The impending Seattle housing market collapse. (Bellevue, Redmond: rent, HOA, lender)

[Jennibc]

The stats say North Seattle is still a seller's market, even if nobody agrees (http://seattlepi.nwsource.com/local/399922_sellers13.html - broken link)
But North Seattle is still considered a sellers market -- although it doesn't necessarily feel like it

"Northwest and Northeast Seattle are the only areas of King County that haven't crossed that threshold for single-family houses. But try finding someone who thinks these are seller's markets."

[70Ford]

Obama mortgage plan should rescue many Seattle homes


Oh well, thought I was going to buy when homes came down a bit more.

Oh well.

Ya know, if the stats says it's a seller's market... then why wuld a seller's market need help to sell?
Why do homeowners in a seller's market need to be rescued?
Makes no sense, does it?

[MissingAll4Seasons]

I think Obama's plan might help some homeowners afford their payments and not default; but even lowering the interest rate and extending the loan period isn't going to help the "upside down" situation. If the market continues to drop, and the home values never get back up to previous amounts... the homeowner will just be upside-down for longer. If the rela estate market bubble bursts, many homes will make the owners insolvent... having a debt (mortgage) higher than their asset value (home).

At some point, it may be prudent for the government and banks to start renegotiating the remaining balance on mortgages, HELs, and HELOCS down to reflect the depreciated fair market value of the houses... not just twiddling the interest and repayment periods.

[toughguy]

I'm not incredibly savvy when it comes to real estate finances, but I just don't understand why being "upside-down" is considered such a death knell. So you owe more than it's worth....why is that such a big deal?? You can still pay off your mortgage eventually, just like someone that has equity in their home would. Maybe you can't refinance and use the savings to go to the Bahamas, so what?? I am significantly "under water" on my car loan, am I destined for financial ruin?

[jenlion]

And I'm not sure it's the right thing to do to reduce the amounts owed on mortgages, and especially not on helocs. You signed the papers, you AGREED to pay that much money back, and that's how much you owe.

It's like my parents grounding my brother for two weeks when he was a teenager. He was so annoying in the first few days that they just ungrounded him to get him out of his hair. Yeah, he learned a real lesson, there. He learned that he could do whatever he liked with no serious consequences. Fifteen years later he's still clueless and jobless.

We only put down 10% on our house so we're underwater now. That doesn't mean somebody's gonna come along and reduce the amount we owe though. WE made the "mistake" of buying before values dipped. Cry for me. It's really irrelevant. I promised to pay the bank money. Period. Sucks for me the value went down. But it happens.

On the scale we're seeing, no, you can't see everyone turned out of their homes -- compounds the issue. So, it probably does make sense to extend the payment period. To even reduce interest rates (though that burns me up a little... where's MY interest rate reduction?...). But to reduce principal? Come on. People messed up. Did people get their money back when their tulips rotted? Sometimes you win. Sometimes you lose. I don't want to see anyone in the street, but you do NOT get a free ride on a home just because you made a mistake. Sorry. You DO have to pay back the money. Sooner or later, you do.

Extend the payment period, reduce the interest rate, shoot, give a payment holiday where interest accrues at a minimal rate if you lose your job or something. Just like they do for student loans. But the loan does NOT go away. You signed, you pay.

[MissingAll4Seasons]

OK, I'm not a financial expert either, but I'll try to explain the little I know and how I see it from a mathematical viewpoint instead... hopefully this will make sense.

Historically, when adjusted for inflation, the average Americon home can be built (and is therefore WORTH) for $100k. Due to several market factors (some supply and demand and some that could be argued as bank market-fixing), the market value of those homes ballooned in the last 20 years or so. So, let's look at a hypothetical example:

That $100k "real-value" house had an inflated "fair market value" of $300k in 2000 -- in this area that's still a pretty cheap and/or small home.

So, you put down a deposit of 20% ($60k of "real money") and get a loan for $240k (digital numbers) from a bank. The majority of that transaction is just ledger numbers from your bank to the sellers bank... possibly the seller got some "real money" in the deal, or maybe it just canceled their debt (mortgage).

You pay roughly $15k of interest (real money) to the bank every year on that borrowed $240k with a small percentage going to reduce the priniciple balance. In a typical 30-year mortgage, the interest is front-loaded, so the beginning payments are almost all interest and not principle, so you aren't really gaining any true equity until a long enough period has elapsed that the principle comprises the majority of the payment (or, unless the "fair market value" of your house rises).

So, we jump ahead 8 years and the "fair market value" of your home, now dropping because the real estate bubble is bursting, is only $200k (30% drop from purchase)... but you still owe the bank $235k. That puts your asset $35k in the hole, which means it is insolvent - worth less than is owed.

If the market goes back up - no problem, you just ride it out. BUT if the market continues to go down, your asset value will continue to decrease, while your debt remains constant and actually continues to INCREASE because of interest. Lowering the interest or extending the pay-off period still does not address that the asset have decreased in value and is not likely ever to recoup it's value after the bubble breaks.

So, let's assume that you want/need to sell that house... you are stuck eating a loss of $35k (or more) on the sale, plus your $60k down payment, and $150k worth of interest (15k x 10 years) -- and still having to continue making mortgage payments for a house you no longer live in.

So let's take a look at the numbers again:

You give the bank $60k down payment in real money (cash), and they "give you" $240k in electronic digits (debt). Actually, they don't give it to you, they give it to another bank, but it's still not cash.

In ten years, you give the bank another $150k in real money (cash), and they let you live in the house that you both own.

So, in 10 years, the bank has collected from you $210k of your real money (earned income cash)... but you still owe them $235k principle balance on the house for the use of the electronic digits and a place to stay. Meanwhile, your home is now only valued at $200k...

Right there, you notice something... the bank has already made $10k MORE than the current value of the home, and is still expected to get $235k MORE plus additional interest for the next 20 years.

At this point, if the homeowner defaulted on the mortgage (for whatever reason) and voluntarily signed the deed over to the bank... the bank only "loses" $25k, which can easily be recouped when they resell your house for the $200k current market price (or even less, because they only really need $25k).

If property values drop to the national historic adjusted value of $100k and stay there, then you permanently eat a $200k loss in value, plus all the interest you paid, because you have to keep paying the bank for the loan of the original price... and the bank makes about a 300% profit.

Considering that property values are expected to continue decreasing AND the economy is experiencing a credit bubble burst as well... what ends up happening is that your asset is worth less, your dollar has less spending power (if you're lucky enough to still have a job), and goods/resources become more expensive so that underwater house becomes even more of an albatross consuming more and more of your income.

This is already happening now with the recent real estate and economic dips, and people are already beginning to default because they've lost their jobs. If there are large-scale defaults and foreclosures nationwide, the banks are in even worse position than if they restructured everyone's loans to current market values... one is painful injury that everyone could recover from, the other is an arterial bleed that could be fatal. Restructuring for reduced values spreads the hit out to the banks, not just the homeowners... no one has to go bankrupt (bank or person) because they are insolvent and no one has to be turned out onto the streets.

[Jennibc]

So in some thread I wrote that I would report back when we sold our house in Seattle. I think this was the one. Our house went on the market and within 2.5 weeks we were under contract.

We started out a little high to test the market (it failed-LOL). We lowered the price after a week and a half and within the following week we got an offer. Right after we accepted and before my realtor could put "pending" in the MLS, another realtor contacted him to put in an offer. So, if priced right houses still sell quickly here...in the northeast part of Seattle, south of 100th. So I guess we're back to what they have always said about real estate. The three most important things are location, location, and location.

[texastrigirl]

Many of the houses in my neighborhood are starting to go too...and the price drop was not horrendous. Let's hope it fires up so folks can get moved to where they need to go. The people who bought the house across the street from me have been trying to sell in Beaverton for almost a year. Finally sold and were able to make it official in Seattle. Friend of mine who just moved here from Dallas finally got a contract on her house there as well and my client who is a realtor in Austin said things are picking up. Congrats Jennibc!!! Glad you made it official as well.

[eskercurve]

If you excluded the exuberance of the early 2000's home buying and leveraging spree, today's home prices are about halfway to the bottom.

Now that doesn't mean homes aren't selling ... see above post. Anyone who is realistic for the market will sell. These same people realize that those who are buying have stable incomes and likely won't get the axe, and they also realize that when the starting price for a starter home in a marginal area is on the order of 6-7 times starting wages for even engineering types ... something's wrong. VERY wrong. I knew this wasn't sustainable in 07.

Once we get back to around 4-5 times starting salaries for starter homes or condos in less marginal areas, I'll feel more confident we are approaching a bottom. That and when the area actually adds jobs with the same purchasing power again.

And last I checked, Seattle is ranked as a nice place to live, but it doesn't warrant NYC style cost of living metrics. No chance of a snowballs' in hell.

[70Ford]

Just got off the phone with the wife. She said the place (that is selling new homes) close to our place changed their sign from "from the 600's" to "from the high 400's". That's interesting. (We live in Issaquah/Sammamish/depends on who you ask and time of day which one it is...HA!)

And that bank failed in Bremerton (I know, I know Bremerton ain't Seattle)....but it failed because of dum dum dum...bad housing loans. Just like that one in Clark county back in January. Interesting to note that that's like 2 more than last year. Makes you wonder who's hiding what. Makes me wonder, anyway.

FDIC: Press Releases - PR-69-2009 5/8/2009