You Know, We Probably ARE In A Housing Bubble

In a recent interview, Windermere Chief Economist Matthew Gardner said that Seattle is not in a real estate bubble. Unlike 10 years ago, lending standards have become much more stringent.

Similarly, Windermere CEO OB Jacobi “is confident that we’re not headed in that direction” because “bubbles result from irresponsible lending practices.”

Quoted in the same Northwest MLS news release, George Moorhead, head of Bentley Properties, also thought the quality of local home buyers will help insulate Seattle from any massive real estate fallout.

But according to this Quartz report, subprime loans were not to blame for last decade’s housing market collapse. As you’d expect, borrowers whose credit scores were at the bottom 25% percentile accounted for 70% of foreclosures during the early 2000s real estate boom. BUT! Their share of delinquencies FELL to 35% following the bust.

Most of the post 2007 defaults came from borrowers with higher credit scores, and many of these borrowers had multiple mortgages. In the top 25% credit percentile, multi-mortgage borrowers accounted for 43% of the total loan balance. In the middle credit range, multi-mortgage borrowers took out 35% of the loan balance.

Multi-mortgage borrowers had less attachment to their extra homes than those with only one home. When the market tanked, they bailed en mass. The higher their credit scores, the more willing they were to cut their losses. The researchers quoted by Quartz put it bluntly: the rise in defaults was mostly attributable to real estate investors.

Now, coming back to Seattle in 2017:

In the same Northwest MLS news release mentioned above, Bentley Properties’ George Moorhead pointed out that when local homeowners move, many are choosing to hold on to current homes as investments rather than offering them for sale.

In addition, Windermere’s Matthew Gardner was quoted in this June RealtyTrac Home Flipping Report that “Seattle has such a high percentage of flippers who are financing their purchases (51.6%) relative to the U.S. as a whole due to escalating home prices in our region. The decision to finance is proof that these flippers believe the risks of financing are low due to our booming housing market.”

And according to this April King 5 story, 17% of metro Seattle home sales are flipped houses. As a case study, King-5 offers up Scott and Ann Carson, who “sometimes have up to 30 properties at once”. The Carsons say King County is so saturated with investors that they are now buying properties in Skagit and Whatcom Counties.

So, will responsible lending to high-quality Seattle borrowers insulate the region from the next housing bust?

Over the past year, I’ve been sort of, kind of dreaming of buying a fixer as an investment. Suddenly it’s not feeling like such a great idea.

Posted on August 29, 2017 at 8:01 pm
Isabel Wang | Category: Uncategorized

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