Rich Americans Default on Luxury Homes Like Subprime Victims

May 6 (Bloomberg) -- By Bob Ivry and Dan Levy

HIGHLIGHTS:

The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, California, show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.

• Jumbo lending Slowed: in the fourth quarter to $11 billion, or 4 percent of the mortgage market, the lowest quarterly figure since Inside Mortgage Finance, a Bethesda, Maryland-based trade publication, started tracking the data in 1990.
• Sales: for all homes in the state increased 2.5 percent last year from 2007, sales of homes valued at more than $1 million declined 43 percent to the lowest since 2003, MDA DataQuick reported. Part of the reason is falling prices as California’s median home price dropped 41 percent in February to $247,590, according to the state’s Association of Realtors.
• David Adamo, chief executive officer of Luxury Mortgage Corp.: “Just like homeowners in smaller homes, these homeowners anticipated being able to refinance mortgages to continue making payments and at a future date sell for a gain and put it toward their next home. That strategy backfired when the market for jumbo mortgages dried up.”
• Andrew Laperriere, Managing director at research firm International Strategy & Investment Group: “There was this unrealistic view that the crazy financing was limited to subprime when of course it was across the board,” in addition “A lot of jumbo mortgages were nothing down with high debt-to-income ratios.”
• Philip Tirone, president: of Los Angeles-based Mortgage Equity Group Inc., Values have taken longer to decline in more affluent areas, taking some homeowners by surprise. People are coming to me to do a refinance or buy another property, and what they thought they had in the equity of the home they don’t have and they don’t know what to do.”

COMMENTS

All real estate pricing is connected. Don't expect your home to be isolated from the equity storm.

Near Term: Loans qualification for Jumbo loans can be very conservative compared to Freddie and Fannie conforming loans. Look for values to keep sinking for 2009.

New Threat: Rising unemployment is an emerging home equity threat that has not been fully valued into the majority of econometric type models. Yes, if you lose your job you might not be able to pay the mortgage there by forcing you to take action against your best economic judgment.

Finally, the message going forward continues to be the same, stay liquid and protect principle. Deflation is counter intuitive to inflation. Almost all Americans only understand inflation and that type of strategy will prove unsuccessful these next couple of years. Save your money if you can and only spend what you feel you must.

James Monachino