Let’s Talk About Seattle Real Estate

A Wall Street Journal article reports Senator Johnny Isakson, a Republican from Georgia and a former real-estate broker, has introduced legislation to increase the Home Buyer Tax credit from $8,000 to $15,000. He proposes to remove income restrictions and in other ways make it available to many more people than currently qualify.

Buyers, be aware.

I am a Realtor in Seattle, and I observed what happened while last year’s $7,500 loan was being made into today’s $8,000 grant. Buyer’s held off, waiting for the $8,000. They got it, along with higher interest rates and competition from other like-minded buyers for the cheaper, first-time homebuyer-type properties.

Buyers will probably hold off again, waiting for the $15,000. The danger will be that any advantage gained by the increased home buyer credit amount will be offset by interest rate and price increases. The world really does work this way.

If buying a home solves a problem for you and your family, it is not a bad idea to buy now.

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The Case-Shiller numbers came out today, for two months ago, March; they always lag. They are subject to extremes of subjective interpretation. However, they are in fact mostly down, although not as much as in the last few months. Los Angeles and Las Vegas are actually less down this month than last month! But, there is no national trend evident yet.

This New York Times article has as good a treatment as any of the illusive significance of the C-S report. By comparison, here is a PDF link to graphs with helpful statistics about the huge dimensions of the loan problems that are burdening our broken financial system. Caveat: The package was assembled by brokers selling investment alternatives to real estate, but their statistics are drawn from legitimate sources; I do not endorse or recommend the advertisements at the end of the presentation.

Here are all the Case-Shiller statistics, nicely presented in Excel; click on “March 2009.

Credit-card users are the latest group of borrowers to come to the attention of congress, resulting in legislation that is supposed to make it easier for people to repay these loans. Longer waiting periods before penalties for late payments kick-in. Big deal, right? If the economy functioned, people would be able to pay their credit-card bills, exorbitant fees and all, the card-issuers would make grand-theft profits, and everybody would be happy. Know anybody wo has a HELOC (home-equity line-of-credit)? Or an unsecured commercial line-of-credit, used to run their business? Then you know that banks are cutting back or even eliminating them for many of their borrowers.

Bad news and not fun if it happens to you, but I think there is a bright side to this. The banks want to loan the money. They just want it repaid. So, they are not going to reduce their loan amounts and refuse to deal with people and companies they consider too risky (which, by the way, is me and you). This is GOOD! The more the banks behave this way, the more misery will be inflicted on all our lives. But the quicker the economic decline will bottom out. And the banks will be there immediately, willing to lend, pleading for you to borrow.

Here’s a recent paper on the housing crisis and the related Wall Street Journal article. A few figures from the paper are interesting. They show the movement of home prices by low, middle, and high tiers. The ones for Seattle and Portland are below, look at the paper for the rest.

Read the long paper for a complete understanding of these graphs, but in a nutshell: the greatest flow of money was to the lower-value tier of Seattle area housing, so the greatest appreciation took place there. When no more sub-prime buyers were available to bid house prices up, prices then dropped the most in the lower tier. Therefore, that is currently where all the “deals” are to be had, a fact recognized by the federal government’s $8000 first-time home-buyer credit: real value is to be found, for the moment, at the cheaper end of the market.

For the last 25 years until 2008, we have enjoyed a national and individual prosperity that was financed.  We borrowed massively in order to buy what we wanted, instead of buying only what we had the cash to afford.

I know what changes my wife and I are putting into place in order to spend not more than we earn, and I see my friends and colleagues also cutting back, refinancing and doing without.

Empty-nesters that we are, we’re still aware of the challenges our children are experiencing now in order to build careers, while at the same time they look to the future and the needs of their own growing families.

The option for them to finance their future spending, the way our generation did, does not exist for them. And it will no longer be allowed us, either.

Let us make our plans accordingly, and for the long term. The old system no longer works, and we will be the ones, through dramatic changes in our individual behavior, to put the workable new system in place. How we spend borrowed money is the problem that has to be dicussed and resolved.

I have been self-employed all my professional life. My wife and I have put two children through college, and saved for retirement along the way. It has never been easy for us. Over the last thirty years we have felt every bump in the economy, and there was nothing fancy about all the hard work we had to take on to protect ourselves from those bumps.

So, all this misery that the country is going through now I have lived with, in some version, all my adult life.

I am not happy to see our nation’s economy in this mess. This is affecting members of my family, my friends and my community, all in the present, and the deficit spending that will have to be repaid, by a universal increase in taxes, will burden the futures of our children and grandchildren.

It is going to take a lot of hard work, and most of that work will have to be performed by ourselves.

It will be very difficult, of that I am sure. But, it is all going to be OK, really. No one should lose faith in the ability of our economy to make the adjustments needed to once again support us.

But, as I have written before, it sure is going to be different.

And correctly organized real estate ownership will lead us out of this, as a nation and individually.

My wife and I had close friends over for dinner recently, a young couple about to start professional careers, and the question was raised: We read your blog and understand what you are saying, but, WHAT ARE WE SUPPOSED TO DO? They asked for a clear, succinct statement of my beliefs and advice.

So, here goes, short and sweet:  Begin long-term planning for your life, using correctly-purchased real estate as the basis of your financial welfare. Utilize the expertise developed by someone you trust who has years of applied experience enabling him to explain the difference between fact and fancy in all areas of real estate. Accept the challenge to learn what to do to make real estate work for you and help you build a good life.

There.

By the autumn of 2008, many more Americans finally understood that the value of almost everything it is possible to possess has decreased.

Scrap metal prices, not on most peoples’ radar but an important economic signpost, started moving down. Prices are now down by at least half.

We all know about stockmarket prices, which affect our 401(k) and other investment portfolios. Down by about half. Cars, clothing, electronics: down, not up.

Real estate equity, not value now, but equity, the amount of the property that is actually yours not counting the bank loan. Down, in most cases, by half, about 50%.

I am a full-time, active real estate agent. I hold open houses almost every weekend. I prospect energetically by telephone and the internet. I meet and talk to many buyers, to help them understand how much they can afford. So I know salaries most people receive are not going up; some people have to accept salary decreases if they want to keep their jobs.

I believe the buying power of the one asset we all possess, of our labor, will, by the end of the economic transition we are going through, reset at about 50% of what we became used to over the last 25 years. Our salaries and wages, if not spent with greater wisdom than most Americans are used to, will not be sufficient to build a secure life.

This makes ownership of real estate (purchased correctly, of course) more important than ever. A house you live in is the one physical asset the value of which you can directly influence, which serves as an investment even though investment should not be the main reason it is purchased.

I believe the signs are there that, over a fairly long period of time, we will end up with an economy that will support our lives and make us feel secure again. But, we will never again, most of us, be able to live in the spendthrift America of the past. Thank goodness.

Owning properly purchased real estate over a long period of time will, for most people, be essential to building a secure and controllable life. I see this in my own experience and in the lives of the wise people whose real estate needs I have served over the last 25 years. I believe it will be possible to live on half, if we plan for it. What do you believe?

Be it ever so humble, I would argue that the business model represented by an ordinary “mom-and-pop”  investor buying a single-family residence or duplex for a long-term investment has proven generally superior to any other investment strategy of the last 25 years. The reasons why?

1)    You know the management well and can count on not going to great difficulty to find it: It’s you.
2)    It is not subject to complicated and hard-to-understand finance structures: A fixed-rate mortgage, make        360 or 180 payments, and it’s yours.
3)    You know what you own, for better or worse: There it stands, go look at it, that is, truly, what you own.
4)    The discipline it requires of us forces us to be alert.

How can any of this be bad?

The last eight years have been spent with our leaders and institutions requiring us to confront the post-9/11 notion of threats to our security.

Now, however, begins the time for us to experience “participatory economics.”

The next decade (at the very least) will find us dedicated to working on recovery, on rebuilding our own personal and financial lives, as well as the spiritual life of our nation.

The fuzzy abstraction of “security” will be replaced by a hard-edged new reality. Starting now, it will be impossible for us to escape the responsibility to do the gritty day-to-day work necessary to recover our personal and national well-being.

Each of us must understand our role in the changing new economy, and work hard at playing our part well. On stage, everyone.