Sunday, January 28, 2007

Sacramento's "Hidden Time Bomb"

From the Sacramento Bee:

James and Beth Fullenwider are living inside a bad dream growing ever more familiar across the Sacramento region: Their 2,400-square-foot house in Elk Grove is slowly slipping away from them. They can't afford their $3,300 monthly payment.

"If the credit people had really looked at our situation, they would have laughed and said, 'You can't come close to qualifying for this,' " says James Fullenwider, who runs a video production business at home. "We're in a house we have no business being in."

He says the couple didn't read the home loan's fine print. Only after moving into the $500,000 home last August did they learn the loan agent inflated their income to qualify them for the financing. "But we were stupid to do it," Fullenwider says.

The couple's story illustrates one of the biggest questions hanging over the Sacramento region's real estate market this year. As housing prices search for bottom, some financial experts fear that a multitude of expensive and newly adjusting mortgages have the potential to spark a rising tide of foreclosures. That, in turn, could be a hidden time bomb, shoving more homes onto the for-sale market and further stressing a downturn already well into its second year.
...
Nearly $1.3 trillion in adjustable rate mortgages -- ARMs -- will reset to higher payments this year, according to mortgage giant Freddie Mac and other financial institutions. That will cause some payments to rise $200 a month. Others will double or triple.

In markets like Sacramento, already heavy with excess resale inventory, some speculate that stressed owners will hand more homes back to banks and aggravate the oversupply. Since the high inventory of houses for sale already is depressing prices, a run of foreclosures would likely further depress them.
...
In 2004, about 65 percent of homebuyers in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties used adjustables. The next year, the total jumped to 73 percent before falling back to 62.5 percent from January through November 2006, according to DataQuick. That's about 135,000 ARMS in the last three years, with thousands of them adjusting upward in 2007....

Loan Performance, which tracks U.S. mortgage industry loans, estimated that nearly half of 2004 and 2005 homebuyers in the eight-county region used interest-only loans...The firm estimates that in 2005 as home prices peaked, nearly one in five borrowers used even riskier Option ARMS...In the first nine months of 2006, one in four Sacramento-area borrowers were using them, Loan Performance estimated.
From the chart--Percentage of homebuyers in the eight-county capital region who used ARMS, by year:
  • 2000: 18.9%
  • 2001: 12.1%
  • 2002: 19.9%
  • 2003: 32.7%
  • 2004: 65.1%
  • 2005: 72.8%
  • 2006: 62.5% (through Nov.)

33 comments:

drwende said...

Yeeup.

I'm sure there'll be realtors and mortgage brokers lining up to say that it's the buyers' fault and they should have known they couldn't afford these houses. But when your realtor is telling you to use a suicide loan, and your mortgage broker is pushing money on you, and the newspaper is telling you that it's a great time to buy and exotic financing is the way to go, how is an ordinary person to figure out that absolutely everyone is either lying or wrong?

We've achieved a society in which people in what used to be positions of trust (say, mortgage bankers) can lie to and exploit their constituencies, then shrug and say people ought to have been more responsible than to have believed them.

Max said...

Not only that, they design laws that are misleading on purpose so you require their services.

I am a little sick of the finger-pointing, though. This bubble was brought on by the mutual greed of all the parties involved. Even though their broker "lied" about their income, they still knew they were taking out an IO. I call that willful ignorance.

Anonymous said...

drwende:

I am so glad you said that.

norcal ray said...

We've achieved a society in which people in what used to be positions of trust (say, mortgage bankers) can lie to and exploit their constituencies, then shrug and say people ought to have been more responsible than to have believed them.

********************************

drwende,

you are right on this. I am not sure if people are more dishonest these days than the past but there is a lot of shameful dishonest deals in RE the last few years. Brokers putting clients into loans and home prices they know they can't handle. At the least, there needs to be tough criminal sentences for some of these brokers and the CEO's of the mortgage companies.

But with Ameriquest and other firms sponsoring the Super Bowl and pouring money into political contributions, Joe sixpack will continue to get screwed.

Perfect Storm said...
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drwende said...

In fairness, Perfect Storm, I don't want to condemn all realtors or all of any other category. The realtor who handled my parents' sale and purchase during the last crash was realistic and honest; they did well out of both deals. The realtor who helped us find our rental here in Phoenix was a gem (landlords put rentals on the MLS and pay realtors a commission to place them). (Our landlord is also a realtor and has been really nice so far.)

So while I've met realtors I wouldn't trust to put a quarter in a parking meter, I've also encountered some who are worth every cent of their commission.

(And yes, I do appreciate people listening to me! I was worried I'd trigger umpteen attacks.)

Perfect Storm said...
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oldsharecropper said...

"If the credit people had really looked at our situation, they would have laughed and said, 'You can't come close to qualifying for this,' " says James Fullenwider, who runs a video production business at home. "We're in a house we have no business being in."

Ok, let me get this straight, here we have a man who runs a video business and he had no idea that they could not really afford this home??????? Now they point the finger at the credit people?

paranoid renter said...

I really don't think the mortgage broker is all to blame. There was too much hype around getting into a home or getting priced out. I did the math and realized it just didn't make sense to buy (even though I could afford it) and I knew I ran the risk of being priced out. Well, guess what? I am currently priced out. In my case, I'm single and don't care too much for what a house would offer, but if I weren't and there were other emotional factors in my decision, I probably would have ended up buying. I think there's a lot of folks that have been affected by the panic of "buy now or get priced out". The brokers tend to do what they are trained to do in order to close sales. If they were taught to be strict about qualifying buyers, we wouldn't have this mess.

But that is Elk Grove. I think Roseville should be in much better shape. There are all kinds of high-end stores coming up there - Nugget, Whole Foods, etc. They must've done their homework to know that they will have enough customers.

lyn said...

I thought we were the only naive people that fell for this. We took out a loan under the same type of situation. Not really knowing what we were getting into and being told false information (wish I had everything in writing). Anyways, we took a big loss but got out with something rather than nothing. Run as fast as you can from these loans and just rent for awhile until you can manage a fixed loan. Our balance kept going up, our payment kept going up, and our house price kept going down. A lesson well learned!!

Anonymous said...

I fear this is far from over. The ARM numbers shown are a good indicator that there will more trouble on the horizon. I don't know what the ratio is for foreclosures on the $1.3 Trillion stated above but I would suspect it is somewhere close to 10%. If it is then 100+ Billion in overhang would, at best, continue to flatten the market for some time. When you add in the peripheral impacts such as labor reductions, pressured retail sales, and loss of service demand, this is no soft landing as the realtors would want us to think.

Real said...

I don't know about the rest of the homebuyers, but when I started working with the realtor the first question they asked was "What price range are you looking for?" - I made the choice then and there what types of homes I would be shown. I don't think the realtor has any obligation to sit you down and walk through the math with you on what you can afford. That is, unless you want the government to tell you what house you can and can't buy - we wouldn't want any PERSONAL RESPONSIBILITY now would we?

As to the family in the article, some backwards math on $500K home (assume no downpayment) and a $3,300/month bill, I would say they are paying an interest rate of 6.9% - if I look at a 5/1 jumbo ARM, the rate would be ~5.7% so that would lower their payment by about $400/month. Second, they bought their home last August - I would bet you that the ARM is up less than 1/2 a point in meantime. So, these guys AT MOST, have had their payment increase by $165 over the timeframe that they have owned their home. That $165 increase equals a 5% increase in their payment.

Clearly, in cases like the one in the article, an ARM is not the issue, it is a buyer being too stupid to understand what they can afford and wanting instant gratification without any sacrifice. I have a really hard time feeling sorry for them as a result.

AgentBubble said...

Their home is 2329 square feet and the area they are in is getting about $180-$210 a sq. foot. Equates to about $489K (at best and before costs). Bad news for them is that there are over 50 homes for sale in their area that are less than $500K (8 under $450K) and larger than 2329 sq. feet.

Principle and interest on a $500K loan at 6% is $2997. Add $80 or so for homeowner's insurance, and $592 for their taxes and you get $3669. Their $3300/mo payment tells me the first mortgage is probably interest only.

Wonder how long before it's a short sale....

drwende said...

Real, every time I've bought a house, the realtor has done two things:

(a) Insisted that we be pre-approved for a mortgage. Someone in charge of handing out money told these buyers that they could afford that much house. It wasn't a number they pulled out of a hat.

(b) Tried to talk us into spending more than we'd budgeted, preferably the absolute maximum we could qualify for by stretching every penny. That includes the realtor in San Francisco who -- upon being told repeatedly that we wanted to stay in the price range of under $400k (back in 2003, when you could) -- insisted that we'd be much happier with a $600k condo.

We also had a paid "financial adviser" tell us that we needed to buy a $400k house in Sacramento in 2005.

Come to think of it, all I heard from anyone except my husband and my parents, from 2002 to late 2006, was how we were idiots not to jump into the market.

If you want to talk about the people who leveraged multiple properties on liar's loans, then we can talk "personal responsibility," as they were consciously part of the game of greed and deception. But the average buyer who just wanted a family home -- and who got a C in college algebra and believed that if the bank wanted to give them money, everything must be okay -- I feel some sympathy for them.

Anonymous said...

This article just illustrates how basic financial concepts seem to escape the average american. If someone cannot understand whether they can afford a particular monthly payment, how are they ever going to be able to be able to grasp saving for retirement, health insurance, voting, etc?

Real said...


"If someone cannot understand whether they can afford a particular monthly payment, how are they ever going to be able to be able to grasp saving for retirement, health insurance, voting, etc?"


I agree 100%. Unless we want to turn over all of our decisions to the government, these cases will continue to exist. I firmly believe that you can not legistlate stupidity out of the American people so you have to step back and let people make their own decisions. The case in the article has nothing to do with the loan used to buy the home - it was the stupidity of the buyer that is now just realizing that he could not afford the home he bought 6 months ago. Rates did not skyrocket, seemingly his income did not plummet from a job loss - only difference between now and 6 months ago is he seems to have wised up on his payment.

Come to think of it, all I heard from anyone except my husband and my parents, from 2002 to late 2006, was how we were idiots not to jump into the market.

drwende, you should have taken the advice from people in 2002-2005 and you would have made a bundle. However, if you are looking at a home as an 'investment', there is not too much I can do for you. Here is a tip - if you live in it, it is not an investment.

Lastly, to the blog owner - is there any way for you to get rid of the word verification? This is the single most annoying thing on the web today.

drwende said...
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drwende said...

Reading the latest Get Rich in Real Estate brochures, eh, Real?

Of course a house is an investment if you're living in it. You gain money (potentially) in two major areas: (a) the difference between the total costs of owning and renting (which frees some of your cash to be invested elsewhere) and (b) any increase in equity above inflation (which is ordinarily small over the short term).

When owning costs 2-3 times what renting costs, you can easily lose the most of the "profit" from buying at $250k and selling at $380k, especially with transaction fees at both ends of the deal, plus capital gains taxes resulting from not rebuying before the bottom of the market.

If we'd played our cards exactly right, we might have cleared $20,000 after all the shouting was done. We made more than that on our regular investments over the same period.

Real said...

Of course a house is an investment if you're living in it.

I disagree 100% - a house is a lifestyle choice. In my opinion, an investment requires liquidity. In the sense of the housing market, the only way you can lock in profits is:
1.) Go back to renting until prices decline or
2.) Sell your house and move to a lower cost area (Midwest?)

Given 99% of homeowners are not willing to do options 1 or 2, the house is not an investment - it is a lifestyle choice. Over the course of the ownership, the value of the house may go up or may go down, but if this value change is part of your core retirement strategy, you are not very bright in my opinion.

You may disagree, but how many homeowners do you know that sold over the last 2 years and are now renting? I would say that the number could be counted on one hand - it simply does not happen. Just as in the same light, there is a possibility that home prices may decrease over the next 12 months, but I WILL NOT sell my house and rent for the next 12 months and then buy again. 99.999% of homeowners will not do that either - this does not make us bad investors, it simply means that home ownership is a choice that goes beyond investing. As I stated above, if you live in it, it is not an investment.

Anonymous said...

Those idiotas are just the tip of the iceberg. How stupid can he be? Betcha his video editing business is in the tank too since any yaywhoo with a PC can do video editing.

Texas here they come.

I hear a crash coming!

AgentBubble said...

"how many homeowners do you know that sold over the last 2 years and are now renting? I would say that the number could be counted on one hand - it simply does not happen. "

We sold in May of last year and decided to rent. We did very well and now the house is worth about $50K less based on the comps I've done. We sold for the second highest price per square foot ever in our development of custom homes too, so I don't fit into your view very well. The house we were going to buy (and backed out of) is worth about $40K less, so I think we came out ahead. Our rent is less than half of what the mortgage payment would have been, so we're saving that money as well, in addition to the interest on the equity we invested when we sold.

However, we do agree that a house is not an investment. I think that's a mistake too many people make, living in it or not.

norcal ray said...

"When owning costs 2-3 times what renting costs, you can easily lose the most of the "profit" from buying at $250k and selling at $380k, especially with transaction fees at both ends of the deal, plus capital gains taxes resulting from not rebuying before the bottom of the market."

There should not any capital gain taxes if the seller lived in the house for 2 of the last 5 years. drwende, are you referring to investment RE?

Cmyst said...

Real:"You may disagree, but how many homeowners do you know that sold over the last 2 years and are now renting? I would say that the number could be counted on one hand - it simply does not happen."

Well, it sure did with me. I sold one year ago, paid off my consumer debt, banked about 10k and am renting a place in EDH that I could absolutely not afford to buy, and am still able to save every month.
I am relieved and blessed that I sold my condo, and grateful that I decided to rent after looking (for the 3 months it took the condo to sell) at the places in my price range. Yes, my Realtor and his financial agent colleague attempted to talk me into buying a home I could not afford.
But I agree with you. If I had bought a single-family home 5 years ago, I'd be happy with my payment and presumably happy with my house.
I wouldn't even be worrying about the "bubble or no bubble" bit if I had bought then, and intended to stay here.
The only people who really worry about such things are prospective buyers in TODAY's market, prospective sellers in today's market, and those who make money off of either of those two groups.
So, which of these do you fall into?
A happy homeowner with such a high degree of personal responsibility doesn't often feel the need to read and post on a blog dedicated to current real estate news and views aimed mostly at those of us who feel we've been priced out of this market.

Anonymous said...

Real, "Given 99% of homeowners are not willing to do options 1 or 2, the house is not an investment - it is a lifestyle choice. Over the course of the ownership, the value of the house may go up or may go down, but if this value change is part of your core retirement strategy, you are not very bright in my opinion."

How wrong you are! Sold in San Diego 2 1/2 years ago close to the high, and have been renting ever since. Best move I ever made because the gov gave me $300,000 free and clear of taxes. Where do you find such an investment? Had a $300,000 note one day and no debt the next. Didn't stay out of the market but paid cash for a 25 acre ranch in a less volatile market here in California. Don't care what happens to the price because all I owe are RE taxes, insurance, and upkeep. Real, you seem to make blanket statements assuming that everyone is in the same position you are (ie: 99.999%). Not true and never will be. There are many, many people who took advantage of the market and rented awaiting another opportunity to get back in. And, so far it looks like they will be rewarded at some point. It's an investment when those of us decided to take profits. It's a supply/demand issue based on value. When exhuberance overtakes perceived value to the extreme, there are many who will profit if they sell. It remains a lifestyle choice, without consideration of price, when we decide to hold on to it indefinitely. As if "indefinitely" is devoid of lifestyle changes that cause one to sell. If you were a student of markets and value, I doubt you'd take the position you do. I would suggest you consider your wild statements carefully. There are many that not only disagree, but know better.

Anonymous said...

Unless you plan to stay put for ten years, the move made by the last two make alot of sense.

The flippers and stupid homebuyers of 2004 and 2005 face alot of downside risk / loss.

Real said...

6SodHow wrong you are! Sold in San Diego 2 1/2 years ago close to the high, and have been renting ever since. Didn't stay out of the market but paid cash for a 25 acre ranch in a less volatile market here in California.

You didn't leave the market? Sounds to me like you sold in San Diego and bought back in in a cheaper market. You can always sell property in San Fran, New York, etc and buy back in somewhere else AND take money off the table. Your post simply does not make any sense in the context of selling, renting, and then rebuying in the same market. So, how many buyers have sold out 'at the high' are renting now and then plan to re-buy? There were what, 14K home sales in Sac last year on a base of what 500K? Of these, sales, which % were existing homes where the buyer is renting now waiting for their re-entry? Your post simply fails to ring true when put up against that actual sales data - sorry, do try harder next time.

Anonymous said...

Real, once again, get real! This party's just beginning and the renters of today will be homeowners of tomorrow at prices they can afford. Happens in every real estate turndown...the market finds its equilibrium where there are willing buyers meeting willing sellers. It's a market and anytime there's buying and selling going on there's investment risk involved. Take off the rose colored glasses, face facts, and attempt to gain some real understanding of what's going on here. If only 10% can afford to buy at current prices, and there are those that must sell for various reasons that create an overabundance of inventory, where do think prices are going? Add it up Real and tell the rest of us your home isn't an investment. Maybe you just got into it a little late and now wonder why.

Anonymous said...

Real, I did buy back into the market but am a renter nonetheless. I am waiting to buy again, for investment no less, at prices that are far below what we are at present. I wouldn't be surprized to see an additional 25%-40% drop out before the end of 2008. If you bought late, your pain is just beginning. Kind of like buying Microsoft at $106 a share during the dot.bomb implosion.

Hyperbolic said...

Soon I am sure we will see someone proposing a government bailout of folks who, like these mentioned in the article, knowingly put themselves in a financial debt position they cannot maintain without sliding. I don't feel for them. If they have to foreclose then maybe they will learn the lessons of creative financing.

Anonymous said...

The same people that put people into "suicide" loans are at this very moment designing and offering creative "bridge financing" that will allow most borrowers to hold on until prices begin to rise again (even if this is 5 to 10 years away).

The expected ARM reset catastrophe will, I think, be like Y2K: much ado about virtually nothing.

anon1137 said...

I'm another who sold on the upswing (2004) and I'm renting today. Didn't plan it that way, just got sticker shock when I started looking in Sac. I may be renting for a long time if things continue like they have been lately, but the interest on my tax-free money market account is paying all my bills and then some.

jeff said...

I was wondering why it took the Bee so long to profile a couple like this, they are one of thousands out there. I love how they blamed the "credit guys" for being in a house over their heads. I think i just heard a loud POP...where's sippin?

Anonymous said...

Here's a very lengthy but excellent report on the affects of the subprime market and it's forelclosure projects. Not pretty as California lead the nation in subprime lending over the last boom period.

http://www.responsiblelending.org/pdfs/FC-paper-12-19-new-cover-1.pdf