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.
I consider this an unfortunate collision of Sonoma locals with local wages trying to match the RE hyperactivity driven by commuters working in job centers. The same applies to Salinas.
ReplyDeleteThe mort reset graph is ominous, because it suggests there will be a lot more illiquidity moving through the banking system, especially when the crunch hits jobs. What happens then--another bailout?
This is exactly why I have put off buying a house in Healdsburg/Santa Rosa. Even though prices have fallen on the sub-prime houses, the next wave will hit the upper-end. Why buy a house now, only to have it take a major hit over the next two years. It is frustrating having to wait, but when you see a train wreck coming, you have to get out of the way.
ReplyDeleteSome lenders are extending the fixed period of Hybrid ARMs unilaterally.A neighbour just got a letter from her servicer stating that her interest rate would be fixed for an additional 5 years at 5%.It was scheduled to reset in february to a rate that was probably not supportable.This is a Jumbo arm on a property that is clearly underwater.This is one way to encourage a continuing cash flow,and it will work in some cases even though walking away and renting makes more sense.
ReplyDeleteI really like this blog post. The information is not new, but it is presented very well for me to point at as an argument ice breaker.
ReplyDeleteMaybe since Sonoma County was one of the most insane during the bubble, it was an easy decision for me to sell and rent before the paper wealth disappeared. I told everyone to sell in late 2005 too, but only one person listened. He is very happy that he did and the others just shrug and say, "oh well."
I know two home owners who truly think the bottom has been here for 6 months (they are already wrong) and wish they had the extra money to buy up more property. This is all on gut feeling with no data to back it up. Luckily, they couldn't afford to do so even before their 401ks dropped 35%.