Tuesday, September 26, 2006

Paying Boardwalk Prices for Baltic Avenue

Q: Why is the cost of housing so much more in the Bay Area than pretty much anywhere else?
A: Because the Bay Area is the bestest place in the whole world, that's why.
Q: Why is it claimed that everyone here is rich or at least pulling down a fat stack of income?
A: It must be true...just look at the prices everyone pays for their crappy POS of a house.

I don't know exactly what originally caused the Bay Area's housing markets to go down the path they did..some twisted combination of NIMBY land use policies, Prop 13, building regulations up the wazoo, etc. But I have to wonder if the prevalence of "stated income" loans (aka "liar loans") in the Bay Area doesn't have something to do with it too. People can seemingly afford to pay our ludicrous housing prices and appear to be making bookoo dollars by virtue of being able to claim whatever income they want on a loan. And all too often, the buyer doesn't even know that their income is being inflated!

It's like:
Lender: "That $500K loan for that 1 br 1 ba, 600 sq ft Marin tear-down will run you $4000/month."
Buyer: "But I can't pay that much each month because my income is only $3000/month."
Lender: "Don't worry about it; I'll take care of everything. Your monthly payment will be $2800. Just don't read the fine print."
Buyer: "Uh, ok."
Check out the video at the end of this link and/or read the transcript (thanks to a reader for the link).

This quote from the video -- "We've seen the banking industry keep getting more creative, and more creative, and more creative to keep putting fuel on this fire of home appreciation" -- makes one think what happens when the fire goes out? What happens to Bay Area house prices when you can no longer lie on your loan?

And if it does come to a stop sooner rather than later, do you really want to be buying now? Is now really a good time to be paying top dollar/speculator pricing for a Bay Area house?

Here are selected excerpts from the transcript (emphasis mine):
What if you could get into Stanford by simply telling the admissions office you are an A-plus student -- without any proof? Or how about driving a brand new Mercedes off the lot after promising the salesman you'll send him a check next week? Fat chance, right? So you might be surprised how easy it is for people buying a new house to borrow hundreds of thousands of dollars by simply telling the bank how much money they make -- without any proof. It's called a "stated income" loan, but many people inside the housing industry call it something else: a "liar loan."

Brian is a Bay Area mortgage broker. "Michael" is his client -- a 23-year-old auto mechanic. The payment on Michael’s new home is $4,200 a month, but he only earns about $4,000 a month -- leaving him $200 in the red. He was only able to get the loan because his broker used "stated income" to inflate his paycheck. Brian (the broker) said, "I put on the application that he made $13,000 a month, which was unverified … That's the definition of a stated income loan. You state the income. Most definitely it was a fraudulent loan. The income was literally made up from thin air."

Last May, Beverly and Dwayne [Bay Area residents] bought their first home. Their broker assured them they could afford the half-a-million-dollar price tag based on Beverly's income as a social worker. She makes $2,750 a month. But what they didn't know? To make the deal work, the broker boosted Dwayne's salary to an impressive $8,000 a month. "Right now I'm living from paycheck to paycheck. I'm struggling with putting gas in my car just to get to work," Beverly said. "I wish I did make $8,000 a month," Dwayne said. In truth, Dwayne is out of work and only gets a small disability check. Nevertheless, based on their inflated income, they qualified for a mortgage of $3,700 a month. That's almost $1,000 more than Beverly's entire paycheck.

...over the last decade, Bay Area home prices have gone up 300 percent -- far outpacing people's incomes -- which is why nine out of 10 households can no longer afford the median home price of $630,000. So to keep the clients and cash rolling in, banks and other mortgage companies began offering easier terms like no money down, adjustable rates, interest-only, and stated income.

One broker, "Dennis," works for a mortgage company where he says a whopping 85 percent of loans are stated income. He says out of that 85 percent, they all have inflated numbers. Dennis added. "We've seen the banking industry keep getting more creative, and more creative, and more creative to keep putting fuel on this fire of home appreciation."

But the buyers may not even know their incomes are being inflated. Dennis said, "Some may know. But for the most part I would say the consumer is pretty much left out of the loop." Out of the loop because the broker often prepares the loan papers without ever telling the buyer their income has been inflated.

Now you might think mortgage lenders would be more careful giving out hundreds of thousands of dollars without proof of income. But in fact there's almost no risk to the bank. That's because most banks turn right around and sell their loans to real estate investors on Wall Street -- to mutual funds, pension funds -- even foreign countries. "In today's environment, if a family does not repay [their loan], some nameless, faceless guy in Wall Street in New York, or the investors take the hit. The bank is not put at risk at all, and so they're not that concerned."

Beverly said, "You know they say you make sacrifices to keep what you have, but they didn't tell me I would totally have to stop living and just exist because of somebody else's deceit."
What happens when investors finally wisen up and say "we're not going to buy your junk debt any longer"? Interest rates go through the roof, that's what.

28 Comments:

Anonymous tom stone said...

well the buybacks of bad loans have started,and some lenders are already refusing to buyback loans,giving whatever excuses they can think of.a whole lot of lenders and banks will drown under a pile of crap loans secured by pos properties in the next year or two.as far as these loan brokers bragging about their conspiracies to commit mortgage fraud i wish them the rewards they have so diligently earned...10 years in state prison

Sep 26, 2006, 6:17:00 PM  
Blogger fredtobik said...

California, the Bay Area, and Marin in particular is no different than any other place in the country. Everyone that bought a house in Marin during the bubble did it using "liar loans", and are really un-educated poor people, that will soon pay the price for their greed.

Is that right?

Sep 26, 2006, 7:56:00 PM  
Anonymous Anonymous said...

I agree. I remain unconvinced at this point of how many FBs there really are in Marin. I do know that a lot of people (whether you agree or not) do feel like they would like to live in Marin.

Yes there was too much hype, and a lot of POS homes will suffer their truth - but I believe the future may not be exactly as some here might feel. I am saying I have yet to really see evidence of such. I am not saying there is no bubble - Marinite has shown that exponentially - but the correction of this in Marin has people dreaming of 1/2 off sales on nice homes.

Sep 26, 2006, 8:09:00 PM  
Anonymous Anonymous said...

I agree. Of everybody in my office I know of only one person that even took out an interest only loan during the runup, and I imagine she will be able to pay when it adjusts. 2 coworkers used the low interest rate to re-finance to 15 year loans. The boss sold his studio rental in Cow Hollow to buy a 2nd home on a golf course in Sacramento outright and the rest of us (2) just rented and wondered when the insanity would end.

My anectdotal evidence might not prove anything but I don't think everyone is running around out there with a box of stupid. I certainly don't work with rocket scientists but i thnk they managed to not HELOC themselves into a HUMMER and granite countertop stupor.

The correction is for certain, I'm just not sure how big it will be.



-Robb

Sep 26, 2006, 8:35:00 PM  
Anonymous Warren said...

When they do this realestate update on Zillow people will find that the housing prices across the board have fallen.

This is a clear sign that the market is about to take a dive, especially in over valued areas like Marin County.

- Warren

Have you seen my baseball?

Sep 26, 2006, 8:38:00 PM  
Blogger marin_explorer said...

I remain unconvinced at this point of how many FBs there really are in Marin.

Right, it's all based on our (limited) contacts, and what they did with themselves. I do know a coworker got heavily "invested" in Marin RE, playing the IO game with property, convinced it's "a good investment at any price" (his words). He also recently bought a new Range Rover, BMW M5, and a Jaguar. I know his salary range, so unless he came into inheritance, he may be hurting reset time (or sooner).

So how many FBs are in Marin, or more broadly: how many in Marin live beyond their means? Certainly there’s a few in Marin to whom money is no object, but many others here actively pursue that lifestyle—even if they can’t afford it. Just like my coworker, consumption becomes a habit with ever higher stakes, until they can’t adequately service their long-term debts. Just my observations.

Sep 26, 2006, 9:41:00 PM  
Anonymous SF Mechanist said...

"Moral hazard." That's an increased tendency to make bad investments and not take normal precautions because of the anticipation of a bail out if the investment goes south.

That explains "liar loans." The banks have no fears of risk because they can, basically, bail themselves out by printing more money if lots of people default. Personally, I suspect banks will be the limit of bailouts--and I think they WILL be bailed out and there is nothing anybody can do to stop it. Everyone else buying these bad investments, including foreigners with lots of trade deficit dollars, or retirement accounts, and probably even insurance agencies, is in for an ugly reckoning.

Sep 26, 2006, 9:45:00 PM  
Anonymous SF Mechanist said...

...by "bad investment" I mean mortgage backed securities.

Sep 26, 2006, 9:50:00 PM  
Anonymous Anonymous said...

To answer your question about why BA RE is as high as it is you only need to look at the opening statement in your post, which is the plethora of anti-development regulations prevelant in most cities in california.
How extreme can these be? let's use my own hometown of Alameda for example. Alameda has a law on the books from 1973 that states that there is to be no more multi-family dwellings or homes built on lots BELOW a certain size. The claim was that it reduced congestion and conserved the classic homes in the town. All it really did was make a loud statement that: " we got here first and we don't wanna' have anyone else!"
Naturally this limits supply. limited supply supresses availability..limited availability creates artifical demand, and hence higher prices. An environment with continuous higher prices causes a long-time population to accept paying more thann 50% of their incomes on housing, which bucks the national trend of 30% or less. People that pay that much for a house will then be inclined to view housing as unneccesarily precious, hence contribute further to the urban myth as to why it was worth so much of their income, and likely join the NIMBY bandwagon.
So in the end, you get a nice neverending vicious cycle. The thorn in the paw is these stupid self-serving arrogant regulations. End them and about 90% of the state's problems are solved.

Sep 27, 2006, 9:00:00 AM  
Anonymous pothead said...

"The thorn in the paw is these stupid self-serving arrogant regulations. End them and about 90% of the state's problems are solved."

Not really. There are many more people coming to California each year than there are leaving. Like you said, increase demand but if supply can't keep pace then prices rise. Yes many of our development regulations exacerbate that price hike. Then again I do think that it helps preserve some of the character of the towns. Let me give you a contrary example from the east bay, the Tri-Valley region. It has gone through such a ridiculous growth curve in the last 40 years that the infrastructure can not support the population. Urban sprawl writ large, from Fairfield to Sunol and Hayward to Tracy. Just try getting on 580 or 680 during the commutes and I think you'll start to reconsider an unfettered growth policy.

Sep 27, 2006, 10:52:00 AM  
Anonymous Anonymous said...

These regulations are also a part of suburban sprawl and quality of life. Allowing high density developments to just be built without care or consideration to those who already live there. Traffic, emergency services, utilities, quality of life, and many other factors then you mentioned why it is important to manage building and populations densities.

Some cities might look like parts of Rio if allowed. I understand your frustrations, but saying just lift controls on building developments is not the answer.

Obviously it's democratic. If people want these in, they can ammend legislation differently.

Sep 27, 2006, 10:52:00 AM  
Anonymous Anonymous said...

So the only solution to the Bay Area's outrageously expensive housing problem is for prices to fall. Good. We should be doing everything that we can to make that happen. I hate watching my house fall in value but it is for the good of all.

Sep 27, 2006, 11:01:00 AM  
Blogger fredtobik said...

Yeah, we need more developments, that is the only answer.

Bay Area RE is expensive because people WANT to live here.

I am starting to think (again), that this blogger is a developer in disguise, tugging at the heartstrings of the real socialists/liberals/renters/Marin "natives".

Sep 27, 2006, 11:26:00 AM  
Blogger haggis said...

I believe prices will fall in spite of the many responsible homeowners cited by previous posters.

As stated ad nauseum, prices are set at the margins. And there may well be a minority of homowners/investors at risk, but they will set the prices.

Every argument about interest rates, planning regulations, migrations are merely a sophistry which skirts the real issues of affordability. House prices will retrench to a ratio of 3X earnings.

And that is a good thing. Housing must be affordable and the market has demonstrated that axiom over a 100 year period.

Sep 27, 2006, 12:19:00 PM  
Blogger Marinite said...

Fred, you are getting to be a bit annoying and frankly your paranoia and scepticism, in my opinion, discredits you.

First, you thought I was two posters...myself and RESkeptic (if I recall correctly).

Then you thought that this blog had two administrators who both go post with the handle 'Marinite' (this blog did experiment with having another admin but that was much later and didn't last very long).

Now you think I am a developer?

Have I forgotten anything? What's next, that I am a RE agent? That I am Alan Greenspan secretly confessing to the economic woes I've wrought? Or maybe I'm David Lereah and I need this blog to tell the truth so as to counter all the lies I tell publicly.

Aside from ownership, I have absolutely no connection with real estate sales, development, or otherwise.

Please go ahead and invent any dissonance-reducing story that you need to so as to discredit/discount this blog in you mind. Then go away confident that you don't have to pay it any mind. Just keep it to yourself.

Frankly, your need to discredit this blog by inventing fantasy motivations for me says a lot about you and your personality.

Sep 27, 2006, 12:30:00 PM  
Blogger marin_explorer said...

Bay Area RE is expensive because people WANT to live here.

That's true to a degree, but it doesn't explain the whole picture. For the record, they say the same thing in Vancouver BC, Seattle, SLO, Santa Barbara, San Diego--anywhere people are proud of their town, and assume that appeal is the driving force behind prices. The availability of housing/expansion controls are a factor too. I could get started on MALT, but we’ve beaten that cow to death already.

As for people wanting to live in the BA, it all depends who you talk to. By now, a lot of my colleagues grit their teeth and simply cope with living costs here. Even the ones who jumped into the panic and bought are saddled with huge amounts of debt—and homes that aren’t terribly appealing, unless they drop another few $100K for a remodel. So what’s another $200K; won’t appreciation take care of that? For many professional couples, it adds to their financial pressure, as they both slave away for the PITI, pay childcare, and hope to have something leftover for themselves and their kid’s college fund.

By now, the luster of the local economy has tarnished for many of my friends, and they’ve wisely left. Personally, I won’t be waiting around for things to correct here, because I see more entrenched problems than an eventual correction can solve. If it’s any indication where the bay area is headed, check out the Milken Institute’s findings on best performing cities. If you scroll down, you’ll notice that Silicon Valley is near the bottom, amongst the Rust Belt cities. Writing on the wall, IMO.

Btw, Fred: I was "reskeptic". I've now changed my handle to suit the content of my own blog.

Sep 27, 2006, 12:35:00 PM  
Anonymous Anonymous said...

check out the Milken Institute’s

SFO is 173rd out of 200 (where 1 is the best). Pathetic.

Sep 27, 2006, 12:40:00 PM  
Anonymous pothead said...

Marin explorer, thanks for the Milken link, interesting list. It seems to rank cities according to a combo of job growth and high tech presence. You'll notice that much of the top 20 cities are areas that have seen enormous real estate gains in recent years. You'll also notice that many of those cities have gone through a lot of RE construction. Guess which sector has been driving that new job growth and thus the basis for the rankings..

Sep 27, 2006, 2:24:00 PM  
Blogger marin_explorer said...

Guess which sector has been driving that new job growth and thus the basis for the rankings..

Yes, that struck my mind as well,with Florida, LV,and Riverside in particular ranked so high. That said, I still find the bay area rankings distressing.

Sep 27, 2006, 2:38:00 PM  
Anonymous Anonymous said...

I always though this blog was a way for dick cheney to express his feminine side safely.

Sep 27, 2006, 2:55:00 PM  
Anonymous Anonymous said...

To the person claiming that more people are moving the bay area, well.. actually you're incorrect on that part. According to the last count which was in 2004, the BA lost around 120,000 people. In fact, next to NYC, San Francisco and the surrounding areas are losing population at the fastest rate in the country. Simply put- the influx of people is actually negative, hence the argument that more people= more high prices is moot. What is readily apparent is that there are now more houses with no people actually living in them than there are people to fill them.

Sep 27, 2006, 3:28:00 PM  
Anonymous Anonymous said...

"the BA lost around 120,000 people. In fact, next to NYC, San Francisco and the surrounding areas are losing population at the fastest rate in the country."

That's quite true and it has been pointed out on this blog before.

Don't let the facts get in the way of a comfortable delusion.

Sep 27, 2006, 3:35:00 PM  
Anonymous Anonymous said...


faceless guy in Wall Street in New York, or the investors take the hit.

Faceless? I think not. Look in the mirror if you want to see who takes the hit. It's your IRA/401K/529/SEP/mutual fund/etc. money being lent out, perhaps not to return; and it will be your tax money paying to bailout the financial institutions( don't worry Mr. and Mrs. fund owner, you'll get pennies on the dollar while the fund managers get to keep all the fees they've collected these last few years) as has always been the case. You didn't know that musical chairs has reserved seating for the Wall street crowd did you?

Sep 27, 2006, 4:52:00 PM  
Anonymous Anonymous said...

To add to this population argument, the opposite if the Bay Area would be Nashville, TN, a city that has gained close to an additional 30% in population in the last 10 years. You would think this would dramatically increase prices, but even still, the prices are as much as 3 to 4 times cheaper than the average home in the cheapest part of the BA. What's more, their economy is growing fairly rapidly. Again- I think the culprit for higher prices in the BA are hampering regulations.

Sep 27, 2006, 4:54:00 PM  
Anonymous ross valley local said...

What's more, their economy is growing fairly rapidly.

Right, I've noticed tech startups now based in Nashville. Between here and TN, it's not too hard to guess where it's cheaper to run an online business.

Sep 27, 2006, 5:01:00 PM  
Anonymous pothead said...

"Again- I think the culprit for higher prices in the BA are hampering regulations."

Regulatory hurdles probably do add cost,but I'd be shocked if that was the main driver behind the cost of housing around here. Which ones specifically do you want to get rid of?

Sep 27, 2006, 9:10:00 PM  
Blogger fredtobik said...

LOL Nashvile vs. Bay Area.. that is fresh...

I think Utah or Maryland are the choices to incorporate a business... it is after all... online..

The existence of this blog only supports my "west is the best" theory.

Sep 28, 2006, 7:27:00 PM  
Anonymous george said...

My opinion is When considering a mortgage refinance, there are several important factors to
consider before deciding on a particular type of refinance loan or a specific
mortgage company. One of the questions it is important to ask yourself is, “What
is the main reason I am deciding to refinance my home?” Are you refinancing to:
Lower your interest rate
Many companies specialize in exactly this type of refinance loan. Finding a
company that will work with you specifically on lowering your interest rate is
not difficult by doing some research on the internet. Try typing in key search
phrases specifically related to “lowering my interest rate” in major search
engines.
Cash out the equity you already have in your home
You can use the equity in your home to get cash. Find out exactly how much money
you can borrow by searching for a equity calculators online.
Consolidate Your Debt
If you have a lot of unsecured, high interest debt (credit cards), it might
benefit you to refinance your mortgage and use the cash to pay off your higher
interest debt. You might be able to refinance and get more cash up front than
what you owe on other debts, allowing you to lower your total monthly expenses
and put a lump sum of cash in your account at the same time.
There are many reasons you may need to refinance your mortgage, and
identifying what your specific needs are is very important before moving forward
in the process.

Oct 5, 2006, 11:17:00 AM  

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