“There was this unrealistic view that the crazy financing was limited to subprime when of course it was across the board,” said Andrew Laperriere, Washington-based managing director at research firm International Strategy & Investment Group. “A lot of jumbo mortgages were nothing down with high debt-to-income ratios.”
∙ Rich Americans Default on Luxury Homes Like Subprime Victims [Bloomberg]
So…are there SFers in these shoes? Contractors? House Flippers? Finance People?
From the Bloomberg article:
“You have to have income of $250,000, a 20 percent down payment and near perfect credit to buy a $1 million home now, so the number of buyers isn’t what it was,” Hanson [managing director of the Field Check Group, a real estate company in Palo Alto, California] said. “There just aren’t enough buyers to sop up supply. We’re seeing the collapse of the high-end market.”
Given the number of million-dollar-plus homes for sale in SF, I can’t see why these factors wouldn’t be relevant here as well. And if you are fortunate to in fact have an income of $250k, a 20% downpayment in cash, and near perfect credit, why on earth would you buy something you almost certainly can get cheaper a year from now? The reason why people have “near perfect credit” is precisely because they don’t make ill-considered and foolish choices about their finances.
Wow, default rates on Jumbo’s are now just as high as on on subprime loans? Somehow, I don’t quite believe that…
“We’re seeing the collapse of the high-end market.”
Hmm, I used the word “collapse” to describe the ~67% YOY decline in high-end sales in SF and was excoriated for it because, after all, there are still some sales being made.
It will be interesting to see what happens to this large inventory of high-end listings that are not being sold (263 over $1.5M per MLS). Presumably, the sellers have listed them because they want or need to sell them. I suspect many need to sell, but can’t get the price they need to avoid bringing a check to the closing and can’t afford to bring that check. Nor can they refi because they can’t put 20-30% down. So they are just hoping and praying. At some point they will just give up (like the guy in the Bloomberg story who used to earn $500k). Still an open question whether it is a significant number or not in that category, but it would not take many to skew the market with only about 15 sales a month happening in the over $1.5M range.
And the fact that sales plummeted shortly after no-down jumbo loans disappeared leads me to believe a not-insignificant number of high-end buyers in recent years got in over their heads (but again, we’ll see . . .)
The reason why people have “near perfect credit” is precisely because they don’t make ill-considered and foolish choices about their finances.
That about sums it up.
Me and my trusty anecdotes are going to stay on the sidelines.
Given the number of million-dollar-plus homes for sale in SF, I can’t see why these factors wouldn’t be relevant here as well. And if you are fortunate to in fact have an income of $250k, a 20% downpayment in cash, and near perfect credit, why on earth would you buy something you almost certainly can get cheaper a year from now? The reason why people have “near perfect credit” is precisely because they don’t make ill-considered and foolish choices about their finances.
Precisely.
This is why I’ve been arguing that the new phase is price compression. The 7-figure market is in a world of trouble, even if it is slow to awareness. I have been watching this market for purchase in the East Bay (for years, now). When I use a certain search engine for houses in our target markets of Berkeley, Kensington, and Piedmont, over half of them are listed for over $1 million.
One. Million. Dollars.
That was always a lot of money. It just didn’t seem like it when you could finance the vast bulk of it from a document-indifferent securitizing dishonest AAA-rating purchasing financial system. Now, when you need a quarter of it to execute a purchase, and then need to finance the rest in a manner that *gasp* requires actual amortization of principal, seven figures reminds you that it is a large sum of money.
The bulk of these houses I watch are going to have to fall long and hard to transact, because there aren’t enough buyers who can purchase such a property. Anyone paying attention to the Piedmont market where +$1 million was long entry knows that it is now in substantial retreat. Go pick your favorite search engine with a price-history capacity and you’ll see.
The problem for these sellers is that cutting price from $1.8m to $1.5m causes them a world of psychological hurt, so they delay, and the market deteriorates away from them in the interim, but it simply does effectively nothing to bid into contention any marginal buyers.
The small pool of available buyers – like our household – got to where we’re at by not chasing the hype. We’re on a buyer’s strike until sellers sober up, which we estimate may yet take several years in a place like Piedmont. Because our capital is dear and challenging to accumulate. And a seller can’t have it except under some very attractive terms. Meanwhile, the +$3,000/month rental market (which I am also following with purpose) in these same neighborhoods struggles to fill vacancies. I’m happy to entertain counter-evidence, but what I’m seeing in the upper-tier market in the East Bay is shocking even to me.
If I needed to sell there, I’d make a massive cut, drum up as many buyers as possible, and do my best to transact ASAP. Embrace a painful loss now.
Because tomorrow is going to be even worse, as more inventory comes available and sits indefinitely.
Next year for the 7-figure market will only be worse yet.
I’m seeing less price-sensitive heirs embracing price cuts: they’re often still walking away with 6-figures with this strategy accumulated over 30 years of ownership. They will become the new price-setters in these East Bay markets. They will establish horrific comps.
All of this will make its way over the Bay to the “real” SF, just as it made it over the hills into the East Bay from Livermore and beyond.
We’re on a buyer’s strike until sellers sober up
Now that is a cause I can support!
Smell test failure: I have a feeling this 500k was business gross, not “salary”. I doubt bloomberg asked to see tax returns.
The first rule of fight club is never to take what a man says about his income at face value (right, ladies?).
His financing is not consistent with spending only 1.5 times his “income” in the first place. He gets a payment option arm, pays less than interest, but puts 25% down? Then he can’t make the payments, after using some subsequent refi money “for business expenses”?
The guy is not searchable, so he is not a large contractor. If he was, the story could have included more information easily, and been more DRAMATIC to boot (he had to lay off xy employees, etc).
This sounds like a subprime loan to an undercapitalized one-man shop in orange county to me! Has anyone heard of this fellow?
A really quick search of the state corporations/LLC and contractor licensing sites did not reveal anything that looked like an obvious match to Chuck Dayton, the $500K drywaller.
Trip wrote:
> I used the word “collapse” to describe the ~67% YOY
> decline in high-end sales in SF and was excoriated for
> it because, after all, there are still some sales being made.
As someone that sold real estate for a few years I can tell you that the proper term for a 66.6% to 99.9% YOY decline in sales is “slight reduction in sales velocity” (the word “collapse” is only used if there is a 100% YOY decline)…
Wow, Debtpocalypse, you are right about Piedmont. Redfin reveals that it is pretty much standard operating procedure to take your 2004-2006 purchase price, add transaction costs, and viola – there’s your 2009 list price. Rude awakenings for sure are on the way for these “upscale” folks. It must be doubly difficult to swallow for people that bought in 2004-2005 who probably could have sold in 2007 at a profit, but for whatever reason elected not to.
“So…are there SFers in these shoes? Contractors? House Flippers? Finance People?”
laid off yahoo employees, google contractors, i-bankers, mortgage brokers, commercial real estate brokers, residential real estate agents, start up execs…
dub dub wrote:
> Smell test failure: I have a feeling this 500k was
> business gross, not “salary”. I doubt Bloomberg
> asked to see tax returns.
I actually lived in Newport Beach for a while…
Newport guys that make $500K are usually closer to $250K and Newport gals that weigh 120 are usually closer to 140 (and in Newport the odds are that the Patek Philippe on the guy and the boobs on the gal are both fake)…
“laid off yahoo employees, google contractors, i-bankers, mortgage brokers, commercial real estate brokers, residential real estate agents, start up execs…”
Prove it.
I’m happy to entertain counter-evidence, but what I’m seeing in the upper-tier market in the East Bay is shocking even to me.
I’ve said this before, but my favorite spot in the East Bay for “foreclosure watching” is the Berkeley Hills firestorm rebuild zone. Buckingham Blvd (Berkeley address, but located in Oakland) is a total disaster — a high concentration of new construction (year 2000+) with mortgages (many 100% financing) over $1 million. Pity the poor seller trying to compete with all the foreclosures and a half built shell.
Re: “laid off yahoo employees, google contractors, i-bankers, mortgage brokers, commercial real estate brokers, residential real estate agents, start up execs…” Prove it.
As Warren Buffet has famously quipped, “You only find out who is swimming naked when the tide goes out.”
The tide is in the process of going out now for high-end properties, and we will be seeing on the MLS who the naked swimmers are soon enough.
I’m happy to entertain counter-evidence, but what I’m seeing in the upper-tier market in the East Bay is shocking even to me.
Really? I watch Rockridge, Elmwood and Claremont and I have not seen much happen there. I might even consider Piedmont if prices came down enough.
Some guy even has his $2M home (2005 price) listed at $3M. Not that I think he is going to get it or anything:
http://www.redfin.com/CA/Berkeley/2970-Avalon-Ave-94705/home/1938041
That whole burn area is a total disaster, if you ask me. What had been an area of tasteful classic understated homes, is now covered with bloated stucco McMansions. Ugh.
I do see big drops on the homes up there, from 2007 prices though, if that is what you are talking about.
Debtpocalypse – I largely agree with you about where prices are going in the East Bay from a sales perspective. I am in Orinda and this area is down 20% for sure, and that is with all that higher end inventory still sitting there. I live across the street from a place that listed at $1.95 MM about 6 months ago, and is down to $1.55 MM, and has lingered there for months. I am not even sure they have open houses anymore, I don’t know what they are doing with that vacant property, but there are plenty of those to go around.
However, I also track rentals, which is what I live in, and although it has been 6 months since I have been truly in the market and talking to landlords, I don’t see that much of a drop in rental listing prices, and that is mostly in the above 3k range. The older homes that have not been updated for decades will linger, and they may have gotten above 3k 2 years ago, and now struggle at $2500 or less, but the typical nicer home that can’t sell, so the owner flips to rental, seem to be getting $3200 and more pretty regularly. When I see a home that looks really good at a decent price (around $3500), it is usually not there a week or two later, so I assume they rented it.
Of course I don’t know what people actually end up paying (Satchel used to argue that it was easy to get much below listed rent if you asked for it and showed solid finances, but my experience was different than that, good places had more than one interested party, so not much room to negotiate), but I suspect that if you have a nice 2000 sq foot home in Lamorinda, you are going to certainly get 3k for it.
I also track Berkeley and Rockridge closely as that is where we really wanted to live, but it was too expensive. I have seen the dynamics change some, but my guess is it is less than the 20% or so we are seeing in the for sale market.
Overall, I agree with you, this entire area is heading down quickly, and I think will only get worse with the inventory backing up. If you propertyshark many of the recent closing in Orinda, you will see many owners took a 150k bath for 3 years of “ownership”. My guess is most of the inventory that is not moving can’t move until they go into short sale or foreclosure.
We looked for rentals for over a year in the East Bay, and you have no idea how many people in 2007 and 2008 were saying they were renting the house out so they could “wait out the downturn, 2-3 more years”. I think that entire crowd is screwed, and there are lots of them out there.
Really? I watch Rockridge, Elmwood and Claremont and I have not seen much happen there. I might even consider Piedmont if prices came down enough.
That area is really Bermuda Trianglesque as far as foreclosures go: white people go in, but they don’t come out. One sign of hope is this listing at 2649 Russell; it’s facing its third Notice of Trustee Sale in as many years. This time it may actually hit the auction block…
Bunk,
I’m watching a neighborhood in 94563 pretty closely. Seems there are lots of 1950’s ranchers that were going in the $900K+ range in the silly years. There is no option but foreclosure here, as many of the loan balances have increased since then due to neg am features. I’m looking for one in decent shape at around $600K. We’re almost there.
“That whole burn area is a total disaster, if you ask me. ”
Restricted to Hiller Highlands (the burn epicenter), that’s putting it kindly. I don’t remember what it was like before the fire, but if it was anything like the surrounding area, what a waste.
rabbits – Yes, we are getting close, I see that low to mid 700s for those older ranchers seems to be where things are right now, but I have not been in any of them to verify how “nice” they are.
There is just a huge inventory out here (Lafayette and Orinda)of 2MM+ homes, there seems to be no market for that price point at all, something has to give soon with those homes.
What is your guess as to where price per square foot bottoms? Looks like it is down from $550 to under $450 right now.
Bunk – I tend to think less about $ per square foot than I do about the utility of a home (perhaps that’s b/c I’m a first timer, and not “moving up”). Therefore a 3rd or 4th bedroom is more important than an extra 100sqft, however, $350-$375psft seems a reasonable bottom to me. That puts your typical 1,750sqft rancher within reach of folks like me, and 3,000sqft “executive” homes just over $1mm. Not saying there won’t be overshooting to the bottom, though. I’ve been a bear on RE for the better part of my adult life by now, but there will be an end to the carnage sometime, and I’m betting on it being highly correlated to median income and rental parity. In 94563 we’ll be there soon.
I’m watching a neighborhood in 94563 pretty closely.
Hang in there guys. A bit more supply from the foreclosure pipeline should help with prices. Currently showing 35 foreclosures (NODs, NOTS, bank-owned) for 94563. The majority seem to be clustered around $750k, with a smattering at $1+million to help unstick the high end.
I would love to see things get down around $350 per square foot. We signed a 2 year lease because I thought that the owner of our place would sell from under us once he saw the market reality. That move was wise, but I also locked into a rent that I could have re-negotiated down after 1 year, so that part is not so good. I basically bought insurance against having to move again after 1 year of living here.
I also like that the schools are funded by addition parcel taxes here, and that goes to the landlord to pay, not us. If the owners of our place had just sucked it up and sold for a loss, they could have gotten with only minor damage to their balance sheet 1 year ago. Instead, they are going to eat over 250k in losses on this place when it is all said and done, and that is probably being optimistic.
Yikes – a $250K penalty for trying to wait out the market. What cracks me up is that people think the timeline for a recovery of prices will be 2-3 years. 10yrs. minimum, maybe more for certain types of property.
Redfin shows a $441sqft pricing on the current listings, which include a lot of inventory that’s been sitting. And to EBGuy’s point above, there are a lot of foreclosures headed to town. I don’t think that $350sqft is unreasonable given that we’re probably at $400+/- right now.
“What cracks me up is that people think the timeline for a recovery of prices will be 2-3 years. 10yrs. minimum, maybe more for certain types of property.”
Boy, you must have a crystal ball, Rabbits. Maybe you can predict when I’m going to be able to retire.
94114 – if you bought a home between 2004-2007, your retirement may be further out than you had planned, no snark intended. Ask someone that bought a home in California in 1989 how long it took them to get back to breakeven – it’s not as if we are without historical precedent here. There will be exceptions, b/c there are always exceptions, but as it relates to the areas that I’ve been watching, valuations became so disconnected from incomes and earning potential (ie – rents) that reversion to mean will trap a lot of people for a long time.
But just to hear your side of it – what do you think will be the impetus for renewed appreciation in Bay Area real estate?
Thanks for putting that all in perspective Rabbits. I guess I will recommend my friends just wait along the sidelines (I’m a happy homeowner) and mark their calenders to buy something in 10 years. 10 years will go by very quickly.
I by no means am advocating waiting 10 years to buy something. Quite the contrary – I am actively looking to buy in the next 6-12 months. If you’ll refer to my dialogue with Bunk and EBGuy, valuations in the area that I am interested in are probably within 10% of what I consider to be rational. However, someone that bought in 2005-2007 may very well have to wait until 2015-2017 to see their price again (at least in nominal terms). Bunk’s landlord, for instance.
Again, what will make RE recover the 25%-40% declines we’ve seen any sooner than that?
One last thing Rabbit. I’m glad that you reminded me that Real Estate is strictly a financial investment. I think I’ve been focusing too much on the warm and fuzzy aspects of owning my own place. Where have my priorities been?
Awww, don’t go all mushy on me. I wonder how “warm and fuzzy” Bunk’s landlord is feeling about their home right now?
Everyone posting on this board has some appreciation of the value of homeownership to one’s health and wellbeing (mentally). Otherwise why would they be here? I’m looking forward to planting a garden and remodeling a kitchen – and the best part is that I’ll have $$ to do it with because I won’t be saddled with 2005-2007 pricing.
Good luck to you Rabbits! I’m glad you are able to time everything in life to the exact minute and second. That’s a great way to live!