Mortgages

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)