Monday, March 30th, 2009 at 9:56 AM
Neg-Am Resets/Recasts
Are you thinking, “Wait until the neg-am resets hit”?
I asked a major title company to tell me how many neg-am loans there were in Encinitas, Carmel Valley, and Ranch Santa Fe, a good cross-section of the higher-end properties.
Here was the response:
There are 29,488 properties
Neg-Am Loans
SFR (Detached) – 682
Condo/Duplex (Attached) – 288
Total = 970
Pay Option ARMs
SFR (Detached) – 440
Condo/Duplex (Attached) – 190
Total = 630
That’s it, 1,600 out of 29,488, or about 5.4% of the properties have either a neg-am, or option-arm.
They confirmed that they read every single trust deed and ARM rider that gets recorded, whether it’s a purchase or refinance transaction.
There were 10,268 adjustable-rate mortgages, so the remaining 8,668 must be mostly the interest-only, 3-year to 10-year mortgages, the ones that lenders are modifying. Today I heard of a homeowner who was coming up to the end of his five-year term, and called Countrywide for advice. He got a five-year extension at 4.75% interest-only, at no cost!
He was so happy he took his wife to Hawaii for a week!
Posted on Monday, March 30th, 2009 at 9:56 AM in Neg-Am, Option-ARMs, Thinking of Buying?, Thinking of Selling? | 28 Comments » | 
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Jim,
That comment at the end was like a kick in the nuts. We all know it’s happening but are trying to ignore it.
Nothing against you, I understand you call em like you see em.
shadash | March 30th, 2009 at 10:07 amI’m with you shadash, when I heard it I was so mad that I had to go run around the block!
The closest I’ll get to Hawaii this year is if I go for lunch ar Ruby’s at the end of the Oceanside Pier!
Jim the Realtor | March 30th, 2009 at 10:10 amThe good news for people with mortages that are resetting is that Helicopter Ben is determined to save them. He’ll be able to do that as long as the dollar holds up…
greenlander | March 30th, 2009 at 10:29 amThanks for the stats Jim. Obviously the neg-ams and pay-options are a small % of total homes in North County, but is that really relevant to home prices? Closed sales determine home values, so it is always a small number of properties that set the price for a much larger swath of overall homes in a given area.
Why wouldn’t the resetting neg-ams and pay-options as a percentage of listings or closings be more of an indicator of future price movement? 1600 out of 29k seems small, but 1600 compared to an annual sales rate of 600 (118 + 30 from your closings above 900k X 4) would seem to predict a greater impact.
What am I missing?
Woodrow | March 30th, 2009 at 11:26 amAnyone who is waiting for the second wave of that infamous reset chart to come crashing in had best pack their belongings and leave the beach. I just don’t see it happening anytime soon. As I’ve said before, my mortgage now is 3% locked for another year. This type of information Jim provides really is another “kick in the nuts” re-enforcement.
Unemployment is the great white shark swimming around just off shore. People might be able to continue swimming naked, but if he gets close there is going to be distress and people will get out.
I must say it’s getting increasingly harder to stay put on the sidelines. Not because I don’t think prices are going down, but because I think the pain just keeps getting pushed further and further out. I find myself asking myself if I really want to wait around another 5 years… or take the 20% reduction in prices now and get on with it. Especially if you add up the costs of renting another X number of years.
sdnerd | March 30th, 2009 at 11:37 amNorth County San Diego is a great place to live. Especially coastal. Nothing in this is a shock to me.
Yep, I’ve got my piece of it. Now I’m going to walk to my local surf spot and catch a few waves, later.
Mozart | March 30th, 2009 at 12:06 pmIt doesnt matter if there isnt a large number of option-arms in the pool.
The new buyers clearly are unable or unwilling to buy at those prices. Those sellers wont sell. It is as simple as that. Sales will stay ultra-low for the foreseeable future in that market segment.
® | March 30th, 2009 at 12:23 pmI’m counting 185 closings in Q1 in Encinitas, Carmel Valley, and Rancho Santa Fe.
If we assume that every neg-am/option arm has to sell at some point, 1600 neg-ams/option arms is two years worth of supply.
Nameless | March 30th, 2009 at 12:49 pmAgreed. I was expecting the rate resets to act as a catalyst; the reaction still happens in the absence of its presence, albeit slower. By the time the market is reasonable in my area I may actually be responsible enough to take care of a house.
Catch some for me as well Mozart. It was flat all weekend and now I’m stuck back at work.
Genius | March 30th, 2009 at 12:50 pmWhat Shadash said.
Dwip | March 30th, 2009 at 1:43 pmI don’t think you’re missing anything Woodrow – I agree with your logic. But I was surprised at the 5.4%, my guess was 20%.
I wanted to list it here for those who were thinking like I was that it could be worse.
Jim the Realtor | March 30th, 2009 at 1:55 pmA low interest rate doesn’t mean much if you don’t have a job.
I still believe that this low interest thing is short lived. At some point, the real cost of this massive bailout is going to rear its ugly inflated head.
Also, how long does a homeowner live in a place on average in San Diego? I heard that it’s 7 years, but I can’t confirm it. The point is, people aren’t going to stop moving because of their house. Unless the next buyer can take advantage of the same low interest rate I don’t see how sellers could avoid lowering their price. I remember when 12% interest was normal – 9% was good. That was for a buyer with good credit.
KC | March 30th, 2009 at 2:27 pmsdnerd, I’m right there with you. Thinking the same things. How long can I continue to rent and keep loosing the tax benefit from owning a home. Especially with all the workouts happening. Builders have slowed way down on new homes, so you are looking at mimimal new home supply. And, waiting around for just the right foreclosure or short sale, is just too much extra stress. With all the workouts, it will take another 2-4 years to find the sweet spot in the bottom, and by then, it would have been a wash because of the current low interest rates and the tax benefits.
Jim, by the way, thanks for keeping up with all the blog postings! It is greatly appreciated, all the information you provide, and keeping us entertained with your field videos. Thanks so much for all you do.
Blue Streak | March 30th, 2009 at 2:37 pmJim,
Agreed, that is a kick in the nuts:
So, I have a few questions;
1. Is the 29K the number of properties, or the number of properties with a mortgage?
2. Any chance for a breakdown of 30yr fixed, adjustable, etc just to make sure the totals match?
There’s got to be one of 2 things happening:
1. Either previous predictions and information was completely fabricated or…
2. The problem clearly is not being well documented.
The point I’m going to make is this as an example: Subprime loans weren’t even on my radar when I first began blogging about housing prices in 2005. Affordability always was and continues to be a big disconnect between incomes and home prices. Clearly, although subprimes were considered a very small portion of total financings, they had a pervasive effect on outlying areas and lower-priced homes. That happens when you both increase supply and decrease demand.
Neg-Ams were affordability products and many were able to trade-up from lower-priced homes to higher priced homes. Remove that stimulus and you’ve got a lack of buyers. Add in the foreclosures it might generate and you’ve got additional supply. Anecdotally, I’m glad your friend got a good deal on a forbearance of principal payments; how long will that last, and will it be enough for his/her income to be able to hold it together? I hope for their sake, yes. However, even if they are able to, their decreased spending elsewhere will have an effect on the local economy; which has an effect on incomes.
Don’t get me wrong; I’m not poo-pooing the information, just trying to remind everyone what affordability really is about. Because, even if you’re in an overpriced home, the important thing is that you don’t damage your own finances with that home. Homeownership is much more expensive than renting on its face; both in terms of time and money. Too many people jumped headlong into ownership solely based on “they’re not getting any cheaper”. Fine with me, if renting is still cheaper (which it dramatically is), I’ll have to keep on renting. Maybe someday.
*Sigh*
Chuck Ponzi | March 30th, 2009 at 2:46 pm[...] here for Jim’s numbers … be sure to put down your coffee before reading the last [...]
Minding Your Business » Blog Archive » Local Neg-am numbers | March 30th, 2009 at 3:01 pmAgree with what Chuck said.
I’ve always thought the “reset” issue was overblown. The real issue is jobs and income over time.
Not only did people get toxic mortgages, but many more were refinancing and taking on more debt every year via cash-outs and HELOCs. For many families, they were spending an extra $50K-$100K **every year** that they thought was income…when it was debt, instead.
Now, people have to make due on less money because they can’t extract credit/debt from their homes every year. In the meantime, their mortgages increased, in many cases up to 3 or 4 times what their original mortgages were, and that has to be paid off somehow.
Additionally, all the long-time owners in the most desirable and established neighborhoods are nearing retirement and/or passing away. Not to sound morbid, but they and their heirs do not need to get peak prices in order to sell. Many of these homes are owned free and clear.
While it makes sense to buy vs. rent in the lower-end neighborhoods that have already seen 50%+ drops, the mid-higher end still has a way to go, IMHO.
CA renter | March 30th, 2009 at 4:08 pmThe drop off in volume is easy to explain. People naturally don’t want to sell at a loss, or even less of a profit than they could have gotten a few years ago. In behavioral finance its known as “anchoring.” It may not be rational, but a person will simply refuse to sell until they can achieve that value to which they have anchored their expectations.
In the wealthier areas very few people absolutely need to sell, so they will simply hold on, maintain high asking prices and allow their home to go unsold. When almost everyone does this, volume drops to a trickle, but the few transactions that do take place happen near or just below those high asking prices because few people in these desireable neighborhoods are willing to drop.
But one interesting thing is, even though the high end homes have dropped less than the lower end homes, all three value tiers have retreated to about 150% of 2000 prices. Which is not far off from where they should be given inflation and historic (non-bubble) appreciation rates. You can see those values graphed on my blog at http://eimre.blogspot.com/ if you would like
Devin Espindle | March 30th, 2009 at 4:10 pmBlue Streak & SD Nerd – I am with you on your thoughts about waiting. As I have posted before, if it is a primary residence, it is important not to let the RIGHT house pass you buy waiting for the absolute bottom. Rates are nice and low, if you fin the RIGHT house at a price you can afford, why wait!!!
Local Boy | March 30th, 2009 at 4:22 pmI agree with Chuck, in particular his comment regarding subprime being a sliver of the overall market but having a large impact.
I share the frustration of other fence sitters but only have to look at the numbers to regain my patience. If the coastal markets are indeed in for a year of constant 2-3% monthly drops (my opinion), your entire tax deduction is swallowed up in a month or two of price drops.
Petco Park isn’t going to be the only meltdown in San Diego this year.
Woodrow | March 30th, 2009 at 4:27 pmNEW YORK (Dow Jones)–Fannie Mae (FNM) saw the largest increase in a month of
Jim the Realtor | March 30th, 2009 at 5:12 pmits single-family delinquency rate among prime borrowers in January. The
mortgage finance company said this rate shot up to a historic high of 2.77% in
January from 2.42% in December, a record 35 basis point increase that hasn’t
been seen since the company started tracking these numbers in 1998. This
compares to a delinquency rate of 1.06% in January 2008.
Sticking just to the $1m+ market. It is the high income earners ($250k+) that would be buying $1m+ homes that are getting disproportionately affected by the recession.
Most people in that income range have salaries that are directly or indirectly (stock options, bonus pools) tied to total company profits. Across virtually every business, profits are down in 2009. So incomes are down (and very significantly in many cases).
Compounding the drop in earned income, every other asset class or investment is down (corporate bonds, money market rates, stock portfolios, real estate, commodities, etc). So your high income earners are feeling the pinch more so than the medium income earners because their incomes are down and their portfolios most likely got much smaller. If you have a $20k portfolio and you lose 40%, that is meaningless to someone with a $500k portfolio who lost $200k.
On top of the income drop and the portfolio squeeze, federal and state taxes are going up for those in that income range.
This analysis does not even consider job losses, just declines in income and net worth.
So the $1m market will be tough for a while. Anyone with a good down pay and a steady $250k income does not want the current inventory that is being offered at $1m.
FuturesWatcher | March 30th, 2009 at 6:24 pmI’m surprised at the percentages of neg-am and option ARMs that Jim quotes. Do you remember this map from Business Week?
http://www.businessweek.com/common_ssi/map_of_misery.htm
I think the map was from 2006. County-wide the percentages of these loans would appear to be much higher.
JE | March 30th, 2009 at 7:16 pmIf you’re getting overly anxious about getting off the sidelines and buying a home, well, might as well jump in and aggressively buy stocks too. As they say, stocks typically bottom early whereas housing prices bottom late.
Gotta keep things in perspective.
tj and the bear | March 30th, 2009 at 7:47 pmDo you remember this map from Business Week?
Yes, I do remember this map. It showed the percentage of payment option loans among all loans issued during some part of 2006. There are at least three reasons why there’s no contradiction with Jim’s numbers:
- Payment option boom only lasted roughly two years, 2005 and 2006. Relatively few neg-ams were issued in 2004 and before. Neg-am business ended in 2007. Loans originated in 2005 and 2006 are probably no more than 20% of all loans outstanding. If 35% of those were neg-ams, that would mean that 7% of all loans in San Diego were neg-ams.
- Some of these loans have already defaulted.
- The original assumption (that neg-ams were concentrated in coastal north county) was completely unfounded. In fact the average balance of all outstanding CA neg-ams is less than 500k. Neg-ams were probably far more popular in San Marcos and Chula Vista than in Encinitas.
Nameless | March 30th, 2009 at 8:01 pmI read on another east coast blog that the areas that disproportionately had subprime, also had Neg AM so its probably not that surprising that these numbers arent very large. Countywide, they were in large numbers, but likely more concentrated in the areas that have already blown up.
I hate to say it, but I think Mr. Mortgage sold us a bill of goods regarding the “PAY ARM TSUNAMI”. Maybe he realizes the jig is up and thats why he seems to have disappeared recently.
In a way, I am just glad to finally know it was more hype than anything. My biggest fear was I would buy and THEN the tsunami would come, putting me instantly underwater – now I dont have to worry about this.
As others have said, keys now are affordability and unemployment. This isnt over yet. Still im glad thats one less “issue” we need to obsess over.
Godot | March 31st, 2009 at 6:37 amI agree whole-heartedly.
I’ll add to your two accurate issues of affordability and unemployment.
3. Can we short-sell our way out of this?
An excruciating idea to those of us in the business, but as long as the lenders are going to fumble around trying to process short sales, it’s going to provide the first option for sellers.
I wish lenders would either streamline the process, or do away with them altogether, but for now we’ll endure a painful road that greatly benefits the sellers – free rent for months (or years) and less impact on their credit (allegedly).
Jim the Realtor | March 31st, 2009 at 6:50 amHow many lied on they loan applications to buy that $1,000,000.00 “dream house”? How many did pull money out of their home to make the payment?
Anonymous | March 31st, 2009 at 3:23 pm“How many lied on they loan applications to buy that $1,000,000.00 “dream house”? How many did pull money out of their home to make the payment?”
Apparently, not as many as we thought.
Anonymous | April 1st, 2009 at 1:25 pm