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.

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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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Palo Alto high schools refuse to join Newsweek survey of best schools - SJ Mercury News, May 21, 2007 

When I saw the above article in yesterday’s Mercury News, I nearly spit a perfectly good latte all over the paper.

The schools in Palo Alto are a major driver of real estate values in the city and are consistently marketed and believed to be the best public schools in the area.

The local real estate community feels so strongly about this that they have an annual drive for donations to Partners in Education, to solicit donations for Palo Alto schools. In return for their generosity, local real estate agents who donate get their picture in the paper as a thank you for being donors and supporting Palo Alto schools. In recent years there has been quite a competition between the various real estate companies in Palo Alto for who donates the most money, which is kind of losing sight of the point of things, but I digress . . .

Interestingly, in Newsweek’s 2006 rankings, we saw a disparity in the rankings between Palo Alto High School and Gunn High School, with Paly coming in below Los Altos High and Cupertino’s Monta Vista.

Article excerpt:

Last year, Gunn High School in Palo Alto ranked 79, and Palo Alto High School ranked 361. But this year, prompted by concern at both high schools, the Palo Alto district refused to send in Newsweek’s required forms.

“We don’t want to be a part of it,” said Gunn Assistant Principal Tom Jacoubowsky.

Said Marilyn Cook, associate superintendent of the district: “It’s a very simplistic premise that the quality of a school can be measured by the number of AP tests students take.”

Gunn neither ranks students nor chooses valedictorians.

“We’re trying to do things to avoid and alleviate student stress,” such as reducing pressure to take advanced placement classes, Jacoubowsky said

Interesting stuff.

This also lends fuel to my personal fire that as increasingly affluent and educated people are moving into cities like Mountain View, they are injecting more money into the schools, while also demanding more of the administration. I prognosticate that we will begin to see increasing parity between Palo Alto public schools and those of the surrounding communities. If this happens, the upward price pressure resulting from a demand for homes in Palo Alto in excess of Supply could be lessened, leading to a stagnation of home prices or even sales.

Heresy! You say.

We will see. In the meantime I welcome your comments and tirades. I don’t pretend to be an expert on education or even to play one on TV.

You can see the rankings for local schools on the SJ Mercury website here.

Thanks for reading.

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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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