SubscribeThe Next Foreclosure Wave: Mid-Range and Luxury Homes
October 28, 2009
As a Certified Foreclosure Specialist, I’ve been talking about the “next foreclosure wave” for quite some time now.
As the subprime crisis winds down, the next crisis emerges – Option ARMs and Alt-A loans (3/1 ARM, 5/1 ARM, and 7/1 ARMs) are all resetting over the next 18 months. See this chart for a visual of what I am talking about.
These are the loans that middle-class Americans all got during the 2004-2007 timeframe. As a Realtor selling homes during this time, all the mortgage brokers and banks I worked with was selling these loans to almost every buyer. It’s scary how many ordinary middle-class folks have these loans. These are not your sub-prime category of people, these are people who probably can afford a jump in their payment if it increases when the loan resets. But the wildcard here is unemployment… With 12.5% of Bay Area residents out of work, this spells trouble for people who are currently struggling to make ends meet. A payment increase is insult to injury when someone is living off savings while trying to find a new job. I talk to people all the time who have drained their savings, 401(k)s, and are hanging on by a thread.
We are not out of the woods yet – there are a lot more foreclosures coming, especially in the mid-priced range of the market. RealtyTrac just released their Q3 2009 Foreclosure Report and it indicates that we are starting to see huge increases in foreclosure rates in cities that were not previously foreclosure hotspots.
What does this all mean? There may be opportunities for buyers to scoop up great deals on properties in the mid-range of the market. For example, we are starting to see properties that sold for as much as $850,000 here in San Jose now selling as bank-owned properties (REO) and short sales for as little as $420,000. 50% price decreases off the market highs is now becoming common among these expensive properties. I expect this trend in the mid-range and luxury markets to continue as we head into 2010…
Economic Forecast, Extending the Tax Credit and the Golden Window for Buyers
October 20, 2009
On October 12, I attended a SILVAR sponsored economic update and forecasting presentation by CAR EVP Joel Singer, and I thought you might find the following summary and comments beneficial:
- As we all know financing is the primary key to housing stability, and Singer is 100% confident that both tax credits and the $729,750 conforming limits will be extended into 2010—both of which are keys to continued recovery
- 40% of first-time buyers for 2009 bought because of the tax credit
- The Feds are on track to extend the credit, maybe even improve it, so let’s keep our fingers’ crossed
- The CA State Senate already approved the extension of the state $10,000 tax credit, and it should pass Assembly this week—yeah!
- Food for thought: before the competition increases due to formalizing the tax credits, first-timers should make their move sooner than later
- The move-up market here is the most impacted, but will improve as financing does; as such, he feels as though there will be some level of government involvement to stimulate the secondary market for non-conforming loans
- Right now, inventory levels for $750k-$1mm are at 6.1 months, which is healthy; inventory levels for $1mm+ are at 12.8 months, which signals a clear buyers’ market
- With government support, non-conforming lending will ease, but not necessarily cause rates to be lower—current margins are already at all-time highs primarily due to risk—by stabilizing the system and improving liquidity, risk is reduced, savings rates increase and rates remain about the same
- Futures point to a Fed funds rate rise of .500% to .750% and conforming 30-year fixed mortgages at 5.6% in Q2 2010
- As such, this gives anyone needing a conforming loan about 5 months before both rates and prices are up significantly
- And if you missed the headline on September 24th about the Fed easing their policy of keeping mortgage rates low, you’ll want to know that they are almost cutting in HALF the the effort– $14B versus $25B
- The overall number of homes/units sold next year will be down, but that’s only because we had a record number of units sell already this year—foreclosures will be DOWN relatively significantly
- Activity will still be high and it’s likely the $1mm+ segment that will provide buyers with the best value
- The “second wave” of foreclosures due to rate adjustments is a farce—many people, like myself, are looking forward to loans adjusting at lower rates, which is precisely what the majority of those loans will do
- 2010 will be a growth year with GDP expected at about 1.9%
- Great news for the economy, but growth causes higher prices and higher rates—
- The population of CA will grow another 1.1%, so that’s about $370,000
- We’ve added about 600k people per year since 2000, and about 500k babies are born in CA each year, so I guess that means there will be more demand on housing, which is also good news
- Unemployment may be 12% in CA, but that number is tied mostly to construction-related industries.
- With High Tech, Finance, Exports and Travel all on the rise for the Bay Area, our property values and local economy should benefit significantly
The Latest on Rates and Activity
Even with the incredible rates that continue to drive the refinance market, over 50% of the transactions that we closed in September were purchase transactions. Also of importance is the fact that of those purchase transactions, 35% were financed using “JUMBO” loans! Jumbo 30-year fixed loans are running about 5.75% and that jumbo 5/1’s are around 4.50%. And if you have a $417k conforming loan, 5/1’s are available at 3.75%!!
According to the MBAA, last week’s applications were down, but the four week moving average is up, along with interest rates (albeit slightly). We’re seeing the opposite effect locally, but it’s likely due to the many move-up buyers looking to take advantage of the $1mm+ market through Winter.
Is it just me, or does it genuinely feel like the golden window of opportunity for buyers right now..?
A great success story for us lately included funding a loan for a borrower who had a 63% debt-to-income ratio. We have also bridged three separate transactions that allowed buyers to move up without having to sell their current home first. And finally, we improved a client’s credit score by 100 points and saved them over $8,000 by having an erroneous collection removed from their credit record. So even with all the news headlining the challenges in the mortgage world, at least some great success stories continue to be made.
Tales From the Front – The World of Palo Alto Area Real Estate 10/16/09
October 16, 2009
Today was re-tour day in Palo Alto. When the price of a home is reduced, or the listing agent is trying to generate some interest in a stale listing, they “re-tour” it, or have it on broker’s tour again. Today we visited three great properties that are looking for new owners and are on tour following price reductions.
First up was a Crescent Park contemporary at 1012 Forest Avenue, listed by Alan Dunckel and Derk Brill of Alain Pinel Realtors in Palo Alto. Since there isn’t an actual Alain Pinel at that office, if you ask for him, you will be connected to Alan Dunckel, who is a nice guy and a good agent and his name is close enough. They have just reduced the price on this home from $2,395,000 to $2,195,000. Not bad for a 4 year old home in that neighborhood. It will have an open house on Saturday and Sunday from 1:30 to 4:30.
Next we moved a little South to 2145 Emerson Street in equally shi-shi Old Palo Alto. This newer traditional home is listed by Lisa Liu of Alain Pinel Realtors for $2,095,000, down from $2,295,000. At 2248sf on a 5000sf lot, it’s a cozy home, with great details, and great natural lighting. Open Sunday from 1:30 to 4:30.
Saving the best for last is my Intero colleague David Troyer’s listing at 75 Coronado Avenue in Los Altos. This new home is 6721 square feet on two levels on a 14233sf lot. Using modern Craftsman architecture and high ceilings, even the basement feels open and spacious, and it has great finishes and details throughout. Normally shown by appointment only, I’ll be there this Sunday from 1:30 to 4:30. Please stop by!
If you would like more information on any of these or other homes for sale in the area, send me an email, or call me at 650-450-0450.
Have a great weekend!
Dow Above 10,000 For The First Time in a Year – Housing Prediction to Come True?
October 14, 2009
The Dow Closed Above the magic 10,000 mark for the first time in over a year, meaning that our 401(k)’s should be back from being 201(k)’s, and that it is time to test my response to the question “What will it take for the housing market to come back?”
I have been saying “Dow over 10,000″, with the logic that a great deal of our local wealth was held in stock on various mutual and hedge funds, and so stocks rebounding to near 2007/2008 levels would return that wealth to our stock accounts, with a little consumer optimism coming along for the ride.
While I never claimed to be Carnac the Magnificent, let’s see how the market has been responding to the rise of the Dow over the last month or so.
Strike 1: The median price of a home for sale in Palo Alto is about $200K lower than a year ago.
Strike 2: My theory that homes in the top 25% of the market are more sensitive to swings in wealth, IPO activity and stock values seems to have sprung a leak as well. The top of the market was on an upswing a year ago, and prices have dropped a bit over the last couple of weeks.
I’m going to quit while I’m ahead, but will defend my prognostication with the observation that the mix of homes can cause the median to bounce around a bit as well.
If you are a data junkie too, you can receive free weekly reports on the cities and ZIP Codes of your choice via email by subscribing at www.REMarketReports.com. No Spam, and opt out at any time.
Thanks for reading, and I hope you are well diversified.
Activity off the Charts, Tighter Guides, Tax Credit Extension– Weekly Comments for October 9, 2009
October 12, 2009
With the number of mortgage applications on purchases surging another 13% last week, combined with conforming-level rates remaining at sub-5% levels and pending home sales rising for the seventh straight month, who in the real-estate world doesn’t need an extra shot of espresso in the am! But not all is rosy with tighter guidelines and the Fed ready to raise rates as necessary to control inflation.
Applications and Rates
With total mortgage applications up 16% last week (13% for purchase applications), how is it that rates are lower if demand for loans is up? The answer is that rates are affected when loans are locked. So if applications are submitted, but processing times are extended and applicants are holding off locking their loan, rates will be lower until real demand (locking the loan) kicks in. The current trend seems to indicate that rates are moving higher, but not significantly. As such, if you are looking for that conforming 30-year fixed under 5%.., it’s still available. Non-conforming rates are also cooperating as they are tied more closely with savings rates than market fluctuations, and we all know how low those CD rates are right now.
What is important to note is that the Fed is concerned about the level of “slack” left as it relates to loose monetary policy, which suggests that tightening monetary policy (raising rates is one way to tighten the screws, but not the only way) has become the focus for the Fed.
Pending Home Sales Up 22.3% Over Last Year
August is typically a slower month for real estate sales, but August 2009 sure bucked the trend with the West reporting a 16% increase over last month and a 22.3% increase over last year—the index now stands at 130.5 in the West. For those still uncertain about whether low rates and tax credits are not doing their part to stabilize the housing market, this latest data is sure enlightening.
Even new construction purchases were up in August with new-construction inventory shrinking for the 28th consecutive month.
Fannie and Freddie Cutting DTI Allowances to 45%?!
Last quarter, Fannie and Freddie cut debt-to-income (“DTI”) allowances for their loans by 16% to 55%. Now, Fannie and Freddie have indicated that DTI allowances will be cut again to 45% DTI—an additional 18.2% cut! What this means is that borrowers who could afford a $500k home today will have to settle for a $400k home in the future. As if there aren’t enough motivating factors for first-time homebuyers already—low rates, low prices, tax credits– here’s another reason…
And speaking of the tax credit, let’s all keep our fingers’ crossed that it at least gets extended and hopefully improved!
Condodealz Update
If you know of anyone interested in purchasing a new condo in Palo Alto at sizeable discount, register yourself at condodealz.com as soon as practical, as a deal is currently in the works.
We’re working this weekend as we do every weekend, so please feel free to contact us at 650.543.8001 or 800.517.LOAN (5626).
Cheers,
Eric
Tales From The Front – My world in real estate, October 9, 2009
October 9, 2009
I’m going back to some of our original content here on 3Oceans and providing some commentary on selected homes I saw today on Broker’s Tour that are worthy of mention to me. Thanks to JT for driving today, and Steve for navigational assistance.
I dragged my Los Altos compatriots to Palo Alto today to see a couple of fine homes from the 1930’s. Being an old house nut, 320 Kellogg Avenue, listed by Tim Trailer of Coldwell Banker in Palo Alto really captured my attention with its period details, classy kitchen remodel and the big soaking tub in the master suite. Set on nearly half an acre of Old Palo Alto, this fine property will only set you back $9,750,000.
Moving downmarket to 2050 Waverly Avenue, listed by Bonnie Bjorn of Coldwell Banker in Menlo Park is this beautifully restored Dutch Colonial, offered with the reduced price of $4,995,000. It’s less house and less land than Kellogg, but you don’t have the train noise, and I actually like the neighborhood better. Plus the almost $5million in change will get you a nice little place overlooking the fairway at Pebble Beach, or a small winery in Sonoma . . .
The highlight for me today was this newer Palo Alto Hills estate, listed by Grace Wu of Alain Pinel for $4,299,000. Almost two acres of land, sweeping views of the Hills, and a 3 car garage (must have!) make this a winner. No open houses, but I can set up a showing if you are interested.
Finally, a big shout out to David Chung of Alain Pinel for rocking his new Audi R8 on broker’s tour today! I think he is the new winner in the sexy Palo Alto Realtor Car competition. Eat your heart out Ken!
If you would like to see any of the homes I wrote about today, let me know.
Thanks for reading . . .
Mortgage Mania 31 – October 2009
October 6, 2009
After a bit of a hiatus, we’re back with our weekly proprietary comments on new developments in the mortgage world, and how they affect you.
S&P/Case-Shiller Home Price Index Shows Broad Improvement
Just released this morning, the S&P/Case-Shiller Home Price Index for July continues to show price improvement across the board, with San Francisco showing an index of 128 (that means the appreciation rate since January of 2000 is 28%) and pricing improvement on a consistent basis since early this year.
As we all know, many homeowners and homebuyers view this index as the authority on real estate values; as such, the latest results show continued evidence that the “bottom” was reached much earlier this year.
Combine this with some recent anecdotes:
- There were 95 offers on a property in San Jose that went for 30% over asking at approximately $550,000.
- Inventory continues to be way below average at about 4 months
- New construction on the Peninsula wasn’t overbuilt to the degree of San Francisco and San Jose,
Combine this with continuing low interest rates, and you have a recipe for a very active Fall market here on the Peninsula.
Conforming Rates Set to Go Higher—Are You Prepared?
My hope is that it’s now common knowledge now that it’s highly likely that conforming mortgages between $625,500 and $729,750 will see rates moving higher by the end of October, leaving those who are looking to purchase or refinance a home only about a month before the cost of borrowing begins to make a significant move higher.
While we all know that the Fed added another $400b ($1.2T now, that’s $1,200,000,000,000.00 WOW!) towards the effort to keep conforming and treasury rates lower through the first quarter of 2010, the concerns include:
- there is no confirmation that the conforming limit of $729,750 will be extended, especially since median prices are much lower than in 2008
- There is no confirmation that the tax credit will be extended beyond November 30, 2009; and if it is, who knows what modifications may be enacted
- If Bernanke and the consensus among economic experts is correct about the recession being over, combined with the confidence gained in the stock market (and as such companies), how much inflationary pressure will exist to push rates higher?
“Jumbo” Market Improving?
As we all know, non-conforming loans like “jumbo” mortgages (locally, mortgage loan amounts in excess of $729,750) have primarily been tied to savings rates, which has kept the rates down. Further good news on this front is the fact that some of these mortgages are being sold in the secondary market and consumers are continuing to save about 4% of their income. The real concern I have here is that rates may be pushed higher by the need for regional banks like Sunwest to shift their focus and money to commercial loans to protect themselves from commercial foreclosures. Effective October 1, 2009, Sunwest will no longer engage in the wholesale mortgage lending business. That written, with home prices stabilizing, the non-conforming market will only improve, and right now there are very attractive 5/1 programs in the low-4% range…
Highlights From Our Monthly Mortgage Market Presentation in September
Every third Wednesday of the month, we do a presentation on the latest in the mortgage market, and here are some highlights:
- Mortgage Loan Disclosure Act simplified; no transaction can close sooner than 7 business days and final documents may be signed provided three business days have passed since disclosure of final terms
- Fannie and Freddie cut debt-to-income allowances by 15.4% to 55% DTI%– rate buydowns more important than ever for buyers
- Housing numbers continue to show strength overall, and the $1.5-$4mm will rebound as clients’ qualifications improve and non-conforming money continues to flow
- Mortgage purchase applications continue their weekly rise, placing more pressure on rates
- Thank goodness the foreclosure moratorium was lifted this month, as the market is in dire need of inventory
- Insight on the “W” theory (no, I’m not talking about Bush)—will there be a second bottom?
Food for Thought: Spending $123B is better than $1.4T
Have you thought about whether throwing $1,400,000,000,000 to keep rates low is the most cost-effective method of stimulating the economy?
I have always been a proponent of tax credits versus manipulating rates mainly because the goal of stabilizing the housing sector to stimulate the economy starts with incenting people to buy homes. Manipulating markets can be a fool’s game. Let’s think about this concept for a minute.
If we gave every homebuyer $15,000 to buy every home on the market for the next year, it would STILL be cheaper than throwing $1,400,000,000,000 at rates. No, really. About 8.2 million homes are sold per year (new and used) in high-inventory markets. If we gave every homebuyer $15,000 to buy the interest rate down and cover closing costs, that’s still only $123B, which would cover an entire year of real estate sales.
As such, it would take over 10 years to equal the $1.4T that we’re throwing at rates. Plus, the average loan in the US is less than $200,000; so if interest rates are about 1% below market today, meaning that the conforming 30-year fixed should be 6%, and someone buys 6 points on the loan to get a rate of 4.5%, that means that it’s actually 10X MORE EFFICIENT by giving homebuyers $15k per purchase versus artificially manipulating rates.
I am oversimplifying a bit, as money is being used to buy treasuries, which is good for institutional borrowing rates, which is good economic stimulator, but I thought you may be interested in the quick math.
Thanks for reading
