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.
Monday, April 27, 2009
Thursday, April 16, 2009
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.
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.
Monday, April 6, 2009
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!
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!
Friday, April 3, 2009
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.
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.
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