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Free Mortgage Payment Protection, FHA Standards Easing and Loan Mods at Absolute Mortgage Banking

Free mortgage payment insurance, really?  Yes!  While hosting one of my monthly mortgage market updates, which generally occur every third Wednesday of the month, I learned that CAR actually offers complimentary mortgage protection through their Housing Affordability Program (special thanks to Pam Page and Julia Keady for this information).   To be eligible, the following are a few highlights:

• First-time buyers only
• Dwelling must be single-family residential
• Must close escrow by December 31, 2009
• Must be represented by a CA Realtor
• Buyer(s) have not received benefits from HAF in the past

The maximum monthly benefit is $2,250 per month for a total duration of six months, after an initial four-month seasoning period.  As such, it may be worth looking in to additional providers to augment the CAR program, should additional peace of mind be desired.

So what else was good information discussed at the update on Wednesday? 

• Bridge financing is available for qualified move-up buyers looking to leverage their current home and buy before they sell
• “Jumbo” money is more available today than it has been over the last year, which is primarily due to price stabilization– there are now programs offering rates below 4%, leverage as high as 90% (80% to $2mm loan amount!) and financing for investment properties
• with the elevated conforming loan limits staying in tact, rates below 5% and a total of $18,000 in tax credits available to eligible buyers, first-time buyers are likely much better off owning versus renting provided that the holding period is five years
• Move-up buyers appear to be the most motivated lately, as we are seeing twice the number of applications on “jumbo” mortgages versus conforming mortgages coming in at present
• with qualifications tightening, sellers are wise to consider offering up to 2% of the sales price  as a credit toward a buyer’s non-recurring closing costs to yield a lower rate and therefore payment
•  Multiple offers are back, so it’s good to know that the 21-day close is also available again

Next update presentation will be on January 20, 9:30 am and posted on the AMB website calendar– hope to see you there!

FHA Standards Easing

If you know of someone looking to puchase a condo in a new development,  HUD just made it easier to obtain an FHA loan.   HUD is easing up on the requirements that 50% of the units be sold (now down to 30%) and now allows up to 50% of the units to be FHA financed (up from 30%) before funding for FHA is allowed.  The rule that no more than 10% of the units can be owned by one owner and that 50% of the project must be owner occupied hasn’t changed, and the developers aren’t very happy about it, but the reality is that the deal is simply not insurable otherwise.

Loan Modifications Available Through AMB

Coming soon, Absolute Mortgage Banking will have an arrangement with a reputable company that can help individuals modify their loans per the HAMP requirements, and we’ll make the process very easy with a link through our website.  We are in the final due-diligence stage, and we will have a formal announcement likely before Thanksgiving. 

Tax Credit Extended, Markets Further Stabilizing and Real Estate Ideal Hedge

Tax Credit and Conforming/FHA Loan Limit Extended

Made official on Friday, the tax credit for home purchases was extended through July 1, 2010 and the important details are exactly as they were in my post on Friday the 30th of October, which was summarized as follows:

· Effective on binding real estate contracts from December 1, 2009 through April 30, 2010, The tax credit would be $8,000 for first time home buyers and $6,500 for move-up buyers who have owned their current home for at least five years

· The tax credit expires on April 30, 2010; however, if a binding contract is reached by April 30, 2010, buyers have an additional 60 days to close the deal and still be eligible for the tax credit

· For purchases made in 2010, taxpayers would be able to claim the credit on their 2009 income tax return

· The income limits for both first time home buyers and move-up buyers would be $125,000 for single return and $225,000 joint return.

· Cost of the home may not exceed $800,000 to be eligible.

Remember that a tax credit has about THREE TIMES the impact of a tax deduction, which allows someone earning $125,000 per year to be taxed on about $102,000*. And since other items like interest and property taxes are also deductible*, that same individual may be looking at less than half of their earnings being fully taxable..!*

Add the above news to the fact HUD also extended the conforming loan limit of $729,750 in the Bay Area to December 31, 2010, and you have a “perfect storm” for every qualified first-time buyer in the Bay Area.

S&P Case-Shiller Confirming Further Improvement of Housing Prices

Released last week, the S&P Case-Shiller index confirms that housing prices continue to improve, especially in areas like San Francisco where the index moved another 2.8% in August to 132.47. This marks the seventh straight month of improvement.

Zillow also reported that their index reflected further stabilization for the third quarter, with over 26% of the metropolitan statistical areas showing signs of improvement.

Real Estate as an Ideal Hedge to Both the “W” Concern and Inflation

You may recall from my last post that we are seeing far more application activity for purchases in the $1mm+ range, especially the $1.5mm to $4mm range. These applications have been coming from our more financially-minded clients, as they not only see tremendous opportunity to obtain a more valuable home, but they are very concerned about a “W”-shaped economic recovery and subsequent inflation. As such, obtaining an upgraded home for less, cheap financing and hedging against inflation make buying a larger home an ideal move. All things being relative, the reality is that the S&P 500 currently has a rather high price-to-earnings ratio at about 19.52 versus the historical average of 15.7. As such, if we were in average economic circumstances, it’s arguable that the stock market is overvalued by about 25%. Given the fact that our current economy is FAR from being in average condition, it’s anyone’s guess just how overvalued the stock market is. All I know is that my savviest, financially-minded clients think that the stock market is due a correction and that real estate is a great asset to have as a hedge against both a market correction and inevitable inflation.

Fannie’s New Program: Deed for Lease

Announced on November 5, Fannie Mae is helping those qualified applicants to essentially sell and lease back their current home. This program is also applicable to investment-property owners who are facing foreclosure and wish to deed the property over to the lender and allow the renters to continue renting at market levels.

Rates and Activity

• Rates continue to run as low as 3.75%, depending on a number of different factors, with the conforming 30-year at just under 5% and the jumbo 30-year at about 4.75%
• 71% of our transactions last month were purchases, and the average loan was in the $500k range.
• As mentioned above, we’re seeing a heavy trend in purchase applications for the move-up market, but inventory is turning off a majority of those buyers
• We closed a deal in TWO weeks, but we still recommend a 30-day closing period
• If you or someone you know prefers to pay cash for a purchase, then finance that purchase within 90 days to protect valuable tax advantages, we can help, as we have programs that DO NOT require 6 months seasoning and pricing is based on purchase money, NOT a cash-out refinance

* Does not constitute tax advice.  Please seek any qualified tax professional for proper guidance.

High-cost conforming loans and housing prices

On November 6, Scott Sambucci of Altos Research did some analysis of housing prices around the $730,00 sales price to see if conforming loans requiring as little as 5% down were having an impact on selling prices, vs. the 20% minimum down payment for loans over $729,000.

Basically, there is an effect, and we are seeing market striations here locally at the $1.5M and $2M price points as well, where most lenders require 20% and 25% down payments respectively.

Get the scoop, analysis and commentary with cool charts HERE

Economic Forecast, Extending the Tax Credit and the Golden Window for Buyers

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.

Activity off the Charts, Tighter Guides, Tax Credit Extension– Weekly Comments for October 9, 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 28^th 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

Mortgage Mania 31 – October 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:

1. There were 95 offers on a property in San Jose that went for 30% over asking at approximately $550,000.
2. Inventory continues to be way below average at about 4 months
3. 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:

1. there is no confirmation that the conforming limit of $729,750 will be extended, especially since median prices are much lower than in 2008
2. 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
3. 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:

1. 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
2. Fannie and Freddie cut debt-to-income allowances by 15.4% to 55% DTI%– rate buydowns more important than ever for buyers
3. 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
4. Mortgage purchase applications continue their weekly rise, placing more pressure on rates
5. Thank goodness the foreclosure moratorium was lifted this month, as the market is in dire need of inventory
6. 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

Pendings, Applications and Multiple Offers all UP

Fellow contributor sent this to me, and I thought is was worth sharing. I’ll have Administrator Kevin re-post this under his authorship when he has a minute….

We are finally seeing seeing a little sunlight through the economic gloom, both nationally and locally. Take a look at these new statistics, and some anecdotal data from here in Palo Alto.

Pending Home Sales

On a seasonally-adjusted basis, pending home sales in the US were up 3.2% last month (3.9% in the West) and 1.1% over last year (1.7% for the West)

On a non-seasonally-adjusted basis, pendings were up 28.2% last month (23.9% in the West) and 3.2% over last year (4.3% in the West)– wow

What’s significant about this is not only the fact that we continue to see more homes selling, but the index itself is running at volumes similar to what we saw in 2001!  Further, this activity helps to stabilize the market, which leads to:

1. more available lending, especially for the non-conforming (jumbo’s equity lines, construction financing) market
2. helps the conforming market by enabling the MI companies to insure up to 95% again, as opposed to the 85% that they’re at now
3. appraisal report concerns reduce
4. reduces the emotional aspect of the sale that has created a tremendous amount of tension in the marketplace, as both buyer and seller feel more comfortable about moving forward

A factor that could be contributing to this increased volume is REO’s since Fannie and Freddie had a moratorium on foreclosures from December through March.  As such, we may see a slight decrease in the median home price for the month of April.  That written, it’s been the first-time homebuyers who have been driving this market, and first-timers don’t prefer to buy REO’s due to the headaches and lack of disclosure involved.

Purchase Applications Continue to Increase

Up 5% over last week on purchase applications, with no signs of slowing down.  Refi’s are naturally very volatile as rates fluctuate with supply and demand.  Overall, the conforming-level loans applications take the majority of overall applications but we have seen non-conforming application double this month over last.

Rates

On conforming loans ($ to $729,750) no matter how hard the government (taxpayers) works to throw money into the system, demand continues to outstrip supply driving rates higher.

On non-conforming loans, rates are driven by deposit rates, which have remained low this year.  The 30-year is running about 6% with the 10/1 about 5.5%, the 7/1 about 5.25%, the 5/1 about 5% and the 3-year at 4.75%

Any mortgage rate below 7% is beating the average over the last 40 years.

Multiple Offers Coming Back

Last night one of our clients was the successful bidder of FOURTEEN total contracts submitted- wow!  And, yes, this was on a $1.3mm home in Palo Alto.  The important thing to remember is that going the old strategy of  “as is” with “no contingencies” against multiple offers should be used with high caution when there’s a loan involved and the loan-to-value limits are applicable.  Why?   The due-diligence process on loans is 4X what it used to be, and appraisal reports are highly scrutinized; as such, it’s recommended that only the most qualified buyers consider proceeding as above.

Mortgage Process, Guidelines and Discretion

Did you know that a loan is actually NEVER officially committed until it funds?  In most of the US, the financing contingency runs all the way to funding.

For the first time in 10 years, underwriters are using discretion to determine an applicant’s ability to replay a loan; as such, guidelines are just that—guidelines—and transactions may be in jeopardy if the process is rushed.  A good example are those borrowers who have had a bankrupts in the past.  Individuals who file bankruptcy once are 80% likely to do so again in their lifetime.   An underwriter may see that a credit score requirement is met, but if the overall profile of the applicant’s repayment history is highly questionable, the request could be severely altered or declined.

The process is far more involved than it’s ever been, for both good and bad reasons.  As such, we all need to keep in mind that closing dates need to be flexible.  Additional due diligence is required on every transaction, and the verification process alone is one that can make the difference between a deal closing and a deal blowing up.  A solid, reliable lending source will always provide proper guidance and multiple solutions

Stress Test

In a nutshell, BofA and Morgan Stanley are ranked at the bottom with Citibank and Wells in the middle, JP Morgan and Goldman at the top…  The need to raise additional capital places stress on the system and essentially forces rates up since investors know that additional capital is required and will therefore demand a premium for it.  For a 4-page version of the results, check out RBC’s summary.

Buydowns and the Bottom

If you were in the market to buy a $2,000,000 home home in the Bay Area, would it make a differnce to you if the monthly investment was less than $5,000 with a 30% down payment?   And I’m not just talking about the mortgage payment, I am talking about complete, tax adjusted cash flow including a 4.25% 30-year mortgage fixed for 10 years, property taxes and homeowners insurance.  Sound too good to be true?  It’s not.  And yes it beats market rental rates by thousands.

Interest-rate buydowns are one of the most effective methods for both buyers and seller to obtain what they want, which of course is value.  For the sellers, buying down an interest rate can have up to 8X the power over a price reduction, depending on the cost to buy the rate down.  For buyers, a lower rate means higher qualification and bragging rights of having the lowest mortgage rate on the planet.  In the example above:

• If the buyer was qualified up to $1.8mm at 5.5%, they are now qualified at $2mm at 4.25%
• The seller only needs to invest four points or $56,000 to move the buyer $200,000; thus a $56,000 investment saves the seller about $144,000, which is therefore about FOUR TIMES more effective than reducing price

I use the example above since I have been receiving a tremendous amount of inquiries about what’s happening at the higher end, which are those homes selling at $1.5mm+, and whether creative financing has been more common than not.  What we’re seeing is that creative financing, like interest rate buydowns and seller financing, are definitely more common at all price points.   But what’s been rather fascinating to watch is that many sellers are becoming less inclined to reduce price, despite the fact that prices are off by between 7% to 17%, depending on which city the property i located.  Yet, sellers have been very open to concessions that help them keep their price, despite the net proceeds being reduced.  One of the reasons for this, in my opinion, is the fact that buying activity has skyrocketed on the last few weeks, which is obviously encoraging to sellers.

So what’s drivng the buying activity?  Well, for starters,  it seems like many buyers properly sensed that we’ve hit the proverbial “bottom” of the real estate market, which was recently confirmed ed by the exisitng home sales figures that came out last week.  That’s right, not only are sales of both exisiting and new homes up significantly (4.7% and 5.1% respectively), the US median price and average price were both up in February over January.   Add this data to the fact that interest rates have set a new low record, plus further validation from one of most respected economic forecasting sources avalable, the UCLA forecast, that 2010 will be a year of recovery, and it becomes clearer and clearer that there couldn’t be a greater opprtunity to buy real estate.

Change, Logic and Money

January is a month typically filled with many things inspirational, and I must say that January 2009 appears exceptional.  In listening to Obama’s inaugural speech on Tuesday, my own interpretation was, “The power of change begins with me.  With you.  The sooner we all believe that we can change things for the better, the sooner we ACT to make things better.”

 Would you like a tax credit of $7,500 for buying a home?  And I mean a REAL credit, not the 0.00% loan that the 2008 stimulus package was enactingfor firs time home buyers?  Well, that’s the latest possible modification going forward as part of the 2009 Stimulus Package, and it’s NOT limited to first time home buyers.  There’s discussion that ANYONE wanting to buy residential real estate will be entitled to this $7,500credit.   As you know, a tax credit directly offsets the amount of federal tax that you may owe the federal government—it’s not a reduction in taxable income—which makes this a very compelling reason for would be home seekers and investors to make a purchase this year.   

Want another compelling reason why the smart, savvy buyers are acting sooner than later?  Because they know that average appreciation rates in California are 8.8% over the last 40 years (yes we all know that the Peninsula is much greater), and today provide an opportunity for both tremendous value and cheap financing.  Let’s think about real value for a moment.  The last year we had average appreciation in California, it was the year 2001 (8.7%).  If we strip out the overbuilt areas of California.., and concentrate specifically on areas where housing expansion is extremely limited, like the Peninsula, one can simply take the median price of comparable homes in 2001, add 8.8% appreciation per year, depreciate appropriate improvements to the property and a value may be derived.  Thus, if a would-be buyer can obtain a home at that value or better, and combine the cheap cost financing, that’s an ideal move on a fundamental basis, whether the purchase is for shelter or for investment.

Want more?  OK.  How about the fact that, since 1968, there have only been four real periods of decline:  1984 (0.1%, so not really), 1990 (only 1.2%, despite the Loma Prieta earthquake in October 1989), 1992-1996 (Average of 2.44% despite a major recession following a major earthquake) and today (yes, believe it or not, there was NO decline for CA as a whole in 2001 when the stock market crashed; in fact, it was up 8.7% in 2001 and up over 20% in 2002. All the more reason why 2001 is a good basis to use.  

Want even more? “Thank you, Sir, may I have another?”  Sure.  How about the fact that I have personally bought at a low point (1994), sold and bought at a high point (2000), sold and bought at a mid point (2004) and came out ahead EVERY time.  In fact, that stepping-stone approach toward buying a home in Palo Alto without a trust fund was a goal realized solely because of real-estate appreciation.  On that note, let’s review again the fundamentals of buying real estate for both the person seeking shelter and the person seeking an investment. 

For those seeking shelter, it does not matter which price point one is buying at today, as there is good value on property and cheap money available now.   It also matters very little at this point whether we’re at the bottom of the current cycle.  The reality is that interest rates across the board, combined with attractive pricing, have made it far more financially advantageous to buy versus rent.  And with a 5-year holding period, equity is protected and an increase to net worth is likely.  For those looking to buy their primary residence, and who are also trying to time the market, they will likely be settling for less desirable property at a higher cost…    

For those seeking investment, there are properties everywhere that are positively cash flowing, thanks again to a strong combination of value and very cheap financing.   A recent example I looked at was a 4-plex here on the Peninsula going for about $900k, and it POSITIVELY cash flowed with only 10% down!  To boot, if the client had 30% to place, it would yield a capitalization rate of almost 3%– that’s HUGE for residential property investment on the Peninsula!   

What about financing?   Mortgage banks offer the greatest breadth and depth of available programs, but large institutions with reputable loan professionals are a good alternative .  As you may have heard this week, Chase is the latest major player to cease brokerage operations (yet they are still buying paper from mortgage banks) making it tougher for brokers to source money.  Rates on conforming programs have risen in recent weeks, but rates are still very attractive around 5%.  Further, rates on non-conforming/jumbo programs have also been very attractive at rates BELOW 5%.

Please keep in mind that seller financing is an ideal way for buyers to buy more valuable property while protecting their liquidity and sellers to obtain a great investment while selling their property at a reasonable price.   Many are waking up to this option, which will undoubtedly move greater inventory.

Mortgage Mania 19 – The Jumbo Strikes Back

Amid all the celebration and hullabaloo associated with the recent drop in conforming interest rates as a result of the Treasury Department taking over management of GSE’s Fannie May and Freddie Mac, there has been scant analysis of the elephant in the room, namely Jumbo (aka non-conforming) loans that are part and parcel of home purchasing here in Silicon Valley.

The GSEs hold or have securitized nearly half — roughly $5 trillion — of all mortgages in the U.S., and in the current environment with private lender constraints, they account for the vast majority of all new mortgages in California.

 This bailout (oops, did I say bailout?) removes much of the risk to lenders of writing mortgages for under $729,000 locally, decreasing to $649,000 next year, because they can resell these loans to the government backed and now managed GSE’s.

But what about loans over $729,000? Well, Wall Street and the secondary market will still be willing to buy those that are considered low risk (excellent credit score, low loan-to-value ratio, verifiable income), but they will demand a risk premium for those loans, meaning that rates are likely to go up, taking us back to the bifurcated market for rates that we have seen in previous years.

 On his way to the SILVAR Golf Tournament yesterday, co-contributor and local mortgage banking hotshot Eric Trailer of Absolute Mortgage Bank in Palo Alto gave this quick analysis of where he sees rates going (paraphrased here):

If you know you can sell off a loan to a government backed agency, you have very low risk, so you demand a low interest rate. However, as risk increases you will demand a greater “risk premium” to hedge against not being able to sell that loan, or the buyer defaulting on that loan. Right now we are seeing investors who are willing to lend the 20% to take a buyer from a 20% down, 80% loan to a 100% loan, but at 15% with 5 or 6 points. That’s expensive money, which is why it is dubbed “hard money”, but it offsets the risk to the lender.

 Eric thinks we could see Jumbo rates heading to the 8 – 9% region, which is still lower than in the 80’s, but the difference between a 6% loan and a 9% loan on $1,000,000 is $2500 a month just in interest.

 Let’s do some math. If you have an 80% mortgage on a median priced home in Palo Alto ($1,921,214, source Altos Research). That is a mortgage of $1,536,971, and payments increasing from $7685 @ 6% to $11,527 @ 9%. That’s a lot of $4.25 a gallon gas!

 So, if you are planning on buying a new home and you need to borrow more than $729,000 you may want to get out there looking sooner rather than later.

 To learn more about the takeover of Fannie Mae and Freddie Mac and what it means to your home purchase, check out a new video featuring California Association of Realtors Executive Vice President Joel Singer at http://www.car.org/newsstand/video-js-gse. In “Fannie and Freddie: Why They Matter to You,” Joel explains the often confusing but critical role Fannie Mae and Freddie Mac play in the housing market in clear and concise terms.

Thanks for reading . . .

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