Northern CA… From Subprime to Negative Equity Epicenter

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 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.”


CA Housing Crisis, The Real Stats – 4.25 Years Supply?!?

April Home Sales Rise, BUT Not as Fast as Inventories

Look Out!! Home Equity Lines Suspensions…


31 Responses to “Northern CA… From Subprime to Negative Equity Epicenter”

  1. “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 buy or rent a new home while the subprime borrower may not have the credit or cash security deposit need to rent and has to fight for the roof over his families head.”

    Mr. Mortgage, could you explain this in more detail? I mean, if the troubled prime borrower can get out, why would they default instead of take the hit of selling? They could-seller finance it, for example. I would expect the prime borrower to be more concerned over their credit and to do more to avoid that huge negative ding. Maybe they could rent it out; given better credit, they’re more likely to be able to refi than the subprimer. Also, the prime borrower (by definition?), probably sank a lot more into this in a down-payment. The drowning subprimer thinks that all that happens is that they take the house away, and probably doesn’t think about not being able to rent…and is more likely to end up renting from someone who won’t check their credit. The drowning prime borrower loses $100K, and is aware that this will hurt their credit.

    I’m willing to buy the argument, but I’m not there yet.

  2. The plague started to reach its tentacles closer to Prime SF Bay, beginning in Q4 2007. I am confident that trophy Victorians in Noe Valley, while they will be among the last to fall, will indeed fall. The cycle will eventually impact everything. In particular, the state budget and the budget for public schools. A sharp downturn in school budgets could turn previously attractive neighborhoods into marginal ones, despite the best efforts of he community.

    Still, I believe historical experience and my own experience has shown that the best time to buy or move to CA is during recessions. This recession coming in CA is gonna be a doozey. And it will not have a V bottom either. I see a running, flat bottom. However, if one can time investment towards the latter end of this flat bottom, the returns could be juicy and it would at feel like a V.

    Finally, as we have noted before, the higher educational and skill levels that prevail in the SF Bay will indeed actually serve to trigger defaults. These, as you note, will be elective defaults from people with other sources of capital or at least enough knowledge of Finance to know that black holes of negative equity during a structural bear market (in houses) are not good targets for fresh investment.

    A person dumping a white elephant in negative equity, who has about 75-100k to invest, and a job, would do so much better by 2012 to rent–and then get that 75-100K working for them in an array of other assets. The elective defaulters will of course all understand this. And I am certain the SF Bay is stuffed with these people.

  3. Matt – in order to walk away you have to be able to afford to buy a new home or rent. A prime borrower may have those options while most subprime borrowers due to poor credit might not be able to secure a rental home easily and certainly cant rebuy.

  4. So let’s get concrete here. Lets say I have a credit score of 750, and I walk away from this house I bought in 2006. What is my credit score 1 year later? And, what kind of loan could I qualify for during these perilous times with that score? Would a bank really lend to me after I walked away from a loan just recently?

    Dave Fairtex

  5. no, buy the new home as an owner occupied now and walk away after you close.

  6. The importance of Credit Scores is gonna dwindle to insignificance before very long, putting Prime borrowers on the same (sinking) Titanic as everyone else. More jobs are gonna go, most investments are gonna tank (including $$$ invested in banks as soon as the 1st major bank goes belly-up), prices of ALL houses will drop and the number of qualified (and motivated) buyers will shrink like the Incredible Shrinking Man! If anyone doubts than the banks will tank, remember that all those exotic, near-worthless and unmarketable Default Credit Swaps, SIVs, etc. are ‘Off-Balance-Sheet-Assets’, not backed by any capital. The banks are facing TRILLIONS of REAL losses! What does a ‘Writedown’ mean under those circumstances?

    When I said in an earlier post that there is NO EXIT from this mess (for anyone), that’s exactly what I meant. Try to imagine a whole bunch of people playing ‘Musical Chairs’ without any chairs and you’ll come close to visualizing what the ‘Game’ will look like before very long.

    And who invented this insane and murderous ‘Game’? Why, America’s Zionist f(r)iends, led by the likes of Sir Alan Greenspan and Whirly Ben Bernanke. Imagine Ben being ‘gloomy’ about the economy at this stage of the ‘Game’! Why did Sir Alan and he subject America to ‘Death by 1000 Cuts’, then? These guys are NO DUMMIES when it comes to Depressions. They knew EXACTLY what the consequences of their actions would be.

    Mazel Tov, America!

    And you think what they did on 9/11 was bad.

  7. Wouldn’t one run the risk of mortgage fraud by financing as owner occupied when they already have another OO mortgage on a house they currently live in, but plan to walk from?

    Also, do you see lenders more willing to do short refi’s on current prime borrowers to ‘mitigate’ the potential loss if they walk?

  8. not if they move into it. When buying an owner occupied proeprty you never live in it before you buy it right.

  9. Would a new lender even make that new loan if they see another that originated in 05-07 timeframe – do they care if someone plans to walk or just interested in new vintage loans these days?

    great site by the way, much appreciated.

  10. In Southwest Santa Rosa, CA (my old neighborhood), I see that nearly most of the listings are short-sell approval or REO. (

    Santa Rosa is the biggest/ghetto-ist city in Sonoma County. I’ve seen some prices roll back to 2001-2002 levels. The nicer, surrounding areas (Windsor, Rohnert Park, Petaluma) are at their 2003-2004 levels.

    Those nice places are surely going to hit 2001-2002 levels in the future. The crisis is only 1/3rd over.

  11. BOONSL, people are allowed to buy a new home before they sell their. Most likely though, people will just rent and walk away.

    PEAK – all realtors are putting ‘short sale possibility’ because is you dont, you dont have a shot. It is more marketing now than anything else.

  12. EternalOptimist said it well. I’m fearful of the future where bad credit is so normal, all the lending standards will have to be reduced to the lowest common denometer.
    If you have 50 kids on a HS football team, and 45 get caught drinking – do you really suspend (basically) the entire team?

  13. Mr. Mortgage,

    Enjoyed this blurb about Antioch and the surrounding area. I live there and “try” to do loans there.

    The article in the COCO Times did not do justice to the extent of the problem here. Most homeowners, even those who bought many years ago are underwater by a minimum of $100k. $150k to $200k are very common. This is because most also used their homes as ATM’s.

    Home values have fallen 50-65% in many areas. More than 1% of the homes go into default each month. It will easily be 15% this year alone at present rates, which show no sign of easing. For May, there were 372 NOD’s filed for the city alone. And 90% will end up as REO’s

    For those with adjustables, there is no hope of refinancing them. Heck, the last loan I did in the area was a refinance in Dec.

    Home purchases have rebounded off the lows, but that is not saying much. There are still more REO’s coming to market than sales per month, so inventory is increasing. Currently a 2.5 year supply minimum.

    Realtors are still doing their trash talking. “It’s a great time to buy.” They are not admitting that values are going to drop further.

    Most people are just walking from their homes, and not even trying to save them. Why bother? it will take up to 15 years for values to come close to reaching where they were in 205.

    BTW, in 05 I saw it coming. Realtors quit using me because I told people not to buy. I lost all my referral business because I would not do stated income loans for lawn cutters who wanted to buy $600k homes, no money down.

    Next year, the Option ARM’s are going to finish off this area. I am waiting until 2011 and then I will buy again. Get a McMansion in Brentwood, 4500 sq ft. for maybe $350k. In 05 and 06, it would have been $1m plus.

    Today, I do most loan mods, working with lawyers and even testifying in Federal Court in lawsuits against lenders.

  14. Anyone who needs a heads-up about what’s coming should read Mike Morgan’s post “Florida and the Precipice of Depression”:

  15. As a new home buyer in Silicon Valley, I would paint a different picture of the local housing market. Until recently, I’ve been a happy renter for years, as the “rent ratio” ( has been just too high to swallow. In my case, factoring in builder incentives, that ratio was recently reduced to just 20 (not bad for an area that “approached 35, higher than it had been in any city, at any point on record”).

    So, am I crazy for bucking the trend at such a perilous time? I don’t think so, especially given the available inventory that allowed me to hand-pick the exact unit/project/neighborhood. In my view, any short term loss I incur is far better than “winning” in the by-gone era of bidding wars, and then being stuck for many years in a house that I wasn’t really planning to stay in that long.

  16. After the first leg down of most bear markets, a big leg down, you often get some heavy hitters coming out to say it’s all over.

    The problem with this thesis is that it’s a bit of a false dillema. Even if the subprime event has already delivered most of it’s punch, that hardly says anything at all about where this mess is headed.

  17. The over bearish sentiment is just as wrong as the overexuberance that homes will not decrease in value. San Francisco and other parts of the Bay Area have not experienced much in the way of price depreciation due to the fact that their is confined supply. During the boom years there was far from any type of overdevelopment in these areas and in fact home prices in SF only began an uptick in 2004 and were flat from 2000-2003 more or less. Historically the only major depreciation in pricing has happened in SF during the 1989 quake, outside of that there prices have generally fallen no more than 10% and held flat.

    Remember people, prices are driven by supply and demand, and incomes are on the raise in the high tech community which bank rolls much of the real estate activity in the Bay area. To assume that home prices will get dragged down to Central Valley, LA, SD, and OC (All Urban Sprawls aka Wastelands) is not a true statement for an area that cannot recreate it limited supply nor can it recreate its plethora of 100+ year old homes. Supply is confined and demand here is constant. That being the case, home prices in SF and other highend areas of Northern California (Peninsula, Marin, and selected parts of the East Bay) will more than likely hold flat with the occasional bargain.

    In 2002 i remember being extremely bearish the DOW at 7700 reading everywhere on sites like this that we were going to 5600, nearly half the 11,000 peak of 2000. What happened, the DOW shot up to 14,000 and is not in the 12,000’s. The point is that no one knows what is going to happen and current levels of nationwide supply are priced into current values, so unless the supply of housing increases dramatically NO ONE knows what prices are going to do. I for one think that the weak areas may still have some more room to go, but even homes in devastated areas like Stockton, Merced, Riverside are priced below replacement cost (ie finished lots going for 35k, when it costs over 75k+ to prepare them for building). If this is not the bottom, we are more than likely fairly close. And once we get there prices will remain flat for 2-3 years. 2009 will be the bottom, and this year will be the biggest year over year downward price adjustments. Who ever said we are only 1/3 of the way over is an idiot, what are homes going to go down to 1995 levels. Get real.

  18. If you buy another home before walking, I would wait two more years.

    Your payment on the new house today maybe a little less than your current payment.

    But by waiting to walk now, the house you buy in two years will be a lot less than today. Then your monthly payment will be big time less than either of the houses today. Plus your property taxes will be 15-20 less than today purchase.

    Just a thought.

  19. The over bearish sentiment is just as wrong as the overexuberance that homes will not decrease in value.

    What are some of your Sentiment indicators? I agree that blogs have been very early to, and dire about, the housing crash. That said, I don’t think Sentiment in the MSM is negative enough. I use sentiment in my trading and investments, and I still see a very notable and strong Slope of Hope towards the Housing-Mortgage complex on a national basis.

    San Francisco and other parts of the Bay Area have not experienced much in the way of price depreciation due to the fact that their is confined supply.

    Case Schiller pegged the index high of the Bay area at 218.00 in late Q2 2006. As we enter Q2 2008, that index is now down to 165.00. That is serious. For those of us who use indexes, we are more than aware that Bob’s house or Jane’s house or my house do not conform to the index, per se. That said, we respect the index. Your quote above is not accurate, and not a credible comment on the situation.

    Historically the only major depreciation in pricing has happened in SF during the 1989 quake, outside of that there prices have generally fallen no more than 10% and held flat.

    I hope you are not making the historical argument that SF Bay real estate has a long track record of being very stubborn on the downside in prices, as point to refute the idea that something much bigger is unfolding. Because to be credible about the current situation one has to acknowledge we are seeing an “event” that is already the most serious decline on many measures since the 1930’s. And we are not finished with this event either. So you need to prepare yourself for an event on the order of 2SD to 3SD or more. In other words, at the very least, we are very much in the territory of an event that will regress and give back 100% of the price rise from 2000 for all markets nationally. Academic studies of bubbles (2SD events lets call them) find that 95% of them give the entire move back. I doubt too that we regress to 1995 prices. But that’s not much comfort, because to regress to the year 2000 on the index will indeed be a major, economic event. One that you and I have not seen before–in housing.

    The point is that no one knows what is going to happen and current levels of nationwide supply are priced into current values

    No they’re not, actually. Housing isn’t as liquid, and does a very poor job pricing in the future. It lags badly. We are not close to pricing in current supply. By definition, if we were, the gargantuan supply would be clearing. Wake up, it’s not clearing.

    In general, I agree that SF Bay will be very stubborn on the downside. Although the prime areas will eventually break, I’m not convinced they will break hard. But break they will. More broadly, however, you have to begin to analyze how the long the hardest hit areas stay down, and to what extent they begin to exert their own force on the State, generally. Here is my call: California is heading into the worst recession in over 35 years. It’s not just the housing bust. Though, that is very, very bad indeed. It’s Calif’s leverage to the automobile that is going to seal the deal.

    I wouldn’t buy anything until late 2009 at the earliest. Anywhere, in CA. the exception as I have said might be the severely beaten central valley where I am calling for an aggie-led re-bound “at some point.”


  20. >>>If you buy another home before walking, I would wait two more years.

    Your payment on the new house today maybe a little less than your current payment.

    But by waiting to walk now, the house you buy in two years will be a lot less than today. Then your monthly payment will be big time less than either of the houses today. Plus your property taxes will be 15-20 less than today purchase.

    Just a thought.<<<

    If you wait 2 years, your primary house will continue to burn equity. So you buy the 2nd house less and monthly payments are less. You’ve just lost a whole lot more on your 1st house by waiting 2 years. How is that any better?

  21. I think when DLove talked about “San Francisco” he was talking about the city itself, not about the entire Bay Area. If you look at the zipcodes in the city proper, things have barely moved down at all, while if you look on the other side of the bay, you see things are down 20-30% in some areas. But the Berkeley Hills and Rockridge are still doing fine.

    Real Estate is still very local. Averages understate the problem in the bad areas, and overstate the problem in the good areas. A nice zillow map illustrates that point. In this map you can see housing price declines broken down by area. Go to the bay area metro home value change map: Antioch, Pittsburg, Richmond, Concord, San Leandro: down > 20%. San Francisco City, Marin: down < 3%.

    I think there will be around a million people in CA who will have to sell from economic necessity over the next few years. We’re running about 350k foreclosures per year. That tells me we won’t see a bottom for at least 2 more years. My wild-assed guess.

  22. Mr Mortgage, what about Palo Alto, CA? Will we ever be able to afford a 1600 sqft home here? These things are going for 1.6M still and are nothing to crow about. It would be worth 150k somewhere in the Midwest.

  23. My wife and I are relocating from NYC to the East Bay for jobs in Walnut Creek. We want to move to the Lamorinda area. Fortunately for us we have secure jobs with good income, and we were briefly thinking of buying until we came to our senses. We decided to rent, and running the numbers renting is so much cheaper than buying right now.

    Looking at the Latest Case-Shiller data, the Lamorinda area (Lafayette, Orinda, Moraga) has not depreciated at all YOY. In fact, median home price is up 1-3% in both areas. However I did find a very interesting statistic. In Lafayette, for example, median household income in 2000 was $102,000 and median home value was $583,000, for a ratio of about 5:1. Higher than the historic 2.5-3:1 ration, but for an upscale area, seems reasonable. In 2005, median household income was $111,000 and estimated home value was $1,284,000. Ratio is greater than 10:1.

    So did the residents of Lafayette double their incomes to be able to support these inflated home values? I don’t think so…

    I’s be curious to see what others think about this particular region, where home prices thus far have been “sticky.” But I think they will be slaughtered in the option-ARM resets coming up. If those numbers don’t look like a bubble, I don’t know what does.

  24. FACTS TO CONSIDER!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
    I bought 300 properties between 1994-2000
    I sold 200 properties between 2000-2007
    Avg. Hold=23.6 months. Avg. GROSS PROFIT=1165%. Avg. GROSS PROFIT PER MONTH = 49%
    I told many to sell between 2001-2005, they all called me nuts!
    Expect these conditions:
    1=Market will bottom out in 4-5 years and CRAWL for 5-10 years!
    2=If you have DEBT, GET OUT NOW OR ASAP!
    3=Indicators to watch= Suicide, Divorce, Crime, Bankruptcies, Foreclosures (when these Max-out & start down, #1 above has arrived). Very Simple to watch!

    1=250-300 Nuke plants @$1B each=Grants! Similar designs 4 easy build & maintenance!
    2=New law 50% of all cars in 5 years must be Electric & 25% must 50 mpg hybrids!
    3=100% Employment by 2009 from above!
    4=In 5yrs USA oil/coal consumption down 50-75%!
    5=In 10yrs USA will be #1 AGAIN!
    6=USA Debt & Social Security paid in Full!
    7=If necessary, Guzzler tax for big engines & Tax Credit for Sipper & Elect. Cars!
    8=$2-10 Trillion Cost to reduce oil 70%!
    9=We all know this is correct & right!
    10=USA will be #1 again for 50 years or longer!
    11=We can buy out Canada & Mexico based on Energy Efficiency and Surplus!
    12=Every Illegal can get a temp 5 year green card by purchasing a home in foreclosure and making payments for the term of their green card. Filing a tax return, paying taxes and staying employed. 5 years extension for being good. 11th year can file for citizenship!
    13=There, all our problems solved in one simple BLOG!

  25. I think when DLove talked about “San Francisco” he was talking about the city itself, not about the entire Bay Area.

    That’s probably true, and I tried in my post to be mindful of the naturally uneven nature, of price–that the index cannot capture. Further, I allowed that Prime had not broken. Yet. But I asserted that Prime would indeed break. (I probably define Prime like most others would: selected Marin, City of SF, Berkeley and OAK hills, select Peninsula especially in Google-Towns).

    However, I think it’s hardly much of an intellectual leap–when you look at the tentacles of the Housing Crash–that Prime can remain Islands of Price Stability. The plague is now well advanced right into the Bay Area, and it’s kissing right up against all these Prime areas. They will fall.

    One of the hoariest phrases in the real estate market is that “all real estate is local.” I agree with that, but, not during Bubbles and Crashes. In those, the rise and fall is systemic. It’s nationwide, it’s “nearly” everywhere.

    The housing bubble was easily a 2 standard deviation event. The Crash will be no different. If not worse.

  26. Right Gregor.

    johnChun…I dont appreciate your BS on my blog but I agree with SOME of your conclusions, which is why i posted it. No need to size up John, we are all friends here.

  27. JJC is just another (Mortal) Optimist!

    That sucking sound we all hear is America’s Black Hole, starting the ‘Really Big’ feast of its lifetime.

    We have crossed the Event Horizon – and there is NO EXIT for anyone, UNLESS.

    This Black Swan event is no accident.

    Click on my name to SEE! – All (and UNLESS). 🙂

  28. For a Visual Aid on how Black Holes work, click on the following link and then click on START on the 1st graphic (LHC photo).

  29. Go to youtube and search for Chalmers Johnson if you want a sobering wake-up about our future. There ain’t gonna be no 50 year bonus for the good ol’ USofA. His non-fiction books include “Blowback”, “The Sorrows of Empire” and “Nemesis -the last days of the American Republic”. We are at the tail end of reaping over 50 years of the good life living off the benefits of the covert military-industrial-congressional complex some nut case warned us about. JJC had an awesome run, but having his kind of smarts is augmented a hundredfold in the right conditions. Good luck finding those again.

  30. […] love this: a blog called The Mortgage Lender Implode-o-Meter, featuring Mr. Mortgage. Interesting reading, although I am not sure I agree that Northern […]

  31. […] love this: a blog called The Mortgage Lender Implode-o-Meter, featuring Mr. Mortgage. Interesting reading, although I am not sure I agree that Northern […]

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