February 2020

February 25, 2017 was when I wrote my last Blog for McKae Properties.  Since then I joined to Berkshire Hathaway HomeServices franchiee Drysdale Properties.  Drysdale had made many changes and additions to a final point, I could no longer add my commentary to their Monthly newsletter.  So “I am Back” as crazy comedian Johnathan Winters exclaimed upon his return from a mental institution on late night Johnny Carson show….if you haven’t seen it do so.  He was one crazy fellow!!! https://www.youtube.com/watch?v=4RRpgYKX3JM

In February 2017 we had conditions that are similar to today.  Low inventory, interest rates which were low for the time are now lower.  Demand for homes remained strong as buyers fought against rising prices only to see them go higher.

So what makes prices go higher and demand to remain strong?  What causes the tight inventory?

Let’s go back to school.  Remember the law of Supply and Demand?  Prices and demand are tied together.  More demand and supply does not meet demand…prices go up.  More supply and prices go down.  Logical.

Now that is the simplistic approach that should be obvious.    There is the tie up of homes to the stock market.  The stock market goes up, people have more money and they are willing to pay more when houses for sale are in tight supply.

Stock prices rise and home prices rise.  They are both asset classes.  They both are a source of funds.  That is when money is needed for an expense, the owner either sell stocks or bonds or real estate. They both offer liquidity and a store of value.

The largest asset the average American has is their home.  When it comes time to cash in their assets the home is sold.  Now here comes the trick.  Most Americans have bought their homes for life.  Business people and those who have a career will not look at a home as a permanent asset.  They will look at their home as a cheap alternative to renting that will create store of value and future appreciation, with maybe some tax benefits as interest write off.

Then we have those owners who will look at better alternatives.  The 55+ communities have become very popular.  Children have moved out and away. The years of sacrificing are over and the need to relax and enjoy the remaining years become something to look at.  The growth in 55+ communities have been quite extra ordinary.  So has the growth in Senior care centers.  Seniors who look at their future with caution would like to have some place to live without the daily needs of cutting grass, replacing broken parts in the house, or fighting with contractors over prices and repairs.  The Senior Care centers will appeal to all who seek an alternative and offer price comparisons to the wealth of the buyer.  Added to those senior care centers are hospice care.  We have all come to face with how to take care of a loved one who can no longer care for themselves.  If you haven’t you will!  A parent falls and can not care for themselves and are unable to live independently will need some sort of care.  The care is not cheap and most do not have Long Term Health Insurance.

How will the care be paid for.  Home sale is a natural choice.

So at some point the question of supply of homes will be answered with a Grey Tsunami.  The Baby Boom generation, who are the major owners of homes, will sooner of later become the major supplier of home sales.  Whether they want to or not, the home will be sold by their children or forced upon them by circumstances.

Now let’s go back to the charts.  We all know that the stock market has daily swings.  The daily swing may pass by until the daily becomes a large decline.  It is the law of supply and demand.  Prices go too high, sellers reduce offering prices as buyers retreat.  The sell off will affect home prices as buyer will feel poorer and they will become less willing to pay up, or over bid on a home for sale.

Whether it is stocks as measured by the S&P or Homes Prices, both will come down to a level the buyer will feel comfortable in making an offer.  It is the cycle of that must be followed and every buyer and seller must become aware of.

Begin to look at home prices in the weekly papers and internet news.  You will see that homes and stocks march together.

With February coming to an end I will being my monthly commentary on real estate in Atherton, Woodside, Menlo Park, Palo Alto and Portola Valley, with some Redwood City analysis in March.

Until then, please add your comments and questions and send them to gary@mckaeproeprties.com or text to 650-743-7249.

Gary

2013/2014: Looking back and Forward

Good Bye 2013

Boy, I miss the warm breezes of Kailua, the body surfing on the north shore and the relaxed atmosphere of the Islands. So I decided to keep the Wahine on the surf board as my year end photo.

In line with escapist thoughts, your parents are planning to blow your inheritance off shore in some idyllic isle. Owing the the increasing costs of home ownership, higher medical costs, and sundry other daily living expenses. U.S. Retirees are planning to pursue the American Dream abroad. While there are pitfalls and benefits, one cannot envy the daring who just say ENOUGH and buy that place in the sun to join many other Expatriates.

There was a time when retirees thought of Tahoe, Incline Village, Aspen as there retirement home. But the cost of skiing has become ver increasingly expensive each year Take a look at prices in Tahoe and you will discover that there is no rally in that market. The inventory of homes for sale in the entry level are substantial. Foreclosures and short sales are still in the markets. High end luxury homes are moving, but at a slow pace. If you are considering a second home, as I am, this is the best opportunity to grab your place in the mountains before the economic recovery goes into full swing. For that reason, you will be receiving Oliver listings in the Lake Tahoe area. You will agree with me that there are some great values when one compares the homes and the prices to our area.

As the market in housing improves in our area, borrowers are emerging from underwater loans. The risk here is not the first loan but the HELOC, home equity line of credit. The HELOC is tied to short term rates. Watch for increases to begin to bite into the cash flow as rates increase. If you have a HELOC, refinance if you can and combine your new first. Don’t find yourself facing 2009 all over again!
Jim in Carlsbad California is a good example of borrowers going into the jumbo market.

While the news continues to talk about falling foreclosures and notices of defaults, I had 24 requests for BPO, broker price opinions, in the past 2 weeks. BPO is the beginning of the foreclosure process. A notice of default may or may not have been given. The serving agent is asking the asset manager to find out the value of the property. The decision to foreclose of modify is on their mind. Don’t hold your breath to modify. The process has gone on long enough that foreclosure is highly probable. I expect a new wave of foreclosures is in our future.

As we continue along with our parents moving to Bali or Costa Rica and the price of housing moving back up to levels above the crisis, we must be aware of the Affordability factor. California Coastal Housing is Unaffordable Again!

If our parents are finding affordability a problem, what about our children? To help them out do your homework on the MHA, Making Home Affordable Program. Check with BofA, Chase and OneWest if you have an interest. Or email me and I will direct you.

If affordability wasn’t a problem, think about renting. 43 million households are renters. This is 35% of all US households. It is the highest rate in over a decade for all age groups. No wonder our parents are looking outside our borders.

As December 31 approaches, and you have not thought of refinancing, think about this. The US Department of Housing, HUD, will reduce the maximum limit from $729,750 back to $625,000 for HUD insured mortgages.

To give you all a good feeling if you are a home owner or considering becoming one. Who has the healthiest housing market? Would I surprise you with California? San Francisco, Los Angeles San Diego in the TOP 10.

If your ever increasing stock portfolio is stopping you from making that purchase, think fast. Merrill Lynch is saying prepare for a 20% corrections. To add to the woes could be a new tax package of higher capital gains rates.

Year End Comments

We have have had a great year.  Median prices for homes have risen. Loan terms have loosened.  Multiple offers and over bids are selective.  The economy is moving up slowly without inflation.  The Federal Reserve continues to have a loose money mentality and has kept and will keep rates low. The stock market is at new highs.  Employment is picking up.

 

So where do we go next year?

 

Analysts say the Double Digit Appreciation will come to an end by 2014.  Borrowers are less healthy in the third quarter  of 2013 as home prices have moved up and Loan to Value ratios have risen.  This will stop the sharp rise we have seen in home prices as things settle down to a normal market as home ownership begins to level out and more people begin to qualify again for home ownership.  We still need to come to a conclusion and decision on Fannie Mae and Freddie Mac, they are the major processors of mortgages in America.

 

What are the reasons for a slow down in our housing market.  First is the Bubble Fears.  Certain areas in our market place have had a run of over bids and multiple offers.  While I do not believe we are in a bubble; in as much as, the bubble has to be universal.  We do not have a over bid and multiple offer environment in certain sections and cities in the Peninsula.  In fact once you move over to the East Bay or South of Los Altos the market sits loaded with inventory.

 

Next the low inventory may really be caused by under water homes.  Homes in which the mortgage is more than the value of the home.  Do we really have more vacant homes that we are aware about.  Have owners simply walked away and left it to the Bank?  Are there properties servicing agents/investors still have on their books because the owners care the property?

 

Like the recovery in stocks, real estate is an asset class that has come under extreme pressure from the 07 Crisis forward.  Even with the recovery, the Government Bail Outs and low interest rates from the FED from the past present and future at least until spring 2014 many sections of our real estate market are far from the highs of the Pre- Crisis level.

 

The buyer market still has a long way to go when one considers that foreclosures and short sales put a time line on when a buyer can qualify.  That means that we will not see from the foreclosures of 2007 until next year and most likely 2015.  Then it will be a slow process of each following year a new crop of buyers will come on the market.  unless there is some extra-ordinary rule changes in loan qualifications, the housing market will be in a slow process of recovery fed by returning buyers.

 

The signs that our market may be in for a rest is the October Existing Homes Report.  It fell 3.2% nationally, but in some sections in the West they were down 7%.  Parabolic rises collapse or consolidate.

 

From my previous Blogs, I have noted that the high End market was DEAD.  Realty Trac is quoted here:

 

Ultra High-End Foreclosures Are Up 61% in 2013

 

“Overall U.S. foreclosure activity is down 23 percent through October 2013, but foreclosure activity on homes in the $5 million-plus value range is up 61 percent from the same time period in 2012, according to a RealtyTrac analysis just released this week.

 

The number of these ultra high-end properties with a foreclosure notice in 2013 is relatively small, but each of these high-value homes represents a much bigger potential loss for the foreclosing lender compared to a median priced home.

 

From Miami to Malibu, visit us online to see a slideshow and learn the details about 10 spectacular multi-million dollar foreclosure properties.”

 

Talking about Foreclosures, the past several weeks I have been sent 3-4 Broker Price Opinion Requests.  A BPO is a precursor to a Notice of Default, which leads to foreclosure.  

 

Were are the BPO’s centered? They are 2 in San Mateo, 2 in Menlo Park, 4 in Alameda, 6 in Oakland, 3 in Redwood City, 9 in Sunnyvale and 2 in Hayward.  All in a two week period, with 3-4 to 4 a day coming in for the past several month.  

 

Now do you think we have a bubble?  I think that home prices will stall, and the market will begin to absorb the new buyers.  Buyers will absorb the future short sales and foreclosures.

 

Continuing on this vein, Bank Of American has invited me to several Short Sale Seminars.  If we are done with the crisis, why the seminars.

 

So buyers relax.  Home prices are not going higher, you will not be priced out of the market.  It remains to be the best time to buy a house.  Interest rates are historically low.  The economy is improving.  Unemployment is declining.

 

To sellers, be realistic.  This is not a return to the past where you will see your most over priced expectation come to fruition.  While home prices are higher than last year, over pricing your sale will find it languishing on the market.  Once one price cut comes in the buyers smell blood and will look for others.  Price your home under the market and continue to expect over bids and multiple offers from buyer’s realized value.

 

McKae Properties Blog http://www.mckaepropertiesblog.com WARNING SIGNS AHEAD

THE SHUT DOWN AND THE BATTLE OF THE DEBT LIMIT AND THE BUDGET IS BECOMING AN EMBARRASSMENT TOOUR COUNTRY!

I recently had a conversation with a successful real estate developer and investor. We discussed the process of debt limits. I brought up the suggest that, “why don’t we create debt as a function of Gross National Product, similar to the measurement of corporate financial health?”. If Apple is growing at double digit rates, and it has a substantial balance sheet and cash reserves, would it make sense to put a cap or ceiling on its ability to borrow with a debt cap?

This political football or hot potato game is creating issues with our economy and our ability as a nation to snap back from the brink of financial disaster to a vibrant economy.

Silicon Valley growth is a legend and its ability to snap back is what gives us the highest priced communities in the nation. We have recently seen that employment is reaching the 2001 levels in growth. Home prices should be moving accordingly, but they are not. Why is that? The high end homes are suffering from an impact on mortgages. Median price homes too have begun to soften. This is not an economic function but from a structural issue. The inability to get social security number is verified and tax returns verified creates an inability to close escrow. No close of escrow, no sale of house and buyers are left frustrated and may just back away until these issue settle out.

Does it make sense for politician to play chicken with our economy? When I was Mayor and on Woodside’s Town Council, I made decisions that was for the better of the entire community not a single part of the community. When you are elected, you represent 100% not 40%. Something is wrong with the present situation.

Prices are softening in all areas expect Palo Alto. Demand remains and sales over list are still part of the risk of buying a home. The only fail safe is the market is beginning to recognize the over pricing by sellers and sales in these over priced homes are not having the over bid. In fact, in certain areas, homes have been taken off the market. This is a sure sign of a maturation of the market, could it be a leveling off phase?

Third quarter report for banks are weak due to the decline in mortgage banking.

There are fresh concerns for America’s Housing Market. Balance sheet rebuilding of the average American is still going on. As balance sheet rebuild, home owners must seriously look at their housing asset and make the decision of hold, sell or refinance. If refinance is being put in abeyance, that means it is hold or sell. There is another selection, “STRATEGIC FORECLOSURE”. The strategic foreclosure is an option that must be considered here in California as the State has not renewed the phantom income forgiveness. That is, if a short sale creates a difference between the first mortgage and or the first plus the second, the difference presently is taxable State and non taxable Federal. Another game of “CHICKEN” is being played by the California Legislature. A Senate Bill sits waiting to extend the non-taxability of phantom income or for given debt. If not, any short sale which creates phantom income or forgiveness of debt will create a taxable event for the seller without cash flow. What is the alternative? Only one, let the bank forecloses and no taxable event. Yes, the credit rating is hit, but would you rather pay cash on the forgiven debt? Sticks and stones will hurt my bones, but names (credit ratings) will never hurt me. Think about that one!

What makes me think we are at that juncture?
Housing market is funning at 85% of normal, pre-recession activity.
Shadow inventory is a lowest level since 2008. This make me think that with the inventory of banks holding mortgages with a notice of default without foreclosures. Foreclosures can increase, since we are no wheres near full recovery.
Foreclosures at the lowest level since 2nd quarter 2007 as housing starts plummet to a 7-year low. To me it makes sense for banks to salvage their losses by foreclosing and selling into a tight housing market where builders are not in competition.
Broker Price Opinions mounting. This is a precursor for notice of default and foreclosure. The process begins with an asset manager, a service used to market foreclosed properties, sending out BPO’s to qualified agents to price a property. I have been on this list for several years. The requests to me started in Hayward and have slowly moved up to Los Altos. This process begins with a real estate agent making a exterior visit, takes pictures and then begins a comparative analysis of the sale price of a property based upon other sales of similar properties in the same area for a short period of time. As BPO’s increase the asset manager then begins to create a list of salable properties to give tot he bank or servicing company to decide to foreclose or not.

How can the pick up in foreclosure activity be proven? I would look at the next analysis of under water homes. So far I have not seen any news or analysis of the under water homes. The next is a pick up in foreclosure activity. Again, this will be a lagging number as once foreclosed the property will take some time to come on the market.

How does that affect us in Silicon Valley? We need to see what happens to the back log of escrows waiting for close due to the shut down. The next is how our California recovery continues and what affect distressed sales will have on the over all market. All of which will be lagging indicators.

What it does mean is the seller and the buyer must be realistic in their expectation. This is not the return of 2001, nor is it 2007. Bubbly home prices create warnings. Robert Shiller of Noble Prize Fame and the housing index quoted monthly has warned of the Bubble.

What does this mean, or indicate, to me is we will see volatility in home prices and markets, just as we are seeing volatility in the stock market and now in the bond market.

Remember the Old Chinese Curse, “MAY YOU LIVE IN INTERESTING TIMES”.

There are too many inconsistencies and with them opportunities. One cannot look at housing as a forward upward movement or downward movement. There ill be under priced properties and over priced properties. It will take a savvy buyer and or seller or their agent to maneuver in this market.

Local silicon Valley Markets ignite and Lift Off

Will Ben Bernanke Pull a Rabbit Out Of The FED Hat?

A number of forecasts are all coming together.  Let’s deal with Home Sales first.  From the last report I heard 52%, down from 56%, of homes sold in the United States last month were either REO, Bank Owned, or Short Sale classified.  More people bought new homes in March, helping give the battered real estate industry a small lift after the worst winter for sales in almost 50 years. READ

To begin with the future outlook for real estate going forward, there is an interesting report put out by the Federal Reserve.  The Report is called: “Senior Loan Officer Opinion Survey on Bank Lending Practices”.  This Report will be an indication of where we are in the lending cycle.  As banks become more confident we should see some changes in this report.

Are buyers become more confident as the economy improves while the housing market has questionable signs?  How does the prospective buyer judge what direction to take?     The people at CNBC have another bit of information that they have gathered from Real Estate Moguls, READ IT HERE. 

From the April 22nd issue and the comment on rental housing, the Wall Street Journal now gives credence to my first comments from late last year that rental housing was a great investment!  How about rents are rising and we are in a Bull Market in Rental Housing?  Nationally, rents have moved from $930 in 2006, pre crisis, to $991 today and the forecast is $1025 in 2012.  READ

Strong demand in rental housing was really a “gimme”.  Too many people lost homes.  They had to live somewhere.  Even those who sold and decided to wait to buy by renting are finding themselves in a hole of higher rental prices as their leases mature.  You must look at diversifying your investment portfolio if you feel too top heavy in equities.  If you are fearful of your bond or fixed income portfolio declining when QEII ends, real estate as an income investment couldn’t be at a better point for rising rents and eventually rising property values, A GREAT INFLATION HEDGE.

That leads me to rents as part of the inflation figures and a reader’s comments to me from a Bank of America commentary in that there is no inflation.  We heard from Ben Bernanke’s first FED news conference the word “inflation”.  We heard it several times to note that Mr. Bernanke is now looking down the barrel and sees that “Inflation” is popping up its head.  How far in the distance?  It could be as soon as next year, IF THE WALL STREET JOURNAL IS CORRECT.  If rents are up and it creates 4% increase in inflation annually, that means it goes from 0% to 4%, it will have a meaningful impact on the formulae the FED uses to monitor inflation and to make decisions on interest rate direction.  From the Wall Street Journal article the statement was a move from $990 today to $1012 in 2012.  that is a $22 increase per month or a 26% annual increase.  Is that inflationary?  I think so.  So, why isn’t Ben Bernanke worried?  What will offset the increase?

Commodity Prices could come off their highs and we will see greater profits from the manufacturing sector as their productivity savings are further enhanced by raw material savings.  Why would that happen?  It has to do with commodity prices.  The reason was a weak US$ and foreign demand.  The weak dollar transferred into higher prices for internationally quoted products as local currencies appreciated at the cost of the US$.  All the Asian Economies and the including Brazil as Latin America’s Growth Economy all prospered and their currencies appreciated against the US$.  Due to demand from them there was some appreciation in unit cost of raw materials.  The quoted cost in US$ further increased due to the exchange rate adjustment.  That had a minimal effect in the US as we were still struggling out of our Great Recession.  Our economy was not a buyer of our manufactured products.  The offshore was the buyer.  As inflated commodity prices were put into manufactured products purchased offshore those countries began to see inflation ramp up and they began to temper their growth by raising interest rates; as an example, in China and Brazil.

We now have their economies throttling back and our economy beginning to revive.  The big question will be what could cause inflation here?  Higher commodity prices or the present high commodity prices cannot be covered by increased productivity.  The other one is interest rates.  Interest rates are abnormally low we are told.  There has been a great deal of commentary, including myself, on the forecast of higher interest rates once QEII end on June 30th.  Interest rates are tied to the weak US$.    What if the US$ strengthens and interest rates do not rise?

That takes me to an interesting statistic I heard of on the total amount of bank debt maturing this first half at the banks.  The total amount of C&I, Commercial and Industrial, loans maturing is $2 trillion.  The total amount of Quantitative Easing and debt owned by the FED is $2.6 Trillion.  The total amount of US Debt owned by China is $1.6 Trillion.

IF A BIG IF, the US Banks allow the $2 trillion to mature, where do they put it?  How about the $2.6 Trillion in mortgages and bonds the FED purchased.  No new money is printed.  No inflationary impact.  No increase in interest rates.  No inflationary impact.  A REVERSE REPO on a monumental scale!   The FED took on the old and toxic debt, sold US Debt to finance the healing of the capitalistic system, bought that debt back to support low interest rates and then sells the debt from FED Inventory back to the banks with matured funds from C&I Loans.  If I am right, Ben will be in that office forever!  It will be a new strategy for all Banks all over the World to use!

What makes me think this is possible?  Let’s look at the contrary indicator news.

.                 1.China needs to guard against volatility in U.S. Treasury prices should investors demand higher returns from U.S. government debt, a researcher at the Chinese central bank said on Monday. READ


.                 2.China’s central bank is considering setting up new investment funds to diversify holdings in the country’s swelling foreign exchange reserves, the world’s largest stockpile, local media reported on Monday.  READ

.                 3.Silver traded to historic highs Monday, taking out the $49.45 an ounce that held for more than 30 years when the infamous Hunt brothers tried to corner the market.  READ

.                 4.Economic growth slowed more than expected in the first quarter as higher food and gasoline prices dampened consumer spending, and sent a broad measure of inflation rising at its fastest pace in 2-1/2 years.  READ

.                 5.Americans’ cheap money spigot remains open and the flow is as fast as ever, meaning the world had better brace for even higher oil, metals and food prices and a weaker dollar. READ

Mr. Bernanke knows too much to let us fall on our backs again.  Too many are forecasting something that is going to happen that will happen for me to believe it.

Even IF, the housing market revives itself, there is too much in inventory of REO homes for the market to run away in an upward spiral.  EXCEPT, HIGH END HOMES, that side of the market never ran away as did the low and median price homes driven by easy money in the Pre-Crisis Era.  The high-end market will be strong and that market will see higher prices, but that market will affect median home prices.  Median home prices will slowly increase while REO inventory will still keep a lid on prices.  There will be a sense of recovery while there will be none in the prices of middle to low end homes.

There will be a great deal of adjustment in thought as we move toward June 30th.  The earnings season is over and a lid will be placed on the stock market, bonds will go no where and neither will rates.  The concept of “Sell in May and Go Away” could once again prove correct.  The stock market could continue to see appreciation in mergers, takeovers and buy backs. Now is the digestive phase.  The Asian Economies and LAtin America will slow down as they all try to curb in their inflation.

Finally, some thanks to Osama’s demise in the form of Fortress America is the safe haven when the world looks at the terrorist card again.  Pakistan is not a real trusted ally, India is back on the favored list.  Adjustments are need throughout the Middle East.   The monied people there will look at a home in the US, mainly west coast, as their safe haven.

It all goes down to looking at the last Great Recession, after 1974, to determine your investment strategy.

Here is the report on sales in the last 14 days for your review.  I have included Townhouses/Condo’s in the report.  We continue to see over bidding in homes and the DOM, Days On the Market,as old inventories are liquidated.  In comparison look at 98% of sold versus original compared to 85% from last report.  DOM has increased as more older listings dominated the sell list of this report.  inventory is declining and not being replaced.  The one exception is Portola Valley where I see a very large list of for sale properties than i have seen in the past.

SEE REPORT

Fortress America: The Growth Continues

MARKET COMMENTARY JULY 17, 2009

• Log Jam busted, pending sales close
• Loan commitments and closing continue cause delays
• Appraisal process in a new world
• High-end homes back on demand as prices increase

 

City              Pending     Pending do not show     Sold

Menlo Park   12             15                                   19

Portola Valley 1              3                                      6

Woodside         4                6                                      1

Atherton          5                 8                                     7

Palo Alto         13              22                                   39

 

On June 23^rd the report below was sent.  The concern I had was the closing of the pending sales.  Palo Alto can be a divergence from the figures.  While many look at Palo Alto as a city with expensive high –end homes that can be deceiving.  Confidence in our economic recovery can only be seen by high-end buyers willing to make commitments with all cash offers.  We can see from the above report above and below the log jam has broken and the homes sold in the past 23 days have dramatically improved.  The sold homes on June 23^rd were 41.  The homes sold as of today are 72! 

City          Pending     Pending/Do not show      Sold

Palo Alto    21              43                                    39     

Portola Valley 4  5                                               0

Woodside   5             3                                              0

Atherton    4           10                                              0

Menlo Park   17      19                                              2

What does this tell us? 

New appraisal rules are creating delays in closings, is one answer.  Short sales, depressed areas and foreclosures have had an impact on the appraisal process.  Inexperienced and out of the area appraisers have had an impact on valuations.  Fannie Mae and Freddie Mac have created new rules nationwide.  Along with the new rules are lower fees, sometimes; 50% lower than prior standards.  To complicate matters further, the Fannie-Freddie system known as the “Home Valuation Code of Conduct” has been complicated by a settlement with Fannie-Freddie and the New York State Attorney General’s office.  Under the code, appraisers are assigned by an appraisal management company who keeps 40-50% of the fee.  The result is frustration, complaints and new appraisals paid for by the buyer, increased deposits, greater verification of documents.  It appears the deal gets done but the time factor to close a transaction has lengthened appreciably!

Securing Jumbo Loans is no small task.  It is like a barbell, easy to get at each end of the barbell and little in between.  In high cost areas, such as our area; the cost of getting a jumbo is dear.  High compensating balances at banks are required, greater down payments of 25-30% are a norm.  The rates are 1. 5% higher; were as, the past difference was less than 1% between a jumbo and a conventional loan.  Of course then there are origination fees or points. 

To add to the delays, a new law will come into effect on July 30, 2009: Home Ownership and Economic Recovery Act and the Housing and Economic Recovery Act.  The changes are all made to make the deceptive acts of past lending institutions disappear.  New time frames for disclosures will be in force.  Consumer review of documents will change and re-disclosure of the Truth in Lending laws will occur.   These changes will impact closing dates. 

What should it mean to buyers and sellers?  It means “Financing Contingencies” are a must.  If not the 3% down payment is at risk due to the failure to close.  Buyer beware is back. 

WHAT TO DO?

1. Obtain credit pre-approval commitments before making an offer and do not accept an offer without source of funds and ability to close
2. Review Timelines and impacts with agents and lenders
3. Review the appraisal process; whether you are a buyer or a seller.
4. Understand the interest rate on your loan, it changes and impact on APR.  Determine when rates are locked.
5. Understand the charges and fees by third parties and obtain a closing statement before close and at the time of the offer.

To close off the new world and not to give you ill thoughts, the prices of homes per the San Mateo County Assessor have increased in Atherton and Woodside.  Both rose more than 6% and 7% respectively.  Portola Valley rose 4%, and Menlo Park rose 3.5%.  Other cities such as Belmont and San Carlos rose about 2%.  Redwood City increased 1.5% and Burlingame +3%.  When one considers cities like Burlingame, San Carlos and Redwood City were impacted by dramatically lower home prices in certain parts of their cities due to short sale and foreclosures; it give heart to know that high-end homes preserved their values.

Market Commentary

June 10, 2009

 

I am returning to the old form of communications.  We have moved offices, the phone lines are in, but not the internet.  My laptop at home has a problem accessing the Blog.  This will have to do.

 

Big TWO WEEKS, homes went pending all over the area.  Sounds like the return of the past market with those who were waiting for a bottom, or those who could not wait any longer jumping in.  The big change was the price per square foot paid.  Three weeks and more ago, buyers were getting big discounts for last year.  Menlo Park saw the larger homes of 3000+ square feet going down below $600 per square foot.  West Menlo and Allied Arts were down to the mid $700 per square foot.  And then, pop went the weasel.  What caused the pop and what happened?

 

The big POP was how quickly homes went pending.  Multiple offers were not uncommon.  In Palo Alto on Middlefield a home went off above list with 7 offers above and one offer below.  Multiple offers were not uncommon in Menlo Park.  There were over bids too!

 

What these homes sell at will be the big question on all buyers and their agent’s minds.

 

What caused the run?  I think two things caused the run.  School ended and those parents who wanted to enroll their children in Oak Knoll and Hillview want in early.  From what I have heard form listing agents, the offers were all cash. The other cause could be the jump in mortgage rates in the past two weeks.  We saw rates move into the 5.5% to 6% range from the 4.5% to 5% range.  If buyers had a locked in rated they jumped in once they rates increased, rather than lose the lowest rates in history.

 

Here is how the stats run:

 

Atherton 10 pending

Portola Valley 8 pending

Woodside 11 pending

Menlo Park (west of 101) 42 pending

Palo Alto 60 pending

Redwood City (over $800,000) 32 pending

 

All it tells me from the statistics and my experience with buyers is that we have seen the end of the wait and see group.  New listings are returning to the $900 range in Menlo Park. Palo Alto is picking up along with Menlo Park.  Redwood City is seeing great activity outside of the REO, Short Sale, and Foreclosure market.

 

We have some time to see what the FED will do on interest rates.  If home sales/pending sales continue to move along with rates in mid 5’s to low 6’s. We may not see the FED buying bonds in the after market to drive down rates.  If pending and sales slow down, the FED is a buyer and rates will come down. 

 

Buyers have finally gotten smart about price versus rates.  If you have a 4.5% loan it is cheaper than have a 5.5% loan and a lower price.  Go figure it yourself.  $500,000 with a 1% savings is $5000 per month, per year $60,000.  Over the life over three times the original mortgage.  Waiting for the bell to ring at the bottom will cost you in mortgage rates.

 

June 23, 2009

• Market Statistics
• San Carlos is “hot”
• Palo Alto leads list is closings
• Pending’s and the risk
• Are we in a bubble?

City                   Pending/Show       Pending/Do not show           Sold

Palo Alto             21                         43                                        39

PortolaValley       4                            5                                         0

Woodside            5                            3                                         0

Atherton               4                           10                                        0

Menlo Park          17                          19                                        2

RWC +$800K     16                          10                                        0

San Carlos            23                           19                                      1

The past 3 weeks has seen some notable changes.  The pending does not show, or those offers that removed all contingencies, have dramatically increased.  We are either to have an avalanche of sold’s within the next week or some offers collapsing, and home back on the market.  The risk, as I see it, is FINANCING.  I am hearing more comments from agents that lenders are asking for another appraisal, increase in deposit, compensating balances, and or more due diligence in closing a transaction.

What started the buying? 

1. Commitment letters for financing were based upon rates of 30+ days ago when interest rates were 1% point lower.   “Use it or lose it” is the short answer.
2. Pent up demand caused by the dead zone from November 2008 to March 2009.  Buyers walked from the market when the financial system tottered.
3. Cash no longer placed in the stock, bond and or hedge fund market saw greater value in real estate.

I have been asked to explain why is our real estate market vibrant when the rest of the world east of 101 and north of San Francisco and south of Los Altos struggling?  Cash is king, alternative investments are lacking, and technology still remains to be the driving power of our employment figures.  Once the excesses of the past leveraging era are cured, the substance or firm base of our technology base holds our economy together.  Let’s look at Telsa versus Ford, GM and Chrysler.  The former is building plants in our area and will be hiring people; whereas, the later will be closing plants and laying off people.  The RUST BELT continues to erode away.

Our residents are not stock market investors, they may own stocks, but they own them from Venture Capital deals and stock options.  Investing to our Valley people come in cash in banks, and treasuries, investments in VC partnerships and then the ties of success: cars, homes and education for their children.  That is different from the east coast and the mid west.  They are stock and bond investors and to some extent hedge funds, usually fund of funds.  When the stock market tanks the mid west and east coast feel it hard and their real estate market suffers; because their economy is based on industrial production and finance.

Are we in a bubble, I don’t think so.  We just have a stronger and more solid economic base.  When the crisis hit in November it was not based upon the same economy of the “29” Crash.  People had money in banks, money market funds, and various other cash equivalents.  The trust had been broken when Lehman was allowed to fail and the short term paper in Lehman failed.  The dominoes began to fall and trust disappeared.  Then fell the money market funds, the banks began to shutter and the commercial paper market disappeared.  Investors went to the safest paper, the US Government paper.  The dominoes not only fell in the US they fell all over the world; we are in a global economy. 

Where are we now?  Cash buyer predominate the over $2 million market.  Atherton homes are beginning to close very quickly.  Those sellers who had to sell are now gone; whether that be Atherton, Menlo Park, Palo Alto, Woodside and Portola Valley.

The market of under $1 million gets very hot once you drop down in list price.  If I give you San Carlos as an example; the price of $500,000 to $800,000 last days once listed. 

A client said to me businesses are closing in SF, the news on the economy stinks and I can’t buy a home in San Carlos because I can’t move fast enough.  It is not the economy it is de-leveraging of the financial system and all those who relied on excessive leverage.  The excesses will be eliminated and sound base of our economic system will remain.  If our economy is in trouble ask yourself who is buying the IPhones in such unprecedented numbers.  Or how can a band make $1 million on 99 cent downloads onto an IPhone IF are truly in a recession?  Or how many Telsa’s sold at $100,000+.  I remember the last big recession in 1974.  I bought my first Mercedes for $1000 more than a Ford Fairlane for one simple reason, I had cash. 

It is unfortunate that some business will fail, that could simply be the fact that they only existed due to unsound leverage. 

 

Use your common sense when making offers.  Do not think that because you are a cash buyer you are going to steal a property.  There are other cash buyers in the same situation.  Some of whom will pay up to get the house they like in the neighborhood they want.  If you are listing or selling a house or plan to sell a house, make reasonable expectations.  This is not 2006.  If you bought in 2006 and must sell, you make take a loss. 

 

In the next several weeks we will see if pending’ do not show become sold’, or if fails occur and homes are back on the market, or if the pending’ continue.  Sellers may see a greater risk by canceling an offer rather than working with buyers.  My bet is they work with buyers.

 

Regards To All