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The 2009 San Diego Real Estate Bust

San Diego homes in the $500,000 to $1,000,000 range are getting clipped:

Point Loma, Solana Beach and Rancho Santa Fe and other expensive areas reported numbers several times the level seen a year ago, a sign that the trend may continue upward.

For example, in Carmel Valley, where the median sale price this year is $676,500, there were 44 default notices in May, up from 14 in May 2008. May sales in the coastal community east of Del Mar totaled 54.

“There's more distress in the high end, and we'll just have to watch to see if it continues to build,” DataQuick analyst Andrew LePage said.

He and other observers said high-end owners once had the resources to resist defaults and foreclosures, but the recession is reducing their income and investments.

I'm not going to say "I told you so" BUT...I told you this was gonna happen:

The cautious real estate buyer will avoid the mid-range priced homes ($500,000-$1,000,000) in San Diego throughout 2009. As more folks in mid-priced homes lose jobs, foreclosure activity will rise.  The problem with that price range is that there will be little or no financing available for buyers due to the loan limit of $625,000.  This means that if the mortgage payment on your Carmel Valley home, worth $1.1 million, is causing you financial discomfort, you'll be selling that home into a market where a willing (and well-heeled) home buyer can't get mortgage financing unless he puts a minimum of a half a million bucks down.

Here's what you need to know:

No Financing = No Sale
No Jobs = No Financing

We started seeing white collar unemployment spike last December, in New York.  Stockbrokers and their assistants were out pounding the pavement as a result of the Fall meltdown in securities markets.  It was only a matter of time before that virus infected Southern California.  White collar unemployment is working its way through the system and the mid-priced property market is going to be a huge casualty.

Investors should clamor to the lower end of the market.  Properties cash flow, prices are down, and when this stoopid foreclosure stay is lifted, there will be a plethora of bargains to pick off.  Stay away from the over $500,000 market...

...until it drops to below $500,000, of course.  Prime your pump for October, 2009.  (That means making sure that your financing is in order).

June 18, 2009 Mortgage Rates Report: Ouch! 5.5%

Mortgage rates rose, yesterday afternoon and early today.  Yesterday's decline was old-fashioned profit taking, by mortgage bond traders.  Today, the renewed theme of economic recovery and Government overborrowing revived the inflation hawks from the dead:

Treasuries fell for a second day as the index of U.S. leading economic indicators rose more than forecast in May and the U.S. prepared to announce the amount of 2-, 5- and 7-year notes it will sell next week.

Ten-year yields climbed from a two-week low amid concern President Barack Obama’s record borrowing will overwhelm demand as the deepest recession in 50 years shows signs of easing. A government report showed manufacturing in the Philadelphia region contracted at the slowest pace in nine months and the Labor Department said the total number of people continuing to collecting unemployment insurance dropped for the first time since January.

This is why I'm "biased towards locking rates".  We had been floating loans since last Friday and yesterday morning, I locked on the early strength.  Amazingly, the mortgage rates market deteriorated by .375% in rate between NOON (PST) yesterday and this morning.  I'd like to say I'm prescient but I"m just risk averse.  When the mortgage bond traders sell off to the extreme, I'll float for a few days but I never want to be to greedy.  That's why I pulled the trigger yesterday morning and initiated locks.

Let's continue the bias and lock all new loans at application.  I think we'll see weakness through tomorrow and Monday in fear of the amount of money the Government borrows.

We're back to Monday's original rates:

Conv        5.3755% (no points)  5.125% (1 point)
FHA          5.5%  (no points)         5.25%  (1 point)
VA              5.5% (.25 point)           5.25%  (1.25 point)

All loan quotes assume a 740 credit score, full income documentation with acceptable debt-to-income ratios, and required down payments (20% for conventional, 3.5% for FHA, and zero-down for VA).  We will charge a 1% origination fee plus a $695 processing fee.

Apply online now.  It's really simple and should take about 20 minutes.

What's The Cost Of Renting?

Does buying REALLY make sense?  In this goofy real estate market there really are some costs associated with renting instead of buying a home.  Opportunity costs but costs nonetheless.

Why are folks buying homes today?

1- They're cheap. It's going to go up in price. It won't be for awhile but still a good reason to buy .
2- You can write off your mortgage interest.  That's not true for most home buyers today.
3- A fully-amortizing loan is like a forced savings account.  Illiquid savings account but I'll buy that.
4- The US Government is bribing people to buy homes.  We'll harvest that $8,000 tax credit.

Let's run some numbers.

June was considering a Pacific Beach condo for $278,000.  She currently pays about $1,000/month in rent.  She's considering this condo purchase with a VA loan because she's a veteran of the US Army.  Her total payment, including the property taxes and HOA fee, would be about $2200.  June's a nurse who makes $80,000.  She's single so she currently takes the standard tax deduction of $5,700. She plans to hold the home for five years and expects to sell it for 15% more than today's price; she'll net $296,000 after sales expenses (in 2014).

What is the cost of NOT purchasing the Pacific Beach condo today?

1- Let's assume June's right about the appreciation.  She stands to make $18,000 in five years; that's about $300/month.

2- June doesn't fully benefit from mortgage interest deduction.  If she stays put, she can write off $5,700/year (479/month).  She will have paid about $75,000 in interest over the next five years or $1250 per month.  When we back out her standard deduction ($479/month), her benefit of buying the home is that she can write off an extra $771/month.  She'll also be able to deduct her property taxes (289/month) for a total MARGINAL income deduction of $1,060.  That saves her about $365/month in income taxes.

3- June will pay that loan down to $257,000.  That builds equity up of about $350/month.

4- The effect of the $8,000 legal bribe is about $133/month, over five years.

5- June's closing costs are $6,000. Amortized over five years, that's an added expense of $100/month

June's opportunity cost of NOT buying, exclusive of appreciation, is $748.  Subtract that from the $2200 payment and her payment "feels like" $1452.  She gains $352/month by renting instead of buying.

The big question is...will June make 15%, over five years, by owning this home?

or...can June negotiate a lower price, by about $45,000, so that her monthly payment drops about $350/month?  At $233,000, June is actually losing money by renting.

June 17, 2009 Mortgage Rates Report: Approaching 5.0%

Mortgage rates have improved since last Friday.  I felt we could delay locks (float) in hopes of better rates and that's proved to be fruitful. Lock-in your mortgage rate on the strength of this improvement.

Inflation doesn't appear to be a threat.  Yesterday's Producer Price Index reflected the threat of higher oil prices but came in within reason; the mortgage bonds market liked what it saw.  The Consumer Price Index, released this morning, was well under expectations; this should be positive for mortgage bonds and could lead to lower rates.

I expect our morning rate sheets (no points, 1% origination fee) to look something like this:

Conv        5.125%
FHA          5.25% 
VA             5.25% 

Next week's Fed meeting could stifle speculation that it will hike interest rates later this year:

Federal Reserve officials are considering whether to use next week’s policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year.

While policy makers have signaled they accept an increase in longer-term Treasury yields as the economy improves, some are concerned at any premature anticipation of rate rises. Fed staff have examined the Bank of Canada’s public intention of foregoing an increase until 2010, according to a person familiar with the matter, without concluding the statement has proven effective.

I have mixed feelings about the Fed adopting a policy akin to the Bank of Canada's rate commitment.  Markets crave stability but react to reassuring news in a volatile fashion.  I wouldn't be surprised to see mortgage bonds decline on such news; traders might think the Fed has abandoned its commitment to taming inflation.  Counter-intuitive thinking?  Absolutely but reason and rational thought sometimes give way to fear.

I'll update rates later, if necessary.

Apply online now.  It's really simple and should take about 20 minutes.

 

June 15, 2009 Mortgage Rates Report: Lower Rates To Start The Week

Mortgage rates edged lower towards the end of last week.  Today, mortgage rates look good and the mortgage-backed securities market opened strong.  Rates for today:

This morning's mortgage rates quotes:

Conv        5.3755% (no points)  5.125% (1 point)
FHA          5.5%  (no points)         5.25%  (1 point)
VA              5.5% (.25 point)           5.25%  (1.25 point)

All loan quotes assume a 740 credit score, full income documentation with acceptable debt-to-income ratios, and required down payments (20% for conventional, 3.5% for FHA, and zero-down for VA).  We will charge a 1% origination fee plus a $695 processing fee.

The weekend news was focused on Fed officials' waning support for the asset repurchase plan:

Richmond Fed President Jeffrey Lacker, the first policy maker to advocate buying Treasuries, said this week he doesn’t see a need to increase purchases. Atlanta Fed President Dennis Lockhart said yesterday that while he’s not necessarily opposed to more purchases, the Fed would first need to weigh the impact on the economy and other factors in a “a complex equation.”

Policy makers at their June 23-24 meeting would more effectively curb yields by signaling the benchmark interest rate will stay low for a long period rather than by raising the ceiling on $1.75 trillion in debt purchases, said John Ryding, a former Fed economist and chief economist at RDQ Economics LLC in New York. More than half of the purchases remain, and Fed officials want to keep inflation from rising above 2 percent.

“As a policy maker, you’ve got to be a little bit skeptical” the debt purchases are “having the desired result,” Ryding said of the Treasury purchases. The option of paring borrowing costs by pledging in a statement to hold down interest rates is “low-hanging fruit for policy,” he said.

Fed Chairman Ben S. Bernanke sought in June 3 testimony to Congress to indicate the rise in yields isn’t necessarily negative, saying the trend may reflect optimism about the economy and concerns about large federal deficits. He ruled out the option of printing money to fund the fiscal shortfall, saying “the Federal Reserve will not monetize the debt.”

Across the pond, Treasury Secretary Tim Geithner is starting to sound a lot like the mythical Wesley Mouch in Ayn Rand's novel, Atlas Shrugged.  The Europeans ain't buying Wesley Mouch's Geithner's "directives".  They're saying "Nein", "Non, Merci" and "No Mas".  Ironically, it's the countries which we consider to be "socialist" that are the biggest critics of our new, government-controlled economy.  Gotta love the advice of good ol' fashioned, American-branded, bootstrap, self reliance coming from Europeans...

...but I digress.  

This morning, the mortgage-backed securities market opened strong.  Mortgage rates should improve but we're all gonna be watching the next Fed meeting.  I'm locking all loans at application and taking these good rates.

Apply online now.  It's really simple and should take about 20 minutes.

San Diego County Houses For Sale Down. Is This a Head Fake?

Jeff Dowler reports that Oceanside supply (number of properties available) is dropping precipitously.  This phenomenon is happening all over San Diego County causing new home buyers to get into bidding wars for aggressively-priced, bank-owned properties:

At the end of May 2009 there were 726 Oceanside homes for sale (380 detached and 346 attached) a decline of 7% from the end of April (this includes the homes with Contingent status). This represents an inventory of only 1.8 months for detached homes and 3.7 months for detached homes based on the current rate of sales over the last 6 months, both of which declined again from the previous month.  These absorption rates continue to be impressive when compared to many other parts of the country, some of which have over 2 years of inventory. Indeed we are seeing more multiple offers, not only on distress sales but also on regular sales, especially below $400,000. 

In May we saw 162 homes come on the market, 31% fewer than in April (and almost half the number of new listings in March) . During May 211 homes went pending, about 20% fewer than in the previous month. So coupled with another decline in inventory (with fewer new homes for sale) we saw an increase in volume, which has resulted in the low absorption rates noted above.

Is this the bottom of the real estate market or, as Greg Swann referred to this phenomenon in Phoenix, a "Fools Gold Rush" ?

Here's what's really going on: Last fall FannieMae and FreddieMac, along with some of the bigger private mortgage banks, declared a moratorium on new foreclosures.

So for four months, homes that would have been foreclosed on sat on the sidelines of the real estate market.

And for those same four months, inventories of already-foreclosed homes declined. In March of 2009, for example, a total of 7,621 listed homes were sold in the Phoenix area, of which 5,066 -- two thirds! -- were lender-owned homes.

That sounds good doesn't it? Even better, as I write this, only 7,607 lender-owned homes are listed as being Active in the MLS database. That's just a month-and-a-half's supply. Happy days are here again!

Not quite. That Fannie/Freddie moratorium on new foreclosures ended on April 1st. In the first three weeks of April, there were 2,460 new lender-owned listings. And there are still two years of foreclosures in the pipeline.

What we're seeing is a Fool's Gold Rush. The perceived shortage of housing is an illusion, an artifact of a normal number of buyers competing for an inventory that seems to be declining rapidly. It isn't. Instead, even now the inventory of lender-owned homes is surging.

Head fake or hard numbers?  The federal foreclosure mortatorium is over but the State of California just initiated a like measure for ninety days.  Are these moratoria government's efforts to delay the inevitable or are bargains really available to the San Diego County home buyers?  Keep in mind that lenders will have been forbidden to pursue a defaulted San Diego County homeowner for seven out of twelve months this year.  This could lead to an onslaught of inventory after Halloween.  That might just be okay because we're seeing lots of pent-up demand to mop up that excess supply.

A first-time home buyer tax credit, combined with relatively low mortgage rates still might make today's property offerings a bargain.  You might analyze each property the way we do so that your downside is limited.  Certainly, property prices should be higher in 2020 than they are today.  Just be careful to do your homework.

Whichever you decide, Jeff Dowler is a pretty sharp North County real estate agent.  Use his Search tool to look at the properties offered.

VA Home Loans Have "Non-Allowable Closing Costs"

The VA forbids the veteran to pay certain fees in a VA home loan transaction.  We call these fees "non-allowable" closing costs.  The fees are traditionally paid by the seller but often can be paid by the loan originator (but will probably be offset by the discount fee).  This is why VA loans sometimes appear "more expensive".

Lenn Harley went to settlement with one of her buyers and found two of these fees on the HUD-1 Settlement Statement.    Fortunately for the lender, Lenn caught this and demanded that they be removed.  Had the lender funded the loan with the non-allowable closing costs, the loan wouldn't have qualified for the VA Loan Guaranty and probably couldn't have been sold to Wall Street.  That lender would have been stuck.

If you're a real estate agent, look at the good-faith estimates we issue prior to negotiating an offer.  We clearly mark seller-paid items on our good-faith estimates.  One agent, in a recent transaction, cost our veteran-borrower some $2,000 because of her neglect.

If you're one of the many loan originators who ask for help with VA home loans, I'm happy to answer your questions...

...after you've read the VA Lenders Handbook (all 673 pages of it).  The VA Lenders Handbook is one of the two books on my night stand.  Yoou'll be shocked at how simple and easy these loans are to understand.

Do Buyers Trust Sellers ?

Well, Mortgage Rates Report hit a milestone; we had more than 2000 visitors each and every day this week.  I've had some days where we've reached that mark but this is the first time we've held that sort of traffic.  I suppose I have the wacky gyrations of the mortgage-backed securities market to thank for all the new visitors.  With that traffic came a LOT of loan applications; I'm grateful for the confidence y'all place in our team.

I think we're okay at these rate levels to delay locks through Monday so if you're holding your breath, relax and enjoy the weekend.  Now...for something completely different

Let's talk about transparency in the real estate brokerage market. I ran an idea up the flagpole on Bloodhound Blog; disclose ALL offers, rejected and accepted, to any buyer, so that they can see the size of the market for a property.  Naturally, the 6% crowd gets REALLY testy when they think you're messing with their business model.  They do NOT like any change whatsoever; just look at the comments thread on Active Rain and on BloodhoundBlog.  The folks on BloodhoundBlog tend to be more consumer-centric and confident in their value so they tend to welcome an alternative marketplace to the MLS.

Melina Thompson, a real estate agent in Oregon, wrote a good summary, requesting feedback from consumers.  You might read the Bloodhound Blog piece, click on over to Melina's summary, and offer your opinion.

June 12, 2009 Mortgage Rates Report: Arigato Gozaimasu Yosano-San

Mortgage rates should go lower today.  The Japanese Finance minister gave the Treasury market a public vote of confidence:

Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, signaling the second-biggest foreign holder of the securities will keep buying them amid record sales.

“We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending a Group of Eight meeting of finance ministers starting today in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”

This morning's mortgage rates quotes:

Conv        5.5% (no points)  5.25% (1 point)
FHA          5.5%  (no points)
VA              5.5% (.25 point)  

All loan quotes assume a 740 credit score, full income documentation with acceptable debt-to-income ratios, and required down payments (20% for conventional, 3.5% for FHA, and zero-down for VA).  We will charge a 1% origination fee plus a $695 processing fee.

More analysis coming.

UPDATED at NOON:

My mortgage-backed pricing service tells me that the MBS market is up about a half a point; lenders haven't repriced with lower rates yet.  My guess as to why the mortgage bond market was rallying (Japan's endorsement) was, in the words of my mortgage bond gurus, merely a rumor.  They think the end of the Treasury Bond auction is the reason for this rally:

MBS coupons are rallying because TSY auctions are over, dealers got the high yields they wanted, and now traders are basking in a TSY supply-less sunlight (FOR NOW). Technically, in terms of MBS, real money accounts (banks, pension funds, insurance companies) are all moving "down in coupon" as extension risk is exhausted and their portfolios have a need to adjust duration gaps. Adjust what?

Real Money accounts need to match the duration of their liabilities to the duration of assets!!! To do so they move "down in coupon" into a security that has a longer duration. These balance sheet adjustments are occurring because the yield curve has flattened out over the past 24 hours..unfortunately these positions can/would be rapidly reversed if the yield curve steepens up again.

I'm comfortable delaying locks until Monday but I remain defensive through the rest of the afternoon .

Apply online now.  It's really simple and should take about 20 minutes.