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

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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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A few days ago I spoke about the effect a mythical local insect, Vendus Encourigitis, has on housing inventory patterns here in Silicon Valley. It quite dependably comes out in the early part of each year, spraying homeowners with pheromones that make the notion of selling their home completely irresistible, thus putting an end to the seasonal problem we have here of low inventory. A close cousin of said insect, Achetus Encourigitis, tends to come out shortly thereafter, encouraging buyers to compete with eachother to buy the new inventory and drive prices up.

To continue the allegory, we look at another creature, this time a real one, but again with an allegorical function in this tale. I speak of the lowly plankton, a tiny oceanic life form: in size, seemingly insubstantial, but in importance, great. The plankton, you see, is at the bottom of many aquatic food chains, and if it were for some reason to disappear, the effect would be disastrous for the creatures that depend on it for food, and for predators of the creatures that depend on the plankton, and so forth: a ripple effect ultimately reaching most aquatic life.

The plankton of local real estate is the humble first-time homebuyer in the lower priced areas such as Redwood City, East Palo Alto, Menlo Park east of 101, parts of Mountain View and San Jose, and so forth. These folks purchased their homes in the last few years, assuming (as we all did) that prices would continue to rise, and they could then “move up” into a ritzier neighborhood with the equity they had built up. A higher than normal percentage (for this area) of such purchases were made with sub-prime loans.

Fast forward to 2008…these markets are hurting, some of them quite badly.

East Palo Alto’s inventory, for instance, has been marching steadily and worryingly upwards since early 2007…

…and prices have been going in the opposite — and expected — direction:

When inventory is over three times what it was a year ago, and prices have dropped by over 15%, the market basically freezes. Deflation does what it always does: makes the bargain-hunters decide to continue salivating just a bit more, because surely those prices are going to continue going down! Homes sell more slowly, prices continue downwards…it’s a vicious spiral.

And the plankton who own these homes? Well, if they can’t sell, that means they can’t buy the $850K starter home in Flood Park…and that homeowner can’t buy the $1.1M home in Palo Alto…who in turn can’t upgrade to the $1.6M property in Los Altos he’s been salivating over…who in turn can’t move to a respectable venture-capitalist-ridden neighborhood in Atherton.

The sub-prime woes affecting the lower-end markets are bound to eventually impact Palo Alto and its kin — though probably not as much as this analogy makes it sound. Why? In this market, there are plankton at almost every price point, so homeowners looking to sell don’t necessarily need to wait for a $500K homeowner to be able to sell his home. For every East Menlo Park’ian who was planning to — but no longer can — move across the 101 to buy an $850K home, there’s a dual-income tech couple who’s looking for the same $850K as their first home. Higher up the food chain, newly minted Googlers represent the plankton of the Atherton market.

But make no mistake about it: the lower end markets here are hurting, and will continue to do so for a while.

For instance, Redwood City’s inventory, much like East Palo Alto’s, is more than triple where it was a year ago…

…and prices in the two lowest quartiles are not looking pretty:

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The blogosphere has been buzzing since yesterday with news of the Microsoft-Facebook deal in which Microsoft invested $240M in Facebook in exchange for a 1.6% stake.  To spare you reaching for your calculators, that gives Facebook a whopping valuation of 15 billion (with a b) dollars — not bad for a company with a 24-year old college-dropout CEO.  (Perhaps part of the attraction of Facebook for Microsoft was a sort of nostalgic deja-vu on the part of Bill Gates, who is also a Harvard dropout, and was also running an exciting and very successful company by the age of 24.)

I’ll leave the analysis of the deal itself to pundits far more knowledgeable on the subject.  What interests me as a real estate professional is the impact this deal may have on real estate in the area.

The connection, in my mind, is quite simply:  One of the reasons why the real estate market here in Silicon Valley continues to chug along is that the tech industry is doing very well.  VC’s are flush with cash, busy investing in the next big thing.  Many of the local tech giants are having good years.  The current bellweather of the local tech economy is Mountain View-based Google, and with its shares well north of $600 each, and its ongoing voracious appetite for skilled engineers, the Valley is feeling pretty brash and confident these days.  That confidence, and the cash that comes from stock options, translates into buoyed demand for housing in this area.

So what happens if Google, which currently can do no wrong, stumbles a bit?  What if it fails to hit analysts’ quarterly earnings target?  What if it even fails to beat expectations by as much as analysts thought it would?  What if its stock drops to, say, $300, over a one year period?

Without a doubt, that would have a negative impact on our local real estate economy, both directly — Googlers not buying as much housing — and indirectly — the overall attitude of the local tech economy getting soured.

Here’s where Facebook, currently housed in downtown Palo Alto, comes in.  The company reminds many of us of the pre-IPO Google of, say, 5 years ago:  great product, smart people, excellent management, modest cash flow, and HUGE ambitious and expectations.  If Facebook continues along the same trajectory, it may well be that in, say, three years, it becomes our local bellweather.  It may well have several thousand stock-option-engorged employees right at the cusp of their homebuying life stage.  They may well do for our local housing economy what the Googlers are currently doing.

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I’m very excited to be a contributor to 3Oceans. I hope you find my posts to be as informative, witty and entertaining as they are intended to be.

I live in Mountain View and focus on the surrounding communities of Los Altos, Palo Alto and Menlo Park. In the last couple of months since the local real estate market has come roaring back (think bullet train), Mountain View has been the epicenter of the multiple offer, sales way above asking madness.

Mountain View used to be the Johnny-come-lately, ugly stepchild of Palo Alto to the North, so what is driving this turnaround? As with most answers to simple questions, it’s a number of things.

1. The other Castro Street – Like it’s more famous namesake in San Francisco, Castro Street in downtown Mountain View has become a destination in recent years, with more good restaurants, decent bars and even a couple of nightclubs drawing gen X and Y hipsters from the surrounding communities. The local nightlife scene has made housing within walking distance of Castro Street hot properties.
2. Google – As a former employee of Silicon Graphics, Inc which formerly inhabited the GooglePlex that now houses the Valley megalith, I know that many Google employees don’t stray all that far from work, and have used their stock funds and high-salaries to purchase homes in Mountain View. It is definitely a different vibe from ten years ago, and the sleepy neighborhoods like Cuesta Park and Varsity Park that border Los Altos are seeing an influx of young, successful 30 somethings looking for neighborhoods to start families in, while still being close to major transportation routes.
3. The 3 L’s of real estate – Location, location, location. Mountain View is at the intersection of 3 major freeways, 101, 85 and 237, and only 10 minutes from 280, giving good access to major commute routes to all of Silicon Valley’s major employment centers. If public transit is your thing, there are two train stations near housing areas, and a light rail station in the middle of the Whisman Station neighborhood.
4. Buzz, buzz, buzz – Last week, the San Jose Mercury News had a 30 page special section on Mountain View real estate and the run up in values in the last few years, which prompted me to write this as an opening post. If you haven’t seen it, check it out online. Interesting stuff.
5. Values – As prices in neighboring Palo Alto and Los Altos have climbed to stratospheric levels, many people who are priced out of those markets are finding better “deals” in Mountain View, so we are seeing a market with many buyers chasing a few homes, particularly in the areas adjacent to downtown.

I’m very bullish on Mountain View, and my trusty Magic 8-ball here says that the trend of increasing property values will continue, particularly on the West side of town in the 94040 ZIP code. Don’t just take my word for it though. Surf on over to Altos Research and check out their market reports for Mountain View 94040. You can even sign up to get them weekly.

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3 Oceans is pleased to welcome aboard Chris Iverson, a Realtor with Keller Williams, who operates under the enticing name of Ventoux Real Estate. Chris and I have been friends for several years and, similar to myself and some other contributors, is also a corporate refugee. Glad to have him on board, and welcome!

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Well, nowadays, and at least in the Bay Area, that is no longer the question. Bay Area buyers have become accustomed to hearing agents, and their friends, emphasize the importance of being “preapproved”. But like many overused and underexplained topic, few people actually fully understand the power of a properly executed preapproval, and how to distinguish it from its more commonplace cousin, a prequalification.

If you are in the market for to buy a home, especially in some of the more competitive neighborhoods of the Bay Area (such as Palo Alto, Menlo Park, Los Altos, Mountain View and San Carlos), your agent – if he or she is any good – will ask you to meet with a qualified mortgage advisor as soon as possible to get prequalified or preapproved. This will serve two main purposes: 1) the agent will be able to serve you best by understanding the range of your affordability and not waste anyone’s time, and 2) you will be able to focus your search on what you know you can comfortably afford and not fall in love with something that was not meant to be. The purpose of the initial meeting with the mortgage specialist is to get “prequalified”; however, you can also get preapproved at the same time. So what’s the difference, and who cares?

Prequalified means that the mortgage specialist has taken a detailed discovery interview of your financial and credit background, along with your housing goals. Based on the information collected, s/he should be able to make a professional decision (based on his/her years of experience and the guidelines published by the lenders) whether or not you are “qualified” to get a loan and approximately how much you can qualify for. Let me stress that this is a decision that the mortgage specialist will make, NOT the person/organization who will ultimately lend you the money. Needless to say, the prequalification has the following weaknesses:

- There is no assurance whether you will actually get a loan or not

Preapproval, when done properly, is much more powerful. It is a prequalification taken to the next step. Preapprovals can take 2 forms:

CONFORMING LOANS ($417K and under)
For conforming loan amounts, the mortgage specialist can actually upload your file information into one of two national approval engines (Fannie Mae or Freddie Mac sponsored), and within minutes, obtain a printed formal approval of your loan amount and any pertaining conditions. This approval, because it is governed by a set of approval criteria that is universally accepted by all lenders, can then be submitted along with the hardcopy of your loan file to your lender of choice. That lender’s underwriting department will in turn accept and adopt the findings generated by this online engine. Hence, once you received an from this online engine, you can be fully confident that your loan is essentially approved. The reason that mortgage specialist don’t automatically do this is because (sadly) most people in the industry are not properly trained financial advisors and simply don’t know how to use this application, or are not even aware of it! Those who are aware are often deterred by the extra work and/or upfront cost, and so simply downgrade their clients’ to a “prequalification,” assuming that they won’t know the difference anyways.

NON-CONFIRMING (AKA JUMBO) LOANS (Over $417K)

For Jumbo (non-confirming) loans, preapprovals are a bit more complicated, and controversial. Since the national (Fannie Mae or Freddie Mac) engines that are uniformly accepted by all the lenders approve up to $417K – the conforming loan amount limit – many loan agents simply treat jumbo loan preapprovals like prequalifications. That is to say, they use their judgement to see whether a loan would be approved. In most cases, and especially if the agent is seasoned and dependable, the preapproval will not be at risk. But, if time permits and the agent has access to underwriters, it is always safer to discuss the actual loan package with a specific underwriter and obtain a verbal approval. In this case, the loan is not only in good shape according to the agent, but actually considered “approved” according to the person who would ultimately be granting the funds. This “preapproval” is very important – basically, as long as the borrowers can subsequently provide the required documentation (according to loan type) to support what was disclosed to the underwriter, than the written approval would be provided almost immediately upon submission.

Preapprovals, when executed properly, provide buyers with peace of mind when they need to go in with an aggressive offer, such as bypassing finance contingencies. If a loan is preapproved, either through the automated engine or verbally with an underwriter, buyers can be assured that their financing is confirmed within the payment terms of their comfort level, subject to slight market movements prior to locking a loan. However, if a preapproval was not done properly, and the buyers waived finance contingencies, they could be in a sticky situation. I have inherited many clients who have learned this lesson the hard way, having had to back out of a beloved house they won through multiple offers due to a prequalification error, and risking their deposit in the process.
Lastly, while it’s a hard sell, what people don’t realize is that a strong preapproval from a reputable mortgage specialist should placed the buyers in a more desirable position than even a 100% cash buyer. The sellers have no control over what a cash buyer will do with their money between offer acceptance and close of escrow. While not probable, it is possible that the purchase money could go down the drain through a big Vegas visit, or disappear through a bad stock day. Conversely, if the bulk of purchase money is coming from a reputable lender, and the lender has already preapproved, then sellers can have the comfort of knowing that the money is not going anywhere and not accessible to the buyers for any purpose except to buy the house. As a seller, I would much rather to see a strong preapproval than an all cash buyer.

SUMMARY:

- Make sure you know whether you are getting a prequalification or a preapproval (hint, latter is better!) If the person you’re speaking to can’t explain the difference to you – SWITCH!

- If you are getting a preapproval, ask which lenders you have been preapproved with (and why those were chosen)

- Before you waive finance contingencies, make sure that the person doing your preapproval has verified your credit, your cash reserves, and your household income

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I just got back from a champaign toast celebration at my clients’ new Mountain View home, a wonderful re-modeled 2-story 2400 sq ft place near downtown. We reminisced about the ups and downs of the transaction (there are ALWAYS ups and downs!) and how we put the deal together over the Thanksgiving holiday, while my clients were at the Grand Canyon. Thank you Docusign! (No, I’m not on Docusign’s payroll!)

A day or two before Thanksgiving, an interesting Mountain View home came on the radar screen of some clients. I showed it to them the day before Thanksgiving, after which they headed to Las Vegas for the long weekend and I headed to the in-laws.

After mulling it over for the night, my clients decided to make an offer. By this time they were en-route from Vegas to the Grand Canyon, which under normal Real Estate 1.0 circumstances might have presented some logistical issues. No worries this time, however.

I put together the offer documents, including several dozen pages of disclosures and put them through Docusign’s electronic signature process. When they were ready, I called my clients, and they stopped at the next Starbucks, whipped open their laptops (I tend to have clients who, just like me, take their laptops with them on vacation), jumped on the T-Mobile wi-fi network and e-signed the documents before they were halfway done with their double-mocha-lattes-with-room-for-cream-and-a-dash-of-cinammon.

They hit the road again, and I presented the offer. The next day we received a counteroffer, which we decided to counter back on. I put the paperwork together and my clients signed it, this time at their hotel’s Internet cafe, and then went on with the rest of their day.

We got in contract, my clients enjoyed their holiday, and not so much as a branch of a tree was sacrificed to make it happen.

—-
(Images courtesy of okalrel.org and atpm.com)

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At our regular Monday morning office meeting today, there was still more evidence of a schizophrenic market. Some properties have been languishing on the market for months — Menlo Park’s longest-suffering property is currently at 400 days, and Palo Alto’s is at 270 days — while others are being snapped up quickly, often with multiple offers.

Today the following sales were announced:

Mountain View
1 offer; below list price
5 offers; above list price
1 offer; under list price
Menlo Park
2 offers; at list price
1 offer; below list price
1 offer; not sure
Sunnyvale
10 offers (!); above list price
1 offer; not sure
Redwood Shores
3 offers; above list price

Foster City
2 offers; not sure

Burlingame
5 offers; above list price
Palo Alto
1 offer; under list price
12 offers (!); above list price

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In my first post on this topic, the “aha” insight was that, even with today’s wacky ratio between home prices and rents in the Bay Area, you’re likely to be better off in the long run — five years or so — buying than renting, even if you assume fairly modest property appreciation. This “killer” chart, based on how long you’ll be in the house and what you expect the housing market to do in that time, helps you figure out the tradeoff.

Now let’s play with some numbers and see where this graph came from.

Since we’re comparing renting and owning, it makes sense to start with a sample home and figure out what it would cost to rent and what it would cost to buy.

Let’s imagine your standard ranch-style 3-bedroom, 2-bath, 1400 square foot home, in good condition, in an average neighorhood in, say, Mountain View, for which you would expect to pay around $825,000. Renting the same home would set you back around $2400 per month.

Let’s assume you buy the home with 10% down and finance the rest with a 6% 30-year fixed loan. (Current interest rates are actually a bit higher, but that doesn’t materially change the answer.) Let’s assume property taxes are 1.25% per year, and that maintenance and insurance cost you around 0.5% per year each — figures very much in line with my own experience as a landlord. Though technically only mortgage payments — not taxes, maintenance, and insurance — get paid monthly, let’s smooth things out and pretend all of these are monthly expenses.

Punch these numbers into your calculator, and you’ll end up with just under $6000 per month in expenses — a hefty premium over the $2400 you would pay to rent. But…as we real estate professionals never tire of telling you…don’t forget the tax benefits of home ownership.

Uncle Sam, and his counterpart in Sacramento “Uncle Arnold”, often let you write off your local property taxes plus the interest portion of your mortgage payment. Assuming you’re in a 30% federal and 10% state marginal tax bracket — and in this area it’s hard not to be — that gives you a tax break of about $2000 per month. You end up with a net monthly cost of just under $4000, a lot better than $6000, but still uncomfortably higher than your $2400 rental bill.

Ouch! What if you go with an interest-only loan to reduce your monthly payments? Keep the other assumptions the same, but let’s change your mortgage into a five-year interest-only product at 5.25% (again, the real rates are higher, but this doesn’t materially change the answer). Now you end up with monthly expenses of only $2900 per month, closer to but still higher than your monthly rental expenses of $2400.

In the short run, you are indisputably better off renting than buying. In the long run, however, the opposite becomes true.

Stay tuned…

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