Secrets of Crafty Old Homes

Recently I previewed one of those custom-built ramblers from the middle of last century.  Retro we call them now.  You have seen plenty:  hip-roof over a single-level structure that is often faced in Roman brick. A wide overhang hunkers over the entryway.   The clean rambler lines suggest Japanese tea houses, especially in a misty setting of Northwest cedars and pines.  This one was custom-built, so we got the grand tour.

Glowing oak floors and mahogany millwork - the real stuff, no veneer or parquet wood here - a custom sink - avocado of course, and a sleek faucet mount years ahead of its time. The kitchen was done in varnished mahogany.  The floor plan followed the contour of the lot and looked out on absolutely throbbing views of the entire north-end of Seattle.

All three bedrooms sported cedar-lined closets. Aromatic cedar, to be sure, the kind that masks the smell of wool and so keeps clothes moths away.  If you rub them with very fine sandpaper from time to time, they can do their job for a few more centuries.

Each closet had its own window,  bright enough to distinguish dress from sports pants, but not enough to color coordinate anything. The windows were plain, not pretty like those diamond-shaped, carefully trimmed closet windows you find in modest 1920's bungalows or classics from the first decade of last century. 

Here comes my ah-ha moment - that sudden discovery of a purpose hidden right in front of your eyes.  The builders took such pains to install closet windows (what builder would take the time now) not merely to provide light, but to keep the moths out.You don't usually see clothes moths because they prefer dark, undisturbed places, like the top shelf of your closets. They conceal themselves there, avoiding the light in the hems of your clothes or the folds of your sweaters.

Dah!  Why didn’t I think of that! Our technically unsophisticated builders of yesteryear knew a thing or two about the habits of the insects they had to live with.  They avoided the toxic doses we are exposed to from moth balls and all sorts of petroleum derived poisons. 

If you want more info on how to cope with some of these critters, the September 2002 issue of the Missouri Conservationist  is full of good ideas.

New Home Sales Jump… Surge… Soar… Hop or just Mosey Along?

The Commerce Department report on new home construction came out this morning - with all the excitement of watching for your horse to cross the finish line. About the same time Robert Shiller, of the Case Shiller HomePrice reports, stepped back from his more dour stance and allowed that housing may have hit bottom.
Nationwide new construction contracts (not closed sales, but signed contracts for purchase - subject to cancellations and other market forces) were up 9.6% , or 433,000 units per year. They were up - compared to last month’s numbers. But compared to July 2008, they were down 13.4%. That was the month Barron’s ran their well-reasoned analysis: “Bottom’s Up: This Real-Estate Rout May be Short-Lived.”http://online.barrons.com/article/SB121581623724947273.html

At any rate, the stock market gave a little yawn and then went on about its business.  Did I mention that new home sales account for about 7% of total sales volume? In addition, it is one of the most dramatically revised numbers that Commerce releases.
To get a large sense of scale, we can go back to July of 2005, when annual closed sales, not just contracts, came in at 1,370,000 units per year. A drop of 68% from there and 2005 wasn't as good as 2004!
Seattle tends to lag the rest of the country in slowdowns and in pickups. July new construction sales were down in King County from the same time last year – 526 units compared to 636 last year. The median price of listed new homes ($495,000) was $60,000 less than last year. The number of closed new homes was also lower: 280 vs 315. Median price of sold homes was $422,475 this July vs. $435,000 last July.
We can see that some of the builders’ subsidized interest rates, the first-time home buyers’10% tax credit (up to $8,000), the huge infusions of money used to keep mortgage rates low, not to mention declining home prices, are having a definite effect on the housing market. Yet it seems premature to be still feeling around for bottoms. Even though this follows the olde timey summer ritual, when the best half-year of buying and selling hits a seasonal crescendo in July, just in time for everyone to go on vacation or get ready for the relatives. Happens year in and year out, giving us plenty of high-octane hope for the more serious autumn season. Until then, enjoy the last golden rays here in sunny Seattle.

Homes Sales Soar, Mortgages Sour

Nationwide, the number of existing home sales in July – one of our busiest months for closed sales - rose 7.2% from last month and 5% from a year ago. That translates into an annual rate of sales this month of 5.24 million; July a year ago = 4.99 million; in 2005 = 7.05 million of annual sales. So from our peak annual sales year we are seeing 26% fewer homes sold. Ouchh!
In the West (including California and Arizona, don’t forget) sales actually dropped by 1.7 % . July median prices dropped 28% from a year ago to $202,300. That is down 6% from a month ago when the median price was $214,800.
Closer to home in King County the number of closed sales rose by a smaller 4% : from 2083 in June to 2161 in July. The increase was 6% from a year ago July. The $250,000 to $350,00 had the largest share of action.
Median prices in King Country were higher than in the West as a whole - $350,000 in July. That was down from June’s $363,116 and from a year ago median price of $401,000. This followed the nationwide pattern, where the median price dropped 15% from a year ago to $178,400. Our median price dropped slightly less – 13% from a year ago. Statistics provided by National Association of Realtors

While we don’t have distressed sales numbers for the local area, nationwide the calculation is 31% of all sales were distressed. 30% were first time home buyers. With all the stimulus provided by the first-time buyers’ credit, low interest rates boosted by the Fed bond market supports and prices lower than at any point back to 2004 you would expect a rise in the number of sales. The big question is what happens when these government supports go away in October and November of this year? We saw what happened to the clunker program. The money was used up in a flash, or actually in two flashes. The second round of 2 billion went in two weeks, instead of the anticipated two months.
The biggest factor to keep an eye on is the foreclosure and delinquency rates. The percentage of residential mortgages either in foreclosure or with at least one payment past due hit 13.16% in the second quarter, the highest percentage ever recorded by the Mortgage Bankers Association, the industry group reported on Thursday. Foreclosures are now 4.3% of all mortgages. What surprised most was the rise in the prime, fixed rate loans, typically taken out by well-qualified buyers. They now account for one in three of all new foreclosure starts – up from one in five a year ago
The chief economist for the Mortgage Brokers Association isn’t seeing a lot of hopeful signs out there. He noted that during much of 2008, foreclosure starts were flat. They began to go up this year after the foreclosure moratoria imposed by Congress and some self-imposed by banks were removed. In Florida, 22.8% of mortgages are delinquent or in foreclosure. Does anyone remember the Marx Bros movie, Cocoanuts? Groucho auctions off Florida lots to buyers as far north as Minnesota in a spoof on the big land boom/bust of the late twenties. A great movie for our times!

Which Banks Are Modifying Mortgages?

In June 2009, the number of mortgages delinquent by 90 days or more came close to 3 million. That represents an increase of 160% over the 1.8 million delinquencies in June 2008. Since then the number of delinquencies has ripped to 3.5 million!

The Mortgage Home Assistance Program of February 2009 is the administration's attempt to slow down foreclosures by offering service and mortgage companies money incentives to modify delinquent loans. Treasury released the results of the program through July, shown in the above chart.

The difference in rates of modification are dramatic. For Washingtonians especially, the gap between JPM Chase and Bank of America rates stands out big time - 20% as opposed to 4%! Think back to the shotgun wedding between JPM Chase and WAMU last year and you realize what a deal it was for Chase. Calculations are that Washington Mutual assets were then valued at $307 Billion. Chase paid a grand total of $1.9 Billion in an agreement made overnight between the Fed, headed by Hank Paulson, and the banks. Penny and a half on the dollar. It's not hard to see why Chase is writing down more loans than the competition. The profit margin must be what those collection agencies that buy up bad loans are accustomed to getting. Bank of America bought Countrywide at full value before the sub-prime woes had done their damage. And so they are one of the too-big-to-fail banks forced to continue living on TARP largesse.

For some insight into why other banks and service companies may not by racing into the modification action just yet, see the New York Times piece on how these companies can profit more from foreclosures than modifications.

In case you are shopping for a mortgage or a loan modification, there are many non-profit organizations out there ready to help. I list several on my web page:
http://greengatesonline/carolpearce.aspx

Home Sales Are Up Half a PerCent - Who's Buying?

See the full report : http://www.campbellsurveys.com/AgentSummaryReports/AgentSurveyReportSummary-June2009.pdf

The federal tax rebate of up to $8,000 for buyers who have not owned a home in the past 2 years is the Number One Factor in their decision to buy a home. The Number One Difficulty these buyers have is coming up with the Down Payment. Presto - FHA loans and many state programs allow the buyer to apply that tax rebate directly to the down payment - problem solved.

If 43% of all sold homes are bought by First-Time Buyers, you'd expect home prices to decline. Especially as these buyers are, together with investors, buying up the majority of foreclosed and underwater homes that go as short sales. These houses are priced below what an owner not acting under duress would consider selling for, especially if that owner needed to purchase a replacement home.

According to campbellsurveys.com, almost 1/3 of the all buyers are homeowners. 69% of that 1/3 are selling because of financial, relocation, estate or divorce issues. Folks, that means 31% of homeowner buyers and 10% of All Buyers - investors, first-timers & owners - are buying because they choose to do so, what we used to call life-style reasons. It's true that even during normal times divorce and death are often the reason for buying and selling, but they're usually a small factor when compared to life-style reasons.

The other 91% of buyers are buying for investment/resale purposes or to take advantage of one-time discount that could range from 1 - 10% of the home's price. Both groups are buying because of discounts to recent market prices and so their effect on the market is to lower prices still further. You may question the wisdom of buying something because of such a small portion of the total cost, but when finding the down payment is so difficult, that small discount is enough to tip the scales. The banks know this. Who can blame them for holding back on lending out good money today after so many loans have gone bad, especially to borrowers who have to scrap up a down payment from sources other than savings. For this reason appraisals have become critical for the banks and often come in so low. With all these pressures on home prices, the expectation is that they can and likely will go lower.


It was only a few years ago that everyone wanted to buy a home because everyone knew that home prices never go down. Now you have to bribe people to buy them. This is not what will lead to a stable real estate market. Seems to me that the home building/lending industry is not going to be the engine that will pull us out of this cycle. Either wages and employment go up and people in their homes will be able to afford the rising costs of home ownership or deflation will continue to erode home prices as fewer can afford the debt and costs involved. As the economist Kevin Phillips has argued, there are limits to how much a country can grow by means of credit/debt. We will have to become productive again, as in creating products and not instruments of financial manipulation, in order to pull ourselves out of this downward spiral.

(Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism was published by Viking in April. His article on untrustworthy government statistics ("Numbers Racket") appears in the May issue of Harper's.

A Way to Save Mortgages that are Underwater

http://online.wsj.com/article/SB10001424052970204908604574330883957532854.html

In the above article Martin Feldman argues for lowering the principal balances of mortgages that are in default or on their way to default if the value of the debt exceeds the value of the home by more that 120%. Mr. Feldstein proposes that the government (that would be us, the deep pockets) compensate the banks for 50% of the forgiven principle and the banks eat the other 50%.
In exchange, the homeowner agrees to make the mortgage a non-recourse mortgage (details like changing appropriate state laws and bankruptcy laws to be worked out later). So, if the home goes into foreclosure, the homeowner is on the hook for the difference between what the bank nets on the sale and the balance of the mortgage plus all costs associated with the sale. Normally the cost of selling is about 10% of selling price, but the bank would have additional legal, administrative and loss of interest income costs. In this case costs could go as high as 25% of the selling price. This would be sure to happen if the banks continue to process short sale and foreclosure as their current glacial pace, which is 4-6 months in King County, where we don’t have an excessive number of homes under water.
As a real estate agent this sounds terrific - it would be good for business by slowing prices by slowing the number of foreclosures coming on market and thus slowing the fall in prices of other competing homes. Banks should love welcome it as another back-door subsidy, especially if they are reigning in their current lending in anticipation of further depreciation in real estate prices.
How about from the homeowners point of view? If home prices go up, they may be eventually up out of the deep water. However, I haven’t seen any market forecasters predicting a rise of 20% in home prices any time soon. Even though they have been wearing their rosy-red glasses lately, most look for a gradual leveling off. If you have 20 to 30 years left on your mortgage and you stay in your home, you’ll at least break even
What if prices go down more and that mortgage goes from 120% back to 140% of the price of your home? After all some astute analysts ( at S&P, Robert Shiller, Moody’s economy.com) are looking for further price drops. Imagine the pain then of having to dig into your own pocket to the tune of 20 to 40 % of the price of your home, plus 10 -25% of that price (all the costs associated with selling it). Not to mention the higher taxes you’d pay to fund the program in the first place.
Those are the risks.
Read the whole article for some more of the benefits

Lions and Tigers and Trips to Rome.......

What do lions and tigers and trips have to do with real estate, you might wonder.
That’s what I was wondering when I read an open house flyer promising a trip to Rome – roundtrip for two – as a reward for selling a lovely $800,000 home.
That’s way up on the scale of inducements most real estate agents are used to. Starbucks cards and cold spreads used to be the standard inducements for previewing homes. During the summer of $4-a-gallon-gasoline, gas cards were a big lure. Some agents even gave out cold cash to preview their listings as home sales slowed to a crawl.
One Eastside builder offered a week in Hawaii for closing a set number of sales; others gave out week-end stays at exclusive resorts to reward sales. Now we have open houses complete with barbecues, gorgeous catered spreads, live music, a free bar and even drawings for pricey prizes.

The report on July home sales in Seattle tells us the number of home sales increased by about 10%, while the median price is down almost 14% from a year ago. The real kicker is that sales in the least expensive area of Southwest King County were up 54%, while on the Eastside ,where homes cost twice as much, sales were up less than 2%. http://seattletimes.nwsource.com/html/realestate/2009607020_homesales06.html

This may be a bit simplistic, but doesn’t it make more sense to take that round-trip airfare for two to Rome and back and apply it to a price reduction of the home? After all, it is the home we want to sell! This may not put the house into another price range, but at this point in time, every bit helps.

Home Prices in Dollars and in Gold

Gold vs Dollar

For a long time I wondered why the prices of homes moved so much faster then the prices of other things. In the seventies they started acting more like Aladdin’s lamps than houses. No matter how much we wanted out of them, they never said no. We didn’t even have to polish them up and poof, more money came out of them.

Say you were fortunate enough to buy a nice house in a nice area of Seattle for $20,000. In the year of 1970. Ten years later you check around and it’s worth $80,000. Forty years later it gets even better - the going price is $510,000. It’s the same house, the same street - no fancy upgrades or gentrification.

Over the years I’ve heard lots of casual explanations for this incredible feat of making money out of thin air. Supply and demand was one stock answer. But we didn’t have the tsunami of immigrants to the state that would have caused house to quadruple the decade of the 1970’s. Another answer was inflation. Budget & Labor Statistics figures, (http://www.bls.gov/data/inflation_calculator.htm )tell us that any other basket of goodies costing $20,000 in 1970 would cost $111,800 in today’s dollars. That discrepancy of $400,000 means that we’ve got inflation plus something else.

During the 1980’s both spouses began working, sometimes doubling the income of single households. Better yet, DINKS (double income, no kids) came along and could afford bigger house payments. That explained where the money to pay for the bigger mortgages came from. But why the rising prices in the first place?

Might it be that the government policies of ever more generous tax breaks for home-owners encouraged ever growing demand? In the 1970’s you were taxed at the capital gains rates on your gain when you sold your home; you could carry forward your gains to the next house and so on and on and you’d never pay a cent in taxes. Not to mention the write-off for mortgage interest and taxes.

In the 1990‘s it got even better. Each land-owning citizen became entitled to keep $250,000 of gain tax free. This allowance could be repeated every 2 years. It didn’t matter whether you carried that gain forward into another home or spent it on a camel caravan to Timbuktu. These were powerful incentives to buy and gave some compensation for the pain of rising prices. They maybe accelerated the process, but they hardly caused it.
I’ve heard a few Seattleites say it’s all Bill Gates’ fault, bidding up house prices to the level of a Boston or a Silicon Valley. Ah, but that came later, much later than the 400% appreciation we saw by 1980. Mr Softy’s millionaires piled on later and then we all kept rubbing the lamp.
Recently I came across an article that put 1971 into perspective

In the early 1960s, Charles de Gaulle induced the Bank of France to convert large amounts of dollar reserves into gold. The reasoning was that the reserve currency role of the U.S. dollar was being seriously undermined by large U.S. balance of payments deficits that were inflationary under the gold-dollar international monetary system.
The French … bought their gold at $35/oz from the U.S. Treasury. The dollar remained under pressure for some years, leading President Nixon to abandon the gold-dollar peg and convertibility of the dollar into gold in August 1971. Over the next eight years, gold rose in a series of moves to $1,000/oz, not far from today’s level. Price inflation in the U.S. and other major countries soared to almost 15% at the peak in the 1970s.
http://www.boeckhinvestmentletter.com/newsletters/

The cost of that $20,000 house in gold was 571 oz at the 1971 rate of $35 an ounce. At the time $35 seemed a reasonable price, as gold had held a steady $20.67/oz from 1880 to 1932! From the 1930’s till 1971 it bounced between $35 - $45/oz.
A mere ten years later (1980)the price of our house went to $80,000 and gold had climbed to $600 an ounce. It would have taken only 133 oz of gold to buy it. The dollar price went up 400%; the price in gold went down by that much.

Fast forward to 2009 and same house is valued at $510,000. Take out the inflation on the original price ($90,000) and you have a $400,000 price tag. At today’s $950 oz, that’s 421 oz - enough to buy the house and $142,500 left over.

So far gold has preserved its purchasing power better than dollars. If gold were to go to $1000 oz this year and the dollar house price remains the same (both seem quite probable), anyone who held that original 571 oz would be even farther ahead.

Going off the gold standard removed any predictable limit to dollar prices of any investment - equities, homes, commodities. Perhaps one day the lack of appetite for dollars will provide a limit.