News Flash on Home Loans

The deadline for funding loans under the temporary conforming loan limit is December 15th 2008.  Some banks are cutting off funding on December 1st.  Loans between $417,001 and $729,750 absolutely have to fund by these dates.  The maximum conforming limit for 2009 will be $625,500 and we are not sure which areas in the San Francisco East Bay areas will qualify at the new limits. Some areas will most likely not qualify for the maximum.  We don’t really know how different markets will be affected by this change. 

If you are a buyer who wants to put no more than 10% down and you are looking at buying a house for a little over $800,000, your time to buy is quickly approaching a deadline.  Jumbo loans require at least 20 to 25 percent down and offer much higher interest rates. 

If you are a seller considering selling your home in around the $800,000 price range, I suggest you get your house on the market immediately and price it right so that it will get immediate action. The pool of buyers able to purchase your house after the middle of November is going to be greatly reduced.
There is no information yet available as to how the interim period between December 15th and the beginning of next year will be handled. 

After taking Meal-on-Wheels to Grandma, the small, good wolf co-signed home loans for all the little pigs

On another lending front, for any of you that are having trouble with your payments, Countrywide has come out with a plan aimed at borrowers with subprime mortgages, or pay-option adjustable-rate home loans, which would temporarily cut interest rates on some loans to as low as 2.5%. Some borrowers who owe more than their homes are worth could even see their loan balances reduced, giving them equity once again in their properties. The idea is to modify a loan’s terms just enough to create a new monthly payment, including principal, interest, taxes and property insurance, equal to 34% of a borrower’s verified monthly income. Bank of America, who will be slowly taking the name “Countrywide” out of circulation, says they have obtained permission for the modifications from the vast majority of the big banks, investment funds and institutions to which Countrywide sold most of its loans while continuing to service them. 10 other major mortgage-servicing companies have been given an ultimatum by the Senate to adopt programs similar to the Countrywide plan.  Thank-you Bank of America for being pro-active.  Now let’s see how this shakes out.

There may be a bright side to our financial crisis

Here is something to leave you thinking about as we go into our last week prior to elections.
The next time you hear a politician use the word ‘billion’ in a casual manner, think about this. A billion is a difficult number to comprehend, but one advertising agency did a good job of putting that figure into some perspective in one of it’s releases.

 
A. A billion seconds ago it was 1959.
B. A billion minutes ago Jesus was alive.
C. A billion hours ago our ancestors were living in the Stone Age.
D. A billion days ago no-one walked on the earth on two feet.
E. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.

I think it’s time for a major change, don’t you?

Edited and Written by Dan Joy

This video touched me.  It’s great to see young people so involved in our country’s politics again. Thanks to this Marin kid. 

http://www.youtube.com/watch?v=3iojPaw8yX0

The Goldman Report for October 6, 2008

I told you to hold on to your hat. Even though the economic rescue plan was signed last week by the President, the stock market reacted as if it didn’t get the news.  Two points to note: first, this economic upheaval is a global issue, not just national.  The stock exchange reacted based on what happened in earlier time zones. Although we have a plan, many other nations are still grappling with what to do. Iceland is in dire straits and could become an iceberg. And secondly, this is not just about housing any more. We are in a recession and the market is reflecting the economic woes.

The main purpose of the plan was to unclog the financial system and keep credit flowing. The plan was to act like an ad hoc Drano with the intention of getting money flowing for businesses and home loans. The Treasury will need to quickly begin implementing in order to make sure the plan has it desired effect. Nearly seventy percent of our GDP is based on consumer spending. And therefore our financial health depends on the free flow of credit.

The plan will not stop the recession, but it may lessen its harshness and reduce the period of time it will take to recover. It is a step in steadying the patient—the economy. We will know it is working by watching four credit market signs according to Kathleen Pender’s article in last Sunday’s SF Chronicle. The four markets include: 1) Three month treasury bill yields—yields have been driven down to under a half percent. It needs to get back to 2 percent.  2)  The Libor rate—the rate at which banks loan to each other. It should be close to the federal funds rate—2 percent.  Last week it was at 6 percent. 3) The Ted spread—this is the difference between the 3-month Libor and the 3-month Treasury yield. It is about .5 percent and it needs to get above 1 percent. 4) Corporate bond spreads— this is the difference between high-grade corporate bonds and junk bonds.  The spread currently is about 6.5 percent. In May 2007 it was 1.5 percent. A reasonable rate would be around 4 percent.  These are the litmus tests. If they return to more reasonable numbers then the plan will have worked.  Now you know what to watch for.

How does all of this affect the housing market?  Our September sales, both open and closed, were up over last year, however average sales price was down by an equal amount. The lower end of the market continues to dominate the number of sales driving both median and average price down.  The higher end of the market has been less active due in part to the cost and terms of jumbo loans (those loans over $729,750) and that buys in the higher price ranges are more discretionary.

Volatility in the financial markets, increasing unemployment and uncertainty in the direction of the economy is putting up a yellow flag for a number of buyers. It is almost like putting the process on pause.  Open house activity has slowed in some markets like Marin and the wine country.  The East Bay and San Francisco are still seeing decent numbers for homes that are open for the first and second times, but the number of buyers is declining.  Transactions are taking longer to close as banks and mortgage companies are demanding more documentation and requiring buyers to meet more stringent guidelines. The volatility of the economy is also taking its toll. One buyer walked away from a large deposit due to their rapidly changing financial position. Yes, just like the financial markets, the housing market is feeling the stress. For those brave and financially stable buyers, there are rewards in negotiating exceptional values.  As has been said many times, the best time to buy is when others aren’t.

Believe it or not there are still multiple offers. Again with most occurring under the million dollar range. Those properties that are competitively priced (some would say well below market) and in the most desirable neighborhoods are receiving a great deal of attention. For example, a REO 3bedr. 2 bath home in Larkspur priced at $789K received 22 offers and, from my understanding, went over a million.  Go figure.  Most multiples are receiving between 2-4 offers and going a little below or above list price.

Next week will be the full review of September numbers around the Bay. I believe those numbers will reflect what I have been reporting over the last four weeks—sales numbers are up over last year, median/average prices are dropping, and inventories are declining as distressed properties are being sold and fewer listings are coming on the market.

Until then, buckle up.

http://www.youtube.com/watch?v=-Tze6Ir2jNY&feature=related

Written by Avrom Goldman, President CEO Pacific Union

Edited by Dan Joy

Have we Reached the Bottom Floor Bargain Basement Yet? Market Stabilization in the East Bay Real Estate Market

Do you want to buy a house but are afraid the market may be going down even further?  With the recent stock market crash this week and all the other grim financial news reports broadcasting gloom and doom everywhere you look, I cannot blame you for thinking things could get worse before they get better.

There is no national market when it comes to real estate. The real estate world is local – meaning the markets are like wine regions, there are many micro-climates.  As a whole, the countries prices may come down more.  But in the good neighborhoods of the San Francisco East Bay, market stabilization seems to on the upswing.  In my office at our weekly staff meeting we have nearly 40 agents present. Most agents, for the past few weeks, have reported very high turn out to open homes with many new buyers showing up.

Interest rates have come way down in the last week.  One of my clients locked in at 5.75% on a 30 year fixed.  We haven’t seen that low in a long time.  They have generally been around 6.375 or so.  This presents an incredible opportunity for new home buyers to buy a house and pay much lower payments than they would at the higher rate.  And with the conforming loan amount being $729,750 only until the end of the year (next year it will go down to $625,500) there is motivation for buyers to get something now while they still can afford it.

 We also talk about new listings that are coming up in our staff meeting.  Another trend that is happening is a reduction in the amount of new inventory coming on the market.  I have several clients in the $500 – $600,000 price range and there is almost nothing new coming on the market in the next month from our office in that range and really not much coming on period. Typically September and October are times where lots of new inventory comes on the market. So people are holding back putting their houses for sale. YIKES!!  Are we going to have an early winter? But I can already hear you saying, “So what?  How do I know we’ve really hit the bottom?” 

If this is you, it’s time to look at the statistics and figure it out for yourselves.  From what I am seeing, we have hit the bottom and are now stabilizing.  The opportunities for the best deals will soon be gone in the nicer neighborhoods.  But a picture is worth a thousand words.

There are 2 things we look at in evaluating the state of the union concerning the real estate market locally. The first is the number of months of inventory on the market.  That figure is derived from looking at the number of active listings (these are the ones you can still buy) on the market, the number of pending listings (things that have gone under contract in the last 30 days usually), and the number of sold properties in a given month.  You are evaluating how long it will take with the current number of houses being sold to sell the rest of the inventory on the market. 

Are you following me here?  Statistics were never my strong suit in college.  Thank God for my wonderful manager, Pam Hoffman, who uses the Broker Metrics section of our multiple listing services to put all this together.  You can thank her for the pretty graphs coming up. Unfortuantely the pretty graphs do not publish directly on the blog. You will see a link where they belong. You will need to click on it and go back and forth between the article and the graph – sorry about that.

The second thing we look at is the Basic Absorption.  Here we look at the actual inventory on the market in terms of that which is under contract (pending), that which is new properties just coming on that month, and the residual inventory (those houses that didn’t sell in a given month and stay on the market). Together these 2 things can give us a local picture of what the market is doing.

I’m focusing this article on the broader picture in terms of looking at these 2 dynamics by city. You can look at these dynamics by zip code and neighborhoods within the city as well and they will look very different, for example if we compared Rockridge with East Oakland there would really be no comparison as Rockridge has stayed stable throughout this real estate and financial crisis.  Prices have come down mind you, but month’s supply of inventory in Rockridge has always stayed low and still favors a seller’s market.

Let’s start with Oakland. months-supply-of-inventory-oakland-aug06toaug08

As you can see from this graph, the market peaked with 15.7 months of inventory last December.  Since then it has steadily come down to what it was in August, 4.5 months of inventory.  That would be considered a balanced market as far as the advantage for sellers or buyers being relatively similar, whereas even in July it was 6.1 months and would be considered a buyer’s market.  If you look at what it was in August of 2006 (4.1 months), when the market prices were much higher, we are nearly down to the same number of months of inventory.  This is for all single family dwellings in every price range.

When inventory is low and demand is high, that is when prices begin to go up.  With so many people wanting to own homes but waiting for the market to go down some more, we are getting an increasing pent up demand that sooner or later will result in people deciding to come to the table and buy something. At that point, we will begin to see the home prices going up.  The thing is, we will never know what the bottom truly is until it starts going up.  If you find a home you really like, do you really want to wait and risk potentially getting priced out of the market again? I remember when I lived in Boston I used to go shopping at Filene’s Basement.  I always hoped the Armani shirts I liked would eventually appear down there where the bargains were outstanding. But most of the quality wears never reached the basement.  This may be true for you homebuyers waiting for the bottom. You may not find anything you want when you get there.

Next we will look at the basic absorption for the Oakland market over the past 2 years. 

basic-absorption-oakland-aug06toaug08

In this chart you will notice that we have an increase in the number of homes currently under contract of 27% since August of 2006.  People are deciding to take advantage of these prices and buy homes.  On the other hand the number of new listings coming on the market is down 27%.  Sellers are not selling their homes in this market if they don’t have to, or if they can’t move up to something better.  (This can be a good time to move up if you have owned your home long enough.)  And we have an increase of 96% of residual inventory (houses that don’t sell) from 2006.  Wow, you say!!! But when you look at the trends of this chart the gap between the red and the blue lines are narrowing. This means we are beginning to sell most of what comes on the market that is priced right at this point and there are fewer numbers of houses adding to the residual group.

For those sellers looking at this chart you should focus on that residual area and make new decisions if you have one of the homes contributing to that residual number. Either take your home off the market and make other plans or do significant price reductions.  Buyers are not willing to buy houses that are overpriced and they will continue to pass you up, no matter how stubborn you are or how desperate your situation.

Given that Oakland is a balanced market, (requiring equal admonitions) here is a reality check for you buyers out there as well.  Unless the house of your dreams is one of the ones that linger on the market for more than 45 days or so, don’t be thinking the houses you go see and love will come down more.  From what I can see, homes that are priced right and do not have major flaws such as big pest reports, location problems such as near a freeway or busy street, neighborhood issues, or are just unappealing for some reason esthetically; are selling within the first couple of weeks on the market.  If you are working with a good agent who is looking out for your interests and not their own, they will be able to give you a good idea of what might be overpriced and encourage you to make an offer for under asking; and which ones are priced right and may even go up a little bit if other people come to the table on an offer date.

The greatest thing keeping most buyers from buying right now is fear that they will lose their nest egg.  With all the foreclosure news out there it is no wonder you are afraid. But the reason that people are in the situation they are in nine times out of ten is because of the lack of funds they put into the home in the first place.  In the past 8 to 10 years we have had a certain political party (the name I will not mention) that has taken upon themselves to destroy all the protections that were put in place after the great depression that my 90 year old mother lived through as a little girl.  These protections were governmental controls on the way financial institutions did their business. By legislation passed through our congress in the recent years, lenders were allowed to do things they were not allowed to do previously such as subprime loans, lowered qualifications for borrowers, etc. In my opinion, they did this so that a few people could make a bundle and steal from the middle class. It is very important that you know this when you go to the polls in November.  But it is also important that you realize that at this point in time, if you are getting a loan to purchase a property and your job situation is stable, you will not end up in a bad way.  At this point the lending institutions are making sure that sufficient down payment and qualifications are met to give you the money to purchase your home.

By now my readers are noticing that I have taken a detour from my subject, and for this I apologize.  Just know that my goal here is to help both buyers and sellers get information they need to make good decisions and with the election time upon us and the status of the nation being what it is, I cannot help but diverge from my topic.

On to the Berkeley market. months-supply-of-inventory-berkeley-aug06toaug08

Now if you ever wanted to see an interesting micro-climate, Berkeley is the place, in more ways than one.  As you can see from this graph the number of months of inventory is only 2.1 months (a seller’s market) which is actually better than it was 2 years ago at 2.5 months.  Berkeley is like its own country.  Their worst time was last January when they had 5.3 months supply of inventory.  The overall monthly supply of inventory is down 13% of what it was 2 years ago. basic-absorption-bekeley-aug06toaug08  When we look at the basic absorption for the most part new inventory is selling at a reasonable pace and the residual supply seems to have remained relatively consistent for the past year with mild fluctuations (sorry, I only have the chart for the last year as opposed to the last 2 but I think you get the idea).  We see an increase of 48% of properties under contract (UC blue line) and, here is a difference from Oakland, the amount of new listings (red line) is up 14% from 1years ago.  Totally wild!!!!  I guess if you don’t want to conform to the current economic status of the country, move to Berkeley.  They have their own rules.

months-supply-of-inventory-el-cerrito-aug06toaug08 El Cerrito has a 3.7 month supply of inventory which is up from the previous few months. It is a much smaller city so a few properties can cause a really big effect here. And I know them all.  The high was last November which quickly recovered in December and then went up and down until April when it gradually went down until August where it rose again. (wow, this sounds like the same climate as our lending situation over the past year, a rocky road of ups and downs)Overall the number of month supply of inventory is up from August of 2006 by 91%.  basic-absorption-el-cerito-aug06toaug08 Looking at the basic absorption rate in El Cerrito clarifies things quite well. There is actually a balance of what is coming on the market and what is selling (red and blue lines above Aug 2008).  In reality the number of properties under contract is down 52% and the number of new listings is down 72% from what they were in 2006. On the other hand the residual inventory is up by 55%. There are some properties on the lower end of the market that are not selling, a few that are actually great deals but could be ever better ones if someone would just make an offer.  Then there are a couple at the top end of the market that were always way over priced and continue to be way over priced for the current times, in one case on the golf course maybe for any time.  Most of the houses lingering on the market are in the north end.  Come on folks, it’s just one more BART stop away.  For the most part sellers in El Cerrito are staying put, especially those with nicer houses. That’s why the 72% reduction of new listings. The more desirable houses that are coming on the market, mostly sellers moving up, that are priced right are selling. Many of the houses lingering for more than a couple of months have issues of some kind or another.  One is an overpriced house that is a tear down and rebuild situation.

I could go on and talk about other micro climates of the East Bay but if you’ve held in this long with me, you are a very good sport.  I apologize for the length of this article. Talking about the market right now relates to so many things, sometimes I have to diverge in order to paint the whole picture.  I hope this is helpful to some of my readers and, as always, I appreciate comments and feedback. Again, thank-you for your time.

 
Written and Edited by Dan Joy

The Long and the Short about Short Sales

Helpful Hints for the Strong of Heart

Are you the kind of person who wants to buy a house but have no attachment to the home you are buying, no concern about how long it takes to get, and can basically take it or leave it in the end?  If you answered yes, then Short Sales may be properties to consider buying.  Short sales are anything but short in the length of time it takes to close escrow.  They would better be termed extremely long and very uncertain sales.  Let’s talk about why.  Keep in mind as I write this article that this whole subject is new to most agents.  The amount of short sales right now far exceed any time in recent history. No one really has the answers, which makes this a very difficult subject to write about.

 
A short sale is a sale where the seller is selling the home for less than what their current mortgage loans plus selling costs are on the property.  The seller is losing whatever equity they currently have in the property. They are walking away with no money in their hands. So what is the seller’s motivation here?  The seller’s motivation is one of many important questions to be answered before ever writing an offer to purchase a short sale property. Because there are not enough funds to pay off the existing loans on the property, the mortgage lenders are involved in the sale and have to approve the sale going through.  How motivated are the banks to lose their investment?  What will motivate the mortgage holder to move forward on a short sale is the million dollar question that no one seems to have an answer for at this time. In many cases, it appears that they don’t have the proper motivation and seem to not care if the property goes to foreclosure. 

 
When a seller puts a house on the market that is likely to become a short sale transaction they sign a disclosure regarding the short sale process.  That is all that is required for an agent to list a property that will be a short sale. When a buyer puts an offer on a short sale listing, they must sign a short sale addendum which outlines that it could take a long time for the bank or mortgage holder to approve this transaction and that the bank at any time could accept a higher offer on the property should they receive one.  The buyer is still considered to be in contract for buying the property and is on the hook should the lender agree to the sale up until whatever date is written in to the short sale addendum. The buyer basically has the entire obligation and the seller is off the hook for performing on the contract should the lender decide to do something else.  The California Association of Realtors (CAR) that creates these forms is now aware of the problems with the buyer’s short sale addendum and is working on correcting it, but in the mean time it really puts the buyer to a disadvantage.  Some lenders do not seem to be concerned with getting these short sale properties sold. No one knows why?  Maybe they want them to go to foreclosure for some reason economically that is unclear to us common folk.  When I find something out about this, I for sure will write more. But the reality is sometimes they just don’t respond at all.

 
If the agent that is listing the property isn’t familiar with doing short sales, you are far more likely to hit it big in Reno than actually be able to purchase this home.  One of the questions I am now asking the listing agent before writing offers for clients on short sales is, how many short sale transactions have you closed successfully this year?  If they have some they have closed, I actually want to go to the multiple listing service (MLS) and see the closed properties to confirm it before advising my client about writing an offer on the property. 

 
Why is this important?  There is a package that needs to get sent to the lender along with the accepted offer on the property.  This package includes the seller’s financial information and a hardship letter stating why the seller cannot afford to make the payments on this house any longer.  Each lender is different in terms of what documentation they require. Each lender is different in terms of how long it takes for them to respond.  Once this package gets sent to the lender, it could sit on a desk for weeks before anyone does anything with it.  If you are lucky, the financial institution assigns a loss mitigation representative to the file. They then start by doing an independent real estate appraisal of the property by an agent they hire to give them an idea if the property is being sold near market rate.  Once this is done they begin the process of approving or disapproving the offer that was submitted.  If there is more than one lender involved then the process has to be gone through with the secondary financing institution as well. The first lender gets the loans paid off before the seconds so most likely the second lender has far more to lose than the first lender.

 
The one benefit the seller may get from doing the short sale verses going to foreclosure is not having their credit become as tarnished as it would be should they go to foreclosure.  I’ve heard some lenders say it makes no difference, a person doing a short sale with still suffer having their credit affected negatively. One agent who has closed a number of short sale transactions this year (making her an expert on the subject) told me that her clients who have had all their payments up to date came out with no negative effects to their credit.  Other agents have told me that if the seller’s payments are up to date, then the bank doesn’t have any incentive to approve the short sale. They have advised their client to stop making the payments.  Wow…………. does this make your head spin or what?  Personally I would not be advising my clients one way or the other in this regard, I would refer them to an attorney who is familiar with short sales to get the advise they need.

 
I have worked with a few buyers this year putting offers on short sales. What I have found for the most part is that the lenders are not moving at all on responding to the offers in any kind of reasonable time frame. One client wrote an offer for a property in the Montclair district of Oakland over 2 months ago.  The agent had submitted paperwork to the bank two weeks prior to my clients putting the offer in.   Last I spoke with him six offers had been received.  As of yet, I have not heard anything and my clients offer has now expired, and he is about to close on a regular sale property.  The bank in this case is a major local institution.  So did the agent not submit all the proper paperwork?  Is the bank more concerned with areas where they have a bigger volume of properties that are bank owned (REO) or short sales and are just waiting on the market to correct before acting on this one?  Who knows?  I have another client who is in the beginning phase of waiting on the bank to approve. We will see if anything comes of it.

 
My best advice, if you are going to put offers on short sales, is being prepared to wait.  Make sure the agent you are working with asks the right questions from the listing agent to determine if they know what they are doing as far as the short sale process is concerned.  Be sure to have your agent write in the contract protections that allow you, the buyer, to back out after giving the seller notice to provide lender approval of the sale within a 48 hour time frame if you choose.  If at all possible write in the contract that your buyer’s agent gets permission to have full access to the loss mitigation representative at the lending institution involved once one is assigned so that you can know exactly what the lender is waiting on.  That way it keeps the seller motivated to provide whatever paperwork the financial institution is requesting to complete the sale and keeps you informed of exactly where things are in the process instead of your offer feeling like it’s out there in the great abyss.  On the whole it seems like it may be better for you to wait until the property becomes bank owned to make an offer on it. 

Written and Edited by Dan Joy

Mortgage Money is Not That Hard to Get

We are obviously in a credit crunch right now. . . but, with that said, there is plenty of money available at fantastic rates.  The old days of zero to 5 percent down are pretty much gone.  Stated income loans (loans with no w-2’s or tax returns needed to qualify) are very hard to come by and no document loans (lenders that need to see very little financial income or account verification information) are a thing of the past.

If you have decent credit scores between 700 and 825, can document your income, and can put 10 percent down toward the sales price; then there is a great mortgage product for you.  I am doing 30 year fixed mortgages now at 6.12 percent up to 729,750.  That is a better rate than we have seen in years on jumbo 30 year products. 

It is my feeling and my advice to my clients that we should start to move away from interest only products and switch to 30 year fixed loans.  Interest only loans are still available to people who want them but lenders are now qualifying people on the basis of interest and principle payments. So even if you choose to purchase an interest only product, you will have to qualify based on interest and principle. If you think you might be receiving a large sum of money (such as from the sale of another home) that you want to use to pay your principle down and thereby lower your payments, an interest only product might be the right choice.

I am doing super Jumbo loans up to 5 million in the mid to high 6 percent range.  There are certainly less lenders than there were 6 months ago but that is not necessarily a bad thing.  Lenders are looking for good strong borrowers. For the best of the best they will reward you with an excellent rate.

Written by Mike Rutledge, Senior Loan Officer, First Security Loan / Edited by Dan Joy

The Goldman Report for May 12th, 2008

It’s getting better, better all the time. Yes, I admit, it’s getting a little better all the time. Great lyrics sung by the Beatles.  And so it is with the real estate market. Not that the market has returned to halcyon days, but it has steadied itself and making modest steps toward equilibrium. 

This is the local forecast, not the national.  The Bay Area forecast is loaded with microclimates. Meaning that as usual San Francisco is still bright and sunny, Marin, Alameda, and Contra Costa are cloudy with breaking sunshine, while Sonoma and Napa are still rather cloudy.  Even within each county we find areas that continue with rain storms mixed with bright sun. You can even find a rainbow or two.

The overriding theme is plenty of buyers circling, with many still trying to figure out the long term weather pattern.  The majority of homes open for the first time are attracting ample crowds of between 10-40 potential home owners.  The best and most attractive listings are drawing numbers in the high double to triple digits, like the Piedmont 3 bedr./3 ba. home that was visited by 140 guests and  the SF Noe Valley listing priced at $2.095 mil. that garnered over 200 buyers.  Buyer traffic drops off significantly after the first open home as buyers are constantly looking for the newest eye-catching listing.  Usually the only exception is when a property has a noteworthy price reduction.

Those that are jumping in are doing so with gusto. Nearly 30% of our transactions during this period were involved in multiple offers (29% to be exact). The majority of these transactions are drawing between 2-4 offers and selling at asking or 2-6% over list. There are exceptions such as the Noe Valley listing in SF priced at a bit under $ 1 mil that did go over by 10%.   The upper end of the market is still healthy in San Francisco and appears to be coming back in Marin.  As evidenced by the multiple offer on a $4 mil. home in Tiburon and another Marin listing at $3.9 mil. that also went into escrow. Contra Costa is also seeing resurgence in their upper end where a $2.075 mil. home in San Ramon sold. The Oakland/Berkeley area is seeing a different pattern where listings between $1 – 1.5 mil are selling, but those over that level are being more challenged.  Napa and Sonoma are experiencing the bulk of their activity in the lowest and highest ends of their market.  As you can see, the weather is quite variable.

The majority of buyers are still lacking a sense of urgency.  However, buyers do know value and when they see it; do not hesitate to make their move. Volume of sales was well off last year comparing first quarter 2007 to first quarter 2008.  The pattern changed in April, where in a number of counties open sales were actually up over 2008. This is a positive trend if it holds for May and June.

We will continue to see volatility in our market, just as we have seen in the stock market. Inventories continue to shrink and new home building has pretty much come to a standstill in the Bay Area. At the same time buyer demand is increasing. At some point the pressure will have to release itself. Although this time it should come in a measured release rather than with hurricane force as it did in 1999/2000 and again in 2004/2005.

I am attaching two articles that acknowledge that the worst is behind us and that the repair has begun.  One is by a hedge fund manager, Cyril Moulle-Berteaux http://online.wsj.com/article/SB121003604494869449.html?mod=WSJBlog   and the other by George Soros the billionaire investor http://blogs.wsj.com/economics/2008/05/07/soros-market-will-retest-its-lows/?mod=WSJBlog.  These articles are significant because they are the first national articles that are beginning to look at recovery rather than continuing to dwell on the rubble in the rear view mirror. We will still experience the on-going fall out from the sub-prime debacle, but like after shocks from an earthquake they do diminish over time.

Hard to find live Beatles performances from the Revolver album so this will have to do.    http://www.youtube.com/watch?v=Bd-vU4Uot90&feature=related

 Written by Avram Goldman, President and CEO Pacific Union Real Estate

 

To Buy or Not to Buy? Are we at the Bottom Yet?

I wanted to take this opportunity to educate people to the market conditions today. With all the news media predicting gloom and doom, it’s hard for buyers right now to get a grip on what is really going on. Whatever glimmer of truths lie in the articles written or news reports made they are well hidden behind the sensationalized headlines that sell their stories. So I want to take some time to present some facts and some history. I also want to look at trends to determine what is actually happening here. There is a lot of information here so take it slowly, don’t try to grasp it in one sitting. The reality is there are a lot of factors at bay. Trying to make sense out of them is not a simple 2 paragraph piece.

The real estate market always works in cycles, just like the seasons. That is true everywhere. Real estate is still one of the best financial investments a person can make and one of the only ones that you can have a $250,000 gain as a single person or $500,000 as a married couple (provided it’s your place of residence and you have lived there at least 2 years) tax free.  As you can see from this graph compiled by the California Association of Realtors’(CAR),

 

rate of return on real estate investments vary from year to year but overall over a period of 34 years from 1968 to 2002 there was an 11.7% average increase. Not only do you get a better return than most other investments, you get to enjoy living there while the value increases. One should always be thinking of real estate as at least a 5 year investment.  

We have just come out of a very long upswing market in the bay area which began in the late 90’s and continued up through 2006 and the first part of 2007 where we reached a peak. We were overdue for a market correction. Within that time there were some periods when things went down a little bit for a while, like when the dotcom crash occurred. But the market recovered very rapidly. So what is different now?

I recently attended an all day class where Deputy Chief Economist of California Association of Realtors, Dr Klinehenz, spoke. His information on the cycles of past markets was very helpful.  The real estate market is measured in two ways, number of units sold and the median price. Looking back at the last 40 years it appears that the cycles in housing went for 10 year stretches between big dips.

The dips were more pronounced in terms of number of units sold while the medium price was less volatile. From 1970 to 1980 there was a mostly gradual increasing market as to price and number of sales in California. Then in 1980 there was a big dip in the number of sales that bottomed out in 1982 and went in a “V” shaped curve back upward. At the same time the average prices were not that affected, they mostly just leveled out. In 1989 the market again took a turn and by 1991 came to a less drastic lowering in the number of home sales than in the 80’s but the prices steadily declined until 1996.

So what was going on in these 2 different periods? The crisis in the 1980’s was inflation, and like today’s problems, stemmed around financing issues. The inflation rates of the 1980’s were from 10-14% when what we normally want to see is around 2.5%. This resulted in extremely high interest rates (we are talking about 18-19%).  People nowadays get upset by interest rates when they are around 8% and believe them to be high but on the scale of things, our interest rates today have remained very low. 

 

In the 1990’s the situation was a little different. The economy began to change in 1989 and then in the Bay area we had the 1989 Earthquake which compounded the effect. The real estate market was slower to rebound mostly driven by job losses and high rates of unemployment.  In other words, there were other factors going on that affected the overall picture having to do with the broader economy. Keep in mind that although there was a decline in housing prices statewide, they were not that drastic.

So what factors are we taking into account today. The current crisis in the market is much like the one of the 1980’s and the economists are predicting that our curve will look more like the one of the 80’s than the slow decline over time of the 1990’s. 

Sales in the 1982 valley were at 189,345 units. As you can see from this chart we have reached a similar low level in units sold. 

As you can see from this graph we reached a low last fall that continued into the beginning of this year and then started to rise.  In terms of median price, we are seeing a decline in Alameda County as of February 2008 of 12.6% and in Contra Costa of 14.5%.

Another marker for market conditions is the unsold inventory which looks at number of months of inventory we have given the current rate of sales.

In the markets of the past years we have had 2 to 3 months of inventory. Now we have around 13.5 months in Alameda County. Keep in mind that these numbers differ between cities and neighborhoods as most of the markets I work in show a far lower number of months than this. Inventory verses demand is really what dictates prices going up or down.

We have some other factors affecting real estate in California as well. 

Do to higher gas and food prices real disposable income is very low. Unemployment is a little higher than last year but not as high as it was in 2003 when the dot com crash occurred. The big difference between California and many other parts of the country is that we are expected to have a population increase while many other parts of the country are experiencing a large population decrease.

But overall, the current crisis in California is about the unavailability of purchase funds, especially for those who need to buy with less than 20% down. The sub-prime problems hit the fan at the end of last summer. That continued to some degree into the early months of this year combined with the normal winter slump. As a result prices have come down in the bay area.

Now, of course this chart is an average for the whole counties and we all know here in the east bay, in Alameda and Contra Costa Counties, there are neighborhoods that have not come down as much as these percentages indicate.

So how come so many people got into trouble buying houses and now are taking huge losses? Our current financing problems with real estate are in large part related to financial institutions (in order to continue showing profits) approving loans for people in 2004 – 2006 that could not actually afford to buy them. In order to help them qualify they were often put into loans that adjusted after 2 years to much higher interest rates. They were assuming they could refinance and get into better types of loans. Many people were qualified on the basis of a negative amortization loan which means that they are not fully paying the interest on the loan, so every month the principle gets bigger. The initial payment was low but this can’t last forever. With the market already moving into a natural declining price adjustment cycle combined with their payment becoming higher due to the nature of their loan, these individuals were unable to afford their home. They could not refinance because the house would not appraise for the value of the increased loan and therefore had to sell their home in a short sale or their loan was foreclosed.

The increase in short sales and bank owned property due to foreclosure (a topic for a future discussion) brought housing prices down dramatically in certain areas.  As you can see from this chart; the numbers of notices of default going out increased dramatically from the 4th quarter of 2006 to the 3rd and 4th quarters of 2007.  Some areas were not as drastically affected by the sub-prime crisis. 

Although the charts above are about Stockton, you can see a very similar situation in many parts of our markets as well, especially in Oakland where 580 is often the dividing line.  In the east bay those areas are Piedmont, Berkeley, Albany, and in Oakland neighborhoods such as Rockridge, Crocker Highlands, and Montclair. Wherever people traditionally put more down for their home purchase, the sub-prime crisis had less effect on home owners being forced to sell their property. Other areas, where some first time buyers (who could not really afford the first time buyer prices) were getting in the market, have been affected to a large degree and prices are at record lows. This presents a great opportunity for people wanting to get in the market at affordable prices and take advantage of appreciation when the market begins to stabilize.

According to our economist with CAR it seems that the market is likely to remain low for the rest of this year and the beginning of next year. At that time foreclosure rates will return to a more normal level and bank owned property will get sold and done with. This will be the window of time that buyers can get in and get a great deal. They expect this period to last for around 12 to 18 months and we are 4 months into it already.

Could prices come down even more? Maybe a little but is it really worth risking loosing the chance to get a house you are happy with at a really good price.  As you can see from the chart below, we had our biggest

drop in the numbers of sales between 2006 and 2007 which resulted in the largest decrease in prices in 2008. But the downward trend is beginning to level off while interest rates have come down. This is the time to buy folks’; there is no question about it.  I see it week after week in open houses. More and more first time buyers are coming out to see houses. Open houses in the east bay markets this year have seen increasing large numbers of people turning out. There is pent up energy around buying a home. People want to buy a home and move on with their lives, they just want to be sure we have reached the bottom. I hope seeing all this information can be of assistance in the process for you as it has for me in seeing that the time to buy and get the best prices is from now until sometime mid next year. The time to wait is over if you have the financing to move forward. We are already seeing some change in the financial market with some 90% financing returning which should make it easier for more buyers to move forward. 

Here in the bay area we have a unique environment in that it is a very desirable place to live. The bad thing about that is that housing costs remain high making it difficult for the first time buyer to get into the market. 

 We are now in a time period where buyer affordability is higher than it’s been in a long time.

The good thing about the bay area for real estate investment is that once you get into the market and begin to own property, it is one that traditionally appreciates at a faster rate than other parts of the country. The areas closest to San Francisco always begin to increase in value faster than the areas further away. This trend will probably be more emphasized in future markets as the price of gas continues to go up. Being a short drive from a BART station or other forms of public transportation will also be a factor for where values go up the fastest. 

One final note I’ll leave you with is that the east bay, of all the bay area property, is the most affordable. We have wonderful cities, neighborhoods, parks, culture and good places to eat. We have public schools with very high ratings and many more private schools with excellent programs. We are a short commute to San Francisco. I think the likelihood of our markets being a very good financial investment in the years to come is very high. That’s why I believe in our communities and their strengths for our financial future ahead.

Edited by Dan Joy