News and Tips by Jasmine Darcy
Market Monitor
Should I Be Worried? 
Prices are down. “For Sale” signs linger. Foreclosures and short sales are cropping up everywhere. You’ve undoubtedly read various versions of the same info. But what exactly does this mean to you, and is there a general consensus on where prices and interest rates are heading in the foreseeable future?
You already know that the housing boom of the last decade is well over. Prices declined throughout 2008 in most of Los Angeles County, and much more significantly in San Bernardino and Riverside. In some areas, prices are down as much as 50%. The market is also flooded with short sales and foreclosures. But for homeowners in the Los Angeles area, there is also good news: according to Money Magazine and other authorities on finance and markets, L.A. consistently rates among the five bubble-proof real estate markets in the nation, along with New York, San Francisco, Seattle, and Boston. While home sales and prices did decline in L.A., the supply-to-demand ratio translates into a market that is far more resilient than most. Even if you are in an area where prices fell noticeably, unless you are planning to flip a house (buy, renovate, and sell right away in the hope of making a quick profit), do not worry about your home’s value all the time. You probably do not concern yourself too much with the day-to-day value of your 401K. That account has most likely gone up and down quite a lot in recent years, and has almost certainly taken a hit in recent months. But when the media gave us splashy headlines like “Stocks Plunge!” or “Dow Takes a Dip!”, most of us did not need to call up our 401K manager in a panic. Unless you are very close to retirement, the odds are that you will be fine, and you can leave your investments alone. History still shows that your investment should provide a nice return over time, despite periodic highs and lows. While serious real estate declines are much less common than stock market dives, it is still normal for values to head south now and then. Home prices soared so fast and so high in the early years of the millennium that many people forgot this market truth. And always remember that the investment part is only one aspect of owning a house. The bigger aspect is that you have purchased an actual home, a place to live, to love, to grow into, and maybe to raise a family and grow old in!
Still, historically, real estate has proven the most reliable and profitable investment most people ever make. If you are 62 years old, bought a house at the market-high a year ago, and were planning to sell the property this year to retire on the profits, then you may be in a jam. If you bought for the long term, or have held your home for several years, the past tells us that you should be just fine. I recently heard a long-time real estate investor say that he had lost money on every house he had ever bought—because every house had eventually risen in value after he had sold it!
The nation’s only true real estate bust was in the 1930s, during the Great Depression, with home values tumbling an average of 25% in just a couple of years. The market recovered in a spectacular fashion, and people who hung on to their homes were rewarded handsomely. Other downturns have been less dramatic, but the rebounds equally reassuring. In Los Angeles, Long Beach and Santa Ana, the average price of a home fell 19% from 1993 to 1998, the last time the Southland faced a housing slump. We all know that prices skyrocketed once the crisis was over. Simply put: Slip happens.
Prices are stagnating in some areas and falling in others, but this will not go on forever. Some insiders thought the current slump would last through mid-2008, and they were wrong. Prices continued to fall into early 2009. And now that many economists believe we have entered a national recession, it is entirely possible that the market will not begin its recovery until some time in 2010. I share that view: I do not believe prices will begin to rise until 2010 or 2011. Many of the ‘creative’ loans that buyers obtained during the boom will reset this year, meaning there will be more short sales and foreclosures next year. But the prevailing advice is to ride it out if you own a home, and to buy if you have been sitting on the sidelines!
If you have concerns about your mortgage, and fear you won’t be able to make your payments anymore, please read the “Mortage Matters” section.
Should I Buy? Should I Sell?
If you are planning to buy all-cash, I believe you can safely wait until 2010. Some areas may still be searching for the bottom, so I do not think you will miss the window of opportunity by waiting a bit. But remember that much of Southern California does buck the national trend. In the most desirable parts of Los Angeles, many houses are still selling fast and over their asking price. Well-priced foreclosures are selling within days of listing, usually with many offers. In the past few weeks, I have seen foreclosures sell with 18, 13, and 9 offers on them on the first day of listing! This is especially true in Santa Monica, Mar Vista, Palms, Culver City, West L.A, Brentwood, Westwood, Beverly Hills, Malibu, Pacific Palisades, Rancho Park, the Hollywood Hills, and the most sought-after parts of the San Fernando Valley such as Studio City, Sherman Oaks, and Encino. It is also happening throughout the first-time buyer market, in the affordable ranges of $300,000 to $400,000, in both Los Angeles, San Bernardino, and Riverside counties. Houses that were built in the past few years in Rancho Cucamonga, Upland, and Fontana, for example, are seeing a very high rate of foreclosure, and are selling extremely fast for around $350,000.
If you are not buying all-cash, and need to take out a loan to purchase a home, the interest rate environment is now greatly in your favor. I am working with many buyers who want to take advantage of the unusual combination of lower prices and historically low interest rates. Today, the average 30-year fixed mortgage rate is around 5.75. That is half a point higher than just a few weeks ago, so rates are on the rise, just as experts predicted. If you are buying a home and taking out a mortgage to do it, locking in still-low rates makes sense. This is the time buy!!
It you want to sell your home, ask yourself a couple of questions first. Why am I selling? Do I need to be out of this house within the next few years? Do I have enough equity that it makes sense to cash in? If you are definitely ready to move, then by all means list your property. If you’ve owned your home for more than two or three years, the chances are you will make a tidy profit, unless you have already taken most of the equity out of the home.
When you list your home, price it realistically. The right price is still the best sales tool! Reducing your sales price after a few idle months on the market is not as good as pricing intelligently to begin with. If your home does not show well, spruce it up and stage it before you put it on the market! This makes a dramatic difference in both swiftness and price of sale, even in slow markets. If you come away with a nice amount of cash from the sale, this may be the right time to upgrade to a better house, taking advantage of still-low rates and lower home prices.
But if you’re selling because that seems to be the trend, and because you’re being whipped into a frenzy by the media, step back and relax. Insiders who have been following the market for decades don’t foresee any permanent plunge into a price abyss.
If you need to sell your house ‘short’, i.e. for less than you owe, you have a struggle ahead of you with your lender. A good real estate broker will help you negotiate with your lender, and increase your chances of having a short sale approved. If you are selling a ‘standard sale’, meaning not a short sale, you will attract lots of buyers if you are priced right —- most buyers do not want to deal with a short sale, and many are nervous about foreclosures as well. There are few ‘standard sales’ on the market these days, especially in the entry-level areas, so you have a big advantage if you are one of them!
Mortgage Matters
What do Rising Rates Mean?
Interest rates have been climbing. But the fact is that we still have rates that are low by historical standards. For the two weeks ending June 5, rates posted their highest increase in several years. The average 30-year fixed loan moved up almost an entire point. It’s no surprise that rates are on the ascent. We are emerging from an anomaly in the rate environment, but that does not mean we are heading into forbidding territory. For buyers, the current rates are still very attractive. Does anyone remember the 1980s, with rates looming around 15%...? Some say we are heading in that direction. While that may be a bit alarmist, the fact is that rates will rise, so please take advantage of the current combination of low rates and low home prices. This window of opportunity will not last very long. Many of my buyers who waited out the housing boom are finally entering the market.
If you own a home and have an adjustable-rate mortgage (ARM) that is about to reset to a higher rate, you may have cause for concern. You should talk to your lender to see by how much your payment will go up, and by when. Some mortgages will not reset to dramatically higher rates, but some will. Some are also nearing the stage where the borrower needs to begin paying towards the principal. Worst-case scenario, the combination of a higher interest rate and a new payment towards principal can translate into a monthly payment that is unmanageable.
If that is the case for you, inquire about refinancing. If you have made your mortgage payments on time and you have built equity in your house—either by making payments towards the principal, or through a natural increase in the home’s market value—then you can probably refinance into another comfortable ARM, or into a fixed-rate mortgage. Refinancing is an excellent option for many homeowners with an ARM. If you have no equity in your home at all, however, and your rate is about to reset to a payment that is too high, it’s important that you talk to a mortgage broker or a financial advisor soon, and also consult with a realtor. You may decide that selling is your best option. If you have a prepayment penalty, a mortgage broker or financial advisor can help you decide whether it makes most financial sense to pay the penalty or to wait.
Many companies are offering loan modification programs. Banks are notoriously slow in reviewing and approving loan modifications. And in many cases, they will only agree to lower your payments for a limited time. They will not lower the actual principal that you owe. Also, be cautious of companies announcing what seems too good to be true, like guaranteeing that they can lower your monthly payments. Do not, under any circumstances, pay upfront fees to such companies. There are many scams out there! I am happy to give you advice if you receive an email from a company offering loan modification. I will do my best to help you figure out if it is legitimate.
Is it Harder to Get a Loan? 
You have probably been hearing about the “subprime meltdown.” While there is no set definition of a “subprime” borrower, subprime borrowers typically have less than stellar credit, or an income that is technically too low to qualify for the loan amount they want to borrow. When money was at its cheapest, even subprime borrowers were able to get loans fairly easily. Overall, this was actually a good thing. Despite the current rise in foreclosures, the vast majority of homeowners—including subprime borrowers—never foreclose, and the easy loans of recent years have made it possible for many people to become homeowners for good.
Some subprime borrowers have not been able to keep up with their mortgage payments, however. Subprime borrowers constitute the largest group facing foreclosure today. As a result, lenders have seen their profits fall. Washington Mutual, one of the largest, recorded a 20% drop in profits in the first quarter of this year, in good part due to defaulting borrowers. WaMu responded by putting in place more stringent guidelines for home loans. Citibank and other large lenders have followed suit, and a number of smaller outfits have closed their doors.
It is definitely more difficult for subprime borrowers to obtain attractive loans today, and it’s getting tougher every week. Fewer and fewer lenders are providing a 100% financing option, even for borrowers with high credit scores. Especially hard to come by are mortgages that provide 100% financing for “stated income” applicants who also lack proper reserves. Buyers who want to 100% finance their purchase can no longer do so unless they qualify for exceptional programs, like a VA loan. If you have good credit and a down payment of as little as 5%, however, you need not worry. Lending has actually loosened up a bit over the past six months.
Foreclosure Fever?
For years, foreclosure bargains were virtually non-existent. Now foreclosures are up, and a softening market means greater opportunity. 1.28% of homes are currently in foreclosure nationwide. While this number is the highest in a decade, the picture is a bit different in the Southland: Los Angeles County actually has fewer homes in foreclosure today than ten years ago. It also has proportionally fewer than harder-hit counties such as Riverside and San Bernardino. But overall, foreclosures are a rare phenomenon just about everywhere. Most homeowners go to lengthy steps to avoid a foreclosure on their property.
Buying a foreclosure is fraught with difficulties, and you need to consider the risk-to-reward ratio before pursuing. Here are the three stages of the foreclosure process.
Stage 1: Default
Also known as pre-foreclosure, this is when the borrower has defaulted on mortgage payments and the lender has notified the local court. (Currently, homeowners are a median five months behind on their payments before the lender starts the default process.) You can visit the courthouse for Notices of Default, but real estate agents often subscribe to services such as RealtyTrac for daily updates on new Notices. You have 90 days from the date of notice to make an offer to the homeowner. The trouble is that bargains are hard to come by among the most desirable homes and areas. Pre-foreclosure homes typically sell at market value. And most delinquent borrowers emerge from the foreclosure process already at this stage, by coming to a payment agreement with the lender.
Stage 2: Public Auction
If the home was not sold during the Default stage, and the delinquent borrower failed to catch up on payments, the property goes to Public Auction. Here is what most bargains can be found, but there are many risks.
Properties are sold “As Is.” Unlike regular real estate purchases, sellers do not need to disclose known defects of the property, and buyers typically have no time to perform inspections. Even if there is time, it is not certain that buyers will find someone who will provide them with access to the property. Buyers often have no clear idea of what they are buying.
Title searches do not always turn up clean. The buyer may discover that a third party has a legal claim to the home, or that a plumber has a lien on the property for an unpaid bill of $7000. Or there may be back-taxes owed on the house.
The winning bidder needs to submit 10-20% of the sale price on the spot, with cash or cashier’s check. The remaining balance is typically due within 30 days, but sometimes in as little as 24 hours. Unlike in regular real estate purchases, that deposit is forfeited if the buyer withdraws for any reason. Auctions normally do not allow a financing contingency, so if you do not obtain your loan for some reason, you forfeit the 10-20% you paid at auction! You need to be aware of this risk!
If the delinquent borrower is still living in the house, it is the buyer’s responsibility to make the person move. This can entail the difficult process of eviction.
Auctions are often canceled or postponed. If the lender is able to arrange a payment plan with the borrower—which they often are—the auction is canceled. If the homeowner is in bankruptcy and has legal representation, repeated postponements are common. If there are two lenders on the property, i.e. a first and a second mortgage, the first lender’s interests take priority over the second lender’s. The first lender has the primary right to the proceeds of the auction. If the property does not sell at a high enough price, there is a risk that the second lender will not be repaid at all. To avoid that possibility, second lenders will often find ways to delay the auction as well.
Stage 3: REOs
REO stands for “Real Estate Owned,” i.e. owned by the bank. REO homes are frequently seen on the MLS. You will also see them listed as “Bank Owned.” If a property did not sell at auction, the lender puts it on the regular market, normally through a real estate broker. Lenders are motivated to sell, and REOs are often priced competitively. For a desirable home in an established neighborhood, however, expect competition and multiple offers. Again, many real estate brokers subscribe to services that keep them updated on new REOs. I am among them, and I represent many buyers in REO transactions.
This market update is for information purposes, but is commercial in nature and may contain advertising. The author believes the information to be reliable and accurate. The author and The Closing Team, Inc and its affiliates do not endorse any specific investment decision or consider this information to be financial advice. Please consult your financial advisor and tax professional for financial decisions tailored to your individual goals and circumstances. Sources for this newsletter were RisMedia, Money Magazine, Forbes Magazine, CNN, MSNBC, Moody’s Investment Services, The Los Angeles Times, The Wall Street Journal, Realtor Magazine, National Real Estate Investor Magazine, DataQuick, Interest.com, and Mortgage Daily. All quotes and statistics were used in good faith and with every effort at accuracy and integrity.
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