The course of a financial market, particularly the real estate market, is a long and winding road full of twists and turns and unexpected outcomes. It was certainly foreseeable that banks and builders might fail and the GSEs might need to be bailed out, but the how and when of these occurrences are always unpredictable and newsworthy.
The Great Housing Bubble is the third real estate bubble in California since the 1970s. Each one seems to reverberate causing the next one to be even larger and more painful than the last. The drop in prices always leads to the market entry door of affordability. It is possible that history may not repeat itself for a third time, but this seems unlikely. There was good reason for prices to retreat to this level: it doesn't make much sense to overpay for a depreciating asset. There doesn't seem to be any reason this will not happen again (wishful thinking by those who do not want it to happen is not a reason).
You would think that million dollar foreclosure would be very rare. Aren't $1,000,000 homes the exclusive enclaves of the rich and famous. The many pretenders who paid more than $1,000,000 for tract homes would undoubtedly like you to think so, but most of these houses were purchased by high-income (or high stated-income) individuals and families utilizing exotic financing.
Very few of the loans issued in high-end California suburbs were conforming loans because during the bubble rally, the cap was far too low to be a viable financing alternative. Also, since people in these suburbs do not make the money necessary to support home prices, particularly peak prices, many, if not most, of the loans were stated-income, liar loans. In order to get the monthly cost down to manageable levels, many borrowers used Option ARM loans and have only been making the teaser-rate payment. In short, most of the loans issued in high-end California suburbs were Alt-A and jumbo loans.
It is not a matter of if these loans will blow up; it is only a matter of when.
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
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The High-End Suburbs Will Also Crash.
