Weekly Sales Report

It has been another week of limited activity here in the San Francisco real estate market. Overall, statistics look very similar to last week's numbers. Half of the properties that received offers this week were multiple offer situations. The most offers received on a property was three.

All of the properties that sold this week were either at or under the asking price. This should be a message to sellers that pricing the home where you are willing to accept the offer is very important at the moment. The idea of pricing low to generate activity and drive the price up is not getting the results it once did. Sellers are then left with their property sitting on the market at a price lower than they want to accept.

There is a single family home on the north slope of Potrero Hill, located on Rhode Island and Mariposa listed at $1,195,000. It is a large Victorian with three bedrooms, lots of light, and sits just a block away from the new Whole Foods. The sellers are in a hurry to sell and set an offer date just days into the marketing period. Due to the lack of inventory in Potrero Hill, it was a zoo at the open house that first weekend. I spoke to the listing agent on the offer date, and they only expected one offer. There are probably hundreds of buyers at this moment waiting for a single family home on the north slope of Potrero Hill. Granted, this one house wouldn't have been right for all of them, but only one party ready to pull the trigger really speaks volumes. It may very well only sell at asking; maybe even below.

Mortgage Minute

On the financial front, which along with the Presidential race is all we seem to hear about these days, the Fed announced another rate cut this morning of 0.5%. This will most directly affect those with HELOCs, or home equity lines of credit. Some adjustable rate mortgages will be affected as well, although not directly.

The key message to buyers is that rates are the best they have been in two and a half years. Get yourselves ready to go. Get preapproved and underwritten if possible. Being underwritten means that you have met the conditions that were outlined by the lender. There will be conditions specific to you, the borrower, and another set of conditions for the property. Buyer conditions will be your documentation such as pay stubs, W2s, landlord referral, credit report, etc. The property specific conditions will of course wait until you have entered into contract on a home. These are things like an appraisal and a satisfactory preliminary title report.

Because conditions are tighter at the moment, do as much work as possible on your pre-approval. That way you are really ready to go once you locate a property, and there will be fewer bumps along the road when you least need them.

Lastly, we are hearing that more loan programs are being pulled off the market daily. This limits your options when choosing or qualifying for a loan. Areas that are most affected are 95% loan to value ratios, which means that your down payment is 5%. Also stated loans are much more difficult at the moment; your credit score needs to be higher than it used to in order to qualify for a stated program. If you fall into one of these categories, have a conversation with a lender as soon as possible.

Recession?

This is quite a subject, and trying to tackle it is almost scary. You hear it everywhere, but who knows what it really means? I just read an article based on a survey conducted by Forbes magazine, that I found rather interesting. According to the survey, 3 out of 4 people believe we are already in a recession or will be sometime in 2008. Does believing we are in a recession make it so? It can be a self fulfilling prophecy. After all, half of the people surveyed have cut back their spending compared to last year. That in itself can cause a recession.

What is a recession? According to Wikipedia, it is "a decline in any country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year."

What does that mean? The benchmarks are:

People buying less stuff
Decrease in factory production
Growing unemployment
Slump in personal income
An unhealthy stock market

In the United States, the word for when a recession begins and ends comes from a group called the National Bureau of Economic Research. This is a non-profit committee made up of 600 academic economists. Their definition for a recession is "a significant decline in economic activity spread across the economy, lasting more than a few months,".

Although some signs point in the direction of a recession, such as a rise in unemployment and a falling stock market, there has not yet been an announcement from NBER. The last recession in 2001 was not formally recognized as one until it was ending nine months later. According to NBER, the average recession lasts only ten months. The point is, of course, that by the time it is recognized we will be well on the way to recovery.

What really worries people is how their lives will be affected. The first thing to note is that even those economists who do predict a recession are suggesting that it will be a mild one. That may mean that the worst is over. Depending on your career, you may or may not be directly affected.

If the idea of a possible recession scares you, there are a few things you can do to ease your mind. The first is to stay away from the stock market temporarily. Instead of investing in stocks, you can build or add onto your savings. Make sure you have at least a six month reserve, which is a smart thing to do with or without a recession. Lastly, remember that cutting spending for fear of a recession could be the very thing that sparks one.

Keep in mind that, over the long run, real estate values have tended to hold their values, appreciating at a pace that at least matches inflation. Especially in stronger markets, such as in San Francisco, real estate represents a good investment, both in times of growth and in recession.

Equally important is to recognize your personal needs, both for investment and for personal housing. If you are “in the market” to buy a personal residence, the value of the property as an investment has to be balanced with the security and advantages of home ownership.

Lending Options

After the fall of the sub prime market this past August, home buyers have growing concerns about their own financing. Initially people thought they wouldn't be able to get a loan at all. That is definitely not the case. We have asked all of our clients, old and new, to get a new pre-approval letter if the original had been done before August as some restrictions have changed.

Being approved by a lender is one of the first necessary steps in the home buying process. It will give you a clear idea of what you can, and want to afford. Many people don't know where to begin when looking for a lender. It is wonderful if you know somebody in the mortgage business or can get a referral from a friend, but if not here are some basics.

There are different types of lenders, each with their own set of restrictions and loan programs. The three most common types are banks, mortgage brokers, and credit unions. Credit unions are known to offer the lowest rates but have the strictest guidelines, and you must already be a member. Banks are second in line in terms of guidelines, and mortgage brokers have the most leniency as they can shop around with different lenders to find one that fits your needs.

We recommend doing some comparison shopping. Have a conversation with your bank and a mortgage broker. Make sure to compare with your own numbers. Don't compare your scenario with the loan your friend got as there are many factors that go into it.

Get as much information up front as possible. Ask to see different loan scenarios based on the same purchase price. Make sure they include property tax and insurance in the equation. Don't let them make any assumptions; tell them you want to see all of the possibilities based on your purchase price, down payment, and income to debt ratio. There are many options from a two year fixed to a thirty year fixed and everything in between.

The shorter the fixed period of the loan is, the lower your interest rate will be. A thirty year fixed loan is the most conservative and safe, but also the most expensive with the highest interest rate. If you are on the conservative side, the thirty year fixed loan is your best bet. If your goal is to keep your monthly payments as low as possible, you might want to go with a five year adjustable rate mortgage which is fixed for the first five years and then adjusts according to a predetermined schedule.

Once you submit a loan application, you should receive a good faith estimate from your lender which itemizes your closing costs. You don't want there to be any surprises at the end.

One more piece of advice. Monitor your credit score to make sure there aren't any mistakes or surprises. Make your payments on time, especially from the time you applied for the loan to the time you close escrow on your home. The lender will pull your credit report a second time at the end, and if there are changes they may reject the loan in the eleventh hour. Don't make any big purchases in this time.

Everybody is extremely busy, especially this time of year. If you are in the home buying process make sure you take the time to inform yourself. There are many options available to you, but if you wait until the last minute you may be stuck with whatever you get.

Creative Financing

The phrase "creative financing" may scare people these days, but I encourage you to look at different scenarios when shopping around for a loan. Two general loan categories are fixed and adjustable, but within those two categories there are many different options.

A fixed loan is a safer option for the more conservative buyers as the interest rate stays the same throughout the life of the loan which is most commonly thirty years. Some lenders are offering forty year fixed loans as well. Another variation in this category is a fixed loan that offers interest only payments for the first ten years. That would make your monthly payments slightly lower for the first ten years as you would not be paying towards the principle. Fixed loans are the more expensive option meaning they come with a higher interest rate which makes your monthly payments higher.

Adjustable loans are loans that are fixed for a period of time and then adjust according to a preselected index. The most common are those that are fixed for 15 years, 10 years, or five years and then adjust yearly after that. The shorter the fixed period is, the lower the interest rate will be. People will use these loans if they are only planning to be in the home a short time, or if they want to increase their buying power; a lower interest rate will allow you to increase your purchase price.

There are other things to think about even within those two categories. One is a rate buy down, or paying points. Points are prepaid interest and are a percentage point of the loan amount. Let's say you have a loan amount of $800,000. One point would be $8,000. If you have an interest rate on a thirty year fixed loan of 7%, you can pay one point and bring that down to 6.5%. (each point does not reflect one percentage on the interest rate, only the loan amount) If you were to pay two points ($16,000), your interest rate would be 6.250%, and three points ($24,000) will bring you down to an interest rate of 6%.

The difference of paying no points and having an interest rate of 7% and paying three points and having an interest rate of 6% translates to about $500 less in monthly payments. If your savings is stronger than your income, this would be a perfect option for you. Check with your lender and see how this would work with your numbers. Also be sure and ask how long the buy down stays in place; it may be five or ten years; then the loan is re amortized over the remaining term.

With the market being at a balanced point and buyers having more room to negotiate, you can also request that the seller pays for the buy down. Also, if you are a seller and your home is sitting on the market, this could be something you offer to potential buyers.

This is why it is important to talk to a lender before you begin your search. They may have options you hadn't thought of which could affect your purchasing power. Also, you don't want to fall in love with homes you can't afford. Figuring out the financing is definitely the first step, and it is much easier to do with a professional. Let me know if you need referrals.

New Lending Restrictions?

What I have been hearing in the past few months since the fall of the sub prime market is that restrictions on home loans have tightened. I had heard that your credit score must now be above 720 and you must have a minimum of 10% down. I had also heard that the lenders had cut some of their loan programs such as those that did not require you to document your income or your assets; they would simply take your word for it. Not any more, they said. It was proving to be too risky as the default and foreclosure numbers were multiplying before their eyes. It seems, however, that although some of the restrictions had tightened initially, things are already starting to loosen up.

A very nice man walked into my open house this past weekend and mentioned he was looking for a house that had a lot of bedrooms so that he could rent out some of the rooms to help pay his mortgage. It turns out I had helped somebody do this same thing last year so I am familiar with the game plan. My past client bought a house in the Excelsior. He lives in the in-law unit and rents out the main part of the house leaving him responsible with only a small portion of the mortgage. He purchased the home with 100% financing, and although he did have some cash reserves, he did not have to pay a penny out of pocket for the house or closing costs until the first mortgage payment was due. The seller paid the closing costs. This is rare in San Francisco, so don't get any ideas!

The man in my open house seems to be in the same situation. He also has some cash reserves but would need help coming up with the mortgage on a monthly basis. He mentioned that he does not have enough for a 10% down payment but could possibly put 5% down. I told him that he would need to get his financing in order first, and that it might be difficult for him based on the newer, tighter credit restrictions.

Boy was I wrong! He called Countrywide straight away. Countrywide is a national bank known to do sub prime lending; they have really suffered in the credit crunch. I think it is 12,000 employees who lost their jobs? Anyway, the very nice loan consultant he spoke with there mentioned that they not only have loan programs with 5% down payments, but they still do 100% financing. I was very surprised. He mentioned that some programs had been cut initially, such as the stated income/stated asset program, but they recently had started to come back.

It seems some banks are still eager to lend money to just about anyone. Hopefully there has been some lesson in all this, for the banks I mean. The lessons for the borrower are clear. Be conservative. Be sure you understand the terms of your loan. Read the fine print.

Credit Myths

Your credit score has always been an important factor when financing a home. With the fall of the sub prime market it is that much more important as there are fewer lending institutions willing to take the risk of loaning money out to those with lower credit scores. Unfortunately, it seems that the majority does not understand how the credit score works. It seems to go against intuition. I thought I would clear a few things up.

Step one is to check your credit in advance. You can get a copy of your credit report once a year from each of the three credit reporting agencies. It would be a good idea to make this a yearly habit; it does not hurt your score to check your credit in this way and it is free. You may find something on there that you forgot about. There may also be something that doesn't belong there or wasn't reported correctly. These mistakes can take time to clear up; don't wait until the last minute. Make sure you check the report from all three agencies; one may have something the other two do not have.

Don't close any of your accounts! You can certainly pay down your debt, but even once they are paid off, do not close the accounts. You can cut the credit card up if you feel tempted to start using it, but closing the account; erases the credit history and reduces the amount of total credit you have available. The credit score looks at the difference between your available credit and what you are using.

If you have an excess of credit and you feel like you need to close something, make sure it is the newest account as you don't want to erase your credit history. Keep the accounts you have had the longest.

Shopping for a mortgage or a car loan will not hurt your credit. When you are going to make a large purchase, it is wise to shop around and get the best loan possible. Doing this will not hurt your credit score. The credit score will see multiple inquiries of the same type within a short period of time as one inquiry, and your score will only get dinged once.

My last piece of advice is to always seek professional advice before you do anything to try to improve your score. Call a mortgage broker; they would be happy to look at your credit report with you and lead you in the right direction.

If you are already pre-approved for a loan and in the process of buying, don't make any big purchases! Even though your lender has already checked your credit in order to approve you, they will check it once more right before closing. If there is a change the bank could pull out of the loan. I heard a story of an excited couple who went out and charged a house full of furniture for their new house before their escrow had closed. Needless to say, they were stuck with a lot of furniture and nowhere to put it!

The Federal Reserve's Big Announcement

They did it! We were all hoping they would! The Federal Reserve lowered the Fed Funds Rate by a half of a percent. The Fed Funds Rate is a short term rate that banks charge each other. This is important to consumers because it affects the cost of things like credit cards, home equity lines, and auto loans. It is also important because it has a direct effect on the Prime Rate, which is the rate banks charge their best customer (usually corporations). Bank of America lowered their Prime Rate just minutes after the Fed made their announement; a few others including Wells Fargo followed. This half percentage reduction is the first of its kind since 2003, and the prime rate hadn't budget since mid 2006.

The first to be affected will be those with home equity lines, as they are directly linked to the prime rate. Credit cards in some cases are also linked to the prime rate, but they will take longer to adjust. Those who have adjustable rate mortgages and are soon facing a reset may have a bit of relief as well.

We have yet to see what effect this short term rate cut will have on new mortgages. The long term mortgage rate is determined by the market and inflation. The best thing you can do is shop around. Don't take the first quote you are given; visit two or three different lending institutions before you commit.

Don't be fooled by teaser rates! The interest rate advertised in the paper is not necessarily the rate you will get, or the rate you want if the terms of the loan are undesirable. The banks will do whatever they can to get you in the door; many walked through the door because they saw an advertisement for 1.25% home loans. That is how we ended up in this mess. That person is now facing foreclosure as they owe more than they did when they purchased and their loan has just reset to an amount they cannot afford.

It has been said that one or two percent of the population will be directly affected by this change, which is substantial. The Fed is scheduled to meet again at the end of October and then again in December. Of course we do not know for certain that there will be another cut. My father says that if you talk to six different economists you will get nine different predictions. What we really need in this market is trust...from the buyers. People just need to keep buying houses. If everyone was scared off by fear of the economy crashing, well, then it would.

I toured properties all over the city today. There is a lot out there; something for everyone. Talk to your lender and see what you qualify for. The time to buy is in a slow market; if you wait for the market to improve you have already lost your window.

What Can I Afford?

Everyone would agree that the most important factor in purchasing a home is money. Whether you are buying purely for investment or because you become emotionally attached to a home and are thinking more of quality of life, it all comes down to money. We are currently in a state of crisis because over the past few years lenders have been passing out loans like candy, and unfortunately not everyone could actually afford the loan they were given. The first broker I worked with used to say, "All you have to do to get a home loan these days is fog a mirror!" It looks like that is changing now, but only because an estimated 2 million adjustable rate mortgages are scheduled to reset this year. Of course not all of these will default, but many borrowers with poor credit who had already pushed their income to debt ratio to the limit will certainly be over their heads. Who's to blame for this problem? Some say the consumer and other say the lender. Of course, both hold some responsibility. The buyer needs to be sure they understand the terms of the loan. READ THE FINE PRINT! You need a loan consultant you trust! I received a phone call a few months ago from a man who needed help trying to figure out if he should sell his home or buy his ex wife out. I did some research into the title and found that he owed more than he did at the time of purchase. This was news to him, and although they weren't in a default position as they could afford to make the payments, he could not afford to sell the home as he owed more than the home would have been worth on the open market. He had a negative amortized loan and had been making the minimum payment each month without realizing that this caused the loan balance to increase over time. He didn't know; wasn't told. Should he have read the documents more carefully? Sure, but I believe that is called predatory lending. English also happened to be his second language.

So how much can you afford? As I mentioned before, banks have tightened requirements. You need to have good credit and a minimum of 10% down, but most importantly you need to decide how much you can comfortably afford to pay each month. Many times people qualify for more than they actually want to pay. Once you have a comfortable monthly payment amount in mind remember that amount needs to include not only the loan payment but also property tax (1.14% in San Francisco) and home owner's insurance (home association dues if you are purchasing a condominium). One other cost to consider when you are going to purchase a home is closing costs. On average, closing costs are 1.5% to 3% of the purchase price. They can be higher if you are paying points (prepaid interest) to lower the interest rate on your loan. Closing costs for the buyer include lender's fees, escrow fees, title insurance, and inspection costs. Closing costs are not taken out of the down payment; they are a separate cost. This is probably the largest purchase you will ever make (aside from your second or third home of course). Take your time. Surround yourself with a good team , don't over extend yourself, relax, and enjoy your new home.