The other shoe has dropped. That’s the best way for me to describe the situation. Of significant interest to me is the relationship between the first and second quarters. Rarely, and not for a very long time, have prices in the second quarter dropped below prices of the first quarter of the year. This is a significant and telling change. To me it means a longer and sustained downturn is coming.
This “downturn” is not a “correction” phase. Corrections happen in gain taking, and are a result of prices going up. Our downturn in the Seattle Area is primarily and perhaps singularly the result of changes in the financing options available to buyers and persons needing to refinance. That’s both good news and bad news. The good news is that the impact should not be as great as it has been in areas of the Country who are experiencing BOTH a correction AND being impacted by financing issues. The bad news is that it will be harder to call how low and how long.
So What’s Happening out there right now? In a nutshell? The best is selling at lower prices and the worst isn’t selling at all. Lots of in between there.
Each week I post the stats on Sunday Night. Today I offer a quick visual reference. When looking at smaller segments of the marketplace, the abnormalities will be a bit more extreme because there is not enough volume in the final “closed in the last 30 days” to make it an accurate indicator. Consequently you need to look at that last number (closed in the last 30 days) in conjuction with the MMPSF of those currently in escrow and balance that with 2008 2nd quarter to date.
I used Redmond (detail here) mainly to show that the price changes are not totally about short sales and foreclosures and subprime financing issues. It’s a combination. No area is NOT impacted. Some are impacted more than others, but no area is NOT impacted and the full effect will not play out for at least 18 months due to lagging market segments. The first time buyer portion will play out in conjuction with those not able to refinance. Some areas will get a double whammy while others will only be adjusting to a reduction in the number of first time buyers. The 2nd and 3rd legs of the marketplace that need first time buyers to move them forward, will be impacted further down the road.
(above info and graphs not compiled or published by NWMLS – required disclosure)
Most importantly is do the stats agree with what we are seeing and hearing on the street?
What people want is the BEST property on market at the price of the worst propert on market 🙂 Some, in fact many, are going home after looking at property and waiting for that to happen. Some are making offers based on the lowest price on market to the best house and largely being unsuccessful at accomplishing that. Those who are buying, are buying the best property on market at the lowest price they can achieve.
Consequently when property is selling at a higher price per square foot, it is not an indication of rising prices, but of best on market selling at a lower price than it would have sold in the 3rd quarter of 2007, but still more than the worst and cheapest property on market.
We’re still about 10 days away from the full stats of the second quarter, but too many people need up to date info now. For the most part, sellers need to be a whole lot more reasonable and accommodating than buyers. It may not be a full fledged buyer’s market, but the large majority of sellers have to adapt to the fact that is is NOT a seller’s market.
Ardell,
I agree with just about everything you say here for the overall market in the Seattle/Bellevue areas. What I think we all need to be very careful of however, is putting all neighborhoods and home/condos in the same pot when it comes to mixing up the numbers stew. Using price per Sq Ft doesn’t really give an accurate picture especially when it comes to single family homes in the close-in Seattle neighborhoods. Price per Sq Ft work well in larger developments where many homes were built with similar floor plans and finishes. There usually aren’t many good comps for in-city homes. Also the smaller the homes is the higher the price per Sq. Ft. if it’s a good home in a good location. So your sales mix will then skew your numbers. Also and more to my concern that “overall and average” real estate numbers can have an undue negative effects on a market, is that Redmond Condos don’t compare to Belltown Condos and Federal Way home prices and the price per Sq Ft and the sales mix don’t compare to Wallingford and Queen Anne home prices, Sg Ft costs, and sales mix.
What buyers are generally doing right now we agree with you completely. We have several listing where we have gotten very low ball ball offers the first day and others where we have gotten full priced offer the first week. It depends on the price range and location. There are not that many buyers out there right now and many of the ones that are there expect some kind of screaming deal and if you want to sell…maybe you should take your first offer, often times it ends up being your best offer.
Not sure this is the right place to ask, but what is the deal with mortgage rates, that seem stuck at 6.5% even though the stock market is going down the drain… I thought when stocks go dow, interest rates go down too.
Commenter #1
It’s hard for me to respond to “David AND Karen” which one are you?
Financing availability seems to be the big issue in the Seattle market; just not lots of options right now, although that will change I think as the lending market sorts itself out some. Maybe secondary issue is people hesitating a little and waiting for the “bottom” — wherever that might be. I would be surprised if we don’t see velocity of sales increase in 3Q, even with the summer slowdown.
” What I think we all need to be very careful of however, is putting all neighborhoods and home/condos in the same pot when it comes to mixing up the numbers stew.”
…and yet “it depends” is not a good answer either. Clearly 5% down will equal 3% down one place and 7% down someplace else. But in the long run the financing issues will affect everyone to some degree. To pretend it will not is misinformation.
MMPSF might not tell the full story for a particular house but it does tell us, with a good deal of confidance, where the market is headed.
I agree that the sellers and many of the agents are being unreasonably unrealistic when pricing their homes. They still expect annualized gains of 8-10% for a house that was sold not more than 10 years ago. I hope the market conditions and these charts help put some sense in them.
Alex,
There is no direct relationship between the stock market and interest rates. Primarily what happened since all the way back to 9/11 was that rates were being artificially lowered to counteract the negative impact. Then you switched from Greenspan to Bernanke who had more of a “let the free market reign” attitude that didn’t work out too well.
Of course this is how I see it. I think rates should currently be this or that side of 6.25% and should have been for quite some time. The pressures that made them lower are gone. Get used to anything under 7% being “good” and a smidge under 6% being close to a miracle.
Chaina,
I heard an unbelievable story this week. A guy bought a place down in…well lets just say way South of Downtown Seattle, last year for $300,000. Brand New house. He GUTTED it and to make a long story short, now wants to sell it with NO KITCHEN! AND he thinks he’s going to walk away after costs with $20,000 and he thinks he’s being reasonable. Why? Because some house down the street sold for $400,000.
If you paid $300,000 a year ago…how the heck could it be worth more with no kitchen today?
Needless to say…I declined the opportunity to prove him right OR wrong. No way I’m listing it.
Gordon,
2Q will be up as to volume by 7/10 or so. No comment from me re 3Q until I see where the final second quarter numbers fall. Most areas are showing slight gain in MPPSF over 1st quarter, but a decline from peak pricing. Those that are showing lower MPPSF in the 2nd Quarter than the 1st Quarter are in worsh shape but there may be some better number in the end of June closings…not enough to make a huge difference in the full quarter results though.
Financing is affecting a lot of people who started projects and can’t get the financing to finish them. It’s not all about financing for owner occupants. There are a fair amount of half finished projects going to foreclosure. Even some 95% finished projects going to foreclosure. Especially the ones where the main participants were living off the continuous REFIs.
As for people “waiting”, there are a few who shouldn’t be waiting. Sellers who think next year will be better for one, especially if they are buying down. Anyone thinking of selling in the next 3 years should bite the bullet and do it NOW!
ARDELL,
Well, you can respond to David or to Karen or to David & Karen or…you could just call us Al 😉
Prices are down, and buyers who are hesitating may well do fine to wait … or they may find that everyone decides to jump back in at the same time. Right now, financing is an issue, but it is hardly impossible to get a decent loan, and one thing everyone needs to remember is that you “don’t get both price + terms”. If interest rates keep going up, and financing doesn’t ease up a little, then prices certainly will go down. Yet, if interest rates go down, enticing more people into the market, prices will go up.
We don’t have that crystal ball to know where the bottom is, but I do know for a fact that there are many motivated sellers who have equity, and who will negotiate a very fair price for a solid deal. Add to the mix that you’re not likely to get into a “bidding war” and bump the price up 5 or 10% … you may well get a home listed for 5% less than it would have been last year, negotiate another 5%, maybe more, off that ask price, not have the bidding war, and see yourself paying somewhere like 10 – 20% less than just last year.
Maybe the bottom is lower than that, but I’m not sure I’d speculate on being the one who finds that bottom. After all, just a few months ago we actually had FIXED interest rates just below 5% … and how many of those loans actually were obtained by buyers or people refinancing? Very few. That bottom was missed by the majority.
Leanne, you’re supposing perfect coupling between prices and interest rates, which we all know not to be true. There is a correlation, to be a sure, but a lot more factors weigh into mortgage interest rates than just home prices.
Also, there is always the future option of refinancing to take advantage of lower interest rates. No such second chances available with the price.
Uh oh, sounds like RE is tanking here in the Emerald City. I thought we were special. I guess not. Looks like the skeptics were right all along. Silly renters with their dismal basic economics.
Yet I have seen only a few hints of California-style RE horror around town, the handwritten signs, the FSBOs, and that idiot in upper Fremont/Phinney with the $750,000 sign standing watch on his lawn.
We’ll see the horror soon enough. 1997 prices are coming to a market near you soon. So are 8% mortgages.
The condo towers in Seattle and Bellevue will fail on a Miami scale. WaMu is dead, and the RE market is heading south (ie to California) in a hurry.
I’m also seeing FOR LEASE signs all over Seattle on CRE. Yes, that’s doomed, too.
Are you ready?
JosephP, “perfect coupling”? I wasn’t suggesting perfect coupling at all. More like a yo-yo.
Christian, the ‘idiot’ in upper Fremont/Phinney has been for sale at least 4 years now if he’s the one by the gas station … :-). Maybe the worlds longest Days On Market!
You sure are a gloomy gustafson though :-). I don’t agree with the idea that prices will pop back down to 1997. That would require something major – like a major earthquake, high & widespread unemployment, a DEPRESSION, the swine or bird flu … something devastating.
Seeing prices correct downwards by 10%, 20%, or even in some cases 30% isn’t fun, but it isn’t too horrible either, and I mean HORRIBLE in the ‘people don’t have jobs, people don’t have enough food / Great Depression’ sense.
Sure, many people are getting clobbered right now, and many didn’t buy to actually live in their homes for ‘quiet enjoyment’, they bought for speculation. That’s the risk of a speculator. Just like the people who thought they were great Day Traders in 1999, amassing huge profits by internet stock trading (ie gambling), they speculated, and many got badly burned.
We seem to be running on greed cycles in this country, and that’s got to stop. 1998/1999/2000 the Day Traders, and the dot.com bust. The real estate run up, fueled by insanely “easy” Subprime money, and individuals thinking they could buy today, sell in a few months at a huge profit, so they took that “easy” money. Perhaps it’s true as well that the run up of oil prices is being caused not by lack of supply, but by high end speculators all throwing their money at one target.
Maybe we should just call it: The Culture of Lemmings.
Leanne –
I think the commodity bubble right now is the last of the speculative bubbles for a while. People will run up stocks and lose their shirt and keep going, they will run up home prices, then lose their shirts and keep going. But food and fuel going sky high is the kind of thing that ends with riots in major cities and government price controls, not just investors losing on their futures contracts.
Also, I do not think that prices going to 1997 will require any sort of disaster like that (although I think prices more like 2001/2002 are more likely). If you want them to crash in all markets then I would agree. However I forsee markets like Seattle, and other stronger metro markets, just slowly drifting down and sideways for the next 3-7 years. Price declines and inflation will eventually eat away the bubble excess, but we probably are not going to see an SD style freefall.
WHAT?! Real Estate doesn’t always go up? I’ve been lied to. 😉
Surely this is a good time to buy though…. 🙂
The only way the lending market will go back to “normal” is if banks can charge 8%+ or more interest on loans. One of the problems of the lending bubble was that banks and others made loans with too high a risk at too low an interest rate. The problem is banks know if they raise mortgage rates that high then the real estate market will really tank, which puts them on the hook as more of their loans fail and foreclose. Oops.
Conrad,
Must you always act like that? Aren’t you capable of having an intelligent conversation?
The most credible hypothesis I’ve seen says that price trends in a given real estate market follow sales volume trends in that same market, but lag by about a year. If that hypothesis is more or less accurate, the Edmonds market we’re shopping in is really scary for potential buyers and will be scary for many months to come. Instant negative equity and all that.
HUGE leap to proposed new topic: Our 4th offer failed, we’re settling in for a long haul, and we would be riveted (better late than never) by a discussion on what protocols govern behavior among real estate agents, firms, and customers here. I can’t find a way to introduce new topics myself.
I agree with b. When I started in real estate after a substantial run up, prices receded 35% back from peak almost overnight without any major event except for a whole lot more sellers than buyers. 1990 – NJ is when and where I started. Prices went from $100,000 to $250,000 and then back to $175,000 in a 7 year timeframe from 85 through 91.Peaked in 88 or so. The $100,000 was up from $75,000 in the previous 5 year time frame of 80 to 85. Took from 1989 to 1998 to get back to peak pricing.
Many of the current appraisal standards were formulated as a result of that “recession” period. Major changes promote increased standards.
Run ups usually last up to 7 years. Corrections last 3-5. Last sustained run up nationally was 82 to 89. Correction lasted until 92 or so and then flattened out until the next run up that started in 98 and ended in 05. There is a pattern to these cycles.
Seattle didn’t follow a national pattern from 98 forward, and whatever measures help the rest of the Country as to the financing issues, if there indeed any that will be successful, will be successful here as well. I think the market will be down at least 20% anyway you slice it though, regardless of government and lender measures.
“HUGE leap to proposed new topic: Our 4th offer failed, we’re settling in for a long haul, and we would be riveted (better late than never) by a discussion on what protocols govern behavior among real estate agents, firms, and customers here. I can’t find a way to introduce new topics myself.”
Feel free to give me a buzz at 206-910-1000. Give me a run down of how you are approaching the offer and where it is falling down and I’ll give you a few pointers. I’m assuming that you are not in contract with an agent and I have no self interest in this offer except to try to be helpful. I don’t think you are looking in my “service area”. Just a “two heads are better than one” offer to bounce some ideas back and forth.
I’ll write a post for you on the topic right now. It’ll be “a quickie” though 🙂
This is quite a shock.
Nobody could have predicted this.
b and Ardell, I agree that a correction of as much as 30% doesn’t require a big, devastating event. But to imagine Seattle correcting back to prices of 9 or 10 years ago, is difficult to imagine, believe or relate to … unless we have that devastating event.
As GOD as my witness…
I did not hijack Ardell’s identity for this thread.
E.
Everyplace I go some blogging agent whines to me about someone cut and pasting their blog posts and calling them their own on their blog. The good thing about being you and/or me is…no one wants to pretend they are us 🙂
Hi Leanne,
Intead of a one-time devestating event, there have been predictions by Eleua and many, many others that we will see a collapse of our banking system. This will have a dramatic effect on home prices nationwide including here.
Or, as Eleua said on April 30th, “Your banks have collapsed. You just don’t know it yet.”
Jillayne, I would hope that you don’t share that uplifting vision.
I’m trying to remember what fueled the huge upswing and 50% down crash (correction) I experienced in my first years in real estate. (East Coast and much of the Country; not Seattle)
Seems lower interest rates started it all when we came out of the double digit interest rate period. Single digits looked damned good and at 7% people were screaming “Rates will NEVER be this low AGAIN!” People were standing 100 deep in line at new construction hoping they wouldn’t be sold out before they got to “the counter”. Much like Kirkland condos in 2005.
What made it go really down was when there were only 3 buyers for every 10 sellers…which is what I see coming down the pike pretty quickly. Not sure what the ration is here and now until we get to the end of the third quarter or so…or at least early August. But what created that situation? Possible, simply that everyone who was thinkking of buying in the next 3 years did it all at once, leaving fewer people wanting to buy.
Wants a market softens, it’s up to the sellers whether it crashes or not. How many come off market when they don’t get their price? How many rent instead? How many keep dropping the price untl it does sell. Sellers control the downside and how low it goes.
The more people that HAVE TO sell…the lower it goes. No event needed.
Leanne,
Words like “uplifting” are not all that appropriate at present. Anyone talking about any great news is likely slanting the truth. Down a bit accumulates, if down a bit continues at a monthly rate.
Ardell, E’s dire predictions are massively darker than any of us would ever want to see, so I certainly hope people aren’t thinking he is correct.
However, if you do — wouldn’t you get all of your capital out of any banks, stocks, or other asset accounts and put it into something solid like real estate, and have a place to live? Maybe you’d do gold, I don’t know. I like a place to live personally.
If we really have a collapse of our banking system, we basically will be in survival mode, nothing else.
I’m no pollyanna, but E’s suggestions are dark, dire and dangerous.
Spreading such fear is just as wrong as saying things are normal and fine.
Leanne,
I’m not trying to spread “fear.” I’m pretty sure the regulars around here on RCG (including Ardell) will say that I was talking about banking problems almost 18 months ago. My point isn’t to spread “fear,” but to get people to look beyond their own horizons for what might be coming their way.
A banking crisis is certainly a reality. How deep it goes is anyone’s guess, but I’m thinking we are still in the very early stages of whatever plagues us.
Asking people to think and be somewhat promethian about their business outlook is not “wrong.” Just because what I say is more uncomfortable than you are prepared for does not make it untrue or wrong. There is more to fear than fear itself. We can’t “kumbayah” our way out of this debt disaster.
I guess we are now at the phase where RE agents need to educate thier clients that they need to be extraordinarily aggressive about their pricing
Leanne,
If we assume that my outlook is the closest to reality (won’t know until we experience it), then the very last thing you want to have are hard assets. Gold, real estate, stocks, boats, etc will go down in value.
What I am predicting is DEFLATION, not INFLATION. Inflation is caused by excessive debt creation over a relatively fixed asset base (housing bubble?), whereas deflation is the massive default of debt over the very same asset base.
In my scenario, people are defaulting on their debts in record numbers and this causes the money base to contract and velocity to slow dramatically. This causes the value of money to INCREASE, not decrease (as we are presently seeing). As the scenario develops, money becomes more scarce and thusly more valuable. It becomes harder to obtain, which causes more defaults, more monatary destruction, more scarcity and even higher values.
Later, rinse, repeat.
Now, you have a skyrocketing value of the US dollar, which crushes “hard” assets.
Think of the strategy for “deflation” in the exact opposite way of how you would play “inflation.”
Debt, assets are bad, whereas cash is king.
Eleua, in your world the harsh reality is jobs will also be scarce, people will be homeless and hungry and there will be no safe place to park your cash. Mayhem on the streets in a society that has way more guns than needed. Yikes almighty!
They call that condition a Great Depression, and we do not want to see another one, since it would be worse than the last one. GDII, I can just see it now …
Parking cash in real estate is what many investors do when they feel the stock markets are too volatile. What do they do when they feel banks are not safe? I think they still park their cash in their home real estate investment – no matter if it goes down, it’s a place to live.
Perhaps many might park some of their cash under their mattresses too. Perhaps safe deposit boxes, but that seems risky if we see financial institutions closed.
Cash may be king, but if you can’t keep it safe, it’s not likely to stay yours.
Leanne,
You are going in the right direction. The excesses of the past 30+ years have created an entire caste of people that only exist in a paradigm of cheap credit and cheap energy. We now have 305million people in the US. What happens if credit and energy costs can only sustain 240million?
Mahem on the streets would be a foregone conclusion. In that scenario, we would find that we have too few guns (but that is another topic).
Now, where do you park your cash? I’m a fan of safe deposit boxes, as the bank does not have it invested in their endeavors, thus it is immune from a credit default. Access could only be an issue if the institution is closed temporarily by civil unrest. In that scenario, the only currency is lead and food, and I believe that is too dire. Granted, I probably wouldn’t hold my loot in a SDB in places like urban Detriot, Miami, LA, etc. I fail to see how Redmond, Mercer Isl, Medina, Bellevue, or Madison Park will be set on fire in any scenario.
If the institution closes down, you have the right to everything in your box. As long as you pay your rent, which should not be a problem since SDBs are a pay-in-advance item.
Yes, Roosevelt confiscated gold and would not allow SDBs to be opened without a Treasury official present. My guess is the current court would not allow such a violation of the 4th Amendment, and since most Americans do not keep anything in SDBs other than car titles, marriage certs, passports, and baseball cards, it would be cost prohibitive to station a G-Man at every bank branch in the US.
If you are scared of that, you live 3 hours from Canada, where their government has no interest in US enforcement. Their SDBs work in the same manner as ours do.
BTW, regardless of the macro outlook, you should be stashing a few months cash for emergencies.
Regardless of your strategy, that level of civil unrest brings larger problems than what you fear. In that scenario, real estate will be the very last destination for people to sink thier precious money.
My guess is the people that lived in 1929 wanted a depression about as badly as we do today. Wishing and reality often are at odds with one another.
Anyway…tell your clients to be aggressive on their prices and if they have a profit, they should be grateful. They stayed too long at the party. If you want to convince them, pull down an “H.3” for the Federal Reserve, and a graph of non-borrowed assets from the St. Louis FED.
If they can look at that and still believe that they are in command of the transaction, they are delusional. Move on to someone that can deal with reality.
E.
I think I cleaned that up correctly for you. Anytime you get stuck in the spam filter just email me. I can fish it out. Don’t feel slighted. For about a month almost every one of my comments went into the spam filter. I had to fish them out every time I wrote a comment. Pain in the butt.
That happens when anyone who uses Askimet as a spam filter deletes you on their site and marks as “spam” when doing so. Askimet then thinks you are spam on other sites.
You are a lot of things, E., but spam you ain’t 🙂
Leanne,
Ten years back is not far fetched in the Seattle Area. We didn’t have the same run up from 98 to 05 that the rest of the Counry did. A lot of our appreciation was from early 05 on. Going back 3-4 years vs. 10 years is not that much of a difference.
Hi Leanne,
I went on record last summer as saying things were going to get worse. I am on record here locally as saying that things are going to continue to get worse. We have only just begun to see defaults and foreclosures rise in this region. Lenders must continue to constrict underwriting guidelines until defaults on the CURRENT loans being originated right now, stabilize enough so that the lenders can sell loans on the secondary market. Nobody’s buying RMBS right now. (Residential Mortgage Backed Securites.) Instead, everything is being sold to Fannie, Freddie, and FHA and the banks will probably be allowed to unload their toxic waste to them, too, which means the taxpayers will become the ultimate bag holders of this entire mess when Fannie, Freddie and FHA get bailed out.
The REOs, when then come back on the market, will continue to pull prices down for quite some time.
The powers that be will see to it that instead of a giant crash, we have a long and slow decent which will prolong the price declines and the recovery that much longer.
I taught a class last week in Puyallup and the agents told me that half the listings down there are listed as “short sales.”
We have small to medium sized local, state-chartered banks that lent money to commercial developers and residential builders that are probably looking at some pretty hefty write-downs. The smaller local banks can’t take the billions of dollars in write downs like the national commercial banks. All it takes now is to guess which one will go first. Okay, I’ll stick my neck out and guess City Bank in Lynnwood.
Ardell,
Thanks for the help and the compliment.
I must say that what you are posting in this thread is the very same things I am hearing from my RE agent friends that I pump for information on the market. For a while, many were not seeing the declines, but there was a huge shift in October and another one just hit within the past month or so. Wierd.
I mean this as a compliment, but reading your comments and postings makes “Twilight Zone” theme music play in my head. I really never thought I would be reading what you are writing, but I will say that for you to have this level of concern, the market must have really taken a headder. I hope your clients are listening as this warning will be their best chance to comport their real estate holdings to suit their needs for the upcoming debacle. Good for you.
BTW, are you a reader of “SoundBiteBlog”? It’s a very good blog for Kitsap. They even have an “Official Devil’s Advocate.” 😛
I think many of you are missing my point.
Jillayne said “Intead of a one-time devestating event, there have been predictions by Eleua and many, many others that we will see a collapse of our banking system. This will have a dramatic effect on home prices nationwide including here.” And I said to her, “Jillayne, I would hope that you don’t share that uplifting vision.”
I hope none of you honestly feel our banking system will collapse. It could happen, we all know that, but if it happens, that’s not just a little something that will bump prices down to 1998 levels (or pick whatever year as your personal favorite).
The collapse of our banking system would be more destructive than you’ve even begun to define here.
A small regional bank failing isn’t all that newsworthy. That happens with regularity when we see recessions or other economic problems. Sometimes it even happens due to graft or fraud, or poor management choices, a few bad loans, etc.
What I’m talking about is the overall failure of our banking system. I really hope none of you actually share Eleua’s belief of “the upcoming debacle”.
Being aware of what could happen is far different than believing it will happen.
Check out tonight’s stats. Median Price per square foot. You can use the charts to track the drop from peak (current and peak prices are in bold) and you can also see when the last time that price per square foot was last in play. Neither is lower than last quarter of 06 at present. But the in escrow ASKING MPPSF is more telling.
A couple of weeks back I posted the data back to early 2000. For ensuing weeks I’m only going back to 2004.
I think the new format hides the tags, so you’ll have to click on my photo in the sidebar to find the Sunday Night Stats a little more easily.
Leanne,
Very few people walk by my house. The other day I was out painting the steps and a couple walked by. He had to be 80 or so and she was in her 70s. He said “I was thinking maybe an interest only loan”, she said “What’s that?” I couldn’t imagine what the two of them needed a mortgage for, let alone an interest only loan.
The day before another man in his 70s said he didn’t know what to do. He had been borrowing againt his equity for years, and now he can’t borrow any more and he can’t make his payment either.
There’s lots more to happen in the next 18 months. I heard all this just by sitting on my porch, not counting what I hear out in the field.
Not to mention all of the people that make a living from the sale of real estate in one form or another.
I’ve heard lots of things about banks over the years. I once heard that there would only be 5 banks in the Country, with the small ones needing to sell out to the larger ones, leaving only 5 left. It didn’t happen. That was in 1984.
Leanne,
I do not look forward to a banking collapse. I really do not. However, when you look at the realities of what the banks face, it is hard to picture a scenario where the banks do not collapse. Some will likely survive, but the bigger, global and national banks are probably toast. That pretty much pegs-out the suck meter.
I can see how we lose JPM, MER, C, WM, LEH, WB, WFC, and BAC. In that scenario, the FDIC can’t cover the losses and Warren Buffet can’t save us. The banks that survive will be in no mood for exotic loans to sketchy clients, which unfortunately, are most of us.
There goes your demand for housing.
If we reprice the assets and start originating debt against a properly priced asset class with sufficient margins for both borrower and lender, then we rebuild. If we bury our heads in the sand and pretend we don’t have a problem, then we end up like Japan and take decades to right the ship.
The US.gov can’t save us and they will have to cut back on all forms of spending. Entitlements and Pax Americana will have to be scaled back, regardless of who wins in November 08. If the US.gov tries to get too cute, they will default, and THEN you will have complete anarchy.
This is what happens when you have an entire generation of people that believe they can build wealth by spending more than they make for decades-on-end. Economic reality sets in, and it isn’t pleasant, but it is not the TEOTWAWKI.
Best option? Avoid a situation like this.
Second best option? Take your marks and reboot.
Worst option? Denial.
What I am trying to get across is that “belief” in a given scenario does not impact the outcome. What Jillayne or I think is irrelevant, just as what you think is irrelevant. What does matter is how you prepare for likely scenarios.
Getting gassed-up on overpriced real estate in the beginning stages of a deflationary collapse is probably not prudent. Debt free is probably the most prudent.
Interesting interplay and useful contrasting outlooks!
Eleuea, you suggest debt reduction as a prudent strategy (if by that, you mean earning more than you spend, then we are definitely agreed).
Assuming a family had done all it could manage to do to get spending to EQUAL earnings, and that family were to choose between leaving $100K in an interest bearing bank account (let’s say at variable rate of 5%), or borrowing it from RE equity at a variable rate of 6% (no cost to borrow, except interest), which would you choose? Let’s assume that there is an additional cushion of savings for 6 months expenses.
Although hypothetical, it is not designed to be a trick question. I can think of loads of people that could make a similar choice.
And, in the event of a bank collapse, would you suggest that it would be better to have 4 accounts of $25K, than one of $100K, or are you suggesting that paper currency in a SDB would have the most future value?
Preparing for near-worst case scenarios has a pretty high opportunity cost.
For example, if an individual decided in 1960 to invest $2,000 in a well equipped bomb shelter (concrete, fuel, food, ammo), while another individual chose to invest there $2,000 in the stock market or real estate, which individual would be more secure today, or the near term future?
I believe that an individual’s belief in a scenario does have an impact on most outcomes, however, it may be irrelevantly small (think butterfly effect).
A group’s belief in a scenario can have a large (though not necessarily deterministic) effect on an outcome. That is the essence of the creation of market bubbles.
Generally, the individual that has the largest group follow his/her beliefs benefits the most (assuming the individual has previously invested according to his/her beliefs).
I think that has a lot to do with the intelligent disagreements here, even though the opinions are offered with only good intentions.
I’m leaning towards E. at the moment…
I’m leaning towards Roger!
And I am chuckling!
I didn’t think I actually espoused pro or con on the issue!
So, in one corner is the contention that owning real estate is a safe investment (which implies debt accumulation, and faith in the survival of the banking system), and in the other, is the contention that no debt, and investments in paper cash (or possibly commodities, in the form of REAL food, fuel, and ammo) is the safest, due to an imminent collapse of the banking system.
Loads of room in between, and probably a few defensible positions even more extreme than the polar opposites defined.
But I guess I have a bias, too.
First, I want to survive (in business, in life, in spirit), while maintaining certain philosophical ideals. A non-surviving idealist is not of much use to anyone (however, there are legitimate questions regarding their usefulness when alive), so I temper the idealism with a healthy shot of pragmatism. I see alot of that here.
Second, I want the community to survive, meaning the overlapping circles of communities that I belong to, up to, and including the community of life on Earth, with greatest concern for those communities closest to me. Again, largely a shared value, I believe.
Third, I think liquidity of assets is very important in uncertain times, but there are opportunity costs associated with liquidity. That was kind of my question for Eleua. I would be glad to hear others opinions as well.
Thanks for reading, and writing. You are a VERY interesting bunch to know, and learn from.
Roger,
A family going about their life and not thinking of buying or selling is insulated from needing to think about it all. Clearly no one is saying everyone should sell their house and hide their money under a mattress. But among those thinking of buying and or selling, the landscape has not only changed…but is at the beginning of change.
Ardell:
Oh, I agree with that! We are pretty clearly at the end of one kind of economy, and moving to a new one, locally, nationally and globally.
I just wonder what is the best strategy to employ through the transition.
So, let’s say the family has decided to buy, and could choose from putting $100K down, and $200K down, with no resulting change in loan terms.
Which option should they choose?
Eleua says reduce debt, while I would normally counsel keep the 2nd $100K in a more liquid investment, with increased debt.
Believe it or not, I had a very similar situation last month, and the borrower chose to put the $200K down, so that his payments would be more managable.
He was clearly a smart guy, and I think his unique experience and intuition told him that the $100K was safer in King County real estate than in any other alternative.
“Believe it or not, I had a very similar situation last month, and the borrower chose to put the $200K down, so that his payments would be more managable.”
I am seeing the same, but I don’t agree with your rationale about “safe investment”. The people I see doing that are also buying down the rate. They are making sure their payment is affordable for the LONG term. Where to “put their $100,000” is not part of the equation. It’s about the comfort level of the monthly payment.
Well, I guess I’ve got to chime in with my opinion. I have had most of my transactions this year (not just my buyers, but also buyers who bought my listings) have either all cash or a more-than-20%-down payment. Just 1 or 2 with less than 20% down.
I’m seeing more transactions this year with higher down payments, or all-cash than in recent years, mainly because of interest rates.
When interest rates are low, and PMI isn’t charged, why would people put bigger down payments? They invested other places. Today, those who can invest a larger down payment, likely will – since the other investment choices are not so stable either.
These have all been intelligent people who didn’t come by the money by gift, or ‘found’ money such as winning the lotto :-). They earned it, mostly from other real estate transactions or from savings, or working at a high tech company with stock options. They have other cash available, although not one of them is ‘rich’ as far as I knew.
Eleua in other posts has been far more extreme than in this one the last few days, but he’s still at the extreme view that things are collapsing around our very ears. The rest of us line up in various places above that. While fairly neutral in his outright predictions, Roger is also wise enough to think about what matters.
In the long run, your home, where you live, is critical. Yes, you can survive without it, but that isn’t the way of a stable society. Our society may be bumpy, but it is stable, more so than some want it to be.
That attitude of wanting failure I quite frankly do not understand.
A desire for stability cannot be wrong.
And, even if home prices reduce to 20 – 30% below where they were last spring or fall — I do not see that as a major disaster for the whole. For individuals, yes. We should have corrected 4 or 5 years ago, so we’re doing it now. It has happened before, it will happen again.
Quite frankly, if you were prepared to buy last year, and pay up to 10% MORE for the house you were bidding on, you’re going to get that same house today for 10 – 20% less than you were willing to pay for it then. Once you were prepared to pay MORE for the house, and didn’t conside that a risk or a ‘loss’ … I fail to see why someone wanting to purchase for the long term would worry about the potential his price might drop 10%. You had the same scenario last year, you just looked at it differently!
Changing the patterns of our lemming-like, high-consuming society, well that is a nice and lofty goal, but short of a major depression, I don’t think those changes will come fast. Human nature wants what it cannot have. Always has, and sometimes that turns into greed, that can destroy the known world, but I really don’t think we’re in that extreme phase. Not at all. Don’t call us the Roman Empire just yet.
Leanne,
If you believe that I want some form of failure or massive civil unrest, then you are mistaken. Believe it or not, I have the same human desires as most people of my generation and experience. I want to see my children grow up in a peaceful, prosporous, and socially rewarding nation.
My entire point of visiting RCG (for 2+ years) has been to expand the dialogue to include “what if?” scenarios that might be overlooked while transfixed by the kaleidoscope of wall-to-wall prospertity. To that end, I think I succeeded.
True, in the past, I have been somewhat cheeky and had a flair for the dramatic. This is somewhat necessary when one seeks to draw attention to an argument that is not supported by the current paradigm and facts. Remember, the bulk of what I was talking about was discussed while PNW real estate raged upward without governance of any kind.
I assure you this is not the case as I discuss the state of our banking system. I am not saying that we are about to reenter the bronze age, but that certain institutions are insolvent and the FDIC insurance is inadequate to cover the failure of one of the larger institutions. Keep in mind that your deposits are third-in-line for redemption in the event of a bank failure. FHLB has quite a lot of exposure in many of the troubled institutions, and they are higher on the totem pole than you and I are.
Are all institutions insolvent? No, but we don’t know which ones are healthy and which ones are rancid. You can thank your Treasury Secretary and your Federal Reserve Chair for that obfuscation. Let it suffice to say that the failure of a few institutions will cause a cascading default scenario which will reach beyond the original bank failures. It is sad that healthy banks are being sacrificed to temporarily buoy the financial toxic ooze.
OK, so why reduce to cash? It is not a permanent situation, but a temporary precaution against an event that is rapidly morphing from the highly improbable to somewhat of an inevitablility. The opportunity cost of holding cash is dwindling as the risks of holding “traditional” stores of wealth are rising at a breathtaking clip. Certainly stocks are the easiest place to see these risks, but certainly real estate holdings and bonds are frightfully overpriced. Quite simply, I do not believe that current returns are high enough to compensate for the considerable risk. Reducing to cash at the top of a market is almost always considered a good move.
As for debt…
Even in normal times, debt is the antithesis of wealth. In times where global debt can only be described as “binge,” taking on debt carries the risk of the denominational currency increasing in value against your ability to earn it. Being in debt is being “short” the currency. Should the supply of money decrease, the value will rise. This starts the deflationary cycle and will absolutely crush those in debt.
Certainly the widespread defaults that we are presently seeing across the US are starting this, but when the banks default on thier multi-billion dollar obligations, the currency destruction will hit overdrive. This doesn’t even begin to address the personal defaults that will occur on the other side of the banking unpleasantness. Those holding debt that is guaranteed by a rapidly falling asset value (real estate) will be even further enticed to default.
The hits just keep on coming.
Meanwhile, the debt remains, and that debt is denominated in a currency that is increasingly difficult to obtain.
Perhaps being debt-free and holding cash in a manner that is not subject to the investment savvy of the people that brought you “subprime,” isn’t a bad thing to ponder. Sure, if you can continue to maintain your mortgage, or own your home outright, then you can enjoy the comforts of your own home. If you are stretched in 2008, perhaps you need Ardell to find a buyer for you. My guess is most people are less secure in their ability to maintain a home than they think.
The good news is deflation increases the value of your cash in a tax-free basis. Sidestep the banking disaster and tell the IRS to piss off, all in one fell swoop.
Depressions happen. They are not the end of the world, just a change in how it is financed.
E.
Clearly if not for you and people like you, I would not have been looking so hard for the first signs of change. For that I thank you.
Roger,
Thanks for the questions. Let me attempt to do them justice.
I think your questions presuppose that a family has to purchase a place to live, rather than rent. Many people find buying more satisfying, but in our current environment, that satisfaction comes with a hefty price tag.
If someone was hell-bent on buying in this environment, and asked me how to structure their $200K, I would have them put as little down as the lender will allow. The money that is put down against the home is the first money that disappears in a declining property market.
Why take the risk when Mr. Dumb Banker will take it for you? This was the lesson of the past decade.
If the house is viewed as an investment, then treat it as such. Mr. Dumb Banker has agreed to take back your house, without recourse, in the event you default. What a deal! Take your $200K in cash and stuff it in a vault box. In the upcoming environment, cash trumps credit.
Regarding keeping $100K in one account or spread over 4 accounts: I would go with the 4. In the event of a crisis, you don’t want to have the FDIC grab your bank that is holding $100K, when it could grab one at $25k and you get to drain the other three. Also, it is much easier to drain $25K than it is to drain $100K. Go to your local bank and ask for $100K in cash. You will likely get a 10 day delay. With only $25K, you have a chance of getting it all at once. $5K per branch, per day is usually a matter of a few minutes.
Also, become familiar with ACH and your debit card. These are handy tools and allow you to “run” your bank without even going there.
You bring up a good point about $2k invested in a bomb shelter in 1960 and $2k invested in GE. Now, what conversation will our children be having about how various people dealt with the “Bank Run of 2008?”
If the scenario does not materialize, then you take your cash and redeposit it back into your bank. If it does, you start your own bank.
Remember, in deflation, cash is becoming priceless. In order to obtain money, people have to pay more for it (higher interest), which in an environment of increasing currency value, is a double win. Right now, money is relatively cheap. Banks are getting little ROI, while getting paid back in dollars that are currently losing value (double loss.) No wonder they are going bust.
People with more money than debt will be able to command a higher return for their money, as those with more debt than money will be scrambling to extinguish their debt. More assets will be pledged as collateral against the debt creation, which translates to higher interest rates and more favorable terms for lenders.
I hope I answered your questions to your satisfaction.
Ardell,
Thanks. I am speechless (which is tough to do).
Your contributions to this dialogue made for a great discussion. I hope that all parties derived a generous benefit.
I certainly continue to do so.
Phase II – convincing the sellers that they are not in command.
E, you said this: True, in the past, I have been somewhat cheeky and had a flair for the dramatic. This is somewhat necessary when one seeks to draw attention to an argument that is not supported by the current paradigm and facts. Remember, the bulk of what I was talking about was discussed while PNW real estate raged upward without governance of any kind.
Cheeky?? A flair for the dramatic? Oh please. You were disturbingly horrifying in your gusto for the downfall. I like you better now, but I can’t say I trust that the old E won’t return.
Leanne,
LOL!
One day, we will welcome you to the “dark side.” Your title of Darth Leanne is reserved for you. You can not escape your destiny.
Until then, “may the Kool-aid be with you.” 🙂
E, oh no, you can’t call me Darth Leanne – that title is already Jillayne’s if I remember correctly.
How about Leanne, Queen of PPC. Pure, personal charm. haha. That was tagged on me by someone else many years ago.
Leanne and Eleua, opposing forces. Hmmm.
“may the Kool-aid” be with you” I think I need a t-shirt saying that! I love it. 🙂
I’m sorry I missed Alex’s comment #2. Although the stock market and mortgage interest rates are not directly connected; there can be a relationship between what rates do and the stock market. This is because mortgage interest rates are based on mortgage backed securities (bonds). If the stock market is having a bad day, traders will often pull funds from stocks and opt for the safety of bonds. The reverse is also true.
With that said, we have other factors that are impacting the market–namely inflation (oil) — which has a negative impact on mortgage backed securities and we also have building tensions with Israel and Iran.
Watch for the Jobs Report which will be released this Thursday instead of Friday for the next significant economic indicator. If it points towards inflation, we’ll see rates continue to rise.
It is a very complicated market right now with regards to mortgage interest rates. Most lenders that I work with are averaging 3 rate changes per day.
Eleua:
Thanks for the response.
It is nice to know we are in agreement on a number of fundamental issues.
I recently stumbled across this article in praise of market bubbles. Since the general public consensus is that bubbles are bad, and governments should strive to prevent them, it was insightful to read a contrary opinion.
Here’s the link:
http://www.newscientist.com/channel/opinion/mg19826615.600-comment-are-economic-bubbles-so-bad.html?DCMP=ILC-hmts&nsref=specrt10_head_Don%27t%20burst%20it
(PS, if anyone knows how to insert links in a less ugly manner, please let me know)
What I am wondering is if we are actually operating as a bubble (or series of bubbles) within a larger bubble (that of monetary inflation, preceding monetary deflation), which seems to be the drift of your thread, or at least how I am interpreting it.
Your thoughts?
PS, I think the appropriate Stars Wars character for Leanne would be Princess Leia: upbeat, hopeful, idealistic..don’t know about the hairstyle.:)
Hey you guys, I think the references many use to kool ade is in poor taste. The Jamestown event was in 1978, and families of those people are still around, and I’m sure trying their best to live and forget, but I doubt you do put such a massive trauma behind you easily.
For us to encourage any use of the trendy reference to ‘drinking the kool ade’ is beneath us.
It’s a horrible moment in history, and shouldn’t be trivialized.
Now, back to the party for some humor!
Leanne doesn’t know the power of the “dark side.”
I hope my “disturbingly horrifying” postings have not colored Princess Leia’s opinion of me.
@Rodger,
We have been operating in a bubble since the mid-90s and the banks had the depression-era safties taken off by Greenspan and the Clinton Treasury Dept (Rubin). Since then, they have been blowing one bubble after another.
Perhaps our great-grandparents were not so dumb after all?
Roger, I have to be Queen. Princess is too frilly :-)!
Leanne,
To be fair, ‘drinking the Kool-aid’ has been part of the American lexicon for 3 decades.
Also, it wasn’t “Kool-aid.” It was “Flavor-aid.”
Roger,
To imbed a link, use the following format:
(substitute for [ and ])
[a href=”www.yourlink.com”]your highlighted text[/a]