Giving context to those alarming foreclosure numbers.
With so many scary headlines these days—about real estate, about the effect of all those foreclosures on real estate, about the effect of all those foreclosures on the national economy, about the effect of all those foreclosures on the global economy, about the effect of all those foreclosures on the positions of the planets—it would be helpful to compare the foreclosure rates of cities here at home, in the Bay Area and South Bay and on the mid-Peninsula, with the rates of cities elsewhere in California known for their foreclosure problems.
It would also be helpful, and potentially reassuring, to look at two foreclosure-related indicators that suggest how long and deeply the foreclosure crisis might hit each city, here and elsewhere in the state.
Using data from the Department of Housing and Urban Development (HUD) Web site, I've charted three key foreclosure-related statistics for three groups of cities or neighborhoods.
The charted foreclosure-related statistics, as estimated by HUD, are:
The first statistic, estimated foreclosure rate, is straightforward. The second and third need explaining.
The estimated 90-day vacancy rate is supposed to be an indicator of the number of ultra-motivated ("desperate") sellers in each city or neighborhood. Desperate sellers are thought to a) create downward pressure on prices, and b) be tomorrow's foreclosures, which in turn create even more downward pressure.
However, it's my opinion that the 90-day vacancy rate is more useful in determining the number of unsold new homes on the market, which indicates how well new-home developments are selling, which in most markets (those with plenty of land to build on) indicates how much inventory is on the market (including brand-new homes competing with older, worn, functionally-obsolescent homes) which indicates how well homes are selling now and are likely to sell in the near future, which indicates how distressed that locality's market is.
Why do I distinguish between new and resale homes? For two reasons. First, I don't believe that the 90-day vacancy rate is a particularly relevant leading indicator of foreclosures and short sales in the core Bay Area because, in an area with minimal new construction, desperate builders are far less likely to drag down the prices of all homes, new or resale. And second, in my experience, Bay Area homes in foreclosure, and/or short sales, are rarely vacant. They're occupied right up to the bitter end—and why not?—until the moment the Sheriff's deputies evict the occupants, whether those occupants are owners or renters.
But to some extent the 90-day vacancy rate does suggest the number of motivated sellers in any area, including ours, since vacant homes are owned not only by the relatively few builders active but also by homeowners who've moved out and are paying two mortgages, and by the heirs of deceased homeowners.
The other indicator, "high cost" loans, is defined by Federal regulators as loans with interest rates 3 percentage points higher than the benchmark (or market average) for first loans, and 5 percentage points higher for second mortgages. These higher rates are a risk premium, a premium that when these loans were made was thought by lenders to offset the risk of a) offering 100 percent financing and option-ARM loans, and b) lending to borrowers with poor or non-existent credit and undocumented income and assets. Or some unstable combination of a) and b). And we know how that turned out.
The three groups of cities or neighborhoods I've charted are:
Before we look at individual California cities and neighborhoods, let's get some broad context. In November Nevada had, for the 20th consecutive month, the nations' highest foreclosure rate at 1 in 91 households, or slightly more than 1 percent. California was second, with 1 in 130 state-wide, or about 7 tenths of 1 percent.
Now let's look at California cities, notorious foreclosure hotspots, outside the core Bay Area.
Although the Nevada and California state-wide foreclosure rates are high, these city foreclosure rates, at anywhere from 5 to 12 percent, are staggering. Note that the ratio of high cost loans to foreclosures is relatively constant from city to city and seems to be a reliable indicator of defaulting borrowers, while the ratio of homes vacant 90 days to foreclosures varies significantly among cities. How close to home is this crisis? Antioch, Santa Rosa and Vallejo are, of course, Bay Area cities, but they're on the outskirts, farther from the attractions that make the Bay Area such a desirable (and expensive) place to live. In addition, they're in areas where land is readily available for new home development. During the boom these cities were often affordable second choices for buyers priced out of hot Bay Area cities.
The high ratio of high-cost loans issued during the peak of the boom, from 2004 to 2006, suggests that these cities were popular with what might be called "second-choice borrowers", buyers who for a variety of good reasons were not the mortgage banking industry's top choices. And as we're finding out, the high default rate of these high-cost loans—even high-cost loans modified by lenders to forestall foreclosure—indicates that many should never have been made and will not survive.
Another city on the chart, Stockton, isn't far from the Bay Area, but it and Sacramento are Central Valley cities, even further removed from the Bay Area "good life". With over ten percent of its homes in foreclosure, Stockton has the dubious distinction of "foreclosure capital" of America.
Let's bring it home and compare this dismal picture with Santa Clara County.
There the foreclosure situation is a mixed bag, depending on city and neighborhood, but it's obvious that, on the whole, things are much less dire in Santa Clara County than on the edges of the Bay Area or in the Central Valley. San Jose is the hardest hit, but a city that big, with a price range so relatively broad, has nuances to its marketplace that resist generalization. I've separated two of San Jose's most affordable neighborhoods, Alum Rock (often called East San Jose) and Burbank, an unincorporated area in west San Jose, to show how price-driven the foreclosure crisis is. Alum Rock, for example, is almost as hard hit as the Central Valley, and its percentage of high-cost loans is also almost as high.
But move up the next level in price, to the city of Santa Clara, and you see how rapidly both the percentage of homes in foreclosure and percentage of high-cost loans declines. Keep moving up a notch in price, to Sunnyvale (seemingly almost identical to Santa Clara's numbers, but most foreclosure activity in that city is confined to affordable North Sunnyvale), to Campbell, to Cupertino and Mountain View, and again, the foreclosure numbers decline progressively. Reach the rarified air of upper-middle class cities such as Los Altos and Palo Alto and you'll find negligible foreclosure activity and high-cost loans.
Next, let's look at San Mateo County:
Much the same story. The most affordable city, East Palo Alto, has by far the highest percentage of foreclosures and high-cost loans. Move up one notch in price, to North Fair Oaks, and the numbers aren't as distressing and, in my experience, the foreclosures in this neighborhood are concentrated mainly at the northern end where prices are lowest. Move up another notch, to Belmont and San Carlos, and the foreclosure statistics improve dramatically. Move up yet again, to a city like Menlo Park, and the numbers improve further, although here they're deceiving. Compare Menlo Park (all) with ultra-expensive Menlo Park (west) and you'll see that ultra-affordable East Menlo Park must account for most of Menlo Park's foreclosure activity. San Mateo's numbers are similarly deceptive, with virtually all its short sale and bank-owned activity east of El Camino and, particularly, east of 101.
Note that the three most expensive towns on the San Mateo County chart, Atherton, Woodside and Portola Valley, have a proportionally higher rate of homes vacant 90 days or more. Are these wealthy enclaves the next to topple? Since most homes in the $3-5M range are purchased with all or mostly cash, it seems unlikely that "high cost" loans will bring these markets to their knees, at least directly. My guess is that the long-time vacant homes in these towns were purchased to undergo substantial renovation or be torn down for new homes, sometimes, yes, by speculators/builders, but also often by their eventual occupants.
Despite the chatter I've heard on local blogs about how hard hit even midrange neighborhoods are by defaulting borrowers, it's obvious that the direct fall-out from the subprime mortgage debacle has been limited to the lowest end of the price range. Yes, the numbers are scary, but if you live in a neighborhood that sells for more than about $700k these days, it's unlikely that either you or your neighbor will be the next foreclosure statistic.
But if the recession, so recently declared, hits Silicon Valley hard, and if the stock market continues to lose big chunks of value, these factors could cause the economic distress that traditionally increases the foreclosure rate. This, in turn, could affect the prices of midrange and top-end homes.