This Week in Real Estate

Although CAR reported this week that California home sales increased 84.9 percent in December compared with the same period a year ago, they also noted the flip side, that the median price of an existing home fell 41.5 percent...a continued symbol of buyers taking advantage of the large number of distressed properties currently available.
So why the sudden, so drastic surge in sales? There are a few reasons:
A lot of people who were previously priced out of the housing market can finally buy. With interest rates under 5%, a buyer’s purchasing power is at its best in more than three decades.
After months of increasing or stable inventory, we are finally starting to see the numbers fall, possibly because of increased consumer confidence, based on the new administration.
We’re seeing a lot more investors coming into the market in addition to first time buyers.
So is it too early to call it a trend? Probably. We still have a lot of distressed properties to move through before we can begin to see prices stabilize. At least for the foreseeable future, buyers will probably have the edge but we’re finally moving in the right direction. The key to all of this: buyers are ready to buy when they perceive a good value. Until then, they wait.
Open house attendance is up and there is activity with first time buyers and investors. I will have a townhouse listing open this weekend in Westside Sunnyvale, and will let you know if the combination of a dramatic price reduction, springtime weather, and Cupertino schools brings a good turnout, despite the Super Bowl.

New Features on Zirana

I've written before about the useful area information on the Zirana website.There has been a lot of interest in local crime news, and Zirana.com has added a new section to display information about registered sex offenders in each town. This information includes names and addresses of the registered offenders. Their locations are also displayed on a map of the neighborhood. Currently this information is available on Zirana only for cities in California, but we will soon cover other states also. This information is available as per Megan’s Law and only information on registered sex offenders, allowed to be disclosed under California law, appears on this web site. You can see this data by clicking on the link “Registered Sex Offenders” under News in the left column of the Home page, or from the drop down menu under News on the top bar.
The Home Foreclosures data on Zirana continues to attract a lot of users and they appreciate the fact that it is constantly updated by Realty Trac, the leading provider of Foreclosure information in the country. You can check out the latest Foreclosure information for your city by clicking on the “Foreclosures” link from the drop down menu under Real Estate.

Fans in the Winter? Brrr.

I just read this hint from Kathy Smith at Old Republic Home protection:
Most people think of ceiling fans only as a way to keep cool in the summer. But, do you know your ceiling fan can help keep you warmer and reduce your heating bill in the winter? Simply run the fan on the low setting in clockwise direction. This creates a gentle updraft that recirculates warm air trapped at the ceiling, providing an even, comfortable heat throughout your room. The recirculation of warm air will allow you to reduce the heater setting while still keeping your room warm. To change the fan blades' spin direction, flip the switch on the head of the fan or check your remote control for a button that switches the spin direction.

Gong Xi Fa Cai!

Today we started our "lender lunch" with a Chinese banquet, celebrating the Year of the Ox. Sue, our in-office lender from Princeton Properties, had lots of new information for us. We'll learn even more about this market at the Short Sale Seminar scheduled on the 10th of February.
Some new info from today's talk was: Fannie Mae is charging a half percent "risk premium" for loans on condos with less than a 25% down payment.
The maximum financing available for conforming loans(under $417,000)is 95% on single family homes, and 90% on condos and townhomes.
Lenders are watching for "red flags" on condo sales...15% or more delinquencies in homeowners' dues, and any litigation against the association. They want to see all the association documents and the certification,(cert)especially, at the time the property goes into contract.
Investors may be limited to loans under the conforming limit of $417,000, and should expect to pay at least one percent more in interest than buyers who will live in the property. They should also expect to put 25% to 30% down.
Only a handful of lenders are making true jumbo loans. These require at least a 25% down payment.

If Housing is the Key to End Recession...

...why aren't they doing more?
While the current recession will be longer and more severe than predicted, housing will help lead the country out of the downturn, Boston Federal Reserve Bank President Eric Rosengren told the Massachusetts Mortgage Bankers Association at its annual meeting. He also said the housing market could stabilize this year, which he sees as a prerequisite for recovery.
"The recent reductions in mortgage rates, in part due to monetary policy actions, have enabled more borrowers than would otherwise have done so to purchase or refinance homes," Rosengren said.
"Expansion of this effort and encouraging greater [Fannie Mae and Freddie Mac] participation, should encourage borrowers who have equity and reasonable credit scores to purchase or refinance homes," he added.
He also said that once the market stabilizes, mortgage securitization should be restructured to prevent future upheavals.
Maybe I'm expecting too much, too soon. All this rhetoric isn't helping first time buyers to qualify, or allowing the move-up buyer to get a competitive interest rate.

Fannie Mae Clarifies Condo Occupancy Rules

So many of the new listings that we're seeing in the REO (foreclosure) market are being purchased by investor/buyers that new rules needed to be written.
The Project Eligibility Review Service (PERS) for condo and co-op projects and changes to its condo and co-op project policies were recently announced by Fannie Mae. The announcement clears up how bank-owned units are treated for determining the owner-occupancy ratio. Established projects, where borrowers will occupy the unit or use the unit as a second home, are not subject to any owner-occupancy ratios, according to the guidelines. These are much more lenient than those we were used to working with.
However, Fannie Mae requires that established condominium projects have an owner-occupancy ratio of at least 51 percent at loan origination for investment properties. For projects where a borrower is an investor and that do not meet the owner-occupied ratio of 51 percent, a waiver based on the overall risk of the project may be requested.

Jumbo Loans and the Market

As I noted before, one of the current issues most affecting our market is the drop in mortgage loan limits for conventional financing as of the end of 2008. This is dramatically hurting home sales and trade-up activity in higher price ranges. According to NAR, the National Association of Realtors, “The latest existing home sales data shows transactions under $400,000 are 3 percent below a year ago. However, sales of homes priced at $750,000 or more have declined a whopping 47 percent.” Buyers who need jumbo mortgages must pay interest rates that are nearly 2 percentage points higher than conventional financing; as a result, the high-end market is very slow and buyers in higher price ranges are at a severe disadvantage.
Currently NAR is pushing for the permanent increase of mortgage loan limits to that $729,750 cap. According to a statement released this week by NAR, “To illustrate in dollar terms if mortgage limits are permanently raised to $729,750…the mortgage payment on such a loan would drop by $942 per month by lowering interest rates 2 percentage points. Over the life of a 30-year loan, the homeowner would save $338,000.”
Especially here in our market, we need the increased loan limits so people in all prices are able to purchase. Every segment of the housing market needs a turnaround to spark an overall housing recovery.

Tax Lien Relief for Homeowners

The Internal Revenue Service recently announced it will speed up its process of providing relief from federal tax liens for distressed homeowners. With over a million current federal tax liens against real and personal property, the IRS announcement should help REALTORS® and their clients resolve federal tax lien issues in their sale and loan transactions.
Prior to this, a homeowner trying to sell or refinance a property must generally pay off an existing federal tax lien. However, during the current economic downturn, many homeowners don't have the cash or equity to do this. So for a refinance, the homeowner may request that the IRS makes its tax lien subordinate (secondary) to the lien of the refinancing lender. For a sale, the homeowner may, under certain circumstances, request that the IRS discharge its claim. The IRS's processing time for subordination or discharge requests has been at least 30 days. The IRS is currently working to expedite that time frame to help distressed homeowners. Every bit helps!

I had an email from an old client who was leery of the stock market and wondered if it was a good idea to put some "found money" into paying off his mortgage.
According to a recent Kiplinger article, there's a big downside to tying up too much money in your house: It can be very difficult to access that cash, especially now that lenders are less generous about setting up home-equity lines of credit.
Before paying down or paying off his mortgage, he should pay down high-interest debt and build an emergency fund. And keep some of the longer-term money in stocks or stock funds.
That said, there are a couple of cases in which paying down a loan might make sense. With an adjustable-rate mortgage that continues to move up, putting extra cash into his mortgage could give him enough equity to refinance.
And for someone close to retirement who already has a diversified portfolio or long-term investments, paying off a mortgage can make a big difference in his finances. With no monthly housing payment, he needn't withdraw as much from his retirement funds in a down market.

President Obama and Real Estate

I watched the Inauguration this morning, full of new hope and expectations for the coming years, and with the realization that it won't be an easy turnaround.
President Obama’s economic aids assure that the incoming administration will be responsible with its spending of the Troubled Asset Relief Program (TARP) funds and pledged to commit some $50 billion to $100 billion to address foreclosures.
As we well know, one of the biggest challenges currently affecting our market is the difficulty of even the most qualified buyer to secure financing. The goal of TARP is to open the housing and financial system so buyers—especially those with good credit—are able to once again secure financing.
Several weeks ago, I mentioned that real estate was in one of the best positions, industry wise, for a correction. This is thanks to the fact that lawmakers realize that housing makes up 20% of the GDP, and our economy can't be fixed without fixing the housing sector. With Obama’s recent outreach to Congress and the TARP funds now available, we’re starting to see the first of several outreach efforts to fix the hard hit housing industry.
This won’t happen overnight. We’ve got a long road ahead and depending on what forecast you are reading, some say we’ll start seeing a turnaround in mid-2009 and others say we may not see it until 2010, but the good news is that we are on track and our country is finally moving in the right direction.
Now, on that positive note, let’s take a look at this week in real estate:
In our Cupertino-Sunnyvale area, the first week of 2009 showed an increase in listings and sale pending transactions. It’s hard to know if this is the start of a trend or just coming off the cooler holiday months. This of course will be a market I'll continue to watch over the days and weeks ahead. The San Jose market continues to be driven by REOs and short sales.

Can You Just Walk Away?

With approximately one in five homeowners “underwater” – owing more on the home than than it is currently worth – some homeowners are deciding to walk away from the house and mortgage, often resulting in the lender foreclosing on the property. A foreclosure is considered one the most serious defaults on a credit history, in the same category as a bankruptcy or a tax lien. According to a spokesman for Fair Isaac Corp., which developed FICO, the nation’s most widely used credit scoring system, for a borrower with pristine credit, a foreclosure could mean an immediate drop of 200 points. With an unfavorable credit score, a borrower may find it difficult to rent an apartment, secure certain jobs, obtain lines of credit, and purchase a house for years to come.

Realtors® and Abandoned Animals

I wrote some time ago about animals left behind when pet owners had to leave their homes. Now the state government has stepped in with a new law.
As of January 1, 2009, all persons that discover an abandoned animal in or near a vacated or foreclosed real property must immediately contact animal control for the purpose of retrieval and care.
The law provides that:
• Any person or private entity with whom a live animal is deposited shall immediately notify animal control officials for the purpose of retrieving the animal.
• The person in possession of the abandoned animal is subject to all local ordinances and state laws that govern the proper care and treatment of those animals.
• The person or private entity, or the successor property owner that notifies animal control officials to retrieve the animal shall not be considered the keeper of the animal.
This law impacts banks with foreclosed properties and their real estate agents.
The City of Sunnyvale recommends using common sense when encountering a stray animal. If you don't feel it is safe (for you and/or the animal) to approach – then DON'T. Call the local Animal Control Unit with a description of the animal (size, color, breed, sex, etc.) and the location and/or direction of travel of the animal so they can locate and contain the animal as soon as possible.
If you come across a stray or abandoned animal in a vacant home please contact the following animal control offices in their respective jurisdictions.

THE PENINSULA HUMANE SOCIETY & SPCA
12 Airport Boulevard, San Mateo, CA 94401 - (650) 340-8200

PALO ALTO ANIMAL SERVICES
3281 East Bayshore Road, Palo Alto - (650) 496-5971

SAN JOSE ANIMAL CARE CENTER
2750 Monterey Road, San Jose - (408) 578-7297

SANTA CLARA COUNTY ANIMAL SHELTER
12370 Murphy Avenue, San Martin - (408) 683-4186

SILICON VALLEY ANIMAL CONTROL AUTHORITY
3370 Thomas Road, Santa Clara - (408) 764-0344

Real Estate Question, Revisited

Since writing yesterday's post, I have seen and heard more indicators that the coming stimulus package may include at least two things that would have an impact on yesterday's answer to a Sunnyvale reader. One is the possibility that the package will include lower rates on conforming jumbo loans, and maybe even jumbos. The second is that there is a move to raise the conforming jumbo maximum back up to $729,750, which would eliminate the need for the line of credit the Sunnyvale reader was considering.
By the way, I've been asked about the problems that a longer loan period (40-50 years) might bring. The obvious additional interest paid over the longer term doesn't matter much since most borrowers aren't going to keep the loan that long. The more important feature to consider is that the longer the loan term, the slower the rate of amortization with a fixed rate loan. So when a loan is paid off through a sale or refinance before the end of the loan term, the lender will still get a much bigger check at closing.

A Real Estate Question

After spending much of this year in the 1300’s-1400’s, sales have declined to 1013. That’s better than the 958 of a year ago, but an improvement of less than 6 percent puts Santa Clara toward the back of the activity pack. Unfortunately, median has dropped almost $200,000 since late spring...most of these reflecting short sales and foreclosed properties. Silicon Valley, after all, is prone to extreme reaction when the economy softens.

A Sunnyvale reader came up with a new question: "What do you think about refi for an existing jumbo loan into a fixed rate 625.5K and the remaining 100k or so on a HELOC...monthly payments are lower given lower mortgage rates....anything we should watch out for...thoughts?"
My first reaction is to ask more questions. What is their existing loan on the property? Is it fixed or adjustable? What is the current rate, and is there a prepayment penalty?
Next, what are the terms on the new loans? Are there any upfront costs or points involved? The things to watch for are a prepayment penalty on the new loan (If the conforming-jumbo rate should rise to $729,900 in the future, you might want to pay off the HELOC...line of credit...and refinance to one fixed-rate mortgage.) There is always a risk with a line of credit, which would most likely adjust if interest rates go up, but if your current loan is already adjustable, the smaller HELOC is still a better choice.

How Home Builders Survive in this Market

This past year has been rough on developers, and 2009 doesn't look much more promising. In the South Bay and East Bay, we've seen them holding auctions. With hefty loan payments to cover and time running out, several builders are resorting to this method, previously used only for distressed properties, to sell off excess inventory.
Prices on downtown high rises have dropped quite a bit, but their builders aren't resorting to auctions yet. They are offering generous packages to potential buyers...buying down interest rates and even crediting the first few months' payments in escrow. Although the demand for an urban lifestyle is down, some builders are certain that it will revive, and are renting the units for the short term.
With no more lines of potential buyers signing up for unbuilt models, builders are finishing their units, and find that selling them in "turn-key" condition (often with upgrades included) is the solution to a slow market.

Is Orange Oil the Cure for Termites?

Mike Meek, of Antique Termite, spoke at our Realtors' meeting this morning. Since I live in a townhouse development in the middle of an area of Sunnyvale that was once an orchard, I am especially interested in localized treatment for drywood termites. Fumigation (tenting) is still the best method of eradication, but it's not always practical when you share a structure with several neighbors.
Orange Oil has been heavily advertised on the radio, and on television lately. Unfortunately, according to Mike, there is only a 50% success rate with this method. It is also twice as expensive as other types...probably to cover all that advertising. The oil seeps into wood, and kills all the termites it comes into contact with. Sadly, many of these are located deeper in the wood than the quarter inch the chemical penetrates, and in many cases, further treatment is needed. There is also a residual "orangey" odor left for some time. But as the ads promise, Orange Oil is safe.
At half the cost, two much more effective methods of treatment are Premise Foam and CY-Kick.

But Can You Qualify?

The most-recent survey from Freddie Mac shows interest rates on 30-year, fixed-rate mortgages averaged around 5 percent last week, the lowest level in 37 years. While lower interest rates have resulted in a dramatic jump in homeowners seeking to refinance, now also is a great time to purchase a home. The lower interest rates also are making mortgage payments more affordable, especially on larger homes that previously may have been out of reach. In addition to lower monthly mortgage payments, a lower interest rate also allows more home buyers to qualify for larger mortgages with less income.
The biggest problem borrowers are running into is that it is so much more difficult to qualify. On a refi, if equity has dropped to less than 20% of the property's value, the borrower is out of luck. For home buyers, lenders are asking for a minimum of 20% down, and often want even more than that. They are also looking for borrowers with credit scores of 720 or higher, and very little debt.
Sure, there are still loans out there for those who don't meet these criteria, but don't expect the terms to be as good.

Jumbo Loans, Revisited

A Sunnyvale reader commented on yesterday's post, and asked when the jumbo rates would start to conform with the interest on government backed loans. I spoke to Sue, our in-house lender this morning to get updated rates, and also to get her "take" on the question. She said that she watches the rates on mortgage backed securities daily, and monitors any change. Most individuals use changes in the 10 year bond to predict changes in loan rates, but these securities are the true indicator, and this information is available only to lenders who pay for this service.
So-called jumbo loans have always been a percent or more higher than conventional ones, and even though the difference is currently 6 5/8% versus just under 5%, that rate is still pretty reasonable if you look back at the history of the home loan market.
A second question in the comment was if I knew when the "jumbo conforming" rate for this area might return to $729,000 now that it has reverted to $625,500 (by the way, the rate between $417,000 and $625,500 is now 5 3/8%. The National Realtors Association will be pressing for this change with the new administration, but Washington will probably concentrate on the lower end market first.

When Will it Be Time for the Move-Up Buyers?

The year has begun, and today's Mercury News enthused about the active real estate market for investors and first time buyers, who can buy houses for $500,000 or less in the Valley. With rents holding steady, investors are able to break even monthly when they buy properties that have lost value in the last year. First time buyers are benefiting from Liberal FHA terms and low interest rates on their starter homes. But what about the market where a buyer needs more than a $625,500 FHA loan?
Those record-setting interest rates we read about are still in the $417,000 or less category...not much use to a move-up or high end buyer in Sunnyvale or Cupertino.
Everybody is sitting tight and waiting for those Jumbo loans to become available.

Economic Forecasters...Who to Trust?

In yesterday's post, I talked about the about-face by a former economist of the NAR. It seems that most of these so-called forecasters are employed by investment banks, trade associations, or large corporations. They used computer models that did not take into account emotional factors such as the shock from the credit crisis or the free fall of housing prices. They also did not foresee banks and other lenders holding back on loans and freezing the credit needed to revive the economy.
Most of these economists are more optimistic than Nouriel Roubini of NYU, who foresaw the 2008 recession. He expects a "deep and protracted contraction lasting at least through the end of 2009," and a very weak recovery in 2010.
I hope that the majority of the forecasters are right...the ones who estimate that the housing market will bottom out by spring, fueled by a federal government that will buy mortgage-backed securities, and lower rates to less than 5% on 30 year loans. We'll just have to wait and see.

When an Industry Spokesman "Spins"

David Lereah, former chief economist of the National Association of Realtors, admitted to a Money Magazine reporter in the January issue that he had put a positive spin on the real estate news while he held that position. Although he never thought that the whole national housing market would burst, he says that his views are much more different now, and have been for the last year and a half. He expects to see sales up slightly in 2009, but he estimates that home prices will continue to drop, with a bad economy and a credit crunch pushing prices down
5-10% more.
Now that he's a private consultant, he admits that he was wrong when he wrote that housing had a good future, and has abandoned what he calls the "positive spin."