Spring forward
Real estate activity will start picking up this spring as first time homebuyers and investors begin making deals on bank owned homes. There are a number of reasons besides the longer daylight hours and hint of spring for my cautious optimism.
It has taken a year but lenders are finally getting organized. Banks deal in money, paper and credit pretty well. They buy and sell notes, service mortgages, extend lines of credit and pay and collect interest for the use of money. But they do a poor job of liquidating a large number of properties scattered around the country. Lenders were not prepared for the extent of the mortgage default crises and don't have the expertise or other resources necessary to manage a large number of foreclosures. A cautious beauacratic mentality is an asset when managing other people's money but a liability when attempting to make quick decisions and deals on real estate. They are learning.
Lenders have increased their staff of asset managers and are discovering what's required to sell homes in different regional markets. They are conditioning some properties, discounting the price of others and discovering which real estate brokers they can depend upon for honest advice and results. It has been an extended learning curve for lenders but starting to pay off with increased sales.
In addition to cutting their loses by selling foreclosed homes at discounted prices, lenders are doing what they can to prevent owning another one. Earlier this month Henry Paulson, the Treasury Secretary and Alphonso Jackson, Secretary of HUD, announced yet another new program to stem the tide of foreclosures. "Project Lifeline," is designed to keep seriously delinquent borrowers in their homes. Six of the country's largest financial institutions, representing over half of all home mortgages, have initiated measures that allow borrowers 90 days or more delinquent, the opportunity to put the foreclosure process on hold while lenders look for a way to make the loan more affordable. The program is an alternative to foreclosure for anyone serious about keeping their home.
The economic stimulus package will make it easier to buy or sell a home by increasing the conforming and FHA lending limits. Congress sets the maximum "conforming" loan limits for loans purchased by Fannie Mae and Freddie Mac and "government" insured loans for FHA. Currently, the maximum conventional loan limit is $417,000. Conforming loans receive the best interest rates while loan amounts above the Congressionally set maximum, considered "jumbo loans," carry substantially higher interest rates. The economic stimulus package will temporarily increase the maximum loan limits for conforming loans to $729,750.
The increase in the maximum loan limit will decrease the interest rate on home mortgages under $729,750. It will also help existing borrowers who currently have high interest jumbo loans and may want to refinance to a lower interest rate under the conforming loan program. Jo Perkins, president of the Home Building Association of Northern California, estimates an additional 350,000 homes nationally will be sold or about $44 billion in economic activity from this stimulus.
The new loan limits will not be much help for Sacramento County or the Central Valley where the average selling price of a home is under $350,000 but many other areas of the state have significantly higher average home prices including El Dorado County. Our county would also benefit if more Bay Area sellers could sell their home and become potential buyers for El Dorado County.
A sign of light at the end of the dark housing tunnel is the affordability factor. California housing is still the most expensive in the country but it is becoming more affordable. Our current housing situation was the result of many factors; one was the price of an average home became too expensive for entry-level homebuyers. The affordability factor dropped to the lowest level in 2006 when only 25 percent of California first-time families could afford to buy a home. This year the index has jumped to 33 percent. More potential homebuyers will translate into increased sales.
Another factor that got us into trouble was the excessive exuberance of the building industry, by publicly owned corporations based outside the Capital Region. The building industry over the last 25 years has transformed from small local builders who reside and work locally, to national corporations and their land development subsidiaries. These large national firms have capital commitments totaling millions of dollars, extending years into the future. Their stockholders and share price are driven by increased production, which lowers the cost of every home built by creating certain economies of scale and therefore increased profitability.
With evaporating profits from selling new homes below cost, builders are beginning to realize that less could be more (less building = more profit). Builders are reevaluating their expansion plans. They have put many projects on hold, downsized their existing commitments and are allowing options on land previously designated for development to expire. Large corporations have a tendency for inaction when adjusting to a changing market and usually over compensate when they do. Don't expect a shortage of new construction in the future but standing inventory is half what it was 1-year ago. In the immediate future, builders will be more cautious about out-producing sales. Fewer new homes will be less competition for existing ones.
If interest rates remain under 6 percent, home sales will start improving this spring. Savvy investors are already taking serious interest and many of my colleagues are reporting first time buyers are making great deals on well-priced bank-owned homes. It's going to be a long way back for real estate but should start this spring.
It has taken a year but lenders are finally getting organized. Banks deal in money, paper and credit pretty well. They buy and sell notes, service mortgages, extend lines of credit and pay and collect interest for the use of money. But they do a poor job of liquidating a large number of properties scattered around the country. Lenders were not prepared for the extent of the mortgage default crises and don't have the expertise or other resources necessary to manage a large number of foreclosures. A cautious beauacratic mentality is an asset when managing other people's money but a liability when attempting to make quick decisions and deals on real estate. They are learning.
Lenders have increased their staff of asset managers and are discovering what's required to sell homes in different regional markets. They are conditioning some properties, discounting the price of others and discovering which real estate brokers they can depend upon for honest advice and results. It has been an extended learning curve for lenders but starting to pay off with increased sales.
In addition to cutting their loses by selling foreclosed homes at discounted prices, lenders are doing what they can to prevent owning another one. Earlier this month Henry Paulson, the Treasury Secretary and Alphonso Jackson, Secretary of HUD, announced yet another new program to stem the tide of foreclosures. "Project Lifeline," is designed to keep seriously delinquent borrowers in their homes. Six of the country's largest financial institutions, representing over half of all home mortgages, have initiated measures that allow borrowers 90 days or more delinquent, the opportunity to put the foreclosure process on hold while lenders look for a way to make the loan more affordable. The program is an alternative to foreclosure for anyone serious about keeping their home.
The economic stimulus package will make it easier to buy or sell a home by increasing the conforming and FHA lending limits. Congress sets the maximum "conforming" loan limits for loans purchased by Fannie Mae and Freddie Mac and "government" insured loans for FHA. Currently, the maximum conventional loan limit is $417,000. Conforming loans receive the best interest rates while loan amounts above the Congressionally set maximum, considered "jumbo loans," carry substantially higher interest rates. The economic stimulus package will temporarily increase the maximum loan limits for conforming loans to $729,750.
The increase in the maximum loan limit will decrease the interest rate on home mortgages under $729,750. It will also help existing borrowers who currently have high interest jumbo loans and may want to refinance to a lower interest rate under the conforming loan program. Jo Perkins, president of the Home Building Association of Northern California, estimates an additional 350,000 homes nationally will be sold or about $44 billion in economic activity from this stimulus.
The new loan limits will not be much help for Sacramento County or the Central Valley where the average selling price of a home is under $350,000 but many other areas of the state have significantly higher average home prices including El Dorado County. Our county would also benefit if more Bay Area sellers could sell their home and become potential buyers for El Dorado County.
A sign of light at the end of the dark housing tunnel is the affordability factor. California housing is still the most expensive in the country but it is becoming more affordable. Our current housing situation was the result of many factors; one was the price of an average home became too expensive for entry-level homebuyers. The affordability factor dropped to the lowest level in 2006 when only 25 percent of California first-time families could afford to buy a home. This year the index has jumped to 33 percent. More potential homebuyers will translate into increased sales.
Another factor that got us into trouble was the excessive exuberance of the building industry, by publicly owned corporations based outside the Capital Region. The building industry over the last 25 years has transformed from small local builders who reside and work locally, to national corporations and their land development subsidiaries. These large national firms have capital commitments totaling millions of dollars, extending years into the future. Their stockholders and share price are driven by increased production, which lowers the cost of every home built by creating certain economies of scale and therefore increased profitability.
With evaporating profits from selling new homes below cost, builders are beginning to realize that less could be more (less building = more profit). Builders are reevaluating their expansion plans. They have put many projects on hold, downsized their existing commitments and are allowing options on land previously designated for development to expire. Large corporations have a tendency for inaction when adjusting to a changing market and usually over compensate when they do. Don't expect a shortage of new construction in the future but standing inventory is half what it was 1-year ago. In the immediate future, builders will be more cautious about out-producing sales. Fewer new homes will be less competition for existing ones.
If interest rates remain under 6 percent, home sales will start improving this spring. Savvy investors are already taking serious interest and many of my colleagues are reporting first time buyers are making great deals on well-priced bank-owned homes. It's going to be a long way back for real estate but should start this spring.
posted by Ken Calhoon at 12:03 PM
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