Monday, July 25, 2011

On October 1, 2011 a lot of folks in the Manhattan Beach-Beach Cities real estate market are going to be very upset. That is the day the FEDS have targeted to lower the conforming loan limit from the current $729,750 to $625,000. The downward shift in the conforming limits isn't just going to affect buyers but also homeowners who have been waiting to refinance their existing loans.

If you haven't filled out loan documents by August 15, 2011 you may not be able to take advantage of the current conforming limits for your loan. In fact Bank of America is no longer making conforming loans over $625,000 even thought the official cutoff date is September 30, 2011.

So how will the decrease in conforming limits affect you?


Manhattan Beach-Beach Cities Homeowners:
Many homeowners have been waiting to see how low interest rates will go before they refinance to take advantage of lower rates. If you purchased your home a few years ago with a loan amount of $729,750 and want to refinance... DO IT NOW! If you wait and your loan amount is over $625,000 you will have to take out a jumbo loan which may have tougher guidelines and will certainly have a higher interest rate.



South Bay-Beach Cities Buyers:
For many buyers in the Manhattan Beach-Beach Cities the lower loan limits mean they are going to have to get a jumbo loan to buy the same property they could have purchased a few months ago with a conforming loan or come up with a significantly higher down payment. That means tougher qualifying guidelines and a slightly higher interest rate. As an example;e a buyer looking at a $900,000 purchase price today would be able to purchase with 20% ($180,000) down and a loan of about $720,000. When the conforming limits change a buyer would need to come up with slightly more than 30% ($275,000) down for a conforming loan of $625,000 to purchase the same property.


There are a lot of folks trying to get the FEDS to leave conforming levels where they are for at lease another year for the higher priced areas of the country. However I don't think it will happen. There is a bit of good news. More lenders willing to make jumbo loans are stepping into the market. Also the difference in rates for conforming and jumbo are fairly close... conforming fixed are about 4.6%-4.75% and jumbo rates are 5.125%-5.5%. However that could change if Congress doesn't stop playing King of the Hill with each other and the administration.

The boys in D.C. lament the fact that housing continues to be an issue in most of the country, yet they can't seem to understand that much of the fault lies at their doorstep. There is a new guideline/rule/formula change every few months as the government tries to put the horse back in the barn that burned down. If the folks in D.C. want to see housing markets make a comeback they need to leave the process alone for awhile and let things settle. Ultimately local real estate markets will find their way through the muddle if folks aren't waiting on a daily basis to see what the next new thing will be.

Manhattan Beach CA home sales January and February 2011

Manhattan Beach Bike Path March 2011

Manhattan Beach home sales for January and February 2011 are in and it's a mixed bag for the Manhattan Beach real estate market. January 2011 sales were lower than those in January 2010 but February 2011 sales were higher than February 2010. January and February sale figures are usually lower then other months as they reflect sales at the end of the year.

Pending sale numbers are looking better with 49 homes and 18 townhomes/condos currently in escrow. A few of these may not make it through the process to closing but most of the homes currently in escrow will find new owners.

Despite all the troubles in the Middle East we do appear to be inching our way out of the recession. One of the major differences between this recession and others is that housing will likely be the last area to emerge from the doldrums rather then one of the first.
Coastal cities in California seem to be doing better than other areas of the state. While prices are certainly not headed up they do appear to be starting to stabilize in Manhattan Beach ( see charts for sales 2001-2010) and the Beach Cities.

Manhattan Beach: Sold January 2010 vs January 2011

Manhattan Beach: Sold February 2010 vs February 2011

Manhattan Beach: Sold Homes January-June 2001-2010










Manhattan Beach: Sold Homes July-December 2001-2010

Monday, January 17, 2011

Manhattan Beach: Tale of a Sale.. Appraisals..it's not always about price

A lot of buyers are looking for "fixer uppers" in the Beach Cities. Many buyers believe they can purchase these homes at a low price, put a little money and work into them and wind up with a great deal. Sometimes it works out better then expected. However as with all aspects of the real estate market the more you think you know the more you really need to know.



Last year I closed escrow on a home in East Manhattan Beach that was marketed and sold for land value. The house was small and had a lot of deferred maintenance. The lot was huge, 14,000 square feet, and sat at the crest of a hill.


The home sold within 2 days of being on the MLS. The price accepted by the sellers was close to the list price and the buyers were exceptionally well qualified. The home was sold as is which was acceptable to the buyer as they are going to build their dream home.


All was going well until the appraisal. The appraiser knew that the home was being sold for land value and even noted this on her report. She also noted that the buyers planned to build a new home. She indicated that the value of the property was at the agreed price.


Unfortunately she didn't stop there....she noted something else... the home was not in great condition. She went on about what a great neighborhood it was and how lovely all the homes were and how expensive the property was in the area. Finally she made a list of all the things that needed to be done to the property to bring it to "average" condition and put a price tag on the list of $140,000.

Bells went off, whistles blew, lights blinked while buzzers buzzed..... and the lender who a few days before was ready to fund immediately said no. So what changed this deal... 4 words.. not in average condition. Now remember everyone knew this was a land deal... the house had no value and the appraiser said it was worth what the buyer had agreed to pay but because the appraiser said it needed lots of work to be average the deal was off.

In today's market, lenders don't want to loan on property that is not in average condition. There are a few who will make a loan on these properties but they are so overwhelmed with applications it takes forever to get an approval.

The problem comes down to what it average. The appraiser thought the house needed at least $140,000 to make it average which was silly. The house was solid and really only needed paint, new carpet, minor repairs and a good cleaning for the appraiser to decide it was now average. What was so senseless was that the seller had to spend money to fix up a house that was going to be torn down immediately.

Most of the time appraisers are at or very near the value that buyers and sellers agree on as fair market . It's not always about price... sometimes, even though the appraisal comes in at market value, it is not enough to make the lender agree to make the loan.

Interest rates continue to be at all time lows... even as they bounce up and down like an old time YoYo. Long term mortgage rates seem to have taken on a life of their own. The speculation was that if the FEDS would again purchase mortgage backed securities, home loan rates would continue to be low and stable... but like many government plans the devil is in the details or rather the bond markets.


I have clients who got loans over the last few months from 4.25%-5.5% depending on down payment, loan lock date and dumb luck. Current rates for jumbo conforming loans are hovering around 5% for a 30 year fixed with 20% down and a 760+ FICO. Jumbo loans are a bit higher but still low compared to rates a few years ago.

The current market is very much like the one we saw at the end of 2009. Rates are still good and inventory is slowly disappearing. Prices are flexible with some sub areas showing increases in value, others decreases but most market area prices are on the flat side.

On December 13, 2010, Fannie Mae instituted new mortgage guidelines for consumers looking to purchase or refinance a home. These new guidelines combined with tougher overall lender requirements make it harder to obtain financing for everyone.

Self employed people and those who work on a commission basis (1099 earners) will be hit the hardest by the new changes. While it has been difficult the last few years for those who were not straight salaried to obtain loans it hasn't been impossible if you had a consistent income and a lot of assets. Now that has changed as lenders weight income more heavily and downplay assets as the basis to make a lending decision. Money in the bank doesn't seem to be as important as money from a monthly check.
While I understand that asset values have seen a lot of volatility in recent years, I would think that with the high levels of unemployment continuing to plague the economy strong assets would be important. Historically lenders wanted to see good income along with assets to prove stability but that may be changing. Sometimes I think lenders may be their own worst enemy.


Banks are saying that if you are self employed you can't obtain a loan...which is silly. Many of my clients are self employed, have a lot of cash and assets but a variable income stream. The variable income is often higher on an annual basis then a borrower making a similar income but banks view these folks differently. Stated income loans made to borrowers with lots of assets were not bad loans. However stated income loans made to borrowers with fudged income and no assets were a disaster. Lenders need to learn the difference.

I can't fault lenders for only wanting to loan money to the best borrowers. However while lenders make things tougher for conforming borrowers, the FEDS have far less stringent qualifications for FHA and VA loans. On a national scale there are far more FHA and VA loans being made then conventional loans. Makes for some interesting speculation about future defaults.

Manhattan Beach- South Bay Beach Cities... How low will interest rates go?


 

I was talking some first time  buyers at an open house last week in Manhattan Beach who wanted to know how low I thought rates would go. I'm sure I disappointed them when I said that I didn't think rates would drop much more.  I think they will bounce around over the next few months, up/down a 1/4 point here and there,  but that for the most part they will be fairly stable until the end of the year.  However come Spring it could well be a different story as I expect rates may be on the rise next year.

In today's market interest rates are not nearly as big an issue as obtaining a loan.  Stories are rampant about buyers who were told they qualified and then were denied a loan at the last moment.  These are not flaky buyers with low 600 FICO scores and small down payments.  These are folks with scores in mid 700's and higher  with 20% down that for one reason or another wind up rejected in underwriting.  One major lender is notorious for dumping buyers at the last minute.

Sometimes it's not a buyer issue.  I have a property in escrow where the buyer is very strong, the appraisal came in at full price but..... the existing home had some deferred maintenance that should not have been an issue as the property was sold for land value.  The new buyer plans to tear down the existing home and build a new one.  The lender is aware of his plans and has checked to be sure he has the assets to rebuild. However the appraiser checked a box that the home was in poor condition.  That meant the loan could not be sold to the secondary market.  The seller wound up having to make repairs to the home to get it in average condition even though the home will be torn down and has no value.  This was a needless expense because the appraiser decided the home was not to neighborhood standards even though it was being torn down and a home at or above neighborhood standards will be built. 

To be fair the pressure is on lenders by Fannie Mae and Freddie Mac.  If a lender makes a loan and Freddie or Fannie decide that the loan is going to be problematic they will make the lender buy the home back and often at a premium over the loan value.  That can be very pricey for the lender and cause real problems with investors.  In order to avoid any possible problems lenders are being overly cautious and making issues about things that are really non-issues.

At the same time the FEDS are considering making loans to folks without jobs so they can make payments to lenders on their mortgages.  Even the boys in DC ought to realize this is a really stupid move in an economy where unemployment continues to be high with few new jobs  being created in the private sector as folks continue to worry about the economy. 

If a refinance is in your future now would be the time.  We haven't seen rates this low since the 50's and there is no guarantee how long they will remain at this level.

Interest rate chart... courtesy Chryste Fisher