Monday Open Thread (2009-08-17)

Here is your open thread for Monday August 17th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.

Be sure to also check out the forums, and get your word in the user-driven discussions there!

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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.


  1. 1
    Scotsman says:

    Yes, you can use math to choose your spouse….

  2. 2
    Kary L. Krismer says:

    Is this article just wrong?

    They claim that if your mortgage is at 6%, that you’d have to be able to earn 8% to have it make sense to pay it off. One thing I think they’re doing wrong is assuming all the interest is deductible (even though they mention how much you have to have to itemize), but I don’t get where they come up with the 8% figure.

    My head is in a fog right now for some reason, so I can’t think this one through on my own.

  3. 3
    Racket says:

    Because you pay taxes on the money you make on the investment.

  4. 4
    David Losh says:

    RE: Kary L. Krismer @ 2

    Paying off the mortgage will become a bigger part of the Real Estate discussion. The content is irrelevant because when all is said and done the more front end pay down of the principal the quicker the amortization.

    This will be the only way to address the drop in values. Banks can opt to forgive principal, which they might do, but we are long ways from there and a lot of foreclosures to go.

  5. 5
    Racket says:

    How will paying off mortgages be a way to address drop in values.

    There is no way to address it other than for someone to eat it.

  6. 6
    Kary L. Krismer says:

    RE: Racket @ 3 – I wrote what I wrote, wrong (part of the fog). But I’m not seeing where the 8% comes from.

    Let’s say you have a $200,000 mortgage at 6% (interest only), $200,000 in something earning 3%, and 25% tax bracket. You’d pay $12,000 in interest a year, so you’d save maybe $500 in taxes after accounting for the standard deduction, if that, so your net interest expense would be $11,500. You’d earn $4,500 in interest after taxes. You’re down $7,000 by not paying off the loan. Even at 3% you’re better off paying off the loan. Where do they get 8%?

  7. 7
    Kary L. Krismer says:

    By Racket @ 5:

    How will paying off mortgages be a way to address drop in values. .

    I don’t think that’s what they were trying to address [edit–I see David raised that], but the answer to that is you get the rental value of the property as income, tax free. So it doesn’t help with declining values, but it does give you a ROI.

  8. 8
    AMS says:

    RE: Kary L. Krismer @ 6

    This depends on opportunity cost. It seems you have assumed an fairly low opportunity cost. If your opportunity cost is 10%, then how does this change the situation?

    edit: I guess we should do this right. There is a critical point at the cost of capital. Lets call that i. Now we have three cases:

    1. opportunity costs = i
    2. opportunity costs > i
    3. opportunity costs < i

    I guess there is always the issue of T floating around. Deal with that however you determine is best–possibly net cost of capital.

  9. 9
    Bes2wait says:

    Harbour homes is starting to dump hopefully they will now get some sales.

  10. 10
    Kary L. Krismer says:

    RE: AMS @ 8 – I think what I’m missing is they’re saying you’d need to earn over 8% to make keeping the loan make sense. At a 25% tax rate 8% would be 6%, and that’s equal to the mortgage interest (ignoring any minimal tax savings).

  11. 11
    one eyed man says:

    RE: Kary L. Krismer @ 10

    Kary, you were right in the beginning. The guy who wrote the article needs to pull his head out of his ____. If the full amount of the mortgage interest paid is deductible (which it often isn’t for the various reasons you are aware of) then the interest earned from the money invested by not paying down the mortgage is equal to the interest paid on the mortgage when the rate of interest paid on the mortgage equals the rate of the interest on the money invested (in this case 6% on both the mortgage and the money invested). If you make more than 6% on the investment, then the borrowed money is earning more than the cost to pay the 6% interest on the mortgage, assuming the full amount of the mortgage interest is deductible to off set most of the taxable income on the interest earned.

    If you have a situation in which the persons other itemized deductions aren’t enough to off set the standard deduction, or the person’s itemized deductions are being phased out because they have a high Adjusted Gross Income, then you have to do a more complex estimate to determine how much higher the rate on the investment income would have to be than the mortgage interest rate. The maximum the interest rate which would be needed to justify not paying off the mortgage would be the interest rate on the mortgage times the sum of one plus the persons marginal tax rate. Of course this doesn’t compensate them for the hassle factor involved in paying the mortgage payments and investing the cash not used to pay the mortgage.

  12. 12
  13. 13
    Markor says:

    RE: Kary L. Krismer @ 10

    Yep, the opposite of what you say in #2.

    From the article:

    Paying off a mortgage may make less sense for younger homeowners, for several reasons. First, they should have as much of their savings as they can in tax-advantaged accounts like an IRA or 401(k) — and raiding those to pay down a mortgage comes with hefty penalties.

    How’d that 401K idea work out for younger homeowners in the last decade? Even considering the tax-deferred advantage of a 401K and the mortgage interest tax deduction, no way is a 401K that earns 7% average with high risk (e.g. it might return negative% for the next 20 years) better than paying down a 6% mortgage with no risk. The author underestimates the risk of the 401K, including that they can be frozen at retirement time, or taxes can be a lot higher then. No need to raid the account–just don’t contribute until the house is paid off, except for an amount where the employer match provides a return sufficient to justify the risk.

  14. 14

    King County Closing 39 Parks due to Local Government Butcher Axing

    Is your favorite one on the list?

  15. 15
    TJ_98370 says:

    Consumer Reports magazine, published by a nonprofit research group that evaluates products and services without taking advertising money, has begun evaluating ads for and against health-insurance reform. Linked below are two of their articles. As health-insurance reform appears to be an increasingly polarizing issue, it’s encouraging that an effort is being made to expose bias.

    Health Reform AdWatch: Can you make that a little more bland?

    Health reform AdWatch: New ads mislead or dizzy seniors

  16. 16
    AMS says:

    RE: Kary L. Krismer @ 10

    We also need to consider the tax implications of the other opportunity. If the tax advantages are equal, then we can ignore the taxes. If the tax benefit is more advantageous for the other opportunity, then paying down the principal balance on the mortgage gives up more than just the 6% (8% less the 25% T benefit).

    In any event, a person’s entire financial situation must be considered, including standard deduction versus itemization.

    Expensive debt should be paid off sooner. Cheap debt should be paid off later. The point of payment doesn’t really matter on debt that is neither cheap nor expensive.

  17. 17
    Tim says:

    Any realtor feel like explaining what ‘Pending Feasibility’ means?

  18. 18
    TJ_98370 says:

    By Tim @ 17:

    Any realtor feel like explaining what ‘Pending Feasibility’ means?

    From Mary, of the Redfin staff:
    Redfin Real Estate Forums
    Until recently, NWMLS referred to pending sales as “STI” or “Subject to Inspection”, meaning an offer had been accepted and the sale was pending. As of June 24th, NWMLS got rid of the status “STI” and divided it into three possible categories: “Pending Inspection”, “Pending Feasibility” and “Pending BU (Back-Up) Requested.”
    “Pending Inspection” is used when the property has a signed Purchase and Sale Agreement and has an inspection scheduled. “Pending Feasibility” is used when a property has a signed Purchase and Sale Agreement and is pending a feasibility study. “Pending BU Requested” is used when the seller would like to receive backup offers.
    Once the inspections and feasibility studies have been conducted, the property status must be changed to either “Active” (meaning the sale failed) or “Pending” (meaning the sale is proceeding). According to NWMLS rules, Pending sales are considered “off-market”………


  19. 19
    TJ_98370 says:

    By Tim @ 17:

    Any realtor feel like explaining what ‘Pending Feasibility’ means?

    Was this a test for visiting Realtors, or did you just really want to know? :)
    If it was the former, I apologize for possibly messing things up.

  20. 20
    Tim says:

    what the hell is a feasibility study?

  21. 21

    RE: TJ_98370 @ 19RE: TJ_98370 @ 19

    I’m not a Realtor, but I play one on TV:

    A recent example:
    I submitted an offer on behalf of clients for a fixer home on two adjacent tax lots. Our offer was rejected in favor of a smaller but all cash offer. That offer was ” subject to feasibility”, meaning they brought in a builder/contractor to determine what it would cost and how feasible it was to build another home on the adjacent lot. They determined that it would cost too much, and got out based on the feasibility contingency, the same way a buyer can get out of the deal based on the inspection contingency. My clients, in the meantime, found and bought another home. And that fixer home on the double lot remains for sale. Ha Ha.

  22. 22
    patient says:

    I picked up two interresting comments in the news yesterday:

    1. NAHB proclaims that “inapproporiate appraisals” makes 25% of all new home sales fail.
    ehm…might the inappropriate part be that the appraisers are now trying to protect the lenders from declining home values? Sounds highly appropriate to me since that’s the reason for the appraisals.

    2. Peter Shiff predicts that relative home values on a national level will sink another 50% from current levels. Elua and sniglet seem to have have support in their 80% off prediction from a highly regarded investment analyst that is one of the few “professionals” that could see the bubble and publicly warned about it before it blew up.

  23. 23

    RE: Ira Sacharoff @ 21

    Same thing must of happenned to the $139K home across the street from me, the sale dropped out contingent on the building inspection feasibility study [I thought for sure it sold, there were 5 cars in the driveway and street, happy family members entering the home, etc, etc….now-a-days it doesn’t mean a friggin’ thing?]? Its still for sale…LOL…there was also a feasibility building inspector there the day before [probably took a day or two to get his report out].

    I think the place likely still smells like mildew from being without heat for two years….I haven’t stuck my head in the door yet to “smell” for myself….LOL….maybe when the room deoderizers wear out the sale falls through….

  24. 24
    patient says:

    Ira or Kary, would you mind pulling how we are doing with closings half way into August?

  25. 25

    RE: patient @ 24

    Through August 16th, Single family homes closed in King County for the month of August so far is 549. Data supplied by NWMLS, not verified or guaranteed.

  26. 26
    TJ_98370 says:

    By patient @ 22:

    I picked up two interresting comments in the news yesterday:

    1. NAHB proclaims that “inapproporiate appraisals” makes 25% of all new home sales fail.
    ehm…might the inappropriate part be that the appraisers are now trying to protect the lenders from declining home values? Sounds highly appropriate to me since that’s the reason for the appraisals………

    Purely anecdotal – two months ago I had some property appraised for a relative over here in Kitsap County. The appraised value came in at about 5% under county assessed value. I’ve been told that appraised values are never less than county assessed values. That just never happens. The impression I got from working with this one appraisor is that their work is under close scrutiny these days. She actually said something like, “I know it’s lower than expected, but houses are not selling right now. Sellers have got to realize that things have changed.” It was almost like she was trying make up for past sins.

  27. 27
    patient says:

    RE: Ira Sacharoff @ 25 – Thanks Ira. As we’ve seen it’s hard to predict the final number from the early weeks but 2000 clsoings would require double the first half amount in the second half plus the ~20% extras that nwmls nomrally manage to squeeze in on top of what is pulled by individual agents. 549 + 549 x 2 = 1647 x 1.2 = 1976. Not impossible I guess but it seems unlikely from a glance. I can’t remember how it compares up to the developments in June and July.

  28. 28
    patient says:

    RE: TJ_98370 @ 26 – Thanks for sharing that very encouraging story. Hopefully this is a wide-spread phenomena. From NAHB it seems like it could be.

  29. 29
    Kary L. Krismer says:

    RE: TJ_98370 @ 26 – Here’s a piece I did back in 2007 where I was an expert witness. Both the appraiser and I came in below assessed value back then, and it was going up the next year! That was Snohomish county.

    (BTW, the appraiser’s client wanted a higher value, but the appraiser couldn’t and wouldn’t support even the assessed value.)

  30. 30

    RE: patient @ 27

    First 16 days of June= 726
    first 16 days of July= 704

    But…these are the closings that happened up to that date, and there will still be a few days where closings up to the 16th remain to be reported, so when it’s all said and done maybe we’ll have 685? closings for the 1st 16 days of August? I’m guessing the final August numbers will be slightly less than July’s, but I’ve been wrong before.

  31. 31
    Kary L. Krismer says:

    RE: Ira Sacharoff @ 30 – I don’t think you can compare those off the Locator system after the fact, because they’ll show sales that the agents entered after the 16th. If those were numbers you pulled on the 16th of June, then they’d be comparable.

  32. 32

    RE: Kary L. Krismer @ 31
    Exactly, Kary. That’s what I was trying to say so ineloquently.

  33. 33
    TJ_98370 says:

    RE: Kary L. Krismer @ 29

    Interesting article. Thanx for the insight.
    The detail I wanted stress in my previous post was that I felt that the appraiser was almost defensive and / or apologetic about the bottom line value. I just thought her behavior a bit odd.
    Over in my neck of the woods, market value has been a consistent 20% to 35% more than county assessed value for about the last decade or more. Things are provably different now. Some properties in my area are actually selling for less than 2009 county assessed values, which like I said previously, just did not happen before.

  34. 34
    Racket says:

    By softwarengineer @ 14:

    King County Closing 39 Parks due to Local Government Butcher Axing

    Is your favorite one on the list?

    King county is a horribly ran county they have been dumping municipal land, and parks for a long time. They don’t even run any of their swimming pools anymore which have been around for 30+ years. This happened about 6-7 years ago.

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