This week there has been a spate of articles in the San Francisco Chronicle about real estate and mortgages, such as: Bay Area foreclosures on rise – adjustable loans a growing threat, and Foreclosure rates spike in Bay Area, mingled with: Big drop in U.S. home prices – A record decline nationwide, though California sees rise.
So, what’s up?
I’m no expert, but the word “relative” springs to mind; meaning, as compared to what? Here are my thoughts on the subject…
Yes, the stats do show that foreclosures are rising in the Bay Area and many other areas in the U.S. One article mentioned above appearing in the Chronicle on October 19th reports a spike in loan defaults of 89% in the Bay Area and 112% in California over last year. Today, the same paper shows foreclosures (which is what happens if a default is not remedied within about 100 days) to be at 865 so far in 2006. BUT, the 2005 Bay Area Census estimates that there are 1.5 million owner-occupied housing units located there, which is one foreclosure per 1,734 homes. This relationship lends some perspective.
Then there’s the crunch being felt by those who over-extended their financial capacity to pay their adjustable rate mortgages as rates adjust upward. Crunch time is coming for many of these borrowers because one-third of the Bay Area’s ARMs will reset at higher interest rates over the next two years. The two relevant questions here are: 1) Can these people afford the higher mortgage; and 2) What is their equity position in the home?
Two factors that might mitigate the deleterious effects rising ARMs might have on foreclosures in California is the employment rate and borrower equity in homes. As I noted in an earlier post, these two factors are said by a Federal Reserve Bank study to have a strong predictive effect. Happily, the employment and equity numbers are pretty high in California for the moment.
Given that California prices are weathering the downturn better than most places, homeowners may not experience a substantial decline in their equity sufficient to make them walk away from their homes.