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.
Wednesday, March 25, 2009
Tuesday, March 17, 2009
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.
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.
Friday, March 13, 2009
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.
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.
Wednesday, March 4, 2009
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.
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.
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