Real estate developers were for years in DENIAL that there was even a bubble.  Their attitudes have now changed.  But any talk of the bubble is in pure historical terms, as in the ad shown below – “Life after the Bubble”.

Sorry guys, the bubble is anything but over in Seattle.  By all objective measures, Seattle is still in the high froth area, with plenty of depreciation room on the downside.  Prices will go lower.  MUCH LOWER.

selement townhomes Redmond

element townhomes Redmond

The above image was cut from an e-mail ad that stated:

Own a 379k townhome for only $1,419/mo!

The details of the assumed terms for such a payment are as follows:

  • Limited Time offer expires 2/28/09 [Geldpress Note:  Expect lower prices after that date, if not sooner!]
  • Assumed down payment of 10% – $37,900
  • 4.875% 30 year fixed, with a 2/1 buydown [Geldpress Note: Not clear from the ad if the developer is paying for the buydown]
  • Monthly payment is for principal and interest only!
  • First year interest rate is 2.875%.  Second year at 3.875%.  Third year and beyond at 4.875%.

The real monthly outlay of owning this home is substantially higher than the advertised $1,419, and will look more like the following:

  • $1,805 per month for principal and interest on LONG TERM RATE of 4.875%.  Teaser rate ads are for BANKRUPT mortgage lenders!
  • $142 per month in Private Mortgage Insurance for less than 20% down.
  • $200-$400 per month in mandatory flood insurance.
  • $200-$350 per month in association dues.
  • $400 per month in property taxes.

That brings the REAL COST of living in this place at somewhere between $2,747 – $3,097.  The developer estimate was $1,419, or about HALF of the true cost. In addition, expect the following costs:

  • Expect closing costs of several thousand dollars.
  • Expect the association fees and property taxes to go UP 5-20% EVERY YEAR.
  • Expect the potential for occasional SPECIAL ASSESSMENTS, in addition to monthly association dues.  These special assessments are VERY COMMON in the Seattle area.
  • Expect the value of the property to be stable at best, but likely to go DOWN each year.
  • Expect miscellaneous repair, furniture, services and tools costs of 1% of the home value per year, or about $3,790 per year.
  • Expect that the potential for appreciation is far less than the potential for DEPRECIATION or FLAT PRICES.

And for all the real estate agents and mortgage lenders that want to rave on about “Tax Benefits” of ownership, SAVE YOUR BREATH!  Yes, interest and property taxes are deductible, with the following caveats:

  1. Only the incremental amount of taxes and interest ABOVE the standard deduction is of any use.   The standard deduction is high.  From the IRS website, The new standard deduction is $10,900 for married couples filing a joint return (up $200), $5,450 for singles and married individuals filing separately (up $100) and $8,000 for heads of household (up $150).
  2. You will likely have enough incremental deductions above the standard for the first few years.  But after a few years, the ratio of interest to principal decreases, and your total deduction will approach and fall below the standard deduction, rendering your tax benefit USELESS.

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