The real estate market, like the stock market, is dynamic; not static.
The US saw real estate prices skyrocket to such a point that regular people were finding themselves placed out of the housing market. The coastal markets in particular went a little crazy. 200% profit in less than a year is crazy and unsustainable. If you bought at the high point in your area, you probably need to sit tight. If you have owned your home for more than 10 years, you will probably be okay selling now--- Depending on the location of your home. AND providing you have been paying down your mortgage and not getting a second mortgage.
People who have owned their homes for 20 years or more are in great shape.

In any market, you need to closely at what you are investing in. Sounds like you already have a lot of national information; now all you need is someone to help you get the local information. Once you have that, you can determine which areas are most likely to either retain, increase, or lose very little in value. Also, which areas will recover most quickly.

In my part of the country, there are homes in popular neighborhoods selling at 94-97% of asking price. Considering there were years when you could rarely find a home for sale in those neighborhoods and when one was for sale, the bidding war would take the home up to 110-120% of list price, this is a great time to buy in those neighborhoods.
For long term investors or handy people who are willing to put a LOT of sweat equity into a house, there are some neighborhoods that have been neglected for years and are currently showing the very beginning stages of rebirth. Houses in some of these areas are dirt cheap. They are in horrible condition right now. Besides time, buyers will have to repair, remodel, form homeowner's associations, and generally put some heart into the house and neioghborhood.

Then there are all the inbetween places.

If you want to make huge profits overnight, try the Forex or Commodities Markets.
If you want to live in a house that you own; ask for some help in evaluating the available properties.

Although the answer is different from region to region, the reality is that we are in an adjusting real estate market and we will be here for quite awhile. If you have the ability to hang on to your property for another six to eighteen months, do it.

Real estate will become stable and appreciating once again - but we need to have patience. it is still the best financial investment we can make. Just look at all the people trying to grab up the REO's & Short Sales!

I hate to quote real numbers here but in Sonoma County we have a median drop of 31% in one year which illustrates just where the action is: 70% of our sales are $500,00 and below. 52% of our sales are REO/Short Sales/New Home Sellers--which means over 1/2 of all sellers are NOT going to be moving up anywhere! For the REO market they only make up 22% of the entire market in Sonoma County but equal to 40% of all sales last month in July. We have a 2.25 month supply of of REO's--a raging sellers market with properties flying out the door as they are priced to sell.
Some will look at this trend and state, "quick sales, 2.25 months supply-a seller's market WITH appreciation no doubt!!" This is the tricky nature of our market. NO appreciation is happening. But have we hit bottom? This could be argued YES as the product is being gobbled up with multiple offers. Other segments of the market place? Our "continue to shows" is a big number; 850+ but 40% of those are SHORT-SALES and only 1 in 10 "SS" close! So this is a sucker number. And that's our market in a nutshell--many "sucker" stats which can be misconstrued by those who have "humble opinions"!! Our total time on the market for our 2700+ inventory is now under 6 months which many argue is a market in balance or "equilibrium". But venture into particular neighborhoods or towns, such as Sebastopol and you will get drastically number defying "trends". In other words--quit trying to quantify a market in its entirety. It just can't be done with any accuracy.
But keep trying as the discussion is very passionate, albeit misplaced, but interesting to boot! Please note I'm not even anywhere near predicting a smidgeon of appreciation far from the next "boom"!!

I would love to see a "Real Estate Pro" say, there are a lot of negative signs for housing, we are nowhere near the bottom and are in a massive correction. I would hire someone like that to be my agent. Unfortuantely, none are to be found.

Unfortunately, what I see is 'real estate pro's' glossing over the negative for their own self interest; a good reason to negotiate what your agent gets paid when you go to buy or sell a house. A flat fee, or per hour charge would mitigate 99% of the agents on this board in effect saying, "the next boom is near".

Just my humble opinion - you don't have to agree with me, but don't turn around and say it isn't so.

The "big part of what is happening in Sonoma County Real Estate" is a forced return to an equilibrium. Even with the recent correction, we're still looking at 84% home appreciation over the past 10 years for the county, while inflation registered just 32% and median income rose just 11.5%. Sebastopol is even worse off, with 118% increase over 10 years while the city has actually seen a population decrease since 2000.

Pam, I don't doubt the highest-end properties are holding value. I would guess they will start to slip as true wealth begins to recognize real estate is not going to outperform other investments. That's just a guess though - I can't speculate how the truly rich will decide to spend their money. For the top quarter of Sebastopol real estate, all bets are off.

I don't doubt that you've seen some more modest homes with multiple offers that might suggest the area is holding it's value, but you fail to mention overall sales volume. The first two quarters of 2008 represented a 42% decrease from 2007, 50% from 2006, 58% from 2005 and 63% from 2004. Residents have been able to hold supply down, likely as they're delusional believing their 150% 6-year paper profit return they saw in 2006 took a quick detour and is just around the corner. A pent up of supply of sellers is growing and the floodgates will eventually open. The $90k drop in median from the peak is about to explode.

There's no brochures or copy that can be written that will keep this county from returning to equilibrium. The bottom will require another 15-25% drop from it's present price points, depending if it takes 3 years to reach (25% drop) or drags on out to 6 or 7 years (15% drop). There are no indicators of substantial job or income growth in the area, move-up equity is deflating at a > 45 degree slope and lending standards are returning. It's been ugly around the county and it's only going to get worse. Interest rates on mortgages would already have started spiking -- if there was any demand for mortgages. They'll rise soon, and that will only make qualified, conforming loans viable at lower price points. The Ponzi scheme is over. Surely, you have to see the indicators out there.

Giant PDF link below (from patrick.net's set of links), if Trulia allows links to files. Interesting, albeit sobering read.

Revisit your question in 2011.

This is the thread that won't quit! Good job Jeremy. I will defer to Miguel as to the percentage of his clients who used what types of loan. At least 50% of my business in the last six years has been in Sebastopol and I must comment on Steve's comments below because they absolutely fly in the face of my experience. He states that Sebastopol buyers are move up buyers, and I would agree that many in the county aspire to live there, as in other communities such as Healdsburg, Glen Ellen, etc. But the HUGE factor Steve does not account for is that many of the buyers for these communities are trading sideways or downwards from homes in the Bay Area, Marin County, Silicon Valley, La Jolla, Los Angeles, New York San Diego,etc. ALL of the buyers I have represented in Sebastopol have come from OUTSIDE Sonoma County, and are either buying weekend homes, country retreats, retirement homes or changing lifestyles and getting away from the big city. One of my Sebastopol listings sold last year with multiple offers over asking price (it was only about $700K which was low for the location and acreage). It sold to a move-up buyer from within the county but that was (in my scope of experience) an anomaly for Sebastopol country property. I know of at least 4 properties that have sold this month (August) in the $1 to $1.6 Million range at full price or more with multiple offers. There are two properties in the $3.6 to $3.9 million range on acreage that sold and went pending within a month of coming on the market. So to say that Sebastopol is vulnerable due to a weak employment picture and suffering move-up buyers is missing a big part of what is happening in Sonoma County Real Estate. The last year for which I had numbers showed over 60% of our buyers coming from out of the county. That market really drives ours, in addition to local conditions. The rental market for country homes and homes in town in the areas I mentioned is very strong and prices are higher than quoted below.

All I have to say is when you have found the bottom its too late.... Any home that is priced well right now is getting multiple offers. Clearly, it feels like the bottom for sellers and is a great time to purchase in my eyes. I think you will be upset if you miss this boat and wait and find out you cant get a loan in the future or prices rise and your out. I can not speak for all but I think its a great time to purchase and I am seeing a bunch of great deals as well as nice home to live in...
http://www.taylor-mason.com

Jeremy,

I have found a new graph that you may be aware of, it’s from a BofA analyst. It shows higher amounts coming due in 2008. If that updated graph is correct we may continue to have a steady amount of NDF and NTS for another year. I have to mentioned that we don’t know what the effect of the recent housing law, FHA short-refinance that will help distress homeowner to avoid foreclosure, will have in those loans that will reset to actually go into foreclosure or NTS.

I though you may like to check it out. Again that is in a national level. I tried to gather that information locally but it’s almost an impossible mission since the only way would be to gather all the public information individually on mortgages that have recorded. The summary section in the recorded documents does not have the particular information if it’s Interest Only and ARM or option ARM or if it was sub-prime.

Who knows. All bets are off at this point.

Miguel,

I did notice that NDFs went down 9% from May to June. But there were still 434 NDFs filed, and 410 NTSs, which doesn't seem insignificant to me.

And really, I've looked at the maps of where these foreclosures are happening, and I'm not jazzed to live in East Petaluma, Rohnert Park or Santa Rosa. I would rather wait and see what happens in West Petaluma and Sebastopol when the primes reset.

I would ask this I guess. Of those people that you helped buy or set up a mortgage in the last 3 or 4 years, what % would you say went with the Alt A or Option Arm? 20? 30? If it wasn't a significant percentage, they maybe we are looking at a bottom. If the percentages were significant though, and the median income info I've seen on Sonoma County is correct, then those people might start to default as well when their loans recast.

And in that case, we have a ways to go.

J

Steve - great answer. You should jump into this discussion:

http://www.trulia.com/voices/General_Area/Open_Opinion_Threa…

Can't help but add...

I work with 4 different investors in the San Jose. They are buying up properties as fast as they can. They have made their living over the last 20-30 years, right here in the Bay Area. Last week one told me, "Yeh, everyone was afraid to buy in 1982 and prices went up. Then everyone said wait in 1992 and prices went up. Those are the belt and suspender types and they just can't help but worry their pants are going to fall down." A direct quote.

My point. No matter what the investment, you have to decide whether the risks are right for you. What is not right for some people is a 'no-problem' deal for others. It is not that real estate agents don't see the negatives of this market (we live it) but we also are paid by those who make the decision that the risk is worth it. For those buyer's our duty is to provide the information we have and let them decide. Twisting arms is simply not a good sales tactic. The buyers I work with are intelligent and studious. Some have decided to wait and others believe this market came at the perfect time for them. To each his own. : )

CJ

The market in the county is still highly inflated. That's easy enough to see by viewing historical median county home prices and incomes. Specific to Sebastopol, couple points:

There is no industry in the area that justifies the prices. The community is where Santa Rosa/Windsor/Rohnert Park households "move up" to when they decide to live in a pseudo-country environment, as of late moving their $200K-$300K current home equity and a new $300K-$400K mortgage to purchase the Sebastopol home. That neighboring equity-well has just about dried up, if it hasn't already.

The price/rent ratio is a catostrophic mess in the area. You can EASILY rent a 3/2 home for $1800-$2200 that would go up on the market for $600-$750K. To see just how absurd that is, take this example...

Assume we have a cash investor looking to buy a home in Sebastopol for rental income and asset appreciation.

We also assume:
1. $600K purchase price.
2. Annual property tax of 1% purchase price of home.
3. Annual maintenance costs at a low 1% current value of the home.
4. Annual insurance costs at 0.6% current value of the home.
5. 20% of gross monthly rent goes to a property management company.
6. Maintains a very high 95% occupancy rate.
7. Annual rent increases of 2.5%.

The investor figures he can make a 5% return risk-free in liquid investments. In return for the risk and non-liquid nature of the home investment, he requires an additional (meager) 2% return on the home investment - for a 7% annual return on his $600,000.

What is the first month's rent he will need to charge to hit that 7% return on investment?

If expected home appreciation of 2.5% annually: $6,871/month
If expected home appreciation of 4.0% annually: $5,825/month
If expected home appreciation of 7.5% annually: $2,438/month
If expected home appreciation of 8.0% annually: $1,820/month

In order for a not-so-good investor (willing to accept just a 2% premium for the risk/illiquidy) to purchase the home, given current market rents, he would also have to be delusional and believe the market has bottommed out and he could expect somewhere in the range of 7.5% to 8% annual appreciation onward.

You won't find many investors that stupid. Absent the bubble, and assuming a bottom has already hit (highly doubtful), the 2.5% to 4% home appreciation range is the only realistic one. Rents would have to increase 250% - 350% at current home prices before investors will return.

Absent investment money the market will be dictated by the local economy. The county economy can't sustain these prices (~$650,000 median in Sebastopol), particularly with people having to show they can actually pay for the homes they purchase now. A conforming loan for a $450,000 home in an 8.5% mortgage market requires $90,000 down, $360K mortgage and a $122,000 annual gross income. I think that's closer to the median household Sebastopol can look forward two a few years down the road. Probably even lower - perhaps I'm naive but I don't think there's a glut of savings-rich $122,000 earners in the county looking for a 1,600s.f. 3bd/2ba home, or $85,000 income households with $225,000 in equity willing to risk it all for the same.

Yeah, so my point is, I don't think the bottom is anywhere near us yet.

Hi again Jeremy,

I just got the attached report from Sonoma County Economic Development Board it has great information about residential real estate. You will find information about median prices, rental cost, inventory, construction permits and foreclosures/NOD.

I found interesting the "area" break down of average sales price and units sold, it just reiterates that every area is unique and different even in the same city. Look at the Fair Market Rent projected increase of 14% by 2009 ($1,839 for a 3 bed house). The number of NOD filed in 2Q08 is slightly less than 1Q08 (pretty similar trend to the ARM reset schedule graph I sent you before) that may indicate that the amount of NODs that were filed the 2Q08 may be the loans that reset by the end of 2007. NODs filed in Sonoma County have been slowing down in July and so far this month. Lastly, the number of residential building permits is picking up from their lowest levels. All these factors in Sonoma County are telling a different story of what the media is saying.

You may be closer to find an answer to your question.

Miguel.

Jeremy,
One trick ponies soon become very boring! I have read everything he states and more so. I pride myself in discovering all facets to this market NOT just the downside. I'm extremely curious as to how many "new homebuyers/homeowners” have replaced those who are now loosing their properties. Granted, we have many investors in the market (always a leading indicator of a market's health) but have seen those who once considered leaving our area NOW buying IN the area. And guess what? They are getting loans with much more stringent underwriting guidelines! Is the foreclosure market with us for a while? You betcha'! I think it will spread to other price points. My only concern is the proliferation of FHA loans. Folks don't remember but FHA was the FIRST "sub-prime" lender. Of course it has the full faith and credit of the US behind their underwriting (even more so as it was EXPLICITLY stated in the Emergency Housing bill) but was writing much lower price points. With "normal" underwriting seeing new fico levels of 720, FHA will write to a 580 FICO! I see this as once again encouraging those with shaky credit to take on an even bigger nut with a housing payment. Not good. I applaud you wishing to gather all the data for a high level business decision such as a home purchase but make sure you just don't "read" to one side of the argument. Good luck!! Don't forget to listen to my weekly real estate talk show on KSRO, 1350AM, 9 to 10am PST or streaming on the web at http:// http://www.KSRO.com.

So I just found this site....

http://www.sonomahousingbubble.blogspot.com/

I think I'll just keep hanging in there. Apparently the whole Alt-A and Option Arm mess finally hit the mainstream media (NY Times).

The two quotes that convinced me were:

"The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building."

and

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”'

Thanks for the replies. Michael, there are some really interesting statistics on that blog as well on Sonoma County. Probably ones that weren't brought up at your meeting. You should check them out.

BUYERS THERE IS PLENTY TO GO AROUND MORE ON THE WAY
Fact is the banks and agents are organized where the buyers are not. They believe what the agent says then blindly over asking.Remember how we got here.... people offering (enticed buy their agents) way to much for houses, buyers agents with no incentive to save the buyer money. Ya the inventory is like never in history so why are people getting into bidding wars with each other.
I agree with hanging in the but maybe hang in means "buyers unit" don't let your agents talk you into spending more there are way too many house for us to start playing into the GAME run buy the agents and banks! BUYERS THERE IS PLENTY TO GO AROUND MORE ON THE WAY DON'T FEEL SORRY FOR THE BANKS THEY ARE ALREADY GETTING BAILED OUT(buy the tax payers)

Jeremy, We had at our recent Santa Rosa Chapter of Realors marketing meeting an interesting presentation of current stats for the Sonoma County real estate market by Coldwell Banker's Santa Rosa manager, Rick Laws. Rick tracks data for the Press Democrat. He feels the market "bottomed" in March as the trends and data show lower days on the market, shrinking inventory and in some price segments, full blown,"Seller's Markets". As one who markets REO properties I see multiple offers on 90% of my listings. We try not to price them at "silly" price points as an big over bidding the Assett Managers tend to dismiss by saying, "It will never appraise!". But having cash and sitting on the sidelines in this market won't hurt. I don't see this changing too much for the next couple of years. We also are prediciting a more "widespread" REO market through all price segments.
Currently 70% of the Sonoma County market is UNDER $500,000. The disturbing trend to me is that fully 50+% of all sellers are NOT doing anything when they close escorw--hence NO move-up market. These are the REO's, Short-Sales, New Home sellers dumping product. You get an offer with a house on the market in excess of $600,000--you better be real nice to them!! They are few and far between.
Supply of inventory for REO's is hovering at just over 2 months!! Overall inventory is at just under 6 months which is a market IN BALANCE. These are hard STATS and not Realtor pie in the sky. I think with winter coming on you'll find some VERY interesting deals out there! Stay Tuned!

Where is the bottom?
I just made an offer on a home in Sebastopol. Here is my reasoning: I sold my house in the SF peninsula about 3 years ago, close to the peak of the market. I started looking one year later. After two years of slowly looking I am starting to see lots of activity in Sonoma in the REO and forclosure market with multiple offers on houses in the 300-400K range. I found the perfect house for us in the Sebastopol's best neighborhood. It would have been 900-950 three years ago. It was listed at 799 and I am offering 700. Where is the bottom? I don't know. I do know that those that say they can always sell at the top and buy at the bottom are liars. Your goal should be to buy close to the bottom and sell close to the top. I know I could wait a year and save 25K, but this house might not be available and 25K works out to 2K per year for the 10 years I plan to live here and if interest rates rise, I will have missed out on this house and not saved a penny! I think the time to buy is between now and 1-2 years from now, just make sure you check the comps and have the house inspected by someone who is a prefectionist.

Note to you buyers (who thought they would never own a home) out there (in California).
The banks, the Realtors and the buyers have created this situation. Buyers are guilty of taking a poison pill developed by the banks and dispensed by the agents. DON"T SWALLOW and more poison Pill's. If all of the other necessity's of life were to inflate as did real estate who would be throwing a party. Turn to real estates 100% inflation... people were giddy.
DON"T offer over asking under any condition the inventory is like nothing ever seen and there are even larger inventories coming.
Don't be afraid of the neighborhood it is as good as the people that live there CALL THE COPS! the neighbor hood will clean up fast.
Your agent has no incentive to save you money... don't listen to anyone telling to to spend more money.

Hi Billy--that is an interesting strategy which I have been reading about on-line for addressing commission rates with price triggers. What it doesn't take into effect, however is that sometimes sellers choose to price their properties very high and in effect shoot themselves in the foot by taking longer time to sit on the market until their resistance weekens and they either undertake a series of price reductions and accept a price closer to where the market should have been in the first place. By the same token I could be representing a buyer and write a competitive bid on a multiple offer property that sells over asking because it was priced low to incite market activity and sell quickly. In either case, my role as a buyers agent requires an understanding of the inventory and market values and equal sets of skills to advocate for my clients that have little to do with whether they got a price above or below asking. If we were selling widgets that all looked and felt the same and were priced the same, your formula might make sense. But in the case of housing stock with imprecise pricing strategies, that might be difficult to do fairly. Even in this market about half the deals I have done for the last 18 months have involved multiple offers, whether for ranch properties or REO's. Sometimes we get a great deal in those circumstances, and other times we do when a property has been sitting for a long time and we happened along (or waited until) when the seller finally got realistic about what his property was worth. I appreciate what your are trying to do but I am not sure if that is the way to get there.

Very true Pam. Real estate is a good long term investment - primarily because you live in it. It is a terrible short term investment, as some are finding out now. Of course, there are the lucky ones that did make money during the spike - but that is over. There are agents on here that are pushing buying right now because interest rates will be going up soon! That is not a good reason to buy, in and of itself.

Having 6% of the pie going to agents is another contentious topic. For myself, when I buy in a year, I am planning on having a comprehensive buyers agreement, that includes triggers for my agent getting their full commission. Since the state I am moving to does not currently offer buyer rebates of commissions, I have decided to discuss with agent what I am willing for them to receive from the transaction based on certain price triggers. Once the final price/terms are agreed on, the agent will bring out the fact that the price of the home must be cut down 1% (i.e. due to the agent not meeting performance triggers) and for that 1% price cut, the sellers will only have to pay the buyer agent 2% of the transaction price. Of course, if the buyer's agent does a really good job, they will derive their full 3% - it depends on their negotiating skills.

Any responsible agent is not going to suggest someone could buy a home in nearly any market and expect to sell the following year at a profit, it doesn't take rocket science to figure that out. I advise my clients who are buying to plan on keeping a home for a minimum of three years and preferably five. Even in our peak markets it is difficult to flip properties under most circumstances, and the best returns by and large come from a combination of improving a property to maximum value and holding it over time. That is a wealth building strategy.

Jeremy,

Your question conjures up two sides; buyers and agents. The same people with a vested interest in RE rising are (for the most part) the folks promoting a quick turnaround with out any plausible fundamental reason - and unfortunately they are also the ones with a fiduciary duty to represent buyers in a transaction! Now, lets take any example of appreciation/depreciation of home prices. Just to break even, any buyer is going to have to see a 6% increase in the price of their new home!!! That's right, due to your friendly real estate agent who swears that home prices are going to rise next year; if you don't sell your house for at least 6% more, you lose money! It definitely promotes buyers to look for other alternatives, such as building their own home, renting, or hiring a Lawyer to negotiate a deal on the house the buyer wants.

I hear the agents argument that rising interest rates are going to make your payment more if you don't move now! However, the flip side of that, is at the same time, that financing dilemma is causing and will cause housing prices to slide further - but is only one reason for the decline. It leads to my humble opinion, that buyers saving cash to have a lower LTV on a mortgage (or even saving enough to have no mortgage) instead of throwing their money to the bank now, are going to be better off buying in about two years.

Dear Jeremy,
Pam Buda sent me an email to check out this question. I have some information that may help you find an answer to your question.
The current mortgage environment has drawn many comparisons with the 1930's, when the government stepped in. It is generally agreed that without those fundamental changes, the Great Depression could have been much worse than it was. In the early part of the last century, most home loans were a 5-yr ARM with a balloon payment. A brief summary: In 1932, the National Association of Real Estate Boards proposed (and Congress created) the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. The Appraisal Institute was also founded in 1932 by the appraisal industry. Bankruptcy and eviction laws were modified, and in 1933 Congress created the Home Owners Loan Corporation to help borrowers move from 5-yr balloon loans to 15-year amortizing mortgages. In 1934, Congress created the Federal Housing Administration (FHA) to insure mortgages, and the Federal Deposit Insurance Corporation (FDIC) intended to prevent runs on banks from depleting resources for home mortgages. Lastly, in 1938, Congress created the Federal National Mortgage Association (FNMA). Some argue that it is very early in this business cycle, but it is easy to see the amount of government intervention compared to today's market, especially at the Federal level.
Does it sound familiar...? My point is that in the long term there is always something that will help bring a solution to the problem and the prices tend to be higher.

I have a client right now that bought a house (in Windsor CA) in 1990 for $198K, by 1994 the value of his property was probably 20% less of what he paid for. Was he worried? You bet he was, but he didn't buy for a capital gain.... July 2008 his property value in zillow says $416K and if you look in the price graph it says it was $645K in January 2006, his current mortgage balance $26K. He is looking to buy another property and keep the current one as a rental, and he will use a 15 year fixed this time. This is a good example of a real home owner that has been responsible with his mortgage and not using the house as a piggy bank to cash out as soon as possible by using exotic mortgage products.

I have been sharing a graph that was prepared back in 2006 by Credit Suisse Fixed Income US Mortgage Strategy study. It shows the reset ARM schedule of Alt-A, prime, subprime, agency, option and unsecuretized ARMS from 2007 until 2013. That graph shows the highest month of reset at $50 Billion was November of 2007. For 2007 and 2008 close to 80% of the mortgages resetting are subprime, after 2008 there is a minimum % of subprimes (subprimes were usually issued for 2 or 3 years fixed only). The majority of Option ARM's (the ones that John mentioned) will start to reset in 2009-2010. I know for a fact that some of the major banks (World Saving now Wachovia, Wamu) that issue that type or mortgages have been taking a more pro-active roll lately by offering to modify the note to a fixed 3 years or 30 yrs mortgage with minimum cost to the borrower way before those reset or recast, as a result some of those won't actually reset. Some of the Alt-A, Agency and Prime ARM's (usually 5,7 and 10 yrs with fixed rate) that will adjust have a low margin usually 2.25% over Treasury or Libor (libor is currently at 3.314%) so the effective rate for another year will be the same or maybe lower of what the initial fixed rate was.

I believe there will continue to be defaults and foreclosures for the next couple of years and I also believe we won’t have 2006 prices in a couple of year, I strongly believe (and hope) the lenders won’t be willing to lend the way they were doing it in 2006.

I will love to share the graphic with all of you if you tell me how I can do it. I have it as a picture but can put it in PDF, word, pps, etc.

Don Tepper – best answer, as per usual.

Jeremy – I think you bring up a very valid point. The negative amortization (option-ARM) loans are a very big deal. There is going to be a big ramp-up in recasts come this spring.

They’ll prove to be the “just when you thought it was safe to go back in the water” moment for the real estate market. It’s starting to look safe now; but the recasting of these loans is going to surprise many and juice the supply side in a way that nobody is going to enjoy. I’ll get into “recasting” below.

Why are they such a big deal? Well, the best analogy to draw on the Option ARM loan is that it’s like buying a house with a Circuit City credit card. Actually, it’s just like that.

You can make the sweetheart minimum payment for 2 or 3 years, but in forgoing the payment of the interest that you owe; it gets tacked onto your principle balance. When the principle balance grows to a certain point (usually 110% to 125% of the original amount) then the loan recasts.

By recast, I mean that the whole nut now comes due and you have to pay that new, much larger loan balance on a normal 30 year amortization schedule! The rate’s not resetting, the whole structure of your mortgage note is. It’s a real triple-wammy:

• Payment goes up because your principle amount has grown by up to 25 percent
• Payment goes up because you’re not just paying a fraction of the interest you owe anymore. You’re now paying P&I on the whole inflated amount, including your unpaid interest.
• The value of the underlying house has most likely gone far below what you owe which makes refinancing difficult to impossible.

The result – a lot of people are going to be sending in the jingle-mail at a time when many are hoping for a miraculous real estate market turnaround to materialize.



To those who inspire fear amongst buyers with your “you’ll miss the bottom” logic. Could one of you please present historical data wherein a real estate down-cycle was followed by a quick and measurable jump in housing prices?

If the last downturn is any measure; and the current downturn appears to be much worse, you should note the following. During the 13-year period from 1987 until 1999, real home prices stayed roughly within the range of $125,000 to $150,000 – national average.

Prices won’t “spike” after the blood drains from the street. They’ll bounce along the bottom for many years before any meaningful upward momentum can be established.

There are few certainties in life, but this is one. "You won't know when the market has hit bottom until it starts going back up." You have to consider if your looking for just one home for yourself to live in, then if you wait and prices go down lower but intereste rates continue to go up, you could end up in higher monthly then if you went ahead and boutght now. If your and investor buying multiple properties then your should buy now to get good deals and if prices drop further then the deals will just keep getting better.

Jeremy:

My wife accuses me of being "too literal." However, you posed a very specific question: "nobody has really adressed my question about the prime resets specifically. Do you view it as something that will put more downward pressure on prices? Are you concerned about it at all? Or are you focusing on the market at hand with a "i'll cross that bridge when I come to it" attitude."

My very literal answers: Yes, I absolutely see the resets as putting additional downward pressure on prices. There's an additional huge overhang of coming foreclosures, and I don't see the recently-passed legislation doing much to help the homeowners avoid foreclosure, or other homeowners whose home values will depressed as a result.

Am I concerned about it? Yes. But I'd agree with what I think is the implication in your question that, perhaps, real estate professionals aren't focusing on the problem as much as they should. I remember last November and December all the happy predictions of the "spring rebound" in the market...largely ignoring the credit crunch and other issues.

You're correct that: "if we hit the bottom and bounce, I won't be able to by at the absolute bottom." But don't worry about that. Let's say, hypothetically, the market declines 1% a month for the next 18 months, then starts rising by 1% a month. And let's say it takes 4 months for you (and others) to perceive that the market hit bottom and is on its way back up. Fairly reasonable?

So you buy now. Market declines 16% over the next 16 months. Your property is worth 16% less. Then it rebounds. (Actually, it'll take more than 16 months to get back up to zero, but let's overlook that.) So it'll take 16 months to get back to zero. In 32 months, you'll be back where you were today.

Alternatively, you decide to wait until you see the market rebound. You wait 20 months. Values drop by 16%, then rise by 4%. You're buying 12% cheaper than you would be if you bought today. Twelve months later, you have a 12% gain.

Of course, you should keep your eyes open for real bargains. Suppose you find something at 20% under market value? Using the scenario above, even at the bottom of the market, you'd still be ahead of the game.

Still, given all the uncertainties in the economy, there's nothing at all wrong with your strategy. In fact, it's a pretty good one!

Hope that helps.

I would just say that in any market, conditions are very local. Just make sure you don't paint them all with the same brush. Within this county there are a very broad range of conditions , just as there are nationwide.

Jeremy, you are right on the money. There is going to be a prime interest rate crisis in the next few years as the 5/1 ARM mortgages reset - and I'm like you, it will be next year. If you look at the link that I sent before, the presentation talks about all of the variables that go into the intrinsic value of property.

Don't let anybody push you into buying. Deducting interest from your tax bill (if you itemize) is nice, but the sad part is all of that interest is going to the bank!

Hi Jeremy, while you are socking away more down payment (good for you!)--have you also looked at the additional amount you will be paying in income taxes over those couple of years without having sheltered the interest, property taxes and closing costs you could be writing off? So really what will you have netted?

How much lower would prices have to go for it to be worth your while to wait? Also Sebastopol is far more affordable now than it has been in some time. Also, why are real estate investors out in force in Sonoma County now, competing with first time buyers, and yet not gaining the tax writeoffs of owner occupants? They are buying up the REO's which are in the areas you mention. I have invited one of the lenders I know to join our discussion--you are raising a great point to consider. You might check out inman.com. I attended the Inman Connect Real Estate conference in SF last week and there was much discussion on the state of the market.

Here is a link to a blog post on the Sonoma County foreclosure market on April 28th of this year. Since that post, some REO's have been selling over asking. There is a link to a google doc showing geographic distribution, and you will see a couple of other posts on the topic if you are interested. Regards, Pam

Hi Pam. So in another two years, that 40 to 50k will be closer to 70 or 80k. I know loans are getting harder, which is why I'm being diligent about socking away money. But I'm hoping that prices will also meet me halfway. Which is partly why I'm so interested in the effects of the Alt-a and Option Arm resets on the horizon.

I have no data at all except that most of the current foreclosures seem to be clumping in these areas, but I would imagine that markets like East Petaluma, Santa Rosa, Rohnert Park, and Windsor were pretty thick with sub-primes. I would also venture to guess that towns that are going to be hit by prime mortgage resets like are more along the lines of Sebastopol, Healdsburg, West Petaluma...

As much as I honestly appreciate the info everyone has posted, nobody has really adressed my question about the prime resets specifically. Do you view it as something that will put more downward pressure on prices? Are you concerned about it at all? Or are you focusing on the market at hand with a "i'll cross that bridge when I come to it" attitude. The only opinions I have are from the media based on a couple of graphs out there. I would really appreciate hearing from those of you that pay attention to that sort of thing.

Thanks again for all the input. I'm a computer guy, and a renter, so I have zero experience with mortgages and housing markets. Which is why I posed the question.

Hi Jeremy,
With only $40 or $50,000 to put down in Sebastopol you will be hard pressed to find a house for 90% financing and 95% financing is becoming more difficult to get, so you might want to add loan possibiliites to price and interest rates as part of the equation.

There are few homes of decent condition or square footage under $500,000. Sebastopol has not softened to the extent of other areas and has a much lower foreclosure rate, as I have blogged in the past. The last time I checked there were only a handful of properties that were bank owned in town.

A recent clean but dated home on 9/10 of an acre and 1000 square feet sold at $539,000 the first day on market. There are a couple of places on 1/2 acre, generally dated, in the low 500's. There are some suburban type areas in town but again they are pricier. to find tract housing in town and those that are on suburban lots are more likely to have more square footage and higher price points. Since it is so desirable, in Sebastopol prices have been relatively stable, especially at the entry level. With your size down payment and a less than 10 percent down payment you may find lending standards tightening significantly over the next few months, so that hitting the bottom may be irrelevant to you. For example, I have clients with excellent credit and a five percent down payment opening escrow in Petaluma this week just in the nick of time as the lender has advised us that they may not be able to get the same loan at 95% LTV after August 4th.

In East Petaluma, Windsor and parts of Santa Rosa you can find something under $400,000 or even less, but not with land unless it is an abject fixer. I can pull some more recent stats for you if you like, and you can check in with my blog periodically for market updates and community insights. Good luck to you!

Billy -

I didn't see the prez when you first posted. Thanks for the nudge to go back and check.
Although the presentation is complicated, the concepts are not. I agree with most but do not feel that cap rates are as limiting as the prez would imply. At least that is not what we have seen in California real estate investing over the past 10 years. I would also add that I believe equilibrium is a state that is more commonly being sought