Weekend Open Thread (2009-09-25)

Here is your open thread for the weekend beginning Friday September 25th, 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.

81 comments:

  1. 1
    AMS says:

    By David Losh @ 50:

    Washington is an Agency State. There are reasons for that. I’m a strong advocate for Agency in residential Real Estate because as much as you are buying a property you are also buying a life style which is an intangible. There are sever problems with the system we have. Sales person ship rather than advocacy is by far the biggest problem and we are seeing now what that can do to people and families. A much bigger issue is attorneys who have no working knowledge of Real Estate and no desire to learn anything other than what University has told them. I actually look at the number of attorneys coming out of University with nothing to do as a separate problem all together.
    In commercial Real Estate an attorney can be very helpful. Number one, the contracts are much more open to interpretation. There again I think we have yet to see what havoc those commercial leases and sales will have on the economy and it should be clear very soon that attorney involvement isn’t any guarantee of a more solid position.
    In the week end open thread I would also like to discuss the coming sets of bankruptcy and foreclosures. The other thread got muddled up.

    Washington is an ‘Agency State?’

    Huh?

    Please clearly define the agency relationships.

  2. 2
    Kary L. Krismer says:

    RE: AMS @ 1 – The listing agent represents the seller, even if there is no other agent involved. The exception to that is if the listing agent has also had the buyer sign a buyer agency agreement. That creates dual agency, but seldom happens. The non-listing agent (or selling agent) typically represents the buyer, also subject to some relatively rare exceptions.

    This might also help you: http://blog.seattlepi.com/realestate/archives/169696.asp

  3. 3
    Alan says:

    Heh, shortly after I emailed this to Tim I clicked on Weekend open thread for the first time. So in the proper place here’s my suggestions (you can ignore the email TIm – sorry ’bout that).

    Two issues which you’ve covered before but I think are growing concerns and may deserve further coverage might be the increased awareness of ‘strategic defaults’ been making the news rounds lately with a new study out, and the shadow inventory issues of foreclosed homes news rounds and great in-depths by another favorite mortgage blog. Sure to become a problem as foreclosures and strategic defaults continue to increase in number.

    strategic defaults – http://news.google.com/news/search?aq=f&pz=1&cf=all&ned=us&hl=en&q=strategic+defaults

    shadow inventory – http://news.google.com/news/search?aq=f&pz=1&cf=all&ned=us&hl=en&q=shadow+inventory

    and – http://www.doctorhousingbubble.com/category/shadow-inventory/

    Keep up the good work.

    Alan

  4. 4
    AMS says:

    RE: Kary L. Krismer @ 2 – …and an attorney always represents his or her client without these problems or the sales incentive. Don’t get me wrong, it’s my opinion that a good real estate agent (salesperson) be used, but my attorney will be by my side. When I have legal questions, and anyone who has been to a closing can attest that many documents must be signed, I have someone there representing me, not some other person’s interests. Every document signed was drafted by an attorney, and in our legal system, an attorney is the most qualified person to interpret the various documents. By no means, however, do I suggest that an attorney replaces any listing agent, or buyer’s agent. Dual agency is only good in a few situations.

    Many years ago when I sold my first home, I asked my attorney questions before the listing. I received great advice, and the transaction went great. I would not have received the same advice from my sales agent.

  5. 5
    Kary L. Krismer says:

    RE: AMS @ 4 – I would never advise against using an attorney.

    As to your dual agency comment, I would say it’s never good. It just sometimes happens. If you have a client that you have under a buyer’s agency agreement, and they have an interest in your listing, that’s what happens. The alternative is to refer them out to another agent.

    Some agents think dual agency happens whenever there isn’t a “buyer’s agent.” They create problems that don’t exist.

  6. 6
    AMS says:

    RE: Kary L. Krismer @ 5 – A couple of cases where dual agency might be considered:

    1. New home sales, with full warranty (to go to the extreme, both in condition and price–I forget what the term is for a warranty on price, but the representation is made that it’s a “fair price” given the market conditions at the point of the sale. It does not mean a low price, but the price should not be excessive to the point where it is clearly too high (i.e. easily shown that it was excessive).

    2. A very friendly transaction, where both parties are very clear what they want done and both clearly agree. This happens every now and again with family transfers/sales. The failures in some of these situations are often known by the parties involved, and the failures usually happen long after the dual agent’s work is done, and have nothing to do with the dual agent’s work. Usually it’s some other issue that has nothing to do with the underlying transaction.

    Excluding the very few situations where it can work, in general dual agency is a bad thing for all parties. And one can always suggest that only one party be represented. I am not an advocate of dual agency, but I certainly don’t think it should be outright prohibited.

  7. 7
    AMS says:

    By Kary L. Krismer @ 5:

    RE: AMS @ 4 – I would never advise against using an attorney.

    The bigger question is when is the risk low enough that an attorney need not be used. Yes, I know the saying, an attorney who represents himself has a fool for a client. That said, I have a friend who has transacted hundreds of home purchases and sales. He suggests that he’s pretty much seen it all, and he knows when to stop and call an attorney, if necessary. Thus he goes it alone, based on his past experience. In my opinion every first time home buyer or seller should hire an attorney.

    Maybe Losh should have consulted an attorney before writing, “Washington is an Agency State.”

  8. 8
    Kary L. Krismer says:

    RE: AMS @ 6 – I don’t see how either of those instances would be dual agency under Washington law. In the first the agent would represent the seller (assuming the property was listed) and in the second the buyer. Of course, the parties could change that by agreement to dual agency or no-agency.

  9. 9
    Kary L. Krismer says:

    RE: AMS @ 7 – I guess that depends on what you mean by low risk.

    The NWMLS forms are written with a bias towards not having lawsuits result from failed transactions. Is that low risk? One party would be aggrieved when the transaction fails, so the NWMLS forms increase the risk for them.

  10. 10
    Trigger says:

    I was talking to my friend today and I came to a conclusion that looking at fundamental values of real estate or stock market do not make sense. I remember in 2005 I was sitting in Palm Beach and Palm Beach Post was laughing at a janitor with 20K income who had bought couple of ocean front villas because with ARMs he can afford payments for at least 3 ocean front villas worth 2 mills.

    A normal person or Greenspan for that matter could look at the article and say – WOW – this is gross. Sthg is awfully wring here. But nobody gives a damn about such things. The wise thing at that time was to buy a house to flip it.

    Even if you assume that the US economy is on pain killers now – well if it does not hurt – people get jumpy. Then they think – hey we are in for some good times. And they buy. So the issue is to figure out when the pain killers stop working. I invested when the Dow was down but only 15% of my money. I made a bit. And hey I still hope this is kind of a good time to make a bit more.

    I think analyzing fundamentals makes more sense if you are looking at a very long term horizon. But there are many unknowns. Maybe they will discover some cool bio tech stuff, AI stuff, maybe something revolutionary comes our way. So you kind of count on luck and have good times.

    Same was with dot coms. You get 20 mills. You party on. You spend. You are going thru good times. And then you hope there will be an IPO. And then maybe you will figure out how not to make such huge losses etc. So it is all about a relaxed attitude.

  11. 11
    patient says:

    RE: Trigger @ 10 – No offense Trigger but I’m glad you are not my financial advisor ;-)

  12. 12
    AMS says:

    RE: Kary L. Krismer @ 9 – Risk of failure. There may not be a case against the seller, such as if a buyer does not have a home inspection and later finds problems, but that finding problems later is what I call risk. There are several different kinds of failures. Title insurance will cover some, but not all.

  13. 13
    AMS says:

    RE: Kary L. Krismer @ 8 – I agree that there is no case in which dual agency must be used. None. I am suggesting that there are cases where it may be used with little risk of problem with the transaction. If you have a seller who is providing a full warranty, then there is little risk in dual agency. Again, I am not suggesting this is the way I would go, but if someone asked if dual agency would be acceptable when a seller is providing a new product with a full warranty, I don’t see a major problem, but I am not an attorney…

    (The alternative to dual agency is for the buyer to hire another attorney–is this really necessary on a new product with full warranty? Well, it is to make sure you get the right product, and a dual agency relationship will help assure the buyer of such.)

  14. 14

    I Say, Just Buy the Friggin’ House

    If today’s subprime style contracts are so hard to understand, don’t buy it.

    When I bought my home in 1999 there were 5 concurrent offers and depending on the realitor or any agency for that matter to close the deal was a joke…..there wasn’t time. I pushed [literally] the RE agent away from the paperwork and did it myself. I told her what I wanted in the wording [she did talk me into pretending I was a broke generation X type and to have the seller pay closing costs…which did save me about a grand, so she was useful] and to get it in the seller’s hands that evening.

    The RE agent wanted me to spend twice as much for a bigger home I qualified for and I just smiled….I told her, “I’ll tell you what I qualify for”…..LOL

    I did the same to my mortgage company; no gimmick ARMs, balloon payment future, etc. they tried to pass on me….just a conventional 20% down with fixed rate.

    It worked, while the other buyers were haggling moot points with the agencies; I moved fast and I got the house I wanted….LOL

  15. 15
    AMS says:

    RE: softwarengineer @ 14 – Most transaction happen without a problem. What happens in the event of a problem.

    A problem on a major purchase can be a life altering event. We have heard the stories here, and there are plenty of horror stories to be had. There was a time when the market was hot that buyers would give up inspections. To my way of thinking that’s a bit crazy.

    I had a friend who took no precautionary measures, and suddenly he ended up with two children born by two different mothers exactly seven days apart. He found out about another one born a few months later.

    Some issues are too big to behave in such a risky way.

  16. 16
    TJ_98370 says:

    .
    A Seattle Times article —–
    .
    Collapse still haunts former WaMu workers
    .

  17. 17

    RE: AMS @ 15

    I Agree

    I had contingent on inspection, etc….all the general warranty clauses on most RE contract offers.

    But you’ll never get the house if there’s real buyer competition [that’s probably a dinosaur today…LOL], haggling over a few thousand. That was my point.

    Remember too, every time you have a professional agency look at your paperwork; take your billfold out….whether you buy it or not.

    Those suckers that bought the $300K condos in Seattle and lost their ernest money when they backed out; probably paid lots of agencies for advice too…LOL

  18. 18
    AMS says:

    RE: softwarengineer @ 17 – Inspections are independent of market value changes. These are two separate risks:

    1. Market Value Change
    2. Unknown Defects

    If you find unknown defects in a market that is highly appreciating, then it might not make much difference, as the value change will simply cover the discovered defect.

    Note, however, that I’d rather pay to know the condition of the property rather than take the risk. If I am not a good enough buyer, thus I ‘lose’ out on the deal, then it wasn’t the deal for me. On the other hand, if you demand the property enough, like in your particular situation the price must have been quite low, then things can get overlooked.

    From time-to-time I auction something on that major auction site. I always put something in the listing that says to please bid low. If you bid low, then you will always be satisfied. I’d rather have someone bid a risk-adjusted price rather than complain about some meaningless problem. Yes, I always disclose anything and everything that I think is significant, but I cannot anticipate how someone might use a given product. I’ve never had a problem when I tell people to bid low, and quite honestly, I don’t need the hassle to sell for a couple extra dollars.

  19. 19
    Nell Plotts says:

    Speaking of auctions, is anyone going to get the scoop on the Gallery auction this weekend?

  20. 20
    Sniglet says:

    I came to a conclusion that looking at fundamental values of real estate or stock market do not make sense.

    I completely agree. Investing on fundamentals is a lousy way to make money. Various asset classes can outperform the market (or any rational logic) for decades, and other can underperform by similarly huge time-frames. Just look at how tech companies have traded at MUCH higher multiples than resource related firms for many many years. Just because a given oil company’s stock was trading at a low P/E didn’t make it a good investment, and it’s stock still might not go anywhere for a long time.

    What is MOST important is to identify when a particular asset class is about to come in, or out, of favour, and follow the trend. Buying stocks in 1980 was a no-brainer, the broader markets were set for a 30 year bull run (interspersed with a few short-term declines), and almost anything you bought would appreciate. By contrast, buying stocks at the 1930 peak was a fool’s game. No matter what you bought at the peak in 1930 would have been worth substantially less in 1950, some 20 years later.

    Timing is critical. Fundamentals only make sense when you have already determined that the trends (and timing) are in your favour. Thus, if you were buying stocks in 1980, it would have been great to be a value investor and identify those companies, and stocks, that had the best relative value.

    In short, fundamentals are only useful in helping you identify which of the various comparable assets are the best value, but you still have to pick the right time, and trend, to make real money.

  21. 21
    AMS says:

    RE: Sniglet @ 20 – Clearly you want to buy just before a bubble, and sell at the peak. If you have some way to identify that, you’re golden.

  22. 22
    David Losh says:

    RE: AMS @ 7

    I use John Wagner as my Real Estate attorney and his escrow company does an excellent job. When you place your escrow with him he will answer legal questions for you. i always recommend him over other attorneys with less experience.
    Real Estate is an experience business.
    Washington is an Agency State, that is the correct term. On the east coast most transactions involve attorneys in the negotiations. It’s normal. Here we have agents negotiate the Purchase and Sale Agreement. the Agreement sets the terms for what and how a buyer will pay and what a seller will accept for terms.
    Once you involve an attorney you limit what can be done with the transaction. Once an attorney is representing a client then the other party needs to be advised to get an attorney. At that point all the Real Estate agent is doing is collecting a commission. The listing or buyer’s agent has nothing to say from that point forward, it’s the attorneys who trump the transaction. Anything an agent says from that point forward could be a liability.
    An attorney only does what they are told to do. They can give legal advise when asked, but they are limited in what they can contribute. A Real Estate transaction can involve the neighborhood demographic for kids, an attorney can make observations, but is limited. An agent can go on forever about the neighborhood as puffery of the property.

    Anyway, what I really wanted to address was your concern about the moral hazard of paying a debt as agreed. I personally never agreed to excessive fees and 30% interest. Banks charge that on credit cards. I never agreed that mortgage companies, lenders, and investors could cause a global economic melt down. I never agreed to having property prices artificially inflated to create this bloated debt when the true value of the property was ignored in favor of paper profits. I never agreed to a massive swindle in my chosen profession so a few college educated sociopaths could buy boats and $200K cars.
    The system needs to be corrected and if attorneys want work they should start suing on behalf of the American People.

  23. 23
    David Losh says:

    RE: AMS @ 21

    Please, anybody can.

  24. 24
    AMS says:

    RE: David Losh @ 23 – If everyone can do it, are we all above average?

    Do we all live in Lake Woebegone?

    What about the Efficient Market Hypothesis?

  25. 25
    AMS says:

    RE: David Losh @ 22 – I have no idea what you are talking about, and this is why I pay professionals to take care of problems.

  26. 26
    Scotsman says:

    Microsoft’s future? Or are they already headed down the same road? This is an interesting post and comments:

    http://www.tickerforum.org/cgi-ticker/akcs-www?post=112298

    Falling property values in Redmond/Bellevue?

  27. 27
  28. 28
    David Losh says:

    RE: AMS @ 25

    That is my point: you have no idea what I’m talking about.

    Real Estate is an odd thing, very separate from the rest of the economy. In the article you posted in #27 it talks about just that. The same housing unit can cost 20 times more for being in the right place.

    Houses sold in the Asian communities can be worth more for the direction they face, placement of the doorways, or the numbers in the address. To an executive the house that looks like Leave it to Beaver can have a higher value than the same square footage that may look more modern.

    People buy addresses, towering trees, babbling brooks, school districts, views, life style and a way of life when they buy residential Real Estate.

    Anybody can become rich and wealthy in Real Estate. That’s why the threshold is so low.

    It’s a job like any other. You get better by doing the job. You pick a strategy that works and work the strategy. Some people buy at auction, some leverage, some buy for cash, some trade up, some turn properties, and some people keep everything they ever buy.

    Real Estate is a very stable market place. A lot of people are all excited because sales people create hype. In this particular case of the past five years millions of people got caught in the hype.

    We’re on a blog about Real Estate like it’s something to talk about. Comparisons are made to the stock market, snippets of Real Estate information are thrown around like they mean something. Little phrases like location, location, location don’t mean anything unless you know the location.

    I have spent a great amount of time on the internet. The goal is to have an internet business model related to Real Estate. That has gotten to be the Holy Grail of the Real Estate business. Claims are made that people will make the biggest purchase of their lives by doing the leg work. In the future we will make the biggest purchase of our lives the same way we buy a vacation package from expedia.

    Expedia, Priceline, Orbits, and Hotels.com are interesting business models. In my opinion these online companies manipulate the travel industry. In my opinion we all pay more and get much less. There is a ton of slight of hand in online travel. Promises are made and broken. Prices are inflated so when you get that discount you are still paying premium prices. Holiday Inn Express, and Comfort Inns are built based on internet traffic models. Airlines now book online and can easily over sell every flight by setting prices on line in minutes to sell every seat.

    Is that kind of manipulation what the public really wants for the biggest purchase they will make in their lives?

    How much time are you really going to spend researching Real Estate? How many transactions will you personally be involved with? Even if you become seasoned at the purchase and sale of Real Estate how much distance would you have, emotionally, from your personal deal?

    In your particular case you then turn around and talk about the moral hazards of not paying on a promise. There are no promises. There is fifty pages of paper work that come down to one question: Do we have a meeting of the minds? Do we agree to the terms and conditions or has some one very smart swindled you? Really, how smart is that in the world of business?

    In Real Estate lenders wanted foreclosure. They have that as a recourse. It’s a secured debt. If the asset being purchased is far below the the face value of the Note, with no chance of ever covering the principle, fees, penalties, and interest then you dump the property. It’s nothing personal, it’s just business.

  29. 29
    Tim's dog says:

    RE: Scotsman @ 26 – uh, MS was planning on hiring 30,000 people in 2008, atleast 15,000 of them would be in Redmond. A -25% growth in PC demand fueled by a global recession sort of put a stop to those plans, but the fact remains that MS is heavily invested in Redmond (they just opened like 6 new buildings), and is not looking to leave any time soon.

  30. 30
    Sniglet says:

    Evidence continues to mount that banks are dragging their feet on foreclosures. It has been nearly 2 years since my sister in Florida ceased payments on her mortgage, yet the lender still hasn’t initiated foreclosure proceedings.

    I just don’t buy the argument that the reason for such tardiness is due to overworked remediation/foreclosure staff.

    http://surkanstance.blogspot.com/2009/09/when-banks-cant-afford-to-foreclose.html

  31. 31
    Cheap South says:

    RE: Sniglet @ 29

    It depends on the lender. My neighbor next door left last December; by May the bank was leaving notes on the front and garage doors. But it’s been brutal here in West Central Fl. Yesterday they published August 2009 numbers for Greater Tampa. YOY, Sales up 17% (2370 homes changed hands), prices down (another) 17%. Median price: $144,600; Median price Aug. 2008: $173,900. Median price August 2007: $ 214,100. Florida lost about 200,000 residents between 2007 and 2008. And all this without getting hit by any tropical storms or hurricanes in the past 4 years.

  32. 32
    Markor says:

    RE: Sniglet @ 29

    I read that an attorney in Florida, who is employing the “produce the note” strategy to forestall foreclosures for her clients, is also filing quiet title actions to try to get rid of the mortgage. The idea being that if nobody can produce the note then the mortgager should be off the hook entirely.

  33. 33
    Sniglet says:

    It depends on the lender

    Absolutely. The more troubled a given lender is the more likely it is to avoid foreclosure for as long as possible to avoid having to take additional write-downs.

  34. 34
    AMS says:

    RE: David Losh @ 28 – The bigger question is do you know what you’re talking about? I have my own opinion on that.

  35. 35

    So….if banks are dragging their feet on foreclosures because they don’t want to take additional write downs, wouldn’t you think they’d be more eager to act a little more quickly on short sales? That’s far from the case currently.
    They don’t want to foreclose yet they let full price offers on short sales, not much less than the amount owed on the property, just sit for months without responding.
    Somebody explain this one..

  36. 36
    David Losh says:

    RE: AMS @ 33

    Exactly the point: you have no idea, but you do have an opinion.

    I’m not kicking about that. You, along with a lot of people, are trying to figure things out. I applaud that and at this stage of the game I think every body should.

    We have a mess.

  37. 37
    David Losh says:

    RE: Ira Sacharoff @ 34

    And I’ll take this one.

    The investors who bought the Notes are the problem. I did a short sale where the investor couldn’t understand why the property was selling for such a discount. The property had flooded. It was a side by side and one side wanted out the other side was staying. All the numbers came in at the sales price because property pricing was declining in the area. The lender and investor were looking for recourse on the short. They were trying to scare the guy into keeping the property.

    That was in 2007 and it’s only gotten worse. If you own a mass of Notes in a portfolio and you are a big time financial management company you must be looking pretty stupid at this point. If you start dumping Notes how does that look to the share holders who invested in your financial management company?

    At least with a foreclosure you have something to take back to the share holders that is clean and maybe not your fault. If you sell out I think it looks bad.

    In my opinion there is a lot of ego involved with the losses.

  38. 38
    AMS says:

    RE: David Losh @ 35 – Note how this discussion relates to your discussion above. It appears that even if we have the same set of information we might draw different conclusions, yet everyone is above average?

  39. 39
  40. 40
    AMS says:

    RE: David Losh @ 38 – Do you live in Lake Woebegone?

  41. 41
    Sniglet says:

    if banks are dragging their feet on foreclosures because they don’t want to take additional write downs, wouldn’t you think they’d be more eager to act a little more quickly on short sales?

    A short sale is just as bad for a lender as a foreclosure. The bank has to write down the value of the loan in short sale, just as they do in a foreclosure. If you want to avoid taking any write-downs for loans, the very last thing a lender wants to do is any kind of deal that would permanently foregive a portion of the outstanding debt. A rework of the loan would even be preferable, so long as no principal reduction, or significant reduction in interest rate, was taking place.

    Thus, any lender that truly is in a bad state of financial affairs will be dragging its feet on short sales, foreclosures, REO sales, and mortgage reworks alike.

  42. 42
    AMS says:

    RE: Sniglet @ 41 – On a finance basis, banks would want to sell at the higher price. On an accounting basis, banks would want to delay as much as possible, especially given the whole “mark-to-market” avoidance these days. The whole asset classification is an interesting topic, but it does not escape finance. The bank’s performance in the short-term looks better, but it costs the investors/stakeholders long-term results. The problem is that no one can measure the specific damage without more information, which the bank’s are not giving. Note how banks suddenly have a high discount rate (high demand for present performance at the expense of the future).

  43. 43
    Sniglet says:

    The bank’s performance in the short-term looks better, but it costs the investors/stakeholders long-term results.

    The “long-term results” are irrelevant if short-term write-downs would force a lender into insolvency. Almost anyone would choose to delay recognizing a loss if taking the hit today meant immediate bankruptcy (or the FDIC seizure equivalent). It is far better to hurt long term profits with short-term delaying tactics if this allows the organization to remain in business. Those long-term profits are kind of beside the point if the business shuts down next week.

  44. 44
    David Losh says:

    RE: AMS @ 40

    OK, I looked up Lake Woebegone and am askimg again, What?

  45. 45
    AMS says:

    RE: Sniglet @ 43 – This is just like various cash flow problems. It does not matter that you have a very profitable business with future orders if you cannot make payroll this week.

    Here is an prime example of the problem. (We must assume that the debtor is unable to pay)

    Let’s say a bank is owed $180k and the property’s value today is $100k.

    There are three cases:

    1. Increasing market value of the property.
    2. Not increasing or decreasing market value.
    3. Decreasing market value.

    Case 1:

    The bank would delay as long as the rate of market value is above the cost of capital, or ideally the interest rate on the note, plus fees. By delaying the bank actually makes money. I had a friend who botched a housing renovation, flip. He was in California in an area that took off in value. Obviously this was a few years ago. The time he took was way too much. He went way over budget in dollar terms too. That said, he walked away with a much larger profit than he originally projected. The market value absorbed his overages and provided excess returns. It did not matter that he managed the job poorly, his performance was superior. It was all luck with the high price appreciation, but his bank account was extra fat in the end none-the-less.

    Case 2 & 3:

    Ideally the bank would take $100k today and write off the $80k today, as that would minimize financial losses.

    In other words, as long as property values increase, delaying isn’t such a bad thing. In a down market, delaying makes the losses much worse. In a market where property values remain unchanged, the delay costs time.

    Here is the big problem:

    We don’t know how much better a bank would perform if they cut the losses today.

    Take the case of constant market value. We don’t know how much better off investors would be today if the bank would have simply took the $100k cash with the $80k hit a year ago. Alternatively, we don’t know how much better off investors would be a year from now if the bank executed a similar deal today, took the $100k cash and recognized the $80k loss today.

    What the banks want to do is suggest that the $180k note is really worth $180k, even if there is clear and convincing evidence that it’s really only worth $100k. I do agree, however, that it would be an impossible job to try and determine the fair market value of each individual note. It would be even more difficult to try and project the future losses given the market conditions.

    Finally given the whole idea of intent to hold-to-maturity, normally it would not matter if market values change.

    The banks are like my friend who had to hold his gold for 30 years to realize a profit, “I will not sell at a loss, even if it takes me 30 years to recover.” I don’t actually realize the loss until it’s sold, so as long as I don’t sell, there’s no loss.

    Accounting versus Finance

    In accounting, generally speaking, losses/profits are recorded at the point of sale.
    Finance is not bound by this same restriction, but finance relies on accounting as a basis of measurement (i.e. the numbers must come from somewhere, and that somewhere is accounting).

  46. 46
    AMS says:

    RE: David Losh @ 44 – By David Losh @ 23:

    RE: AMS @ 21

    Please, anybody can.

    This is getting old fast. It’s clear that you are not an attorney, as you still have not done a good job with the whole agency concept, and then when I call your garbage out, you suggest I have limited understanding. To better understand agency, you might want to consider taking a basic law class, or actually consulting with an attorney. Additionally, take a look at the dialog between myself and Kary above as a starting point.

    I’ll try to make this simple, but you still may not follow. If you do not follow this, I suggest taking some logic classes.

    If “anybody can,” then doesn’t it follow that “everyone can.” And if everyone can, then are we not all above average, just like the children in Lake Woebegone?

    I could extend this further, as I did above.

    If everyone can make money, then it appears that this is a bubble psychology. As such, what happens in the end. Oh, yea, that’s right, we are still sorting that out with the current housing situation… Which gets back to your whole claim about the “mess.” If we really have a mess, then how can “anybody” make it? Furthermore, when we all play the same move, then what happens when an unexpected even occurs (note how this relates to the Efficient Market Hypothesis (EMH), as previously discussed).

    I also find it interesting that you have a “anybody can,” but then you talk about inexperienced lawyers.

    Are you a REALTOR? If so, how’s business these days? Can “anybody” be a REALTOR?

    Clear?

  47. 47
    David Losh says:

    RE: AMS @ 46

    No, sorry, you are not clear. You are agnozing over minor points.

    Any body can become wealthy if they want to be. Most people make very clear choices in life and wealth is one of the last things on the list.

    Most people prefer freinds, family, sports, nice weather, the church, or to help others.

    My focus has been in South America. I have not purchased property here since 2005 and sold my last property in July of 2007, except for my personal residence.

    The price of Real Estate will continue to decline. There was a chance this selling season that there would be some blood letting and that didn’t happen. Problems with value will continue and the people who bought this year will be more vocal in the future.

    I’m not here to answer your questions. You are a faceless commentor on a blog. In my opinion I have been very forth coming with you. As I said I do appreciate you a trying to figure some stuff out.

  48. 48
    Trigger says:

    RE: Sniglet @ 20 – Hey Singlet – This is really true. I think you just need to be relaxed and take it easy when investing. For example let’s say someone comes up to you and says – look I am selling a rusted nail for 300$. Should you buy or not? Well – it all depends. If you see Goldman Sachs bullish on rusted nails, CNN is saying that rusted nails are in vogue. Then you know there is lots of hype on rusted nails. Although the rusted nail is worth 1 cent – it may make sense to buy it for 300$. Why? Because you can try selling it for 500$ and making extra cash.

    So if people like in Seattlebubble start screaming that real estate is overvalued, we need to look at fundamentals – then it does not make sense to buy a house because people are looking at fundamentals and not at emotions.

    But if in the future CNN, Seattle Times start screaming – hey Seattle is a great place, you buy a house in paradise, people dig Seattle. The radio talk shows come up. Then overall media statrt saying that Seattle is the last gem in the US – then it will make sense to buy a house in Seattle so you can flip. At that time rental prices etc. are secondary because emotions is what guide the overall population. A normal Joe is not going to be figuring out if it makes sense to rent vs buy. If he sees that his friend bought sthg – he will do the same. So now we need to count on the media. Maybe even Barrack Obama should come in and say now is a good time to buy a house, then Goldman Sachs CEO should say that they have done some analysis that the market is set to explode etc. The realtors can come in and send the message like buy now or be priced out forever etc.

    So fundamentals are secondary completely if you can steer the population do sthg. And the key for the investor is to look at the fundamentals but also at emotions of the society and what media are doing. Right now based on what the media are saying and because there are lots of web sites like seattlebubble the overall population will be cautious and maybe it is not the right time to buy. In this climate I would be afraid that the price of a shack might go below the price dictated by fundamentals.

  49. 49
    Zipzippygc says:

    THis is the most affordable, best priced new home I can find in Seattle. I am impressed with this price point for value.

    http://www.redfin.com/WA/Seattle/10717-24th-Ave-NE-98125/home/18661326

  50. 50
  51. 51
    AMS says:

    RE: David Losh @ 47 – “As I said I do appreciate you a trying to figure some stuff out. ”

    What am I trying to figure out? I doubt, very much, that you have much to offer. It seems you have a very limited background. You rant on and on, but say very little…

    Best wishes.

  52. 52
    David Losh says:

    RE: Zipzippygc @ 49

    This house backs up to a hillside about one block from Lake City Way. It is built in a depression that may or may not be a natural spot for water retention on the hillside. The construction is adequate, but my concern would be soil stability and moisture. It is priced in my opinion at the builders cost.

  53. 53
    AMS says:

    RE: David Losh @ 52 – So some person comes on here and claims that he has found “the most affordable, best priced new home,” and you actually believe him?

    Seems more like an attempt at advertising, something The Tim likes to sell.

    If Zipzippygc is so impressed, why doesn’t he simply buy it?

  54. 54
    David Losh says:

    RE: AMS @ 51

    The article in Sunday’s paper about Mastro is a good example of what I’m ranting about. How are the banks going to get anything out of this guy’s assets? Who will be unwinding that mess? It is a mess.

    In the list of Real Estate offices doing well I think I recall the foreclosure office of Windermere was in the top ten in sales. How many people are buying at auction this year with the hope of making a profit? When you go to the auction meetings it sounds like a sure thing, but the reality is some properties go to auction for a reason.

    The pitch at auction is you will be buying at 80% of value when in fact you are buying at 80% of sales data pricing. They make money by financing the cash purchase and the buyer is supposed to refinance or sell. Right after auction there may be financing available because the property will appraise. A year from now that will be another problem.

    Prices are declining in the broad market rather than just pockets.

    On the other hand prices for condos in Lima and Trujillio Peru have doubled in the past five years. If you look at foreign debt in South America it’s surprising how much they have paid off. My choice, if you are on Social Security, would be Peru, the first country to the United States where a foreign national can still own property on the coast.

  55. 55
    AMS says:

    RE: David Losh @ 54 – There is a big difference between ranting and substance. Blah, Blah, Blah…

  56. 56
    Sniglet says:

    prices for condos in Lima and Trujillio Peru have doubled in the past five years. If you look at foreign debt in South America it’s surprising how much they have paid off. My choice, if you are on Social Security, would be Peru, the first country to the United States where a foreign national can still own property on the coast.

    It sounds to me as if Peru is just the next bubble waiting to pop… Actually, I believe all of Latin America, and the entire universe of emerging markets, are going to suffer proportionately worse than anyone when the great bear market rears its head again in 2010 (and beyond). These emerging markets have relied heavily on a booming commodities market, exports to developed nations, and cheap capital inflows. All these things are going to reverse.

    Commodities are going to collapse with the advent of even greater global demand destruction, capital won’t be flowing anywhere but US dollars and T-bills (and a handful of other developed nation’s currencies), and whatever manufacturing there is in emerging markets will be hammered by collapse in demand from developed nations.

    In short, Peru (and any developing nation) is the last place you would want to have your money. Like I’ve said before, about the only thing that won’t lose value (and will actually gain purchasing power) is the US dollar.

  57. 57
    David Losh says:

    RE: Sniglet @ 56

    I fully agree that in the next two years there will be a more global collapse. In Africa Europeans are moving money there to get a return. For some countries that has been good, but for many others things are getting worse.

    Was it you who mentioned that reserves will need to be accounted for in the banks and when that happens dollars will be sucked out of the institutional investor funds?

    What I was saying is that if you are on a fixed income either here or in Europe there are cheaper places to live.

    I do think the value of housing units anywhere in the world has been over inflated. It would be a good time to sell in Peru and wait it out.

  58. 58
    Trigger says:

    RE: Sniglet @ 56 – Sniglet – I would be careful about this prediction. The know how transfer has already happened to emerging markets. If you assume that an emerging market will not have a dictator or some screwed up rules on doing business – what kind of advantage will the US have? Ok. maybe infrastructure – but even in this aspect – emerging markets are catching up. Then there is education. But look at emerging markets – new generations are growing up that have similar education as in the US.

    So if you are looking at fundamentals – THEN – emerging markets will be catching up with the US. There is nothing magical that the US has that emerging markets do not.

    Now – if you assume that African countries have dictators and they will be making sure that poverty stays there – then sure. Same is with countries like Belarus or North Korea. Over there regimes will be doing fine – just that society will be barely making it.

    Even countries like Russia are doing a good job on making sure that its citizens cannot start companies. Take for example google. A guy from Moscow Univ started it – he could have started it in Russia and US consumers could have used a Russian search engine to find sthg. But he had to do it in the US because in Russia – the govt would meddle with such a company and push comes to shove owners would magically end up in Siberia. But even in Europe lots of emerging economies like Poland became part of EU and as such EU will not allow the local govts to destroy local economies because EU law trumps local laws etc.

    So I think it will not be that all emerging markets will be in 1 basket. Emerging markets whose economies rely on just sending oil or gas to other countries and do not allow its citizens to thrive and start businesses – those economies will fail. And I agree with Sniglet. But other emerging economies where the govt will allow its citizens to start companies and will deal with corruption – then those economies are simply likely to catch up with the US.

    It was funny to me when the crisis started happening Eastern Europe was put into 1 basket. And then in the end they figured out that during recession in Europe some will contract 20%, some will contract 3% and some will grow 1-2%. And there is some difference between contracting 20% and growing 2% he he he…..

  59. 59
    David Losh says:

    RE: Trigger @ 58RE: Sniglet @ 56

    I agree also with the trigger comments for the most part.There are many emerging markets that are not credit based that will do better in the years to come.

    Actually I had a question about commodities. A guy from Kenya was trying to explain they were a commodities based economy and that the price of commodities was crushing economic advancement. Sniglet said Commodities are going to collapse with the advent of even greater global demand destruction,

    I don’t see how this is possible with the global population, but I have pointed out over many years that Africa can produce enough food to feed the world. If they did address continent wide infrastructure they would be a great world power.

  60. 60
    David Losh says:

    RE: Trigger @ 48

    I just reread this commnet at 48 because of your other comment. George Bush did in fact make a speech claiming our economy was better because so many people were home owners. That was hype.

  61. 61
    David Losh says:

    RE: AMS @ 53

    I messed this earlier and how does:

    This house backs up to a hillside about one block from Lake City Way. It is built in a depression that may or may not be a natural spot for water retention on the hillside. The construction is adequate, but my concern would be soil stability and moisture. It is priced in my opinion at the builders cost.

    translate into I believe this is affordable?

    In Real Estate there are assets and liabilities. In my opinion this property is a liability. Just because the builder is selling at what I belive is cost doesn’t make that a good deal. As a matter of fact if this is the builders cost it shows what the margins are on properties selling for $699K

  62. 62
    Trigger says:

    RE: David Losh @ 59 – Hey David – Keep in mind that any impoverished country happens for a reason. It is not that citizens of emerging markets are dummer. Usually the govt would screw the local business thru corruption, unclear laws, poor infrastructure. Look at the aid that went into Africa? Very little went to normal Africans – most went to the govts and they rewarded a few people. So the local govts did not allow people to innovate. I don’t know Kenya in specific – but I am sure this had to happen in some form.

    Look at Russia. I just read an article that Putin went into a big chain grocery store and said that prices of certain products are too high. And the onwer lowered them? Why? Well – if this did not happen – maybe this person would end up in Siberia. Tax authorities would suddenly find papers not in order. How can you run a serious business in such a climate? This way countries like Russia are just small outsourcing centers and their economy only relies on price of oil.

    That’s why for all new members of EU like Poland, Hungary – they actually asked those countries to fully comply with all EU laws. And EU laws trump laws in local countries. On top of that those countries can be sued by their own citizens in court in Brussels. Normally you would think – hey – those countries are giving up independence. But no – it is really for their own good.

    So basically when you are a poor country – you are poor for a reason. It is not that it just happens to you. You must have been oppressed, had screwed up govt, went thru some genocide etc.

    But the point stands – functional emerging economies will just catch up with the West and disfunctional emerging economies will compete with Africa on poverty levels.

  63. 63
    zippygc says:

    RE: AMS @ 51 – It is an open thread, relax prickly, plenty of people lurk this site and post occasionally. I think this site would be more valuable if houses , in their specifics, were discussed , beyond theories. David Losh is a champ that way.

  64. 64
    zippygc says:

    RE: David Losh @ 61 – Thanks for looking it up David L.

    I am offering a low ball. You have sound concerns. i do believe the price per sq ft is extraordinary in this case , for the quality build.

    If offer progresses I will get soil inspection

  65. 65
    DrShort says:

    Brix Condo auction today. Final prices were at 69% of the list price, but well above the minimum bids. I gotta think other developers will look at this as a good way to dump their inventory. I’d hate to be trying to sell a normal condo in the city these days.

  66. 66
    Sniglet says:

    Sniglet said Commodities are going to collapse with the advent of even greater global demand destruction. I don’t see how this is possible with the global population

    It’s very simple: population size has very little to do with aggregate demand. Poor people won’t “demand” much because they can’t afford it. Rich people, by contrast, “demand” a whole lot since they have the wealth to indulge their desires.

    We’ve been over this population/demand issue before in relation to real-estate. I think we’ve pretty much agreed (in past SeattleBubble discussions) that employment and incomes are more important to real-estate prices and demand than simple population.

    In short, it is VERY easy to have demand for commodities shrivel if people are getting poorer, even if populations are increasing at the very same time.

  67. 67
    Sniglet says:

    other emerging economies where the govt will allow its citizens to start companies and will deal with corruption – then those economies are simply likely to catch up with the US. It was funny to me when the crisis started happening Eastern Europe was put into 1 basket.

    True, some emerging markets will do worse than others, but virtually every one of them will do FAR worse than the USA. Just look at how China’s economy has been severely hit with the downturn? Tens of thousands of factories have already closed shop in China, and there is an otherworldly overhang in mal-investments that is hanging over the economy, which will bring the nation to its knees when the reckoning comes. Just look at the South China Mall, which is twice the size of Mall of America, yet is completely vacant! This kind of thing is replicated everywhere across China. The number of brand-new, hundred million dollar, modern skyscrapers that are completely empty is just unbelievable.

    The reality is that these emerging markets have inefficient capital, and financial, markets which have led to a lot of mal-investments that will need to be purged from the system. Moreover, emerging markets just don’t have enough domestic demand to support their present economies. Without European and American demand China is a complete basket case. The idea that emerging markets will all just somehow trade with one another, replacing the demand from developed nations, is barmy. You can’t take -1 and -1 and wind up with +2.

    Further, emerging markets all rely disproportionately on foreign capital than the developed nations. Name just one emerging market that doesn’t have a significant number of corporate bond offerings, or loans, that are denominated in the currencies of developed nations? Even Brazillian and Chinese firms often borrow in dollars.

    The consequence of this borrowing in foreign currencies is that these nations become highly vulnerable to economic crisis, and panics, which is precisely what we are going to be facing in the next year.

    We are just experiencing a brief respite from the depression, similar to what happened in 1930 (when the Dow recovered most of its ’29 losses).

    For the record, I don’t expect to see that Eastern Europe will get off any easier than Turkey, BRICs, etc. They were just lucky enough to avoid most of the pain in the first initial wave of the downturn. The financial industries in eastern Europe are nearly as bad as those in China, and many of them are controlled by western financial institutions that are already insolvent by any rational analyses, and are only surviving due to the willful ignorance of regulators (allowing them to cook the books, etc). The wild appreciation in asset prices that Eastern Europe experienced in the last 10 years should be enough to convince any level-headed person that those economies have experience a bubble of tremendous magnitude, and we all know what happens when bubbles pop.

    Heck, Kiev real-estate was trading at higher prices than prime Manhattan properties just a couple years ago!

    Of course, for more details I will refer people to my podcast outlining the case for defation:
    http://bit.ly/YlmXD

  68. 68
    David Losh says:

    RE: zippygc @ 64

    I would agree with you on the price per square foot and the bigger problem of the depression are across the road way. It may be OK, but the buyer pool both now and in the future will be limited. Did you look at the other house on that block that is up off the street?

  69. 69
    deejayoh says:

    By DrShort @ 65:

    Brix Condo auction today. Final prices were at 69% of the list price, but well above the minimum bids. I gotta think other developers will look at this as a good way to dump their inventory. I’d hate to be trying to sell a normal condo in the city these days.

    I’d hate to be one of the people who bought at list price!

  70. 70
    AMS says:

    RE: zippygc @ 63 – It’s one thing to discuss a specific property that has some relevance to all the readers, but it’s quite another for people to come discuss a property they are looking to sell, and thus individually gain. I note also that you didn’t disclose that you were closely related to the property, and furthermore, I note that you put two entries, each with the same link.

    Good luck with your sale.

  71. 71
    AMS says:

    RE: deejayoh @ 69 – I can hear one of those people now, “If I hold out long enough, I will make a profit.”

    Hopefully the seller is young, or there will have to be a little extra put on the end:

    “If I hold out long enough, I will make a profit, if I live long enough.”

  72. 72
    AMS says:

    RE: David Losh @ 61 – Real Estate is always an asset. Debts owed are liabilities (Assets to others). Debentures owned are Assets (Liabilities of Others).

    A = L + E, or Assets = Liabilities + (stockholder) Equity

    It’s the fundamental balance sheet equation on which double-entry accounting is based.

  73. 73
    David Losh says:

    RE: AMS @ 72

    Swamp land is a liability, toxic sites are liabilities, a structure with a meth lab is a liability, structures themselves can be a liability. natural disasters, lava flow, flood plain, cliff, liquification, and a long, list.

  74. 74
    AMS says:

    RE: David Losh @ 73

    #1 Clearly you are not an attorney.
    #2 Clearly you have little to no knowledge of Generally Accepted Accounting Principles.

    The list keeps getting longer.

  75. 75
    David Losh says:

    RE: AMS @ 74

    That was fast. No I’m not an attorney. i mentioned that I have a Real Estate attorney I have worked with for over twenty five years. John Wagner escrow is a great place to get advice and close a transaction.

    Generally Accepted Accounting Principles; again what are you trying to say here?

    Let’s say you buy a house, You purchased it with cash and a sink hole develops in the back yard the day after closing. Can you sell that house for the price you paid, or do you now need to disclose the sink hole? Do you need to repair the sink hole? If the sink hole grows and damages the house next door is it your responsibility? What if it’s shown on the national news? How about Magnolia bluff that has been stable for years and begins to erode during your ownership? How about a wooded lot next to another persons house?

    There are many things about Real Estate that differ in many ways from other assets.

  76. 76
    David Losh says:

    RE: Sniglet @ 67RE: Sniglet @ 66

    Then what the guy from Kenya was saying is that commodities are over priced today and you are saying commodity prices will fall.

    It’s interesting about China. I also have said many times before that Chinese dollars will come to the United States and one of the things that does make Seattle special is it’s proximity to Vancouver B.C. If there was an immigration policy to allow Chinese citizens into the United States I think Seattle would be overwhelmed. Right now I don’t see that happening, but if our tax base gets worse immigration may be a solution.

  77. 77
    TJ_98370 says:

    RE: deejayoh @ 69RE: DrShort @ 65
    .
    There was a story on KOMO news tonight about a big auction for “Belltown Gallery” condos that happened today. Is that the same as the “Brix” condos?

  78. 78
    AMS says:

    RE: David Losh @ 75 – What I am saying is that you need professional advise when it comes to accounting too.

    If you buy a home, then your cost basis, book value, is the purchase price, plus some other items that might be necessary to place it in service. If an peril happens, insurable or not, then the loss happens at that point in time. You do not re-write your asset to a liability. If you have insurance and the peril is covered, then there is little impact to the home owner.

    Let’s go ahead with your exact example:

    “Let’s say you buy a house, You purchased it with cash and a sink hole develops in the back yard the day after closing.”

    Day 0

    Debit Asset:Land XXX (The land must be separated from the structures, shrubberies, and so on.)
    Debit Asset:House YYY
    Credit: Asset:Cash XXX+YYY
    Memo: Purchased house with land for cash.

    Day 1
    Sink hole develops — no entry is necessary, as we are within a reporting period

    Day 2 Fix sink hole
    Debit Expense:Housing (of some sort)
    Credit Asset:Cash
    Memo: Repair sink hole

    NOTE: Never did we ever make any entry to any liability account!!!

    We could say that the fix was made and credit was extended, and thus have a liability account entry to AP.

  79. 79
    Mariner22 says:

    No, the Brix condos are on Capitol Hill, the Gallery Condos are in Belltown. Both had large number auctioned today, the Gallery condos were more expensive. It will be very interesting to see what the higher priced Gallery condos sell for – the minimum bids for both were set at roughly 50 cents on the dollar.

  80. 80
    Kary L. Krismer says:

    RE: AMS @ 78 – There can be environmental issues where the cleanup cost exceeds the value of the property. In the past some creditors have not foreclosed because they were concerned that they’d be held responsible for the cleanup cost. I think they worked that out so that there is no such liability in excess of value for such innocent third parties, but I’m not sure of that.

  81. 81
    AMS says:

    RE: Kary L. Krismer @ 80 – There are some interesting accounting questions about how to handle some of these not so common situations.

    Similarly for lawsuits. How likely a future loss will happen makes a difference as to what must be recorded and disclosed.

    I am not a CPA, and for these more complex issues, one really should seek and obtain specific professional advice.

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