Weekly News Round-Up
The big debate these days seems to be when the foreclosure mess will come to an end. RealtyTrac reports that foreclosures in California went up 20+% in March, totally 65,000 properties. That’s 65,000 people that lost their homes, some of which I hope are mortgage lenders who are partly responsible for this mess in the first place. It also means that there are 65,000 listings on or coming on the market, many of which are handled by lazy agents who put forth no effort to sell the foreclosed home, thereby contributing to the decline of neighborhoods due to neglect, vandalism, and constantly lowering prices. (Yes, the lenders also contribute to this growing problem.) According to a report on MSNBC.com, ARM resets will crest in May or June. Rick Sharga, RealtyTrac’s vice president of marketing was quoted as saying: “Once we’re through that batch of loans, the worst will have been worked through the system.” One can only hope.
At times, I think there is just too much alarmist reporting, too much doom and gloom about what lies ahead. Waiting for the shoe to drop is not good for our blood pressure. But I am often concerned that in a rush to be first to report a trend or prognosticate a tragedy or financial fiasco, that the media creates self-fulfilling prophecies. Yes, I want to know if a tornado is coming my way tomorrow (based on factual information), but I don’t want to know that maybe, at some undetermined point in the future that possibly X could happen (based on nothing more than a guess or assumption). Slate had an article this week, “Here Comes the Next Mortgage Crisis,” but I ‘m not sure I agree with all of the tenets of the article. It talks about prime borrowers with interest resets, which will affect upper middle-class homes. I think there is an underestimation of these homeowners and their intelligence and income level, not to mention their dedication (and dare I say “status”) of owning their home. The SF Chron had a map of Bay Area foreclosures recently, and I noticed that the higher-end areas had little to no foreclosures to speak of. They were smarter than the sub-prime lenders. And the homes in these areas are not losing their value, like they are in more middle- and low-end neighborhoods. I don’t think we are going to see another full-scale meltdown in these areas. Hopefully that is just not wishful thinking.
Interesting posts over at MyBudget360.com. First we have “California Mortgage Rates Still High: Examining Actual Mortgage Products in Today’s Market and the Family Budget Impact,” something we should all read. And then there is the post on California home prices and mortgage loan caps. “California Median Home Price, $373,000: Maximum federal government loan limit of $729,500. Does that Make Sense?” What do you think, does it make sense?
Our litigious society is at it again. Last Saturday, our Alameda County writer reported on the San Diego case where a couple sued their agent and broker, alleging they were duped into overpaying for their new home. They lost that case. Now the Las Vegas Review-Journal reports of a Nevada man suing his lender, which according to the plaintiff’s lawyer is based on the lender failing in their “fiduciary duty to explain all borrowing and buying options, and to give home buyers professional recommendations on their best interests.” The article also mentions similar lawsuits in 5 other U.S. states. We all want someone to pay for this mess, but who should it be? Borrowers who did not inform themselves thoroughly before making the biggest decision of their life? Agents who brokered the deals? Lenders who maybe disregarded due diligence?
David said:
Remember that if foreclosures peak in May/June, those houses won’t hit the market until November/December at the earliest. Should make for an interesting ‘09 “Spring selling season.”
April 16, 2008 10:04 AM
David Gordon said:
Susan, good informational post with good questions.
But I disagree whole-heartedly with the notion that prime borrowers with upper middle class homes somehow equates to intelligence and high incomes. San Francisco is not a sub-prime city, it is an Alt-A city with a helluva lot of stated income loans on the books. This was a popular loan in the past several years and their resets will just begin happening this year and continue until 2010-2011. Just another reason why SF has not shown much weakness yet, esp in the SFR market. Condos/lofts are already showing many signs of weakness in the city and short sales are turning up more and more often now, which precedes foreclosures.
“Nicer” neighborhoods may not lose the 20-30% values of outer circle neighborhoods (a case that can be applied almost everywhere) but they will be affected and are not and never have been totally insulated.
April 16, 2008 11:48 AM
Susan Brady said:
Well, the recyclers just came and took all my newspaper, so I cannot find that lovely color-coded foreclosure map I was referring to. But I know, for my coverage area, that places like Woodside, Portola Valley, Los Altos, etc. had little or no foreclosure activity. These are upper-middle and upper class enclaves. These are people who have a status to uphold, a reputation amongst their peers, and I don’t see them needing or wanting to walk away from a home.
April 16, 2008 12:03 PM
Red said:
The higher end homes will just be slower to drop in price, as the majority of owners will have far more equity and more reserves than the current foreclosures. Faced with losing $200,000 + in equity or sitting, they will sit. And some homes will sell, to those for whom price is not the major issue, who are buying the very best. The stock market was only recently at a peak, lots are still feeling very rich. That changed… so sales volume will drop, prices will slowly slide as sellers decide that they really do want to sell, not sit.
What will really kill the higher end is the number of owners that have 30 year loans and few years to retirement. Far too many don’t have enough investments to keep paying the interest and property taxes on multi million dollar homes with a flat stock market and minimal bond rates.
April 16, 2008 12:28 PM
Colin said:
David, it’s ARM resets that peak in June, not foreclosures. Based on past experience there’s at least a six month lag before a reset is likely to become a foreclosure. So it willprobably be well into ‘09 before a peak in REOs on the market.
April 16, 2008 3:15 PM
david gordon said:
Susan, I know the map you are referring to (or a similar one). Almost all of the foreclosures/defaults are in District 10 and some others scattered around. As Red said, the inner-most (usually the higher-end) areas will be the last to be hit. They might not get hit as hard as the outer areas, likely because their financing was a little “better” than 100% LTV, subprime, liar/toxic/etc. loans more prominent in District 10.
But your point about the higher-end areas — whether it’s Pac Heights, Russian Hill, Presidio or Woodside, Atherton, Portola — is a lot more about the wealth and financial balance sheets of the owners and a lot less about their status or reputation. If these upper-middle class people thought it best to walk away from their $1M++ homes because it made the most business sense for them personally, you can bet they would have no problem making that decision. Many of them pay cash or highly leverage their RE purchases, which takes away the very logic of walking away – too much equity, even after a correction.
Colin, I agree that 09 is gonna be a nice time to be a buyer sitting on the sidelines looking for deals around the bay area.
April 16, 2008 9:25 PM
david gordon said:
Here is a direct quote from San Francisco Fed President Janet Yellen, released today, found on CalculatedRisk.
“I should also note that, while default rates for prime loans are lower than for subprime loans, delinquency rates among all categories are highly correlated with house price declines across the country, whether borrowers are prime or nonprime, or whether loans have fixed or variable rates.”
So once the high end areas show price weaknesses, and they will, delinquency rates will creep up.
April 16, 2008 9:58 PM