Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Monday, August 04, 2008

All The News That's Fit To Print...




.... and they did!


(NYTimes)


"The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time."

"The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building."

"Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults."

'“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”'

"Many borrowers who got these loans during the boom had good credit scores, but many of them owe more than their homes are worth. Analysts believe that many will not be able to or want to make higher payments."

'“The wave on the prime side has lagged the wave on the subprime side,” said Rod Dubitsky, head of asset-backed research at Credit Suisse. “The reset of option ARM loans is a big event that will drive the timing of delinquencies.”'

"Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets."

"What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and appeared appealing while home prices were rising and interest rates were low.
But now, some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe."

"Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year."

"The wave of foreclosures is still rising in states like California, where many homeowners turned to creative mortgages during the boom. From April to June, mortgage companies filed 121,000 notices of default in California, up nearly 7 percent from the first quarter and more than twice as many as in the second quarter of 2007, according to DataQuick, a real estate data firm based in La Jolla, Calif. The firm said the median age of the loans increased to 26 months from 16 months a year earlier."

19 Comments:

At 8/04/2008 08:36:00 AM , Blogger tom12008 said...

Welcome back!You've been missed.

 
At 8/05/2008 03:15:00 PM , Blogger Lisa said...

All the new posts today! I'm thrilled!!!

Yes, the story on AltA and Prime loans starting to crumble was front page on the NYT yesterday. Great to see, as this has been the elephant in the room no one was talking about.

I drove around the west side of Petaluma over the weekend, as I'm pretty sure that's where I'm going for the next house. Lots of cute cottages (still overpriced), BUT they had all lost money since their previous sale according to ZipRealty. And I'm talking since 2003, $100K, $150K, $200K losses. And these places are still sitting. Cottages that went from mid $700's were down to mid $400's. Still ridiculous, but OMG.

I guess not too many people who can actually qualify for a $400K+ house really want to live as far away as Petaluma with 2 bedrooms and 1 bath.

We all knew this would happen. The minute voodoo financing was off the table, there was nothing to prop up prices.

And I won't get serious about buying until late 2009 or early 2010. The AltA resets will be a blood bath up there. And in Marin, where I'm happily renting.

 
At 8/05/2008 04:57:00 PM , Blogger Athena said...

you said it Lisa! The minute the voodoo financing disappeared the bottom fell out of the RE pyramid scheme. you know, after doing the research and seeing that the subprime portion of the Sonoma County bubble really only teetered the totter in the last stages of the bubble- it makes me realize that prime and Alt-A population that bought before the bubble was living high on the hog with their house ATM... then the actual buyers during the bubble with their risky loans. We have a big fat Alt-A and Prime meltdown coming here- because that has been the bulk of our buyers and housing ATM imbibers for the last 10 years! 10 years!!! think of that... you may get that cottage for a very reasonable price yet.

We still have a couple years of resets for the prime and alt-a borrowers- and we already have done the math- based on household incomes in Sonoma County- only a very low, single digit % of the entire county population can afford the mortgage payments on
400k, 500k, 600k homes.

many others will be so far under water they will simply walk away of the next couple years.

We are already seeing "east side" listings popping up like overpriced mushrooms... and the rental lists are bloating more every day.

We might be starting the official main attraction in Sonoma... it will be nasty and brutish and the FBs will pray it will be short.

 
At 8/05/2008 06:24:00 PM , Blogger Lisa said...

"We still have a couple years of resets for the prime and alt-a borrowers- and we already have done the math- based on household incomes in Sonoma County- only a very low, single digit % of the entire county population can afford the mortgage payments on
400k, 500k, 600k homes."

Amen. I make a decent income, but I know enough about owning a home to know I shouldn't buy much above $350K. I owned for 8 years (1996 - 2004), and even buying within 3x my gross income wasn't easy by any stretch.

You're absolutely right, Athena. The nicer neighborhoods will be toast once the AltA and Prime resets begin in earnest. I think about 80% of bubble mortgages were adjustable in Sonoma County, and I have to believe most won't be able to refinance or afford the higher payments, so another wave of walk-aways and foreclosures will hit.

I can't wait until folks digest that this was never a Subprime meltdown. It goes all the way up to Prime.

 
At 8/06/2008 12:14:00 PM , Anonymous Anonymous said...

So because I had been reading articles about the prime resets, I actually asked this question over on Trulia to see what our trusted real estate professionals would say. Note the first 6 or 7 responses didn't even adress the prime crisis...

http://www.trulia.com/voices/Home_Buying/Bottom_of_the_market_-49030--

 
At 8/06/2008 12:24:00 PM , Blogger Athena said...

I don't expect those at Trulia to engage in substantive discussion and analysis, Anon. I am sure there are some well educated and wise folks in the industry now and again, but many don't flock to the profession because of the demand for keen analytical skills and financial responsibility. many just lead through their lives with personality and are in the right place at the right time, willing to do paperwork for a transaction that the last several years has proven to be an emotional transaction.

People in the last 10 years spent more time researching which digital camera to buy than they did researching buying a house.

Trying to change the mindsets at trulia is quixotic. If you like tilting the windmills then there will be plenty to tussle with, though I bet you will find that battling wits with unarmed folks to get boring pretty quick.

 
At 8/06/2008 12:44:00 PM , Anonymous Jeremy said...

I actually asked just out of curiosity. Would they know about it, would they admit to knowing? I don't really have the inclination or spare time to try and change their minds.

I know I'm an ass for wishing the sonoma housing market goes down in flames, but I should get some reward for not falling into the greedy/stupid pothole that everybody else is living in. I'm glad to see there are some other people out there looking at this realistically and honestly.

 
At 8/06/2008 12:53:00 PM , Blogger Athena said...

Why is expecting housing prices to return to a realistic and sustainable balance in relation to income being an a$$? I don't think you are an a$$! and... I think our prize for staying sane is only going to be our sanity, and the ability to buy a house to live in that we can afford at some point in the future when all the fools are fully shaken out.

As for if folks on Trulia will even cop to awareness of the prime/alt-a meltdown on the horizon... I imagine it can't compute for them. How will they ever be able to tell who is a "qualified buyer" without being able to rely on a high credit score? How will people ever get mortgages if prime and alt-a melt down? Who will lend money and who will be qualified? the sky will begin to fall... because then they have to realize that the lenders that survive may well go back to larger down payments and full documentation of ability to repay... and oh no! very few of those realtwhores know anyone who can qualify for their loans by that criteria. And if that is true... then prices will have to return to normal and that will ruin a lot of people... and no more will houses be a commodity like tulips. If all that is so... well, then what will they do?

 
At 8/06/2008 12:55:00 PM , Blogger Athena said...

oh and ... Calling MV! Where ya' been girl?

 
At 8/06/2008 04:51:00 PM , Blogger Lisa said...

"How will people ever get mortgages if prime and alt-a melt down? Who will lend money and who will be qualified?"

We'll be back to conventional lending practices when this happens, which means we'll be back to conventional home prices....i.e. the median household income can afford the median priced home with a 20 % down payment and 30-year fixed mortgage. A long, long, painful way to go.

And the MSM and its RE "experts" never see anything on the horizon. It's not until something blows up in front of their faces that it becomes acknowledged. Look at what they said about Subprime....small % of the mortgage pool, no big deal, much ado about nothing. It's almost taken down our financial system, and we still have AltA and Prime resets coming our way.

Couldn't happen to a nicer bunch, if you ask me -);

 
At 8/07/2008 11:44:00 AM , Blogger marin_explorer said...

People in the last 10 years spent more time researching which digital camera to buy than they did researching buying a house.

Isn't that the truth! In early 2005, I researched buying outside the state and noticed something odd was happening. Researching just a bit further brought me to the conclusions which are now common knowledge--in retrospect. Then again, if all your friends were extolling real estate as the "next great thing" (remember that?), suggesting a downside to this fiasco would've been an unhip, "loser" thing to say.

I suspect very few homebuyers took their research further than friend's advice. I think the Bay Area looks at themselves with a particularly large set of blinders--and the downside will be acute because few think it can happen here.

 
At 8/07/2008 11:54:00 AM , Blogger Athena said...

ME- nice to see you! Isn't it funny how the same experience of everyone proclaiming RE is the holy grail and it only goes up, and Sonoma is the new Sausalito, drove such different behavior? You, me, and many of our friends on this blog and others were motivated to do more research and discuss financial fundamentals and do a little basic math and (gasp) dare to shame the devil and speak the truth... and yet so many others were motivated to throw all their 3rd grade math skills to the wind with their caution and sign up for a financial rollercoaster ride to housing hell?

So very odd. I think we all ought to pick up that little book called: The Madness of Crowds

you would think that $$ would motivate people to think just a little... I can hardly understand how so many were so foolish ... but history says this is nothing new, tulips, tulips, tulips... they only go up, you can't lose, you double your money every year, everyone wants them... tulips, tulips, tulips.

That one seems even crazier than the housing mania... tulips? really? but it turns out it was the same kind of crazy.

 
At 8/07/2008 05:29:00 PM , Blogger Lisa said...

"you would think that $$ would motivate people to think just a little... I can hardly understand how so many were so foolish ..."

Athena, I know so many people who bought during the bubble with nothing down (or a tiny down payment), piggy back loan, IO, the works....and jumped at the chance to live way beyond their means for a few years until their voodoo loan reset.

Think about money? It was all someone else's (i.e. the bank's). What's to think about?? All they thought about was the teaser payment and the guaranteed road to riches.

As down payments become the norm again, and people have to cough up $50K, $100K, $150K of their OWN MONEY, then we'll see people giving some serious, serious thought to what they're buying.

 
At 8/07/2008 06:04:00 PM , Blogger Athena said...

As down payments become the norm again, and people have to cough up $50K, $100K, $150K of their OWN MONEY, then we'll see people giving some serious, serious thought to what they're buying.

...and if substantial down payments become the norm again- we will see a return to normal prices, and in a hurry. There will be few to no sales if 50k, 100k, & 150k down payments are expected.

1998 was the last year of normal housing increases on the trend line.

in 1998 the median priced house was: $218,950

in 1999 it was $244,000

I am sorry, but houses don't increase even 10% a year.

The value certainly doesn't triple over 10 years.

Sonoma County is going to have to give it all back.

I realize the median is now about 2003 territory... but we still have 4 additional years of ill gotten gains to give back.

2003 is still close enough to double what prices should have been. So... get in, sit down, hang on, and scream your head off to your heart's content, because there is still a rough ride ahead for the FB's and their RE cheerleaders.

 
At 8/07/2008 06:22:00 PM , Blogger Lisa said...

"...and if substantial down payments become the norm again- we will see a return to normal prices, and in a hurry. There will be few to no sales if 50k, 100k, & 150k down payments are expected."

I actually think the GSE's raising the loan limit to $729K for the Bay Area was the nail in the coffin. Now there's NO SUCH THING as a non-conforming mortgage up to this amount.

Sure, you can get in for a 3% down payment, but you have to document the income to qualify to carry 97% of the purchase price + interest.

So, either way, people can't buy. They don't have the money saved for a hefty down payment, nor do they have the ability to document income to carry a high LTV ratio if they make a small down payment.

Game over.

I can't wait until peoople really understand how utterly disconnected prices got from local incomes. No more crap about how special an area it is, blah, blah, blah.

For those cute little westside cottages, an income of about $130K a year would be required to buy even a $400K house under conventional lending standards. Yeah right. Lots of those folks running around, I'm sure.

 
At 8/07/2008 06:43:00 PM , Blogger Athena said...

yep... they all have to qualify for a conforming loan up to $729k.

That is indeed the nail in the coffin. All those prime and Alt-A getting their resets and wanting to refi into a better loan will have to prove they have the income and good debt to income ratio. This is where the bottom falls out. ;-)

 
At 8/07/2008 07:28:00 PM , Blogger Lisa said...

"yep... they all have to qualify for a conforming loan up to $729k."

I emailed the SF Chronicle reporter who wrote the all too predictable "we're saved" article when the GSE loan increases were announced. I reminded her that no one would be buying houses up to $729K who didn't actually qualify. Lo and behold, 2 months later, another article appears about how the increased loan limits weren't helping all that much, as not many buyers qualified under all the rules for conforming loans.

People just refuse to get it.

 
At 8/08/2008 01:40:00 PM , Anonymous Anonymous said...

you would think that $$ would motivate people to think just a little...

Money does motivate people to think. But given that so much real estate money was not theirs, but borrowed way too easily, they didn't think cuz they had nothing to lose (or so they thought).

Oh, and welcome back to the bloggosphere Athena.

- Marinite (who seems to have forgotten her password)

 
At 8/08/2008 01:44:00 PM , Blogger Athena said...

Hey Marinite! Thank you for the welcome, and welcome back to you too! It is always good to see you and your musings and opinions. Keep them coming!

I guess $$$ did motivate them, just like the tulip craze people were excited just to "get in the game" as so many put it. They were motivated by dreams of $$$ and somehow blinded to their responsibility for their debts.

It is all coming home to roost now, and we are just seeing the tip of the iceberg. We will see just how the unsinkable primes and alt'-a does in the frigid waters of financial reality.

 

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