How Well Dressed People Breathe Underwater
The centre of the Dot Com controversy in 2000, Silicon Valley in the South Bay district has retained some of the highest quality intellectual property in the world. The largest participants in technological commerce choose their place of business to be San Francisco’s South Bay. While unemployment has been an inevitable consequence to the economic crisis, the South Bay has a monumental 30% of its workforce employed in a high-technological capacity; the average high-tech salary remains at approximately $144 000 p.a.
This of course translates to a population with a reasonably large disposable income in order to buffer the local economy, and an equally voracious appetite for a large mortgage.
These investments invariably have enormous serviceability cost, and with increased unemployment across the board, along with savings being eroded by the stock market collapse, many high income earners in the South Bay area are unable to maintain the lifestyle they enjoyed prior to the financial crisis.
Recent statistics reveal that mortgages greater than $1m are defaulting at a far greater rate than smaller borrowers and 12% of them are 90 days in arrears. Short sales as it turns out are the device these borrowers are using to rid themselves of what is now a balloon payment of gigantic proportions. It appears that the reduction in interest payments over the past 12 months is simply not enough to offset the increase in unemployment and asset price reduction.
When the high income earners take a loss, they will invariably be prepared to realize it all at once; it only hurts for a little while. For this reason, the astute investor with unfettered capital will arguably, be able to acquire a prestige property for less than its construction cost. In this event, the prudent buyer will capitalize on decisive action.
Not only has the top end of the mortgage market been contemplatively excluded from Federal stimulus packages that sought to protect the rest of the mortgage market, reduce interest rates, and support demand in the low end of the market through a first home buyers grant, but there is simply no executive motivation to offer financial assistance to this segment of the demographic. Market forces therefore have seen interest repayments on large mortgages actually increase to a 1% premium on the rest of the market.
Although it pays to bear in mind that in favorable times, prestige properties such as these dwarf the gains made by other sections of the market. Owners of these mansions therefore, invariably accept this boon in return for a lower rate of return from the rental market. While the capital gain can well exceed 25% p.a. in a bull property market, rental returns will commensurately remain limited to 1-2% p.a. In times such as the present however, there is little recourse to be found in any type of return on these large property investments, for there are simply none to be found. In fact, the tendency toward drastic price movements is typical of expensive real estate in the San Jose area.
Given these intriguing turn of events within the South Bay property market, it is hardly surprising that short sales in the area have tripled in the past six months. A resort to other solutions routinely applied to distress property would quite conceivably result in far greater losses than the euphemistic ‘haircut’ that exuded by the short sale.
