Seattle Bubble Primer
So I have a friend whose girlfriend is dead set on buying a home in the near term, and they're only looking to own for one to two years. I keep telling him that it's not a good time to buy for the short term, and that he should wait 6 months to a year to see what happens, but his girlfriend seems to have firm grasp on controlling the conversation (among other things).
Anyway, he's a smart guy, but woefully undereducated in the current market. He gives me all the typical media BS (boeing, microsoft, no place left to build, market is still going up, seattle is special, pink ponies, etc.)
I've learned a lot from reading the site, but it's been in bits and pieces over the last four months. Is there a good/quick primer that explains the current market situation and dispels a lot of those myths that I could find and send along to him?
Anyway, he's a smart guy, but woefully undereducated in the current market. He gives me all the typical media BS (boeing, microsoft, no place left to build, market is still going up, seattle is special, pink ponies, etc.)
I've learned a lot from reading the site, but it's been in bits and pieces over the last four months. Is there a good/quick primer that explains the current market situation and dispels a lot of those myths that I could find and send along to him?
Comments
On the back of the ticket write that the housing market in any of these places was doing as well 12-18 months ago as Seattle's is now. Oh, and make sure he boards the plane too.
I was in LA this summer. If you turn on the radio, the ratio of foreclosure-commercials (FC) to other-commercials (OC) was about 1-2 (1 foreclosure commercial for every other commercial including other real estate commercials). A normal economy has a FC2OC ratio of about 1-1000,000, and no economy is functioning with a FC2OC ratio above 1-100, so this is pretty scare stuff.
This is a great page that also provides links to tons of US housing crash news articles. It also links to a Bay Area bubble blog. Although not Seattle-specific, it provides good info about the national bubble as well. This was the first "bubble site" I ever frequented, and I believe it existed before Seattle Bubble.
Anything concrete for how Seattle isn't special? Since every news media coverage still says that Seattle is? Most of this mumble jumble financial crap is too hard for our peers to digest.
I think the hardest part is trying to explain why Seattle happens to be a year to fifteen months behind the curve of all of the other places where the market has fallen apart.
I might add that every snowflake is special, but they all eventually fall to the ground. Every dollar bill has a unique serial number, but they all spend just the same. Before manufacturing, every (nail, gun, pot, etc) was special but they all did the same tasks (join wood, shoot bullets, hold fluids, etc). Every oxygen and hydrogen atom probably has a unique molecular spin, but they still fuse to form water in the same way.
_____ is special. I a fallacious argument, because you can pick out any two similar things, find a small difference, and then state they are special.
On second thought, if someone uses that argument, just smile and walk away.
Of the top of my head:
1. Credit Suisse sub-prime chart
2. Subprime arm in Seattle
3. Seattle median price 1 year shift compare to San Diego and other cities
4. Migration chart
5. King County recent survey on land and population growth (read it somewhere that we have plenty of land available)
6. YOY monthly inventory chart
What else?
2 incomes, combined salary of about $80K, no down payment, looking at houses in the $350K range.
He thinks he can get a $350K 30-year fixed at 6.25%, but I'm pretty sure that's naive. I was worried about him before, but I'm pretty sure no lender would touch him. Is that true?
Not sure they can get that rate with FHA. Otherwise his price range works for FHA, and seems in keeping with where we'd want to see it in terms of combined income/affordability (using 5X DTI...I know you guys like 3X DTI better--but that isn't the number those of us in the industry use).
He might be able to make it work but it would be better to have something to put down.
Here is what I'd be the most concerned about: they are not married. I wouldn't discriminate against someone on that basis, but the reality is, this would be a huge commitment for them to be making together if their relationship is not solid. Real estate can go up and down. Does he know what he would do if the market were to go down and he had to sell...which could happen if he and the girlfriend break up?
The break-up is the scenario I'd be most worried about if I were their agent. It seems that neither would be able to afford that payment separately, and that could necessitate having to sell sooner rather than later. And they should be planning to stay put if they buy, for at least 5 years.
Unless they are very committed to each other, buying is probably not a great plan unless they have a strong backup plan on how to make those payments if they broke up.
Marital status is one of the prohibited bases under ECOA, The Equal Credit Opportunity Act.
Speaking as a former underwriter, I would be more concerned about their combined debt to income ratio for housing expense and overall debt to income.
For example, many homebuyers who are "committed" to each other default on their loans, and many homebuyers who buy as single individuals pay their loans as agreed.
Lenders have discovered that a better gauge of measuring a borrower's ability to repay has been past credit history, job stability, verifiable income, and availability of assets in case of unplanned financial distress.
Wouldn't you also want to advise JLD to have that same conversation with friends of his who are married persons?
Seeing as how we have such a high divorce rate in the United States, I imagine that real estate agents would also want to encourage married couples to consider what they'll do about the mortgage payment if they decide to split up.
But no, I imagine most all real estate agents would not think to bring this up with a married couple, which is one of the many reasons why we have federal laws like ECOA and Fair Housing/Fair Lending.
Instead of treating an unmarried couple differently, I would recommend to any reader of this thread, that no matter what their marital status, that they always consult with their own individual attorney prior to purchasing real property so they can receive legal counsel as to this many-paged document they're signing called a deed of trust, as well as legal counsel as to how to hold title to the property.
Hiring an attorney for one hour is not as expensive as people might think.
Suggesting a Realtor will send a married couple visit an attorney before buying a house is a lot like expecting pastors send a young couple off to get a pre-nup before getting married. It might make financial sense, but the couple's probably not going to go (unless one partner has significantly more assets than the other).
Part of the reason we wouldn't bring it up in the case of a married couple is that there is at least a declaration of commitment there. It may not mean much these days, but the commitment was made even if it may not be honored.
And just to inject some personal experience into this: I had a couple of clients last year that had a similar situation. They were dating and wanted to buy a place together. Actually, she wanted to. She wanted to get married and all that jazz and thought buying a place together would be a good first step, and he wasn't sure, felt like he was too young to settle down, etc.
Fortunately, the stress of the home-buying process sort of solved the problem. Although they were able to get financing, they were not able to agree on a place and broke up right in the middle of things. I'm sure that in the end it was the best thing for all concerned that it worked out that way.
So maybe that experience is what raised a red flag with me in JLD's friend's case.