News and Tips by Jasmine Darcy
Market Monitor
Should I Be Worried? 
Prices are down. “For Sale” signs linger. Foreclosures are up. Mortgages are resetting at higher rates. You’ve undoubtedly read various versions of the same info. But what exactly does this mean to you,and is there really a clear trend that applies to the real estate market nationwide?
The housing boom of the last decade is over. Prices are declining in much of Los Angeles County, and much more significantly in San Bernardino and Riverside. 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 do 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 are sinking, 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. But when the media gives us splashy headlines like “Stocks Plunge!” or “Dow Takes a Dip!”, most of us don’t call up our 401K manager in a panic. Nor should we. The idea is that we’re making an investment, and history shows that that 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 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.
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, but 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. But the prevailing advice is to ride it out.
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’re planning to buy all-cash, you may want to wait to see if prices fall further in 2008. 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. Since January, I have seen house after house sell with multiple offers. 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. Through the first four months of 2007, houses in the 91316 zip code of Encino experienced an 18.2% jump in price over the same period last year. This puts 91316 in second place for greatest increases in Southern California for the period, just behind Malibu.
If you are not buying all-cash, and need to take out a loan to purchase a home, the interest rate environment is still 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. On May 10, the average 30-year fixed mortgage rate was 6.15%. A half-point higher rate (6.65%) translates into a $105 higher monthly mortgage payment on a $300,000 loan. While a 6.65% rate is still historically low and attractive for buyers, it’s clear that higher rates do you mean higher monthly payments. If you are buying a home assuming a mortgage to do it, locking in still-low rates makes sense.
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.
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 week ending June 14, rates posted their highest increase in four years. The average 30-year fixed loan moved to 6.74% from 6.53%, prompting frenetic media announcements. A week later, the announcement was that rates had fallen again, with the 30-year back down to 6.69%. As I write this, that same 30-year indicator is hovering around 6.33%. The obvious conclusion is that rates are volatile. The equally obvious fact is that rates were extraordinarily low four years ago. 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 attractive. Does anyone remember the 1980s, with rates looming around 15%...?
If you own a home and have an adjustable-rate mortgage (ARM) that is about to reset to a higher rate, however, 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.
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 should seriously consider buying sooner rather than later. If you have good credit and a down payment of as little as 5%, however, you need not worry.
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.
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,” and 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.
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.