As our resident expert, Kevin Boer noted in his April 1 posting, the housing market officially hit  bottom a couple of weeks ago. For those of you who  were  skeptical of his information given the  April 1 posting date, and Kevin’s well known reputation for satire and irony, the California Association of Realtors published some new market data yesterday (April 24) showing how real estate really is local, and that the local real estate market in Silicon Valley is humming along nicely, thank you:

In case you’ve been wondering why high-end real estate markets continue to perform relatively well:  One out of every 10,000 American families has an annual income greater than $10.7 million, according to two university professors who study the super-rich.  By their tally, there are some 15,000 Americans who fit into that category.  These individuals also are getting an increasing share of the economic bounty:  In 2006, the super-rich possessed 3.89 percent of total income, up from .87 percent in 1980 and the highest level since 1916.

Strong employment and wage growth are two factors that have helped the San Francisco Bay Area stave off the kind of home sales and price declines experienced in the inland regions of California.  For example, Santa Clara County residents earn nearly double the nation’s average weekly wage and surpassed Manhattan as the county whose residents take home the largest paycheck, according to the U.S. Bureau of Labor Statistics.  Santa Clarans take home an average of $1,585 per week, slightly more than Manhattanites, who earn an average of $1,544 a week.  San Mateo County ranks fifth in the nation at $1,322, while San Francisco is eighth at $1,286.  Nationally, the average is $818.  San Francisco ranked tenth in new-job generation, adding 18,000 jobs for the twelve months ending Sept. 30, 2007.

Despite the above, some worry that California’s technology sector may be in for another “dot bomb.”  But experts say technology and Internet companies are better prepared to weather the storm this time around.  Their reasoning?  Many Web 2.0 companies learned a lesson from their free-spending predecessors and have discovered ways to operate with fewer employees and at lower costs.  That appeals to venture capitalists, who have tightened their criteria but continue to seek companies with strong revenue models.

Lately, I have been describing the market as “upside down”, where I am seeing unusually strong sales activity in the over $3 million market, while under $1 million is about the same as last year, or a little off depending on the neighborhood. What is interesting, is the $1 million to $3 million market, what I call “tweeners”, because these homes are in-between the entry-level and high-end.

Gross simplification warning: Buyers of “tweener” homes have significant amounts of cash or equity to put down, but still need a mortgage, and often a significant one. As banks and other mortgage providers have tightened their lending guidelines from recent years, it has become harder to get a $1.5 - $2 million mortgage, and those have become more expensive. As a result, more people aren’t upgrading, or they are getting priced down from say, $2.5 million to $2 million. Thus reducing demand relative to supply and creating a soft spot in the market.

In my experience, in the $3 million and over market, Buyers have more cash, Euros, Rubles, Yuan, Dinars, stock, gold, trust money, etc. to use to purchase their new “executive home”, so they are less concerned or affected by interest rates and loan qualification hurdles.

Let’s hope that VC money mentioned in the article above keeps flowing so we can keep paying for our million dollar tract homes and $5 a gallon (you know it’s coming!) gas.

I know you will have an opinion or comment, share it here.

Thanks for reading.

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Some of you will remember my post on the lawsuit in Southern California where the buyers of a home were suing their agent because they felt they overpaid, and the agent had acted to hide that information from them (Refresher available here).

This case had lawyers salivating, and brokers trembling, as it potentially could provide precedent and open the door to lawsuits by home buyers who purchased homes during the recent run-up in housing prices, and are now seeing their local markets stagnate or fall.

According to the following article released by the California Association of Realtors, the jury on the case found in favor of the real estate agent.

There was no mention of the issues that I flagged in my earlier post, namely that the agent didn’t share the appraisal or list of comparable properties with the client, or that he encouraged them to get their home loan through him and use his appraiser.

I’m sure that there are many real estate agents out there who also are great mortgage brokers. I’m not one of them. Frankly, I’m not smart enough to keep up with all the issues in real estate law and the local market, plus all the ongoing changes in the lending market.

Thanks for reading . . .

REALTOR® WINS HIGH PROFILE JURY TRIAL
After only two hours of deliberation yesterday, the jury unanimously vindicated a buyer’s agent accused by his clients of failing to disclose that two other homes in the neighborhood sold for less than what they paid. As a trial court case, this decision in Ummel v. Little is binding on the parties to the case, but has no binding authority for other cases. Moreover, the buyers may file an appeal.

This case involved a couple who bought a home in a coastal Carlsbad community in 2005 for $1.2 million. They regretted their purchase when they discovered that two other homes sold for about $150,000 less than theirs. They sued their real estate agent for negligent misrepresentation and breach of fiduciary duty. Their lawsuit grabbed national attention, given the recent downturn in the real estate market.

At the trial, the agent’s attorney argued that there were valid reasons these two other properties sold for less. One home, for example, had a lap pool which was unappealing to many buyers, and the sellers wanted to rent back the home for two years.

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All hail our legislative and executive branches for passing into law the latest shot of adrenaline to our economy: the 2008 stimulus package. And it looks like a record was set with how fast the bill became law– wow, pretty impressive… Efforts like providing consumers with tax refund checks and businesses with additional write-offs should certainly inject the economy with billions of dollars, but many have asked me how raising the conforming loan limit, especially in CA, will truly stimulate the economy. Further, many of those have asked me whether it’s really the right thing to do.

Let’s start with whether it’s the right thing to do. Probably one of the better arguments against raising the conforming loan limit is the fact that doing so seems to reward those institutions and individuals that/who put us into this mess. If estimates by the National Association of Realtors is correct, 500,000 refinance transactions will be generated, 300,000 additional homes will be purchased and 210,000 foreclosures will be avoided. So if we conservatively estimate the revenue generated and the losses avoided using industry standards, the total is over 40 billion dollars! $40 billion certainly helps answer the question of how such an effort helps the economy; but again, why help those who caused billions of dollars of losses and a turned the market upside down? Shouldn’t we be punishing those bad, bad people and institutions? Well, the truth is that many of those institutions and individuals have gone away or moved on. So let’s take a moment to see what’s being created here.

Raising the conforming loan limit has the following benefits:

1. It does in fact greatly stimulate the economy
2. Many consumers who got in over their head will now be able to afford their mortgage
3. Greater affordability for housing is created
4. It will influence a portion of the jumbo market that has been lost and create some investor confidence, and finally
5. California has been long overdue to have a raise to the conforming limit given that over 50% of the nation’s jumbo mortgages were originated in California.

Okay, let’s say that raising the conforming loan limit is good for a moment. What’s next and what are the details? There’s still some speculation, but here goes:

1. The conforming loan amount will be determined based on 125% of the median price of a given county…
2. This allowance will NOT go into effect for purchase or refinance transactions until July 1, 2008 (that’s the earliest date that the loan application may be signed) since the market needs from now to June 30, 2008 to liquidate current qualifying mortgages available for sale from institutions
3. The types of programs allowed will be fixed-rate programs on a full-doc basis, which means that the hybrid, interest-only programs using “stated” income will not be allowed
4. The property must be single-family and owner occupied, which means that 2nd homes, investment properties and multi-unit properties are ineligible
5. Credit scores must be “reasonable” with a combined loan-to-value not to exceed 90%
6. No cash-out, which means that a refinance may not allow the borrower to receive any greater than $2,000 at closing
7. Loans must be funded and closed prior to December 31, 2008

The last question really has to do with what pricing of conforming loans will look like come July 1, 2008. My prediction is that, all things being equal today, that conforming loan rates will increase and that jumbo loan rates will decrease, leaving a much smaller margin between conforming and jumbo loans in the future. Since all things won’t be equal due to decreased short-term rates by the Fed and the overall stimulus package helping the economy, conforming loan rates will increase greater than jumbo loan rates will decrease. So, if you’re buying closer to the conforming level today, you’re better off getting a mortgage for the long term; if you’re at the jumbo level today, you’re likely better off going more for a short-term solution. Of course always consult closely with your mortgage, tax and legal professional for the best advice as it relates to your individual situation.

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. . . Said my friend Amy to me the other day. Since she is sort of a typical first time buyer, (actually not), I decided to make an example of her and contribute to her 15 mins of fame.

Amy is your somewhat typical Sillycon Valley MBA tech-marketing type. She works in marketing for a large company, so her income is derived from her salary, as opposed to commissions or stock options that may or may not vest. The company is stable, so her bonuses tend to be consistent and her income fairly predictable. She recently moved from one giant tech company to a large one, so she has a number of years of experience in her industry and job classification, excellent credit, and some equity from a condo that she sold.

Being an MBA, and financially conservative (politically liberal), she can comfortably afford something in the $650K price range, even in the current lending environment. The previous idea was for her to take out two mortgages, a conforming loan of $417,000, and then a second or equity line to cover the rest.

Now that Mr. W. has signed off on the stimulus package that included a short-term increase in the conforming loan limit for 2008, Amy’s interest in buying a house has gone up. The tax rebate will let her buy her kids a happy meal and some new jeans, so her interest is much more in the mortgage changes.

At the time of our conversation, the difference in rates between a conforming (under $417,000) and jumbo ($417,001+) loan was about .75%, depending on a million things, which I will leave to co-contributor Eric Trailer to explain. Jsut plugging in some numbers, on a loan of $585,000 (10% down on our $650K house), her payments would drop about $4300 a year excluding taxes if that loan was at the lower rate. Now we are talking interesting.

Admittedly, this is very simplified, because it doesn’t take into account the cost of a conforming first and then a second, or whether lenders will have tiered pricing based on the loan amount, or credit scores, documented vs. non-documented income, etc., etc., etc.

My intent is to show the effect of this new law on “normal” Silicon Valley home buyers who have “normal” jobs, and are trying to put a roof over their heads. While the tax rebates of a few hundred dollars will only have minor impacts on most of us (I get $300, I think), the effect on home buying capability will be potentially significant.

Let the comments fly, and thanks for reading.

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The Superbowl traditionally marks the beginning of the Spring real estate market here in Silicon Valley. True to form, we are seeing inventories climb from seasonal lows, and a lot more people visiting open houses on the weekends. As the media continues to run stories on increasing foreclosures, and an economic stimulus package that includes an increase in the limits for conforming loans wends its way through Congress, more and more people are asking me if this is a good time to buy a home.

 In our area (Palo Alto, Los Altos, Los Altos Hills, Menlo Park, Mountain View), prices have been stable in 2007 (except Palo Alto which is up significantly), and we aren’t seeing the big jumps in foreclosure activity that are widely reported in the media in other areas. As the Federal Reserve has cut interest rates to stave off a national recession, loans have become more affordable nationwide, with rates near historic lows.

The majority of short sales and foreclosures in the area have been in homes in the $600,000 price range, having the effect of making many of these homes more affordable as lenders want to get rid of them. In contrast to most economic downturns, the higher - end market is doing better than the lower end.

Fellow contributor and mortgage banker Eric Trailer at Absolute Mortgage Bank in Palo Alto had these thoughts on the local housing market for the next few months:

“The coil on the Spring market is winding tighter every day this year already.  Applications are up 100+% this month over December and January’s production is more than double December’s.  In addition, we continue to be flooded with refinance inquiries this month.  Many of the buyers that we had on the fence have been jumping off in an attempt to get into contract on a home prior to February 9.  Why Feb 9?  That’s the weekend following The Superbowl, and those fence-jumpers feel as though they can avoid the threat of multiple offers by securing their home now.  With many of the top agents that we do business with stating that they have multiple listings coming on the market the week of February 9, combined with the flurry of activity on the buyer’s side, combined further with the strength of our local economy, it’s looks like this Spring will produce transactions well beyond expectation.”

Well Eric, it’s February 10th, my open house for today sold without contingencies 3 days after going on the market, and the number of new listings in Palo Alto this week was double that of any week for about 3 months. It looks like we are off to a good start to 2008, and the local economic indicators are still favorable.

Homes are not liquid investments like stocks, so make sure you actually like the house you are buying, and plan to be there for 5 years or more. With those caveats, in this area, it’s almost always a good time to buy a home.

Thanks for reading.

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Several changes are afoot that may give some breathing room to the troubled parts of the housing market — which includes much of the country, even some areas here in the Peninsula. The Fed’s surprise 75-basis point rate drop a few days ago may lead to lower mortgage rates, and some of those with soon-to-reset adjustable rate mortgages may also be breathing easier.

The news today is that the House of Representatives has signed off on at least a temporary increase in the conforming loan limit, from its current level of $417,000 (more than enough for much of the country, almost irrelevant here) to $625,000, and perhaps as high as $700,000 in high-cost states. Now if the Senate and W. sign off on it, we could have ourselves a deal!

Currently, conforming loans (those which are guaranteed and resold by Fannie Mae and Freddie Mac) are limited to $417,000 in most states, but are about 50% higher in “high-cost” states like Hawaii and Alaska. By some twisted government logic, California is not included as a “high-cost” state.

What impact would raising the limit from $417,000 to $625,000 have on our local market? As a non-mortgage professional, here’s my take on it… (I’m hoping that a local mortgage expert or two may chime in here.)

First, if you’re buying a $1.5M home and putting $300K down — ie you’re borrowing $1.2M — nothing would change for you. Since you’re borrowing more than the limit, your loan can’t and won’t be resold and guaranteed by Fannie and Freddie, and the risk premium for this has increased dramatically over the last year. A quick check over at bankrate.com shows a full 1.16% price difference between a conforming 30-year mortgage at 5.25% and a jumbo 30-year mortgage at 6.41%. Sorry, you’re stuck in the 6.41% camp.

However, if you’re buying a less expensive home — or putting down a lot more money — this could help dramatically. Say you’re buying a $750,000 home and you’re planning on putting $125,000 down — ie you’re getting a $625,000 loan.

Currently, that’s above the conforming loan limit, so with today’s rates you’d be paying (click click click on my calculator) $3914 per month. If the bill passes, you could get that same $625,000 loan for for 5.25% (click click click) or $3451 per month. That’s a handy pre-tax savings of a tad over $500/month, hardly chump change.

The lesson? If this bill passes, and the numbers work out such that the home you’ve been eying would require a loan between $417,000 and $625,000, here’s what you need to do:

• Scramble, beg, borrow, steal — do whatever you need to do in order to get enough of a downpayment to bring your loan in under $625,000.
• Work with your mortgage person to get a big enough second mortgage so that your first comes in under $625,000

Further coverage:

• Brian Brady notes that some political horse-trading may be ongoing as part of the negotiations. In particular, President Bush may have dropped his insistence on increases in loan limits being tied greater regulatory oversight.
• The Front Steps blog posits that this will cause a rush of demand for appropriately priced properties in San Francisco, leading to a good year for real estate.
• A commenter at Socketsite notes the downside of this move: Hooray! Privatize profits, then socialize the losses…Now all the troubled lenders can refinance this toxic garbage and put it into Fannie/Freddie’s lap (oh, and FHA too.)…I’m saving my $300 tax rebate (that I don’t qualify for) so that I can pay my share of the bailout.
• The OFHEO (government body charged with oversight of Fannie Mae and Freddie Mac) released a hefty 19-page position paper earlier this month with some fascinating statistics. Of particular note:
  Nearly 50% — half — of all jumbo loans come from California.

  Secondly, this graph, from the same OFHEO report, clearly shows the havoc the whole mortgage fiasco has caused to the Jumbo loan market:  the difference in interest rates between conforming and Jumbo loans more than quadrupled in 2007.  Here’s how to read this graph:  In January 2007, the interest rate difference between conforming and Jumbo loans was a scant 20 basis points; a confirming loan product at, say 6%, would have a comparable Jumbo product at 6.2%; by the end of 2007, that difference had increased to 80 basis points, so a conforming product at 6% would have a corresponding Jumbo product at 6.8%.

  That’s real money, folks!

  

Caveat: I am not a mortgage broker or banker. In particular, I am not your mortgage broker or banker. The above represents my layman’s understanding of the issue. Don’t make any kind of home purchasing decision based solely on the above. Talk to your mortgage professional. ‘Nuff said.

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I recently read a great post from Dan Green, a mortgage planner in Ohio, titled, “While Rates Are Low, Schedule Your Purchase Closing At Least 45 Days Out “, and I wanted to remind any potential home buyers searching within or around Palo Alto, CA that local sellers are still requiring a 30-day or less close. Thanks to our main man, Dr. Boer, for bringing this blog to my attention.

Dan does have some great points about turn times deteriorating, underwriters being more cautious and resources being slimmer. All of these concerns are valid and may press the close date on any transaction. Thus, it’s important to verify with whomever you select as your lender what the timetable looks like for your situation. As a general rule, purchase transactions are given higher priority than refinance transactions.

The reality is that we have worked on two transactions already this month where the close date was ten days or less from contract ratification. In fact, one call I received yesterday asked whether a month-end close would be possible for a client looking to buy a condo in Menlo Park. Yes, a one-week close is possible.

So how can you prepare, and whom can you trust to get your transaction done right and on time? I offer the following:

1. if you have a trusted mortgage lending source, double check to determine whether the institution makes direct lending decisions (usually a direct lender or a mortgage bank)

2. if your trusted source does not make direct decisions (usually a mortgage broker), request a realistic timetable to determine whether your loan will fund in the time required by the contract

3. ask your real estate professional for a referral to a lender that she or he trusts

No doubt, this is a fantastic time to be buying a home: there a some local values out there, rates are phenomenally low (have you seen that 5-year treasury lately, wow! And what a move by the Fed to lower another .75%..!) and our local economy is doing well (check out Iverson’s latest post for more on that subject). The flip side is that the inventory of available homes has not been very encouraging (only four new ones in Palo Alto on Friday– ouch).

My position has always been that you can’t go wrong with purchasing real estate in select areas of the peninsula, provided that your holding period is five years. And if you’re someone with a reliable real estate professional, a reliable lender, reasonable qualifications and a solid plan, you will likely see a nice bump to your net worth over the next five years by making a move sooner than later.

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