Tuesday, June 12, 2007


Last Saturday, Steven Gardner of the Kitsap Sun, reported that Kitsap home sellers are coping with declining demand for their homes. This could have been a long overdue article on how economic reality applies to everyone, regardless of how special they may believe they are. Unfortunately, Gardner didn't present any skeptical analysis of what his "experts" were telling him, or give any real perspective on how national trends might weigh on Kitsap families. He essentially asked a glorified used car salesman if this was a good time to buy a used car.

If you were waiting for the peak time to sell your house, it may have already passed you by for now.
How true. Given that the PNW has had the luxury of watching every other market in the country roll over into a seller's nightmare, I am amazed that most of us have spent that opportunity to wax eloquently on how special we all are how economic reality does not apply to us.

Nonetheless, it's clear the market was hotter for sellers a year ago. The 2,488 active listings in May was 41.5 percent higher than the number a year ago. At the same time, there was a 12 percent drop in the number of sales and a 15.4 percent decrease in pending sales.
It might explain the increased number of "for sale" signs, including the ones that show "price reduced."
41.5% isn't exactly a seasonal aberration. It is a defined shift in the market.

Rich Jacobson with Windermere Real Estate in Silverdale:
"It's not quite the seller's market from a year ago. Buyers are more cautious now; days on the market have gone up, prices have gone down. They're not jumping on the first thing they see."
So, were the last few years a healthy market or a speculative frenzy? If it was a frenzy, can our market end up like Salinas, California?

[Glen] Crellin [director for the Washington Center for Real Estate Research], and Jacobson agree that even though conditions are not what they were a year ago, the pendulum is still on the seller's side. Part of that has come because the Puget Sound region has not suffered the problems other areas have.

Crellin said he believes innovative lending was not as popular around here as it was in other parts of the country, meaning people here are not foreclosing at the rate their peers are elsewhere.
This is where they lose all remaining credibility. Yes, we are not seeing the phenomenal increases in foreclosures, because we have been in a bull market. If someone gets into financial trouble, they throw it on the market, and it is gone. They walk away with some profit and everyone wins. This is true in every market that is a raging sellers speculative frenzy.

"Innovative lending" [what a euphemism] is very much alive in the PNW. Washington ranks 5th in the nation for "innovative lending." There is absolutely no reason to believe that our innovative lending will end up any different than what pushed Boston, Florida, Arizona, Vegas, and California over the brink. To think otherwise is utter foolishness, or panglossian arrogance.

There might be hope ahead for sellers.
The National Association of Realtors projects the median price nationally will slip 1.3 percent overall this year, but it should begin increasing in 2008.
The NAR recently abandoned this projection. They are now predicting at least twice the damage. Keep in mind, the NAR didn't even recognize the apex of the national real estate market until 18 months after the fact. Their disgraced spokesman, David Lereah, kept telling us that all was well, when in fact it was not. The NAR, along with most RE "experts" failed to see the nation-wide slump that is hanging over every market when it was about to happen, so I wonder how they can so confidently predict what 2008 will look like.

With all the ARM/subprime resets that are looming in the next 4 years, with the steepest part of the reset schedule due over the next 2 years, how can '08 be ripe for improvement? The homebuilders finally threw in the towel on predicting a turnaround, and they are now slashing prices to move inventory.

Jacobson said he believes most homes locally will see an increased value of 4 to 5 percent next year over this one.
It's one thing to give an opinion. It's quite another to be quoted as an "expert" and give a wildly unsubstantiated prediction that flys in the face of the macro economic reality. Just how does Mr. Jacobson arrive at his 4-5% increase? History? Wishful thinking?

Finally, the absolutely most irresponsible statement I have read from a real estate agent in our market.

"The doom and gloom really doesn't apply in the Pacific Northwest," Jacobson said, adding that it's particularly true in Kitsap County, because of the stable military presence and the housing prices compared with the market closer to Seattle. "We're still a great value over here."
Right...just like that used car was only driven by a little old lady to and from church on Sundays.

How does the PNW get the immunity idol against "doom and gloom?" Honestly, are we on a different currency? Do the laws of economics not apply to myopic, provincial communities? What makes us so special, but not Boston, San Diego, Phoenix, Sarasota, and Vegas? The Navy? Is Norfolk immune and special? The weather? We are better than San Diego or Sarasota? What is the education disparity between Boston and Bremerton?

How many people have overpurchased on the belief that we are insulated against the economic realities that are befalling the rest of the nation?

Real estate agents are sales people - not financial advisers with a fiduciary responsibility. Their loyalty is to the seller. Their job is to find the dumbest person with the largest stash of cash and get them to the closing (typically Californians). The buyer is a pigeon to be plucked. Caveat emptor.

Stable military presence? As long as Norm Dicks is alive, that may be true. How old is Norm? If the military is so stable, why did prices skyrocket over the past few years? Did the Navy suddenly start spending 60-100% more on wages and compensation?

I wish the Kitsap Sun would spill some ink on real estate speculators, toxic loan applicants and purveyors, and ask some questions that challenge the prevailing "wisdom" that Kitsap is special and immune from real estate reality.

How about looking into how Kitsap has had one of its biggest building booms since WW2, but every school district (X-Bainbridge) is losing enrollment?

What happens to a school teacher that extends himself to buy a nicer piece of property (on the assumption that the rising real estate market will liquefy the financial strain) when the market turns? Can a decidedly middle income person survive a 15% downturn that lasts for 10 years? How about a 30% downturn? 50%?

What happens to people with "good credit, good jobs, and good educations" that lose their homes to foreclosure? Perhaps buying a Kitsap Sun reporter a airplane ticket to Florida or Boston would be a good investment. "Coming to a Real Estate Market Near You..."

What happens when a commissioned officer fails to sell his house when he transfers? What is the Navy's view on an officer with excessive debt? Bankruptcy? Tax liens? How does an officer do his job on a nuclear submarine without a security clearance?

How about macro-economic issues? What happens to local home prices if mortgage rates hit 7%? 9%? 12%? What happens when 20% down payments and job verifications are absolutely necessary? How many local Kitsap homeowners have $80K in liquid assets? How about first-time home buyers? What happens if X-Cals dry up? Can real estate outstrip incomes over a long period of time? If so, how?

What happens if Norm Dicks gets hit by a bus? What happens if we lose Keyport? What happens if we lose subs to the Atlantic Fleet? What if PSNS loses business?

Kitsap is overpriced by any reasonable metric. Yes, we are cheaper than King County, but King County isn't a one industry county. It's still an hour minimum commute, and that commute is getting more expensive. It takes more than a feeling of "golly gee, I'm so special" for real estate to appreciate. Beanie Babies once appreciated so fast, they became a national phenomenon.

At the end of the speculative cycle, houses will be priced on the ability for people to buy them with prevailing lending standards on prevailing incomes. That is traditionally 2-3.5X income. For most of Kitsap, that translates to homes that sell for less than $200K.

Yes, you read that correctly.

It is going to be an ugly story when middle income households are $200K upsidedown on their "dreamhomes." The Kitsap Sun will have no shortage of people willing to cry a river on how unfortunate they are. Naturally, it will be the fault of someone else. I seriously doubt anyone will look in the mirror and say, "Yup. I screwed up. I tried to get rich by speculating in a consumer commodity at the top of the market. I ignored all the warning signs. I listened to people that had a powerful incentive to lie to me. I will NEVER do that again."

It isn't different this time. We are not special. We are not immune.