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Is California’s High-End Housing Market In Trouble?
While sales of low-priced foreclosed homes are sparking bidding wars in some areas and there’s talk of healing in California, a huge storm cloud hovers over the Golden state: the high-end real estate market.
In California, delinquencies on jumbo mortgages, which are too large for government backing (and start at anywhere from $417,000 to $729,750) rose for the 33rd consecutive month in February, according to a report out from Fitch Ratings on Thursday. Fitch says that 11.6% of prime jumbo loans in the state are 60 days or more delinquent.
Congress tried to help two years ago by increasing the limit for jumbo loans to as high as $729,750, and some borrowers have likely been able to take advantage of those higher government limits by refinancing. But borrowers who owe more than their homes are worth are out of luck.
While rates on jumbo loans are still around one percentage point higher than on conforming loans, it’s not really the rate that’s the problem–after all, jumbo rates below 6% are pretty good. The bigger problem is that it’s tough to qualify for a jumbo loan. Banks require at least 20% down, and often more in shakier housing markets. Many borrowers looking to refinance don’t have much equity and aren’t too excited about sinking more money into their home to refinance.
California’s high-priced real estate has always had a large share of the jumbo market. “California is driving the national performance for this sector since it has the largest concentration of prime jumbo loans,” says Fitch managing director Vincent Barberio in a release. California’s share of the market is 44%, the state with the next highest share is New York (7%) and then Florida (6%).
Now, even though home prices have fallen by more than 30% in the state, most of these high end homes still are too costly to fall out of their jumbo status.
The question now: will these jumbo delinquencies wind up tumbling into foreclosure? Many think it’s more likely that the banks will want to keep yet more property off its books and arrange short-sales, in which the property goes for less than is owed on the mortgage.
So, for rich folks with cash the “deals,” are out there. Today the Journal reported that Hilton CEO and president Christopher Nassetta just sold his Los Angeles home for $18 million–35% less than what the 2007 purchase price and nearly $10 million off its list price.