Recent King County pending sales continue to dip in price. There seem to be more bargains in the single family home market than the condo market overall. But that is starting to change.
In the condo market, of the 628 condo sales pending, only 283 have gone pending since the 1st of October, and the asking prices on those were 3.7% lower than the pending sales from before October 1st. Considering that condo prices for the 3rd Quarter were only down 7.2% YOY, a 3.7% dip in prices is significant and should bring condo prices down to more than 10% lower YOY by year end. We’ll have to wait and see where they close out. Those that have closed so far in October have actually closed at higher prices than the 3rd Quarter, so we may not see the full impact of lower prices until the end of the 4th Quarter in condos.
In the Residential market, 957 of the 1,893 pending sales went pending since October 1, so less of a backlog on a % basis than in the condo market. The prices of the recent pendings is only down by a hair, compared to pendings from before October 1. But pending prices overall and closed prices in October to date are down almost 10% compared to the 3rd Quarter and almost 20% YOY.
If you are hanging in for the perfect house, you may have to wait until Spring of 2009. But if you’re looking for an opportunity to buy based on bargain prices, the last quarter has a lot to offer. Remember, for every bargain priced property SOLD there are 5 or more overpriced properties. So far in October it looks like buyers are choosing wisely and getting some real deals. But you have to know what you are doing out there.
Kind of like going to a huge shoe sale and picking out the Prada’s from the Payless overstock.
As always, stats are not compiled, verified or posted by NWMLS. (required disclosure – it’s also required that I say that in bold letters, for those who’ve been wondering.)
The big difference I’m seeing between this October and last October is last October only the lower income people mistakenly thought that mortgage financing had dried up. People in the higher income brackets were used to being able to get credit, and had expectations of continuing to be able to do so.
This year, with the selling of the bailout, even higher income people think mortgage financing is unavailable. Assuming housing really does drive the economy, by selling the bailout the government may have undermined the economy.
Ken Harney had a good piece in a week ago Sunday’s Seattle Times on why mortgage financing is still available: http://seattletimes.nwsource.com/html/realestate/2008280221_harney19.html
As to this last Sunday’s Seattle Times, it was there I learned that builders are having trouble DESPITE appearances to the contrary. And that there are not a lot of half-finished buildings and unfinished projects. It’s somewhat amazing to me that two reporters from the Times apparently don’t make it outside the city limits of Seattle. Or maybe to qualify as half-finished, a building has to be exactly 50% complete. 😀
There is financing available. You may have to jump through a few hoops and provide non medical proof (having a pulse is not a metric these days) and a decent FICO among other things on the conventional loan front. But for those who are prepared, is it nothing that you can’t work through.
FHA is king though. By far.
Kary,
I couldn’t believe that article. Just yesterday afternoon while doing errands, I drove by several plats growing weeds. Builders are having a very difficult time (understatement) and signs are not hard to see.
Tim, when I saw the headline I assumed it was just a case of a bad headline (they typically are not written by the author(s) of the piece). But then reading into the article, it was apparent that was the authors’ belief too. I felt like I might have been like the character from “Life on Mars” and transported to a different year, but no, the date on the paper was 2008.
Kary wrote:
“Assuming housing really does drive the economy, by selling the bailout the government may have undermined the economy.”
Thanks for the laugh Kary, now we all know that it was the bailout package that caused the housing problems not the opposite.
tj, what I’m saying is that the economic crisis has made the housing situation worse. If you don’t believe that you’re in denial and/or don’t understand simple economics.
Kary the economic crisis is caused by housing not the opposite. Your attempt to spin it the other way is pretty sad. Housing needs no help to make a situation worse, it’s the driver of all the problems we now have.
And when I’m at it I’ll comment on your other thesis as well. The problem with housing has never been people who think that they can’t get credit but can. The problem is people who think they can’t or shouldn’t but find out that they can.
I see two things affecting the decision making process, and neither have anything to do with people thinking they can’t get financing.
1) People are in “I don’t have to have it” mode. Whether it be dinner out vs. dinner at home affecting restaurants, wear something in the closet vs. getting new seasonal clothing affecting retail, or staying where they are vs. trading up in housing. As to the latter, I am hearing from remodelers who were booked a year in advance not too long ago, that they have no jobs at present. So “staying where they are” doesn’t mean improving where they are, but making do with what they have in “as-is” fashion. No one wants to throw money at a declining asset, so remodelers are also feeling the pinch.
2) Those who do “have to have it”, are being exceptionally careful to the extreme. They want the perfect house in the perfect location and they want that perfect house to be a foreclosure or pre-foreclosure at a drastically cut price of 30% or more. Most agents have a group of clients ready to buy when we find a perfect house in a perfect location that is selling at fifty cents on the dollar. All we have to do is go find it for them. It’s not that they think prices are down 50%, but that they are going to be down 50%. So they want to grab a house today at tomorrow’s price. Before you think that is ridiculous, remember the questions of sellers who wanted to sell their house today at next year’s increased value, and all the seminars who taught them how to do that.
If builders could come up with a 0% financing scheme like the car industry, they might be able to move some inventory. How does the car industry do that? I saw an ad for that during the World Series and remembered when we bought a car back in 1985 or 1987 with 0% financing. My husband got a huge kick out of buying a new car with 0% financing and no frills, and driving it till it died a natural death over 100,000 miles later.
tj#7 “The problem is people who think they can’t or shouldn’t, but find out that they can.”
I would say the more dangerous last leg was when the most conservative people jumped in near the end, feeling foolish to be so conservative, and watching all their friends in new big houses. How many people did we hear from in the comments here on RCG who went to parties hearing their friends brag about how they not only bought with no money…they walked away with money from closing. Then they bragged about how much more their home was worth…the home they bought with no money. It reached a point where being conservative looked like “a fool’s game” and made people feel lesser and it turned into “if you can’t beat ’em; join
em” mode.
tj, rather obviously too loose of credit standards increased demand and drove up prices some. And in the past year we’ve seen the results of unwinding that. But the incorrect news reporting has created the opposite problem, lowering demand over what it should have been.
It’s not a matter of what caused what when, it’s a matter of what’s happening now.
Ardell, your assessments aligns well with what I think is going on with comsumers. Regarding 0% downs and how they do it? My experience is that if you get 0% financing you loose 10-15%% bargaining power on the sales price. The sum as usual is that the dealer gets the deal and looses nothing or little in the process and the consumer walks away thinking he got a “deal”.
Kary,
It IS “a matter of what caused what when”. Those who believe “too loose of credit standards increased demand and drove up prices some” emphasis on the word “some”, are in denial, and so also believe ” in the past year we’ve seen the results of unwinding that.”
Until those people in denial change the word “some” to LOTS, they won’t realize that the unwinding is going to take years forward, and not simply the small change in the year behind us.
The question remains, will prices roll back to 2004 pricing? Will they roll back to 2001 pricing? If prices doubled, then why would anyone think 7% or even 20% is enough of a rollback? If the rollback has just begun, why would someone buy something today, if they know it is going to cost less tomorrow?
Ever go into a store to buy something, but when you go to checkout the salesclerk quietly whispers “that’s going to be 30% off tomorrow”. Do you buy it anyway? Or do you put it back on the shelf and come back tomorrow? THAT is “what’s happening now”.
Ardell, it’s impossible to determine how much 0% loans and sub-prime loans (the bigger culprit) drove up prices. Some or lots, it’s impossible to know.
But the point is, my first post here was talking about current day. Until recently, I’ve never seen relatively well to do people say mortgage financing is not available. That is today, and that is having a downward effect on prices.
Once again, however, you can’t precisely quantify how much that decline is. From the individual seller’s point of view though, it very well could be the difference between a sale and an expired listing.
Kary, it is not impossible to make an educated guess at how much the credit fiasco drove up prices. There are several models for the appropriate value of a home that are not tied to the credit market. The first is the price of comparable rentals in the area, the second is to compute the current value of the home based on it’s pre-bubble price and normal home value appreciation over the past 100 or so years in America (approximately the value of inflation). Take your pick of these, or use some hybrid. What you will find is that houses have quite a way to come down.
Well I could also toss leaves in the air. That would probably be worth about as much as either of your methods for the reasons discussed previously. For example, whenever a model relies on the last 100 years of housing prices, it’s just total BS. Zoning is much more restrictive, population much higher and there are a lot more two income households (including those based on sexual orientation). All of those factors would call for higher prices today, and none of those factors are likely to reverse.
In my comment above I did not mean to say 0% down but 0% financing as in a loan with no interest period. In my epxerience a car dealer who offer this will not bargain on the sales price and thereby make up the difference from an interest collecting loan that often is based on a 10-15% reduction of msrp from bargaining.
Kary,
Do you really believe that the problem now is that prices are too low? Seriously?
And these fake news reports about a non-existent financial crisis is what is causing it!? DO YOU REALLY BELIEVE THAT?
I have been following your posts and you have consistently blamed the media as the only source of the problems all year. Most people have given up that delusion by now. Step back for a moment and think about whether you are really being reasonable here.
cautious buyer, I’m not saying any of those things.
What I’m saying is prices are dropping faster than they should because a good percentage of people are out of the market based on incorrect information. For supply and demand to work, you need good information.
And I’m not saying the financial crisis is fake, far from it. What I’m saying is they did such a good job selling the bailout that people think that certain types of financing are not available, when they are. Basically that they over-sold the bailout, which might have negative effects because people think the situation is even worse than it is. Think of it like a bank run, where bad news can change peoples’ behavior, resulting in worse results than what would have occurred without the news.
If someone hears that GM or some other major company cannot get financing, they think that they’ll have problems too. As the Harney article points out, that’s not the case.
Do you feel the same way about good news, Kary? Or do you, like most of the industry, only want the good news to be screamed from the mountaintops and bad news to be swept under a rug?
You can’t have it both ways.
Every week I get a few “good news” emails to use as “talking points”. How can an industry that thrives on good news, complain about bad news?
There is no end to comments like “interest rates are lower than when they were double digit”. “Home prices are lower than last year…and who can really pick bottom; maybe THIS is bottom”. “How much should you pay for a house? Look at the comps. Don’t look at comps on the way UP but DO look at comps on the way down”
For every one person looking hard at the facts and being tough on predictions, there are at least 10 spreading erroneous good news. And yet the few are blamed for the demise of the market. If the few are blamed for the demise of the market, how many are blamed for getting it to the dangerous precipice?
Kary,
You said that there is no way to tell how much crazy financing drove up prices. I gave two models that worked up until about 5 years ago. However, you said that things have changed so much since then that we can’t use those models any more. Do you really think that zoning and demographics have changed that much in 5 years? I really don’t know about zoning, but it seems to me that if it affected home values, then it should have affected rental prices as well.
Anyway, your assertion that throwing leaves in the air is as good a model as either rent to value or just normal home value appreciation is a little ludicrous. I am not saying that either one of these are exact, but they are definitely something worth thinking about.
Ardell said,
“For every one person looking hard at the facts and being tough on predictions, there are at least 10 spreading erroneous good news. And yet the few are blamed for the demise of the market. If the few are blamed for the demise of the market, how many are blamed for getting it to the dangerous precipice?”
Yikes. 🙂
Ardell, perhaps you missed my post about the Seattle Times totally missing the fact that there are a lot of uncompleted new construction projects.
Also, I don’t know why you’d think I only want it one way. I’ve constantly referred to the press as being a contra-indicator.
Kary said:
Wait, wait. How do you know prices are falling faster then they should? I’ve seen a lot of your comments which say you can’t make predictions. If you can’t make predictions, how can you know that prices are too low? It seems like the only way for that to work was if you had a model to predict what prices should be, which I was pretty sure you said is impossible.
I though you went by: If that’s what someone pays, that’s what it’s worth?
You can know what’s going on now without knowing the impossible (what will happen in the future). If people are basing their decisions on incorrect information (e.g. that real estate prices will never fall, or that financing is not available when it is), then the prices at the time will be different than what they should be.
Now you’re right that other factors could be countering the financing impressions people have. I’m merely trying to say that that one piece of incorrect information is causing prices to fall faster than if people knew the real facts. There could be some other piece of erroneous information that is countering that (although I can’t think what it might be).
Edit: That piece of information could be the positive spin the press put on the September numbers–which I was critical of at the time.
Kary,
If you can’t predict whether prices will be higher or lower next month, next year or two years from now, you can’t understand where the market is now. Buyers don’t want to buy if they think prices will be lower in the coming months. Clearly that’s an understandable position…no?
Say a seller comes to you and says, I was going to sell, but the market is down, so I’ll wait until next year ‘when they are back up’. Do you let them believe that prices will, in fact, be back up next year? If you can tell a seller that prices might be even lower next year…then you will understand how buyers are thinking today.
fair enough Kary,
What I think I hear you saying is:
“prices would be higher if the only variable that changed was buyer’s understanding of available credit.”
As for knowing where we’re at today, well.. Your earlier post with TJ about economy and housing.. seem to show that even with hind sight there’s a lot of difficulty coming to consensus on the cause-effect relationships. It seems just as muddy as predicting the future..
Ardell wrote: “If you can’t predict whether prices will be higher or lower next month, next year or two years from now, you can’t understand where the market is now. Buyers don’t want to buy if they think prices will be lower in the coming months. Clearly that’s an understandable position…no? — Say a seller comes to you and says, I was going to sell, but the market is down, so I’ll wait until next year ‘when they are back up’. Do you let them believe that prices will, in fact, be back up next year? If you can tell a seller that prices might be even lower next year…then you will understand how buyers are thinking today.”
I completely disagree. An appraiser can determine the value of property today without predicting the future. They don’t even try to predict the future.
As to buyers, obviously they won’t want to buy if they think the price will drop, but that doesn’t mean they’ll be right. Few people will be right at either end of the extreme. The most buyers will be buying at the peak and the fewest at the low point.
As to the seller situation, I would point out that prices might drop further. What I wouldn’t do is give the smart-arsd answer I might give here, which would be: “If you’re so damn great at predicting things, why do you still own the property?” 😀
Everett Tom–re 26–exactly.
BTW, keep in mind a lot of people buy and sell without regard to where the market is headed (or they think it’s headed). Other events in their lives determine those decisions. But if there’s a buy event and they think they can’t buy, they’ll look for another option.
Does the price of pending sales for SFH in KC really indicate a close to 20% YoY drop? If the mls numbers will be even close to that it will send shockwaves through the home ownership society.
tj, the October sales number should be down from September. This might be the first month in quite a while though where the median pending price is above the median sales price. Keep in mind the actual price on those pendings could still be lower, but in recent months the median pending has been well below median sale.
The outstanding pendings have been a drag on prices for months (and I think it was Ardell which first pointed that out).
tj, here are some numbers (subject to typos and rounded) for King Cty, SFR 2008
Month—Med Pending—Med Sold
May—-449k—-440k
June—-445k—449k
July—415k—445k
Aug—-414k—424k
Sept—-400k—415k
You can see how the pendings guided the sale prices down.
Ordinarily I’d say if October comes out with pendings above closed that would be a good sign. But there’s so much uncertainty about the economy right now, I wouldn’t make that call. But it’s clearly not a bad thing.
tj,
From my notepad used last night while writing the post.
2007 3rd Quarter residential median price $469,950
2008 3rd Quarter residential median price $425,000
October pendings (went pending since 10/1) asking $389,950
$469,950 less 19% (I rounded it up to “almost 20%” in the post) YOY is $380,659.
I figured asking price median of $389,659 should be closing price at no more than $380,659 which is 98% of asking.
Those numbers may not be reflected until November closings, as going pending today or last week closes next month or later. But looking at recent pending asking prices, tells you more than looking at last week’s closings which are 30 days past market price negotiations.
“The outstanding pendings have been a drag on prices for months…”
That’s why I only used current pendings, as in those that went pending since 10/1 vs. old stale pendings, hoping to avoid overweighting toward short sales hanging in pending longer.
Wow Ardell, if the mls numbers will be close to that I think almost everyone will be surprised. We just got to YoY 10% if we now hit close to 20% it’s really quite a shock. The pace that is, not the level of decline as such.
tj,
I just saw someone on SB saying Spring 09 will be “the best time to buy”. I don’t talk much over there, but the price supports from April through July are much stronger than the last quarter and even the first quarter. His thinking scared me as to “best time to buy”.
Historically 10/15 through 12/31 is the best time to buy, not Spring, as to prices vs. good inventory. I expect prices to be a bit up in Spring based on good inventory and momentum, from the 4th quarter. I think 4th quarter will be down, 1st quarter 2009 will be basically flat and 2nd and 3rd quarter will get a boost if seller’s asking prices are not too out of line.
A 20% YOY in the 4th quarter 2008 could equal a 16% YOY come Spring and Summer. Even if downward trend continues, it could then continue down again in the 4th Quarter of 2009, with a slight break from down in “high season”.
That fall is a better time to buy than spring in a normal market makes sense to me. However with the ongoing deflation of the housing bubble coupled with the coming restructuring of WaMu and the rumoured hiring freeze at Microsoft + the other bad stuff that is bound to come from the recession I think the later the better independent if it’s fall,winter, spring or summer.
tj,
I agree if someone is willing to wait past Spring if need be. But if they set a deadline to buy before September of 2009 (and I know people in that frame of mind for school change reasons) then sooner may be better than later.
Let me do a quick check on something to test that thinking…be right back.
I went back to 2002 (pre-bubble) and October through December closings had a lower median price than April through July closings. Also 11% fewer homes sold at 99% of asking in October through December than April through July and 17% more sold at 97% of asking rather than 99% of asking.
So based on my perception, and after checking the facts slightly to test my thinking, Spring sales should produce more profit for the seller and less advantage to a buyer. It’s why most sellers want to “wait until Spring” and come off market after summer and wait until next Spring” traditionally and historically.
“Also, I don’t know why you’d think I only want it one way. I’ve constantly referred to the press as being a contra-indicator.”
I want you to look at tomorrow, Kary. Not making any determination or expectation for tomorrow equals “there’s no time like the present” for both buyers and sellers. That is too convenient a truth for agents to believe.
Hand on heart Ardell do you think it’s likely that prices will be higher in say May next year than what they are currently? I’t not a trick or offensive question I’m, just curious.
Today isn’t best for both buyers and sellers. But we won’t know for 45 days who it was better for. 😉
Seriously, we probably can predict 45 days out, due to pendings, but beyond that it gets impossible.
tj,
Hand on heart answer (all my answers are always hand on heart, BTW).
I think the median price vs. what you personally will pay for a house is the issue. The median could be down overall, but Spring inventory will still sell higher than leftover inventory that would have been cheaper in the 4th quarter.
Best choices sell for most money in any market. Best choices sell more quickly than lesser choices. Best choices exist more in Spring market than any other time of year. (talking single family homes here, not condos).
Sellers on market in November and December who put their homes on market in April, are generally the most realistic sellers. In Spring, new inventory is not as negotiable for sure…hands down…no question…any year and any market. I have seen houses fall out of escrow in December and sell for more in January. Something about that “new year” that makes sellers believe their home is worth more now, and often buyers reward that thinking.
The advantage of the 4th quarter is the lower and usually lowest supply of buyers in the marketplace.
So I’m not saying prices won’t be down in the Spring, I’m saying the likelihood that an individual buyer will pay more in Spring is higher. They will fall in love with something when it hits the market, and forget all about being discerning and frugal. Or their wife will do that for them.
I’m not saying hurry as in this year is cheaper than next year, I’m saying next fall is cheaper than this fall but Spring is dangerous water.
Capish?
Capice and I agree.
eh, capish, I wont make a good wise guy.
You don’t have to be a wiseguy, tj, just a smart one.
The credit freeze was just a figment of the media’s imagination. We didn’t have LIBOR shooting through the roof, a completely frozen credit market, massive bank failures, and investment banks imploding left and right. The media has never said that credit is impossible to get, it merely said that the standards are reverting back to traditional standards. If anything the media has been overly bullish, not bearish, throughout this crisis. The only people that have had this thing nailed from day 1 are the peeps in the blogosphere.
BTW that was sarcasm at the beginning of my post in case it wasn’t obvious…
Are you talking to anyone in particular there, Matthew?
Matthew wrote: “The media has never said that credit is impossible to get, it merely said that the standards are reverting back to traditional standards.”
What media do you read/watch/listen to? The media has done a horrible job for over a year reporting on the availability of credit, at least for the home mortgage market. Unless you talk with mortgage professionals, you’d have no idea whether or not the media was bullish or bearish, because you wouldn’t have a clue what reality was.
Just to a certain someone that is anti “bubble blogger” despite the fact that he probably spends more time “blogging” than anyone in the civilized world.
I am waiting for the day that certain someone to come out and say “the bubble bloggers were right”. It would take a set of large wontons to “man up” and say something like that.
….I’m not holding my breath.
Kary,
I keep a live stream of CNBC going at work all day long, have the Bloomberg app for my Iphone, and the only t.v. I watch are sports and news.
My brother in law was a senior Executive Vice President at CFC. I have spoken with him at length regarding what was being reported by the media as opposed to what was really happening in the lending markets.
So please get off your high horse, thinking that somehow because you are sales guy that you somehow understand the mortgage markets better than everyone else when you have been living in a world of denial.
Matthew, are you trying to make me laugh? CNBC is not a very good source of any news.
People watching such sources, and reading the papers, etc., they thought 100% financing dried up months before it did. Freddie and Fannie were offering it a long time. That was never reported.
CNBC is a total joke as is most MSM. But the MSM media is to blame for being overly bullish, not bearish.
Are you talking about bullish on the economy, stocks, or the availability to get mortgage financing on a house that is intended to be used as a residence. I’m only dealing with the last item. Quite frankly, I don’t really know how CNBC is playing the news now, because seeing their reporters during the first few minutes of the NBC Nightly News is about all I can take.
As for the last item, I’d suggest you read Rhonda’s posts here every Friday. They’re much better than anything you’ll see out of the MSM.
Ardell, I’m curious of “who” the buyers in todays market are. From what you see have the mix changed the last year? Relatively is there more or less:
– 1st time buyers
– Move up / move down buyers
– National transplants
– International transplants?
I know you only see a fraction of buyers but it would still be interresting to know.
TJ, an FYI. I had the same questions on a PI post, where Kary and Leanne gave their answers.
I’d love to hear from Ardell (and others too) on the same questions
( PI post w/ comments can be found here: http://blog.seattlepi.nwsource.com/realestate/archives/152782.asp , comments 206158 and 206362 )
tj,
I heard a statistic the other day that 40% are first time buyers. I would have to say that is likely true and not a change. That would include most “International Buyers” as many did not own property where they are coming from, and we tend to call anyone buying in this Country for the first time, a first time buyer. That also includes International and National transplants who rented before deciding to buy here.
I’d say there’s another 10% to 20% who are currently in rentals, but are move up buyers who rented when they sold their previous residence, and are now at least looking if not buying.
Another 10% to 20% are move up buyers and there would be many more plus more move DOWN buyers, if they could sell the property they are trying to move up/down from. I find the move down buyers (or electively moving away retirees) are the hardest cases, as they tend to be less flexible on the asking price of the home they are trying to sell.
National Trasplants, as in relocated here for work purposes and buying at time of transfer, accounts for a large portion of the remaining amount.
The percentage in each changes from area to area. I don’t think “the mix” has changed that much. I would guess the overall volume being down dramatically still includes the same basic mix. Areas that depended more on local move up buyers are the ones suffering most, as the local buyers no longer qualify at the bottom rung.
The most motivated are those who are relocated, and not considering rental beyond corporate housing provided for a short time. Second most motivated are those that rented very small places when they first arrived, or when they sold their previous residence, and are now tired of living in small quarters.
People who rented small places in order to save 20% down are fairly motivated once they achieve the savings goal, and anxious to get more space and a yard and a dog and maybe even a baby or two 🙂 If fact I think having a baby is on the rise. Anyone else noticing that? Or is it just me noticing because I’m about to have my 2nd grandchild by year end?
I’m starting to see more relocation properties than we have seen in recent years. People leaving here to work elsewhere who weren’t able to sell quickly and took a buyout, leaving the relocation company to handle finding a buyer. The change of buyer type hasn’t changed as much as seller type. More corporate relocations, bank owned property, builder spec houses and vacant short sale properties. That’s often true when we get past October 15th and occupied properties fall off market. But this year there are more vacants than usual that are staying on market.
New construction moving into winter is starting to be much more competitive with pricing, than move down buyers of larger homes.
I would say hit hardest is new construction priced above the normal sale price for an area. Projects started in “so-so” areas that were supposed to elevate the area as to price.
This based on what I see and hear from other agents. No one agent has a volume of experience these days. You have to poll all the agents you speak with. Most that I speak with don’t have any serious buyers and I have very few as well. All you have to do is divide the number of sales by the number of agents to know that everyone is in need of a few serious buyers these days. And when I have them, it’s still hard for me to find a property worth recommending. And when I find a property, no guarantees the seller isn’t going to create problems by refusing to fix things at inspection. It’s very tough and “the mix” for the next 90 days is likely going to be different than the last 60 days.
I just saw Everett_Tom’s comment when I posted this. I’ll go see what Leanne and Kary answered.
Thanks Ardell for the long and informative answer and thanks Everett_Tom for the link even if I don’t read the PI blog since I find it so full of realtor spin and bias that I loose interrest after the first realtor response and therefore I find the blog about as useful as a real estate ad campaign.
Ardell, so did I make the math correctly that 20-40% of the buyers are national transplants? Together with the international tranplants is it possible that work transplants as a whole makes up close to 50% of the buyers? And if so, is that about the same as before the price declines?
tj,
You are right, as long as you count people who transplanted in the last 3 years, and rented until now. Many if not most buyers are coming with 20% down in price ranges of $400,000 plus. Many of those saved that money while renting, and are not bringing it from a property they sold. I’d say that is at least 50/50 as to people with 20% down.
Who do you call a transplant? Met a guy who moved here from Italy a year ago, rented for a year and is now looking for something to buy. Many of my clients came from India or Romania 3-7 years ago. Do you call them transplants? I don’t. Let’s get the terminology down of what a transplant is. Some call anyone who wasn’t born in the Seattle area “a transplant”.
If you are only counting people who are buying now upon moving here from somewhere else, without owning or renting in between the time they arrived and now, then no, I don’t think the percentage is that high.
As to the last paragraph of mine above, I also think that is going to decrease as more companies impose hiring freezes.
Zillow just sent me the 3rd Quarter Homeowner Confidence Survey while I was typing the comment above.
“Denial ain’t just a river in Egypt”– Mark Twain
Apparently 49% of homeowners think their home went up in value or stayed the same over the last 12 months.
Here’s the link to the Zillow Post about the Survey that includes the link to the actual survey data:
http://www.zillowblog.com/strangely-not-my-house-sentiment-continues-albeit-a-smaller-group/2008/10/?s_cid=emm-2007112MYZSurvey-surveytop
Hi Ardell, I was thinking of a transplant as someone who purchases within a year of arriving. Longer than that I’d call it a local renter who purchases.
With one year as the threshold between being transplant and local and counting all local renters with saved proceeds from an earlier sale as move up or downs would this be an apporximate picture?
20% Local 1st timers
20% International transplants
20% National transplants
40% Local move up or down
Now that you mention it, last I heard MS had an 18 month time constraint. Anyone who buys within 18 months does so under relo restrictions. (depends somewhat on the extent of their relo benefits) So before 18 months is a transplant and after is a local resident. Thanks for jogging my memory.
Two years ago these numbers would be quite different as more people bought upon entry or within 18 months of entry.
For the 2nd and 3rd quarters of 08 I’d say your numbers are fairly accurate.
For the last quarter 08 and first quarter 09, I’d say:
35% Local 1st timers
30% move up or move down
20% Transplants (more of those rent first)
15% investors both from in the area and outside the area (long distance buying of foreclosures and short sales)
I don’t have a good handle on International vs. National transplants. A large majority of my clients are from other countries originally, but I tend to view everyone as a local 🙂
May I ask where you are from (State/Country) and how long you have been living in the Seattle Area?
Yes you may. I lived here for 10y and I’m originally from Sweden.
Note. The transplant vs. local segmentation is just of interrest in the context of home buying otherwise my view is as yours that you are local where your home address is.
Transplant is usually a term for someone who has been residing in an area for quite some time, but who wasn’t born there, and most often is used in a negative context. I think you are talking about people who have recently relocated here.
Some people I know buy here to be near their grandchildren and have second homes here for that purpose. We forgot second homes. I have seen parents buy a two bedroom condo for a young adult who works here, so that they have a place to stay when they come to visit.
Thanks Ardell, then relocations is the group I was looking for not transplants. And yes I forgot 2nd homes, what percentage would you guess that is? ~5%?
In the height of the market in 2005, I saw many in upscale downtown Seattle condos and in Kirkland condos. From an overall market standpoint 2nd home purchasers are often the first to disappear in a recession. At present I would not attribute a percentage to 2nd home buyers, but seeing them return to the markeplace as an indicator to watch for in terms of “bottoms and recovery”.
I’m curious how San Diego’s dramatic increase in volume that we are hearing about is breaking out in terms of 2nd home purchasers, and whether that increased volume is helping to stabilize prices there.
If we see a baby boom that sometimes comes with recession, we may see an increase in 2nd home purchases by grandparents. When people stay home and spend less, and raises are frozen or reduced, we sometimes see an increase in births. I had all of my children during a promotion and raise freeze in the recession of the early to mid eighties.
I think baby booms in tough economical times is supported in history. Dunno about 2nd homes for grandparents though, many in or close to retirement have had their retirement funds slaughtered in 401ks and home values. My guess for San Diego is that homes are close to become affordable except for in the posh areas and people are starting getting off the fences. I would also think that many who left to other more affordable places are now seeing a chance to return to their beloved state with the sun and the beaches. I think that is more likely than an upswing in vacation homes.
I had not seen 2nd home for grandparents until moving to the Eastside where there are many hired, primarily by Microsoft, from all over. I don’t think you have the same thing in Boeing areas as you do in Microsoft areas, and I don’t see them buying homes as much as condos. In 2005 you had the double whammy of it also being “a good investment”. Prices would have to be perceived as “at bottom” and “a good investment” for that segment of the market to return.
Grandparents becomes a part of my job, in particular when my clients are from Inida, which is often. Not in terms of home for parents coming from India for six months at a time, but in finding a suitable home for the family that accommodates the visits. Often his parents for six months and then hers for six months, especially if there is a new baby in the house.
I agree as to people viewing the market as an opportunity to return to CA. I have personally heard that from more than one client who was looking for a home here, but have turned their eyes toward CA. I haven’t seen them do it yet, but I have heard it, particularly from people who rented upon arrival and who can pick up and go anytime without the need to sell here first.
“Apparently 49% of homeowners think their home went up in value or stayed the same over the last 12 months.”
They must have believed what their realtors, brokers, and organizations of realtors and brokers heve been telling them all year. Suckers.
I don’t think so, CB. From what I’ve read over at Zillow, it’s more likely to be people who are not in the market and have no reason to believe otherwise. People who have owned their homes for quite awhile and have not been, nor intend to be, near a realtor for any reason.
You see this in the stock market. People who have long term holdings who are happy when they have gains, but call losses “just paper” numbers and stick the statement in the drawer after a quick glance. It’s easy to be in denial if you have no need to beat yourself up about losses, given you have no intention of selling during the down market.
I don’t know, I see a lot of listings for much more than thier 2006 or 2007 prices.
Most of the ones I see in that situation, CB, are people who refinanced in those years. Keeping the price above liens keeps them from having to list as a short sale. You have to look past the obvious to the inevitable.
It’s one of the mysteries of this market. Can a seller price a house for less than what is owed, without knowing that the bank will consider that price? Isn’t that false advertising?
It still sounds like a form of denial to me. I mean if it’s worth less, it’s worth less. It would be easy to believe because for every piece of negative (for high prices) news that shows up in the paper, real estate interests get some positive (for prices) slant in the headlines the same day. Even people who aren’t selling read the paper (at least some of them).
I think cb has a valid point here. From what I see the pricier the area the bigger the denial. I think much of this can stem from realtors constant propping of “core areas”. No wonder people in Redmond, Bellevue, Kirkland thinks their homes have appreciated in value. In areas as Sammamish and Bothell you see more signs that sellers is starting to understand the situation.
And for people who are not listening to realtors they for sure notice their taxes. Higher property taxes much mean higher property value right?
tj, I suspect #80 was a bit tongue in cheek, but if everyone’s assessed property tax doubled, the tax rate would be cut in half, and the tax amount would remain the same (subject to any changes in levies, etc.)
As to the rest, this market isn’t all that different than other markets in one regard. Sellers still try to price off of things they shouldn’t. What they want to get out of the property, what another listing is listed at, etc. The big difference is in a really hot market the market might catch up to the price, where now they might end up chasing the market down.
You are right Kary both about the tongue in cheek and the risk of having to chase the market down. The same scenario as we had with Seattle as a whole is now happening with the “core areas”. We are special and immune etc. It still seems hard to accept for many that all areas and all buyers are impacted by what happens in the financial markets. It doesn’t mean that a home in Medina will be priced as a home in Pyuallup but the ability and willingness to pay is impacting both the targeted buyers in Puyallup and Medina in a similar way. Perhaps even more in Medina since there still are programs to assist lower income buyers while the higher priced markets has an added impact from the jumbo penalty and people in that market are probably more impacted by losses on the stock market.
tj, I largely agree. I was even going to respond about Medina being affected by the stock market–but as I read you mentioned just that.
tj,
What I am seeing is the core areas started with a lesser supply going into the weaker market. Fewer sales at lower prices takes longer to register as what % down are we? I’ll be doing some specialized market stats this week, since it’s too early to count October volume.
That 2009 valuation in the mail, irregardless of tax consequence, absolutely influenced sellers and had them thinking their asking prices was justifiable. And it came at the worst time, just when people were starting to get real. Then, open the mail, and that valuation discounts all the hard work the agent did to explain lower prices.
Kary is absolutely right that sellers have a tendency to look at the asking prices of neighbors vs. sold prices. In an up market that is not nearly as dangerous as it is in a down market.
As to high prices vs. low ones, I’m hearing from agents in CA that they are having much more luck with higher priced property, as they are the only buyers with enough money to buy anything. This is very true in areas where they have NO property that fits FHA guidelines and their low tier is totally stagnant.
I disregard Medina stats when I get them from the Title Company, because they look like this:
Volume -75% Which looks WOW bad…until you see it means 1 house sold instead of 3. Not enough sales there to track. You have to lump more high end together for the resultant data to be mean much.
I just used Medina to make a point that all buyers and all areas are impacted by the financiail meltdown from the cheapest to the most expensive. I have no interrest in Medina as such. I also guessed that Puyallup are mostly in the low tier without checking any stats so don’t shoot me if I’m wrong.
High end in Bellevue was doing abnormally well as to volume in the last 30 to 45 days. Low end I tend to look at Tacoma vs. Puyallup, just because I hear and see more of what is happening there.
In “core areas” we still see “hits” and showings, whereas the most depressed areas report almost no activity at all. Not having an offer is not nearly as depressing as not even having a showing no matter how low you drop the price.
I often here people talk as if everything would sell if sellers dropped prices. My thinking is everyone dropped to fifty cents on the dollar, there still wouldn’t be enough buyers to sell all the properties.
“My thinking is everyone dropped to fifty cents on the dollar, there still wouldn’t be enough buyers to sell all the properties.”
Wow, is it really THAT bad out there already?
Sorry, I didn’t mean to shock you. I thought everyone knew that the problem was volume of sales. If x amount of people can’t get a mortgage, no price change will fix that.
I was just thinking that what people can get should depend on the size of the mortage. If the target buyers in an area can’t get a $600k loan they might be able to get a $300k loan and somone looking for a $300k loan could potentially qualify for a $150k loan. But if the feeling is that not even that will make people qualify it will be bloodier than what at least I expected.
Ardell wrote: “I’m hearing from agents in CA that they are having much more luck with higher priced property, as they are the only buyers with enough money to buy anything. This is very true in areas where they have NO property that fits FHA guidelines and their low tier is totally stagnant.”
I don’t usually discuss real estate as an investment, but if I were in CA and real property prices had dropped 40%, and my stocks had dropped 40%, I might consider real estate the safer investment at this point. At least it’s a tangible asset.
Ardell, as to 89, I think the problem is more buyers not wanting to buy, as opposed to not being able to get a mortage. Perhaps Rhonda or another mortgage person could answer that, but I’ve yet to hear from a professional that money for mortgages is in short supply.
tj,
When you remove zero down and stated income, you eliminate a large % of people who can buy regardless of price.
Kary, that’s a tricky assumption. Personally I think the big profits will be made in the stock market once this thing turn around. And with stocks you can always put a threshold to auto sell to protect yourself. With real estate you have a lot of costs involved and to count on a fast recovery of prices carries significant risk and if you are wrong it’s not always easy to unload property. Renting is also tricky to profit from in shorter term and a lot of work.
Kary, see my #92 to tj. Volume can’t come back to what it was during zero down and state income times. I’ve never said there is a shortage of money to lend. I’m simply trying to think forward based on some % of buyers being removed from the marketplace entirely, due to stated income and zero down issues.
Good point Ardell. That makes it tough for the low tier for sure.
I agree with tj that people who bought when the market dipped into the 7s have a much better shot at appreciation in the next 12 months (they are already seeing some) than in housing. I clearly don’t expect the market to get into the 6s and it recently was in the 7s. I don’t expect it to get to 14 again in a hurry. But it could ride 10 on and off. 7 to 10 is a pretty good return.
As for the higher tiers I think that +$800k prices will move back to the place where they belong. With the rich. The typical Seattelite just can’t afford it and if you can it could become more interresting to buy a nice $500k home after the declines and put $200k into a condo in the sun and why not buy your wife ( or husband 🙂 ) a Porsche for the balance.
Ardell, I don’t think the difference in volume is due to the difference between the number of people who could get 0 down loans and those who can get 3.5% down. That a big part of it, but that’s not all of it.
Remember Kary, FHA does not have stated income. That’s another part of it. Clearly you agree that if you look at 2005 and 2006, stated vs. fully documented played some role in that volume. Also, regardless of the small difference between zero and 3.5%, there are many who bought at zero down who wouldn’t have bothered to convert from renting to buying if they had any skin in the game whatsoever. Add the % who thought sure gains were in the near future, like presale condos.
Volume couldn’t possibly bounce back up to 2005 and 2006 levels simply due to price changes.
Look at the people displaced by condo conversions. Some of them bought instead of renting elsewhere because it was “cheaper” from a cash perspective.
There are many facets of the market from 2004 to mid 2007 that will not be repeated in the future. That has to account for at least 30% to 40% of the buyers on a combined bases…no?
1) zero down is gone
2) stated income’is gone
3) multiple purchases at zero down by the same person is gone
4) people forced out by condo conversions likely gone
5) for those prices not in FHA range – higher credit score requirements takes its toll
6) lack of confidence in prices rising near term
Can anyone think of other buyers in 2005 and 2006 who wouldn’t be able to buy today, regardles of price?
Even if I assume zero down can move to 3.5% down…that only covers that portion of the market that would would be within FHA price limits.
Ardell, accepting that there are buyers that are gone I still think that low enough prices will create sufficient buyers to eat the inventory. 2005 -2007 you had people priced out or skeptical to the price level. Chop of 50% of today’s prices and you would create enough buyers that you didn’t have 2005 – 2007 to make up for the losses. I would be one.
Ardell, it’s not like everyone who was qualified to buy in 2005 or 06 did. You’re staring from a false premise.
Per the census data, there are over 800,000 housing units in King County. The peak volume was around 3,000 units or so. That’s less than one percent of the housing units changing hands in any given month. Even if you add the condos and actives to that, by far most people neither want to buy or sell at any given point in time.
The prices today are not low enough that as many people would buy today as did back then. What’s sort of ironic is that a rise in volume from today’s level wouldn’t necessarily require a further price drop–a price rise might do the same thing. But at some lower price you’d see the same volume as back then–I just don’t think we want to necessarily see those prices.
These kind of go along with #6, but people who aren’t confident they can stay in the house long term (military or other jobs requiring transfers), since the idea that you will profit in 2 years is gone. Also flippers.
Can we assume that FHA will always be giving out loans with so much more risk than banks can? If they were ever to require meaningful down payments or prime credit histories that would knock out a lot more volume.
If half the people who are renting now purchased, what kind of number would that look like?
CB,
I think you can rely on FHA being around and taking on more risk than conventional lenders. It always was that way from the beginning of FHA.
What changed was the conventional lenders who assumed more risk, not FHA. When I bought FHA in 1982, I only needed $500 total cash on a purchase of $45,000. That home is currently valued at about $225,000. It is reasonable to expect the Department of Housing and Urban Development (HUD) to have special programs and looser guidelines, promoting home ownership.
It was unexpected (and shortlived) for conventional lenders to overstep their bounds into such risky territory. When they first started doing 10% and 5% down loans, it was with Private Mortgage Insurance on all amounts over an 80% LTV, paid for by the borrower. When they found an alternative to PMI…that was the beginning of the end. It would have been better if the government had allowed PMI premiums to be deductible, than for lenders to find ways of gettig rid of PMI.
The limited provision in 2007 to deduct PMI didn’t help at all, as no one cared about a one year promise on a 30 year loan.
Some very interesting facts about FHA Loans:
Started in 1934 when conventional lenders would only lend at 50% of a home’s value, with 50% downpayments and 3 to 5 year repayment terms with a balloon payment at the end. YIKES!
America was perceived to be “a nation of renters” with 4 out of 10 households buying vs. renting. That figure increased to more than 2/3rds owning vs. renting by 2001.
Link to History of FHA:
http://www.hud.gov/offices/hsg/fhahistory.cfm
Cautious Buyer,
The #1 thing you can do, besides what you are doing, is to vow to STAY in the house that you buy for a really, really long time. Most people who are comfortable are people who bought many years ago, and stayed in their home without refinancing it ever.
Moving a lot and/or refinancing a lot is what hurts people the most. Think about the people who have no trouble with their home value or with their monthly payments. I bet they all bought years ago at a fraction of today’s prices and never added to their mortgage debt.
Ardell wrote: “When they found an alternative to PMI…that was the beginning of the end. It would have been better if the government had allowed PMI premiums to be deductible, than for lenders to find ways of gettig rid of PMI. . . . The limited provision in 2007 to deduct PMI didn’t help at all, as no one cared about a one year promise on a 30 year loan.”
You might want to re-think that Ardell, because I agree with that 100%. 😉
Many people, particularly early in a career, can’t vow to stick around for a really, really long time. That’s why I think changing the calculation for how long you need to stay to make it worthwhile from 2 years to 10 reduces the number of potential buyers(maybe 2 was never reliable).
There is always going to be a rental market for people who value the flexibility of being able to move, whether to change jobs or just change scenery. I don’t think that is such a bad thing.
If 40% of people still owned with 50% down and 3-5 year repayments, homes must not have cost much more than construction costs.
Ardell, re: your comment 100, loans for investors are tougher too. There’s a bigger hit to price and it’s more challenging to convert an existing residence to an investment prop. when someone is buying their next home.
There are now limits to how many mortgages (4) someone can have. Picture an investor wanting to refi…if they have 5 properties, they’re in tough shape or may have to seek out private or commercial financing.
I have clients who became preapproved this summer hoping to scoop up investment properties and they’re now having to rethink their game plan.
Private mortgage insurance is tougher and more expensive (making FHA look like an even more attractive alternative).
I began my mortgage career in 2000. I had FHA, VA and conventional products…we brokered very little “alt-a”. These were your options (at least the ones I knew of at the time). It was pretty straight forward.
I remember when the first subprime reps began calling on us (it was First Franklin) and telling us about the transactions they were doing. 600 was the minimum credit score for an 80/20. It was unreal…however, you could do the same w/FHA using DPA or a gift (and actually have lower or no credit scores).
There’s a lot to one of the comments above (sorry–this is such a great thread…I’ve lost count of the solid opinions) that potential home buyers became very caught up in “if so & so can buy a home, then why can’t I”.
I would have conversations w/folks asking them, did you see their Note? Do you actually know their terms? I suspect many didn’t admit to having a subprime loan, high rate or prepay when bragging to their friends who were renting.
A majority of the consumers SEEKING subprime loans did not care to be educated about their mortgage or terms–it was all based on emotion and want. When/if I tried to tell them to work on their credit or to consider buying a home when they have been on their jobs longer, I was pretty much told to kiss off and down the street they went on their own or w/their RE agent to their back-up LO. Who knows how bad they got screwed…and they’re probably the one’s crying the loudest now about their current financial situation.
Mortgages are not something to take casually. Yet people gave such little thought or consideration about the largest debt they’ll have in their lifetimes. Trying to chase an 0.125% in rate or making sure they got “that house” regardless of how high it was bid up was what mattered.
Everyone was high on emotion.
It actually sucked at times to be in mortgage dealing with this. I want to help people, sometimes, you cannot save them from themselves.
cautious buyer, if you can’t stick around, why would you buy a home? Why not rent?
On another note, I wouldn’t want to live in most of the places I see in my price range for the rest of my life. If we are viewing it as other than a “starter home”, either prices better come down a little more or I would move east of the Cascades.
The places do look much nicer than the same price range last year though!
Kary #108,
It’s inevitable that one day you and I will agree on everything. We may both be dead by then…but it will happen 🙂
Rhonda, that’s pretty much what I was saying.
If there’s a risk you can’t stick around, then you are at a greater percieved risk for taking a bath on the house if you buy now than if you bought a few years ago. 2 years ago people were saying you would profit by buying if you stayed for 2 years. OK, so you get your first career job and yes, you are pretty sure you will be good with that job for 2-4 years. A lot fewer people get that 1st job and are sure they will stay around for 7-10 years.
“Private mortgage insurance is tougher and more expensive (making FHA look like an even more attractive alternative).”
I agree, Rhonda. But only 25% of all property for sale in “my service area” is within FHA price limits.
I stayed in my first job for 19.6 years 🙂 I got promoted every year or two and went from a starting salary of $4,800 to $36,000 in that time, but I stayed from 1972 until 1990. My sister did the same with a different bank except she stayed 40 years. Her bank changed names 4 or more times, she only changed her name once LOL! My bank only changed its name once from Girard to Mellon. I switched to real estate when my three children were 4, 2 and 6 months old for the flexible hours. There are clearly days when I wish I were still at the bank, but then I wouldn’t have met Kim…so no…no regrets.
Wow, Ardell, current FHA Jumbo limits are $567,500 for our area (King, Pierce & Snohomish counties). It’s going to be very interesting to see how the median home prices come out next week and what the new loan limits will be for 2009 @ 115% of median home price (vs the current 125%). Will the report factor in the higher prices of the past or ??? We’ll know late next week.
I used $417,000, Rhonda. We’re talking about the future volume of sales, if prices reduced dramatically. I don’t expect that to happen before jumbo limits are history.
No trick or treaters here yet.
Looking at my salary going from $4,800 to $36,000 from 1972 to 1990. The Dow only tripled in that same period of time from roughly 1,000 to 3,000.
We have $567,500 for a jumbo loan limit for conforming and FHA until December 31. If the median values stayed the same, the new loan limits will be about $522,100 effective 1/1/2009.
Thanks Rhonda! Does that mean $522,100 for non-jumbo? FHA really does need to lower the interest rate. 5.875 would do it.
The kids are coming now. Started around 7.
Rhonda can answer this (I tried to hit on it in P-I land earlier this week), but doesn’t FHA have the mortgage insurance built into the rate? I don’t remember how exactly their fees work.
By the way Rhonda, I think you hit it right on the head in 110. People were high on emotion, not focusing on making a good decision.
It probably would have been much more fun to be a mortgage broker trying to make money without caring too much if you helped people. Not nearly as fun for the people you ended up helping though. The people who had the good fortune to go to someone like you should count their blessings.
Ardell, 19.6 years? You hit the jackpot with your first pull!
cautious buyer, I hope that the LO’s who were just in this for the money (gauging as much as they could get away with) are twisting in the wind right now. Yes, we had little regulations but we (human beings) have (or should) a conscience.
Kary, FHA does not have mortgage insurance built into the interest rate. The rate often times may be pretty close to conforming (especially if you compare equal loan to values). What FHA does have is upfront mortgage insurance that is financed plus monthly mortgage insurance.
Hey–send me a shout out the next time you’re trying to hit on something FHA. 😉
BTW currently, the upfront (typically financed) mortgage insurance is 1.75% of the base loan amount and the monthly is 0.55% of the base loan amount regardless of loan to value. (This is effective as of FHA case numbers issued as of Oct. 1. 2008).
Thank you, that was what I was looking for.
“If half the people who are renting now purchased, what kind of number would that look like?
I think there is close to 1m households in King County whereof ~40% are renters. So 400k / 2 . You would have close to 200k new sales. Should be enough to reduce the inventory some and get rotation a bit of a kickstart among move up/downs…
TJ, there were only roughly 38,000 sales in King County (SFR and Condo) in all of 2006, so 200k new sales would to a lot more than reduce inventory.
What I was trying to get at with post 102 is that only a small percentage of the population move the real estate market up and down. A small percentage can drive prices up, but if it’s a smaller percentage buying, that sends prices down. That’s because most properties are off the market.
Kary, that is why demand can easily outstrip supply if sellers prices right. As you say just a fraction of all properties are on the market but you have 40% of the households as a potential buyer pool at any given time. To get a market a balance it’s all about the price nothing else. You need to price within affordability and give the buyer pool a value proposition that makes sense. Everlasting appreciation is no longer such a value proposition so it’s about price. If it’s cheaper then renting you will likely flood the market of buyers. If it’s 2x renting the market dies.
Most people view “affordability” by payment. I’m wondering how a buydown of rate might impact prices, or rates lowering on their own with possible government intervention.
Lets take $650,000 at 6.5% with 20% down. which would be a payment of $3,286.75 principal and interest and an income of $118,325 at 1/3 of gross.
At 5.5% the payment would be $2,952.50 and an income of $106,290.
At 4.5% the payment would be $2,634.76 and an income of $94,850
Altering price to get to $94,850 being able to afford the same house on the same terms without changing the interest rate from 6.5% would be to reduce the price of the house to $520,000. Cost to the owner $130,000.
So pressure to reduce interest rates makes sense…no? Let’s say buying down the rate 1/4 of a percentage is 1.5 points. On a loan amount of $520,000 in the original $650,000 with 20% down at 6.5% it would take 12 times $5,200 to buy the rate down to 4.5% or $62,400 vs. a $130,000 price reduction. It costs the owner about half as much to buy down the rate vs. reduce the price.
Any owner buying down the rate to that degree is unheard of, and not permitted either by lender guidelines for seller contributions. But I have seen at least one plea for the government to do something to pull rates down to 4.5%. Let’s not forget that “the bubble” was created to some extent by lower interest rates than are available today. So lower rates would likely have a significant impact on prices being “more affordable” and at this point lower rates would be the most logical answer to helping the housing market.
From May of 2005: “Long-term mortgage rates fell for the fifth straight week, Freddie Mac said Thursday, adding that low mortgage rates will ensure that housing activity will continue to flourish.”
Lower rates combined with lower prices will lessen the impact on prices needing to fall, just as lower rates impacted rising prices in the first place.
If “the going rate” dropped back to 5.5% and the owner paid 3 points buying that rate down to 5% then the $650,000 house would only have to come down to $630,000 to be affordable.
Don’t discount the impact of mortgage rates on prices both on the way up and on the way down.
I’m not sure that we’re going to see interest rates go much lower. I saw something in the paper yesterday that was ambiguous at best, but seemed to indicate that there still isn’t really much of a market for mortgage backed securities.
Since a year ago August I was saying that they needed to make the current batch of mortgages better than what was out there before, to make them more appealing to investors. If what that article was saying was what I think it might have been saying, I’m not so sure we’re there.
I’ve also been critical of credit scores being good indicators for mortgages, but you’d think that higher required credit scores, reduced loan amounts and no 80/20s would make these things more attractive than what was out there two years ago.
tj,
40% of households would equal 100% owners, so viewing 40% as potential buyer pool is not realistic.
What we do know is that we went from 40% owners and 60% renters in 1934 to 68% owners in 2001. Not sure what it is today, but let’s say after all the foreclosures and short sales we’re at 60% owners and 40% renters. Then the buyer pool in the renter category is 25% of 40% to pull the ratio to 70% owners and 30% renters. 1 in 4 renters would be the buyer pool, not all 4 renters.
tj, yes, demand can easily outstrip supply and supply can outstrip demand. Throw in the long lag time on new construction, and it’s amazing the market works at all!
I continue to think that one solution to the problem is to limit loans not only to X% of current value, but Y% of the value two years ago. So maybe 96.5% of current value and 112% of the value two years ago. That would really slow speculative bubbles.
Ardell, yes the 40% is not realistic, but the point is more that you need a relatively small change–something single digit.
“I’m not sure that we’re going to see interest rates go much lower.”
I don’t know how you can think that Kary when both Presidential Candidates have promised to shore up home values. You are not suggesting that those are empty promises, are you 😉
No, I’d never do such a thing. 😀
If inflation becomes a non-factor I guess I could see interest rates dropping, but at some point you need a market for these things.
I’ve been reading a lot about the rent vs. buy needing to make a lot more sense, but I don’t see that happening on the West Coast to a meaningful degree.
Let me test that. In early 2005 rent at $600 equaled price of $90,000 (not $60,000 as in the national standard 1% rule). I have a specific example in my head, that being Bellevue Manor across from Microsoft on 148th Ave. Today those rents are $750. So prices would have to be $112,500 for those units to be on the same rent vs. buy scale as they were before prices jumped in June of 2005 to present.
In 2002 the median price of those 1 bedroom condos was $80,500.
By 2006 the median price was up 73% to $139,000.
For the 12 months prior to peak in 7/07 the prices went to 170,000 for that same unit or slightly more than double what they were in 2002.
Post peak no change in sold pricing to date. In fact median asking price is $184,950, even though sold price of $150,000 would likely be more than what one might expect today given market changes.
I agree that prices could come back to $140,000 quickly and $184,950 median asking is without basis, but down to $112,500 to bring back the rental ratio to 2005 levels would likely take years of bad market. I don’t see that happening. I think anything priced at $139,000/2006 level or better would clearly sell. Even $150,000.
I use this microcosm of the market as it is where I have seen the most dramatic price increase in recent history, and all units are basically the same for apples to apples comparison purposes.
How is one supposed to go out there and make a living, if asking prices are above peak sold prices? You’d have to take 100 showers to take the stink off of selling something over peak pricing in this market. The biggest standstill of the marketplace are the asking prices, leaving only shortsales and bank owned properties as viable “on market” alternatives, to a great extent. Though I am recently finding new construction prices to be a fair alternative in this last quarter, as builders are getting very reasonable as to spec house pricing and coming down substantiall from what they were asking just 30 to 60 days ago.
The thing with interest rates is that they must be at a rate where the lender have virtually no risk to loose inflation adjusted money during the duration of the payback time to make it interresting for the lender. Taking the risk of some foreclosures is one thing but taking the risk that all loans will yield negative roi is another beast. So if you lend money on 30y basis you want to minimize your risk that the interest rate is lower then the average inflation. From looking at interest in an historical perspective it seems like the consensus is that the threshold is close to 5% for long term. I doubt you will see it lower than that. Short term lending as 2 and 5 years can be much lower even 15 years since if we know face possible deflation it will offset higher inflation later. And for the governemtn to mess with the mortgage interest rates I think would be a pretty bad idea.
Ardell, there are people out there who have owned for a considerable amount of time and did not use their house as an ATM machine (refinance). But I’d agree, new construction is getting to be attractive–I think the banks are putting pressure on some developers, more than the developers are getting nervous, but that’s because I hear that side more.
Kary,
I have not found that significant equity makes seller’s more realistic about wanting more than the last sale, even when the last sale was pre-peak pricing. Have you?
The smaller the developer the more “nervous” he/she is, and larger ones seem to want the spec houses gone more than lots, from what I am seeing. Some of the best choices are in “spec” houses that were built under contingent contracts, with the contingency expired and buyer backing out. Better lot choices in that group.
tj,
Back in the day, 7 year was my preference, so lacking a good 30 year rate, I’d like to see a good 7 year rate vs. a 5 year rate. More practical for most people. 7 year spreads have not been good for many years, as they used to be. I’d like to see 30 year at 5.5%, 7 year at 5% and 5 year at 4.875% with virtually no spread on the 7 vs. 5.
I have seen it. In reference to short sales I always say you can likely do better if you can find some sort of combination of equity, vacant and on the market a long time (preferably all three). On the equity issue if they’re selling for over 2x what they paid, they’re going to feel better about the sale. That and with equity a $10,000 price change might be the difference between $210,000 and $200,000 in their pocket, where without much equity it might be the difference between $20,000 and $10,000. It’s sort of the flip side of sellers pricing too high based on saying “I want to get $XX,000 out of closing.”
Ardell, I don’t know why you bother with these price stat threads when Elizabeth Rhodes has such in depth cutting edge analysis in the real estate section of the Seattle Times. 😉 😀
The piece this week is almost as bad as her all time worst one–the condo that wouldn’t sell at $660,000 that had just been purchased 4 months before for $600,000 (or some similar numbers).
What? No link? My recent favorite was Leanne’s piece on being sick of “armageddon” posts.
Ardell, how would rates get so low? Are you thinking that the government would fill the gap between what sellers will sell for and what buyers will pay by effectively buying down points on mortgages on every transaction?
I imagine homeownership increased 2001 to 2007 due to people who ordinarily wouldn’t have qualified for a mortgage becoming homeowners. Some percent of those have lost the homes and probably reduced the homeownership rate. That percent probably isn’t coming back on the anytime soon though.
CB,
You reach a point in a market, we aren’t there yet, where only people who have to sell are selling. Builders with already built product, relocation companies, bank owned property. A portion of the price buys down the rate on the offered low financing. Per the math above, buying down the rate is cheaper than a price reduction, about half the cost. In the beginning of a down market there is more opportunity to do that, as appraisers use comps, meaning higher past sales. But if they wait too long, the opportunity is lost.
I do think there is pressure for government involvement as to reduced interest rates. Clearly the government was involved in lower rates after 911 to support the housing market. Remember, no one would do a thing to keep Seattle prices as high as they are. What will happen will be to help Detroit and Florida and Vegas and areas that are building up areas of empty houses. But what is done, gets done on a national scale, so the rich get richer and the poor get saved all in well fell swoop.