Pam, I don't doubt the highest-end properties are holding value. I would guess they will start to slip as true wealth begins to recognize real estate is not going to outperform other investments. That's just a guess though - I can't speculate how the truly rich will decide to spend their money. For the top quarter of Sebastopol real estate, all bets are off.
I don't doubt that you've seen some more modest homes with multiple offers that might suggest the area is holding it's value, but you fail to mention overall sales volume. The first two quarters of 2008 represented a 42% decrease from 2007, 50% from 2006, 58% from 2005 and 63% from 2004. Residents have been able to hold supply down, likely as they're delusional believing their 150% 6-year paper profit return they saw in 2006 took a quick detour and is just around the corner. A pent up of supply of sellers is growing and the floodgates will eventually open. The $90k drop in median from the peak is about to explode.
There's no brochures or copy that can be written that will keep this county from returning to equilibrium. The bottom will require another 15-25% drop from it's present price points, depending if it takes 3 years to reach (25% drop) or drags on out to 6 or 7 years (15% drop). There are no indicators of substantial job or income growth in the area, move-up equity is deflating at a > 45 degree slope and lending standards are returning. It's been ugly around the county and it's only going to get worse. Interest rates on mortgages would already have started spiking -- if there was any demand for mortgages. They'll rise soon, and that will only make qualified, conforming loans viable at lower price points. The Ponzi scheme is over. Surely, you have to see the indicators out there.
Giant PDF link below (from patrick.net's set of links), if Trulia allows links to files. Interesting, albeit sobering read.
There is no industry in the area that justifies the prices. The community is where Santa Rosa/Windsor/Rohnert Park households "move up" to when they decide to live in a pseudo-country environment, as of late moving their $200K-$300K current home equity and a new $300K-$400K mortgage to purchase the Sebastopol home. That neighboring equity-well has just about dried up, if it hasn't already.
The price/rent ratio is a catostrophic mess in the area. You can EASILY rent a 3/2 home for $1800-$2200 that would go up on the market for $600-$750K. To see just how absurd that is, take this example...
Assume we have a cash investor looking to buy a home in Sebastopol for rental income and asset appreciation.
We also assume:
1. $600K purchase price.
2. Annual property tax of 1% purchase price of home.
3. Annual maintenance costs at a low 1% current value of the home.
4. Annual insurance costs at 0.6% current value of the home.
5. 20% of gross monthly rent goes to a property management company.
6. Maintains a very high 95% occupancy rate.
7. Annual rent increases of 2.5%.
The investor figures he can make a 5% return risk-free in liquid investments. In return for the risk and non-liquid nature of the home investment, he requires an additional (meager) 2% return on the home investment - for a 7% annual return on his $600,000.
What is the first month's rent he will need to charge to hit that 7% return on investment?
If expected home appreciation of 2.5% annually: $6,871/month
If expected home appreciation of 4.0% annually: $5,825/month
If expected home appreciation of 7.5% annually: $2,438/month
If expected home appreciation of 8.0% annually: $1,820/month
In order for a not-so-good investor (willing to accept just a 2% premium for the risk/illiquidy) to purchase the home, given current market rents, he would also have to be delusional and believe the market has bottommed out and he could expect somewhere in the range of 7.5% to 8% annual appreciation onward.
You won't find many investors that stupid. Absent the bubble, and assuming a bottom has already hit (highly doubtful), the 2.5% to 4% home appreciation range is the only realistic one. Rents would have to increase 250% - 350% at current home prices before investors will return.
Absent investment money the market will be dictated by the local economy. The county economy can't sustain these prices (~$650,000 median in Sebastopol), particularly with people having to show they can actually pay for the homes they purchase now. A conforming loan for a $450,000 home in an 8.5% mortgage market requires $90,000 down, $360K mortgage and a $122,000 annual gross income. I think that's closer to the median household Sebastopol can look forward two a few years down the road. Probably even lower - perhaps I'm naive but I don't think there's a glut of savings-rich $122,000 earners in the county looking for a 1,600s.f. 3bd/2ba home, or $85,000 income households with $225,000 in equity willing to risk it all for the same.
Yeah, so my point is, I don't think the bottom is anywhere near us yet.
Jeremy â€“ I think you bring up a very valid point. The negative amortization (option-ARM) loans are a very big deal. There is going to be a big ramp-up in recasts come this spring.
Theyâ€™ll prove to be the â€œjust when you thought it was safe to go back in the waterâ€ moment for the real estate market. Itâ€™s starting to look safe now; but the recasting of these loans is going to surprise many and juice the supply side in a way that nobody is going to enjoy. Iâ€™ll get into â€œrecastingâ€ below.
Why are they such a big deal? Well, the best analogy to draw on the Option ARM loan is that itâ€™s like buying a house with a Circuit City credit card. Actually, itâ€™s just like that.
You can make the sweetheart minimum payment for 2 or 3 years, but in forgoing the payment of the interest that you owe; it gets tacked onto your principle balance. When the principle balance grows to a certain point (usually 110% to 125% of the original amount) then the loan recasts.
By recast, I mean that the whole nut now comes due and you have to pay that new, much larger loan balance on a normal 30 year amortization schedule! The rateâ€™s not resetting, the whole structure of your mortgage note is. Itâ€™s a real triple-wammy:
â€¢ Payment goes up because your principle amount has grown by up to 25 percent
â€¢ Payment goes up because youâ€™re not just paying a fraction of the interest you owe anymore. Youâ€™re now paying P&I on the whole inflated amount, including your unpaid interest.
â€¢ The value of the underlying house has most likely gone far below what you owe which makes refinancing difficult to impossible.
The result â€“ a lot of people are going to be sending in the jingle-mail at a time when many are hoping for a miraculous real estate market turnaround to materialize.
To those who inspire fear amongst buyers with your â€œyouâ€™ll miss the bottomâ€ logic. Could one of you please present historical data wherein a real estate down-cycle was followed by a quick and measurable jump in housing prices?
If the last downturn is any measure; and the current downturn appears to be much worse, you should note the following. During the 13-year period from 1987 until 1999, real home prices stayed roughly within the range of $125,000 to $150,000 â€“ national average.
Prices wonâ€™t â€œspikeâ€ after the blood drains from the street. Theyâ€™ll bounce along the bottom for many years before any meaningful upward momentum can be established.
It's just hard to get a straight answer out of people on whether this market (because of the coming resets) will go lower. Mortgage and real estate people have tended to be on the optimistic side throughout all of this. And I think those skeptical buyers on the sidelines (and non-real estate/mortgage professionals) have leaned towards pessimism.
I know the market is cyclical, and I know that if we hit the bottom and bounce, I won't be able to by at the absolute bottom. But the reset timeline seems to be fact, not opinion. The opinion part is what these massive resets will do to an already floundering market like California.
Anyway, thanks for the input.
Unfortunately, what I see is 'real estate pro's' glossing over the negative for their own self interest; a good reason to negotiate what your agent gets paid when you go to buy or sell a house. A flat fee, or per hour charge would mitigate 99% of the agents on this board in effect saying, "the next boom is near".
Just my humble opinion - you don't have to agree with me, but don't turn around and say it isn't so.
I think I'll just keep hanging in there. Apparently the whole Alt-A and Option Arm mess finally hit the mainstream media (NY Times).
The two quotes that convinced me were:
"The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building."
â€œSubprime was the tip of the iceberg,â€ said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. â€œPrime will be far bigger in its impact.â€'
Thanks for the replies. Michael, there are some really interesting statistics on that blog as well on Sonoma County. Probably ones that weren't brought up at your meeting. You should check them out.
I just made an offer on a home in Sebastopol. Here is my reasoning: I sold my house in the SF peninsula about 3 years ago, close to the peak of the market. I started looking one year later. After two years of slowly looking I am starting to see lots of activity in Sonoma in the REO and forclosure market with multiple offers on houses in the 300-400K range. I found the perfect house for us in the Sebastopol's best neighborhood. It would have been 900-950 three years ago. It was listed at 799 and I am offering 700. Where is the bottom? I don't know. I do know that those that say they can always sell at the top and buy at the bottom are liars. Your goal should be to buy close to the bottom and sell close to the top. I know I could wait a year and save 25K, but this house might not be available and 25K works out to 2K per year for the 10 years I plan to live here and if interest rates rise, I will have missed out on this house and not saved a penny! I think the time to buy is between now and 1-2 years from now, just make sure you check the comps and have the house inspected by someone who is a prefectionist.
My wife accuses me of being "too literal." However, you posed a very specific question: "nobody has really adressed my question about the prime resets specifically. Do you view it as something that will put more downward pressure on prices? Are you concerned about it at all? Or are you focusing on the market at hand with a "i'll cross that bridge when I come to it" attitude."
My very literal answers: Yes, I absolutely see the resets as putting additional downward pressure on prices. There's an additional huge overhang of coming foreclosures, and I don't see the recently-passed legislation doing much to help the homeowners avoid foreclosure, or other homeowners whose home values will depressed as a result.
Am I concerned about it? Yes. But I'd agree with what I think is the implication in your question that, perhaps, real estate professionals aren't focusing on the problem as much as they should. I remember last November and December all the happy predictions of the "spring rebound" in the market...largely ignoring the credit crunch and other issues.
You're correct that: "if we hit the bottom and bounce, I won't be able to by at the absolute bottom." But don't worry about that. Let's say, hypothetically, the market declines 1% a month for the next 18 months, then starts rising by 1% a month. And let's say it takes 4 months for you (and others) to perceive that the market hit bottom and is on its way back up. Fairly reasonable?
So you buy now. Market declines 16% over the next 16 months. Your property is worth 16% less. Then it rebounds. (Actually, it'll take more than 16 months to get back up to zero, but let's overlook that.) So it'll take 16 months to get back to zero. In 32 months, you'll be back where you were today.
Alternatively, you decide to wait until you see the market rebound. You wait 20 months. Values drop by 16%, then rise by 4%. You're buying 12% cheaper than you would be if you bought today. Twelve months later, you have a 12% gain.
Of course, you should keep your eyes open for real bargains. Suppose you find something at 20% under market value? Using the scenario above, even at the bottom of the market, you'd still be ahead of the game.
Still, given all the uncertainties in the economy, there's nothing at all wrong with your strategy. In fact, it's a pretty good one!
Hope that helps.
For those who claim to be RE experts and have never heard of the 4Q graph, I hope you will look at the link to understand where I am coming from. The 4 Quadrant model explains it all! You can probably find this on Wikipedia as well.
I think we all need to take a "time-out" from the 24 new cycle and ponder these timeless barbs regarding "Statistics!!"
98% of all statistics are made up. ~Author Unknown
Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital. ~Aaron Levenstein
Say you were standing with one foot in the oven and one foot in an ice bucket. According to the percentage people, you should be perfectly comfortable. ~Bobby Bragan, 1963
Statistics can be made to prove anything - even the truth. ~Author Unknown
Statistics are human beings with the tears wiped off. ~Paul Brodeur, Outrageous Misconduct
Facts are stubborn things, but statistics are more pliable. ~Author Unknown
The US saw real estate prices skyrocket to such a point that regular people were finding themselves placed out of the housing market. The coastal markets in particular went a little crazy. 200% profit in less than a year is crazy and unsustainable. If you bought at the high point in your area, you probably need to sit tight. If you have owned your home for more than 10 years, you will probably be okay selling now--- Depending on the location of your home. AND providing you have been paying down your mortgage and not getting a second mortgage.
People who have owned their homes for 20 years or more are in great shape.
In any market, you need to closely at what you are investing in. Sounds like you already have a lot of national information; now all you need is someone to help you get the local information. Once you have that, you can determine which areas are most likely to either retain, increase, or lose very little in value. Also, which areas will recover most quickly.
In my part of the country, there are homes in popular neighborhoods selling at 94-97% of asking price. Considering there were years when you could rarely find a home for sale in those neighborhoods and when one was for sale, the bidding war would take the home up to 110-120% of list price, this is a great time to buy in those neighborhoods.
For long term investors or handy people who are willing to put a LOT of sweat equity into a house, there are some neighborhoods that have been neglected for years and are currently showing the very beginning stages of rebirth. Houses in some of these areas are dirt cheap. They are in horrible condition right now. Besides time, buyers will have to repair, remodel, form homeowner's associations, and generally put some heart into the house and neioghborhood.
Then there are all the inbetween places.
If you want to make huge profits overnight, try the Forex or Commodities Markets.
If you want to live in a house that you own; ask for some help in evaluating the available properties.
Real estate will become stable and appreciating once again - but we need to have patience. it is still the best financial investment we can make. Just look at all the people trying to grab up the REO's & Short Sales!
I have found a new graph that you may be aware of, itâ€™s from a BofA analyst. It shows higher amounts coming due in 2008. If that updated graph is correct we may continue to have a steady amount of NDF and NTS for another year. I have to mentioned that we donâ€™t know what the effect of the recent housing law, FHA short-refinance that will help distress homeowner to avoid foreclosure, will have in those loans that will reset to actually go into foreclosure or NTS.
I though you may like to check it out. Again that is in a national level. I tried to gather that information locally but itâ€™s almost an impossible mission since the only way would be to gather all the public information individually on mortgages that have recorded. The summary section in the recorded documents does not have the particular information if itâ€™s Interest Only and ARM or option ARM or if it was sub-prime.
Fact is the banks and agents are organized where the buyers are not. They believe what the agent says then blindly over asking.Remember how we got here.... people offering (enticed buy their agents) way to much for houses, buyers agents with no incentive to save the buyer money. Ya the inventory is like never in history so why are people getting into bidding wars with each other.
I agree with hanging in the but maybe hang in means "buyers unit" don't let your agents talk you into spending more there are way too many house for us to start playing into the GAME run buy the agents and banks! BUYERS THERE IS PLENTY TO GO AROUND MORE ON THE WAY DON'T FEEL SORRY FOR THE BANKS THEY ARE ALREADY GETTING BAILED OUT(buy the tax payers)
Having 6% of the pie going to agents is another contentious topic. For myself, when I buy in a year, I am planning on having a comprehensive buyers agreement, that includes triggers for my agent getting their full commission. Since the state I am moving to does not currently offer buyer rebates of commissions, I have decided to discuss with agent what I am willing for them to receive from the transaction based on certain price triggers. Once the final price/terms are agreed on, the agent will bring out the fact that the price of the home must be cut down 1% (i.e. due to the agent not meeting performance triggers) and for that 1% price cut, the sellers will only have to pay the buyer agent 2% of the transaction price. Of course, if the buyer's agent does a really good job, they will derive their full 3% - it depends on their negotiating skills.
Your question conjures up two sides; buyers and agents. The same people with a vested interest in RE rising are (for the most part) the folks promoting a quick turnaround with out any plausible fundamental reason - and unfortunately they are also the ones with a fiduciary duty to represent buyers in a transaction! Now, lets take any example of appreciation/depreciation of home prices. Just to break even, any buyer is going to have to see a 6% increase in the price of their new home!!! That's right, due to your friendly real estate agent who swears that home prices are going to rise next year; if you don't sell your house for at least 6% more, you lose money! It definitely promotes buyers to look for other alternatives, such as building their own home, renting, or hiring a Lawyer to negotiate a deal on the house the buyer wants.
I hear the agents argument that rising interest rates are going to make your payment more if you don't move now! However, the flip side of that, is at the same time, that financing dilemma is causing and will cause housing prices to slide further - but is only one reason for the decline. It leads to my humble opinion, that buyers saving cash to have a lower LTV on a mortgage (or even saving enough to have no mortgage) instead of throwing their money to the bank now, are going to be better off buying in about two years.
I didn't see the prez when you first posted. Thanks for the nudge to go back and check.
Although the presentation is complicated, the concepts are not. I agree with most but do not feel that cap rates are as limiting as the prez would imply. At least that is not what we have seen in California real estate investing over the past 10 years. I would also add that I believe equilibrium is a state that is more commonly being sought after than actually achieved. The prez definitely adds definition to the many factors influencing the market. Thanks for sharing!
CJ - The DisPasquale-Wheaton 4 quadrant graph applies to any market. How you determine what data to insert into the graph is something that major REIT's, builders, and other Real Estate big whigs do. The four quadrant graph is very useful for examining the effect on the long-run equilibrium simultaneously within and between the space and the asset markets. The concept of long-run equilibrium in real estate involves allowing the markets sufficient time for the supply of built space to adjust to the demand.
The model is very intuitive, but takes an hour or two to actually understand - and realize how cool it is. I recommend that any RE pro look at it and understand it thoroughly.
The only down side to falling prices is rising interest rates. It comes down to some "flipping of the coin" per se to see whether the drop in prices that may come from waiting (in certain neighborhoods - because some are actually appreciating) verses interest rates climbing.
Some neighborhoods have lost 40+%, some have gained 5% over 2007. We can probably project neighborhoods with high sub-prime/re-setting arms will see further decline in price but in general, those were never the fastest/highest appreciating neighborhoods. To me it comes down to affordability (price or interest rate driven) verses value (appreciation and lifestyle).
The "buy as soon as you can" may not be the right answer and equally the "no-no wait and let the market come down some more" is not necessarily the best answer. The best answer is specific to each buyer's situation. The thrill of dynamic markets is that they are always changing and therefore offering different opportunities to different consumers.
I really like Sebastopol ...and it is one area that has held its value when others have declined. With life changes you never know where the bargain might come up...
Structuring the investment is even more important now .
Key characteristics just as important as price:
bioregions hold their value best of all.
Worst house in best neighborhood is a good strategy only if you CAN remodel the home.
Some floor plans are just a waste of time from the start...know what you have. Tear downs are rarely a bargain. Know if a home can be rebuilt if it is torn down...some areas are very restrictive.
Buy what you need for you and/or your family...not more. Smaller homes can be very cozy especially for one or two....for a family try to create private spaces for breakaways.
Watch for stalled building projects...such as an overbuilt home and builder can't pay taxes
Proximity to schools, especially college & university
Good roads and less than 1/2 hour commute to work
The foundation (too hard to fix usually)...
if land... how does the water move? if it puddles under the house look close at mold and deterioration.
Look at the roof line...does it slope? does a marble roll to one corner (failing septic?)
what is the history of any applications to build
For me these questions are much more important than how much I can exploit another...
I'm currently seeking 2 types of buyer/investors for real estate:
Santa Cruz Rural ECOVillage Project: Just One Mile from Downtown:
Property owner seeks collaboration to fund a 3 Acre Parcel for Microremediation Project and suburban farm. Investor to contribute $60,000 toward the development of the home on the property by the current owner. Rights to live there are negotiable. The person might choose to live in the house and have the value for the rent deducted from the return due back upon resale or refinance.
ECOVillage near you:
There is a Co-Housing project in Reinert park right now that is a good opportunity.
Turnkey home in Sebastopol
I saw a 5 bedroom house I would have jumped on right away since it has a ranch style layout and a separate suite. Could be ideal for seniors with a live in nurse as an investment property.
As a personal residence the property owner could live in the separate unit and rent out 4 rooms to cover the mortgage. Why wait when you can leverage the purchase especially in this market.
Bright future for a sweet community:
Sebastopol is not unlike Santa Cruz in that it operates on a local economy yet feeds from San Francisco just one hour to its south. The climate is excellent and it is still relatively rural. Santa Rosa has an enterprise zone just 15 minutes east... Sebastopol is a bit set back from crazy growth pace of Santa Rosa.
These lifestyle areas are mixed in offerings. For personal residential its a good idea to buy it when you see it. The decision IS an emotional one. We're talking about your home.
Many quiet and pleasant streets with sweet neighbors. The bargains you are like to see come up likely will be in more transitional areas. Certain streets really need to be choked of with barriers or the (not so pleasant) speed bumps. Santa Rosa reminds me of Orange County in the early 80's ...just would not stop. Speed over comfort.
Some smart people have provided valuable answers and information.
The last commenter here seems to focus on a home buying opportunity like buying a share of equity stock ... or buying shares of an REIT.
Truth is the real estate is local. Example: If a person wants to find and buy a home at Mission Viejo, CA, there are great opportunities, with good buyer selection of SFR detached homes, some with yards, others with pools, some close to great schools, others with great privacy, others with nice views, and some with all good local character, almost all available at moderated asking prices, and with the best mortgage rates in 30 years.
So it's a good time to buy a home here in Orange County if you find the right one for you and your family, have good down payment, have incoem to support the payment, have documents to support income, and can get good financiing.
Harrison K. Long, Explore Group, Coldwell Banker Previews.
In this great buyer's market, we recommend that you find the right home and property for you, and buy it now at the best possible price. Don't wait for the perfect time.
Harrison K. Long, Explore Group Properties, Coldwell Banker Previews.
For a great home and property search check out
Some will look at this trend and state, "quick sales, 2.25 months supply-a seller's market WITH appreciation no doubt!!" This is the tricky nature of our market. NO appreciation is happening. But have we hit bottom? This could be argued YES as the product is being gobbled up with multiple offers. Other segments of the market place? Our "continue to shows" is a big number; 850+ but 40% of those are SHORT-SALES and only 1 in 10 "SS" close! So this is a sucker number. And that's our market in a nutshell--many "sucker" stats which can be misconstrued by those who have "humble opinions"!! Our total time on the market for our 2700+ inventory is now under 6 months which many argue is a market in balance or "equilibrium". But venture into particular neighborhoods or towns, such as Sebastopol and you will get drastically number defying "trends". In other words--quit trying to quantify a market in its entirety. It just can't be done with any accuracy.
But keep trying as the discussion is very passionate, albeit misplaced, but interesting to boot! Please note I'm not even anywhere near predicting a smidgeon of appreciation far from the next "boom"!!
I did notice that NDFs went down 9% from May to June. But there were still 434 NDFs filed, and 410 NTSs, which doesn't seem insignificant to me.
And really, I've looked at the maps of where these foreclosures are happening, and I'm not jazzed to live in East Petaluma, Rohnert Park or Santa Rosa. I would rather wait and see what happens in West Petaluma and Sebastopol when the primes reset.
I would ask this I guess. Of those people that you helped buy or set up a mortgage in the last 3 or 4 years, what % would you say went with the Alt A or Option Arm? 20? 30? If it wasn't a significant percentage, they maybe we are looking at a bottom. If the percentages were significant though, and the median income info I've seen on Sonoma County is correct, then those people might start to default as well when their loans recast.
And in that case, we have a ways to go.
I work with 4 different investors in the San Jose. They are buying up properties as fast as they can. They have made their living over the last 20-30 years, right here in the Bay Area. Last week one told me, "Yeh, everyone was afraid to buy in 1982 and prices went up. Then everyone said wait in 1992 and prices went up. Those are the belt and suspender types and they just can't help but worry their pants are going to fall down." A direct quote.
My point. No matter what the investment, you have to decide whether the risks are right for you. What is not right for some people is a 'no-problem' deal for others. It is not that real estate agents don't see the negatives of this market (we live it) but we also are paid by those who make the decision that the risk is worth it. For those buyer's our duty is to provide the information we have and let them decide. Twisting arms is simply not a good sales tactic. The buyers I work with are intelligent and studious. Some have decided to wait and others believe this market came at the perfect time for them. To each his own. : )
I just got the attached report from Sonoma County Economic Development Board it has great information about residential real estate. You will find information about median prices, rental cost, inventory, construction permits and foreclosures/NOD.
I found interesting the "area" break down of average sales price and units sold, it just reiterates that every area is unique and different even in the same city. Look at the Fair Market Rent projected increase of 14% by 2009 ($1,839 for a 3 bed house). The number of NOD filed in 2Q08 is slightly less than 1Q08 (pretty similar trend to the ARM reset schedule graph I sent you before) that may indicate that the amount of NODs that were filed the 2Q08 may be the loans that reset by the end of 2007. NODs filed in Sonoma County have been slowing down in July and so far this month. Lastly, the number of residential building permits is picking up from their lowest levels. All these factors in Sonoma County are telling a different story of what the media is saying.
You may be closer to find an answer to your question.
One trick ponies soon become very boring! I have read everything he states and more so. I pride myself in discovering all facets to this market NOT just the downside. I'm extremely curious as to how many "new homebuyers/homeownersâ€ have replaced those who are now loosing their properties. Granted, we have many investors in the market (always a leading indicator of a market's health) but have seen those who once considered leaving our area NOW buying IN the area. And guess what? They are getting loans with much more stringent underwriting guidelines! Is the foreclosure market with us for a while? You betcha'! I think it will spread to other price points. My only concern is the proliferation of FHA loans. Folks don't remember but FHA was the FIRST "sub-prime" lender. Of course it has the full faith and credit of the US behind their underwriting (even more so as it was EXPLICITLY stated in the Emergency Housing bill) but was writing much lower price points. With "normal" underwriting seeing new fico levels of 720, FHA will write to a 580 FICO! I see this as once again encouraging those with shaky credit to take on an even bigger nut with a housing payment. Not good. I applaud you wishing to gather all the data for a high level business decision such as a home purchase but make sure you just don't "read" to one side of the argument. Good luck!! Don't forget to listen to my weekly real estate talk show on KSRO, 1350AM, 9 to 10am PST or streaming on the web at http:// http://www.KSRO.com.
Currently 70% of the Sonoma County market is UNDER $500,000. The disturbing trend to me is that fully 50+% of all sellers are NOT doing anything when they close escorw--hence NO move-up market. These are the REO's, Short-Sales, New Home sellers dumping product. You get an offer with a house on the market in excess of $600,000--you better be real nice to them!! They are few and far between.
Supply of inventory for REO's is hovering at just over 2 months!! Overall inventory is at just under 6 months which is a market IN BALANCE. These are hard STATS and not Realtor pie in the sky. I think with winter coming on you'll find some VERY interesting deals out there! Stay Tuned!
The banks, the Realtors and the buyers have created this situation. Buyers are guilty of taking a poison pill developed by the banks and dispensed by the agents. DON"T SWALLOW and more poison Pill's. If all of the other necessity's of life were to inflate as did real estate who would be throwing a party. Turn to real estates 100% inflation... people were giddy.
DON"T offer over asking under any condition the inventory is like nothing ever seen and there are even larger inventories coming.
Don't be afraid of the neighborhood it is as good as the people that live there CALL THE COPS! the neighbor hood will clean up fast.
Your agent has no incentive to save you money... don't listen to anyone telling to to spend more money.
Pam Buda sent me an email to check out this question. I have some information that may help you find an answer to your question.
The current mortgage environment has drawn many comparisons with the 1930's, when the government stepped in. It is generally agreed that without those fundamental changes, the Great Depression could have been much worse than it was. In the early part of the last century, most home loans were a 5-yr ARM with a balloon payment. A brief summary: In 1932, the National Association of Real Estate Boards proposed (and Congress created) the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. The Appraisal Institute was also founded in 1932 by the appraisal industry. Bankruptcy and eviction laws were modified, and in 1933 Congress created the Home Owners Loan Corporation to help borrowers move from 5-yr balloon loans to 15-year amortizing mortgages. In 1934, Congress created the Federal Housing Administration (FHA) to insure mortgages, and the Federal Deposit Insurance Corporation (FDIC) intended to prevent runs on banks from depleting resources for home mortgages. Lastly, in 1938, Congress created the Federal National Mortgage Association (FNMA). Some argue that it is very early in this business cycle, but it is easy to see the amount of government intervention compared to today's market, especially at the Federal level.
Does it sound familiar...? My point is that in the long term there is always something that will help bring a solution to the problem and the prices tend to be higher.
I have a client right now that bought a house (in Windsor CA) in 1990 for $198K, by 1994 the value of his property was probably 20% less of what he paid for. Was he worried? You bet he was, but he didn't buy for a capital gain.... July 2008 his property value in zillow says $416K and if you look in the price graph it says it was $645K in January 2006, his current mortgage balance $26K. He is looking to buy another property and keep the current one as a rental, and he will use a 15 year fixed this time. This is a good example of a real home owner that has been responsible with his mortgage and not using the house as a piggy bank to cash out as soon as possible by using exotic mortgage products.
I have been sharing a graph that was prepared back in 2006 by Credit Suisse Fixed Income US Mortgage Strategy study. It shows the reset ARM schedule of Alt-A, prime, subprime, agency, option and unsecuretized ARMS from 2007 until 2013. That graph shows the highest month of reset at $50 Billion was November of 2007. For 2007 and 2008 close to 80% of the mortgages resetting are subprime, after 2008 there is a minimum % of subprimes (subprimes were usually issued for 2 or 3 years fixed only). The majority of Option ARM's (the ones that John mentioned) will start to reset in 2009-2010. I know for a fact that some of the major banks (World Saving now Wachovia, Wamu) that issue that type or mortgages have been taking a more pro-active roll lately by offering to modify the note to a fixed 3 years or 30 yrs mortgage with minimum cost to the borrower way before those reset or recast, as a result some of those won't actually reset. Some of the Alt-A, Agency and Prime ARM's (usually 5,7 and 10 yrs with fixed rate) that will adjust have a low margin usually 2.25% over Treasury or Libor (libor is currently at 3.314%) so the effective rate for another year will be the same or maybe lower of what the initial fixed rate was.
I believe there will continue to be defaults and foreclosures for the next couple of years and I also believe we wonâ€™t have 2006 prices in a couple of year, I strongly believe (and hope) the lenders wonâ€™t be willing to lend the way they were doing it in 2006.
I will love to share the graphic with all of you if you tell me how I can do it. I have it as a picture but can put it in PDF, word, pps, etc.
Don't let anybody push you into buying. Deducting interest from your tax bill (if you itemize) is nice, but the sad part is all of that interest is going to the bank!
How much lower would prices have to go for it to be worth your while to wait? Also Sebastopol is far more affordable now than it has been in some time. Also, why are real estate investors out in force in Sonoma County now, competing with first time buyers, and yet not gaining the tax writeoffs of owner occupants? They are buying up the REO's which are in the areas you mention. I have invited one of the lenders I know to join our discussion--you are raising a great point to consider. You might check out inman.com. I attended the Inman Connect Real Estate conference in SF last week and there was much discussion on the state of the market.
I have no data at all except that most of the current foreclosures seem to be clumping in these areas, but I would imagine that markets like East Petaluma, Santa Rosa, Rohnert Park, and Windsor were pretty thick with sub-primes. I would also venture to guess that towns that are going to be hit by prime mortgage resets like are more along the lines of Sebastopol, Healdsburg, West Petaluma...
As much as I honestly appreciate the info everyone has posted, nobody has really adressed my question about the prime resets specifically. Do you view it as something that will put more downward pressure on prices? Are you concerned about it at all? Or are you focusing on the market at hand with a "i'll cross that bridge when I come to it" attitude. The only opinions I have are from the media based on a couple of graphs out there. I would really appreciate hearing from those of you that pay attention to that sort of thing.
Thanks again for all the input. I'm a computer guy, and a renter, so I have zero experience with mortgages and housing markets. Which is why I posed the question.
With only $40 or $50,000 to put down in Sebastopol you will be hard pressed to find a house for 90% financing and 95% financing is becoming more difficult to get, so you might want to add loan possibiliites to price and interest rates as part of the equation.
There are few homes of decent condition or square footage under $500,000. Sebastopol has not softened to the extent of other areas and has a much lower foreclosure rate, as I have blogged in the past. The last time I checked there were only a handful of properties that were bank owned in town.
A recent clean but dated home on 9/10 of an acre and 1000 square feet sold at $539,000 the first day on market. There are a couple of places on 1/2 acre, generally dated, in the low 500's. There are some suburban type areas in town but again they are pricier. to find tract housing in town and those that are on suburban lots are more likely to have more square footage and higher price points. Since it is so desirable, in Sebastopol prices have been relatively stable, especially at the entry level. With your size down payment and a less than 10 percent down payment you may find lending standards tightening significantly over the next few months, so that hitting the bottom may be irrelevant to you. For example, I have clients with excellent credit and a five percent down payment opening escrow in Petaluma this week just in the nick of time as the lender has advised us that they may not be able to get the same loan at 95% LTV after August 4th.
In East Petaluma, Windsor and parts of Santa Rosa you can find something under $400,000 or even less, but not with land unless it is an abject fixer. I can pull some more recent stats for you if you like, and you can check in with my blog periodically for market updates and community insights. Good luck to you!
Thanks for the detail. You have a plan and it is tough whenever anyone is pressuring you. If I were you, I would keep a close eye on all and keep running the numbers. Don't forget the tax advantages in those calculations. The new bill going to the senate will provide $7500 to first time buyers toward down payment /closing costs (?) (repayable over 15 years). Not much in California but something.
The other think I would do is start the conversation with an agent that knows the area where the desirable schools are in. Ask them to keep you updated with trends and incredible deals. If your not sure who you want to work with, you have time to interview a couple and see how they respond to your needs. Also, you might want to stay in touch with a good mortgage planner. A mortgage planner does more than just write up a loan, they look at your complete financial situation and see how owning a home would work with your longer term goals.
So I guess my situation would have helped give the whole picture... We aren't in that 700k and above realm. We have a child (around 1 yr.). We've said we want to be in a house (as owners) before he starts school, which gives us a few years at least. We are currently renting, and due to all of this scary info, have signed another year's lease. We could get out of it by subletting (we're in a college town, and our lease allows it). We have solid credit. We have 40 or 50k for a down payment, which is growing every year. We both work from home, although I occasionally need to go to SF. So because commuting isn't really a consideration, it boils down to a couple of pretty simple criteria. Schools (which in Sonoma county seem to be the best in Sebastopol and Petaluma), climate (Davis has made us hate the heat), some land (which points to Sebastopol or the country area around Petaluma. Maybe even Penngrove.
Anyway, we're certainly not in a rush. My wife and I were pressured by just about everyone we know to buy a house in the last five or six years, and we're watching some of those people really struggle now. We resisted, and are thankful, but the whole thing has left us uber cautious. Which is why any news about more downward pressure really sticks with me. I'm pretty sure I'm not the only one out there like this.
Thanks again for the input.
There are markets/neighborhoods/regions/areas that will definitely go lower. If you are looking to buy in those areas waiting may be the answer. You will still have to run the numbers and see if the downward trend out weighs the potential interest rate gain. And yes, you can refinance but you have to bet on whether or not the interest rate will be lower in whatever time frame you are planning on refinancing. That is a more difficult forecast because it takes in consideration the prediction of a global economy in years to come. Also, add that real estate prices over the historical trend curve do not tend to go back to previous trough values. That is why most RE agents promote sizing up in a down market. Resetting on the appreciation curve is a very smart investment.
I have seen the graph referenced from Bank Suisse and it certainly would indicate a "wait" to buy approach. However, that is not in anyway a local graph. If I have buyers in the less than $600K, I am not rushing them because I believe there will continue to be some downward price pressure in that range. However, for my $700 and above range, I believe the window is tighter in regards to the interest rate vs market adjustment discount. Of course, the in between value range is a toss the coin group. ( My numbers are specific to the Bay Area.)
Again, I believe it comes down to the buyer's situation. If I have a client that is ready to buy a house, needs the tax benefit, wants to get the kids settled down before school, has a down payment, good credit, I help them find a house now. On the other hand, if I have a client who could improve their credit score, could save a bit more for down/closing, has an lease not up until next year (with ramification for breaking), I don't call them everyday yelling , "Buy Now!". I do advise with caution because even with my ear to the rail road track, the interest rate jump could get ugly quick and without too much notice.
For certain neighborhoods and buyers, I am very optimistic. For other neighborhoods/markets, I am cautious. I have clients in certain neighborhoods where I have recommended they not sale. I have clients looking in certain wanting to buy in certain neighborhoods where I feel time is of the essence to get the best deal.
Hopefully, you are working with someone you trust that can show you the "whys" and "wheres" of buying or holding off to buy. Great question to get the "bottom of the market " discussion going.
So why not play with the numbers. You're seeing prices go down, true. But you're also seeing interest rates go up. So what's the net effect of rising interest rates. For example, if a house is reduced from $550K to $500K, but the interest rate went up from 6.5 to 7%, what will your monthly payment look like then, versus what it would be today at $550K at 6.5%?
It's not always how much you pay for the property as much as it is what your monthly payments are going to be.
Have fun exploring the possibilities.
Oh...here's a link to a Time article earlier this year you may want to read http://www.time.com/time/magazine/article/0,9171,1713483,00.html
If you believe that the bottom has not reached based on all these evidence and information. You should wait. After all buying a home is personal, and emotional. Every buyer has its own reason. You have yours. Nevertheless I believe election year and the first year after are when we find the best prices. I am a buyer too and have my own reasons and belief.
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