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Bill, Home Seller in San Francisco, CA

My condo ARM reset - lower - now locked in for 6 months (on the 6 month LIBOR). I've been thinking of

Asked by Bill, San Francisco, CA Sat Jun 6, 2009

selling as I watch the market drop and afraid it's going to keep dropping. So 2 questions - is there any advantage to keeping my old payment up - an extra $500 each month towards my $300k mortgage? Will it mean any signficant savings wen it resets again later on, or is this a pitiance? And do I sell my 1BR condo now, or wait to any point during my cheaper 6 months, or not sell at all although I will need/want to sell within the next 2 to 3 years no matter what, so i don't plan to re-finance. The condo is in a decent part of the marina and i've got 50% equity. I just don't want to lose any more of that equity.

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Congratulation on your coming addition. Starting a family is a wonderful thing and all the happiness.

Back to real estate. If you have equity in the condo and can leverage that into a move up property this is a very good time to do that. The rates are good as stated, you will have the required down payment to meet lender requirements, the prices for homes in the suburbs are depressed and all of these factors will not line up again or last for years to come. So with the life changing event that is coming now is a very fortunate time to move.

Depending on whether or not you want to stay in the City or not is a big factor. I run my own numbers to look at the SF market and I mean inside the City not the nine Bay Area Counties. Our median price is off 12% from a year ago and has been rising now for three months. Sales volume is down 30% from May 2008 to May 2009 but it also has been rising for three months.

Can San Francisco proper buck national trends? Yes it can and probably will. While the disparity between incomes and housing price is huge, giving fewer and fewer workers the ability to buy, it reamins a vibrant world class city attracting new industries and many of the brightest and most capable of each generation. All on a peninsula that is only 49 square miles. Single family homes are no longer being built and the yet we are creating new neighborhoods with higher density and great (hopefully) services.

I agree with you that if you are going to do this sell first then with cash in hand buy. I'd like to hear from the agents in any are you would consider if purchases are happening that are contingent upon the sale of the buyers property. We still do not see this in the City at all, except when the buyer is willing to pay a premimum price.
1 vote Thank Flag Link Sun Jun 7, 2009
Jed Lane, Real Estate Pro in San Francisco, CA
MVP'08
Contact
Hi Bill,

Without knowing more about the specifics, please take this advice with a grain of salt. With this disclaimer in mind, here are a couple of notes.

Many folks are predicting a further decline in condo prices as a second wave of foreclosures hits the higher end markets like ours in San Francisco. If you plan to sell within 2-3 years, I suggest you do this as soon as possible. Rates are fantastic now (as you know) so first time buyers are out shopping. If rates climb and prices dip, you'll be in a worse position to sell.

Assuming you do have significant equity in today's market, why would you continue paying down the loan if you plan to sell soon? Perhaps, you can look at an ammortization schedule to see what dent you'd make, if any.

Bottom line: if you plan to keep the condo 5+ years, I'd say work on a refinance. If you will need to sell sooner, the best way to preserve your equity is to sell now.

Let's discuss this offline....

Warmest regards,
Danielle

Danielle Lazier, San Francisco Realtor
Zephyr Real Estate
415.731.5000 x158
danielle@zephyrsf.com
Web Reference: http://sfhotlist.com/
1 vote Thank Flag Link Sat Jun 6, 2009
Hi Bill,

This is a good question. If you look at some predictions about the San Francisco market you might want to consider a refinance. Option Arm loans are a financing technique that is great to get into a home when prices are going up but dangerous when prices are going down. You will have no control of the loss or gain of equity this is going to be effected by other REO and short sales and regular sales in your neighborhood.
I would suggest you refinance soon and perhaps pay a point or two to lock in that low interest rate to get a favorable interest rate. You might want to check with your favorite tax professional to ask this question. Also if your current loan is a recourse or non-recourse loan. A refinance always means the loan becomes recourse and some folks in California do not like recourse loans.
Here are some resources that may give you an indiciation of where the San Francisco Market is headed

Google

Caroline Said Chronicle Option Arms

Credit Suiss Reset Chart

Case Shiller Futures Data

Good Luck!
0 votes Thank Flag Link Sun Jun 7, 2009
If you reinvest in a bigger home that will accomodate your growing family now - you can take advantage of the great interest rates on your purchase. Plus you will continue to benefit from the income tax credit that you enjoy now, which is one of the best write offs we have! You need to figure out how much you will be paying in taxes too in the meantime while you rent.

Meanwhile, with any luck (and historical data to prove it) the market will pick up again and you will already be sitting pretty in your family home that you bought while the market was low with a great interest rate. Custom nursery and play yard in the back all set up for junior to grow up in! Renting is just a drag. I did it in the early stages of my marriage, and in such, have lived in a total of 33 different homes - a fact that I am proud of - I consider myself a professional 'mover'. But there is something to be said for pride of ownership. There is nothing like having a home to nestle into with the family and kids!!
0 votes Thank Flag Link Sat Jun 6, 2009
One more thing...
I blogged recently about how it can totally make sense to "trade-up" in a down market. Check it out. You could save money by moving into a larger home for your family.

-Danielle
0 votes Thank Flag Link Sat Jun 6, 2009
Wow, great and quick answers, especially appreciate the LIBOR comments. As for the market, I don't see how lending or interest rates will ever be better. The Fed has thrown everything they can at the market, so it seems things will only get worse for loans down the road. Plus the SF market only now seems to be off in price. Friends outside of the City - Sacramento in particular - have lost a significant amount of home value - at least 40%. I'm concerned we're just late to that decline game. How on earth can prices appreciate from here with a worsening job market, incredibly difficult lending standards, and presumably and eventually higher interest rates, and when we have yet to drop in any signficant way. We can't buck long term trends forever. Home price to income is way out of whack and has to correct.

By the way, the reason I have to sell now or in 2 to 3 years is we're pregnant. 2 or so years with a baby is probably about all I'll be able to take in a 1 bedroom. And my thought is to rent until the market shakes out, and hopefully buy a 2+ bedroom in 2 to 3 years time. So I'm curious about everyone's opinion of the market between now and then. I won't be able to afford a new place without the equity out of my current place, so hanging onto it is not an option unless I want to be a renter forever. thanks agian everyone
0 votes Thank Flag Link Sat Jun 6, 2009
If you are looking to move up, now would be a great time to do that. 6 months from now would not be prive selling season, as the traffic for open houses, etc drops during the winter months. If you want to sell, you want to do it in the Spring or Summer. Even if you don't get a huge payback on the sale of your condo now, you could move up to a better property now in this inventory laden market. Right now, properties at the higher price points (over $800K) are moving slower, so you will have a better selection on a move up home. Your entry level, smaller condo would probably sell quickly because those are selling first right now. Because larger, more expensive homes are sitting longer on the market, it will give you some time to sell yours and move over to the next home.

Depending on the bank you have your loan with, you may be able to lock into a better loan now with the great interest rates that we are enjoying, and possibly keep the condo for an investment. The market seems to be leveling out a bit now, but with the new flow of inventory coming out from the banks this month (a reported 20,000 new bank owned properties) inventory will keep the days on market up there and starting price homes as desireable - especially in good neighborhoods. I feel that you would do well to sell it now, otherwise, refinance and keep it!

I would be happy to give you a more in depth consultation, if you are interested in talking to a top producing agent about finding your next home! jonicox@BayAreaHousingGuide.net
0 votes Thank Flag Link Sat Jun 6, 2009
If you choose to keep your old payment, the additional $500 will go towards principal and by reducing your principal, you should also reduce your owed interest (check with your lender to be sure they will recalculate your payment on the lower principal amount and ask your lender about any prepayment penalties - borrowers can generally prepay up to 20% per year without penalty and make sure you designate the additional $500 payment as “principal”). Even if the lower principal doesn’t result in a huge savings, it will keep this money out of your disposable income.

A couple of points on the ARM: LIBOR is the most volatile rate – best rate to have in a declining rate market, because it falls sooner and by larger amounts, but worst to have in an appreciating rate market, because it rises faster and by larger amounts.

Condo prices are still depressed by people having to sell. No one has a crystal ball to predict the future, but many experts are saying we’ve seen the bottom of the market in San Francisco, meaning properties should start to appreciate across the board as the market recovers.

If you expect to sell in 2-3 years, you may want to start working with a Realtor now because they can closely follow the condo market in the Marina and advise you about values should you decide it’s time to sell. Instead of selling, you might want to look into keeping your condo as an investment property.

How wonderful to be living in the Marina - enjoy!
Web Reference: http://www.azaripm.com
0 votes Thank Flag Link Sat Jun 6, 2009
If you are going to sell in 2 to 3 years, I would probably not pay the extra $500 per month. Save it in a separate account where it's safe, yet earning interest. Then 5 months from now, see where the LIBOR index is (by the way, it's the fastest moving index, not the slowest), and if you would like to pay down your principal at that time in order to make your next payment adjustment more manageable, you can do so then.

I agree that you should not refinance since you are selling in 2 to 3 years; just enjoy your new lower payment now, and reevaluate your situation every six months until you sell. You may continue to lose equity if the condo's value continues to lose value, but you are also starting a new savings account that could have as much as $18,000 in in after three years, so it's sort of the same thing.
Web Reference: http://www.natashalovas.com
0 votes Thank Flag Link Sat Jun 6, 2009
Bill,

Relax a bit. If you bought a condo in the Marina the values are probably not off that much. Talk to you Realtor or find some one to sit down with and look at the numbers. When you look at a comparative market analysis you will be better informed and probably breate easier.
If you don't need to sell right now - don't. The problem with the market is acess to money is tight. Lending criteria is strict and the lenders are requiring significant down payments (except FHA which requires PMI). That has reduced the number of buyers which has reduced demand. The folks that have to sell have to lower thier price to compete for buyers.
Also if you are looking at general reports iin the media try to understand the criteria used and how the criteria skews the reported number. For example, the median is skewed to the larger quantity of sales in a price range. In a normal market high and low price properties sell in a time frame. In this market fewer high end properties are selling so the median is shifted down.
0 votes Thank Flag Link Sat Jun 6, 2009
Jed Lane, Real Estate Pro in San Francisco, CA
MVP'08
Contact
Dear Bill,

You ought to have your condo appraised first to see where it is in today's market. Then compare it to where you bought it. I do not think prices in the Marina will drop any more unless the economy takes a really bad turn and I cannot predict that. Economists seem to feel we are at or near the bottom and should start a rebound, slowly, but still our economy is expected to recover.

Libor is the slowest mover. But you should still talk with a mortgage broker about interest rates. If stagflation comes about, interest rates will rise. In fact, they have risen slightly already. If the economy does not move, then the Fed may lower them again. There are several excellent ones to pick from my website under RESOURCES-mortgage brokers & bankers.

If you really can hold for 2-3 years, I would suggest you hold on. If the economy gets better so will prices. But do not expect a huge increase in percentages. After you get your Comparative Market Analysis/Appraisal and talk to an "expert" in the banking business, then make your decision. Naturally, I and my other colleagues would be happy to give you a FREE CMA and list your property should you decide to sell.

Cheers,

Sally
0 votes Thank Flag Link Sat Jun 6, 2009
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