Helping or Hurting?

Missed this one a few weeks ago, but it's worth a trip back in time. New appraisal guidelines are making it harder than ever to get financing for a home purchase. These days, anti-reform and anti-regulation stances are less popular than ever, but reform for reform's sake can backfire.

In our sphere, we've heard innumerable stories of local appraisals being done by out-of-area appraisers. (Mill Valley house, Sacramento appraiser. San Francisco condo, Morgan Hill appraiser.) We talk often about the importance of working with a Realtor who really understands a local market. Well, that wisdom gets severely compromised when an out-of-area appraiser can step in and blow up a transaction.

So is this a good thing or a bad thing? Are regulators protecting us from ourselves or are they preventing the market from recovering?

The Biggest Investment That Isn't

Apropos of today's earlier post, we were thinking about the conventional wisdom that one's home is usually one's largest investment. In light of the number of people walking away from their "largest investment," it's worth asking...if a person buys a home with zero down and an interest-only loan (as was the case for more than a few buyers during the boom time), is it really an investment at all? The only thing the buyer is risking is his credit score. There's no judgement or political statement implied by the previous sentence. Just an observation meant to spark debate.

Who's At (De)Fault?

An interesting article in today's Chron raises the questions about what happens when defaulting on debt no longer carries much of a stigma. Up to 25% of foreclosures are occurring because homeowners simply walked away from their home; something what was all but unthinkable for previous generations. For those with a talk radio viewpoint on this subject, the piece makes the notable point that it's not just individual homeowners who are walking away from financial obligations. Developers are abandoning multi-million dollar projects. And, of course, we all know about the Wall Street bailouts, which resulted from similarly reckless behavior, with consequences softened only by the government's golden trampoline. We'd be interested in hearing what readers think about everyone from homeowners to Wall Street brokerages getting into trouble from which they cannot recover. Has fiscal accountability become a national afterthought? And if so, is this a temporary phenomenon or a permanent shift in how Americans view debt and risk? Can the shame of being a welsher ever be recaptured? (I'm one quarter Welsh, so I think I can use that word.) Should it be?

What's Your Point?

In today's Chron, various parties weigh in on what will happen to mortgage rates in the coming months. Of course, to borrow from William Goldman, "Nobody knows anything." Nevertheless, speculation that rates could jump as much as a full point should give some pause to anyone with a stake in real estate. Higher rates usually mean falling values. With apologies to Mr. Goldman, one thing we do know is it's going to be a very interesting year in real estate.

Posted by Jess Pearson

Rising Tide?

If a rising tide lifts all ships, then what do rising interest rates do? Unless, like us, you assiduously avoid television news and talk radio, you've already heard about Fed Chairman Bernanke's comments regarding eventual and inevitable increases in interest rates. Here's the article about it in the Times. When rates go up, lots of things will happen; some bad and some good and all depending one your point of view. But they won't all happen at once and they won't all happen right away. One thing we think we can say with relative confidence...if you're thinking about buying and you plan to hold on to your investment for a good long while, this might be the time to act. Conforming loan rates are under 5%. Even if prices fall, higher rates will mean higher cost of ownership over the long haul. Unless you're a cash buyer, you may look back on Q1 of 2010 as that rare moment when prices and interest rates were both low.

ARM and a Leg

If you visit us regularly, you know about adjustable rate mortgages; the pros and the cons. You may not, however, know about Option ARMs. This clever lending product is what made it possible for many not-so-wealthy people to afford very expensive homes in the Bay Area. In a nutshell, Option ARMs offer different payment options. The first option is a "full" payment of interest and principal. Option two is an interest-only payment. Option three is some amount less than the monthly accruing interest; a negative amortization payment.

Option three has the potential for big problems.

When you aren't paying even the total interest on your loan, you better hope your home's value is going up. Otherwise, you have no chance to build equity. For the last 2-3 years, as California home values have fallen, borrowers choosing option three have been falling farther and farther behind. Many are now well "upside-down" on their homes.

And that's not the scariest part. Like all ARMs, Option ARMs have lower initial rates. After a few years (usually three or five), the rates re-set. This means that all three payment options can go up. Borrowers who could only afford the negative amortization payment find themselves struggling to pay even that amount. And guess that happens?

Default. And guess what follows default?

Foreclosure.

Read this article from the Chron for some stats. To us, the scariest number is not the 50,000 or so Option ARMs floating around the Bay Area. No. It's the 94% of borrowers who've been making the minimum payment.

It will be interesting to see if another wave of foreclosures is on the horizon.

New Wave

If you've talked to us recently, you've heard us say that we're not out of this mess yet. The shadow inventory of bank-owned properties yet to be released to the market, and mortgage delinquencies that will result in additional waves of foreclosures are harbingers of further erosion in statewide real estate values. As usual, our local neighborhoods appear to be in better shape than most, but the damage is wide spread. Today's Chron spells out the ugly truth. The market will continue to be friendly to buyers for the foreseeable future. And if your were thinking of selling but thought you'd be better off waiting a year until things pick up, you may want to rethink that strategy.

You Never Forget Your First time

Next Generation Real Estate is getting blogged down. And it's about time!

Welcome to our latest resource for clients, friends, relations, and people with too much free time at work. Check back often for timely reports on the state of the Bay Area real estate market, as well as updates on the lives of your favorite intergenerational real estate team.