If you are a homeowner or prospective homeowner in Manhattan Beach or the Beach Cities you need to become very proactive about the the various types of home loans being offered in the current market. Whether you are an owner who is going to have to refinance or a buyer looking to purchase a new home, financing is going to be a key factor over the next few years.

It seems that the FED may have finally decided that inflation rather then recession is going to be where the monetary policy should focus. Bernanke has been very upfront that not only will the FED stop lowering the discount rate but may even up it sometime soon. This has brought about a lot of speculation in the market pushing rates up slightly but steadily. The Bank Rate Trend Index has most of the respondents looking toward further rate hikes. It's beginning to look as if the FED may buck the election year trends of keeping rates low and start tinkering instead.

While rates still are a bit lower then they were at this time last year I don't think anyone doubts that the trend is up. That said, rates are still very good. However, consumers are going to have to realize that the days of a 30 year 5.5% fixed loan are gone and adjust their thinking accordingly. They are also going to have to understand that they will probably not be able to refinance to a lower rate at any time soon and perhaps never. These may be the best rates we will see for years to come.

Is this catastrophic... no.. but it does mean that financing is going to be more of a consideration in the future then it has been. This is especially true for those who need to think about refinancing. I strongly urge anyone with a loan that will re-set in the next 18 months to talk to a lender now about refinancing. For buyers or current homeowners it means that making a choice between a fixed rate loan or an adjustable rate is extremely important.

If you choose an adjustable rate you will need to compare margins and the index... ie..Libor or Treasury notes with varying terms(these seem to be the most commonly used) as the basis of the rate. You should know how the index moves... is it fast or slow. Slow is good if rates are moving up but not so good when rates are moving down. The margin will be the most important factor in choosing a rate. This is the spread between the initial rate and future rate increases. Sometimes a higher initial rate with a lower margin will be a better overall choice then a low introductory rate with a high margin. I think a longer term will be a better choice then a shorter one for the next few years. Look for 7-10 year adjustable terms rather 3-5 years. Paying a point up front could prove to be more cost effective then a zero point loan. Have your lender run a number of computer programs to show you how the loan will work over the whole term of the loan not just the first two years.

Unless you have lots of cash available on a long term basis, negative amortizing loans are rarely a good choice. There are a few consumers who know how to use these loans effectively but most consumers only wind up in trouble with a negative amortizing loan. Interest only loans are another choice for a small group of savvy investors with cash behind them but again are not a great choice for most homeowners. Nor is a loan with a pre-payment penalty a good idea.

Consumers are going to have to be very selective about the financing they choose. Don't count on being able to refinance to a lower in a year or two if you don't like the loan. You may wind up having to live with the choice you make for a long time... so it's important to choose wisely.

June 19, 2008 UPDATE:

Dan Green has a terrific article on mortgage rates, inflation and the FED.

Last March the government finally agreed to increase the conforming loan limit from $417,000 to $729, 750 for higher priced areas. For a short time it looked as if Manhattan Beach and the Beach Cities along with other high priced California markets and those in other states would finally get a break on mortgages and possibly mortgage rates. The increase in conforming loan amounts would make it easier for a people to refinance and to purchase. Higher conforming rates made a lot of sense to my clients who are buying homes in Manhattan beach and the Beach Cities.

If you are looking for one of those loans.. forget it! At this point you probably have a better chance of winning the lottery then getting a jumbo loan with a decent interest rate. Lenders claim there is just too much risk but I dont really buy that little scenario. Oh, dont get me wrong I know lenders need to be compensated for risk but if the FED is backing the loans then the risk should be acceptable if these loans also have a high down payment. Even if banks charged 1% over current the lower conforming rate it would be better then we are now seeing in the market.

Nope¦ lenders cant possibly make jumbo loans at anything less then very high interest rates¦ unless of course you would be willing to take a short term adjustable rate. That they can do¦ at a pretty decent rate. Hmmm¦Isnt pushing adjustable rates over fixed rates one of the things that got them into trouble in the first place?

We are seeing a little light at the end of the tunnel on foreclosures. One of the things the FED has managed by lowering the discount rate is to lower the prime rate. A number of loans that are and will be soon re-adjusting will do so at a lower rate then they would have even four months ago. This will diminish a number of foreclosures that might have happened. With the tougher underwriting guidelines and higher down payments new jumbo loans are probably a better bet then the conforming loans lenders were jumping all over themselves to make a few years ago. So why dont lenders want to make these loans¦.

I have a theory¦ I dont think it has as much to do with the amount of the loan as it does with the fact that lenders know rates are going to go up and dont want to be stuck with a 6%..30 year fixed rate loan¦ on large amounts of money. I think lenders would like to do away with fixed rate jumbo loans and instead do 10 year adjustable loans in the expectation you will refinance in about 7 years and they wont be stuck with 30 year low fixed rate loans. If rates jump to 8-9% in the future who wants to be stuck with a bunch of 6% loans.

Lenders talk a good story but the truth is they dont like 30 year fixed rate loans. They have always made it far harder to get a fixed rate loan then an adjustable. I have never understood the rational that makes it harder to qualify for a loan that has the same payment over the life of the loan. Whereas an adjustable with a payment that continually changes is far easier to obtain. This has never made sense to me. It seems far less risky to make a fixed rate loan.

Anyway¦ thats my theory.. and Im sticking to it..

Making a housing decision based on Doom and Gloom could wind up costing consumers who want to buy a home a lot of money.   Most people think they can time the market and buy at the bottom. A number of potential buyers are afraid that if they buy now the housing market will drop drastically and they will lose money. The fact is that a lot of buyers will wind up missing the point when the market begins to change. They will miss it because they are so caught up in bad news that they will not be able to tell when the market changes and take advantage of the change.

 I dont know when the market will reach bottom. I do know that once it reaches that point it will stay relatively flat for a time before cautiously moving upward. I know this because this is how the Manhattan Beach-Beach Cities and the general California real estate market has behaved for many years. I know that the flat time will be a good time to buy. I also know that bar a massive recession or other disaster we may see the market begin to level off within the next 6-8 months. A number of buyers will miss that period because they dont understand that a flat market after a down market is the bottom. Too many prospective purchasers keep waiting for the bottom long after the bottom has been reached and the market begins to move upward.

In a recent Daily Breeze article on California foreclosures the article noted that most of the foreclosures in the South Bay were in Carson and Gardena and other areas to the east. The article pointed out that the rate of foreclosures in the South Bay was half what it was last year¦ Hmmm¦now that would have been an interesting headline but it wasnt the one chosen by the paper. Nope the headline was about the large number of foreclosures in CA. Im betting a number of potential buyers caught the headlines and missed most of the report. Negativity sells newspapers. But negativity can also cost you money.  Most of the people who are trying to time the market will fail miserably. A number of those who are the most adamant about waiting for prices to drop are the same people who missed the late 90s and early 2000 market. They are going to miss this one too.

If you are thinking about buying a home then you need to find out what is really happening in the market where you want to buy. Do you want to know about the number of foreclosures in your zip code¦ check out Foreclosures: How Does your Zip code Fare . This tells you the number of foreclosed properties in your zip code. There are 2 in Manhattan Beach, 3 in Hermosa Beach, 7 in North Redondo, 9 in South Redondo and 1 in El Segundo. If you are waiting to buy a foreclosed property in the Beach Cities¦ it could be a long wait. Its tough for prospective buyers in this market. The media cries that the entire state of California is in foreclosure but most of the highly desirable local markets just dont seem to reflect that data. Buyers still dont understand that when the headlines talk about massive foreclosures they are in Palmdale and Lancaster not Manhattan, Hermosa or Redondo. Prices have gone down but they havent reached meltdown¦. and are not headed in that direction.

 Real estate agents get blamed for spinning if they dont talk about the terrible real estate market in the Beach Cities. The truth is the market isnt what it was four years ago but it isnt awful. Since April 1, 2008 20 homes and 6 townhomes have gone into escrow in Manhattan Beach. Thats a bit more then one per day. This is not a bad market.. not great¦ but definitely not bad. We need to stop comparing the current market to that of a few years ago. More homes sold in 2003, 2004, 2005 and 2006 then at any other time in the last 50 years. We won’t see those numbers again.

It’s time to look at the current market. If you are thinking of buying make your judgement on what you need to do personally and on what you see happening in this market… not the one in 2004. Buy something you can afford and plan to stay there for awhile… 5-7 years at a minimum. Understand that you are buying a place to live not a mutual fund. If you plan smart and buy a property that makes sense the chances are very good that you will have a nice place to live and maybe make a little money along the way.

If you are thinking about buying a home in the South Bay Beach Cities one of todays big concerns is about obtaining a loan. The stories and rumors are everywhere¦ lenders are not making loans even to the most qualified buyers¦. homes are falling out of escrow as qualified buyers cant get loans. As with all rumors there is a little bit of truth along with a little bit of fiction in these tales. The reality in the Beach Cities lies somewhere in the middle. While the volume of sales is way down from previous years..homes are being sold and closing escrow.

 There are currently 179 homes and townhomes/condos in escrow in Manhattan Beach, Hermosa Beach, Redondo Beach and El Segundo. April saw 98 homes and townhomes/condos close escrow in the South Bay Beach Cities ranging in price from $420,000 for a 1 bedroom condo at The Village in Redondo Beach to $3,025,000 for a new home in the Sand Section of Manhattan Beach. 16 properties sold at $600,000 or less; 30 sold between $600,000 and $1,000,000 while 52 homes/ townhomes/condos had prices over $1 million dollars. Trust me.. these were not all cash transactions¦ so loans are available.

There are a number of reasons why homes fall out of escrow¦ low appraisals, unresolved repair issues, buyer cant qualify, a change in plans for buyer/ seller or they find a home they like better. One of the biggest reasons homes fall out of escrow may surprise you¦ sometimes buyers just change their minds. This is especially true if there are multiple offers on a property. Buyers get caught up in the bidding war psychology and wake up a week later wondering what they have done. Certainly obtaining a loan in 2008 is not the piece of cake it was in 2004. It doesnt mean loans are not available or that they are only available for the wealthy.

Qualifications are tougher but not impossible. They key to getting a loan in the current market¦ be sensible and get approved before you even think about looking for a place to buy. Making $300,000 a year doesnt mean you can afford the home of your dreams in Manhattan Beach. It isnt so much what you take home monthly as it is what you have left at the end of each month that matters. If you have three expensive cars, buy your clothes in Beverly Hills specialty shops, take vacations at top notch resorts and are on a first name basis with the maitre d at all the hot spot restaurants then you may not be able to afford as much house as you think. Add tougher underwriting rules and obtaining a loan could be far more difficult then many anticipated.

The new lending rules dont mean you cant buy a home but may mean you may be buying in Hermosa, Redondo or El Segundo as Manhattan Beach may be too pricey for first time buyers. This is what buyers did before 2001 and the subsequent loosening of loan criteria. Ive closed three properties in the last few weeks with buyers who all made in excess of $200,000. There were no problems with the loans. They bought in South Redondo, Torrance and North Redondo. They all had 20% cash down payments and great credit. Their house payments are affordable and they plan to stay for a minimum of 5-7 years. Then they will look into upgrading closer to the beach.

If you feel that now is the time to buy a new home the first thing you need to do is talk to a lender and get pre-approved.. not pre-qualified but pre-approved. Figure out what is on the market in your price range in the area where you want to live. If you are adament about being west of the highway then you might have to look at a little house under 1000 sqft rather then the 3000+ sq ft house you really like. In the Beach communities buyers often have to sacrifice square footage and number of rooms for location. If you find you need the bigger house then your choice of location may have to change. I know many buyers think that if they just wait another year they can have price and location. The truth is that thats probably not going to happen and most locals know it. They may not want to admit it.. or may be hoping for a miracle.. but realistic buyers know the market isnt headed to 1990 prices.  

There were two good articles in the LATimes Sunday Real Estate Section. One by Kenneth Harney¦ Credit crunch puts squeeze on specialized mortgages.. and directly below it was another by Jack Guttentag¦ Steps to getting a home loan.. These two stories reflect the ever changing real estate home loan market. They are both worth a read.

Part II will cover the jumbo loan market