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Which offer should a San Diego home seller accept during the COVID shutdown crisis?

Q- Which offer to buy your home should you accept?

A- The highest net offer which is most likely to close.

 

That seems obvious, doesn't it, Let's consider the second part of the answer though. An old friend and Phoenix real estate broker Greg Swann, was promoting this new listing on his Facebook and asked me this question:

 

Q- Can you reflect on the current state of borrowers? I've never loved FHA-ish loans, especially not in cash-poor offers. Obviously, everyone loves cash, and 80/20 conventional is hard to turn down. Are government loans still doable? If so, are they more or less risky to close than they were two months ago?

 

My answer is:

 

Great questions. Government loans are fine and, based upon whom the buyers may be, might be preferable. Here is the biggest concern from a lender/servicer's point of view; will the new buyers start deferring mortgage payments under the blanket of COVID?

 

Lenders are going to verify employment before the loan is approved, right before the loan docs are drawn, and right before they fund the loan-- yes, three times.

 

How might a seller mitigate that risk? Consider the buyers' jobs as well as their qualification standards. "Essential" workers are good buyers but government-funded paychecks are the best buyers.

 

If presented with a VA offer, from a Staff Sergeant at MCAS Miramar, take it. If presented with a VA offer, from a Navy veteran working for a start up, scrutinize it.

 

If presented an FHA offer from a Law Enforcement Officer, take it. If presented an FHA offer from a security officer for an office building, scrutinize it.

 

If presented a 40% down conventional offer from a business owner, scrutinize it. If presented a 20% down conventional offer from a public school teacher, take it.

 

The old saw "money cures all problems" isnt applicable anymore if there is a loan involved.

Each acceptance should have an addendum and/or counter which states that the buyers lock their interest rate within 24 hours and order the appraisal within 48 hours of acceptance.

 

Unless you have a cash offer, there is ALWAYS going to some risk that the loan is declined. Most lenders are looking for a 680 minimum credit score for conventional loans and a 640 minimum credit score for VA/FHA loans. Downpayment matters only inasmuch it can mitigate a low appraisal. Ability to repay a loan, especially in a time when forebearances are handed out without much scrutiny, has underwrters worried about the continuity of the income and employment.

 

It's a whole new world in mortgage lending...AGAIN. As always, Debra and I can help you

 

Call or text Brian at 858-699-4590. Call or text Debra at 858-228-0617

VA home loans and FHA mortgages could be shut off as early as April 15, 2020

Want to hear something scary? Mortgage industry association executive Anthony Casa thinks VA and FHA lending will cease to exist as soon as April 15, 2020. He breaks it down for mortgage brokers in this 9-minute video.

 

If you don't want to watch Anthony's video, mortgage trainer Barry Habib explained the VA/FHA liquidity crisis in this long article.

 

I might suggest that you watch Anthony's video and read Barry's article if you are a REALTOR who services veterans and first-time homebuyers. If you don't want to watch the video or read the article.

 

Here is an explantion (pay close attention to emboldened statements)

 

There are four major particpants in the mortgage market:

 

1- lenders (originators)

2- servicers (collect monthly payments and remit them to investors)

3- investors (for VA/FHA loans, those are GNMA pass-through securitires)

4- Wall Street (hedges interest-rate risk for lenders and packages loans sold from servicers to investors)

 

Servicers buy loans from lenders and sell them to investors (through Wall Street) for a cost of about 1% of the loan amount-- they earn about .35%/year in fees for servicing the loans. Thus, servicers need to hold a loan for about 3 years before they make a profit.

 

Lenders lock interest rates for borrowers, guaranteeing the terms from the application date through funding date. Without getting into the technical details, it costs lenders about .25% of the loan amount to hedge that interest rate risk through contracts with Wall Street.

 

When the Federal Reserve makes a huge drop in the Fed Funds rate, and intervenes in the market by directly buying mortgage-backed securities, it has unintended consequences:

 

1- Borrowers break interest-rate loacks with lenders and switch the loan to another lender-- lenders who "paid" that .25% to hedge the interest rate risk dont recover it with a loan funding and are out that money-- that eats into the lenders' capital and Wall Street requires them to put up more cash as collateral for future rate locks (which they may not have)

 

2- When loads of people rush to refinance the loans they took out less than 18 months ago, servicers "lose" the premium they paid for the servicing contract, Servicers typically borrow against their servicing contracts to buy more loans, using those servicing contracts as collateral. If that collateral disappears, Wall Street issues a "margin call" to the servicer, asking them to put up more capital (which they don't have)

 

This is no big deal is it happens over a period of 3-12 months (as it has in the past) but when it happens in a 2-3 week period, the whole mortgage industry gets hit with a margin call-- both lenders and servicers are scrambling for capital they dont have.

 

3- But wait, there's more bad news. You know how the federal government is trying to "help' borrowers by staying foreclosures for a 90-day period? That hurts the servicers even MORE. When the borrowers dont make their mortgage payments, the servicers STILL have to remit those payments to the investors, draining their capital even MORE. It's like that scene from the 90s movie Goodfellas.

 

There is some hope. GNMA announced yesterday that they will try to alleviate the third problem but the first two problems still exist: lenders are getting burned on locks and servicers are losing their shirts on rapid refinances.

 

The problem wont last forever but we may see major changes (for the next 4-12 weeks) in the VA and FHA loans markets. Here is what to expect:

 

1- borrowers may not be able to lock rates until they have full loan approval

2- some lenders could go out of business altogether

3- some lenders could delay loan closings because they have a liquidity crunch

 

Call us to plan for this market interruption. 

Accessory Dwelling Unit (ADU) Financing in San Diego

I like doing what I do because I can help people solve problems:

I met a lady today who has a 30 year old son who moved to Vegas three months ago-- he doesn't want to stay there. His girlfriend lives here and is getting a Master's degree and they plan on getting married.

His mother and stepfather own a home in Paradise Hills which they bought, 10 years ago, as a HUD repo-- they are sitting on a LOT of equity. Mother says, "I wish I could just buy a duplex so we could both live there"


"How much land do you have?", asks I.

"I have a huge backyard; I could build whole house on it" says Mother.

"Accessory Dwelling Unit. Build one for $50-70K, with already-approved plans from the City of San Diego, move the kids in and when grandchildren come, switch houses. " I offered.

"I love that idea. Now I just need $75K and someone to build it", replies Mother.

"I can solve BOTH of those problems for you. When do you and your husband want me to come over and meet with you?" I asked.

"How about next week?", she asked.

This is what turns me on. Helping young service members buy their first homes is cool. Helping retired people keep their homes with a reverse mortgage is cooler. But helping a mother keep her son and grandchildren in San Diego, and providing a safe retirement home for her is what this job is ALL about.

"Real estate is the husbandry of man to the land"-- Greg Swann

 Keeping families together and strong is REALLY what I do. I can't wait for this to happen for her family.

Wht China Matters to Southern California Real Estate

You have heard me talk about China and it's effect on California real estate a lot.   Just two years ago,  I was on TV, talking about the oversized influence Chinese nationals had on Southern California real estate.  Since then, a trade war with China escalated and the Chinese government cracked down on capital leaving Mainland China. The result has been lower mortgage rates and lower real estate prices in areas where Chinese nationals were buying properties.

Chinese buyers aren't as active as they were two years ago:

A big reason Chinese investors are retreating from the American housing market is that Beijing has placed tight limits on how much capital can leave the country in the wake of a devaluation in the yuan a few years ago. 

“In China, each family member has been restricted to $50,000 or less,” says Steven Ho, senior loan officer at Quontic, a New York City-based bank. That makes it tougher for Chinese investors to elbow out American buyers with all-cash offers.“A few years before, these restrictions were not so stringent.”

The government toughened capital controls last year as the Chinese economy weakened, Ho says.

Also, China's slowing economy itself has dampened the confidence and purchasing appetite of Chinese buyers, Yun says. The Trump administration's trade war with China, he says, has further chilled investment in U.S. housing.  

Meanwhile, more Chinese homeowners have been selling their American houses and condos because they can’t pay the maintenance costs with their money trapped in China, says Jeff Lu, vice president of Fidelity National Title Insurance.

President Trump's tariff war, with China, is causing global unrest.  Investors are flocking the US treasury bonds, driving US mortgage rates lower:

U.S. Treasury yields have plunged since the July meeting and the gap between 2-year and 10-year yields has inverted, a typically reliable indicator of an impending recession.

Thirty-year mortgage rates have dropped about 100 basis points since late last year and are expected to stay below 4% over the next several years, around 60 basis points lower than forecast just three months ago.

You may love or hate China.  You may love or hate Trump.  You can hold either or both opinions but to ignore Chinese buyers of real estate or US treasury securities is to let youor opinion cloud your judgement when making a real estate purchase

HIgher Loan Limits in Southern California for 2019

The 2019 San Diego County loan limit is $690.000, up from $649.750 in 2018.  

In Orange & Los Angeles counties, it's $726.525 and in Riverside, San Bernardino, and Imperial counties, it's $484,000.

 

The higher loan limit affects FNMA, Freddie Mac, and FHA loans. For VA loans, the county limit is for zero down payment loans ONLY.   VA loans have no loan "limit"  but may require a down payment for prices over the county limit. Read about how to calculate the VA downpayment for purchases over $690,000 here

This year, the FHFA published this interactive loan limit map, showing the loan limit for every county in the US.

For fun, compare the 2016 Presidential election map (by county) with the FHFA interactive loan limit map.  If you click both links, the maps will open side-by-side

There are STILL great real estate investment deals in San Diego

Yes, you can still make money in San Diego real estate and no, I dont know if property prices are going to drop. Here is what I DO know; there is a housing shortage in San Diego and rental rates should keep rising.

 

This means that, if you buy a property at the right price, and intend to hold it for 7-10 years, you should really make some money. Let me share with you the most recent transaction I handled for an investor. I represented the investor and my wife Debra handled the financing.

 

Our investor bought a Mission Valley 2 BR, 1 BA condo for $355,000. We closed on it three days ago (June 12)   She put 30% down and, with closing costs, it cost here $113,000 cash-to- close. Her mortgage payment, including taxes, insurance, and HOA fee is $2096. You can see the whole financing breakdown here

 

I immediately advertised it for rent on Craigslist, Zillow, Trulia, Hotpads, and Cozy at $2095/month. Yesterday (June 14), we signed a multi-year lease with a tenant who has a credit score of over 750.   In two days, my investor signed a lease which covers all the debt servicing expenses.

 

I think rising inflation will double San Diego real estate prices in the next 10-12 years but, with just a 4% inflation rate, this property should sell for $525,000 in 2028. At that point, my investor will walk away with about $300,000, almost triple of what she invested today.

 

Was this easy?

 

Absolutely not. I toured over 40 properties for her and only showed her properties which met three criteria:

 

1- They were "clean", meaning it would cost less than $1500 in cosmetic repairs to move in

2- They were in a San Diego neighborhood which was in demand.

3- They had been on the market for 21 days and could be purchased for a price which produced positive cash flow with 30% down payment.

 

She spent a 4 hour period with me and saw 7 properties. She offered on three of them, we negotiated with two sellers, and settled on the Mission Valley condo

 

It wasn't easy for me but I made it easy for her, and now she has a great investment.

 

Want me to do this for you?

 

Call me at 858-777-9751. We'll meet for lunch and I'll listen to your investment needs and goals. If they match up with what I am doing, I'll find the perfect investment property for you. If not, we'll have a great time catching up with one another.

2017 San Diego County Real Estate Market Outlook

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.

Conclusion:

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.

San Diego Mortgage Rates Report: July 10, 2013

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.

San Diego Housing Approaches Rent Vs. Own Parity

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.

Jumbo Mortgage Rates Report--July 21, 2011- MARKET ALERT

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:

• 5/1 ARM----------3.875%/4.110% APR
• 7/1 ARM----------4.375%/4.571%APR
• 10/1 ARM---------4.750%/4.917%APR
• 30 Yr Fix----------5.125%?5.557%APR
• 30 Y FNMJmbo-4.500%/4.724%APR
• 30 Y FNMA-- ----4.375%/4.615%APR

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