Wednesday, July 27, 2011

Sonoma County Housing Recovery? Think Again.

Other than a reader poll in February, it's been over a year and a half since I posted on this site. This break from writing on Sonoma County's housing bubble was worth it. Keeping this site up and running was more work that one might have guessed (it also can be quite depressing at times). But when I see articles like this on the front-page of the Press Democrat I get the itch to post an update.

So without further ado... Take a look at this headline and first few paragraphs of this article:
Mortgage defaults tumble in Sonoma County
Press Democrat - July 19th, 2011

Mortgage defaults continue to decline in Sonoma County, dropping this spring to the lowest level in four years, according to a new report.

Between April and June, lenders sent 738 default notices to Sonoma County homeowners who had fallen behind on their mortgages, down 19 percent from the same period a year ago...

With headlines like these across the front-page of our local paper, you could be forgiven for thinking Sonoma County's real estate market is finally turning a corner. Bottom-line: It's not.

But before we get to the data let's take a look at what the Press Democrat was writing about foreclosures exactly four years ago (their benchmark of choice). Take a look at THIS headline and first few paragraphs of the article on the same topic from July 2007:
Foreclosures surge in Sonoma County
Press Democrat - July 24th, 2007

More and more Sonoma County homeowners are falling behind on their mortgage payments, a sign that financial stresses are continuing to build in the region’s real estate market, according to a report issued today.

Mortgage defaults, the first step in the foreclosure process, are the highest in Sonoma County since at least 1992, according to DataQuick Information Systems, a La Jolla firm that tracks real estate trends.

Lenders sent default notices to 462 homeowners in Sonoma County during the second quarter, up 129 percent from the same period a year ago, DataQuick reported.

Meanwhile, 163 Sonoma County homeowners lost their homes in foreclosure proceedings during the second quarter. A year ago, lenders seized 18 homes in foreclosure proceedings during the same period...

Let's review:

2011: April-June = 738 Notice of Defaults
2007: April-June = 462 Notice of Defaults

2011: July PD Article: 'defaults continue to decline in Sonoma County, dropping this spring to the lowest level in four years'
2007: July PD Article: 'defaults, ...are the highest in Sonoma County since at least 1992'

I'd say it's time to go where most real-estate agents and local journalists dare not venture... to the original data back to the bursting of the bubble:

Here is what to take from this graph: WE ARE NOWHERE NEAR A HOUSING RECOVERY IN SONOMA COUNTY!

Yes, notice of defaults (blue bars - the first step in foreclosure) were lower than in Q3 2007.

Hip Hip Hooray!... or not.

Defaults at 738 were actually only 11 less than the 749 defaults in Q3 2007. If you compare the same monthly time frame (April-May-June) defaults were actually up dramatically from four years ago (738 vs. 462). It's also worth pointing out that foreclosures (red bars) at 495 in the spring of 2011 are higher than the 462 defaults (blue bars) in the spring of 2007. How's that for a recovery?

It's fairly obvious looking at the graph that the number of foreclosures and defaults are anything but normal. Back in the good ol' days of 2005 we averaged 140 defaults every three months. And due to artificial housing appreciation less the 15 homes per quarter (yes, less than 15!) were getting foreclosed on as people would simply sell their homes for a gain without the need of sending the residence to the courthouse steps. All that began to change in 2006 when the bubble popped and defaults and foreclosures jumped dramatically. They've shown little sign of abating no matter what the Press Democrat headlines say.

This can be confirmed if you read 13 paragraphs past the recent sanguine headline to a quote by local REO specialist James Madison. When asked about the "improving" numbers he has this to say:
...he [Madison] still thinks several more years must pass before the level of distressed properties drops significantly.

"This isn’t a sign that we’re out of the woods,"...

Another gem buried in the article is that the drop in default notices in recent quarters might have more to do with banks accelerating short sales rather than a sign that less people are falling behind on their mortgages. This can be partially confirmed by the uptick in Windsor short sales this year as documented here by one of Healdsburg Bubble's favorite agents Dave Roberts.

Given the data above it should be clear that housing isn't anywhere near a recovery. Over half the sales in the county are still distressed, the gap between defaults (blue bars) and foreclosures (red bars) represents shadow inventory that will be coming to market in the coming years, while tougher lending standards, high unemployment, and eventually higher mortgage rates will continue to put downward pressure on housing prices for years to come.

On that note, to the right you can see I highlighted one of my first posts on this site with the title: "CBS Report on Why Real Estate Will Continue to Fall Through 2011". At the end of 2008 that sounded preposterous to most. Now it's self evident. Today, I'd venture to say we won't see meaningful appreciation in real estate until 2015, if not a decade.

What this means is that if you're in the market to buy a home and can afford it without burdening yourself with too much debt be my guest. But don't fall prey to the endless chant from the real estate industry telling you "don't wait, buy now".

They always have a reason: take advantage of low rates before they go up (see here), hurry before conforming loan limits are decreased (see here), a home is the best way to invest in your future (see here), etc.

Ask your real estate agent what they think about the foreclosure crisis in Sonoma County and by all means print out a copy of the graph above. Who knows, they may have some direct insight into the matter. As anyone who scans the public notice section of the paper is aware, there are plenty of agents who have stopped paying their mortgage in our area. They know better than anyone: we are far from the end of the foreclosure crisis in Sonoma County.

For that reason home prices will continue their decline.

Tuesday, February 15, 2011

Reader Poll (that is.. if there still are any)

Although I've been enjoying my hiatus from writing on Sonoma County's real estate bubble, I'm getting angry enough at some of the real estate lobby propoganda out there I might be motivated enough to do a post to update everyone.

On the right you will find a reader poll. If you're interested vote for a potential topic with some elaboration below:

  • A series of posts featuring real estate agents who are defaulting on their mortgage in Healdsburg. It's shocking how many there are in this category. First and foremost I'd be highlighting those who aggressively pushed homes during the bubble and encouraged their buyers to take on massive debt.

  • High-end foreclosures in Sonoma County. There is plenty to write about here with more and more notice of defaults filed on expensive homes in the wine country every week. These posts always seemed to get lots of traffic in the past.

  • A simple overview of foreclosures and shadow inventory in Sonoma County. [Hint: There are still a lot of both]

  • My prediction for the housing market in 2011, 2012, and beyond. I could also cover why I was overly pessimistic (read: wrong) on interest rate increases and update my current views.

  • Other. Post in the comment section.

That's it. If anyone is still out there let me know what you think.

Wednesday, December 30, 2009

A Farewell to Equity... and to this Website

Jim Cheney has a featured listing up on a Windsor home located on Equity Court. It caught my eye not only for the ironic name of the street, but because it is listed for $399,000... nearly $100,000 less than what it sold for in 2003.

When I started this website a year ago I viewed it as a way to address what I saw as a major problem: housing prices were still too high and first time buyers were getting bad advice from Realtors.

This post by local agent Dave Roberts was emblematic of what I viewed as the problem (i.e. no presentation of the downside of home ownership, stating that despite the bubble a house was still “a sound basis for financial planning”, telling first time buyers they “are the heroes of our economic recovery”, a misconceived notion of bank capital, etc.).

While I’ve had some cordial conversations with Realtors, for the most part the reaction to this site has been negative. That was to be expected.

What I did not see coming was how first time buyers would generally react. I thought it would be a useful source of some facts/opinions regarding the risks of home ownership. But overall these facts/opinions have NOT been seen as a beneficial point of view to weigh when considering the purchase of a home. They’ve been viewed as an annoyance.

People want to buy a home, they want to have someone tell them it is the smartest decision they are making in their lives, and they don’t want to hear about any downside risk. In hindsight it makes sense. You are about to take on a load of debt that is 4, 5, 6 times or more your income for a 30 year time frame. Buying your first car for a couple thousand dollars is stressful. Buying your first home for a couple hundred thousand dollars is all the more so. You don’t want to hear that all that debt you are taking on could be a huge mistake that could ruin your life.

But this brings me back to the home on Equity Court. It’s an example of how the problem is not high home prices per se. The problem is too much debt.

Let’s take a look. According to the public records on

  • It was purchased in 2003 for $495,000 with a 1st of $396,000 and a 2nd of $49,500 giving them a 10% equity cushion.

  • In 2004 it was refinanced for $522,000 with a 1st of $445,000 and a $77,000 2nd mortgage (i.e. $76,500 pulled out of the home).

  • In 2005 it was refinanced again into a single $580,000 loan, thus taking out another $58,000.

  • In 2006 it was refinanced again into a $564,000 1st mortgage, and a $44,550 2nd mortgage (i.e. another $28,550 pulled out).

The home was put on the market last January for $495,000 and within 2 months it was lowered to $399,000. We’re still waiting for a sale. A Notice of Default was filed in August meaning in a normal foreclosure time frame it would have went to auction a few weeks back, however, a Notice of Trustee’s Sale has still not been filed. This is going to drag on for a while folks.

The total loan balance on the home is $608,500 (not including negative amortization from non-payments). Now, I’m not judging how this money was spent for I have no way of knowing. Tragedies happen in life (divorces, deaths, diseases and medical bills) and possibly the money pulled out went to take care of problems like these.

But $608,500 is a lot of debt. It looks to me as if this Countrywide loan was an adjustable rate mortgage due to reset in the summer of 2011. That’s still a year and a half before they would have to fully service the loan. Again, using ForeclosureRadar you can see that there are a multitude of homes in similar situations. No doubt more will appear in the next 2 years as everyone’s interest rates reset.

All this debt is not going away. Either people will struggle with this burden for a decade or they will default and a government that is already bankrupt will be picking up the bill. How that all ends I don’t know but you can bet that it means higher interest rates compounding the problem for everyone. Expect housing prices to fall for the foreseeable future.

At any rate, I feel it is time to wind down this website. I’ve still got a few posts in the works that I want to put up (one in particular focuses on around 60 homes purchased for over a million dollars that are all severely underwater showing this crisis is far from over) and from time to time I’ll link to interesting news stories. But overall the website has served its purpose. I’m now one of the top rated real-estate websites in Sonoma County so anyone looking for information on the local market can find reasons why buying in Sonoma County in the immediate future might not be a good idea. Sadly, that’s the last bit of news most want to hear.

A special thanks goes out to Patrick Killelea of (see a great recent interview with Patrick here). He really helped put this site on the map and has driven tens of thousands of readers to some of my posts. I also take some pride in the fact that the top three economic blogs on the web (Calculated Risk, The Big Picture, and Mish) have all linked to my articles as have news websites like the Wall Street Journal, Orange County Register, Washington Independent, Seeking Alpha, etc. Even real estate firm Redfin put a link to the site on their blog. A year ago I would not have thought all this was possible for a small local website with an anonymous author.

Also the regulars in the comment section have really kept me going (Tom Stone, Lisa, Tyrone, Tom from Healdsburg, and others). Maybe we can keep the discussion going in the comment section of occasional posts.

While the site is not completely dead, it will now begin its ride off into the sunset. Happy New Years and best of luck to everyone in 2010.

Tuesday, December 29, 2009

Mortgage Rates Forecast to Head Back to 8% in 2010

Article from Bloomberg (via Rolfe Winkler):

Dec. 28 (Bloomberg) -- If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale.

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

We are not close to a bottom in home prices, especially in Sonoma County where we have more Option-ARMs than almost anywhere in the country. Major resets/recasts begin next year.

And there is little doubt that mortgage rates heading higher will push housing prices lower across the board. Buyer beware.

Tuesday, December 15, 2009

Real Estate Agent Quote of the Month

"Kirsten, sorry this happened to you! We had it happen in our office recently. Remember, all the stable people who make logical decisions are sitting on the sidelines until the uncertainty ends. All the CRAZIES are out there buying now." - Linda Ferrara, Coldwell Banker

This is a response to a post by local agent Kristen Lindquist lamenting the fact that her clients had backed out of a home purchase. Interesting that the first reply, by a Realtor no less, states that people "who make logical decisions" are not buying, however "CRAZIES" are out in full force.

Other comments in the thread are also revealing like:

"Kirsten, I've had this happen to me as well. Everyone is different. My buyers ended up getting a divorce 2 months later after being married for only 1 year. I had another client who almost pulled out of the transaction because he was worried about his job. A week after his offer was accepted, his company had a meeting and gave out pink slips to 20% of the staff and told everyone else there may be more layoffs. Hopefully, your clients will ultimately come back into the market with you when they are ready. In the meantime, keep up the professionalism!" - Anthony Ebright, Santa Rosa Home Loans

Notice the risk of taking on hundreds of thousands of dollars of debt for 30 years when this world throws you life changing curveballs months or even days down the road.

The second example is mindboggling. The client "almost" pulled out because he was worried about his job. Low and behold it looks like it is in serious jeopardy. The real estate professionals involved in the deal should have told him to seriously reconsider buying given his circumstances. It doesn't look like this was the advice he received.

Tuesday, December 8, 2009

Housing News From Around the Web

I've been slow getting up some posts I have in the works. In the meantime here are some interesting links from around the web:

Underwater with Little Hope (Press Democrat): The Ochoas Real Estate agent no doubt told them in 2005 that they were making the the most important investment decision of their lives and to act now before they were priced out of the market. Now Sal Ochoa admits the home was "the worst investment I've ever made in my life." They put $120,000 down on their home yet are still almost $100,000 underwater on their loan. Trying to modify their mortgage is proving near impossible. If the terms they are offered are anything like those I've seen being offered to some of our readers (artificially low rates that creep up yearly, massive balloon payments in 25 years) they would be better off walking away.

HAMP = Another Exotic Mortgage (WSJ): Related to the above, the Obama program to help homeowners looks like they are curing the disease with more poison. As such, the Home Affordable Mortgage Program looks like at best will just kick the day of reckoning down the road.

Will BofA aggressively unload 500,000 foreclosures on the market? (Naked Capitalism): Various readers write in to shed some light on the rumor that Bank of America is about to flood the market with foreclosures.

New Healdsburg/Windsor Real Estate Website (GreenVine): I just stumbled upon run by Andrew Meyer that covers the local market. Looks like it has some good pictures and updates on projects going on around town.

Sales in Healdsburg Skyrocket (Redfin): Sales in Healdsburg surged in September and remain at an elevated level. My opinion is that this is a result mainly of the government throwing everything and the kitchen sink at the housing market trying to prop it up. A local agent also relayed that there are several first time buyers(many with the help of family members) who have been sitting on the sidelines for a while and now think they are timing the bottom. Readers of this site know I think we've got a long way to go before we see real estate prices bottom out. Still, the sales numbers can't be ignored:

Wednesday, November 25, 2009

Bay Area Home Prices Posied for Another Downturn?

The Case-Shiller numbers are out and we've updated our monthly graph of the data to the right. As usual, we've included futures market data on the index from the CME to get a view of where the market thinks home prices are heading.

Granted, these future contracts barely trade. But it was interesting to see that the price of the June 2010 contracts got pushed down significantly. As you can see, continued declines in Bay Area homes are expected.

The real catalyst to real estate taking another hit will be when interest rates rise. Most economists expect this to occur in early 2010. That plays out well with the data in the graph.

Friday, November 20, 2009

FHA Insanity Exposed in San Francisco

Great article in the New York Times exposing the insanity of FHA loan policies in San Francisco. [HT: Calculated Risk]

The first few paragraphs say it all:

In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.

A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”

We're also introduced to a rarity, a real estate agent thinking beyond their commisions and warning about these loans:

Even some San Francisco agents who are doing F.H.A. deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the F.H.A. minimum would suffer a loss after fees. And while the Bay Area has traditionally been an excellent investment, the last few years have proved a big exception.

“Is this going to be the next wave of the housing downturn?” asked Eileen Bermingham, an agent with Pacific Union. “With such a minimal down payment, how do we make sure people don’t get in over their heads?”

And finally, while I sound like a broken record saying these policies can't go on forever month after month, apparently a move is underway to do exactly that:

A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750.

His bill would make the new limits permanent.


Friday, November 13, 2009

FHA Takes Another Step Towards Blowing Up

Real estate agents love FHA loans. These 3.5% down payment loans have kept the housing market on life support and allowed them to keep collecting commissions over the last few years. Of course, taxpayers are ultimately responsible for picking up the bill if the housing market continues to collapse and default rates rise. It looks as if that day is nearing.

Today, news is out via WSJ reporter Nick Timiraos that the FHA's reserves are far below their legal limit. Take a look at the graph to the left. Notice that over 15% of loans originated in 2008 are already 60 days delinquent. More losses are surely coming and taxpayers will be picking up the bill.

One of the tipping points for sending the housing market into another tailspin will be the removal of government support from the market (90% of new mortgage loans are currently insured by the federal government). A key driver in this change coming about will be public backlash against the FHA once taxpayers realize they are on the hook for the losses.

At that point expect the minimum down payments to increase (something real estate agents are fighting against vehemently). When people have to start putting 5% or, dare we say, 10% down expect housing to take another step down across the board. Looking at the abysmal state of the FHA presented in the graphs from the WSJ, I'd say that day is closer than most expect.

Tuesday, November 10, 2009

Foreclosures come to High End Zip Codes

The S.F. Chronicle had a feature article on Sunday describing how notice of defaults are spiking in the affluent neighborhoods in the North Bay.

Here is a key quote:

"A lot of people in California who own $1 million to $3 million homes bought larger and more expensive homes than they really needed," said Peter Schiff, president of Euro Pacific Capital in Darien, Conn. "Part of their purchase was for investment purposes, because they assumed values would go up. Now that people have a more realistic outlook on real estate prices, it changes the dynamic. There is very little reason for someone with a million-dollar mortgage on a $700,000 house to struggle to make that payment. More and more people are going to walk away from these homes."

And here is a key graph:

Wikinvest Wire