Comments on: Weekly News Round-Up

By: david gordon

david gordon — Thu, 17 Apr 2008 04:58:49 +0000

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.

By: david gordon

david gordon — Thu, 17 Apr 2008 04:25:51 +0000

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.

By: Colin

Colin — Wed, 16 Apr 2008 22:15:39 +0000

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.

By: Red

Red — Wed, 16 Apr 2008 19:28:03 +0000

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.

By: Susan Brady

Susan Brady — Wed, 16 Apr 2008 19:03:00 +0000

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.

By: David Gordon

David Gordon — Wed, 16 Apr 2008 18:48:44 +0000

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.

By: David

David — Wed, 16 Apr 2008 17:04:44 +0000

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.”