I’d like to thank Kristen Emery at Princeton Capital in Palo Alto for providing me with the first bit of information that actually explains what the changes to conforming loans will mean to someone in Silicon Valley trying to buy a home.

A little light reading for you:

We have seen a whirlwind of legislative activity these past few weeks! There is much confusion surrounding the recentlypassed Economic Stimulus Package and higher loan limits. Unfortunately, the new law can be confusing to decipher, andnot everyone will benefit. For this reason, we have provided an outline below that clarifies what this new law means for youand how you can benefit from the higher loan limits. 

Description and Overview:An economic stimulus package just passed Congress on February 7, 2008 and was signed into law by the President onFebruary 13, 2008. This new law is effective immediately and includes a temporary increase in both the FHA andconforming loan limits to as high as $729,750 in high cost areas. This means that the interest rates on many mortgages willgo down because these loans are now eligible to be purchased by Fannie Mae and Freddie Mac or insured by the FederalHousing Administration (FHA). Previously, the FHA was only allowed to insure loans with balances lower than $200,160 -$362,790, depending on the county where the property was located. Also, Fannie Mae and Freddie Mac were only allowedto purchase loans with balances at or below $417,000. This resulted in limited options and higher financing costs for thosewith loan balances above these limits. The new law substantially increases these limits in high cost areas and opens upnew options and lower financing costs for many people. 

How to Determine “High Cost” AreasThere are two things you must know in order to determine if you are in a high cost area: 

1. Understanding the Formula

If 125% of the local area median home price exceeds $417,000, the temporary loan limitwould be that 125% of the median home price with a cap of $729,750. Here are threeexamples to illustrate this concept: If the median home price in your area is $375,000, 125% of that number is$468,750. Thisis above the current $417k conforming loan limit. Therefore, the conforming loan limit inyour area WILL change and go up to $468,750. This number is also higher than thehighest FHA loan limits, so therefore your FHA loan limit will also go up to $468,750. If the median home price in your area is $650,000, 125% of that number is $812,500.This number is greater than the maximum cap of $729,250. Therefore, the conforming loan limit in your area willincrease to highest allowable amount under this new law which is $729,250. (Our median home price is $612,000 for Santa Clara County). 

2. Determining the Median Home Price in Your Area

The Secretary of Housing and Urban Development (HUD) will publish the median house prices within 30 days of the billgoing into effect (30 days from February 13, 2008). HUD does not have any interim stats or information for us to use. However, the bill also states that HUD can use any commercially available data if they are unable to compile theinformation on their own within the 30 day timeframe. With that in mind, it is likely that HUD’s numbers will be relativelyconsistent with the data published by the National Association of Realtors (NAR), which already has a solid track record oftracking and publishing this information on a quarterly basis. Therefore, until HUD actually publishes their version of the median home prices, the most accurate way to get thisinformation today is to utilize the data that is published by NAR. Ironically, NAR just released their latest median homeprice update for the 4th quarter of 2007 on February 14, 2008! Contact me today and I’ll research your info and let youknow exactly what the median home price is in your area and how you can benefit from this information. 

What do all the dates mean?

There is some confusion because the bill has a provision that says the higher limits areonly effective for loans originated between July 1, 2007 and December 31, 2008. Inshort, the reason it is effective beginning July 1, 2007, is because the credit crisis startedto unfold in July and August of 2007. Mortgage market conditions rapidly deterioratedalmost overnight. Many secondary market investors suddenly refused to purchase loansthat couldn’t be sold to Fannie Mae and Freddie Mac. (For more info on how this processworks, please see the article entitled Saga of the US Mortgage Industry.) Unfortunately, many mortgage banks had already funded these loans in their ownportfolio or through their warehouse lines of credit. Their intention was obviously to sellthese loans on the secondary market after the loans were funded. However, the creditcrisis prevented them from doing so, and they were stuck holding these loans in theirportfolio. The July 1, 2007 date in the bill is designed to allow these lenders to unloadthese mortgages and sell them on the secondary market to Fannie Mae and Freddie Mac. 

However, the July 1, 2007 date has no bearing whatsoever on new refinance transactions!

In other words, it doesn’tmatter when the loan you are refinancing was originated. The old loan could have been originated in 2005, 2006 oranytime before or after July 1, 2007 and it would have no effect whatsoever on your current purchase or refinancetransaction.

If you are refinancing a new loan today, whether it is a purchase or refinance transaction, that loan issubject to the new limits set forth in the bill. 

The other date of December 31, 2008 means that the old limits will go back into effect after this year. In other words, now isthe perfect time to buy a new home or refinance your mortgage because after this year, your costs will be higher and youroptions more limited again. 

When does this all go into effect?

February 13, 2008 – immediately upon the President’s signature. Therefore, HUD is obligated to publish the median homeprices within 30 days of that date. However, Fannie Mae, Freddie Mac, and various wholesale lenders may have different policies as to how these new loans are going to be priced and underwritten.

 - - - Information provided by:

Kristen Emery

Princeton Capital

Tags: 2008 real estate market, 4---mortgage-mania, Conforming Loans, first-time buyer, Mortgage, Mortgage Forgiveness Debt Relief Act of 2007

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Well, it was just a matter of time before someone who bought at the top of the market sued their agent because they paid too much for their house. In this article in today’s New York Times, we learn of the sad story of the Ummels who bought a retirement home in Carlsbad, CA to be near their children.

The Ummels worked with a Buyer’s Agent who had a fiduciary responsibility to assist them in finding and purchasing their home. They looked for quite a while, fired one agent and then canceled contracts on two other homes that they had written offers on. I’m sure nerves were getting a little frayed for all concerned by the time they finally bought their home.

“Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.”

Where things get interesting, and their agent, Mike Little, makes the rest of us look bad is stated further on in the article:

“Mr. Little also worked as a mortgage broker. The Ummels say he encouraged them to get their loan through him. Mr. Little ordered an appraisal of the house but did not respond to the couple’s requests to see it, the suit charges.

A few days after the couple moved in, in August 2005, they got a flier on their door from another realty agent. It showed a house up the street had just sold for $105,000 less than theirs, even though it was the same size.

Then they finally got their appraisal, which told them the house up the street was not only cheaper but had a pool. Another flier in early October mentioned a house down the street that was the same size and closed the same day as the Ummels’ but went for $175,000 less.

The Ummels accuse Mr. Little not only of withholding information but of exaggerating the virtues of their house to push them into a deal.

Ms. Ummel said in her deposition that Mr. Little had told them “many times that it was a very good buy.”

The mortgage brokerage that funded the loan, and the appraisal company both settled out of court, but Mr. Little fights on. I bounced this off of fellow contributor Eric Trailer, and we saw a couple of red flags waving.

1) Mr. Little acted as the agent and loan broker. This is legal, but as noted in the article, he now has twice the motivation to get the deal done.

2) He urged them to get their loan through him - again legal, but the ice in sunny Carlsbad is getting thinner.

3) Mr. Little’s appraiser found the house to be worth $1,150,000 to $1,200,000 in the summer of 2005, the Ummels’ appraiser valued the house at $1,050,000. This is about 10-15%, which is pretty significant, but within the realm of possibilities. I’m getting nervous if I’m Mr. Little’s broker however.

4) Mr. Little didn’t share his appraisal the Ummels. (His broker is drinking heavily at this point.)

Long story somewhat less long . . . The Ummels (plaintiffs) are suing because they didn’t get what they felt was appropriate representation from their agent. This is what many consumers expect of Realtors, and books like Freakonomics don’t help.

One of the things we contributors to 3Oceans preach is Transparency in Real Estate. We share the information and tools that we use with our clients, provide data from unbiased sources like Altos Research, and don’t try to do loans and sell houses at the same time.

End of rant, let the comments fly!

Thanks for reading . . .

Tags: Bad-Realtors, Buyer and seller tips, Dirty agent tricks, market downturn, Realtors who give the business a bad name, sneaky realtor tricks, Transparency

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With all of the media coverage about the implosion of the real estate market and the rising rate of foreclosures, every time I turn around someone is asking me about the health of the local real estate market in and around Palo Alto. They seem to expect me to echo what they are seeing on TV and reading in the newspaper. Nothing could be further from the truth, especially in Palo Alto, which is still enjoying a Seller’s Market with prices maintaining their stratospheric levels as hordes of well-qualified buyers patrol the city in hopes of seeing something new to look at. Last week there were a whopping three (that’s 3) new homes coming on the market in Palo Alto.

When hearing this unexpected good news on the health of the largest investment and asset that most non-Google employees have, a few folks have asked me if I think this market will continue (I do - subject of another posting), and that they are considering selling their homes in the Spring.

Spring, like April 2008? I ask

Yes.

Why then?

Well, that is when all the houses seem to come on the market, so that must be the best time to sell . . .

I have gotten better at controlling my reaction (giggling is a great way to start off on the wrong foot). But I then usually explain things in economic terms of Supply and Demand.

If you are a lemming seller and put your home on the market when everyone else does, how do you make it stand out from the competition? You can spend more on preparation (fresh remodel, landscaping, staging, etc.), more on marketing (more advertising, open houses, etc), or you can price it below the competition, or a combination of all three.

These approaches all result in less of a return for the homeowner at the end of the day, much like the price of oil usually drops in May because demand for heating oil has dropped off and the summer driving season hasn’t started yet. Alternatively, when oil is scarce like during a particularly cold winter, or if oil producers reduce production, prices go up.

What if you could make a house scarce? Would that increase the relative interest level and selling price?

Generally, we see the number of homes in Palo Alto for sale increase in mid-February and be high until around Memorial Day, then there is another seasonal increase after Labor Day until late October. Seasonal lows in inventory run from mid-November to mid-February, and then there is another drought in late Summer. Selling prices tend to run inverse of these seasonal inventory fluctuations, as greater scarcity creates greater perceived value for Buyers.

In Summary, an easy way to get your property to stand out is to put it on the market during one of the low inventory times. Serious buyers are always looking, and who would you rather have trooping through your home, serious, qualified Buyers, or people who like to look at houses on a pleasant weekend afternoon?

If you are considering selling, don’t be a lemming and wait until Spring, contact your real estate professional and have him or her show you market data and discuss how to get your home on the market during one of the “off-times”.

Skeptical? Don’t believe me? You can see objective market data for your area, courtesy of Altos Research here, or sign up for a customized report on the market in your area here.

Thanks for reading.

Tags: , 94301, 94303, 94306, Altos Research, Area-information, Buyer and seller tips, Home selling, market timing, Palo Alto, palo alto market, palo alto real estate market, palo alto realtor, palo-alto-real-estate, when to sell my home?

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Ben And The Boys (aka the FOMC) cut short-term interests rates by .25% earlier today in an attempt to:

1) Soften the mortgage industry landing from a smoking hole in the ground, to more of a smoldering skid mark. Don’t tell Washington Mutual who announced 3000 employees were getting pink slips in their stockings, and the bank is setting aside up to $1.6 Billion for losses in the 4th quarter.

2) Generate some consumer confidence this Holiday Shopping Season, since 2/3 of our economy is driven by consumer spending. Uncle Sam wants you to buy a Ford and / or Chevy.

3) Address concerns that “information suggests that economic growth is slowing,”

4) Give me somethnig to rant about (Thanks, guys!)

Interestingly, Wall Street, which has been on the rise over the last two weeks, had apparently priced in a bigger cut, so it responded by pummeling the Dow, lwhich lost 294 points on the day. Ouch! Maybe some retail therapy is in order . . .

Mortgage rates weren’t significantly affected by the rate cut. The Fed Funds rate is a short-term rate, and mortgage rates are long term. Mortgage rates are still at two-year lows, and it’s a Neutral or Buyer’s Market everywhere but Palo Alto.

Apparently, Palo Altans stayed awake in Econ 101 during the lecture on how relative Supply and Demand affects Prices. Although Demand in Palo Alto has dropped in recent months, Supply has dropped equally or more, maintaining or increasing Prices. Adam Smith would be proud.

Bueller, Bueller . . .

For an actual news article on today’s rate cut by an actual journalist, as opposed to a caffeineated Realtor, click here.

 Thanks for reading.

Tags: 4---mortgage-mania, 94301, 94303, 94306, buyer's market, Consumer, For buyers, Home buying, interest rate cut, interest rates, Mortgages, Palo Alto, palo alto market, palo alto realtor, palo-alto-real-estate, seller's market, washington mutual

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Pat Kitano notes with his usual insight that spontaneity is both the joy and bane of blogging. In a rush of post-Martian Flu exuberance, I showed what looked to be a pretty neat correlation between the NASDAQ and Palo Alto median home prices. Alas, the spontaneity of that moment led me to not dig quite deep enough…

Enter reader Greg, whose facility with numbers and patterns has led to previous interesting discussions. He suggested running some regression analysis (for those who missed Stats 101, “regression analysis” is simply finding relationships between different groups of numbers.) I did that and came up — surprisingly — empty-handed: it turned out there was actually very little correlation, mathematically speaking, between the NASDAQ and Palo Alto median home prices. Puzzling, puzzling indeed, because the graph showed at least a rough correlation.

Greg ran a regression of his own comparing Palo Alto median home prices vs. the number of months since January 1997…and found a reasonably strong correlation, an R-squared value of 75% for those who care about such things.

Here’s a graph:

The wavy blue line indicates Palo Alto median home prices; the straight pink line is the prediction, based simply on the number of months since January 1997.

Fortunately, all was not lost, as it turns out that while the NASDAQ alone was not a very good predictor, adding it to the mix turned out to increase the accuracy of the predictions, resulting in an R-squared value of 85%. The chart:

Again, the blue line represents Palo Alto median home prices, while the pink line represents the predicted median home price, based on both the number of months since January 1997 and the NASDAQ.

What does this all mean? In a nutshell, this entire analysis proved what we all already know to be true: Palo Alto real estate prices in the last 10 years have tended to go up. The key predictor of prices is simply time; adding in other variables like the NASDAQ improves the predictive power, but the main indicator — by far — is simply that of time.

Which brings us back to the Lesotho Loti. Just for the fun of it, I ran one more regression, this time between Palo Alto median home prices and two variables: the number of months since January 1997, and the exchange rate between the US Dollar and the Lesotho Loti. (Yep, I’m the kind of person who “just for the fun of it” runs regressions. For other like-minded people, the R-squared for this regression was 75%.)

The graph:

So does this mean that the exchange rate of the US dollar vs. the Lesotho Loti is an accurate predictor of Palo Alto median home prices? Not at all…it simply means that adding in that variable doesn’t really detract from the predictive power of the time factor.

Geek out.

Tags: For buyers, For sellers, Palo Alto, Real estate, Real-estate-Analysis

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