Current Market: September 2007 Archives

Let's consider where the rates are: Ever so slightly higher than a year ago. With the Fed boosting liquidity and cutting their short term rates, I expect this to change rapidly, but let's take a look at the actual cost of money on sustainable loans - those same boring thirty year fixed rate loans that ethical providers have been pushing this whole time, rather than the negative amortization loans that has a low payment for a few years while the principal keeps going up every month - just long enough to put you into financial purgatory or worse for the rest of your life. When the forty to sixty percent payment increase hits for those or a short term interest only loan, you're hosed, because if you didn't need all of those tricks to qualify for the loan, you could have had a solid, sustainable loan at a lower interest rate.

One year ago, for one total point retail, I had a thirty year fixed rate loan at 6.00 percent for loan amounts up to $417,000, and not exceeding 80% of the value of the property. If you had credit that wasn't too far below average, you could get a second mortgage back then for the remainder of 100% financing at about 8.25%. Nowadays, second mortgages to bring your CLTV up to 100% just aren't available, so until this changes, if you want financing over 90% of the value of the property, you're probably stuck with Private Mortgage Insurance for a while. In all of the below cases, the best loan for 100% of value I could get right now was a 6.25% 30 year fixed with Private Mortgage Insurance (PMI) of just barely below 1%, which I'll call 1%, until such time as you've got 20% equity. Before I go any further, I want to emphasize that if you don't need 100% financing, all of these current properties are even more affordable now as compared to then. If you could put 10% down (or more), you'd come away a lot better! But the object of this exercise is to shine the hardest, most unfavorable light on today possible. I'm going to assume all monthly homeowner's insurance is $110, either then or now, and I just went through my usual area of operations and found the first 10 properties that were on the market both then and now. Nor am I going to use any qualifying tricks like a Mortgage Credit Certificate or any other form of buyer assistance. These are qualifications for straight up A paper loans with average credit scores, doing it all completely on your own.

Exhibit 1: I noticed it early in the spring of 2007, when it was priced at $399,000. I thought it might be worth $340,000 back then. Now, it's priced at $324,000. (This article should also serve as a warning to owners of the dangers of overpricing the property, especially when you first put it on the market). Monthly Income to qualify then: $6810, now: $6027, an 11.5% decline.

Exhibit 2: This sold in June 2006 for $445,000. It's on the market for $375,000 now, and they're not going to get anything like it, but I've got to be true to my assumptions. Monthly income to qualify then: $7567 Now: $6938, a decline of 8.3%.

Exhibit 3: This is a very nice property I noticed in March when it had a $515,000 asking price on it. I thought it was maybe worth $470,000 then. Now, the asking price is $420,000. Monthly income to qualify then: $8,719. Now: $7,687.59, an 11.8% decline.

Exhibit 4: This is a nice older home on a good size lot with mature trees. It expired last December at $440,000, and I thought it was maybe worth $410,000. It's back on the market now for $380,000. Monthly Income to qualify then: $7,485. Now: $7,027, a 6.1% decline.

Exhibit 5 Is an older home in a really nice suburb. It was put on the market for $440,000 in August of 2006, and if they'd priced it just $10,000 lower, it probably would have sold then. They just put it back on the market for $410,000. Monthly income to qualify then: $7,469. Now: $7,563, a 1.3% increase, due to PMI being more expensive than second mortgages.

Exhibit 6: This was a blue collar redneck neighborhood when I was growing up. Now it's suburbia. It was priced at $470,000 last summer, and was probably worth $440,000 and would have sold for $420,000. Now it's a severe distress sale at $350,000, with the trustee's sale coming any day. Monthly income to qualify then: $7,962. Now: $6,492, an 18.5% decline.

Exhibit 7: This property really does have a nice view. When I first noticed it last year, it was on the market for $499,000 and the agent didn't want to let me preview it even though it was empty. "Bring a client, or not at all," she told me. I told her "then not at all," and my clients ended up with a much nicer property. It's gone into escrow and fallen out twice, but the agent doesn't know a qualified buyer from a hole in the ground, either. It's now on the market for $395,000, and they might get $370,000 if they're lucky, but we're still going to use the asking price for comparison. Monthly Income to qualify then: $8,390. Now $7,295, a 13.1% decline (Meanwhile, the owners are out over $40,000 cash - not exactly a sterling performance on behalf of the agent).

Exhibit 8: Post Probate estate sale in a neighborhood with pretty darned good schools. The heir owns it essentially free and clear, but I first noticed it priced at $480,000, and thought it might have sold for $420,000 then. Now it's priced at $400,000, and I would be astonished if they came within $20,000 of that. Monthly Income to qualify then: $8,143. Now: $7,384, a 9.3% decline.

Exhibit 9: This property gets some significant freeway noise, but the previous owners sold it to someone through Dual Agency about a year ago for $585,000. No way was it really worth anything like that, even then. Maybe $470,000 at the most, but it was marketed on the basis of payment on a negative amortization loan, and a sucker walked into the trap. One hopes regular readers understand by now why I keep saying to Never Choose A Loan (or a House) Based Upon Payment. If I sound like an infinitely repeating loop on this point, you should understand why. Now they're in foreclosure, and the property is on the market again with an asking price of $425,000, which they're not going to get with a recorded Notice of Default. Monthly Income to Qualify then: $9,871. Now: $7,830.38, a 20.7% decline.

Exhibit 10 is the star of the show, a relocation company owned property originally priced at $530,000 in summer 2006. I noticed it back then, and thought it was worth every penny at the time. Actually had a client offer $490,000, and they blew us off without a counter. We were within 10% in a very strong buyer's market, so this was pretty silly. My client found just as good of a property, and now the asking price on this property, which has been on the market the whole time, is $450,000, which I'll bet you they're not going to get. Monthly Income to qualify then: $8,966. Now: $8,277, a 7.7% decline.

Average the monthly incomes to qualify a year ago, and you get of $8138. The average now is $7252, a 10.9% decline. It's not like they're making a whole lot of new properties around here. Indeed, the easiest place to find a buildable lot is by tearing down an older existing structure.

These are not really "starter homes." Those are condominiums, these days. These are homes that are really priced for families that have owned condominiums for several years and been well started. Many people may want to move directly into a single family detached home, but most lack the necessary self-discipline. And yet, you can now afford them, with no down payment, with a family income not much over the area median income of $5408 per month, provided you have lived within your means otherwise. If you have a 10% down payment, they become more affordable yet. Even if you don't, as soon as you've got enough equity to get rid of PMI, things become more affordable yet. A few days ago, I found a nice solid four bedroom home that a family making $5000 per month should be able to afford on a currently available thirty year fixed rate loan, in a pretty decent area with above average schools.

My point is this: The days of only 9% of the population being able to afford a single family home are behind us. Rents are experiencing upwards pressure like they haven't seen since the early 1990s, as those people who bought too much home with a loan they couldn't really afford lose them and now have to fit into rentals. Where before landlords didn't want to raise the rents because their tenants would buy, now the people who are looking for rentals have hosed their credit and do not have the option of buying, and will not for several years. The supply of rentals is just as constricted as ever. Last summer the vacancy factor was 3.4%, tight enough in any market. Now it's even lower. I just did a search, and the vacancy factor as of a few days ago was down to 2.6%. Increase the demand side of the equation while constricting the supply, and what happens to price, aka rent in this situation? Add that to the fact that landlords now have to make the cash flow work, as the ability to flip for a profit in a year has dried up, and you have even more upwards pressure on rental rates. Landlords can not only get it, they need it.

Purchasing housing has become much more affordable in the last year. Furthermore, upwards pressure on the price of rentals is increasing, as I have repeatedly predicted over the last year or so. With the federal government looking like it's ready to take over all the bad loans the lenders have made, I wouldn't expect the market to get significantly lower than it has already gotten. Furthermore, another point I and others have repeatedly made is that San Diego has just about saturated its natural and legal boundaries. There isn't a whole lot of dirt left to build more homes upon. It's still a rotten time to sell, but if you have a desire to own the property you live in here in San Diego, I would start looking right now. Because unless something about the situation changes for the worse, I think the market is going to turn from buyers to sellers in the spring of 2008.

Caveat Emptor

My answer is yes.

National Association of Realtors is very proud of their sponsorship of legislation to keep lenders out of the business of real estate. They quote the legislation keeping banks out of the real estate business as being one of the reasons they're worthy of our dues money. They quote all kinds of justification, centering on the fact that they fear that the banks would "drive all the independents" out of business.

Folks, the vast majority of market share goes to a few big chains. You've heard the names. You know who they are. One belongs to one of the world's biggest financial corporations. Four of them, that most people think of as being competitors, are nothing more than different brands owned by the same company. On that scale, independents like the one I work for - thousands of brokerages nationwide, some of them in multiple locations - account for a grand total of about fifteen percent of market share, last I checked. The big national chains get the rest. They're just as corporate as the lenders, and they're anxious to protect their turf from the one group of potential competitors who have some kind of understanding of the business and otherwise low barriers to entry.

In fact, the lenders would compete primarily with the chains. Corporate marketing channels all look remarkably similar, and reach pretty much the same audience. Sure, lenders would probably take some transactions I'd otherwise get, but most of what they'd be getting would be feeding off fellow corporations. If you're the sort of idiot who believes that Major Chain Real Estate is better because you've had their television commercials tell you so, you're also part of the lender's target market.

Now, let me ask about the interests of the consumer, which are supposedly paramount. Our current system amounts to an oligopoly, controlled in fact by fewer than ten chains who can easily control the market, and practices of everyone, based upon what is in the best interest of those chains. How many lenders are there? I know I've done business with dozens, and even if the current meltdown ends up shaking them out to the point that there are only a couple dozen holding corporations, that's still expanding the choices of this sort of consumer by a factor of three. Furthermore, because there are more corporations in the power circle, it becomes easier to get one (or a few) to break ranks, and harder to get all of them to agree to protect each other.

Let us ask about real estate which has become owned by the lender. Why should lenders lack an ability shared by every other citizen, resident, illegal alien, and even people who have never set foot in the country - the ability to sell their own property? There's no requirement for anyone else to use an agent. It may be smart to use an agent, but everyone else has the legal right to go it on their own. Why not lenders?

I'll tell you why. Because not only would lenders being able to get into the business threaten the interests of the major chains that control most real estate, but this requires lenders to pay those same firms money if they want to get the property from their bad loans sold - and they need to get the property sold.

I have to admit, I'm not exactly eager to compete with yet more big corporations with huge advertising budgets. It remains the right thing to do. Right for the industry, and right for the consumers. As I've said many times before, rent-seeking is repugnant, and that's what NAR is doing - seeking rent from lenders who are not permitted to be in the business themselves.

Mortgage brokers have been competing successfully with lenders for decades, to the benefit of consumers. There's no reason real estate brokerages can't.

Caveat Emptor