Flood of Foreclosures To Hit Sonoma County in 2009

This quote from the Press Democrat is yet another signal that the declines are just beginning in Sonoma County:

...real estate agents who sell foreclosed homes for banks said lenders have been holding back on foreclosures. One reason could be to avoid adding to the flood of foreclosed properties hitting the market and driving down prices.

“They just pulled the throttle back in the foreclosure process,” said James Madison, a foreclosure specialist at Coldwell Banker in Santa Rosa. “Most of my clients are saying the floodgates are going to open again in February.”

And this isn’t just the lower end of the market. The PD continues:

Homeowners who once seemed immune to the housing downturn now face having to sell to avoid foreclosure, said Beth Robertson, a Rohnert Park real estate agent.

“I have gotten a couple of calls from folks that are in trouble that I would never have thought would get in trouble,” said Robertson, a broker-agent for Century 21 Classic Properties.

Robertson’s clients are not subprime borrowers. But they now can’t afford loan payments after losing jobs or seeing incomes fall and can’t refinance because their mortgages exceed what the homes are worth, she said.

“I think we’re going to move into a whole different group. I think foreclosures are going to creep into the upper income brackets,” she said.

As the graph demonstrates, with Sonoma County nearly leading the nation in Option-ARM loans, this is something we’re going to be dealing with for the next few years.

Value of our $600,000 Home Falls to $371,699… Predicted to Fall to $313,230 by Year-End

(Click Image for Larger Version)

With the release of the Case-Shiller November numbers today, I've updated the graph of a Bay Area house whose hypothetical value was $600,000 at the peak of the bubble.

In one year it fell in value by $165,435:
(Nov 07 - $537,134, Nov 08 - $371,699)

In just one month it fell $11,430:
(Oct 08 - $383,130, Nov 08 - $371,699)

And according to the Chicago Mercantile Exchange futures contracts it will fall to $313,230 by November 2009.

As the numbers show we're not anywhere close to a bottom yet.

[Note: All future prices on the graph represent contracts that traded today. To see last month's graph click here.]

Update: Case-Shiller futures data should be lagged 2 months (i.e. November 2009 should be September 2009).

Reality Check: A Tale of Two Condos

One of the unique features of the real estate market is the fact that home owners usually don’t have to face up to the fact that their home has declined in value.

Your home is unique, and what it is worth to you is highly subjective. Additionally, the mantra of “a home is your most important investment” has generally led people to believe that the value of their home is higher than what they paid for it.

The same cannot be said for most markets.

Just because you feel your company stock in your 401(k) is worth $50 a share doesn’t make it so. Stocks are traded on an exchange and you’re forced to deal with the market price of your investment every time you look at your brokerage statement.

Or, take a look at automobiles. Most owners realize their vehicle has declined in value. If they need any reminder, all they have to do is look at the bright yellow numbers posted on the windshield of a similar model as they drive past their local dealership.

Given that 1) turnover in the real estate market is lower than most markets and 2) you are not dealing with a homogeneous product, someone selling their home can have unrealistic assumptions about its value for an extended period of time.

But while real estate prices take longer to adjust to current market conditions, they do in fact adjust. That process is slowly beginning to happen in Healdsburg.

Take a look at 436 North St #7:


This condo was purchased in December 2005 for $255,000. It’s been on an off the market since mid-2007 and is currently listed for $260,000. The owner knows the property is worth at least what they bought it for and are holding out for someone else to realize that fact.

Unfortunately for them, a similar unit (actually 50 sq feet larger) right next door at 426 North St just went on the market for $180,000:


Take a look at the sales history of the two units (notice that the unit at 426 actually sold for MORE than the unit at 436 in the early 90's):


There is no more pretending the unit at 436 is worth close to what it was bought for in 2005. The nearly identical place next door is selling for $80,000 less. As you can see, it’s reality check time.

Foreclosures Account for 52% of Home Sales in December

Click Image For Larger View

Foreclosures made up a majority of the home sales in Sonoma County in December according to an article in the San Francisco Chronicle. This should be especially worrisome for those looking to sell as this cycle is just begging.

Interest rate resets, which will force even more people out of their homes, will begin in earnest over the first 6 months of 2009 and continue through 2011. Given that Sonoma County was ranked 2nd in the United States for originating some of the worst of these loans, expect foreclosures to increase and prices to continue to drop.

AUCTION!

On February 16th at 1pm, 515 Tucker St will be auctioned off to the highest bidder. Bidding will start at $100,000 and can be done on location or on WilliamsAuction.com. It's a beautiful place in a great location and it will be interesting to learn the price of the winning bid.

More importantly, I think it is a genius idea to get a place sold quickly before the bubble deflates further.

This is something owners whose property has been languishing on the market should look at closely.

Take a look at 545 Westmont Court:


This property was listed on October 11th at $569,000... nearly a quarter of a million dollars more than the owners paid for the place in 2002. They have surely done some upgrades and are convinced the value has appreciated significantly, but to date buyers don’t seem to agree.


You can almost see how painful the sales process is for the owners in the numbers above (click image for larger view). Their real estate agent is probably pleading with them to lower the price to spur demand. The owners hem and haw, wonder if they have the right agent, wait a few more weeks with still no offers, then decide: "Well, I guess we could lower it another $10,000."

To them $10,000 is a vacation or a car. To potential buyers looking at home priced at over a half million dollars, $10,000 is less than 2%. Amortized over 30 years that's equivalent to a few trips to Starbucks a month. Meanwhile, in the two months it took them to decide to lower the price by $10K, the housing slump has probably decreased their home's value by $20K.

If I were the seller I would take a different approach. I'd have my agent run an ad in the Press Democrat and Healdsburg Tribune announcing an innovative home sale. In one month's time (pick a date... let's say March 1, 2009) your home, currently priced at $529,000 will begin to fall in price by $10,000 A DAY!

If there are no bidders the first day, it falls to $519K. If none the second, it falls to $509K. If after 50 days there are still no bidders it would fall to $29,000!

Of course, it would never fall to $29,000 (I assure you I'd buy the home well before that). I'm guessing such a sale would generate such a buzz and get so many people looking at the home it would sell in no time. Maybe even the first couple of days.

The catch is you have to act sooner rather than later. As REOs start hitting the market and auctions become more common, such a technique would lose its novelty. Owners will be stuck chasing the market down, auction or not.

$100,000 Price Drop

The price on 529 Fieldcrest Drive was dropped $100k today from $495,000 to $395,000. We’ll see if it is enough to entice a buyer in the current economic slowdown. It has been on the market for almost a year and a half, originally being listed at $530,000 in August 2007.

This is clear proof that houses in Healdsburg are not immune from the housing downturn.

However, I don’t believe we’re at the bottom yet. It’s worth noting that houses in this area were worth around $180,000 at the beginning of the bubble. This house in particular sold for $250,000 in 2002. So, even a reduced price of $395,000 represents a 58% increase from its last sale just a few years back.

Such appreciation is simply not sustainable and due to correct.

It’s hard for people to imagine that homes could fall another $100,000 to $150,000. But a quarter million dollars for a home is a lot of money for a middle class family and returning to these levels over the next few years is entirely possible.

Condos at The Grove

The Grove still has 5 units for sale that have been sitting on the market for months. To get these elegant condos sold we see they are now offering a new deal on the availability page of the official website:

ONLY 5 Homes LEFT!
CLOSE OUT INCENTIVES
2.75% First Year Interest Rate

Doesn't that sound an awful lot like the Option-ARMs that got us into this mess?

Ironically, the preferred lender for The Grove is Wells Fargo who recently acquired more than $120 billion of Option-ARM loans when they purchased Wachovia.

There's more... if you click through to The Grove's preferred lender page you’ll see this list as of January 14th:

Why use our Preferred Lender?
1. Free Appraisal.
2. Free Credit Report.
3. 30 minute loan approvals on the site.
4. Long term rate lock in with roll down feature if rates get better.
5. Familiarity with The Grove and constant communication with Sales Staff.
6. Security of dealing with the only U.S. bank to have the highest-possible credit rating from both Standard & Poor’s (AAA) and Moody’s (AA+).
7. Rate discounts for existing & new Wells Fargo customers.
8. Ease in obtaining future credit lines.
9. Extensive portfolio of loan products.

Take a look at #6. That's their emphasis, not mine, on “the only U.S. bank” with top credit ratings.

One problem. Wells Fargo was downgraded by S&P on December 19th and by Moody’s on January 6th.

The reason? You guessed it:

Moody's Investors Service on Tuesday downgraded ratings on Wells Fargo and Co. on concerns that the bank's acquisition of Wachovia Corp has undermined its credit quality as it takes on the additional risk of Wachovia's loan book.

Moody's cut Wells Fargo's senior debt ratings by two notches to "Aa3," or the fourth-highest investment grade, and said the outlook is negative, meaning it could lower the rating again within the next two years...

...Wells Fargo has already said it will write down $71.4 billion of Wachovia's $482.4 billion loan portfolio, including $36 billion of option adjustable rate mortgages...

Lastly, it is worth noting that one of The Grove condos is now a rental going for $2,650 a month. This is starting to look like a trend.

Sonoma County Facing $21 Million Deficit

Expect more headlines like this as property values continue to fall.

I'd be surprised (actually shocked) if property tax revenues only fall 1.6% ($189 mil to $186 mil). Given the magnitude of the real estate declines we've seen to date combined with expected real estate declines to come I'm guessing the final figure will be much higher.

County facing series of budget cuts

The sour economy has spoiled tax revenue projections to the point that Sonoma County's government will end up $21 million in the hole next fiscal year unless supervisors impose employee and program cuts, a new budget report warned Friday...

The economic downturn, in which housing prices have sunk and property assessments have plummeted, is a major reason for the general fund shortfall.

The county expects to collect almost $3 million less next fiscal year because of "the dearth in real estate market activity and reductions in values," Deis' memo said.

Administrators predict property tax revenues will fall from $189 million this fiscal year to about $186 million during the fiscal year that runs from mid-2009 to mid-2010.

Healdsburg Commons Converting to Rentals?

The 604 Healdsburg Ave unit at the Healdsburg Commons is officially now a rental listed at $1950 a month. If you would have bought this property as an "investment" at the lowered price of $499,000, you would be losing well over $1000 a month if you chose to rent it out ($1950 vs $3200+).

If that math isn't enough to convince you condos at The Commons are overpriced, this figure showing how many units have sold since early 2008 should:

2009 is a 'Bad Time to Buy a Home'

MarketWatch has some great advice for first time buyers(via Patrick.net):

Home buyers advised to look before they leap

Fox-Pitt Kelton home-builder analyst Robert Stevenson said Wednesday he thinks this year will turn out to be "a bad time to buy a home" as the U.S. economy loses more jobs, especially if buyers don't plan on staying in the house for at least several years.

"While some suggest that now is great time to buy a home given low mortgage rates and falling home prices, we believe that for most homebuyers, the opposite is true," Stevenson said in a report to clients...

"Buyers who lose their jobs or who stay in their homes for less than seven years stand to incur substantial losses as home prices decline further in 2009 and the U.S. experiences more moderate home-price appreciation going forward," Fox-Pitt said. "We believe too few buyers do the simple break-even math before sinking their life savings into a house."

1720 Canyon Run

An article in the Wall Street Journal a few days back from the perspective of first-time buyers in Chicago had an interesting comment on realtor tactics:

Time and again, we saw agents trying to avoid slashing prices. Thanks to Redfin's Web site, we could see when listing agents pulled units off the market and relisted them two days later at the same price, trying to make it look like a new listing.

Apparently this tactic is alive and well in Healdsburg. Today, 1720 Canyon Run listed a price cut on Redfin’s website to $445,900.

But take a look at the history of this listing over the last 6 months (click to enlarge):


Strange to say the least.

423 Haydon Street

Here’s another overpriced home a few blocks from the plaza. Listed for nearly $1.5 million, 423 Haydon is off the charts.

According to Zillow this home was worth $360,000 in January 1999. Currently they value it at $940,000 (37% less than the listed price, and I still think Zillow’s estimate is inflated). The home sold for $650,000 in October 2003.


Assuming you had $300,000 laying around for a down payment, you would still be facing a monthly mortgage payment of $8,800 (over $100,000 a year). Add in yearly property taxes of $15,000 plus maintenance and you get the picture.

UPDATE (7/17/09): See comments below regarding the history of this home and remodeling dollars spent to rehabilitate the house. It also has sold for over $1 million, well above the Zillow estimate.

229 East Street

The listing on Homes and Land still has this property at $979,000, but over at Full Spectrum Properties the price is $100,000 less at $879,000.

Quite a drop, and it still looks overpriced for a 2 bedroom place with an attached appartment.

According to Zillow this home was worth $236,000 in January 1999 as the economy was roaring in the dot-com boom. Currently they estimate the value at $643,500.



Ask yourself, how many people could come up with a down payment of $175,000 (20%) and still afford mortgage payment of $4700 a month for 30 years. Contrary to popular belief mortgage rates are GOING UP for homes this expensive.

The one bedroom rental would barely cover the $8700 in property taxes a year plus maintenance expenses.

Of course, all it takes is one buyer. But in this economy I don't see it happening at anywhere near this price.

40% of Houses in Sonoma County to be Reassessed at Lower Value

Mike Coit has another excellent article up at the Press Democrat on the local real estate market. Head over and give it a read:

After reducing property tax bills for about 25,000 homeowners last year, the county could add another 15,000 this year. That two-year total would more than double the county's previous high, which occurred during the last housing slump in the mid-1990s, said Bill Rousseau, the county's deputy chief assessor.

It's a staggering total: Nearly four of every 10 houses in the county, he said.

Option ARMs in Santa Rosa: Second Worst in the Entire Country

The map above should be disconcerting to anyone looking to buy in Sonoma County. Option ARMs, mortgages where homeowners can decide to pay less than an “interest-only” monthly payment, are one of the most toxic mortgages out there. This is for the simple reason that if you're not even paying all the interest on your mortgage, the amount you owe the bank (principal) will increase every month. In a declining real estate market this will make homeowners very likely to be underwater and increase the chances of default. [Watch this 60 Minutes special report for more info]

The preliminary numbers show that around 48% of these mortgages are defaulting...

The map above, from this BusinessWeek article in 2006, shows that Santa Rosa nearly led the nation in the percent of new mortgages that were financed with an Option ARM. 37.7% OF ALL MORTGAGES IN SANTA ROSA WERE FINANCED THIS WAY (a close second to only Salinas with 40.3%)!

Finally, Option ARMs are just beginning to reset for homeowners. Take a look at the graph below from Credit Suisse via the International Monetary Fund. This is going to be a problem that is with us through 2011.



(Click Graph For Larger Image)