The San Francisco Real Estate Blog

Investor's Business Daily: Bust In Nation's Housing Sector Could Hit Freddie, Fannie Hard

In this cycle, home prices have continued to climb even in regions that suffered widespread job losses, such as the San Francisco Bay Area after the tech bubble burst in 2000.

Meanwhile, an 80% rise in average home prices since 1997 means many owners have substantial equity in their houses. Homeowners struggling with payments are more likely to sell and avoid foreclosure than those with little equity.

"It's rare that a homeowner would default on their loan if they have home equity," said Freddie Mac chief economist Frank Nothaft.

I plucked this nugget from a much longer article, (which you should read in its entirety) because of its applicability to the SF Bay Area. It's true. If you bought your house more than 18 months ago, you very likely have several hundred thousand dollars in equity that is, for you, the equivalent of finding money in a brown paper bag on the street.

If you get the notion you might lose it all, wouldn't you sell in a heartbeat in order to stick as much of it in your pocket as you could, and then ride out as much of the crash as possible before re-entering the market?

Do you think that sort of "perverse" incentive might speed up a price collapse in the SF Bay area?

Remember: If you have a nice, solid 30 year fixed at a great interest rate, and you plan to live in your home for the next twenty years, none of this means anything to you, nor should it. But if you got into a place on a one-point ARM and some iffy secondary financing with the idea you'd flip in five years anyway, what do you think you will do if the market starts to slide in a big way?