It's been a great run. Back in late 2011, we were pounding the table for investors to buy a single-family home in San Diego County, especially in what we called "Blue Collar Beach Towns". Then, you could purchase a single-family detached property for $250,000. We were nervous so we advised investors to put at least 25% down and only buy a property where the rent could cover the pre-tax housing expenses (mortgage, taxes, insurance, estimated maintenance). If you were one of our investors, you are probably sitting on over $100,000 of profit today. That means you will have almost tripled your investment in a period of about 5 years or earned an internal rate of return in excess of 27%.
It's been a great run but it looks like the party is over. We think the first half of 2017 is going to be a good time for investors to take some money off of the table, especially if they have a plan for that money in the next 3-4 years. This doesn't mean we think the market is going to crash, like it did in 2008-2012 but we think the prices are going to soften and perhaps decline 10-15%.
The three reasons we loved San Diego single-family homes, as an investment in 2012, are the same reasons we don't love them today: median price and median income, price-to-rent-ratio, and mortgage rates direction. We still like single-family homes for owner occupants but we just don't love them as investments.
The 2016 median income in San Diego County is $73, 500 for a family of five. This translates to a maximum monthly mortgage of approximately $2050 (PITI) or a $344,000 mortgage. Add a 20% down payment and the family of five, earning the median income in San Diego county, can afford to purchase a home for $430,000. A median-priced home, in San Diego county, was $495,000 this past summer. That's a 15% premium.
Keep in mind that. back in late 2011/early 2012, a veteran could purchase a single-family home, in Oceanside CA, for zero down payment and her mortgage payment would be cheaper than rent. Today, if that same veteran purchased a median priced home in San Diego County, the mortgage payment would be $2800. There are tax benefits to owning versus renting so let's make the after-tax costs of owning a home $2500. That same home can be rented for $2200; this is after a rental shortage in San Diego County spiked rents these past few years.
Look at 3792 Atlas Street as an example. It is being offered for rent at $2200 and the Zillow Zestimate is for a $528,100 value. Even if a home buyer had 20% down payment, their after-tax mortgage cost would be about $2300; $100 month more than they could rent the property. It still makes sense to own that property, if you intend to live in it for 7-10 years but it just isn't a compelling investment when looking at the price-to rent ratio anymore.
Finally, we think the carrying costs for real estate (aka mortgage rates) can only go up from here. Interest rates may start climbing in a couple of months or it could take as much as a year for mortgage rates to rise. Eventually, mortgage rates are going to be 1-2% higher than they are today. More importantly, the threat of higher mortgage rates is starting to affect pricing now. Back in 2014, people still thought rates could come down so they weren't too particular about paying 5% more than last year's prices; they figured they could refinance into a lower rate soon enough. Today, the opposite is true.
What does this all mean to you?
If you are a real estate investor, it might make sense to sell that San Diego County investment property, especially if you plan to use the money in the next 4-5 years. If you don't plan to use the money, and want to avoid paying capital gain taxes, I have two ideas for you:
1- Consider the Greater Phoenix area. You will increase your income (the capitalization rates are better) and there is still some upside appreciation to be gotten there (not a ton but better than San Diego County). We refer our clients to Greg Swann of Bloodhound Realty.
2- Consider placing the proceeds from the investment property sale into a Delaware Statutory Trust. This is a security so we don't handle these transactions but we refer our clients to investment adviser Tony Krvaric of Krvaric Capital.
What if you just want to buy a home to live in?
There is no greater place to live (in my opinion) than San Diego County. We have beaches, mountains and deserts. Our climate is second to none and our business environment is relatively robust. Unemployment, in San Diego County, is less than the rest of California and the rest of the country. San Diego County is a great place to own a home.... BUT....
...we think the short-term prospects of higher prices are unlikely. Even with the Great Recession, if you bought and held a home fir ten years, you made money in San Diego County. Our advice then is to be judicious when buying an owner-occupied home in 2017. We suggest that you do three things:
1- Establish your holding period. If you plan to move in less than 7 years, you could lose money. If you plan to live in the property for at least ten years, you should make money.
2- Call us to run a rent v. own scenario for you. This is where we analyze the price-rent-ratio. For traditional, 20% down payment transactions, it can still make sense to own for the long-term in San Diego County.
3- Negotiate, be patient, and shop around. You don't have to get a home at 15% under list price to get a good deal but we don't' think you have to pay list price to get a home in 2017. Sales have slowed in San Diego County, ever so slightly, but they have slowed.
Inventory is still under three months which suggests that this is a seller's market, That could all change once prices start softening (they are showing signs of that now). If you are an current investment property owner, the first six months of 2017 will be an excellent time to sell and realize your profits. If you are a potential home buyer, we think you are going to have more options next year than you do today.
Independence Day meant more things than barbecues, beer, and baseball this year. Mortgage bond investors didn't like the idea of independence from Federal Reserve Bank subsidies.
Just before the holiday, I suggested that the Fed was sending stabilizing signals that the quantitative easing programs wouldn't be completely abandoned. Last week, there was only one fear; the non-farm payrolls report released on Friday (July 5, 2013). That report exceeded expectations and the mortgage bond market nearly collapsed-- rates spiked to as high as 4.875% for conventional loans and 4.75% for VA/FHA loans.
One thing which contributed to Friday's volatility was that it was a day after a holiday. The trading desks operated with skeleton crews of junior traders, most of which were nervously selling befoe the weekend. When their senior colleagues returned on Monday, they saw buying opportunities in mortgage bonds. The mortgage bond market recovered a bit more than half of its losses, in two trading sessions, and rates settled in at 4.625% for conventional loans and 4.5% for VA/FHA. Today, the mortgage bond market is slightly off on news that wholesale investory stocks are being depeleted.
All eyes were on the release of the June meeting of the FOMC minutes. The consensus is that the bad news is already out and, since the Fed Governors are split on the idea of QE tapering, the bond market is getting used to the idea that Fed action (or inaction) won't ruin the bond market.
Where do we go from here?
I look to investment adviser Lenore Hawkins a lot. She and I both share free market views and she has a good understanding of how non-subsidized economies should act. From her July newsletter:
While many are criticizing the Fed for the tumult the comments caused in the markets, we think they ought to be applauded for injecting uncertainty into a market that was becoming entirely too complacent about the degree of excessive leverage being used to combat the low rates of return imposed by the Fed’s financial repression.
As we delve deeper into the data, and you knew we were going to go there, the job growth continues to be among lower quality jobs. The unemployment rate held steady at 7.6%, but the U6 (broader employment metric) jumped from 13.8% to 14.3% caused by a surge in part-time work. Full-time jobs dropped by 240k and in fact, since the start of the year only 130k full-time jobs have been added while 557k part-time jobs have been added. The unemployment rate would today be 11.1% if the participation rate was the same as it was pre-recession. Despite the headlines, Main Street is still struggling.
I agree with Lenore--the grass isn't necessarily greener in this economy...yet. As economic data materialize this summer, we may realize that the QE bond buying program is (a) ineffective and (b) causing little asset bubbles (think real estate prices in San Diego)--a classic case of the unintended consequences of bad monetary policy.
I thnk we're at a crossroads of a mini-panic. The higher mortgage rates have certainly slowed mortgage applications, listings aren't moving as quickly as they did 4-5 months ago, and sellers are rushing to list homes for fear that higher mortgage rates will tank the real estate market.
The Fed isn't going to let mortgage rates tank the real estate market. Bernanke sees a housing rebound as essential to a broader-based economic recovery. On the other hand, Bernanke understands that QE has to end...eventually.
This summer should continue to be choppy. I expect the mortgage bond market to bounce around a lot this summer as we all get used to a "new normal". That "new normal should have mortgage rates bouncing from as low as 4.25% up to 5%. Currently, best-execution conventional rates are around 4.625% and best execution VA/FHA rates are around 4.5%. Jumbo rates are still over one percentage point higher with executions in the 5.75%-6.125% range
As volatility is the word of the summer, I still advise home buyers to lock-in rates at application--floating is just too risky.
Should you buy a home or rent one, in San Diego?
As always, that depends. If you're looking for a home in La Jolla, you may never find a one which is less expensive to own than rent, in today's dollars. The physical beauty of the seaside burg is stunning and La Jolla has traditionally traded at a steep premium to rent v. own parity.
Nick Timiraos suggested that buying conditions are getting better for San Diego, in the Wall Street Journal:
Home ownership is also looking more affordable because after several years of declines, apartment rents will rise by around 4% this year, says Mr. Nadji. He says rents are poised "to pick up even more momentum across the country next year."
Rising rents are one reason a would-be home buyer should consider purchasing a La Jolla home rather than waiting for prices to reach parity there. If inflation kicks in, and onc day it will, rents could increase a level far above what the mortgage payment, for a La Jolla home, would be today.
Even cities where it is still cheaper to rent than own have seen big boosts in affordability. In San Diego, the monthly cost of owning a home has averaged around 83% more than renting over the past two decades. During the third quarter, owning was 22% more expensive than renting, according to John Burns Real Estate Consulting
Take note of this figure. In many San Diego sub-markets, (mostly the beach cities), housing prices will never reach parity with today's rents. Like the La Jolla example, inlaftion may cure that in 2-3 years. Still, some San Diego County markets have already reached parity meaning, it's cheaper to own rather than rent. Even in some beach cities, like Oceanside or Imperial Beach.
I searched active Oceanside homes for sale and found one which is listed for $189,000. With about $7,000 down payment, and an FHA loan with a 4.88% APR, the monthly mortgage payment would be $1250, some $50-$100 below what it might fetch in rent. That's one of many Oceanside properties which are at or below parity for the rent V own model.
I also found plenty of similar opportunities while searching for homes for sale in Chula Vista. There were many more recently built homes, which command premium rents, listed under $250,000.
San Diego entrepreneur Bill Lyons intends to make these home searches easier when he releases his new website, Revestor.com. Revestor organizes current listings, by capitalization rate or cash flow, to offer homeowners a chance to "rate" properties, by comparing the listed price to current rental data.
San Diego is still selling at a slight premium but this may be as good as it gets. If mortgage rates continue to stay low, because of the Fed's printing press and quantitative easing, the bubble for low rates will soon pop, and inflation will kick in. Locking in a price, and a low mortgage rate, might be the best way to insure you won a piece of our sunshiney paradise.
Posted at 11:02 AM in Blue Collar Beach Towns, Current Affairs, Da' Fed, Economy, FHA Loans, Financial Planning, Investment Strategies, La Jolla Real Estate , Mission Valley Condo Loans, Mortgage Financing, Mortgage Rates Report, Opinion, Real Estate, Recession, San Diego Condo Loans, Solana Beach Real Estate, Triple Crown Condos, Value Investing, Veterans Admin Home Loans | Permalink | Comments (0) | TrackBack (0)
LA JOLLA, CA--Jumbo mortgage rates are essentially unchanged since my last report (rate indications offered below) and that worries me. Wall Street may be overconfident of a debt-ceiling hike deal and that overconfidence is priced into the market.
In Washington, it can be tough to understand why New York is so sure of itself. While Wall Street is brimming with confidence that a deal will be struck, many Washington officials say the dynamics of this stalemate are different from any other they have encountered. And that means New York traders could be in for a big surprise in early August.
With less than two weeks to go before the Aug. 2 deadline, no deficit-reduction plan offered by the Senate or House has gained a significant amount of momentum. The House GOP’s “cut, cap and balance” proposal is dead on arrival in the Senate, which has yet to move its own budget.
This means that a failure to extend the federal borrowing limit will catch markets by surprise; we could conceivably see jumbo mortgage rates rise 1-1.5% overnight, in early August.I've worked with mortgage-backed securities traders and I'm amazed at the huge gamble they're taking. The culture of government bailouts is so pervasive in the financial community that the very flinty-eyed bankers are willing to ignore this risk.
Could jumbo mortgage rates go lower? I suppose they could but not much. There is clear and present risk right now. If you CAN, lock your mortgage rate to avoid this risk.
Jumbo Mortgage Rate Indications, as of July 11,, 2011:
Jumbo mortgage rates quoted are for loan amounts from $700,000 to $2,000,000. Credit, down payment, and income restrictions apply. Not all will qualify. Equal Opportunity Lender. NMLS ID 339261
Jumbo mortgage rates gave returned to the end of June levels as the mortgage bond market reacted to a weak employment report and more fear about bloated PIIGS (European government default risk). I talked about this in my Jumbo Mortgage Rates report for July 5, 2011.
I digress but I'd be remiss if I didn't tell you that today is Free Slurpee Day. Slurpees can cause Brain-Freeze. I would love to freeze today's mortgage rates for a week or so but I'm not so sure the markets will accomodate. Last week, I suggested you could hold out for lower rates; that happened. Today, I think it makes complete sense to lock-in your mortgage rate at application. While rates could trend lower, the risk of them rising another .25%...quickly, far outweighs the reward of them improving by .125%. As always, my advice may not be perfect for you so it's best to speak with your loan originator.
Jumbo Mortgage Rate Indications, as of July 11,, 2011:
Jumbo mortgage rates quoted are for loan amounts from $700,000 to $2,000,000. Credit, down payment, and income restrictions apply. Not all will qualify. Equal Opportunity Lender. NMLS ID 339261
Why do La Jolla, CA home buyers keep watching the riots in Greece?
Once again Greece threatened default on its soveriegn deb. This sent shockwaves through the world financial markets. This time around, the European Union was offering less solidarity and more austerity to its little peninsular cousin. Capital fled European markets and into American treasury bonds during the middle of June. This drove bond yields down which caused jumbo mortgage rates to decline to their lowest levels since 2004.
Last Monday, we locked a $500,000 loan, at 4.75% (30 year fixed), with no fees or discount points. We locked a $1.1 million loan at 5.125% (30 year fixed), with no fees or discount points. Today, those same loans would be more expensive by a discount point (1% of the loan amount). This means that the first buyer would have to bring an extra $5,000 to closing today, and the second buyer would have to bring $11,000 to closing today , just to get the same rates.
Why are jumbo mortgage loans so much more expensive today than they were last Monday? Greece struck a deal with the European Union to get emergency loans. That action reassured golbal financial markets that a Greece default would be stayed. Money flowed into equities and out of the safe haven of US Government securities. Mortgage bond investors demanded higher yields from mortgage originators which was passed onto the retial borrower.
In which direction will jumbo mortgage rates head this summer? I believe rates will be stable through Labor Day with some erratic movements upwards. The federal Reserve bank has halted its quantitative easing plan. While this should pressure jumbo mortgage rates higher, Greece is but the first of many sovereign default crises bubbling beneath the surface of a calm Mediterranean Sea. I expect those threats of crises will hold the upwards pressure in check.
If you can, lock a jumbo mortgage rate under 5%. If higher than 5% is offered, you might pause to read what's happening in Europe. Anothe ron of these crises could afford you that rate under 5%.
The Solana Beach Junior Lifeguard program may not be assembling in the S. Sierra Ave parking lot in the future. A low-income housing project is being proposed for the current drop-off site for the Junior Lifeguard program:
The three-level building would have a 1,300 square-foot market on the ground floor, and 10 housing rental units above. The site is now a parking lot with 31 spots, used heavily for beach access and for the junior lifeguard program. A lot with some underground parking with 54 spots is proposed.
"The Pearl" will be a mixed-use development, with a small market and ten housing units which can house up to 44 people. Ginger Hitzke is the Temecula-based developer. Her work history includes various "public/private developments", as a Vice President with the Affirmed Housing Group and now, as a lead developer with Community Collective. From her website:
We started our careers working on the most challenging, politically charged rental projects for the lowest income familes (emboldened by the author).
Solana Beach really doesn't have a choice in the issue; the City has to do something becuase this wealth-redistributiuon scheme was mandated by the State of California. The projects are politically charged because this is a classic use of Rotarian Socialism (or crony capitalism). In this case, the State mandates that cities build low-income housing, funded by taxpayers, and politically-favored individuals get the contracts to build that housing stock. Financing is easy for such projects because the rents are usually guaranteed (by the taxpayers) under Section 8 Housing rules. Approvals will be fast-tracked through the Coastal Commission and City zoning because of the State mandate.
While free-market developers, wait for years for project approvals, risk their own capital, and pray that developer financing becomes available from banks, those "politically charged" competitors feed at the public trough with projects which are essentialy arbitrage plays, not entrepreneurship.
Solana Beach Councilman Dave Roberts sees this as an excellent opportunity to add some union card holders (his base) to the Solana beach voter roster:
He said the city has been sued in the past for not offering enough affordable housing, and a project like this would save taxpayers hundreds of thousands of dollars in avoided legal fees and allow the city to continue providing services for residents. Roberts said the housing would be an opportunity for police officers and teachers to live in Solana Beach, an area they otherwise could not afford. (emboldened by the author)
Roberts' statement shows his ivory-tower thinking. Cops and teachers usually make more than the income limits of low-income housng rentals unless...
...the fix is already in.
Alternative ideas for this project (since we are mandated to this wealth-redistribution scheme by the State) might include:
The wealth distribution scheme, that is low-income housing. is a violation of ownership of private property, as is secured by our Founding Documents. The State of California has seen fit to violate that principle and socially game the system to politcally-favored people. As distasteful as this unconstitutional mandate is, we're stuck with it. We might as well make the best of it, for the benefit of our residents and veterans, rather than feeding the wealth-eating machine.
FOLLOW UP THOUGHTS:
Excerpt: The City of Solana Beach could make a public announcement that it intends to purchase ten homes for less than $550,000, offer a 4% co-brokerage fee, and suggest that it will give preference to short sales or foreclosure situations, My guess is it would be flooded with offers to sell.
Just in case you missed how horrendous the results of centralized, government planned, sub-prime, mortgage industry were, the Kommisars have decided to....
...create a sub-prime mortgage industry? From the Boston Herald:
•Strict mandatory debt-to-income limits. Under the proposal, to get the best mortgage rates, you would need to spend no more than 28% of your gross monthly income on housing-related expenses, and you couldn't have total monthly household debt that exceeds 36% of your income.
There would be no flexibility to go beyond these ceilings, unlike in today's marketplace, in which Fannie Mae and Freddie Mac consider debt-to-income ratios along with other factors through their electronic underwriting systems. Freddie Mac, for example, has an overall debt-ratio limit of 45% of an applicant's stable monthly income.
•To refinance your existing mortgage and replace it with one carrying the best interest rate, you'd need no less than a 25% equity stake in your house to qualify. If you sought to take any additional cash out through a refi, you would need 30% equity. Today's typical requirements for a conventional refi are nowhere near as strict.
•Pristine credit standards. For example, if you were 60 days late on any credit account during the previous 24 months, you would be ineligible for a mortgage at the best terms.
These are all core features of what may be the most sweeping and controversial set of changes in decades for the housing and mortgage markets. The so-called "qualified residential mortgage," or QRM, proposals were released at the end of March by banking, securities and housing regulators, along with the Department of Housing and Urban Development. The agencies were required by the 2010 financial reform legislation to come up with new standards for low-risk conventional mortgages.
Of course, this isn't being sold as a creation of a new sub-prime mortgage industry but simply rewarding those who have the money, credit history, and income to qualify for the best mortgage terms. Wait a minute! Isn't that what banks are supposed to do? Aren't bank underwriting departments supposed to analyze risk, assess a commensurate return required for that risk, and offer loan terms?
This is MORE centrailized planning and it won't work because it never does. Scream if you want but there is nothing you can do about it. This Administration rules with an iron fist and Wall Street, and the banking cartel are being guaranteed profits by eliminating any competitiion. These proposed rules will stifle any form of innovation in residential real estate finance. This is Rotarian Socialism at it's finest and, as Greg Swann says, "It's evil dressed up in a Brooks Brothers suit"
The only way to save the mortgage industry is to break up the big banks, deregulate completely, which means abolishing the FDIC depositor insurance, and letting the free market determine interest rates, risk analysis, and loan terms. If you want a robust economic recovery, get rid of this adolescent President, his Soviet-style Adminsitration, and demand an abolishment or (at the very least) completely transparent central bank (the Fed).
Can you imagine if the Kommisars regulated green beans the way they regulate your money?
Oh wait...never mind.
Picture credit icanhascheeseburger.com
This just in, about February sales, from the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.).
The statewide median price of an existing, single-family detached home sold in California was $271,320, down 2.8 percent from a revised $279,140 in January and was down 2.5 percent from the $278,190 median price recorded for February 2010. The February 2011 median price was the lowest since May 2009, when it was $263,440.
Why are prices declining?
Perhaps the shadow inventory is being released. It is widely believed that most buyers will be looking to move in the summer which means the best time to list a property would be April, May or June. Expect more of this slow decline for the next 3-4 months. After that, it's a crap shoot, If the California unemployment rate stays north of 12%, this might be a tepid summer for real estate. Until Jerry Brown's tax hike is defeated, expect the unemployment rate to remain over 12%.
Here are other highlights of C.A.R.’s resale housing report for February 2011:
- The Unsold Inventory Index for existing, single-family detached homes was 7.3 months in February, up from 6.7 months in January 2011. The index was 6.0 months in February 2010. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
- Thirty-year fixed-mortgage interest rates averaged 4.95 percent during February 2011, compared with 4.99 percent in February 2010, according to Freddie Mac. Adjustable-mortgage interest rates averaged 3.35 percent in February 2011, compared with 4.23 percent in February 2010.
- The median number of days it took to sell a single-family home was 64.4 days in February 2011, compared with 39.2 days for the same period a year ago.
So mortgage rates are similar to what they were a year ago but inventory is rising and staying on the market longer? How can that be? Perhaps the first-time home buyer tax credit was really just another failed stimulus plan, stalling a meaningful recovery. The result is a bunch of wasted money; $600 stolen from nine neighbors so that one neighbor could sell his home at a higher price.
This is a perfect illustration of the broken window fallacy. We still have a lot of broken windows in California. My California real estate weather prediction? Cloudy with a chance of rain.