CNBC Story This Morning

Because they own a lot of real estate and would take a bath if it corrected.

The cause of the crash in Miami was subprime, Alt-A, flippers, and overbuilding. The cause of what's about to happen here is the turmoil on Wall Street, which represents 33% of all jobs in the city, which means lower incomes. It's derivative of subprime, Alt-A, M&A, all of which are dead for the foreseeable future as banks restructure, reduce risk and leverage.

In Florida, before a construction loan is released, the building must have contracts on 51% of the units. Given that: "We are buying product for .30 on the dollar."

No they're not.

"We don't try and time a bottom, we look for good deals in the current market and buy and hold for the long term"

Some are out there - just not many.

Steve - you totally talk out of your ass "Wall Street, which represents 33% of all jobs in the city"

not even close. Wall Street is a part of NY but not even close to 33% of all jobs. You are a complete moron.

Funny that this story mentions Vegas. I got a 45% discount of my place there. didnt even buy it as an investment.

In Florida, before a construction loan is released, the building must have contracts on 51% of the units. Given that: "We are buying product for .30 on the dollar.

No they're not."

So what you are saying is that a CEO of a major real estate investment firm and part of the Obama election team lied to millions of investors all over the world. Get over yourself steve. I believe him.

"Wall Street is a part of NY but not even close to 33% of all jobs."

You are correct, petrfitz, I misspoke. It's 33% of all INCOME.

"I got a 45% discount of my place there."

Discount from what? An unrealistic price?

"a CEO of a major real estate investment firm and part of the Obama election team lied to millions of investors all over the world"

Uhm, why no, of course they wouldn't lie! Dottie Herman never does, does she?

Does somehow that he forms part of "the Obama election team" make him a saint? That's what you seem to be implying.

Again, .30 on the dollar FROM WHAT?

Just not true. But it sure makes him look like a savvy businessman, doesn't it?

Now that's what I want to hear!

Rule #1:
Yes, BUY NOW!! It's ALWAYS a good time to buy in Manhattan. Period. Finito. End of Story. Owarimashita.

Rule #2:
Foreigners will save Manhattan

Rule #3:
Wall St. layoffs won't affect Manhattan real estate at all

For a second there, I thought there might be a conflict of interest for them to pump real estate as they are, well, real estate investors... BUT, thank goodness for Rules #1,2 and 3 which override all concerns. whew!

MMAfia, real estate people NEVER LIE. Learn that.

Donald Trump, for instance. Always tells the truth. Never cheats on his wives. Once he said that in Manhattan it was better to live in an apartment than in a townhouse.

Might that be because he develops apartment buildings?

Nah!

The more JuiceMan, petrfitz, malraux, ccdevi, vverain type, the more it sounds to me like they're typing with their fingers crossed.

The other bulls have left the building.

Yeah, I heard the same segment this morning. JuiceMan, you forgot to mention the part where St.Peebles himself stated that the only reason price comparisons are up in Manhattan is becuase of 15 CPW and the Plaza condos. The rest of that "panel" were just a bunch of blowhards. The real estate market "survived" 9/11 because of a massive program of liquidity injection by the Fed that was fueling the homebuilding and lending industries all over the country. Not only did Manhattan directly benefit from the credit largesse, it also enjoyed the second order benefit of jobs and bonuses on Wall Street linked to securitization and such.

Oh, east_cider, you cite fundamental economic principles that do not apply here in Manhattan.

"it also enjoyed the second order benefit of jobs and bonuses on Wall Street linked to securitization and such"

Have I been saying that? Never. I would NEVER link what happened on Wall Street from 2003 on to something as silly as securitizations. You know, Triple-A ratings on securities tied to subprime mortgages. No one would ever give a Triple-A rating to a security backed by loans to people who can't pay them back, and then give themselves huge bonuses for doing such a tremendously good job.

That would NEVER happen, would it, MMAfia?

Not ever.

"So what you are saying is that a CEO of a major real estate investment firm and part of the Obama election team lied to millions of investors all over the world. Get over yourself steve. I believe him.

um,...Senior management at Bear Stearns or Lehman never lied either and portfolio managers never talk up their book on cnbc either....

"Manhattan has already fallen 10% and we don't expect it to fall more than another 10%"

A guy that is long tons of manhattan real estate thinks we are down 10% and have another 10% to go, yeah that's bullish...what do you think he would say if he didn't own any manahattan real estate?

"Part of the Obama election team lied"!

NO! NO! NO!

They didn't get cheap mortgages from Countrywide, either, did they?

NO! NO! NO!

Where is eastvillager when you need him: one time he was in an elevator with Bernie Ebbers, who never lied either.

Bear Stearns was well capitalized, and their shares were really worth $170.

Or was it $10?

No need to worry guys, looks like the Chinese might save us:
http://www.nytimes.com/2008/06/24/nyregion/24chinese.html?ref=nyregion

Thank God for the Chinese!

I must add, JM, in a separate entry, that your "part of the Obama election team lied" statement is the saddest thing you've ever posted.

It reeks of desperation.

"Manhattan has already fallen 10% and we don't expect it to fall more than another 10%"

WOW- NYC real estate experts admitting Manhattan price's have dropped 10% and expect no more then another 10%. ( even the "experts" are telling you to wait) So if my math is right that's a 20% total according to them at the bottom. Hum interesting. Now factor in that they have a tremendous interest in the market and I'd say add an additional 10-20% lower then their estimates. I actually think that this is another sign of how bad things are and getting worse.

NYC Realtors are now predicting a 20% decline. Last month they said things have slowed but expect a recovery and sales to increase. The crack is starting to gain momentum. Their will be no bonus buying frenzy next spring. Job lose and job security will drive this market to it's knees. Not to mention that all the foreigners in places like London are also losing their jobs. Lets see how long they can hold on to their Manhattan Vacation homes when they lose their jobs and are in jeopardy of losing their main residence. It's going to get much worse then people could imagine. Buying today is a foolish decision. I'm sorry the truth hurts.

As does you comment above "Because they own a lot of real estate and would take a bath if it corrected."

Therefore, using your logic and flipping it 180 degrees, the only reason that you're such a bear is that you want prices to come down because "you own no real estate and want to take advantage of weak hands if it corrected."

Now, this may or may not be true. But in reality, both commentaries are total over simplification.

But I guess that's your style and speciality.

Malraux - I think that you need to be more suspicious of a person who is in danger of loosing money than of a person that seeks to save money.

Real estate agents have an extreme vested interest in not having the populace jittery about real estate. Steve might have an interest in making people jittery in real estate, but it is much more difficult to translate Steve's actions into profit than it is for the real estate agent.

Memnonhi - renters are loosing money every month. Owners may be loosing money or may not. They wont lose any if they dont sell.

So yes I am suspicious of a person who is looksing money every month.

actually, malraux, as you know, I do own real estate and it has come down in value.

"both commentaries are total over simplification."

Then what's your take? That no one on the "Obama election team" lies, and that the clouds will part and angels will sing and real estate values will continue to go up forever?

JuiceMan, have to admit I'm surprised at your comment there as well. A CEO with that much vested interest? His words have to be taken with at least a few grains of salt, no? I agree Manhattan will "survive," but I think different people have different definitions of that word. If this guy thinks Manhattan is falling 20% overall, isn't that quite significant? Most of the hardcore bulls here were laughing at that notion mere months ago. I don't think most people were proclaiming 50% drops or more.

petrfitz, enough with the lack of class. These boards aren't for that.

so a 20% drop would bring home values back to Spring 2007? Yeah devastating.

But I don't think renters look at it that way.

Besides, If some sort of "lower rent advocacy organization" was on T.V. then I would be suspicious about their motives too. You can't tell me that real estate agents don't have a vested economic interest in telling homeowners and potential homeowners that every thing is fine? Ergo, you have to entertain the possibility that real estate agents, and the industry as a whole, might shave several degrees of truth off the current situation.

All I am saying is that the guy trying to sell you the car on the lot might not be entirely truthful. The response to that is not "well...bus riders are throwing away their money so...."

As a renter, I hardly feel that I am "looksing" money every month. I am paying for the usage of living space. No more, no less. Kind of like leasing a car. Or staying in a hotel. Not that hard to understand.

If I were to buy, I would be capitalizing that payment stream into a lump sum. I would still be paying for the usage of living space, but I would have collapsed the future payment stream into present value. Again, not that hard to understand.

east cider - how much "savings" from a discounted sales price would you need to adjust for the 1 - money lost while renting (you lose it - you show nothing for it) and the increased payments over the life of a mortgage you incur due to missing historically low lending rates?

You try to say that decrease in sales price means you lose that money. What about the money you lose while timing the market, and the increased payments you will have when you buy?

I said nothing about sales prices.

Let me try this again. I recently stayed in a hotel on vacation. I gave them money each day in exchange for the exclusive use of the suite I had been assigned. True enough, I have nothing to show for it. I don't own the hotel, or the suite, or any part of it. Now lets say I had approached the company and said I would like to secure permanent rights to that suite. In that situation, they would collapse the future income stream into a present value and use that as a basis for an asking price. If I were to buy the suite, I would have substituted a lump sum for daily payments. I would now own an asset, which carries its own opportunity costs, costs of carry, tax benefits and everything else. But since the suite, and my usage/enjoyment of it, is the same as it was before the transaction, the long run economics require that the price of the capitalized payments (the lump sum) should roughly equal the price I paid. So whether I'm renting it by the night or buying it, the only economic factors that matter are the capitalization rate, the opportunity costs and the tangential costs/benefits. The decision whether or not to buy it is an asset allocation decision. The renter doesn't "lose" anything - they've just chosen a different form of payment for usage of space.

Does this help?

East Cider - hmm. So in your theory the renter doesnt lose his money. Also you say an owner doesnt gain anything?

I love people like you. You send me rent checks each month for outrageous fees to live in small crappy spaces.

By renting you are not building a significant credit history, equity, missing tax deductions, etc. If you dont understand that renting gets you no where, I cant help you.

Lets look at this way. In 5 years from now, we will look at the net worth of people who lived in Manhattan and rented and the net worth of people who lived in Manhattan and owned. I am willing to bet you $100,000 that those who owned will have a significantly higher net worth.

hey bjw2103, good to see you.

My comment was that I believed the CEO when he said that he was buying inventory for .30 on the dollar in Miami, and I do. It was a simple statement. The rest of the garbage posted about believing CEO's and investors, Bear Sterns, The Fed, etc, etc from steve and others is just more over inflated, drama queen bull written in the highly exaggerated style that we have all become accustomed to. steve reaches for anything he can to discredit me because I make him look foolish on a daily basis. I find it very funny.

steve, it is interesting that you believe every bearish article and every bearish source such as various newspapers (including the Post), blogs, infomercials, dco, CNN, The National Enquirer, etc. but discredit every bull article / source. You will never be credible without considering (and understanding) both sides of an argument. You are so transparent I bet you can see your asshole through your belly button.

east_cider, that's way too complicated for petrfitz.

here's something petrfitz will understand: it's always a good time to buy real estate in Manhattan since it always goes up.

The owner gains if they are able to earn net returns on their investment (the asset allocation decision) greater than that of other opportunities. With the inherent leverage in mortgage finance, most owners will do well over a long period of time given the buy and hold discipline that real estate requires. Will they do better relative to other investment opportunities? That's not such an easy argument to make. Like any investment, it depends on the entry price (determined by the prevailing price of risk) and inflation (the prevailing price of money).

I mean this in the most constructive way possible -- you seem like an ambitious young guy, and your posting here and on Curbed (as Sneaky Pete, no doubt) makes for entertaining reading. But you shouldn't rely on asset inflation for your financial security, and you shouldn't extrapolate perpetual real estate success from the last few years' experience. Keep reading and learning, and best of luck in the future.

"renters are loosing money"

What are we "loosing" it upon?

"If I were to buy, I would be capitalizing that payment stream into a lump sum. I would still be paying for the usage of living space, but I would have collapsed the future payment stream into present value. Again, not that hard to understand."

Oh no, east_c: you forgot about the tax deduction!

"By renting you are not building a significant credit history, equity, missing tax deductions, etc. If you dont understand that renting gets you no where, I cant help you."

OMG. "Significant credit history." Actually, you might need to have a credit history before you get a mortgage.

"Equity" can be positive or negative. Owning an illiquid asset is very risky.

You should read this: Home Not-So-Sweet Home

First of all, there’s the financial risk. Although it’s rarely put this way, borrowing to buy a home is like buying stocks on margin: if the market value of the house falls, the buyer can easily lose his or her entire stake.

This isn’t a hypothetical worry. From 2005 through 2007 alone — that is, at the peak of the housing bubble — more than 22 million Americans bought either new or existing houses. Now that the bubble has burst, many of those homebuyers have lost heavily on their investment. At this point there are probably around 10 million households with negative home equity — that is, with mortgages that exceed the value of their houses.

Owning a home also ties workers down. Even in the best of times, the costs and hassle of selling one home and buying another — one estimate put the average cost of a house move at more than $60,000 — tend to make workers reluctant to go where the jobs are.

http://www.nytimes.com/2008/06/23/opinion/23krugman.html

"steve reaches for anything he can to discredit me because I make him look foolish on a daily basis. I find it very funny."

Really? How so? Because of all the people on Wall Street losing their jobs.

I'm sure if I were a dedicated sleuth I could find a post of yours from a few years ago claiming how Wall Street bonuses propped up the Manhattan real estate market. So if they propped them up, why aren't they plopping them down?

"discredit every bull article / source."

I haven't seen one, JuiceMan. Even your .30 on the dollar dude said he expects Manhattan prices to fall 20%. That's your version of bull.

And it is.

"the long run economics require that the price of the capitalized payments (the lump sum) should roughly equal the price I paid. So whether I'm renting it by the night or buying it, the only economic factors that matter are the capitalization rate, the opportunity costs and the tangential costs/benefits. The decision whether or not to buy it is an asset allocation decision. The renter doesn't "lose" anything - they've just chosen a different form of payment for usage of space."

I've been saying that for months, east_c, nobody gets it. You capitalize the full expense and amortize it over the expected life of the asset, which is 28.5 years, excluding the land portion. You capitalize the FULL COST, i.e. not your down payment, and you include all costs that a landlord would have to pay, i.e. property taxes, maintenance, insurance. You use a long-term interest rate to calculate the discounted value because real-estate is a long-term asset.

I could go on, but who would listen to me? I'm just pissing my rent away! (And am happy to be doing so.)

stevejhx, at least you're not in Jersey City looking out of the single window just salivating on that hot $1mill 700sq ft 1bed Manhattan apt. that i can't afford. the anguish is killing me. especially when i pay my rent check.

MMAfia, good point. I pay $25,000 a month rent, and have a view of an airshaft.

If only I cold afford to buy.

"With the inherent leverage in mortgage finance"

No, no, no. According to vverain, real estate is not a leveraged asset.

Though Paul Krugman might think otherwise.

Thanks JuiceMan, always good to have you on here. I hear you on the CNBC panel. I know nothing about the Miami market, but would guess that there are deals there for people able to hold long-term and have money to spend. That said, I have to completely agree with you on taking published articles, reports, etc. with a grain of salt as well. stevejhx does post a lot of these articles here, but he's certainly not alone, and it drives me nuts when people jump on these "findings" to corroborate their thinking. Anyway, I was hoping this wouldn't devolve into yet another needless rent vs buy thread, but petrfitz made me laugh with the only-buyers-can-develop-"significant"-credit-history bit. Some people see things black-and-white and can't understand that there are many variables in the decision to rent or buy - one scenario or the other might be right, depending on your sitch.

So in regards to significant credit history. Do you think that in today's world of selective lending and higher competition for loans that credit history is just your FICO score?

Dont you think that banks look at what makes up that credit score? Like were you paying off $10,000 car or were you paying off a $2 million mortgage?

Renting does not help you in the long run if you desire to be a multiple property real estate owner. Banks now look for a track record in servicing large loans. The applicants who actually have a history of owning, will recieve loans of those who have a history of renting. Those who have a history of owning larger properties will also be afforded better lending rates.

A few points on million dollar mortgages can save the buyer with the preferred rates hundreds of thousands of dollars.

East cider - you call me an ambitious young man. I am in my 30's and own 4 buildings in Manhattan. What are your accomplishments that entitle you to speak down to me?

"I am in my 30's and own 4 buildings in Manhattan."

Don't forget to mention your chauffeur-driven Prius, singer/actress/dancer/model/songwriter/puppeteer wife, and that mega-estate in a tony part of Las Vegas (if there is such a thing).

Now to address more of your puffery: your personal credit score will go down if you take out a mortgage because you have more debt, and your debt to available credit ratio goes up.

That's first. Second, if you are taking out a mortgage in your own name on rental properties rather than holding them in an LLC, you're crazy.

Doesn't seem like you know nearly enough about these subjects that you continue to go on about.

"Renting does not help you in the long run if you desire to be a multiple property real estate owner."

Pure genius!

Steve - you are so wrong. So you are saying that a person who has ben a renter for years is a moire favorable candidate to receive large financing that someone who has owned property and service those loans?

I guess that you qualify to criticize me since you are in your 50's own a property in Fire Island that is underwater, pay someone else rent for a crap hole in Manhattan, and claim to make your living investing in Brazilian crap equities.

Notice I didnt get as low and personal as you do when you attack my wife. I said nothing about you being a loner, poofer.

Pete, I'm not "speaking down" to you. You've disclosed your age, career highlights and real estate successes many times here and on Curbed, so I didn't think it was a stretch to point out that you are both ambitious and young.

"So you are saying that a person who has ben a renter for years is a moire favorable candidate to receive large financing that someone who has owned property and service those loans?"

I said no such thing. I said taking out a lot of credit lowers your credit score.

"I didnt get as low and personal as you do when you attack my wife" --> "poofer"

The word is "puffster."

I'm not in my 50's.

Steve says "I'm not in my 50's." Sorry you look like you are.

http://www.cnbc.com/id/25347147

Maybe we could get back on topic. I don't really care what you guys look like.
http://www.cnbc.com/id/25347147

Tony - are you going to post that link to Diane Ramirez, president of Halstead, on every thread? She thinks that Manhattan real estate is still a good buy.

Well how about that!

Here's a better link:

http://latimesblogs.latimes.com/laland/2007/06/realtors-blame-.html

Realtors Blame Media for Housing Slump, by Laurence Yun.

Gee! I thought it was me!

Here's even a better one:

"Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them, by David Lereah.

Guess what? They are the present and past chief economists for the...

...NATIONAL ASSOCIATION OF REALTORS!

Which is why I believe Diane Ramirez.

http://www.amazon.com/Are-Missing-Real-Estate-Boom/dp/0385514344/ref=sr_1_4?ie=UTF8&s=books&qid=1214338756&sr=8-4

Too bad everything Mrs. Ramirez says contradicts what the banner below her says. She says that the Manhattan market is "holding steady" yet, if you pause the CNBC video at 1:38, the banner below her says "Ramirez: Inventory of available apartments in NYC rising sharply since start of '08" Now does that sound like the market is holding steady???

Oh alpine, you're all too good!

CNBC is entertainment not information. They had one real story in their entire history of broadcasting: Maria Bartiromo gets info on possible Fed rate change from Bernake at party in May 2006. Everything else has and will be fluff-n-nutter.

Lawrence Yun, David Lereah, Dottie Herman, Barbara Corcoran, Diane Ramirez... all reliable real estate experts that are never ever wrong.

NOT!

yeah devastating petrfitz! lol

It amazes me how many lemmings are swimming in these boards.
S&PE is almost at yearly highs and most of you are still looking for gloom and doom. The same reason all you idiots were buying at the top are now the same idiots singing at the bottom. Treat housing as a home and not an investment and everything will be fine. When your mortgage, maintenance and tax are 25-30% of your incoming, why does it matter? Are most of you paying a dollar a night to rent a studio hostel in queens while sharing it with your friendly neighbor bum?
Look, I'm not trying to mock you folks here but the amount of negativity is comparable to the cheers we witnessed at the peak. There is nothing wrong with buying now, the same reason why folks go out to buy a 42 inch plasma TV 2 years ago at $2,500 knowing it will be cheaper 6 months down the line are the same reason why people buy something they once can't afford but now can. My wife and i recently picked up a 1,500 square foot unit in long island city. Why did we do it? Well, because we liked this unit 2 years ago when it first went on sale but couldn't afford it then, now it's in our price range. It's that simple. Yes, it can be 10-50% lower as some have argue but how long will it take to get there? Another year? 2 years? 3 years? 5 years? No one knows....which one of you fools will compensate me for rent and lose equity if housing stablizes and are flat to up a little by year end?

True that Manhattan and Miami are different markets, but what no one seems to talk about are the different market "segments" within Manhattan, that I believe will perform differently over time. For example, the $5M+ 3Br+ luxury segment (including townhouses), I believe was seriously overbuilt (through renovations and combinations) over the past 10 years. In addition, many buyers initially purchased them on a whim - without realizing how their salary, real estate, hedge fund investments, were all tied to the same Ponzi economy that would ultimately collapse. $5, $6, $7, $8 million Manhattan homes (many without views, important addresses or decent layouts) stand to lose millions in this economy, not to mention the high costs of carrying them while they languish on the market. Here's where I think the Manhattan market goes bad...really bad!

Rich Default on Luxury Homes Like Subprime Victims (Update1)
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By Bob Ivry and Dan Levy

May 6 (Bloomberg) -- Chuck Dayton put down a quarter of the $950,000 purchase price when he bought his house in Newport Beach, California, in 2004. He was making $500,000 a year with his drywall company and he expected home values to keep rising.

Then the mortgage market collapsed, new construction stopped and builders no longer needed his services. Dayton, 43, went into default four months ago because he couldn’t afford payments on the three-bedroom home, located within a block of the Pacific Ocean. He hopes his lender will agree to sell the seven-year-old house for less than he owes to avoid a foreclosure.

“It’s just wait and see right now,” Dayton said.

Borrowers such as Dayton, whose 2004 compensation was almost 10 times the median U.S. household income, are becoming trapped by the same issue facing the poorest subprime homeowners: falling home prices erase equity and make it impossible to sell or refinance without losing money.

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.

‘Trickle Up’

“It’s the trickle-up effect,” said David Adamo, chief executive officer of Luxury Mortgage Corp., a home-loan bank in Stamford, Connecticut. “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.”

Jumbo loans are larger than what government-controlled Fannie Mae and Freddie Mac will buy or guarantee, currently $417,000 in most areas. 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.

Subprime loans were made available to borrowers who never proved they could make monthly payments on time. The loans accounted for more than 20 percent of the U.S. mortgage market in 2005, up from less than 8 percent in 2003, according to Inside Mortgage Finance.

Subprime Implosion

Defaults by subprime borrowers began rising in 2007. Since then, financial institutions that had bet on earning cash flow from home loans packaged into securities have announced credit- market losses and writedowns of almost $1.4 trillion, data compiled by Bloomberg show.

Among all homeowners, 21.8 percent were underwater in the first quarter, Seattle-based real estate data service Zillow.com said in a report today. At the end of the fourth quarter, 17.6 percent of homeowners owed more than their original mortgage, while 14.3 percent had negative equity three months earlier.

Property values dropped 14 percent from a year earlier in the first quarter, reducing the median value of all U.S. single- family homes, condominiums and cooperatives to $182,378, Zillow said. The gain in underwater homeowners will lead to more bank repossessions, the company said.

The U.S. government has lent banks $392 billion to stem the losses through its Troubled Asset Relief Program. Another $12.4 trillion was spent, lent or guaranteed by the government and the Federal Reserve to stop the longest recession since the 1930s.

Loan Losses

About $500 billion of prime-jumbo mortgages are bundled into bonds, according to Memphis, Tennessee-based FTN Financial. In February, JPMorgan Chase & Co. analysts John Sim and Abhishek Mistry in New York almost doubled their projections for losses on those mortgages to as much as 10 percent because of increasing defaults.

Foreclosures have come to the Hamptons, the beach towns about 100 miles east of New York City on Long Island, where homeowners have included Blackstone Group LP Chief Executive Officer Stephen Schwarzman, hedge fund manager John Paulson and Goldman Sachs Group Inc. CEO Lloyd Blankfein.

Almost 90 borrowers entered the foreclosure process in the towns of East Hampton and Southampton in the first 10 weeks of 2009. That compared with 109 in the same period last year and 73 in the first 10 weeks of 2007, according to the Real Estate Report in West Islip, New York.

Hamptons Sales Fall

Home sales in the Hamptons fell 67 percent in the first quarter from a year earlier, the most since records were first kept in 1982, according to Town & Country Real Estate of the East End LLC. The median sale price slid 28 percent from a year earlier.

Rule changes spurred by rising defaults now require lenders to work with delinquent New York homeowners before beginning the foreclosure process, said Pat Ammirati, president of the Real Estate Report.

“There was this unrealistic view that the crazy financing was limited to subprime when of course it was across the board,” said Andrew Laperriere, Washington-based managing director at research firm International Strategy & Investment Group. “A lot of jumbo mortgages were nothing down with high debt-to-income ratios.”

Short Sale?

Dayton said he financed the purchase of his home, 40 miles south of Los Angeles in Orange County, with a payment-option adjustable-rate mortgage now serviced by JPMorgan’s Washington Mutual. The option allowed him to pay less each month than the interest on the loan, with any unpaid amount added to his debt.

Dayton refinanced in February 2007 with a $1 million loan from Washington Mutual, and used some of the proceeds for business expenses, said Robin Milonakis, his agent at Altera Real Estate in Dana Point, California. He also took out two private mortgages and now has a balance of $106,000 on those loans, she said.

Dayton went into default on Jan. 29 and owes $46,584 in delinquent payments and penalties, according to First American CoreLogic, a Santa Ana, California-based mortgage data firm. Dayton said he’s found a buyer willing to pay $950,000.

The foreclosure process typically takes about a year. That means jumbo-loan defaults, which are climbing at the fastest pace in at least 15 years, will increase over the next year, according to LPS Applied Analytics in Jacksonville, Florida.

Goodbye Jumbo

President Barack Obama’s Homeowner Affordability and Stability Plan has no provision to help jumbo mortgage borrowers. The plan focuses on shoring up home loans eligible to be bought by Fannie Mae and Freddie Mac, also called conforming loans.

“The government has thumbed their noses at people who have jumbo mortgages,” said Steve Habetz, president of Threshold Mortgage Co. in Westport, Connecticut.

The share of U.S. homes in the foreclosure process that are valued at more than $729,750 increased to 2.83 percent this year through March 10 from 2.21 percent in the same 10 weeks of 2008, according to RealtyTrac. In the same 10-week period, the share of homes valued at $417,000 or less in foreclosure fell to 87 percent from 89.7 percent in 2008, RealtyTrac said.

Price Slump

California is hardest hit by luxury-home foreclosures. More than 1,500 borrowers with properties in the state that once sold for more than $1 million defaulted on their mortgages in February, said Mark Hanson, managing director of the Field Check Group, a real estate company in Palo Alto, California.

About 3 percent, or 254,745, of the state’s 8.5 million houses are assessed for more than $1 million by county assessors, according to San Diego-based MDA DataQuick, a real estate monitoring company.

While 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.

Another explanation may be stricter lending guidelines, Hanson said.

“You have to have income of $250,000, a 20 percent down payment and near perfect credit to buy a $1 million home now, so the number of buyers isn’t what it was,” Hanson said. “There just aren’t enough buyers to sop up supply. We’re seeing the collapse of the high-end market.”

‘What to Do’

Values have taken longer to decline in more affluent areas, taking some homeowners by surprise, said Philip Tirone, president of Los Angeles-based Mortgage Equity Group Inc.

“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,” Tirone said.

Delinquencies are caused by people who owe more on their mortgages than their houses are worth, said James McLauchlen, a broker and appraiser in Southampton, New York, for James R. McLauchlen Real Estate Inc. and Hamptons Appraisal Service Corp.

“They throw their hands up and say I’m not going to kill myself trying to take care of this debt,” McLauchlen said. “Some folks work hard to make payments. Others just can’t pay. They offer a deed in lieu of foreclosure and off they go.”

Dayton said he doesn’t know when he’ll restart his drywall business, which he shut down in November for lack of work.

“This market is not even close to bottoming out, in my opinion,” Dayton said. “It continues to drop.”

To contact the reporters on this story: Bob Ivry in New York at bivry@bloomberg.net; Dan Levy in San Francisco at dlevy13@bloomberg.net
Last Updated: May 6, 2009 11:55 EDT

“You have to have income of $250,000, a 20 percent down payment and near perfect credit to buy a $1 million home now, so the number of buyers isn’t what it was..."

Yeah no shit, that's called purchasing a house that you can afford. That is what the market standard should have been anyway, with a further reduction in down payments from 15-10% on houses below 500,000.