Builders are beginning to build again.  Land being purchased for development is a frequent occurrence.   Lenders are excited to be lending again…  Wait?! What was that last one?……  Well it’s true.  Many people (buyers and sellers alike) got a rude awakening recently when rates shot up over a percent from around 3.5% to over 4.5%.  Historically this means there will be buyers getting priced out of the market due to the way mortgages are approved (debt to income ratios, etc).  Also, a rise in interest rates typically signals a decrease in housing prices due to this affordability factor.  But if you look at the current market and the historic place interest rates were at, there was no way for rates to remain that low and housing to fully recover.  Rates needed to rise, and by doing so we may actually come out of the housing slump for good and this time sustain realistic pricing.  Why?  For starters the sudden rise, although comparatively substantial, still has interest rates around 4.35% as of writing this.  4.35% is incredibly low still, so it’s not as if they shot up to 8+% (or will do anytime soon for that matter).  The other and most important reason I think is that an increase in interest rates means loans are more profitable, which in turn signals more lenders to get into lending again.  With more lenders comes competition, which breeds better loan terms.  So for every buyer who may have got priced out there are more who now qualify due to stringent approval standards loosening as more and more lenders want to make that higher return rate from loans.  A sign of this is the fact that the housing market not only withstood that rate jump, but shows no sign of slowing down;  Just imagine where we’ll be when prices increase to the point where the majority of homeowners have equity again!

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Apr

10

Now that prices are climbing and real estate demand is soaring, things like 100% financing are coming back, along with willingness to taking out equity from their home to have some extra spending cash.  Let’s just hope that we have learned from past mistakes and exercise good judgment this time around.  As we know these things don’t always end up as good as promised.

For instance, even if you qualify for a 100% financing, you have to be weary of the fees and risk associated with that as well as who in this market is actually accepting those types of offers?  In Southern California’s hottest communities cash or conventional offers are king right now because of the very real threat of low appraisals and the ability for a deal to be ruined by them.  With so little inventory to choose from feels like every house is receiving a high down payment offer lately, and that’s tough to convince a seller to ignore.

Of course some people are still not selling, maybe because they desire new construction and they’re waiting for builders to ramp up production; or perhaps they simply feel the market is still climbing so they should hold out for even more equity growth.  The reality is that if you sell your home for more due to price increases, you will also be buying a home at inflated costs so that reasoning alone could leave you with a wash.  Still, many people dread the home buying process and fear the perceived risk that has set in the minds of home buyers due to the most recent housing crash. 

With little room for interest rates to drop much more it would seem the perfect time to sell and/or buy, but for those without a pressing need to sell now or a substantial savings for a down payment, coupled with lingering economic uncertainty, inventory remains low.  The first-time homebuyers propped the market up, now the “move-up” buyers will see our next phase of growth.  When inventory (supply) meets the demand for housing, we will see what a healthy housing market looks like.

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Is it great time to buy a house right now?…Yes, not even a question really, but good luck competing with everyone else jumping in the shallow pool of homes right now too.  The competition is so intense many houses receive multiple offers over asking price and inevitably they first go to the cash offers, then in the unlikely scenario they can’t secure a cash buyer at the list price they go to those with enough cash to waive the appraisal.  If you need a loan you are playing shorthanded and will be fighting an uphill battle that is for sure.  Now that’s not to say you can’t get a home with a loan it is done every day, but you better be prepared to write a very attractive offer, and in the high demand areas you’ll need to remove or limit the appraisal contingency to have any real shot.  You also need a lender who is on their game and can honestly spell out what you can afford to do and how creative you can be with your offers, otherwise halfway through escrow you’ll have paid for an appraisal and inspection and find out whoops, you really aren’t pre-approved as our company doesn’t want to take on the risk after looking into it again.  Pre-approvals done in 5 minutes are a complete waste as the lender will find something out eventually if not disclosed upfront.  Buyers increasingly can’t be certain the lenders they shop provide accurate pre-approvals because often they just say, “sure, you’re approved” to get you in the door, then during escrow the wheels come off.  Pre-approvals mean so little nowadays that I caution even considering an offer on a listing unless they are cross -qualified through a known local lender.  This will reduce risk of escrow cancellations before an offer is even accepted and ensure a deal can actually get done under the terms offered.

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   Appraisal issues can complicate selling and refinancing a home because a bank will only lend you what the home appraises for, often leaving you to make up with the difference.  A low appraisal often delays closing as either the buyer finds a way to make up the difference or the seller agrees to reduce the price. 

   Problems arise because many appraisers are employed by large management companies who choose based on availability and not the always the best expert, as they may not have sufficient experience in a given neighborhood.  Also, a low valuation can occur when an appraiser doesn’t take a home’s condition into account or compares the property to homes that really aren’t similar in a market (distressed properties vs. standard sale/turn-key homes). Distressed sales sell on average 15-20% lower than a non-distressed home, so comparing the two often leads to a wide range of interpretation for the appraiser.  Take into account they are increasingly using 8+ comps as opposed to <5 as was the norm in years past, and appraisal’s become a vague opinion of a property rather than a specific value.  Often, lenders are simply being overly cautious to compensate for the erroneous valuations made during the housing boom.

 

What to do when an appraisal comes in below the selling price

Appraisers are more often going by past sales and not future market direction, and who can blame them for being cautious as wasn’t that the problem with the housing bubble?  Well, there needs to be a balance and it is not always there, so here’s some options:

1. Agents MUST meet appraisers at the home and provide comps they used and reasoning for the price they have obtained.  This helps reduce the ‘unknowns’ the appraiser may be dealing with by having a professional who knows the area well provide support.

2. If an appraisal comes in low a good negotiation approach is too have the buyer, when possible, pay a small amount of difference and the seller to drop the price (often to the next best offer price).  This provides a win-win for both sides while conserving the deal.

3. Ask for the appraisal report and dispute the appraisal citing specific reasons to lender.  You can even ask for a new one (not a common allowance so have a backup plan).

 

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As part of the deal avoiding the “fiscal cliff” the Mortgage Debt Relief Act, which was set to expire Jan 1 2013, has been extended to the end of 2013.  This means that most people who short sale their home do not have to worry about the tax man treating it as a taxable gain.  This will help thousands avoid costly tax bills they can’t afford in the first place and thus we will see an increase in short sales.  In reality we won’t really see an increase since it has been in place already, but it does prevent seeing a huge decrease which would have obliterated quality housing inventory and led to many more foreclosures.

Now those that haven’t looked seriously into a short sale up to this point have another chance to do so.  Short sales typically make the most sense because it forces the lien holder (banks) to say they will not come after you for a debt, which foreclosure can’t always provided (especially when there is a second lien on home).  Ask anyone who short sold their home 2 or 3 years ago and they will tell you it was best decision they made with their home as they are now in the market again to buy, and this time they can get a great loan and a great value on a house.  Especially with owning being such an attractive option right now.  Rents are soaring, and it has been cheaper to own than to rent for awhile now largely thanks to interest rates and prices.

Most experts predict a modest gain of 5-7% in housing prices in 2013, but in my surrounding area of Riverside and Orange counties we could see upwards of 10%.  If those gains won’t get even get you close to being even on equity, 2013 may be the year for you to look deeper into short sales.

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The selling price difference between a foreclosure and a standard sale are closer than they have been in 5 years. That’s because a sellers market has emerged in California and is picking up steam. Banks no longer have to choose between a couple offers, but now a dozen or more! Competition drives the selling price up; you see it’s not the banks listing them for that much higher, more than often it is many buyers simply competing for the few homes available to purchase. This is causing home prices to rise and will likely continue as housing recovers and demand increases even further. Also, with foreclosures reaching 2007 levels recently as mortgage delinquencies diminish, signs indicate the REO will no longer be the majority of inventory, but rather the minority as standard sales once again become the norm as the pendulum swings. Often time’s buyers are finding very strong demand for a home where they wouldn’t think that to be the case and a bidding war ensues. With fewer distressed homes  we could see a jump start to new home construction, and a surge in new homes is the next sign that housing is indeed recovered.

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Okay maybe you won’t be able to buy homes at Costco anytime soon, but that’s the idea behind many institutional investors’ plans.  Even though prices are rising steadily, rents are rising even faster!  In fact, rentals are so hot right now that investment firms have now become big players in the income property business.  And we’re not just talking apartments and multi-unit dwellings, but single family homes; and they are buying them by the thousands.  Large investment funds and real estate trusts are currently buying distressed homes; often at below market prices with the intent to collect rental income from single family homes similar to the way REIT’s do from apartments and commercial buildings.

Even Fannie Mae is selling thousands of homes in bulk sales to investors which quickly clears shadow inventory.  But these bulk sales have setbacks.  Experts say bulk sales reduce local ownership and that withholding information regarding the areas and prices that are being bought in bulk create an unfair advantage.  Although, there is also evidence that vacant properties negatively impact communities so much that the benefits may outweigh the negatives.  Of course, the right market makes all the difference, which is why these purchases are being done largely in highly depressed areas such as Nevada, Arizona, and of course right here in the Inland Empire of Southern California.

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Our country went through the biggest economic shift in most of our lifetimes in large part due to the housing crisis, but presidential candidates rarely bring up housing. After thinking about why this is and reading many research articles on the current state of housing, I realize that it really is no easy subject to take on. Take for example a couple issues we face right now: the mortgage interest deduction and the debt relief act.

The mortgage interest deduction allows homeowners to deduct interest from their taxes, but this is a deduction that is under fire when it comes to tax reform. It also seems to be a dividing issue with voters. Also at stake is the debt relief act which expires at the end of the year and currently allows those who short sale to be forgiven of the tax burden associated with the short sale. Again, some say let homes foreclosure naturally, while others advocate foreclosure alternatives for underwater homeowners.

The problem is that most potential housing remedies are either very expensive and/or reward bank irresponsibility in some way. Of course there is no cure all solution and therefore each candidate avoids fully committing to one remedy or the other. On top of it each possible scenario seems to leave someone feeling left out. With housing being a main issue driving our economy and a top concern in many peoples’ minds, I’m surprised they don’t talk about it more, although I guess understand the political dangers of doing so.

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Many homeowners who find themselves severely underwater in their homes are eventually either going to short sale their home or simply stop paying and allow foreclosure to occur, but there is another option available to people who want to stay in the house. Only a select few are taking advantage of these offers but they are out there. Admittedly the guidelines for qualification are somewhat restrictive right now, for example you must not be more than 11 payments past due on your mortgage and you must be able to pay fair-market rent without spending more than 31 percent of your gross income; plus properties with second mortgages are ineligible. But look at the advantages for someone with a grossly inflated mortgage payment but who loves where they live: they still get to stay in the same home, their kids stay in the same schools, they keep their community ties, and most would never know that they are now renting instead of owning. It just goes to show that there are so many programs available to distressed homeowners it really is not beneficial to just sit around and wait anymore.

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It was recently reported that property tax bills have increased significantly from last year in both quantity and amount, indicating that homeownership is increasing along with property values. County revenue will increase as a result and often times that leads to increased spending on infrastructure which could even lead to job growth. Isn’t it ironic that property taxes increasing could now be interpreted as a signal of economic recovery? Guess when that February 1st due date rolls around for the next installment knowing that could take some of the sting out…although not for long if the homeownership tax deduction continues to be threatened.

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