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.

Bay Area Homes Continue to Decline, 50% Price Drop Still Forecast by September

(Click Graph to Enlarge)
The Case-Shiller Index continues to document the decline in Bay Area home prices. Looking at the graph above you can see that our $600,000 home fell to $330,787 in February, from $341,613 just one month ago in January.

Taking a look at the Chicago Mercantile Exchange futures on the index, they continue to predict that we'll be below $300,000 by September.

Given the fact that the markets continue to predict that housing prices will decline, and we're about to have a tsunami of foreclosures hitting the market, buying this spring is risky indeed.

Armitage Home Underwater

Investors in what appears to be the Healdsburg version of Bernard Madoff got some bad news today according to the Press Democrat. Investors filing a $90 million suit against Gary Armitage will apparently get nothing from his homes... both are underwater.

His home in the Parkland Farms area was put on the market for $2.5 million but then lowered to $2.2 million when a buyer could not be found.

According to the PD the estimated value is $1.8 million well below the amount owed on the home, meaning defrauded investors get nothing.

Worse still, Zillow values the home at $1.12 million. I'm guessing even that is overpriced.

Looks like it is price discovery time for the upper-end of Parkland Farms.

Windsor REO Inventory Down Sharply

Dave Roberts has an interesting post up on the Windsor REO market (see his graph above). Apparently, there are only 12 MLS listed properties that are bank owned. To put this number in perspective, there have been more than 70 REO sales since the first of the year.

Dave also points out there are 35 more REOs that have not yet hit the MLS. Yet, even adding in these numbers inventory looks low.

However, I'm confident that these REO numbers do NOT indicate a market bottom. As I've written on this website previously, REOs are down because A) a law passed by the California State Legislature in September slowed down the foreclosure process and B) there were voluntary foreclosure moratoriums by Fannie/Freddie as well as most major banks. In short, foreclosures/REOs are about to soar.

To get a feel for what is in store for the California market take a look at this chart from the Dr. Housing Bubble website:

Notice of Defaults are hitting all time highs after a reprieve due the the aforementioned factors. A good number of these NODs will turn into foreclosures as history has demonstrated.

I assume that Notice of Defaults are soaring in Windsor as well. If anyone can track down this data I'd love to see it.

Monster Home with a monster price tag

A 7 bedroom, 6 bath, 6,458 sq. ft. mansion just hit the market on Matheson Street. It is priced at $3,695,000, which makes it the most expensive listing in Healdsburg according to Redfin.

We'll see if it sells over the next few months. Anyone know the most expensive home ever sold within city limits?

Sales Up 42%! Make that DOWN 42%!

'Sonoma County home sales surge in March' reads the headline in the Press Democrat.

The question not asked: compared to what?

Yes, according to DataQuick, sales in March were up 42%... from 327 in March 2008 to 463 March 2009.

But if you look at the graph above you'll see that does not tell the whole story. Sales are DOWN 42% from March 2005 when sales were 792.

Check out the numbers here and here.

The bigger question is will 463 sales be enough to counter the wave of foreclosures that are about to hit the state and presumably the county? My guess is no.

Sonoma County Unemployment Rate up to 9.8%

Today it was announced that unemployment in Sonoma County hit an all time high of 9.8%. By comparison, the previous high before this recession was 7.9% in January 2003.

We're doing better than the state as a whole, where the unemployment rate climbed to 11.2%. But to put that number in perspective, look at the quote from this Reuters piece:

"This is the worst recession since the Great Depression and it's not over," economist Steve Levy said on Friday shortly after the state released its March unemployment report.

"We have at least six more months of job losses," added Levy, of the Center for the Continuing Study of the California Economy.

Job losses directly correlate with mortgage defaults, which is another sign housing should get more and more affordable in the months ahead.

Why you should Rent, not Buy, in Parkland Farms

In the last post we took yet another look at 1720 Canyon Run in Parkland Farms. It's been on and off the market for nearly a year now and is currently listed at $410,000.

Ironically, another 1720 address is on the market, not for sale but as a rental.

1720 Spur Ridge Lane, the newly listed rental, is located on the very next street. Take a look at the pictures and you'll see the houses are nearly identical.

1720 Spur Ridge Lane:


1720 Canyon Run:


One difference, besides the paint color, is how much you'll pay a month to live in each home.

At 1720 Spur Ridge Lane they are asking $1900 a month.

If you were to buy 1720 Canyon Run with an FHA home loan (3% down) at a 30 year fixed rate slightly under 5% you would be looking at almost $2700 a month with taxes and insurance.

That $800 a month difference is significant.

Given that housing prices are expected to decrease for the foreseeable future, and buying with interest rates at these low levels is risky in and of itself, renting is clearly the smarter option.

1720 Canyon Run... Still on the Market

Another price cut at 1720 Canyon Run... this time to $410,000 from $429,000. Looks like we're approaching a dip below $400,000 for the third time.

As Dave pointed out the last time we posted on this property, the sale on Feb 26th was not actually a sale, but WaMu taking back the property.

It's shocking to me that it took that long for the bank to take back this property and put it on the market as an REO. Or was this already owned by another bank prior to WaMu as another commenter stated? I'm at a loss so any additional info in the comment section would be appreciated.

Elderly Scammed by Mortgage Brokers

If this WSJ article on how mortgage brokers preyed on the elderly doesn't turn your stomach nothing will.

For example, it tells the story of Floy Mae Bryant, 84, who was talked into refinancing six times in less than three years:

Mrs. Bryant's last refinancing was in September 2005, just a month after her previous one. A mortgage broker placed her in a Countrywide Financial Corp. "option ARM," an adjustable-rate mortgage with a monthly payment of $1,545, barely affordable on her $2,310 Social Security and pension income. To make her mortgage payments, she drew on a $39,000 home-equity line of credit that the same broker encouraged her to set up.

One son helped her financially, but he died of cancer in November 2007; five months later, Mrs. Bryant's 65-year-old developmentally disabled son, who lived with her, also died of cancer. Mrs. Bryant missed her March 2008 payment, and Fannie Mae, which had bought the loan from Countrywide, sold her home in foreclosure in April. She moved to a rented trailer 20 miles away, returning two or three times a week to her vacant former home to water the roses.

and of John and Vernice Green, an elderly couple in Sacramento who thought they had signed up for a reverse mortgage, but instead ended up in an ARM that increased their payments from $794 a month to $2,106.

Their story ends on this depressing note:

Amid the continued stress, Mr. Green was hospitalized. He died Feb. 5, 2008, age 83.

In June, Ms. Villegas, 29, was arrested and charged with participating in a scheme to defraud lenders. The criminal complaint alleges that Ms. Villegas made false statements to investigators and that loan applications she arranged gave false occupations and inflated incomes. Ms. Villegas denied wrongdoing, and the case is pending.

Late last June, the servicer agreed to reduce the principal on the Greens' loan and convert it to a fixed rate with 7% interest. Mr. Livingstone called to tell the 80-year-old Mrs. Green the news. He learned she was in the hospital with kidney failure. She died a few days later, on the Fourth of July.

Sadly, not only were their lives ruined, but taxpayers get to pay for the clean-up.

Downward Spiral

37 Front Street Unit D was sold in June of 2005 for $338,000. It's a 2 bed, 2 bath, 1000 sq. ft. condo near Memorial Beach.

In June of 2008 it was put on the market for $230,000. What a price drop! More than $100k less than the sale price three years earlier. Surely someone would snap it up.

But no one did. And the price was dropped to $215,000 in July.

It sat on the market at that price until last month when it was lowered again... on March 1st to $189,000.

Still no offers.

So on March 31st. It was lowered to $170,000.

Still nothing.

So last week it was dropped to $149,000.

You guessed it, still no offers.

Just yesterday it was lowered to $139,000.

The downward spiral continues.

$4 Million Price Cut

No, that's not a typo. The asking price on 1111 Shiloh in Windsor was just cut by $4 million. 'Casa Tortuga' as it is called was worth $10.9 millon to it's owners last week, now it's $6.9 million.

That kind of cut speaks volumes to the insanity of this market.

Big price cut at 355 School St

355 School St was just cut in price from $425k to $369k. Quite a drop.

It's pretty amazing that this place sold for $530,000 in September of 2004, over a year before the peak in real estate prices.

California Foreclosures about to Soar

Mark Hanson at his new blog at Field Check Group recently published a MUST READ REPORT for those interested in the California real estate market. As he explains, foreclosures are about to hit the state in force:

Foreclosures About to Soar Neat-Term — Easily Back to All-Time Highs

Are you ready to see the future? Ten’s of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season - great timing!

For months prior to March, banks/servicers were on and off of foreclosure moratoria with many on a complete hold awaiting Pres. Obama’s plan to save the housing market and homeowners. We track each foreclosure start through the entire foreclosure process individually and in aggregate — also by originator and servicer — and as soon as the Obama plan was made known, banks/servicer shifted their Notice-of-Default and Notice-of-Trustee Sale machines into overdrive.

Foreclosure start (NOD) and Trustee Sale (NTS) notices are going out at levels not seen since mid 2008. Once an NTS goes out, the property is taken to the courthouse and auctioned within 21-45 days.

Head over and give the whole thing a read. It includes some excellent charts.

One chart that really caught my eye was the Notice of Defaults on California homes worth over $750,000:


Not only are we hitting new highs by the month but as Mark points out the supply of $750k homes from foreclosure alone is greater than current demand.

This should worry many in Sonoma County looking to sell in the next few months.

Update: Mark actually has a previous post that goes into more details called "2009 Upper-End Housing Market Outlook"

Shadow Inventory

Via the SF Chronicle:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

Inventory Builds near March & University

Over the last two months quite a few homes in Northeast Healdsburg have hit the market. Over at Redfin most are listed as location 'Undisclosed' but looking at the Cape Cod style I think it is safe to say they are located somewhere near March & University.

'Undisclosed' #1 is on the market for $469K:


'Undisclosed' #2 is on the market for $499k:


and 'Undisclosed' #3 is also on the market for $499k:



These homes are in addition to 602 March on the market for $499k:



529 Fieldcrest on the market for $375k:



and 545 Westmont Ct on the market for $515k:



Quite a few choice for buyers as we enter the spring selling season. But the question remains, is the price right?

Why Low Rates are NOT a Reason to Buy

In the comment section over at Marin Bubble a reader asks the following question:

The new RE agent spin seems to be about the interest rates.

I'm trying to sort out the reality of the situation.

They are saying that even if home prices continue to fall, the interest rates will rise.

So, obviously, now is the best time to buy.

Has anybody done the math on this?

Yes interest rates are at historic lows as the graph above shows. Does that mean it's a good time to buy?

Put simply, no.

Interest rates will be going up. And that does change the math. For example, if you were to buy a $300,000 home with $60,000 down (20%) today with rates around 5%, this would mean a monthly payment of $1,640 including taxes and insurance.

Conversely, if you were to buy a $300,000 home with $60,000 in 1981 with mortgage rates over 18%, this would mean a monthly payment of over $4000.

Quite a difference. For those that remember the early 80s they'll recall that there were not many homes being sold for $300,000.

And that is exactly the point. People won’t be able to afford $300,000 homes anymore, let alone homes priced at $2 million. So home prices will be coming down.

Now ask yourself, in such an environment would it be a good idea to buy now and lock in the low rate, or wait until prices decline and pay a higher one. THE KEY THING TO REMEMBER IS THAT AS MONTHLY PAYMENTS ADJUST WITH INTEREST RATE CHANGES, HOME PRICES WILL ADJUST TO REFLECT AFFORDABLE MONTHLY PAYMENTS.

An easy way to look at it is to use the extreme numbers above. Would you rather A) put down $60,000 on a $300,000 home and pay 5% (payment of $1640/month) or B) put down $60,000 on a $160,000 home and pay 18% (payment of $1650/month).

In situation “A” you'll be underwater when rates go up, lose your down-payment/equity, be unable to relocate if you find a new job, and unable to refinance into a lower rate mortgage (you already timed the bottom thanks to your Realtor’s advice). But hey, at least you locked in that low rate.

In situation “B” you'll own nearly 40% of your home right off the bat, if rates go down you can refinance your mortgage and get a lower payment, you'll have no problem selling if you need to relocate, and you've locked in a low property tax rate (thanks Prop. 13) off the initial sale.

I’d take option “B”, but maybe that's just me.

But how can you be so sure that rates are going up?

Answer: Because Ben Bernanke told me so.

Here is the Chairman of the Federal Reserve on 60 Minutes a few weeks ago:

Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

"You've been printing money?" Pelley asked.

"Well, effectively," Bernanke said. "And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

Which brings us back to the early 80s. Why were interest rates so high in 1981? Because then Chairman of the Federal Reserve Paul Volker's policy was to “raise interest rates, reduce the money supply” to make sure we lived in a world that did “not involve inflation”.

Inflation is a result of too much money. To get money out of the system, as Bernanke explains, the Fed has to raise interest rates (or, more precisely, sell assets taking cash out of the system). What concerns me about the current situation is that in the history of the Federal Reserve we've never seen so much money put into the economy by the Fed.

Take a look at this graph that dates back to 1918:


This is truly unprecedented, and quite frankly, scary. What's worse is this is just the beginning. So far the monetary base (which the Fed controls) has grown from around $900 billion to $2 trillion. If you add up all the programs the Fed has promised it will grow to ~$4 trillion. Some expect this to eventually be over $5 trillion.

All this money is going to cause inflation (which means higher interest rates) unless the Fed can take the money out of the system quickly (which means higher interest rates). If you look at the numbers Bernanke is going to have to pull off a Volker on steroids.

If that doesn't get us the taxpayer via the Treasury is going to be making up the difference. That could get people questioning the solvency of the U.S. government (which like an ARM gets most of its funding from short-term bonds and is susceptible to higher rates). Higher risk means higher interest rates.

You get the picture.

Moral of the story: when a Realtor claims you need to buy now and lock in low rates, ask them if real estate prices will continue to fall if rates go up. Wouldn't it be better if I used my hard earned down payment towards a lower priced home and then refinance down the road?

I'll be polite and assume they simply haven't thought it through yet and will quickly change their tune.