Bay Area Home Prices Surge... Have We Hit Bottom?

The Case Shiller numbers were released this week and they showed housing prices surging, most prominently in Northern California. To the right is an updated graph of the Case Shiller Index using a home that was hypothetically valued at $600,000 at the peak in 2006.

In June this home increased in value to $342,692 from a low in March of $323,588. The futures market at the CME show housing prices increasing again in the next three months with our home peaking at $351,697 in September. From there it trials off through the beginning of next year but no where near the drastic declines predicted a few months back (i.e. below $300,000 by year-end).

So is this the bottom? Clearly the surge is something more than seasonality, something just last month I thought was mostly responsible for the jump in housing prices. Other factors include low interest rates (courtesy of the Federal Reserve), low down payment FHA mortgages (courtesy of government), tax credits (via both California and the federal government), and what seems to be a near panic to buy homes among prospective buyers. In some ways it is as if we are right back in bubble mentality.

Here are some comments I've received that back up this last point.

First from a prospective buyer with their finances in order, looking for a place to settle down for the long haul. Look at what they are up against:

...We're looking in Healdsburg, Sonoma, and Napa. We were going to make our purchase in the Winter, but a few places caught our attention.

The problem was actually getting an opportunity to make an offer. The listing agents say they are being bombarded with phone calls on the properties and other brokers can't be bothered to even put in the offer. One agent said "Please don't ask me to put in an offer on [address withheld]. You're never going to get it. They're getting like 50 offers." That was the only Redfin agent that actually returned our call. We tried traditional agents as well.

...Right now, it seems nearly impossible to even put in an offer, which makes me wonder if buying an REO is all that realistic.

When Redfin, which prides itself on making online offers, won't even place your offer, I begin to wonder.

And from someone involved with Sonoma County REO's:

I work for the most successful REO agent in Sonoma County. I have seen 3 major trends emerge in the last 60 days. 1. REO's have almost completely dried up. 2. Contingent Short Sales (Most of which never sell) are dominating the market and are driving up prices in some areas by tying up most of the active listings. 3. We are doing pre-foreclosure and REO BPO's on a very large number of homes valued from $400k to $1 Mill+.

Again, right now the system is getting propped up by the government (now responsible for over 90% of new mortgages) and banks who don't want to recognize losses on their balance sheets. This can't go on forever. Interest rates will soon be heading up and FHA loans with only a 3.5% down payment will eventually end (once taxpayers are forced to pick up the bill for losses on FHA loans expect standards to go up). And of course, more foreclosures are coming.

So have we hit bottom? Absolutely not.

Banks Walking Away From Homes

CNN details how banks are choosing to walk away from properties, rather than foreclose:

Interesting that Bank of America is the lender they profile. Sounds a bit like Petaluma.

Weekend Reading

Today's edition of the Wall Street Journal has a feature article entitled: "The New American Dream: Renting".

It is an excellent history of the reasons for our obsession with home ownership in the United States and why renting doesn't deserve the stigma attached to it.

Here are some highlights:

On current attitudes towards home ownership:

Many economists, like the Wharton School's Joseph Gyourko, are beginning to make the case that public policies should encourage renting, or at least put it on a level playing field with home ownership. A June 2009 survey commissioned by the National Foundation for Credit Counseling, found a deep-seated pessimism about home ownership, suggesting that even if renting doesn't yet have cachet, it's the only choice left for those who have been burned by the housing market. One third of respondents don't believe that they will ever be able to own a home. And 42% of those who once purchased a home, but don't own one now, believe that they'll never own one again.

On how mortgages used to be viewed:

Until the early 20th century, holding a mortgage came with a stigma. You were a debtor, and chronic indebtedness was a problem to be avoided like too much drinking or gambling. The four words "keep out of debt" or "pay as you go" appeared in countless advice books. As the YMCA told its young charges, "If you can't pay, don't buy. Go without. Keep on going without." Because of that, many middle-class Americans—even those with a taste for single-family houses—rented. Home Sweet Home didn't lose its sweetness because someone else held the title.

...and on the current mess we're in:

During the wild late 1990s and the first years of the new century, the dream of home ownership turned hallucinogenic. The home financing industry—at the impetus of the Clinton and Bush administrations—engaged in the biggest promotion of home ownership in decades. Both pushed for public-private partnerships, with HUD and the government-supported financiers like Fannie Mae serving as the mostly silent partners in a rapidly metastasizing mortgage market. New tools, including the securitization of mortgages and subprime lending, made it possible for more Americans than ever to live the dream or to gamble that someone else would pay them more to make their own dream come true. Anyone could be an investor, anyone could get rich. The notion of home-as-haven, already weak, grew even more and more removed from the notion of home-as-jackpot.

The author, Prof Thomas J. Sugrue, has a book coming out on the history of real estate in modern America. Judging by this article it will be worth the read.

Foreclosure Activity in Sonoma County by City

Here a few graphs depicting foreclosure activity in Sonoma County using data from ForeclosureRadar.com. Click the graphs to enlarge.

Green bars show homes who are delinquent on their mortgage payments (stage 1 in foreclosure), blue bars show homes that have been scheduled for auction (stage 2 in foreclosure), and red bars show homes that are now owned by the bank (foreclosure complete).

As we continue to stress at this site, there are many more foreclosures on the way.

Bloomberg Chart of the Day: Housing Could Fall For Years

Via Bloomberg:

An Example of Shadow Inventory

Out at the Peak profiled a home on Yeager Drive in Santa Rosa earlier in the year pointing out it had been in escrow 3 or 4 times yet the sale would always fall through. The house still has not sold... yet it is NOT listed on the MLS, an example of "shadow inventory" in Sonoma County.

The history of the home is telling. According to Redfin the last sale was in October 2004 for $449,000. But ForeclosureRadar.com show another transaction occurring in January 2006 when title was transferred with a 1st mortgage of $433,600 and a second mortgage of $46,000 (total: $479,600). Both these loans were from Alliance Bancorp of Brisbane, California.

A year and a half later in July 2007 Alliance Bancorp of Brisbane filed for bankruptcy due to defaults in its Alt-A (low-doc) loan portfolio.

A year later in July 2008, a notice of default was filed on the house on Yeager as they had stopped paying their mortgage. By October it went up for auction and was resold to the bank (obviously not Alliance since they were out of business).

Since then it has been on and off the market, but is currently not listed on the MLS. In short, this IS shadow inventory. Comparable homes in the area are now selling for around $250,000, about 50% off the peak.

One last note: while doing research for this post I saw that Alliance Bancorp's former CEO is now working at an investment group in San Francisco that specializes in residential mortgage backed securities. Her bio states:

"Ms. Lisa Huehring was President/CEO of Alliance Bancorp, Brisbane, CA, where she was responsible for the vision, mission and culture of the company. In 2006 and 2007 Alliance Bancorp originated over $8 billion in high credit quality mortgage loans,..."

[emphasis mine]

Google Maps Now Shows Homes Entering Foreclosure

Google maps has added a feature to help real estate investors. Not only can you see homes for sale, but they now map pre-foreclosure homes whose owners are late on their mortgage payments (i.e. notice of default has been filed), and homes that that will be auctioned off on the court house steps. While not as detailed as ForeclosureRadar.com, this is a great option for a free search.

Click on the red dots, and then "more info" to see what state of foreclosure these homes are in:

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