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.