Right Along With the Grunge Look, the Housing Crisis is Over
May 28, 2008
Yes, for those of you gents who still may be holding on to the rather relaxed “grunge” look from the 1990’s, I’ve got a newsflash for you: grunge, along with the current housing crisis, is over.
Articles about the housing crisis ending have been few and buried in their respective periodical, my favorite of which was in TIME magazine back in February titled, “Ignore the Headlines“. But now we have the Wall Street Journal. claiming that the trough was reached in April with an article from May 6, “The Housing Crisis is Over“.
I agreed with Peter Lynch back in February.., and it’s becoming more an more apparent that the longer prospective home-buyers sit on the fence, the more expensive that home purchase will become. And this is not just because I believe that home prices will rise, it’s also because I believe that both long and short term interest rates will rise. The 10-year Treasury Note, for example, is up over 1/2% since the middle of March, and the 10-year Treasury Note is a decent barometer to use when you want to know what the trend in long term mortgage rates have been.
That written, if you really want to continue with the grunge look, might I suggest saving it for your next camping trip?
As always, kindly consult with your trusted real estate, tax and mortgage professional before seriously considering any home purchase.
Tags: Consumer, For buyers, For sellers, Industry, Mortgage, Palo Alto, palo-alto-real-estate, Real estate, Real estate blogging, real-estate-market
Eliot Spitzer and Making Sense of the New Conforming Loan Limits
March 18, 2008
If you’re Eliot Spitzer, probably three feelings come to mind: panic, disorientation and regret. But if you’re a potential home buyer in the Peninsula region of California, you have good reason to feel excited, encouraged and confident! Why? If you read my last post last month, you know that the conforming loan limits for many California Counties are going up and that means cheaper mortgage rates on loan amounts between $417,001 and $729,750. Now that HUD has made it official that ALL bay Area counties qualify for the revised maximum conforming loan limit, that means potentially big savings on mortgages for qualified applicants looking to purchase single-unit properties up to $810,000 with as little as 10% down!
We’ve all heard the cliche, “the devil’s in the details”, so what are the latest requirements to obtain a conforming loans between $417,001 and $729, 750? Since I’ll provide you with a link to Fannie Mae website and announcement , I’ll provide you with some highlights that I think are most relevant and let you read further at your leisure:
1. Single-unit properties only
2. Purchase and “limited cash out” transactions only (i.e. no greater than $2,000 going into your pocket upon settlement)
3. If primary residence purchase, up to 90% loan-to-value (”LTV”) allowed if fixed-rate program is selected–700 minimum FICO(R) required; 80% LTV if an adjustable-rate loan is selected–660 minimum FICO(R) required; if refinance
4. If second home or investment property purchase, maximum 60% LTV allowed with minimum 660 FICO(R) regardless of eligible loan program selected
5. If refinance, regardless of type of eligible mortgage program, up to 75% LTV allowed, plus subordinate financing allowed in addition up to 20% LTV–660 minimum FICO(R) required
a. SPECIAL NOTE, consolidating existing first mortgage and subordinate mortgage into one loan NOT eligible AND six months of “seasoning” (six payments made on existing mortgage) required to refinance!
6. Loans are eligible for origination NOW
7. Eligible programs include 30-year fixed, 15-year fixed, LIBOR-based 5/1 ARM (amortized and interest-only payments allowed for this program)– more programs may become available
8. Sufficient employment, income and assets must be verified and each file will require manual underwriting– automated underwriting engines not allowed at this time
Again, I do encourage you to read the Fannie Mae announcement from the 6th of March for all the details, but the above are the top highlights.
So what will pricing look like on these “new” conforming mortgages? Well, pricing has just recently been released by only a few institutions, but it looks like the 30-year fixed is running at about 6.375% and the 15-year fixed is running at about 6.25%. The 5/1 ARM pricing is expected to be released next month. What I do think is that pricing may actually get a little better in the short term as more institutions post pricing and auctions are successful with Fannie Mae and Freddie Mac.
What’s right for you as a would be home buyer on the Peninsula? That depends of course on your specific situation, and I do encourage you to consult with your trusted mortgage and financial consultant before placing an offer on a home or refinancing your mortgage. What I can say is that the majority of our clients who are buying or refinancing today are selecting a jumbo 5-year ARM in the mid-5% range due to its balance of savings, security and flexibility.
Tags: Buyers, Consumer, For buyers, Home buying, Industry, Menlo Park, Mortgage, Mortgages, Mountain View, Palo Alto, palo-alto-real-estate, Real estate, Real estate blogging
How Stimulating Will Raising the Conforming Loan Limit Be?
February 21, 2008
All hail our legislative and executive branches for passing into law the latest shot of adrenaline to our economy: the 2008 stimulus package. And it looks like a record was set with how fast the bill became law– wow, pretty impressive… Efforts like providing consumers with tax refund checks and businesses with additional write-offs should certainly inject the economy with billions of dollars, but many have asked me how raising the conforming loan limit, especially in CA, will truly stimulate the economy. Further, many of those have asked me whether it’s really the right thing to do.
Let’s start with whether it’s the right thing to do. Probably one of the better arguments against raising the conforming loan limit is the fact that doing so seems to reward those institutions and individuals that/who put us into this mess. If estimates by the National Association of Realtors is correct, 500,000 refinance transactions will be generated, 300,000 additional homes will be purchased and 210,000 foreclosures will be avoided. So if we conservatively estimate the revenue generated and the losses avoided using industry standards, the total is over 40 billion dollars! $40 billion certainly helps answer the question of how such an effort helps the economy; but again, why help those who caused billions of dollars of losses and a turned the market upside down? Shouldn’t we be punishing those bad, bad people and institutions? Well, the truth is that many of those institutions and individuals have gone away or moved on. So let’s take a moment to see what’s being created here.
Raising the conforming loan limit has the following benefits:
- It does in fact greatly stimulate the economy
- Many consumers who got in over their head will now be able to afford their mortgage
- Greater affordability for housing is created
- It will influence a portion of the jumbo market that has been lost and create some investor confidence, and finally
- California has been long overdue to have a raise to the conforming limit given that over 50% of the nation’s jumbo mortgages were originated in California.
Okay, let’s say that raising the conforming loan limit is good for a moment. What’s next and what are the details? There’s still some speculation, but here goes:
- The conforming loan amount will be determined based on 125% of the median price of a given county…
- This allowance will NOT go into effect for purchase or refinance transactions until July 1, 2008 (that’s the earliest date that the loan application may be signed) since the market needs from now to June 30, 2008 to liquidate current qualifying mortgages available for sale from institutions
- The types of programs allowed will be fixed-rate programs on a full-doc basis, which means that the hybrid, interest-only programs using “stated” income will not be allowed
- The property must be single-family and owner occupied, which means that 2nd homes, investment properties and multi-unit properties are ineligible
- Credit scores must be “reasonable” with a combined loan-to-value not to exceed 90%
- No cash-out, which means that a refinance may not allow the borrower to receive any greater than $2,000 at closing
- Loans must be funded and closed prior to December 31, 2008
The last question really has to do with what pricing of conforming loans will look like come July 1, 2008. My prediction is that, all things being equal today, that conforming loan rates will increase and that jumbo loan rates will decrease, leaving a much smaller margin between conforming and jumbo loans in the future. Since all things won’t be equal due to decreased short-term rates by the Fed and the overall stimulus package helping the economy, conforming loan rates will increase greater than jumbo loan rates will decrease. So, if you’re buying closer to the conforming level today, you’re better off getting a mortgage for the long term; if you’re at the jumbo level today, you’re likely better off going more for a short-term solution. Of course always consult closely with your mortgage, tax and legal professional for the best advice as it relates to your individual situation.
Tags: Buyers, Conforming Loan Limit, Conforming Loans, first-time buyer, For buyers, Mortgage
Mortgage Mania Part 16 - The Hits Just Keep On Coming
December 11, 2007
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
Mortgage Mania - Part 3
April 11, 2007
Last week I mentioned an article written by friend and colleague, Rachel Van Emon at OPES Advisors on the ripple effects of the sub-prime lending crisis and impending changes in lending guidelines.
Things move quickly in this market and industry, so I wanted to draw your attention to a recent article in the San Jose Mercury News saying that the impact will be minimal in the local market, except for some first - time buyers. The sky isn’t falling.
However, the article goes on to note that lenders have changed their guidelines, and that highly leveraged loans that are the bread and butter of first-time homebuyers are going away.
Quote: “He cited a recent young client with a credit score of just over 660 but a relatively short credit history, who is looking to buy her first condominium using 100 percent financing.
“With the guidelines changing, now some of the lenders who would have taken that three weeks ago … can’t do it today,” he said.”
Assuming this young buyer has good cash flow and a salary-based job, she should be a pretty good credit risk for a mortgage. That is how I bought my first home. Local prices are sky-high already, and this could be another barrier to entry for many.
It’s not only first-time buyers who are short on savings and didn’t pick their parents well who are affected. Bay Area buyers are financially sophisticated, and have used interest-only and other non-traditional loans to allow them to divert cash that would be spent on traditional mortgages into higher return investments. Reducing their ability to do that could dampen some of the enthusiam that is contributing to the currently hot market.
Thank for reading, and I welcome your comments.
Tags: For buyers, Home buying, Loan Application, Mortgages, Preapproval, Prequalification, Real estate, real-estate-market, real-estate-prices, Stated Income Stated Assets (SISA), Stated Income Verified Assets (SIVA)
Killer Buy vs. Rent Calculator
April 10, 2007
I long ago put together a buy vs. rent calculator and it served as the basis for my buy vs. rent series.
The New York times has just come out with a pretty good buy vs. rent calculator of their own (might soon disappear behind a paid firewall.)
Its conclusions are basically the same as mine: Assuming roughly the same rental cost vs. property price ratio as we have here in the Bay Area, you’re better off owning than renting over a 4 year or greater period if property prices appreciate by 5% per year or more.
Tags: Buy vs. rent, Buyer and seller tips, For buyers, Real estate
Bob and Betty Buy a Home (Part 2): We See Some Homes, But Bob and Betty Get Spooked
March 29, 2007
Let’s continue the saga of Bob and Betty, our hypothetical first-time home buyers who were introduced in the first of a series of articles I’ll be writing.
We met at 9am sharp on Saturday morning at my broker’s office in downtown Palo Alto. Though it’s easier to view homes with clients during open house times, I prefer to do first time tours when nobody else is around.
I had an ambitious tour planned: 12 homes in 4 towns along the 101 corridor. Always exhausting for everybody involved — every time I do this I have more liking for the part of the Redfin business model where clients do this bit themselves! — but nonetheless an important part of the whole process.
While driving, I pointed out important things about the neighborhoods we were in: The typical types of homes, the price ranges, which school district it belonged to, whether it was unincorporated or not, whether it was in a flood zone, where the nearest parks and public services were. I asked them to comment on what they liked and didn’t like in each neighborhood.
At each home we went through the same process, slowly at the first couple of homes, and then more quickly. “What did you like? What did you not like? What did you think of that kitchen? Do you like skylights? Fireplaces?”
By the 5th home I’m usually able to “get it” about what clients are looking for, and with this new knowledge, I crossed out 3 of the remaining 7 homes we had to see.
Suitably tired, we pulled back up to the office around 1pm to review what we had seen, what they had liked, and what they had not liked. I explained the next bit of the process: getting pre-approved. I’m happy to spend a few hours as a sort of “interview” with prospective buying clients, but before I invest too much more, I need them to put some skin in the game too by getting pre-approved. I generally find that if they’re not ready to dig up their financial records and go talk to a mortgage broker, then most likely they’re not ready quite yet to buy a home.
Betty was quite excited about three of the homes we had seen, but it was clear that Bob was losing interest pretty quickly. “Yeah…but nine hundred thousand dollars?” was his most common refrain.
We pressed in on that. Bob had been doing his homework the last week and pulled out all the discouraging figures he had found. Housing starts are down. Interest rates are up. Affordability is down. Condo developments in Las Vegas and Miami are being cancelled. How in the world could prices stay where they are here?
Prices in the Bay Area are indeed a pretty head-scratching discussion topic as they continue to defy gravity, pessimism, and seemingly the laws of economics year after year. I told them bluntly that neither I nor anybody else could guarantee anything about prices here. It is indeed possible that prices could collapse…by 40%…overnight…immediately after they bought a place. Possible? Yes. Probable? No.
I pulled up my secret weapon, Google Earth, on the flat screen wall monitor in the conference room. I zoomed in on the Peninsula and asked two questions: 1) How much land is technically available to build on? 2) How much land is actually available to build on.
The answer to the first question is: tons! From the Bay going west pretty much to Highway 280, nearly every square inch of land is already filled in. From the 280 west to the ocean, there are only a smattering of towns, like Half Moon Bay, Pescadero, and La Honda. The mountains make it difficult to build in that area, but we could certainly fit several hundred thousand more homes there.
However…it ain’t gonna happen! Most of that land is owned and/or protected by Federal, State, County, or City governments, private trusts, conservatorships, parks, and so forth, and not much building is going on.
If you can’t go West, then you have to use the Manhattan strategy: go up. Again, that ain’t gonna happen. San Francisco and San Jose have modest but growing skylines of high-rise buildings, but in between it’s rare to find any structure taller than 8 or 10 stories, and for the most part it’s only up to 3 stories tall. Those zoning restrictions aren’t going to be changing any time soon.
Essentially, 50% of the classic economic supply/demand equation is pretty much fixed, so the real question is what will happen with demand?
Again, at least for the short and medium term, the answer to that is pretty clear: demand is, and will likely remain, robust. Google and other local tech companies are doing well. Venture capitalists are pulling out their wallets again. Start-up nirvana 2.0 is here. Immigrants from across the country, and indeed the whole world, continue to move here.
So, could prices fall by 40% overnight? Absolutely! But in the only scenario I can come up with in which that happens — a scenario which involves an earthquake, a terrorist attack, and bankruptcies of the top 5 tech employers in the area…all within 3 months of eachother — falling equity may not even make the top 10 list of concerns for many people.
We parted company, and they promised to get back to me within a few days about whether they were ready to proceed. I had my doubts, mostly about Bob.
Sure enough, a few days later I got a phone call from him. “We’ve decided to wait it out,” he said. “We’re just a bit nervous about these prices, and we’re not in a big hurry to buy.”
We agreed to keep in touch every few weeks and see how things developed.
Welcome to real estate in the Bay Area. Prices are high, and you need a certain amount of faith and intestinal fortitude to dive in for the first time.
Tags: Buy vs. rent, Buyer and seller tips, Choosing an agent, For buyers, Google Earth, Home buying, Previewing homes, Real estate, Redfin
Multiple Offers Up Again: Chiropractors Still in Business
March 20, 2007
Previously I reported that buyers appear to be more patient, less ready to pile on, and generally doing their best to avoid “buyer whiplash.”
Turns out that was a blip in market activity for perhaps a week or ten days. Feeding frenzies seem to be now be back in force. Last week clients of mine were one of 21 — twenty one!! — offers on a property. Alas, we didn’t get it. Rumor has it that the winning buyer threw in a Hawaii vacation, naming rights for their next child, and a promise to run up and down the street naked on every anniversary of the sale, waving a banner singing the praises of the seller.
Looks like chiropractors in this area will continue to see a steady stream of business.
Tags: Buyer and seller tips, Consumer, For buyers, For sellers, Palo Alto, Real estate
Real Estate Buyers, Tired of Whiplash, Becoming More Sophisticated
March 12, 2007
The Spring sellers’ market here in the Bay Area’s Peninsula continues unabated, with no rest in sight for buyers. Multiple offers are still de jour on many sales in the area, with most listings selling for more than the list price.
This week marks a growing trend that could perhaps be called “buyer’s revenge.” Tired of the constant whiplash inflicted on them by sellers hosting an offer presentation rodeo and then squeezing out every drop of blood they can (wow — three unrelated metaphors in one sentence!), buyers are backing off and becoming a bit more patient.
Anecdotes abound this week about properties that had a dozen offer “maybes” turn into only two real offers. On some other transactions there were more offers — say, 6 to 10 — but the final price was only a few percentage points above the list.
Buyers seem to be getting more patient, more sophisticated, more value conscious. They realize that if they pile on during a listing presentation and drive the price of a property up by 20%, that sets the benchmark on the next properties they bid on.
Anyone else seeing this?
(Image courtesy of www.necksurgery.com)
Tags: Buyer and seller tips, Consumer, For buyers, For sellers, Industry, Multiple offers, Palo Alto, Real estate
The Alphabet Soup of Today’s Financing – FD, SIVA, SISA, NR, NINA, ND
March 7, 2007
Yikes! What do all these acronyms mean, and which one is the best type of financing for your? For most homebuyers (and their realtors), they don’t care how the loan gets done, they just want it done – with as little work and hassle as possible. Behind the scenes, lenders are actually getting very creative in the types of documentation programs that they require (or waive). Some of these variants may make a difference on the pricing, speed and riskiness of the transaction, so it’s a good idea for all parties to become at least a little bit familiar with these strange acronyms.
FD – Full documentation. The crème-de-la-crème of real estate financing, and the most traditional documentation type. Borrower provides full income documentation (2 pay stubs, 2 W2s or 2 years tax forms for all borrowers) and full asset documentation (2 months full statements of all accounts used to qualify assets). Traditionally this is the documentation format with the best pricing.
Minimum/Reduced Documentation types:
SIVA – Stated income verified assets. This has become one of the most popular documentation formats, especially in cases where a fast escrow is needed. Borrower states his/her income but does not have to provide any documentation. Asset document is still needed, but only to show a set amount of reserves. This format is popular among hi-tech executives because of the variable components of their income – bonus, patent pay, ESPP, stock pay, etc. – most of which are highly variable and changes each year, so it’s difficult to document it without inviting unnecessary underwriter scrutiny. While it is technically one step down from FD, most A paper lenders have exceptions where if the borrower’s credit score is high enough, they will accept SIVA documentation and still offer FD pricing. Hey, you CAN have your cake and eat it too!
SISA – Stated income stated assets. You guessed it, in this format, the borrower simply states the income and asset on the loan application, and off it goes. No documentation needed! This makes everyone’s job easy – borrowers, agents, brokers, lenders. Again, this type of reduced documentation usually comes at a slight rate penalty, but with a high enough credit score, I have a number of lenders who can and will waive these penalties. So, for someone with good credit, they can zip through the entire loan process with a SISA submission, and still get the lowest rates on the market. The only thing to be careful about is that SISA guidelines are more conservative when it comes to the amount of money that you can borrow. So, as you approach the higher purchase price (over $1M), super-jumbo loans (loan amounts >$1M) and/or high CLTV (combined loan-to-value of over 85%), SISA loan types may place limitations that FD loan types don’t have.
NR – No Ratio. This reduced documentation type actually fits between SIVA and SIVA. In this program, you don’t provide any income information; you don’t even state a number on the loan application. However, you do provide asset documentation. As you know, in the loan business, cash is king. So, if you have good credit and enough reserves in the bank, underwriters may not care what your income is. So, instead of exaggerating and trying to state an income that is simply not true, it is much safer to go the route of No Ratio. In fact, stated income have been so abused by so many brokers that lenders are cracking down on stated loans and starting to look carefully at the income stated and job type. They will do a sanity check and if the numbers don’t make sense, the loan WILL NOT GO THROUGH. No Ratio is becoming popular because it allows the real estate team to close a transaction as fast as a stated loan, without the increasing risk with the underwriters. Even though the borrower normally has to a pay a small premium for a No Ratio loan, this is a small price to pay when compared to fraud and the risk of losing the escrow deposit when the loan doesn’t come through under another program type. Make sure you discuss with your financing advisor the pros/cons of using stated vs. no ratio on your loan program. As a realtor, you should also be sure that your financing partner is up to speed on the recent mortgage market developments, and not prone to forcing a loan through a stated program where it will ultimately fail and result in avoidable risk and agony to your hard-won transaction!
No Documentation Types:
NINA – No Income No Asset. In this documentation type, borrower provides no documentation, and leaves the income and asset sections blank on the loan application. In other words, borrower discloses absolutely no information about himself/herself except for his/her credit history. The one thing that lenders will verify verbally is employment. They will call the company if the borrower is a W2 employee, and will require a CPA letter if the borrower has been a self-employed individual for at least two years. Other than this, the entire loan decision is made on credit-worthiness. Obviously, pricing will be quite a bit higher than FD or the stated programs. Again, cash is king; so if you are putting enough money down, say at least 35-40% down payment, then your pricing would likely be similar to a FD loan!
ND – No Documentation, or No Income No Asset No Employment. This loan type is generally geared towards retired individuals, or borrowers in between jobs, or just starting out on their own business. Nothing is provided and nothing is considered by the lender except for the credit report. Normally, there is a ceiling on how high the loan amount can go, and how high the LTV (loan-to-value) can be, as these types of loans are perceived to be most risky for the lender. This generally will require a healthy down payment to ensure that the borrower has enough equity at stake and most likely will not default on the loan.
Now, you ready for the quiz? In reality, the only person who needs to know all these formats cold is the mortgage specialist. A good mortgage specialist will know exactly which format, or formats, would best fit his/her client’s situation right after the initial discovery interview. S/he will use this information to help guide the pricing and initial preapproval process, and guide his/her clients to prepare the proper documentations on time. Neither the client nor the agent really need to know about the various loan types. What they need to be sure is that they have a mortgage specialist knowledgeable of all of the new and old documentation types so that the loan can be packaged in a way for minimum underwriting risk and maximum speed to close. Also, if you are an agent who tends to work with busy executives, or families with small children, it also helps to work with a mortgage specialist who is experienced enough to obtain a SIVA or SISA approvals without any pricing penalties to save your clients valuable time – who wants to spend time collecting statements and other documentation when they could be shopping for their next house?
Tags: Buyer and seller tips, Documentation, Financing-Process, For buyers, Full Documentation (FD), Loan-Application, Mortgages, No Documentation (ND), No Income No Assets (NINA), No Ratio (NR), Preapproval, Real estate, Stated Income Stated Assets (SISA), Stated Income Verified Assets (SIVA)
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