Tuesday, June 19, 2007

The Shadow Belt

From CNN Money (hat tip Gwyn):

For sheer volume, housing foreclosures across the nation appear to be moving from the Rust Belt to the Sun Belt.

A study for CNNMoney.com by RealtyTrac, an online marketer of foreclosure properties, showed that 139 of California's ZIP codes fell within the top 500 for total foreclosure filings in the United States. The next highest count for any state is less than half that at 72 and is in another sun-belt state - Florida.
According to Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), foreclosures, overwhelmingly, used to come courtesy of serious underlying economic problems such as job layoffs or plant closings. But the California foreclosure spike, as well as those in Florida, Arizona and Nevada, was set up by runaway appreciation that boosted home prices beyond affordability.
The hardest hit ZIP in California was Sacramento, 95823, where there were 634 default notices, repossessions and auction notices. It had the sixth most foreclosure filings for any zip code in the nation.
In Sacramento, 95823...residents depend more on government jobs and service industries for employment, although wages are still below average for the state. Homes there are more modern and more valuable than in 44105; even modest three-bed/two bath houses go for several hundred thousand dollars.

Neither the Rust Belt nor Sun Belt are likely to see easier conditions any time soon. In the Sun Belt, the subprime mortgage mess will take many months to work through as the many borrowers who took out 2/28 and 3/27 ARMs during 2005 and 2006 will hit their reset points this year and next.
From the Central Valley Business Times:
Several of the housing markets where home prices have a better than 50-50 chance of falling in the next two years are in the Central Valley, according to a list released Tuesday by PMI Mortgage Insurance Co., the Walnut Creek-based subsidiary of the PMI Group Inc. Stockton, Bakersfield, Merced, Modesto and Sacramento all have market risks in place that augur for lower home prices within two years, PMI says.


Perfect Storm said...

Several of the housing markets where home prices have a better than 50-50 chance of falling in the next two years are in the Central Valley.

Hey let me help you out I may being going out on a limb here, but I can guarantee that there is 100% chance that home prices will fall in the Central Valley in the next two years.

norcaljeff said...

Interesting since most realtors always said that since Sacto's economy was based on state jobs, the housing market would never faulter here. Another lie from the CAR.

Gwynster said...

NorCal, what people don't take into account is that state jobs don't pay that much. If you made any kind of money, you didn't buy in 95823 so if those people are state workers, they are the poorest ones. That was bound to end badly.

Diggin Deeper said...

I get the feeling that Sacramento is just warming up on the NOD/foreclosure front.

SMF put it profoundly a few weeks back and I keep going back to the thought...

There are not enough buyers living in the Sacto area to take up all the inventory slack that's floating around and growing. New, foreclosed, existing, etc. If this is true, we can't import, manufacture, or even tempt enough people from outside the area to consume the housing product that's built up over the years. Again, if true, this downturn will have to have a pricing component that will lure the investors back into the market...

Bill said...

Let me point something out;
If you buy a 500k mortgage and put 20% down, that's 100k out of pocket and a payment of $2398+- at 6% for 30 years.

If that house [mortgage] drops to 400k, you put the same 20% down that's 80k [a 20k savings] and rates are 8% payments are $2348 for 30 years

House values drop, rates go up, and you save 20k up front AND $50 per month. 1% taxes is another $1000 per year in savings, insurance is considerable less, all for the same home.

If you don't have the downpayment it works the same [except I want you to get bent and never buy a home]

Since almost everyone is a payment buyer, how is higher rates a bad thing? Values will drop to keep the payment the same. If rates go to 11% you put 60k down and the house sells for 300k, with the same payment.
To quote my favorite joke; 'how do it know?'

Median families get to buy median homes. My colossal amount of cash gets to make a giant rate of return, everyone is happy. Pray for high rates. We all lived through the Carter years. Those that applied themselves prospered. Those that didn't were the neg am, no down, hummer driving goofs of their day.

smf said...

Investors are still in the market!

One of the foreclosure stories had some 'investors' buying a lower priced home, believing that the prices will go up soon.

Remember, to properly invest in a home, your mortgage payment has to be LESS than what you can charge for rent, otherwise you are SPECULATING.

Even a few months ago, our realtor relative was saying that she was ONLY selling to investors. How crazy is that?

Again, to repeat, we might have plenty of jobs here, but NOTHING stops the FACT that current housing prices are STILL unaffordable to MOST area residents.

And thru the grapevine, being people that friends know, I keep hearing the horrible stories continuing. And this is even affecting those with higher incomes.

norcaljeff said...

Bill, it's not a zero sum game. I don't see price drops as rates going up not instantly at least. The exception mught be existing homes if they need to sell. New home builders are just buying down rates in order to keep price artificially high, with buyer still out there buying. Just heard from my friend (locally)that his friend out of college qualified for a $600K loan, not sure the loan specifics, but there are still suckers supporting this market, and they're born everyday, and we have morons lending them money. Until this stops, the market won't break like it should.

Diggin Deeper said...


I disagree...The market will break due to oversupply and peak valuations. It may not fall apart tomorrow or next week but with simple supply/demand forces at work it's going to act like any other market that's over valued. If it doesn't it will be chronicled as one the great market mysteries of all time. Imho, its going down and going down big...When? No one knows which home enters the for sale market that tips this thing over...

Diggin Deeper said...

Bear Stearns hedge funds near shutting down:


"The struggling Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund suffered 23 percent losses through April, amid money-losing investments in subprime mortgages, and faced demands from creditors to post additional collateral."

Oops...and they said it won't spill over into the general economy! Helluva of name for fund, isn't it? More of the same for other funds like it...Most of your high yield funds are holding subprime trash in order to get yields up. Bear Stearns going to take a big hit but the other major money players are in for the same problems. In the end the unsavvy investor will take it in the shorts....

anon1137 said...

Did everyone see the story on the US housing market on the PBS News Hour last night? If not, it's available as a podcast on their web site.

They had four commenters from different regions of the country, with Rafael Bostic (USC, Dir. of Master of Real Estate Program) giving a surprisingly upbeat view of the CA market. He characterized the CA market as "tight", with "low supply in core parts of the region" and that price declines will be minimized due to strong economic fundamentals. No mention of the central valley. The only negative was some oversupply in a few areas due to overbuilding of new homes. So there you have it . . . .

By the way, for all you investors lurking on the blog, seems like TX is the place to be.

Gwynster said...

I watch News Hour every night. I thought the CA housinghead was a complete knob bonnet though the others were starting to loosen up with real commentary right as they closed the segment.

The best part was when the East coast guy began talking about people leaving his area for more affordable locations in the nation. I wish they'd have talked about that more.

BTW, great piece on Bloomberg calling the housing outlook a bloodbath. Everyone over at Ben's is discussing it now.

smf said...

What is sad is when my sister and her husband buy a house in LA.

She then tells my wife that Sacramento is one of the better markets in California, so it still has a bottom to find.

But LA already hit bottom...I was speechless...

LA has yet to find that their values are waaaay high.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

I used to live in Ontario, California in the heart of the smog belt. My neighbors used to tell me, while all the areas around them DID have smog, Ontario had some unusual prevailing winds that kept the smog away. By noon every day the sun was orange and the eyes were burning.

It never seems to be as bad in your backyard, as it is in your neighbor's.

LA, OC, San Diego, Ventura, and the Inland Empire, all face the same real estate problems as Sacramento, only these areas have a couple of advantages that will allow them to weather the bust better.

Southern California has economic diversity, and a huge population that can absorb a high margin of error.

Sacramento's semi-isolated, with a limited industrial base, and the overall burden falls on a very small population in comparison. There's really not much that can cushion an economic shock to the area.

smf said...

"LA, OC, San Diego, Ventura, and the Inland Empire, all face the same real estate problems as Sacramento, only these areas have a couple of advantages that will allow them to weather the bust better."

Nope, they will all have the same problems. Too much supply with little demand.

If we make a note of what areas in California people actually wanted to live in, we would find that there are few and far between.

When you have a product THAT MOST PEOPLE CANNOT AFFORD, you will not sell so much of it.

Ever wonder why so few Ferraris sell per year?

It does not matter whether the LA basin economy is more diversified, the houses there are still waaaaay overpriced compared to the prevailing wages.

Every place is following the same curve. The places where the boom started earlier are the one crashing earlier. 95827 started in 2000, and 2003 prices are starting to show in this price curb now.

The rest of the areas will follow.

Gwynster said...

New York prices in Davis
MLS #: 70065793
Someone has been huffing glue

Diggin Deeper said...

We'll see if that's true in the not too distant future.

I gotta believe there are fewer homes per qualified buyer in Socal then there are in the Sacramento area.

The NOD and foreclosures rates in the area don't appear to be as high as Sacramento area, but when you add everything in, the state numbers probably top the country.

Just and opinion, but I think Sacramento will feel the affects of a market crash more than most areas in Southern California (exepting maybe some parts of San Diego County and Orange County).

We're talking about probably 20-25 Million people in the area...Those are pretty big numbers compared to 1.5-2 Mill in this area.

In any event no one gets out of this one without some major pain.

AgentBubble said...

Gwynster said...
New York prices in Davis
MLS #: 70065793
Someone has been huffing glue

Considering they paid $660K for it in July 06, this is amazing. Someone apparently didn't get the memo that prices are down from when they bought.

Gwynster said...

Contrast that with a 3/2 in West Davis (the good part) that just hit the MLS for 367K.

Could that smell in the air that Davisites thought was the scent of roasting granola really be the burning of their own nether-regions over slow fire? could be, could be >; )

btw I did mention we had 500 people retire this month alone right? I just love that number.

G Spot1 said...

It's very hard to generalize about LA. The high end market - over $1m, and especially over $2m, is still very strong. This is particularly true on the Westside and coastal communities. The lower income areas will get hit very hard, exacerbated by the subprime mess. What qualified buyer wants to pay 1/2 million for a 2 bedroom home in an area wrought with gang violence? The big question mark is the areas in between - The Valley, Pasadena, Silver Lake, Hollywood, etc. These areas have leveled off and I think will start seeing decline very soon. Not sure how far things will fall though, but there is enough demand in those areas to keep things from collapsing.

What's different about LA than Sac is there is little room for new construction any commutable distance from where people actually work. The new home construction has been mostly in the Inland Empire and Antelope Valley (condos are a different story). These areas are about to be CRUSHED. In the meantime, Santa Monica and similar areas will continue to set records. I think when these experts talk about LA still being strong they are thinking of these areas, reflecting a little bit of class and sub-region bias...

smf said...

I dare anyone to show me where ANY crash (post bubble) from the past did not affect ALL bubble participants equally.

You could go back to the 90's bubble, and ALL housing stock suffered similar losses.

Go back to the dot.com bubble, and ALL companies, whether good or bad, suffered significant losses.

This is no different. The move up buyer will NOT be able to get that much equity from their lower price home to buy that higher price home. Hence the higher price market will also suffer in the long run.

The housing market works together. If ALL home prices went up, logic dictates that they BOTH will come down, by a similar percentage.

Will the LA/SF area become as cheap as the Central Valley?

No, they were ALWAYS more expensive areas for housing.

Patient Renter said...

"they were ALWAYS more expensive areas for housing."

Bingo. Before the bubble, Santa Monica was more expensive relative to places like the Inland Empire, and it still will be after this thing bottoms out. It will still fall, but in the end it will still be more expensive relative to other areas.

This is similar to the bay area versus Sacramento. Both will fall, and of course they bay will still be more expensive.

Diggin Deeper said...

SMF...respect your opinion...and there's no argument with most of the logic. I just differ with you on degree...

smf said...

"Santa Monica and similar areas will continue to set records"

This is what you said. All I stated was that everything will eventually fall, even the higher priced areas.

"I just differ with you on degree..."
We don't know what the degree of fall would be.

But I can tell you that the mansion my in-laws bought in EDH last year (yes, conventional loan) has already lost a lot of equity.

The questionable part about higher end properties is that we still don't know if an excess of them were built.

Diggin Deeper said...

I'm afraid I didn't have anything to say about Santa Monica...

smf said...

"I'm afraid I didn't have anything to say about Santa Monica..."

You are right, my bad!

G Spot1 said...

smf -

I don't disagree with your argument generally, but people in the very high end (and I mean VERY high end, well into the millions) are seeing income gains that are far outpacing any equity gain they received from their "starter home" in Echo Park or condo in Brentwood. When you are taking out a mortgage with a payment in excess of $10,000 a month your affordability is being dictated much more by income than equity.

Interestingly, I think these few select markets in LA taint the view of experts. Much like LA focuses on people like Paris Hilton and Brittney Spears to the exclusion of all other 10 million residents, I think housing experts look at a few zip codes like Malibu and say LA is a strong market.

The bigger question is how the housing decline affects the economy generally. So far, people in upper incomes have been largely unaffected. So far.

smf said...

"So far, people in upper incomes have been largely unaffected. So far."

(Little background, both sets of parents are millionaires, we own house with 30 yr loan, make 6 figure income per year)

The better question then becomes 'how many of these wealthy people were involved in RE?'

The grapevine is full with stories of brokers and realtors that were making $$$/week, would these not be included in the group of people that could afford a $10K mortgage?

And what happens to them now?

Just a question.

G Spot1 said...

"(Little background, both sets of parents are millionaires, we own house with 30 yr loan, make 6 figure income per year)"

You'd be surprised how common this is in LA.

Gwynster said...

As someone who was raised in LA/OC, you'd be surprised at how often it is not.

smf said...

"You'd be surprised how common this is in LA."

I wouldn't be surprised. But with caveats.

Most people hang with others in the same income bracket. So my wife and I know plenty of people who make the 6 figure income.

But we know the same amount who DON'T.

And it still begs the question of how many homes were built for people of this income bracket.

And most people in this income bracket (including us) would need to sell our house prior to moving up.

And we would not buy BEFORE selling our current home first.

Gwynster said...


"But we know the same amount who DON'T."

That was my point. The economic make up of LA/OC is so divided. It's one of the reasons I hate the place.

It's the land of the really haves and really, really have nots. A lot of the haves, including much of my family, all absolutely depend on paper profits. The RE market tanking with Wall street taking a dive would make some of them damn near penniless fast.

G Spot1 said...

Some numbers, as reported by the Sac Bee, make my point. Modest gains, to be sure, but quite different from the continued downturn the rest of the region is seeing.

"Meanwhile, amid an abundant number of regional ZIP codes reporting a lower median sales price per square foot than a year ago, at least three stand against the tide.

• Carmichael's 95608, up 5 percent from May 2006.

• East Sacramento's 95819, up 4 percent from last year.

• Arden's 95864, up 6.5 percent.

What do they have in common? They are desirable older neighborhoods with little new-home building activity. Real estate agents said such neighborhoods are better at weathering downturns than newer areas."

Hence why a real estate downturn does not affect all participants "equally."

Diggin Deeper said...

"Hence why a real estate downturn does not affect all participants "equally."

Agree, it becomes a matter of degree. Trouble is there are too few zips in Sacramento that have any chance of driving price points or affecting averages in this market.

A very high percentage of homes and neighborhood that make up Sacramento are set up for the middle class buyer and below.

It's basically ground zero in almost every Sacramento neighborhood. Even the great zips will be hit hard by the collateral damage, again, by a matter of degree. So while one can point to the unique pockets for some ray of hope, its storming everywhere else.