Veterans Day Open Thread (2009-11-11)

Here is your open thread for the mid-week on November 11th, 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.

88 comments:

  1. 1
    Herman says:

    I found a treat for many of the visitors to this site. Those who delight in lapping up the sweet tears of desperate homeowners will enjoy HGTV’s Real Estate Intervention.

    http://www.hgtv.com/real-estate-intervention/show/index.html

    The show typically begins with a FSBO homeowner who has carefully selected her asking price by deciding how much money she wants to have left over for college after selling the townhouse she bought in 2006.

    The format continues with the owner going on two tours of comparable or in some cases identical houses. Denial inevitably yields to tears when she learns that the comps are priced at substantially less than she wants for her house. Finally she is forced to face her situation, in which she not only can’t have her tuition/boat/retirement but she can’t even pay off her loan. (That’s pretty uncomfortable to watch, actually)

    The host offers oft-unheeded advice. Usually it’s to reduce the asking price, along with a Kary-pleasing reminder that sellers should get agent representation instead of FSBO. The host says that he is against mail-in-the-keys solutions.

    I did enjoy a quote from the last one I saw, “She’s starting to understand that she can’t just flip home ownership off like a light switch, even though getting in felt as easy as flipping one on.”

    Enjoy.

  2. 2
    Herman says:

    I enjoyed this week’s Million Dollar Listing as well.

    This week included another ration of angry sellers blaming and berating their agents for asking for price reductions instead of bringing them offers. We also witness some barren open houses and two sellers settling for $400,000 less than they paid for their respective properties.

    Don’t feel bad for our beleaguered agents though, as they managed to pull in about $100k in commissions this week despite their sellers losses. Enough to support their lifestyles, hairstyles, toy poodles, and life coach sessions.

  3. 3
    MooseGH says:

    By Herman @ 2:

    I enjoyed this week’s Million Dollar Listing

    Enough to support their lifestyles, hairstyles, toy poodles, and life coach sessions.

    Now that’s funny!

  4. 4
    Cheap South says:

    HGTV was fun to watch until a few years ago, when they dropped the do it yourself shows (put in a skylight; how to tile counter tops, fixing a faucet), and replaced them with shows where 20 somethings think 2400 sq.ft. is too small for their only child to grow on. But I bet you Home Depot and lowes are happier with this new line-up. Make middle-class Americans feel inadequate so that they run to the store to redo and “upgrade”.

  5. 5
    buystocks says:

    RE: Herman @ 2
    Those are my two favorite shows right now

  6. 6
    seattlerenter says:

    Those shows are evil, they have sucked me in. I normally do not watch tv but recently I have been addicted to Bravo channel.

  7. 7
    softwarengineer says:

    RE: Cheap South @ 4

    Wait Until These Dupes Get Their Winter Heating Bills

    My friend is retired and living on $2200/mo in a 1200 SF rambler. He closes his kitchen door and just heats the kitchen in the winter [sleep there too], leaving the rest of his house cold with mildew odor.

    For most Americans on limited incomes [or too big a mortgage payment], its a choice: heat the house or eat?

  8. 8
    The Tim says:

    King County voter turnout:
    2005: 53.88%
    2009: 50.45%

    Snohomish County voter turnout:
    2005: 49.69%
    2009: 47.09%

    Pierce County voter turnout:
    2005: 47.97%
    2009: 42.65%

    Wow I sure am glad we switched to all-mail voting.

  9. 9
    Lake Hills Renter says:

    Are you blaming the voter or the government? Mail voting couldn’t be more convenient, so that’s all on the voter IMO.

  10. 10
    The Tim says:

    RE: Lake Hills Renter @ 9 – I’m just pointing out that all-mail voting was promoted to us primarily as a way to increase voter participation, when in reality, it appears to have no such effect.

    Compared to in-person voting, I’m pretty sure it costs more, the final results come in later, it adds new opportunities for voter coercion, ballot tampering, lost ballots, and we have no increase in voter turnout. So what benefit is there exactly?

  11. 11
    Scotsman says:

    RE: The Tim @ 10

    That’s too bad. I’ve requested mail ballots for years and really thought we would get higher participation rates. Another reminder that what seems obvious to one person doesn’t always work across society as a whole.

    And only King manages to break through the 50% mark? (well, nudge it at least…) That’s sad.

  12. 12
    buystocks says:

    RE: The Tim @ 8
    That’s just a correlation, not causation; many more variables to consider. I’m lazy and only vote during presidential elections via mail (otherwise i wouldn’t vote at all). I’m waiting for online voting, then perhaps I will vote even more often. A tax credit for voting would be very cool also… (wow, I may of stumbled onto an idea to shoot the participation percentage though the roof)

  13. 13
    The Tim says:

    RE: buystocks @ 12 – Well I selected 2005 as a comparison specifically because it has the same elections going on. County executive, Seattle mayor, and the year after a presidential election.

    I agree there are many other variables at play, but again, the claim by the proponents of switching to all-mail was that it would result in greater participation, while comparing turnout to the most recent comparable election year does not appear to bear that out.

    Whether or not increased voter participation is desirable regardless of how informed those voters may be about the issues at hand is another matter entirely.

  14. 14
    Cheap South says:

    RE: softwarengineer @ 7

    I recently took a “solar home tour” here in central FL. I went to see one house; young couple with a newborn. 3600 sq.ft. with a pool; 2 AC units (yes, 2) and single pane windows. People are just clueless.

  15. 15
    Scotsman says:

    Porkulus jobs in WA are a farce- who would have guessed?

    http://www.thenewstribune.com/news/government/story/936585.html

  16. 16
    anonymous says:

    RE: The Tim @ 13 – I always mail in, and would definitely do it online if it was available, but yes, I see the problem with making it too easy for people. Way too many people are OK with just voting for the best sounding name, or worse, voting party line, and it would be better to make it a little difficult to weed them out.

  17. 17
    David Losh says:

    It looks to me as though you either vote or don’t. The reasoning that was told to me for mailing in was the cost. Evidently you have fewer people involved in a mail in campaign.

  18. 18
    David Losh says:

    RE: Scotsman @ 15

    The report today was that 10 States are in a Califiornia like threat of a melt down.

    The bigger problem is that California is an entitlement state that taxes then spends for programs directly related to the welfare of the population. It’s hard to go hungry in California.

    10 other States may or may not have a California sized budget which makes it harder to move money around.

  19. 19
    AMS says:

    RE: One Eyed Man @ 67 – This is exactly where present value theory comes in: “IMO most first time real estate buyers don’t even consider the following: From a financial standpoint, they are down about 10% the moment they close escrow on their purchase.”

    This is the one issue where just about all buyers understand present value, but interestingly enough, they usually split the transaction such that the logic is both right and wrong at the same time.

    For simplicity, let’s assume that the home appreciates at the same rate of inflation and inflation is zero. In other words, there are no changes in value to worry about. The 10% is thus the same amount today, tomorrow, 5 years from now, and 10 years from now. (This avoids a the claim that the seller will just hold a couple of extra days, or years to ‘earn’ that 10% back. In this situation the 10% must be paid at the end, and there is no increase or decreases in its value.)

    Here is what all buyers seem to get right: If they hold for 10 years, then present value on that 10% is very small, given their relatively high discount rate. This is correct thinking–if you can delay paying out cash for 10+ years, the level of savings per month is very low, with a relativity high rate of return.

    That said, these same buyer often have a problem in their thinking about the same exact issue: They seem to think that the funds from sale have a high value in present value terms. In other words, the 10% has a low present value, but the 90% has a high present value, yet both happen at exactly the same time.

    Marginal Analysis should be discussed much more.

    When I was looking at cars, my cash for clunkers deal, my way of thinking went something like this: If I could find a deal for $4,500, then my net cost, cash out of pocket, is zero. This was idea as far as I was concerned.

    Do you know what you get for under $10,000, before discounts, rebates, CFC cash? There were some options that were close, such as the Chevrolet Aveo, some Kia models, and I am sure there are others.

    I drove a couple of those, and I just couldn’t bring myself to buy one, even if the cost was very low. I wanted a decent car, by my measure. The majority of those inexpensive cars were manual transmissions, no power anything, no air conditioning, and so on. By the time I add all the options, the cost is near a better model. Essentially for a few extra dollars, I can get a much better car, and so on for many few extra dollars.

    This happens in homes too. If a person can afford $250k, they notice that the $250k home is not really what they want. For an extra 10% a much better home can be purchased. This continues for many 10% extras until the “perfect” home now cost $350k-$400k. Now we have a problem: An affordable home is not what is desired by other measures, but a $350k home is a bit too heavy.

    The marginal analysis is that the value of the spending the next dollar is high up to a point where the home is not affordable.

    Did I really need a car with an automatic, air conditioning, power windows, and power locks? Clearly a car without all of that would get me from point A to point B, yet I enjoyed the air conditioning during those hot summer days. Similarly for home purchases. Do you really need the view, extra bathroom or bigger kitchen?

  20. 20
    Herman says:

    By AMS @ 19:

    RE: – Do you really need the view, extra bathroom or bigger kitchen?

    Yes.

    My lifestyle and self-image require it. Don’t you realize that my friends will see my house, and judge their relative success accordingly?

  21. 21
    Scotsman says:

    Is Zillow completely worthless? Their estimated values for the homes in my area- near Fall City/Preston- are off by a good 30%. They put my home at $260/sf (close to 2007 peak pricing) when there have been 5 sales in the last 4 months, all newer, nicer homes and averaging $190/sf. Whatever their model is, you’d think it would have adjusted by now. The last home to sell, not yet closed, was smaller (2300 sqft) and valued (Zillow) at $400K. The asking price- which Zillow also reports, was only $296K. It’s now pending. Is Zillow’s credibility completely shot?

  22. 22
    The_Dude_Abides says:

    RE: Herman @ 2

    It’s a great show. Chad should be nominated for worst hair of the new millennium.
    How about Josh telling an owner she’s living in dream world if she thinks her place is worth $10M and advising her to find another agent…that was an Eleua+Scotsman moment all rolled into one.

  23. 23

    RE: Scotsman @ 21

    For a while it seemed like Zillow was inching closer to reality, but lately it seems that most of their valuations are a good 10%+ higher than they should be.
    But are they completely worthless? No, they provide entertainment value.

  24. 24

    RE: Scotsman @ 21 – I think what you’re seeing is they just haven’t figured out a model for neighborhoods that have that “bad neighbor.” ;-)

    There is no way to value a house without going inside. But also, I wouldn’t really use your square footage method of determining they’re off.

  25. 25

    Glenn Crellin predicts that home sales will remain flat or slightly dip over the next six months to a year.
    He’s always struck me as being a stooge for the real estate industry, always putting a rosy spin on things.
    So…are things going to get really bad?
    http://www.seattlepi.com/local/412103_housing12.html

  26. 26
    patient says:

    An FHA audit shows 0.53% reserves. Remember when the FHA guy recently said with confidence “We will not need a bailout!”. Well now, I saw an FHA commisioner on cnbc squirming saying that it will not technically be called a bailout since the rules for the financial industry do not apply to FHA. You gotta love it.

  27. 27
    Rojo says:

    By Herman @ 1:

    Those who delight in lapping up the sweet tears of desperate homeowners will enjoy HGTV’s Real Estate Intervention.

    dude, that is so f’ing stupid and childish – grow up!
    did you also enjoy the tears of people whos homes were destroyed by katrina?

    crazy things people say in public!

  28. 28
    AMS says:

    Tropical Storm Ida and Dr. Masters have brought up an issue that I’ve always considered to be a bit questionable. Dr. Masters writes, “Tropical Storm Ida left mostly minor damage across the Gulf Coast, with the heaviest damage being reported on the west end of Alabama’s Dauphin Island. Roads there were covered with sand and water, and moderate beach erosion was reported. At Gulf State Park at Orange Beach, Alabama, the new fishing pier–the longest on the Gulf of Mexico–suffered heavy damage, and will be closed indefinitely. The pier was replaced after being destroyed by Hurricane Ivan in 2004, and just opened in July. “We may have significant losses,” said Phillip West, Orange Beach coastal resources manager, discussing beach erosion from Ida. “Not catastrophic or devastating, but significant.”

    In the Florida Panhandle near Pensacola, Ida washed huge amounts of sand over Fort Pickens Road in Gulf Islands National Seashore, and over heavily traveled J. Earle Bowden Way, which connects Pensacola and Navarre beaches. Both roads are closed indefinitely. Fort Pickens Road was washed out by Hurricane Opal in 1995, and moved to a new location. Hurricane Ivan washed the road out in 2004. It was rebuilt, but was destroyed and rebuilt three more times in 2005, thanks to Tropical Storm Arlene and Hurricanes Cindy and Dennis. The most recent rebuilding of the road put it at a lower elevation, to allow sand to wash over it. It is hoped the cost of this latest repair will be under $1 million.

    Editorial comment: perhaps having a low-lying road along a barrier island that regularly washes out, requiring millions in taxpayer repair money to fix, is a bad idea?? Seems to me like this is taxpayer money ill-spent. The 1988 Stafford Act, authorizing the rebuilding of damaged infrastructure after presidentially declared emergencies, has resulted in hundreds of millions of dollars in taxpayer money being spent to rebuild infrastructure damaged by tropical storms and hurricanes on barrier islands. In an era of rising sea levels, and with the U.S. in the midst of an active hurricane period expected to last at least another decade, the Stafford Act just doesn’t make sense. Those living in areas subject to a very high level of repeated coastal hazards should pay the bills for their willingness to live in harm’s way, rather than depending on Uncle Sam.”

    http://www.wunderground.com/blog/JeffMasters/comment.html?entrynum=1381

    Rather than discuss who should pay, which is interesting enough, let’s look at the value of the investment. It seems that millions of dollars are poured into coastal properties after a storm, and then a short-time later the same area gets pounded once again. Did these structures actually get enough use to justify the resources expended?

    The Gulf Coast area and Florida get a large number of restoration dollars. New Orleans, Louisiana with Major Hurricane Katrina is an extreme example. There are problems here in the Pacific Northwest too. Think of all the flooding in Centrailia, or consider the flooding problems of Vernonia, Oregon. In 1996 Vernonia had a flood that was considered a 500 year event. In 2007 the flood waters returned and crested about 12 inches higher than in 1996. FEMA was called in to rebuild the area right after the 2007 flood. Centrailia flooded from the same December 2007 storm.

    Does it really make financial sense to keep rebuilding infrastructure that is subject to such frequent natural disaster damage?

  29. 29
    patient says:

    RE: patient @ 26

    http://money.cnn.com/2009/11/12/news/economy/FHA_bailout/index.htm

    Some sane voices are being raised in relation to FHA:

    ====

    “Pinto is proposing more radical changes, including raising the downpayment to 10%, up from 3.5%, and requiring lenders to co-insure the loans. He would also like the agency to stick to its mission of assisting low- and moderate-income households, which means it would insure mortgages on home valued at up to $175,000. The current maximum loan is just under $730,000.

    “FHA should have a limited role,” Pinto said. “It should not be 30% of the market.”

    =======

    I would guess this suggestion would have some impact on our market should it be adopted.

  30. 30
    Ross Jordan says:

    RE: patient @ 29 – That’s such common sense, its bound not to happen.

  31. 31
    AMS says:

    Let’s assume that real estate is going down in value, just like automobiles generally do. For whatever reason, buying a car that goes down in value is viewed as just fine, no problem, so long as the initial cost is reasonable. This is very similar to the value of the cup of coffee that I purchased at Starbucks. Once it’s handed to me, the value suddenly goes down precipitously, yet no one seems to complain about the sudden drop in value of a cup of coffee.

    Let’s get back to automobiles and then onward to homes. There are people who buy “too much” when it comes to transportation (i.e. the initial costs is too high, and the operational costs might be too high). I generally measure this in terms of annual income versus purchase price. When the purchase price of a car is more than about 50% of one’s annual income, the person is weighted a bit too heavy in that area. That said, a reasonably priced car, of less than 50% of one’s annual income, is considered fine, even if the car goes down in value.

    Notwithstanding the whole rent versus buy decision, we could, with a few nice assumptions, compute a reasonable purchase price in terms of annual income. For example, suppose that homes went down in value and had similar maintenance costs as automobiles, then we could conclude that the purchase price should be about 50% or less of annual income. Historically homes have not gone down in value the same as cars, but expectations about future values definitely drive the initial purchase price in terms of one’s annual income.

    Imagine what the value of cars would be if they rapidly appreciated in value like homes did during the run-up in the housing market. Who would want to limit their purchase to 50% of annual income, when more money is going to be made with a purchase of 100% of annual income, and so on.

    I don’t know what the distribution of expectations regarding future home values. Certainly we have seen people make claims about how the housing market will suddenly rebound. Others have suggested that the housing market is going to suddenly collapse. Then there are all kinds of claims in between the two extremes. I have no idea what the net expectation is, but when you expect the future value of an asset to go lower, it’s not worth as much in present value terms.

    On a side note, I’d love it if my cup of Starbucks coffee doubled in value at the same rate housing did during the rapid market appreciation period. I might feel a whole lot better about spending $5 per 16 ounces. Matter of fact, I might be willing to spend $350k on that same cup of coffee, and that’s especially true if I can borrow at a very low rate of interest so I am highly leveraged. As long as my cup of coffee goes up in value faster than my interest rate, it’s like cash in the bank.

    This post is, at least in part, directed toward the whole “housing has intrinsic value.” While this might be true, like transportation, there are bounds to the value of any basic shelter. You know, the value of being able to grow a tomato plant in the backyard, blah, blah, blah. How much is a fresh tomato worth?

    (This post is clearly 50% silly and 50% serious; you guess which part is which.)

  32. 32

    RE: patient @ 29 – I’m not sure the FHA’s mission has ever been low income anything. And if anything, the suggestion sounds like a good way to increase by at least 10x the government’s exposure on existing FHA loans (not to mention Freddie and Fannie).

    Any thinking that money down is that important is naive. It’s the ability to pay the loan back that is important, and the indication that the borrower will do that as long as it’s possible they can.

  33. 33

    By AMS @ 31:

    I don’t know what the distribution of expectations regarding future home values. Certainly we have seen people make claims about how the housing market will suddenly rebound. Others have suggested that the housing market is going to suddenly collapse. Then there are all kinds of claims in between the two extremes. I have no idea what the net expectation is, but when you expect the future value of an asset to go lower, it’s not worth as much in present value terms.

    The people who think the housing market will collapse don’t drive the market at all, unless they happen to own a house and put it on the market. Otherwise, they are not market players. They’re basically part of the demand curve only at much lower prices.

  34. 34
    AMS says:

    RE: Kary L. Krismer @ 33 – This is not true: “The people who think the housing market will collapse don’t drive the market at all, unless they happen to own a house and put it on the market. Otherwise, they are not market players. They’re basically part of the demand curve only at much lower prices.”

    If there are 100 buyers and all 100 think the market will go up, then prices will be supported.

    If suddenly by some EMH event 99 go bear, then clearly those 99 are driving the market. I can continue this downward to the point where even the loss of 1 buyer, and thus a lower quantity demanded, impacts the market.

  35. 35
    zippygc says:

    RE: Scotsman @ 21
    I like Redfin for the comparisons of Zillow, Appraisal.com, and CyberHomes. The low end of CyberHomes seems to be most accurate.

  36. 36
    zippygc says:

    RE: Rojo @ 27
    This is reality TV nation, you have to be a little tougher than that. PC is long dead in a free flowing information universe, where, yes, not shockingly , ever since Jerry Springer 25 years ago, crass is an accepted perspective. South Park is epitome of crass, yet genius. Everyone is in on the game.

  37. 37
    anonymous says:

    RE: Kary L. Krismer @ 32RE: Kary L. Krismer @ 33
    At the very least FHA has been advertised as a program to get people into homes who otherwise couldn’t afford to buy anything.
    At the very least more money down decreases the possibility of people becoming upside down on a loan, and being upside down makes foreclosure more likely.
    At the very least more money down increases the likelihood that they could recoup their losses in foreclosure, or at least some of the losses.

    You at least have to admit that having fewer market players has an effect on the housing market.

    But keep on trying.

  38. 38
    AMS says:

    RE: anonymous @ 37 – Remember de Mere and his dice? de Mere made the mistake, corrected by Pascal, that a non-success did not impact the chance of success. Pascal suggested otherwise, which lead to the development of the modern Binomial distribution.

    http://mathworld.wolfram.com/deMeresProblem.html
    http://mathworld.wolfram.com/BinomialDistribution.html

    And the Binomial Theorem:

    http://mathworld.wolfram.com/BinomialTheorem.html

  39. 39

    RE: AMS @ 34 – That’s a change in demand. But in any case I sort of doubt there there are that many people that in the past 6 months have gone from being neutral/positive on real estate, to thinking it will collapse.

  40. 40
    AMS says:

    RE: Kary L. Krismer @ 39 – For the sake of discussion, how many have switched with respect to Las Vegas?

  41. 41

    RE: AMS @ 40 – In the last six months? Who knows. But it’s possible more have become positive than become negative because of the falling prices there. Being down 30% in a year tends to do that.

  42. 42
    AMS says:

    RE: Kary L. Krismer @ 41 – I guess we need to have a sentiment index, which there are several.

    In any event, those who have a negative outlook affect the market.

    Let me also remind you of my friend who held GM stock.

    Initial purchase price was $70 per share, almost at the peak, about $140,000.

    At $50 per share it was a better deal.

    At $35 per share it was an even better deal.

    At $20, how could someone go wrong?

    Below $10? Super deal!

    Today? Essentially worthless. (I don’t know what, if anything, common equity holders were able to recover.)

    I am not suggesting that Seattle housing will follow this same pattern, but Detroit seems to go down by 10%+ per year, and has done so for approximately 10 years, roughly speaking. Maybe it’s only been 7 or 8 years.

    That said, I am suggesting that the possibility exists that Seattle housing could go down by 10%+ per year for many years.

    I know a guy who did buy housing in a market that went down, which is not hard to find today. He used the philosophy outlined above: The deals kept getting better. Now he has, for all practical purposes, lost all his capital.

  43. 43
    patient says:

    RE: Kary L. Krismer @ 32

    “Any thinking that money down is that important is naive”. I couldn’t disagree any more with this statement. Money down is absolutely critical to the stability of the housing market. Low money down encourages speculative bubbles and increases the risk for foreclosures. It couldn’t be more important. Any other thinking is far up the ignorance scale from “naive”.

  44. 44
    AMS says:

    RE: patient @ 43 – “Low money down encourages speculative bubbles and increases the risk for foreclosures.”

    Not only that, but when the market goes down a very small amount, the losses to the lenders on that increased risk of foreclosure is much higher.

    Probability of foreclosure increases
    Expected Loss increases

    Total loss is the product of the number times the average loss, both of which have increased.

    Total loss in dollars therefore increases drastically.

    If someone put down 50% at the peak, the lender wouldn’t lose much today, even in the markets that have gone down the most. If someone put essentially nothing down in Vegas at the peak, the lender could be taking a 50% hit, plus or minus.

  45. 45

    RE: patient @ 43 – Hardly.

    I’d rather lend 96.5% of value to someone who has always paid their bills all their life and will do so as long as they can. I would not loan 80% of value to someone who has $40,000 of credit card debt, a prior bankruptcy and a foreclosure. The banks did the latter (or worse) because they were playing a numbers game, and look where it got them.

  46. 46
    AMS says:

    RE: Kary L. Krismer @ 45 – Who drives with safety?

    1. The driver who has never been caught.
    2. The driver who has been caught and has changed his or her behavior.

    Those darn crystal ball assumptions are always based on past data. If such holds into the future, then you’ve won. If there is some shift in consumer behavior, it can be problematic.

    Remember the days right before the dot com bubble?

    There were investors who would dump money into new ventures because if they waited the opportunity might be lost.

    As long as those who have paid continue to pay, you’re golden.

    Then there is the whole issue of collateral and risk premium…

    (And I should add that everyone starts with zero bankruptcies. Who knows when the first one will happen?)

  47. 47
    patient says:

    RE: Kary L. Krismer @ 45

    ” I would not loan 80% of value to someone who has $40,000 of credit card debt, a prior bankruptcy and a foreclosure.” Why not? Do you expect values to drop more than 20%? If not, you will not take much of a loss as a lender. If you do belive values will drop more than 20% you should ask for 30% down. You seem willing to lend 96.5% of say $500k to someone with a good credit record in a falling market. That my friend is a much bigger risk.

  48. 48
    AMS says:

    RE: patient @ 47 – Alternatively speaking, simply sufficiently increase the down payment, an no matter how bad a person’s history, the risk is lower. Lending 10% on a $500,000 place has very little risk, if any, no matter how poor the borrower’s past record. Even if the structure was burned to the ground, the land probably has sufficient value to fully recover.

  49. 49
    patient says:

    RE: AMS @ 48 – Exactly. It’s really basic stuff.

  50. 50
    patient says:

    RE: patient @ 49 – And we haven’t even touched the issue of loss of income. A sufficiently large down payment is an insurance for whatever reason the borrower defaults. A good credit history and large income/debt ratio do not insulate from the sudden change in income. Say for example a raise from 5-10% in unemployment…

  51. 51
    AMS says:

    RE: patient @ 49 – Who trusts the credit rating agencies these days?

    In light of the current situation, how much do you trust Fair Isaac (now FICO)?

    Part of the current crisis, if I can call it that, is driven by the credit ratings. We are learning that those credit scores, based on past performance, might not be a good indicator of future performance.

    See also: Lawsuits against Moody’s, S&P and Fitch.

  52. 52
    AMS says:

    RE: patient @ 50 – What? Tell me it ain’t so.

    If you were employed at the time of the loan, won’t you always be, based on past performance?

    How could unemployment possibly increase?

  53. 53

    RE: AMS @ 51 – That’s an entirely different issue. I’ve been saying for over a year that credit scores are not good numbers on which to base a home loan. The factors they use are more useful for granting someone a credit card, because the factors they use tend to be an indication of how much money the creditor will make off the credit card, more than an indication of how likely it is they’ll default.

    And in fact I think they now have a new score intended to be used for mortgages. I’m just not sure anyone actually uses it.

  54. 54
    AMS says:

    RE: Kary L. Krismer @ 53 – It’s applicable in the sense that you developed some “credit rating,” just as Fair Isaac (now FICO) did.

    You come up with a certain set of criteria that you think predicts the future.

  55. 55
    patient says:

    RE: AMS @ 52

    “If you were employed at the time of the loan, won’t you always be, based on past performance?”
    Of course, just as once married all couples will always stay married with dual incomes to support the mortgage payments.

    Sorry for the sarcasm Kary but on this one you are really far out.

  56. 56
    anonymous says:

    RE: patient @ 50 – Lets not forget that the ability to save up a down payment is an indication that the person is more likely to be able to pay the mortgage. The inability to save more than 3.5% is an indication that they are unlikely to be able to handle the increased monthly cost.

  57. 57

    RE: AMS @ 54 – But the criteria have to have some application to mortages.

    Your credit score shouldn’t be dinged because you close one account and open another one just like it. That’s something that is bad for credit card companies, but not bad for mortgage creditors.

    Your credit score should be dinged if you regularly carry $20,000-40,000 of revolving credit debt. That’s something that is good for credit card companies, but very bad for mortgage creditors. In fact, that alone should keep you from getting a home mortgage, IMHO (unless you’re perhaps very high income).

  58. 58

    By anonymous @ 56:

    RE: patient @ 50 – Lets not forget that the ability to save up a down payment is an indication that the person is more likely to be able to pay the mortgage. The inability to save more than 3.5% is an indication that they are unlikely to be able to handle the increased monthly cost.

    That I would agree with, but for that I have suggested looking at other factors that are ignored today. Specifically the change in living expense attributed to the purchase of a house. As I understand it, that’s something they only look at in very extreme situations, if ever. Say where the buyer was living with their parents and had no housing expense at all. If that’s the case and they only have even 10% down, that would make them a very risky borrower.

    But even in less extreme situations, if your living expenses are going to go up $500 a month, then yes only having $10,000 for a down payment would be risky. But that doesn’t mean that only putting down $10,000 would be risky. It’s only if that’s all they have. You really need to factor reserves after the purchase into the equation.

  59. 59
    AMS says:

    RE: anonymous @ 56 – You are making an assumption about where the down payment cash came from. It might have been lottery winnings, which might have a higher rate of failure.

    Also, while I am not going to disagree, you also suggest that buying is more expensive than renting when you suggest, “increased monthly cost.” There are some who think that the monthly costs go down. If you are among the reduced costs group, then you’d suggest that a buyer is more able to handle the monthly costs.

    Some wise advice came from a 75 year old lady, who said, “Those who cannot afford to buy, rent.”

    Certainly if you cannot afford to buy, you will rent. The inverse might not hold, as some people who can afford to buy choose to rent.

  60. 60
    AMS says:

    RE: Kary L. Krismer @ 57 – Any system, no matter how simple or complex, attempts to predict future losses based on past observations. This is true with whatever system you suggest. It’s true with Fair Isaac (now FICO). It’s true with Moody’s, S&P, Fitch, and all others. Some credit unions manually underwrite, and their underwriting criteria is subject to the same weakness.

    See also: LTCM

  61. 61
    patient says:

    Back to the FHA leaderships games. Isn’t first promising that you will not need a bailout and then when you think you might saying that the term bailout do not apply to FHA one of worst attempts ever to cover up incompetency or a full out lie?

  62. 62
    patient says:

    So you all seem in agreement that cedit scores are weak and hard to make reliable and fair. It’s just another win for the argument that the down payment is superior as an insurance for losses. If you require a sizeable down payments you can more or less scrap the credit scores all together. The down payment is the only insurance you need. The problem is that the institutions ( including Kary :-)) still have to adapt to the realities and angles of a falling market. As long as values go up it’s hunky dory but when it doesn’t the superiority of the down payment becomes obvious.

  63. 63
    AMS says:

    RE: patient @ 62 – I’ll take my chances with the US Treasury, even with no down payment, or collateral for that matter.

  64. 64

    RE: AMS @ 60 – Undoubtedly. I’m just saying use factors that make some sense for the job they’re being used for. Carrying $20,000 shouldn’t be a plus factor, that raises your score, for purposes of getting a mortgage. But that’s exactly what it does for the existing credit score, assuming you have at least $40,000 of credit limit and you’ve spread the debt appropriately.

  65. 65
    AMS says:

    RE: Kary L. Krismer @ 64 – This is exactly what LTCM did: “I’m just saying use factors that make some sense for the job they’re being used for. ”

    Of course, the entire financial system just about collapsed from their system. The black swan event took them down.

  66. 66
    patient says:

    RE: AMS @ 63 – I’ll agree with that. To be clear I was talking about asset backed loans and mortgages in specific not lending in general.

  67. 67

    By patient @ 62:

    So you all seem in agreement that cedit scores are weak and hard to make reliable and fair.

    No. What I’m saying is the credit score is the wrong tool, and that using the right tool would be better in every possible way. Your solution of requiring a high down payment would punish the majority of people who are responsible, as well as possibly send the economy into total collapse. But other than that, and being incredibly simplistic, it’s really good. ;-)

  68. 68
    AMS says:

    RE: patient @ 66 – It applies to lending in general, but asset backed loans have lower risk, all other factors being equal.

    (Even though I trust the US Treasury, I’d lower the risk if I had some collateral, but I’d rather trust the US Treasury with no collateral than someone else with collateral.)

  69. 69
    AMS says:

    RE: Kary L. Krismer @ 64 – Also, when you suggest, “I’m just saying use factors that make some sense for the job they’re being used for.”

    Each one of those factors is the subject of controversy. There are those who think that credit scores should be used for automobile insurance purposes. Is a credit score an indicator of how someone drives or the likelihood or size of a loss?

    Causation is often very difficult to establish. If causation can be established, because we are looking at human behavior, the causation might no longer hold, or at least it may vary beyond the expected value by more than the established variance.

  70. 70
    patient says:

    RE: Kary L. Krismer @ 67 – Kary, you beieve in artificially propping up the market on the expense of the tax payers. I don’t. It’s mainly a scam to help banksters and I think it will cause more harm than good to the economy in the long run. I understand as a real estate agent the prospect of higher down payments are very,very scary so I understand you but I do not agree with you.

  71. 71
    Ross Jordan says:

    By Kary L. Krismer @ 57:

    RE: AMS @ 54 – But the criteria have to have some application to mortages.

    Your credit score shouldn’t be dinged because you close one account and open another one just like it. That’s something that is bad for credit card companies, but not bad for mortgage creditors.

    Your credit score should be dinged if you regularly carry $20,000-40,000 of revolving credit debt. That’s something that is good for credit card companies, but very bad for mortgage creditors. In fact, that alone should keep you from getting a home mortgage, IMHO (unless you’re perhaps very high income).

    When you say “bad for credit card companies” and “good for credit card companies”, it seems like you’re referring to profitability. But that’s not what “credit scores” (FICO or otherwise) are designed to measure (There is profitability scores that lenders also have access to that estimate how profitable of a customer you could be when opening a given credit card). Certainly credit scores are imperfect, and only are as good as the model and input data the actuaries used — but there’s certainly a correlation between frequency of changing accounts and default rates, and to that extent the credit score does provide the creditor (mortgage or otherwise) some helpful input on which customers to extend a loan to. BTW, your credit score isn’t necessarily dinged because you carry $20K-40K in revolving debt — in fact it can be helped. The score is impacted by the debt/credit ratio (so if you have $500K in credit, carrying 20K in debt will actually help your score, whereas if your credit limit is 30K, and you have 25K in debt, it will be impacted negatively — until you pay it off).

  72. 72
    anonymous says:

    RE: AMS @ 59 – Who thinks that expenses go down? P&I alone cost more than rent.

    If the 75 year old lady thought expenses decreased buying, she would have said “Those who cannot afford to rent, buy”.

    You are correct “Certainly if you cannot afford to buy, you will rent.”, but only because renting is certainly less expensive.

  73. 73
    AMS says:

    RE: Kary L. Krismer @ 64 – One last comment, and then I am outta here.

    Back to this claim, “I’m just saying use factors that make some sense for the job they’re being used for.”

    First of all, isn’t that how people pick stocks, for example? No one selects stocks on factors that don’t make some sense for the job, right? Yet there are so many people that make poor choices in the market, as measured by historic performance.

    This also gets to a topic that I keep bringing up, over and over.

    By “using the factors that make some sense,” you are actually claiming that you have some better information that someone else. Your set of factors are better than the next person’s set of factors. It may be true. I have no idea. That said, I note that this is based on technical analysis, where you think you have identified trends that may be used to predict the future. The Efficient Market Hypothesis is in direct opposition to this claim. The EMH suggests everyone has the same information. Finally, even if you did have a better system, it would need to be proved as effective, which is very difficult to do.

    This is very similar to the thinking of some home buyers, who think they can identify the home that is sure to increase in value. They know “the right factors” that predict the future value. You don’t have to look far to find someone with this idea. Go to Vegas and I think you’ll have a hard time avoiding such.

    The quest for the higher risk-free return continues.

  74. 74
    anonymous says:

    RE: Kary L. Krismer @ 58 – If the FHA required 10% in reserves in addition to 3.5% down, that would be better than what we have now.

    I agree they should look at other factors rather than the credit score, but down payment should be the biggest factor, since it does the most to protect them from losses.

  75. 75
    anonymous says:

    By patient @ 70:

    RE: Kary L. Krismer @ 67 – Kary, you beieve in artificially propping up the market on the expense of the tax payers. I don’t. It’s mainly a scam to help banksters and I think it will cause more harm than good to the economy in the long run. I understand as a real estate agent the prospect of higher down payments are very,very scary so I understand you but I do not agree with you.

    I think that is exactly the issue here.

  76. 76
    AMS says:

    RE: anonymous @ 72 – There are those who say things like, “Buying is cheaper than renting, ” and “Your house payment is less than your rent.”

    This may be contrasted to the claim, “Those who cannot afford to buy, rent.”

    Some of the claims to support the “Buying is cheaper than renting,” include, “The landlord makes a profit,” “You’re paying the landlord’s payment and then some.” Then there are claims about how rent goes up but fixed mortgage payments do not. This clearly ignores taxes, insurance, maintenance and other expenses that go up.

    I have long stated that at a low enough purchase price, it is cheaper to buy. Alternatively, if the rent is high enough, then purchasing looks inexpensive.

    (To cover the P&I more directly, this depends on interest rate and purchase price relative to the rent, oh, and let’s not forget about the amortization schedule–a negative amortization has lower payments.)

  77. 77
    DrShort says:

    By AMS @ 69:

    There are those who think that credit scores should be used for automobile insurance purposes. Is a credit score an indicator of how someone drives or the likelihood or size of a loss?

    A person’s credit score is one of the best indicators of a his/her insured losses. A person with bad credit will cost 3 to 4 times more than a person with great credit. People who are responsible and careful with their money just happen to be responsible and careful drivers.

  78. 78
    AMS says:

    Here is a group that has other ideas.

    “Claims Consciousness: A person with the good credit score is more likely to settle the accident without the insurance company, the person who scored poorly is more inclined to file a claim and expect to be compensated for the loss.”

    “There is absolutely no link between credit score and the likelihood you will have an accident”

    http://www.insurancescored.com/industryvsconsumer.htm

    I did a quick web search. I have no idea the value of this information, but the basic idea has been a hot topic.

    Also, “There is also no way to identify exceptions within the current scoring models. Being unable to meet obligations is not the same as being unwilling to meet them. A poor insurance score may reflect irresponsibility but it can also reflect financial hardship through a layoff, divorce, or a multitude of other reasons.”

    http://www.insurancescored.com/IvsCII.htm

  79. 79
    DrShort says:

    By AMS @ 76:

    Some of the claims to support the “Buying is cheaper than renting,” include, “The landlord makes a profit,” “You’re paying the landlord’s payment and then some.” Then there are claims about how rent goes up but fixed mortgage payments do not. This clearly ignores taxes, insurance, maintenance and other expenses that go up.

    For most people, owning has significant benefits over renting the exact same property. These include control over the property, a sense of pride and social status, a nesting instinct, knowing they won’t have to move with 30 days notice, a sense of belonging to a community, and possible future capital gains. These are the reasons people trip over themselves and take out huge loans. These benefits shouldn’t be ignored.

    There are others who like the freedom that comes with renting. They like being able to up and move to another state and not have to worry about the roof leaking. Or they can’t stand the thought of being in that much debt or being tied down for whatever reason.

    Both points of view are valid personal preferences, but I think there’s more people who prefer owning and that’s reflected in the historic price differential.

  80. 80
    DrShort says:

    By AMS @ 78:

    Here is a group that has other ideas.

    “Claims Consciousness: A person with the good credit score is more likely to settle the accident without the insurance company, the person who scored poorly is more inclined to file a claim and expect to be compensated for the loss.”

    “There is absolutely no link between credit score and the likelihood you will have an accident”

    That’s great, but it’s 100% wrong. Just about every insurance company uses credit now and each and every one has had to prove it’s undeniable correlation to 50 different skeptical state insurance departments. In all but a couple of states, it’s allowed despite the political backlash. And for some insurance companies, it’s the single biggest determinate of what you pay.

  81. 81
    AMS says:

    RE: DrShort @ 79 – I agree about the whole idea that there is a personal preference one way or the other. What I disagree with is the basic claim that it is always cheaper to buy. I have run into a good number of people who believe this–I have no idea where or what the idea is rooted.

    I have no dispute with home ownership is an investment in the local community. At the same time, if you can rent the exact same property for similar terms as ownership, then many of the benefits fade. We probably all know someone who has rented a single place for 10 or more years. Many of these renters have all the basic benefits of ownership. Nesting instinct, whatever it is, included. I have not heard of lack of nesting instinct from those who have rented a given place for years. (Excluding, of course, the financial losses/gains of ownership.)

  82. 82
    AMS says:

    RE: DrShort @ 80 – Yes, I understand that. Insurance companies don’t generally prove causation, however. Being age 75 doesn’t cause accidents, but rather age is an established risk factor, or undeniable correlation. Correlation /=/ causation.

  83. 83

    By anonymous @ 74:

    RE: Kary L. Krismer @ 58 – If the FHA required 10% in reserves in addition to 3.5% down, that would be better than what we have now.

    I agree they should look at other factors rather than the credit score, but down payment should be the biggest factor, since it does the most to protect them from losses.

    I wouldn’t have a problem with something like that. In fact, that’s part of the reason I like the first time buyers’ tax credit more than other first time buyer programs. It creates reserves after the fact, rather than helping people buy in the first place.

  84. 84
    patient says:

    Not to take anything away from the waste of the tax credit and the dangers of low interest rates but I suspect that the by far biggest bailout of the housing markets and the banks is the supply of mortgages with insufficient down payments. I.e FHA. It is what keeps prices from quickly correct and it is what will cost the tax payer the most in terms of loan losses. I hope it will come to end when FHA blows up and comes begging for more tax payer money. Perhaps it will coincide with the end of the tax credit?

  85. 85
    David Losh says:

    By AMS @ 73:

    RE: Kary L. Krismer @ 64 – One last comment, and then I am outta here.

    I thought you were out of here.

    It’s a great discussion though.

  86. 86
    Zipzippygc says:

    At some point the heaviest posters have got to consider starting their own blog. I mean it is the Kary blog really.

  87. 87

    RE: Zipzippygc @ 86 -Well this would be a pretty stupid boring place if it was the Zipzippygc blog. Have you ever contributed a useful thought here on any subject?

  88. 88
    David Losh says:

    RE: Zipzippygc @ 86

    Thank you for the segway, I did put up three blogs last week, one of which will be a Real Estate and local business site at http://www.buyingseattle.com

    The main focus will be on local businesses because that’s what makes a location, location, location. Tangle Town by Green Lake comes immediately to mind. I had a home buyer one time who paid a premium to be within walking distance to Tangle Town.

    This site really is great resource and when my site gets up and running I would like to have more input.

    Thanks

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