Tuesday, August 21, 2007

Bay Area Real Estate 411: Opportunities for the Adventurous

Do you have to be Warren Buffett to find "deals" in the current market?
Buffett has been increasing his stake in financial services companies, including those with significant exposure to the mortgage market.
Nation wide, real estate markets are stalling as the financial turmoil sorts itself out. Many prudent buyers are on the sidelines as they wait to assess the resulting implications to the Bay Area real estate market. This may create opportunity for the adventurous. First a warning: This post is about speculation and speculation involves risk. For those ready to put a big toe in the deep-end here are some facts in your favor:

1.) Buyer competition has been greatly diminished. Some buyers are out of the market because they will not qualify for a loan given the implementation of more prudent lending practices. Some buyers are out because they do not have a sufficient down payment mandated by new guidelines. Some buyers will sit the next few months out voluntarily as they wait for the market to declare itself.

2.) Lending institutions do not want to be landlords and some will be anxious to unload bank owned property to free up capital. Bank owned properties are not as common in the East Bay as in other parts of Northern California, but they are more common than they have been in past. Some banks will still seek to protect the value of their collateral by pricing aggressively and holding firm through negotiations. However, it is our experience that most bank owned properties are not advertised optimallyl or as well presented as other "pride of ownership" properties. If you have a little vision (and look beyond challenged aesthetics and the advertised open houses) you may find an opportunity.

3.) More Sellers will be willing to negotiate. Sellers who do not need to sell will wait for the market to correct itself. These are the sellers who can afford to wait for the perfect buyer and are often the most tenacious negotiators. When this group sits out, buyers will find a more level playing field. Other sellers will need to sell based on personal circumstances, job transfers, or excessive holding costs. In contrast to the first type, these are the motivated sellers and qualified buyers will have their attention.

4.) Money talks as well-qualified buyers gain renewed credibility. As the mortgage market stands on shaky ground, buyers with good credit and decent down payments are gaining the attention of Bay Area sellers. In addition, a bird with cash in the hand is worth a flock of seagulls. Sellers will give extra credit and consideration to Buyers offering all cash.

Buyer Tips:
  • If you are looking for your "forever" home, don't obsess about the short term market. As your event horizon projects further out, market fluctuations will have less impact. This is where buyers can really benefit from reduced competition and greater opportunities. Desirable homes in prime locations are experiencing an unforeseen lull.
  • Look for the motivated sellers and buy below current market value. Time is money for some banks looking to unload. Don't be afraid to try a low offer as your timing may be opportune.
  • Be prepared to hold onto your investment through any downturn with an expectation that a market correction may take several years. If you plan for a downturn, you resulting decisions will be more prudent.
  • Make location your primary objective. Buyers often seek "fringe" properties during a hot market with the hope that the gentrification tide will absorb them and the value will increase exponentially. In a downturn, values often recede from these areas first as buyers can once again afford the prime locations.
  • Seek your agent's advice in obtaining real-time market data. Look to the most current sales in order to assess value. June sales are already obsolete in most areas. Some agents also know market grapevine information which may be more telling than recorded sales data.
Seller Tips
  • Good news for those who need to sell now; the area has not yet experienced significant price reductions. If price reductions do happen, they are likely a month or so out. However, you may have to be willing to make more concessions to buyer contingencies because the pool of buyers is reduced.
  • 417,000 is the magic number. This is the cap on a conforming loan. Conforming loans have become more desirable as jumbo loans become less available and rates increase. If you can price your home within range of a conforming loan, you may find more buyers.
  • Exposure is your key to success. As the pool of buyers shrinks, increased market exposure will reach the widest possible audience. Now is not the time to put a sign on the front lawn and wait for a buyer. Discuss with your agent a strategy for reaching the most qualified buyers possible.

Friday, August 17, 2007

Recession or Rally? The Feds Lower Discount Rate

Aug 10 (NYT) -- Saying it now feels that the recent disorder in financial markets has raised the risk of an economic downturn, the Federal Reserve today approved a half-percentage point cut in its discount rate on loans to banks....

The upheaval in the credit markets have confronted Ben S. Bernanke, the Fed chairman, with the first crisis of his 18-month tenure. In recent weeks, the Fed has intervened to support the markets by lending in the money markets against mortgage securities and Treasuries. It did so again this morning, by lending $6 billion against mortgage securities. Over all, since Aug. 9, the Fed has injected $94 billion into the financial system by lending in the open market.
The Federal Reserve is scrambling to address the mortgage crisis in an effort to stabilize the US economy. A reduction of the discount rate will specifically target banks that are having short-term financial difficulty (like, Countrywide.) This rate does not have a direct impact on consumers, so we will not see an immediate drop in interest rates. It does however free up financing making loans easier to obtain.
The discount rate is the one the Federal Reserve charges qualified lenders, mainly banks, for temporary loans. Lowering interest rates encourages banks to lend more money to mortgage borrowers.

That in turn could make it easier for home buyers, especially those using big-ticket loans called Jumbos, to get financing.
Lending restrictions will remain tight and sub-prime loans difficult to obtain. The ultimate question remains: Will the Feds efforts be enough to bolster consumer confidence? Information may arrive instantly, but insight takes longer. Fortunately, our traditional/seasonal August slowdown will give us an opportunity to sit back and watch the chips fall. Hopefully, the market will announce itself come September.

Wednesday, August 15, 2007

Keeping an Ear to the Ground: Update on the Real Estate Market

It appears lenders are facing the increase in jumbo loan rates with new yet, prudent flexibility. Instead of recommending jumbo loans at 8% for clients who qualify, many are turning to loan combinations: Specifically, a buyer looking to purchase a single family home in this area for $750,000 with 20% down ($150,000) might consider a conforming first mortgage for $417,000 and a second mortgage at a reasonable rate for the remainder ($183,000.) In many cases the average interest on the two loans is more favorable then a jumbo loan of equal value. This flexibility is accompanied by more stringent qualifying criteria, as lenders pendulum away from the looser standards which contributed to the sub-prime fallout and resulting nationwide foreclosures.

There are oportunities for Buyers in this market. More stringent requirements have resulting in a smaller pool of buyers, and less competition. There are oportunities, but not a lot of bank owned property available for any reasonable discount. We do not have the frequency of foreclosures that some out-lying areas, such as Sacramento, are experiencing. There are two reasons for this. First with a high median price for Bay Area houses, many buyers enter with strong dual incomes and often bring equity from a previously owned property. This means fewer buyers sought 100% financing. Also, because our market has still had reasonable gains over the last two years, those who found themselves in trouble had more of an opportunity to sell and limit their losses. For Sellers, time on the market has increased and multiple offer winfalls are less likely, but buyers are still out there.

Friday, August 10, 2007

Help is on the Way: Central Banks Rally to Stabalize the Credit Market

Aug. 10 (Bloomberg) -- Central banks in the U.S., Europe, Japan and Australia added at least $131.3 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets
More than just a housing crisis, the sub-prime fallout threatened worldwide economies as confidence faltered and stock market funds plummeted. Monday mortgage lenders seemed to be over-reacting as many companies stopped taking new applications and others failed to honor existing commitments. Major lending sources recoiled in fear of uncertain futures. Now the central banks are uniting to inject money back into the banking system. This major act is designed to help stabilize the market and soften the risk for mortgage-backed debt.
In the U.S., the federal funds rate opened at 6 percent, the highest in six years. The rate fell to 5.25 percent after the New York Fed bought $19 billion of mortgage-backed securities and then followed up with $16 billion of funds in a second operation.

'Unlimited' Ability

"The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate,'' Rivlin said. She noted that it was "symbolic'' that the New York Fed's first operation today involved mortgage-backed debt -- the type of securities that investors are unloading.

Thursday, August 9, 2007

"Suddenly It's Not So Easy to Borrow"

As is often the case the New York Times says it best. Click on the link below for an easy to follow explanation of how we got into trouble:

Housing Busts and Hedge Fund Meltdowns: A Spectator's Guide

As new money loans dry up, sellers may have to consider creative financing to help buyers get in the front door, including; seller financing, land contracts and lease options. These concepts are not new, but feel more difficult to approach as sellers grapple with "the house that sold down the street two months ago for over asking price and closed in two weeks." As part of our service to sellers, we hope to expose your home to the largest pool of buyers, sell your home for the most money possible, and do our best to ensure that you never have to look back. Creative financing might help accomplish the first two tasks, but may keep your purse strings tied to the picket fence.

Wednesday, August 8, 2007

Lending Freezes, Rates on Hold, Clinton seeks Remedies

Here is an article listing some of the companies that have put a hold on writing new loans, or in some cases have declared an inability to fund existing obligations:

Mortgage mess spreads, creates bargains (Reuters)

The Federal Reserve met on Tuesday and left interest rates unchanged at 5.25%

Fed keeps US rates on hold; acknowledges market turmoil (AFP)

Hillary recommends action:

Clinton seeks aid for at-risk homeowners (AP)

Monday, August 6, 2007

The Sub-prime Fallout and Housing Affordability in the Bay Area

All of my usual optimism aside: For many months the sub-prime fallout did not seem to affect East Bay real estate, but now we are getting direct evidence that it is in fact taking some buyers out of the marketplace. A local lender, MPR Financial just sent a bulletin stating, "The secondary mortgage market has become extremely bearish on buying any new mortgages evidently due to the sub-prime fallout. If you have clients who are approaching the purchase of a home or new pre-approvals, please let them know that rates have risen dramatically and that lending guidelines have changed considerably." Although conforming loans are still available at reasonable rates, interest rates for jumbo loans are now exceeding 8%, and qualifying criteria has become more stringent. Self-employed and first-time buyers are often hardest hit as no-doc or low-doc loans and low-down payment loans become the first casualties of tightened lender restrictions.

Lenders are quickly closing the door to borrowers with low credit scores, small down payments for a new home or little equity in their current homes. Homeowners and buyers in high-cost areas such as California, Florida and the Northeast are also reeling as lenders chop "jumbo loan" programs.

"The market for virtually any loans with the slightest element of risk has effectively disappeared," John Bollman, an executive vice president at Cleveland-based National City Mortgage, wrote to his employees.

This will increase financing costs, mandate larger initial down payments for some buyers, and make monthly payments on some loans more expensive. Subsequently, the cost of home ownership has increased in our area. The full extent or length of this trend is unknown. Our housing inventory is still limited by our geographical boundaries, so how this will effect home prices remains to be seen.

Tip for Home Sellers: Make certain your real estate agent is equipped with the latest information on lending requirements and is assertive in asking the right questions of your perspective Buyer. Dated pre-approval letters may not meet the latest lender standards and no-doc, or low-doc loans may no longer be possible. A sizable down payment is now an even more valuable consideration in evaluating a purchase contract.

Tip for Home Buyers: Now more than ever, an experienced loan broker can help match your strengths to the best available loan program. Be wary of online lenders, especially if you do not have a local broker available to answer questions. A reliable real estate agent is also a must in the current climate. In a changing market reputable advisers are the best protection for your investment. See our post on fixing your credit score.

Saturday, August 4, 2007

Can We Know It All? Introducing the New California MLS Alliance

East Bay Regional Data has just announced, "in an unprecedented cooperative effort, ten MLS organizations in California have signed a joint data sharing agreement forming the new California MLS Alliance, a new MLS gateway providing agents and brokers with a single source for accessing real estate information throughout California." Now East Bay agents have access to 2.5 million active listings and off-market properties throughout the state, including; Alameda, Contra Costa, El Dorado, Lake, Marin, Mendocino, Merced, Napa, Placer, Sacramento, San Francisco, San Joaquin, San Mateo, Solano, Sonoma, Stanislaus and Yolo counties.

This provides great access to outlying real estate trivia. However, more is not always better. We believe in quality representation and take pride in our local expertise and area knowledge. The merit of our personal business lies in Alameda and Contra Costa counties, specifically; Albany, Berkeley, El Cerrito, Emeryville, Kensington, Oakland, Piedmont and Richmond. We know East Bay real estate and will provide unparalleled service here. We also know our limits. We would no sooner represent a Seller or Buyer in Napa than we we would attempt to fix your automobile. We are acquainted with many reputable agents throughout California and can confidently recommend the appropriate expert for any outlying community. If you or anyone you know needs some sound real estate advice, let us guide you where we know best, and refer you for the rest.