fixed at more than 1.5 percentage points below the old rate. Our monthly payment will go up SLIGHTLY but in the long run we’ll save a ton of money.

    Oh yeah, and about that tax deduction: I’d rather not pay the interest in the first place than deduct it on our taxes.

  65. 65
    Ray Pepper says:

    RE: mukoh @ 59

    I will ask again….. What Lender? What is the length of the term? …Owner occupied? Rental? Come on …Help the masses with some facts. After you add in taxes and insurance its still ALOT cheaper to rent. That home owner is still upside down on their 417k principle and according to all the stats the home will have a greater then 50% chance of going back to the bank anyway.

    AGAIN …with no principle reduction….it will just delay the inevitable for over 1/2 the homeowners. Mukoh…I will say it again. There is NOBODY that WAS paying 2800 and is now paying 1500. Don’t forget taxes and insurance. If I’m wrong give me a lenders name and someone to verify this. The Loan Mod’s are not 50%………….

  66. 66
    Kary L. Krismer says:

    By Jeremy @ 64:

    JOh yeah, and about that tax deduction: I’d rather not pay the interest in the first place than deduct it on our taxes.

    Yep, with the zero bracket (or standard deduction–whatever it’s called now), even if you’re ttaxed at 30% you’d be lucky to get 15% of the interest paid back on your taxes. But people will do stranger things to save on taxes.

  67. 67
    Kary L. Krismer says:

    RE: Ray Pepper @ 65 – You could conceivable have someone who was in a bad ARM that they shouldn’t have been in originally, because they had decent credit, who still had decent credit and stayed in it way too long. I’ve seen some ARMS that would go up a lot in rate even at our current interest rates.

    Also, and although this shouldn’t count as part of the savings, maybe there was no tax escrow account for the new loan.

  68. 68
    mukoh says:

    Ray, those mods haven’t recorded from what I know yet. It is a local bang with first letter S. Further then that is just too much to disclose.

  69. 69
    Ray Pepper says:

    RE: mukoh @ 68

    mukoh when you hear of 100% closure of those Mod’s please tell me and EVERYONE here. I can attest to the fact that on rentals and owner occupied homes owners ARE actively getting reduced rates from 6%+ to 4.25% and extended terms to 40 years. In addition delinquent months are being added on to the loan balance. This is being done by Wells Fargo daily. No appraisal fees nothing!!!

    Wachovia and Indymac are still just taking the delinquent months and tacking them onto the principle and bringing investors current.

    I suggest on a macro-level none of this will work and delays the inevitable until principle reduction occurs!

  70. 70
    Kary L. Krismer says:

    By Ray Pepper @ 69:

    <I suggest on a macro-level none of this will work and delays the inevitable until principle reduction occurs!

    It would really depend on the situation. If someone had been out of work for six months, or in a major auto accident, etc., then yes just tacking the delinquents onto the balance could work. If, however, they had steady income, and none of their expenses have gone down, then it’s not likely to help.

  71. 71
    Ray Pepper says:

    RE: Kary L. Krismer @ 70

    Kary, people will NOT continue to pay on their upside down assets. I eagerly await the incentives the Feds have for us all to retain our homes. I sincerely believe qtr after qtr we will see foreclosure levels spike higher and higher. Don’t count the FED out nor the Lenders quite yet. Deals of a lifetime I feel are just around the corner for people to hold onto their homes.

    We have seen nothing yet in our foreclosures surging and creative methods for homeowners to stay put!

  72. 72
    Jonness says:

    I used David’s Losh idea and punched some figures into a mortgage calculator. I’m not sure what the typical reset rates are for subprime and alt-a, loans so I used a range. Does anyone know what these loans typically reset to?

    mortgage calculator: http://www.bankrate.com/brm/mortgage-calculator.asp

    417K @6% for 30 yrs = 2500.13/mo.
    417K @7% for 30 yrs = 2774.31/mo.
    417K @8% for 30 yrs = 3059.80/mo.
    417K @9% for 30 yrs = 3335.28/mo.
    417K @10% for 30 yrs = 3659.47/mo.

    417K @4.25% for 40 yrs = 1808.20/mo.

  73. 73
    Jonness says:

    Concerning the reset rates, I got this from an article in the Seattle Times:

    “Under the typical subprime loan, those offered to borrowers with spotty credit histories, the rates for the first two years were at levels around 7 percent to 9 percent. But after two years, those rates were scheduled to reset to levels around 9 percent to 11 percent.”

    No wonder so many subprime borrowers were defaulting even before their loans reset.

  74. 74
    Kary L. Krismer says:

    By Ray Pepper @ 71:

    RE: Kary L. Krismer @ 70

    Kary, people will NOT continue to pay on their upside down assets. t!

    Well ignoring the fact that people are not as stupid as you claim, people actually love their houses. I’ve seen people go to extreme lengths to try to save them–irregardless of the equity in them.

    Back when I was upside down it wasn’t even a concern. The average person doesn’t check the Case-Shiller numbers monthly to see how their home investment might be doing. That’s a very tiny percentage of the population. All they know is that when they bought the house they agreed to pay $X,XXX.xx a month for it, that it was worth it to them then, and that it’s still worth it to them. Then there are other smaller factors, like not wanting your neighbors to know you’re being foreclosed. You can hide a car repossession–a house foreclosure not so much.

  75. 75
    Kary L. Krismer says:

    RE: Jonness @ 72 – There’s often a limit on how much they can go up. I look at one once were it was something like .5% every six months, and but for that it would have gone up 4%, so the owner was probably looking at 4 years of increases.

  76. 76
    Kary L. Krismer says:

    By Jonness @ 73:

    No wonder so many subprime borrowers were defaulting even before their loans reset.

    What I’ve seen is was not attempting to refinance until it was too late. Letting it go up, not being able to make the higher payments, defaulting, and at that point they’re looking at a refinance with an even higher rate, if one’s even available at all.

  77. 77
    Ray Pepper says:

    RE: Kary L. Krismer @ 74

    Kary…people also love their cars and pets. I agree people are NOT stupid. Thats my point! They will continue to WALK in historic numbers and the FED knows this. Brace yourself Kary , you will be shocked at the amount of clients you will have in the next 5 years that have a foreclosure on their credit. It will be explained away just as a medical collection.

    The rules of credit will be rewritten to accomadate what the Country needs. The reabsorbtion of homes!

  78. 78
    Kary L. Krismer says:

    Back when I did bankruptcy law it was practically impossible to get people that were behind on their mortgages who couldn’t afford to pay to be willing to give up. So let’s just say my experience with people is considerably different.

  79. 79
    what goes up must come down says:

    Okay maybe I am missing something here, wasn’t part of this post about UNEMPLOYMENT going UP? I don’t care how you mod a loan — NO JOB = FORECLOSURE —- HELLO MCFLY.

    This is crazy people talking about 40 year mortgages hey why stop there how about 50 or 60 years. Better yet how about 80 year leases like they do in Hawaii?

    I see that the cheerleaders are still around, same attitudes that started this mess and see it want to continue.

  80. 80
    Kary L. Krismer says:

    By what goes up must come down @ 79:

    This is crazy people talking about 40 year mortgages hey why stop there how about 50 or 60 years. Better yet how about 80 year leases like they do in Hawaii?

    Diminishing returns, or more precisely, diminishing reductions in payment. At 6% you’re paying about $100 a month in principle per $100,000 borrowed on a 30 year schedule. That gets cut in half moving to a 40 year schedule, and roughly half again moving to a 50 year schedule. So less benefit each time you extend past 30.

  81. 81
    what goes up must come down says:

    Kary,

    I think you missed my point. If 40 year mortgages were a good thing or should I say if banks could have suckered people into them in the first place then that would have already been the standard.

    I think these 40 year mortagages are band aids on a gaping wound. They are not a solution but a short term fix for today. I would venture to guess that maybe 1 or 2 percent of people buy a house and stay in it 40 years. Therefore, as others have pointed out, when people go to sell in a year or two or three they will be screwed. Now short term the hype can began again but this will not address the problem.

    I think I now know who is the new cheerleader.

  82. 82
    David Losh says:

    RE: what goes up must come down @ 79

    It’s an interesting discussion, but I agree. The price of housing went way out of control over the past ten years. We don’t see it because we went through it.

    Unemployment is another issue. It is the elephant in the living room. A focus I have had in these past two years is business mentoring. Many people who lost jobs or fear losing a job have started small businesses.

    It will take time, at least three to five years for the economy to adapt to the job losses. Good paying jobs were a bubble like anything else. Big companies made big money and hired more people. Easy profits are way down so the ability to pay those good wages has gone way down.

    I look at this as a positivive thing. Just as the Real Estate industry has to change so do many other stagnant business models.

  83. 83
    Kary L. Krismer says:

    RE: what goes up must come down @ 81 – Well as a practical matter, even with a 30 year loan you’re not going to pay it down much over just 2-3 years, because of the low amounts paid to principle the first year.

    Perhaps a better solution would be to have a temporary payment reduction that would be revisited in 2 years (or whatever), so that eventually they’d be converted back to 30 year.

    But remember, I agree these programs are band aids, but I go further. I think they are band aids that only treat part of the problem. I support Chapter 13 “cramdowns” as being the better solution because they deal with all the owners’ financial problems, not just mortgage debt, and require that they live on a budget for 3-5 years. Thus not only does that help them out, but it also costs them a bit of their freedom, and hopefully teaches them something about a sustainable lifestyle. Just cutting their mortgage payments does none of that.

  84. 84
    DaveyDave says:

    RE: what goes up must come down @ 81 – This link is about to go dead, I feel, but something just clicked in my head as far as possible outcomes for the real estate bubble/credit crisis.
    My assumption has always been that prices must come down to affordable levels or we will continue to have low sales volume. But another option is that 40 or 50 year mortgages may become more normal, thereby maintaining higher sales prices while keeping monthly payments affordable. Maybe this is something that Americans are willing to put up with. It’s quite possible if government programs support this through deductions, rebates, gifts, etc. Certainly the banking industry would promote this over principle reductions and cramdowns.

  85. 85
    Kary L. Krismer says:

    RE: DaveyDave @ 84 – People accepted a bunch of other stuff that made even less sense than a 40 year loan to get low monthly payments. 80/20s and interest only loans come to mind. Of those two, 80./20s were the worst because of the significant potential for liability on the 20 after a foreclosure of the house. But few cared. They preferred a slightly lower payment.

    Part of that is that when buying a house no one wants to think about foreclosure. Attorneys, however, tend to think of worst case scenarios.

  86. 86
    mukoh says:

    RE: Ray Pepper @ 69 – Ray wells is not that aggressive, a whole plat of 12 brand new homes was assigned to an “investor” at 2.75%. :) at 60% of the notes value.

  87. 87
    David Losh says:

    RE: DaveyDave @ 84

    It’s common in Asia and Europe. 40 year notes have come and gone here in the States many times. We are a bit more constrained in terms of time. There is a churn rate to consider. It’s bantied about here as the velocity of money or credit. Americans don’t think long term.

    The current notes would need to be modified and most banks, investors, will not do that.

  88. 88
    Esol Esek says:

    I’ve got a good chunk of change in the bank that I didnt use because this market was PO-ing me so much.
    Now I’m waiting for my queen Anne craftsman for $75k. It doesnt need to be updated, except I would like a new roof and a new furnace. Yeah, I’m the greedy on the fence buyer with resources. Not much of a job, but resources.
    I’m finally seeing a drneching arival in the market of homes, homes and more homes. A chart I looked at said it would arrive in the best center parts of town last, and that seems to be whats happening. Of course, this place is great compared to some places. Then again, buying a house for $100 in Detroit is gonna create the next art/grunge scene – maybe…living with hordes of criminal gangs around you doesnt sound like much fun to me. I dont even want to live in mcuh of Tacoma or South Seattle. Dont want my wife mugged, or get into a shouting match with these uneducated morons and their eternal whinerhood. Two people have died getting into just fistfights with these slope-brains, let alone the shootings. Naa, I’ll take the neighborhood where the police show up, thanks,

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