Bay Area Local | Bay Area Real Estate Finance

Mothball Fleet Revealed – Peek Behind The Curtain Of A Bay Area Icon

National Reserve Fleet, Suisun Bay, Calif. photo © 2009 NOAA’s National Ocean Service | more info (via: Wylio)If you remember when you were a kid taking family road trips up north, and at the crack of dawn as the family station wagon was crossing the Benicia/Martinez bridge, and your father pointed to his right and said “look kids, the Mothball Fleet” every time you made that trek, well then, just like me, the Mothball Fleet likely became a recurring family joke. I mean, we all had Griswald Family moments like that, right?

Maybe that doesn’t ring a bell. But if you’ve ever traveled over Suisun Bay on 680, you’ve likely looked out into the water and wondered what the dozens of idle Naval warships were doing there.

Well, folks, that collection of rusty, peeling-paint, barnacle-clad vessels is known around here as the “Mothball Fleet”. The Mothball Fleet is part of the US National Defense Reserve Fleet which has installations in several locations. This one is the largest in the Pacific. Apparently, despite the ghosty appearance, those bad boys are maintained and service-ready, and in fact two ships were called upon for transport as recently as the Gulf War.

If you’ve driven by, and not noticed, well, thanks for keeping your eyes on the road, I suppose. But if you’ve ever been intrigued by their appearance, you could always have taken a guided tour around the bay – I did it once. It was a birthday surprise with my family, for my father, who was utterly fascinated with the up-close inspection and historical insights given by the tour guides. (I’ll see if I can track down the contact info for that tour – good stuff.)

But now, you can get a peek behind the scenes at some of the inaccessible views of these ships, at a live showing of the work by some local photographers. It’s on May 7 at Workspace Limited in San Francisco. You can see all the details of the event on this page, as well as some intriguing historical background, sample images, and bio about the photographers.

Go check it out.

I love this kind of photography – abandoned, deserted, decrepit relics of commercial and industrial magnificence. A ways back, I pointed to a 100 photo collection of abandoned homes in Detroit MI. There are quite a few real estate related collections like this making their way around, and sometimes you just have to sit back and appreciate what you can about some of life’s less pleasant moments. Anyway – enjoy the scenery…

Freak Nasty Predicted This Real Estate Market In 1997 (proof)

Who knew back in 1997 that Freak Nasty was talking about a housing bubble?

Consider this quote as evidence – was it a clue?

“Drop down, double-up on those dips”

Following the release earlier this week of the Case-Shiller home price index, there has been a rash of articles about the Double-Dip in housing hitting the wires. While that conversation is a little big different than the much-debated Double-Dip in the broader economy – another downturn in housing will not help an economy that is struggling to recover from the last one.

Yikes. Kind of makes me feel like just throwing my hands up and dancing.

What say you, homeowner past-present-or-future? Case-Shiller looks at national figures, and 20 metro markets. But inside the Bay Area, there are hundreds of micro-hoods where different forces are at work. Even San Francisco proper has dozens. What’s going on in your neighborhood? Post your thoughts about your local market (or about Freak Nasty if that’s what you’d prefer).

Greed, Capitalism, Budget Debates and Bank Robberies – What’s Changed Since 1979?

There’s a lot of crazy in the air right now, with the impending threat of a United States Government shutdown. Politicians are in a deep, muddy ditch of negative public sentiment, and by the way: when you’re in a hole, you’re supposed to stop digging… Budget fighting is nothing new, but it seems the stakes are growing larger with ballooning federal debt, compounded by increasing fears of rising interest rates. This graphic from Planet Money helps put the dispute in perspective:

There are swelling fears about entitlement costs (crazy infographic on social security from visualeconomics.com).

There is anger over wall street titans getting rich (from Big Picture blog):

About That Shutdown and Mortgages

Anyway, this is a mortgage website. So it’s worth making a quick comment here about what a government shutdown would mean inside this space. The primary concern is with Federal Housing Administration (FHA) lending. FHA is under the US Department of Housing and Urban Development, considered a “non-essential service”, and therefore subject to some “lights out” time. If lenders cannot obtain FHA case numbers from FHA offices (part of the origination process), that will prevent forward progress on FHA transactions. Also, FHA will not be available to issue endorsements and mortgage insurance certificates. Banks seeking to make FHA loans are unlikely to do with a delay/block of this step in the process. Functionally, FHA lending could take a hiatus along with your elected representative. A shutdown in 1995 caused such a disruption with FHA lending, then a much less important sector of the Bay Area real estate marketplace. It won’t crush the marketplace, but it has the potential to stress a few people out.

What’s Changed?

This is a really interesting snippet of an interview of famed economist Milton Friedman by Phil Donahue in 1979. Phil questions the philosophy of capitalism, core to the spirit and foundation of the United States of America. As we sit here approaching 2 and a half centuries as a nation, and our fearless leaders are bickering over ideologies and the near-term direction of our teetering economy, this conversation from a different time and a different social and political and economic context is really, really interesting.

Craziness. It’s in the air today, isn’t it? What do you think about it all? Welcoming (encouraging) comments below…

Understanding The Marginal Cost Of Borrowing (Case Studies)

Elphinstone Winning Washington marathon (LOC) photo © 1911 The Library of Congress | more info (via: Wylio)Imagine running a marathon – a full 26 miles, only to find that you’re breaking down in the last mile. Physically exhausted, 26 miles was just one too many. All you can do is walk the end, and it’s going to blow your overall time. How much impact can one bad mile have on the overall score?

Well, if you’re running at an 8 minute mile pace up to that point, and you have to walk – it takes twice as long – 16 minutes, then your average speed for the race is 8.3 minutes per mile, or an 8:18 average.

By no means have you ruined the race.

But what If there was a retroactive penalty for walking? What if it added, say, 30 seconds to every mile run thus far? In the case where you ran the last mile in 16 minutes instead of 8, given this penalty of 30 seconds per mile, the average time per mile is now 8.79 minutes (or 8:47). Your average, as far as the record books go, is 47 seconds per mile worse than your pace for 25/26ths of the race.

That’s not an insignificant difference in the grand scheme of things. Quite a few runners likely finished ahead of you with average times of 8:00 to 8:46.

If I were an economist, I’d call this the “marginal cost” of walking mile 26.

The Marginal Cost of Borrowing

One of the best questions you can address when buying a house is how much should your down payment be. There’s no set rule. There are loan guidelines to set the landscape. Within that landscape, you have options, and the options come at varying costs. Everyone brings their own somewhat unique circumstances to the table. Exploring the spectrum of options to find breakpoints where the trade-offs shift will increase your chances of landing in the sweet spot.

There are various trigger points along the spectrum of options where additional costs will come into play. For example, if you were buying a home for $1,000,000, and planning to make a 25% down payment, your loan would be 750k. But in The Bay Area, where the split between conforming and jumbo loans is $729,750, you’ll pay a premium on your rate to borrow 750k compared to borrowing $729,750. That premium affects the entire total being borrowed, not just the “marginal” sum of $20,250. Not just the last mile… the whole race.

Case Studies

Understanding the marginal costs associated with borrowing inside of your transaction parameters will help you evaluate your options. In the two cases that follow, options that were previously not considered feasible suddenly looked different when the right light was shined upon them.

Case Study 1 – The Cash-In Refinance

THE PREMISE:

refinance; payoff of existing loan was 440k
conforming limit of 417k. Above this level is considered “high-balance conforming”. Different product.
rate difference for conforming vs. high-balance conforming: 0.25%

THE MATH:

417k at 5.00% for 30 years has a payment of $2238.55
440k at 5.25% for 30 years has a payment of $2429.70
- The payment difference would be $191.15
The difference in borrowed total is 23k. A 30 year payment of $191.15 on 23k implies a rate of 9.37%
- Don’t believe me? I’ll show my work.

THE CONCLUSION:

If the borrower has access to 23k at a cost of less than 9.37%, it presents a potentially appealing option. In this case, the borrower had ample cash reserves – earning ~1.00% – which could be moved over to reduce the loan to the conforming limit. Would it make sense to borrow money at 9.37% and invest it at 1.00? It costs another $191.15 (minus the $19.18 interest earned on cash at 1%). By understanding the marginal cost of borrowing that 23k, and it’s impact on the entire loan, the borrower saw the situation differently, and acted differently.

Case Study 2 – The Private 2nd Mortgage

THE PREMISE:

Purchasing a home at 550k
Planning to put 10% down
10% down payment restricts options to those that include mortgage insurance – it’s an additional monthly cost

THE MATH:

495k at 5.125% for 30 years has a payment of $2695.21
- it also caries a Mortgage Insurance cost of $350.63
  - in this case, MI was a non-deductible expense, and the borrower’s tax bracket was 25%
  - $350.63 non-deductible expense would be the same as $467.50 deductible at the 25% bracket
if they could find an alternative way to get to 20% down payment:
- 440k at 5.25% (actually higher by .125%, different product entirely) for 30 years has a payment of $2429.70
- Mortgage Insurance cost is $0.00
The payment with 10% down + grossed-up MI ($2695.21 + 467.40) equals $733.01 more than the payment with 20% down
The difference in the total being borrowed is 55k. A 30 year payment of $733.01 on 55k implies a rate of 15.81%
- Don’t believe me? I’ll show my work.

THE CONCLUSION:

At 15.81% marginal borrowing cost, the borrower might be better off taking a 55k cash advance on a credit card. Ok, maybe not that extreme, and that’s probably a bad idea for many other reasons. But the point is, there might be other cheaper ways to finance that portion of the down payment. The 10% down plan might not have been a bad option, but in this case, there was a better one. The borrower discussed it with family, and got a private, secured, tax-deductibe 8.00% loan from them. It was a great opportunity for the family member to lock in an 8% return on some of their money, and the borrower cut their costs on that portion of the funds nearly in half. Sometimes you just have to see things in a different light, and you’ll discover you have additional resources.

Every Situation Is Different

You can’t simply decide based on how much money you have available. You decide based on what makes the most sense from a broader view. But you need to be able to see where these breakpoints are, so you can balance the total financing costs with things like maintaining some liquidity or emergency cash. Or maybe you just need to see where the land mines are beneath the surface, so you don’t pay cash advance-like rates on any portion of the money you are borrowing.

If you need such guidance, that’s what I’m here for. Contact me by putting your name in the form below. To learn more, sign up for email updates from this site in the upper right.

Should You Fix Up Your Home Before Selling?

According to this report from Hanley Wood, who is “the number 1 media company covering construction”, the short answer is “Hell no.”

There are a few key takeaways from this Remodeling Cost vs. Value Report. I viewed the Pacific region, but it looks like they offer much more granular city/area specific reports. You can drill down into San Francisco, Los Angeles, San Diego etc.

The only investment in remodeling that suggested a lower cost to build than implied increase on sale price of the home was to replace the front door to the house. This is for mid-range value property. At the high end, nothing paid off.

In fact, some of these look terrible. A bathroom addition returns 53% of the cost at resale. A home office remodel returns 46%. Why bother? I wonder how accurate this data is. It’s not like they sell the same house with and without the improvements, and compare the outcomes. They are going off averages and comparables here.

But notice also how each of the categories has shown a decline in the percentage that is recouped as compared to prior years. Makes sense, because home values have fallen over that time frame. So naturally, the averages are all lower. But if the input costs were also falling, the year over year changes would be more mixed.

In other words, labor plus materials to do these remodel projects has not fallen as fast as the value of the product they produce.

This is an interesting subtext of markets in transition. I don’t believe for a second that there are not some remodel projects that, when done with cost efficiency to the right property at the right time, can bring on better than 100% return on investment. If this weren’t possible, it would imply that you couldn’t make money building a house. I don’t think we’ve come that far.

But if you are looking to sell a not-so-pretty property, wondering if you should do some cosmetic repairs – or more – you really do have to wonder about this climate. It could be throwing good money after a not-so-pretty asset. Best bet, talk to your real estate agent about it, and get their opinion on this report, and the topic in general.

If you could use an introduction to a real estate agent who can have this conversation with you, contact me through the form below.

SF Supervisor Sends The Bank “Jingle Mail”, Oakland Mayor Takes A Pay Cut

door key photo © 2010 woodley wonderworks | more info (via: Wylio)What do you make of this? San Francisco Supervisor Malia Cohen has entered strategic default, allowing her home to be foreclosed on not necessarily because of hardship with making the payments. It’s referred to as “jingle mail” to euphemistically represent the idea of sending your keys back to the bank by mail. The article doesn’t mention whether she demonstrated that level of courtesy.

I am sensitive to the times we live in. There is financial wreckage all around us, I understand survival instincts, and am sympathetic to the many who have been screwed, whipsawed, and browbeaten by the markets. There’s a million places to point the blaming fingers. At the end of the day, there is damage, on a wide scale and at the individual level.

But there’s also a spectrum here. And some people are in dire straits, losing their homes. And there are others who are financially stable, but are letting go of investments that didn’t work out. These cases introduce an interesting moral quandary in a paradoxical situation: what’s good for the individual is not good for the collective.

Meaning, at the individual level, default makes sense when you’re upside down. Or at least it might. We do the math, sometimes it says let go, sometimes it doesn’t. But strategic default isn’t just about you and some big evil corporation. It affects your neighbors. And neighborhoods. And collectively, the entire fabric of the US housing market. And then the broader economy. There’s a ripple effect here. More defaults lead to more defaults, when you think it through.

So what moral obligation does one have when addressing this equation individually? I first wondered about the fading social stigma associated with strategic default back in December of 2009.

What if that individual is in a position of public service, like a city supervisor? Does it change? What do you think? As an interesting juxtaposition, the first link under the article is to a story about Oakland mayor Jean Quan, another public servant across The Bay, and how she took a massive pay cut.

I’m going to leave it at that. I only wish to introduce the topic. Tell me what you think?

California Home Buyer Tax Credits – New Construction AND First Time Buyer – DETAILS

Tax Credit Reference Sheet
California Assembly Bill 183

Background

Part of the Governor’s big Jobs Initiative. This is his #1 priority. Credit for new construction stimulates job creation/preservation, and credit for first time buyers stimulates homeownership.
Total Availability of funds is $100 Million for new construction AND $100 Million for first-time buyers

Terms

Lesser of 5% or $10,000k (200k min purchase to maximize claim)
Must enter contract between May 1-Dec 31 2010
Credit is received over 3 years, equal installments

Eligibility

Purchase new construction property OR
Purchase existing property as a first-time buyer
1. First Time Buyer is still defined as having not owned residence for the three years preceding purchase
If married, filing separately, split allocations
If unmarried, purchasing together, split according to ownership stake in property

Restrictions

No income restrictions
Cannot be a dependent on somebody else’s tax filing
Cannot purchase from a relative *
Cannot be under the age of 18
Cannot have received CA home buyer tax credit from 2009
2 year recapture
If first time-buyer AND new const – new const allocation overrides

Procedures

Reserve credit by contacting Franchise Tax Board with notice that a contract has been signed (not required)
Follow-up with FTB within 2 weeks of closing with:
1. Settlement statement and cert by seller of non-occupancy (new const)
2. Settlement statement and cert by buyer that they are first time buyer

If you have questions about how this might affect your plans to buy or sell a home in California, please email me

* Internal Revenue Code for Family (IRC 267 section (c)(4):
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants

*** Please consult with your tax professional for advice specific to your situation!

Are Home Sales Up? Depends On Your Price Point

Real estate is all about micro markets. In the San Francisco Bay Area, homeowners might be celebrating the recent trend to higher sales volume in recent months. But that data comes from national sources. How much of the Bay Area falls into the brackets below, where we are seeing increases in volume? Thanks to Steve Harney for the info:

Below $100000 – sales up 38.8%

100k-250k – sales up 8.7%
250k – 500k – sales down 6.2%
500k – 750k – sales down 8.9%
750k – 1MM – sales down 10.6%
1MM – 2MM – sales down 23.3%
2MM+ – sales down 32.4

Not to be a wet blanket though… This data does not show the volume of sales in these brackets, and the bulk of housing likely falls into those lower price brackets. Activity at the lower end means future liquidity at the higher end. It’s the “plankton theory” of housing: If a homeowner want’s to buy a higher priced home, they need to sell their lower priced home to somebody. There’s a food chain. First-time buyers, aka the “plankton” have to get into the market to support the ripple up the chain for move-up buyers. So I would expect that this activity will work its way up through higher price brackets in coming months.

Slideshow of 100 Abandoned Homes in Detroit

This is a view of disaster through an artistic lens. There are some downright gorgeous shots in here, every one of them representing a story of tragedy, loss, failure, and hurt. A sign of the times, Detroit has had as many headlines as any other city as a representation of the worst economic conditions in our nation in ‘The Great Recession’.

Remember the mood only 6 months ago? While I think the recovery rally cries are a bit premature, it certainly does not feel as likely as it once did that we could see a full wide-scale meltdown or economic collapse.

We’ll come back, and the beginning of that long process is underway. I’d love to see these same 100 photos updated in a few years.

Stevie Ray Vaughan Called; He Wants His Social Security Back

According to The Tax Foundation for 2007 (most recent data):

the top 1% of tax filers paid 40.4% of all Federal taxes (up from 39.9%)
the top 1% of tax filers made 22.8% of total reported adjusted gross income
$410,100 income required to be considered top 1%
top 5% paid 60.6% of all Federal taxes on 37.4% of adjusted gross income
$160,000 income required to be considered top 5%
top 10% paid 71.2% on 48% of all income
$113,000 to be in the top 10%
bottom 50% of all filers paid 2.9% of the total income tax bill