Wednesday, January 06, 2010

Local NAR Hints at Housing Time Bomb???

Today's Kitsap Sun had a great article by Rachel Pritchett discussing the direction of Kitsap's troublesome home resale market. It was surprising, not because Pritchett did some fine journalism (as that is her baseline), but that the real estate professionals seemed to be telegraphing an ominous development in real estate.
While December’s numbers were encouraging, it’s too soon to say the market has bottomed out, said Mike Eliason, association executive of the Kitsap County Association of Realtors.

“The big issue in the pond is the foreclosures,” he said.
I'd rather say "A" big issue... rather than "The" big issue... because there are scads of problems bearing down on real estate. Among these are: rapidly rising interest rates, discontinuance of government life support, rising unemployment, falling stock market, adverse demographic changes, and acceptance that "real estate can, AND DOES, fall in price."

Let's talk about foreclosures. On that score, Eliason probably doesn't know how correct he is.

The Market Ticker , by Karl Denninger, is one of the best sources for the play-by-play of this horrific debt implosion we are all witnessing. Earlier this week, he noticed that the US Treasury is lobbing a financial nuke into this year's housing resale market.

Come the spring selling season you're going to see the inventory of homes that were "HAMPd" and failed for whatever reason hit the market.

This is not a trivial number of houses - there are close to 750,000 homes currently under trial modifications, and only a tiny number of them - something like 30,000 - have converted to permanent payment changes.

Thank Treasury for not telling you about this until the "selling season" had ended and we were in the middle of the winter months when sales are slow - and timing the "required start" date for April 1st, right into the maw of the spring selling season.

If you need to sell your house in the next year this is something you need to take into consideration. A flood of nearly 3/4 of a million houses appear poised to hit the market as short sales and "deed in lieu" sales beginning in April.

It appears that the US Treasury is going to do something prudent, which is to force the market to clean up this mess, and not allow "extend and pretend" programs to continue as institutionalized denial.

The resale market is likely to get hit with an avalanche of low priced sales, which will overwhelm the bid and crush prices. This doesn't include houses that were not subject to HAMP, but are distressed nonetheless.

Rumors are floating around that Bank of America will push 600,000 foreclosures into the market in 2010, up from 100,000 in 2009. I guess they saw that Treasury release. You can bet if BoA is going to disgorge 6X what they did in 2009, other banks will as well.

Remember from ECON 101 - Supply isn't just the number of units for sale, but the eagerness of the owners of those units to sell at the current market price. He who sells first, sells best. Put another way, "sell now, or be locked in forever."

If you bought a home in the past few months thinking you were really getting a good deal because rates were low, prices are "at the bottom," and you got $8000 of free government cheese, you are going to realize how expensive that $8000 cup of financial hemlock was when you find the homes in your neighborhood are dropping 20% below your price in very short order.

Eliason continues:
Eliason said bankers are warning his organization that the number of foreclosures and short sales is expected to grow locally in 2010 and 2011, working against a market that otherwise is attempting to recover.

Eliason estimates that 25 percent of homes selling now have been foreclosed on, are short sales, or are selling for less that what was owed on them.

Yup. Looks like Eliason got the memo. Remember, our market is one of the "healthiest" in the nation, which is to say we are in the last car on the roller coaster. Those 25% are with all the government backstops, and enormous financial engineering being done at the Federal Reserve, and being the "last car on the roller coaster." The backstops are going to end when interest rates rise and the US Treasury can't roll its debt. The Institute For Economic Reality is predicting rising rates as money comes into short supply and deflation sinks its talons into the flesh of the productive economy.

Here is a thought experiment: ask yourself how many of your acquaintances are holding their homes off the market until housing recovers? What is the ratio of that number to those you know equally well that are facing forced foreclosure or distressed sales? Extrapolate from the 25% that Eliason is quoting and see what is really out there UNDER CURRENT CONDITIONS.

Now expand that with local unemployment rising another 5-8% and home mortgage rates pushing 7% for short term loans, or 9% for 30yr fixed?

“Yes, it will still pull down the prices because of the appraisal problem,” agreed Heather Holmen, an agent with Windermere Real Estate of Silverdale. She explained that a homeowner who wants to sell will have to adjust the asking price based on homes that have recently sold in the neighborhood, which likely includes distressed properties with low prices.

Appraisals are the least of our problems. Sure, the outright fraud that was foisted upon us during the go-go years is over, with Realtors and lenders no longer being able to twist arms to get appraisers to "hit the number," but the real problem with prices will not be in the appraisal. It will be in the inability of people to find the money to pay. Appraisals will trail the market as prices will continue to fall due to lack of liquidity. Remember, appraisals are a lagging indicator. They tell you what HAS happened, not what IS happening or WILL happen.

Holmen continues:

Holmen is among many local professionals who believe that continuing tax credits and low-but-rising interest rates will help the market hobble along this year, especially for homes in the $200,000 range in Silverdale and East Bremerton, the most active segment of the market.

“We’ve actually had some multiple offers,” she said.

She expects interest rates to approach 6 percent by mid-year.

Delusional. The tax credits are not indefinite and only go through the end of April. The Congress is in the process of foisting upon us the largest tax hike in our history, which will certainly weigh on our ability to scrounge up money to buy Bainbridgeislanddreamhomes. However, the most glaring evidence that Holmen is under the influence of "hopium" is that "low but rising interest rates will help the market hobble along this year."

Excuse me? How do interest rates rising off a low base "help" home prices? I'd like for Holman to chime in, with her HP 12C in hand, and 'splain that to me. I realize that I went to Port Orchard schools, but the math on that is elusive.

If the county median home price is in the low-mid $200K range, and the most active $200K range is slightly below the median, that screams two likely possibilities: first time buyers are using the free government cheese and VHA backstop to buy homes they can't afford, or that flippers are descending on homes in that range. Rising rates will scare off the flippers like soap scares off hippies. Without flippers, or first time buyers, those foreclosures and distress sales are going to have an increasingly difficult time finding suitors.

Holmen continues:
It may take up to a decade, she said, for the market to genuinely return to normal, when homeowners can expect a modest-but-steady 3 percent to 5 percent annual rise in home values.
Source? Why a decade? Why would homeowners expect 3-5% What drives that return? (something must) I'd like to see the basis for such a fanciful prediction.

Additionally, I'd like for someone from the NAR to clarify what "normal" means. Was 2006 normal? I hardly think an unending torrent of brain-dead Californians armed with truck loads of money that was borrowed into existence against the self-delusional hope of ever rising home prices is "normal."

Holmen starts to find reality:
Even then, the days of easy home loans are gone forever, she said, and consumers need to be ready.
This is undoubtedly true (at least for our lifetime). If easy loans are a thing of the past (thank God), then home prices are about to revert to a very short orbit around declining disposable incomes. Consumers are not the ones that need to be ready - homeowners need to be ready. Their home isn't going to recover anywhere near the 2007 peak. That is not an opinion. That is a mathematical fact every bit as valid as AxA+BxB=CxC.
“People are going to have to get used to the fact that it’s not going to be as easy to get a loan,” she said.
Banks will take longer to check out prospective borrowers. Would-be homeowners will have to clean up their credit and do away with multiple loans on boats and RV’s, for example.
I guess lending based upon the premise of being paid back with good collateral as a backing will replace the 20 year old paradigm of lending against anticipated future appreciation and refinancing. Yup, that will leave a mark. Loan officers are going to actually have to do homework and learn to say "no." They will no longer be able to securitize their ineptness and greed.

In the go-go years, you borrowed more on your home to finance your his/her Sea-Doo, Disney Cruise and Whistler weekends. Soon, those boondoggles will cost you the ability to buy a house. Ironic, isn't it? Imagine the stories you can tell your grand kids.
Grandpa: "Well, back at the turn of the century, we used to borrow money against our house to buy lifestyle toys and bling without ever having to worry about paying it back."

Grand kid: "That's insane! Are all old people as dumb as you? Is that why I'm in debt beyond my comprehension and our standard of living hasn't improved in 40 years?"
Here is the money quote (no pun intended)

And most of all, homeowners from now on will have to plan for a down payment, she said.

This is going to be the killer for home prices. If we are paying down debt, and our debt service is pretty close to our disposable income, there simply won't be any savings worth mentioning. There can't be in that scenario. If banks won't lend without a substantial down payment, and the lunatic practice of borrowing the down payment, or buying PMI (an even dumber idea), is a relic of a fool-laden era, how do you get rising home prices?

You don't.

If banks settle on 20% down (and we would be lucky if they stopped there), you can borrow 4x your savings. Think about this. How many people have, as liquid and disposable assets, $40K? Seriously, how many people do you know that could have 400 Ben Franklins in their hands by the end of the week? We are not discussing lines of credit, but actual cash they have saved over the years. Not many, and those that can are likely living in the upper tier of real estate in Kitsap County. Under this metric, that upper tier is worth $200K, provided you can get the loan and are content to blow your entire life's savings on your down payment.

Good luck with that.

How about $25K? That pencils out to $125K house.

What do you think a "first time" home owner has as savings? Let's review: these people need to get $8000 from Obama's Stash and VHA loan to buy their home. They don't have squat. If they have $10K in real cash savings, I'd be surprised.

Think about this some more. Every house in Kitsap County would necessarily be valued at 5X the cash savings of the occupant (on average), and that presupposes they can service the debt on 4X their savings with no reserves of any kind.

There is no recovery coming in housing. Prices are going to continue to fall until debt burdens are relieved such that disposable incomes can rise to create savings and enough to service debt at 2-3X income. That's an awfully tall order if we consider where we are in this cycle and the FACT the government remedies for all of this have just piled on even more debt in a failed attempt to prevent the market from clearing.

It actually breaks my heart to see so many friends and family continue to buy into the insane notion that you have to own a home at these prices. Many have had the great fortune of being able to sell their homes in this environment, only to blow it by rushing in to buy something else.

The people that have bought in the past few months are going to be very P-Oed. 2010 is going to be a year people won't soon forget.

I still hold to my prediction of "20 cents on the dollar by 2010." I have 359 days left on that, and it is going to be tight, but I still like my chances.


Anonymous said...

I've been thinking about vultureing but it's obvious that the more patient I am, the better it will be when I eventually swoop.

Eleua said...

@Anonymous 1719 1/7/2010,

The people that are vulturing now are called "knife catchers." You wouldn't want to even consider this until there is a widespread gloom over housing. As long as flippers are in the system, and the .gov is backstopping everything, you should stay clear of this and allow the reality to set in.

One day it will make sense. That day is not anywhere near today. Allow the greater fools to pass property back and forth to one another.

Anonymous said...

still looning, sailor. 20 cents by 2010, eh?

PricedOutForever said...

Nothing to add, but just want to show appreciation for your writing and this blog.

As 1/2 of a young, married couple living in Seattle, working, and looking forward to starting a family, I've been watching the real estate websites seeing if prices are affordable yet. Reading your blog is very encouraging, and let's me know that I'm not crazy for not jumping into this housing market.

Kudos again for the blog. Keep the posts-a-comin'!

Eleua said...

If you can rent, do so. There is no point discussing a bottom until well after the bond market shatters and sends interest rates up.

Don't believe your local brain-dead RE agent. NOW IS NOT THE BEST TIME TO BUY. IT IS THE WORST!!!!

You buy when prices are low, not interest rates. When interest rates rise, the money supply will contract dramatically, throwing people out of work and dramatically reducing demand. Prices will plummet even faster than rates will rise. Homes will become decidedly more affordable, in terms of multiples of income, and that includes higher interest.

So, if incomes are relatively high today, and homes are at a high multiple, and both the income base and multiple contract, you are certainly better off waiting and putting up with dumb landlords.

IMHO, price to income ratios are going to go below 2.0, and that will be on incomes that are probably going to be half, to two thirds of what they are now, and that assumes the .gov makes good policy.

If you buy when rates are high, while prices are low, as rates come down, prices will grow dramatically. That's what you want.

Be patient. Let the dumb money scoop up all the "good deals."

Anonymous said...

There's a lot of air left in those real estate bubbles. There was another foreclosure down the street from me. It was purchased for $375K, and got foreclosed for $297.5K. The bank is now trying to sell it for $385K.

Eleua said...

That's what this faux recovery is all about. The financial authorities have engineered this rally, centered on the fraudulent backstopping of MBS', so they can sucker the last of the dumb money to buy homes at inflated prices.

The banks are on the wrong side of the trade. In order for them to get out of the trade, you need to get into the trade.

Don't be a sucker.

Glad you are paying attention.

PricedOutForever said...


I've been reading your comments and posts both here and on Seattle Bubble for years now - and I've always appreciated your strong conviction on where you believe the local housing market is headed. I must ask you why 20 cents on the dollar?

I've been a firm advocate to my friend, family and anybody who will listen that housing isn't a good "investment" these past few years, but even I can't proclaim with any level of confidence in 20 cent, or even 50 cents, on the dollar. As a renter hoping to buy one day, that's music to my ears (assuming I'm still employed by then); but it's really hard to believe.

Any comments why 20 cents on the dollar, and in less than a year?

Eleua said...


Thanks for the great questions and I will answer without my usual snarky tone.

Back in 2004, I started to cogitate on the housing bubble and how it was unsustainable. During that time, I lived in North Texas in a town with an average household income 50% higher than Bainbridge Island. My 3000sf home that was built in 1997 was worth $200K and change. I wasn't living in Belfair - I was living in a place like Mercer Is.

By the time I started CLEARCUT BAINBRIDGE, I was firmly convinced that the market needed to be analyzed from a mathematical point of view, rather than from a momentum point of view, which is why I started CCB and was contributing to SB. If you recall from that era, the bulls were talking momentum and the bears (all three of us) were talking about history, math, and human nature.

Here is my view from early 2006. In that example, I lay out a hypothetical situation of how the blow off would take place. I'll let you judge how realistic it was. Notice that I arrived at a very steep discount via the math, and the predictable pattern of human nature when under duress.

I stand by that analysis, even though as the years have progressed, some refinement would be necessary.

In this example, I take a stab at the downside price from a cash-flow point of view.

"Speculative Premium" is a term I use to describe how much extra money someone uses to pursue capital appreciation on a home, versus just paying for the "home" part of the package. My IER Home Valuation Workshop is where I outline how to value a home or rental from a dispassionate investment point of view. As interest rates rise to compensate for higher risk, what was a speculative premium turns into an dread discount, as buyers want no part of owning a falling asset.

Looking at all these models, you will see that a very realistic scenario is homes finding equilibrium in the 20% range from the peak. Will my models work out? Only time will tell, but nobody has been able to show me why not. All I have ever received by way of critical analysis (which I welcome) is a lot of arm waiving about "how it can't possibly be that bad."

Sorry, but that's just denial. Anger follows denial, which is what I expect in the near future and why I'm glad I am not a banker, builder, broker, or agent.

Eleua said...

(Part 2)

As for my timeline...

Back in 2006, I picked 2010 because it sounded good. It was a number I pulled out of my butt with some cogitating on how long it would take for the bust to work its way through the system and force homes onto a market with declining demand. I said it on SB and my pride got the best of me, so I have stuck with it.

For the record, I knew "they" would try to levitate the market, but knew they were close to exhausting their traditional tools. I had no idea the extent that 2008 would have gone to use flat-out criminal behavior to kick the can down the road. 2009 has had sucker's rally written all over it, and rudimentary technical analysis shows that it was never, ever sustainable (rising price on falling volume - the hallmark of a bear market rally).

Will it end in 2010? I would like to think so, but I honestly can't tell you. I have been habitualized to think the FED and Treas will try something even more absurd to buy time for the PTB to exit their positions. I am not proud to say that my mind can find dark and cold places in the human psyche, but I can't even fathom what subterfuge our leaders are planning. I am of the opinion they are trying something, as this year long rally has bought them time to do something.

This I do know: NOTHING HAS BEEN FIXED IN OVER A DECADE!!! Not one thing has been addressed since this debacle has unfolded. The entirety of the US economy is still based upon leveraging up assets to create debt to fuel consumption, without the meaningful production to support it. Asset prices are still well above historical peaks, government manipulation is in uncharted territory, and we have 77million Boomers that desperately want there to be "one more bubble" to get them into retirement.

This isn't over. All the games that have been played over the past 30 months have only made the disparity between our expectations and reality worse.

Does it happen this year? By looking at Europe, it would seem that sovereign debt is coming under attack. I suspect the FED will try to patch that over and create another "save." IF they do, the eventual bust will be that much bigger and that much easier to come by.

2010 will be very interesting. If the GOP gets the majority, expect bank stocks to crater. Yes, you read that correctly.

We are in uncharted territory. 2010 will be the year the bond market shatters or a year of breathtaking manipulation. Either way, the shattering will eventually take place.

I hope that helps.

Eleua said...


Concentrate on the IER Home Valuation Workshop to drill into the guts of the underlying math. If you have any questions, please ask.

mannfm11 said...

I cut my teeth in the real estate business in DFW right out of college in 1979. 1978 had been the peak year locally for all time a the time and in fact had been the peak year of all time until this recent bubble started in the mid 1990's. I think 1997 was the first year existing and new home sales exceeded 1978.

In any case, DFW was the last housing market standing come 1982 and the entire industry along with S&L crooks came here and started building homes and developing lots. 1983 and 1984 saw 200,000 homes and apartments built here, which has to be near an all time record for anywhere. We spent the remainder of the 1980's after 1983 in a housing depression that didn't end until about 1993. Pent up demand? I don't know,but DFW wasn't Detroit or Cleveland during that time and never quit growing. Had population flattened out here, the bust might have lasted to the end of the 1990's.

There are a couple of things that people don't understand in this game of calling an end. One is that we aren't at the tip of the iceberg any more and now people that bought homes 5 or 6 years ago now have no equity. It is equity and not much of anything else that keeps a house off the courthouse steps. The oversupply here wiped out the equity in homes, especially the lower end back into the late 1970's.

Second, the means of getting a downpayment to buy a larger home is generally dependent on extracting the equity in a prior home. I spent rougly a decade in that business, either on the sales or finance side and I rarely saw anyone under 50 that had the downpayment. Third, the $8000 and the perception houses were cheap pulled forward a lot of demand.

As far as normal goes? I have studied the data and done much writing on this subject. The boomer generation was the high point of demand on this economy, not the echo generation and the peak years in the 1970's and 1980's are, in my opinion, near the peak of normal. That is annual resales in the 4 milllion range (we never fell that far, yet 3 million was probably a good average between 1988 and 1993) and new home sales at a peak of 820K and around 600K on the lower range. We are below both figures, but 820K was the record prior to 1997 and it was excessive at the time it was established. I estimate there were somewhere around 3 million extra homes built above normal demand in the bubble, so we have close to 10 years of excess to work off if we sell 500K annually, a depressed level. Any effort to boost that number will only add to the bubble and future problems.

mannfm11 said...

Eleua, I get the idea you might have lived in Plano. That is where I am. I agree with your assessment, except the interest rates aren't going too far. Rising rates would indicate a recovery. The debt in the USA and the rest of the world won't allow a recovery. China is about to crater, contrary to the popular delusion. Also, you are right on que with the banks being on the wrong side of the trade. Plano was 2500 people when I moved there in 1963. It was 17,000 in 1970, about 25,000 when I got out of HS in 1974 and 70,000 in 1980. It was about 110,000 in 1990 and had spent the entire period from 1983 to 1992 in a real estate depression that had declining interest rates nearly the entire time. My mother bought houses in the early 1980's that wouldn't have brought more than she paid for them until maybe 1993.

As I posted above, the US has 4 years of surplus construction to work off. The 200K units built in 1983-1984 were in a market that probably could have absorbed an honest 85,000 in those 2 years and it almost didn't recover. We were still trying to house the boomer generation then. In places like Houston where things really went bust (Dallas wasn't an oil town in the 1980's like much was then) $80,000 homes went to $25,000. Ditto OKC and much of the West Texas oil patch.

Lastly, I don't believe we have seen what has been to this point the successful rental market hit the street yet. People who bought property that would rent close to its payments are suddenly going to find they are going to have to cut rents. Once renting property gets tough (I am in that business and finding anyone you would want in your house is really getting hard), those that earn their living out of houses that are old enough are going to want out. Those that have managed so far to cash flow are going to find their other income consumed by vacancies and the condition of their property is going to suffer. Our property is old and the newer stuff is going to prevail, I am afraid. Much of it is near the DART rail or I would find it advisable to sell it and get some newer stuff. My mother, the old pro, is aching to buy some more property, but I continue to tell her we haven't seen the worst of this. I don't want to own properties that are going to sit vacant or find I paid too much. We have a million dollars cash and no debts, so there isn't any reason to break our necks.

Matthew said...

Another interesting fact to consider is that the most recent slump in housing was the first time, in the history of the United States, that housing prices declined while interest rates declined.

Our creditors will start asking for better rates on taking on additional US Debt. Rising interest rates will have nothing to do with "recovery" but rather everything to do with risk/reward. Who is going to want to hold US Debt as our debt/GDP ratio approaches 100%?

Rising interest rates will crush any hope of economic/housing recovery. Why do you think the fed has engaged in such a massive amount of QE and purchases of MBS? They are hoping to put a floor in housing and attempt to allow most people to refi while they can.

It isn't going to work however, they have merely shifted the burden to the U.S. tax payer and future generations. We would rather bankrupt the nation rather than swallow some ill tasting medicine now.

Eleua said...


You write as if I wrote it. That summarizes exactly my thoughts on the subject.

You can't live on credit forever. At some point, you can't expand the credit cycle any further.

Eleua said...


I lived in Highland Village.

We do have massive inventory that needs to be worked off in a declining home formation economy. That is going to take a lot of time, or we are going to have to reduce prices enough to encourage more home formation (kids leaving their parent's nest). Doing this with smaller generations that are also more debt encumbered is going to be tough. So much of our current economy is building, selling, financing, repairing, marketing, of homes, those people will have to find other work in an economy that both parties have decided has too much manufacturing and needs more outsourcing.

The "real estate escalator" is busted and running backwards. Rather than creating equity to bid up another home, we are destroying equity. If that is the case, what do we expect will happen to the price of the "next home?"


We were in a bubble and we are going to lose 80% of the peak value, if not more. We are still in the "denial" phase, but that will come to an end when interest rates spike.

Q: What comes after "denial?"

A: Anger.

I do disagree with your assertion that rising interest rates denote recovery. That isn't the case if the circulation craters faster than demand, which is exactly happening now. As money becomes scarce, its price rises, even if the demand is falling, so long as the demand destruction is outpaced by the circulation drop.

That is my thesis. Rising interest rates denote DEFLATION, not inflation, and are a symptom of a rapidly shrinking money supply.

For your scenario, you would need demand gains to outstrip circulation gains, and there isn't much demand for commercial credit and when the debt has to be paid back, circulation will drop.


The worst is yet to come.