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Tales From the Front 1/31/2010 – The Return of the Tulips

I have been patting myself on the back over the results of my contrarian marketing of 842 Sycamore Drive in Palo Alto.

It sold in a week with 14 offers, when the average Days on Market for a home in that area and price range is about 100.

Part of my contrarian marketing was to put it on the market during January, before the “traditional” beginning of the spring market, which is the week after SuperBowl Sunday. With the recent sales activity, I’m expecting a number of homes to come on the market starting in mid-February, as most agent “hold” listings until then. I have confirmed this with a number of my colleagues who are big “listing agents” meaning they hang signs in front of a lot of houses. (Most of my work is with Buyers).

Another house on Greer in the same neighborhood on and price range (listed at $979,000), received 12 offers and sold for very near what Sycamore did. Both homes had over 100 visitors to the open houses and the offers landed in the same ranges.

One question that came up immediately was “These are so similar, I wonder how many buyers are writing offers on both homes?” I haven’t been able to confirm anything, but I have a sneaking suspicion that the same 12 – 15 people were writing offers on both of these homes.

If this is the case, then the entry level market in Palo Alto is like a game of musical chairs. The same 12 – 15 people are going around writing offers on homes, and with every sale one drops out. After 12 rounds or so, they all have homes and the market stops.

So, when the conventional wisdom listings hit the market in February, there will be a flood of inventory, and choices, so the number of offers per home will likely drop off as buyers have more choices and less of a feeling of scarcity. In the case of the homes mentioned above, that would have resulted in a loss of thousands of dollars in proceeds to the sellers, but great news for the buyers of those homes.

This is all speculation now, but worth keeping an eye on over the coming months as we wait to see if the market is returning, or if we are seeing a short-term blip driven by a very limited supply in shortage to a relatively limited demand.

Thanks for reading . . .

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

Mortgage Mania 25 – What’s Next?

Last week I attended a lecture given by economist Chris Thornberg of Beacon Economics on the economic forecast for 2010. The event was sponsored by accounting firm Petrinovich ,Pugh and Co., and Bridge Bank. You can view Dr. Thornberg’s recent presentations on the Beacon Economics website, and his talk from last week HERE.

The digest version is that we will continue to see positive economic news and growth through 2010, but much of that will be driven by the various government funded stimulus packages, which will be ending next year. Since these programs can’t go on forever, Dr. Thornberg predicts that we will see stagnation in 2011 due to the double whammy of unemployment and defaults in the commercial real estate market. Yes, the hits just keep on coming!

We continue to see the following strata in the single-family home market across our area. Here is how the Palo Alto market is currently behaving:

• Under $800,000 we continue to see some multiple offers and some homes selling briskly for over the list price as buyers are enticed into the market by low down payment (3.5% down), FHA backed loans up to $729,750. New home builders are adding pricing and rate incentives, with some offering 3% rates, if you use their lender, their contract, their terms.

• $800,000 – $1,500,000 homes are selling more slowly as buyers need 20% – 25% down payments and substantial cash flow to qualify for mortgages in this price range versus the FHA backed loans mentioned above.

Palo Alto $1.25M - $2M, Oct. 2009 vs. Oct. 2008

• $1,500,000 – $2,000,000 has had an uptick in sales activity in the last month relative to Summer, as buyers in this price range have come back out and absorbed much of the available inventory.

• Over $2,000,000 we are seeing fewer sales and some homes selling at large discounts from listed prices as those owners are overextended and are under financial pressure to sell. Recently, there was a $3.3M short sale in Los Altos, and a $1.8M foreclosure sale in Palo Alto.

Armed with this information, if you are considering selling, early 2010 is the time to take advantage of the current consumer optimism and positive economic news and sell in a relative high (Relative compared a year ago that is, not compared to 2006). As mentioned above, inventory is low relative to demand, especially for updated, attractive homes, and those priced under $2 million are selling. The market above $2 million is moving, but more slowly.

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.

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

The Innovator’s Dilemma in Real Estate Redux: Redfin Proves You Can Turn a Profit Even With Lower Commissions

In Redfin CEO’s Glenn Kelman’s inimitable “Aw Shucks” writing style, he announced recently that the discount online hybrid brokerage has turned its first monthly profit.  While one month certainly a trend does not make, it is an important milestone in the company’s development.  If Redfin can make money while a) charging a lot less than its competitors and b) serving a market segment that the traditional industry is wary of … then Redfin’s prospects going forward just got a whole lot brighter.

Exercising my blogger’s prerogative to quote myself, here is what I said some two years ago, applying Harvard professor Clayton Christensen’s thinking on “The Innovator’s Dilemma:”

His theory, put forth in his books The Innovator’s Dilemma and The Innovator’s Solution posits that new entrants into an industry often take advantage of a disruptive technology to enter the marketplace at the lower end, catering to the low-margin customers that the established players aren’t that interested in serving.

…

If the new entrant succeeds, it starts to take market share from the incumbents, who finally wake up — often too late — and discover that the “cheap, undesirable” part of the market is both larger and more lucrative than they previously thought.

…

Even more interesting is that as the new entrant grows, its clients’ needs often change over time — to the point where the new entrant now also provides more of a “traditional” experience. Think back to Charles Schwab: its early customers were drawn in by the prospect of significantly less expensive stock brokerage services. The Charles Schwab of today still provides that, but also provides a higher-touch, higher-cost service, akin to that of the Merrill Lynches.

Exercising another of my blogger’s prerogatives — that of making wild generalizations — many of Redfin’s clients are tech-savvy, data-hungry, 30-ish first-time home buyers for whom Redfin’s data-rich site is like crack cocaine … and for whom the company’s 50% buy-side rebate is like, well, crack cocaine on steroids. These folks are do-it-yourselfers who think — rightly so — that much a traditional Realtor’s tasks (educating clients about neighborhoods, taxes, the transaction process, etc.) can be done on their own, in their pajamas, in the comfort of their home office, on their favorite Macbook.

Think about these same folks five to ten years hence … they’ll be wealthy(ier) tech-savvy, data-hungry customers, perhaps with a kid or two in tow … looking to sell their existing home and buy a newer, larger one.  They’ll probably be more pressed for time, perhaps less concerned about getting a rebate … and voila! Redfin will be there to hold their hand again, perhaps operating like a traditional brokerage, charging more.

Prediction:  Within 2 years, Redfin will launch a “Redfin Deluxe” service which will look and feel an awful lot like a traditional full-service real estate experience, with no or little rebate.  If they can make a profit giving back half the commission, imagine their bottom line when they apply those efficiencies to the full-service market!

Other commentary on this event:

• Techcrunch, predictably, painted the event as causing “shudders” in the real estate industry.  Even more predictably, the post attracted the usual scrum of Realtor-hating consumers, with Reba Haas pretty much single-handedly keeping them at bay.
• Nearly-the-same-last-name-as-mine Brian Boero of 1000 Watt Consulting notes that Redfin works by concentrating on three things that many traditional brokers ignore:  talent, transparency, and technology.

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.

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