Real estate across the bay – Looking at Hayward and San Mateo. California financial bubbles springing up once again in the Bay Area. Hayward up 56 percent from last year?
I wanted to compare two cities across the bay that are showing the split in California housing. In one select area we are seeing prices persistently high and in another area, we have seen prices come down hard. Yet the interesting thing about the data is that it shows us that both areas are seeing wild price swings to the upside again reminiscent of the California housing bubble earlier in the last decade. Now most of the recent boost in these areas has come from the government tax credit and pulling demand forward. But will this last given the state of the California economy? From looking at these two areas, it would appear that the Bay Area is seeing housing bubbles once again. Here is a map of the areas in question:
Now to most people outside of California, this doesn’t seem like a big deal. But ask anyone in the Bay Area about Oakland versus San Francisco or Hayward and San Mateo and you’ll get two very different stories. And the price of housing reflects this difference:
We should spend some time analyzing the above data since it gives us good perspective with the market. All zip codes in Hayward and San Mateo are up in price over the year. In fact, in one Hayward zip code prices are up 56 percent! This brings back memories of the California housing bubble. Now part of this is also being driven by banks retooling and understanding how to squeeze people into FHA insured loans that require only 3.5 percent down. If you combine this with the expired tax credit, many people were able to move in with nothing down. Nothing down was part of the toxic mortgage problems in the state but also has created an incentive for strategic defaults if things go bust.
San Mateo is clearly more expensive but sales are brisk in both areas. In fact, in the 94403 zip code prices are up 30 percent for the year with 28 sales. This is a good set for measurement. What does this tell us? That housing bubbles are alive and well in both Hayward and San Mateo and with two different audiences.
For each zip code in Hayward a family would need to bring in at least $100,000 a year to purchase the lower end homes. Yet the median income for the area is $61,000 and roughly 20% of families bring in more than $100,000 a year. This is typical of areas in California with housing bubbles.
The results for San Mateo are similar but the data is pulled higher but not to a level that would justify current prices:
The median household income for San Mateo is over $100,000. Two zip codes in San Mateo have prices of $662,000 and $710,000. Let us just say we are looking to buy a $700,000 home. A household would need to gross roughly $250,000 per year to be able to afford this house without stretching their budget. The data shows that less than 15% of households meet this metric.
In other words, you have the same tiny sliver of people that can afford a common home in these areas. This was very common in bubble areas across California. The above information shows us that in Northern California home prices are once again reaching bubble levels. This is unsupportable and will adjust. Short of families doubling income in the next year, it is hard to see this remaining this high for a very long time.
Leave it to California to start housing bubbles again.
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Strategic Defaults go Mainstream – Why the strategic default trend shows us the need for larger home buying down payments.
You know something has gone mainstream when it hits 60 Minutes. The latest episode on 60 Minutes discussed the topic of strategic defaults and how 1 out of 5 current foreclosures are actually occurring because people are voluntarily choosing not to pay their mortgage. This is a trend that started last year and has picked up steam. The reason strategic defaults have gained favor is partly due to the fact that many Americans have chosen this as a path forward in dealing with large mortgage payments on underwater homes.
The 60 Minutes piece is worth watching. It seems like the question of morality comes up a few times. But I can assure you that if people went in with 20 percent down, they would think multiple times before walking away. Also keep in mind that big banks went into deals with little down and have also walked away from giant deals:
“Despite some indications that the economy is recovering, the housing market remains a disaster area. Currently, about seven million homeowners are behind on their mortgages and that number is only getting worse.
Banks, with the help of the government, are offering some relief to homeowners who’ve lost jobs and just can’t meet their payments.
But there’s a growing number who can pay but are simply walking away from houses that are now worth as little as half of what they paid for them.
It’s called “strategic default.” People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders – the banks – as zookeepers of an ever-growing parade of white elephants.
In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.”
Yet one point wasn’t discussed and this was why strategic defaults are only occurring during this housing crisis. That is, people purposely trying to lose their homes. The reason has to do with toxic mortgages like option ARMs that required very low down payments (or nothing). The minimum down payment we should require on all home purchases is 10 percent. Why? To avoid massive problems like this. Someone that has 10 percent in a home will think twice about walking away. They also won’t jump into a home with no skin in the game. Until we change these rules, we can expect more people to walk away from mortgages that are more valuable than the homes they are attached to.
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401k retirement account an antiquated investment vehicle? As economy stalls companies stop matching 401k contributions.
Many Americans are questioning the idea of a 401k. As many baby boomer near retirement, their 401k is largely seen as their primary retirement account yet with current stock market fluctuations, many are wondering if staying with a 401k is smart. Many Americans have already seen the gyrations with housing values and don’t want this to happen in their retirement accounts. But what people forget is that when baby boomers start drawing from their 401k (something starting now), they will need to sell their stocks to draw on their accounts. You already know what happens when you have more sellers than buyers and prices actually go down for stocks. Younger Americans are taking the brunt of this recession and many are not even receiving company matches to 401k accounts. Take a look at this account:
“(PTMoney) Beginning this month, my company is no longer matching my contributions to the company 401k. That’s essentially $2,000 less in compensation I’ll receive this year, if they don’t match for the remainder of the year. They do say that this is a temporary, precautionary move. Still, this is disappointing news.
I thought about making this post a rant about why that is a horrible cost cutting idea (hurts those that are most responsible, doesn’t really save that much, etc.), but I decided instead to talk about what I’m going to do in light of this change. How am I going to respond?
I also don’t want to rant because I know (a) not everyone even has this benefit to begin with, (b) not everyone even has a job right now, and (c) I don’t want to let them (my company) know it got to me.”
And this isn’t just one case. Millions of Americans have seen their employers cut back on 401k matching contributions. Now for the company match, this is usually a good deal because it is guaranteed money (usually up to 3% of your pay). But even that has now been cut for many. Yet the reality is, most Americans don’t even hold that much money in retirement accounts:
“(Census) There was at least one retirement account in 57 percent of the households. The average or mean amount in the retirement accounts was $49,944, but the standard deviation was $174,193, suggesting that the dollar amount held in retirement accounts varies widely by individual households. The median amount held in retirement accounts–$2,000–provides another indication of the wide variation in the amounts held by households.”
The above variation and data simply reflects the fact that the top 1 percent control some 40 percent of all financial wealth. With wages stagnant I’m certain that many Americans are simply keeping their money especially if their companies are not matching their funds. And with massive market volatility, many are wondering if the market is rigged.
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