Bay Area Local | Bay Area Real Estate Finance

Did She Just Say "Pundint"?

eh? I know Suze Orman is already a target for laughs, portrayed on Saturday Night Live by Kristin Wiig. So I’ll try not to get petty here.

There are a few well known “pundits”, or even actual financial services practicioners, who have taken opposition to some of Suze’s advice. Particularly her hardcore blanketed advice to pay down all debt as a top priority. Critics say, sometimes it’s just not that black and white.

In this video, Suze makes a key shift in favor of liquidity for safety purposes as a priority over eliminating credit card debt. It’s interesting to note however, that this advice comes too late in the game for many to react. I think it really highlights the key issue some have with her advice – we need to be financially prepared for the unknowns in life before they hit us. It doesn’t really help to start preparing for disaster after it strikes.

Her former advice to pay down credit card debt is basically a math lesson gift wrapped as financial planning advice. Too many of the variables in her equation are held constant, when true financial planning takes a subjective, individualized look at all variables in a particular scenario. Same goes for the new advice – that may be the right idea for some, but don’t mistake what is going on here. Her extreme point of view, and universal conviction are what make her interesting enough to put on TV. That’s not what makes individual advice pertinent or valuable.

For kicks, here’s the SNL version.

Long Exhale… Brain Dump 06/09/2009

I’ve been plugging away some long hours over the last few months, but I’m back to shake some dust of the blog here. No cohesion promised here, just a spewing of some of the more evocative and interesting ideas, quotes, etc that I’ve seen since the last post:

– Jon La Grou introduces an awesome home construction enhancement, cheap, smart, simple. Updating 150 year old technology, bravo. 5 min video

– John Mauldin on the current crisis: “..This again illustrates the problem of using past performance to protect future results. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a deleveraging recession in the US for 80 years. Using the past data in today’s world is useful, and may be harmful to your portfolio.” >> Word.

– Pimco’s Paul McCulley on the current crisis: “There’s nothing like a bull market to make geniuses out of levered dunces.”

– There’s a battle Royale taking place right now in the debate on the future of interest rates. We saw the low trend break down over the last two weeks, and what followed was one of the biggest downlegs in the bond market I’ve ever seen. Cheerleaders of the recovery think that long term interest rates need to be higher to attract investment capital. The Federal Reserve can’t continue to make the market with mortgages at 4.5% if all of the ‘safe haven’ dollars are now getting cozy with alternative vehicles to the US Treasury markets. But are we even out of the woods yet? With credit contracting, and unemployment rising (10% here we come!) how are we supposed to spend our way back to positive GDP growth? It doesn’t add up… I said it before, and I’ll say it again, we’ve got a lot of bites left in this sandwich…

– US Housing affordability index (which began tracking data in 1971) was at an ALL TIME HIGH before rates popped. This has been bringing in bargain hunters to gobble up the excess housing inventory. But the momentum was just getting going. With rates up, it knocks the index back a ways. But financing a home today is still cheap by historical standards. 30 year average of the 30 year fixed mortgage rate is closer to 7.500%

– In much of the recent economic press, there is discourse along the lines of “the worst is behind us”. The stock market has had one or two down weeks over the last three months. In other circles, we hear “commercial real estate is the next shoe to drop”. Given that it would be less likely that the government would bailout strip mall developers, will the markets be able to shake off an era of see-through buildings and continue dancing like there’s nothing to worry about?

Is The Stimulus Coming to a Town Near You?

Stimulus Watch.

This is a pretty cool resource. It gives an overview of the projects, budgets, and number of jobs created by various stimulus plan initiatives.

I clicked around for a few local towns, places I’ve traveled recently, and places I’ve lived.

Oakland CA
San Ramon CA
Pasadena CA
San Francisco CA
Jackson MS
Nashville (zip!) TN & Memphis (zilch!) TN
Maui HI
Grants Pass (nada!) OR
Tucson AZ

California’s $10,000 Tax Credit for New Home Buyers

No income limitations? Not limited to first time buyers?

A quiet little news item that for some reason isn’t grabbing as much headline attention as I would expect… has me a little curious about the validity. A quick search points to several mentions, but all trace back to blogs on new home builder sites, and PR releases from builders like THIS ONE. I guess that makes sense, but I’d expect to see more attention drawn to this, or something pointing to an official CA.GOV page.

If this is legitimate, it is in some ways BETTER than the federal tax credit of $8000 to first time buyers with qualified income. And if you are a first time buyer in California, you could be eligible for both!

UPDATE: Proposed Changes to Tax Credit, Conforming Limits

Republican amendments to the current stimulus package up for vote later today include:

-Restoring the $729,750 loan limits in some areas

-Temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year – no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

-Other details:

buyers must occupy the home for two years as their principle residence
includes a two year recapture provision (if they leave the home in two years they lost the credit)
purchases of homes by investors are ineligible

The bill is still working its way through Congress, and the House of Representatives must still negotiate with the Senate since the House bill does not contain the credit.

Proposed Changes to Homebuyer Tax Credit, Conforming Limits

Rumors are going around about the following ideas, supposedly on the table for legislative discussion:

First Time Buyer Tax Credit Change:
Currently, the credit is up to $7500 for qualified first time buyers, and the funds are expected to be repaid at the rate of $500 per year for the ensuing 15 years.

Proposed changes are for increasing the credit to $14,000, and also to make it forgivable. In other words, no requirement to be repaid. Ever.

That is a significant change, and would represent a MAJOR incentive to enter the market.

Conforming Loan Limits:
Currently, the limit is 417k nationally, and in some high cost areas, it can be as high as 625,500. All 9 Bay Area counties are currently at 625,500. During 2008, the ceiling was higher – 729,750, but the “temporary” classification caused the lenders, who still operate in a free market world, to have almost zero interest. It didn’t really work. The 625,500 level was more conservative, but permanent. It has helped, but not quite as well as intended.

Proposed changes would reinstate the ceiling at 729,750 for qualified California property, or, according to one source, raise the ceiling to ~$932,000 for qualified California property.

Also potentially significant change, unlocking many borrowers with high outstanding loan balances on expensive property. No way of knowing if lenders will have an appetite for these deals or not, but it’s something to keep an eye on…

Where Are California’s Most Undervalued Real Estate Markets?

According to the Sept 10 Kiplinger Letter, which they admit may surprise some, they are:

San Diego 17.2% undervalued!
San Francisco 15.9% undervalued!
Stockton 13.8% undervalued!
Vallejo 13.4% undervalued!
Modesto 12.9% undervalued!
Santa Ana/Anaheim 12.4% undervalued!
Santa Barbara 12.3% undervalued!
Sacramento 11.1% undervalued!

Despite the fact that some of these areas are known to have some of the worst subprime mortgage problems, Global Insight (a forecaster) suggests that they have relatively healthy economies, strong job growth to support demand, and home prices have already dropped significantly.

hmmm… signs of a bottom? or overly optimistic?

Down Payment Assistance Programs – Updates At Legislative Level

I am breaking a long inexplicable silence here to follow up to a recent post about rules surrounding seller-funded down payment assistance programs (DAP).

What’s a DAP? (or a DPA? I’m not sure if there is an official acronym; both seem prevalent at this point). With the credit markets recoiling, the ability for homebuyers to enter the market with small down payments has been hampered. Big time. Lender’s simply want the borrower to have skin in the game, so that if the value drops a little, they still have incentive to keep paying back the loan.

The DAP programs that were eliminated in the recent HR 3221 Housing Bill refer to those facilitated by a charitable organization to essentially ‘launder’ a down payment from the seller of the home. The down payment needs to be from the buyer’s funds, not the seller’s. If it came from the seller, its the same as buying the house for cheaper. Proponents of DAP argue that the borrower has equity in the house, regardless of the source. Opponents claim that the fair value of the house is really the purchase price less the seller-funded down payment, or in other words, there is no equity.

FHA was allowing these programs until they realized that default rates on borrowers with DAP assistance were 3x that of borrowers who funded their own down payment.

But without DAP in the market, fewer buyers can get into the market at entry level. And if there are no first-time buyers, who do the move-up buyers sell their homes to? They don’t, and all of the sudden, nobody is buying anything, and inventories skyrocket, and prices fall… sound familiar? This is the “plankton theory of housing”. We need first time buyers to keep everything moving…

There are also community organizations that provide down payment assistance, but do not receive funding from the seller of the home. There is no regulation on the table to curtail these programs, and with them, buyers can still obtain 100% financing in some circumstances.

Here is the latest on the seller-funded side of the practice:

At this point the ban on the use of seller-funded down-payment assistance with FHA-backed loans takes affect October 1st. But a compromise may be in the works. HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, may pass. HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans. Borrowers with scores between 620-680, who relied on seller-funded gifts, might be subject to higher insurance premium fees. Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA’s insurance requiring taxpayer subsidies. Chairman Barney Frank said, “The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing…That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground.”

Buy Or Rent – What Can We Learn From The Rent Ratio?

The New York Times has an interesting graphic illustrating the costs of renting versus owning a home in various US cities. The Rent Ratio is a useful metric for people contemplating the costs of renting versus owning a home. Bay Area residents will notice that the ownership premium is higher here than many other areas, especially non-coastal metro zones. Historical appreciation records are likely the reason why buyers are willing to pay a greater premium in these cities.

Understanding the true costs of renting relative to the true cost of owning, you need to look well beyond average rent prices and average mortgage payments for equivalent properties. A true rent vs. buy analysis will take into account:

inflation of rent costs
opportunity costs of down payment funds that could have been invested elsewhere
return on investment of dollars invested rather than spent on mortgage payments in excess of equivalent rent
tax implications of owning real estate
appreciation of housing as an asset

Also, are we looking at the cost of renting the home we want to buy? Or are we looking at the cost of renting the home we would likely rent, if we chose not to buy? They may not be the same, for when we are not required to sink 100k or 200k into a down payment, we may be inclined to spend an extra $200, $300 even $500 a month more in rent. If you want to see how a true rent vs. own analysis works, please email me.

Some other interesting observations: San Jose, CA has the highest ratio. New York City is surprisingly low, suggesting that it’s not only expensive to own, but also to rent in that city.

OFHEO’s Four Quarter Price Change By State For US Housing

Interesting graphic. With all the news about house price declines, and expectations of declines in the current marketplace, there are some interesting take-aways from this chart, published last week by OFHEO. You can read the full report here. OFHEO says the decline in values is accelerating. I like the pictures, and this one is telling. Most markets appear flat, and Utah and Wyoming are showing above-average gains year-over-year. Worst performance is in California. Easy come, easy go? Housing prices, like all asset value cycles, are showing characteristics of “Mean Reversion“.