Mortgage Industry News in Need of Sensible Moderation
Deborah Burns on 08 22, 2007
The news about the Mortgage Industry is in need of common sense and responsible moderation. Yes, there has been bad speculation, wrongful risk and some greedy, short-term thinking people on all sides of the loan table. Those practices need correction and changes, and that is what is happening right now. It is going to hurt, but the extent of that hurt/loss will have a wide range.
Some lenders have and will feel it keenly as will their clients, and they will both bear the brunt of this financial mismanagement tragedy. This is the saddest part of the mortgage mess, that it will cause terrible harm to a lot of people. But many, many more people will feel the consequences much more lightly, because most mortgage companies, banks, credit unions and so on, did not abuse the system.
Those companies will continue to make home loans, albeit more prudent loans due to the current climate, because they have to continue to make money for their clients and investors by making loans with reasonable risk assessment. There is money for lending, and it is still at low rates historically speaking. People will continue to be able to secure loans to buy their homes, life does go on….
There will be changes, needed changes, good changes as the mortgage industry returns to its’ historically more sensible financial risk management and practices. This is will benefit most people in the long run. The sensible, watchdog Internet dialog that has been bringing these abuses and needed changes to light have probably lessened the damages overall since the behemoth mortgage industry could begin to change its’ course sooner. The pendulum is swinging back.
However, the “mortgage wreck” that some of the news and Internet is slowing down and stopping to gawk and talk about in “worse case scenario” language is made worse by those actions. Since investor confidence is a large part of the financial markets’ health, this is bad and can make matters worse than they have to be by essentially shouting “fire!” in the crowded financial, lending and consumer markets.
So we each get to choose how we react, and respond to this situation: Are you going to make the problem worse by making inflammatory, sweeping declarations for dramatic effect? Are you going into denial and continue as if nothing has changed and not acknowledge the situation causing more damage by ignoring the situation? Are you going to enlighten your clients and audience with responsible information, sensible comments and thoughtful analysis?
Where are you and your actions going to be on the scale?
About the Author: Deborah Burns
- Author's website: http://seattlesurbanvillages.com
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I certainly don’t want to exagerate the mortgage finance problems. However, I don’t think we should artificially minimize them either. It is certainly significant that a large portion of consumers can no longer qualify for loans.
What is unknown is how big an impact on the general real-estate market the loss of these buyers (who simply can’t qualify for loans under the new standards) will be. It certainly causes one to pause when looking at just how large a portion of sales in recent years were done using mortgage products that no longer exist.
Will most of the people using the discontinued products be able to just move to conforming loans, or will they be frozen out of the market altogether? If it is the latter case (i.e. that many people who were able to buy homes in recent years no longer can), then the future of real-estate for the next couple years doesn’t look to hot.
In the Seattle area alone 33% of all mortgages were of a negative amortization variety in 2006. Does the sudden absence of these loan products mean that 33% of buyers have now vanished? Sure, some of those people getting neg-am loans would have qualified for conforming products, but likely at smaller total amounts.
What would be really interesting to hear is what impact the recent changes over the last month are having in the Puget Sound area, if any. What percentage of deals are failing to close due to financing? How much have realtors and brokers noticed a change in traffic of people wanting to make offers on homes?
According to Jillayne it seems as if some local mortgage brokers and title offices have seen business plumet dramatically. But how wide-spread is this phenomena?
This kind of in-the-trenches information would help us get a more reasonable understanding of just how good or bad things are.
Hey, if you are a real-estate professional, and business has been going gang-busters for you since August 13th, we would LOVE to hear from you. Unfortunately, the only anecdotal information we are seeing from local RE people is of a negative variety (e.g. mortgage brokers or title officers saying their business has dried up).
Help demonstrate that things are still going strong in Seattle: tell us about how great your business has been in the last week.
I don’t think it’s very efficient to try to tell people what thoughts and views to express…it’s much better to counter with arguments and/or facts. Things like personal attacks or profanities is a different matter but to encourage censorship on views and opinions related to the subject is probably not a good idea.
The best way for those who feel the mortgage finance problem is being overblown is to counter with some good anecdotal information about how great the real-estate market is still functioning in the last week. It’s hard to argue with results, and if realtors and mortgage brokers have seen a surge in business over the last week, then they should let us know.
Perhaps Madame Burns could tell us what she has observed in her business in the last week? Are there more potential buyers ringing her phone than earlier in the summer? That would speak FAR more towards dispelling fear-mongers than the general admonishment for positive thinking (which isn’t a bad thing, all-in-all).
Hi Sniglet,
I think that most of what will happen is difficult to gauge right now, because “real time” analysis is balenced on too small of an informational base. All we can see now is the small picture of what is happening now. The larger vision will need time to develop and more information to see the landscape that emerges.
Smaller increments of time have a heighten reality or urgency that historical time allows to be put into perspective. However, that does not lessen the pain of the moment.
I agree that there will be effects on the real estate market with a certain portion of buyers now gone, how serious only time will tell.
I am courious about where you got the information regarding:
” In the Seattle area alone 33% of all mortgages were of a negative amortization variety in 2006.” That seems very high to me.
Trying to see what effect that the mortgage climate is causing with
Seattle real estate is difficult. August is typically a slower month with fewer buyers since the larger portion of buyers bought earlier in the spring/summer, and many consumers are on vacation (as are agents). Also worth noting is that inventory also typically increases in August as some sellers are finally getting their houses ready for the market, there are fewer buyers now, and homes that are unique, less desirable or may have been over priced have remained on the market.
I don’t know if anyone really cares, but my business has actually picked up a little, and I’m starting to do much more FHA, VA, and we’ve just now picked up USDA rural financing (most of Snohomish County is rural, believe it or not!) I’m still doing My Community and have moved more towards the Flex 100 and Freddie Mac Home Possible (all these above programs are essentially 100% financing).
That being said, we work quite a bit with portfolio lenders, and our business hasn’t been that affected. Banks like Chevy Chase and World Savings still have their funky Option Arm loans…just make sure the rebate isn’t ridiculous if you DO get one.
Ciao!
That would be “Mademoiselle Burns”, LOL. Currently my business is the busiest it has ever been, and I don’t mean that in a “Pollyannaish” way.
I want to see some balance in considering what is happening right now, there are always many differing POV and this is mine.
I care David! Glad to hear about your business, and the new diversity that you and your clients are working with for their loans.
What is the sub prime mortgage crisis? Lending institutions started making loans to borrowers that previously did not qualify for a variety of reasons:
1) Poor Credit (low Fico scores)
2) Could not verify the income that the borrower claimed they made
3) Little to no down payment
These buyers were not considered prime (i.e. sub prime)
So the lenders decided that more people could get loans if they loosened their criteria… so some borrowers with poor credit and stated income (oh stated income is when the bank asks me how much I make and I tell them $1,000,000 and the bank accepts that figure without verification) and little to no down payment AND if the payment is still too high the borrower could just pay interest only (which means a 30 year loan never gets paid off) AND in the meantime the lending institutions revisited “negative amortization” where the loan balance increases instead of decreases AND by the way when you owe 125% of the original loan balance it is time to pay the piper….
If you are interested or if you are having trouble or need more specific information, here is some good information:
If you are having difficulty paying your mortgage
http://www.realtor.org/subprime_lend…nly%202007.pdf
Shopping for a mortgage
http://www.realtor.org/files/governm…nding_text.pdf
Risks and advantages of “specialty mortgages”
http://www.realtor.org/files/governm…ialty_text.pdf
Traditional Mortgages
http://www.realtor.org/files/governm…ional_text.pdf
Deborah,
I got the information about Seattle area negative amortization loans from a Credit Suisse report.
http://www.recharts.com/reports/CSHB031207/e31.gif
The biggest providers of home loans are Fannie Mae and Freddie Mac and both groups are still going strong. The best part is that most Americans are “clients” of these two groups and not of the banks from which we’re hearing so much news.
Dan,
Unfortunately, pricing is driven at the margins. It only takes one extra buyer than there is supply to drive prices up enormously. Likewise, you only need one less buyer than the supply of a given product to have significant price declines.
As stated earlier in this thread, at least 33% of the Seattle area home buyers used negative amortization loans in 2006. If all those buyers vanished from the market, I can’t help but think that would have an impact on over-all pricing. Even if the remaining 66% of buyers were all using Fannie Mae conforming loans (which is certainly NOT the case when one considers Jumbo loans, sub-prime, etc), a loss of 33% of demand would put a serious dent in the market.
“worst case scenario?” I’m in! I hate to be Bear-er of bad news,but…
http://ml-implode.com/
Boy do I agree that we need to make changes. And I think it starts at the top. It i amazing to mee that so many Realtors are now jumping on the “blame the mortgage lender” bandwagon. From my dealings with all it seems the top bananna is the Reatlor and from there down everything shakes out. Obviously I think there is a lot of problems with the mortgage, but the WHOLE Real Estate industry should be looked at and changed
Jasper you are correct, a buyer’s realtor should assist a buyer in understanding the loan process. However, most realtors are not specifically trained to understand these complex loans. The disclosures that the government requires lenders to provide buyers are too confusing (ever look @ your credit card disclosures?) I think quite honestly that many of these buyers did not understand “worse case” scenerio and that is not their realtor’s fault.
I previously worked in mortgage banking and remember in the 80’s banks initiated the “no income verification” loan, which required a 25% down payment. The thinking was that if you had excellent credit and 25% down it was a prudent loan – makes sense right? So, who in their right mind would lend their money to people with NO down payment, poor credit and in many instances not verify income? Lenders have a history of swinging back and forth with riduclously stringent lending practices AFTER “the horse has been let out of the barn”.
Jasper,
I don’t blame anyone for the current real-estate market hiccups. I think it is just a law of nature that the longer the time from a previous market downturn is the riskier people become. Rating agencies were happy giving AAA ratings to sub-prime mortgage securities because the defaults had been low over the last 5 years. Banks weren’t concerned about a borrower’s credit quality because “perpetual” appreciation would bail them out if they ran into trouble. Consumers weren’t worries about taking on massive debts because they knew their homes were going to appreciate and make them rich.
Unfortunately, the short memories of human-kind means that we will be doomed to keep going through boom and bust cycles indefinately. It’s no “one’s” fault in particular.
Oh please. Where were you when the “internet and news” was pumping housing as the greatest investment you’ll ever make and if you don’t buy you’ll be priced out forever and 10% appreciation will continue on into the next decade? Do you have a blog post from those heady days exhorting the masses to not echo the beliefs of the frenzied media?
When everything is going your way it’s all good, but when it starts to crash down it’s the media’s fault! WE MUST SILENCE THE DISSENTERS!
Deborah,
Just one question: Have you been reading The Secret?
If consumer confidence is what is propping up the mortgage/housing market, then we are all in trouble!
This is almost as good as the “Chicken Little” post. Mish will be happy to link it I am sure.
Suggestions for future topics:
– “The only thing we have to fear is fear itself”
– “I wish I were in Kansas”
Between the time my RSS Reader picked up this article and when I clicked it, the headline count rose from 38k to 40k. That is how fast things are moving. I hardly think the problem is that the news is being overstated.
Mortgage industry job cuts surpass 40,000
Companies stop ‘on a dime’; 25,000 positions eliminated so far this month
http://www.msnbc.msn.com/id/20396081/
Mid quarter layoffs of this scale look very desperate.
yes business is still booming, there is a townhome in the heart of Magnolia (dont personally like them) that has been on the market for months. Seller got rid of their real estatae agent ….then put up a FSBO offering 3% to buyer agent. No luck even with the price reduction and then hired an agent again and waited another month or so. When the sold sign went up i must say i was suprised but they did reduce the price by 50k. Well drove by today and must have been a premature sold sign cause something fell through. The home is back on and i personally find it pretty funny. Funny because of the initial asking price and seeing what it did to the seller, anyway good luck to them.
Down the street I noticed the home has been taken off the MLS but the sign is still in front. No pending or STI notice so I am under the assumption the listing wil be tweaked and relisted as a new listing with a price reduction (i am making this assumption becasue interest has been low and the asking price was very high). Homes are sitting here in Magnolia, sellers are being very to stubborn. WHat is one of the hottest areas has slowed dramatically now compared to the last few years I have lived here. I dont buy the median reports etc… i go buy what i see with my own eyes. Do people with their homes that are 90 days + listed not realize that the home has become more expensive with rates going where they have gone. I think the party is over and the area i am in is a microcosm of Seattle.
The argument that the psychology of panic is fueling the demise of lending institutions is an overly simplistic argument, and patently untrue. The psychology at fault is not that of today (which is prudence, repricing of risk, and pulling back from poor underwriting guidelines) it is the psychology of the boom years that is at fault. The irrational exuberance is what put us in this mess – the people saying buy, and that homes will only go higher are the ones at fault; not those calling for a reigning in of the clearly unsustainable asset bubble.
Investors get nervous not because some reporter says the sky is falling, they get nervous when they see billions of dollars disappearing as the result of defaulting loans.
Hi Joel,
I have only recently been posting so I can’t give you a post to refer to, but I am a “moderate” person and overly optomistic news reports and posts bother me too. Hype makes me suspicious, if it sounds to good to be true, well then it take care, because it just might be.
The “moderation” I wrote into my title was about my wanting to see less hype and sensationalism regarding this topic, there are other sides to the issue. It is not about wanting censorship but the opportunity for people to see that there are other POVs. You are entitled to your opinion as each of us are.
Hi Deejayoh,
Thanks for the topic suggestions, I think that Churchill’s line would be interesting, but I am not a fan of “The Wizard of Oz”.
Hi Deborah,
People want someplace to go to talk about what is happening nationwide. One agent’s vantage point: “I’m busy!” Does not mean the thousands of agents all across the Puget Sound region are busy.
People are hungry for street talk: What’s REALLY going on out there? All traditional media gives us are re-hashed MLS statistics gleaned from press releases.
I believe people are curious about the pulse of the Puget Sound market not because they’re waiting for our market to fall into a death spiral, but simply because we can’t find a pulse through traditional forms of media.
If all is well, then let’s hear from you as to how well it is from inside your own real estate office. Are sales up? Down? Are agents having a slow year? How are they adjusting? How are the seasoned veterans doing when compared with the rookies?
Some blog readers love the stats and numbers. I love hearing about the people.
With a blog, we can make our own media. I will patiently wait to read more from you.
Hi Dan Green,
Thanks for the perspective, your post today that the Majority of Americans Can Still Get Loans (And Eat Their Bread Too) is another POV to the topic.
http://www.themortgagereports.com/2007/08/the-majority-of.html
Hi Redmondjp,
LOL, well I know about “the secret” but I’m afraid that I have too many negative/skeptical thoughts for that to work for me!
No system is perfect, there is always a constant struggle to find balance, everything and everyone has to make corrections. In the struggle to make those corrections you learn and suceed or you hopefully learn from your errors/disasters to suceed another time. So the perfection of positive thoughts is not within my reach, that is my “secret”.
Hi Morgan,
I agree that “irrational exhuberance” has lead us to the present situation, but that is the flip side to irrational “panic” both are the extremes, and that is what I am concerned with. Extremes are bad, and cause harm. I don’t want the pendulum to swing so widely, I want
toharm to be minimized.Hi Phyllis,
Thanks for your explaination for Jasper, as well as your insight and perspective.
Hi Magnolia44,
Those are interesting stories, and I am sure there is much more to them than what is apparent from the outside. It would be interesting to know more about the reasoning behind those houses’ stories.
I love how for the last 6 months myself and a few other folks have been warning people about the potential ticking time bomb that this irrational lending has been causing in the marketplace, but yet we have been called “bubbleheads”, “doomsayers” “end of the world crowd” etc.
Fast forward to today and guess what? Everything we have said is coming true! Let’s take a look at the current market:
1. Record Inventory – check
2. Record Foreclosures – check
3. Sales slowing – check
4. Lending tightening – check
5. Lenders going bankrupt – (130 so far) check
6. Massive credit crunch underway – check
7. Financially institutions forced to borrow money at distressed discount window rate – check
So 6 months ago if you talked about any of these things happened you were laughed at, ridiculed, mocked and basically preaching of doom and gloom and the sky is falling. Now that all these things are happening people want to say that apocalyptic predictions of a major asset decline in this country by the very people that HAVE BEEN CORRECT ALL ALONG is somehow irrational? We are the sensible ones. ANYONE that is sensible can see that a median house selling at 7x or 8x median income does not make sense! There is 100+ years of home buying history in this country that says a house appreciates at slightly above the rate of inflation, and possibly slightly higher if you live in a desirable area.
Life sometimes is negative. We should be looking at this situation in a VERY skeptical/cynical manner. It’s a dire situation and anyone that says otherwise doesn’t have a very good grasp on it.
Lending is going to continue to tighten, we are in the very first stages of the tightening. Lenders are going to continue to borrow money. The Fed is going to continue to print money to try and prop everything up. ARMS are going to continue to reset at an even faster rate, with the majority of ARMs to reset in the spring of 2008. Many of these people will not be able to refi into a fixed rate loan due to the increased lending standards.
If someone here has a positive way on how this is all going to play out, I’d love to listen. I’d like to see the bright side of how this situation unfolds, unfortunately I just don’t see it.
Hey Matthew.
I did not laugh at the bubble talk.
It has been very challenging teaching topics like predatory lending, ethics, mortgage fraud, short sales and foreclosures over the past 10 years. Here is how I would lay out a typical bubble case study in the classroom for a group of Realtors:
If you’re preparing a CMA (comparative market analysis) on a home, do you want to know if the sales prices of the comps included seller contributions towards closing costs? Everyone answers yes, but there was no way for the Realtors to get that data. When I showed them on the white board how this was creating an artificial rise in values, their answer was, “well, a home is worth what a person is willing to pay for it. If we don’t sell homes with sellers contributing closing costs, none of these homes would sell.”
So for years, we’ve had zero down loans with seller contributions, and with each CMA, the Realtors are using the inflated sales price.
Then, pressure is put on the appraiser to meet the sales price or risk retaliation.
Not every home is purchased by a Microsoft manager putting 20% down. The Puget Sound region is so much more than just the glowing stats we hear about Seattle and the Eastside.
Hi Jillayne,
I like stories too, they connect better for me. Although sometimes numbers do a better job at explaining particular situations.
My situation about being “busy” is a little unusual since it is because I have been actively working on developing my business and the hard work I have been doing is finally coming to fruition. Because of that focus I don’t spend much time in my office socializing, so I can’t give much insight to others’ experience.
While I think what you are asking is interesting, I don’t think I am the right person to post those types of stories. I find the interaction over the internet with others in the RE industries to be much more interesting, so the time I have is spent “there”, not “there” in my office. My office summer picnic is this week and unfortunately I will not be there, it’s just not my cup of tea, or can of soda as the case may be!
Hi Matthew,
I do agree and posted that what is happening is going to hurt, and to some degree has to hurt to get the needed corrections. I just think that there needs to be some balance. It will be very bad for some people, and lessening degrees of bad for most people as the changes – NEEDED – changes take place.
I feel for those people who are really caught up in this situation, from all sides of the lending table; buyers, lenders, homeowners, real estate agents, title, escrow, investors…everyone who is going to be hurt. What I don’t want is for the situation to made worse by people only hearing the worse case senario, not seeing the entire picture and acting with irrational panic.
That lopsided exposure is part of why we are in this situation in the first place, as Morgan commented about the “irrational exhuberance” of the recent market, well it works on the flip side too.
I am not disputing that you and many others are being proved correct that we are experiencing a mortgage correction (posssibly severe) my questions at the end of my post were on how we each are going to choose to react and respond to the developing situation.
Are we going to make the situation worse by spreading the infection of panic or are we going to help control the damage by understanding and communicating that just because the “ARM” is infected it can be treated, and it does not necesssarily mean that the person is going to die.
Hi Sniglet,
Thanks for the link to Credit Swisse, that was interesting, and much higher than I expected.
deejayoh,
I gotta admit,got link to “chicken little”from Mish’s site.Jillayne,I like your candor,and you are right on,people need to know whats goin on”out there”.Well,have you noticed a lack of ,or heavy drop in,unsolicited credit card offers in everyones mail box?Think about that.There are heavy storm clouds on horizon,which will result in pom-poms layin on the sidelines,getting soaked.
The big boys cashed out,and we have a situation surpassing 1929 looming,which was also credit driven.This is far beyond that in scope+volume.Thanks,I’ll hang up and listen.
Deborah,
These statistics which show the explosion in the use of negative amortization loans in recent years is what really causes me pause when considering any possible negative outcomes in the economy. As recently as 2000 such loans were almost non-existant, and now they’ve become commonplace.
Can this really be healthy? It indicates to me a high degree of complacency about risk on both the consumer and lending side of the business. Consumers don’t mind stretching themselves with mortgages they can’t really afford since they are “convinced” the house they are buying will be a gold-mine. Likewise, lenders didn’t care that the borrowers really couldn’t afford the mortgage because they knew that rapid appreciation would solve everything.
And this isn’t even talking about sub-prime. When you take sup-prime and negative amortization loans out of the market-place, what kind of impact will that have on real-estate in general? Together, these types of mortgages have easily made up 40% of the real-estate market in recent years. Unfortunately, I just don’t think that most of the people who have been using negative amortization or sub-prime mortgages will all just be able to move over to conforming products. In fact, a very small percentage of these people will be able to (at least for loan amounts that aren’t vastly reduced).
Hi Sniglet,
Those are very thoughtful questions and ones that need to be asked. I agree and think that most everyone would agree with you that what you are asking is not fiscally healthy.
We all need to tell our public the truth instead of looking for more ways to be like NAR cheerleaders.
The public is smarter than they get credit for.
They are looking for skilled professionals who tell it like it, not the way we wish it were.
Phil,
And just what is “the truth”?
Are we just going to undergo a moderate correction in the real-estate market, and homes will start appreciating again smartly in 2008? Are we facing catastrophe with mass foreclosures and plummeting house prices for many years ahead?
Enquiring minds want to know…
Matthew (#32) is absolutely spot-on here.
It was almost comical how the “bubbleheads” were almost universally scoffed at when they were stating what amounted to basic common sense.
It is even funnier when we have the luxury of looking back 18-24 months and looking at the various posts on RCG and SB (as well as many others) to see who was correct. Those that most accurately called our present mess are now dismissed as being doom-n-gloomers, or sensationalists.
Looking out your window and telling us what the weather is takes no talent. Who cares what our present situation is? We want to know what tomorrow will look like.
Asking those that have been navigating by looking in the rear-view mirror is pretty foolish. Ask those that saw this coming and see what they predict for the future.
For me? (because I know you all just hang on my every word)…
I see:
A powerful inflationary recession followed by a deflationary depression (even in Seattle)
A banking crisis (even in Seattle)
65-80% discount off the peak (even in Seattle)
Large unemployment, although gov’t will try to hide the numbers (even in Seattle)
Stock market in the 7000s or worse (even Nordie’s, Starbucks, Amazon, and Microsoft will get hit)
Widespread personal BKs (even in Seattle)
Boomers’ inability to retire (even in Seattle)
A huge holiday in X-Cal equity locusts (especially in Seattle)
Why? Because we have been in a bubble economy for 10 years and for 10 years we have misallocated productive captial (both human and financial) to produce a highly leveraged, speculative, end-consumer good. The economy will have to reallocate capital to some genuine productive end, punish bad debt (and there is a TON of bad debt out there), reward the savers, get the dollar on sound footing, pare back government, and get everyone retrained.
This will be painful. Our grandchildren are going to ask us about this. They are going to wonder what we were thinking, and we won’t have a good answer for them.
Either that, or real estate will always go up because they aren’t making any more land and we had better get on the train, or we will be consigned to be bitter renters for all eternity…
Even if you don’t buy Elua’s predictions it could be a good idea for those with loads of cash (Eastsiders?) to verify that your deposits are within the FDIC insurance limits. If not, it could be wise to distribute them in a way that they are. Especially if your deposits are in banks with a relative high exposure to bad debt.
I concur with much of Eleua’s prediction, but I take more of a deflationary view. I think we are going to see a collapse in almost all asset prices (commodities, stocks, housing, etc) as the credit bubble unwinds, and everyone rushes to de-lever. We are already seeing this as hedge funds and institutions rush to sell whatever assets are liquid to reduce their leverage (i.e. debt). This will also play out on the consumer side as credit becomes tighter and people have to actually “pay” for things (e.g. you will need a big down-payment for a house).
Just keep stuffing that cash under the mattress…
So, what is it with posters on this site believing that the Eastside is immune and/or populated with borrowers flush with cash? Working for a large wholesale lender I saw multitudes of loan files come across my desk that were SISA/SIVA/NIVA/NINA doc types with the bare minimum down. I’d say a majority of these borrowers were also swimming in revolving and installment debt as well and were using their houses as ‘equity ATMs’. And these were just the files I was asked to troubleshoot because the brokers had technical issues. I can only imagine how many files underwriting saw that fit the profile I described above, but I believe it was quite a few as many of them refer to HUMMERS as rolling HELOCs.
So, this nonsense that the Eastside or extra special parts of Seattle are bubble immune because residents of these neighborhoods have ‘loads of cash’ is just plain wrong. Many of the residents worked really hard at refinancing their homes over and over and over again to support their Eastside/Special Seattle lifestyles. It’s all an illusion.
Eleua #42
I can tell friends and family that no, I’m not the most pessimistic man on the planet. I have no idea if it’ll get that bad, but I concur we are in for some well deserved rough times.
DDX12000, I suspect that what you indicate is very true but as you say there is this re-iterating that the typical Eastside buyer is a high-income good credit score, affluent move-up buyer able to cough up very large downpayments and avoid extending him/herselves with no need to take out risky loans and thereby making the full Eastside market robust towards the ongoing turmoil. I guess the upcoming month will put the truth of it all to test.
DDX12000,
Having lived on the Eastside for the past 12 years, I’m sure that there will be some distress but I’m not sure how much. My neighbor has been using his house (1977 split-level) as an ATM, extracting equity four times the past five years (and then blowing it on cars, RVs, home repair, etc). And anybody that has bought in the past five years may be in for some trouble.
But at least in my neighborhood where I have been keeping an eye on what houses have sold, I’d say that things are pretty stable and that 75% of the properties (just a guess) have been owned by the same owners for at least 8-10 years or more. In my cul-de-sac of six houses, my home was the most recently sold back in 1998. So many long-time owners that have not extracted equity are in good shape and could neither rent nor buy their own houses at today’s prices for what their current holding costs are.
There are other factors, such as Microsofties or other dot-commers who exercised stock options and could put down a lot on a place. [My MS neighbor who owns a house identical to mine just moved into a $775K place one block over, and is renting out his old house for $1800/mo, easily being cash-flow-positive on the rental.] Plus the California Equity Locusts swooped in (mostly job transfers, a lot of them during the dot-com boom years) and were able to buy no problem (and yes, some of them moved away during the dot-com-bust and that was the last time I saw a lot of for-sale signs in the neighborhood–back in ‘01-02).
Plus, Bellevue has (or used to have) the most corporate headquarters per capita, and those types of jobs pay well above the median.
Another factor — immigrant families pooling multiple incomes to own/occupy one house — not the American Way, but not uncommon in other cultures from what I have observed. And why not? It’s stupid, just plain idiotic, for a working couple of two people, with maybe one or two kids, to have a 5K sq ft house (and never even spend time in it because kids are in daycare and both parents are working 10-12 hours a day to afford it).
I’m certainly not rooting for a crash, but I certainly think that prices will correct downward now that the ‘fog-the-mirror’ mortgage money is gone. I would really like to know who is buying the $1.1M crapboxes down the street from me (I suspect flippers)–even two mid-level MS wage-earners would be hard-pressed to afford this without putting a lot down.
I have noticed the same thing as you–on the very-new houses that have just sold, I’d say there are 50-50 odds of a new Hummer being parked in the driveway (with fugly oversized wheels usually).
Hi Deborah,
Your answer in comment #34 gives me all the information I need.
Thank you.
Hi Deborah,
No, I’m not going to help in “controlling the damage”, for the most part the people getting hurt got what they deserved and the end result will be something very positive: home prices will be at affordable levels again.
RedmondJP – I’d say that most people that bought their homes for what they were designed for – shelter – will, for the most part, be okay. With that said, I feel too many people bought into the ‘real estate only goes up’ mentality and pulled equity from their homes. Again, if these same people plan on living in their homes for a good long while (at least 8 years), they should be okay when the dust settles.
My fear for the Eastside and other areas of Seattle is that a lot of younger couples/families bought homes and then refi’d to do extensive makeovers. You couldn’t swing a dead cat at the Bellevue Home Depot last summer without hitting a young mom pushing a stroller and perusing the granite tile selections or a young dad shopping for a stainless steel sub-zero fridge. The Eastside has always been one to set and follow trends, there’s a real keep up with the Jones’ mentality in Kirkland/Redmond, and keeping up with trends costs dollars…and a lot of these dollars were extracted from equity in their homes.
It is my feeling/belief that the housing woes that are befalling outlying areas of Seattle will be visited upon the Eastside within the next 30-45 days. There are only so many buyers out there that work for Microsoft that will be able to meet the tighter lending standards. Plus, a multitude of ARMS will begin resetting in Oct, forcing a lot of borrowers chips to the middle of the table.
I could be wrong, of course, and the Eastside and Greater Seattle will remain unscathed by the mortgage mess and the streets will be paved with rainbows and gumdrops…but I have a hard time believing that these areas are immune from basic economics. When median income is in the mid 70’s but the median price of a home is 380k tells me that there is something wrong with the region’s financial model. Something has got to give, either housing prices come down or wages go up…and last time I checked no one was lining up to give me a raise…probably because I’m on this website all the time.
redmondjp, those who did not act during the boom had no impact on it and will have no impact on the reversal if they stay in their homes. It is the people who did and do participate that is of interrest, i.e that either purchase/d a home or re-finance/d and pull/ed equity. Were/are they by the vast majority acting well within their means and with low risk loans or not? That I think is the question.
Many of the people getting hurt TRULY did not understand the loans they were getting – they didn’t understand that there is “NO free lunch” or that you “can pay know” or “pay later” MANY of the loan officers were new to the business….. I don’t even know that they understood, AND the lenders (their bosses) paid them bonues to push these BS loans.
380k? Man, I wish. Median in Bellevue: ~$875k, in Redmond: ~$725k, in Kirkland: ~$800k according to Altos (http://tinyurl.com/2dkkp6). The MS people that have all of the money are the ones that have been with the company for a while, and for the most part they already own houses. Now, of course there’s going to some level of exchange as they move up to bigger homes or different locations, but those changes usually only happen if they can sell their current home. And who are going to buy them? Not the new employees for sure, 70k isn’t enough to buy a below median $600k home.
No, unless MS stock suddenly quintuples or MS gives out 20% yearly raises microsofties aren’t going to prop up the entire eastside market.
Okay–here’s an agent perspective from the trenches of South Snohomish County.
After a slow July, I suddenly have a bunch of people coming at me all at once to buy and/or sell. Who’da thunk?
What’s interesting is that I am hearing some of the traditional reasons for wanting to buy again, such as wanting to put down roots, tired of renting, etc. Not big dreams of appreciation and equity, at least not in the short term. My current buyers are talking about old-fashioned ideas like buying a house, paying it off and living in it til they die. Everyone is going 30 year fixed for the most part, and I’ve got some good ‘ol FHA going too.
6 months ago, people were talking about appreciation and I usually had to try to temper their enthusiasm with my speech about market dynamics and how what goes up must inevitably come down. Now they are talking about stability and the ability to paint the walls orange. No need to give the speech anymore.
As for sellers, they are beginning to realize that they no longer have the advantage. The playing field has definitely leveled. The reality for them is that you buy when you need to buy, and sell when you need to sell. If you don’t need to sell and aren’t happy with the price you can get now, maybe you hold off.
Everyone has always had the ability to choose whether the market dynamics in play at any given time suited them or not, and now is no different.
Our job as real estate professionals is to help folks do what they need to do without manipulating a need where it doesn’t exist. It’s also to give good, honest advice based on our current and past experience.
We are not, as Greg Swann put it, “Loki-like tricksters” who fool people into buying homes. We shouldn’t be anyway. I don’t think anyone who posts here is–we probably represent a lot of different ways of thinking and doing business, but I think the real estate professionals who read, write or comment here are probably among the most ethical, caring people you are going to find in our industry. We care enough about what goes on in our industry to spend a great deal of our time educating ourselves and others about what is going on out there, and providing a forum for dissenting opinions. I think the Rain City Guide folks deserve some credit for that.
So from an agent’s perspective, what does it matter if prices are up or down? Someone always needs to do something, so what is the harm in calling a dragon a dragon rather than a fluffy bunny? It’s our job to deliver the bad news along with the good. But it’s also our job to realize that usually there is good news that goes with the bad–it’s never all good or all bad, if you see what I mean. You can’t present the full picture unless you recognize both sides.
Nobody posting to this board really knows what the future brings. But I think even the most adamant real estate cheerleaders out there know that the next few years are going to be interesting to say the least. And there’s no point in getting all worked up about it. We just have to adjust and adapt. This, for good or bad, is what markets do–they go up AND down. We’ve had a lot of up. Down doesn’t mean nonexistent.
And the reality is that people will need to buy or sell no matter what the market is doing. Their reasons will just be different. Those in our profession who were just in it for the quick buck and the good times will move on to greener pastures. Those of us who are in it because we like the clients and the work, will stay and keep doing it. These are good things.
“Everyone is going 30 year fixed for the most part, and I’ve got some good ‘ol FHA going too.”
Seems like the updated lending standards are doing the trick. People are buying homes they can afford, excellent development. Very nice post Sandy, thanks!
That is a very reasonable response, Sandy.
Most of my interaction with real estate agents comes from open houses where I often do get the “Loki-like trickster” sales pitch telling me about appreciation and such. But then I’m not their client, am I?
In order for reported sales prices to drop, there need to be sales. I expect there will be plenty to do in a bear housing market. Although if sales volume decreases, there will be some in the industry who are left out in the cold.
[...] Deborah Burns in this post suggests that all the bad news from traditional media channels is having an effect on home buyers who might be scared to enter the market and become homeowners. We here at raincityguide have been touting the exponentially wondrous benefits of blogging. Blogging as social media means if the real news is being distorted by traditional media in either direction (“the market’s great: now’s the time to buy!” Or, “the world will come to an end if Countrywide goes under!”) then it must mean that we as real estate industry folks now have a beautiful opportunity to do that thing called transparency and give Seattle homebuyers and sellers what they want from their real estate agents and mortgage lenders: naked truth. [...]
Let me clarify that by “everyone” I mean “everyone I am working with.” I have no insight on what others’ clients may be doing.
I think the ones left in the cold will be ones who refuse to adapt to a new reality.
Hi Joel,
I can see why you are not interested in a more balanced POV, since your platform is weighted as “HousingPanic”. While I disagree about people “getting what they deserve”, I partially agree about the housing prices, because I think tigher lending standards will eventually help housing prices stabilize and have a more moderate, sustainable appreciation, which is a good thing.
Hi Eleua,
Very interesting and dire predictions, we will just have to see how it all plays out. You express yourself very well, and have a lot of passion for your POV, and I respect that part, but my POV is different, so we will have to agree to disagree.
Hi Sandy,
LOL, ” Who’da thunk?” That is interesting and nice turn about for your August, often a vacation month for many.
I enjoyed your common sense approach to the changing climate.
Hi Deborah,
I don’t know how you decided that I’m not interested in a more balanced POV. Actually I just think you’re trying to insult me buy insinuating that just because I have a different view than you, I am close minded. Anyway, I can play that game too:
I know it makes you giddy to think that people like me will never be able to afford a house since you are a realtor.
You really don’t seem to get it do you? If home prices “…stabilize and have a more moderate, sustainable appreciation…” then home prices will take decades (or may never) come back down to affordable levels. So no, that’s not really a good thing. A good thing would be 30-40% reduction in prices.
I agree with Sandy in that it shouldn’t matter that much to a realtor what prices are as long there are transactions happening. For prices to come down, homes have to be selling at lower prices. As long as stuff is selling, agents are making commissions, right?
I am a buyer and I will be buying where I know for a fact the appreciation rates will be going up or holding steady. Anywhere near the new light rail project is a safe bet, IMO. Gas prices go up, and people will want to live near light rail to save money over the long term.
I don’t believe the mainstream media because the majority of mainstream media is manipulated by those with controlling stakes in the media — for example, did you know that David Rockefeller, the same man who founded the pro-war Council on Foreign Relations (CFR), has controlling stakes in ABC, CBS and NBC? Most of what we see on the mainstream news is manipulated to keep the economy plodding along… this has been going on for quite a long time already.
Only the USA has its own Plunge Protection Team (PPT) assigned the task of manipulating the purported “free markets” in order to keep the value of the US dollar strong. When the game is rigged in your favor, there’s no way to lose. American homeowners have it made!
Wealth transfer cycles seem to be pre-planned to shake “loose” money from the hands of the weak investors, and hand it over to the wealthy. This is what the dot-com crash was all about. But if you bought when the worst had hit the markets, you would have done very well as an investor.
Think contrarian when you know the markets are already rigged in your favor. Follow the big money. Buy when everyone else is scared and selling.
Hi Joel,
As a real estate agent I want to help people buy a home if that makes financial sense for them. It does not make me “giddy” to think that you or anyone who wants to buy can’t, although I realize you were saying that for effect. Helping people makes me happy (I know that sounds sappy but it’s true) I am a very service oriented person, I want to HELP people, that is one of the reasons I have started to blog.
Sometimes the “can’t afford” is really “I don’t want to settle for that”, not that that necessarily applies to your situation, and those are two separate issues. I still have and live in the first home I bought in an area that many would consider a less than desirable. Buying a home was important to me and this was where I could afford to buy, not where I would have LIKED to live. It is definitly a first time buyer home, think avocado green fridge! I plan on someday either selling or renting it (depending on how it works out financially) and buying a “step-up” house closer to where I would like to live.
I disagree that for most people losing 30% to 40% of the value of their homes would be a good thing, even if it benefited you and others.
Deborah–good point about the difference between “can’t afford” and “don’t want to settle.” We see a lot of that.
It’s okay not to want to settle and not to like what you can afford as long as it isn’t your intellectual alibi for sitting in judgement of others who’ve made different choices, or wishing ill for others just so you can “get yours.”
I’ve been reading this blog for some time with interest. As someone who has been pretty disappointed with what’s out there in my price range, I think the “can’t afford” versus “don’t want to settle” argument is really a false dichotomy. Consider this: to buy a place comparable to the place I currently rent, I’d have to put 100K down and still have payments of over $2000 per month, which is more than twice my current rent. The money I currently don’t spend on a mortgage goes into my retirement account and allows me to have a slightly higher standard of living than would be otherwise possible. According to the logic of “can’t afford” versus “don’t want to settle,” I should either (1) live in a dumpy place further away from where I work, or (2) sacrifice funding my retirement in order to get into a place comparable to where I live now–not to mention the lost interest on my 100k downpayment!
But the real issue for me when I look at what’s available is that it just quite frankly doesn’t seem to be worth what is being asked.
Indeed, the dichotomy of “can’t afford” versus “don’t want to settle” implies that the current inflated prices are somehow justified. We all are familiar with the law of supply and demand. Still, you’ve got to ask yourself, what real value has been added to a house or condo that’s appreciated 100% in four or five years? It certainly isn’t rational to extrapolate outward from that past performance–which thankfully no one is doing anymore. But beyond that, the question still remains, what value has been added? All of the factors that are usually cited seem somewhat specious to me, particularly since most of them were in place well before the current run-up in prices.
I don’t think I’m alone in my view, and I think that the current news headlines are just pushing more people to question whether it might not make more sense to just wait. Heck, even the majority consensus on this real estate blog is for at best flat prices over the next few years.
Bob Barker you are not alone in your view. I agree 100%.
I also don’t understand the exteme fear of depreciation indicated by some re-agents. What’s the big deal? Yes, it will flush out the speculators from the market for a while, not a bad thing. Yes, it will put pressure on overextended borrowers, not neccesarily bad since they probably are best off getting out of a home they can’t afford. Yes, it will stop some people from using their homes as ATMs and increase their debt level, not a bad thing. Yes, it will lower the value of owners homes, doesn’t matter much as long as they plan to stay owners of their current home or another home. ( A potential move-up home will also depreciate making the balance very similar ).
But depreciaton does matter a lot for first time home buyers and for the long-term health of the economy. It matters in a very positive way.
I think what bugs a lot of us in some of these comments is the sense that some people would be happy to see other people lose their homes, because then prices would come down and they could afford a nicer house.
Sandy, understandable but the people who will loose their homes due to price depreciation gambled on very risky terms and lost. It’s the nature of gambling you can win or loose. By gambling they also closed the homeowner door for many non gamblers for many years by driving the prices into the stratosphere. I don’t think many are happy if people loose their homes but they might not be that supportive either and I understand that too.
tj–I think we largely hear what you’re saying, still, there is something of sour grapes in the whole thing. Why not just make decisions based on what you feel works for you, and accept that others will do the same. There is a big difference between that and resenting the choices other people are making/have made and hoping harm comes to them.
Sandy, I think the whole “hoping harms comes to them” is totally overblown. It’s not foreclosures that will drive prices down, it’s unaffordability with proper lending standards that will. And people are not hoping harm will come to others they are hoping for prices to return to affordable levels. There is a big difference.
I think that a little schadenfreude is inevitable in a situation like this. How many times have I been bombarded by the “buy now or be priced out forever” mime. I guess what goes around will eventually come around. But to be honest, for most people who’ve realized huge gains over the last four, five, or six years, a ten or fifteen percent decline in prices isn’t going to have much of an effect. Those most at risk, it seems to me, are those who were hoping to cash in–literally–on the pyramid scheme that the market has become in recent years. And I can’t say that I have a lot of sympathy for those individuals.
I suspect that a lot of the tension in blogs like this has more to do with the situation among real estate professionals. If a lot of people make the same calculations that I’m making, it’s going to be a tough couple of years. And I do have a lot of sympathy for people trying to make an honest living who are now finding themselves in difficult straits because the industry overexpanded.
In the end, though, as everyone is fond of saying, buying a house–or condo–is the biggest investment most of us will ever make. Given that truism, it seems ludicrous not to take market factor into account. For that reason, I can’t help but feel some skepticism when I’m told that I should ignore the news and buy based on “my individual situation.” Isn’t my individual situation also effected by what’s happening in the marketplace at large?
Hi Bob,
Your individual situation IS how you make an educated decision based on the information: news, blogs, market conditions, your housing needs, financial picture, questions you ask, and so on that allow you to make to make the best decision that works for you.
Your situation is unique to you, and others will have different situations and make different decisions or even similar ones to yours. Everyone is free to choose; some will make great decisions, some will make bad decisions, and most will make moderate decisions.
Renting does have it’s advantages, you can usually rent for much less than it costs to buy (as in your particular situation) you have the flexibility to move when you want (unless you are asked to move because your landlord has decided to sell, then you move into another rental) and you don’t have the expense of maintaining the house. Those are great advantages.
Buying has its’ own advantages that work better for others, and the great thing is that everyone gets to choose what works best for them. Renters need homeowners to rent from and some homeowners/investors need renters.
Sniglet,
This statement is not correct: “at least 33% of the Seattle area home buyers used negative amortization loans in 2006″.
If you visit the link you provided on #10, it’s including interest only loans with the neg. am. loans. A fixed period interest only ARM without neg. am. is quite different than a true neg. am. loan (such as the Option ARMs and pick-a-payment programs).
Sorry I’ve been away RCG…I’m just returning home from a week long vacation with the kids before school starts. I’m still catching up so I’ll see ya later. I just wanted to clarify Sniglet’s comment.
Bob, it may help to disengage the investment mentally in the prurchase of a ‘home’.
Many believe a buying a home is the largest ‘purchase’ they will ever make while a 401K or IRA started early in life is more likely to be the biggest ‘investment’ one will ever make.
We bought a home at the top of the market in Whatcom County, spring 05. Because of the timing and the money we spent remodeling it is not a ‘good’ investment. It may appreciate significantly (or not) in the future but we are enjoying living here more than I could have imagined.
Bob, Deborah,
Thank you both for responding. While I certainly understand your perspectives, I think that for most of us earning around the median income in the Seattle area, the notion that we should ignore the “investment” side of the equation is a bit naive. As I mentioned in an earlier post, the purchase of a condo equivalent to what I have now as a renter would require me to contribute far less to my 401k (or in my case 403b) than is currently the case. Hence, in response to Bob’s observation that I should “disengage the investment mentality,” I can do so only by ignoring the financial reality that even a modest home purchase will have a serious impact on my ability to save for retirement. There is, in other words, a huge economic oportunity cost to buying over renting for those of us with incomes around the median and limited cash reserves. Furthermore, I think you would agree that few people would buy a house if it were a “depreciating” asset, like a car, given that a house purchase generally involves tremendous leveraging of your initial downpayment, and the consequent risks that such leveraging entails.
Deborah, with all due respect, I think your post glosses over the serious affordablity issues that are currently affecting the marketplace. My original post (#68) was responding to the claim–which I think you originally made–that some people just aren’t willing to settle for what they can afford. That argument seems highly condescending and moreover completely disregards the reality of market distortion. There is no rational value-added argument that can be offered to justify the recent run-up in prices. Or as one economist recently put it, real wealth is not created selling houses back and forth to each other. The NY Times had an article about a year ago showing how the current inflation in house prices is the biggest in the history of this country. That seems like a big deal to me, indeed, perhaps the biggest factor that anyone who isn’t rolling in money should take into consideration.
Of all the times to buy a house, this seems to me to be the least auspicious in recent memory–unless, of course, you’re so flush with cash that you can afford not to care. Call me a pesismist, or perhaps it’s just that I know way too many people in California. . .
Rhonda,
You are correct. I should have mentioned that this 33% figure included interest-only loans. Still, I don’t think this changes my interpretation of this statistic. First, NEITHER of these loan types were widely used until recent years, which indicates that something has changed in our market.
Second, the primary purpose of both these loan types is to allow people to purchase homes they really can’t afford, and may not have the ability to actually pay off the mortgage. Sure, there are a few people who get interest-only loans who are quite wealthy and just view it as a way to manage their cash-flow better. But from what I’ve heard, this is a minority of negative amortization or 100% interest only mortgage holders. I have read numerous articles stating that these types of loans have higher default rates than other loan categories for people with similar credit ratings.
If nothing else, people with these loan types have less skin in the game if there is any kind of depreciation (an extremely small percentage of these loan-holders have much of a down-payment).
Bob, we may think more alike than my response might suggest. Of course ones overall investment strategy should be considered in regard whether to purchase a home.
I guess that I fall into the camp that ones home is not an investment in that many different factors come into play compared to a pure real estate investment like income property.
My home probably will never return what an equity porfolio will.
Hi Bob Barker,
From what I read it does sound to me that not wanting to “settle” for an affordable house vs being not being able to afford what is preferable or “wanted” is true, although perhaps not in your particular case. I would have prefered to buy a home closer in to Seattle, and yes I could have afforded to rent in Seattle (Queen Anne, or one of my other favorite places) although not a house, it would have been a condo or apt., but my rent would have increased over the years and my mortgage did not, or would not have except I did refinace 3 1/2 years ago. But Queen Anne was not in my price range even then, unless I bought a studio or 1 bedroom condo, and space was important to me so I settled and bought a house in South Seattle.
We all make our financial choices, you choose how you allocate your income in the way that best suits both your short and long term needs/goals as does everyone else. Others will allocate their income in different ratios than yours as it suits them and their needs/goals. If your choices in allocation prevent you from buying a house where you would prefer to live, then that is your choice and not necessarily a function of the market. Very few people can afford to buy what they really want, everyone makes concessions and choices, your choice seems to have been to rent.
That of course does not mean that the market has not appreciated too much and too quickly with all the low cost money, and looser lending standards available to buy homes to live in or rent out. But the situation is what it is, and perhaps (underlined) there will be enough of a market correction for you to afford what you want and where you want, then again perhaps not. No one knows.
Hi Rhonda and Hi Sniglet,
Thanks for the clarification regarding #s 10, 76, and 79.
[...] The media, because they keep running bad news stories, which are frightening homebuyers; The Community Reinvestment Act for forcing banks to make loans to non-whites; [...]