Appraising the Current Market Situation

by Arlene Baxter

Today our Berkeley Association of Realtors auditorium was packed to capacity with Realtors wanting to get the latest information on the status of loan availability and appraisal conditions in this changing market. Our speakers, one representative each from the mortgage and appraisal industries, confirmed what we’d been hearing anecdotally from our colleagues. Loans were super abundant a year ago, with everyone knowing someone moonlighting as a loan broker who could get you “such a deal!” Last summer came the implosion of sub-prime lending and the virtual disappearance of jumbo loan products, those loans larger than $417K. Fast forward to our current state. The pendulum has swung so far that now folks with a fully documented loan application may have great difficulty getting financing if they have less than 20% down, gorgeous credit scores, and substantial assets. Buyers who can stay within the limit of a $417K loan can still get very attractive rates, today at the 5.5% level. But buyers who need to borrow amounts up to the new “super-conforming” limit of $729,750 need to be prepared for much stiffer requirements (see FHA and Freddie Mac Daddy from March 6th, below).

One of the elements of loan approval that has been mostly in the background up until now is the appraisal process. In our area we have for more than a decade been able to assume that homes would appraise for their contract value, except in the rarest of circumstances. If a property had multiple offers, as so many did, that was a strong argument in determining that market forces were setting value, and that we were in an area of increasing values. Lenders allowed appraisers to use closed sales back as far as six months, and there was reasonable flexibility to use properties that shared a similar characteristic to the subject property, even if they weren’t in the same neighborhood.

The job of the appraiser has changed dramatically over the past few months. Marian Huntoon, the owner of Real Valuation in Berkeley, spoke to our Association today about the intensity of scrutiny that appraisers must now face. Lenders want to see properties used as comparables that sold within three months or less, and they insist on having both an active and a pending sale in the same neighborhood. Appraisers are now routinely making significant adjustments to value in order to use “comparable” properties that are really not very comparable at all. Marian estimated that it takes appraisers anywhere from twice as long to four times as long as a year ago to complete an appraisal report that is acceptable to the lender. Appraisal reports are now routinely sent back to appraisers with the request that additional adjustments be made to reflect declining market conditions. That is really a loaded phrase. Lenders are now reviewing market conditions with an extremely broad brush, defining the direction of the market by county, not by city, nor by neighborhood. Those of us who are actively representing clients in this area know that we are still seeing multiple offers on many properties in the most desirable neighborhoods. We are back to seeing pre-emptive offers both in the modest and in the most expensive price ranges. So to have both Alameda and Contra Costa Counties defined as a whole as “declining market conditions” makes us all a bit crazy. Explain that to my buyer who lost out in fairly modest competition of only four offers. He still didn’t get the house he loved! And then there was the James house, receiving 17 offers last week after only one Sunday open house (see our March 14th entry below).


But it is also true that there are properties sitting for a few weeks before they sell, as opposed to selling according to a pre-established seven or ten-day schedule. And then, even in some of our most desirable neighborhoods, there are the short sales, trust sales and foreclosures. Those are topics for another day!


Tip for Home Sellers: Review carefully with your listing agent what the recent sales have been, closest to your home both in location and style. Try to step back and look at the data the way both buyers and appraisers will now be forced to look: at currently active homes, those recently pending, and the sales back only a very few months. Even if some buyers might be willing to offer a very high price, unless they have unusually high cash reserves to make up the difference, most buyers will need to have your home appraise very close to their offer, in order for the contract to close. Sellers should come to expect to see both financing and appraisal contingencies in the majority of offers, rather than assuming that buyers will waive those contingencies in order to have their offer accepted. The goal is not receiving and accepting a very high offer. The goal is, and really always has been, to close the escrow, and at an acceptable price.

Buyers in Flocks and Local Peacocks

The Bay Area never ceases to amaze. This picture was taken (with a cell phone) during last week's Brokers' Tour on the 1700 block of Arlington Avenue (its a busy street) in El Cerrito. Apparently this gorgeous fellow lives in the nearby trees. Look closely and you can see a car through the feathers in the upper right corner.

And now for the real estate market jaw-dropper:

5333 James Avenue in Rockridge*
2bedroom/1bath, listed for $799,000
3/13/08 - received 17 offers

How is this possible?

1. Great Urban Location
2. Fabulous Condition
3. Original Charm

Tip for Home Buyers: If you are considering buying a home in the near future, continue to follow the market today. If there is a property you find compelling, have your agent track it until it closes escrow and tuck that information under your hat. The more informed you are about home values the better you will be prepared when you enter the market. A sense of value is important and it is something that is best gained through experience. We can give you lots of market statistics to justify prices, but until you have your own experience of the market, this information is just anecdotal. For instance, 5333 James Avenue will likely sell over $900K. Those chasing statistics may feel this is nearly impossible for a two bedroom home. Those more directly familiar with local inventory would understand the features and dynamics that made this home exceptional. Our website www.berkhills.com features links and feeds to current real estate market news and this blog is rich with anecdotes. Stay tuned.

* The property referenced was not a listing represented by Berkeley Hills Realty

FHA and Freddie Mac Daddy

The new FHA and Fannie Mae- Freddie Mac conforming loan limits have been released by the U.S. Department of Housing and Urban Development. Alameda and Contra Costa Counties qualify for the maximum calculation of $729,750. (to see the National list of HUD-Determined Single Family Loan Limits click here.)

"We expect the impact of these loan limit increases on the housing market to be significant because of the infusion of capital into the mortgage market, which should result in lower interest rates across the board. In addition, there will be a direct impact on high-cost areas that previously required borrowers to take out costlier jumbo mortgages."-- Dick Gaylord, National Association of Realtors 2008 President

The true impact of these "temporary" increases mandated by the Economic Stimulus Act remains to be seen. In the meantime, I spoke with Ted Maniatis at MPR Financial for the tips on what it takes to get a home loan. Having a qualified mortgage broker look at your individual situation remains vitally important. There are lots of shades of gray as lenders look for new ways to scrutinize what you provide in black and white.

To paint a broad stroke, based on my conversation with Ted: Buyers seeking a conforming loan with at least 20% down (verified with two months of bank statements), a good job (with full documentation including one month of pay stubs, 2 years W2s; self-employed individuals need the last two years of tax returns) and good credit (at least 680) still have lots of options. Even so, a home buyer's budget should take into consideration fluctuations in interest rates.

There are noteworthy exceptions to the rules. For instance, a self-employed buyer may harbor tax returns that show unnatural downturns in income levels (true for me during my baby making years.) If said buyer has 30% down and a 700 or better credit score he/she may only need a statement letter of income to qualify for a loan (instead of submitting the full tax returns.) Sizable down payment and good credit scores can offset the need for full documentation. Down payment money may include a gift from family, provided they are willing to sign off that they do not expect repayment. (Mom, dad, are you listening?) If you are at all unsure, talk to a lender. Often there are creative solutions to the restrictive guidelines.

Beyond the loan application, there is the purchase contract. When negotiating to purchase a home from a seller, make certain to include adequate time lines. Allow for at least thirty days to close escrow. In the recent past, lenders had been performing within twenty-one days. Now, increased scrutiny often means more eyes on the loan package and a longer process. Appraisals also take more time and a contract should allow for at least ten to fourteen day loan/appraisal contingencies. Some lenders are using an Automated Valuation Model (AVM) , a bit like Zillow, to help satisfy their investors. In the past, if a reputable appraiser gave a property the thumbs up, you could be reasonably assured that the bank would approve of the loan amount. Now banks may routinely order an AVM. This automated valuation may conflict with the home appraiser's valuation. Such a conflict may necessitate a bank ordered appraisal review, and/or the bank may request one or two additional comparable recent home sales. An appraisal contingency can help protect a buyer through this process.

Maintaining adequate time lines and including appropriate contingencies can also buffer against the volatility of interest rates. Fluctuating rates can affect a buyer's ability to qualify for the requested loan amount. Contingencies can allow buyers the time to confirm and lock rates.

Tip for home sellers: Contingencies and contractual terms are negotiable. Your Realtor should be able to walk you through the contract from a risk versus benefit standpoint. Verifying down payment and the credit-worthiness of your buyer is an important part of this analysis. A strong financial possition may be worth considering, possibly even over a competing buyer's higher offering price. Many negotiating points in an offer clarify who will take on a given risk. In some competitive situations, strong buyers may be willing to forgo financing contingencies (therefore absorbing the risks) for the benefit of being favorably considered for the purchase. It is worthwhile to examine the buyer's credentials, regardless of contractual contingencies, in order to assess the buyer's ability to perform and thus complete the transaction.

Blue Skies and a Bloomin' Bay Area

Today is a day for play with temperatures in the 60s, blue skies and blossoms.

Beneath these fruit-tree boughs that shed
Their snow-white blossoms on my head,
With brightest sunshine round me spread
Of Spring's unclouded weather,

In this sequester'd nook how sweet
To sit upon my orchard-seat,
And flowers and birds once more to greet,
My last year's friends together.

- William Wordsworth, from “The Green Linnett”

The Subprime Scape Goat

Excerpt from the March 2008 Atlantic Monthly, The Next Slum?, by Christopher B. Leinberger:

The decline of places like Windy Ridge and Franklin Reserve is usually attributed to the subprime-mortgage crisis, with its wave of foreclosures. And the crisis has indeed catalyzed or intensified social problems in many communities. But the story of vacant suburban homes and declining suburban neighborhoods did not begin with the crisis, and will not end with it. A structural change is under way in the housing market—a major shift in the way many Americans want to live and work. It has shaped the current downturn, steering some of the worst problems away from the cities and toward the suburban fringes. And its effects will be felt more strongly, and more broadly, as the years pass. Its ultimate impact on the suburbs, and the cities, will be profound....

...Some experts expect conventional suburbs to continue to sprawl ever outward. Yet today, American metropolitan residential patterns and cultural preferences are mirror opposites of those in the 1940s. Most Americans now live in single-family suburban houses that are segregated from work, shopping, and entertainment; but it is urban life, almost exclusively, that is culturally associated with excitement, freedom, and diverse daily life. And as in the 1940s, the real-estate market has begun to react.

Excitement, freedom and diverse daily life are all hallmarks of the Bay Area. Add a temperate climate and picturesque park lands and it is no wonder our real estate values have held strong. National headlines belie the strength of our local market. Many have found it hard to rationalize our local market against national statistics. Our sales volume is down because buyers and sellers are hesitant to make a move in an area that feels like an isolated anomaly. This Atlantic Monthly article gives credence to the virtue of our housing stock. There is science behind what is happening in the market place. Now is the time to move out of the suburbs. Be on the forefront of a trend that is quickly gaining momentum and take advantage of incredible interest rates and market opportunities that exist today.