Dsiclaimer: The following post is based on a presentation by Christopher Thornberg, an economist at Beacon Economics, that I attended last night, courtesy of my accountant, Tom Wagstaff of Petrinovich, Pugh and Co. This is a departure from my normally upbeat view of the local economy, and fortunately they re-opened the bar following the presentation for all the Realtors in the audience to drown their sorrows.

Economist Chris Thornberg showed some pretty convincing evidence for his expectation that housing prices will fall between 20% and 25% over the next couple of years, primarily because the ratio of home prices to incomes is higher than anytime in history, almost double the peaks in previous economic cycles. Gloom and doom for an hour, ah it brought tears to the eyes of many a Realtor in San Jose. Smugly I said, ” . . .but I live and work in Palo Alto, land of Stanford, Venture Capital, Facebook and Google! Sushi on every table and a BMW in every driveway! We are our own little world here, so we don’t have to worry about the housing market meltdown in Nebraska, or even the East Bay.”

Not so fast. The lastest housing boom has been driven by increasing housing prices, driven in part by cheap credit and loans. More people got these loans, bought more expensive houses, so the demand for these loans went up, and the cycle accelerated.

Now the appreciation is going the other way (flat to negative), and the equity that has driven consumer spending over the last few years (cash out refi = new boat), has gone away (bye, bye boat, and house!).  Thornberg forecasts that the subprime meltdown will be followed by Alt - A defaults (already happening) which will pull down the high-end markets from below (that would be Palo Alto, Los Altos, etc.). Even if the Fed were to reduce interest rates to 0%, it wouldn’t fix this mess. Much like last night’s temblor in San Jose, Palo Alto will be on the periphery of this shakeup. We won’t be knocked flat, but we will rock and roll a bit, and not in the fun way. Sigh . . .

To add to the gloom, I have been attending recent forums for candidates for Palo Alto City Council. Whether the topic is Palo Alto’s aging libraries, or green initiatives, the same topics keep coming up: Infrastructure, Schools, Tax revenue.

If you live or work in Palo Alto, I highly recommend you take an interest in the upcoming City Council race and the issues the candidates are raising. You can learn more about the issues and candidates on the Palo Alto Weekly website.

Happy Halloween!!

Tags: 4---mortgage-mania, Buyer and seller tips, Countrywide, Facebook, Google, Google Analytics, Home selling, Loan-Application, Option ARMs, Preapproval, Prequalification, Real estate, real-estate-market, real-estate-prices

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You longtime readers (since March 29th) will remember my original Mortgage Mania article “Subprime Loans - Should Palo Altans Care?” that discussed some potential ripple effects of the subprime lending boom and bust, and the resulting changes in lending requirements for purchasers of million-dollar plus homes in Palo Alto and surrounding communities.

In that article I mentioned that tougher lending standards were on the horizon. Since major lenders do loans all across the country, they take a one-size-fits-all approach to guidelines, and in attempting to shelter themselves from risk associated with rising loan defaults in free-fall markets like Detroit (or Antioch, Gilroy, etc.), for example, they are making changes to lending guidelines that will make it harder for high-income folks with strong credit to buy homes here.

For some in-depth knowledge on this issue, the changing guidelines, and what you can do now if you are in the market for a home, I turn to Curt Van Emon of OPES Advisors, a wealth management firm with offices in Palo Alto, San Mateo and now Los Gatos. OPES is latin for wealth, and my go to source for analysis of what changing lending rules mean to my clients.

Curt is a fellow blogger, so you can read all of his analysis here at financeambition.com. I’ll just give you the summary here.

- As I mentioned back in March, guidelines are changing, and so buyers wanting to use interest-only loans for purchases will need to qualify based on their ability to make payments including principal AND interest.

- It will become harder to qualify for an adjustable rate mortgage than a fixed rate mortgage

- Buyers will qualify for lower loan amounts, meaning less buying power. (Goodbye 4-bedroom house, hello 3 bedroom)

When do the new guidelines take effect? July 22. So, read Curt’s recommendations, mark your calendar and contact your Realtor if you are planning on buying a home anytime soon.

If you aren’t currently working with a Realtor who is financially savvy and can explain what these changes mean to you, I know where to find some.

Stay tuned for updates on if and how these new guidelines affect buyers and the local real estate market in and around Palo Alto.

Thanks for reading . . .

 

Tags: Area-information, bay-area-real-estate, Buyer and seller tips, Home buying, Loan Application, Option ARMs, Preapproval, Preapproval, Prequalification, Real estate, real-estate-market, Stated Income Stated Assets (SISA), Stated Income Verified Assets (SIVA)

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If you are a reader of The San Jose Mercury News, or any other paper or media outlet, you know that there is a growing issue associated with home buyers who purchased their homes using subprime loans and are now facing foreclosure as they are unable to keep up with their payments when their rates adjust.

On Sunday, March 17, the San Jose Mercury News ran an article describing how an agent and lender with Century 21 Su Casa Realty violated a number of lending laws and ethical guidelines to get people to purchase homes which are now in foreclosure, in some case because the buyers couldn’t even afford the first payment.

While it is a stain on the already tarnished image of Realtors, it is easy for us in Palo Alto to say ‘what a shame, it won’t happen here’, or words to that effect. But, what is the effect of this issue on homebuyers in Palo Alto and the surrounding communities?

Rachel Van Emon with OPES Advisors, a financial services firm with offices in Palo Alto and San Mateo, recently sent me an article that discusses the effects of impending legislation and revised lending guidelines that will affect the ability of buyers to qualify for products like the interest only loans that so many of us use to buy our million dollar teardowns in Palo Alto and surrounding communities.

The highlights are:

• The Department of the Treasury has issued a Guidance on Guidance on “Nontraditional Mortgage Product Risks.”
• The Guidance specifies “nontraditional” as those loans allowing the deferment of principal and/or interest payments – not just sub-prime loans.
• The Guidance states that borrowers for these products are to be qualified at the “fully amortizing and fully indexed payments.” This means that qualifying payments will be bigger, and it will take more income to qualify.
• The new guidelines are to be in effect by 9/07. Some lenders have already adopted them, and many more will do so in the coming months.
• Virtually all lenders have cancelled their programs allowing 100% financing on a Stated Income basis.
• Guidelines have tightened around lending when other “risk factors” are present such as 100% financing, low reserves, high debt-to-income ratios and condo properties.

In short, it’s going to be harder to pay for that million dollar teardown in Palo Alto starting now, and especially in September.

The big question is whether these changes in lending laws will cool the red hot housing market we are currently enjoying, or if the Valley’s amazing ability to generate disposable incomes and wealth will overcome another hurdle to home ownership. Stay tuned . . .

The entire article is posted for your reading pleasure. Click here to view it.

Tags: Bad-Realtors, Century 21, Crooked-realtors, Deceptive-realtors, Dirty agent tricks, Financing-Process, Loan Application, Loan-Application, Mortgages, Negative Amortization, No Documentation (ND), No Income No Assets (NINA), No Ratio (NR), Option ARMs, Palo Alto, palo-alto-real-estate, Preapproval, Prequalification, Real estate, Realtors who give the business a bad name, Stated Income Stated Assets (SISA), Stated Income Verified Assets (SIVA)

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