Freddie Mac announced yesterday that for the first time in history, the average interest rate for a 30-year fixed rate mortgage has dropped below 4.00%  to 3.94%.  Rates for 15-year fixed rate mortgages are even lower, at 3.26%.  Last year at this time the 30-year rate was 4.27%  and the 15-year at 3.72%.

When you combine the low rates with prices that have generally declined throughout the county you have a great opportunity to buy more home for less money.   On a $300,000 mortgage the principal and interest payment at 4.27%  is $1479 per month.  At 3.94%  the monthly payment is $1421 per month.   That is a savings of $58 per month which may not sound like much, but over the length of the mortgage, that is a savings of over $20,880.

So whether you’re looking for your first home, a move-up, or an investment property, now is a great time to buy!  Curious about what’s available?  Give me a call and I’ll be happy to send you some listings of homes and investment opportunities throughout San Diego County.

I think we all agree that the lack of regulation in the mortgage lending industry was a primary cause of the housing market collapse.  Not everyone with a pulse should qualify for a zero- down, $400,000 mortgage.  However, the new rules being proposed by the federal government could be the fatal blow to a struggling housing industry that is barely surviving on life-support.

The cornerstone of the proposal is the idea that the very best rates and terms for conventional loans would be reserved for the very best borrowers…..sounds somewhat reasonable, until you understand what an exclusive club that would be, and how difficult it would make buying for first-time or lower-income borrowers.

First, a 20% down payment would be required.  In some parts of the country, you can buy a nice home for $150,000, but even so that would mean a down payment of $30,000 – a big number for a lot of people.  But here inSan Diegowhere a nice 2 bedroom condo is going to cost you around $320,000, a buyer would need $64,000, which is most likely a staggering sum for anyone considering a condo purchase.

If you think that sounds a bit harsh, you’ll love the other suggested requirements for the so-called “Qualified Residential Mortgage” or QRM:

  • Strict debt-to-income ratios.  A max of 28% of gross monthly income could be used for housing expense and total monthly debt could not exceed 36%.  Currently, both Freddie Mac and Fannie Mae guidelines take other factors besides DTI into consideration, and Freddie can go up to an overall debt-to-income ratio of 45%.  And of course, this is fully documented income, so tough luck for the self-employed.
  • To refinance your existing loan for a better rate you would need a minimum of 25% equity, and if you wanted to take out any cash, 30% equity would be required.  Today’s requirements vary by lender, but are no where near that strict.
  • Pristine credit.  If you were 60 days late on any account in the past two years you would not qualify.

So to put this into perspective, let’s see what someone might be able to afford here inSan Diegowhere the median household income is $67,000.  Their total monthly housing expense, including tax and insurance could not exceed $1,563.  This means they could purchase a single family home for $295,000 (if they could find one that would qualify for conventional financing), but would need a down payment of $59,000.  Presuming their monthly take-home pay is $4,466 and they are currently renting a 2 bedroom apartment for $1200, and after all other expenses they could still manage to save $500 a month, it would take these would-be home buyers 9.8 years to save for the down payment!

What if you don’t qualify?  Get ready to pay-up.  The mortgage industry estimates that non-QRM rates will be from .75 – 3.00% higher, again pushing more people out of the market with higher rates.  So if you are like the majority of today’s borrowers and don’t have a big down payment, make an above average income and have perfect credit you could be paying 8.00% interest while the QRM borrower will pay just 5.00%.  Sounds really fair and I’m sure that will mean a big boost to the housing market, right?

This is a total over-reaction that threatens to kill the small gains and recovery that we’ve seen in the past year.  I agree that reforms are necessary, but requirements should not be so stringent that home ownership is only accessible to a privileged minority.  If only the wealthy can purchase a home, some of our troubled neighborhoods (where the QRM buyers won’t want to live themselves) will be owned by investors and would-be buyers will be doomed to a life-time of renting from them.  I don’t know about you, but to me this doesn’t sound like a way to re-build neighborhoods or salvage the American Dream of home ownership.

Once again, Santa forgot to bring me a crystal ball.  So this look into the future of the housing market is based on trends from the past year, projections from those that crunch the numbers, and my gut feelings based on life in the real estate trenches.

Foreclosures continued to be the top story in 2010 with robo-signing and questionable practices making headlines.  In 2011 so-called shadow inventory will be making news as it grows and clogs the pipeline.  This includes borrowers that are 90 days or more delinquent, homes in foreclosure, and bank-owned properties not yet on the market.  S & P estimates that it will take 41 months to clear the backlog, continuing to slow the recovery.

Short sales will increase as the government and lenders try to stem the deluge of foreclosures that add to the shadow inventory.   Right now about 35% of defaults end in a cure or short sale.  I see that number growing as banks and the government iron out the problems with HAFA (Home Affordable Foreclosure Alternatives), and the processing of short sales is streamlined.

Loan modifications will continue to be largely unsuccessful.   There is some hope for small improvement in the numbers if the FHA principal reduction program can be expanded.

Mortgage interest rates jumped this last month, but are gradually heading down.   Frank Nothaft, chief economist for Freddie Mac foresees rates staying below 5.00% throughout the year.  Let’s hope he’s right.

Home sales will increase, especially for first-time buyers, provided interest rates remain low and the economy continues to improve.  If unemployment continues to decrease and incomes increase we should see an increase in home sales over 2010 by the 2nd half of the New Year.

Home values throughout most of the country will reach the bottom by mid-year and many areas, such as San Diego County will see modest gains of 2.00 – 4.00%.  The exception continues to be the luxury home market where home prices in locations such as La Jolla and Rancho Santa Fe will continue to decline.

My advice?  If you own a home and are not terribly upside-down, hang tight.  Looking to buy?  Do it now!  This is a great time to purchase your first home or pick-up an investment property.  Struggling with your payments?  Let’s explore your options, before it’s too late.  Overall, I’m cautiously optimistic.

Best wishes for a happy, healthy and prosperous New Year!

We all know that numbers and statistics can be interpreted in many different manners, depending on the desired outcome and the audience.  Case in point, within the last two weeks we have two separate reports on U.S. housing prices that range from cautiously optimistic to doom and gloom.   What’s real, and who do we believe?

Back on October 13, I happily reported in a post on this blog that according to an elite panel of economists surveyed by the National Association for Business Economics, home prices across the US saw their lowest point in the first part of the year and have been gradually trending upward.  In San Diego, the news was even more encouraging as our prices rose higher than the national average.

However, that trend over the past nine months might not hold true for the future.  On October 29th, Capital Economics, a leading international economics research firm, announced that a double-dip is already underway for both housing activity and residential prices.  Paul Dales, a U.S. economist for the firm, predicts that home prices will continue to decline over the next twelve months with a dip of over 5%.  Paul and his team add that if the economy continues to improve more quickly than analysts predict, home prices might hold steady.  On the other hand, if the economy worsens greater than predictions, prices could fall as much as 20%!

That’s huge!  Couple that with the firm’s forecast that housing demand for the next three years will remain “unusually weak”, while supply remains “unusually high”.  Right now the analysts say that there are about 1.5 million too many homes on the market given today’s demand, and that number will likely swell with additional foreclosures.  There are approximately 2.5 million homes in foreclosure and 2.4 million that are 90 days past due.  That is an addition of nearly 5 million homes that could flood the marketplace in the next year.

So what does all of this mean for San Diego real estate?  Well, I wish I had that crystal ball, but here’s my take.  To a certain degree, I believe that both reports are correct.  I certainly believe that we’ll see an increase in the supply of homes on the market due to foreclosures and short sales.  Banks can control the number of REO properties they bring to market, but I think that we’ll see a large increase in short sales as homeowners seek to avoid foreclosure. However, I don’t see a huge dip in home prices, at least here in San Diego.  I do believe that barring a total economic melt-down we’ll continue to see static prices with some modest increases in value, particularly in the $250,000 – $400,000 price range for single family homes.

Is this a good time to buy?  Absolutely!  With prices and interest rates at near record lows, what’s not to like?  Waiting to see if prices fall further is a gamble in my book as it is very likely that 6 or 9 months from now, interest rates could be as much as a full percentage point higher.

Remember back in 2005 when anyone with a pulse could get a home loan?  Well obviously, that didn’t work very well, but the qualification paranoia we see today may be equally destructive to the housing market.

I spoke with a client the other day who was grumbling about not being able to get a line of credit.  Mind you, this gentleman used to run a bank, owns 20 rental properties, his own home is valued at $1.5 million, and he owes less than $200,000 on all 21 properties combined.  And let’s add to that the $1 million plus cash in the bank.  He applied to an investment firm (which shall remain nameless) for a $200,000  line of credit in case he finds a great real estate investment opportunity.   After 3 months of supplying documentation several times over, (seems it kept getting lost), his application was denied because they couldn’t understand that he had moved a small amount of money out of an IRA for tax reasons!

So this is a man with exceptional assets, and he can’t get a loan…what about the rest of the population?  According to an article in SmartMoney it’s getting more and more difficult to qualify for a mortgage and even the smallest negative detail can either cost you an approval or thousands of dollars over the life of your loan.  A score of 720 is the ticket these days for a conventional loan with the best rates….that is up 40 points since the housing collapse.  Ed Mierzwinski of the U.S, Public Interest Research Group says that “Credit scores are a blunt tool being abused by creditors as if they were a sharp instrument.”

Ouch.  We feel the pain.  As a Realtor in this market with so many opportunities for buyers, it is extremely frustrating to see how difficult it is for home buyers to get a loan.  Granted, the credit requirements for an FHA loan aren’t quite as stringent, but the increased level of documentation is staggering.  A recent buyer of mine left me a message that was one long scream….she said she just had to vent after being asked by her FHA lender to supply a paper trail for the money her 90 year-old mother in Eastern Europe sent to her as a gift.  She sighed and said she was just waiting for the call requesting a blood sample.

So what can you do to improve your chances of getting a loan in this market?  

  • If you’re self-employed, plan ahead.  Banks will primarily look at your last two years tax returns, so your qualifying income is based on your tax returns.  Amounts on your returns should match financial statements and bank statements.
  • If you have any skeletons in the closet, deal with them before applying.  This might include things such as an unresolved judgment or child support payment issues.
  • Be prepared to explain ANY credit inquiries for the last two years.
  • Try to avoid any late payments for a full year prior to applying.
  • Maintain balances on revolving credit below 30% of your limit.
  • Don’t apply for new credit, and don’t close accounts.  Use zero balance credit cards now and then, but pay them off right away.
  • Don’t transfer money from retirement accounts.

And finally, stay calm and realize that over the next year as the number of people with less than perfect credit increases and the market continues to stabilize, it is expected that the banks will gradually release their stranglehold on qualification standards.  But be prepared, that call for the DNA test just might be next on the list.

For the first time in over 6 weeks interest rates for 15 and 30-year fixed mortgages rose…not much mind you, but they did increase.  15 year rates rose from an average of 3.62 to 3.74 percent, and the 30 year rate increased from an average of 4.21 to 4.34 percent.

According to the Mortgage Bankers Association we also saw a sharp drop in the number of applications submitted for the week ending October 15th, down by 10.5 percent from the previous week.  Refinance applications were down 11.2 percent and applications for home purchases were down 6.7 percent.

Now I’m no economics wiz, but even I can tell you that this is not good.  The MBA attributed the drop in applications to the slightly higher rates, but more importantly to public apprehension and confusion surrounding the mismanagement of foreclosure paper work by some banks and servicers.  So at a time when we have an increased number of foreclosures and short sales hitting the market, we have potential buyers of distressed properties pushing back, fearful that there could be issues in the transaction that would give them less than clear title.  And, oh yeah, let’s throw in a rate increase.

So once again, it appears that the banks are doing nothing to get us out of the mess they created….but of course, it’s not all bad for most of them.  Wells Fargo turned a profit of $3.35 billion for Q3, up from $3.24 billion a year ago.  I’m sure that warms the hearts of everyone who lost their home last quarter.