X-Pert Knowledge: November 2007 Archives

One of the things I've heard and read other agents complaining about is that they can't find qualified buyers to represent.

Welcome to Unintended Consequences 101.

The way that the market had been working is this: Young, often unmarried, buyers buy a starter place, usually a condominium of some description. A few years later, once they're married and have a couple kids, they trade up, using their equity for the down payment and (usually) increased income in order to make the payments. They may do this a second time when the kids are teenagers, or when they get another rise in income. This is all simple demographics.

However, we all know that most buyers want to stretch to their maximum, and even a bit beyond, not understanding that there is no magic wand to make borrowing money more affordable. The absolute hardest thing for a buyer's agent who's trying to to their job correctly, is persuading buyers with property lust in their hearts to limit themselves to properties they really can afford. Traditionally, the penalty for failing to do this was a failed transaction, and a ticked off client who had already spent hundreds of dollars on appraisal, inspection etcetera, and quite often, multiple trips to the decorating store planning and a month or more fantasizing about the decorating they're going to do. When that all comes crashing down, it's kind of difficult to hold onto the client.

During the era of make believe loans, however, the immediate downside disappeared, and by the time people figured out that they couldn't really afford the property, those agents were long gone, with their commissions, leaving those buyers high and dry. With easy loan qualification, and initial payments way below a sustainable level, there was no immediate need to restrict themselves to selling what a client could afford. Since given one client or set of clients, most agents would rather make more money than less, they sold higher end properties than clients could really afford. The clients, for their part, were happy that there was no apparent need to spend years living in the lesser property, building equity.

However, by skipping over those starter properties, those agents greatly exacerbated their future problems. When the condominiums and other starter properties don't sell, the owners are stuck with them, and they cannot afford a larger, more expensive property until those properties do sell. These folks are the largest single source for buyers of archetypical three and four bedroom detached housing. If you bought a condo for $90,000 and sold it for $200,000, you have roughly $100,000 down payment for a $500,000 home. This lowers the payments from about $3415 (assuming PMI) to $2398, total cost of housing from roughly $4045 per month to $3030, and the income to qualify from $9000 per month to about $6730, a full 25% less, assuming no other debts. Considering the median family income is approximately $5500 per month in San Diego, this makes a major difference to how many people can qualify - far more than a proportional difference. Assuming a standard normal distribution, you're going from about 3.5 standard deviations over area median income to about one and a quarter. This increases the number of people who qualify from 233 in a million to 110,000 in a million (via Hyperstat). Now, you have 470 times as many people in your target group! But in order for this to happen, the condominiums and other starters have to sell.

The temptation is always there for agents want to hunt the big game, but now that the make-believe loans that enabled it are gone, we've got a situation. We've conditioned the public to believe that everyone can afford the property of their dreams, right off, and that's just not the case. This makes it much harder to sell them starter properties that fit within their budget. Their friend John or Jen was able to get that dream property, why can't they? The fact that John and Jen are fighting a losing battle against foreclosure doesn't enter their thought process. The people that already own the starter properties, having bought five or ten years ago and gotten to a position where they're ready to move up, can't. Not until the starter sells. This makes the crimp in the market far worse.

If condos and other starter properties don't sell, you don't have the usual influx of buyers with a down payment that enables them to afford more expensive properties. When you're essentially putting contact superglue on the bottom-most rung off the property ladder, you can't be too surprised when the higher rungs are vacant. So if you want buyers for higher end properties, and you want your higher end properties to sell, sell a few starters.

Caveat Emptor

HT to Unrepentant Individual, who also has some good information on what it means.



The genesis of all of this is Something's Gotta Give, a report (.pdf format) from the Center For Housing Policy. Furthermore, there is an article in the Washington Times from UPI that connects the dots on the tactical level.



The Center for Housing Policy report details some of the costs to society. Not surprisingly, when people are forced to spend a large portion of their income on housing, they have less to spend on other things, and so they can't spend as much on other things. Lest you think I'm talking about Lexuses, Lattes and Liposuction here, I am not. I'm talking about bare minimum things like food - as in people going hungry because they don't have enough to eat. Far from talking about liposuction, I am talking about basic medical care and insurance. I am talking about clothing, which, rightly or wrongly, people use to judge the worth of other people, and people who cannot afford good clothing are not given the opportunity to advance because no one will hire them. I am talking about basic transportation needs, without which people's job-hunting prospects are limited to the places they can walk. If you cannot get from work to home and back again in reasonable amounts of time, then you're either not going to live here or not going to work there.



Nor am I talking about the needs of some nebulous underclass. As the NHC report makes clear, these are people earning up to 120 percent of national median income. Furthermore, they are among the fastest growing classes of worker.



Below the first level effects, there are others lurking, largely unmentioned in the report. But malnutrition, parental depression, and lack of good medical care are the causes of many other ills. Malnutrition allows health problems to become chronic and generates more health problems. These are people who have more difficulty getting and holding jobs. So long as we have societal programs of social insurance, these folks are going to cost us, as a society, tens to hundreds of billions of dollars annually. If they can't hold a job, they've got to get money somewhere. No job means welfare or crime, and both are bad situations not only for that person, but for everyone else as well. Poor or no medical care makes any problems they have worse than they need to be, further increasing both explicit costs, what we actually spend on them, and implicit costs, money they don't make, taxes they don't pay, and other stuff that they suck out of society. Long commutes people suffer in order to buy housing they can afford means less parental supervision of children, leading to delinquency, increased crime, and other problems a few years out. Most critically, difficulty with money is the number one cause of divorce, and when families go through a divorce, the standard of living suffers even more and more long term societal troubles ensue.



Who is causing all this bad stuff? The short answer is that we all are. The cold hard fact of the matter is that they are not making any more land. Housing needs land. Land that is in use for other uses, whether it is industrial, commercial, open space, or other housing is not available for housing. Higher population means we (as a society) need more places to live. Anytime we add a person or a family, we add the need for that person to live somewhere. We can't just push them under the workbench in the garage until the next time we need them. Well, actually, I suppose we could, but I am certainly not going to vote for policies like that, nor, I imagine, is a majority of the electorate. So that fry cook at Lenny's, the cashier at the supermarket, and the nice lady who helps you carry your purchases out to the car at Home Despot, all need places to live.



Cold hard fact number two: In the high density places where jobs are to be found, land is expensive. In fact, it is far and away the most costly thing about a place to live. I can show you places where the lot goes for $350,000, while the finished home goes for $500,000. Considering the economic realities: Developer has to buy the land, then apply for permits that take years, then put the homes up for sale. Developer has to pay for the land, the cost of the money to own it for the years that are necessary, the property taxes, the cost of the permits, the cost of the people to get the permits, the labor and materials to build, and of course, they have to pay the people that sell the finished product. Except for the comparatively miniscule costs of labor and materials to build, these are all fixed costs! They are what they are. So if the developer pays another $5000 for labor and materials, and can sell the house for $200,000 more because it's got two more bedrooms and Italian marble floors, that is obviously the way for them to make a better profit. So they build the higher end home, which cannot be afforded by the lower income buyer. If the government requires so many homes to be set aside for lower income people, that merely increases the money they have to charge for the rest. Plus the "low income" buyers are likely to sell as soon as their contract limitation on doing so runs out. Just because Mr. and Mrs. Lower Income Couple only make $40,000 per year doesn't mean they don't realize they can make enough money to pay their rent for the rest of their life by selling the home that the city forced the developer to sell them at a reduced price for a huge profit. It's not like there's any difference between their home and the house next door that the developer sold for full price. I assure you that they are keenly aware of this. This makes getting into low income housing akin to winning the lottery in expensive parts of the country, and that is not what it is intended for.



There are obvious solutions to this. More housing. High density housing. Shortening the approval process, and making it less expensive and less uncertain. But the observable trend is in the other way. Why?



This is where it comes down to you and me. We're making it tougher for the developer to get those permits. When developers offer to buy property with the intent of building, neighbors come out in force to protest. Oh, we use all of the high-sounding names like "open space" and "habitat protection" and "quality of life" and even the mostly honest "No higher taxes to pay developers costs!" They come out and throw obstacles in the way of the project and



But the real issue, the elephant in the room that everyone desperately wants to ignore, is scarcity. We all want housing to be scarce. Why? Because we're already owners, that's why. If there's not enough of something, the price goes up and people wanting to buy have to pay the people who already have more money in order to buy. Whether people who obstruct developers will admit it to themselves or not, they are trying to vote themselves a profit at other's expense. The cashiers who work at the stores in the strip mall where you buy groceries need to live somewhere, and the lower on the socioeconomic scale they are, the closer that they have to live. It has almost nothing to do with the "Eeevil!" developers or any other corporate alleged malefactor. If they have to charge two million dollars per house to make a profit, they will build two million dollar houses. Or three. It's the buyers that pay for it, and these buyers are real people just like you are, who need a place to live just like you do, and if they can't get one in a sustainable way, will do it in an unsustainable way, as too many people have.



If you really want to watch something both amusing and eye opening some time, go to a planning commission approval hearing where you have nothing at stake. Let's say the proposal is thirty miles away on the other side of the city and you never go there. And watch them try to have a discussion about high density housing.



Oh!, the carrying on I've seen! The histrionics! The burying of the real issues! The hysteria! Ask for the mike and mention "property values" and the NIMBYs will go ballistic, guaranteed. "It's not about that!" some will scream. Then why, once all of the other concerns have been dealt with, do they continue to oppose the project? Or do you think it's really about a little bit more traffic on the roads, or open space that most of them can't see and never go use? "Ruining the character" of a neighborhood where they might know two or three other families at most? Why then, won't the people live near where they work? "Because it's not a nice neighborhood!" "Explain," you will say, and they will oblige with "Because it's all condos and apartments and it's a nasty neighborhood and and everything is expensive and property values don't go up!" And there the real agenda slips out. Figuring it out, and getting them to admit it, is about as challenging as dynamiting fish in a barrel.



Recently, the City of San Diego made a rational attempt to plan for housing affordability, lessened commutes, etcetera. Called the "City of Villages" concept, it envisioned more decentralized and distributed services, employment, and shopping, and in particular, a lot more high density housing with neighborhood parks and social centers. It may still come about, but over the objections of suburbia which sees their future increase in property value drying up. Over the objections of members of my profession who have tried everything they can to obstruct it. Let's face it, when everybody who has a job in a county of about three million people is trying to get to one of three places, and then out of those same three zones where everyone works, all at the same time, it's a recipe for a traffic jam. Add in the fact that the median commute is something over twenty miles, and many people drive well into the next county over (80-120 miles) and it's a recipe for an extended traffic jam. We have three full-blown interstates and at least a dozen spur and connecting freeways, and they're all jammed solid at least ten miles and two hours one way every morning, and the other way at night.



People in my profession aren't exactly blameless for the high cost of housing. Real Estate, as a profession, is responsible for a significant amount of price increases due to encouraging speculation and selling exclusive lifestyles. Actually let's stop for one quick moment and consider the idea of "exclusive lifestyle." Doesn't it have to do with excluding the masses? Making yourself one of the well off? Raising ones' self? It's not like the money to buy you out is coming from nowhere, and the poor schmuck who buys the property is going to have to deal with every penny of it.



Everytime I go into the MLS, a large percentage of the results have the statement "Quiet cul-de-sac," and these are all homes built within about the last thirty years. Cul-de-sacs were comparatively rare before then. Even in San Diego, with all of our hills and slopes and irregular terrain, neighborhoods older than that are designed for open access. The streets are laid out on a grid. Major and secondary roads cut all the way across entire developments. You can get from point A to point B without going around the whole thing. Cul-de-sacs were rare, and mostly there because the developer could get a few more homes into irregular terrain that way.



This suddenly changed sometime right around 1970. Suddenly developers realized that the "exclusive" label added to the value they could receive. Now streets were designed not to encourage access, but to discourage it. They start and stop and start again for no reason other than to discourage access. The quickest way to get from one major road to another, on the other side of the development, is to go all the way around the development. The developers lost very few homes to the redesign, if any, but now they could sell the cachet of "exclusivity," as in keeping the helots out. The start of accelerated growth in home prices traces to this period. It's also worthwhile to note that when these "keep the peasants out" neighborhoods start downhill, they tend to go a long way down, very fast.



The motivations for driving the prices up on the behalf of my profession are certainly understandable human motivations. We make more money on bigger transactions from the same amount of work and expense. That doesn't make them good for society, but higher profit for performing your professional function is at least an honest motivation. Ditto for the City, County and State. You're taking up X number of square feet of land, and they're not getting any more land in their jurisdiction. If the price goes up, they can sock you and they can sock the merchants and they can sock everyone in the area for more money. More money means more money for salaries - their salary. Their cronies. More lucrative contracts, necessitating more campaign contributions.



Fact: Given the current economic situation, the only way to get developers to build more housing that low income people can afford is to make housing for low income people more profitable than other housing.



How do you accomplish that? Allow more high density housing, but force them to plan the impact correctly. Enough parking, water capacity, sewage. Give the developers the parameters up front, so they know whether or not they can meet it, and enact a "must issue if standards met" law. Let the community get involved in setting the standards, if they want, but make them universal throughout the jurisdiction. Same standards for hoity-toity-ville as for the wrong side of the tracks. And make the citizens themselves subject to the same requirements. Make waivers as tough to get for homeowners as for developers, and come down hard on non-permitted activity. I just pulled up a couple dozen properties on MLS, and the well over half of the listings had the notation somewhere that "X may not be permitted." In my experience the owners know damned well that they didn't have the proper permits, but that it's very easy for the people who buy it from them to get a waiver as theoretically innocent, and they know that there's very little enforcement even if the new owner doesn't get it retroactively approved. So they put on an extra bedroom or bathroom without permits, knowing it made the property more valuable when they sell it, and because if they don't get a building permit, their property won't be reassessed until they sell. Incidentally, most of them don't use licensed contractors, either, but rather what our wonderful government euphemistically calls "undocumented workers" because contractors have to report where they did the work and woe be unto the contractor that does something without the proper permits. This means that the people who go through the process that society has agreed is necessary to perform competent, safe work in accordance with code, pay their people in accordance with the law, report their income so that a fair share of taxes are paid - the people who are playing by the rules - get cut out. Either do away with those rules or come down on the people who violate them, please. But I suppose that since it's "the little guy" who wants to make some money illegally, that makes it Okay? Even when in order to buy the property, this "little guy" has to have income in the top ten percent of the population? Didn't think so.



I am not trying to get all holier than thou on anyone here. I am as much of a capitalist as anyone, and more so than most. Capitalism works, but it works better when everyone has to follow the same set of rules. I'm tired and disgusted of bending the rules on behalf of one class but not another, because of lying, self-serving propaganda. My younger brother works - when he can find work - as an on the books construction worker at about $13 an hour or so. This works out to $26,000 per year if he was working full time all the time. This is well below the federal poverty line for a family. So far below that were he married and his wife working a minimum wage job, they still wouldn't beat the poverty line. Compare this to the "handymen" who work off the books, without any qualification beyond their word that they can do the job right, and who claim they make $80,000 per year when they're asked how much they make in order to get a loan. The taxes they don't pay means that you and I pay more. The property taxes their clients don't pay mean that you and I pay more. The permits that their clients didn't get means that there are more building code issues out there that someone else is going to have to deal with - after said client makes the inflated profit on the sale of the home, despite not having properly paid the increased property taxes they should have.



Contrast this with the hell a developer has to go through, often for years, in order to get a project greenlighted and never knowing for certain whether some stupid technicality will put the whole thing back to square one. For smaller developments, it's hard to find a place where it they are economically feasible, even with higher sale prices.



Furthermore, no developer with a lick of sense is building condominiums here in California right now. For ten years, they have unlimited liability for anything that can be considered a "construction defect." There are several highly profitable law offices that actually make a career out of going around nine to nine and a half years after the project is sold out, and telling homeowner's boards they can get them money. Usually this is done without any prior complaints, and they don't have any knowledge of actual conditions there - they just know they can get money. There was a period not too long ago where you just couldn't find condos that weren't going through a lawsuit, which is why it was eventually dropped from many underwriter's standards. I'm certain that a certain percentage of them had legitimate complaints, but there were just too many lawsuits filed with exactly the same sort of timing for anything else to be the explanation. For the record, what the developers are doing is building them as apartments, and then they are being converted after the unlimited liability period has expired. This is a severely bad thing, societally, but a full explanation would digress too far.



If a developer wants to build high density housing, there should be a fixed set of steps - parking, utility upgrades, etcetera - they have to go through, and then approval is immediate and mandatory - provided they actually sell the units for the stated price. If they renege, they are prevented from selling at all until they've gone through the whole approval process from the start, with no mandatory approval.



Put this into law, and watch the prices of available housing drop. We could even structure it into tiers, Tier A where the approval process is basic and automatic, Tier B with somewhat higher prices but more hoops and less certainty, and so on. I would love to be able to find young families affordable three or four bedroom condos - but three bedroom condos are like hens's teeth whether or not they are affordable, and four bedroom just doesn't exist, period, affordable or not.



For the last decade or so, the various governmental entities even been requiring developers to set aside infrastructure projects which, under current rules, are more properly the realm of government. They have to build schools and deed them to the government. Funny, but I thought with the increased tax base they are getting, that was the government's job. It doesn't do anything beneficial for the price of the homes in the rest of the development. Ditto parks, which are an excellent and admirable idea, particularly near high density housing, but should not be part of a government shakedown to cut down on the profit margin of land the developer paid their own money for, and went through an extended approval process for. The population is already there, and whether the developer builds new housing for them or not, the government would be responsible for finding school and park space. At the very least, the government should reimburse the developer for the proportional cost of the land and utility capacity, and do the building themselves.



Many of you reading this are thinking about money - dollars and cents. And you know, that's fine. I like it when clients make money on their property. It's part of my job to help them make money on their property. But there's a difference between a reasonable profit at 5% increase per year, and extortion because you happen to own a place to live and there isn't enough housing to go around because you're doing your best to get policies enacted to make certain that there isn't enough housing to go around.



The gentrification has reached the point in many areas of the country where you need to be in the top ten percent of all income earners in order to afford to buy a place to live - any place to live. That's great and wonderful if you're seventy years old and you can sell your home for a three quarter of a million dollar profit to your retirement nest egg and go live somewhere cheap. It's not so hot if you're a young working class couple looking for a place to live that you can afford and here is where all the jobs are. The damage done to the latter far outweighs the benefits that accrue to society because of the former.



If this continues, what happens next? Instead of having to be in the top 10 percent, now you've got to be in the top five percent, or the top one percent. If mommy and daddy never owned a house, or were so unlucky as to sell for less than stellar profit, you won't either. If there's no place to live that you can afford, you have to stay with mom and dad - but what if they don't want you, or they're in no shape to host you, or they just don't live in the only place you can get a living wage job? Suppose now you're twenty-five or thirty, engaged or even married, and still cannot afford a place to live? This is a recipe for social disaster.



At one percent homeownership rates, we're below what the homeownership rates were when we had tenements and slum lords, even if they are single family homes in older areas of town. And many people who have been engaged in "condo flipping" are themselves priced out of the market. There are damned few folks who cannot be priced out of the market if it gets bad enough, and if policies remain unchanged, who is to say that it will stop just before you become one of the victims, the permanent underclass? Even if you're one of that fortunate class who isn't priced out, when there are ninety-nine people who want housing for every one who can actually afford it, what do you think is going to happen at the ballot box, or in the streets if necessary? I'd rather start now, while we can plan it rationally, as opposed to later when any old low quality crackerbox will be thrown up in panic mode anywhere and anyway it can be just to keep people from rioting in the streets.



Other things that need to happen. Tax codes need to be rewritten. this article traces the most recent acceleration to 1998 - coincidentally about two years after the $250,000 profit exclusion on housing began ($500,000 for married couples) was enacted. All you had to do was live in it for two years, and bang! you didn't pay taxes on the gain. I believe that instead of keeping it in the current "cliff" form (after two years you qualify for the full exclusion), I think it needs to be phased in over a longer period of occupancy. Two years gets you maybe $50,000, then another $25,000 per year until ten years are done. It's hard to argue that someone who makes more on flipping houses every two years than they do on their day job deserves to make that money tax free, when the poor shlub who can't qualify to get into the first house pays taxes on every penny he earns.



I also suspect that we would benefit from more limits on Section 1035 exchanges (and reverse exchanges), which has to do with not taxing profits from real estate when it's replaced within six months with other real estate. Don't get me wrong, it's a beneficial code section overall and I'll keep helping clients with them, but I have to question whether someone who makes an exchange and then refinances to strip equity is really doing something to earn all that tax free money, or just engaging in paper transactions that make it look like they contributed something. I don't blame the participants for taking advantage of what is in the code, but some of what I have seen, and much of what I have heard about, is of questionable economic benefit to the country.



Zoning also needs to be heavily looked at, and not just for high density housing. "Granny flats" are just too useful, but prohibited by blanket R1 zonings with no exceptions allowed in too many neighborhoods. Many folks don't want and don't have room for granny to live in the same dwelling, but if they could put up a small second dwelling, whether attached or not, granny could live there rather than off somewhere else where the choices are often "completely alone" or "in a nursing home," by which I mean they are one of the best ways to keep granny out of a nursing home. Furthermore, granny flats are also good for young adults who may not be able to easily afford housing on their own. None of this was a problem before 1970, and it's not a problem now - except in so called "modern" "exclusive" neighborhoods where we've made it a problem.



I hope this article will start a certain amount of discussion about what's really going on, and whether it is of net benefit to the country, and the people in it.



Caveat Emptor

One of the hard things to get through to sellers is the characteristics of the sort of buyers they need in order to have a successful transaction. If a given set of prospective buyers can't afford the property, they might look anyway. They might even make an offer, and it's possible the offer might even be accepted. But in the current loan environment, the necessary loan won't fund, so the transaction isn't going to actually happen.

Furthermore, it's a good idea to know the income characteristics you're aiming at by the price you set. If you set a price of $400,000, what does someone who can afford a $400,000 loan make? You'll know better than I who makes and does not make that kind of money in your area, but you should know it. I know it for San Diego. This isn't the kind of knowledge that comes from 10 minutes on the internet. I know what professions do and do not make the required money, and what professions for which it's a matter of where a particular prospect falls on that profession's pay scale, but it's taken me years to learn, just for San Diego, and every city is different.

Most areas have their own character. Some neighborhoods have a working class character, while others attract highly paid professionals. Some have an artsy orientation, others are very matter of fact. Properties have their own characteristics. The one property in the neighborhood with a panoramic view of the area is not going to appeal to the buyer who's looking for any hole in the wall, so long as it's in that neighborhood so their kid can go to Super High. Put property character and neighborhood character and the price you want to obtain together, and if you're a listing agent, that had better give you an idea of exactly who you're hoping to attract to your property. Like all targeted marketing, you won't turn away someone from out of the targeted demographic, so long as they can actually get the transaction done, but you don't have to be in the business long to discover that you'll do better by appealing to the degreed professional who makes the money to qualify based on Debt to Income Ratio for an 80 to 100 percent Loan to Value Ratio loan, than you will targeting the fry cook who's saved and invested for twenty years and is all of a sudden ready to buy the property, now that he has a 70 percent down payment. That fry cook may show up on their own anyway, but how many people do you know who save that much over that long a period and then want to spend it all on real estate? As opposed to the newly married professional couple who've been in their careers a couple years each, have a little bit of money saved, and now they want to stretch their budget as far as they can?

As I type this, I can do a thirty year fixed rate loan at 6% with a total of one point. Since the equivalent rate for a 5/1 hybrid ARM is 5.75, I'm thinking most folks are going to want that thirty year fixed when I offer them the option. This is going to change a little bit every day, but in most cases, it's not going to be significant change. Things like interest only loans will stretch their qualification a little bit, but those are best approached with a trembling hand for purchases, and you're better off planning for the buyer being advised that the property may be too expensive for them in such an instance, and having a plan in place, than you are hoping that everything goes perfectly for you to sell to an unsuspecting buyer.

Not all loan amounts are the same. Once the loan amount goes over $417,000, the conforming loan limit in effect right now, the current loan environment is that 100% financing goes away for A paper borrowers. You might be able to get them 100% financing on a sub prime loan, but the rate/cost tradeoff will be even higher than the A paper rate of 6.625% for one point on non-conforming loan amounts. Subprime is kind of in never never land right now. If you read between the lines of what their reps are saying, they want A paper borrowers who don't know they can get an A paper loan. And nobody wants to touch 100% stated income loans, no matter how good the credit score. Fact. You can live with it and plan for it, or you can fight it and still lose.

So what I'm going to do is compute the monthly cost of housing on purchases of a given size, together with the income to qualify. I'm going to assume this is California, with California property tax rates. Furthermore, I'm just going to make a flat allowance for Homeowner's Insurance plus Association dues of $250 per month. It's not exact, but it'll put you in the right ballpark. With a specific property, you can get closer, of course.

Let's start with 100% financing, a 100% loan with PMI, because that's the only way to do it right now. This limits us to conforming loan amounts. Here's what it takes:

purch price $200,000.00 $220,000.00 $240,000.00 $260,000.00 $280,000.00 $300,000.00 $320,000.00 $340,000.00 $360,000.00 $380,000.00 $400,000.00

Monthly COH $1,788.94 $1,942.83 $2,096.73 $2,250.62 $2,404.51 $2,558.41 $2,712.30 $2,866.20 $3,020.09 $3,173.98 $3,327.88

mo income $3,975.42 $4,317.40 $4,659.39 $5,001.38 $5,343.36 $5,685.35 $6,027.34 $6,369.32 $6,711.31 $7,053.30 $7,395.28

annual inc $47,705.02 $51,808.86 $55,912.69 $60,016.53 $64,120.36 $68,224.20 $72,328.04 $76,431.87 $80,535.71 $84,639.54 $88,743.38

In other words, a family who wants to buy a $400,000 property without a down payment needs to be making almost $89,000 per year. Them's the facts, and that's not including any existing debt service they may have. Credit cards, car payments, student loans, etcetera. If other debt service is $500 per month, you raise the income to qualify by over $1100, and the yearly income by $13,000 plus change. San Diego's Area Median Income is a little over $64,000, and a family making that much money can afford a loan of about $280.000 - if they don't have any other debt. If they have a huge down payment, of course, it's easier, but how many people have you encountered recently with huge down payments?

Now, let's consider people who actually have a 20% down payment. Most likely, they bought a condo a few years ago and now they've sold it, but they had enough equity in the condo to account for that 20% down on the more expensive property. Or they sold the condo and bought a starter home, and now they've sold that and are looking to move up again. This is without PMI, and having some equity means that not only are the terms of the loan more favorable, but you don't have to borrow as much to buy a property that costs the same, and so a property of the same value is much more easily affordable.

purch price $200,000.00 $220,000.00 $240,000.00 $260,000.00 $280,000.00 $300,000.00 $320,000.00 $340,000.00 $360,000.00 $380,000.00 $400,000.00 $420,000.00 $440,000.00 $460,000.00 $480,000.00 $500,000.00 $550,000.00 $600,000.00 $650,000.00 $700,000.00 $750,000.00 $800,000.00 $850,000.00 $900,000.00 $950,000.00 $1,000,000.00

MonthlyCOH $1,417.61 $1,534.38 $1,651.14 $1,767.90 $1,884.66 $2,001.42 $2,118.18 $2,234.94 $2,351.71 $2,468.47 $2,585.23 $2,701.99 $2,818.75 $2,935.51 $3,052.27 $3,169.04 $3,640.28 $3,948.49 $4,256.70 $4,564.91 $4,873.12 $5,181.32 $5,489.53 $5,797.74 $6,105.95 $6,414.15

mo income $3,150.25 $3,409.72 $3,669.19 $3,928.66 $4,188.13 $4,447.60 $4,707.07 $4,966.54 $5,226.01 $5,485.48 $5,744.95 $6,004.42 $6,263.89 $6,523.36 $6,782.83 $7,042.30 $8,089.52 $8,774.43 $9,459.33 $10,144.24 $10,829.15 $11,514.05 $12,198.96 $12,883.86 $13,568.77 $14,253.68

annual inc $37,803.04 $40,916.68 $44,030.32 $47,143.96 $50,257.60 $53,371.23 $56,484.87 $59,598.51 $62,712.15 $65,825.78 $68,939.42 $72,053.06 $75,166.70 $78,280.34 $81,393.97 $84,507.61 $97,074.26 $105,293.14 $113,512.01 $121,730.88 $129,949.75 $138,168.63 $146,387.50 $154,606.37 $162,825.24 $171,044.12

Once again, this assumes there's no other debt service involved. But if you've got a home with a $700,000 price tag, you're still looking at trying to lure in a buyer family that makes at least $10,000 per month. These kinds of buyers are not going to go for old carpet and a carpet allowance. They want your seller to have already dealt with it. Even if it's the cheapest, most beat up property in Rancho Santa Fe, on the smallest lot, the sellers are still going to take a hit on the price for not dealing with it themselves.

For a successful listing, you need to know your target market. Some people do buy properties that are apparent mismatches between their lifestyle and the property, but not many. As listing agents, we not only need to understand what is and is not a match before setting off to attract a buyer, and recommending appropriate measures to the owner before it goes on the market, we are much better off concentrating our marketing efforts where they are most likely to succeed.

Caveat Emptor