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The State of California Real Estate – Changes Are Coming

Yesterday I was at a seminar where Leslie Appleton Young, Chief Economist for the California Association of Realtors was speaking. Had a million stats but the bottom line is that interest rates will hit 6% sometime next year, the economy and real estate market will stay flat. The biggest challenges to the market are that there are going to be several new fees added to loans starting 4/1/11 that will make it more difficult for buyers as it will be more costly to secure a loan. This will knock off a group of potential buyers. The next item is that the cap for non-conforming loans that is now at $729,000 before the loan becomes a jumbo loan (with higher interest rates) is going to be lowered back down to $650,000 on 10/1/11 unless it gets renewed. This will knock out another group of buyers that will be affected by higher interest rates and/or needing a larger down payment.

Last year, the stimulus package worked beautifully. This year, comparing the stats from the same period last year, the market is showing how much that stimulus package meant to sales. This year is down significantly. Also, the investor pool where many loans were funded has dwindled. The bottom line was that the real estate market will not look much different over the next few years. Interest rates will level out at around 7%. The concern for high priced areas like California is a government cap on the mortgage interest deduction. The new proposal is a $500,000 cap on the value for the interest deduction. When you fly across the country, every area between the West and East coasts would be OK with the cap at $400,000 or even less. So there won’t be enough of us to speak up and be heard on placing a lowered cap. Now this next one is a biggie-in 2013 any appreciation from a home sale that goes over the new cap, proposed now to be $500,000, will be taxed at 3.8%. Lastly, Fannie and Freddie loans are planning to be phased out. Higher down payments are going to be required to secure a loan.

What all this means to you is about timing to sell. It would seem that with the current information, a buyer might want to close on a sale prior to 10/1/11. You are going to incur the same dynamics when you purchase in a new area. Because you are going to buy and sell, market timing for local prices is less important as they will balance themselves. The known and unknown changes the government makes is what we are going to be most affected by.

The San Francisco Bay Area is an Oasis in the Desert as it is the Gateway to the Pacific Rim, Silicon Valley and the new center for companies like Facebook, Zanga and SalesForce.  New wealthy buyers will be coming from these companies in the next 18 months.

The main reason to buy versus rent is because we need to build wealth.  Renters can take advantage of the same benefits as home owners.  They get the benefit of location but not appreciation.  Now we have affordability and appreciation as inflation is down.  With interest rates in the 5% range anticipated through 2011, this may be the the open window for buyers.

Related: Banks Push Home Buyers to Put Down More Cash (WSJ.com)

Changes Again for Buyers starting in the Spring

Thanks to Susan O’Driscol of Princeton Capitol for this update today.

“The FHA announced changes to its guidelines yesterday. It will raise the minimum down payment required for borrowers with credit rating scores below 580 to 10%, while the down payment for higher-ranked borrowers would stay at 3.5%. The up-front MI premium is also going from 1.75% to 2.25%. HUD is seeking congressional approval to allow it to raise annual mortgage insurance premiums — which are paid out by the borrower over the life of the loan — above the 0.55 percent maximum. Lastly, the FHA also said it was cutting the amount of aid sellers could provide buyers to 3 percent of the purchase price from 6 percent; a move it said could help lessen incentives to inflate appraised home values.”

It’s on the Table by Rick Turley, Coldwell Banker SF Bay Area President

Rick has given us the update on the possibility of extending the tax credit.  Also check the market news from last week for the coast and San Mateo County.

“There’s no question that the government’s first-time homebuyer tax credit has spurred a significant amount of sales this year.  Latest estimates show that some 400,000 additional sales occurred this year due to the first time home buyer tax credit, which is about 8% of all sales this year.

In the latest news, The Senate has reached a compromise on extending and expanding the $8,000 tax credit for first-time home buyers.  While its passage remains uncertain, this plan would extend the existing credit for first-time homebuyers, worth up to $8,000, while offering a new credit of up to $6,500 for some existing homeowners.  The reduced credit would be available to  homeowners who have been in their current residence for a consecutive five-year period in the past eight years.  Lawmakers in Washington also raised the qualifying income limits to $125,000 for single taxpayers and $250,000 for joint taxpayers, from the current $75,000 and $150,000.  Under the Senate compromise, buyers must have sales agreements in hand by April 30, but they will have until June 30 to go to settlement, said the sources. The measure still faces votes in the full Senate and the House.  The U.S. Senate won’t vote until next week at the earliest. ” 

This week, Business Week reported “The broad improvement in the housing indicators in recent months leaves no doubt that the long-awaited housing recovery is finally under way.”  The article went on to report:  “Policy alone cannot explain the 24% gain in existing home sales since January, nor the 22% increase in new-home purchases, the 40% rise in single-family housing starts, and the recent upturn in home prices. The primary driver is historically high affordability. Fixed 30-year mortgage rates are at 5%, a multi-decade low, and prices have plunged a total of 30% since May 2006, based on the Standard & Poor’s Case-Shiller Home Price Index. By that price gauge, homes are well undervalued relative to both rents and aftertax income.”

Here is what is happening in San Mateo County

  • PeninsulaHalf Moon Bay reported it is sensing a slow down with less inventory. MLS tour sheet reflects all the retours, many with price reductions and few new listings.  Menlo Park El Camino reported a bit of a sea change in the market-not much new inventory, only three new listings on tour this week which is very, very low.  Menlo Park Santa Cruz Avenue reported very slow open house activity this last week.  Many listings are receiving price reductions as new inventory is limited.  Pricing is critical.  52% of the listings on the Menlo Park Atherton Broker tour have price reductions and 82% are retours.  Palo Alto Downtown reported the market is generally slow.  We feel like the holiday season has started early.  The activity is reflective of that.  Sales are down in our area.  San Mateo reported a look at its pending sales (SFR) of its six main communities; here is a breakdown of the total and the percentage of short sales plus REOs.  Belmont 31 pending sales (35% SS/REO), Burlingame 27 pending sales (33% SS/REO), Foster city 12 pending sales (18% SS/REO), Hillsborough 22 pending sales (23% SS/REO), Redwood shores 10 pending sales (10% SS/REO), San Mateo 109 pending sales (52% SS/REO).  Most of San Mateo SS/REO is in entry level areas.