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.

KITSAP SELLERS, I'D LIKE YOU TO MEET REALITY

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.