Creative Real Estate: Building Homes From Reclaimed Stuff

Dan Phillips has the distinction of being one of my heroes. I base it solely on this video – it’s all I know of him. But this video demonstrates such amazingly creative and interesting approaches to real estate construction. You have to watch it.

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Similar to the previous posts in our Creative Real Estate series, this has a strong “Green” component, which is just simply a huge deal in the Bay Area housing markets.

I am particularly fascinated by the social changes that would permit something like this, or make it appealing. Only during times of extreme household deleveraging would something like this strike an accord. Along these lines, I’ve categorized this post in the “Markets” category as well the typical “Unplugged” section of the site.

What do you think your neighbors would do if you built a new roof out of license plates? How about a beer tap in the bath tub? Which ideas are your favorite? Please weigh in by commenting below!

Here’s A New Idea – Grow Your Home (Filed Under: Ideas That Make The National Association Of Home Builders Do A Facepalm)

Just think – you could have your very own “Meat House” (yeah, just what it sounds like) complete with sphincter doors and windows. In the latest installment of our Friday ‘Creative Real Estate‘ series, take a look at a few innovative ways we could literally grow our houses.

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This is in line with last week’s look at Building Green. In fact, I think it’s more green than anybody had in mind, even around here in the San Francisco Bay Area real estate world.

I might be up for the tree house idea, but… thoughts? Share below!

How To Build Green – Inspiring Approach and Solutions

If you’re interested in the Green Movement, a hot topic in and around Bay Area real estate circles, I think you’ll find this video (~6 minutes) fascinating. I really like the economic approach behind the planning; there are all kinds of cost/benefit evaluations. From this angle, costs are viewed, at least in part, in terms of energy and resource consumption; the basis for “Green” thinking and planning.

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If you have a story about green style home improvements, construction, or planning in general, we’d love to hear about it below.

When Do Conforming Loan Limits Change?

San Francisco
Fewer homes in San Francisco and other Bay Area counties will transact under conforming loan guidelines effective 10/1/2011

photo © 2006 Franco Folini | more info (via: Wylio)After several months of speculation that conforming loan limits would be reduced in 2012, FHFA released the official numbers last night. A similar announcement was already made about FHA loans. This another significant step in the declared effort to limit future US Government involvement in the mortgage industry.

Economists and regulators have so far speculated that the broader market impact will be insignificant. However, in a case study below, we will see that at the individual level, property transactions in the affected price ranges will assuredly notice a difference.

Quick Background

At the beginning of 2008, we found the market throat-deep in the mortgage meltdown, and in the early stages of the housing crisis. Conforming loan limits were set nationally at $417,000. Congress passed the Housing and Economic Recovery Act (HERA) of 2008, bumping the conforming loan limit celiling to $625,500 for select ‘high cost’ areas, as defined by median house value in 2007. Some counties hit the max, others landed somewhere between the old limit and the new one.

But a few months later the Economic Stimulus Act (ESA) of 2008 took over with a more liberal approach, and the new ceiling was raised to $729,750. ESA is set to expire on before October 1, 2011. The HERA limits will still be in place.

San Francisco Bay Area mortgages – What’s the Impact?

For most parts of the country, the conforming loan limit is, and has been $417k since 2005. That is not going to change.

Seven Bay Area counties currently have ‘high cost’ conforming loan limits at the national maximum of $729,750. These are:

  • Alameda County
  • Contra Costa County
  • Marin County
  • Napa County
  • San Francisco County
  • Santa Clara County
  • San Mateo County
Effective October 1, 2011, all of these counties except Napa will revert to the new max of $625,500. Napa County will fall all the way to $592,250.

Impact to the Market and to Buyers and Sellers

For the last year’s worth of mortgage data, approximately 50k loans would have fallen in this ‘used-to-be-conforming-now-jumbo’ range. Roughly 30k of those are California transactions, and though the data didn’t get more specific than this, it’s safe to assume that a significant number of those were from Bay Area real estate transactions. Market-wise, economists say this will not have a significant impact.

But for an individual transacting in the affected sector, the impact will be substantial.

Taking a single price point as a case study:

  • Purchase price $787,500, 20% down
  • Loan amount $630,000 (just over the new conforming limit)
  • Assuming a 0.500% rate increase for jumbo rates relative to conforming
  • Assuming a .04% qualifying ratio limit decrease for jumbo relative to conforming
  • As a conforming loan, assuming 4.750%, normal tax and insurance figures, the monthly housing payment in this scenario would be about $4106. Conforming loans allow for up to 45% of gross monthly earnings to be used to service recurring obligations, so the minimum income needed to qualify in today’s environment would be $9125
  • As a jumbo loan, assuming 5.250%, the same tax and insurance figures, the monthly housing payment in this scenario would be about $4299. Jumbo loans allow for up to 41% of gross monthly earnings to be used to service recurring obligations, so the minimum income needed to qualify after October 1 would be $10,485.

There’s a squeeze play at work here. It will take 14.9% more income to qualify for the same sized loan, because the costs are higher, and so are the benchmarks for qualification. Just like that. Overnight.

In this case, a borrower would likely find another $4,500 to put down on the house and keep the loan under conforming limits. A keen understanding of the marginal costs of borrowing would provide that incentive. But what if the loan amount would have been $640k? $650k? $675k?…. $700k or $725k?

Simply put, there’s a bandwidth of market activity that will be disrupted by these changes. Along with the changes to FHA loan limits, any property selling for between $650k and $912k will have a buyer pool who has seen their borrowing options change. Faced with a different set of options:

  • Some will put more money down, keep the loan conforming. But not all will have the capital to do so.
  • Some will digest the higher jumbo loan costs. But others will reduce their top price to keep the payment from increasing.
  • Some will simply not be able to qualify for financing the home they wanted.
If you’re a seller in this range, this is one more reason to get your home on the market today. If you’re a buyer in this range, this is one more reason to ramp up your home search today. And if you’re a refinance candidate with a balance between $625,500 and $729,750, this is one more reason to evaluate your options today.

Do not Assume the Effective Date is a Safe Deadline

FHFA has announced the change to be effective October 1, 2011. However, even before the announcement was made, last Friday we learned that a major national lender was ceasing all applications above $625,500 for conforming loans. For whatever reason, they’ve decided that the don’t want to participate in this sector for the final three months. Other lenders could follow suit. Maybe today, maybe tomorrow. Maybe not until September. But you certainly don’t want to be too patient here. Rates are presently low as it is, so the risk of waiting is only increasing, and seems to exceed any potential benefits.

Don’t wait. If you’d like to see how these changes would impact your loan payment and long term cost of financing, or if you’re a real estate agent who would like to show a buyer or seller client how these changes might impact their transaction, send me a note in the form below, and let me know the details.

 

 

How To Compete With Cash Investors In The Bay Area Real Estate Market

Money Hand Holding Bankroll Girls February 08, 20117
'Come on, come on. Listen to the money talk.'

photo © 2011 Steven Depolo | more info (via: Wylio) A common frustration voiced on the real estate transaction front lines: We keep getting outbid by cash investors.

This is particularly common at the lower end of the price spectrum, as seasoned real estate investors are active in the market for investment real estate. They have been since the crash, and with every notch lower in the housing value indexes, more buyers step in to the market.

Any seller in this market has to be careful about qualifying any offer, given the challenges associated with borrowing mortgage money in the current climate. If financing is involved, the odds of that offer following through are lower than if there is no financing from a bank. An all cash offer conveys capability, intent, and speed – all variables that the seller will value, sometimes more so than price.

Investors use this to their advantage by offering quick closing time frames and all-cash offers, and often get the property at a discount.

Compete with price. Period.

Everything has its price, they say. If you need financing, but want to buy real estate in a market sector that is swimming with cash-laden investors, you have one real variable you can manipulate: price. You can offer more money than the cash investors – enough to compensate for the risk you bring: risk of financing following through, risk of financing taking too long, risk associated with you being a first-time buyer – a little less confident about buying in general and maybe hesitant to make it past your contingency removal dates.

You can mitigate these risks by dangling more money in front of the seller. Most sellers in this market are not selling because they think it’s a great time to do so. They’re selling because they need to. So they’re anxious. An offer to close quickly is relatively appealing. But money buys time, and offering a higher price than the all-cash investors will get the attention of that seller. You just need to find out how much it’s going to take to get that attention.

Wait just a second…

I am not suggesting recklessness in the bidding process. I am suggesting that money will compensate for the advantages the all-cash investors bring – at some point. I don’t encourage anyone to allow for budget creep – where the anxiousness about getting an offer accepted leads to overspending and operating beyond the intended price range. I just think that you can’t expect to compete with a cash offer and expect the same discount to the acquisition price.

This would be a good time to remind you that your own individual circumstances require unique planning, especially with respect to financing.

Built-in reality check

Your financing relies upon a valid appraisal. If you really shoot the moon, and pay too much for the property, the appraiser is going to have a tough time justifying the price. You’ll have a chance to think about it if you receive such an indication. The financing may still work, but would likely require you to increase your down payment dollar-for-dollar above the value indicated by the appraisal, and when making an aggressive offer, you should be prepared to encounter this.

At the end of the day, you can pay any amount you want to as long as the seller agrees. You can finance it if the lender agrees. Believe it or not, there are still some free market dimensions to this marketplace. But to continually make financed offers that are on par with all-cash offers is a process that is likely to lead to exhaustion, frustration, and disillusion. And also prolonged renting.

The other card you can use to your advantage is to appeal to the seller on a personal level. Sometimes that happens, but that’s about as common as finding a diamond in a haystack. So don’t count on it.

If you do compete with investors, and pay a higher price, you’re going to have to shake off the feeling that you overpaid for your home. Fair market value is a subjective concept, and the all-cash investor looking only for discounted acquisitions likely places a lower value on the property than a first time buyer would. If it is about buying your home, and competing with someone who wants to buy a house, fix it up, and sell it for a profit, the cost is just going to be different. Period.

Are you encountering this?

I’d love to hear about frustrations in the bidding process – have you been outbid by all-cash buyers? How many offers have you made or did you make before getting one accepted? Please share your story in the comments below!

 

Jumbo Rates Have Fallen Harder In The Recent Mortgage Rate Decline

Elephantphoto © 2010 Lizzie Erwood | more info (via: Wylio)I remember watching the rate for jumbo mortgages change from around 5.750% to about 8.250% over the course of something like three days. It was in August of 2007, when subprime’s “well-contained” meltdown jumped the firebreak into the broader mortgage market, and eventually grew into the wildfire that set global financial markets ablaze and brought the US economy to it’s knees in 2008.

As we draw nearer to the 4th anniversary of that event – a memorable one for this writer – jumbo rates have become more readily available and become relatively competitive again. Buyers planning a move up into jumbo territory, and borrowers who have been locked out for the past few years because of the jumbo market dysfunction should consider now a good time to revisit their situation.

By the time the greater economy was into it’s full-blown panic in 2008, the mortgage industry had already been in the doldrums for a year. A tremendous backpedaling of lending guidelines was well-underway, and the marketplace for jumbo money – then any loan above 417k, no matter what the location – was essentially shut down.

Jumbo rates shot up based on the seizure of liquidity in that marketplace. Banks were not willing to lend without a serious premium because the private, wall-street fueled mortgage marketplace was defunct. The demand went to zero, very few lenders wanted to supply the product, and those that did charged a shelving premium knowing that they would need to sit on the investment indefinitely. This was not the business model preceding the meltdown.

First Steps Toward Jumbo Relief

The Economic Stimulus Act (Feb 2008) and then the Housing and Economic Recovery Act (July 2008) were a couple of economic ‘smokejumpers‘ that helped push the conforming/jumbo breakpoint up from 417k to as high as 729,750, depending on the median home prices by area. For the San Francisco Bay Area, all counties were temporarily bumped up to the max of 729,750. This opened up quite a bit of the formerly-jumbo marketplace, but left anything from 730k and up locked out in the frigid jumbo market.

Eventually, more jumbo product started to appear, and at mildly more competitive prices. Traditional 30 year fixed rate loans were essentially non-existent however, since the banks making jumbo loans did not want to commit money over such long time frames. Instead, they offered more competitive pricing with shorter term scenarios, like 3 and 5 year fixed rates.

Over the past year or so, we’ve seen some 30 year money show up, but with so few suppliers, the terms often  just weren’t quite competitive enough. Either the rate was at too big of a premium over non-jumbo (“conforming”) loan rates, or the reach was restricted to low percentages of the home’s value, or the guidelines were too cumbersome to qualify for.

New Life In Jumbos

But in the last few months, jumbo product has begun to show up in the marketplace. As the private secondary market begins to show signs of life, originating lenders are showing an appetite to get back out to the consumer to deploy some capital. With increased supply, we are seeing increased competition on terms.

While a recent bond market rally has brought conforming mortgage rates to their 2011 lows, the jumbo rates have fallen farther as this same bond market activity has been coupled with increased competition.

Jumbo rates today are better than where they were when the market seized up in 2007.  You can reach above 1MM in borrowed money with just 20% equity.

Quite a few would-be jumbo borrowers have been stuck on the sidelines waiting out the return of this market. While being held back, they’ve also watched their values decline. But for the many jumbo borrowers who were deep in equity to begin with, this represents as good a time to look at jumbo financing. And for move-up buyers looking to trade-up while prices are down, this is the environment to transact in.

If you’d like to explore this market in greater detail, drop me a note in the form below.

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    FHA Borrowers In The SF Bay Area To Face Restricted Access

    California awash in red as the most severe adjustments will hit the highest cost areas

    There is structural change pending for FHA mortgages that will soon trim down the maximum size of an FHA loan by 14%.

    Due to change on or before October 1, 2011, this change will impact the San Francisco Bay Area more than any other part of the country.

    The following counties in the Bay Area are presently at the loan limit ceiling of $729,750, and will be reduced to $625,500 ceilings in a matter of months:

    Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, and Santa Clara

    Already on Borrowed Time

    The limit of $729,750 is a temporary extension afforded by stimulus act legislation that put a temporary lift on the conforming loan limits. This was intended as a way of opening mortgage refugee camps to provide borrowing access to just-barely-jumbo borrowers when the jumbo market went into seizure in August of 2007 – the beginning of the financial crisis.

    The limits have been extended by Congress each year since. But for the first time since the crisis and associated meltdown in financial markets, the political sentiment has flopped the other way. Movements are afoot to trim down the exposure and involvement of government-sponsored, government conservatorized, and government run bodies in the mortgage marketplace.

    That means that despite the growing realization that the economy is not on a clear recovery path, the usual assumption that Congress will extend these loan limits is currently questionable.

    HUD Releases Impact Study Findings

    HUD recently issued a study to measure the impact. Their findings suggest that for California FHA-endorsed loans since January 1, 2010, 5% of the cases representing 12% of the outstanding balances in dollar total would be ineligible under the new ceilings.

    Reaction

    12% of the dollar volume of the FHA marketplace is not insignificant by any stretch.  Right now, you can use a maxed-out FHA loan to buy a home worth $756,000 with the minimum 3.5% down payment. Once these limits expire, the reach is reduced to $648,000

    That is a key price range in the high cost Bay Area. The 650k to 750k range is an active price bandwidth that will undoubtedly feel this impact. If this is to be a step backward in order to take two steps forward toward a privatized mortgage marketplace, it certainly will not have a positive initial impact; the housing economy is on wobbly knees as it is. Trimming access, as this will do undermines demand, period.

    We already have demand issues. And we certainly have credit access issues. This will not help.

    The Current Opportunity

    If you’re a buyer in this range, or a refinance candidate looking for the right opportunity to transact, you should give serious consideration here. Rates are at 2011 lows, and lenders have been known to cut off access prior to formal effective dates of changes like this. Meaning, an October 1 change date does not guarantee you that lenders will still participate in originations in September, or even August.

    If this is your range, the clock is ticking. Contact me below if you’d like to explore how this applies to your individual circumstances.

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      Is George Costanza A Case-Shiller Analyst? And Why Does The Mercury News Think Declining Foreclosures Are Bad?

      silicon_valley_jobs
      Somewhere out there ... there's a job

      photo © 2009 Revol Web | more info (via: Wylio)Real estate values are off 33% from their 2006 value peak, nationally speaking. According to the Case-Shiller home price index, we’ve just crested the hump of a small bounce, and are in the early stage of ‘double-dipping‘.

      But national trends don’t tell you everything you need to know about your local Bay Area real estate market. Real estate value trends depend on the broader national picture, but also on a scale of region, city, even neighborhood. Local forces are at work in local markets.

      As an example, a San Francisco client of mine who bought a condo for 1.2MM in November 2009 just had it appraised at 1.6MM in April 2011. 33% gain in 1.5 years – you’re not getting a read on that micro-market when you look at the Case-Shiller index, or even the San Francisco-specific data for Case-Shiller, which suggests a decline over the same period.

      Watch Jobs Data To Predict Real Estate Values

      With a title like “Foreclosures In Silicon Valley Remain Stubbornly Low“, you might think the San Jose Mercury News would follow with a story about the relatively strong employment market in the area. Unemployment is still high, like everywhere, but it’s lower than the general California rate. And, there’s that whole booming dotcom round two going on with Facebook growing like a weed, LinkedIn set for IPO tomorrow, and of course bellwethers like ‘the’ Google.

      Unemployment correlates to real estate values. It’s pretty tough to pay the mortgage when you don’t have income. Tech firms are in growth mode, and with that sector abuzz, jobs are available. It stands to reason that fewer properties in the area would be falling into foreclosure, because the people who live there, more so than greater California, are still drawing income.

      So why does the Mercury News draw a different interpretation? They suggest that the decline in foreclosures represents a concern because it must imply there is a building back-up of soon-to-be foreclosures. Maybe, but jeepers, talk about a glass half-empty attitude!

      Maybe the news media has to paint the situation with a black brush to stir up drama. Maybe they just don’t get it. Or maybe they are on to something… But even if there is a mechanical problem with the foreclosures being purged from the marketplace, and you have improving employment trends, some of those would-be foreclosures are going to be cured, prevented, avoided, etc. So in the end, I don’t share the sentiment expressed in this article.

      The robo-signing issue cited in this piece is a national phenomenon. To make local extrapolations like this is awkward – it would affect other areas in the same way, and I believe this robo-signing is a state-by-state issue if not just a national one.

      This isn’t the first time the newspapers misrepresented the story of the mortgage marketplace. But I’d rather they applauded the local industry and somewhat stronger jobs marketplace.

       

       

      How To Chagrin A News Reporter 101

      I love Martin Andelman. I read his column Mandelman Matters periodically – not religiously, because his posts can be long. But they are so tempting – he’s a skilled wordsmith.

      Biggest Consumer Advocate In Mortgage Modifications?

      I admire his hard-core protectiveness of the consumers’ interests. At times, a bit brash, I get the idea that every once in a while, he’s in the midst of over-selling his point just for the sake of good writing. That said, I do believe he has unbridled passion for the consumer.

      He is devoutly defensive on their behalf when it comes to the core area of his focus (as far as I am aware) which is banks screwing people in the mortgage space. But often when he lets loose, there are many notes of sarcasm that serve to underscore the absurdity of the situation he’s riled up about. That’s the part I really enjoy… he is a talented writer.

      Many of his articles are about loan modification absurdities. Oh there are absurdities. But “Mandelman” doesn’t take this marketplace sitting down. He’s a crusader, persistently vocal, demanding better human-to-human interaction than what typically gets reported in the nastiest corners of this housing market turmoil. I admire that.

      “Oppression Can Only Survive Through Silence” (Monteflores)

      He recently took Carolyn Said of the San Francisco Chronicle to task for an article about homeowners who have overcome foreclosure challenges. I’ve said it before, and I’ll repeat it here – there is no shortage of tragedy in this marketplace.

      His basic gripe is that Said is far too casual in her portrayal of the bank each case. But you have to read his words. There were portions that made me feel that the reporter was getting more of a beating than she deserved. But, I’ll go back to what I said before – If Andelman wants to over-sell the point to ensure that it is clearly laid on the table, I’m fine with that.

      Got my attention.

      Follow the money, they say. It’s always good to remember who’s doing the talking and what might be in their agenda. I’m not so sure it’s as cut and dry as he makes it out to be, but he certainly got me thinking about it.

      I’ll be interested to know if there’s a follow-up.

      Is Now The Time To Buy A McMansion?

      McMansion - a gigantic suburban home

      Social trends influence real estate development – what little of it there is right now – and the result is a meandering set of styles, attributes and value systems in the fabric of the marketplace as time marches on.

      This piece from Slate speculates about the waning appetite for the super-sized “McMansion”, characterized by extra bedrooms, gigantic kitchens, and above-average square footage, that were increasingly sought after as the real estate bubble was inflating a few years ago.

      I think these are pretty easy to find in certain Bay Area suburbs.

      Get a mortgage rate quote for a McMansion

      Those homes still exist. Even if the demand falls, it’s not like they’re removed from the market. But after a few years of punishment for living on too much credit, does the consumer psyche have what it takes to justify so many extra bedrooms? Or a fully functional outdoor kitchen? Does that imply that the McMansion is hit harder on value in favor of more practical options? It wouldn’t surprise me if the data supported this idea.

      What about when we bounce back from this mess – has the consumer credit monster been lobotomized? Was that just a crazy fad like bell bottoms?

      Guess you better slow your mustang down…

      Take a look at what happened in the auto industry in the early 80s – after a bout of hyper inflation and skyrocketing fuel costs, gas guzzling muscle cars like the Dodge Charger, Pontiac GTO, and Plymouth Road Runner fell out of favor to the newly energy conscious driver. Compact fuel efficient models took over the marketplace until society worked out the hangover of high prices. And that’s when the SUV arrived.

      Now that we’re becoming fuel cost-sensitive again, I happen to find myself in need of a large vehicle while everyone else is chasing after the hybrids. Politics aside, there are some sweet deals on the big thirsty family haulers these days…

      I looked in the mirror, a red light was blinkin

      So if the McMansion is declining in appeal, I doubt it will last. Now might be a good time to go bigger on real estate in a sector that is in a bigger state of decline. In 2006, everyone wanted the McMansion. Now, they’re half as expensive, and there’s concern about value decline… I wonder if in a few years we’ll look back and think do that whole woulda coulda thing…

      If you’re shopping for a new home, how has the recent environment shaped the profile of your target property?