Uncategorized | Bay Area Real Estate Finance

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.

Ayn Rand – Liberty vs Socialism

This is worth a spin…

July Jobs Report to Mortgage Rates: "You can call me Susan if it makes you happy"

Today we saw release of the anxiously awaited July employment report, which turned out to have a few surprises, and a general portrayal of an economy that is continuing to struggle, but at a slower pace than before. The number of jobs (net nonfarm payrolls) lost over the month eased to 247,000, as against June’s loss of 443,000. Obviously, this is an improvement, and it is generally being read as indicative of a gradually healing jobs market.

It is important to recall, though, that this recession has seen the loss of 6.7 million jobs—and “less-worse” won’t make that number decline. And while the unemployment rate fell to 9.4% from 9.5%, there is a lot of indication that a primary reason reason was that people took themselves out of the jobs market, as they stopped actively look for a job. This is no improvement, and the unemployment rate is still expected to break 10%. When we see a greater number of people entering and re-entering the jobs market, it will signal an improvement to confidence in people’s ability to find a job. Improvements in the jobs market tend to follow improvements in other areas of the economy. It will be some time before we can say we’re in a recovery, not just moving toward one.

So how did mortgage rates respond to this news? Not so good. If you are on the fence about refinancing, or waiting for a better deal, it might feel like somebody’s got a grip on your necktie right now, no clear sign of them letting go at the moment…

…For approved audiences, this clip is “Rated R”. The butt-kicking in the bond market today reminded me of this…

Revised Emergency Economic Stabilization Act

The bailout bill. The recovery bill. All the controversy, all the market whipsaws, the panic, the debates, the politics. It passed today. Signed by the president. Want to know the details? Here’s 451 pages of weekend reading for you.

How Big Is This Bailout?

Bailouts are nothing new, history has many examples. Some recent ones are explored below courtesy of ProPublica, and are put into perspective in terms of their size with a nice visual. If any of the links are broken, view them here.

With the flurry of recent government bailouts, we decided to try to put them in perspective. The circles below represent the size of U.S. government bailout, calculated in 2008 dollars. They are also in chronological order. Our chart focuses on U.S. government bailouts of U.S. corporations (and one city). We have not included instances where the U.S. government aided other nations.

Check out how the Treasury did in the end after initial government outlays.

	Industry/Corporation	Year	What Happened	Cost in 2008 U.S. Dollars
●	Penn Central Railroad	1970	In May 1970, Penn Central Railroad, then on the verge of bankruptcy, appealed to the Federal Reserve for aid on the grounds that it provided crucial national defense transportation services. The Nixon administration and the Federal Reserve supported providing financial assistance to Penn Central, but Congress refused to adopt the measure. Penn Central declared bankruptcy on June 21, 1970, which freed the corporation from its commercial paper obligations. To counteract the devastating ripple effects to the money market, the Federal Reserve Board told commercial banks it would provide the reserves needed to allow them to meet the credit needs of their customers. (What happened after the bailout?)	$3.2 billion
●	Lockheed	1971	In August 1971, Congress passed the Emergency Loan Guarantee Act, which could provide funds to any major business enterprise in crisis. Lockheed was the first recipient. Its failure would have meant significant job loss in California, a loss to the GNP and an impact on national defense. (What happened after the bailout?)	$1.4 billion
●	Franklin National Bank	1974	In the first five months of 1974 the bank lost $63.6 million. The Federal Reserve stepped in with a loan of $1.75 billion. (What happened after the bailout?)	$7.7 billion
●	New York City	1975	During the 1970s, New York City became over-extended and entered a period of financial crisis. In 1975 President Ford signed the New York City Seasonal Financing Act, which released $2.3 billion in loans to the city. (What happened after the bailout?)	$9.4 billion
●	Chrysler	1980	In 1979 Chrysler suffered a loss of $1.1 billion. That year the corporation requested aid from the government. In 1980 the Chrysler Loan Guarantee Act was passed, which provided $1.5 billion in loans to rescue Chrysler from insolvency. In addition, the government’s aid was to be matched by U.S. and foreign banks. (What happened after the bailout?)	$3.9 billion
●	Continental Illinois National Bank and Trust Company	1984	Then the nation’s eighth largest bank, Continental Illinois had suffered significant losses after purchasing $1 billion in energy loans from the failed Penn Square Bank of Oklahoma. The FDIC and Federal Reserve devised a plan to rescue the bank that included replacing the bank’s top executives. (What happened after the bailout?)	$9.5 billion
●	Savings & Loan	1989	After the widespread failure of savings and loan institutions, President George H. W. Bush signed and Congress enacted the Financial Institutions Reform Recovery and Enforcement Act in 1989. (What happened after the bailout?)	$293.8 billion
●	Airline Industry	2001	The terrorist attacks of September 11 crippled an already financially troubled industry. To bail out the airlines, President Bush signed into law the Air Transportation Safety and Stabilization Act, which compensated airlines for the mandatory grounding of aircraft after the attacks. The act released $5 billion in compensation and an additional $10 billion in loan guarantees or other federal credit instruments. (What happened after the bailout?)	$18.6 billion
●	Bear Stearns	2008	JP Morgan Chase and the federal government bailed out Bear Stearns when the financial giant neared collapse. JP Morgan purchased Bear Stearns for $236 million; the Federal Reserve provided a $30 billion credit line to ensure the sale could move forward.	$30 billion
●	Fannie Mae / Freddie Mac	2008	The near collapse of two of the nation’s largest housing finance entities was yet another symptom of the subprime mortgage and housing market crisis. In an effort to prevent further turmoil within the financial market, the U.S. government seized control of Fannie Mae and Freddie Mac and guaranteed up to $100 billion for each company to ensure they would not fall into bankruptcy.	$200 billion
●	American International Group (A.I.G.)	2008	When AIG was unable to secure a private-sector loan, the federal government intervened by seizing control of the insurance giant.	$85 billion
●	Auto Industry	2008	In late September 2008, Congress approved a more than $630 billion spending bill, which included a measure for $25 billion in loans to the auto industry. These low-interest loans are intended to aid the industry in its push to build more fuel-efficient, environmentally-friendly vehicles. The Detroit 3 — General Motors, Ford and Chrysler — will be the primary beneficiaries.	$25 billion
●	Troubled Asset Relief Program	2008	The Bush administration has proposed a rescue plan to ease the current crisis on Wall Street. If approved by Congress, the Treasury Department will be authorized to purchase up to $700 billion of distressed mortgage-backed securities and other assets and then resell the mortgages to investors.	$700 billion

Ed McMahon In Foreclosure – Lessons Learned?

Ed McMahon, notable sidekick to Johnny Carson for what, 25 years or so, host of Star Search for 12 years, and pitchman for Publishers Clearinghouse Sweepstakes for who knows how many years, is making headlines for hitting the skids. At 85 years old, he is late on roughly $650,000 in payments on his $4.8 million mortgage with Countrywide.

So what’s the problem? For a guy who’s been working forever, in the entertainment industry, where we are taught that employment is very lucrative, this seems pretty odd.

Apparently at 83 years old, Ed broke his neck, and has been unable to work. And the housing market coupled with the his injury is forcing him to fail making his payments. He put the home on the market 2 years ago, and has been unable to sell it.

Are we really supposed to believe that a guy who was forced to stop working at 83 due to injury, and worked in a lucrative business all his life is supposed to go broke 2 years later? Are we supposed to feel sorry for this? In the article, McMahon cites “the economy, health problems, and poor planning” as reasons this happened. I think we can strike the first two excuses from the list.

He isn’t exactly shirking responsibility, but this is an “aw, shucks” way of avoiding the significance of POOR PLANNING. First of all, the guy should have socked away a boatload of cash in his line of work. Second, he should have planned for retirement, differently, and should not have been living in a house with 4.8MM in debt unless he had significant liquid assets on the other side of his balance sheet. I love that he was still working at age 83, but sadly this seems now to have been out of necessity rather than a passion for his work.

The market has been turbulent, this much is obvious. But when high profile, high income-earning people like this get caught up in the mess, you have to take a hard look at why. Is the economy so bad that even rich guys like Ed McMahon, Jose Canseco, and Evander Holyfield are getting wiped out? Or is it a fact that people with more money that most of us can fathom can get ruined with poor planning, while modest income-earning blue collar workers, and others can take a slow steady path to safety and wealth if they plan wisely? The answer is very clearly the latter.

Look at this headline for Holyfield’s case. “Not Broke, Just Not Liquid”. You must learn how to plan, and learn not to compartmentalize your financial decisions. For those who’s mortgage is their biggest bank account, this is where it begins. Work with a Mortgage Planner to learn how to position yourself for the right balance of cost, safety, and return on your investment.

Jumbo & Conforming Loan Limits – More Market Chatter 5/8/08

A big wet blanket got thrown on the whole idea of the new conforming loan limits when we realized that the banks were going to take advantage of the new limits to off-load some frozen pipeline to Fannie Mae and Freddie Mac, but not turn around and extend the offer to the consumer. As a result, we saw a new market form between Conforming and Jumbo sized loans – the new “Agency Jumbo”, “Conforming-Jumbo”, “High Limit Conforming”, or whatever you want to call it – the names are all over the place. But banks priced these much closer to the currently-dysfunctional Jumbo market rates – with 30 year loans pricing at 7% and higher.
But not any more! Here is some fresh news from a colleague:

Fannie Mae threw some chum into the water for loan agents in high balance areas, saying that it will buy jumbo mortgages for the same prices as smaller loans. Some random notes:

Fannie is expecting the benefits of the price improvement to be passed along to the consumer. The intention and spirit of the price change is to improve the rate for the borrower, not to present an arbitrage opportunity. Fannie’s policy is that for loans already in pipeline lenders can float the borrower’s rate lower or sell already closed loans at the originated market level – they will not buy closed loans at flat to conforming. Other investors have yet to announce firm guidelines regarding those loans already locked in.

Credit pricing is unaffected, and all adjustments still apply, including the 25bp for fixed rate, 75bp for ARMs, and the 25bp adverse market delivery charge.

Fannie Mae approved seller/servicers should see approximately a 37bp yield improvement for the jumbo-conforming fixed rate and a 20bp yield improvement for the jumbo-conforming 5/1 adjustable rate whole loan postings.

Fannie Mae Trading Desk will buy jumbo-conforming adjustable rate securities at levels flat to where they are bidding conforming ARM securities.

Fannie also announced that they will handle refinancings of non-delinquent mortgages for as much as 120 percent of property values when it owns the existing loans.

Some investors made the change effective immediately and reduced the spread from 150 basis points down to 50 bps, of which 25 bps is a direct fee to Fannie Mae.

Manual u/w is still required, DU can be run but it must meet the product overlays.

Questions about what any of this means TO YOU? Email me here! This appears to be legitimate, real positive news. For the first time since the crisis began back in August, we are seeing 30 year rates near or even below 6% at the new conforming limits in high cost areas!

CMPS Proposal For Housing Crisis Reversal

I recently wrote about the negative feedback loop this credit crisis is causing, and how it causes a downward spiral in home values. You can read about it and the study referenced right here. Many economists are discussing ways that the government or the banking institutions can put up a backstop to help break this cycle. It’s a complicated issue.

The CMPS Institute has issued a proposal designed to offer some ideas from the perspective of the mortgage industry. It’s an interesting argument against some of Washington’s proposals, which include a tight ratcheting down on the lending industry. This feels very threatening to mortgage professionals who know how to run an ethical business and use flexibility in creative ways for their clients. Read the proposal for more insight.

Flat or Inverted Yield Curve, and Recession Watch

New York Fed President Timothy Geithner made a comment recently that provides interesting testimony on the extent foreign investment in our bond market has subsidized our long-term interest rates and mortgages:

“China’s policy of buying dollar assets to keep its currency tied to the dollar masks US financial-market conditions and heightens the risk of inflation in the US . China’s purchases of US dollar assets could spur inflation by putting downward pressure on US interest rates and producing more expansionary financial conditions than fundamentals warrant.”

With the Federal Reserve ratcheting our short term money to higher rates over the past 2 years, the expectation was that we would see the yield curve shift upward, with a generally higher interest rate at all maturities – for the most part. Instead, we have seen downward pressure on the long end of the curve, largely due to the Chinese government, who have bought as much as 28% of our recent treasury auctions (high demand means higher prices, and lower yields or interest rates).

Looking at the yield curve, the left side has risen much faster than the right, now to a point where we are seeing either flat curves or inverted curves from day to day. Some pundits argue that a flat or inverted yield curve signals a recession to follow, as the expectation is that rates will drop, making longer term maturities more valuable, so investors bid the prices up making the yields lower. This dated wisdom discounts the impact of the modern global economy, where as much as 60% of our treasury auctions have involved foreign money.

With the Fed expected to raise rates 2 or 3 more times, you can count on this curve seeing a steeper inversion, unless the long-term rates start to really lift. We are already seeing foreign interest peel away, as the European Central Bank and the Bank of Japan have initiated tightening cycles in their markets, drawing attention from foreign investors and competition for our money.

This may lift some of that downward pressure on the long side of the curve. On the short side, the Fed will probably have to lower rates again after the full effect of this tightening cycle has been felt. Its kind of like when you get into a hot car and turn on the air conditioner at full strength; after a few minutes you are cold again, and have to adjust the air back to a balanced and comfortable level. The Fed will do this as soon as they find that counter-inflationary sweet spot. And from there, the yield curve will likely shake its way out to a more natural slope.

Our National Builder Division Hits the Ground Running in San Ramon

We have been busy in San Ramon for the last month helping the first phase of 496 new home owners get their financing together. At the ‘Reflections‘ property, one bedroom condos are selling for as little as 249,900, and 2 bedroom models are getting up around 439,900. The first release took place this last Saturday, and it was a feeding frenzy. Anybody concerned about real estate bubble conditions in the East Bay might want to keep an eye on this project, because they had more than 200 qualified buyers waiting in line for housing.

When it comes to housing prices, its all about supply and demand, folks. Good old fashioned economics. You will not see prices trail off until demand subsides. For now, strong job growth, and a general lack of supply for housing at this price in this community are going to keep demand pretty strong.

We have met some interesting people, and had quite a bit of fun out there so far. But I think this is the calm before the storm. 496 units makes for some serious paperwork, and some serious weekend hours. Have you ever bought real estate directly from a new home builder, or through a condo conversion? I’d like to hear about your experiences with this process, especially how the financing was handled. Drop me a note and tell me about it if you get the chance…