David G
Recent posts
May 31, 2008
The Department of Justice (DOJ) and National Association of Realtors (NAR) settled an ongoing dispute Tuesday over competition and usage of the Multiple Listing Service (MLS). This can only be viewed as positive news for online discount brokers such as Redfin and ZipRealty.
The DOJ says this “levels the playing field” by providing these discount brokers with full access to the long coveted MLS, and that eventually hefty sales commissions will come down.
The NAR claims it is a “win-win” for the industry overall and also noted that they admit to no wrongdoing or paid any fines or damages related to this settlement. General counsel Laurie Janik stated:
“The settlement would have no real impact on home buyers or sellers. I don’t think they’ll see anything different. This lawsuit never had anything to do with commission rates, or discount brokerages. This was a five-year education of the Department of Justice, unfortunately, and the real estate industry had to pay for that education.”
Norman Hawker, a business professor at Western Michigan University, predicts that sales commissions will ultimately be reduced by 25 to 50% as a result of this settlement.
Wouldn’t that be nice.
May 26, 2008
In a followup to my previous post on February 5 regarding “declining markets” restrictions, it appears that Fannie Mae and Freddie Mac have reversed course and given up on this method, as Ken Harney reports.
Starting in June, applicants will qualify for 3-5% down payments in all areas, depending if their underwriting was done online or required “manual” underwriting. They will no longer penalize anyone by requiring 5% additional down payment money.
The change is welcomed by many as the main critique of the policy was that certain submarkets can are performing well that fall within an overall declining market. Supposed improvements in Fannie’s automated underwriting system allowed for the change and will allow lenders to assess individual properties and loans more precisely.
However, private mortgage insurance is still an issue as the major insurers are not budging from their declining markets approach. The option is to turn to the FHA (Federal Housing Administration), which does accept 3% down payments, does not have a declining markets clause, and can sell their loans to Fannie and Freddie.
Either way, it’s a positive step in the lending environment that has been nothing but trouble in the past year. This could help stabilize some markets.
May 14, 2008
This was another classic quote from Warren Buffett during the annual Berkshire Hathaway shareholders meeting, where he and Charlie Munger give their only planned news conference each year.
He is specifically referring to bailing out more banks and lenders who had a large part in creating the current trouble we are in as a whole. Buffett said this about the Bear Stearns bailout:
“The Federal Reserve’s bailout of Bear Stearns Cos. likely prevented a crisis among investment banks because Bear Stearns held a large number of derivative contracts with other investment banks. If Bear Stearns went bankrupt, all those derivatives would have to be valued at zero or unloaded quickly.”
But he and Munger agreed that not every business or investment bank should be rescued, because failure is an important part of capitalism (see title of this post).
They also aren’t opposed to Congress helping certain “homedebtors” (as opposed to homeowners) who were taken advantage of and misled:
“Lenders and investors who were dumb enough to deal in subprime mortgages should not receive any special help, Buffett said, but if homeowners were deceived about the terms of adjustable mortgages, they should be helped.”
When Warren speaks, it is usually very wise to listen and heed his advice.
May 11, 2008
The new development at Esprit Park in the Central Waterfront district is getting even more aggressive to bring in buyers with a new financing offering requiring only 5% down. After announcing a price guarantee back in November and “new” pricing (i.e. reduced) in April, taking on the credit crunch with high LTV financing is the latest plan to sell the remaining 110 units. Approximately 32 units have been sold since sales began way back in September. I love this quote on the marketing piece:
“With over 32 homes already sold, take advantage now of this incredible offering from Patelco Credit Union and join our growing community of happy homeowners at Homes on Esprit Park.”
Of course, you have to dig pretty deep on the website to find out there are 142 total units, which makes for a whopping 23% sold in almost 8 months! Not exactly flying off the shelves are they….
According to Patelco Credit Union, the lending “partner” offering this financing, the following terms and restrictions apply:
- $850,000 maximum loan amount
- Escrow for property taxes required
- No more than 35% of total complex to be financed by Patelco
- 700 minimum FICO
- No delinquencies in past 24 months (no mortgage delinquencies ever)
- 42% maximum DTI
- Owner occupancy required
- 5% down payment cannot be gifted
- 2 months PITI reserves
If I was in the market for a tastefully done property in an area that still needs more gentrification, but is in a direct path of future progress extending from the new Mission Bay area, I would consider this development. And I like to have as little skin in the game as possible, and this new financing offering allows for that.
May 1, 2008
Local developments are showing signs of weakness as the big incentives start to roll out.
The Potrero above Whole Foods in Potrero Hill is offering one year of no mortgage payments on its remaining 25 homes available. The offer is good from May 1st to June 15th. These units have already seen price reductions in recent months, and this is basically another reduction that amounts to anywhere from $40k to $80k in my estimation.
Signature Properties is also offering a price guarantee for two years on eight developments in the Bay Area, including one in San Francisco and the rest in the East Bay. If you buy a home at one of these properties, and they lower the list price within two years, they claim to reduce the purchase price of your property. Of course there is another asterisk advising you to contact them for further details on how that “reduction” (refund?) occurs. With the current and expected price declines in the coming two years, this is a fairly drastic move (but necessary) to move inventory.
April 30, 2008
I decided to tour some homes this past Sunday and Tuesday since the weather was so fantastic. Okay, I walked into the one on 18th because I was playing tennis across the street at Dolores Park. Enjoy.
1719 9th Ave, Inner Sunset, $628k, 3/1
Having lived in this neighborhood years ago, I was interested to see this home priced where it is and on a nice street. I was not surprised after walking in and immediately realizing it is a borderline fixer. Being a probate sale, I knew this was a possibility. While walking through I overheard the listing agent tell someone that a lady over 100 years old died in the home. It needs quite a bit of work to make it livable for most people I know. The photo of the extremely dated kitchen is shown to the right. It is a nice shell for someone who has lots of cash to remodel and choose his/her own finishes, but a “deal” this is not.
57 Webster, Hayes Valley, $998.5k (reduced from $1.025M), 3/2
This 3/2 condo on 2 levels has been newly remodeled and staged nicely. Claiming 1800 sq ft with a privately deeded rear patio, there is quite a bit to offer for the price (comparatively speaking), that is, if you like these types of neighborhoods. About a 1/4 block from a “tiered” public housing project, I saw some questionable people walking around the neighborhood during the middle of the day yesterday. This would be a deterrent for me, but maybe not for others at this price point.
3816 18th St, Mission Dolores/Dolores Park, $1.4988M, 2/1
This amazing home can only be appreciated in person in my opinion. It has been remodeled very tastefully and appears staged, but apparently the owner actually lives as the place shows. With over 1700 sq ft finished plus a huge 1200+/- sq ft attic ready to sheetrock and remodel to your liking, with a little extra cash, this home can be your dream home of almost 3000 sq ft with full garage for 2+ cars. The usable backyard area could be bigger but it’s not easy to have everything in the city.
April 29, 2008
Eli Broad, the “B” in KB Home, was quoted yesterday at a conference in Beverly Hills as saying, among other things, that he expects prices to drop another 20%:
“I don’t think we’re anywhere near a bottom in housing. We’re going to have a big inventory of unsold, unoccupied homes that’s going to take three or four years to clear out.”
“People were using their home equity as really an ATM machine. They were spending more money than they were earning by taking equity out of their home. That couldn’t go on indefinitely. We’re now paying a price for that.”
What Broad is saying is nothing new or exciting, but it is news to hear something so deeply pessimistic from someone in his position. Though I do take exception — as do some readers over at Calculated Risk, one of my favorite blogs — to that last quoted sentence. He says “we” are now paying the price. This coming from a man who has made billions from the low-quality tract homes Kauffman & Broad became known for before the name change to KB Home. I don’t know about you, but I just don’t see him paying much of a price now compared to what he has accumulated. He was worth nearly $6 billion according to Forbes in 2006 - could be much more now since homebuilders saw near-record profits into 2007.
So how does this relate to the San Francisco or Bay Area real estate market? Well, it does and it doesn’t. As most know, KB Home and the big homebuilders don’t build in San Francisco, at least nothing I have ever known about. They build in suburbia and stack homes pretty much on top of each other as much as they can. But factors that are largely affecting suburbia and the outlying areas all over the country are also having effects on cities like San Francisco - highly-leveraged mortgages, resetting interest rates now and in the future, and the current recession almost all economists now believe started in December of last year.
Will every city see a 20% drop in prices from here? No, of course not. Some will see more, some less. I don’t see San Francisco as a whole declining more than 20%, other than some of the outlying areas in the southern and western districts, and possibly the condo supply issues looking in downtown/SOMA.
But the fact remains that a billionaire homebuilder founder is calling for these big declines and that speaks fairly loudly to me. At least this billionaire isn’t like fellow RE billionaire Sam Zell, who said yesterday that existing commercial real estate prices will be just fine.
April 21, 2008
The real estate information service DataQuick reported last week that March was the slowest month in the Bay Area since they started recording statistics in 1988. Monthly sales numbers have been setting record monthly lows each month since September.
The nine-county Bay Area saw 4,898 sales take place in March, an increase of only 22.8% from February. Compare this to the historical jump from February to March each year at 40% and we are off to a poor start in the spring selling season.
DataQuick President Marshall Prentice is quoted as saying the following:
“Other parts of the state have been hit harder by the downturn in the housing market than the Bay Area. Most of the distress is in areas that absorbed spillover activity during the 2004 and 2005 frenzy. For the most part that’s the Central Valley and inland Southern California. It still appears that a lot of Bay Area activity is just on hold, waiting for the mortgage markets to open back up.”
I agree with him on the comments regarding the Central Valley and Southern California, but I disagree that the Bay Area activity is simply on hold. There may be some buyers and sellers who were waiting for the jumbo-conforming loans to come online, which they now are but at higher rates than regular conforming loans, but I don’t think they are waiting any longer. Supply is growing and demand is softening as more and more are figuring out it is a buyer’s market and prices are heading down quickly in most areas. Supply will continue to increase this summer and there won’t be enough buyers to absorb this growing supply. It isn’t just as simple as supply and demand. but it explains a lot of it! This is just the natural correction process for a ridiculously overvalued market. I don’t the think “activity is on hold” as he puts it - it is falling off a cliff just the way it should be.
April 14, 2008
On March 31st Fannie Mae sent out letters to its lender network with stricter guidelines for those who choose to “walk away” from their mortgage without “documented extenuating circumstances.” The highlights are as follows:
- If you allow the bank to foreclose you are prohibited from attaining a mortgage through Fannie/Freddie for 5 years
- If you can provide the aforementioned “documented extenuating circumstances” that period is reduced to 3 years
- After the 3 or 5 years is up you will be required to make a 10% down payment
- You will also need a minimum FICO score of 680
Of course the quasi-government entities Fannie and Freddie are going to try to coerce homeowners to stay in their underwater homes with rapidly increasing negative equity. They don’t want their lenders to get stuck owning a massive real estate portfolio (which is already happening). But I have no sympathy for these lenders who created toxic loan products and pushed them on the wrong people to grow their own commissions and profits. This is how collateral works, people. You don’t pay, the bank takes the collateral back - the house. That is completely fair. And homeowners do and should have that option (as I have mentioned before, I have advised a close friend to walk away from her Sacramento condo). This letter to lenders is merely a scare tactic aimed at clearing up some of the rumors and hearsay about how a foreclosure really does affect one’s credit and future borrowing ability. For that reason, I have no problem with this letter and its contents.
The bottom line for me is this — I still feel in most cases if it makes sense to walk away, these ramifications are more than tolerable and after 3 to 5 years in most local markets, you will still be paying less for that home than what you paid at or near the peak of the cycle — which created your current upside down mortgage situation. So go rent for a lot less, take advantage of the flexibility of renting, and rebuild your credit over the next several years to be prepared to buy again when you are ready. And actually, 3 to 5 years from now might be right at or near the bottom of the cycle in many markets. Most reputable economists are predicting a very flat and drawn out pricing plateau after a bottom is reached anyway. So don’t fret if you are in a situation where it makes business sense to walk away. It might be the best decision you made in awhile.
April 9, 2008
When the spread between conforming and jumbo loans was about 1 percentage point a few months ago — an all-time high — the powers that be decided to pass a bill aimed at helping those buyers and sellers in the jumbo price range. With the passing of the Economic Stimulus Act of 2008, the government raised the conforming loan limits from the current $417,000 to a maximum of almost $730,000. What they mistakenly did not foresee was the fact that skittish investors on the secondary market would not accept lower returns for these new “super conforming” loan products, as they have not yet established and inherently carry higher risk in a declining home price environment. Many saw this coming, at least in the interim — but maybe indefinitely — until investors have time to digest this new product after Fannie and Freddie buy and resell these on the open market.
I had a little “debate” with a reader back in February and would love to continue the discussion here and get her thoughts, as well as those of other readers.
The bottom line here for me is that what the authors of the bill tried to do was ill-conceived in the first place. The fact that their intended results have not played out is irrelevant to me. The market needs to correct and get back to a place where the “P/E” ratios of home prices vs. rents is closer in line with historical numbers. Take a look at the above graph using Case-Shiller home price and BLS rent indices to see just how crazy things are.
Time will tell how the secondary chooses to assign risk premiums to new jumbo conforming loans, but no matter what you call the mortgages on the higher end of the scale, they aren’t getting any less risky anytime soon.
