The Ron Report

Can Lower Interest Rates Help?

2008-12-06T12:43:00.000-08:00

I just wanted to jot down my thoughts on interest rates, since they seem to be coming down quite a bit recently. That's the good news.

The bad news? Well, I don't think that they are going to do a bit of good to turn this real estate market around. Interest rates have been at historically low levels for a long time now, and yet here we are in a recession with low real estate transactional volume. The reason to me is clear: consumer confidence.

Consumers are scared. I have a buyer client who recently said to me 'why should I buy now when things could get worse'? I agree. There really is no catalyst for change to move the market upwards right now. Perhaps Barack Obama has some tricks up his sleeve, but nothing is going to be a quick fix and effectively flip a switch and turn on the economy.

I do have another buyer client who understands this. We are working together in placing low low-ball offers on properties. And you know what? We're getting countered at reasonably low levels. Literally 6 months ago, the same seller would have laughed us off the property. Now, it's just a matter of time before we find a desperate seller and my buyer gets a great deal. Times have sure changed.

So the Fed can reduce rates all it wants. I don't believe anything will change in the short-run. Perhaps even lower interest rates will spur the economy, but I don't think we'll see anything substantially different until mid to late 2009.

Feel diffently? I'd love to hear your thoughts.

Cheers,
Ron

It's the Economy, Stupid

2008-09-25T23:52:00.000-07:00

Well, the economy came down and bit one of my clients hard this week. I have a new listing in the Mission Dolores neighborhood of San Francisco. It's a nice little condo of around 1100 square feet priced at $699,000. Last year, I would have priced it higher, but this year all bets are off.

But that's not the crux of the story. Shortly after my open house, I received 2 offers for my Seller. We chose one and thought that all was fine in the world. What economic meltdown? What recession?

Well, it turns out that shortly thereafter, the buyer got laid off out of the blue from a name-brand company. The company decided it best to do a round of layoffs given the economic downturn. My Seller got caught in the middle. The buyer had to rescind his offer and we were back to square one.

Ah, but Ron, you said that you had TWO offers. What about that other one? Well, I went back to that buyer and since there is such a nice flow of inventory for buyers right now, he was able to find another property to buy. So, in a nutshell, the property is back on the market as if it never had an accepted offer.

The morale of the story: even when you think all is fine and dandy, you can get bitten in the butt. Let's hope this economy starts to pull itself out of the doldrums...

Even the San Francisco Market Softens...

2008-08-30T10:30:00.000-07:00

I just wanted to jot my thoughts about the San Francisco market. I'm on the front lines for my buyer clients and I'm seeing a continuing trend of lowered prices and sellers that are beginning to wake up to the fact that you can't always get what you want (a la Rolling Stones) when it comes to sales price.

Case in point: my last 2 buyer clients. In each case, we bid well under the asking price. In last year's market, we would have been ignored by the seller in each case. This year, and specifically now, my clients are getting counter offers, or out-right acceptances.

Why is this? I think a lot has to do with the mortgage market and the fact that it's almost a prerequisite now to have 20% down. In San Francisco, 20% on almost any piece of real estate is a lot of money. Not everybody has that kind of liquidity, so the buyer pool has shruken down. Coupled with the fact that the general sense from my buyers that the market will continue to soften, and you can see the lack of impetus driving buyers to purchase right now. And that feeds the vicious cycle that we're seeing right now. And so the market softens.

Now, for my seller clients, I'm having tough conversations with them that they have to price their property competitively to show value to prospective buyers. It's not a fun conversation, believe me.

In the end, I think that the mortgage market holds the key to how the market shakes out. I'll keep y'all posted...

The Mortgage Market

2008-07-20T13:40:00.000-07:00

San Francisco real estate is not immune to the mortgage mess going on right now. The tug-of-war for the ultimate direction for mortgage rates continues, and with it, the overall direction of the local real estate market. After weeks of rising on inflation fears, the drag of a dispirited economy exerted greater leverage this week, pulling mortgage rates back from 10-month highs.

Let’s go over the facts: interest rates are moving up. This week's overall average for 30-year fixed rate mortgages declined by nine basis points (0.09%) to 6.91%, breaking a five-week string where rates rose by a full half-percent. Beginning in August 2007, mortgage rates have traveled a full-circle path, with rates just over 7% in the early stages of the credit crisis before sinking all the way down to just above 6% in January, and then ramping all the way up to an inflation-fear-goosed flat 7% last week.

For a number of different reasons, we've traveled this range for mortgage rates a number of times, and with the economy signaling weakness anew, we may just see rates settle back somewhat once again. The cost of mortgage money responds to the vagaries of growth and especially inflation, but it's also influenced strongly by investor demand for mortgage instruments. There continues to be a considerable lack of demand for certain types, and in order to attract even the meager amount of attention currently in evidence, mortgage debts need to pay higher yields to keep attracting money. Thus, mortgage rates remain not only higher than they would normally be (compared to risk-free investments) but remain stubbornly firm, too.

Conforming loans which can easily be sold to Fannie Mae and Freddie Mac continue to absorb much of the available investor dollars, and so those rates remain comparatively low relative to private-market jumbos. The average for a 30-year fixed-rate conforming loan slipped nine basis points this week, as did jumbo mortgages. Other products continue to offer little significant relief from elevated rates, with the popular 5/1 ARM standing at an overall average of 6.42%. At the moment, a weakening economy is pressing mortgage rates downward.

A lighter calendar of economic data is due out, and it's reasonable to expect that the markets will be fully in "summer mode" now that July is here. This argues for little significant change in interest rates next week, but mortgage rates may tick down a basis point or two.

I’ll keeping my eye open as far as what the mortgage mess means to the San Francisco market. Stay tuned…

The Market Softens

2008-07-10T23:54:00.000-07:00

Well, I think that it has finally happened in San Francisco. The San Francisco market is following suit with the trend affecting many other parts of California.

I'm definitely seeing properties sitting on the market for longer periods of time. Moreover, I'm seeing properties experience price reductions. These are the same properties that would have quickly sold over the asking price last year.

There's a growing sense that buyers are sitting back and waiting things out. Buyers can be more finicky than ever. I've been able to get my buyer clients into great properties well under the asking price. Last year, that was a difficult task. But not so anymore. Plus, the summer malaise will probably help continue this trend...

New Loan Limit Amount

2008-02-20T22:38:00.000-08:00

President Signs Economic Stimulus Package

Good news! On February 7, the Senate reached an agreement and passed its economic stimulus package by a bi-partisan vote of 81-16. Within hours, the House accepted the Senate's measure by a vote of 380-34 and sent the final bill (H.R. 5140, as amended) to President Bush for his signature. On February 13, the President signed the bill.

What does all of this mean? The biggest news in my opinion is that the plan increases the loan limits for Fannie Mae and Freddie Mac and also FHA loans. These types of loan normally have a lower interest rate and were previously capped at $417,000. Not anymore:

The FHA limit will increase to as much as $729,750 in high cost areas (to 125 percent of local median home prices) for loans approved on or before December 31, 2008. In addition, the measure gives the Secretary of HUD the discretion to raise any individual area loan limit by an amount not to exceed $100,000.
The GSE limit will be increased up to $729,750 for loans originated after July 1, 2007, to December 31, 2008. Currently, Fannie Mae and Freddie Mac are capped at $417,000. It appears the formula mirrors that used by FHA, with GSE loan limits increasing to 125 percent of the local median home price, but not to exceed $729,750.

The tax centerpiece of the stimulus package is a tax rebate provision. The rebate will be $600 ($1200 for those who file a joint return). In addition, individuals with children (generally minor children or some older dependents) will receive rebates of $300 per child, with no limit on the number of eligible children. The rebate will phase out for those with adjusted gross income above $75,000 ($150,000 on a joint return). The IRS will likely begin sending the rebate checks in late May, following the 2007 income tax filing season.

In addition to the rebate, two business tax provisions will provide benefits to small business. The first would permit a business to deduct as much as $250,000 of the cost of otherwise depreciable property. This expensing provision applies to property acquired and placed in service during 2008. A second provision would provide a "bonus" depreciation deduction for the cost of leasehold improvements and certain other equipment. The bonus will be 50 percent of the cost of the improvement. The provision is effective for improvements placed in service during 2008. Improvements placed in service during 2009 will be eligible for the bonus deduction, but only if they are made pursuant to a contract entered into in 2008.

So, overall, this is positive news for the Bay Area real estate market. The interest rates on future home purchases should be lower, helping to strengthen the real estate market. Should you have any questions, I'm always available at Ron@RonAbta.com

BIG Fed Cut!

2007-09-18T19:39:00.000-07:00

Good news today! The Fed surprised many with a stronger-than-expected 1/2 percent rate cut in both the Fed Funds and Discount Rates. As expected, stocks soared higher and enjoyed their largest gain since 2003.

So what does the Fed cut mean? Basically, rates on consumer debt, car loans, and Home Equity lines will all benefit. But because Home Loan rates are tied more closely to inflation, it is not uncommon to see less of a movement in mortgage rates.

The Fed cut also hurts rates of return on investments, which gives foreign investors less incentive to invest in US securities. This has sent the Dollar much lower against the currency of most major foreign countries. This makes foreign goods more expensive for us to buy, which adds to inflation pressures.

Overall, I believe that the Fed cut is good news for the economy, but may nudge inflation a bit higher in the near future.

What the Mortgage Meltdown Means to You

2007-08-22T19:45:00.000-07:00

As of this writing (August 22, 2007), the mortgage market has been in the news almost daily, and for good reason. I’ve received calls from several past clients asking for insights on what it all means to them. I thought that I would put together an FAQ to address questions that may be on your mind:

Does the Fed rate cut on Aug. 17 imply that mortgage rates will fall?
No. The Discount Rate cut applies to borrowing by big banks. It does not help small borrowers. If the Fed had cut the Fed Funds rate, it would have helped people trying to borrow to buy a house. But that rate has not been changed.

What happens if my mortgage company goes bankrupt?
If your mortgage company files for bankruptcy, another company will take over the servicing of the mortgage. The new owner of your mortgage will expect you to pay every month. If you stop payment because you think your bankrupt mortgage company won't care, prepare for the consequences.

What happens if I apply for a mortgage with one of these troubled mortgage companies?
You might not qualify for a mortgage that you could have gotten a month ago. If you started the home buying process, say a month ago, and you haven't locked in a rate that you could afford, chances are good that your options have gotten worse. That's because there's less money around for mortgages since the credit crunch started a few weeks ago. The people who get that mortgage money will be the ones willing and financially able to pay a higher rate.

What should I do if my mortgage rate adjusts so high that the payments are over my head?
While rare in the Bay Area, this could happen. Talk to the company that services your mortgage and ask for a new payment schedule. This is a tough situation because often the company that originated your mortgage has sold it to another company -- a mortgage servicer. The mortgage servicing firm is the one that sends you your monthly bills and collects the checks you write. Try to talk with the mortgage servicing firm to ask if it can change your payment schedule. Unfortunately, only the owner of the mortgage might be willing to make that change. But if that owner is an institutional investor in Germany that owns your mortgage and 14,000 others as part of a mortgage-backed security, you will probably be out of luck.

Is it dumb for me to buy a house now with all this going on?
Perhaps. With mortgage money in shorter supply, some home buying transactions may fall through. As such, there may be some opportunistic buys available for those who can move quickly and decisively. The only downside is that purchasing a property will cost you more due to the surge in interest rate. In the Bay Area, where the economy is strong, I never believe it foolish to purchase a home. I’m bullish on the location feel that buyers can rest assured that in the long run, you’ll be in possession of a historically appreciating asset.

When in doubt about what to do, please don’t hesitate to call me or my father, Daniel Abta, a mortgage broker, at (408) 739-6465, or at DanielAbta@aol.com

This Crazy Mortgage Industry

2007-08-16T13:07:00.000-07:00

The mortgage industry is all over the news these days, and for good reason. The big hit is that the days of putting just 10% down with minimal income documentation are over. In the Bay Area, the start of August shows numerous bright spots in what is traditionally a slower month for real estate sales. Many areas have seen an increase in activity as sellers have adjusted their pricing, and for qualified buyers this remains an excellent opportunity to invest in some great real estate deals. More on this as it develops...