Morning News Links: Boeing Profit, Prime Defaults

Here’s a brief roundup of some of this morning’s housing and economic news:

Let me know in the comments if you think a brief daily feature like this would be a useful addition to the site.

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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.

37 comments:

  1. 1
    The Tim says:

    From the last story:

    Rents in Washington’s Seattle, Tacoma and Bellevue area fell 3.4 percent from the previous quarter to $1,067, and in the Oxnard, Thousand Oaks and Ventura area of Southern California they dropped 2.8 percent to $1,473, RealFacts said.

    The Seattle area also had the biggest drop in occupancies, falling to 92 percent in the first quarter from 94.4 percent in the previous three months, followed by Fresno, California, where occupancies declined to 92.5 percent from 94.5 percent in the fourth quarter, RealFacts said.

  2. 2
    David McManus says:

    So Boeing profit falls, yet I see this on the Yahoo Finance web site:

    Stocks Rebound as Traders Look to Upbeat Earnings- AP
    Investors set aside worries about bank earnings Wednesday to focus on upbeat reports from industrial and technology companies. Dissipating concerns about Morgan Stanley’s weaker-than-expected results made it easier for investors to respond to better earnings news from AT&T Inc., Boeing Co., McDonald’s Corp. and Yahoo Inc.

    Ummm….which is it? Good or bad??? The DOW is up 50 and it makes absolutely no sense.

  3. 3
    Joe says:

    RE: David McManus @ 2 – Bad news to the local economy and workers is not always bad news to Wall Street. Boeing’s stock price going up would be a reaction to the better-than-expected results, even if the results suck. If Boeing cut half of its workers in order to become more profitable, that could be the end of the world for us locally, but I’m sure their stock would shoot through the roof.

  4. 4
    David McManus says:

    Right, but in the article it also says that Boeing admits that the outlook is not good.

  5. 5
    The Tim says:

    RE: Joe @ 3 – Here’s the crazy thing though, according to the reports, the reported results were worse than expected:

    Excluding one-time charges, profit reached 87 cents per share. Analysts had expected a profit of 91 cents on revenue of $16.70 billion, according to a survey by Thomson Reuters.

  6. 6
  7. 7
    b says:

    David –

    Those articles are generated by perl scripts, they check if the DOW is up or down and then get a list of everyone who reported earnings today. If the DOW was down 50, it would say “The DOW is down on news that earnings from Boeing and other companies sucked”, but since its up then we must assume the Boeing earnings were good despite the actual numbers or any sense of reality.

  8. 8
    Genob says:

    “Rents in Washington’s Seattle, Tacoma and Bellevue area fell 3.4 percent from the previous quarter to $1,067”

    Based on personal experience renting in downtown Seattle, rents have dropped 15-20% compared to this time last year. And there is much more availability.

  9. 9
    b says:

    Genob –

    I have seen the same thing, but I think its key is that a lot of the real price drop is in free rent, or concessions, etc, which do not reflect in the market price they track. For instance, my rent dropped about 15% over the entire year in my latest lease, however on paper it dropped 0% because the price drop was all from free rent concessions.

  10. 10
    WestSideBilly says:

    RE: David McManus @ 2

    Relative to Morgan Stanley, Boeing did pretty good. No, it doesn’t really make much sense, but that is nothing new.

  11. 11
    TheHulk says:

    I think the daily briefs is a good idea. Unfortunately since this site is about real estate there will be no immediate repercussions of daily news (which is a good thing!! I would not want people’s biggest assets to be as volatile as the stock market).

    What would be relevant is perhaps a small blurb (or is it twitter these days?) about how this could impact investments/real estate etc. over a period of time.

    For example the Boeing news above certainly means housing near major boeing locations (everett, renton) is going to have an even tougher time with even greater declines possible.

    The Fannie/Freddie news is more significant for the whole banking sector in general. As CR likes to say “We are all subprime now”. With the economy tanking, more mortgages are likely to fail. Luckily for us, Fannie and Freddie have to be honest unlike the Goldman Sach /Citi / Morgan Stanleys who seem to be in an accounting bizzarro world these days. Look at Krugman – Alice in FinanceLand if you dont believe me.

  12. 12
    EconE says:

    Per your request Tim…

    This would be a great feature to have daily…not sure if the suicide articles are appropriate however. JMHO.

    WRT the F&F default article…

    I wonder how many of the people in the F&F article who “cite” lower incomes were people with “stated income” mortgages who “fudged” the numbers upwards initially. How high could the “stated income” go?

    How many had Option-ARMs? From my understanding…there were Option-ARMs up to $2 Million.

    My opinion is that before any of the stated income people are helped, there should be cross referencing of tax returns and mortgage applications. If they don’t match, we know that it’s not the bank that’s at fault but the borrower. If a borrower overstates their income (lies), I can’t see how there can be any blame placed on anybody but themselves. I’m sure many will say something along the lines of “My morgage broker encouraged it”…in one fashion or another…but really…the bottom line is that the borrower lied.

    It shouldn’t matter that “everybody was doing it” either.

  13. 13
    Rojo says:

    There seems be a lull on seattlebubble …. Very few posts, both on the blog and on the forum.
    Maybe, dare I say, regulars are flocking to get appointments with their real estate to make offers to houses that have come down 20-30%!

    I am thinking about getting the renters out putting my capitol hill house on sale again. There seems to a huge shortage houses 3br and less that 600k.

    On another note, two weeks ago a bank owned house came on sale for 609K, >3000sf, 40% down compared to 2007 price. Guess what, there were 9 offers, sold before the first open house for around 670-680 with a cash only deal. The agent did not tell me the exact price but we can find out in a week or two. The people who bought it new what they were doing. They did the inspection before the open house, made a cash offer and significantly higher than asking. So, overall, this house sold for around 30% below 2007 pricing. Maybe, dare I say again – a seattebubblite?

  14. 14
    Everett_Tom says:

    RE: Rojo @ 13

    There seems be a lull on seattlebubble …. Very few posts, both on the blog and on the forum.

    Or maybe we’re checking out some of the new cool tools on redfin .. (here’s an example, for Seattle , see the “Market Trends” section with the slider and stuff… ooohhh, pretty)

  15. 15
    Tsuru says:

    Rojo@13: The buyers must have seen the pink pony in the backyard before anyone else noticed it.

  16. 16
    David Losh says:

    RE: EconE @ 12

    We began this discussion last night and I would like the opportunity to respond to it.

    There have always been exotic loans for self employed people. Most of my income is expensed out. My home is my office. If it looks like I might make money I advertise or buy equipment. It’s the American way.

    Some business people have employees and count themselves as one. They get a pay check. Usually the pay check is small to cover living expenses. Most if not all business people plow money back into the business.

    The problem is that many people got Stated Income loans because they were easier for the loan originator to do. The commssions paid were usually higher on Stated rather than full doc. Last but not least is that the terms and interest were usually heavily in the investors favor.

    You have to also remember the time when these loans were originated. Prices of properties were going up. You had to act quickly. There were very few contingent sales. People bought a house, paid two mortgages for a while then sold off behind them for a profit. Full doc loans wouldn’t allow for that.

    Another market for Stated Income is extended families. There are some programs that allow for related, or unrelated people to be on the Note. In many of those cases, even though full documentation is required, the paper work was done as a Stated Income loan. It was a very common practice.

    The real purpose of these loans were for people who at some point would refinace into a better loan or in my case sell the property. These were never meant to be long term financial instruments and that’s today’s problem. Incentives are built into these loans to move the borrower out of them. These are short term, high profit to the investor kind of loans.

    Today you can’t refiance or sell your way out of the loans. As a matter of fact the value of the property is declining rather than appreciating. People are now stuck with a bad loan product on a declining asset value. The lender recourse is foreclosure.

    This is the system lenders wanted, now they have it.

  17. 17
    Kevin says:

    http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html?_r=3

    seattle home price to median income:
    1978 1.8
    current 2.9

  18. 18
    EconE says:

    RE: David Losh @ 16

    David…are you telling me why stated income loans are a good or even necessary thing or are you telling me what lenders (on commission) or banks (earning interest) have drilled into your psyche? Kind of like treating asset appreciation like it was some sort of law of nature? Like…say…gravity?

    I’ve been trying to figure out a reason why a person would go “stated income” for reasons other than greed, dishonesty or impulsiveness and quite frankly…I can’t come up with one.

    I don’t see where it benefits the borrower nearly as much as it benefits the lender.

    You have an extended family that states they are bringing in additional income?…ok…show me.

    Parents gonna help with the mortgage? Are they able to? ok…show me.

    Buying a new home? Color me simple, but I just can’t wrap my mind around the idea that selling one’s home should be an afterthought to buying a new one…but to the bank…two mortgages are better than one right? If they sold their home first, then the debt would be extinguished and there would be no mortgage.

    Self employed? Commissioned? Entertainment Industry? Aren’t those historically feast/famine types of income? Why go “stated” using the “feast” figures? Doesn’t seem sensible to me.

  19. 19
    S-Crow says:

    Econe,

    Here’s a reason for Stated Income: I went Stated Income because I could care less about the hit of 1/8th of a point difference in my loan interest rate vs gathering all my financial info. to go full doc. To me, it was worth it. And this was when lending was starting to go back to actual underwriting a year ago, although nothing like today. Today, I’d have to gather all my income, tax, banking and other information. In my application, our “Stated Income” was under-reported so it was not of the “liar loan” variety that we read about. The ease at which a loan is generated going Stated Income was simple. We signed our application, stated our income and assets, pulled credit and that was about it. Smooth. Today is a far different beast.

  20. 20
    faster says:

    By Rojo @ 13:

    There seems be a lull on seattlebubble …. Very few posts, both on the blog and on the forum.
    Maybe, dare I say, regulars are flocking to get appointments with their real estate to make offers to houses that have come down 20-30%!

    I think Kary Krismar is on vacation or something. He seems to be missing on all the most recent news items. That’s about 25% of the posts right there.

  21. 21
    Hugh Dominic says:

    RE: Kevin @ 17
    I saw this one as well. Great article and good graphics….thanks for the link….

  22. 22
    what goes up must come down says:

    Rojo if wishes could be reality you would have it made LOL.

  23. 23
    Marquis De La Loins says:

    RE: faster @ 20
    faster wins the thread.

  24. 24
    David Losh says:

    RE: EconE @ 18

    Bottom line is that lenders lend on an asset value.

    Interest income is a gamble.

    Many full doc loans are defaulting today because banks lent on inflated value. Many Stated Income loans are in the process of being paid off. I know of a dozen families from Asia who Stated Income and are paying off loans in as little as eight years. It’s a goal.

    There again you can still State Income with 30% or 40% down. You always will be able to. I personally think banks should pay me to get me to take out another loan.

    It’s just business.

    What is happening today is that prices went higher than actual value. As prices began to fall banks lost equity in loans they chose to make. They went ahead with business as usual like the idiots they are and wanted people to pay 14% interest rather than the 6% teaser. The buyer walked.

    These were not toxic loans while prices were going up. Banks were happy while prices were exceeding value. They were making money and lots of it.

    Now it’s all boo hoo the poor little bank is losing money because the big bad borrower figured out they got screwed. There again if prices were going up it would all be the same.

    The best part is that the banks could fix this today. Banks can modify their own toxic assets. Banks could actually do some business but banks want to whine about how the borrower cheated them.

    Really who do you believe? Do you really believe that the Bank who has been in business for a hundred years, has billions of dollars in loans outstanding for the past fifty years was swindled by the borrower? Come on, really?

  25. 25
    EconE says:

    S-Crow…1/8 of a point isn’t enough of a risk premium as far as I am concerned. It would probably take most people a couple hours to gather all their “documents”. You say that you “understated” your income. Most people overstated…we’ve all read about it. That’s where part of the problem lies.

    Today’s standards can hardly be referred to as a “different beast”…today’s standards are just back to the same way that it was done in the past.

    Banks gave the borrowers enough rope to hang themselves.

    The borrowers chose to hang themselves.

    Workouts will put the stool back and let the borrower stand on their tippy toes.

    And if a person borrows too much based on a fictitious asset value then they’ll end up losing that asset if their incomes don’t allow them to service the debt.

    The banks will steamroll their way through every neighborhood..even the best of the bunch. They are basically machines. Learn to get out of their way.

  26. 26
    Cheap South says:

    By Kevin @ 17:

    http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html?_r=3

    seattle home price to median income:
    1978 1.8
    current 2.9

    God; if we could go back to that multiplier. Could it happen in Seattle? That would put the median home at under $150K. Wow, let me wake up.

    But; it’s that current 2.9 real?

  27. 27
    Angie says:

    S-crow, that’s kind of a peculiar argument. My guess is that someone like you–who works with financial and legal matters for a living–would be organized enough that pulling that documentation together would be a snap. I keep great files and could get my hands on every piece of paper needed to justify a mortgage in 15 minutes or less. (And pretty much did, back in Jan 08 when I acted on your hot tip and got that 5% 30 year fixed.)

    I also don’t see how the convenience argument would be attractive from a lender’s side–especially one with a legitimate long-term interest. Getting documentation together is such a low hurdle in the grand scheme of things. If someone (by which I mean “someone from the general public”, not you specifically, Tim) really cannot get their act together for that, what chance do they have of being responsible enough to deal with a house and all associated issues?

    I was a classroom teacher for several years. From that perspective, the requirement for documentation is a lot like the requirement for homework. Some (small) fraction of people can blow off the homework and still have sufficient mastery of the subject to get a passing grade, but for the vast majority of people their ability to make it directly correlates with whether they are willing and able to do the homework.

    If I were a lender, I’d require full documents *and* an obsticle course consisting of minor and major home repairs, landscape maintenance, and neighbor relations. :)

  28. 28
    Cheap South says:

    By Cheap South @ 26:

    By Kevin @ 17:

    http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html?_r=3

    seattle home price to median income:
    1978 1.8
    current 2.9

    God; if we could go back to that multiplier. Could it happen in Seattle? That would put the median home at under $150K. Wow, let me wake up.

    But; it’s that current 2.9 real?

    One more comment on this; it’s quite amazing the number of cities that are currently below their 1979 multiplier (San Diego, Tampa, etc).

  29. 29
    Grelker says:

    Tim, I’d like to see news stories and I’d agree the suicide stories should be left out…..

  30. 30

    “S-crow, that’s kind of a peculiar argument. My guess is that someone like you–who works with financial and legal matters for a living–would be organized enough that pulling that documentation together would be a snap.”

    You ever see the kinds of cars mechanics drive? …And I’ve seen plenty of barbers who needed haircuts.

  31. 31
    David Losh says:

    RE: Angie @ 27RE: EconE @ 25

    First you ask about Stated Income, now it’s simple to pull paper work together, next it will be that every body should have known we would have a global economic melt down.

    People are losing jobs. Income is declining for thousands and millions of businesses. From what I think I hear you saying peopel should just man up and pay the mortgage.

    OK, no problem, I can think of a thousand ways to make money to pay that bank.

    In my opinion the vast majority of people just wanted to own a home. Most people were grateful for the opportunity.

    Today the defaults people are making are by a hard difficult decision. Home prices are declining. In my opinion this is a system banks put in place to generate short term high profits. Banks lied, people wanted to do something they thought was the right thing.

    If you are accusing people you should also accuse the banks.

  32. 32
    One Eyed Man says:

    RE: Cheap South @ 26

    Don’t forget that 30 yr fixed rates weren’t at 5% in 1978. Just as the ratio of median home price to median income will likely revert to the norm, 30 yr fixed rates will also likely revert to the norm, which I believe is in the 8% range over the last 40 years. If one is interested in buying and holding real estate for the long term, interest rates must be considered in addition to price. Because price is a one time factor and you can never redo the price decision whereas interest rates may once again be low at a later time as The Tim and others here have often pointed out, price should probably be given preference when deciding whether to buy at the lowest price in the cycle or the lowest interest rate. But both are important.

    If I recall correctly, from a pure “affordability” standpoint, we are now within about 10% of the early/mid 1990’s level when interest rates are thrown into the equation. Notwithstanding that fact, I think most bubble heads (including me) believe that decreasing prices will overshoot on the affordability cycle and move down another 20%. If interest rates stay at historic lows and prices drop down to the historic median price to median income ratio or below, long term investors who buy at that time will in all probability make make a f___ load of money over time.

    But there are other factors to consider. One is not to buy into a bear trap like Detroit unless you can afford to loose your investment. Locally, I think the risk of buying in areas like Aberdeen is too high even though prices are low, because the economy there may never grow again in my lifetime. But if you think Boeing and other employers will likely remain in and/or continue to move to King County, the next year or two may be the chance of a lifetime to make money in King County real estate. (That’s why the news stories that The Tim listed above are so important and should probably be part of the site.)

    Just don’t foreget probabilities only dictate the likely outcome not the actual outcome and are only as good as the model they are based on. Probability says the coin comes up heads half the time, but reality says results may vary.

  33. 33

    I agree with David.

    Yes, there were stupid and greedy people out there buying homes, some of whom were guilty of either fraud or something akin to it. And yes, there was a certain amount of pressure from some in congress on banks to make home loans easier to get for people with lower incomes.

    But those banks could have resisted, or made very small meaningless gestures in that direction. Instead they saw dollar signs and opportunities, and were more than happy to make subprime loans to get a higher interest rate.
    Banks are supposed to be conservative. They’re not supposed to gamble.
    I know, Barney Frank and others were bleating about banks needing to make loans to lower income folks, but can anyone show me actual legislation that forced banks to do this? Seems to me that the banks were more than willing participants.

  34. 34
    vermillionsky says:

    I don’t understand why it’s so difficult to provide documents that prove your income. If your personal income is sufficient to qualify for the loan, that should be reflected in your federal income tax returns, even if you have a gazillion deductions and credits that bring your taxable income down. If you aren’t organized enough to keep track of your tax returns, then you shouldn’t be taking out a loan for hundreds of thousands of dollars.

    If you are a small business owner and pour most of the revenue from that business back into the business instead of drawing a larger salary, that’s awesome, but that revenue isn’t your personal income.. it’s business revenue.

  35. 35
    Joel says:

    I don’t see why suicide stories should be left out if it pertains to the housing market.

  36. 36
    One Eyed Man says:

    RE: Ira sacharoff @ 33

    I agree Ira. Both lenders and borrowers were responsible for deterioration in loan underwriting standards. Yes the motivation was greed, but that’s probably a natural human trait and an essential compontent of capitalism. But don’t forget, the biggest contributor to the deterioration in underwriting standards wasn’t the banks. It was the shadow banking system. Mortgage brokers did stated income deals, They sold them to Wall Street, who packaged and sold them as mortgaged backed securities. They were able to sell them because the rating agencies like Standard and Poors and Moodys rated the securities as AAA. The rating agencies rated the MBS’s as AAA because AIG and others insured the MBS’s by writing Credit Default Swaps.

    They were all making money as long as real estate prices went up. But the models of those writing the CDS’s and the rating agencies didn’t accurately reflect the risks that the loans would default if real estate prices dropped.

    Yes I agree with David that many people went stated income because they didn’t want to be priced out of the American Dream. But as the loan app says above their signature, its a Federal Felony to lie on the app. It’s understandable and sad, but it’s still wrong to lie, and it’s stupid when the lie is a Felony. Losing your house is one thing, free government institutional housing is another.

    There were pressures on Lenders to lower underwriting standards to make credit available to low income areas. But the Community Redevelopment Act didn’t force them to decrease underwriting standards or to accept stated income deals. And if I recall correctly, the majority of the stated income deals (or at least the sub prime deals) came through the shadow banking system and /or other entities that weren’t subject to the terms of the Community Redevelopment Act.

    There was greed and stupidity on both sides. The RTC fiasco was primarily in the commercial loan markets. But the current collapse and the RTC fiasco both involved either deregulation of the system or the birth of an unregulated portion of the system (I.e. Credit Defaut Swaps) which facilitated and/or assisted an increase in poor loan underwriting accompanied by greed and stupidity by both borrowers and lenders.

    I think the historic lesson is that we probably need to regulate (but hopefully not over regulate) the shadow banking system. Unfortunately the lesson is also that at some future time, creative people will once again find a new way to make money by decreasing loan underwriting standards and threaten the financial system by creating a real estate bubble fueled by easy money.

  37. 37
    David Losh says:

    RE: One Eyed Man @ 36RE: vermillionsky @ 34

    Yes it is very easy to show income. To answer the second part from the one eyed man yes there are ways around underwriting.

    If you want to talk about the people who know and work the system I could ramble along time. I have always had to use Stated Income. There is no way an underwriter who looks at W-2s all day is going to ever give me a loan.

    I will say that in my case many an underwriter has come back and asked me for proof that I have the ability to pay. In most of my cases I supplied documentation of how my business was doing in the last six months. I have always had to supply bank statements. Tax returns mean nothing, underwriters are not accountants. Underwriters have talked with my accountant or my accountant provided a letter.

    Banks didn’t care about the ability to pay. The issue was banks wanting to generate paper, loans, Promises to Pay to show as assets. Home loans in the scheme of things mean very little. There are some Rockefeller Center size loans that will be bankrupting some institution somewhere very soon.

    The underwriter has always had the ability to say a loan is good. In my opinion the underwriter should have spent more time looking at the core value of the property rather than the borrower. The banks recourse is to repossess the asset. If they can get a judgment for the remainder great.

    Todays problem is the number of people who are coming away from the deal with nothing. Nothing. Let me say that again because very seriously it can happen to you, you end up with nothing and that makes you judgment proof.

    That’s the system. To believe Stated Income was a problem or that people were buying homes was a problem is different from what’s happening.

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