Friday, December 16, 2005

PIMCO says...82% of CA purchase loans are interest only or Option-ARM


The data below is from Scott Simon of PIMCO:

The really negative sign for us is the fact that, last year, 82 percent of the purchase loans in the state of California -- Orange County being representative -- were either interest-only or negatively amortizing loans. We view that not as an economic choice people were making, just simply an I-can’t-afford-the-house choice.

Need I say more?!?!? If you have been reading this blog, you know what happens when ARMs adjust, and how neg-am (option-ARMs) work. I'm just glad that a major company compiled the data that backs up what I have been seeing on a daily basis for a while now. Patience will be rewarded...



Blogger chickelit said...

What does the qualifier "purchase" mean? Does it include refi? or purchases leveraged from existing properties?

12/16/2005 11:28 AM  
Blogger SoCalMtgGuy said...


Purchase money is when somebody is PURCHASING the house. Not refinancing or anything else.

That stat is saying that 82% of people BUYING homes in CA last year were using ARM's and option-ARM's.

I hope that answers your question.


12/16/2005 11:37 AM  
Anonymous Anonymous said...

Isn't the actual info much worse than your headline?

When I read your title, I thought "Big deal, the interest rate will float in a few years". Then I read the content and was shocked because they are IO or Neg Am ARMs, not just ARMs/Option ARMs.

12/16/2005 2:19 PM  
Anonymous Anonymous said...

Here's a history lesson for us.

Read this and see how much is in common with our current econonomic climate.

12/16/2005 2:25 PM  
Blogger Mark said...

Interesting read on the Great Depression. Not to worry - for four reasons:

1) There are no manufacturing jobs left to lose (in the US, anyway)
2) Agriculture now is very well subsidized indeed.
3) Helicopterfuls of money will fall from the sky to keep asset prices high (unless it happens before Greenspan retires) :)
4) All the non gainfully employed politicians believe in free trade - regardless of the cost to the rest of us. So there won't be any tariffs even when the last employed American gets his pink slip.

Hope this puts your mind at ease ;)

12/16/2005 2:46 PM  
Anonymous Anonymous said...

I moved out of Seattle because of soaring real estate prices. I would love to know what kinds of loans have been taken out to buy property there. Anyone know? Or can point me to a site that has the info?

12/16/2005 3:02 PM  
Blogger SoCalMtgGuy said...

Anon 2:19

Option ARM loans ARE neg-am loans!

The minimum payment option on the option ARM is the Neg-am payment.

See the link in my post where I talk about option ARMs.


12/16/2005 3:11 PM  
Anonymous Anonymous said...

The PIMCO article says 82% of CA purchase loans are either IO or neg am. Although I'm sure the bulk of those IO loans are ARM or hybrid ARM, it's possible that they are fixed rate IO as well.

12/16/2005 3:26 PM  
Blogger SoCalMtgGuy said...

There are 30year fixed loans that have an interest only period.

Lets say you did a 30yr fixed, with the first 5yr I/O. The rate is the same for all 30 years, BUT after 5 years the loan will amortize over 25 years, so there will be a big jump in payment.

I do not see very many people doing 30yr fixed loans with the I/O period. The adds for fixed and I/O add to the rate.

Most of these people will do a 5yr ARM, and then refi after that time.


12/16/2005 3:40 PM  
Anonymous Anonymous said...

That is absolutly shocking.

Well, no not really, at least to those of us who already strongly suspected it.

How can so many people be so incredibly foolish? I just don't get it.

12/16/2005 4:04 PM  
Anonymous Anonymous said...

"How can so many people be so incredibly foolish? I just don't get it."

Simple: FEAR and/or GREED. The two emotions which control most people's investment decisions.

Home buyers in bubble land FEAR that if they don't act now they will be priced out forever and will have to live in hondas or tent cities.

And the greed side helps them justify living paycheck to precarious paycheck - with double digit gains "guaranteed" forever, they will come out ahead.

12/17/2005 9:29 AM  
Anonymous Anonymous said...


What a bunch of fools.

And Al Greenscammer and the other Fed Gov's just turn their backs on this speculation and corruption running rampant across the industry.
This is the biggest mania ever. The RE industry will fight this to the bitter end.

12/17/2005 9:52 AM  
Anonymous Anonymous said...

How about Sacramento????

My take on Sacramento "The Big Tomato" and its housing bubble:

There is no reason in h*!! why my house should have increased from $375K (base without options) to $600 K in 2 ½ years. My house is worth about $400 K(base without options) and that is it.

Take it from me I was pretty accurate when it came to forecasting the crash of 1989 – 90.

There really isn’t much of a labor market here once you take out the State jobs and construction, real estate and finance related jobs.

· The state is in financial trouble and it will be getting worse (tech companies continue to shed jobs in the Silicon Valley – over 300,000 jobs disappeared since 1999).

Fewer jobs = less state tax revenue. Higher prison population and welfare utilization = big time drag on state spending.

· Construction of new units is already starting to decline. With that go real estate, insurance and finance related jobs. There are so many new real estate salespersons here.

· Seems like “stay at home moms AKA housewives” and real estate are the biggest job categories among Bay Area people that recently moved to Elk Grove.

No more two income households with good pay in a lot of the new lower end subdivsions.

o The men in the lower end subdivisions primarily work in construction, real estate and mortgage brokerage.

o The men and women in the higher end areas like mine work in health care, government or commute at $2.50 a gallon to the Bay Area.

o Never thought having a State job would be considered prestigious.

The rest of the market consists of people making $20 to $30,000 per year without benefits.

They can’t afford these $500,000 cookie cutter 4 BR, 3 BA homes being slapped up in Lincoln, East Elk Grove and the Sunrise / Rancho Cordova areas.

Prices in Yuba County (AKA Flood Zone Central) are already in the mid to high 300,000 range (1,200 to 1,800 square foot

New houses in Dunmore’s “Provance” in Yuba City are already over $400,000. These houses (future dumps) have great views of the Sri Narayan Hindu Temple, the subsidized Mahal Plaza apartment complex and most importantly, the Roll a Home trailer park and several orchards and dairies (the lovely smell of cow)!

Most of the Sac region buyers use ARM’s, Negative Amortization / Interest Only loans. Or even worst, loans with adjustable interest rates, interest only for the first three years with payment level options (pay what you can afford).

On top of that all I see out here nowadays are new cars and I am talking about 35,000 Pickup trucks with leather seats (!), big SUV’s, BMW’s, high end Toyotas and even Mercedes (in a cow town!).

0% loans and goofy lease deals with high backends abound.

The best job you can get out here is working for the State at 40,000 a year with benefits and no prospects for a payraise.

What happens when the interest rates go up (and they are going up)? Mortgage rates increase at the time of adjustment. What is even worse is that a lot of the people buy with second and silent third loans.

Well the notion of creditworthy borrowers changed in 2003 under pressure from the Bush Administration that wanted to stoke the economy.

Greenspan in his speeches influenced a downward trend in rates, Fannie Mae and Freddie Mac lowered their lending criteria.

More importantly the Chinese Central bank bought a ton of treasury issues to keep rates down so that we can buy more of their output.

All you had to do in the last two years was "fudge" your application, be able to walk, talk and fog a mirror and you got a loan!

12/17/2005 10:47 AM  
Blogger Out at the peak said...

Idaho spud, you are correct that we are in a different situation than before the Great Depression.

However, the money we borrow for our home loans is mostly foreign money indirectly. Asian countries buy our debt in a crazy cycle to keep us afloat so we can buy their exports. If they no longer see USD as the default currency of the world (this will happen when they realize they can't get their principal back), a sell off of USD could occur. Many people can't imagine this happening, but I am protecting myself from this scenario.

Forget about the economy on a global scale. If we are seeing 82% of buyers over 12mo choosing an exotic loan, then we need to raise the red flag that most of them could not afford their residence. Appreciation must halt because the next set of buyers might not be able to afford the exotic loan. Once buyers notify sellers that $x is all they can afford, sellers must sacrific accordingly. Other buyers might become aware that appreciation has stopped or, even worse, depreciation has begun. They will rethink about the opinion that the home is the "best investment."

The fear of being priced out should raise a flag in people's own minds. "If I can no longer afford it, who else can? And who else will buy from me for even more in the future." The reason why the bubble has gone on longer than most predicted is because the market found people who are willing to take an even bigger risk and take out these exotic loans. You can only be creative up to a point with money.

12/17/2005 12:06 PM  
Blogger Mark said...

Out at the Peak:

Maybe the tongue-in-cheek nature of my post didn't come through clearly. I thought it was dripping with irony. Thus the wink ;)

You are absolutely correct that there are some *huge* imbalances in the global economy right now. We are racing through uncharted territory in a field of economic icebergs. It's OK though because Captain Greenspan (and soon Captain Bernanke) knows what he's doing, LOL.

I suspect that they'll end up printing a lot of money, the dollar will devaluate, interest rates will spike, and that all commodities will become *very* expensive (which has already started).

I do not think it's wise to be in cash right now, rather foreign stocks and pretty much any commodity, whether it's orange juice, pork bellies, metals, or fuels. They've all gone up relative to the dollar - and should continue to do so if they continue to keep the printing presses running at warp speed.

12/17/2005 2:21 PM  
Anonymous Anonymous said...

Any idea how many purchase loans there were in 2004? Re-fi loans? The statistic is scary, but it would be nice to know the hard numbers.

12/17/2005 7:42 PM  
Blogger Out at the peak said...

Idaho Spud: Now re-reading your post, I can see the sarcasm. I started getting use to real opposition posts.

I do have a lot of holdings in foreign currency right now (AUS, NZD, CAN, ISK). My commodity will be Canadian oil with dividends (PTF, PVX, PGH). I still have USD investments because I'm hedging against my own intuition. However, it's like 50/50.

12/17/2005 9:08 PM  
Anonymous Anonymous said...

Have to agree with Out at the Peak. WIfe and I are just starting our first career jobs after a grueling 5 years of graduate school. We're lucky; we'll be at the 95th or so percentile of income--almost $170k a year. Your point resonated with us so well that we had to tell you we thought of the exact same thing: If we can't afford it, who the F@#$ else can? For a 30-year loan we found out we can only qualify for about a 500k. This would get us an 800 square foot box in North Orange County. No thanks.

We're renting and waiting, and perhaps we'll now think of holding our cash (future down payment for when the market crashes) in a money market account to hedge against the devaluing dollar.

12/18/2005 1:17 AM  
Blogger Mark said...

Anon 12/17 7:42PM:

From Cumberland Advisors:

"There is a total of $941 billion outstanding in sub prime fixed rate mortgages and ARMs. Of those, $543 billion sub prime ARMs will reset by yearend 2006. The rate resets are underway right now and will accelerate during the next year as the chart shows. That means nearly 4 million households are, or soon will be, feeling this impact."

We *all* will be feeling the impact. There will be failed financial institutions, collapse in housing prices, and a nasty consumer-driven recession.

My defensive positions are gold, big pharma, nat gas, and oil. Biggest concern is that a nasty recession will reduce the demand and value of the fuel commodities. Wish I'd hung on to the coal and base metals :(

12/18/2005 7:40 AM  
Anonymous Anonymous said...

This is what's going on in Florida:

(Yes we're in a bubble here)

Most people earn $30k or less a year. High end hi-tech jobs pay ~$75k; that is close to a 2-3 year experience job in Atlanta where the costs of living are comparable. Florida looks great since there are no income taxes. I'd gladly pay my $3k per year if it meant the highways weren't full of out-of-staters year round, especially people from the northeast who insist on paying $15 for a top meal when most people here qouls charge $7 otherwise.

Mind you that the average wage where I live is $30k, yet all the farms around here are being turned into myriad subdivisions of boring, cookie cutter houses that wouldn't survive the weakest hurricane and are selling for $300k. The neighborhoods offer little for families other than the 6 foot open spaces on each side of the yard to get to the backyard where you can sit on your back patio and watch your neighbors big-screen TV through their sliding glass door.

The highways are chocked full of large 4x4 SUVs and pickup trucks (mind you it doesn't ice/snow and no one ever goes off road) and people are driving 60 minutes each way for a 30 mile commute. I've worked with guys that drove 1 hour to work and 1 1/2 hours home everynight in Land Rovers. (about 50 mile drive). The weekends are spent inside watching TV while the wifies are out at the suburban shopping malls, filling the back of the pickup truck with grocery sacks and clothing purchases. Meanwhile, the guys feel that no Saturday is complete without some kind of home renovation project, necessiting the truck/suv for Home Depot purchases (never mind 4x4 doesn't help in the parking lot).

Meanwhile in the suburbs some old people retire there and complain about all the code violations (grass too tall/short, car parked in street, too many cars, door wrong shade of green, etc). I know people who literally cannot do ANYTHING to the exterior of their home. Might as well live in an apartment so it's someone else's problem if the roof flies off in one of the storms.

Summers are spent inside trying to avoid the searing heat/humidity and the winters are spend inside trying to avoid the 50' wet cold.

If you still want to move to Florida, I've got some swamp I'll sell you for $30k an acre. If you dont' buy it, some developer will and fill it in. That way when the summer rains come it will flood yet I'll be laughing.

12/18/2005 5:55 PM  
Anonymous Anonymous said...

RE: Florida

I wanted to add that across the street there are some high-scale townhomes being built between a grocery store and a busy interstate (should make the 3 weeks a year that the weather is nice enough to sit on the patio very relaxing if you like the sound of 18-wheelers). The sign used to say "starting in the $240s" which was spray painted black around April. I Drove by the place back in Nov and the sign said 1 UNIT LEFT, HURRY. Drove by this week and the sign said 5 UNITS AVAILABLE. Anyone want to bet that when I drive by next month there will be more than 5 available?

12/18/2005 6:00 PM  
Blogger The Oracle said...

How do you like those two dummies in the SacBee Article? Two real brain surgeons on the loose! Just like Bush running the war in EyeRack.

What do you expect when the house in question in 3 blocks from a real rough neighborhood with the largest SacTown gang (Broderick Boys - 300 gang members)?

Those two idiots think that they can sell their house for $880,000 (Wishful thinking). The house is just like mine, has no upgrades, only three car garage and a much smaller lot. To top that off it is in an inferior location. My take is that the house is worth about $575,000 to $620,000 at best not $860,000.

I hope those two have enough to pay the IRS after the foreclosure (IRS charges taxes on forgiveness of debt).

Built on the boom: Realty feels a chill
Days of torrid buying, prices giving way to 'for sale' cycle
By Andrew LePage and Dale Kasler -- Bee Staff Writers
Published 2:15 am PST Sunday, December 18, 2005
Story appeared on Page A1 of The Bee
The day was sizzling hot. So was the market.

Lynette Wall and John McConnell are waiting for someone to make them an offer on their 3,100-square-foot home in West Sacramento. They're not alone: The inventory of homes for sale in the area has swelled as part of a slowdown in the housing market that has seen prices and sales pull back from record-high levels.
Photo gallery

On a sun-scorched Saturday 18 months ago, hordes of people lined up for hours outside a sales trailer in a West Sacramento housing development called The Rivers. Their prize: stylish homes at $550,000 and up.

Now they're lining up to sell. The homes that sold in July 2004 have just been completed, and some owners want out. On one small street, Woodhaven Place, five buyers have put their properties on the market. Three have already dropped their asking prices.

"If I had known a year later that there would be a million homes listed, I might not have bought," said Lynette Wall, a real estate agent who helped her husband buy an $809,000 home on Woodhaven.

Now, facing a $6,000 monthly payment on a vacant house, they've put it up for sale. But there are no illusions about a big payoff; she says they're hoping to make "a little bit of money."

A wintry chill has descended on the Sacramento housing market. Sales have slowed, cancellations of new-home purchases have soared, and prices in some areas are edging downward - signaling the end of an epic housing boom that increased wealth, generated jobs and turned real estate into the healthiest sector of an otherwise sluggish economy.

Experts aren't sure how much the market will weaken, but most say the region is experiencing something beyond a seasonal lull. And it appears the area's troubles are worse than in most other parts of California.

"At the moment it is one of the weakest in the state," said economist G.U. Krueger of Irvine consulting firm Institutional Housing Partners. "I can't see anything that's weaker."

Still, most experts don't see Sacramento crashing. They predict a soft landing in which prices stagnate or decline modestly for a while, and then increase slightly over the next year or two.

But brisk sales and 25 percent annual price gains - fed by low interest rates, easy credit and a tide of Bay Area transplants - are over. Real estate agents now talk about the biggest inventory of unsold homes in a decade.

"For Sale" signs have doubled in the past six months. Cancellations of new-home purchases shot up 260 percent in the third quarter over last year, says Hanley Wood Market Intelligence.

Michael "Brick" Brickner, an agent with Lyon Real Estate in Sacramento, said he's "scared as hell" that a slew of homeowners will list their properties come January, figuring the new year is a better time to sell. If that happens, "it's going to be a lot more challenging to sell a house."

Some segments of the market are in tougher shape than others. West Sacramento and Lincoln, where construction and prices exploded, are among the most susceptible to price decline, experts say. Anything above $650,000, regardless of location, could see price slippage - the inventory in that range keeps growing, as builders continue to churn out high-end homes.

Rising mortgage rates, now above 6 percent, are a key reason why the market is slowing. In addition, banks are tightening their lending standards, especially on the riskier types of loans that helped fuel the boom.

"You can't buy as much house, it's not as easy to qualify and (lenders) are looking more carefully at borrowers and appraisals," said Vicky Henderson, a loan consultant at Vitek Mortgage Group in Sacramento.

Sacramento may be particularly vulnerable. Bay Area emigrants aren't snapping up Sacramento properties as quickly because it's taking them longer to sell their existing homes, said analyst Greg Paquin of the Gregory Group in Folsom.

Another issue: Investors are leaving. For the first nine months of the year, 16 percent of all sales in the area went to investors or speculators, one of the highest percentages in the nation, according to market researcher LoanPerformance Inc. Krueger says many investors, sensing the market has peaked, are cashing out of Sacramento and putting their money into less expensive markets in the Midwest and South.

"I felt there were just way too many investors out there, and everyone was talking about real estate," said Edwin Covarrubias, 35, a full-time Bay Area real estate investor who sold two Sacramento homes during the past year and is plowing his profits into duplexes in Texas.

He still owns rental property in Sacramento and plans to buy here again, possibly as early as next summer. By then, he figures, prices will have dropped as much as 10 percent.

Such expectations are making homebuyers pickier. After several years of bidding feverishly, Sacramentans are making offers below the asking price.

"I'm looking for a bargain," Rose Chan said recently as she and two friends toured new $900,000 homes in West Sacramento's Bridgeway Lakes development. Stopping in at Shea Homes' sales office for the Westport neighborhood, she was told she could receive $65,000 in builder "upgrades" and other incentives on a $948,000 home.

But Chan wasn't ready to bite.

"It's too early to buy," said Chan, an accountant who lives in Sacramento's Arden Park area.

The slowdown is ironic in one respect: Prices have risen so sharply, fewer Sacramentans are able to buy. Just one in five Sacramentans can afford a median-priced home, says the California Association of Realtors.

In the Sacramento resale market, sales volume fell nearly 20 percent in October from a year ago, said DataQuick Information Systems. The median price of a resale home in Sacramento County fell 2 percent to $363,000 in October from $372,000 in August, according to DataQuick.

Resale prices are still about 17 percent higher than a year ago. But until recently, the year-to-year gains were 25 percent, among the nation's highest.

As for new homes, prices could take a hit because builders keep building. "The new-home market is more volatile than the resale market because of builders' desire to meet their monthly sales quota," said John Burns, a real estate consultant in Irvine.

Sales of new homes in the area fell 49 percent in the September-through-November period compared with last year, according to the Building Industry Association, which tracks 55 percent of the market.

Builders are offering incentives worth thousands of dollars and are giving away upgrades - nicer kitchen counters, for example - ordered by previous buyers who backed out.

"None of us is saying, 'Ah, it's just seasonality and it will pick up in January,' " said Kevin Carson, president of the Sacramento division of John Laing Homes.

The slowdown could deprive Sacramento of its strongest economic engine the past few years. Construction accounted for 26 percent of the region's 147,400 new jobs the past 12 months.

Experts hope the rest of the job market will pick up the slack.

"I think we have enough fundamental strengths in our economy," said David Lyons, labor market consultant at the state Employment Development Department. "Technology's coming back. You know, Intel is quietly hiring."

But Stephen Levy, head of the Center for Continuing Study of the California Economy, said the slowdown will be felt statewide.

Though it won't be as severe as the early 1990s recession, "it will be a drag next year," he said.

And the dropoff in price appreciation will curb the "wealth effect" that's enabled homeowners to borrow against their equity to raise cash for new cars, home improvements and other goodies.

"It definitely worries me," said UCLA economist Ryan Ratcliff. "It's been sort of the life preserver ... of spending, nationally and locally."

Of course, this could be nothing more than a temporary lull. Last fall, for example, Orange County prices dropped below their May 2004 peak but bounced back early this year.

Sacramento may see a return to a "normal" market, said Jeff Culbertson, the regional head of Coldwell Banker.

"Normal is where people can make an educated decision," he said. What's not normal "is people lined up outside homes waiting to make purchases."

Not too long ago, it seemed normal to wait in line to buy a house. It was a sign of the boom, like hard hats and road graders: homebuyers queuing up at a new subdivision.

On a Saturday in July 2004, the line formed at The Rivers, outside a sales trailer operated by Sacramento homebuilder JTS Communities Inc.

Perched next to an old golf course just minutes from downtown Sacramento, the subdivision is one of several projects bringing high-end housing to West Sacramento.

On this day, 70 lots were being released. As the line of buyers lengthened, sales people passed out water bottles to the parched masses.

John McConnell, an Elk Grove building contractor, waited in line with his real estate agent and future wife, Lynette Wall. Hours later they got inside the trailer and he reserved a two-story, 3,100-square-foot home on Woodhaven Place. The price: $809,000, including an unexpected $85,000 "lot premium" for sites next to the golf course. But he wasn't complaining.

"At the time we all thought it was a fairly good deal," McConnell said.

An agent who works for Wall snapped up a property on Woodhaven, too. When the trailer closed, at 10 p.m., the lots were gone.

McConnell said he and Wall originally planned to live on Woodhaven. By the time construction was completed two months ago, they'd changed their minds. The purchase was now an investment - and a somewhat risky one at that.

They listed the property in early October for $885,000. Soon they dropped it to $880,000.

They need $860,000 to break even, Wall said, given the closing costs they paid, the $6,000 monthly mortgage payments and a 3 percent commission to the buyer's agent.

Complicating things: competition. Four other homebuyers on the two-block street are trying to sell, including Wall's agent. And the builder is offering discounts on four other Woodhaven homes it hasn't yet sold. All told, one-fourth of the street is for sale.

Wall has faith, but acknowledged she's getting uneasy.

"I knew it was going to have to slow down (but) I didn't think we would have so much inventory," Wall said. "I'm hoping somebody will offer me a fair deal that'll make me a little bit of money."


12/19/2005 11:23 AM  
Anonymous Anonymous said...

"Krueger says many investors, sensing the market has peaked, are cashing out of Sacramento and putting their money into less expensive markets in the Midwest and South."

Great, the people who propelled the California market to unsustainable highs are now doing the same things in other parts of the country. Idaho, Dallas, and Houston all come to mind.

12/19/2005 11:49 AM  
Blogger superhotasses said...

82%?????? That is mind boggling!

1/20/2006 8:32 AM  

The housing mess is really one big scandal.

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