Monday, February 26, 2007

'A Market Way Worse Than Anyone Expects'

From the Sacramento Business Journal:

Residential mortgage lenders are tightening underwriting criteria for people with blemished credit as thousands of homeowners are defaulting on their mortgages. And homeowners who will soon have unmanageable monthly mortgage payments might not find a lender willing to handle their refinancing.

The problems surfaced in the fall with a sharp rise in foreclosures after years of almost none. Lenders in the four-county area took possession of 814 homes in fourth-quarter 2006, a 1,300 percent increase from the same three-month period in 2005.
Now, the easy lenders have disappeared from the market in some sudden and spectacular bankruptcies as borrowers face the end of their teaser rate period...Several large national lenders to people with blemished credit were forced to seek bankruptcy protection in the past month, including ResMAE of Irvine and Mortgage Lenders Network USA of Connecticut. Some of the big players, such as HSBC Holdings PLC and New Century Financial Inc., recently have warned of major problems.
"It is not unusual for someone who makes $4,500 a month to have a mortgage payment now of $1,700, and when that loan adjusts, it will go to $3,200 a month," said Scott Thompson, owner of Short Sale Resolution Services in Carmichael. Thompson for 15 years was co-owner of Thompson & Brown, a real estate brokerage company.

"A year ago, I was uncomfortable with the market, so I started my own business for short sales. I think we are about to see a market way worse than anyone expects. This is going to be bad," he said. "In past declines, borrowers were $200 or $300 a month away from making ends meet. Now, when these option ARM loans adjust, people are not even close to making ends meet."
"It doesn't matter if the fault is with the people who sold these loans or if it was with the borrowers who exaggerated their income to get the loan," Thompson said. "Everyone was caught up in the real estate hype. And that is now coming home to roost."
Faced with a new, higher mortgage payment, people are looking for new loans. Many are not finding them. "In some markets, over 90 percent of the people who come to us for help are in properties they shouldn't be in," said Ed Shanks, executive vice president of national retail lending for U.S. Bank in Minneapolis. "That, combined with the decreasing appraisal value of their home, is turning into a perfect storm."

Wells Fargo Bank this month tightened its underwriting standards. It reduced by 5 percent the maximum loan-to-value ratio it will lend to subprime borrowers in declining markets. A declining market is one in which house values are either going down or staying flat, said Wells Fargo spokeswoman Julie Campbell. All four counties in Greater Sacramento are included under that definition.

"Clearly, across the board, we are seeing tightening in underwriting," [Jeff] Tarbell, [owner of ATM Mortgage in Sacramento] said.

The loose underwriting tended to be done by mortgage companies, but the heat is being put on all financial providers. Banks are being told by regulators to underwrite even their nontraditional loans -- such as option adjustable rate mortgages (ARMs) -- as if they were traditional, fully amortizing loans. The criteria will take many lenders out of the subprime loan market and could even remove some of the investment money from the secondary market that funds such loans.

"We are just beginning to see the tip of the iceberg on this," CoreLogic's [Anthony] Romano said.
From the Sacramento Bee:
The economy is bearing up well, in Sacramento and across the country, despite the weakened housing market, a Federal Reserve economist said Friday.
Sacramento, even though it's faced some of the worst of the nation's housing slump, continues to generate decent job growth, she [Janet Yellen] said.

The "overall health of the local economy," including renewed hiring by state government, should help Sacramento avoid a repeat of the significant recession that engulfed the area in the early 1990s, Yellen said during a speech at California State University, Sacramento.

"While the pace of employment growth slowed last year in the Sacramento area, as it did in the rest of the state, the state government's fiscal situation has improved over the past few years, and that's helped create new jobs locally and keep the area economy on a stable expansion path," Yellen said.

She added that "there are signs of stabilization" in the Sacramento housing market. DataQuick Information Systems, which tracks the housing industry, reported recently that while sales activity in Sacramento is still in a slump, the decline in prices has slowed.
From the Sacramento Business Journal:
Less than one in 10 families, or 9.2 percent, earning the annual median income of $65,400 could afford a home in the Sacramento region during the past quarter, but that was better than the 7.9 percent rate in third-quarter 2006, according to a California Building Industry Association report released Thursday. Despite the increase, the affordability rate, which also includes the area's median-price of $370,000 for the just-completed quarter, makes the region the 18th-toughest market for home shoppers.


ralphk said...

"Less than one in 10 families, or 9.2 percent, earning the annual median income of $65,400.... Despite the increase, the affordability rate, which also includes the area's median-price of $370,000 for the just-completed quarter, makes the region the 18th-toughest market for home shoppers."

There are many out there that say prices aren't going to drop anymore.

If I can no longer get my exotic mortgage to pay the $370k median, how will I be able to buy it?

Oh, I know. I'll get a raise this year of around $60,000. $60,000 + my existing median of $65,400 = $125,400. $125,400 x 3 (former fundamental lending standard) = $376,200.

Problem solved.

arizonadude said...

Look at countrywides reo list and you will sacramento near the lead in nuber of REO's.I think they have around 700 properties in california alone.It is going to get ugly in the sacramento area for sure as the subprime tightens lending requirements.This market was based on speculation and that has to be worked out of the system.

Bakersfield Bubble said...

Looks like the MSM is stealing headlines from the bloggers.They are starting to scare me - LOL.

Diggin Deeper said...

Less than 10% Affordabilty Index


Tougher Lending Standards


High foreclosure rates


Increasing Inventory levels


Low Median Wage


Unsure buying public

= Lower median prices and lower rents

How much lower? Anybody's guess.

Patient Renter said...

Diggin Deeper:

What you said...

+ 1 trillion dollars of mortgage adjustments this year.

Diggin Deeper said...

Ouch! How could anyone forget that number? The actual demand for homes drops as well because subprime made up about 25% of the market. With new lending standards you probably can't take credit for the whole 25% but I'd bet 20% in demand loss. Any way you look at it something's gotta give before we reach the bottom and price is the easiest way to move a property. Buyer's are pretty saavy and I'd wager there are some really "dumb" offers being thrown out to sellers right now.

drwende said...

So I looked at West Sacto houses between 1350 and 1650 sf -- your basic "investment" property out in the generic 'burbs, with a mean asking price of $371k (similar to the regional median).

Of 17 listed houses meeting these criteria, six are definitely being sold at a loss (either the listing says so, or it's clear from past sale data). Two more are being offered for a price that won't turn a profit after realtor commissions, which would give you almost 50% of sellers asking a price that nets them a loss.

The other 9 houses were bought well before the top of the market, and there's no easy way to see if they were pumped for equity when the seller chooses not to mention it.

While the sample size is too small for drawing serious conclusions, this data at least points to a substantial proportion of sellers being in trouble -- and taking a loss is not moving the houses.

Gwynster said...

Those same properties are renting (and often times NOT renting) for 1300 to 1600. CL is filled with ads. They all say no pets/no smoker which leads me to belive they on the market and trying get renters at the same time.

The burn rate on those babies must have people scared.

Patient Renter said...

"Those same properties are renting (and often times NOT renting) for 1300 to 1600. CL is filled with ads."

...and as always, the fastest way to scare away renters is to place your house for sale at the same time. Good luck with that.

drwende said...

Identical properties, but not currently the same properties, at least on CL... though some CL rental addresses are looking awfully familiar as houses that failed to sell in the fall.

Enough of my specific list of properties is already bank-owned that they're past the "let's try to rent it out" stage. Someone with more patience could do a topographic map showing the locations of "rent me!", "buy me!", "rent or buy, anything!", and "oops, I've been repossessed!" neighborhoods in the region. Maintain it over time, and I bet you'd see a moving wave from the further suburbs in toward central Sacramento and also toward the Bay Area.

ralphk said...

Classic craigslist house for rent ad - pictures of front of home show for sale sign. Pictures of inside of home show multiple LCD or Plasma TV's.

Sometimes I think I'm the only one in Sacramento without a LCE or Plasma.

Although, I've seen many ads that if I purchase or rent, the price includes a new TV.

Another problem solved.

Mark said...

I was thinking of moving from the Bay Area to Sac (Elk Grove) I'm not so sure. 6 people SHOT over the WEEKEND. Jeez.

paranoid renter said...


Use tinyurl for links.

You can always pick a better neighborhood in the Sacramento area. Elk Grove is near what traditionally has been the higher-crime area. Try Roseville and Rocklin instead.

drwende said...

Have yourself a crime map for the city of Sacramento.

Jeff said...

Sippin, where are you? you always seem to hide once the bad RE news hits the wires on monday, then you show up in latter part of the week hyping RE. it's all about "location" right? right? where's your bullish statements? why aren't you buying up everything in "the good locales" around town? i'm reminded of a good friend of mine, one who is a very successful stock investor. he was buying the hell out of a few stocks tied to RE, including Toll Brothers and Countrywide. He couldnt buy it fast enough and it split and split and just won't fall. it remindedd me of the dot com stocks. i warned him over and over it couldnt last, that subprime was just that, subprime. and that RE no matter what end of the market it was on, was destined to come down. i was called a chicken little. he pointed out to me over and over that in the shareholder meetings and 10k reports that Toll only catered to the very high end housing market, customer homes that one "the rich" could afford. he would point out that the rich people have money and no matter what the economy does, the rich will ALWAYS have money to buy things, esp a home. well, the day has come where Toll has taken a bad beating, and written off hundreds of millions in RE loses can cancelled huge land contracts b/c "we just aren't selling these types of homes anymore and we don't need land." so while i was on the sidelines getting laughed at, who's laughing now? sippin, sippin where are you???

Jeff said...

RalphK: you're not the only one without an LCD or Plasma. :) BTW, builders actually offered those as incentives to get ppl to overpay for their home. Sometimes I think these morons, er, buyers, only bought so they could get a new plasma and brag about it at work. I guess a $4K/month mortgage is worth it if you get a 42" plasma thrown in...

Jeff said...

So, my second comment:) I love the speech by the Fed Reserve "Economist" Jenet Yellen? where did she get her degree, online? So she's saying that Sacto, even though we're near the highest in the country for defaults and repos, we're still ok because of the strong local job market, including state jobs? Are you freaking kidding me??? So, the average state job can't possibly be high enough to make the average home mortgage payment in this area, and with the loan standards tightening, it will get FAR worse before it gets better. Plus two of the major local employers, Intel and HP are hurting. Intel has laid of thousands in Folsom and more are to come with falling chip prices. And HP has always rumored to pull out of Roseville altogether for consolidation reasons. Ms. Janet must have a financial interest in the Sacto RE market, or just poor studying skills in college. That's not the same econ class I took.

Karl AMC said...

I service many restaurants in the sacto area. They are Down 10%. I thought we have a strong and growing economy. I don't it is as strong as they claim. I am watching the 95678 area and prices are at a standoff. I keep hoping that the houses that have been sitting, will start dropping. Will prices drop in the spring when alot more houses come on the market?

Perfect Storm said...

"In some markets, over 90 percent of the people who come to us for help are in properties they shouldn't be in," said Ed Shanks, executive vice president of national retail lending for U.S. Bank in Minneapolis. "That, combined with the decreasing appraisal value of their home, is turning into a perfect storm."

Yes a Perfect Storm, now where have I heard that before, lets see hmm.

Sippn said...

Geez, Jeff... someones gotta work!

Had my comments all nicely laid out and "poof" net died.

You can find my comments about Toll stock and other public builders on this blog and/or Calculated Risk ... I said "they haven't written off enough" and "sell short" in December and January. Last week a stock analyst said they were a good buy. Hmmm. Maybe now.

BTW who said invest in stocks on this blog?

I don't spread my real estate purchases "all around town" ... when you do that, your investment performs just like the market.

Countrywide is very active here, check other lenders rates of REOs before you judge Sacramento.

Mark - Elk Grove is not Sacramento. Elk Grove is ....Elk Grove. Thats why it has a different name. Ha Ha. Pow pow. Bang Bang.

paranoid renter said...

This is starting to get scary. I think the fed will have to come in and bail the banks out. Otherwise things will be so bad it won't matter if you're renting or owning. (Think really high unemployment and crime.)

anon1137 said...

Nice try, sippn. What you should have said is that these are all very interesting observations, but they don't amount to a pile of beans until they affect *prices* . . . and I'm not talking about 10% off, I'm talking about 25% off . . . and I'm not talking about talking about 25% off some stucco warehouses in EG, I'm talking about 25% off the county median.

This could speed things up: Greenspan fears recession - report

lexi said...

You know when I first read
about 50 percent decreases
in prices I thought it was too
much, but the way things are
going ... I'd say 50 percent
decrease from the height of the
Market is right on.

Sippn: Since you say it's location.. would you be so bold
as to name a few locations in
Sacramento that you believe will
hold their value?

sf jack said...

Re: Jeff's comments with regard to Janet Yellen

I was wondering about some of that baloney myself.

She's just not paying attention or she's trying not to scare the crap out of everyone.

Jeff said...

Sippin...My comments weren't related to stocks, they were related to an investor buying stock in real estate related stocks. Thus my point, if even the top builder of custom homes is losing money when the rich never stop spending, then the market is over bought. A side note, the author of rich dad poor dad said get out of RE back in the summer of 2005 when the cashier at Safeway handed her RE business card to him and said if he wanted to get into home flipping, she could help him out. At that point, when cashiers at Safeway are RE investors/flippers, it was time to sell. Good advice.

Karl AMC, yes prices will continue to decline. I don't see any reason or catylst which would spark RE prices to go higher. Job growth is slowing and Alan Greenspan is even predicting a recession, and the stock market is starting to contract. Sit tight and it will pay off for you.

Sippn said...

Lexi - Sacramento Co, east of 80 north of 50 is a good plact to start, otherwise, its a crap shoot and always has been except for 2004-2005. Or near the med center - where they're bringing jobs.

Jeff - good idea to get out of something when the checker is pushing it - coffee stores, yougurt shops, video stores, remember these fast bucks?

Whoa - please don't call Toll the top end builder of custom homes, they are a builder of high(er) end tract homes, and not the best by far. Saw their stuff in El Do after it opened last year and it was pathetically dated and sloppy - they got here lazy. JTS, Greenbrier, Standard Pacific, Shea are much more in tune. They came to CA when the market was hot and didn't have to adapt, kind of like trying to sell a French Citroen here - thanks I'll keep my BMW.

Yellen is closer than you think - govt workers used to drive the higher market here into the 1970's here, but now driven by tech, med and corp management buyers.

Gotta work, ta ta!

Perfect Storm said...

Check the Sacramento Police crime by area report on the internet before you take any of Sippin's advice. The Med Center area is flush with crime.

Patient Renter said...

I agree that Greenspan's comment (recession is a possibility this year), although stupidly obvious for most of us, will serve as a big wakeup for lots of people and those who only pay attention to MSM.

Already today the market is down quite a bit for the first time in a long time. Of course, Greenspan is still confident about housing, because to be negative would be to admit that essentially he created the problem.