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Wednesday, January 28, 2009
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28 comments:
Does this have any implications for the high-end of the DC area real estate market?
"Rising defaults by affluent homeowners are raising the specter of another cloud over banks and investors, which could get stuck with thousands of expensive homes."
"About 6.9% of prime "jumbo" loans were at least 90 days delinquent in December, according to LPS Applied Analytics, a mortgage-data research firm. The rate was up sharply from 2.6% a year earlier. In comparison, delinquencies of non-jumbo prime loans that qualify for backing by government agencies climbed to 2.1% from 0.8% in December 2007."
http://tinyurl.com/co7bug
This is in today's Wall Street Journal.
JF,
Thanks for the link directly to the graph, since the WSJ let me see that without a subscription. The DC region has tracked the overall US trends pretty well so far, (other than in job losses) so if that holds here too, then yes, I would think this is another big potential impact at the other end of the market. However, given that these defaults will be primarily job loss related, DC may fare much better than the overall trend.
You still have the problem of the houses that are on the cusp of conforming jumbo and jumbo and the cusp of true conforming/ comforming jumbo, in that potential buyers (after the job loss) will have easier access to money under each of these limits than they do above them. That must be part of the explanation for why conforming jumbo is doing so much better than jumbo right now. I think you will see a lot of ~$900k properties coming down to $780, such that 80% LTV is within jumbo conforming. All sale price above that will have to be in cash. Likewise $520k will be percieved as a magic number under which you "should" be able to get buyers to bite.
(I can't read the whole article so my LTV assumptions may be off)
contrarion,
Perhaps one of us needs to adjust their screen.
The whole of Fairfax in all zip codes is pretty darn light in color in each of the categories you listed. While there's no scale bars to make quantitative judgements these don't look particularly dire or strongly differentiated.
This still leaves out entirely the current item up for discussion, the prime jumbo and prime jumbo conforming loans. Alt A is not prime.
I would say that the jumbo delinquincies are a sign of the job/income loss due to the overall recession combined with the piper being paid on a culture that ties people's self-worth into the price tag on their house, thereby encouraging optimistic buying price scenarios (like assuming two incomes plus yearly bonuses indefinitely).
contrarian,
Holy Smokes! Thanks so much for that great link. I noticed First American CoreLogic was the data source for the Post's most recent front-page article about foreclosures (1/17/2009), but when I Googled them, it looked like it would be impossible to review their data. This is fantastic.
(By the way, direct to all interested parties, we are waiting for the appraisal on the house. We should have it by the end of the week. Keep your fingers crossed! I promise to share all the details if this works out...)
c,
My first point was that the map you brought up didn't seem to strongly suggest pain in the near term. The wording you chose to describe it made it out to be a lot harsher than it appeared to be when actually looking at the map.
My second point was just meant to convey that my objection to your Alt A problem in no way negates the potential problem with jumbos.
We've all been having the Alt A implosion discussion here for some time, you bring in the map, CRT reposts his actual last available hard numbers, etc. But jumbo default rates are a new separate threat that may attack a different segment than has been hit by subprimes, Alt A's and speculators.
tabitha,
fingers crossed!
(and my apologies to contrarian, apparently others hadn't followed that link before)
I hadn't seen the link before, but there are weeks when I don't get any chance to check here, or many of my other blogs.
I shouldn't complain, being gainfully employed is something of a luxury.
Did someone discover oil on this "Rare opporunity (sic) to renovate, pop-up, or tear down" property? How exciting!
AR6967864
That's the only thing I can think of that would make a tear-down property for which the speculator paid $799K in Sept. 2007 now worth nearly $1.2 million. Hurry, this won't last!
Arl. assessment
Ace,
That one also has a "for rent" sign in front of it. I see a trend here... "hold" the property and wait for the appreciation tooth fairy to kick in with your free money. Too bad this one's going to knock their teeth out instead...
Or maybe they found palladium (spell?)
(the Wakefield St house is for rent @ $3,600/mo)
Ace,
I know this home listed at $775K is below your price range but are you surprised it went under contract in just four days? It's really an ordinary 2-level update rambler on a semi-busy road and has small backyard. I guess what caught my eyes was that the asking price is 125% of 08 tax asses.
Any thoughts? Could this be the work of the magic price point of $780K that Cara pointed out?
MM,
It's always easy to say this with 20-20 hindsight (remember I thought that the modern house on Barton would sell quickly because I thought someone would get emotional over it, and it's still on the market :-)) but this one doesn't surprise me at all.
From the description and photos, it looks to me as if the owners invested well over $100K in the renovations (maybe over $200K - the stuff described is very expensive to do), which the assessment usually does not account for, and it's in a good school district. And I don't see any major, unchangeable shortcomings (e.g., VERY busy street such as Lee Highway, NO back yard vs. a small one, zoned 2 family) that keep many other houses from being sold.
So my only bold prediction would be if this falls out of contract, someone else will buy it quickly at asking price or close.
MM, I'd just add, I think the updates are very, very nicely done (at least from the photos - but this is a matter of taste - you may hate them or think they're nothing special), and it has a good-sized kitchen for the size of the house. So many other "renos" I've seen, even in much more expensive houses, looked so cheap or ugly you would want to rip out everything and start over.
The place listed below has an interesting story. It came on the market on January 16th at $665k. Two days later they had an open house, and a few days after that it went under contract and pulled off the market.
Today, it's back on the market, presumably because the contract fell through. But now it's listed at a higher price -- $700k. Can anyone think why on earth, if the contract just fell through, that they would bring it back on the market at a *higher* price?
http://franklymls.com/FX6969303
Here's my hypothesis, NoVAWatcher - maybe the inspection revealed a lot of costly problems, and so the sellers wanted to start higher since they know they'll have give more back. And/or, since it went under contract quickly, maybe they had multiple bidders who bid up the price, and they may be confident that there are other bidders interested at the higher price, so they put it back on the market rather than return to negotiate with one of the other original bidders. I saw something like this on HGTV. However, it could easily backfire.
Another hypothesis:
I've seen this happen a lot with properties I've watched. From my own experience, it's a shocker how much the buyer has to pony up when they sell. In fact, it's an unlubed ass-raping. Most sellers don't realize they have to throw in 7% of the selling price to pay those over-priced commissions, etc.
It could be that the buyer was selling to break even, then realized they don't have enough to cover the garbage rates for the agents, the buyer then cannot go higher, and they have to re-list for a bit more.
Just my theory.
Cara, you think all properties sold over 780k will have to be purchased in cash?
Thats absurd.
Jumbo rates with good lenders are only 0.25% over conforming rates right now.
Doug,
No, that's not what I meant. I meant any portion of the purchase over $650k will likely need to be paid in cash (just like the 20% to bring the price up to $780k), because the cost of financing it will be too dear.
For concreteness, a $1m purchase would best be paid for with $350k down and a $650k jumbo conforming loan. Those that finance now in the truly jumbo category are paying higher and higher rates due to the exponentially growing number of defaults in that category (as shown in the WSJ plot linked to by John Fontain). Thus for those that don't have $350k to throw down, they will be hunting for properties that fit within their downpayment limits or otherwise minimizing their loan amount to compensate for the "high"* cost of borrowing money.
* relative to conforming jumbo and under $417k rates.
(although I really think anyone buying over a $1 million dollar house would in normal times have been paying for most of it outright anyway, so this is really just a return to sanity)
One of the mortgage insurers just eliminated MI on houses over $417k in CA today... see CR.
Where can we get tax payment history for a pwc property.
Effective demand has a very nice way of presenting the effects of changing the availability of mortgage insurance. Although sadly his LTV data is for Ventura County, the principle is the same.
Effective demand
thank you Ace. very insightful comments as always.
"it's an unlubed ass-raping."
Well, that is the first time I have read that today...
contrarian,
That was breathtaking. 30-40% of CR loans being due in the next 5 years in and of itself just seems normal given the lengths of those loans, but the interest-only aspect... scares the living daylights out of me. I/O loans have to go. The banks are essentially assuming all of the risk. And at the time, getting paid a pittance of interest for it. While the landlords were assuming non of the risk, and hoping rents covered the interest and made them a little money. Insane, insane. Well, and the landlords were counting on cashing in the appreciation they assumed would be coming their way. All the upside, and none of the down.
Cara said...
"but the interest-only aspect... scares the living daylights out of me. I/O loans have to go."
Depends upon the business Cara. There are some CRE loans (car dealerships for example) where IO has been the norm for 25 or so years. A few forms of business really wouldnt survive without IO. These dont scare me.
This was what IO loans were meant for, intermittent cash flow where sophisticated clients pay IO when in between payments, and a good portion of principal when the payments are made. Turns out, this doesnt work well for residential, but thats another story!
What does scare me about this is as the story notes (1) the bundling and repackaging on wall street. and (2) the optimistic proformas they used on vacancy rates, rents, etc.
Number 1 is a problem because it really prevents loan workouts. Nearly all my bank clients held their own paper (no bundling & selling to wall st). For about a year and a half now, a huge percentage of my business is reworking loans into workable solutions. We had to hire 3 more people to handle the workload.
In our case its easy for the borrower to do a modification (call your local bank and say I need help). However, when your loan has been repackaged and resold, who do you call to rework it? Can the servicer rework it without calling all the holders? This is clearly a problem (like it is in residential).
Also, #2 Is a problem and I do see this first hand, even with my guys. The strip mall development in far flung St. Mary's county was going to get a Chilis, and a Target to cater to all the middle income folk they were sure would move into the new subdivison. You just knew this strip mall would make X dollars a month. Well, when the subdivision (which was selling to flippers) goes belly up, Chilis & Target pull out, and now you have a problem.
Contrary to public opinion, lenders rarely ever want to foreclose - they will bend over backwards to prevent that from happening. However, its never an easy task in the best circumstances and when these two things are hanging over your head, you have a problem.
The other thing I should mention is that in IO situations, the commercial lender will often demand more collateral to diminish his risk - here its not just a mortgage and personal guarantee, but maybe a mortgage on your home, or your shares of company stock, or something else to help ensure you are going to get repaid.
Incidentally, if they ever started adopting this in residential, I can guarantee you a lot of the walk aways wouldnt happen (or more likely, the borrower would have never wanted the loan in the first place).
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