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Wednesday, Jul 24, 2024

Rising Delinquencies Send Shockwaves Through Credit Strata

Where is the high-end market heading these days?

The high-end market is “holding fairly steady, and is surprisingly resilient,” said Tim Kruger, executive vice president of Sherman Oaks-based Private Mortgage Banking Group, which provides “concierge-level” mortgages to the luxury market.

But, he warned, “There are some storm clouds brewing on the horizon.”

One cloud is the recent meltdown experienced by subprime mortgage lenders, who catered to those with bad credit and now are getting burned by mounting foreclosures.

“There aren’t many luxury home owners who need to qualify for subprime loans,” said Kruger. “But the collapse of that market is starting to have a trickle-up effect into other credit strata. The net result is the possibility of a sort of mini-credit crunch in other grades.”

And this may mean a smaller pool of potential buyers for high-end properties, including in San Diego, said Kruger.

In agreement is Ann Brizolis, executive director of Prudential California Realty’s estates division in the San Diego region, who considers the subprime market something that, “We need to be concerned about. Since there has been an abundance of mortgage money available, you had subprime lenders come on the scene and start making loans to people who wouldn’t necessarily be a good credit risk or borrower. Some of this market is responsible for foreclosures. A few bad apples spoil it for credit-worthy borrowers.”

Here To Stay

According to First Republic Prestige Home Index, released by San Francisco-based First Republic Bank, San Diego property values dropped 1.3 percent from the third quarter of 2006 to the fourth quarter, and gained 3.3 percent from a year ago, with the average luxury home in San Diego now valued at $2.1 million.

The 1.3 percent change in the fourth quarter represented the first drop in luxury home values in three years, according to the index. The average luxury home in the region has risen more than $300,000 during that period, and prices have more than doubled since the fourth quarter of 1999.

“Speculators have come out of the market,” said Michael Taylor, sales agent for Dougherty Taylor Premier Estates – Prudential California Realty. “It used to be, buy in today, because it will be worth more tomorrow.”

Nowadays, investors are more likely to put money into bonds or Real Estate Investment Trusts, or REITs, and are no longer buying speculative properties, he said.

“It was like when people were buying every high-tech stock, thinking that it would go up, back in ’89 and the ’90s,” said Taylor. “You do have speculators selling off products, and that tends to artificially inflate inventory for a period of time and artificially depress prices until inventory is absorbed. At the high end, it isn’t as dramatic.”

Michael P. Morgan, senior vice president of Wells Fargo’s Wealth Management Group in San Diego, agreed that high-end homes are not as affected by market forces as those valued at under $1 million.

“People with that kind of wealth are buying as a long-term holding, and they know what they want,” he said. “They don’t change residences as much as others, and they have a tendency to have more residences. And, if you stay in a residence long enough, the value will increase.”

Also likely to increase is the demand for personal banking services, said Morgan.

“There is a huge transition of wealth with the baby boomers,” he said. “Trillions and trillions of dollars.”

Kruger agreed.

“The market is going to continue to increase,” he said. “If you look at the demographics of the baby boomers, the wealthiest generation in our history, the biggest wave of boomers are hitting the prime age group, and making their largest purchases, and are yet to come into the wealth they will have. The need for private banking services is going to increase over the next five to seven years.”

He also predicts that the second-home market will rise as well locally, which, said Kruger, “bodes well for the market in the long term.”

Meanwhile, life is good for Norma Nelson-Wiberg, branch manager at Wells Fargo Home Mortgage in Rancho Santa Fe. The branch generated $530 million in new mortgages in 2006.

“I did more volume in ’06 than in ’05, and I am doing more volume now than in ’06,” she said.

In 2005, Nelson-Wiberg closed on $132 million in mortgages; in 2006 it was $136 million; and this year, she expects to rack up $200 million , 98 percent of them in San Diego.

“I’m going bigger and stronger than ever,” said Nelson-Wiberg.


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