Thursday, September 21, 2006

SN&R: "Has the bubble burst?"

Sacramento News & Review looks at the aftermath of Sacramento's housing bubble.

In mid-2004, John and Karen Philbrook bought a home in Sacramento's North Highlands neighborhood, when buying a house seemed like a sure ticket to security. They opted for an interest-only, adjustable-rate mortgage and counted on the value of their house continuing to rise as a way to build up equity.

Now, as the pillars upon which the real-estate boom rested--low interest rates, easy credit and ever-rising house prices--begin to crumble, the Philbrooks, like countless others, are finding their piece of the American Dream increasingly hard to keep a hold of...

...[E]arlier this summer, a note from the Philbrooks' mortgage broker arrived in the mail. Overnight, the note informed them, their monthly payment was increasing by close to $500. And the Philbrooks, who had about $900 saved up for their daughter’s future, a few hundred more for emergencies and nothing in reserve beyond that, realized their entire dream now stood ready to fall...

Over the past year, as interest rates have risen and for-sale houses have sat unsold for months, much has been written on various aspects of the housing market.

Journalists and analysts--not to mention homeowners or potential buyers--want to know: Is the current slowdown just a blip in an otherwise vibrant market, or is it the end of a decade-plus bubble? Will national trends be magnified in Sacramento’s suburbs, which have seen startling appreciation in house values in the recent past? Will the air in the bubble gradually leak out, giving people time to adjust their expectations and their financial planning, or will it burst spectacularly? Will interest rates continue edging upward? If so, will the real-estate market collapse, when it becomes impossible for new buyers to make offers that are acceptable to sellers who bought homes when rates were low and prices were high?

Much of the ink spilled on this has examined these issues as a series of isolated problems. It's becoming clear, however, that the problems are interlocking. Indeed, there's a fear voiced in real-estate circles that some parts of the country, including Sacramento, might be facing a perfect storm in which the true losers are families who borrowed cavalierly without adequately crunching the numbers. Families like the Philbrooks--who, at the urgings of sometimes-unscrupulous mortgage brokers, seriously over-extended themselves at the height of the housing boom--now will pay a high price for reaching toward the American Dream...

How are Sacramentans paying for this?

"You're seeing people who were living off the equity in their house. It worked real good for three or four years," said attorney Scott Coben, a bankruptcy specialist who works out of an airy office, built around an inner, roofed atrium decorated with palms and tropical plants, in downtown Sacramento. Seeing their houses keep appreciating, Coben explained, homeowners borrowed against the increased paper value of their property, essentially living off the promise of an eternally rosy real-estate environment. "But now the gravy train is coming to an end. They've got the credit cards, crazy loans, 40-year mortgages, and they’ve done refinancing. A lot of them are going to lose their homes.

"People were just totally unrealistic about real estate--refinancing to sustain their lifestyles, or people who got in the game late took out horrible loans to get real estate," Coben said. "They're getting killed now."

8 comments:

Lander said...

Thanks to a reader for posting a link to this article.

Anonymous said...

Check this item over at Sonoma Housing Bubble blog.

Looks like the shredder parties are starting. Think is has something to do with all those "exotic loans"? ("Mortgage Fraud" is SUCH a bitter-renter word...)

tom stone said...

this crash will affect eat theynd out thveryone,and further destabilize our country.it is going to get very ugly indeed when tens of thousands of "entitled" people realize that they have been sheared,and the only open gate leads to the slaughterhouse.i saw Athena's post,lenders are legally required to hang on to loan apps,etc for 5 years.so maybe these folks are cleaning out old files safely in anticipation of the next boom,which lereah says will be along in a few months...maybe.

Rod said...

I live in the Bay Area, but I can't beging to tell you how many people who I've talked to the past two years who bought a house told me I was absolutely crazy and stupid for even intmating that the market might go flat or down. Apparently, they have no sense of history.

DavisGuy said...

How's this for irony?

SN&R's front page article is about Sacramentans losing their homes to toxic mortgages---interest-only and option ARM.

On the back page of the same issue is an ad for Jasmine homes in Elk Grove, with "payments under $800 per month*".

Read the fine print and that $800 payment is for a PayOption ARM with negative amortization, and rate subject to change monthly!!

Max said...

Somebody just emailed me a link to this blog:

iamfacingforeclosure.com

24 years old, $2.2 million in outstanding debt. I wonder how many people there are like this...

Anonymous said...

24 years old, $2.4 million in hock, 6 flipped properties sitting there.

This kid reminds me of all those 18-year-old dot-com millionaires with BCDs and pocket protectors back in 1999-2000 talking about COMPLETELY NEW ECONOMIC PARADIGMS (TM).

And in 2001-2002 staggering around in shock repeating "I'm wiped out... I'm wiped out... I'm wiped out..."

Anonymous said...

this kid has some splaining to do when the FBI comes a knocking on his door. How can he get 2 million in loans with no income?????