New FHA lending policies

Last year, several of my first time home buyer clients were able to take advantage of attractive FHA-backed loans. In 2010 the FHA is making policy changes, including removing rules against providing FHA backing to loans made to investors who may flip the properties within 90 days. I think this could provide more support and liquidity to the overall market.

Credit score requirements are increasing this year, meaning the low 3.5% down payment FHA loans will no longer be available to those with scores below 580; borrowers with lower scores will have to put 10% down. The percentage of permissible seller paid closing costs will drop from 6% to 3%. And finally, up front mortgage insurance fees are rising from about 1.75% to about 2.25%.

Late 2009 Foreclosure Update

Towards the end of 2009, I ran some numbers on the MLS and on Realty Trac to test our local pipeline of foreclosure inventory. Every micro-market is different, based on supply and demand and the economic outlook for jobs, etc. For example, practically everyone agrees Santa Cruz hit bottom early this spring and has leveled out since then?Scotts Valley is similar. I don't work the San Jose market but I hear it's gotten very competitive too.

In the San Lorenzo Valley - from Boulder Creek to Felton - 167 homes had sold in the first 3 quarters. Since 86 of those were distressed or foreclosure related, 51% of all sales were distressed. Another 69 homes were on the market waiting to sell, and another 73 were in escrow. So the total inventory for the year so far is about 309. The ratio between sales and listings indicates a balanced market between buyers and sellers.

According to RealtyTrac.com, as of late October 2009, about 155 properties were in distress: 42 are bank owned and 32 are scheduled for trustee sale?which will end up bank owned. 79 are in default. Let's assume that some portion of the properties in default will not foreclose because the families will get back on track or their loans will get modified. Round numbers, 74 are more or less bank owned right now, with let's say another 45 coming on the horizon over the next six months or so (that is about how long it takes now). That's about 119 distressed properties somewhere in the pipeline. 48 of those distressed properties are in escrow right now, while 18 are listed as actively for sale on the MLS. So 66 of the 155 distressed properties are already listed or in escrow. That leaves a "back-log" of somewhere between 89 to worst case 110 properties. Compared to the sales activity so far this year, the pipeline in this area doesn't look like a looming wave to me.

Here and nationally, sales have definitely picked up over the last few months. Nationally, part of that is attributable to the 1st time home buyers' tax credit. Locally, a lot of investors and first time buyers believe we are at or near the bottom in Santa Cruz County. For the first time since I can remember, properties generate positive cash flow for investors. In other words - properties generate more money than they cost to own. So investors are moving money out of other investments and into real estate because it is more profitable for them right now, before even considering any appreciation potential. Also for the first time since I can remember, people are paying less each month to buy a home than they pay to rent. Statewide, economists are saying that housing affordability is the best it has been since the late 1970s.

In 2009, my clients invested over $870,000 in cash into the market--much, much more than in 2008. Transactions included a vacation home, investments and rentals, and first homes. Because the monthly mortgage payments are so low, I am confident about the long term potential of this market. I'm basing this not only on my own experience, but also those of agents who've been working as agents in the valley 20 and 30 years. This is like getting a second chance to buy at prices of 10 years ago, with the added benefit of currently low interest rates.

Mid May 2009 Market Update

People always ask me, ?how is the market?? I can only answer that in some areas like Santa Cruz, prices have fallen to levels last seen in 2004-2005, but by and large are holding up fairly well. Other areas, like Watsonville, are so decimated by foreclosures that homes are selling for 50 cents or less on the dollar compared to a few years ago, so prices have effectively reversed to levels seen in the early 2000s. Distressed sales have pulled the entire market downward - they have become the most common transaction in the under $500,000 market. As a whole, regional prices are dropping, because the ratio of ?normal? sales and high end property sales has fallen dramatically.

First time buyers are optimistic due to a combination of powerful forces. To stabilize the market, the government has reduced borrowing costs, and prices have dropped to the point where many people can afford to buy for the first time?often at a lower cost after tax than renting. These historically low interest rates won?t be around forever ? there will be pressure to increase interest rates when the economy picks up or there are indications of inflation. Meanwhile, excellent loans are available to people with good credit and verifiable income, especially those purchasing moderately priced homes. The FHA loan for example, only requires 3.5% down payment and frequently permits the seller to pay points and closing costs, reducing the buyers? monthly payment. Simultaneously, the government is offering a first time homebuyer tax credit of up to $8,000? this incentive is set to expire on December 1st of this year. So if you haven?t owned a home in the last 3 years, you?ve got about 200 days left to take advantage of this.

Importantly, there are a lot of all-cash investors in the market, picking up foreclosure properties. For the first time in years, investors can get a positive cash flow on rental real estate. While investing in the depressed stock market might lead to long term gains, investors may realize immediate return on a real estate investment.

This equation of all cash investors, first time buyers, and depressed prices can lead to multiple offers, typically a few of which are over asking price. Some all cash offers have no loan contingency and can close in a couple of weeks; while other buyers are putting way over 20% down. It is this demand which may formulate the ?bottom? of the market. Because our economy is in such upheaval, unemployment remains a risk. No one can offer certainty on the duration of the recession nor the direction of property prices. Yet, if you are considering purchasing for the first time, you can be certain of one thing: the rent you pay now is contributing to someone else?s real estate portfolio instead of your own. Around here, that could easily add up to $20,000 a year or more.

In a nutshell, buyers in some sectors of the housing market may face competition. Foreclosures (bank and corporate owned properties) can offer excellent value, but at the same time, there are minimal disclosures about the property?s condition. Further, each corporation and bank follows their own guidelines and can prove inflexible about repairs during negotiations. Meanwhile, short sales require persistence and ongoing communications with the original lender as well as the buyers? lender. Making strategic decisions and avoiding costly mistakes is critical to getting a good value in this difficult market.

Single Family Home sales data for the last month:
SLV: 17 sales; 11 (65%) of which were distress sales.
Prices ranged from $127,500-$539,000
95.8% sales price / list price
Average discount $13,000; just under 5%
$79,000 largest discount; $28,250 largest premium
5 ?homes? sold for under $200,000: all were foreclosures that needed substantial work prior to being habitable
Only 4 homes sold for over $400,000, 3 of which were not distressed sales.

Santa Cruz: 29 sales; 7 (24%) of which were distress sales
Prices ranged from $365,000 to $2,350,000
94.86% sales price / list price
Average discount: $39,659: just over 5%
$345,000 largest discount (listed at $2.695 million and sold for $2.35 million)
$38,100 largest premium (listed at $399k; sold for $438k)
3 sales over $1,000,000; 4 sales under $475,000

May 2008: most asked question...

The most often asked question I've gotten lately is, "Have we reached 'the bottom?'" Since no one really knows if we've reached the bottom until we've passed it, here are some indicators from the trenches:

Many agents are reporting increased numbers of buyers looking at homes, my clients included.

An investment advisor reports parents are liquidating investments to help their grown children buy homes.

Homes that are priced really well compared to the competition are getting multiple offers.

The average asking price of homes on the market is approaching the average price of the homes that have received offers, indicating sellers have gotten realistic about what it takes to get a property sold in this market.


Quick San Lorenzo Valley Statistics:
o 100 homes are for sale in the four towns;
 Average days on the market:108
o 33 homes are pending sale:
 average days on market 117
 average asking price $534,000
o 19 of those went into escrow in the last 30 days
o 13 homes sold in the last 30 days
 Average asking price $428,000; sales price $403,000
 That's a discount of about 5%

Although the Fed lowered interest rates again, this is not really benefiting the residential market, because the lenders themselves have tightened their lending criteria so fewer people can get loans. We have seen a few situations where the lender required the buyer to put up a larger down payment or make other adjustments in order to get the loan funded. Yet, there are positive developments including FHA and Cal HFA programs that have broader criteria. As of this writing, the 30 year fixed rate is just over 5.8%, the new conforming jumbo category is hovering around 6%, and the jumbo is over 7.5%. Despite the Fed's cumulative rate reductions, interest rates on mortgages are only slightly less this year than last.

Recent statistics show that even in markets that have declined the worst, homes have appreciated modestly over the last 5 years. Yet, many homeowners who purchased in 2005 and 2006 owe more than their home is worth. People who can afford their mortgage and intend to stay in the same home are relatively unaffected. Some are even benefiting from declining interest rates, which have reduced some adjustable rate mortgage payments. The nugget to glean from all this is that buying a home should be considered a long term investment, backed by adequate financial reserves to weather short term setbacks.

In the News:
Here's the Mercury News' latest take on local home value changes and the popular service Zillow
http://www.mercurynews.com/ci_9167620?source=most_emailed

The latest housing article in the Santa Cruz Sentinel indicates home sales rose 50% in April (normally, May's seasonal increases are 5% over March). The median home price rose to $661,000 from $650,000.
http://www.santacruzsentinel.com/ci_9253667?source=rss

Useful advice for all ages in last week's Santa Cruz Sentinel: http://www.santacruzsentinel.com/ci_9223937?source=rss

And finally, submitted by a client, is this great reminder about common contractor scams. Another valuable benefit of being a Century 21 Showcase client is that all you have to do is pick up the phone or e-mail me for the latest list of our approved vendors: people our clients have used with confidence. We update this list frequently, so if you ever have a negative experience, or discover a new someone wonderful, tell me all about it! http://www.scambusters.org/contractors.html

April 2008 Update

UPDATE:
Yesterday, the Bush Administration announced additional flexibility for the Federal Housing Administration to insure more mortgages. Specifically targeted to help borrowers already in trouble, the FHA may be able to insure up to 500,000 refinanced home loans through FHASecure. For more details, visit http://www.hud.gov/news/release.cfm?content=pr08-050.cfm

Seems everyone wants to know what's happening with home sales. REALTORs in our offices are reporting consistently higher buyer attendance at open homes. Multiple offers are common on well-priced homes. In contrast to a few months ago, when the "short sales" often took a while to sell, it seems a new trend is emerging: "bank owned" homes are often priced to sell quickly. Today's savvy buyers can tell when there's a good value, and they are taking advantage of the downturn in increasing numbers.

ARTICLES:
We are also beginning to see a change in tone in the press, including writers from Forbes and the San Francisco Chronicle. There are signs of improvement in even the worst housing markets, and home sales picked up in February for the first time since last July nationwide. Here in California, February sales rose 10% over January's sales rate.


EVENTS:
Saturday, April 12th 10 am - 2:30 pm
Santa Cruz County Housing Expo
Free to the public:
Twin Lakes church, Monschke Hall
2710 Cabrillo College Drive,
Aptos, CA
Santa Cruz Association of REALTORS (831) 464-2000 for details, or visit
www.scaor.org for list of workshops, speakers, and more, including how to "green" a home!

OPEN HOMES:
Sunday April 20th 1 - 4 pm
Century 21, Showcase REALTORS will be hosting open homes all across the county; contact MC for details at
mcd@mcdwyer.com or (831) 419-9759

Mid March '08 Market Update

The other day a buyer remarked to me that there are a lot of homes are on the market right now, with all the foreclosures and everything. Actually, I shared with him, right now there are only 114 homes actively listed for sale on the MLS in the entire San Lorenzo Valley. In comparison, often during 2005, there were 100 homes for sale in Boulder Creek alone!

This past winter, there were a lot more homes listed for sale, so what happened? I think many of those sellers, if they had a choice, took their homes off the market to wait for a better selling season. Meanwhile, recent positive press articles and low interest rates have stimulated a new wave of buying here: in the last month, 22 homes changed to pending, and 7 closed escrow. The average time it took those 7 homes to sell was just 5 months, and the sellers received on average 93% of asking price. Looking closely at those 7 homes, one was a major fixer that sold for 72% of asking price. So if you took that one out of the mix, the other sellers got 95.5% of their asking price.


The key for sellers in this market is setting the right price and taking the time to make sure your home is more appealing than your competition. The key for buyers is to realize just how rare it is to be able to buy with the current combination of low interest rates, motivated sellers, and home prices their lowest in the past few years.

March Market Musings

As the subprime situation worsens statewide, somehow Santa Cruz County has managed to avoid the worst of it. However, the average and median home price dipped below $600,000 for the first time in years. While on the face of things this is an 18% drop in prices, the reality is more complex.

During most of 2007, sales in the million plus price range remained strong and steady, accounting for about 25% of all home sales. Similarly in 2007, homes priced under $500,000 accounted for only about 15%.

In contrast, this year has started out quite differently: about 33% of home sales in Santa Cruz County were sold for less than $500,000, while homes over a million dollars accounted for only 14%.

This dramatic change in the sales mix is what caused the average price to fall 18%. Homes haven't dropped 18% in value. In fact, over the last 4 months, most homes in the San Lorenzo Valley have sold for about 95% of the list price.

Here's where the difficulties lie: areas that experienced rapid building, sales and expansion, such as the Watsonville area and much of the Central Valley, where as many as 1% of homes have some sort of a foreclosure filing. There is no question that prices and sales are dramatically affected by the sub-prime loans, defaults and foreclosures. Statewide, home sales have fallen dramatically.

Many mortgage professionals draw sharp distinctions between geographic areas. One of the bix six lenders is in the process of re-evaluating the Santa Cruz County market as stable (up from soft); at the same time they expect to downgrade Santa Clara and Monterey Counties. Borrowers nowdays need to put more money into the purchase, have solid credit history, and provide better documentation. Sounds like good business practice to me.

Here in the San Lorenzo Valley, home values in each town have been affected differently. There are a few distress sales where the savvy buyer can negotiate a low purchase price and lock in today's low interest rates. A few homes are being sold at auctions. But the majority of homeowners here are not distressed: they are selling for the normal reasons. Well-priced homes in good condition with appealing features often sell within a matter of a month or two, often at or quite near the asking price.

Larger Loans Approved; Project Lifeline

On February 13th, the President signed the economic stimulous package as expected, so the conforming loan limit is officially increased in high cost areas like California. Many borrowers are expected to take advantage of lower interest rates, previously only available to people borrowing less than $417,000.

On February 12th, the President announced Project LifeLine - a program designed to help people who have fallen behind on their mortgage payments. Some of the nation's largest lenders, accounting for nearly half of all mortgages, are participating: including JP Morgan Chase, Washington Mutual, Bank of America, Countrywide, Wells Fargo Bank, and CitiGroup. These institutions have pledged to work with delinquent borrowers, including providing some people extra time prior to processing official foreclosure paperwork.

Meanwhile, a recent analysis of RealtyTrac foreclosure statistics shows that there may be counting errors. The company apparently counts each loan and each stage of a property default. It is possible that as a single property moves through the foreclosure process, there may be more than one loan being counted each time there is a notice of default, auction, or lender repossession. So it is possible the degree of the problem may be somewhat overstated. Nonetheless, this is a difficult stage in the real estate cycle, and an indicator we are watching carefully.

Better loans for California by mid February

Today, Congress completed passage of a $150 billion stimulus package designed to avert recession; next it goes to the President, who has indicated he will approve it.

The bill contains economic assistance for about 100 million US households. Here in California, the housing market is expected to greatly benefit from the expansion of the conforming loan size from $417,000 to as high as $729,750. These larger conforming loans can then be purchased by the government sponsored mortgage companies Freddie Mac and Fannie Mae; this will add much needed liquidity to the market. Larger loans can also be insured by the Federal Housing Authority.

Previously, any loan over $417,000 was considered a jumbo loan and there weren't as many investors buying those mortgages. Consequently, the interest rates on jumbo loans were much higher than conforming loans. In my opinion, this liquidity problem is what caused the average California home price to dip below $500,000 in December - for the first time in years - specifically because the number of people buying homes priced over $500,000 using jumbo loans, fell off after August 2007.

I expect this increase in the conforming loan amount, combined with 30 year fixed mortgage rates hovering between 5.375% and 5.5%, will lead to increased buyer activity. Further, as far more people will be able to refinance inexpensively now, we may see fewer homes going into short sales and foreclosure, which could stablize prices.

Isn't it ironic that when we were in a feverish sellers' market, buyers were eager and willing to pay more than ever for a home. Yet in a buyers' market like we have now, when offers below asking price are being negotiated and accepted, and homes are selling at a discount, there just aren't that many buyers. No one can predict the bottom of the market. But in my practise, I am seeing an increase in intelligent, educated buyers looking to lock in great interest rates on homes that are selling at prices that are the lowest in years.

Good News for Conforming Loans

According to the California Association of REALTORs president, William Brown, the White House and Congressional leaders have agreed to expand certain housing benefits long enjoyed by the states of Hawaii and Alaska. These two "high-cost" states have conforming loan limits higher than the rest of the nation. California has higher home prices than the national average, yet has only been allowed a conforming loan limit of $417,000. Any loans above that have been considered Jumbo Loans, which for a variety of reasons (including support from Fannie Mae and Freddie Mac, government sponsored entitites) are more expensive. The new conforming loan limit may be as high as $729,750!

This change is being contemplated as part of the current government stimulus package. There is still opposition from the Office of Federal Housing Enterprise Oversight, but the California Association of REALTORs has pledged to continue to advocate the reform for the benefit of all high cost housing areas.