May 2009

The San Fernando Valley is Hot, Hot, Hot!

Just in: the latest information from the Southland Regional Association of Realtors, as reported in the Daily News, is that the San Fernando Valley is heating up – with home sales reportedly leaping 26 percent in April, 2009. Moreover, the median price of a previously owned Valley house actually increased by 3 percent in April!

I can’t say I’m completely surprised by these stats, having recently seen lower priced houses fly off of the market, being snatched up by eager investors and homebuyers, frequently with multiple offers. The reasons are straightforward: historically low interest rates and excellent housing affordability. Many people recall what happened after the last real estate crunch of the early 90’s and are eager to buy in at such attractive prices, and many, many more can afford to buy now. In particular, the SRAR’s data on housing affordability makes the case:

“The minimum household income needed to purchase an entry-level home at $213,040 in California in the first quarter of 2009 was $38,090, based on an adjustable interest rate of 4.96 percent and assuming a 10 percent down payment. . . . The monthly payment including taxes and insurance was $1,270 for the first quarter of 2009.”

This amounts to a 41% lower qualifying income than just twelve months ago. No wonder Valley buyers are getting back into the game. I’m guessing that the real estate weather this summer will get even hotter – barring any radical spiking in the interest rates, of course.

Short Sales: Walk, Run, or Run Away?

A short sale is a sale in which the lender(s) agree to take less than the amount owed upon the sale of the property. The problem in a nutshell: because so few short sales have historically resulted in closed deals they can amount to a colossal waste of everyone’s time. The Washington Post has written about the problem: “Why Short Sales Stumble.” There are a number of reasons for problems with short sales, some of which can be blamed directly on the financial institutions involved (which, in their defense, are typically overwhelmed these days), but others can be blamed on good old-fashioned PPP (poor prior preparation). In the words of the Washington Post, “Too often, sellers and their agents are calling a listing a ‘short sale’ or saying that ‘offers are subject to third-party review’ without even having talked with the lender. They plan to get a live fish on the hook before they try to tempt the lender. Do you want to be that fish?” While banks were formerly very reluctant to approve short sales, the word on the street is that they have found religion, and are now more willing than ever to short sell than ever, to avoid adding to bloated REO inventories and the costs of the foreclosure process.

How can the buyer – or, more likely your agent – separate the wheat from the chaff? Frank Llosa, a Virginia-based real estate broker (and blogger) has created an excellent and very comprehensive screening list of screening questions for the listing agent of a short sale, (assuming, of course, you can get them to answer). Mr. Llosa’s suggested email questions include:

1. Have you closed a Short Sale before?

2. Have you requested and received the short sale package from the bank, including the hardship letter?

3. Have you sent the package AND have you confirmed receipt?

4. What communications, if any, have you had with the bank?

5. Has the bank approved the list price?

6. Have you received any other offers that you are waiting to hear back from the bank on?

7. Does the loan have PMI on it? (Private mortgage insurance)

8. [Are] there one or two trusts? Any other liens?

9. What are the names of the banks? Are these FHA or VA loans?

10. How long do you estimate that the lender will take to provide an answer to an offer?

11. Has your seller completely stopped making payments on their loan.

Unfortunately, as even Mr. Llosa concedes, the chances of getting a response to all of these questions is not great, particularly via email. I prefer to just cut to the chase and see if the property is worth further evaluation with a “quick and dirty” list. Here’s the minimum questions I ask before conducting any further investigation or even thinking about showing a short sale to a client – most likely over the phone:

1. Have ALL the lenders involved approved the short sale price? If not, why do you think they will?

2. Are there any other offers on the property?

3. Do you know how long the lender typically takes to respond to an offer?

If the answers to these questions are satisfactory, and everything else pans out, I may well advise my client to put in an appropriate offer. My next advice is to move along, and continue the house-hunt as if the first offer does not exist. The reason for this is that it can easily take three months or longer to even get a response on a short sale offer, and I don’t want my clients to miss any deals that come along in the meantime. If they find something else, we simply withdraw the original offer. (As you can tell, the short-sale game is particularly suited for investors: I’m not expecting my investor clients to fall in love with a property: if it makes sense, they buy, if not, they should move on. As someone once said, “real estate deals are like buses – if you miss one, there will be another coming along any minute.”)

A Tale of Two Cities: The Divergent Fortunes of High and Low End Properties in the Greater Los Angeles Area

From my perspective, many cheaper houses in close-in, desirable San Fernando Valley neighborhoods have reached a price point where they make sense to purchase as flips, long-term investments, or shelter, when viewed in relation to market rents. The higher-priced properties, in contrast, are still selling for an extraordinary multiple of their rents. In addition, the spread on interest rates between conforming and jumbo has been out of whack ever since the beginning of the financial crisis, as the secondary market shunned anything that was not Fannie Mae/Freddie Mac backed (and, as transpired, ultimately backed by us, the taxpayers.) Thus, it seems like this recovery will be a “tale of two markets”: sales are brisk a the low end, but the jury is still out on what will happen to the higher priced markets. Is Malibu REO an oxymoron? Not anymore, it seems.

Signs of Seller Capitulation in the Los Angeles Market: Is The Bust (Finally) Over?

According to Forbes.com and Radar Logic, a New York-based data provider, sales of non-distressed Los Angeles properties are up 6% from a year ago and now make up 58% of all transactions. The same article reports that L.A. houses were recently going for $236 a square foot on average, down 25% from March 2008. What do these statistics mean? Certainly, more sellers have given up on unrealistic price expectations. In financial markets, market capitulation is the “term is used to indicate the point in time when investors have decided to give up on trying to recapture lost gains . . .” and may signal a bottoming (if not rebounding) of the market if enough sellers join the capitulation party. Thus, Wall Street pundits spend a lot of time trying to decipher when the market has finally “capitulated” so they can go plowing back into equities. However, the problem is that no one really knows when the bottom has been reached: at least not until after the fact. Intriguingly, the Associated Press recently reported an upswing in prices in Northern California – is Southern California next? We suspect that, for the low-end properties in the San Fernando Valley, the bottom may already be in place. The reason we think this is that the rent to purchase price ratio (the equivelent to the price/earnings ratio or P/E ratio for stocks) is at the most attractive valuations in years. This fact, coupled with historically low interest rates, is driving a resurgence in demand in cheaper properties, and rightfully so.

The New Real Estate Feeding Frenzy – Are You A Shark or A Minnow?

The last investor-friendly house we looked at was a fixer in West Hills. Within a couple of days of it hitting the market, it had attracted 8 offers. I’m confident it will sell for well over asking price. No wonder that the San Fernando Valley Business Journal reported on May 11, 2009 that “first time homebuyers and investors are snatching up an increasing number of homes in the San Fernando Valley . . ..” It is well past the stage of a few isolated occurrences. When I recently looked at two months worth of closed transactions in Encino, the average sold to asking price was slightly over 100%. These are strange times indeed. When you figure that some of the inventory had to be “normal” – i.e., not distressed properties, that typically sell for some kind of a discount from asking, the fact that the average house sold for more than asking gives you an idea of the way that the REOs and short sales are affecting the market. How to play this game? You have to be aggressive, have all your financing together (or cash – best case scenario) and jump on a property before someone beats you to the punch. The days of waiting around to see if someone else bids are history — at least if the property is distressed.

Is this the “Golden Age” for First Time Homebuyers?

“Five or 10 years from now, when the financial crisis has ended and housing prices are up smartly once more, we will look in the rearview mirror and realize that we missed a golden age for first-time home buyers.” So says the New York Times.

Something tells me that a lot of potential homeowners aren’t thinking this way. Perhaps, instead, you feel that it would be completely nuts to be considering buying your own place, given the awful state of the economy? I feel your pain. In fact, I’ve been there myself: my husband and I bought our first home in 1996 at a time when things were not looking good at all. The market had never even started to recover in the six years since the crash that started in 1990. We certainly never bought the house thinking that we’d get any kind of decent appreciation out of it: we bought in order to have our own house, and, frankly, to save a bit on taxes. In retrospect, it has turned out to be the best investment of our lives.

Will you have a similar experience? Only time will tell, but the only way to experience the benefits of homeownership is to get into the game. Find a starter house that you can afford, and make the most out of the government programs designed for first time homebuyers.

The FHA’s “Anti-Flipping” Rule and Dorothy, the Wannabe First Time-Homebuyer.

Once upon a time, there were fantastic loans widely available that were backed by government “FHA” insurance. Down payments as low as 3.5% were made available to encourage homeownership by The Wizards of Oz, and homebuyers flocked down the path of golden bricks. All was well in the land of first time buyers until the Wicked Witch of the East decided to throw a flying monkey wrench into the game and passed the evil anti-flipping rule (as codified in 24 C.F.R. § 203.37a) which prohibits the FHA from insuring loans on properties which have sold within the last ninety days. While the Good Witch of the North temporarily suspended the anti-flip rule, it is currently scheduled to go back into effect in June of 2009.

Thus, these days, even if you are a legitimate flipper (and add value to the property), the buyer won’t be able to get an FHA backed loan until your ownership is property “seasoned” – i.e., aged to perfection. The upshot: If you plan to flip to FHA buyers, expect that you’ll have to wait 90 days before you get the property under contract and then perhaps even longer get to closing. (This may not be a problem if you have a lot of work to do). This can be avoided by simply using conventional financing, but that eliminates a lot of buyers, and profits.

In our opinion, the anti-flip rule needs to go – all it does is discourage people from fixing distressed properties and making nice housing affordable to all, including Dorothy, the Tin Man, and the Cowardly Lion.

The Sky is Falling – Lock In Your Thirty Year Fixed Rate Financing Now!

Is the U.S. getting ready for a dose of “good, old-fashioned inflation?” It sure is starting to look that way. Bloomberg reports that billionaire investor Warren Buffet recently said: “A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, it’s going to inflate its way out of the burden of that debt.” Who was he talking about? Yep, it could only have been the U.S. of A., with its enormous national debt. How can we reduce the burden of that debt? Only through gradually increasing inflation and repaying our creditors with increasingly worthless dollars. That is why the same article discussed several prominent economists who are calling on the Fed to move to a monetary policy that will cause 6% annual inflation for the next few years. If this takes place (as appears quite likely), you’ll want to have your fixed rate financing locked in well in advance. For, as the old saying goes, the time to buy insurance is before you need it.

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Don’t Be Surprised By a Bad Credit Report!

First things first – you need to know what your current credit report looks like. You have a legal right to a free credit report only once a year from the three credit reporting agencies. However, many smart people check just one of the three every four months (spaced out) to keep from being surprised at the end of the 12 month period by a bad credit report.

Here’s how to get your report (courtesy of the FTC)

How to Order Your Free Report

The three nationwide consumer reporting companies have set up one website, toll-free telephone number, and mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form (PDF) and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can use the form in this brochure, or you can print it from ftc.gov/credit. Do not contact the three nationwide consumer reporting companies individually. They are providing free annual credit reports only through annualcreditreport.com, 1-877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order from only one or two. The law allows you to order one free copy from each of the nationwide consumer reporting companies every 12 months.

You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address. To maintain the security of your file, each nationwide consumer reporting company may ask you for some information that only you would know, like the amount of your monthly mortgage payment. Each company may ask you for different information because the information each has in your file may come from different sources.

How Many Trillion [of your] Dollars Will it take to put Humpty Dumpty Back Together? And What Can You Do About It?

Do you know how much a trillion dollars is?  Admittedly, it is kind of hard to fathom.  According to NASA :

One trillion is written as the number “1″ followed by 12 zeros (1,000,000,000,000). One year of clock time = (60sec/min) x (60 min/hr) x (24 hr/da) x (365.25 da) = 3.16 x 107 sec
One trillion seconds of ordinary clock time = ( 1012 sec)/( 3.16 x 107 sec/yr) = 31,546 years!
Six trillion seconds equals 189,276 years. Now, as an aside, along with the nearly six trillion miles in the light-year, you might be interested to know that there are nearly five trillion dollars in the current U.S. national debt. Is it any wonder that our politicians in Washington are concerned?
(An interesting bit of trivia: If one were to count the national Debt at the rate of one dollar per second, he or she would have to use a mechanical counter to click off the digits. Why? Because, if he or she counted in the usual way, saying “one, two, three, …” etc., there would be numbers whose names are so large, that it would take more than a second of clock time to pronounce them. For example: “Nine hundred and ninety nine billion, nine hundred and ninety nine million, nine hundred and ninety nine thousand, nine hundred and ninety nine,” takes about 8 seconds to pronounce.)

For a really amazing visual representation of a trillion dollars, check out “what does a trillion dollars look like?

Sadly, the rocket scientists at NASA are just a tad out of date.  There’s no longer a five million dollar national debt.  Those were the good old days.  Now, it is over 11 trillion, per the National Debt Clock.  Worse, just the spending on the current federal bail out plan (SO FAR) has been estimated by the Milken Institute at . . . almost 10 trillion dollars.

So, imagine if you will, the final image of a trillion dollars stacked on a giant field of pallets and, another nine of these massive installations of double-stacked pallets of $100 dollar bills, all being spent by our government in order to stop us from falling further into the abyss.

What will happen to the U.S. dollar after these bucks are all flushed down the proverbial toilet?  I don’t have any crystal balls, but I can think of plenty of historical examples where uncontrolled government deficit spending lead to hyper-inflation.  Starting with Germany during the 1920s — the time of Weimar Republic. Think it can’t happen here? People have short memories. Here are some historical interest rates as collected by the U.S. Government:

In other words, we had rates of 13-16 percent on the safest, 30 year fixed rate loans imaginable. For a long time. What can you do about the current situation? Neither the Republicans nor the Democrats appear to have any obvious solution, so you’d better figure out your own, pronto. One answer is to not worry about it, go to work, and stick whatever is left over after you pay your taxes and expenses in “safe” investments, where they are as likely as not to be gobbled up by inflation.  Another is to borrow as much as you possibly can (at fixed rates — please!) and invest it in income producing properties, and pay those loans off with dollars that are worth far less than they are today. I’d be happy to show you how the numbers work out. Suffice it to say that at the end of your thirty year mortgage, your payments will be inconsequential compared to the inflated rents you will be able to command, assuming that this plays out the way it inevitably has in the past.

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