Defaults Rising in Luxury Home Areas

Mortgage defaults in high priced markets of the Bay Area are increasing, according to the SF Chronicle. In many upscale markets such as Alamo, Los Altos, and Greenbrea, there were twice as many notices of default filed this year versus the same period last year.

“The question is, could this be the beginning of something that gets a whole lot worse?” said Andrew LePage, an analyst with DataQuick. “The distress in the high end right now is important to watch; it helps explain why we have more sales (of high-end homes). More distress means more-motivated and more-realistic sellers. We’re just starting to find out whether the riskier loans that were not subprime will come back to haunt us.”

For example, according to the article Saratoga, an exclusive community with a median home price of $1.34 million, had 101 default notices filed for the first 9 months of this year, up from 43 for the 1st 9 months of 2008.

The combination of rising unemployment at all income levels and the recasting of exotic loans used for expensive homes are likely culprits for mortgage problems infiltrating housing’s top tiers, experts said. And values have slumped for homes at all price points, leaving many high-end homeowners, like their counterparts at lower prices, upside-down.

“A lot of people in California who own $1 million to $3 million homes bought larger and more expensive homes than they really needed,” said Peter Schiff, president of Euro Pacific Capital in Darien, Conn. “Part of their purchase was for investment purposes, because they assumed values would go up. Now that people have a more realistic outlook on real estate prices, it changes the dynamic. There is very little reason for someone with a million-dollar mortgage on a $700,000 house to struggle to make that payment. More and more people are going to walk away from these homes.”

“At the mid- to high end, it’s now like October 2007 was for the broader housing market,” said Mark Hanson, principal of Menlo Park’s Field Check Group, a mortgage consultancy. “Sales are drying up and a lot of price discounting is going on. Notices of default are sharply increasing.”

When that happened two years ago across the broad market, “it led to foreclosures, and that’s what kicked off the housing implosion,” he said.

While low end prices appear to be stabilizing, there is still weakness on the upper end of the market. With more default notices being filed, we will probably see weakness in this sector for some time.

Read the whole article here.