The Real Estate Weather Report - Jul 09 - Ken Roberts

A R E A L E S TAT E P RO ’S P E R S P E C T I V E

The Real Estate Weather Report Keep Umbrellas Handy and Make Hay When the Sun Shines

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f the real estate climate was reported like the weather, it might sound something like the following: “Expect the stormfront in the South Bay real estate market to continue with cold temperatures, scattered showers, and occasional gale force winds in the middle class areas, gradually giving way to partial clearing and a warming trend for first-time buyers with the worst behind us for the high-end market.” One of the barometers of the real estate climate is the number of foreclosures being filed in a city. While this really doesn’t paint the whole picture since need to take into consideration the number of short sales (where the sellers owe more than the home is worth and the bank agrees to take the loss and allow the homeowner to walk away) and other distressed sales, it’s a pretty good indicator. As the flood of distressed properties subsides, a more normal market will emerge with real live people as sellers rather than institutional sales dictating market values. Let’s look at the number of properties in foreclosure where the notice of default has been filed and the clock is ticking, along with properties recently foreclosed on and sold at a trustee sale. Remember, if a property is in foreclosure, it doesn’t mean it will go to sale. Homeowners may redeem their home by paying the amount in arrears and thus cancel the foreclosure. As of this writing, the number of homes either in the process of or recently foreclosed upon in the South Bay looks like this: Manhattan Beach – 69, El Segundo – 27, Hermosa Beach – 56, South Redondo Beach – 84, Palos Verdes, Rolling Hills – 53, Rancho Palos Verdes – 105, San Pedro – 384, Torrance – 624, Hawthorne – 513, Lawndale – 222, North Redondo – 112, Lomita – 81, Harbor City – 161 and Gardena – 605. As you can see, sellers are still weathering the storm. On the national real estate scene, the Mortgage Bankers Association reports that during the first quarter of this year, 12 percent of all homeowners with a mortgage are behind in their payments. And half of those, or six percent, are borrowers with good credit and fixed rate mortgages! This tells us that job losses are wreaking havoc with the well qualified borrowers as well. This is in stark contrast to almost 46 percent of all subprime mortgages currently in default. For buyers, however, and especially first-time buyers, you could find yourself in the eye of the storm with blue skies and warm weather. The affordability index in the Western States has increased 40 percent from a year ago and is at a 30-year high. This is due to a combination of falling prices and historically low mortgage rates. If that doesn’t lift the gloom, there is a federal tax credit of up 12 S o u t h B a y B u s i n e ss I n s i d e r M a g a z i n e

to $8,000 for first-time buyers that earn $75,000 or less as single filers, and $150,000 or less for those married filing jointly. (With joint income over $150K, there is a gradual phase-out of the credit going to zero at $170K combined). This is a tax credit that reduces the amount of federal income tax you pay dollar-for-dollar by up to $8,000, as calculated by taking 10 percent of the purchase price, not to exceed $8K. (For more information go to http://www.federalhousingtaxcredit.com/2009/home.html). Another silver lining in the cloudy forecast is a $10,000 state tax credit for new construction purchases by first-time or existing homeowners between 3/1/09 and 03/01/10, with no income restrictions. Break out the sunglasses, sunscreen and swimsuits! There is $100,000,000 allocated by the state for this on a first-come, firstserve basis. (For more information, go to http://www.ftb.ca.gov/individuals/New_Home_Credit.shtml). Many of us noticed that mortgage rates rose dramatically in the first week or so of June. This potential cold front could develop into another major storm, causing the economy to stall and double dip. The Fed knows the foundation of a sustained economic recovery is rooted in shoring up the real estate market. The home value freefall needs to cease, and jobs need to be created before consumer confidence and spending can return. The mortgage rate spike occurred for several reasons. First, toward the end of May, Bill Gross, the “Warren Buffett of the bond world” who manages the PIMCO Total Return Bond Fund, came out and stated the possibility exists that the United States could lose its AAA rating as a creditor by the rating agencies. Next, we got a few flickers of positive economic news. Not good news—just economic data that disappointed less! But what really caused a mortgage bond selloff and drove rates up is what some are calling “the Fed’s dilemma.” As we may recall, mortgage rates initially dropped at the end of last year. The Fed made the announcement that it was going to buy mortgage-backed securities from Fannie Mae and Freddie Mac directly, and committed $600 billion toward that end. Accordingly, rates dropped from the 5.25-5.50 percent range to the 4.50-4.75 percent range virtually overnight. Because the Fed became a buyer, it decreased supply and increased investor demand, ultimately pushing rates lower. Now, however, the Fed is issuing record amounts of treasury bonds to finance the corresponding record amount of spending. That is creating a glut of supply, weakening demand from investors and pushing rates up. So the Fed is buying mortgage bonds, trying to push mortgage rates lower, with money borrowed from sell2 n d I ss u e 2 0 0 9

For buyers, however, and especially first-time buyers, you could find yourself in the eye of the storm with blue skies and warm weather. The affordability index in the Western States has increased 40 percent from a year ago and is at a 30-year high. ing treasuries causing rates to go up. This is kind of like that time the kitchen sink was stopped up and you took the plunger to the left side of the sink and pushed the water down only to have it rise right back up on the right side! The Fed needs to find a way to continue to pressure mortgage rates lower again until the economy truly finds a foothold and moves in earnest toward expanding again. Part of the trick will be to convince foreign investors like Japan and China to continue to buy our treasuries, which will help mop up the excess supply that is hitting the market. If foreign demand wanes, it causes bigger supply and less demand, forcing up rates to attract investment dollars. The good news as of this writing is that mortgage bonds are starting to rally again, causing mortgage rates to improve. Rates had increased about one percent from

the previous lows to the mid-five percent range currently. Many feel (and many more hope) that the bond market sell-off was an overreaction and that it is just part of the incredible volatility we continue to experience in the stock and bond markets on our long journey back to economic recovery. And participation at the treasury auctions has been met with reasonably good participation by foreign investment. We don’t know how low rates will go as a result of this rally. What we do know is that the economy may be finding a bottom soon. Some feel the so-called “Great Recession” may officially be over this year. But it may take far longer for a new crop of jobs to be cultivated. That’s what the average American really needs to see in order to declare the recession is history. Mortgage rates are good and improving again. Real estate prices have declined and

here in the South Bay, they may have bottomed out as well. The affordability index is the best in decades. Generous tax credits are available for home buyers. FHA financing allows buyers to purchase with as little as 3.5 percent down. Conventional financing requires just 10 percent down with loan amounts up to $729,750. With 20 percent down, there is financing available on loan amounts up to $1 million; and from 25 percent down to $2 million. So if you’re a first-time home buyer or looking at making a move-up purchase, your timing couldn’t be more perfect. You may find yourself one happy camper who made hay while the sun shines!n Ken Roberts is a mortgage planner with over 30 years experience in the South Bay real estate market. Ken can be reached at (310) 534-6200.

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