• GeekWire: Redfin CEO warns of slowing national real estate market, as frustrated buyers are sitting out
• MarketWatch: Housing market has hit a ‘significant slowdown’ in recent weeks, Redfin CEO says
• Seattle Times: Washington state no longer has the nation’s fastest-climbing home prices
• Financial Post: Cracks are appearing in the world’s most desirable property markets
• Bloomberg Businessweek: The U.S. Housing Market Looks Headed for Its Worst Slowdown in Years

Back in early June I said that based on the May inventory numbers, “we could finally be seeing the beginning of a trend that points toward an easing market.” In the months since then, it seems that a lot more people are coming around to that point of view as well. Personally I think it’s still too early for hyperbolic headlines like BoingBoing’s proclamation that “the housing market in America’s most expensive cities is imploding,” but more and more signs seem to be pointing to a serious cooling, which is definitely a good thing, in my opinion.

The post Summer 2018 slowdown link roundup appeared first on Seattle Bubble.

The limit on the maximum amount of mortgage interest that can be deducted has been reduced from a loan amount of $1M down to $750k. A home buyer would have a loan of around $750,000 if they purchased a home priced about $950,000 with a 20 percent down payment.

To get an idea of how many home buyers is the new limit is likely to affect in the Seattle area next year, I pulled down some sales stats for the last six months from Redfin. Here are the total sales of single-family, condos, and townhomes over the last six months, and the sales over $950k.

As you can see, the new limits are not likely to have much effect at all in Sonohomish and Pierce counties. Even in King County and Seattle, the vast majority of sales come in under the limit.

In order to afford a $950,000 home, your income would need to be around $180,000 at a minimum, which puts you well within the 24 percent tax bracket. The interest paid in the first year of a $750,000 30-year mortgage with a 3.9% interest rate comes to around $29,000. Any amount over that is not deductible, so the maximum tax benefit from the mortgage interest deduction is around $6,960.

Prior to this change, the limit was already $1 million. The interest paid in a year on a $1 million home comes to around $38,682, which would be a tax savings of $9,284. So the biggest difference here is a loss of up to $2,324 in tax savings for people probably earning $200,000 or more.

In other words, we’re talking about around fifteen percent of home buyers in King County paying around one percent of their income in additional taxes. Will this have some effect on the housing market? Sure, probably. But given the fact that over 90 percent of Puget Sound home buyers will be completely unaffected, I doubt the difference will be very noticeable.

Finally, let’s look at how the $10,000 limit on state income tax, sales tax, and property tax will affect us.

According to an article in today’s Seattle Times, the average taxpayer who itemized their taxes in Washington state deducts about $2,650 in sales taxes. Since we have no state income tax, that leaves $7,350 in property taxes that can be deducted before hitting the cap. With the average effective property tax rate in King County at around 1 percent, that means that anyone with a home worth more than about $735,000 will start to hit the limit. Around 28 percent of homes sold in King County in the last year (4,488 out of 15,840) sold for $750,000 or more, so it’s probably safe to assume that about a quarter of home owners in King County will bit hit by this limit.

Here’s a look at how a buyer making around $180,000 and in the 24 percent tax bracket (previously in the 28 percent bracket) would be affected by the combination of the lower mortgage interest deduction limit and the $10,000 local tax deduction limit. The table below looks at the tax savings in 2017 and 2018 from deducting mortgage interest and state sales+property taxes.

With just the standard deduction (which doubles in 2018) and personal exemptions (which go away in 2018), a married couple earning $180,000 a year would pay around $31,500 in 2017 and around $26,250 in 2018. So before we even look at the changes in the deduction limits, it’s important to keep in mind that the new tax brackets and standard deduction changes are saving them $5,250 right up front.

It’s not until a home price of around $1.25 million that the difference starts to exceed the baseline savings from the new brackets. So if our hypothetical couple buys a $2 million home, the net effect of the tax changes in 2018 will be a bump up of about $2,390 in their taxes. Again, about one percent of their income.

In short, I doubt that the changes will have much effect on Seattle-area home buyers at all. Yes, a few wealthy home buyers will see slightly higher tax bills next year, but for the vast majority of home buyers and existing home owners, the changes will have zero effect.

The post Will the new tax laws slow Seattle’s housing market? (Part 2: New deduction limits) appeared first on Seattle Bubble.

Before we start, I want to be very clear up front: I am neither endorsing nor denouncing the tax plan that just passed. To be honest I don’t personally know anywhere near enough about it to know whether it will be good or bad on the whole. If you’re hoping for that kind of analysis, you should look elsewhere. This analysis is merely a narrow look at how some of the specific changes may affect our local market.

There are two major changes to the tax code that will matter to home buyers and home owners: the doubling of the standard deduction (from $12,700 for a married couple in 2017 to $24,000 in 2018) and the reduction of the mortgage interest deduction cap from $1 million to $750k.

First up let’s look at the doubling of the standard deduction. Here’s an excerpt from a USA Today opinion piece by William E. Brown, president of the National Association of Realtors.

In reality, there’s a homeowner tax hike hiding in plain sight.

The recent tax-reform framework doubles the standard deduction from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for joint filers.

…the near doubling of the standard deduction means all but the top 5% of American tax filers won’t itemize. That nullifies the incentive effect of the mortgage interest deduction and essentially ends a century-long tradition of encouraging homeownership through the tax code.

I’m sure you will be quite surprised to hear that I find this argument to be complete and utter rubbish. Doubling the standard deduction is not a “homeowner tax hike” by any stretch of the imagination.

To understand what doubling the standard deduction will mean to home owners, let’s look at an example using some relevant local data. Let’s say we’ve got a married couple making $120,000 a year, buying a house at the overall King County median price (across SFH and condos) of $575,000.

We’ll assume that our example couple put 20% down and have an interest rate of 3.90% on their $460,000 mortgage. They would pay an average of $17,100 in mortgage interest per year over the first five years of their mortgage. We’ll also assume that they’re making $4,000 of deductible charitable donations (source), and can deduct $1,400 in state sales tax paid plus $5,800 (1.01% of the home price) in property taxes paid. This gives them a total of $28,300 in itemized deductions.

Under the 2017 tax structure, the standard deduction of $12,700 reduces the couple’s taxable income to $107,300, which puts them in the 25% tax bracket. The standard deduction saves them $3,175 in income tax. If they itemize they can deduct $28,300, which will save them $7,075. That’s a $3,900 tax advantage for the home owner who itemizes.

Under the 2018 tax structure, the standard deduction of $24,000 reduces the couple’s taxable income to $96,000, which puts them in the 22% tax bracket. The standard deduction saves them $5,280 in income tax. They would still have slightly more to deduct if they itemize $28,300, which saves them $6,226. Still a $946 advantage for the itemizing home owner.

To put it another way, it currently makes sense for our hypothetical home owners to itemize if they purchase a home that costs more than about $200,000. Under the new tax structure, that number more than doubles to just under $500,000.

It’s important to note that although the tax savings from itemizing is lower for itemizing the same amount in the 2018 scenario ($6,226 in 2018 vs. $7,075 in 2017) that’s just because the tax rate is lower, which means that the home owner is still paying less of their income in taxes overall.

Here’s a graphical look at the total income taxes the hypothetical couple would pay if they itemized the mortgage interest on a variety of home prices. Note: This chart has been updated to reflect the deductions of state sales tax and property tax, which will be capped at $10,000 in 2018).

The change to the standard deduction does slightly reduce the incentive for buying a home by eliminating the benefit for itemizing at most home prices below $500,000, but is it a “tax hike hiding in plain sight”? Not remotely. In fact you can see that at every single home price level above, home owners are paying less in income taxes under the new plan with the higher standard deduction and lower rates.

I highly doubt that there are many people at all whose decision about whether or not to buy a home hinges on whether or not they will be able to save a couple thousand dollars in income tax after paying over $17,000 in mortgage interest. Personally I don’t think this change will have any affect on the housing market at all.

Since this post is getting pretty long, I’m going to split it in two parts. Tomorrow I’ll take a look at the other big change in the tax code: The reduction of the mortgage interest deduction cap from $1 million to $750k.

The post Will the new tax laws slow Seattle’s housing market? (Part 1: Doubled Standard Deduction) appeared first on Seattle Bubble.

Trulia shareholders will get 0.444 shares of Zillow stock (Z) for every share of Trulia stock (TRLA), making the deal worth $3.5 billion at today’s prices.

I’ve never been much of a fan of either company, since they aren’t really “disrupting” or improving the real estate industry so much as they are just leeching off of it. Their persistently lousy data makes either site a terrible place to try to find a home that is actually for sale, and their business model is basically to be a middle man.

Both of these companies make most of their money by selling advertising and collecting referral fees from real estate agents and mortgage providers. That is, if you can really consider consistent net losses to be “making money” at all:

So all in all, it seems like a great match. High fives all around!

The post Zillow + Trulia = Love Forever appeared first on Seattle Bubble.

Here’s an excerpt from the Seattle Times article about the melting Antarctic ice sheet:

“A large sector of the West Antarctic ice sheet has gone into a state of irreversible retreat — it has passed the state of no return,” said Eric Rignot, with NASA’s Jet Propulsion Laboratory in Pasadena, Calif.

That move by itself could increase sea levels by about 4 feet, Rignot said. But it also will help set in motion other changes that could cause the ice sheet’s contribution to sea-level rise to triple to 12 feet or more.

I was curious how a 12-foot increase in sea level might affect homes around Seattle, so I pulled up the handy Surging Seas simulator by Climate Central. Their simulator only goes up to 10 feet but even at that level you can see that the increasing sea levels will have a dramatic effect on Seattle.

Here are a few highlights:

• 8,257 homes in King, Snohomish, and Pierce Counties will be literally underwater
• Most of the Snohomish River Valley and the Duwamish River Valley will become ocean.
• Lake Union and Lake Washington would both become saltwater bays.
• I-5 through Fife would be submerged (along with 30% of the city of Fife)

Although thousands of homes would end up in the Puget Sound in this scenario, that only represents about one percent of all homes in the Seattle area. Still, the overall effects on our area would most likely be quite large.

Thankfully, we’ve got a while to figure out how to handle it (the article estimates 200-1,000 years), but unfortunately, if the scientists are correct, there’s absolutely nothing we can do to stop it.

Bottom line: Buy a waterfront home in the Seattle area for yourself and your kids to enjoy, but don’t count on passing it down to your great-great grandkids.

[Update]
Apparently the visualization tool at Climate Central fails to properly account for the 20-22 foot differential between the Puget Sound and Lake Union / Lake Washington that is maintained by the Ballard Locks. Thanks to commenter Brad for pointing that out below!

The post Thousands of Seattle Homes to End Up Literally Underwater appeared first on Seattle Bubble.

While the housing market was definitely on fire last year, with respect to bidding wars and home price gains, there are a lot of signs that things will slow back down dramatically this year. If you’re a buyer looking for a home, near-record-low inventory will no doubt still make things feel intense, but it definitely looks like 2014 will be quite a bit different for housing than 2013.

Calculated Risk: MBA: Mortgage Purchase Index lowest since 1995

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 8.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 21, 2014. …

The Refinance Index decreased 11 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier to the lowest level since 1995. …

“Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it,” said Mike Fratantoni, MBA’s Chief Economist.

…
The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index – but this is still very weak.

Calculated Risk: Housing Weakness: Temporary or Enduring?

The recent data for housing has been weak, with new home sales and housing starts mostly moving sideways over the last year (with plenty of ups and downs, and I expect downward revisions to Q4 new home sales). Existing home sales have declined 14% from a peak of 5.38 million in July 2013 on a seasonally adjusted annual rate basis (SAAR), to just 4.62 million SAAR in January.
…
The bottom line is the housing weakness should be temporary. There should be more inventory this year, price increases should slow, and sales volumes increase.

Wall Street Journal: Mess in the West: Home Sales Index Hits 7-Year Low

An index that measures contracts to purchase previously owned homes was mostly unchanged in January from December, according to a report Friday. But the index showed another drop in the West, where it has fallen for eight consecutive months.

The index fell in the West to its third lowest level since the NAR began its tab in 2001, surpassing only two months from the summer of 2007, when housing markets were beginning their free fall.

Wall Street Journal: Don’t Get Excited by Jump in New Home Sales

New home sales jumped to the highest level since July 2008 in January, which is really good news if it holds. But the Census new-home sales data is a choppy indicator with a small sample size, and when you take a longer look at the series it’s pretty clear that the nation’s two-year-old real estate turnaround is still largely a recovery in prices.

The building of new homes — the housing sector’s biggest contribution to annual economic growth — continues to lag badly. This disconnect goes a long way toward explaining why U.S. growth is still pretty weak some four years after the recession. It’s also why economists’ hopes that 2014 will finally be a breakout year for the economy depend on home building regaining its footing in the spring.

“The key piece for the U.S. economic outlook in 2014 is a turning point in the construction cycle,” says Ryan Sweet, an economist at Moody’s Analytics.

The post Link Roundup: Housing Market Strength Evaporating appeared first on Seattle Bubble.

Quoting from the letter:

As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

• certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
• the borrower has demonstrated full recovery from the event; and,
• the borrower has completed housing counseling.

In other words, they’re throwing the gates wide open, extending FHA-insured financing to borrowers who have gone through foreclosure, deed-in-lieu, short sale, or bankruptcy as recently as one year ago. The waiting periods were previously three years after a foreclosure or short sale and two years after a Chapter 7 bankruptcy.

To me the three-year waiting period seems completely reasonable. Why would FHA feel the need to shorten it to as little as one year? My tipsters have their theories.

Says one:

…FHA is nearly broke and this creates huge churn in fees. …it was only a matter of time before they did something like this to keep the churn going. …it is still almost hard to believe they would take it this far.

The other’s theory is remarkably similar:

In my opinion the reason FHA has relaxed underwriting guidelines is because the FHA Mortgage Insurance Fund is dangerously low and they need to invite more people to use FHA because they need more mortgage insurance premiums to pay losses on future claims.

I think people who are that close to financial disaster in their recent past need to stop and think before jumping into home ownership again. It’s really not for everyone… lots of work… cost of upkeep. I know the industry especially Realtors will jump all over this.

One thing we can be sure of: HUD Secretary Shaun Donovan (pictured at right) isn’t pushing through a major decision like this out of the kindness of his heart and unbridled empathy for downtrodden homeowners. National government agencies make big policy changes for one of two reasons: the new direction either furthers someone’s political agenda or it is a necessary reaction to cold hard economic facts.

Given that this move isn’t getting the usual media circus attention that the political agenda items typically receive, I’m inclined to subscribe to the theory offered by my two tipsters.

The post FHA: Foreclosure One Year Ago? No Problem! appeared first on Seattle Bubble.

However, since this is obviously a topic of interest that we haven’t covered here before, I thought it would be worth explaining when you can and can’t find yourself at risk of deficiency judgment in Washington State. Note that this is not legal advice, just my best interpretation of the available information on the subject.

The most authoritative resource I found that details the nuances around deficiency judgment in Washington is this page on short sales from the Washington State Department of Financial Institutions. You can also go straight to the law and read the Revised Code of Washington, specifically RCW 61.24.100.

You could face deficiency judgment in the following scenarios:

• You had loans with two banks but only one foreclosed. The other bank may pursue deficiency judgment.
• Your home was foreclosed in a judicial foreclosure (most foreclosures in Washington are non-judicial via a Trustee Sale).
• You sold your home in a short sale and did not receive a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
• You gave your home back to the bank via a deed-in-lieu of foreclosure and did not receive a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
• You trashed your home so thoroughly as to reduce its “fair value.”
• You collected rent for your home after the foreclosure sale.

You should not face deficiency judgment in the following scenarios:

• You had just one lender, and they foreclosed in a non-judicial foreclosure (via a Trustee Sale).
• You sold your home in a short sale and received a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
• You gave your home back to the bank via a deed-in-lieu of foreclosure and received a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.

Again, this is not legal advice, and I make no guarantee that the scenarios above are comprehensive, but this should be a guide to at least give you an idea if deficiency judgment is a risk you might be exposed to.

For the most part deficiency judgment is relatively rare in our state, but if you’re worried about it and any of the scenarios in the first list above apply to you, you should contact an attorney (I recommend both Craig Blackmon and Marc Holmes).

The post Can Banks Seek Deficiency Judgment in Washington State? appeared first on Seattle Bubble.

Looks like it’s that time again… Recent headlines have described an increase in mortgage interest rates from 3.35% to 4.0% with hyperbole like “Mortgage Rates Soar,” and “Soaring U.S. Mortgage Rates.”

If this sounds familiar it’s because we heard the same nonsense when rates moved from 5.0% to 5.3% in 2010. These types of articles often include a graphic like the one at right, with the x and y axes manipulated to make the latest gyrations in interest rates look like a very big deal that will most likely destroy the housing market.

I’ve pointed this out numerous times in the past, but it is worth repeating: Rates are still crazy low.

Rates could increase four percentage points and still be historically low. Here’s the appropriate historical context to keep in mind when you read these hysterical stories about rates “soaring” or “hitting a one-year high.”

The latest increase barely registers as a blip when the chart is appropriately scaled.

As long as interest rates are still below 6%, I doubt we’ll have anything resembling a “normal” housing market. I for one take increasing interest rates to be a good sign. It’s an indication that the market is able to sustain itself without artificial manipulation via ridiculously low rates.

The post Déjà Vu‎: Mortgage Interest Rates Panic appeared first on Seattle Bubble.

Homeownership is a good thing, for the individual and for society. Or so American governments, whether Republican or Democrat, have long believed. The benefits have been cited repeatedly in justifying the existence and expansion of the tax breaks given to home buyers.

But maybe it isn’t nearly as good as had been thought.

A new study by two economists concludes that rising levels of homeownership in a state “are a precursor to eventual sharp rises in unemployment in that state.” As more homes are owned, in other words, fewer people have jobs.

This week’s poll is inspired by the story, but since I only linked to it in the comments and I’m interested in seeing more broad discussion on the topic, I’m dedicating a regular post to the topic. Commenter “whatsmyname” weighed in, accusing the study authors of having ulterior motives:

English translation:

Cutting taxes for the rich without decreasing tax revenues will require increasing tax revenues from the not rich. We think they’re too stupid to notice when we say it openly. Oftentimes, we are right.

Here’s the problem with that claim, though. It has been well-documented by numerous sources that most of the benefit from the mortgage interest deduction is in fact collected by “the rich.” The “not rich” have been duped into thinking it’s a great deal for them when in reality they get very little from it. Here are a few links on that topic:

• Despite Benefit Disparities, Middle Class Supports Mortgage Deduction
• Only Rich People Benefit From The Home Interest Mortgage Deduction
• The Stark Geographic Inequality of the Home Mortgage Interest Deduction
• Who Really Benefits From Interest Deductions

So what do you think about the claim that increasing homeownership in a region leads to a later increase in unemployment? I think the authors make a compelling case, although I admit that I have not yet read the entire original study. I’m a fan of homeownership, but I also understand that it’s not right for everyone, and it is ill-suited to the increasingly mobile workforce of today’s economy.

[Update: Here’s the link to the original paper from the Peterson Institute for International Economics: Does High Home-Ownership Impair the Labor Market?]

The post Rising Homeownership May Lead to Rising Unemployment appeared first on Seattle Bubble.

Earlier this month, Redfin released the results of an in-depth study of real estate listing accuracy across various websites, including Redfin, Windermere, Zillow, and Trulia. The results will not surprise anyone who has attempted to do any serious home searching on these sites, but I still wanted to share the Seattle results of the study.

As you would expect, the MLS-powered sites (Redfin and Windermere) matched the MLS almost perfectly. The other sites… not so much.

First up, the study looked at how many MLS-listed homes appear on each site. In Seattle, Trulia was missing 37% of the listings, and Zillow was missing 28%.

Next, the study looked at how long it took between when a home was listed on the MLS and when it appeared on each site. Trulia’s median delay in the Seattle area was 10 days, and Zillow’s median delay was 5 days.

Finally, the study looked at what percentage of “for sale” listings were not really for sale. This only counted homes that the sites claimed were agent-listed and still active. When you search on Zillow or Trulia for homes “for sale,” they both return many homes that are actually just at some point in the foreclosure process, and are not for sale. These were not counted against them. Nor were homes marked as pending counted against them, even though there was no way to filter those homes out of a search of homes “for sale.” Even after all of these exceptions, there were still 32% of the listings on Trulia and 19% of the listing on Zillow that were not really for sale. There were two listings shown on Windermere as for sale that were not really still for sale.

Yes, I am employed by Redfin and it is obviously in our interest to make these claims. However, you could do the same experiment in nearly any area that has a decent MLS-powered site and get basically these same results. In fact I encourage you to do so. Don’t take my word for it, see the results for yourself.

And while my biased opinion is that Redfin has the best features and the most user-friendly site, you don’t need to use Redfin to get this advantage. Here in the Seattle area we have more choices than nearly any other part of the country when it comes to accurate home search. Redfin, Windermere, John L. Scott, Estately… The list goes on and on.

Here’s the bottom line: If you are a serious home shopper and you are not searching on an MLS-powered site, you aren’t really a serious home shopper.

REMINDER – Full disclosure: The Tim is employed by Redfin.

The post MLS-Powered Search Sites Hold Major Advantage Over Zillow & Trulia appeared first on Seattle Bubble.

Nick Timiraos noted this in the Wall Street Journal in early September. Here we are in late October, four debates later, and nothing has really changed. Barely a peep about housing from Obama or Romney.

Here’s one possible explanation: Neither wants to have a serious discussion about housing because they would have to talk about the mortgage interest deduction, which more and more is looking like it will need to be severely limited or possibliy even eliminated no matter who gets elected.

The burgeoning federal debt makes it unlikely that the mortgage interest tax deduction will survive in its present form, but any proposed changes to the tax break for homeowners will likely spark a fierce debate over the fundamentals of the U.S. housing market, the value of homeonwership, and consumer behavior.

That’s according to panelists at a housing forum hosted Friday by real estate search and valuation company Zillow Inc. and the University of Southern California’s Lusk Center for Real Estate.

“I think its entirely likely that something big is going to happen (with the MID) starting next year with either administration,” said Jason Gold, director and senior fellow at the Washington, D.C.-based Progressive Policy Institute, an independent think tank.

The idea of eliminating or reducing the mortgage interest deduction has been popping up for the last couple of years. A year ago I said that it was “unlikely that any of the current talk of eliminating the mortgage interest deduction will come to pass,” but the notion seems to be gaining some serious momentum.

MARTIN: Why is it that economists seem to be pretty – I would not say united on this point, but there seems to be a growing consensus among economists that this is bad public policy, this is bad economic policy.

GEEWAX: Well, we have to make choices among different kinds of ways of dealing with the budget deficit and they say this is a good one to go after because it really doesn’t make all that much economic sense in today’s climate to continue to push this. For example, one might argue that, yes, the American dream of the 1950s was to buy a home, but if you talk to young people today, their American dream might be quite different. What they really want is a great education and mobility so that they could pursue the jobs they want.

Could it be that both candidates realize that the mortgage interest deduction’s days are limited, and neither wants to go on record supporting its demise? If I were a political strategist, that would be a good reason to encourage my candidate to avoid housing as a topic.

The post Are Obama & Romney Avoiding Housing to Avoid Talking About Killing the Mortgage Interest Deduction? appeared first on Seattle Bubble.

“…a new reality: The economy has made the transition from tentative to robust recovery, and the period of historically low interest rates is ending.”

“In the residential market, the belief that the period of historically low interest rates may end has begun to sink in with buyers.”

“Historically low interest rates have boosted home sales, persuading renters to become buyers.”

“In recent years, many homeowners have made good use of historically-low interest rates and remortgaged to a cheaper deal, cutting their mortgage costs…”

…”the end of a long period of historically low interest rates, a period that may not be repeated anytime soon.”

“The days of historically low interest rates are likely soon to be behind us.”

Here’s the thing about these quotes though… They’re all from May and June of 2004, a time when home prices were just beginning to boom and the “historically low interest rates” were around 6.25%.

You can perhaps understand why I am skeptical when I hear claims that a point or two increase from today’s sub-4% interest rates is somehow going to destroy the housing market.

For the full context, here’s the long-term chart of rates since the early 1970s from the Federal Reserve:

Rates could nearly double to 7% and they would still be lower than they were 96% of the time from 1971 through 2000. I’m sure the housing market will get along just fine if rates go up a few points.

That said, we’ve all been expecting rates to increase for years now, and yet low rates persist. It would not surprise me one bit if rates stay in the threes and fours for at least a few more years.

The post Will Higher Interest Rates Kill the Housing Market? appeared first on Seattle Bubble.

Rather than re-writing all of my thoughts on this issue, I thought I’d get out in front of it this time with a wrap-up of the posts I wrote the last time this topic spiked in the collective consciousness back in mid-2008 (whoa, has it really been that long?).

From Gas Prices & Home Buying

Let’s say you’ve got a 30-mile commute from Sultan to Redmond (one of my former coworkers did that—yuk), and that your car gets a decent but not great 25 miles to the gallon. At $2.50 per gallon, you were spending $30 a week (~$120 a month) on gas for the commute. At today’s $4.00 per gallon, that is up to $48 a week (~$192 a month), a difference of $72 per month, or $900 more per year.

So lets say you decide to move in closer, to Kirkland or Woodinville. Now your commute is just 6 miles, and a week’s worth of commuting costs you just $10, saving you a grand total of $1,900 per year.

From Will High Gas Prices Save Close-in Neighborhoods?

Pretty much any way you slice it, the higher cost of housing close-in far outweighs any financial benefits you get by cutting your commute. Run the numbers for any pair of far-flung vs. close-in cities around Seattle and you’ll find the same thing.
…
What I’m trying to get at here is that the “high cost of gas” argument for why close-in neighborhoods will somehow retain their value just doesn’t wash.

There is value in living close to your job, but with the current dynamics of home prices and gas prices, that value is simply not financial.

That post also included this handy reference chart:

Finally, from Beating a Dead Horse: Gas Prices

I’m not saying that there aren’t a lot of convincing reasons to want to live “close-in.” I’m also not making some sort of general statement about the overall economics of living further out. Articles such as these are making the claim that gas prices alone will drive people into more expensive in-city real estate. I’m simply saying “prove it.”

True, homes are considerably cheaper today than they were four years ago when we had this discussion last time, but unless you’re commuting daily between Bellingham and Tacoma, the cost of gas (however high it is) is still likely to be dwarfed by the housing costs of moving to a closer-in neighborhood.

The post Here Comes the Gas Prices Discussion Again appeared first on Seattle Bubble.

Latest rates came in at 3.88%, the lowest they have been as far back as the Federal Reserve’s data goes (early 1971). Here’s a chart of the entire data set:

I can’t wait until rates finally rise back to six percent or so—about where they were through the duration of the real estate bubble. I have a feeling that agents and news headlines won’t be touting six percent rates as “historically low rates” like they were in 2005 and 2006, despite that they will still be historically low, as you can see above.

The post Still Waiting for the Promised Surge in Interest Rates appeared first on Seattle Bubble.

U.S. home sales from 2007 through 2010 were about 14% lower than first reported, a real estate trade group said Wednesday, a sharp revision showing the housing bust was far worse than initially thought.

The National Association of Realtors revised downward its sales figures since 2007, using annual Census survey data to recalculate how many homes were sold.
…
The Realtors’ new figures also show 2008 was the worst year for home sales during the housing bust, with only 4.11 million sold, down 16% from the previous estimate of 4.91 million.

Home sales for the first 10 months of this year were also revised downward. October’s sales pace was lowered to a rate of about 4.25 million sales per year, from an original estimate, from an original level of 4.97 million.

Yun cited several reasons for the group’s sales revisions. The group’s reports were “not matching up with other housing-related data,” he said.

As you know, I regularly criticize the local multiple listing service for their lousy accounting methods that result in frequent blatant mis-statements of basic facts. Now multiply these types of issues times a few hundred MLSes across the whole country. Then realize that many MLSes geographically overlap each other, so a single sale gets reported in two or three different MLSes.

The NAR combines all of this crappy, sometimes redundant MLS data and then builds an estimate on top of it.

So you can perhaps understand why all of these stories about the NAR overstating sales have not come as any sort of surprise to me.

Of course, even the revelations that have come out of the NAR so far may not be the full story of just how crappy their data is. Calculated Risk reports: Lawler: The NAR "benchmark revision story" is not over!

In closing, enjoy this vintage 2007 NAR propaganda piece.

The post Big Freaking Surprise: NAR Overstated Home Sales appeared first on Seattle Bubble.

As a refresher, in the map below I’ve put the Case-Shiller home price index data from all twenty cities on a map. The size of each circle represents how far back prices have rewound (larger = further back), and the circles are color-coded by how much prices have fallen from their peak value. Float over a circle for the details about that city.

Most years lost: Detroit at 15.8. Seattle is number 18 out of the 20 cities with just 7.0 years lost.

Largest percentage lost: Las Vegas at 60.0%. Seattle is number 12 with 29.5% lost from the peak.

Next, the month to month visualization I introduced last month, showing the number of cities experiencing month to month gains and losses each month:

click this text for a full chart back to 2000

I think it’s crazy how in just three months we’ve gone from all twenty cities showing gains to just three cities increasing. Summer certainly didn’t last long for home prices this year.

The post Case-Shiller: Six to Sixteen Years of Lost Appreciation appeared first on Seattle Bubble.

• Wall Street Journal: Home Sales Climb But Prices Decline
• CBS News: Home sales up, but housing prices continue to fall nationwide
• The Real Deal: U.S. existing home sales rise slightly, but prices fall
• Chicago Tribune: Local existing home sales up double-digits in October, but prices fall
• St. Louis Post-Dispatch: St. Louis-area home sales up, but prices down
• Bangor Daily News: Maine home sales up in October, but prices slip
• St. Paul Pioneer Press: Minnesota home sales surge in October, but prices still falling

News writers still don’t seem to get it. Home sales are increasing because of lower prices. Just like televisions, cars, and any other material good, when homes become more affordable, more people buy them. It isn’t rocket science, people.

I for one am thankful for falling prices.

The post Home Sale Up <em>Because</em> of Declining Prices appeared first on Seattle Bubble.

I just posted the findings below to the Redfin blog, and thought they would be worth sharing here. I’ve been spending some time at work digging into sales data to figure out if there are any significant differences in listing performance correlated with what day of the week a home comes on the market.

As it turns out, there does appear to be a significant difference in tours and eventual sale success. The bottom line: Do list on a Thursday or Friday—don’t list on a Saturday or Sunday.

For the full details head over to my post on Redfin. For the highlights, enjoy the charts below.

The post Don’t List Your Home on a Weekend! appeared first on Seattle Bubble.

Yesterday over on the Redfin blog, I dug a little deeper into the conforming loan limit changes, pulling detailed sales data from all around the country by zip code to see which areas would be most affected by the change.

The result was another Google FusionTables zip code heat map. Below I have embedded the Seattle area. Note that to calculate the percent of sales that would be affected, I assumed 20% down. Click on any zip code to see the breakdown. Red represents 20% or more affected, Orange for 10% to <20%, Yellow for 5% to <10%, and Blue for <5%.

As I pointed out a couple weeks ago, for most of the Seattle area, the change is a non-event. The use of the word “hardest” in the headline is highly relative. For most of the Seattle area well under 5% of homes fall between the two limits. Over on the Eastside there are a few areas that creep up to around 10% affected, and one—South Sammamish—that hits almost 25%.

It will be interesting to see if sales in the red and orange areas on the map take any sort of hit over the next few months beyond what we would expect to see due to regular seasonality.

The post Conforming Loan Limit Changes to Hit Eastside Hardest appeared first on Seattle Bubble.

In order to get a sense of scope on how many sales might be affected by this new change, I did a few quick searches on Redfin.

Under the current limit of $567,500, a buyer with 20% down could buy a home priced up to $709,375. Under the new limit of $506,000, the 20%-down buyer can now only go up to $632,000. According to Redfin, 4.1% of homes on the market (SFH, condo, & townhouse) in King County right now fall between those prices (426 out of 10,490 listings). 4.5% of sales in the last six months have fallen in that range (601 out of 13,350 sales).

If we assume the worst-case scenario of just 3.5% down under the existing limit a buyer could purchase a home of up to $588,083, while under the new limit that drops to $524,352. 4.8% of current listings fall between those ranges (502 out of 10,490), and 5.4% of sales (724 out of 13,350).

If you take the broadest possible range of $524,352 at the low end under the new limits, down from $709,375 at the high end under the existing limits, you’re talking about 11.7% of listings (1,228 out of 10,490) and 12.9% of sales (1,725 out of 13,350).

So the new conforming loan limits will affect between 4% and 13% of the Seattle-area market. Doesn’t seem like such a massive disruption to me…

Full disclosure: The Tim is employed by Redfin.

The post How Much of the Seattle-Area Market Will be Affected by New Conforming Loan Limits? appeared first on Seattle Bubble.

What a perfect example of the problem with most real estate reporting. Same data, polar opposite headlines. Reporters telling the story they want to tell, regardless of what is actually going on in the market.

So did pending sales “rise substantially,” as claimed by Inman News, or did they “drop” as claimed in the San Francisco Chronicle’s headline sound bite?

As readers of these pages likely already know, they were down month-over-month and up year-over-year, but the critical piece of context to that YOY rise is that in July of last year pending sales were in the midst of the major post-tax-credit hangover. Of course you won’t find any mention of this fact in the Inman story that trumpets the “substantial” rise.

The worst part is that most people’s perception of what’s happening in the housing market comes exclusively from shoddy reporting like this.

The post The Problem with Real Estate Reporting appeared first on Seattle Bubble.

The era of record-low mortgage rates is over.

The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market — a threat to the fragile recovery in the housing market.
…
“We are seeing some panic among potential buyers who have not found houses yet,” said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. “They’re saying: Man, I should have found a house three weeks ago or last month when rates are lower.”

It was funny then, and it’s even more funny now, as rates hit yet another new all-time low, a year and a half later.

Here’s an updated chart of 30-year rates, going all the way back to 1971:

Again, notice that even when rates go up two entire percentage points, they will basically be about where they were during the hottest years of the housing bubble, when real estate salespeople were crowing about how amazing rates were, and what a great time it was to buy because of it.

Of course, at this point I wouldn’t expect rates to rise anytime soon. Demand for borrowed money is in the crapper and probably will be for a while.

The post Friday Flashback: “The era of record-low rates is over.” appeared first on Seattle Bubble.

First up, Diana Olick with CNBC: Vacant Homes Will Drown Housing Recovery

A real estate source I knew recently told me about a guy he knows in Atlanta who has been hired by several different banks to winterize their REO’s (real estate owned, i.e. the bank-owned foreclosures).

The homes are abandoned and empty, and clearly the banks think they’re going to stay that way for a while.

The winterizer didn’t want to do an interview, for fear he would lose his clients, the banks, who might not want us all to know about this.

Interestingly, I had actually heard that exact story through the offline grapevine before reading this article. It’s not hard to see why banks might already be shuttering thousands of homes for the winter, at least in Atlanta.

Take a look at any recent Case-Shiller release for Atlanta, and you’ll see that low tier home prices have dropped like a rock in recent months. I’m not talking about three or four percent a month. Try seven to ten percent per month drops—in five of the last nine months.

Or just go do a search for Atlanta foreclosures on Redfin. Just within the city limits right now there are over five hundred foreclosures active on the market (with nearly half priced under $50k), and another four hundred or so unlisted.

And Atlanta’s not even the worst market. Obviously Phoenix and Las Vegas are bad, but even Baltimore, just a short drive from the gravity-defying DC market has over a thousand unlisted bank owned homes. Yikes.

Article number two by Daniel Indiviglio at The Atlantic touches a similar theme: Are Ugly Houses Preventing a Home Market Recovery?

Maybe Americans aren’t avoiding buying homes right now — maybe they’re just avoiding buying ugly homes. The housing market may be splitting into two sub-sectors: well-kept, good-looking homes and run-down, torn-up homes. Could the latter group be preventing the housing market from stabilizing?
…
The disparity between these two groups of homes matters, because Lichtenstein has seen prices of the good properties remain relatively strong recently, as prices of worse properties have declined. This means that it’s those run-down, dilapidated foreclosed homes and short sales that will disproportionally bring down aggregate home prices, while well-kept homes should see much smaller price declines, or even appreciation.

It seems like we’ve been hearing these claims a lot lately, that non-distressed homes are somehow immune to the effects of foreclosure sales. Obviously non-distressed homes won’t sell at as much of a discount as foreclosures, but I think it’s rather naïve to think that there really exists two completely separate, distinct housing markets.

Finally, here’s a piece from Rasmussen. According to their latest survey, 62% Say Troubled Homeowners Should Buy Cheaper Houses

The federal government Friday extended its deadline to apply to the Emergency Homeowners Loan Program, but most Americans believe troubled homeowners should sell their homes rather than receive government assistance to keep them.

The latest Rasmussen Reports national telephone survey of American Adults shows that 62% believe it’s better for homeowners who can’t afford to make increased mortgage payments to sell their homes and find less expensive ones. Twenty-five percent (25%) think it’s better for the government to assist those homeowners in making their payments. Thirteen percent (13%) are undecided.

These results have changed little in surveys since late 2007.

And yet, the government continues to come up with new programs designed to keep people in homes that they fundamentally cannot afford (and in many cases never could).

It’s a problem of perspective. Foreclosures are not the problem. Foreclosures are the solution.

The post REO Roundup: The Long, Slow Path to Market Clearing appeared first on Seattle Bubble.

Calculated Risk: The upward slope of Real House Prices

I don’t think we have to choose between real prices and price-to-rent graphs to ask “how far out of line are house prices?” I think they are both showing that prices are not far above the historical lows. Prices might overshoot to the downside because of supply and demand issues; there is a large overhang of vacant housing units and many distressed properties still coming on the market, plus demand is soft with weak employment, fairly tight financing, negative home buying sentiment and some usual buyers excluded because of credit issues. But I don’t think national real prices are that far out of line.

Note: usually near the end of a housing bust – after nominal prices stop falling – real prices decline slowly for a couple more years, and we will probably see that this time too. Of course, right now, nominal prices are still falling.

Reuters: Is real estate for suckers?

Are you a dope for buying a home in the U.S. right now?

If you need and want one, there’s no harm in that. Yet if you think it’s an investment that will actually appreciate, you’re taking a sucker’s bet.

During the bubble years, the “greater fool” theory prevailed. When you bought a home, you were confident that someone would buy it for a higher price than you paid. “Flippers” prospered from this mass psychology.

Right now, it’s a “lesser fool” market: You’re hoping that you’re not foolish for buying a depreciating asset in a troubled economic climate. Millions stay out of the market just to avoid the feeling of doing a fool’s errand.

Home prices are still dropping in many areas with no real bottom in sight. … The U.S. home market is no longer in triage mode. It’s a train-wreck. Zillow said home prices “are no longer due to bottom out” this year. When will they, then? It may take years, and here’s why.

New York Times: Rent or Buy, a Matter of Lifestyle

As this year’s spring buying season nears its peak, the relative merits of renting and buying are closer than they have been since the housing bubble began inflating almost a decade ago. So the best single piece of advice for most people is to make a decision based mainly on their stage of life, rather than on any complex financial calculations.

If you think you are ready to settle in one place for at least five years, if not more, buying often makes a lot of sense. That’s why I bought my first house, in the Washington area, a few years ago, despite thinking local prices remained high.

But if the chances are good that you will move again in the next few years, renting is usually the better bet. The various closing costs, including real estate agents’ fees, are just too high. Owning a house also makes it much harder to move when you want to because selling a house is complicated.

Within this basic framework, the numbers — specifically, something called rent ratios — are the next place to turn.

Thoughts?

The post Weekend Reads from Across the Spectrum appeared first on Seattle Bubble.

The Cycle of Market Emotions

By my reckoning, in late 2007 we were somewhere between anxiety and denial, and by mid-2010 we were treading water between fear and desperation. Today I suspect we’ve made it to capitulation, based on two major factors:

• Many sellers have given up, not even bothering to list their homes.
• Many would-be buyers have given up on home ownership entirely.

For evidence that sellers have given up, look no further than any of our recent posts on inventory trends, showing flat/falling inventory at a time of year that usually sees the largest increases.

For evidence that buyers are giving up on home ownership, consider mainstream articles such as this story that ran in Bloomberg Tuesday: Americans Shun Most Affordable Homes in Generation as Owning Loses Appeal

Victoria Pauli signed a one-year lease last week to stay in her rental home in Fair Oaks, California. She had considered buying in the area, where property prices have slumped 57 percent since a 2005 peak.

In the end, she decided it wasn’t worth it.

“I know people who have watched their home values get cut in half, and I know people who are losing their homes,” said Pauli, 31, who works as a property manager for a real estate company. “It’s part of the American dream to want to own your own home, and I used to feel that way, but now I tell myself: Be careful what you wish for.”

The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership.

Sure sounds like capitulation to me. Of course, we may be in the capitulation and despondency stage for quite some time—maybe years, even—so I think it’s a bit early yet to be looking for relief and optimism around the corner.

What about you? Where do you think we are in the cycle?

The post Has the Tide Turned Against Home Ownership? appeared first on Seattle Bubble.

Renters beware: Double-digit rent hikes may be coming soon.

Already, rental vacancy rates have dipped below the 10% mark, where they had been lodged for most of the past three years.

“The demand for rental housing has already started to increase,” said Peggy Alford, president of Rent.com. “Young people are starting to get rid of their roommates and move out of their parent’s basements.”

By 2012, she predicts the vacancy rate will hover at a mere 5%. And with fewer units on the market, prices will explode.

Rent hikes have averaged less than 1% a year over the past decade, according to Commerce Department statistics, adjusted for inflation. Now, Alford expects rents to spike 7% or so in each of the next two years — to a national average that will top $800 per month.

In the hottest rental markets, the increases will likely top the 10% mark annually for the next couple of years, according to Lesley Deutch of John Burns Real Estate Consulting. In San Diego, she anticipates rents will rise more than 31% by 2015. In Seattle rents will climb 29% over that period; and in Boston, they may jump between 25% and 30%.

I have often been critical of scare-mongering reports such as these in the past. This time around, with demand for rental housing increasing due to more people ditching homebuying in favor of renting and thousands of borrowers losing “their” homes to foreclosure each month, it intuitively seems like the prediction of rising rents might possibly hold a little more water.

So, let’s have a look at the data and see what the picture looks like for Seattle area rents.

In the chart below I’ve taken annual rent price index data for the Seattle area from the Bureau of Labor Statistics and plotted it against household income data for the same region from the Washington State Office of Financial Management.

The CNNMoney article claimed that “rent hikes have averaged less than 1% a year over the past decade.” In reality, rents in the Seattle area have increased an average of 2.7% per year since 2000. Meanwhile, over the same time period incomes only increased at a rate of 1.9% per year. So, despite rental increases over the past decade of more than double the (presumably national) number stated in their article, Seattle is one of the areas predicted to have the biggest increases over the next few years—huh?

As I have pointed out numerous times before, the interesting thing about rent is that you can’t take out exotic financing to pay it, so over the long run, rents and incomes tend to track pretty darn close to each other, as can be seen from 1990 through 2003. In the aftermath of the housing bust, it seems like rents have already shot up more than local incomes would support, probably due to the factors I mentioned above.

From what I can tell by looking at the available data, rents are highly unlikely to “climb 29%” over the next four years unless we see a sudden sharp increase in incomes. If anything, rents seems poised to fall over the next few years to get back in line with incomes.

Am I missing something here?

The post Are Seattle-Area Rents Poised to Shoot Up Again? appeared first on Seattle Bubble.

SEATTLE — Few believed the housing market here would ever collapse. Now they wonder if it will ever stop slumping.
…
In the last year, home prices in Seattle had a bigger price decline than in Las Vegas. [Case-Shiller for November: Seattle down 4.7% YOY, Las Vegas down 3.5% YOY]
…
“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ ” said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”

Not sure who Stan was talking to, but the vast majority of people I encountered prior to spring 2008 didn’t think Seattle was going to fall at all. Even a 10 percent drop was unthinkable to those outside of the writers and commenters on this blog.

It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable. In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.

Two local economists were quoted all but guaranteeing that Seattle was immune “if history is any indication.” A market-risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.

I recall that piece well. The front page of the paper was emblazened with a giant chart of home prices going up, up, up. It was thoroughly mocked on these pages:

There’s not a shred of new information in this 1,265-word rant, just the same tired arguments we’ve been reading over and over again—strong local economy, not as expensive as California, etc., etc., etc… The focus of this particular article is the “it’s never gone down before” argument. I wonder if Ms. Rhodes and her lauded “local economists” have heard of the phrase “past performance is no guarantee of future results.”

But I digress. Back to the New York Times…

These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off.
…
Increasing numbers of sellers are simply surrendering.

Megan and Ryan Dortch tried to sell their one-bedroom Eastlake condo for $325,000 two years ago. They rejected an offer of $295,000 as inadequate. A year later, they relisted it for $289,000, then $279,000, which was less than they paid. Without a sale at that price, they could not afford to buy a place big enough for them and their new baby.

They have given up on real estate. They are renting out their old apartment at a small loss every month, and living in a rented house. “I don’t expect the market to get better,” said Ms. Dortch, 31, a customer service consultant.

“Better” is obviously in the eye of the beholder. In my opinion, today’s real estate market is immensely better than it was from 2005 to 2007, but for those who bought into the fantasy of easy riches through ever-increasing home prices, the last few years have definitely been sobering.

Redfin, a real estate brokerage firm based in Seattle, says foot traffic began picking up in the last several weeks. Mortgage rates are rising, which could nudge those who need to buy to make a deal now for fear rates will rise even more.

But whenever the market finally does pick up, all those accidental landlords will want to unload, putting another burden on the market. “So many sellers are waiting in the shadows,” said Redfin’s chief executive, Glenn Kelman. “The inventory is going to expand and expand and expand. I don’t see any basis for significant price increases.”

This is the same thing Glenn was saying in his Wall Street Journal editorial last week. It sounds like Glenn agrees with my theory that the pent-up supply will serve to balance out any pent-up demand that might still be lurking out there, putting a damper on price increases for the foreseeable future.

David Leonhardt had a brief follow-up to yesterday’s story in his Economix blog: Seattle’s Foreseeable Housing Bust

Real-estate agents, homeowners and even home buyers can tell a lot of stories to justify the bubble — stories about central cities or good school districts being immune to bubbles — but eventually people will realize that renting is a much better deal and more will do so.

There is no such thing as a market price that cannot fall.

Bingo. If only more people in super smart Seattle would have applied a modicum of critical thinking before diving head first into the market.

The post New York Times: Seattle Sellers Simply Surrendering appeared first on Seattle Bubble.

• May 2006: Next hot market…think Washington (woo! everybody party!)
• June 2007: Where the housing boom goes on (Seattle, of course)
• May 2008: Bulletproof housing markets get hit (oops, we were wrong)
• May 2009: When it makes sense to rent (hope you didn’t listen to us in 2007)
• June 2010: Is a housing shortage coming? (a new partytime is just around the corner!)
• February 2011: Housing markets: Best recovery bets (Tacoma! Seattle!)

Forgive me if I don’t take this latest prediction from CNN Money too seriously. Neither does Kathleen Cooper down at the Tacoma News Tribune: Tacoma housing market cheered on CNN Money — but is it true?

The post CNN Money Still Throwing Around Random Predictions appeared first on Seattle Bubble.

Here’s a brief excerpt from the August 3rd Bloomberg article about the forecast:

At some point, everything stops falling. Sometimes things hit bottom with a bone-crunching thud and just lie there in a heap. Sometimes they bounce back up at least part of the way. The U.S. housing market is in the latter camp.

…the forecast in numerous regions across the country is for a healthy recovery by 2014.

While four years may seem too distant to offer many U.S. homeowners much reassurance, the outlook could be worse. Taking into consideration such factors as employment, foreclosure rates, income growth, demographic trends, and construction costs, Moody’s Economy.com and Brookfield (Wisc.)-based financial services industry information firm Fiserv (FISV) estimate that by 2014, U.S. home prices will be 7.2 percent above 2010 levels, with the strongest growth in the Pacific Northwest.

Now here’s an excerpt from an article Bloomberg ran two days ago on September 15th about another Moody’s forecast:

The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.

Shadow inventory — the supply of homes in default or foreclosure that may be offered for sale — is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc.

Photo by Flickr user Phil W Shirley

And that is why I pretty much completely ignore any “forecasts” from Moody’s these days. Which one is it, are home prices going to rise an average of seven percent in four years, or are they going to continue to slide for another three years?

If you’re looking to read the random output of a drunken monkey making out with an iPad, feel free to indulge in Moody’s “forecasts,” but if you’re hoping to find any actual insights into the market, I suggest you look elsewhere.

The post There’s a Reason They’re Called “Moody” appeared first on Seattle Bubble.

From Reuters: No Decision on Reviving Homebuyer Credit: Donovan

“It’s too early to say whether the tax credit will be revived,” Donovan said in an interview on CNN’s “State of the Union” program. He said the administration would “do everything we can” to stabilize the shaky U.S. housing market.

…
It would be far better for housing and the economy to announce “There will be no further housing tax credits.”

I could not agree more. Enough with the credits, subsidies, and stimulus already. And I say this as someone who is seriously considering buying a home within the next year. I would much rather have a rationally-functioning market than a few grand in my pocket.

To me, the homebuyer tax credit was like an invasive species that was introduced to an ecosystem to try to control a different invasive species that was introduced earlier.

I think I’ll name them Fannie & Freddie.

Pardon my pop culture reference, but I can’t help thinking of the Simpsons episode “Bart the Mother,” in which Bart released a pair of “Bolivian tree lizards,” which destroy the town’s pigeon population. In order to eradicate the lizards, the people of Springfield plan to release “Chinese Needle Snakes,” followed by “snake-eating gorillas.”

In the real world, the government wanted to encourage home ownership, so they beefed up Fannie and Freddie, loosened lending regulations, and held interest rates low. Things got overheated, so they began jacking up interest rates. High interest rates cooled things off, but that exposed the underlying weakness in the economy. Of course, when people realized how weak the economy was, the housing market crashed. In order to combat the crashing housing market, they dropped rates to the floor and introduced tax credits. Once the credits disappeared, sales fell hard, sending the housing market back to the gutter.

Yes, I realize that I am oversimplifying and leaving out a lot of steps, but I think that at its core, the invasive species analogy really works well.

It’s time to stop screwing with the ecosystem by introducing one invasive species after another.

The post Time to Let the Snake-Eating Gorillas Freeze to Death appeared first on Seattle Bubble.

Of course, you know what that means… As soon as rates start to climb a few tenths of a percentage point, we will no doubt be subjected to a barrage of scare tactic articles like the one we thoroughly mocked back in April that boldly declared “the era of record-low mortgage rates is over.”

For some context on just how low rates are, and more importantly how low they will still be even if they go up two full points, here’s a chart of mortgage rates through 1971 via the Federal Reserve.

Since 1971, rates have been above nine percent 39% of the time. They have been above eight percent 55% of the time. They have been above seven percent 74% of the time, and above six percent a staggering 89% of the time. In other words, even when rates eventually do rise a few points, they will still be “at historic lows.”

I’d also like to make a quick observation about why rates are still this low. Consider the basic economics of supply and demand. The price of a good (in this case, borrowed money) tends to be high when supply is low and demand is high and the price tends to be low when supply is high and demand is low.

When the government got out of the business of buying mortgage-backed-securities a few months ago, everyone was thinking that the price of borrowed money would go up due to a contraction in the supply. Rates did tick up slightly for a while, but have since fallen to these new all-time lows.

Since supply is still fairly low (banks not super excited to lend), it must be a reduction in demand that is driving rates down. Incidentally, that reasoning happens to be backed up by the recent data on post-tax-credit sales (falling through the floor).

Thus, I suggest that mortgage rates are likely to remain quite low until homebuying demand begins to pick back up in earnest, which I’m betting won’t be until sometime next year at the earliest.

The post Interest Rates Hit All-Time Lows: Scare Tactics in 3…2…1… appeared first on Seattle Bubble.

David Wessel, Wall Street Journal: Rethinking Part of the American Dream

It’s time to have a serious conversation about the American approach to home ownership and mortgages. A system once celebrated for putting so many families into their own homes and for making mortgages so widely available has become, as one housing economist puts it, “a case study in failure.”

Beyond the complexities of securitization, the merits of home ownership tax breaks and the politics of Fannie Mae and Freddie Mac lurk two fundamental issues.

One, the U.S. has for decades overemphasized the virtues of home ownership.

Two, many Americans are addicted to a unique, and costly, strain of mortgage—a 30-year fixed-rate loan that can be paid off at any time without penalty.

The U.S. has long seen home ownership as an unquestioned virtue, dating to a 1918 government “Own Your Own Home” campaign. Herbert Hoover, Franklin Roosevelt, Bill Clinton and George W. Bush all talked as if owning a home was the only way to join the middle class. Not only did it promote social stability—recall Mr. Bush’s “ownership society”—and build well-maintained neighborhoods, home ownership became a hedge against inflation and a way to save for retirement. Until it didn’t.

Personally I think home ownership is great—as long as it is done right. That means buying a home you really want to live in, not one you think will make you a bunch of money. It means buying a home you can afford, even if a few unexpected expenses come up or you’re out of a job for a few months. And it means eventually paying off your mortgage, not trading houses every few years and re-starting yet another new 30-year interest cycle.

David Streitfeld, New York Times: Housing Market Slows as Buyers Get Picky

Before the recession, people simply looked for a house to buy. Later they got squeamish just thinking about buying. Now they are on a quest for perfection at the perfect price.

Exacting buyers are upending the battered real estate market, agents and other experts say, leading to last-minute demands for multiple concessions, bruised feelings on all sides and many more collapsed deals than usual.

It is a reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners. These days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.

“We see buyers who must have learned their moves from the World Wrestling Federation,” said Glenn Kelman, chief executive of the online broker Redfin. “They think the final smack-down occurs at the inspection, where the seller will be reluctant to refuse any demand because the alternative is putting the house back on the market as damaged goods.”

Everyone expected the housing market to suffer at least a temporary hangover after the government’s $8,000 tax credit expired, but not necessarily this much. Preliminary data from around the country indicates that the housing market began swooning last month immediately after the credit was no longer available. In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided.

To me it makes perfect sense that buyers should be the ones in the driver’s seat. After all, they’re the ones coming to the table with a giant wad of (borrowed) cash. Why shouldn’t they be able to be picky?

And as far as the sudden drop in sales post-tax credit… Duh.

The post Rethinking Home Ownership / Buyers Get Picky appeared first on Seattle Bubble.

The era of record-low mortgage rates is over.

The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market — a threat to the fragile recovery in the housing market.
…
“We are seeing some panic among potential buyers who have not found houses yet,” said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. “They’re saying: Man, I should have found a house three weeks ago or last month when rates are lower.”

I mean, that was totally justified, right?

Clearly the era of record-low mortgage rates is over. If you didn’t buy a house before early April when interest rates shot up to terrible new heights, you have obviously missed your chance.

Have fun renting… forever.

The post Checking in on SKYROCKETING Interest Rates appeared first on Seattle Bubble.

With the subject of “walking away” finally hitting the mainstream media in full force this weekend with a dedicated segment on Sunday’s 60 Minutes, it would appear that the idea of giving the keys back to the bank to get out of a financial death spiral continues to gain some serious traction.

Of course, even though walking away would massively improve their financial situation and should be a no-brainer for many people (several such people are profiled in the 60 Minutes segment), strategic default (choosing not to pay your mortgage even though you can afford to) still carries something of a social stigma in many people’s minds.

For example, “walking out on a mortgage” was recently listed among “8 money missteps” by USA Today, which was then repeated without question and escalated to a “financial deadly sin” by my favorite personal finance blog, Get Rich Slowly (P.S. – buy J.D.’s book). Here in my neck of the woods, Kenmore real estate agent James Lupori called the notion “disturbing” in a recent post.

However, while some individuals may still be fretting about their “moral obligation” to pay their mortgage, a growing number of recent high profile examples have demonstrated that strategic default is really nothing more than a smart business decision.

In January, the owners of the massive 11,227-unit Stuyvesant Town and Peter Cooper Village apartment complex in Manhattan announced they would be handing the property over to their creditors. Closer to home, Boston-based Beacon Capital Partners announced last month that they will be intentionally defaulting on the $2.7 billion loan that they used to buy the Columbia Center—Seattle’s tallest skyscraper—and 8 other towers in the Seattle area (as well as 11 in the DC area).

“We’re seeing a lot of these ‘strategic defaults,'” said Ben Thypin, senior market analyst with Real Capital Analytics, a commercial real-estate research firm in New York. “Beacon could probably pay the mortgage, but the properties are worth less now, and they don’t want to make payments based on outdated values.”

If you’re one of the people that is still not convinced that walking away is a strictly business decision in which ethics and morals should not even enter the conversation, allow me to point you toward an excellent pair of recent papers by Brent T. White, legal professor at the University of Arizona: “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” and “Beyond Guilt in the Housing Crisis: The Morality of Strategic Default.”

Here’s a particularly compelling passage from the second paper that specifically addresses the lack of any moral component in the decision to walk away:

Think of it this way: when you got your cell phone, you likely signed a contract with your carrier in which you “promised” to pay a set monthly payment for two years. Let’s say, though, that two months after you sign your contract, the price of cell phone service drops by half – meaning that the same cell phone service you pay $100 a month for could be had for half of that with another carrier. You decide that you would be financially better off paying the early termination fee of $300, rather $100 a month for another 22 months for the same service that you can now get for $50.

Would it be immoral for you to break your contractual “promise” to pay $100 for two years, and elect instead to pay the early termination fee? Of course not. The option to breach your “promise” to pay is part of the contract, as is the consequence of breach – a $300 early termination fee. There is absolutely nothing immoral about exercising your option to breach, and you’d be financially wise to do so.

Though a mortgage contract is more substantial, and involves a home, it is simply a contract, just like a cell phone contract. Like a cell phone contract, a mortgage contract explicitly sets out the consequences of breach.

In other words, the lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. The lender then wrote that compensation into the contract. Specifically, the lender probably included clauses in the contract providing that the lender may foreclose on the property, keep any payments that have been made, and may opt to pursue a deficiency judgment against the mortgagor, if state law so allows.

By writing this penalty into the contract, and then signing the contract, the lender has agreed to accept the property, and (in most states) the option to pursue a deficiency judgment, in lieu of payment. Of course, even in states where they can, lenders frequently don’t pursue borrowers for deficiency judgments because it’s often not economically worthwhile to do so.

Nevertheless, that’s the agreement. No one forced the lender to sign that contract. Indeed, they wrote it. And, to be sure, the lender wouldn’t hesitate to exercise their right to take a person’s house if it was in their financial interest to do so. Concerns of morality or social responsibility wouldn’t be part of the equation.

In short, as far as the law is concerned, choosing to exercise the default option in a mortgage contract is no more immoral than choosing to cancel a cell phone contract. The borrower just has to be willing to accept the consequences – which, in the case of a mortgage contract, typically include being subject to foreclosure and, in most states, the risk of a deficiency judgment.

Banks and corporations like Beacon Capital Partners understand what Mr. White is talking about here, that a mortgage is merely a legal contract, not some sort of sacred vow. They will continue to do what is in their best financial interests, and you should too.

If you find yourself in a situation where you have run the numbers every way you can and the best decision for your family’s financial future is to walk away from your mortgage, don’t let a misguided sense of ethics lead you to the wrong decision. Continuing to pay a mortgage that is hopelessly underwater is throwing good money after bad. If you already made the mistake of buying a massively overpriced house, that doesn’t mean you need to continue paying for that mistake for the next twenty years when there exists a way out.

Please note that this post is absolutely not intended to be legal advice. If you are considering walking away, it is imperative that you seek experienced legal council that can fully explain the legal ramifications of strategic default in your specific state or municipality.

It has been a couple of years since we last ran a poll on this subject, so here’s a new poll:
Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

[Continue Reading – Part 2: Did Banks Act in Good Faith During the Bubble?]

The post On Misguided Ethics and Walking Away from a Mortgage appeared first on Seattle Bubble.

In some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis.

But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began. People who buy a home in these areas will face higher monthly costs than if they rented, even after taking tax deductions into account. As a result, buyers are effectively betting that prices will rise enough in future years to cover the difference.

A similar AP article from the day before (apparently based on a separate study) tells the same story: Should You Buy or Rent a Home? Cost Gap Narrows

Renting remains far more affordable than owning in traditionally pricer markets such as New York. In Manhattan, the gap is more than $4,000. Renters will save $1,000 or more a month in metro areas such as Los Angeles, Seattle, San Diego, San Francisco, and San Jose, Calif.

The New York Times article includes a nifty chart of the price to rent ratio of 46 metro areas around the country. Their chart of five metro areas in the west is shown at right in the quote above. They also published an updated version of their excellent buy vs. rent calculator that we have recommended here numerous times in the past.

We have visited the rent-vs-buy discussion here many times before, most recently in August, October, and January. I’m not really interested in rehashing everything that has already been said on these pages in recent months, but I will attempt to add some new thoughts to the discussion of this week’s articles.

First up, I wanted to point out a post by local title/escrow company The Talon Group in which Chris Lodge attempts to debunk the New York Times’ claim that Seattle’s price-to-rent ratio is still unusually high.

The rent vs buy ratio they use seemed simple enough to calculate. We just need the average sales prices in an area along with what the annual rents are for the same area.

For March, we found that we had an average sales price in Seattle of $493,971.

Average Rent, according to rentbits.com, were $2069 for all home rentals in Seattle. On a side note, here’s a graph of the rental rates for Seattle as well going back 12 months.

Using the NY Times model above, lets put in our own calculations:

$493,971/($2069*12) = 19.89.

Thats right, we come in right at the benchmark of where you should think about buying rather than renting.

While I appreciate Chris’ attempt to run the numbers for himself, there are a couple things that are missing from his assessment. In order to get any really useful information from the price-to-rent ratio, you need to have something to compare today’s data point to. This means running the ratio using the same data sets for price and rent over a long period of time. Today’s ratio of 19.89 according to Chris’ sources doesn’t really tell us anything, because we don’t know what those same data sources would have put the ratio at last year, two years ago, five years ago, etc.

The other thing that Chris seems to be ignoring is that the New York Times ran their ratios for 46 regions across the entire country. Speaking from experience, I can tell you that it is very tricky to find data sets that are uniformly available for that many metro areas. Running Seattle’s ratio with Chris’ particular data set and coming up with 19.89 doesn’t tell us how Seattle’s ratio compares to all the other cities, which was half the point of the New York Times article.

Moving on… Let’s get a little more context on the buy-vs-rent discussion. Over at the Center for Housing Policy they have a nifty online tool that allows you to compare the costs of buying or renting a home to the average income of various professions.

Here’s what the buying situation looks like for an assortment of ten occupations:

Now compare that to the rental picture for those same jobs:

So is someone really going to sit there and try to tell me with a straight face that renting is still not the most financially sensible choice for most people in the Seattle area? Granted, things are a lot less out of whack than they were in 2006 and 2007, but in many neighborhoods around Seattle there is still really no comparison. Everett, Federal Way, Kent… it may make sense to buy. But close-in, in Seattle, Bellevue, or Kirkland, the scales are definitely still tipped in favor of renting.

The post Oh Boy, Let’s Visit the Buy vs Rent Argument Again appeared first on Seattle Bubble.

The era of record-low mortgage rates is over.

The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market — a threat to the fragile recovery in the housing market.
…
“We are seeing some panic among potential buyers who have not found houses yet,” said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. “They’re saying: Man, I should have found a house three weeks ago or last month when rates are lower.”

It’s all about affordability. For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.

The rule of thumb is that every 1 percentage point increase in mortgage rates reduces a buyer’s purchasing power by about 10 percent.

Here’s a recreation of their included chart, using interest rate data from the Federal Reserve:

Note that their chart includes only the last year. What does it look like if we zoom out a bit, say to the beginning of 2000?

Suddenly that uptick at the end of the chart doesn’t look so scary. “Oh no, interest rates are skyrocketing… to a level still well below where they were for most of the last decade! What ever will we do?” Give me a break.

How about a 20-year view of rates, just for fun?

Rates could shoot up a full point-and-a-half, and still be in the range that they were during the housing bubble when we were all subjected to an endless barrage of mortgage finance ads extolling the “historically low interest rates.” So why exactly should we be terrified and jump-into-the-housing-market-right-now-quick-before-it’s-too-late?

The AP’s rationale seems to be that because a rise in rates will reduce buyers’ purchasing power, it will therefore result in a big dip in demand.

In a normal market, with home prices steadily rising, a jump in rates doesn’t cause a big dip in demand. That’s because people know their homes will eventually rise in value and they’re willing to accept a higher mortgage payment.

But now home prices are flat nationally and still falling in some places. Potential buyers are nervous about jumping in.

“In this environment, any rise in mortgage rates does significant damage because people don’t think they’re going to get their money back” if prices fall, said Mark Zandi, chief economist at Moody’s Analytics.

Of course, what they seem to be ignoring (intentionally or not) is the flip side of the equation… If buyers have less purchasing power, won’t that just put more pressure on home prices to keep coming down to a point where the qualified buyers can afford them?

Nah, that would never happen.

* (The link has been updated to the Spokesman-Review website since the original Seattle Times link is now dead.)

The post Interest Rates SKYROCKET! Everybody PANIC! appeared first on Seattle Bubble.

Financial Blogger On Ethics Of Mortgage Modification

A full transcript is available at the link above. Here’s an excerpt.

SIEGEL: But what’s the risk of providing some kind of mortgage relief, whether it’s a suspension of full monthly payments, or whether it’s a reduction in the principal for somebody whose house plummeted in value and who is also unemployed and really will have a very hard time making the payments regardless?

Mr. RITHOLTZ: From a broad perspective, again, you’re keeping them in a house that they can’t afford, and they’d be much better off going to a place that leaves them a little spare change in their pocket, as opposed to just draining everything they have to make those payments.

Secondly, if these banks have their balance sheets just festooned with bad loans, we’re not allowing them or not forcing them to do what they’re supposed to do, which is take the write-down, get it off their books, free up some capital and move forward as a healthy lending institution.

Barry also wrote some additional thoughts on this issue on his site last week: More Foreclosures, Please…

It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded.  We need more, not less foreclosures.
…
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.

I agree with Barry 100%.

Also related: with all the foreclosure prevention and delay programs going on, it’s hard not to feel like you’re basically a chump if you pay your mortgage. Many stay at home for free as banks defer evictions

It’s been 16 months since Eugene and Patricia Harrison last paid the mortgage on their home in Perris, Calif.

It’s been 11 months since the notice got slapped on their front door, warning it would be sold at auction.

A terse letter from a lawyer came eight months ago, telling them that their lender now owned the house. Three months later, the bank told them to pay up or get out by the end of the week.

Still, they remain in the yellow ranch-style home they bought seven years ago for $128,000, with its views of the San Jacinto Mountains. They’re not planning on going anywhere.
…
Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.

The post Foreclosures: Better to let them happen appeared first on Seattle Bubble.

First up, Zillow Chief Economist Stan Humphries on Yahoo News:

Here’s the money quote:

We think that the amount of pent-up supply that we have of people on the sidelines, combined with the amount of foreclosures that we have, combined with the current negative equity rates and the foreclosures they are going to produce in the future—all that combines to keep more supply than there is demand for the near term. We think it’s going to take three to five years for us to work through this.

“Pent-up supply,” you say? That sounds like a familiar concept, like one I’ve heard somewhere before…

Next up Aubrey Cohen of the Seattle P-I gets some face time on CNBC’s 4-headed talk-box. Skip ahead to 2:25 in the video to jump past the blah blah about condos in Florida.

Aubrey’s take on the current market in Seattle:

Our prices have been bouncing around pretty much at the same level for nearly a year now. Our sales are up year over year, of course a year ago they were nothing to write about. We’re seeing now some of the fallout hitting some of the higher end, because of condo projects.

I got the impression that Aubrey wasn’t being “optimistic” enough for the CNBC hosts.

The post Video Two-Pack: Pent-Up Supply & High End Condos appeared first on Seattle Bubble.

Quoting in part:

These are challenging times and many people feel they are running out of options. Whachovia Mortgage is pleased to let you know about an alternative you may not have considered — a Short Sale.
…
Call us to learn more about the benefits of a Short Sale and how you may qualify for a $5,000 seller incentive!

Considering all the stories about banks taking forever to respond or simply not responding at all to short sale offers made by potential buyers, this seems like an odd tactic.

Has anyone else seen this with any other banks? Are the banks beginning to approach short sales differently than they have been over the past year?

Hat Tip: Ray Pepper, 500 Realty

The post Banks offering cash incentives for short sale sellers? appeared first on Seattle Bubble.

From the real estate news source Inman News: Final push for tax credit

Real estate industry trade groups are mounting a final push for an extension of the first-time homebuyer tax credit, with Sen. Johnny Isakson planning to tie the issue to an extension of unemployment benefits.
…
In testimony before the Senate Banking Committee today, Isakson, R-Ga., said he plans to introduce an amendment to legislation extending unemployment benefits that would make the current $8,000 tax credit available until June 30.

Isakson’s amendment would raise the income limits for the credit to $150,000 for individuals and $300,000 for a couples. The existing tax credit can’t be claimed by individuals making more than $95,000 or couples with adjusted incomes of more than $170,000.
…
The estimated cost of his latest proposal would be $16.7 billion over five years, Isakson said, citing the Joint Committee on Taxation.

So apparently the latest plan is to pull a common DC trick and tack the bill onto something else that would be political suicide to vote against. This disgusting ploy usually works, and if they pull off adding it to the unemployment bill, it is almost guaranteed to be passed. Also, considering that the current credit is probably going to cost in excess of $15 billion versus an original estimate of $6.6 billion, it seems likely that if passed, this proposal would cost us another $30 billion or more that we don’t have.

Next up we have a different outlook on the credit, via Calculated Risk: Home Buyer Tax Credit DOA?

From Reuters: White House skeptical on renewing home buyers credit
…
And more from Reuters on the widespread fraud: IRS warned again of U.S. homebuyer credit fraud
…
From Diana Olick at CNBC: HUD Hints on Home Buyer Tax Credit . Olick reviews Donovan’s testimony and writes:

[T]hat sounded more like a “No” to me than a “Yes.”

And Rex Nutting at MarketWatch reviews many of the arguments against the tax credit: Kill the wasteful home-buyer tax credit

Note in the second story CR points out that the IRS “has opened 107,000 civil cases related to the credit.” If we go by the NAR estimate that around 1.9 million buyers “will take advantage of the $8,000 tax credit this year,” the 107,000 civil cases represent a potential fraud rate of over 5%. Who could have guessed that when the government starts handing out free money, people would race to game the system?

I apologize for the overload of posts recently regarding the $8,000 tax credit, but I feel strongly this is an important issue related to real estate. The tax credit is wasting money, harming potential buyers by hampering the natural correction of the market, and helping to push the rental vacancy rate higher, which causes further pain for local and regional banks. The government needs to stop trying to prop up a broken market and let home prices fully correct.

Here is the contact info for our senators. I encourage you to call or fax them and encourage them to vote against any form of extension, renewal, or expansion of this wasteful and counter-productive spending spree.

Patty Murray
Phone: 202.224.2621
Fax: 202.224.0238

Maria Cantwell
Phone: 202.224.3441
Fax: 202.228.0514

[This story was corrected on 10/20 at 11:00 AM to indicate that the 107,000 civil cases opened by the IRS represent potential fraud, not necessarily actual fraud.]

The post Extension to Fraud-Laced $8k Homebuyer Tax Credit to Piggy-Back on Unemployment Bill? appeared first on Seattle Bubble.

Nationwide, home prices are falling, sales are sluggish and the number of foreclosures is mounting. Ask any economist and you’ll hear that things are bad, and likely to get worse.

Unless you live in Seattle, where the market is slowing but fundamentals remain strong.

“Fundamentals remain strong” appears to be nothing more than code for “prices haven’t fallen… yet.” Here in Seattle, things aren’t yet “bad,” but they are almost certainly likely to get worse. I guess being “barely ok, and likely to get worse” is enough to catapult us to the top of the list.

The Emerald City has experienced strong price appreciation over the last six quarters, and that’s expected to continue in the new year, though at a slower pace. In addition to a very low housing inventory and a strong sales rate…

Wait, did he just say “a very low housing inventory”? That’s a riot. And while sales have been slowing YOY for 21 of the last 22 months, I will grant that through July, it could still be described as a “strong sales rate.” July’s sales were higher than every year outside of 2003-2006. Of course, with the tightening mortgage market, sales in August came to a screeching halt, coming in lower than any August since 2001… but we’ll let that slide, since Forbes probably isn’t working off of data that current.

…there are few non-conforming and high-risk loans on the books than in other cities, which means the area will likely see fewer defaults in the coming months than the rest of the country’s markets.

Really? I suppose with a statement as vague as “than in other cities,” it’s true. But the list of qualifying “other cities” is frankly pretty short. We’re right up there with most of the other cities that started experiencing increasing foreclosures once the appreciation music stopped. For more on the loan picture, check out this and this.

To arrive at our list, we teamed with Moody’s Economy.com to develop three prediction models based on a range of factors that affect how prices move. These include, among other things, the state of local economies, new construction contracts, foreclosure rates, local credit markets, sales rates, affordability and inventory.

[From the slide show:]

Median home price:$395,000
Annual price change from 2006: 8.9%
Projected price change to 2008: 3.09%

Moody’s Economy.com sure seems to be fickle with these predictions. Just last month CNN reported on “an analysis conducted by Moody’s Economy.com” that showed prices in “Seattle-Bellevue-Everett” declining 2.9%.

Also, it’s not at all clear from the article what specific geographical area they’re referring to when they say “Seattle.” It’s definitely not just the city of Seattle, where the median home price sat at $439,000 last month. It’s also apparently not King County, where the median is $415,000. My best guess is that they’re using some combination of King, Pierce, and Snohomish counties—which makes the prediction of continued price increases seem even more unlikely to come true.

In related news, the author of this piece and the previously-featured “Best Places to Flip a Home,” Matt Woolsey, contacted me after my post about that article:

I came across your blog while looking for information on Seattle real estate and I must say a lot of the analysis looks great. Your apparent desire to punch me in the face regarding the flipping story is of some concern to me for my next visit to your city, but I nonetheless will continue to follow your site. For future consideration, you should know that all of our stories are comprised of data driven analysis

For the record, my comment that I would “really like to gut-punch these reporters” was tongue-in-cheek. You have nothing to fear in Seattle, Matt. Well, not from me, anyway. I can’t speak for anyone that giddily jumped into the market to flip a house after reading that article, only to find that the time for flipping in Seattle is long gone…

(Matt Woolsey, Forbes, 10.01.2007)

The post Depends on what the meaning of “stable” is… appeared first on Seattle Bubble.

The Methodology
To measure inventory glut, we used Moody’s Economy.com and National Association of Realtors data that tracked a market’s current sales rate by projecting the amount of time it would take to sell off the excess housing stock at the current rate of sales.

We also looked at the change in sales rate over the last year to measure the relative tightening or loosening of the market. Finally, a measure of price stability was applied so as to prevent the list from being a rundown of upstart markets.

The measurements left out a few cities that lacked comprehensive data. Seattle, for example, has incredibly strong market fundamentals—the lowest vacancy rate of major metros at 0.9% and is a small geographic area not conducive to overproduction. It is a good seller’s market, but for tracking what we were after, Seattle data was incomplete for our analysis.

I’m not sure why their data was “incomplete” for Seattle, and I imagine that if they had access to everything they were looking for, it probably would have been on their list. However, while Seattle might be a better sellers’ market than most of the country, all indications are that we have been granted only a temporary reprieve.

While the language in the article makes their calculations sound fancy and complicated, it would appear that their primary measure of whether a city has a good “sellers’ market” comes by dividing the total monthly sales by the current number of homes for sale. This is commonly referred to as “months of supply” (MOS), but they are referring to it as the “rate of sales.” Here’s a graph of King County’s SFH from 2005 to the present:

Click to enlarge

Forbes mentions that they “also looked at the change in sales rate over the last year to measure the relative tightening or loosening of the market.” As you can see, the Seattle market can only be described as “loosening.” At the end of May, MOS stood at 3.02, up 59% from last May’s value of 1.89, which was itself up 18% from the May 2005 value of 1.61.

Sales have been declining at an average rate of 10% year-to-year for the past 19 months:

Click to enlarge

While inventory has been increasing by over 24% year-to-year for over a year:

Click to enlarge

Is Seattle presently a seller’s market? Probably. Will it still be a seller’s market by the end of the year?

“Outlook not so good.”

(Matt Woolsey, Forbes.com, 06.22.2007)

The post Seattle’s “Seller’s Market” Status Rapidly Eroding appeared first on Seattle Bubble.

• Keith at Housing Panic provides a concise history of the housing bubble.
• Calculated Risk expects a recession in ’07 and explains what would change his mind.
• The state legislature might take a short break from the important business of neutering the initiative process and imposing an income tax to pass a bill “protecting” renters from condo conversions.
• Matt Goyer points out some of the problems Vancouver, BC is facing thanks to the condo boom there.
• Blogging Realtor Susan Ryan takes Bill Fleckenstein to task for not providing data, yet utterly fails to provide any data of her own.

Seen any other good snippets lately?

The post Bubble Link Roundup appeared first on Seattle Bubble.

More surprisingly, these figures didn’t match those in the Census Bureau’s Current Population Survey, or CPS, which showed that median household income in the US had fallen only 2.8 percent — and had risen in around 20 states, not four. Where, we wondered, had they gotten their figures?

An e-mail exchange with the journalists gave us the answer: They had taken their 2005 numbers not from the CPS, but from the American Community Survey, a new research product that is scheduled to replace the detailed “long form” census collected every decade. But they hadn’t taken the 1999 figures from the ACS — in fact, the ACS is so new that it didn’t even publish nationwide data for 1999. Instead, the journalists had taken the 1999 income figures from the official 2000 census.

Whoops. So what was Washington State’s actual change in median household income from 1999 to 2005? According to the US Census Bureau’s inflation adjusted household income table, incomes in Washington State fell only 7.0% from 1999 to 2005, not the 8.4% reported by the Detroit Free Press.

Bad news for Michigan residents, though. Not only is their income drop still the worst, but it’s actually worse than reported by the Detroit Free Press. Here’s the entire map, corrected by yours truly using the same data source for both years.

Click to enlarge

Overall it is a less grim picture than the bogus map, but Washington still sticks out as a loser among the western states. It should be noted that this does not change the point of my original post. Incomes have gone down in Washington, and thanks in large part to risky loans, during the same time period home prices have gone up. That’s just not healthy.

(Stuart Buck & Megan McArdle, The Examiner, 09.14.2006)

The post Correction: Income Decline Map appeared first on Seattle Bubble.

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

Click to enlarge

As you can see, the Seattle area is right up at the top, with only portions of California, Nevada, and Florida having a larger percentage of option ARM loans. Note that this only includes option ARM, and does not include interest-only loans or other ARM products. Who knows how high that number would be if it did.

The second map comes courtesy of the Detroit Free Press, and shows the difference in inflation-adjusted median household income from 1999 to 2005. (Correction: The Detroit Free Press used inappropriate statistical methods, leading to incorrect values on the original map. The below map is a corrected version generated by yours truly. See this post for details.)

Click to enlarge

So, during a time when wages have decreased 7.0%, home prices have doubled, defying all logic. How is this possible? Sure, low interest rates were a factor, but they only dropped about two points from 1999 to 2003. That does not explain 100% home price appreciation. No, the primary culprit is certainly the ready availability of adjustable-rate mortgages, including a large number of option ARMs. Too many people have been swept up in home ownership psychosis, and have been all-too-willing to jump head-first into dangerous financing.

And yet there are still those that insist that our housing market is 100% healthy.

(Cover Story, Business Week, 09.01.2006)
(John W. Fleming, Detroit Free Press, 08.30.2006)

The post Mapping Housing Market Health appeared first on Seattle Bubble.