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:

View Larger Map

Bay Area Home Prices Up Again According to Case-Shiller

Here is the updated Case-Shiller graph for the San Francisco index. The index was up again for the second month. This month I did not include the CME futures data as it appears there is a problem with their website and the prices are not updating from last month.

It has been pointed out that the data is seasonal, so the May increases probably do not mark a turning point for the real estate market. Sure enough, if you look at the monthly changes in the index, it is clear that May has been strong in the past. The trend looks to be continuing this year.

Another point, stressed by Mark Hanson of the Field Check Group is that the indexes will move up as high priced homes begin to sell at lower prices.

Here is Mark on the subject in early June:

I was on CNBC several weeks back with Erin Burnett and she asked if there was any chance for the Case-Shiller to suddenly spike one month in the near-term. I said ‘no major spike — but there absolutely will be price leveling and even rising in some the hardest hit MSA’s’. It’s time to revisit this.

In my April 30th report entitled ‘Housing (bottom) Update’ I highlighted the reasons why some of the hardest hit MSA’s might do well over the near-to-mid term:

• artificially depressed supply through gov’t and bank-specific foreclosure moratoria;


• artificially low rates and temporary tax benefit;


• foreclosure mix-shift creating an artificial skew higher in reported median and average prices;


• And fleeting seasonal demand.

Essentially, everything is artificial and so should the bottom that comes out of it. I have been looking for this false bottom phenomenon to play out for months and believe it is here.

Real Estate Agents and Rose Tinted Glasses

Local agent Dave Roberts does some good work on foreclosure data in Sonoma County but I have to take issue with a recent post where he profiled two neighborhoods in South Santa Rosa, Kawana Springs and the Santa Ana area. In it he points out "the attractiveness of both sets of homes as entry level housing in Santa Rosa" but neglects some major faults in the neighborhoods.

Some of the homes are dramatically off their highs (from the mid-$400,000s to low $100,000s). But while the price declines are impressive, to me, the post is more of a demonstration of how real estate agents wear rose tinted glasses.

When you're a hammer everything looks like a nail, and when you're a real estate agent every home looks like a buy. But the question to ask is: "What is the upside AND DOWNSIDE of buying in this area?"

Renting a home in the area is another option. Given some of the current problems in the neighborhood (most not mentioned in the post) I’d say it is the smarter one. That way you can get a real feel for the area before potentially locking yourself in for 30 years.

In the Santa Ana area profiled, the post mentions some problems like "illegal garage conversions, dilapidated facades, cracked concrete driveways and patios, and failing roofs". This however is just the start of the issues. The biggest is crime. Not ideal for first time buyers looking to start a family.

Don’t take my word for it, listen to the residents themselves:

“You don't want to be raising your kids here,” said John Kelsey, an Aston Avenue parent who wants to move his young family of six to Sebastopol.

This quote is from an article in the Press Democrat describing a break in and molestation of a 12 year old girl at duplexes on Aston Avenue, the street that parallels Santa Ana Drive. Reading the article will make your stomach turn.

Kawana Springs to the south is described in the post simply as “blocks apart physically, but miles apart in terms of amenities, style, price, and maintenance.” Looking at the homes that is no doubt true. But in terms of crime they are suffering from some of the same problems. Again, from the Press Democrat last month:

The break-in is the second time in as many weeks that a sleeping Santa Rosa girl has been approached by a man entering a home in the early morning hours. Last week, a man approached a 13-year-old girl in her home on Tokay Street, just a few blocks south of Tuesday's attack. He fled but the girl recognized him as a neighbor and he was arrested.

Other problems include murders, shootings, gangs, drug deals, and a general feeling of unease especially at night according to the article. Is this the best place for first time buyers even if homes are going for $120,000? Some residence claim the fears are overblown, but reading the post gives no hint of any of these problems. First time buyers stumbling upon his site I think would find this information relevant.

Another issue I have is when the post states:

A 10% down payment is only $12,500 for the low end of this market, and that's only about twice as much as the initial deposits to rent an apartment.

Since when is an initial deposit about $6250? Deposits on apartments less than a half mile away are 1/10th that amount ($600).

The post also implies that the foreclosures in the area have for the most part already worked their way through the system when it states:

The bubble victims are mainly gone. Banks have either taken ownership or already sold these foreclosed properties to new buyers.

This map from ForeclosureRadar suggests otherwise. There are numerous homes where people have recently stopped paying their mortgage (green circles with a “P”) or where an auction has been set at the court house steps (blue circles with an “A”). Many of these will turn into foreclosures. I’m also sure we will see more delinquencies in the months ahead given Sonoma County’s double digit unemployment rate.

Finally, even at these apparent rock bottom prices there is still considerable downside. Given the problems described above I wouldn't be surprised if some of the homes in the area fell below $80,000 in the coming years as interest rates rise. Because people buy real estate with leverage this would mean losing not only your down payment, but also upwards of $25,000 if you put down 10% on a $120,000 home.

The post concludes stating that Kawana Springs offers "great first time buyer homes for people who can qualify for the higher payments on a house that is selling for around $300,000" and the neighborhoods "are both useful ways to get started in the housing market in Santa Rosa".

I would disagree. I don't have a crystal ball, but if a friend or relative were looking to buy their first home in these neighborhoods I’d suggest they reconsider. From my perspective, renting and continuing to save would be a better option than plunging into home ownership in this area given the risks.

Update on Sonoma County Foreclosures

Data showing people are falling behind on their mortgage payments soared from April through June. Actual foreclosures... not so much.

I've updated the graph showing Sonoma County Notices of Defaults (blue bars - borrowers are 60-90 days late on their mortgage) and Trustees Deeds Recorded (a signal homes were lost to foreclosure).

Notice of defaults continued to climb nearing all times highs. However, this did not translate into more foreclosures which only slightly nudged up.

These bad loans will have to be dealt with eventually. Notice that the last time NODs were at this level it led to 933 foreclosures in the 3rd quarter of 2008. That's nearly double the current rate.

According to a quote from the Press Democrat the president of DataQuick expects foreclosures to "shoot back up" over the next three months.

Data from ForeclosureRadar confirms this assertion. In just the first two weeks of July their have been 125 auction dates set for delinquent homes in Sonoma County. In all of June there were just 144.

Again, if you're in the market for a foreclosure, don't panic when your real estate agent tells you about dwindling supply. There is plenty more on the way.

The Healdsburg Foreclosure Market

Dave Roberts has a post up documenting new bank owned properties in Sonoma County. In his chart (that I'm reposting) he breaks down new REO's in the county by month and by city. Interestingly, it shows there is huge variance of supply by city each month. Cloverdale and Petaluma stand out in particular as foreclosures will jump back and forth between being practically nothing to soaring.

Healdsburg, as one might expect, has had very little action on the foreclosure front. Heading to Dave's Healdsburg REO map confirms this trend as we see there are but a few foreclosure within city limits. But can we expect more in the future?

Dave states in his post regarding the county as a whole:

There are continuing reports of a vast pipeline of foreclosed properties ready to hit the market. Only time will tell if that new surge in properties materializes. For now, this chart shows the modest and relatively small flow of Sonoma County bank owned homes into the marketplace.

My contention is that a wave of foreclosures will be hitting, and Healdsburg will not be immune from it. Heading back to Dave's map we see that one of the foreclosures he lists is at 1337 Lily Street for $275,000. It is one of the few foreclosures in the area, but if we take a look at ForeclosureRadar.com we see that trouble could be brewing on the horizon.

On Fuchasia Way just down the street there are 3 homes that have Notice of Defaults because they have stopped paying their mortgage. On March Ave in the other direction, just this past Tuesday, another Notice of Default was filed on a home less than a block away.

Looking at the loans it become clear how slowly this crisis is progressing. The loans were issued by New Century Financial (once the second largest sub-prime lender in the country, it filed for bankruptcy in 2007), GMAC Mortage Corp. (now government controlled), Golden West Financial (Option-ARM king which we have covered here), and Indymac Bank (the 4th largest bank faliure in the history of the United States). This is a who's who of troubled lenders but NOD's are just being filed and none are yet foreclosures.

This tells me we're just beginning this mess. In the months ahead there will certainly be more NOD's which will lead to more foreclosures.

ForeclosureRadar.com is a subscription service but in my mind is worth the money to real estate agents and home buyers that are interested in the foreclosure wave to come.

If you don't want to pay the subscription, another great source is the Field Check Group which publishes one free report a week based on ForeclosureRadar's data. Their last report describes a "brutal" last two months for the mid to high end real estate market.

More on Option-ARM Loans

Yesterday Calculated Risk linked to our article on Option-ARMs and the Credit Suisse reset graph. To review, the point of the post was that while Wells Fargo claimed that virtually none of their $100 billion Option-ARM portfolio would recast before 2012, the Credit Suisse graph showed that no recasts would occur after 2012. Looking at the data it was clear that Credit Suisse made an error in their calculations.

Since there has been new activity in the comment section and I've started to get emails on the subject I wanted to clarify a few points:

1) I've gotten emails asking: "Given your chart, how is it that my neighbor/client/friend's Option-ARM loan recast last year?" The answer is either A) a lower cap (many lenders had a 110% cap, as opposed to the 125% cap for virtually all of Wells Fargo's Option-ARMs) or B) a higher margin (I use 2.5% which was a typical rate but it was higher for some mortgages. If you up the margin to 3.5% you're going to recast much sooner).

2) I agree that all this talk about recasts being pushed out might be a moot point. Option-ARM borrowers still face yearly increases of 7.5%. That starts to add up quickly and will likely get people walking away from their homes well before the recast date.

And if you read the first article posted at CalculatedRisk you'll see that 36.9% of Option-ARM loans are already over 60 days late on their payments.Sonoma County I'm looking at you! If those aggregate numbers reflect what is happening to Wells Fargo's portfolio, there won't be many loans left to recast in 2014.

Sonoma County Foreclosure Specialist

This weekend the Press Democrat profiled the real estate agent who was connected with nearly 1 in 10 sales in Sonoma County in 2008 due to his focus on foreclosures. Here is the first few paragraphs from the article:

James Madison peers into the window of the empty Santa Rosa home, quickly calculating numbers in his head.

The lawn is dead. Junk mail is piled on the stoop. A notice taped to the front door warns against illegal entry.

A week earlier, the owner lost the West Eighth Street home, unable to pay the mortgage any longer.

Madison’s job is to find someone to buy the small, threadbare house. He figured the residence could easily sell for $145,000, ideal for a first-time buyer — a bargain compared with the $345,000 paid by the previous owner just four years ago as Sonoma County home values were reaching record highs.

Judging by this visual from ForeclosureRadar.com of the current and past foreclosure activity around West Eighth Street, it's no wonder he is busy:

Home Price Falls From $236,000 to $30,000

Here is a sample of homes in the Atlanta area that were sold in 2005, 2006, and 2007... and what they are selling for this year. Look at #4. It recently sold for $30,000.

Try to find a deal like that in Sonoma County.
Fire Sale

Over 94% Chance Sonoma County Homes Decrease in Value

Mortgage Insurer PMI Group just released their second quarter report forecasting home prices in the 381 MSAs across the U.S. The title of this article sums up their findings nicely: "Expect More Home Price Declines Almost Everywhere".

Regarding Sonoma County, as you'll see by looking at the map our area is colored candy apple red. The color refers to the chance that home prices will be lower in two years. Probabilities are as follows:

Blue = 0-10%

Green = 10-30%

Tan = 30-50%

Orange = 50-70%

Red = 70-100%

Looking at the actual data we see that they put the probability of the Sonoma County home prices declining at 94.2%.

Derelict Foreclosure Ruins Neighborhood... But Did Bank of America Actually Foreclose?

This morning the Press Democrat ran a front page article titled: "Fight Against Blight". It details the plight of Phyllis Sharrow of Petaluma who has the unfortunate luck of living next to a foreclosed property. Weeds have overtaken the lawn of the abandoned home next door and her property value is being affected. Calls to Bank of America to try to get the place cleaned up go unanswered. This has been going on for 2 years prompting her to put a sign outside her home with an arrow pointing at the foreclosure stating: "Bank of America. Your taxpayer bailout dollars at work. Our home values lose!"

Looking at the photo that accompanies the article we can see the address is 821 Madison Street. I pulled up the address on ForeclosureRadar.com and got the history of the property. Shockingly, the bank has NOT foreclosed on the home according to their data. Here are the details:

Loan Amount: $494,000, 9/29/2006

Notice of Default - 4/25/2008

Notice of Trustee Sale - $544,954 (neg-am?), filed 8/6/2008

Notice of Trustee Sale Scheduled for 10/17/2008

NTS then Cancelled...

So it looks like the home was never foreclosed on and therefore is not owned by the bank.

Is Bank of America just sitting on this loan and letting the property deteriorate? I've heard that banks are reluctant to foreclose because A) this forces them to recognize a loss on the loan, and B) if they do foreclose they are the owners and are responsible for the property taxes.

To me it looks as if that is what is happening here. But how long can this go on? You would think the banks would want to flush out these loans before the mid- to high-end foreclosure crisis is upon us.

The Elusive Milllion Dollar Sale

Three weeks ago a milestone was reached in Healdsburg. According to Redfin, for the first time this year a million dollar home was sold in the Healdsburg area. Compare this to the glory days of, dare we say... 2007, when 15 million dollar homes were flying off the shelf.

I don't have easy access to the data more than 3 years back but I'm guessing that in 2005 the numbers were even higher.

Back then, a million dollar home was your ticket to a quick quarter million dollars when you would flip the place after putting in granite counter tops, hardwood floors, and remodeling a bathroom.

Today, a quarter million dollars is the amount of cash you need for a down payment to buy such a home. For that reason there is but one sale year to date.

Two things to note about this particular sale on 235 Appaloosa Trail overlooking some of the foreclosed homes we've covered in the past:

1) the previous owner took a loss (it last sold for $1,295,000 in 2004, compared to the sale price last month of $1,150,000).

2) in Healdsburg there are 18 other single family homes listed above $1 million according to Redfin. Just yesterday, two more hit the market (here and here). If the 2009 sales pace continues it will only take 9 years to clear the current inventory.

Case-Shiller Bay Area Update

The Case-Shiller numbers are out and for the first time in quite a while there was an uptick in the monthly data for the San Francisco data. On our chart, the value of our $600,000 home jumped from $323,588 in March to $325,484 in April. The futures market shows continued deterioration through the end of the year.

Regarding the rebound, this was predicted by Mark Hanson at the Field Check Group. With artificially depressed supply, artificially low rates, and foreclosures on the higher end of the market are putting some upward pressure on the index temporarily.

However, this does not mean the market is bottoming.

Here is Mark on the subject in early June:

I was on CNBC several weeks back with Erin Burnett and she asked if there was any chance for the Case-Shiller to suddenly spike one month in the near-term. I said ‘no major spike — but there absolutely will be price leveling and even rising in some the hardest hit MSA’s’. It’s time to revisit this.

In my April 30th report entitled ‘Housing (bottom) Update’ I highlighted the reasons why some of the hardest hit MSA’s might do well over the near-to-mid term:

• artificially depressed supply through gov’t and bank-specific foreclosure moratoria;


• artificially low rates and temporary tax benefit;


• foreclosure mix-shift creating an artificial skew higher in reported median and average prices;


• And fleeting seasonal demand.

Essentially, everything is artificial and so should the bottom that comes out of it. I have been looking for this false bottom phenomenon to play out for months and believe it is here.

Sign the World is Coming to an End

Sheila Bair is the head of the FDIC.

She's got a front row seat to witness the real estate crisis. This past Friday alone her agency took over 5 more troubled banks with non-performing real estate loans. She also has an army of economists on staff that must be telling her we're far from out of the woods yet.

So who does get advice from on her home? According to this article her Realtor:

After listing the five-bedroom property in April, the couple cut the price to $745,000 less than three weeks later, then reduced it again before withdrawing the listing. Ms. Bair's real-estate agent, Stephen Feldman, of Prudential Sawicki Real Estate, declined comment. An FDIC spokesman said Ms. Bair decided to remove the listing and wait for the market to improve on the advice of her real-estate agent.

That's scary. With this kind of denial we're in for a decade of price declines.

California Tax Credit for New Home Purchases to End

The $100 million dollar fund California set up to subsidize new home purchases via a tax credit is coming to an end. Enacted March 1st, about $95 million has already been used. With the state government in a budget crisis don't count on this getting refunded.

The Wall Street Journal has the details:

To jump-start the ailing housing market, the state set aside $100 million for qualified buyers on or after March 1. With some able to combine the Golden State's bonus with a federal credit of up to $8,000 for first-time buyers, the response has been enormous. Some $94.7 million has been claimed via 9,848 applications, according to the most recent data from the state's Franchise Tax Board.

...not everyone was a fan, anyway. Critics said it promoted building new homes and did nothing to ease the glut of existing inventory.

"All this ended up doing is adding additional supply to the California markets, many of which are among the most oversupplied in the country," Stevenson said.

Visual of Windsor Foreclosure Wave to Come

Via ForeclosureRadar.com, here is an image of 35 bank owned properties in Windsor that have already been foreclosed on:



And here is an image of the 182 homes that have recieved a Notice of Defualt (Green) or already have an aution set for the property (Blue). Most of these will soon be foreclosures:


Don't believe the real estate agent hype that you need to "buy now" because supply is drying up. Clearly there will be plenty more bank owned homes for sale in the near future.

Agent Admits Banks Holding Foreclosures off the Market

In case there was any doubt that banks are trying to create the illusion of limited supply of homes on the market, real estate agent Chris Smith of Santa Rosa sets the record straight in the Press Democrat:

While buyers are snapping up distressed homes, the supply could swell again if banks put more on the market, said Chris Smith, a CPS agent in Santa Rosa who sells foreclosed homes.

“The fact that the banks held foreclosures off the market from the foreclosure agents dried up the supply,” he said.

Some banks held off selling foreclosed homes this spring after President Obama launched an effort pushing lenders to help owners stay in homes, Smith said. Banks also didn’t want to help drive prices lower by flooding the market, he said.

After receiving a handful of foreclosure listings the past two months, Smith received six in the past week.

“I think we’ve got another wave of foreclosures that is about the same size as the first wave that we had,” Smith said.

Expensive Homes will be last to recover, will fall 60% from peak.

While housing at the lower-end of the market is currently selling, there is no such luck for homes in $1 million plus range. As Bloomberg reports:

Prices for the most expensive U.S. homes may not reach bottom for another few years, according to JPMorgan Chase & Co. analysts...

“Currently, we have national home prices bottoming in 2011,” [JPMorgan Chase & Co.] said. “However, prices for more expensive homes may not bottom out until 2012, and ultimately result in peak-to- trough declines in excess of 60 percent (compared to 40 percent nationally).”

“California is probably worse than other states, but higher-priced homes in general are going to be a problem,”

Sonoma County take note.

Finally a sale at Canyon Run?

It looks like 1720 Canyon Run has finally sold. Really this time.

We've followed this home for quite a while so it is interesting to see the price where it settled: $395,000.

But what I decided to do was to graph the last sales price of all 36 homes on the block given that most are very similiar. As you can see after a flurry of activity after construction was complete (1999 and 2000), very few sales pushed prices up in the neighborhod.

This last sale confirms that the trend is heading back down. I doubt we're done yet.

(Note: To clarify the presentation of the data, 12 sales in 2000 means that of the 36 homes on the Canyon Run block, currently 12 had their most recent sale in the year 2000. More than 12 homes could have sold in 2000, but these would have been flipped and sold at a later date. Example: If a home sells for $270,000 in 1999, sells again in 2003 for $423,000, then in this chart its 2003 data is used.)

Walking Away with a 780 Credit Score

Mish just posted a letter he received from a reader. I found these segments telling of what lies ahead:

I am a condo owner who has done nothing wrong. I put money down, I did not buy over my means, and I did not attempt to use my house as a credit card. As a matter of fact, I am still employed and I still continue to make payments on my mortgage. All that said, I am at a loss of over 100K and the banks are unwilling to work with me because of the loss of equity.

I've actually had one loan officer laugh at me when I called to discuss the refi...

...I simply - simply - cannot see a good business reason to continue paying on my mortgage. I try to rationalize the situation, but there is *NO* good business reason. Please understand I say this as a person who has NEVER missed a bill in my life. My credit rating is 780 (averaged between all three agencies). I've always taken pride in paying and making my own way... but I've reached my breaking point.

Remember, 60% of Sonoma County homes sold in the last 5 years have negative equity. This could very well be another driver of foreclosures in the future.

Glass Half-Empty vs Glass Half-Full on Sonoma County Foreclosures

Dave Roberts has a follow-up post on his website taking another look at REO sales in Sonoma County. Head over and give it a read.

The bottom line is that REO sales have picked up and there are currently less than 140 active REO listings on the MLS. Compare that to 187 REO sales last month alone! Good news for sellers, bad news for buyers... right?

Not so fast. Take a look at the graph to the right.

It shows Sonoma County Notice of Defaults, Auctions, and REO data off ForeclosureRadar.com (in blue) and compares it to Dave's active REO listing number of less than 140 (in red).

Clearly there is more supply that is going to be hitting the market. In the last 120 days 1,546 households in Sonoma County received Notice of Defaults. Another 890 have an auction date set for the courthouse steps. Finally, Foreclosure Radar shows a total of 535 REO's in Sonoma County (if you add up Dave's Pending, Contingent, and Active REOs it gets you somewhat close to about 392... does shadow inventory account for the remaining 143?)

Whether this is a glass half-full, or glass half-empty, depends on your vantage point. As most of these NODs turn into Auctions, and Auctions turn into REOs, supply will once again ramp up and prices will continue their fall. Glass half empty for sellers, but for buyers this means more selection at lower prices.

90% of New Mortgages Now Backed by the Government

The Mortgage Bankers Association is in front of Congress today calling for the U.S. government to continue to intervene in the mortgage market. But just how involved are they currently? The WSJ explains:

The government is providing guarantees on more than 90% of new home mortgages through Fannie Mae, Freddie Mac and the Federal Housing Administration.

This clearly shows that the only reason we're seeing slight signs of 'stabilization' in the housing market is because taxpayers are taking all the risk.

L.A. Times on Sonoma County Foreclosures

The LA Times highlighted the recent articles from Sunday's PD on their website and had this to say:

The Santa Rosa Press Democrat noted this weekend that many Alt-a mortgages, a type of variable-rate mortgage sold to people typically better off than subprime borrowers, are now heading into foreclosure in that area. The paper says 18% of Sonoma County mortgages are Alt-a's...

...As Calculated Risk notes in its analysis of the trend, when these borrowers are foreclosed, it may be harder to find buyers for their mid-range houses than for the bottom-end properties that now dominate the foreclosure market. That's because there are fewer "trade-up" buyers who sell a lower-priced home then buy a more expensive one. Sellers of low-end homes today aren't people moving up, but banks clearing out repossessed inventory.

"The foreclosure crisis will now be moving up the value chain," CR predicts.

Press Democrat on Alt-A and Option-ARMs

The Press Democrat published three articles on the mortgage crisis on the front-page of Sunday's paper authored by Michail Coit. Head over and give them all a read:

Ticking time bomb for borrowers in pay-option loans

Alt-A loans: Second wave of foreclosures ahead

and

Bank convinced SR borrower 'pay-option' loan was best

This line even surprised me:

Today, there are 18,000 Alt-A mortgages in Sonoma County. They account for about 18 percent of the county’s 102,000 home mortgages — triple the U.S. average, according to First American CoreLogic, a real estate research company.

This is an enormous amount of low doc loans and leaves little doubt that we're going to see more declines in Sonoma County real estate prices for years to come.

Reset Chart from Credit Suisse has a Major Error

Versions of the Credit Suisse reset graph have been featured in the Financial Times, used by the International Monetary Fund, and are a staple of web sites like these that are dedicated to the housing bubble. It’s fairly shocking then to see what appears to be a major error in their calculations.

Last week (here and here) I noted that something didn’t make sense about Wells Fargo’s estimates that only one third of one percent of their Option-ARM loans would recast before 2012. Reader’s comments and an email from CalcualtedRisk helped me to get my head around what was going on. In fact, Wells Fargo’s numbers are technically correct.

First for some background, when Wells Fargo purchased Wachovia it acquired about $120 billion of Option-ARM loans originated by a Northern California company called Golden West. These Option-ARMs, or “Pick-A-Payment” loans, allowed borrowers to literally pick their monthly payment from four options: 1) a payment that would pay off the loan in 15 years, 2) a payment that would pay off the loan in 30 years, 3) a payment that only covered the interest, and 4) a minimum payment that was less than the interest only payment.

The last option allowed for “deferred interest” or “negative amortization”. In essence, since not all the interest due was being paid by the borrower, the principal balance on the loan would grow each month. This was an extremely popular choice for borrowers at the peak of the real estate bubble, as Golden West noted in their 2005 year-end filing with the SEC:

In 2005, the initial monthly payment selected on almost all new loans was lower than the amount of interest due on the loans.

For obvious reasons this has been of particular concern. If the amount one owes on a loan goes up while the value of the home is decreasing, there is a heightened risk the borrower might walk away from the home leaving the bank to deal with the loss.

As the housing market has continued to deteriorate, the question on everyone’s mind is when will borrowers have to face the reality that they can't make a minimum payment forever? The Credit Suisse chart has been a guidepost for that reality check.

But interest rate resets don't pose much a problem for those with Option-ARMs when rates are low. They can continue making a minimum payment that only adjusts upwards by 7.5% once a year. The real "payment shock" comes when the loan is recast (i.e. becomes fully amortizing over the remaining term of the loan). This occurs after a contractual time limit (normally 5 or 10 years) or, if due to negative amortization, the loan value increases to 110-125% of the original principal of the loan.

For this reason Credit Suisse used the recast date in their chart above for Option-ARMs as stated by Mathew Padilla of the Orange County Register:

Credit Suisse, an analyst told me, used resets in the chart for all loans except option adjustable-rate mortgages, when borrowers can choose a minimum payment that may be less than interest owed (option ARMs are in yellow on the chart… see how they are rising!). For option ARMs it used recasts, which can happen either when the loan amount expands to a maximum allowed — often 115% or 125% of original principal — or a set period, such as five years.

If you’re paying close attention you'll notice that something doesn't add up. Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:

Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012... In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.

In short, Wells expects $56 million in Option ARMs to recast due to the loan balance reaching 125% of the value of the original loan and another $269 million to recast based on the terms of the loan. Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.

Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:

...most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.

History doesn’t look like it will be a good guide going forward but this at least clearly spells out what we are facing. If recasts don’t happen contractually for 10 years this means that the $49 billion of Golden West Option ARMs originated in 2004 will recast in 2014, and the $51 billion originated in 2005 will recast in 2015.

But take a look at the chart. Credit Suisse shows NOT A SINGLE OPTION-ARM RECAST IN 2014 (nor any in 2013 or the first three months of 2015).

Maybe Credit Suisse moved the recasts up based on the loans hitting their 125% balance caps as they state in their footnote? But again, the numbers don’t add up to what Wells states in their last 10-Q: virtually no recasts due to "reaching the principal cap" before 2012.


They also don’t add up if you model this out in excel with some actual numbers. Take a look at the table to the right (click for larger image):

Here we look at a hypothetical $500,000 Option-ARM mortgage originated by Golden West in January 2004 that now sits on Wells Fargo’s books. In order for the loan to recast before 2014 it needs to have enough negative amortization to hit the 125% limit. Wells Fargo assumes a "flat rate" environment in their calculations, but I assumed that today the CODI index (used for a majority of Golden West loans) plus margin jumps to 7% from its current level of 4.875%. At the end of the year I assume it jumps another 100 basis points to 8% and stays there until 2014.

Even with the assumption of higher rates the loan never hits its 125% cap. The loan currently has accrued about $40,000 of negative amortization. By 2014 it would accrue another $45,000, making the final balance $585,388 (115% of the original loan). In order to get the loan to hit the 125% cap by 2012 the accrual rate would need to jump today to 10% and say there for the next 3 years.*

In short, the Credit Suisse chart above looks to be incorrect. Contractually, these recasts won’t happen until 2014 and given the generous 125% cap it is unlikely negative amortization makes these loans hit that limit unless we have a major spike in interest rates. As mind boggling as it may seem, recasts for Wells Fargo’s giant Option-ARM portfolio won’t take place for another 5 years.

Of course, none of this is to say that Wells Fargo is out of the woods. They are essentially stashing away on their balance sheet tens of billions of neg-am loans that will recast into 20-year fixed rate mortgages in 2014 and 2015. Talk about a payment shock. (Although, it is important to note that the minimum payment automatically increases by 7.5% a year. If rates were to stay low this could mean that borrowers would eventually start paying more than their interest only payment and paying down their loans. My guess though is that these automatic increases will get people walking away from their homes before the recast date. Who wants to pay $3000 a month on a home that's underwater? Any way you look at it, it’s a mess.)

Also worrisome is that we’ve heard from readers that WaMu/JP Morgan is notifying Option-ARM borrowers that they are extending their minimum payments out another 5 years. Are they pushing off recasts into 2014/15 as well?

The bottom line something doens't add up when Wells Fargo predicts virtually no Option-ARM recasts before 2012, while Credit Suisse predicts no recasts after 2012. While I would guess Wells Fargo is underestimating recasts assuming a flat rate environment, the bulk of recasts do look like they will be pushed out to 2014/2015. Surely, some of these recasts need to be reflected in the Credit Suisse chart. I’ll leave it to others what this means for the housing market, but what is clear is this needs more attention.

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* [To verify these numbers download this spreadsheet from CalcualtedRisk, update the index with the CODI series, and plug in your own home values.]

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Update: Regarding the 125% cap, to clarify, this was for loans with a LTV of less than 85% at origination. This represents the structure of "almost all" the Option-ARM loans according the the Golden West 10-K:

A 125% cap on the loan balance applies to loans with original loan-to-value ratios at or below 85%, which includes almost all of the loans we originate. Loans with original loan-to-values above 85% have a 110% cap.

Case-Shiller Bay Area Update with Futures Data

(Click Image for Larger View)
Above is our monthly chart updating the Case-Shiller numbers with futures data from the Chicago Mercantile Exchange.

While the CME futures continue to predict home price declines out through the end of the year, they are slightly above where they were last month.

Courthouse Steps Auction in Sonoma County

Dave Roberts has a first person account up of a recent foreclosure auction down at 575 Administration Drive. If you've never attended one of these it is well worth the read. Here is a snippet:

Finally, on the sixth try, we got an active auction going. The opening amount for this property was only $62,000 and a series of four bidders made their way to the auctioneer to demonstrate their financial bona fides and provide their names. I should mention the auction master made it clear that cash or cashier's check were the only legal tender for the auctions and that even though she might say "sold" to a high bidder, until the money was in her hands, the bidding was still open...

There would be a long pause, much talking on cell phones, wandering back and forth on the plaza and then the fateful words, "plus 100". This went on for about an hour at which time the winning bidder (pictured with the phone to his ear (also the main Mr. Plus 100)) got the right to pay $128,000 for the property. I think that was probably a good deal, but several bidders had stopped at around $115,000, so maybe the deal isn't as good as I thought.

Surge of Activity at the Healdsburg Commons

Over the last few months there has been quite a bit of activity at the Healdsburg Commons. Units have sold, others have gone into escrow, and units still on the market have had their prices slashed.


Above is an updated chart with data I've pulled off the web on the units. Two things to note: 1) It will be interesting to see the actually selling price of the units currently in escrow if in fact the sales go through and 2) what price cuts will be needed to clear the remaining six units.

More on Option-Arms and a Request to Readers

It turns out we were on to something in the last post and all the comments questioning Wells Fargo's assumptions on Option-ARMs.

Above is the latest version of the Credit Suisse mortgage reset chart. The Orange County Register states:

Note that the chart uses both resets, when interest rates change, and recasts, when payments change. Resets and recasts often happen at once, but not always. Credit Suisse, an analyst told me, used resets in the chart for all loans except option adjustable-rate mortgages, when borrowers can choose a minimum payment that may be less than interest owed (option ARMs are in yellow on the chart… see how they are rising!). For option ARMs it used recasts, which can happen either when the loan amount expands to a maximum allowed — often 115% or 125% of original principal — or a set period, such as five years.

Funny how Wells Fargo assumes virtually no recasts before 2012. Remember, Wells states that they expect only $325 million to recast before 2012 assuming flat rates. This on a portfolio of over $100 billion.

Is Credit Suisse taking this into account? Or are we going to get another wave in 2015? Either way Wells Fargo's assumptions are insane. CalculatedRisk asks the same questions and promises a follow up post.

Also, I have a request for readers. It has been mentioned in the comment section that banks have been automatically extending the teaser rate periods for up to 5 years on loans. One reader wrote saying the low rate on their Option-ARM from WaMu had been automatically extended for another 5 years last fall. There are some really perverse incentives here as A) the new low rate keeps people paying but just pushes the day of reckoning out and B) banks get to book this additional negative amortization as revenue (this has been called "phantom revenue" see more here).

Does anyone have access to a copy of one of these letters that is automatically extending low rates another 5 years? If so, I'd love to take a look at a copy and post it. You could black out all the names and account information to make it anonymous. If you could obtain something like this please send it to healdsburgbubble@gmail.com.

Remember, Sonoma County is ground-zero for Option-ARMs. These loans will no doubt be a driver for the high-end housing market for years to come.

Big Price Cut at 529 Fieldcrest Drive

After "selling" for $473,064 two weeks ago, 529 Fieldcrest Drive is back on the market and now listed for $332,500.

This should be of particular interest to comps in the area.

Something Not Adding Up on Option-ARMs

Here in Sonoma County we need to pay particular attention to Option-ARM loans (some of the most toxic that allowed for negative amortization). As we've pointed out before, we are second nationally only to Salinas in issuance of Option-ARM loans according to BusinessWeek. This a time bomb on the horizon for Sonoma County as 37.7% of all loans were financed this way in 2005 in our locality.

For this reason I pay close attention to any mention of these loans in the media. This morning I noticed CalculatedRisk linked to a New York Times article that has me scratching my head.

Well Fargo, thanks to its acquisition of Wachovia, has around $115 billion Option-ARMs (or as they call them "Pick-a-Payment") on its balance sheet. But according to the article:

Only $325 million of the [Wells Fargo Option-ARM] loans — less than a third of 1 percent — will reset by the end of 2012.

Say what? Something doesn't mesh with the chart that leads off this post. Notice that it shows virtually all of the Option ARMs resetting (recasting?) before 2012.

But yet it's true. Here are the actual numbers from Wells Fargo’s filing with the SEC:

Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012. In first quarter 2009, the amount of loans recast based on reaching the principal cap was de minimus. In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012. A payment change recast occurred on $4 million of loans during first quarter 2009.

In short, Wells expects $56 million in Option ARMs to recast due to the loan balance reaching 125% of the value of the home and another $269 million to recast based on the terms of the loan. Given that we’re talking about a portfolio of over $100 BILLION of these loans, the bulk of which are in California, Florida and Arizona, how can this be?

Surely more than a fraction of one percent of the homes behind these neg-am loans will not meet the 125% loan-to-value requirement, even in a flat rate environment (and I think that assumption is a stretch). The same goes for the contractual recast. My understanding was that this was structured to take place 60 months (5 years) from origination. So how can Wells say that only $269 million will recast by 2012?

Has Wells Fargo gone mad? Or am I missing something? Any input in the comment section would be greatly appreciated.

Of note: It’s important to understand the difference between "reset" (interest rate changes) and "recast" (payments change to reflect full amortization). CalculatedRisk has a great post on the subject.

UPDATE: Please take a look at the follow up post on this topic here.

More on the Coming Foreclosure Wave

From today's Press Democrat:

But a new wave of foreclosures is building. More county homeowners are falling behind on their mortgages, and some could lose homes to banks while others sell to avoid foreclosure. The latest data indicates 4.7 percent of mortgages in the county were 90 days or more late in March, up from 3.5 percent a year earlier, according to First American CoreLogic, a real estate research company.

Already, lenders have seized 2,970 homes in Sonoma County during the 12-month period through March, more than double from a year ago, First American CoreLogic reported.

A rising tide of foreclosed homes could wash over buyers if their numbers don’t grow to match the busiest years of the last home sales boom, Holmes said.

“If we have this much inventory and we’re not even keeping up with our peak year — even though prices are so much lower — it indicates we don’t have enough buyers,” she said.

New Foreclosure Wave Begins in California

It looks like May might be the first month that foreclosures begin to once again flood the market in California.

This report over at CNBC (via Patrick.net) states that foreclosures did not surge in April because "banks simply didn’t have the capacity to process all the distressed loans" due to the moratorium.

They quote Mark Hanson of the Field Check Group regarding Washinton Mutual loans:

Beginning on May 4th the properties taken to foreclosure in CA surged. For the past few months, WaMu had been on near full foreclosure moratorium. As of May 7th -- only 5 calendar days into the month -- WaMu already has 10% MORE foreclosure-related REO’s than in all of April. At this run rate, WaMu will have a record foreclosure month of 3300 foreclosures in CA alone or 7000 nationally worth approximately $2.5 billion.

This fits right in to the data we've presented on Sonoma County:

60% of Sonoma County Homes Sold in the Last 5 Year Have Negative Equity

Zillow.com just released data for the first three months of 2009 showing that nationwide 20% of homeowners owe more on their mortgage than their house is worth.

While those numbers sound horrific, they are nothing compared to what has happened in Sonoma County over the last 5 years.

Taking a look at the Zillow data for the Santa Rosa-Petaluma MSA, we find that 59.6% of mortgages for homes purchased from 2004-2009 have negative equity. Let that sink in... SIXTY PERCENT.

It that is not enough, for homes sold in 2005 and 2006 more than 70% are worth less than the debt owed on the home. Again, let that sink in... SEVENTY PERCENT.

Unless homes drastically begin increasing in value in short order (which they won't), many of these people will simply walk away these mortgages. It's little wonder the banks are in the mess they find themselves.

Finally, here is a map from Zillow showing negative equity for our area:

Renting vs. Buying

For more videos from Kahn Academey click here.

Sonoma County REOs are Just Beginning

Dave Roberts has another post up asking: "Is The Golden Age of REO Bargains Over?"

He cites the low number of Sonoma County REOs on the market relative to sales, and while he provides the caveat that his data is just a snapshot and "Sonoma County foreclosures might shoot up again", he ends by saying:

The more than 800 buyers who were quick got homes already. Another 300 are in the process of buying. The ones who were slow to act are now fighting with all the rest of the late movers to get one of the 160 remaining bank owned homes in Santa Rosa or Windsor.

So should you be "quick" or "slow"? Before you answer it's important to look at some data that was left out of his analysis. You've worked hard to save up that down payment. I wouldn't panic and jump into the market based on the quote above.

Looking at the following chart you'll see it's not a question of if foreclosures "might" shoot up in Sonoma County, but WHEN THEY WILL:


The blue bars are Notices of Default (borrowers are 60-90 days late on their mortgage) and red bars are Trustees Deeds Recorded (a signal homes were lost to foreclosure). See the raw data here.

Many Notices of Default turn into foreclosures, as the graph clearly shows and common sense dictates.

You'll notice that in the second half of 2008 fewer and fewer people were falling behind on their mortgages (i.e. the blue bars started shrinking). This seems odd given that this was when unemployment was dramatically increasing and home prices were plummeting.

It turns out this was not a sign that borrowers fortunes were improving. Again, as common sense dictates, the economy was getting worse and borrowers were under increasing strain. So what caused Notice of Defaults to fall? Answer: the California State Legislature.

Last summer they passed SB 1137 that substantially slowed the foreclosure process in California. Now, before a Notice of Default could be filed, a lender had to make contact with the borrower and waiting periods were mandated. Additionally, due to the holidays Fannie and Freddie voluntarily slowed down the process as did many banks.

As Mark Hanson of the Field Check Group has pointed out this has created pent up supply and tens of thousands of foreclosures will be hitting the market over the next 1 to 5 months. This coincides perfectly when regular sellers will be putting their homes on the market for the spring and summer selling season. In short, supply will be increasing.

The proof that this is happening in Sonoma County is evident in the chart. In the first three months of 2009 Notices of Default have skyrocketed once again. Foreclosures will surely follow.

Don't panic and feel you need to jump in and buy a foreclosed home because supply is drying up. With this pent up supply about to hit the market and unemployment hitting all time highs... THIS MESS IS JUST BEGINNING.