Friday, October 27, 2006

Real Estate Agent Rosetta Stone

POULSBO-(ESB) A dramatic development in the ongoing struggle to crack the cipher used by the Real Estate Industrial Complex (REIC), known as FLEECE (Freaking Liars Endangering Economic Certitude for Everyone), was achieved by the Poulsbo based Institute for Economic Reality.

After risking his life, health, and most of his Friday evening, Dr. Eleua von Bloviator discovered a translation algorithm that actually translates the raging torrent of Bravo-Sierra found on most MLS entries into plain-spoken English.

News of the discovery was released with this statement:

"The days of obfuscating and misdirection are numbered. Thanks to the hard work of those at the IER, everyday country bumpkins can understand just what in the world they are reading on the Multiple Listing Service. We certainly hope this serves to level the playing field for everyone involved in real estate transactions.

For those that continue to believe the extortionate effluvium that the REIC employs, we are working on a cure for stupidity. Either that, or move out of Seattle."

Dr. Eleua von Bloviator could not be reached for comment, but released a statement through his publicist.

"It's all insanely, overpriced crap! Don't these people know that the REIC and government are in cahoots to relieve them of all their money? Who is the PEAK IDIOT? What's the frequency, Ken? The Housing Bubble is just the sequel to the Equity Bubble, but this will make Breakin' 2: Electric Boogaloo look like a stroke of genius! New Coke, parachute pants, and WHAM! Hey! Don't steal my hubcaps! ARMs will adjust. What then, Carnack? The Refs wanted the Steelers to win. Area 51. Does anyone have any lithium?"

Mathematicians at the NSA are trying to decode Dr. E's comments.

The IER has released for publication, some of the more common phrases used by real estate agents in their FLEECE cipher. The list follows:

"return to normal" is REIC-speak for "we have no freaking clue what is happening, but we slap up this euphemism to keep the panic down to a dull roar. All we know is the salad days of 20% y/y appreciation, and bidding wars are over."

"passive security system" = bars on the windows

"vibrant neighborhood" = multi-linguistic ghetto

"peakaboo view" = in the dead of winter, during a 50 knot gale, you may, if conditions are perfect, be able to use a 500 power telescope from the upper windows in the laundry room, and be able to see more than 1/4 mile for half of a second.

"looking for an owner that will give plenty of TLC" = crack house.

"recent thorough renovation" = granite countertops with Made in China cabinets from Home Depot.

"quaint/charming" = smaller than a NYC studio apartment

"professionally decorated" = gay chic.

"blue ribbon schools" = we, along with 99.999999999999% of all sellers, believe our school district is the best in the state.

"exemplary schools" = our graduates can read their diploma

"won't last! HOT! HOT! HOT!" = recently relisted due to lack of activity over the past 6 months.

"professionally landscaped" = lawn service.

"natural setting" = house being overrun by vegetation.

"convenient walk to..." = can get to your destination with less than a gallon of gas. The walk refers to the distance to your garage.

"terrestrial view" = no view

"semi-private" = zero-lot-line zoning.

"classic architecture" = 70s style tri-level.

"two mile exercise loop outside the front door" = you can run on the county road that goes by your house. (serious! That was used on an Agate Pass home I almost bought)

"shows like a model" = the owners have vacated the house and are moving on.

"old world charm" = 95 year old woman, painted the house pink prior to WW2.

"good investment potential" = you wouldn't want to live here.

"highly desirable neighborhood" = characterless track home.

"priced for immediate sale" = we hope you don't lowball us.

"good highway access" = freeway noise will rattle the fillings out of your teeth.

"revived in-town location" = chalk outlines have been washed away.

"gourmet kitchen" = kitchen

"country setting" = you need a 4x4 to get from the paved road to the driveway (not recommended for pregnant women)

"peaceful and serene" = UPS won't even deliver here

"shop" = rotted-out 6x8 woodshed

"watch the eagles soar from the comfort of your Bainbridge dream home" = roof needs replacing

"eclectic" = owner's multiple do-it-yourself projects make the place look like Fred Sanford lives here.

"unlimited potential" = tremendous money pit

"active community" = neighborhood youth actively recycle (fence) anything they can see in your car, or through your window.

"Japanese garden" = ungroomed bamboo tree and ceramic frog.

"park-like setting" = clear-cut

"high quality construction" = at least one person on the job site speaks English. Builder's pending law suits have not yet bankrupted him.

"affordable fixer" = Has been neglected for 50 years, and you are the over ambitious sucker that we are looking for.

"seasonal pond" = mosquito breeding ground. Wetland that renders most of the property worthless and will be protected by a phalanx of overeager civil servants. Will be taxed at waterfront rates.

Wednesday, August 09, 2006

June Price Update: Bainbridge Average Up, Median Down

Sorry for the late update, but here are the numbers for June '06 compared to June '05.

Average price of a Bainbridge Island home is up 6% Y-O-Y ($558,661 from $525,395).

Median price of a Bainbridge Island home is down 1% Y-O-Y ($481,000 from $485,000).

86 homes were sold in 6/06 compared to 50 sold in 6/05, so sales volume is up.

I don't think there is much to make of this data, other than when combined with the previous two months data, it shows Bainbridge homes are not as "hot" as is commonly thought. This really shows that the old Real Estate Agent maxim of "getting in while you can" is not as compelling as it has been in the very recent past.

Kitsap county homes increased 14% and 10% (average, median) on a Y-O-Y basis. Bainbridge is the laggard for the rest of the county in home appreciation.

My view is that prices are moderating and will start to show consistant Y-O-Y declines. I still hold to my 20 cents on the dollar by 2010 prediction. Once California shows complete inversion of appreciation, you will see an amplified response on Bainbridge (since we are California's 59th county).

Comments are always welcome. If you know any Realtors that can contribute one way or another, please direct them to this site.


Monday, June 12, 2006

Bainbridge Slide Gathers Steam

The West Sound home sales for May are out and, as I predicted in last month's report, Bainbridge Island home prices continue to slide.

Average home prices dropped 13% Y/O/Y ($548,941 from $630,306), and median home prices tanked 16% Y/O/Y ($467,500 from $559,000). This sample is based upon 38 sales in the month of 5/06.

Kitsap County, as a whole, was up 9% on average and 17% on the median.

The data are over a relatively small sample, so we can expect to see wild swings. It is interesting that the sample size for Bainbridge is the second highest in the county, and is starting to show the slide that just about everyone said would never happen.

There is much work to be done on the downside, as the Seattle area home prices are still relatively bullet-proof, and the economy is still relatively healthy, and interest rates/creative financing heavily favor mindless borrowing.

When Seattle home prices get clubbed, the economy slips, the stock market tanks, interest rates rise, and lending standards come into some form of fiscal sanity, we can expect Bainbridge Island homes to suffer a thorough beating. Ferry tolls and excessive building will also weigh on home prices.

Here is another thought...if there were 38 sales on BI last month, and assuming that 76 different agents split all the commissions, that means that 70% of the RE agents didn't get a payday in May 2006. Of those that did, $16K was the payday prior to marketing costs, and paying their broker.

Average DOM for a BI home last May was 117 days, and that was in a white-hot market. How long do you have to market a home this year?

Thursday, May 18, 2006

Median Price of Bainbridge Slips Year over Year

I'm trying to get the data from the internet, but until then, the Kitsap Sun reports that Bainbridge Island real estate has started to slip.

When you compare April 2006 to April 2005, you get the following:

Number of homes sold has fallen by 28% (41 vs 57)
Average price of a home has risen by 3% ($695,699 vs $672,729)
Median home price has fallen by 2% ($587,000 vs $600,000)

Now, this isn't exactly a cratering, but it is early in the bust. Most of 2005 was a very up year for the national, regional and Bainbridge bubble. Most RE pimps are trying to convince us, and themselves, that there is no bubble, and prices are only going up from here.

I would expect to see more dramatic YOY decreases as time marches on. The comparisons will start to reflect the present price as marked from the peak.

The remainder of the Westsound was not much better.

Hansville prices are down by 21% to 26%.
Poulsbo median prices are down by 5%, while average is up by 4%
Kingston median prices are down by 5%
Kitsap County prices are up by 2% to 4%.

When you compare this to the Feb '05 numbers, it shows that the bubble is cooling all across the board. Back then, Bainbridge was increasing 12 to 27%, Poulsbo was up 27% to 16%, and Kitsap County was up 18-23%.

Wednesday, May 03, 2006

Housing: Island's 'Guest Workers' Find Few Places to Live

April 30, 2006

Bainbridge Island

Each day, Jason Sovick drives from his Manette home in Bremerton to Bainbridge High School to teach math. In his ninth year of teaching, the 33-year-old gets a daily math lesson of his own.

He earns $48,000 a year — good, but not good enough to buy on Bainbridge.
"I’ve never not lived in a community that I’ve taught in," said the former Bremerton High School teacher.

Will Sapp, 34, is a nine-year Bainbridge police veteran who recently bought a home in Seabeck with a view and creek. It would have been a mobile had he and his fiancée settled on Bainbridge, he said. He earns between $55,000 and $60,000.

Sovick and Sapp are among the large and growing ranks of island "guest workers" — middle-income professionals who toil at making this rarefied community all it is, but who can’t afford to live here themselves.

With the median cost of a home on the island now at $500,000 — far more than in any other part of Kitsap County — and with almost no middle-income affordable housing available, the island finds itself losing the diversity of people it’s tried so hard to keep. Perhaps more than any other West Sound community, Bainbridge is missing its teachers, city workers, police and fire personnel and service workers.

"Very clearly it’s getting worse, and I think we’re at a critical juncture," said Dwight Sutton, a former Bainbridge mayor. "Once we’ve lost folks in that economic level, then you have lost a major part of what constitutes your community."

More than half the island’s teachers and city workers don’t live here. And 64 percent of the island’s police force calls somewhere else home, according to their employers.
Incomes have stayed flat as island housing prices have nearly doubled between 1998 and now. Suddenly, the people in the middle who earn too much for housing subsidies but too little to buy a home on their own are in crisis.

One life change — divorce, job loss or illness — tips the scales. They leave, if they were ever here to begin with.

"They had to sell their life here," said Bill Reddy, director of Housing Resources Board of Bainbridge Island.

It’s arguable that many don’t see a problem. Residents have seen their homes appreciate handsomely. They bought smart years ago and paid the price of inconvenience — living on an island.

Click here to read the article in its entirety.

Tuesday, April 11, 2006

Math For Real Estate Professionals

What Do Today’s Home Buyers Have in Common With Lotto Players?

Neither are very good at math.



“OK, class! Let’s be seated. We have a lot to cover today.”

“Jenny, could you put the cell phone down?”

“Don! Sit down. No, I don’t care that you have 4 tickets for Van Halen that you want to unload – this is MATH 231 – Math for Real Estate Professionals.”

“Who can tell me what the four basic parts of a monthly house payment are?”

“Anyone? Anyone at all? “

“Jake, can you tell me?”

“PITI. Very good. Now, can you tell me, without looking at Peter’s notes, what PITI stands for?”
“That’s OK. In the interest of time, and the fact I only get paid $45K/year to lecture you dolts, PITI stands for PRINCIPAL, INTEREST, TAXES, INSURANCE.”

“Don, what is PRINCIPAL?”

“No, that’s the guy you had to visit to explain why you were running a sports book in your ethics class.”

“Jenny? Never mind…”

“Yes, Peter?”…”Very good. PRINCIPAL is the amount of the monthly payment devoted to reducing the amount you owe on the house. This is the portion that determines how much the seller receives for his house.”

“Just to make this move along, I’ll explain the rest. INTEREST is the amount that goes to the banker. The higher the rate, the more you pay in INTEREST. TAXES are the amount you pay to keep the state from stealing your house, and INSURANCE is what you pay as homage to our legal system.”

“Given the robust participation in this class, we are going to have one of Dr. E’s pop quizzes.”

“Yeah, I know it sucks, but listen to me. You had better take this seriously. Jenny, let me give you a hint: the answer is not 6%, as you put on all your tests. Jake, do you think you can function without copying off Peter’s paper? And Don, I know you are the one sending threatening phone calls, and the flaming fudge bags, and I don’t care that you have three generations doing time in the joint – you will take the quiz.”

“Yes, Jenny?”… "Because LIFE is a story problem, and you have to know some skill other than how to multiply by .06, yack on your phone, and shop for a new car.”

“Here we go. Assuming you have a home that sells for $600,000 in a hot market, has a 1.25% tax rate, $900 annual homeowner’s insurance, and the buyer uses a 3/1 ARM at 4.75%, and puts 20% down…what is the monthly payment?”

“Jenny?”…”NO! IT IS NOT $36,000, and a write-off on the new Lexus”

“Don?”…”No, we are not calculating how much your cut is before you wrap it and sell it to Fannie.”

“Peter? Please tell me.”…”$3207.06 is the correct answer. Very good.”

“Jake, how did you do?”…”$675,000? WTF? How did you come up with that number?”…”Ahh, I see. We don’t calculate PITI based upon what Don tells us it has to appraise for.”

“Moving right along…Question #2…Assuming everything remains constant, except the new interest rate is 8.75% (where it was in the summer of ’00), calculate PITI.”

“I’ll just do us all a favor and ask Peter.”…”Very good, the answer is $4478.34.”…”That’s an increase of almost 40%, just by moving the interest rate back to where it was before Easy Al started dicking around with the yield curve.”

“Question #3…Assuming the market will not bear the extra $1271/mo, and the buyer can only pay what the current owner pays, how much house does $3207.06 buy you at 8.75%, and taxes remaining at 1.25%, with the same 20% down?”

“Jake, I’ll start with you.”…”How did you get $780,000?”…”No, the market didn’t go up the standard 30%”

“Don, what did you get?”…”NO! THE BUYER PUTS DOWN 20%, AND DOES NOT NEED A PIGGY BACK LOAN AT 103%LTV!!! Put the knife away.”

“Jenny? Dare I ask?”…”$36,000 is STILL not the correct answer.”

“Peter?”…”Correct again. $427,000. The owner just took a $173,000 bath prior to real estate fees.”

“Yes, Jenny, the fees would be $25,620 + $4,270 for a title policy. That is question #4, so you spared us all that higher math.”
“Question #5, how much would our seller have to bring to the closing?”

“$82,890…Very good, Jake. Let me guess, Peter had the same answer.”

“Don, you had a question?”…”Yes, he would likely default, and skip town leaving Fannie with the remainder. Sounds like you know something of this?”

“Our seller would have to bring almost $83 grand to unload his house.”

“Question #6…Assuming the economy tanked with the higher interest rates, and housing was in general decline, so the “hot” investment money came out, while at the same time, buyers were harder to find, and they were a lot more conservative with their money, given all of Greenspan’s inflation, what would be the new value of the home when our prospective buyer pulls 15% of the “hot” money out of his PITI, while pulling another 7%, due to inflation/caution considerations, and interest rates were a flat 9%. Assume the same 20% down (if you could find a buyer with 20% in this environment).”

“Jenny?”…”I know real estate never goes down, but the question is not a BS question. We are dealing in the hypothetical.”…”Sorry, hypothetical means ‘in theory’…What? Sorry, theory means ‘it never happens, but if it did, what would it look like?”…”OK, I KNOW REAL ESTATE NEVER GOES DOWN. Imagine our example is in Dallas. Ahh, much better.”

“NO, JAKE! You just can’t “find the value” and help out the seller.”

“Peter, you are all that stands between me and a padded room with lots of pastels and board games.”…”$324,300.”…PRAISE GOD!, and this is before closing costs and real estate fees…”

“Yes, Jenny, in Dallas they charge 6%. They also eat three times a day, sleep at night, have running water, and call their mothers on Mother’s Day. The difference is they can, in addition to finding their own state on a map, they can find yours.”…”No, Dallas is not in Europe. It is in Texas.”…”You know, TEXAS? Remember Victoria Principal, and Larry Hagman? That’s right. Yes, that is the USA; not the Middle East.”

“Don, what is the total bath our seller takes?”

“No, he just can’t burn the house and collect the insurance money.”

“Jake. What does Peter’s paper say?”…”Yes, in addition to losing his $120,000 down payment, he loses another $178,401.”

“Keep in mind these numbers assume foreclosures, and all the speculative rentals don’t hit the market, to say nothing of all of the Californian’s second homes. If the government raises property taxes, that will make the problem worse, as will the insurance companies if the sellers all were taking advice from Don. If interest rates go above 12%, you can expect the problem to be even worse. Many educated people think there could be a 2/3 to ¾ reduction in the price of homes in the frothy coastal markets.”

“Yes, Jenny, I’m talking about Houston, New Orleans, and Mobile. The Pacific NW will never go down. We are just too special.”

“Well, you kiddies had better run to your marketing class. Next week, we shall discuss INTERNAL RATE OF RETURN FOR A SPECULATIVE RENTAL WITH NEGATIVE CASH FLOW IN A DECLINING MARKET.”

“BTW, Peter. What field do you want to explore when you graduate?”

“Ahh, yes. You are going into Bankruptcy Law. Very prudent.”

“Why did you take this class?”

“Yeah, she probably does give it up on the first date. If not, try 7%”

Wednesday, January 11, 2006

Do the Math: Why Real Estate Will Get Cut By At Least 50%, and more likely 75%

Q: How do you know how much a Bainbridge Island house is worth?

A: The owner will tell you.

I keep hearing about how real estate will "only" lose 10% - 15% in the coming "correction." This is in conflict with my predictions of a 50% to 80% drop in prices in the more bubbly areas of the nation. Perhaps the best way to look at this is by studying the underlying mathmatics at work in purchasing residential real estate.

First, our assumptions:

1. The economy is generally considered to be healthy, and could slip into recession. While bulls and bears disagree on the general health of the economy, the assumption is that the economy can shift into recession in the next few years. Bulls believe the economy is underpinned by sound fundamentals, and we are in a new paradigm of expanding credit and service oriented jobs. Bears would believe that what is passing for a good economy is nothing more than a government funded, FEDERAL RESERVE sanctioned, sugar high, and when it wears off, the economy will suffer until the debt bubble is worked off.

2. Interest rates will rise to historical norms or even higher. This will be necessary to keep foreign investment in the US as the dollar continues to lose value.

3. There is a general euphoria about real estate that is bringing in more money than would be necessary just to provide shelter. This is what I call "hot" money - the money that is diverted from other assets to capture the upside of a raging bull market in real estate. Think back to 1998-99 and all the money people were setting aside to chase the .com era stocks.

4. People are stretched to afford mortgages under present conditions. The plethora of interest-only, negative amortization (IONA) loans being written is proof-positive that monthly payments are as high as they can be, given the present job conditons.

5. Inflation will continue to increase in energy, medicine, education, and food.

6. Local governments are, even in these times of plenty, stretched to the limits on their bloated budgets.

7. Houses are purchased in one of two ways. First, there is the "List Price" method of valuation. This is the number you think of when someone asks you what your house is worth. It is what someone would pay if they were paying cash, and not using a mortgage. It is the method you use when you buy a loaf of bread or a new suit. The second is the "monthly payment" method, which is what 99% of buyers use to see if they can get into the house. Creative financing lowers the monthly payment, and allows the total value to increase. Keep in mind, buyers only use the total payment as a benchmark for what they can afford each month, but really look at monthly payment when buying a house. As interest rates decline, the same monthly payment buys more house, and the converse is also true.

OK, now the math part. Let us use a typical home in my city.

This home lists for $628,500, and was purchased in August of 2001 for $439,000. It is assessed by the county at $362,780 for 2006. For the year 2005, it was assessed at $311,760. If you put 20% down, and take out a loan for 5.875%, your monthly payment will be $2930 per month. You can get a 5/1 interest only ARM for 4.95%, which is the route most buyers will go. I didn't look at interest only loans with negative amortization for this example.

At 4.95% (IO), that payment drops to $2074. If you add taxes ($297) and insurance ($75) to this, that brings the entire principal, interest, tax, and insurance (PITI) to $2446/mo. In August '01, the owners took out two loans in the amount of $351,200 and $43,900. They later refinanced in August of 2002.

Assuming you have $125K to sloshing around in your savings account, or if you managed to keep that much equity in your house after a "correction," you can live in this house for $2446/mo. For the overwhelming majority of Americans that won't save $125K in three lifetimes, some creative financing will be necessary.

Let us just stick to the folks that have the money for the down payment. If my predictions come true, banks will, once again, concern themselves with down payments, loan-to-value, and the creditwortiness of borrowers (like they did less than a decade ago).

Our hypothetical buyers, Joe Hippen and Mary Trendy, sell their two bedroom rat trap in Orange County and move north for peace, quiet, and Gore-Tex. They pony up their $125K in equity and life savings, and sign on for $2446/mo in payments for the next 3 years, after which, it will adjust down with the reduction in interest rates (at least that is what they believe will happen). They are now the proud owners of a Bainbridge farm house, that needs a lot of work. Their heating system is oil, and the eight decades of Northwest weather and ambitious renovation projects gone sour have made the place quite a money-pit.

Joe Hippen-Trendy is a mortgage broker for a sub-prime lender. He gets a small salary but is paid on commissions and works in a high pressure environment. Mary Hippen-Trendy gets her Washington Real Estate license and starts schlepping Bainbridge Island real estate. Life is good. They take out an additional $75K home equity line of credit (HELOC) for some basic home improvements, such as new carpets, seismic upgrade, renovating the tiny, closet-sized bedrooms, and the installing the perfunctory granite countertops and stainless appliances. Credit cards were paid off by a home equity loan, which means their new plasma TV is now being collateralized by their Bainbridge home.

Then...the bubble breaks. Sales drop through the floor, as sellers fail to come to terms with the drop in demand, and buyers dig in and wait for more reasonable prices. Suddenly, Mary is spending a fortune on gasoline and advertisements trying to move her burgeoning list of homes for sale, while at the same time, she and the other bazillion Bainbridge Island RE agents can't get any sales.

Joe's career is also stalling. The refi boom is a distant memory, and the folks in the lower income bracket just are not buying homes, as they did back in the bubble.

A cash crunch hits our hip-n-trendy couple. The his/her Escalades in the driveway are putting a major hole in their monthly budget. The oil heater, in combination with the drafty, older home isn't helping either. Ferry tolls, at $600/mo, and the 4 hours of commute time per day are beginning to lose their power to charm Joe.

Quality of life also begins to suffer. Joe is up at 4:30am every weekday in order to make it to his job on the Eastside by 7:30, and he isn't back home until after 7pm. His work day is now work, rather than the easy money of the go-go days during the housing bubble. His wife, Mary, is now more of a roommate, as her evenings and weekends are spent playing tour guide for Bainbridge Island Looky-loos. Her frustration mounts at both seller and buyer. Sellers have dug-in and won't budge on their price, as they believe they are entitled to 15% appreciation every year. Buyers look and look and look. They send up low-ball offers, which are rejected by sellers. Nothing moves, and RE agents get paid on the movement.

Life sucks, and the amount of money coming in every month shrinks, while expenses creep up. Stresses mount, and with the lack of familiarity due to job demands, the marital spats become fights. The Bainbridge life is not what it used to be.

The lock-in period on the Hippen-Trendy's mortgage expires, and now jumps to 7% on its way to 9%. Uh-oh. The county has also hiked their taxes 15% for the last two years, and this year it only goes up 10%. That $297/mo in taxes is now $432/mo, as Washington does not have a Prop 13 protection for homeowners. Their payment to the bank is now $3462/mo. Couple this with their taxes and insurance and the payment is now $3969/mo. That is only a $1523/mo increase or $18,276 annual bite from their already diminished income. Now, they look at next year's tax assessment and possible rate hike from their mortgage holder with dread.

They can't refinance, as they are paying on their second mortgage as well as their first, and the appraisals just are not cooperating. Their savings is zero, and their credit cards swell every month, just to make ends meet. Year-end bonuses and commissions vanish, and a round of layoffs was just announced at Fly-by-Night Mortgage Inc. The stock market is also not playing along. The bears are carrying the day on Wall Street. The Hippen-Trendys just don't have any access to additional funding, and are now wondering how they are going to keep things afloat.

The His and Hers Escalades are sent back to the leasing company. Uber-Chic Leasing Corporation demands money for excess mileage, damage from the combo of the soggy Bainbridge climate and lack of a garage, lease termination fee, etc.

They decide to throw the house on the market, as they don't see how they can make the payments much longer. Given that Mary is in the business, they decide to try $725K (to cover their mortgage and HELOC). They are confident they will get their price, as they have lived in the house for three years, and real estate, ESPECIALLY BAINBRIDGE ISLAND REAL ESTATE never loses value in the "long run."

Their are no takers.

Why? Well, the Hippen-Trendys are asking someone to take out either a $725K loan at 7%, or a $580K loan with $145K cash. No one has $145K to throw around, as they are all on the same real estate "escalator" as the Hippen-Trendys. Both Mary and Joe know this, but have not yet come to terms with the present market. Finding someone with a spare $145K and $3993/mo + tax and insurance, for a total of $4500/mo is just not going to happen. Those people are not buying in this market, or are buying any of the other homes that crowd the MLS.

The no-document income sub-prime buyer trying to finance $725K isn't any easier. $4995/mo + the $500/mo in taxes and insurance bring their monthly nut to $5500, and that is without PMI.

The Hippen-Trendys were asking that someone pay a monthly payment for their home in excess of what they (the highest bidder 3 years ago) could not pay. That $4500/mo, back when they bought the house would have fetched $1.21M, at 4.95%.

In order to attract the same buyer they were three years prior, the buyer would need the same monthly payment of $2446/mo. Back out the current tax and insurance, and you have $1930/mo in interest. That interest is at 7% today, which fetches $413,500 in an interest only environment. Given that I-O mortgages have been shown to be very dangerous, the new buyer would need to originate a 30 year fixed mortgage, to lock in their payments. Now, that $1930/mo buys a $350K house.

But we are not done. This is not realistic.

Remember three years ago, when the Hippen-Trendys bought the house? The mood at the time was that housing was a fail-safe investment. Money. Gold. Cant-lose. Get-on-the-train. The Hippen-Trendys committed an extra 15% to the purchase price in the form of "investment" or "hot" money. Today's buyers, Jason Munn and Jennifer Danes, are not interested in chasing a falling investment. The Munn-Danes pull out the 15% hot money, and reserve another 5% for caution. That $1930 is now $1544, and that $350K house is now $280K.

$280K is now the price of the very same thing that was $625K, just three years ago. Why? Because house prices are driven by peoples' ability to pay.

We have not assumed that the job environment for the Munn-Danes has deteriorated, or that interest rates have climbed. Pull another 10% out for a crappy job environment, and crank the rates up to 9% (where they were at the height of the Internet Bubble), and that house is now worth $211K. That is assuming the Munn-Danes have $42,200 in down payment, and banks are only requiring a 20% equity stake from the buyer.

There is NO WAY the Hippen-Trendys are going to sell to the Munn-Danes for a $489K loss + fees amd closing costs. They will default.

Their neighbors will too.

Now, the Sheriff is selling homes on the courthouse steps. If they don't retail for $211K, with all the advertising, marketing, and personal attention of the phalanx of Bainbridge Island realtors, what would make the Sheriff sell them for anywhere near that amount? These properties will sell at a discount to retail.

There goes the neighborhood. Comps get crushed. Appraisals are also aware of this. Lawyers took out their knives after the bubble broke, and went after inflated and fraudulant appraisals. Appraisers are scared, and conservative. They want to get in front of the trend and appraise even lower than the numbers show.

Property taxes go up to compensate for declining sales taxes, and interest rates continue to climb. Jobs are much harder to find (you can't sell real estate, bundle mortgages or build spec homes), and money becomes scared. Sources of funding continue to evaporate as banks get religion. That $211K house is now even less.

By the way, when the mortgage defaults, the IRS attaches that as income to your tax form. $500K worth of taxable income, without the income continues to drain the pockets of buyers. Equity is almost universally negative.

Remember all those rentals and vacation homes purchased in 2004? (39% of the total) Remember all those IO loans in California in 2005? (80% of the total) Remember all that frenzied building by the home builders in the past two years? Does anyone have any idea how many spec homes and homes under contract the builders are generating? All of this will have to be worked off before we stabilize the owner-occupied, traditional loan segment of the market. This means the bottom will be a long time in the future, and a lot lower than we could have possibly imagined.

That is how we could lose 2/3 to 3/4 of the market value of homes in the aftermath of the Hippen-Trendy's bubble.

Bye-bye Escalade. Bye-bye Volvo. McMansion? Buh-bye. Making $6K/mo at the daily grind, while losing that much in the housing market stinks. Paying off the debt accumulated extracting equity thinking your house would never lose value stinks even more. Having your primary retirement vehicle crater just as you step into retirement is positively horrid.

Sunday, January 01, 2006


The point of this blog is to deflate the stuffy, provincial, self-congratulatory mystique that permeates Bainbridge Island.

Bainbridge Island was, once upon a time, a nice place to live. It was a community with its own identity in the Westsound region. Then, the 1980s came along - and the Californians - LOTS OF CALIFORNIANS.

Prices escalated due to the importation of gobs of home equity money from the seemingly inexhaustable California Real Estate escalator. That happened right up until 1990, when the California RE escalator stopped. California sneezed and BI caught the flu.

Prices were fairly flat until the next California expansion in the mid-late '90s, when BI piggybacked on the inflation of California. Seattle grew on its own, with the dot.bomb industry, but that came to a crashing halt in 2001-02. A buyer's market started to set in, but the Federal Reserve spiked the punch bowl, and the past few years has been nothing short of breathtaking in the appreciation of Island RE.

Bainbridge Island carries the reputation of a place with a lot of money, and as far as home equity goes, the reputation is well deserved. As far as income goes, that is another matter.

BI income ranks 24th of the 522 ranked areas in Washington. Not #1, or #2, or #3. Median income of all households on BI is just a hair over $70,000/year. Not bad by Kitsap County standards, but it is a far cry from the cities that many Islanders like to compare themselves (La Jolla, Hillsborough, Martha's Vinyard, etc.) Keep in mind this data is from the 2000 census, and was a snapshot at the HEIGHT of the dot.bomb/internet bubble. Since this time the internet and dot.bomb money has vanished, but BI has to have one of the hightst Real Estate agent ratios in the entire nation. It seems that just about everyone who has moved to the island is schlepping real estate, or building spec homes. I will attempt to get some hard numbers as to how many builders and sales agents populate the island.

My guess as to how the money gets flashed around Bainbridge Island has everything to do with home equity extraction. If your household income is $70K/year, and you get another $100K in home equity, that's alot of cash to throw around. One little problem is that $100K/yr has to be paid back - either by selling and walking away with nothing, or by servicing the debt on the remaining $70K. Banks are persnickety in that way.

Distorting the housing market was the minor issue with the influx of Californians. Pushing the Puget Sound region, and Bainbridge Island in particular, to the far, moonbat left is the worst legacy of the Californians. The hippies got crowded out of California, so they moved to the forested solitude of Bainbridge Island, and brought their stupid politics with them. Island politics are laughable, even by Leftist standards. This blog will explore this phenomenon as we progress.

Keep it dignified. Don't post things that you would be ashamed to have attached to your name. Tongue-in-cheek is expected. Spirited comments are encouraged. Occasional bruising is OK, but at the end of the day, don't hold a grudge. If you are a hip-n-trendy, uber-chic, see-and-be-seen, California ex-pat Neo-berry, bring it on. I'd love to hear from you. The purpose is to deflate egos, so don't get yours all inflated in the process. Have fun.


Michelle Malkin · July 10, 2004 09:32 AM

My old hometown of Seattle--the Berkeley of the Pacific Northwest--just can't stop showing its contempt for America.Take a look at this disgraceful incident on Bainbridge Island, a few miles west of Seattle proper (and the future home of Hollywood liberals Brad Pitt and Jennifer Anniston).

One of the participants in Bainbridge Island's annual Independence Day parade was Jason Gilson, a 23-year-old military veteran who was injured in the line of duty in Iraq. He wore his war medals and carried a sign indicating his support for President Bush--heresy on liberal Bainbridge Island. Upon seeing Gilson and his sign, the crowd booed and called him names including "murderer" and, yes, "baby killer."

One has to wonder what the mood was on the parade route. Calling a veteran a "murderer" and "baby killer" is a direct throwback to the halcyon days of hippidom in the 60s and 70s. My guess is the bulk of Bainbridge Isl. residents are California ex-pats and aging hippies. They ruined
California, so they are now bringing their filth to the PNW. How original. "Baby Killer?" How much longer until they break into the tried and true "Hey Hey! Ho Ho! (fill in the blank) has got to go!"

Kevin Dwyer, mealy-mouthed executive director of Bainbridge Island's Chamber of Commerce, is quoted in Seattle Post-Intelligencer writer Robert Jamieson's column making excuses for the crowd's outrageous behavior:

"I believe (Jason's) mom when she said her son was called 'a murderer.' But I'm sure it wasn't so much directed at the kid as it was the president. A soldier with a sign represents that."
Crap on a vet to send a message to the President? How educated. How refined. How bold. How Bainbridge.

Meanwhile, at the same parade, Jamieson reports that "people bearing pro-Kerry signs were cheered and applauded for, among other things, tooling around in an environmentally responsible car."

Wear your nation's uniform in armed conflict and get booed, whereas drive a hybrid, or bio-diesel and you get cheered. Such are the priorities of the self-congratulatory Left.