the mesh network | northern california real estate

And now we have new Short-Sale rules

An interesting article in today’s WSJ regarding short-sales.  Right now in our Bay Area market, the short-sale success rate is at an all-time low and from my most recent short-sale experience I feel the acceptance/approval process has gotten much worse (read: slow) than just a year ago.

The article mentions a new “incentive” program to encourage borrowers AND lenders to make the short-sale work (hopefully more quickly).  The Feds will give a borrower $1,500 and give the mortgage servicing company $1,000 to complete the short-sale.  Nice.  Best of all, these guidelines specify that the borrow must be “fully released” from the debt liability -- basically the lender cannot chase the borrower for the bad-debt.

Maybe it’s just a phenomena of the Bay Area, but most of the short-sales I’ve seen are not happening from “poor” people where $1,500 makes a difference.  In most cases, I see flat-screen TVs and newer cars in the driveway no doubt bought through their equity line.

I’ll be curious to see what effect this new guideline has on the short-sale numbers.  My gut tells me it will have a minimal effect.  The process is the problem, not the incentive, but we’ll see.

-Mark

New Foreclosure Rules

New Foreclosure Rules

Here is an interesting new policy change coming from Fannie and Freddie.  If you have been trying to buy a foreclosure home recently, you have probably been just as frustrated as I am.

When they first hit the market, most foreclosure homes are listed about 10%-15% under “market price”.  This is mainly to make sure the asset does not sit on the market a long time and lose even more money, but also in some part because a foreclosure buyer is taking some level of risk since the seller is not testifying to the property condition and reports are non-existent.

The low price has attracted a lot of investors, who in many cases are buying with all-cash, or first time buyers.  Of course, the all-cash investor has a strong offer through a quick close and no appraisal; this puts the first-time buyer at a big disadvantage and what we’ve seen in the market is a “feeding frenzy” where investors are blocking normal buyers out of the market completely.

So to help make situation more fair, the latest announcement from Fannie/Freddie is that they will force a 15-day waiting period before hearing any investor offers so normal owner-occupied buyers can be allowed to make a reasonable offer.  Great news!

I wonder if this policy change is a result of many complaints from eager buyers.

-Mark

Recession rebound -- 2009 is already looking up?!

“It’s a recession when your neighbor loses his job; it’s depression when you lose yours.” – Harry S. Truman, April 13, 1958

The Feds are doing everything they can to get this economy out of recession as fast as possible in 2009.  They are putting faith back into the financial market.  They are committed to turning this economy around and by lowering rates and pumping stimulus money into the system they will make sure that housing prices will bottom in 2009.

Oh, a “bottom” you say?!  Yes, I do.  More numbers are coming out to confirm an earlier post I wrote where I talked about future supply problems for housing.  New homes built this year are at the same level we built in 1959 (when we only had a population of 179M people).  The US now has a population of 310M people, so if we’re only building homes at 1959 levels, you can imagine what that might mean.  Just wait, excess inventory will be consumed and house prices will once again rise due to lack of new homes being built.  It’s not going to happen over night, but it will happen sooner than you might think.

One side effect of the Feds rate reduction is that they will also make it so lucrative to be a bank lending money right now that it will become irresistible.  Banks need to lend money to make money and they will soon begin to see how profitable it is.  They can borrow from the Feds at 0.5% and lend out to borrowers at 5% -- that’s a great business!

Stability will return.  We are not going to zero.  We are not falling apart.  Anyone borrowing money right now has gone through the toughest lending requirements we’ve seen in 10 years.  Their loans are great paper and very stable which means that whoever buys them in the secondary market won’t need to worry about the loan going bad.  Again, making the secondary market for mortgage-backed paper more stable.

I hope you are making smart choices right now and positioning yourself for the next big run of growth and prosperity.  I’ll leave you with a quote from one of the most entertaining guys on TV (Jim Cramer from Mad Money on CNBC) -- “I command you to go out and buy a house in the next 3 months.” (December 16, 2008)

-mark

Bay Area House Prices Drop 25% . . . , Really?

I am about to post an article showing the monthly house price trends for the areas we cover.  As a follower of our blog, you can say that you’ve seen it here first because I can safely say that you will soon be reading a headline on local newspapers like this -- “Bay Area House Prices Drop 25%”  (or something more dramatic that will catch your attention.)

Please don’t be fooled.  Yes, the headline will be “technically correct”; however, it does not mean that your house price is down 25% or that the price of every home in the Bay Area is down 25% from last year.  The fact is just that we have many more $500k homes being sold and fewer $1.5M homes being sold; therefore, the average sales price will look like it is down sharply.

That is what is happening now so don’t get nervous when you see the headline.

Buyers and investors are snapping up deals on foreclosures and short sales around the $400k - $600k range so our average sales price for the county will be trending down for quite a while. 

-mark

What the NEWS doesn't tell you that you should know

With so much negative news around us, I thought it might be nice to see some facts that may help you keep some perspective on where we are when people start throwing around the “Great Depression” comparisons.

-    More than 1000 banks closed in 1930, yet only 14 banks have been taken over in 2008.
-    There are 76 million households today in the US that own their home and of that, 24 million are owned free and clear -- no loan at all.
-    52 million homeowners have a mortgage and 97.2% are NOT in foreclosure and 98.3 are current on their payments.
-    There is about $11.7 trillion currently held in money markets, treasuries, CDs, and cash -- this is higher than the accumulative debt of the whole country.

However, because I should be a realist and not Pollyanna about what we are facing, it helps to understand how we got here.  For each decade, we can see how many homes were sold both in the peak year and the average for the whole decade:

        Peak # Homes Sold        Average Homes Sold
        ----------------------        -----------------------
1970s            3.9 million            3 million
1980s            4 million               3.3 million
1990s            4.9 million            3.9 million
2000s            7.1 million            5.6 million

In 1999 there were a series of laws to expand home ownership beyond where it had historically been for generations -- thus the spike in volume of homes being sold.  It became an entitlement, not a privilege.  Instead of working hard to save money and earn the position to own a home, it became somewhat of a gift due to poor lending practices.  Furthermore, people became used to refinancing their homes to support an excessive lifestyle.  We moved away from a tradition that required a person to work hard to save 20% as a down payment to buy a home.

We’re having a necessary adjustment to housing prices so they will come down in line with where they should have been “naturally” had we not made financing changes and incentives in the early 2000s.  It is likely to over-correct, which means a buying opportunity will be created for those who need to and can afford to buy a home.

To deal with the excesses of the 2000s, we’re now facing “distressed sales” -- short sales and foreclosures, because:

-    40% of the 7.1 million sales in 2005 were non-owner occupied (investors, second homes, and speculators).
-    40% of all foreclosures are non-owner occupied.
-    Over 20% of homeowners with a mortgage owe more today than their home is worth.

However, consider the laws of supply and demand, which continues to be the foundation of every economy no matter what else is happening.

Demand:
-    People are living longer and with continued advances in medicine for the decades to come we will all need a place to live out much longer lives.
-    Population is growing -- People are still having babies.  Immigrants are still coming to America for education and jobs.
-    One baby is born every 7 seconds; one person dies every 12 seconds; one immigrant comes to the US every 29 seconds; which means the US population grows by 1 person every 11 seconds, according to USCensus.gov. 
-    On February 11, 2008, the Pew Research Center published their projections for U.S. population growth through 2050. In the last 40 years, the U.S. population has risen from 200 million to 300 million people. Pew estimates that the population of the U.S. will reach 438 million by 2050 or an increase of 48% over the population in 2005.

Supply:
-    Major development loans have been drying up so new construction is slowing.
-    September sales in California were up 68% over 2007, 51% of which were distressed sales.
-    Average supply of homes was 11 months in January and it is now down to 9.9.
-    We will end up with a shortage of housing in 3 years at this pace.

The government is throwing HUGE money at the economy right now.  The new administration coming into the White House is planning to invest in creating jobs and stabilizing housing.  I’m sorry that most of us have been trained to have short-term vision -- only being able to see a couple months into the future.  I agree that it looks pretty cold and dark if that’s as far as we can see.  However, if you’ll adjust your “future glasses” just a little and see out a couple of years I think you will see that the seeds of opportunity are being planted right now.

-mark