How Obama could help the housing market

The recent report that the Obama plan to re-negotiate mortgages in trouble shows exactly what I have been saying for months. This plan simply isn't working! Out of almost 651,000 applications barely 2000 have been re-negotiated through October 31, 2009. Now to be fair, some of the blame is due to incomplete paperwork by applicants, but there simply is no rational reason why a lender would want to follow through with this process. And for the government to now publish "lists" of those loan servicers who are not meeting some standard level of mortgages re-negotiated is not going to help. Look what happened to the TARP money. When the banks realized how much the government was going to meddle in their affairs if they kept the TARP funds, many opted to give it back rather than be "under the thumb" of the government.

If Mr. Obama wants to really help the housing market, he should drive a process that completes short-sales in reasonable timeframes. What we are seeing today is that these sales are taking longer and longer to close. Some are taking six months or more to close IF the buyers are still interested at that point in closing on the home. No one profits by the delays we are seeing. Sellers are disappointed, their hopes get raised and then dashed. Buyers get excited and then are slowly disillusioned. Agents are frustrated. And the banks get to keep the assets on their books at full value until THEY decide what to do with the property- sell it short or foreclose.

Short-sales are, and will continue to be for some time, a significanty portion of the market. Unfortunately we have no real process that expedites them. If we want to get people out from under an unaffordable mortgage, and get capable owners in a home, then we should begin to solve the short-sale problem. Over 60% of all sales today in our local market segments are short-sales. The time is now. The urgency is great.

Why Banks Don't Want to Do Short-Sales

For some time now I have been noticing that the repsonse time and quality of responses from the major banks on short-sales have been deteriorating. Short-sales are just simply taking longer and getting much harder to complete successfully. Bank negotiators seem to be less responsive and negotiations seem to be less flexible. It seems thatmore and more often a home doesn't sell as a short-sale and then a few months later re-appears as a bank-owned foreclosure and sells for less than the offers it received when it was listed short. Why would a financial institution elect to go this route and seemingly lose money?

Last April the government changed the accounting rules for Mark to Market. Essentially what this did was to give the banks more leeway in when they marked down an asset (a mortgage) that was valued at less than its face value. If a bank re-negotiates a mortgage with an home-owner, they must write-down the value of that loan immediately when the loan is re-negotiated. If a bank agrees to sell a property below the mortgage value (i.e. a short-sale) and "forgive" a portion of the existing loan, they must write-down that loan to its short-sale value (less costs of sale) immediately. But while holding a mortgage, even one where the mortgagor is not performing or paying the monthly payments or one where the market value of the collateral (home) is less than the amount owed, the value of the loan as recorded on the bank's books can be the full amount of the mortgage. Real-time mark-to-market has been suspended. Even after a foreclosed property is sold, the bank has some discretion in when it must report the write-down of the loan.

So all this revolves around the timing of the write-off or write-down. For most of us it makes better sense to sell now for more rather than later for less (i.e. take the money and run makes more sense in these cases). However, to the banks, the government requirement that they maintain a certain amount of assets compared to their liabilities (deposits) coupled with the lack of mark-to-market requirements, makes for interesting choices. If they mark down the mortgage (asset) then they have to raise additional capital somehow (likely by selling stock or similar) to compensate and maintain the required asset amounts. The total portfolio of assets and the capital and investment income (stock share price) that these asset valuations can influence apparently is sufficient to trade off a few million (or billion!) dollars of mortgage write-off for time. The banks win and the home-owner / seller (and in many cases the potential home-buyer) loses. I bet that there are periodic bulletins issued inside the banks that tell their negotiators how much of a write-off (in percentage terms) they can negotiate given the forecasted asset to liabilities ratios, etc.

Home Buyer Tax Credit Clarifcations

The recent expansion of the Home Buyer's Tax Credit has created some confusion in the market regarding who qualifies as a "current homeowner". There have been several erroneous descriptions in the press but checking the IRS link to the tax credit http://www.irs.gov/newsroom/article/0,,id=206293,00.html.) one finds the following restriction :
If a homeowner has owned, or had a financial interest in, their principal residence for the last three years prior to purchasing a home that may in all other respects qualify for the Home Buyers Tax Credit, the new home purchase is NOT eligible for the credit. If they owned their principal residence for 5 of the last 8 years (but not the last three years!) then they are considered a "current homeowner", not a first time buyer. In other words if they own a home that up until 3 years ago was their principal residence, but they have not used it as such for the last 3 years, they are considered "current homeowners". First time buyers have not owned a home (I believe that means "any home") in the last 3 years. The difference is that "current homeowners can own or have a financial interest in properties that have not been their principal residence for the last 3 years.
The law elsewhere specifically eliminates using the credit for acquiring investment properties. To qualify, the property MUST become your principal residence (the purchase of a duplex may qualifyfor the credit on that portion of the property that you live in). The restriction described above eliminates the credit on the purchase of any property IF you currently live in your owner-occupied principle residence. Apparently the law is intended to get people back into home ownership, not increase investment purchases or vacation home purchases.
As always, check with your accountant for tax advice on any real estate transaction!

Is Now the Time to Buy?

Today's manufacturing news was a definite lift to the markets as it reported the third consecutive monthly gain in the manufacturing sector. If this trend continues, employment will have to increase to keep up with demand. And umemployment is today's biggest dead-weight on the real estate and stock markets.
The government guaranteed mortgage rate limits were renewed last week at the existing maximum of $729,000. Set to expire this December, they have been extended through Dec. 31, 2010. This is great news for the middle tier of our local market.
There is no news as yet on the $8000 first-time-homebuyer tax credit which is set to expire in 28 days. Personally, I dont believe that this will be expanded to all buyers nor will the credit amount be increased. I think its a 50-50 chance that the Congress will extend the existing tax credit as it stands. While it has definitely been ONE OF SEVERAL incentives that has helped the real estate market at the entry level, I believe it's somehat like the "cash for clunkers" credit that basically stole future car sales and brought them into play earlier. Whether any more cars (or homes) will be sold over time due to these incentives is not clear; only time will tell. But the data now available shows mixed results.
Nonetheless, many signs point to continuing support for home sales. Inventories remain at low levels in our area, especially in the entry and middle tiers. Even high end sales are happening and at a pace that just about equals the number of new listings coming to market. It's in vacant land sales that we are still seeing weakness, primarily due to lack of available loan money.
If employment begins to rebound, look for continued increase in home sales and more pressure on inventories. While rumors of increased foreclosures remain in the media, we have in fact seen very few new foreclosed properties come to market. There has been a continuing rise in the number of Notices of Default issued, but I am also seeing more of these be resolved lately prior to foreclosure.
With the government slowing its purchase of mortgage-backed securities (set to conclude in March 2010) mortgage interest rates must start to climb soon. So far there has not been any other significant source of buyers for these securities and supply and demand will force rates to rise to attract more buyers.
We have said it many times before, but it bears repeating; NOW is a GREAT TIME TO BUY a home. All the signs point to higher total costs for home purchases in the coming year. Whether its selling price or interest rates that rise, the effect is the same. There is pent up demand in the market for both new buyers and trade-up buyers. I dont foresee a quick return to the levels of 2005 or 2006 in terms of total units sold annually, but I do see more pressure on the existing inventory, especially the nicer properties, in the next year.

Bay Area Update

The following is from an internal Coldwell Banker memo from our regional President, Rick Turley. I thought it was so well written that I wanted to post it here. I have highlighted some key points Rick makes.

Recent Housing Upturn Sparked By Buyer Leverage

The latest S&P/Case-Shiller home price index reveals home price for 10 major cities rose 3.6 percent between April and July. So does this recent uptick in the housing market mean we are on the cusp of an all-out housing boom? Probably not. In all likelihood, the recent upturn in the housing market has been sparked by several factors:

· The impending expiration of the $8,000 first-time home buyer tax credit
· The impending expiration of current conforming loan limits
· The recent uptick in the stock market
· Increased consumer confidence
· Continued low interest rates
· Increasingly low supply of entry level homes

As you look through our past weekly reports – you’ll see that in the Bay Area it’s our entry level that has continued to have the highest demand and lowest supply. This has resulted in multiple offers, often over the list price, in almost all of our entry markets. (Ex: Alameda and Contra Costa County homes under $600K= 1.6 Months Supply of Inventory –dropping every month this year) In some areas we’re beginning to see a trickle-up effect, where the next tier price-point of homes is getting some activity from move-up buyers. (ex: For homes priced over $1.5M: San Francisco = 4.9 Months Supply of Inventory, down from last month and down Year over Year. Santa Clara County over $1.5M = 6.8 MSI, down from last month, down Year over Year)

Will it last? It’s tough to say. Right now we’re in a slightly unique position because some of the stimulus dollars the government has put in play are working which may be causing a false front for the overall economy. The stock market is up, Dow hitting over the 10,000 mark this week. Consumer confidence is on the rise. The US housing market is looking up.

But, the fundamentals themselves haven’t changed. Outside of Fannie and Freddie, there are few resources for making home loans. It remains a challenge to get a good competitive market for Jumbo loans –and much of our Bay Area is Jumbo loan territory. Foreclosures remain a major issue. We know there is a shadow inventory of homes already foreclosed on and not yet released to the market place. Another new phenomenon is the creation of a market where under-performing and non-performing assets (mortgages) are being purchased in bulk by investors, most likely adding to a further delay of more foreclosed homes hitting the market. As unemployment remains a challenge and businesses and employers continue to tighten their belts, it would seem there are more foreclosures ahead of us. Loan re-sets will provide a challenge.

Sounds a little grim and sober, but probably a bit more realistic. Clearly we are in a much better position than the majority of the State. Our world-class desirability coupled with our finite amount of homes and buildable land will always keep real estate in the San Francisco Bay Area performing better than most markets. But we need our entry market to remain stimulated. One major factor that stands in our way is the impending expiration of the first time home buyer tax credit and the higher conforming loan limits. These have helped tremendously to drive much of our recovery. But right now the debate on Capitol Hill continues and everyone is waiting to learn whether the credit will be extended, expanded or will it simply expire. Many on the opposing side believe it is too costly to finance. But NAR had this to say: “Each home sale pumps an additional $63,000 into the economy through related goods and services, so the benefits of extending and expanding the tax credit far outweigh the costs.”

If the current tax credit and loan limits simply expire, NAR had this to say: “All we can say for certain is sales will decline when the tax credit expires because we are not yet on a self-sustaining recovery path. It also raises a risk of a double-dip recession. Extending and expanding the tax credit is the best tool in our arsenal to encourage financially qualified buyers to stimulate the economy and help reduce the budget deficit.”
As this debate continues, buyers seem to be leveraging today’s market advantages which continues to create great activity in our local markets. Let’s just hope the leveraging opportunities continue.

While I Was Away!

Sorry but I have been closing a LOOONG transaction, taking a vacation showing my dogs, and otherwise working since my list post! It's been awhile!
So what's new? Well, "Bank" has become a 4-letter word for me as some of these short-sales are just being poorly handled by the existing lenders or some listing agents. One I just closed had teh final settlement statement sitting on a Freddie Mac bureaucrat's desk for over a month as my clients and I waited and pleaded for some news and the final approval.
Commercial properties ae possibly the next BIG shoe to drop in our economy. Many loans on commercial properties have 5 or 7 year terms before they adjust, not the 2 years we saw in residential loans. Many of these commercial loans are up for adjustment in 2010 and 2011 and many will re-set higher even given today's low rates. WIll there be money for these loans to be re-financed or re-negotiated? Most commercial loans are held by smaller, local institutions who likely wont qualify for TARP or similar bailouts. If these loans go belly-up, look for a rash of smaller bank failures as well.
Mortgage rates are at their lowest of the year now but once the government stops buying mortgage backed securities (now scheduled for Q1/2010) interest rates MUST rise. A graphic I saw a few weeks ago showed the decline in mortgage rates as the number of m-b securities purchased by Uncle Sam went up. Perfect correlation!
Locally, prices are increasing. So far, with only 44 days before the First Time Homebuyer Tax Credit expires, there is no word on an extension. Buyers who qualify are rushing to REO listings as a short-sale likely wont close escrow by Nov 30th at this point. The NAR and CAR are both pushing for an extension, an increase in the credit amount and to have it apply to ALL home purchases. More on that next time.
Good to be back! Thanks for waiting and reading!

Foreclosure Trends

There has been a lot of positive news about the real estate market in the last week or two. Pending sales for July are up from previous months' levels. Home prices nationally rose in June for the second straight month. The Case-Schiller home price index showed that 18 of the 20 metropolitan areas it surveys reported price increases averaging 1.4% in Q2.
Yet there is an ominous cloud on the horizon. Foreclosures continue to rise. Yet few of these are reaching the market. The Mortgage Bankers Assoc. reported in late August that 13.2% of all mortgages nationwide were at least 30 days overdue or in the foreclosure process in the second quarter of the year. This is an increase from the Q1 rate of 12.1% and the 9% rate of Q2, 2008.
Most distressing was the news that 9% of all prime loans, the most secure, were past due or in foreclosure, up from 5.4% in 2008. Prime loans accounted for 58% of all new foreclosures, up from 44% a year earlier and compared to 33% for sub-prime loans. Fixed-rate prime loans accounted for 20% of new foreclosures or 1/3 of all prime loan foreclosures.
Yet the government continues to believe that the loan modification processes they have in place are sufficient. While there are 1.8 Million homes in foreclosure at present and another 1 Million more possible according to Deutsche Bank, only 300,000 loans have to date been re-negotiated.
More than two-thirds of all home sales nationally are either short-sales or foreclosures and of the remaining third only 31% of these are "non-distressed" sales, i.e. sales that were unforced or optional for the seller (a relocation is considered one example of a "forced" or non-optional sale). That means that only 10% of all sales nationally are the result of something close to a normal market sale with a completely willing seller.
Short-sales continue to dominate the local market and times for obtaining the required existing lenders price approval seem to be lengthening again. Fewer bank-owned homes are coming to market. Whether this is a concerted plan to "meter out" the number of foreclosed homes to market in hopes of keeping prices high or not, the number of REO homes coming to market does not match the reported number of foreclosures. Second lenders are requiring more money as their part of the short-sale settlement; many times that results in a conflict between the first lender and the second that necessitates the buyer or the real estate agents paying more to resolve the difference (typically in the $7000 range locally).
Locally, in the entry level segment of the market (under $400,000), there are only 30 homes available today in Morgan Hill, Gilroy and San Martin. This is the lowest inventory in several years and reflects the continuing demand by first-time buyers and investors. With the $8000 first-time buyer tax credit set to expire Dec 1st, the demand will only increase in the interim.

Going "All In"

Renting rather than owning. Has the time come to be a landlord? An article in the Wall Street Journal on Saturday described a June 2009 survey by the National Foundation for Credit Counseling that discovered a deep pessimism about home ownership. 33% of all respondents do not believe they will ever own a home. 42% of those who once purchased a home, but don’t own one now, believe they will never own one again. While 66% of all families in the USA own their own home, that percentage is declining and is highly correlated with culture and race. Minority home ownership at the peak of the housing market in 2006 was less than 50% for blacks and Latinos and those percentages do not look to increase in the near future. Minority home buyers in 2006 assumed sub-prime mortgages at twice the rate of white buyers and similar statistics exist for foreclosure rates. So where are these families to live? Even if renting isn’t as fashionable as home ownership, it may be the only alternative for many. Also remember that a short sale impacts the sellers’ credit (and thus their ability to qualify for a loan to purchase a home) for a minimum of two years. A deed-in-lieu of foreclosure process impacts the mortgagors’ credit for seven years same as a bankruptcy.
Thus a significant set of families may have no other alternative but to rent. Many investors see this already; that is why there are so many “all cash” offers on bank-owned properties in our area. The prices are so right that most of these properties can return a positive cash flow that only gets better the more you invest.
For example: assume a $400,000 purchase price for a nice 4 bedroom, 2.5 bath home that is in good physical shape needing paint, carpets and similar “wearables”. Assume that the typical rent for such a property would be $2350 per month.
Case #1 – 25% down payment
Down payment =$100,000 Loan = $300,000 30 year fixed rate loan @ 6%
Principal and interest = $1800/mo Taxes = $415/mo Insurance = $75/mo
Total expenses = $2290/mo
Income = $2350 / mo Gross Profit = $60/mo before taxes etc ROI= $720/100000 = 0.72%
Case #2 All Cash Purchase
Expenses = $490/mo
Income = $2350 /mo Gross Profit = $1860 /mo
ROI = 12* $1860 / $400000 = 5.58% before taxes
The only way a Case #1 scenario would prove more lucrative is when you consider the appreciation on the properties and assume that you spread a $400,000 investment over 4 properties rather than one. But what average rate of appreciation would you need to get to make the two cases returns equal?
Assume a 5 year window. Case #1 (assuming 4 properties) earns a total of 3.6% return ($14,400) over the period while case #2 (the single investment) earns 27.9% over the period ($111,600). The four properties need to recoup $97,200 more in appreciation over 5 years than the single property. In other words, assuming all properties appreciate the same, the properties must appreciate at a rate of: $32,400 each over the period or $6,480 each per year. That’s 1.62% average. Certainly an achievable return in most real estate markets of the past.
However, this does consider selling costs. When selling costs (primarily real estate broker fees) are included, the required average appreciation rate for the four property scenario rises to 2.82% annually.
And there is your conundrum, Mr. or Ms. Investor! If you believe the real estate market will hold prices relatively flat for the next five years, a single large investment could pay off better and return significant cash each year along the way. If you think that home prices will accelerate in the next decade, spreading your available cash among several properties will create a better return but only if your realizable appreciation exceeds about 3% per year on average. From this, you can see why many investors today are going “all in”.

High-End Homes- Disaster or Opportunity?

Yesterday's Wall Street Journal included an article that echoed what I have been saying about the market for $1M and above homes. Higher mortgage rates (6.35% vs 5.25% yesterday), higher down-payment requirements (25% to 30% or more vs 3.5% for FHA) and no "buyer incentives" (ex. First-time buyer tax credit, New Home tax credit, etc) all have contributed to a dead high-end real estate market. Nationwide there is a glut of these homes on the market and experts predict more to come as unemployment increases. Nationally there is 21 months of inventory at prices above $1M compared to 16 montsh a year ago. In the $500K - $750K price range there is 11 months on properties available today versus 13 months a year ago. And at the entry level, there is 8 months inventory nationally versus 11 months a year ago says the National Association of Realtors.
Locally we are seeing the same situation: the >$1M price range has 14 months inventory as of July 15th; the $500-750K range has less than 3 months and homes below $400K have 18 DAYS of inventory!
We are seeing prices for upper level properties retreat to pre- 2002 levels. For example, a beautiful 18 year old home with 4000 sf and 4 BR and 3.5 baths plus office and game room, on 2.5 acres is priced at just over $1M today down from selling in 2005 for $1.5M. There are so many properties on the market and so few active buyers that "Feature Compression" is running wild again. This is when a small increase in price offers much more in the way of land or amenities. As prices fall at the upper tiers and sales pick up in the lower and middle tiers, huge compression occurs in the market above $800K or 900K. Buyers are not valuing "extra" land (ex. 5 acres when all they need is 2 acres) and so properties on larger parcels are suffering even more. Many sellers see this as a disaster. Many are renting in an attempt to keep their homes from foreclosure rather than selling at what they perceive as an unacceptable loss. Buyers should look at this as an opportunity to obtain homes with the quality and acreage they may have thought unobtainable in our area at prices they thought would never return.

A Home Again

I’m hosting an Open House at a home I listed a couple of years ago. Not sure exactly what happened since, but the owners went through bankruptcy and now the home is back on the market as a short-sale after being rented for awhile. It's vacant now. Yet it's still a magnificent home. Only nine years new with all the bells and whistles, and the most awesome views of the valley I have seen in a long, long time. It’s bitter-sweet however, as while it's still gorgeous in so many ways, it’s a bit dingy, unkempt and unwanted. The grass is browning and some of the flowers look tired and thirsty. Sad really.
I’m sure there were some fantastically happy times in this home. Maybe a few unhappy ones as well. I know at one time there was love here. I could feel it when I worked for the owners. You can see it in the murals on the kids old bedrooms, the Pooh lamp and fan in one bedroom and the care in selecting the colors, wall treatments and landscaping. Now it’s kinda like a stray puppy at the pound. Looking for a new start, a new family, some care and some appreciation.
And so today, at this Open House, I discovered another reason I like real estate. Not only do I get the opportunity to help people find a new home, start a new life, or make the transition to a new part of their lives; sometimes I get to help rescue a wonderful house and help it become a home once again.
I hope I get a lot of traffic this weekend. I hope we (the home and me) can find it a buyer. If I work hard perhaps I will earn a sale. But the home deserves a good family no matter what. It‘s ready to be a home once again.

Positive News Continues

The latest reporty from the National Association of Realtors (NAR) continues to show positive news similar to that we have been seeing in our local area since last October. June existing home sales rose for the third month nationally (and for the sixth month locally in the entry price segment). Pending home sales results will be released next week but all indications are that these will also have risen (for the 3rd month nationally and for the 6th month locally). Existing home sales nationally are now running at a 4.85M unit per year rate, the highest since October 2008. Yet they remain 10% lower than in 1999 just before the real estate market took off.

One potential negative that could impact this trend of increasing sales is the pending end of the first-time home buyer tax credit which expires Nov. 30 , 2009. This credit, the lowest fixed rate mortgage rates in history, and the availability of decent homes priced under $430,000 have all led to the entry level home sales boom we have been seeing since October. Unless the Federal Government extends this tax credit, one strong impetus will be lost.

Locally we are in the midst of a "buyer boom" with many agents and brokerages reporting high buyer interest at open homes, walk-ins and inquiries on listings. Homes in the mid-price tier ($400,000 to $800,000) are moving and inventory is down markedly. Mortage rates on loans to $729,000 are also at historical lows. Buyers sense this trend, are getting off the fence and starting to buy! Now if we could just open up the upper tier above $1M.......

Steal or Deal??

There must have been something in the water recently. I’ve heard the following three times within the past ten days: “I want to get a steal!” Always in the context of finding and purchasing a new home and spoken by people who aren’t usually that aggressive or financially strapped.
There’s just one problem with “getting a steal” when buying a home, land, ranch or other property. Someone wins (the “stealer”) and someone loses (the “stolen from”). Transactions become a search for an edge in a competition instead of a search for a home. And oftentimes the deal doesn’t turn out to be quite the “steal” someone thought. I’ve seen transactions fall apart when one party begins to sense they are becoming more a victim than a seller (or buyer).
The definition of “fair market value” is what two parties, acting at “arms length” (i.e. they have no pressures or incentives other than the desire to buy and sell), agree on price and terms. But both parties have to come to the same agreed upon set of terms. Sometimes one party has a personal opinion of market value that isn’t substantiated in reality as determined by recent comparable sales. In these cases, the two parties usually don’t reach an agreement and no sale results (and no one gets a “steal” either!)
I actually run from potential clients wanting a “steal”. I’d rather shoot for a win-win in negotiations between buyers and sellers. In a win-win scenario, no one gets a “steal” but both parties can get a good, or even great, deal and both can walk away eminently satisfied. In these cases, both sides believe they got FAIR market value for their home or their money. I’ve found usually what one party considers a “steal” is just a few percent (or less) different from the “fair market value”. When the full costs to purchase or of ownership are calculated over a reasonable period of time, the difference between a “steal” and a “deal” usually melts into insignificance. When a transaction fails because of a monetary difference that is small in comparison with the happiness and satisfaction one could get through ownership of a property, or the benefits one could get from accessing the equity built up in a property over time, both sides lose. It’s just that the side seeking a "steal" will continue to lose, missing out on property after property (or sale after sale); while the side working to get a fair deal will eventually get their reward.

No Skin in the Game

There was a fascinating article last week in the Wall Street Journal about the root causes of many foreclosures. Written by Stan Liebowitz, a director in the managament school at the Univ. of Texas in Dallas, Mr. Liebowitz used data on 30 Million mortgages compiled by McDash Analytics. The bottom line of his analysis was that low equity, either due to low money down at mortgage inception, or loss of equity due to refinancing or the market changes, was the major contributor and cause of the foreclosure crisis, not sub-prime loans. One interesting data point was that 51% of all foreclosed homes had prime loans, not sub-prime, and that the foreclosure rate for prime loans grew by 488% in the second half of 2008 compared to 200% increase for sub-prime mortgages.
The most comon factors leading to foreclosure were: (in order of number of occurrences)
1) Negative Equity- 285,000 loans
2) Unemployment - 183,000 loans
3) Sub-prime Loan- 149,000 loans
4) Low Downpayment (< 3%)- 130,000 loans
5) Mortgage rate reset upward- 61,000 loans
Items #1 and #4 are the factors that were included in the "Low Equity" category.
I have been discussing low "skin in the game" for several months in this blog. It was refreshing to see some actual mortgage and foreclosure data that supported my beliefs.
Another interesting part of the article was Mr. Liebowitz' conclusion that the Obama plans to help homeowners by adjusting mortgage rates may not be a big help in keeping people from foreclosure. His data supports that conclusion. It's not a rate issue. The major factor that causes people to walk away from their mortgage is lack of equity and a feeling that the situation will not turn around.
Mr. Liebowitz also concludes that lower morgage rates usually lead to more re-finances, not more sales. I agree with the first part of this statement, but the recent rebound in entry level sales is directly tied to lower mortgage rates, tax incentives and pent-up demand. Mr. Liebowitz correctly states that while refinancing keeps money each month in people's pockets, it is home sales that directly impact house prices. Precisely what our market is showing us today! What we have now occurring in our entry segments is low mortgage rates driving sales which are depleting inventory leading to increased competition, more multiple offers and higher selling prices. So one can make a claim that lower rates do drive selling prices IF certain other factors are in play to help drive down inventory and make homes affordable. Given the pent-up demand at the middle and upper tiers that I am seeing in our market today, lower rates at these levels would drive sales and provide support for prices as inventory stabilizes at more traditional levels. We still desparately need mortgage rate relief at the upper tiers of the market.

Conflicting Data

This week has seen alot of conflicting data on the real estate and econmic fronts. Last Friday, median home prices rose in Ca. for the third consecutive month, with May prices up 4.2% from April 2009. Inventory statewide continued to drop as well, down to 4.2 months for May compared to 4.6 months in April and 8.7 months in May 2008. That was some of the good news.
On the negative side, unemployment continues to rise and delinquencies on home loans with it. Now we are seeing significant increases in prime loan defaults and also on properties valued at $1M or more. This new round of increases in defaults is driven by job loss or underemployment for those who may have found a new job. 8.5% of all mortgages were 30 days or more past due in May, not inlcuding those in foreclosure. That's up from 5.7% a year ago. Consumer confidence also showed a decline this week likely reflecting concern about deficits and employment.
Local statistics reflect some of these trends, but not all. Inventory of homes in Gilroy and Morgan Hill priced below $400,000 stands at 18 DAYS, the lowest in many years. At the $1M price level, we have 15 MONTHS of inventory! Yet in Almaden one seller of a semi-custom home on a tract-sized parcel listed for $1.25M, received five offers within the first ten days of being on the market. Hollister reflects similar statistics with demand at the entry level (below $300,000) outstripping availability and country properties languishing. There is a huge compression in features available for the dollar in San Benito county properties. Inventory of country properties with acreage in Santa Clara county has been stable recently in spite of the fact that sales since February have been improving. This increase in activity is due primarily to lowered asking prices- we now have more than 50 homes on acreage priced less than $1M.
Another bit of good news is that short-sale transaction times are finally getting shorter. I have clients that received price approval within 25 days! This was primarily accellerated by the fact that the property already had a Notice of Default placed on it; but the listing agent had a complete package for the lender, and while there were two loans on the home, they were both with the same lender.
So what does this portend? I believe the market is stabilizing. Even with unemployment predicted to rise through mid-2010, I expect prices to begin to solidify and even rise in the "hot" market segments. There is pent-up demand across all price tiers. If mortgage money remains affordable and available, and especially if purchase incentives are extended to more buyers, this demand will surface and people will buy.

Median Selling Prices May Distort Reality

There's been a flurry of numbers out this week on the real estate market. Some were up, some were down and some were in conflict with others! Yesterday's WSJ had two housing articles on page 2 quoting two different sources for May home sales. The numbers were dramatically different! I've said it before: don't believe everything you read. Check it out or have someone you trust check it for you.
Here's another interesting concept that you should consider in evaluating future trends in the real estate market. Nationwide, foreclosures have accounted for as much as 50% of all recent home sales. When you add "short sales' to the mix the number goes up to 85% to 90%, especially in the lower price tiers and in our area. (Silicon Valley is a little less). But here's the rub.
When these distressed home sales are factored into the data in coming months, we're going to see some huge distortions.
Today, when we compare sales numbers (year-to-year), that data shows median home prices are still declining. But the large volume of distressed sales have dramatically lowered the recent median home selling prices. Price declines in the segments that are comprised of distressed sales are reflecting the foreclosure prices and the sheer number of these sales has year-to-year comparisons depicting almost the full brunt of that decline. In areas like ours where the inventory of lower priced homes has significantly declined of late and selling prices are reflecting multiple offers, etc., median prices are stabilizing or even rising. Future year-to-year price comparisons will reflect this rise in price in the base month.
Consider what happens when a home that sold at $1M in 2005 now comes to market and sells for $650,000. This could be a foreclosure caused by unemployment, a bad mortgage or just a seller caught needing to sell at the worst time. This 35% drop in price will get buried under the volume of other sales (today most all at entry-level price points) and will hardly affect the median price number. What we could witness is a rising median selling price while we are simultaneously experiencing significant price erosion at the middle and upper ends. These declines could be completely hidden if all one does is look at median prices.

Skin in the Game!

I was listening to a long-time Wall Street trader and the CEO of Cougar Investments discuss the Obama administration's new financial regulations yesterday and he touched on a subject near and dear to my heart. He was saying that the top executives at the banks and investment houses that "invented" the highly-leveraged financial packages, at the mortgage lenders who sold some of the undocumented loans and the boards of directors at publicly traded companies should all have signifcant personal skin in the game.
It is so easy for someone working with another client's money to take a few "extra" risks because the pain incurred for failure doesn't hurt the trader or director personally. Even if they hold stock in a company, if they didn't pay their own hard-earned money for it, they don't have skin in the game.
This is exactly the problem we have today with most foreclosures and with some home-owners who are considering walking away from their mortgage and handing the lender the keys to the home. So when someone tells me that there is this "new loan program" that allows buyers to get in for zero down or almost zero down, I shudder! Deja vue! Didn't we learn anything? Hard-earned money that is at risk is a key element to minimizing financial over-reaching.
The speaker also commented on the argument by some investment houses that tough regulations would stifle creativity in the financial markets. He astutely and politely avoided saying that some of the financial creativity that were demonstrated in the past should have been stifled! He did, however, say that a study of times when new regulations were enacted showed that they were followed typically by periods of greater financial growth for clients as well as greater financial stability in the markets. It's a lot easier, safer and faster to go down a road when you know where the edges of the pavement are located and where the out-of-bonds are.

Inventory remains tight at the entry price levels. Mortgage rates are down slightly from the highs of two weeks ago. More foreclosures are coming. There are 4 Million homes behind on their mortgages in the USA. Only 400,000 mortgages have been re-negotiated so far by the banks and government. We have buyers ready to buy these foreclosures and short-sales.
At the upper tiers of the market, it remains a slow and tough sell. Jumbo loan rates remain high compared to conforming rates and downpayment requirements are stringent. The recent testimony from several real estate industry leaders to the US Congress recommended that interest rates need to be maintained / instituted at low levels across all price ranges and that the tax credits for first-time buyers should be extended to all buyers as well as extended in time beyond Dec 31, 2009. All the stuff you have been reading here!

Competition for Homes To Increase!

Since last November I have been discussing the increased demand for entry level and firt-time-buyer homes on our area. At present we have a severe shortage of homes in the entire county below $500K and especially below $400K. In Gilroy and Morgan Hill we continue to have fewer than 40 homes available for purchase below $400,000. In Hollister we have fewer than 50 homes available below $300,000. WHen nice homes in these price ranges do come to market, they are receiving multiple offers and selling for $20,000 to $50,000 over list price! Not all of the homes are foreclosures. Some are short-sales, and a few are straight sales.

The rumors are that the banks have another wave of foreclosures coming but what I am seeing is that they are releasing these homes VERY slowly and in bits and batches to minimize any drop in prices due to over supply. So while there may be mnay more homes available over the next six months, they will likely come to market in a slow steady strem, rather than a torrent.

On the buyer side we continue to see many first-time buyers entering the market. I have really been surpised at how many first-time buyers there are who have basically been shut out of the market for so long. Investors are also snapping up good rental properties. And lastly, we are seeing the first signs of a relatively new class of buyer: those who were forced to sell their previous homes via a short-sale in 2007. These sellers may have sold homes that they originally pirchased for $500K or more but were forced to sell at $300K or even less. Now that their two year forced hiatus from the market is expiring, they can re-enter the market at prices even less that they might have sold their previous home. Talk about re-negotiating your mortgage!! Mabe this is the way the government should have their plan operate!

Lastly, while bank-owned sales can close within 40 days of going into contract (up from 20 to 30 due to the new laws governing selection of appraisors that lenders can utilize), short-sales which are dominating the market can take as long as 3 to 4 months to close. Given that the first-time home buyer federal tax credit expires at the end of the year, I would expect a crush of buyers hoping to qualify for this credit as we get closer to fall and especially before the holiday season.

You might think that the recent rise and possible continued rise in interest rates would reduce the buyer pool somewhat. That is a good assumption. The question is more how much will Mr. Bernanke and the Fed allow the Treasury and the Congress to borrow and spend before they really protest (Bernanke last week complained that the government spending if not curtailed soon will cause the economy to slow down). Bernanle faces quite a conundrum in trying to maintain interest rates at levels where they will stimulate home sales while also trying to keep the recovery going.

Bottom line: I don't see the competition for entry-levbel homes easing up even if interest rates do climb abit. I expect interest rates to start a slow, inconcistent but relentless climb as government spending and borrowing drive Treasury bonds yields higher and mortgage rates along with them. I do not expect mortgage rates to exceed 6% in 2009 for a 30 year, fixed, conforming loan but I think they will approach that level- still historically low. Irrespective of what mortgage rates do, the supply of buyers is set to remain constant, if not increase, in the lower tiers of the market. Competition won't lessen which should maintain or even increase selling prices in spite of any increase in foreclosures. Once the next (and last?) wave of foreclosures have been exhausted, unless we have a significant change in the economy, look for entry-level prices to really start to rise- somewhere around late 2010.

GM and Real Estate Agents

Yesterday the unthinkable (at least to some mids) happened with the bankruptcy of General Motors. Frankly, my personal opinion is that this is what should have been allowed to happen months ago. But it's here now for the good or the bad, and we will just have to watch and see how it unfolds.
I was somewhat amused when Fritz Hendersen, the "new" GM CEO, told the news conference that the "New GM" (they used that term so often to maximize the distance between the old GM of yesterday (literally) and the new company they hope will rise from the ashes of bankruptcy court) would not be the same company that disappointed customers in the past. The company that sometimes would have 15 new-car introductions a year and hoped five would be hits, the rest they would be satisfied if they turned out "okay". The company that disappointed (and broke) shareholders. (Shares of GM were still traded today on the NYSE as collectors wanted the certificates to hang on their walls!) The company whose quality drove buyers out of showrooms in years past.
Gee, what did the workers of the old (or the new) GM think when they heard those words? Thanks so much for the vote of confidence in their efforts and performance. Just what will the management of the new GM do that will be so significantly different that financial success will occur?
And that's the same question that you as a real estate buyer, seller or investor should be asking your agent. What will your agent do that will be so significantly different that you will reach your real estate investment goals? Which leads me to a series of thoughts I bring to all my open houses.
There are many keys to finding the right real estate agent but here are four important ones that your agent MUST possess:
1) In-Depth Knowledge of the Area. A good agent has broad knowledge of area issues, future development plans, schools, community resources and neighborhoods. Agents who live, work and participate in their community possess the necessary up-to-date information you need to locate the neighborhood that best matches your needs and avoid situations that could cost you thousands of dollars at re-sale. When selling, good agents know how to best promote local attributes to maximize the price you receive for your property.
2) Real Estate Experience and Savvy. Your agent should have extensive, detailed knowledge of, and experience in, real estate practice. In particular, your agent's knowledge of the purchase contract that you will sign when buying or selling is critical to protecting your financial interests. He or she should also possess strong negotiating skills that maximize your bargaining position. Not all agents are REALTORS. REALTORS adhere to a code of ethics and usually possess additional training and course-work in real estate practice.
3) Wide Network of Lenders and Vendors. Your agent should be able to connect you with key people in many important areas including property inspection, title insurance, city and county regulations and processes, repairs, building contractors and mortgage financing. A good agent should personally know and have experience dealing with these vendors and should be able to recommend several qualified professionals in each category for your consideration.
4) The Real Estate Company. Good intentions are not always sufficient to keep a potential transaction from falling apart. Sometimes there are legal as well as financial ramifications that must be addressed. Te real estate company that employs your agent may be able to advise or mitigate some of these issues saving you frustration and money. Your agent's skills and professionalism partially reflect the emphasis the brokerage places on continuing education, legal updates, professional certifications and ethics.
Whether you are buying or selling, you and your property deserve the best agent you can find. Check agents out, ask for references and past successes with your type of property. It's nice that your third cousin's sister's boyfriend is a real estate agent. But let's face facts. Your real estate transaction is a business transaction. Your money and your happiness depend on how successful your agent meets your needs. Why settle for anything but the best?

Looking at Listing Statistics

The Wall Street Journal reported last week that the number of homes listed for sales continued to fall in 29 major metropolitan areas in April. The decline was 3.6% from the previous month. Typically April is one of the first months where listings increase during the annual spring sales rush. Since 1982 the average increase in listings in April from the prior month has been 4.8%.

In our local area listing inventories have declined in most market segments as shown in my last blog. What is driving these declines?

1) Some sellers are withdrawing their homes from sale trying to wait out the housing market. This happens early in a market decline as un-forced sellers face the first wave of price drops and then again later in the market cycle as some sellers give up on selling at their price or any price. This, and teh unavailablity of loans at prices greater than $1M, is the primary reason inventories have declined at the upper and middle tiers of our local market.

2) The number of foreclosed homes declined significantly from Oct through April as banks placed a moratorium on new foreclosures. These moratoria have ended, and Barclay's Bank estimates that the number of bank-owned properties rose to 765,000 in April 2009 from about 629,000 a year earlier. Barclay's also predicts that bank-owned inventory has yet to peak and will do so in early 2010 at approximately 1.3Million homes.

3) At the entry end of the market, a combination of low interest rates, price declines and pent-up demand from first -time buyers and investors has depleted the supply of homes priced under $400,000 to less than 45 homes in MH, Gilroy and San Martin. Additional demand still exists at these prices and as soon as a quality home appears on the market, it usually has several offers. I see no relief for buyers (or un-forced sellers) in this sector of the market in the near future. Bank-owned homes and short-sales will continue to drive prices. While demand remains high, prices will continue to stabilize. If the banks release their inventory of foreclosed proerties in an orderly fashion, we will continue to have some price stability and possibly some price increases. If they dump these proerties en masse on the market, look for prices to fall even in the face of strong demand.

Some other things to consider include:
1) There are many investor-buyers who see the present prices as real bargains and recognize that at these prices they can rent a home for more than their mortgage payment. A positive cash-flow plus the potential of significant appreciation when the market turns around, has led many investors to purchase now. However, this reduction of inventory, says Gorilla Capital Investors, may be only short-term as eventually investors will want to sell out bringing these properties back to the market.

2) The lack of available and affordable loans at the upper tiers has essentially shut down this portion of our local market. Even good properties priced at or below market are not moving. The few sellers who can afford and obtain a jumbo mortgage today are looking for the best bargains and believe they can wait until they find one. The scarcity of land-loans has eroded the price of vacant land and forced sellers to offer owner financing to attract potential buyers.

South County Sales Are UP!

Contrary to what you may be reading in the press, the South County has been on a rising sales trend for 4 or 5 months now! We are likely leading the rest of the country out of the housing slump!
Periodically I review all the sales and listing data for trends that will be important for you! I ususaly track properties on acreage, properties selling for more than $1M, entry level homes and the overall sales data for Morgan Hill, Gilroy and San Martin. Here are some "headlines" and graphs that should give you a better idea of just what is transpiring in our market.

Here are the headlines:

Sales in the Morgan Hill, Gilroy and San Martin areas continued to climb for the 5th straight month! We placed 174 properties in contract in April at a median price of $455,000. Overall, the local market has only 3.7 months of inventory at this recent sales rate!

In the rural market (properties located on more than 1 acre) we had 18 homes enter into contract in April, the most in any single month since July 2007!!! However, while the median price for rural properties rose for the 3rd straight month, it was only $800,000. This glaringly demonstrates the significant shift in selling prices in the country areas over the past two years. Although inventory has been falling for 6 months now, we still have 6.7 months of inventory of homes on acreage. Primarily inventory has been declining sue to increased sales in the $600K to $900K price ranges. Yes, there are homes available on acreage for less than $700K in our area!

Homes priced above $1M also experienced a good month with 9 sales and a median price of $1.4M. Even though inventory has been decling since August, we have 11 months of inventory in the upper (>$1M) price range. The decline in inventory above $1M has been due to falling prices more than rising sales.

The fastest moving market segment continues to be the entry level with prices below $399,000. We sold 68 homes last month at a median price of $290,000. Inventory at the entry level remains low with about 1.5 months of inventory! BTW, a recent USA Today poll found that 42% of all first-time homebuyers thought now was a good time to buy a home, 48% said prices will keep falling and were waiting, and 10% were unsure. Very different from what the general population is reported in the press to be thinking!

Mortgage rates tied the all-time record set earlier this month for the lowest 30 year fixed rates since Fannie Mae started keeping records in 1971. The rates were 4.78% with .75 points. Rates today (Thursday 4/30) are 4.82% for a 30 year fixed rate conforming loan. Agency jumbo loans ($417,000 to $725,000) average 5.25% and Super Jumbos are running 6.5% with 1 point.

The trend in number of sales and inventory versus price is clear! As price increases, sales fall and inventory climbs. Look at the currentr mortgage rates and lender down payment requirements and you will easily see why.

What are Buyers Thinking?

I've been hosting a lot of Open Houses lately. It's a great way to really hear what the buying public are saying and thinking. Here's some insights that I have gleaned over the past few months. Just be aware that this is not a scientific study!
1) Buyers are mixed on just how much further home prices will fall. Most believe that prices have some more to drop, maybe as much as 10%. However, some believe we will see another 25% decline in prices.
2) Buyers are concerned about interest rates long term. Most believe that the government will eventually have to deal with inflation due to all the money being pumped into the system.
3) Interest rates and down-payment requirements at the upper price points are keeping buyers on the sidelines. Here's an example: At purchase prices above $1M, buyers need 30% minimum downpayment. At a purchase price above $1,025,000 and even with 30% down payment, a buyer must get a Super Jumbo loan with a rate premium of 1.25% above the Agency Jumbo loans for loan amounts under $725,000. And that's after paying one point in pre-paid interest! Yet even the rates on Super Jumbo loans are at historic lows! It's buyer perspectives that have changed!
4) Buyers are looking for bargains. And they are not willing to pay for exta land or space that they do not need, even if it has value. If all they need is 2 acres, they won't value 5 or 10 acres at anything near reasonable market value.
5) Buyers are caught between wanting the lowest price on their next home and having to sell their present home in a declining market. Which one will decline fastest? Also a good percentage of buyers are looking to minimize their property taxes going forward by using the Proposition 60 advantage. This means that they can buy the next home for no more than 5% above what they sold their present home (within one year). Both of these trends are forcing buyers to constantly re-evaluate purchase price comfort ranges from month to month.
6) Specialized buyers (Ex. equestrian and vineyard, etc) are having to stay put because they cannot find enough interest in their present property to consider a larger, newer or different one. Most don't have enough equity to qualify for the loan on a larger property.
7) Raw land prices are plummeting yet loan requirements are tight forcing sellers to offer secondary financing. Nonetheless, most buyers believe they can find what they are looking for in an existing home without resorting to new construction, and at a savings to boot.

In spite of (or maybe because of) all this, buyer traffic at Open Homes is up. There is pent up demand out there that eventually will be set free. For me it's fun and eductaional to pump the flesh meeting and greeting potential buyers at Open Homes. There's no better way to catch the heartbeat of the market.

Surf's Up! Get Ready for the Next Wave!

Here comes the next wave of foreclosures! The major banks have recently rescinded their moratoriums on foreclosures and Notices of Default are on the rise. In California in March default notices climbed to 33,178 up 80% from February according to ForeclosureRadar. The increase was driven by the expiration of lenders moratoriums that began in October 2008, along with the expiration of a Ca law that temporarily delayed default notices.
According to data from LPS Applied Analytics, in March 2009, 3.7% of all mortgages in the USA were 30 days late, another 1.5% were 60 days late, yet another 0.9% were 90 days in arrears and 2.55% were 120 or more days past due. A total of 7.7% of all mortgages in the country are late as of last month!
Many people who were hoping that the Obama mortgage relief plan would allow them to renegotiate their mortgages have discovered that they do not qualify; mainly because their loan was sold to investors who won't cooperate or because they are either unemployed or under-employed and cannot afford even a reduced-principal mortgage. Recent numbers show that only 10% of homeowners in some stage of foreclosure qualify for the Obama plan.
Nationwide there is a feeling that a new wave of foreclosures will cause home prices to fall further. In the local Hollister, Gilroy and Morgan Hill markets, prices at the upper tiers may indeed continue to decline as foreclosures set the bottom level of price. At the entry level, prices are already below the "magic" $430,000 price where buyers can qualify for a FHA loan and those historically-low 4.75% rates. I don't expect prices in this tier to fall any further as we are already seeing numerous examples of multiple offers and selling prices way above list price. One home in Hollister last week enjoyed 20 offers and sold $30,000 over list price! What is likely to occur is that nicer homes will sell easily and poorly conditioned properties will languish and may only sell when significantly discounted. Don't let the basic averages fool you- look at the selling prices for reasonably condition properties in your particular price range and track those trends. You'll get a more accurate picture of your segment of the market, not one influenced by the bopttom-feeding that will occur elsewhere.

The Fed Inflates While Property Values Deflate

The Federal Reserve’s recent promise to purchase troubled mortgages kicked off a surge in re-financing, gave a boost to existing home sales in February and March, and drove mortgage interest rates below 4.75% for the first time in more than 50 years! And that was with only $250 Billion of guarantees! There is another $1Trillion coming from the Fed over the next year or so!
It’s pretty amazing what just 20% of the Fed’s promised relief has generated in the way of increased home sales and reduced mortgage rates. But buyers who think that rates will fall further may have a surprise in store. Fed Chairman Ben Bernanke stated last week that rates were not going to be driven further down by Fed action. There’s a reason for this in spite of the fact that the Fed has so much more money to print and spend! The Fed is having trouble finding buyers for loans that return less than 5 %. If rates were to fall below 4.5% the Fed would likely have to sell these loans with an premium to attract buyers. This premium would have to be at least one percent and would compound the Fed’s tidal wave of red ink. If there are no buyers for the Fed’s guaranteed loans, then the Fed will have to hold them to maturity which isn’t exactly what the Fed or Mr. Obama had in mind! The bottom line: Don’t expect mortgage rates to fall much further!
All this money being printed and spent by the Federal Reserve is highly inflationary. While the “I”-word is not in much usage of late, there will come a day of reckoning. Coupled with the recently passed Obama budget whose projections for 2010 through 2019 calls for a $5 Trillion increase in the national debt, we are heavily leveraging our future (and that of our grand-children). Just the interest on $5 Trillion would amount to $50B per year or about $1000 for a family of four for every year of their lives. Paying off the $5 Trillion itself would mean a debt of $17,000 for every man, woman and child in the country.
Both of these assessments tell me that the next year or two will be very good times to purchase real estate and other long-term investments.
Speaking of assessments, the Santa Clara County Tax Assessor has stated that more than 90,000 properties will have their assessed tax values reduced in 2009. This is the largest number of reductions in a single year since Proposition 13 was enacted in the late 1970s. The revenue loss to the county is expected to be on the order of $180M. Given that for every $1 reduction in property taxes, the assessed valuations have to drop by $100, an $180M tax revenue shortfall translates to assessed property values in the county falling at least $18B (or an average of $181,000 for each of the homes re-assessed in 2009)! Assessor Larry Stone concedes that this is much worse than expected and that additional reductions in assessed values will occur going forward. "It's going to get worse!", says Stone. Next time you wonder if there are fewer sheriff's deputies available or whether there are more potholes in our roads, you'll know the reason why!

Glimmers of Hope

Several indicators may be pointing to significant shifts in the local real estate market. While these glimmers may be the first light at the end of the tunnel, some pessimists think they might be an oncoming train! Let’s see what’s happening and I’ll give you my opinion.
The first positive indicator has been the continuing uptick in sales at the entry level. Since mortgage rates fell to 5% or lower in late October, sales of homes priced below $430,000 have gone through the roof. Not only are investors returning to the market but many first-time home buyers are as well. (Keep in mind that the IRS defines a first-time home buyer as one who has not lived in a home they own in the past three years. Thus many “first-timers” may have significant equity in a rental property or may have liquidated their previous real estate holdings keeping some cash available for a down payment). Homes that are in nice condition are flying off the market. I have buyers who saw two homes that sold within 1 day of being submitted to the MLS! Whatever happens at the middle and upper price tiers, eventually these new homeowners will gain equity and begin to think about trading up. This segment was the first to fail locally beginning in 2005 and led the rest of the market down by shutting off trade-up buying. I believe it will also lead the market back, perhaps with the same one to two year time lag.
The next indicator is the fall in mortgage rates since the Fed announced they were buying Fannie and Freddie mortgages and guaranteeing several hundred billion dollars of home loans. This announcement drove rates below 5% two weeks ago where they remain at historic lows (4.85% last week). Not since the 1950s have mortgage rates been at these low levels. While unfortunately these low rates only apply to conforming (non-jumbo) loans, in the near future most analysts predict no major rise in rates. Nevertheless, requirements have tightened recently especially with regard to condo and town-home mortgages. Lastly, there is still very little lending outside of the loans being guaranteed by Fannie Mae, Freddie Mac or the FHA, some of which carry strict requirements and / or premiums for certain types of purchases or levels of credit scores.
Another glimmer is the data for February which shows nationwide existing home selling prices rose for the first time since 2007. Also nationally, the affordability index for homes is showing housing is the most affordable (as a percentage of monthky incomes) that it has been since 1991. In California the median time on market declined in January to 6.3 months from 16 months a year earlier. While the median selling price in Ca. is down more than 40% since the peak in 2006, prices seem to be stabilizing, particularly at the lower tiers. This is true for local rural properties as well where smaller homes (less than 1700 sf) on an acre or so are selling in the $600,000 to $800,000 range-prices unheard of a few years ago. Given the scarcity of raw land, which has always supported prices for rural properties, there likely isn’t too much further that these prices will fall. In town, foreclosures have driven prices to 2002 levels and the resulting demand has generated multiple-offer situations with selling prices going over list and support for prices seems to have solidified. Last summer, prices in the lower tier declined to the point where it was less expensive to own than to rent. That situation continues today. The biggest obstacle to buying a home today for some people is the 3% minimum down-payment required by the FHA (5% for Freddie and Fannie loans) while the biggest cash-flow issue compared to renting is the strict requirement for mortgage insurance for all buyers with less than 20% down.
One bright spot locally was the recent rise in condominium sales, especially in Silicon Valley. When mortgage rates fell in late 2008, HOA dues were the primary cash-flow issue that drove people to choose single-family homes over condos. The rise in condo sales may be an indication that there are more buyers than desirable, entry-level, single-family homes at present.
It is only in the middle and upper price tiers that prices show continued weakness. The scarcity of buyers with sufficient cash to buy-in while keeping their mortgage below the conforming loan limit (now $725,000) has depressed prices at the high end of the market. The current premium for a jumbo loan remains approximately 1.5%, pushing rates up toward 7%. In addition, most lenders are demanding a 35% down payment for a $1M loan increasing to 45% for a $1.5M or larger loan. Since few entry level sellers are selling and retaining any equity, there are no buyers to trade-up for middle tier homes which also eliminates those owners from trading up to the high end. Nonetheless, the recent Obama change to increase the conforming loan limit to $725,750 from $629,000 in high-cost areas like ours will help the middle price segment.
There are two issues that could forestall a housing rally. First, family finances are still being reset as savings increase and credit use declines. In 2008 personal disposable income covered only 75% of household liabilities. In 1991 it was 114%, so we have a ways to go before the average houshold is living completely within their means. Secondly, the spectre of unemployment continues to haunt even Silicon Valley. With unemployment up again in March to the highest level since 1983, and no end in sight for more bad job news, some potential homebuyers are sitting on the fence. Some must think the light we see in the housing "tunnel" is an oncoming train, but many see the situation as the dawn of a once-in-a-generation opportunity. Personally, I am betting on the latter and helping as many new buyers as possible achieve their dreams of homeownership.

We Still Need Lower Rates

There's good news on the home sales front the past couple of days. New home sales in February were up nationwide and sales of California's previously-owned homes also increased. California homes averaged 6.7 months on the market in January compared with 16.6 months in Jan. 2008. In fact, nationwide, average time on market was 9.6 months. While prices are down form 2008, prices seem to have stabilized and may even be starting to show some signs of rising in our local markets for entry level homes.
Some analysts are saying that California may be leading the nation into and through the bottom of the housing slump. Sales news should remain positive for the next 30-60 days as pending sales in California were also up 13.5% in January from the same period in 2008 according to the National Association of Realtors.
Primarily most of these sales have been at the entry level; but keep in mind that back in 2005 this segment led us into the decline. Unfortunately many of the sellers in the entry tier have been short-sellers or have been foreclosed upon and thus are out of the housing market. This implies that "trade up" buyers for the middle and upper price tiers are still almost nil. The best way to generate "trade up" buyers is to lower interest rates so sellers who dont have to sell can survive a price haircut on the selling side and still be able to afford to buy a larger or more expensive home.
The following data illustrates the problem with interest rates and loan requirements today. The more progressive lenders that are offering jumbo loans typically are requiring a minimum of 35% down payment at $1M loan amounts rising to 45% at $2M and higher loan amounts. Couple these high down payment requirements with the prevailing rates on 30 year fixed jumbo loans which are averaging 6.65% (or about 1.8% higher than the lowest conforming rates), and then compare them to those on conforming loans (3% minimum down payment, 4.98% rate for a 30 year fixed -rate loan, and 1 point loan costs or PMI). The contrast makes clear why buyers at the upper tiers are simply staying out of the market.

The Three Prices

There are only three prices in real estate. But every so often an agent will try to find a new one! The three prices are:
1) Wholesale Price- the price you will get if you have to sell “yesterday” or for some other reason such as to pay medical bills, avoid foreclosure, access equity, etc. This is the price you might receive when you must sell now. It is usually below market by 10% to 25%.
2) Market Price- the price you will get if you and a buyer reach an accord without either party being subject to outside influences that affect the purchase or sale. This price reflects as close as possible the current market value of a property and is usually reached (on average) in current market time.
3) Above Market Price- sometimes referred to as “what the seller wants” to receive for his property, but also what unskilled agents promise a seller in order to get the listing. The farther above the current market price, the longer the typical time before an offer might be received at this price, if ever. If the seller can wait for the market to eventually climb to this price or, in some happy circumstances, a buyer is found who is so emotionally attached to the property that they are wiiling to pay extra to ensure that they get it, things work out. But usually an excessively high price results in a lack of activity and no offers which forces the seller to lower the price.
The difference between all these prices is time and money. Very often in real estate, time is money. The sooner you need to sell, the more you likely will have to discount your property. The sooner you need to buy, the less selection you may have and the more likely you will pay Market Price, or more, for a property. Conversely, pricing your property above market in any market except a rising one usually costs you twice. Once when you lower the price to what was the Market Price when you originally listed and then again to get it to where the market is currently. Pricing above market wastes time which is money!
Then there’s the new wrinkle some agents are employing in today’s market. I’ve seen this technique more and more frequently of late and in all price tiers of the market. Sometimes it is used to sell a foreclosed home or one that is about to go to a trustee’s sale (auction). Sometimes it is used when a property has gotten stale from being on the market a long time at an Above Market Price. But I am also seeing it employed to sell new listings and properties that are not even under water! What I am describing is the pricing of a home way below market price and setting a deadline (usually a few weeks in the future) for offers to be received and presented to the seller. What transpires is basically a feeding frenzy! The seller hopes that the below market price will generate multiple offers and the ensuing competition will bring a much higher price in a very short time. Ideally a seller could get a price that is close to market value in a lot less than market time.
Does this technique work? Sometimes. But usually not without some tradeoffs. You get all kinds of buyers and “tire-kickers” through your home. As a seller you must be prepared for offers that fall way short of your target and you must be prepared to say “No” to these offers if they cannot be negotiated up to meet your price and terms. You must be prepared to wait the market out if necessary because a lot of activity doesn’t always generate a lot of quality offers.
The best technique to sell a property remains to price it as close to the actual market value as possible. Buyers are so savvy these days and see so many properties that they recognize a reasonable, win-win price and a good value when they see it. They also are quick to recognize prices that are unreasonably high, casually and quietly writing these homes off their list of possible purchases. Serious buyers can easily sense a price that is too good to be true and automatically get their guard up. In addition, while they may be the perfect buyer for a home, they may want to avoid a “gunfight” over price or need some time to sell another home and feel that the low priced seller will not be receptive to a contingent offer.

Short-Sale Lunacy!

Why do real estate agents hate short sales? Here’s a recent true experience that I just went through with one of my buyers.
In early January my buyer made a very reasonable offer on a San Jose condominium that had been on the market a few months as a short sale. The sellers had to re-locate and had purchased the unit two years before for $570,000. The lenders (yes, there were two lenders involved here) had agreed to a first mortgage of $439,000 and a second mortgage of $130,000. Essentially the sellers had purchased the property for $1000 down plus whatever closing costs they incurred. They had little “skin in the game”. Now the property needed to be sold and the market value was approximately $400,000- a 30% decline!
There were two units available at the time my buyer wrote their offer. The first unit was the one described above which had rough paint, needed new carpets but did possess some nice wood flooring. The second was identical in layout but was move-in ready with nicer paint and clean carpets but only one room of Pergo flooring. They were priced identically. Both were short sales.
Fourteen weeks after we entered contract on the first property, we had yet to receive a price approval from the lenders. The second unit was by then in contract at $375,000 and we had offered $379,000 on our unit. The first lender had given a verbal approval of our offered price (it had appraised and the market seemed to be saying that it was a fair price) and had agreed to provide $3,000 as complete remuneration to the second lender (remember, the second lender is holding a $130,000 note). The second lender wanted 10% or $13,000 but was negotiated down to a range of $5000 to $9000. There was also $1600 of back HOA dues that the first lender did not want to pay even though the purchase contract stipulated that the sale was to be free and clear of all liens.
After a little more negotiation between the lenders, the first lender abruptly closed their file and effectively cancelled the sale due to non-approval of the purchase price! The home will now go to foreclosure. The second lender will get nothing, the poor sellers are back on the roller-coaster with a good chance that their credit is now ruined for at least 7 years, and my buyers are still without a home. All for somewhere between $3600 and $7600 that the first lender wouldn’t even try to negotiate with my clients. To better put that in perspective, it will likely take three months minimum to get the property foreclosed and at least another month or two to get it sold. That means that four to six more months of HOA dues ($800 minimum) will be in arrears, all the responsibility of the first lender in a foreclosure sale. In addition, the first lender will lose at least another four months of mortgage payments on their $439,000 loan ($10,560). Lastly, the property will likely not sell for the same amount in foreclosure as my buyers were willing to pay today. In summary, two lenders will lose AT LEAST $11,360 and $3000 respectively or DOUBLE what they were unable to agree upon when they had a solid buyer.
The logic here escapes me! When you find yourself in a hole, the first rule is to stop digging! Someone needs to remind these lenders of that maxim! But I can’t worry about that or about the difficulties lenders find themselves in; I have to locate another home for my clients.

The Obama Housing Plan is Unveiled

The number of mortgage foreclosures and loans that are in trouble showed another jump this month, unfortunately. Nationwide, approximately 12% of all mortgage loans are 30 days or more in arrears. 8% of all loans are in some stage of foreclosure proceedings while an additional 4% of all loans are now in bank ownership (foreclosed). In states like California, Nevada and Florida, the percentag of foreclosures and loans in arrears is signifcantly larger (21% of all loans in Florida are 30 days or more behind on payment).
There are approximately 72 million single family homes in the USA. Approximately 30% of these (22 million homes) are owned free and clear (no mortgage). About 14 million homes of the 50 million homes with mortgages are "under water" - i.e. have a mortgage that is larger than the value of the home today. The new Obama housing plan addresses some of these situations, but only some. It will not help many homeowners in California's high-cost areas except at the lower price tiers of the market. To qualify for the new plan you must prove a financial hardship, have monthly payments that currently exceed 31% of your pre-tax monthly income, your home must be your primary residence, it must be a single-family home (no duplexes, etc. qualify), have an unpaid balance on your mrotgage of less than the new Fannie Mae limits if $729,750 and the mortgage must have been obtained prior to Jan. 1 , 2009. IF you meet ALL these requirements (and a few more quirky ones!) you can qualify for a modification of your loan terms.
Homeowners with jumbo loans are not going to be helped with the new plan. Neither are second homes or investor-owned properties. If your loan has been packaged into a security that forbids loan modification, no matter if you meet all the other requirements, your loan will not qualify for modification.
If you do qualify, then your lender may modify your loan terms so that your monthly payment is less than 38% of your monthly income at which point the government will step in and subsidize the loan so that the monthly payment is further reduced to no more than 31% of your monthly income. Some modified rates could be as low as 2% and/or payment terms can be lengthened to as much as 40 years. For those home-owners who do qualify, the new plan could be the difference they need to stay afloat and in their home.

Used Car Salesmen??

Real estate agents are sometimes described in the same category as used car salespeople! Now I've known a few used car sales folks and they weren't all that bad, so why don't we REALTORS get any respect?
First, remember that there is a difference between a real estate agent and a REALTOR. REALTORS are members of the National Association fo REALTORS and follow a code of ethics. Many of us are continually updating our skills with education and seminars to better serve our clients. Designations like GRI and MASTER of Real Estate describe agents that have made significant investments (more than 1 year of classes for each designation) in their skills beyond the minimum needed to become licensed by the state.
I had two recent experiences that may shed some light on this subject. The first was yesterday when a listing client decided out of the blue that he really didn't want to sell his property even though we were just about to receive two very competitive offers on his home! It wasn't the fact that he decided not to sell that shocked me. It was that he had made up his mind a few weeks ago, never told me and then on the verge of success, killed the deal. But that's not the point of this example! Rather it was that this morning he called and said he really did want to sell and could we still get those offers? Now I'm not a miracle worker and in this market where entry level homes are moving quickly with multiple offers I wasn't sure if the buyers would come back. I couldn't promise him anything but that I would try and salvage the offers. A few minutes later after many mea culpas to the buyers' agents, I think we will get the offers. Whew! Still isn't a done deal but we are still in the game! Yes, REALTORS ride the emotional roller coaster everyday! We have lifetime passes!
The second experience was last week when I was able to inform a young couple, who had been outbid several times on a new home, that they were indeed in contract on a nice 2300 sf, 9 year new home. The husband looked at me and said, "Tim, I never thought I could get my wife such a nice place." We aren't closed yet but in a few weeks they will "be home!"
This latter kind of experience is what powers me and many REALTORS through the roller coaster days! The lost transactions, the showings where the buyers never show up, the rainy day Open Homes, the cancelled listings after you've spent hundreds, if not thousands, of dollars trying to market the property, and the buyers who "got a deal" using another agent after you work with them for months!
All of those tough days are more than compensated by one minute with a thrilled client. Yes, there are agents that aren't motivated that way. Too bad for them. They are missing out on one of life's greatest treasures- the feeling that comes when you help someone else and place their interests before your own. The good REALTORS really do care. If you don't have one that you know works that way, get a new one! You deserve it! And so does the better agent!

Don't Believe All You Read!

There, I've said it! Don't Believe All You Read!
Now you should at least think about what you read here because I try to give you the rationale behind my comments. But, in general, alot of what's printed about the real estate market is either an attempt to grab reader's attention, an editor or writer's opinions, or, at best, just old news.
I continually have clients, and visitors at open homes, remark that they think the real estate market is still in free-fall. Prices are plummeting if you believe these folks and the articles they read. But keep in mind that the news you read in the paper is usually based on reports and analysis that uses data which is a minimum of 6 to 8 weeks old. For example, we have just received the December numbers on single-family home sales. The "news" here is that pending sales were up in a traditionally slow month. Readers of this blog and those who receive my bi-monthly market updates knew this at least 4 weeks ago! In a market where everyone is awaiting the "bottom", reading that the bottom happened a month or two ago is of somewhat diminished value! Oops, sorry! You missed it!
Then there is the fact that every real estate market is local. What is happening in San Jose is NOT what may be happening in Palo Alto or Gilroy. Take the situation in Gilroy and Morgan Hill in the $400,000 and lower price ranges. We have seen a huge increase in the number of sales at this price point since November coinciding with the availability of 5% and sub-5% mortgages. Why hasn't this happened in parts of San Jose yet? Well, it's due simply to the fact that prices have to decline in any area to a point where a buyer can obtain a conforming (non-jumbo) mortgage and the low rates now offered on these loans. The true conforming limit of $417,000 (not the in-between conforming limit of $625,000 or soon $729,000 for high-cost areas) offers the lowest mortgage rates. Add a minimum of 3% down payment (preferably more!) and you see that to generate the highest incentive to buy (a combination of lowest rates, affordable prices on quality properties, and reasonable availability of same) prices need to be about $430,000 or less. Once prices on quality, livable homes fell to this range and mortgage rates went to 5%, homes started flying off the market in the South County. In general, prices have not reached this level in most of the more desirable areas of San Jose and certainly not in most of Silicon Valley. Even many Silicon Valley condos are above this price point. While the entry-level market in the South County is afire, the entry market in San Jose is vastly different. Guess which one gets the most press?? Don't believe all you read!!

Jump-Starting the Real Estate Market

Well the U.S. Congress has passed the Obama "stimulus" package at last. While we can debate the merits of this legislation and whether it is a stimulus or a spending package, we all are hopeful that it will help our bedraggled economy.
The bill included a bone for new home buyers. The tax credit for first time home buyers was increased from $7500 to $8000 with the following great changes:
1) the credit does not ever have to be re-paid (unless home sold within first 3 years)
2) the tax credit is retroactive for all purchases that closed or will close escrow in 2009.
3) There are income limits ($75,000 for single owners and $140,000 for married)
Although this is another great stimulus for the entry level of the market, it unfortunately won't help the middle or upper price tiers.
What's needed for these market segments (and the entire real estate market) is free-flowing capital at rates that are a real incentive to purchase. I'm talking 5% (or lower) fixed-rate, 30 year mortgages that are available to every qualified buyer who has some reasonable down payment. I am not a fan of the re-structuring of existing mortgages, especially when the principal is changed (aka "cram down" restructuring), because in many, if not most, of these re-structurings the qualifications of the borrower are not sufficiently examined. It is NOT enough to keep existing borrowers in their homes. If borrowers cannot qualify for their existing loans nor any loan even remotely close to the terms of their present loan, then unfortunately these people will likely have to lose their homes. It calls to question whether they ever should have been given loans (or loans of that magnitude) in the first place.
The second item that should be required for ALL buyers regardless of price point is that they must have some reasonable down-payment. Without "skin in the game" there is no incentive for an owner to maintain a property or stick it out through good and bad times. An absolute minimum should be 5 % of the purchase price. This is not excessive historically and makes good business sense.
The recent surge in home sales in the entry level of the market testifies to the existence of ready, willing and hopefully able buyers in the market. I believe similar pent-up demand exists through out the entire real estate market. If loan rates were rolled back across the entire home loan spectrum to the levels we are seeing in the entry segment (5% approximately), I bet there would be a similar surge in sales at all price ranges. Until the government (Federal and State) supports the housing market by making affordable, market-stimulating loans (including refinances) available across all price points, we are in for slow, and likely unsteady, progress out of the significant inventories of unsold homes.

Feeling Sorry for "Nadine"

With the recent surge in the percentage of short-sales in the entry-level market here in the South County, I happily invested a couple of hours attending a seminar on new short-sales techniques the other day. The major impression I returned with from the seminar was that the lenders holding under-water mortgages still don't get it! And while there are some very positive steps being taken by the major real estate brokerages, in many ways they are missing the boat as well.
Yes, the loan negotiators (one ficticiously named "Nadine"was used as an example throughout the discussion) are over worked, burdened by tons (literally) of paperwork, stressed out beyond belief and harassed by their managers and by real estate agents trying to hurry the process. They also have to deal with agents who don't know or follow what little process exists in closing a short-sale.
Nonetheless, the lenders don't seem to get the fact that a short-sale is the best and fastest way for them to minimize thier financial risk and maximize the possible return on their precarious investment. Instead of implementing processes (for example, having the loss mitigation folks talk to the foreclosure folks, consistent documentation requirements, etc.) that would speed up the process (the typical short-sale still takes from 8 to 12 weeks or more just to get approval on an offered price before the offer can begin moving through escrow), most lenders respond to their frustrating position by stone-walling qualified, ready and willing buyers and their agents.
The major brokerages should band together and submit a standard short-sale documentation set and step-by-step flow sheet to the major lenders to achieve some organization in the process. At present shorts-sales are defined by the phrase "the only thing certain about a short-sale is that there is alot of uncertainty". With lenders receiving on average 70 to 80 percent of the total outstanding loans on completed short-sales compared to 50 to 70 percent of total loans in a foreclosure, there is definite financial rationale for meaking short-sales work rather than going to foreclsoure.
Yes, I feel sorry for all the Nadines, but I also see that lenders and brokerages are missing an opportunity by not cleaning up the short-sales "process". Lenders need to recognize that short-sales are indeed their best way to exit a bad situation. Rather than developing proprietary documentation packages to gain an "edge" competitively, brokerages should get together and drive the organization and facilitation of the approval process. Improvement is needed and it would be in everyone's best interest, especially the buyers.

Feeding Frenzy in Entry Level Homes

Since mid-November we have seen a breathtaking jump in sales of single-family homes in the South County in the entry price ranges ($400,000 and down). From a point where we had about 175 homes on the market in mid-November with only about 50 under contract in this price range, we have moved to about 180 homes on the market with more than half under contract! Many of these sales were foreclosures and were driven by the recent decline in conforming mortgage interest rates (below 5%). We have been seeing multiple offer situations on the nicer properties with many selling for more than the list price. A real feeding frenzy out there!

One new wrinkle I have noticed the past few weeks has been the lack of new foreclsoures coming to this market! Of the twenty or so most recent listings in this price range, only one has been a -foreclosure. The remaining nineteen are short sales. This may have an interesting effect in that prices have been set primarily by the foreclosures and what a bank is willing to take for a property to clear it off their books. If the short-sale dominance in listings continues, look for a possible rise in list prices as sellers and agents set prices (to be confirmed by the lender eventually), not the banks. In general, banks are getting 70 t0 80 cents on the dollar of total loans outstanding on a short sale and 50 to 60 cents on the dollar of total loans outstanding for a foreclosure.