Real Estate Insights

Well, today is another “gut wrenching” reality check for the mortgage and housing industry as home lenders are continually bankrupting and closing up shop (the latest is First Magnus), further restricting consumer’s choices on where they can get a mortgage from.

Problems from the sub-prime mortgage market are continuing to promp revised underwriting standards in all areas of the mortgage market, sub-prime to a-paper lending, making it difficult for even prime borrowers to obtain new home financing. Added to the restricted underwriting guidelines, lenders continue to eliminate certain products altogether as they are forced into submission by the secondary market. The sources for many of these programs being eliminated has dried up. Investors on the secondary market are less willing to purchase mortgages not guaranteed by Fannie Mae or Freddie Mac, so lenders must boost rates on jumbo loans, forcing borrowers with excellent credit, strong incomes, and 20-percent down payments to cough up more money to make a home purchase. HSH Associates says the average 30-year jumbo fixed rate rose to 7.34 percent on Thursday from 7.09 percent the prior week, with the spread between conforming loans guaranteed by Fannie Mae and Freddie Mac and jumbo loans rising to 0.75 percentage points from 0.20 percent points last month. According to FranklyRealty.com broker Frank Borges LLosa, "With a rate increase from 6.75 percent to 7.5 percent, the buyer's buying power just dropped by 10 percent."

This all leads to consumers looking to apply for a new home mortgage must have higher credit scores and down payments, more extensive appraisals, larger savings accounts and additional income verification.

How will this affect the local housing market? Around the Bay Area, where the median home price is close to $700,000 for a single family home, buyers rely on jumbo loans, those over $417,000, which are not backed by the GSE’s as stated above. So with interest rates and down payment requirements increasing, home prices will fall.  So it all depends on your perspective; do you view the glass as half empty or half full?  All this news is good if you are looking to invest in real estate. Home prices are down and there are bargains to be made. Investors will be able to purchase homes again in San Jose for under $600,000, and with the mortgage market restricting, less people will be able to afford purchasing in the Bay Area, meaning they will have to rent instead of buy, driving the rental market through the roof.  Now is a great time for someone who is at retirement age to liquidate their savings, purchase a home, and create a source of income with positive cash flows on rental properties right here in the Bay Area – almost unthought-of just a year ago!

How long will this opportunity last? The National Association of Realtors (NAR) further expects the current tightening credit to result in a five-year low for home sales in 2007. For the eighth time this year, the trade group reduced its forecast for housing sales--this time to 6.04 million units, down 6.8 percent from last year and to its lowest level since 2002. "Mortgage disruptions will hold back sales over the short term," according to Lawrence Yun, an economist for the organization, which expects to see some improvement in sales activity during the year's last quarter. Concerns about the availability of credit have now reached the "jumbo" loan market as investor interest in buying mortgage-backed securities wanes due to widespread mortgage defaults. Mortgage Bankers Association chief economist Douglas Duncan says the market could be "frozen" for as long as a month.

The most negative of analysts believe that because loan standards are now much tougher, at least 10% to 15% of the people who could have qualified for a home-purchase loan last year can't do so now. Meanwhile, many of the people who would still qualify for a loan don't want to buy a house now because they think prices will fall further. So the housing market is likely to remain weak for at least another year or so, they believe. One reason is that it takes time to absorb all the houses and condos waiting for buyers. The National Association of Realtors (NAR) counts about 4.2 million resale homes for sale, along with more than 500,000 new homes on the market. That is enough to last about 8½ months at the recent sales rate; a supply of five to six months generally is considered balanced.

If you view the glass as half full, and if you are looking for the next opportunity to come around, then the time to purchase investment properties has returned. With prices down due to large inventories of homes on the market, now is a great time to purchase a home. Home loans less than $417,000 are still available at historically low interest rates, so the possibility to purchase an investment property in the Bay Area and make positive cash flows has returned!