patrick.net

"but as long as they can hold on to their homes"

What makes you think they'll WANT to!?!

I think Hello Kitty worked in the lending field during the mid-90's and said that people that were as little as 10-15% under water were just walking away. They figure that renting an identical place was so much cheaper they'd just go that route.

That was you HK, wasn't it?

Are they going to ruin their credit for seven years just because they are upside down on a mortgage? I don’t think so, but I am obviously in the minority here.

They may have good jobs but that can still have homes that are too good for them. Once they are unable to extract home equity to pay for their mortgages, all is lost.

Tack on energy costs, ridiculous property taxes, etc.

Actually, allah has convinced me that the property tax here isn't that bad. Prop 13 really does help homeowners (at the cost of children and society).

Most recent buyers have not been very conservative, you know. You are right that they will try to hold on though. With credit contracting, it is becoming difficult.

Actually, allah has convinced me that the property tax here isn’t that bad. Prop 13 really does help homeowners (at the cost of children and society).

I hate prop 13 because it interferes with market processes. Why should homeowners be protected? No one deserves protection from market forces.

Similarly, rent control is evil. But I am tired from saying that. Different Sean will come back and say that I am evil.

@eburbed,

I wouldn't even THINK of buying a house that didn't have power steering! :)

In Chicago the condo market is beyond dead!

I went to check out an open house on Sat. for a condo auction open house. The sellers rep. said they had planned to auction 12 units but now its 17. I guess 5 couldn't even close. A friend went over and asked about the auction and they said don't bother I have foreclosures in the building you can buy.

http://www.ricklevin.com/REAuctionDetail.asp?val=177

"Yes, this is the $64,000 question: will the default rate for Alt-A go up? I tend to think not: most Alt-A borrowers are people with jobs and good credit histories."

Actually, lenders will look for job history in which borrower held a job at one place for 5 years or more. If not you become a risky borrowers, and since the typical job history in SV is more around 2-2.5 years at one place i can see many as being more risk. But than again this is very typical around in Tech Land. Overall credit risk is rather high.

eburbed,

That neighborhood isn't really *that* bad, though I would not personally want to live there. When me and my wife first started dating, she was living on Maple St, about half a mile north of there and on our walks, we would routinely walk around that neighborhood. That areas is definitely Blue Collar, but it did not strike me as being especially high crime: I saw lots of little kids running around and stuff.

Maybe it has changed in the last four years though: after we moved to The City, we never went back to visit or anything.

@FAB,

Yes, but at least in Real Life *you* are financially solvent, well housed and can afford to retire.

NOD? What does that mean?

SP - yea I wont mind seeing that in Los Gatos, very overpriced well beyond fundementals.

PAR-
Aside FICO, you need to factor in Job History.
That will also tac on risk. If we recall the liar loans
also lied about job history not just salaries $$$.

Here is some news from the PRB.

Patrick Kennedy and David Teece—Berkeley’s biggest private landlords—are selling their seven signature apartment buildings to a Chicago-based corporation.
....
Money matters

The sale likely means a huge windfall for Kennedy and his principal partner, UC Berkeley Professor of Economics David Teece, a New Zealand native who has made millions from LECG, a consulting firm he built up, and from a business that sells rugby clothing in his homeland and Australia. One of his homes is a costly house in the Berkeley hills above the Claremont Hotel.
http://www.berkeleydailyplanet.com/article.cfm?issue=04-06-07&storyID=26725

NOD? What does that mean?

Notice Of Default. An acronym lots of FBs will be familiar with in coming years.

sfbubblebuyer, here's a good slicing and dicing of the data for the Bay Area:

http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf

Jimbo, the Alt-A default rate is already rising. Read S&P's comments regarding M&T bank and American Home Mortgage. Both are NOT subprime lenders:

http://www.businessweek.com/investor/content/apr2007/pi20070409_186749.htm

Jimbo

That neighborhood isn’t really *that* bad, though I would not personally want to live there. When me and my wife first started dating, she was living on Maple St, about half a mile north of there and on our walks, we would routinely walk around that neighborhood.

Maybe I'm just spoiled then by living in/around Sunnyvale for so long.

When I was there this weekend:
1) The street had 0 parking spots left - every inch was taken up by a van, or a pick up truck with landscaping equipment. I think I saw like 1 sedan.

2) Most properties had huge gates/fences.

3) As I was leaving, the person in the lowered el camino? car who was turning in gave me a damn cold stare. (I've lived in some very shady East Coast places - I know exactly what that look was...).

I suspect Spanish is the primary language on that street - being that I don't speak any, that would probably be poor neighborly relations. :(

I think you're all on the right track here but you're focusing too much on the seller's finances and not enough on the mortgage market. Let's shift over and take a look at demand rather than supply, shall we?

The secondary mortgage market is blowing up now. Subprime is completely and thoroughly whacked. Alt-A is in the process of getting whacked. What does this mean to us? It means that any area that is heavily dependent on these two types of financing (all non-prime or, if you prefer, subprime + alt a) will find it increasingly more difficult to even QUALIFY FOR A LOAN without paying through the nose. Bay Area real estate financing is essentially a junk bond market at the end of the day. We are currently reliant on these junk bonds to the tune of 80% of originations.

My point is, it won't matter how good the current owner's FICO score is or his likelihood of default. Sure it would be great (for me) if half the people in Palo Alto went into default. What matters more is: how many buyers will now qualify under this increasingly more difficult "credit crunch" scenario? If the secondary market now wants a couple more percentage points to compensate for risk (and they do) then we can't play affordability tricks with unconventional loans anymore, even if we want to do so.

PAR,

You're absolutely right. This expanded credit accounted for much of the runup in demand during the boom times, and its contraction will account for much of the loss in demand.

No doubt many here would decry this as left wing propaganda, but: http://www.newyorker.com/talk/2007/04/16/070416ta_talk_surowiecki

Good point, PAR.

OT: is there any man here playing golf with ladies' clubs.

I love my wife's clubs. I seem to be able to hit better with them. Is it a weight issue or a length issue?

@eburbed,

¡Compre mi pedazo demasiado caro de crap, usted gringo estúpido!

Can you point out to me the section in either of those articles where it says that Alt-A default rates are up? I did not read the entire 67 page billcara link, but it seems to say that lenders will be tightening up their standards, which is great, but not the same thing as saying that defaults will go up.

They could go up, and obviously Wall Street is worried about it, driving down the value of AHM's portfolio, but is it actually happening right now?

It means that any area that is heavily dependent on these two types of financing (all non-prime or, if you prefer, subprime + alt a) will find it increasingly more difficult to even QUALIFY FOR A LOAN without paying through the nose. Bay Area real estate financing is essentially a junk bond market at the end of the day. We are currently reliant on these junk bonds to the tune of 80% of originations.

Wow, so the Bay Area really is "special".

I really should be learning Spanish or Portuguese. It will open up a lot of opportunities.

eburbed,

Yes, that sounds about the same. Sunnyvale routinely ranks as one of the safest big cities in America, you know that right? I am not saying Redwood City is paradise or anything, but it is nothing like Oakland or Richmond (or even the rougher side of San Francisco).

"Sunnyvale routinely ranks as one of the safest big cities in America"

It also ranks as the most "Boring" God knows you may be close to work
if your a workaholic, 6-7 days a week and there are some out there.
But you can find better places to live...

On Friday, the Melville, N.Y.-based mortgage lender said it tried in March to sell a pool of Alt-A home loans, which carry better credit than subprime loans and worse credit than prime. Far fewer bidders offered materially lower prices for the loans, the company said.

Because of a cooling market for mortgage debt and a spike in payment defaults among Alt-A borrowers, American Home Mortgage Investment said it now expects profit of $3.75 to $4.25 per share this year. The company, which operates as a real estate investment trust, previously predicted $5.40 to $5.70 per share in 2007 profit.

http://www.businessweek.com/ap/financialnews/D8OD4B100.htm

Ah, there you go. Yes, that definitely looks bad.

So, it's both. Defaults are rising and the demand from Wall St. is drying up. This is happening to a very, very small extent on prime too. Credit crunches usually play out like this.

http://www.financialnews-us.com/?page=ushome&contentid=2447522020

I'm off to dinner but I'll check back in later tonight...

Sir Randall of H should get a kick out of this:

It's a buyer's market - like never before

"If you go to a lawyer or a doctor, you are paying a lot for that opinion," said Doreen Drew of Coldwell Banker Daisy Mountain. "But in real estate, they argue with you, even though they are paying huge amounts for you to sell their house."

My, but we *do* have a high opinion of ourselves, don't we?

FB: "I've got a bad case of overleverage and it's making me sick!"

"Dr." Doreen Drew: "What are your symptoms?"

FB: "Sleeplessness, stress, a general feeling of doom'n'gloom from that option-ARM reset staring me in the face. I just can't go on like this, doc. Is there anything you can do for me?"

"Dr." Doreen Drew: "Can you afford to sell or refinance into a FRM?"

FB: "Nah, I'm already at 120% LTV, plus the place has dropped 15% in value."

"Dr." Doreen Drew: "I think I have a solution for you, but it's not for the faint-hearted. Have you ever heard of 'organ donation'?"

Excellent point PAR about the extra credit lenders will want in a new, post-subprime/Alt-A disenchantment. I think it puts those of us with excellent credit and that [antiquainted] notion of 20% down at a good advantage, not to mention that such requirements will surely put pressure on sellers to lower the price somewhere within our realistic reach.

I'm thinking rather selfishly about the Tri-Valley area, where new homes are being built for a far as the eye can see. New supply along with used home supply will surely mount as fewer can qualify for the jumbo loans (even with 20% down). Who is going to buy them?

If it's play money based on a shaky loan application, nobody cares if it's a couple extra 100 thousand dollars (or much more). Appreciation cures all evils in that scenario. Not so when you're dealing with credible loans, borrowers with real money to risk, and a stagnating appreciation rate. I think that holds true even for appreciation rates which fall into historic norms of 2 -4% annually.

Is that indeed a historic norm? I sure as hell know 20% appreciation quarter over quarter verges on the psychotic.

Yes Jon, I'm wishful thinking that downpayments will go to 20%.

In your ven diagram, have you accounted for the correlation between autism and parents who are engineers, and the disproportionately high population of engineers in the Bay Area?

I see you have accurately accounted for the other populations. ;)

I get an ad/flyer about once a week for 50y mortgages. I summarily put them in my circular file. Not all of us of us on the sidelines are idiots. Still, fewer idiot buyers are fewer buyers overall.

Not to seem cynical, but... aw hell, when have I ever let that stop me? If someone had a 20% downpayment in the Bay Area, wouldn't it make more sense to move somewhere 1/3 as expensive with better schools and just buy a house outright? If I had $300,000, I would just buy a nice 1500 sf finished + 1000 sf unfinished house for $250K in Fort Collins, get a job at a local firm (sufficient tech jobs in the $40-50K/year range, less in the $60-90K/year range) and then bank my entire salary instead of paying it to mortgage interest. Better schools, safer, less expensive and I'm flush with cash.

theotherside Says:

> Here is an interesting article confirming that lenders
> will be trying VERY HARD to put struggling alt-a
> owners with decent job prospects into more affordable
> and predictable loans…

Keep in mind that “lenders” don’t put anyone in to a loan it is the “loan originators” and “mortgage brokers” that put people in to loans (and they will do what they can to fund as many loans as they can and with rare exceptions don’t care if a homeowner ever makes a single payment as long as they get paid a commission at loan funding)…

Some of us are wed to the tech economy... so moving away is tempting but not a total slam dunk.

It is a third world out there …. India is better than sunnyvale

Terminal C of SJC reminds me of the movie Raid on Entebbe. It looks like an African airport 30 years ago.

Some of us are wed to the tech economy… so moving away is tempting but not a total slam dunk.

The most important asset of the Bay Area is its restaurants. Other things can easily be duplicated elsewhere. (e.g. good weather can be created using broad-spectrum light sources)