Posted on June 5th, 2008 in Daily Mortgage/Housing News - The Real Story
While Northern CA is arguably the epicenter of the subprime implosion, with cities like Stockton, Brentwood and Sacramento within its bounds, many areas have held up very well, such as San Francisco and many cities in the East Bay Area, North Bay and South Bay (Silicon Valley).
In my opinion, this is only a temporary phenomenon, and values in these areas will catch up (or perhaps “catch down”). Remember, we had very affordable exotic and jumbo loan programs until very recently. In addition, this is the very first summer selling season without these programs.
For those of you so inclined, I released a lengthy report entitled “CA Housing Crisis, The Real Numbers…4.25 Years Supply!” a week ago, and the report dovetails nicely with this local story from the Contra Costa Times of NorCal.
Contra Costa County is located just East of San Francisco and is home to some of the most upscale communities in the State, as well as some of the biggest bust areas like Antioch, Pittsburg, Brentwood etc. The county is very spread out with over a million residents.
Below are highlights from the Contra Costa Times Story of the Northern CA Housing Market and the devastating negative equity position in which large percentages of its residents now find themselves:
Under water. Upside down. Negative equity. No matter the terminology to describe the erosion of home equity in the East Bay, the conclusion is inescapable: A local housing sector that once was remarkable for how high it could soar has plunged into the depths.
About two out of three East Bay homes that were bought since 2005 are now worth less than the mortgages on the houses, according to a Zillow.com study. The research by Zillow, an online real estate service, portrays a fresh set of woes for a sinking residential real estate market.
Remember, negative equity has been proven to be the leading cause of loan default across the board, because it cuts across all socio-economic boundaries. It is my opinion that negative equity may force a ‘prime’ borrower into default faster than a subprime borrower going forward. This is because the prime borrower has the credit and means to ‘walk away’ and buy or rent a new home. The subprime borrower may not have the credit or cash needed to buy or rent and has to fight for the roof over his family’s head.
Below are county level stats and they look very dire. If values continue to drop, or fall off of a cliff in September, as they did in September 2007, this problem will become epidemic reaching back in years.
…59 percent of the houses bought in Alameda County in 2005, 2006, and 2007 now have negative equity. In Contra Costa County, an average of 76 percentof the homes bought during those years now suffer from negative equity. San Joaquin County and Solano County fared much worse. In San Joaquin, an average of 93 percent of the homes bought in the same three years are worth less than their mortgages. In Solano County, 85 percent of the homes bought during the 2005 through 2007 period are under water.
The housing market in the East Bay and adjacent communities looks much weaker than the nation as a whole. About 52 percent of the U.S. homes bought in 2006 now suffer from negative equity, Zillow reported.
Zillow estimated that home values in the past year have fallen by nearly 17 percent in Alameda County, 23 percent in Contra Costa County, more than 24 percent in Solano County and almost 34 percent in San Joaquin County.
Finally, to the human reality of the situation…
The drastic slump in property values can depress the outlook of homeowners who have seen their equity sink from view, said Stan Humphries, vice president of data analytics with Zillow. For many U.S. residents, a home is their single largest investment.
“Seeing that investment vanish through negative equity has to be disheartening,” Humphries said. “Nationwide, for people who bought at the peak of the market in 2006, more than half are looking at negative equity in their home.”
What’s more, in recent years, homeowners frequently tapped the equity in their homes to finance one-time purchases. That source of cash has withered during the housing market’s collapse.
“Many people have used their homes as a large piggy bank,” Humphries said. They have seen appreciation over time. Now the good times are over. It has a big psychological effect to know they don’t have that as a recourse any more.
The disclosure that so many homes bought in recent years are under water suggests the deluge of housing problems won’t soon ebb.
“This definitely has a ways to go,” said Christopher Thornberg, an economist with Beacon Economics. “There is no sense this is anywhere close to being over. This thing is not over by any stretch of the imagination.”
More homeowners may turn skeptical about the benefit of monthly loan payments when the owners have little or no chance to harvest a financial upside from the house.
“You have the walk-away issue, where people see the house is under water and they give up,” Thornberg said. “People will realize over time that it is ludicrous. They will ask themselves why keep making a mortgage payment.”
Other owners could become financially frozen in homes that will likely be worth less than the mortgage for the foreseeable future.
“People are stuck in the house,” Thornberg said. “They won’t be able to move because they can’t take the financial hit.”
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