I'm not saying that everyone who bought a home in Los Altos, in the past 4, 5, or 6 years, with an adjustable loan, that is expected to jump significantly; won't be affected just because they made a larger than average down payment and were more than adequately qualified for their loan. It is just less likely when you look at the financial structure of purchases in the West Valley areas.
And when you look at each of the factors I mention in my run-on sentence, you can see that combining them all together gives you very slim odds of them all occurring at the same time. Any of which taken out simply render any guesses about a declining market and deleterious effects on Los Altos property nothing more than . . . guesses. And probably bad guesses.
West Valley property (high end property up the Peninsula as well) has a tendency to be considered a destination rather than a waystation. People buying in these areas will typically have lower ratios for qualifying for loans (higher income) and will be putting larger amounts down. These two factors alone dampen any serious consequences of an adjustable loan going up.
In these areas, you will find a lot of conservative buyers (like I've just described) who opted for a 30 year fixed rate loan. Even with the easier cash-out refinances available to homeowners in the past 10 years, Los Altos, Cupertino, Saratoga, etc., are still areas with low single-digit percentages of properties underwater. The middle of that spectrum is a national average between 20% and 30% of homes underwater. Last time I checked, Cupertino was at 3.3% (for all residential property, refinanced or not).
With all those ideas in mind, we can look deeply into our crystal ball and very easily predict that probably not much will happen in Los Altos when it comes to ARMs adjusting. And what would they adjust to? Probably to within 1 percent of what they are at already based on common indexes and margins. A smaller loan payment going up on a property with a good deal of equity really won't be much of a hardship for people in these areas.
You have to look at the overall turnover for these areas. I won't delve deep into research and prove to you that homes seldom change hands in these areas. You can see it for yourself. People live in their homes in these areas more than 20 years on average.
When people stay in their homes 20 years, the ups and downs of markets like we've been going through recently doesn't really matter very much.
But you may find something down the road that you like at a good price. You never know. I just wouldn't count on being able to predict some advantage in the market rolling your way over the long run.
Mark Burns, Realtor
Coldwell Banker Elite - Top 1.5% Worldwide
President - PRDS, Contracts and Forms for Residential Real Estate in Silicon Valley 2008-2010
President - Silicon Valley Association of Realtors 2007
DRE #00896552 licensed since 1985
Over 500 homes sold
More than 50% of the buyers I've sold homes to in the past 25 years are still in the same house. Go figure.
Los Altos: 0.8%
found on http://www.sfgate.com/webdb/homepricesdrop/
by contrast - East San Jose 95127: 22.3%
Mark Burns, Realtor
Coldwell Banker - Cupertino
In Los Altos, the high-end home is priced at 2.5 million and above. The entry level purchase price for Los Altos is 1.1-1.5 million. Entry level homes have more demand because there are more buyers who can qualify. If you are thinking about purchasing an entry level home in Los Altos, the 5/1 ARM will have virtually no impact on your purchase decision. Loan qualifying, down payment and inventory availabilty will be your biggest hurdles.
None of my Los Altos home buyers over the last 4 years used a 5/1 ARM (two used a 10/1 ARM). They were much too conservative. Historically, buyers moved to Los Altos as there final move and are in their top income earning years. They tend to have large down payments (25-40%+) and tend to be financially conservative (risk adverse to the 5/1 ARM).
According to the Los Altos Chamber of Commerce, the demographics of Los Altos Home owners are: Average family income is 220K, the median is 140K. A good percentage of the households are dual income.
Are far as Los Altos home buyers, those number have dropped by over 40% in the last 4-5 years. Prior to 2003, the number of single family homes sold each year was in the mid 400s. Last year approximately 250 homes sold (out of approximately 10,000 residences) and I expect that number will be closer to 260 for 2009.
I hope this helps give you a better understanding about Los Altos reel estate. Should you have further questions please contact me directly at 650 917-4250. Thanks
I dont have any affiliation with Los Altos other than working there. My job happens to be situated in a really nice part near downtown so Im familiar with the area. I know that it's highly desireable and for every person who can't afford to keep their house I'd imagine there are plenty more lined up ready to take their place.
Completely different dynamic than say East San Jose.
Very fair. One thing that I would add though is this: don't limit your research to a bunch of guys talking like us. This is a BIG decision and these are volatile times so now is NOT the time to blindly follow the herd.
I've pasted a link below to a site with dozens of links to stories and research each day, but beyond that you should learn about the drivers behind housing markets, what drives prices up, what other markets have experienced, and so on. Most people don't understand what a "mortgage backed security" is and before a few years ago nobody had any reason to care. Now you have to care. What you don't know CAN hurt you. And you can't learn it in a soundbite or a few Internet posts, either. It takes a little research, some time on Wikipedia, and so on.
I truly want to thank you, you guys, for spending your valuable time answering my question, regarding the market condition (i.e. ARM) of real estate in Los Altos specifically. I realized that both Dave and Optimizedprime have sincerely shared their valuable inputs. Optimizedprime has argued for the potential significant future down trend of home prices that are great than $1 million, using examples from different highly desirable locations that have high-end home prices in general, while Dave has argued that real estate in Los Altos (specifically) will be only minimally effected by option ARM, unemployment, etc, due to the unique characteristics (financially stable and conservative) home owners at this location. I just hope that we shall continue to keep this discussion neutral and healthy, without making any personal attack.
I am asking these questions above because I want to buy a house possibly in Los Altos in the near future. I am sure that there are many potential buyers out there may have similar questions like mine. My intention of purchasing a home here started since 2007, when I moved down from San Francisco, after I got married and because my wife owned a bussiness in Los Altos. We can certainly afford an entry level home in Los Atlos, but I experienced a sticker price shock. Moreover, due to many negative factors (i.e. sub-prime, unemployment, recession, etc) against buying homes during the past few years, I decided to rent and wait, instead. And I was glad that I did that so far. My rent contract will expire in a few months, which means that it is time for looking into buying a house again, with particular emphasis on any factors that may negatively or positively influence the market in short-term (1 to 2 years). I continue to read your feedback, helping me to make my next decision. Thanks!
A little history. Remember everyone (probably your "national experts" and maybe even patrick.net - if it was around then) thought the "bubble" was going to burst in 1998, then 1999, then 2000 (which it did to some extent aided by Loma Prieta and the stock market "crash"). The market softened/was flat for 2 years and then crept up. Again the doomsayers said the next "bubble " would burst in 2003, then again in 2004 and 2005 and so on. Finally in 2007 the doomsayers got it right. Congratulations! The national experts are now batting about 150ish. If you played baseball you would be out of the minors by now....probably ripping people off by selling real estate! (sarcasm added).
Again I'll ask...Where are your experts detailing that Los Altos will drop dramatically because of option ARM's re-adjusting? You write about markets like San Francisco, New York and even Japan (in other posts), but what about our local market called Los Altos. Tony's question IS about Los Altos. Provide the data specific and/or comments made by "experts" that discuss the Los Altos real estate market or move on. Broad sweeping comments about the world ending don't hold up to scrutiny (it's probably why you went the route of disparaging Realtors).
I would like to comment about your continual Realtor bashing. Don't put every Realtor in one box with your comments. Some agents are good, some are bad. Work with one who provides data, local insight and allows you to make the decision. Like I tell everyone of my clients, "It's your money... I'm not paying the mortgage... what do you want to do?" Have you had a bad experience with a Realtor in the past? What gives?
Unfortunately, your comments are general in nature and don't substantiate your point. You pointed out that option ARMs are bad - agreed. But show us the link that Los Altos home buyers used them. Then you may have a valid argument. Otherwise you just appear as another doomsayer who is trying to get consumers lathered up over nothing. Passionate debate with knowledge is good, debate from passion alone isn't.
I've told you how I based my opinion in my prior post. My opinion is based on an analysis of living in the market that I work. I grew up in Los Altos, went to school here and was fortunate to return here when I sold my first home in West San Jose. I bought in 2000 (the great bubble burst year - sarcasm added). Had I listened to the "experts," I would have missed out on raising my kids in a great family oriented neighborhood, coaching the local high school in water polo, volunteering at my kid's school and being a satisfied home owner in a community that I love. By the way, I believe that home owner's become more entrenched in the community that they own/live in versus those who rent. No stats to back up that statement, but it is what I personally believe. Oh I forgot, my home's value is up over 60% from when I bought in 2000. And no, I'm not selling.
Since you like gambling terms, one can say that I am "All In" for Los Altos home ownership.
What is your purpose here? If you aren't going to buy or don't need advice about owning a home, then why hang around? This is a forum about real estate, not an opportunity for you to denigrate someone with 15 years of real experience.
What do you do? (we don't know) and who are you? (we don't know that either except you like transformers) It's easy to anonymously deride and insult someone on the internet. Would you say the same things if people knew who you were and what your experience is (like the professionals on Trulia who identify themselves and provide specific information about themselves in their profiles)?
What's your deal?
Mark Burns, Realtor
So we both have our opinions and neither of us seem to have the relevant hard numbers.
However, like all realtors, have absolutely no interest in prices becoming more affordable and you have a keen interest in casino-like gains here in Los Altos to continue so you can keep making money here like the House does in every casino. You sucker people in with the promise that they will become millionaires if they just wait around, just like all of the other winners did back in the bubble.
However, if you put hundreds of people into dead-end investments that lose their life savings in 24 months because they go underwater from a 20% price depreciation... let's see... how much of your 4% commission do you lose? Oh that's right, NONE OF IT! The House always wins.
Meanwhile, those of us that have a lot at stake (our financial futures, for instance) aren't so casual about ignoring things like record unemployment or the daily barrage of experts predicting continued price declines in EVERY market ESPECIALLY the high-end like Los Altos. New York City saw 20% declines year over year last year alone. San Francisco has fallen 40%+ from peak. Oh that's right, I forgot, Los Altos is "special" and "there's no place left to build" unlike, say, Manhattan.
I've found a website (which I have no affiliation) that provides links to dozens of articles EVERY DAY to cut through this nonsense:
This site will give you DAILY links to stories by thousands of experts, all of whom have a little broader experience than spending the last 15 years inside of a housing bubble.
How do I know? I'm not 100% sure but I know my information is more accurate and reliable than yours. Therefore I can make better decisions and offer better advice. Advice tied closely to fact.
It is correct that I don't have hard numbers (written statistics) on option ARMs for Los Altos buyers. All I have is 15 years in the business working day to day with buyers and sellers. Based on your prior posts, I know that you think that realtor work experience is self serving, but it experience is important.
I have had countless discussions with local lenders (over the years) about the type and amount of loans used to buy property here. Talks about what has been working and what hasn't. Option ARMs were and will never be a significant part of financing for Los Altos home buyers. Take another look at the demographics of a Los Altos home owner.
Unfortunately, I haven't written down every discussion and taken detailed notes as to exactly how many buyers have taken out option ARMs to purchase property in Los Altos (sarcasm emphasized). My evidence is not guessing but also can't be quantified. I can say with confidence that my stats are much more accurate than the "national and/or statewide experts" you claim as experts. I suggest that it is much more factually based than your "guessing." Remember doom and gloom sells newspapers better than rational and factually based discussions.
I recall that it was the huge exception (as noted in my prior post) that buyers took out option ARMS to buy. Both my personal experience (my buyers...actual closed transactions in Los Altos) and discussions with local lenders confirm my belief that option ARMs were not popular for Los Altos homes buyers over the last 3-6 years. I wonder, have you had any detailed discussions over the last 10 years with any lender(s) as to the type of loan buyers were most comfortable with locally (ie. Los Altos)? I doubt it.
I would also like to address your implication that local agents "steered" buyers who used option ARMs away from Los Altos property. Besides the fact that "steering" is ILLEGAL, the market dictates who gets a house and who doesn't. If I represent a seller who has two offers on their home, one with 30% down,pre-approved loan and assets in the bank versus someone who is pre-approved with an option ARM with a smaller down payment and likely lower FICO scores, I recommend the 30% down deal. Its more likely to close. We all have had "pre-approvals that weren't worth the paper they were written on so a smart agent is going to go further to make sure the potential buyer can afford the home. In a competitive market, the option arm buyer is going to lose.
FYI, your statement about you not meeting a seller who turned down the highest pre-approval buyer just shows your lack of knowledge on the subject. There have been many instances that a buyer who had the highest offer, didn't get the house. The reasons they didn't get it: bad buyer's agent with reputation of not closing deals (preparing their buyer), income couldn't be verified, pre-approval was bogus or from a difficult lender etc.
Lastly, when will the predicted (by "the" experts) implosion of the Los Altos real estate market occur? How far are we going to drop? What are your hard numbers that show that Los Altos homes buyers significantly used option ARMs to buy in Los Altos. What was the down payment of these buyers? Who was the lender? FICO scores? Is there a correlation between these? Remember... we need hard numbers from local experts.
Not so easy if the question is posed to you! If you don't have the hard facts at least you should have details on the numbers of properties in foreclosure in Los Altos. Remember there are over 10,000 single family homes in Los Altos, so I would think that there should be at last a 100, 50, 20 homes in foreclosure to make any sort of dent in our values? I think over the last year there were maybe a dozen or so short sales in Los Altos...mainly small time investors/builders who bought to flip the house and timed the market incorrectly. I would be happy to provide exact numbers if you wish.
The only thing that I can agree with you is that those who used options ARMs are likely to be in trouble and its likely to be sooner rather than later. The problem with your argument is that you haven't showed a strong correlation between option ARM loans and buyers of Los Altos properties using them. My "real world" evidence doesn't show this link.
Getting back to the original question - will option ARMs have an significant effect of prices in Los Altos? Minimal
Will the high unemployment rate significantly effect home prices in Los Altos? Minimal
Will prices continue to soften in Los Altos as the overall economy works its way through it's process? yes - slightly.
As for the predicted Option ARM foreclosure explosion, since NOBODY HERE HAS HARD NUMBERS FOR OUR EXACT AREA so we're all just guessing. Certainly statewide there will be BIG problems since there are statistics on how many Option ARMS were sold in California, but I've never seen a count for Los Altos in particular and NEITHER HAS ANYBODY ELSE HERE even though some of them seem to claim to be experts on this exact statistic by stating, "Option ARMs won't affect Los Altos". Really? How do you know?
Also, the severe issues the experts are predicting have to do with "Option ARM" loans. Option ARMs (also called "pick-a-pay") give you the "option" to pay a normal loan payment, interest-only, or negative amortization (you owe more each payment). These loans are not simply going to "reset" at a slightly higher interest rate, they WILL NO LONGER BE OFFERED leaving the holders of these loans out in the wilderness to get a "normal" ARM loan with payments that include the principle. In most cases, this will be at least TWICE what they were paying before. This, along with the fact that most of these loans were "no doc" (liar loans) meaning that most of the takers probably leveraged way past their income is why most experts assume that virtually all of these time bombs will end in foreclosure.
To give you an idea, a $1M Option ARM could be had for less than $4000/month back in the Bubble times. Somebody wanting to live in our fancy area might be making $6k/month in income but that's okay since the small payment combined with the "lie" about your income would see your application breeze right through.
So to believe that Los Altos wasn't effected by this, you'd have to believe that Realtors and sellers engaged in a kind of active demographic profiling, not allowing "poor people" to come live here EVEN THOUGH THEY HAD AN APPROVED LOAN FOR THE PURCHASE PRICE. I haven't yet met a Seller who will refuse a bank's money for the highest bid on a house.
As for Los Altos' "underwater statistics" I would note that there's a bit of "circular reasoning" here. Since (as some here have noted) many Los Altos sellers have been able to hold out, then we haven't seen the brunt of the price drops here yet. Foreclosures will force the matter.
Also, a bit of reality about prices. Los Altos 3/2s used to cost $1.5m because Mountain View 3/2s cost $1m which were more than Santa Clara 3/2s at $800k and so on. If the low-end implodes, the high-end must fall too. Even if Option ARMs only hit the "low end" the eventual effect will be to take down the entire market. The reaction will be delayed but prices have nowhere to go but down.
Like others here I expect a jump in interest rates this year and next. This will utterly CRASH house prices! Remember that most houses are sold as a payment, not a lump sum. Because of this house prices are virtually indexed on interest rates. Low rates = higher prices; high rates = lower prices.
I agree with Arn particularly around the ARM resets and the well qualified purchases. I would also add that some of the price drops we have seen over the last two years had a lot to do with the "REO flood". A lot of inventory and low demand creates havoc on prices and certainly causes them to drop. However, high end markets tend to have low inventory and can weather low demand situations better.
Some have predicted price pressure in the high end simply because of jumbo loan rates and a smaller pool of buyers. However, I believe that is balanced with the fact that non-distressed sellers can choose when they want to sell and for what price. Even in relocation situations, there is normally something from their employer that makes it all worthwhile.
The deals to me are in the new builds (any left over "spec" homes) where contractors need cash.
The media generally gets things wrong.
The media typically loves to "diss" real estate.
Do not assume that the rates on a 5/1ARM taken out in 2004 or 2005 will go up.
I refinanced my house in May 2004 to obtain 4.625% on a 5/1 ARM.
My first adjustment was May 2009, my rate is tied to 1 year Tbill adjusted to a 12 month constant maturity and my current rate is now 3.625%. Due to the 12 month averageing process, my rate will stay down at least for another 2 years.
Loans tied to Tbills will typically drop. Loans tied to other indexes may not.
The other factor is homes purchased in Los Altos the past few years were not purchased by sub-prime exploding loans. Most homes purchased in Los Altos due to the price range were purchased with larege down payments to very qualified buyers.
So if you are hopeing on a big drop in price, I do not believe your expecations will be met.
I agree the upper end market will continue to be weak and values may continue to push downward a little but in my opinion there will not be a big move down but this will not be due to ARMs adjusting.
The media typically has no idea what they are talking about in real estate.
Mark really gave you a through answer. I'm not going to go into the resetting of ARM'S, but I will comment on the fact that I believe interest rates are going to rise slowly the second half of this year, this will tend to affect the high end markets ( over 1.5 million ) so I would tend to agree with you that it will continue to be a soft market in the Los Altos area for foreseeable future.