patrick.net

Do Santa Rosa, Petaluma, Cotati (or anything in Sonoma County) count as Bay Area for the purpose of this question?

Here in Windsor, there are a lot of high dollar homes that seem to be occupied by... well, "landscaper" types. Lots of pimped out SUV's in the driveways, with trailerd mowers and white construction trucks on the curbs. Not the typical indicators of higher incomes/salaries required to service large mortgages. More like the Manuel-labor types. Maybe they are all "move-ups" bought with the proceeds from a profitable sale.

Even so, For Sale signs are growing like the spring flowers.

Is this what a "Subprime" area looks like?

SoldAtThePeak,

I'm not intimate with the areas you describe, then again... I don't have to be. Regardless of original fico, dti, employment status etc. a stretch is a stretch. This is the core personal financial backdrop that makes for a "motivated seller".

Peter, I wonder how long those “moves” will take. The housing market is not like the stock market where shares are sold almost instantly. Short of a massive loss of Bay Area jobs, most people will be able to ride out the drop in housing prices.

A few years. Some "moves" will involve employment "pieces." First hit would be subprime mortgage jobs.

When the housing market is hit nationally, consumer confidence will fall and companies will spend less on technology. Eventually, the valley will be affected. We live in a highly connected world. We live in a loosely connected house of cards.

I think it's already been stated, but subprime is technically a classification of a borrower, based on FICO. Not a house or a geographic area.

Some lenders say below 620 but the regulatory benchmark is 660. FICO is based on the following: (1) Bill Payment History – 35%; (2) Debt Ratio (i.e. outstanding debt versus borrowing capacity) – 30%; (3) Length of Credit History – 15%; (4) Propensity to Apply for New Credit – 10%; and (5) Credit Mix (i.e. the amount of revolving debt versus installment debt) – 10%.

Exposure to subprime borrowers is limited in the Bay Area. Much higher in Contra Costa, as well as some of the areas identified above. Not surprisingly, it is typically the poor who qualify as subprime.

The focus in the Bay Area (for those of you not wishing to buy in the skankier parts of town) should be on the exposure to "Alt A" financing. Alt A is the rest of all mortgages that are not subprime and not prime. We are extremely exposed. Between 75-80% of all originations over the last 2-3 years are either subprime or Alt A. The borrowers in Alt A may have a great FICO but only a 5% down payment, or an interest-only loan, or a neg-am loan, etc.

The secondary mortgage market is dead for subprime and drying up quickly for Alt A. The talking heads all said problems would be contained in subprime. No spillover/contagion... But M&T Bank and American Home in the last week have destroyed that hope. Citigroup just scaled back Alt-A too. This will have a major impact on credit availability, and not just in the "bad" neighborhoods.

I think it’s already been stated, but subprime is technically a classification of a borrower, based on FICO. Not a house or a geographic area.

But some areas are more prone to the subprime sunset than the others.

I doubt the bond market thinks in term of FICO score. It thinks in term of risks. There may be a flight to quality in the future. The stock market is holding up for now though.

It may spread like this:

1. Subprime credit tightens
2. Market demands higher interest rate from subprime borrowers
3. Subprime mortgage properties fall in prices
4. More subprime foreclosure
5. goto (1)

I agree that Alt-A is the one to watch now.

"Middle East Bay, East San Jose, Menlo Park east of 101, East Palo, most of Redwood City"

I would add --

Daly City, Pacifica, Santa Cruz, Mountain View, (Parts of Cupertino) Campbell, Sunnyvale (freaking working class 'hood, with working class type homes), Willow Glen ( I meet way too many residence of WG that think in their words "exotic loans are great!". Not to be outdone we will see FC in the City ( we may find many that overdid it on the subprime front to get into city limits.)...way too many financially uneducated were getting into real estate in the San Francisco.

Skip Los Altos Hills and Los Gatos-- they will be untouched.

Aside from the SubPrime meltdown, the next Tech recession will be brutal on all fronts. If it does happen during the ARM resetting period.... well you get the picture!

Daly City, Pacifica, Santa Cruz, Mountain View, (Parts of Cupertino) Campbell, Sunnyvale (freaking working class ‘hood, with working class type homes), Willow Glen ( I meet way too many residence of WG that think in their words “exotic loans are great!”.

I'm not so sure about Fortress Mountain View. Maybe some of the condos, but less so about the SFH.

Aside from the SubPrime meltdown, the next Tech recession will be brutal on all fronts.

Traffic relief. :)

" Is a brand-new, 750K townhouse susceptible to this first wave of credit contraction? How about a 700K, circa 1950 spec house ?"

In the Bay Area --- Both

HARM / DinOR :

Isn't the "idea" mentioned in your post - about townships created solely for investors - already implemented ? I cannot dare say the name, but our pal Randy H. went through some hardship for pointing out the obvious in that scheme.

The borrowers in Alt A may have a great FICO but only a 5% down payment, or an interest-only loan, or a neg-am loan, etc.

PAR,

Just a minor point, btu my understanding is that Alt-A is a bit of a catch-all category (anything not Prime or Subprime). It not only includes the groups you mention, but ALSO somewhat lower FICO scores:

http://www.citytowninfo.com/mortgage-articles/specialty-mortgages/alt-a-mortgages

I do agree that Alt-A is the next area of interest to watch, both nationally and particularly in the BA. How many otherwise credit-worthy friends/acquaintances do you know who "stretched" to get into a house in a better school district, that's slightly nicer, etc? For me, it's most people I know, and these are mostly professionals. They see traditional FRMs with 20% down as an outdated relic.

Traffic relief.

Anyone remember the "Day without an (illegal) Immigrant" protest boycotts from last May? I recall being able to get from A to B in nothing flat, and not having to stand in line for anything at even typically crowded malls. I think they definitely made their point (though not necessarily the point they intended to make).

How about a "Day without a FB"?

How about a “Day without a FB”?

Will it become something like The Day After Tomorrow? :)

I went to work the day after my previous employer annouced a significant layoff. I complained to my then-boss that parking was not any better. He said I was mean.

HARM / DinOR :

Isn’t the “idea” mentioned in your post - about townships created solely for investors - already implemented ? I cannot dare say the name, but our pal Randy H. went through some hardship for pointing out the obvious in that scheme.

I guess any recently built 'Flippertown' with very low occupancy, usually built in the distant exurbs, would qualify as a real-life example of this. The only real difference is that WW2's implementation would be designed for this from the outset, and could not really be occupied, even if the flipper wanted to live in the place (no working plumbing or real appliances). The houses --'plumbing', 'appliances', 'furniture' & all-- would be cheap, non-functional props. Basically, like movie studio back lots.

SpaceAce and others,

I'd classify the areas you list as a mix of subprime and Alt-A (using the same slightly-off geographic representation of credit worthiness). To me, here's the Bay Area breakdown (not inclusive):

Subprime:
EPA, East Menlo Park, RWC excluding Emerald Hills, parts of Daly City, Southern SF, East San Jose, Gilroy, East Bay from north of Fremont to Richmond, minus Rockridge and Berkeley/Oakland Hills, Vallejo, pockets of Sonoma, and pretty much all of the Delta (if that's even the Bay Area).

Alt-A:
Western SF, parts of San Mateo/San Bruno/Millbrae/Belmont, San Carlos, part of Menlo Park, South Palo Alto (yes, here too), much of MV, Sunnyvale, Santa Clara, most of San Jose, parts of Cupertino and Los Altos (again, where families stretched to "get in"), Milpitas, nicer parts of Berkeley and Oakland, most of the stuff along the 680 corridor minus Danville, Blackhawk, Orinda, Moraga; crappier parts of Marin.

Prime:
The rest of it, including "prime" SF, Hillsborough, Burlingame, "prime" Menlo Park and Palo Alto, anything along the Peninsula west of 280 and east of Skyline, and "prime" Marin.

Flippertown (TM) already exists: it's just called either Las Vegas, Phoenix, or Miami.

I cannot dare say the name, but our pal Randy H. went through some hardship for pointing out the obvious in that scheme.

Here's a hint. If your life sucked, you know, your life just really blew... Then perhaps you'd want a Second chance where you could pretend your Life was that of FAB's, only with custom designed women and cars, all exhibiting cartoonish proportions.

Then perhaps you’d want a Second chance where you could pretend your Life was that of FAB’s, only with custom designed women and cars, all exhibiting cartoonish proportions.

Not obvious enough. I am dumb. Can you be more direct?

Ah, I see... my bad. So Second Life is the "other" implementation of Flippertownâ„¢ Mr. H was referring to.

Ok, I suspect VR might be enough for most younger tech-saavy Flippers, but what about older (Boomer & Silent Gen) flippers? My guess is they need something "real" that they can actually visit and touch to be satisfied.

In short, I believe there's a market for both types of Flippertownsâ„¢.

Peter P,

You would make a splendid cruel oriental despot.

Hey, why not make a virtual game of it, where you can use real cash to buy properties that don't really exist.

Uh oh, it looks like somebody already thought of it...

http://www.usatoday.com/tech/webguide/internetlife/2004-06-03-virtual-realty_x.htm

You would make a splendid cruel oriental despot.

Huh?

Funny - someone posted a link to that lame money.cnn.com article about the subprime "blame game" and how they neglected to include the damn borrowers in shouldering some of the blame. Well, they've edited the story after apparently a slew of irate reader responses saying how pathetic it was to neglect the borrower's responsibility:

http://money.cnn.com/galleries/2007/real_estate/0704/gallery.paly_the_subprime_blame_game/index.html

Very funny.

"How about a day without a FB?"

How I long for that day! Imagine a world where going some place on the weekend is once again something special, with about half the traffic?

skibum,

FAIK your description of sub prime areas may well be right on the money. Yet I have my reservations. In any neighborhood there are people that can well afford to live there and then there are those that are posing.

I just don't know if everything will be as "tidy" as you describe?

DinOR,

Yeah, I agree that it's never that "tidy" a division. There are always posers trying to live above their means, especially in the wonderful Republic of Kalifornia. I think there will be clearly areas less hit by the fallout and those hit harder. As PAR cited, most of the recent mortgage products issued are either subprime or Alt-A. If only 20% of recent mortgages are prime, I doubt all 20% will be concentrated in the prime locations.

@skibum,

Agreed, likely as not I'm thinking "the fallout" has as much to do with "when" you bought as "how" you bought. I'm sure there are areas that will be almost completely unscathed.

The Economist (March 22nd) describes subprime borrower as follows:

"In America these people are, not surprisingly, poorer (and less likely to be white) than those who can obtain mortgages at lower, usually fixed rates. "

Some more juicy tidbits from that issue:
- on March 13th the Mortgage Bankers Association reported that 13% of subprime borrowers were behind on their payments.
- 80% of subprime loans made in 2006 included low “teaser” rates;
- almost eight out of ten Alt-A loans were “liar loans”;
- loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in.
- 40% of all originations last year were subprime or Alt-A.
- 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more; a fifth will see monthly payments soar by 50% or more.

Some other interesting quotes:
- "The suffering will be concentrated: only 7% of mainstream adjustable mortgages will be affected, whereas one in three of the recent “teaser” loans will end in default. The harshest year will be 2008, when many mortgages will be reset and few borrowers will have much equity. "

- "A glut of unsold homes will also push down prices, particularly in areas such as California and Florida, which had a disproportionate share of riskier loans. "

skibum-
I can cite one home in Los Gatos which was valued at $350K or so in 1997, I knew the owner. I saw the same home sell for $1.3M back in 2003, it many be considered to be valued much higher today. However I did come across the same home on Realtrac has going into foreclosure this year.

Shocker!!!!

I also see some homes going to Forclosure in prime areas of SC... Palo Altos, Los Gatos, and Saratoga. The RT listed some of these homes with Loan outstanding of $1M+

I also see many 750-950K homes as well, based on my memory or prices these homes are much smaller and around 2000 sq ft and I would say were valued at under $225K. Some are close to Stanford U in PA.

My 2 cents...

skibum Says:

> Prime: The rest of it, including “prime” SF, Hillsborough,
> Burlingame, “prime” Menlo Park and Palo Alto,

I don’t have any actual #s in front of me, but in the in the early 90’s when I looked at sheets of REO property coming over the fax form many banks the #1 city on the Peninsula for SFH REOs was often Hillsborough…

"The harshest year will be 2008"

Bummer. You mean it gets worse?

Skibum, from your link:

This means that the borrower's credit score is not quite where it should be, or they are not fully documenting their application, or there is something a little out of the ordinary with the deal.

Notice these conditions are all "or" conditions. A lower FICO that's not quite subprime can put you into this category, but you can still have an 800 and fall into Alt-A, if your loan does not meet other criteria.

Something "a little out of the ordinary" is another way of saying "non-conforming". Alt-A is anything that would not conform to fannie/freddie standards AND has an above-subprime FICO. (Below subprime FICO would obviously make the loan subprime...) Conforming is important for the bond market because they have tons of data on how well conforming loans will react once stress tested, thanks to fannie/freddie selling into the secondary market for years.

Bay Area is infested with Alt-A because just about nothing conforms here. (Tip: you need a principal balance under $417k. Good luck making that happen.)

LowlySmart quotes The Economist:
40% of all originations last year were subprime or Alt-A.

Keep in mind that this is a national figure. Much worse here, specifically. Closer to 80% over the last three years in the Bay Area.

I think the supply will determine the extent of drop.

Anything along the western foothill will be more protected, to a certain degree, because the lots are simply bigger. If you look at any SFH from Palo Alto to Los Gatos (or even down to Alamaden along McKean Road) west of 85, most of the lots are 8000 sft if not larger, and there is no shortage of acre+ properties. Larger lot size=less supply.

If you look on foreclosure.com, at least for now, the not-so-prime areas seem to have far more foreclosures and pre-foreclosures. Foreclosure means the seller has to sell. Lots of homeowners in prime spots who bought in the last few years are likely to be under water, but as long as they can hold on to their homes, the impact on local housing price can be mitigated. It is the foreclosures and must-sell cases (divorce, relocation) that will drive the price down.

Most of South Bay will be quite hard hit, but I am going to mention a few more"prime spots" that I believe will be just as badly hit as the subprime:
Cupertino east of 85 in the Cupertino High district
Saratoga east of 85 NOT in the Lynbrook district
Eastern Los Gatos along 85 NOT in the LG school district

I'm more interested in what percentage of Alt-A's were ARMs. The people who took out prime ARMs have a reset period of (typically) 5 years or even 10. That's at least enough time for inflation to eat at the debt and wages to go up enough to qualify for a new loan if need be, or just accept the adjustment.

Alt-A ARMs typically had a 2 year reset. Those could be brutal.

Saratoga east of 85 NOT in the Lynbrook district
Eastern Los Gatos along 85 NOT in the LG school district

Excellent!

I wish I can buy a house without school "rights."

Randy H Says:

> Here’s a hint. If your life sucked, you know, your life
> just really blew… Then perhaps you’d want a Second
> chance where you could pretend your Life was that of
> FAB’s, only with custom designed women and cars, all
> exhibiting cartoonish proportions.

I bet most of the people in Second Life have more fun than I do in Real Life (like this past weekend when I worked all Saturday morning before driving up to the apartments in Sacramento with a SUV full of crap from HD Supply then worked all Easter Sunday morning before driving to the Peninsula for Easter dinner)…