Thursday, March 31, 2005

In '05, 82% In SF Bay Area Bought With ARMs

In a story I already posted on, this bit of info got past me. "With Bay Area home prices rising steeply over the past two years, most buyers have opted for adjustable-rate mortgages, often with the option of "interest-only" payments."

"In the first two months of 2005, 82 percent of people who bought homes in the nine Bay Area counties and Santa Cruz County got adjustable-rate mortgages."

The potential for payments to increase is pointed out. "A buyer with a $450,000 loan at 3.47 percent had a monthly payment of $2,013.17. This year, with the increase capped at a typical two percentage points, the rate would be 5.47 percent, and the monthly payment would be $2,531.76."

"And you're not done," McBride said, "because this time next year it's likely to adjust again."


At 6:57 PM, Anonymous Anonymous said...

I just cannot believe the situations that people get themselves into.

I also can't believe the stupid products that corporations offer to people.

It seems as though nobody has any brains or willpower.

This is all going to end very, very badly.

Those ARMS should all come due about the time the interest rate peaks in 3 or 4 years.

At 8:19 PM, Blogger Dan said...


At 9:26 PM, Blogger CalculatedRisk said...

Excellent find! I missed that section too when I skimmed that article. Thanks for pointing out the 82% ARMs number.

Best Regards!

At 9:39 PM, Blogger Ben Jones said...

(Those ARMS should all come due about the time the interest rate peaks in 3 or 4 years.)

I would love to have a breakdown of when the ARMs outstanding are to mature, but have yet to see that data. But, yes it could be a bubble buster.

Hi Dan!
Thanks for dropping by guys..Ben

At 9:36 AM, Anonymous Anonymous said...

The statistic that blew me away -- and the one that indicates that the party is nearly over -- is the statistic from the FT's story on the credit bubble on Monday: of jumbo mortgages in 2004, 58 percent were interest-only options (!), up from only 5 percent just four years ago. To me, this proves what I have always believed: the housing bubble is actually a credit bubble; it has nothing to do with the tight supply of housing, but rather with the irresponsibly loose supply of credit. The 82 percent figure quoted here doesn't suprise me a bit; friends of ours just bought a 2 BR fixer-upper in Oakland for $750K, and explained to us why they took the "conservative" option of a 10/1 ARM. Of course, with 58% of jumbos being interest-only options, I can see how they could fool themselves into believing that they're being conservative! Great blog, BTW; so refreshing to find other like-minded people...

At 10:51 AM, Anonymous Anonymous said...

Here in Vancouver, we don't have quite as many ARM's - but I note that Canadian lenders are starting these interest only Mortgages.
The Bubble is alive and well here. People camping overnight to bid around 500K for a hole in the ground. The economy flattens - these speculators - and folks with every dime tied into their home payments, will watch their loans go 'underwater' and they will walk away. Bankrupcy laws in Canada are tighter than in States - so you can kiss your credit rating adios, if you go bust. The whole bubble is alive on the backs of people that shouldn't be in the market - and by speculators, and here in Vancouver we have a huge influx of German, and Chinese cash - snapping at the edges of the prices, that have been rising up to 95% in some parts of the 'Frozen North'.
I don't like this at all.

At 11:08 AM, Blogger Ben Jones said...

Anon in Vancouver,
Thank you for your insight. Please keep us updated on Canada. I have traveled in your country and it is beautiful, with the friendliest people I have ever met.

Have you seen this Van blog? Its pretty cool.

Chat with you next time..Cheers!

At 11:33 AM, Anonymous Anonymous said...

"BTW; so refreshing to find other like-minded people... "

I think you meant to say "right-minded people" (i.e. common sense, realist, logical). I made the very bad decision to move back to California in Oct 04 from the Southeast. I grew up in San Diego and now live back in the Antelope Valley (Lancaster). I can not recognize the state I used to call home. This is pure insanity (housing that is..). The home I left near New Orleans would cost a million plus here (I sold it for $250K). The issue with California is lack of perspective and mob psychology. If you grew up here, you know nothing else. Everyone is doing it so it must be safe. Why get left out. "Danger! Will Robinson". I bought my first home in California in 1992 and in 1996 it was worth 30% less than I paid for it. People say "unemployment was high and that isn't happening now". Yes, unemployment was higher (8%), but interest rates were going DOWN 8.5% -> 6.5% during the correction. What really made prices go down was greed and pride. The recession and job loss just got that ball rolling. It was what my neighbors did next that surprised me. When they realized they were upside down on the mortgages, they just walked away and gave them back to the banks. Mind you, none lost there jobs or had significant hardships, they just didn't like a losing asset. Where did they live you ask? They simply bought bigger homes at bargain basement prices while telling the lenders that the original house would be a rental property. Once the new home closed, they let the upside down home go back to the bank. That made a 15% correction turn into a 30% crash (tons of HUD foreclosed homes make it hard to maintain property values). I recite this bit of history as we are about to see it repeated I'm afraid. Once fear and panic set in, the speculators will be the first to try and unload their homes. The market will respond to the massive infusion of supply (including reams of new construction just getting up to full steam) by depressing the market. Many that find themselves upside down will simply walk and cause a crash bigger than the 90's Southern California crash. So, what to do? I have two choices; wait or leave for good this time. Weeeeeeeeee....... enjoy the ride!

At 1:30 PM, Blogger Ben Jones said...

(FT's story on the credit bubble on Monday: of jumbo mortgages in 2004, 58 percent were interest-only options (!), up from only 5 percent just four years ago)

Holy cow, do you have a link? If not I will try to dig it up this weekend..Thanks for posting Ben

At 1:33 PM, Blogger Ben Jones said...

( That made a 15% correction turn into a 30% crashI recite this bit of history as we are about to see it repeated I'm afraid.)

Anyone with personal on-the-ground info is greatly appreciated! I didn't know much of what you experienced. Thanks a lot anon.

At 2:44 PM, Blogger deb said...

I was a realtor from '90-'02 in the San Fernando Valley outside Los Angeles (still am actually, but being super mom now). The early-mid 90's were UGLY. I had a few clients who saw their properties decline by 50% from what they paid.

I personally had a townhouse which we bought in '91 for $153,000. We thought we were stealing it because they had been selling for up to $190,000. We watched the same units in our complex sell down into the $120,000s over the next couple years. Then the foreclosures started to hit and we saw some go for around $100,000. We held on to it as a rental until '00 and sold it for about what we paid. Now, they go for around $350.

Luckily, we bought a house in '95, remodelled, sold it for double the price in '00. Bought another in '00, remodelled, and sold it for double last July. We walked away from the whole thing with more than half a million cash. We are now renting under the belief that the madness has to end sooner or later.

It is very hard to be out of the market. We find ourselves constantly feeling like we need to aplogize for renting, as if only and idiot would do so.

I do remember in '89 that none of the realtors thought it would ever end. Every year of the decline CAR (Calif Assoc of Realtors) came out with a forcast that the declines were over. Anderson School (UCLA) was the only group whose forcasts seemed to at all fit with what we went through. Now Anderson is predicting a housing bust causing a recession, as opposed to the other way around like we had last time.

At 3:44 PM, Anonymous Anonymous said...

Hang in there Deb. I don't know if I'll be able to wait it out. If the opportunity arises to relocate back to the Southeast, I'm out’ a here! I paid $130K in 1992 (Lancaster, CA) and in 1996 they were going for $90K. Like I said in my previous post, there were no less than 6 HUD foreclosures on my street and not one person had hit hard times. I repeat this as many people think their neighbors will do the right thing. Don't count on it! The selfish and greedy will come out of your friendly neighbor's chest like that thing in the Alien movie. The ones that bought late in this "ponze scheme" will be looking out for #1 and #2 on you. If you buy, better be ready to ride it out. That means quickly losing your 20% down payment and paying that oppressive 30 year mortgage for the next 10 years just to break even again. If you bought three or more years ago, you're fine, you have the luxury of being able to ride it out, but for many, this will end badly. The standard of living in So Cal is in rapid decline (taxes, schools, crime). We will have a bunch of 70 year olds with mortgages. In the Southeast the low interest rates was a chance for low income folks to finally own and for the smart, the opportunity to refinance for 15 or 10 years. Their home will be paid off before their children graduate high school. California is different. This chance of a lifetime to get a leg up and improve your standard of living has been taken any from the young and poor. Greedy speculators have taken this gift and rather than a positive they just said "this just means you can pay more for the same crappy little homes". There is no inherent value to the home (asset). Its the usual California "you can pay it tax". That's why California pays twice as much for electricity and 40-50 cents more per gallon than the Midwest and South. "Because you can". It's become part of California culture to have lower expectations and standards. Our prosperity over the last half century has turned California from the land of infinite opportunities to the lowest common denominator. After living else where, I now see that Californians have much lower standards than many parts of the country, yet you pay the most for what "used to be". The only reason I drifted on this tangent is to illustrate that the inmates don't know they are in the asylum. This market is going to crash and you better be ready, cause your neighbors may not be so ready or honest as you think. My point is, it's going to get UGLY again, really UGLY. Weeeeeeeeee....... enjoy the ride

At 3:50 PM, Blogger Ben Jones said...

That is great info for a reader, and myself, trying to understand what is happening.

(sold it for double last July)
Great timing. Congrats!

(It is very hard to be out of the market)
Very natural, at this point.

(I do remember in '89 that none of the realtors thought it would ever end. Every year of the decline CAR came out with a forcast that the declines were over.)

CAR does seem to be subjective on the matter. Most "experts" now say, "it will level off, not go down". The UCLA forecast seemed straight forward to me.

Great comment. Thanks for taking the time, Deb..Ben

At 8:04 PM, Anonymous TDnSD said...

I couldn't help getting on this and trying to get some opinions from like-minded people. We live in San Diego and bought last year. Unlike most people, we came in with a significat down payment and did it the old fashioned way with a 30 year fixed mortgage. I'm seriously considering selling 'cuz this is scaring the hell out of me. Our problem is that we're going to be hit with tremendous capital gains - roughly 25 percent of our potential profit.

This feels worse than the early 90s home price crash. I don't know what to do. Any opinions would be greatly appreciated. Thank all of you for your opinions and insight.

At 8:53 PM, Blogger deb said...

This is Deb again. We sold, even though the payments on our last house were fairly comfortable. My husbands career can be a little unpredictable, and it wasn't our "forever house". The prospect of $500k tax free was too tempting at the age of 37. I will tell you that it was HARD. Much harder than I thought, emotionally. I truly think that the herd mentality that is at work in this real estate mania really affected me, eventhough the rational, business side of me knew this was the right call.

At 9:39 AM, Blogger Ben Jones said...

(Our problem is that we're going to be hit with tremendous capital gains - roughly 25 percent of our potential profit.)

Tough call. San Diego is one of the markets that seem poised to drop. Maybe Deb can help with suggestions.

Also, check out the San Diego blog in the links section. Prof Pigginton stays on top of your market. Also, please keep us updated on your decision. Ben


At 12:09 PM, Anonymous jack said...

For anyone who worries about having lost the opportunity to get into to real-estate, nothing could be further from the truth. Wait about five years and those Las Vegas McMansions are going to be selling for maybe 20% of what they are selling for now, as in a nearly new 3BR house for maybe $60,000. Maybe Las Vegas isn't San Diego, but what would you rather have? A house in SD with such a huge mortgage that you'll spend the rest of your life paying for it, or a bigger house in LV (or Phoenix, or Austin, or Dallas) with enough cash in the bank that you can semi-retire while still young?

Want to live near the ocean? Think about south florida (another bust waiting to happen) or the Texas Gulf coast, or just rent a place in Mexico for a few months each year.

Coastal California isn't ever going to be cheap. Instead, it will be sort of like what New York is--a place where people work long hours to pay high prices for small housing units in a stress-filled city with long commutes and high taxes, just so they can say they live in a "glamourous" place instead of the boondocks.

At 8:24 PM, Anonymous Anonymous said...

(Wait about five years and those Las Vegas McMansions are going to be selling for maybe 20% of what they are selling for now, as in a nearly new 3BR house for maybe $60,000. )

Presumably you mean 60K 2005 dollars - which could be 300-500K 2010 dollars assuming a five years of hyperinflation and dollar devaluation. If the inflationary scenario plays out then home buyers that locked into low rates in the last couple of years will still come out ahead, no?


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