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The Real Estate Weather Report

Keep Umbrellas Handy and Make Hay When the Sun Shines

f the real estate climate was reported like to $8,000 for first-time buyers that earn $75,000 or less as single
the weather, it might sound something filers, and $150,000 or less for those married filing jointly. (With
like the following: joint income over $150K, there is a gradual phase-out of the credit
“Expect the stormfront in the South Bay going to zero at $170K combined). This is a tax credit that reduces
real estate market to continue with cold tem- the amount of federal income tax you pay dollar-for-dollar by up
peratures, scattered showers, and occasional to $8,000, as calculated by taking 10 percent of the purchase price,
gale force winds in the middle class areas, not to exceed $8K. (For more information go to http://www.feder-
gradually giving way to partial clearing and a
warming trend for first-time buyers with the Another silver lining in the cloudy forecast is a $10,000 state tax
worst behind us for the high-end market.” credit for new construction purchases by first-time or existing ho-
One of the barometers of the real estate climate is the number of meowners between 3/1/09 and 03/01/10, with no income restric-
foreclosures being filed in a city. While this really doesn’t paint the tions. Break out the sunglasses, sunscreen and swimsuits! There is
whole picture since need to take into consideration the number of $100,000,000 allocated by the state for this on a first-come, first-
short sales (where the sellers owe more than the home is worth and serve basis. (For more information, go to
the bank agrees to take the loss and allow the homeowner to walk dividuals/New_Home_Credit.shtml).
away) and other distressed sales, it’s a pretty good indicator. As the Many of us noticed that mortgage rates rose dramatically in the
flood of distressed properties subsides, a more normal market will first week or so of June. This potential cold front could develop into
emerge with real live people as sellers rather than institutional sales another major storm, causing the economy to stall and double dip.
dictating market values. The Fed knows the foundation of a sustained economic recovery is
Let’s look at the number of properties in foreclosure where the
rooted in shoring up the real estate market. The home value freefall
notice of default has been filed and the clock is ticking, along with
needs to cease, and jobs need to be created before consumer confi-
properties recently foreclosed on and sold at a trustee sale. Remem-
dence and spending can return.
ber, if a property is in foreclosure, it doesn’t mean it will go to sale.
The mortgage rate spike occurred for several reasons. First, toward
Homeowners may redeem their home by paying the amount in ar-
the end of May, Bill Gross, the “Warren Buffett of the bond world”
rears and thus cancel the foreclosure. As of this writing, the num-
who manages the PIMCO Total Return Bond Fund, came out and
ber of homes either in the process of or recently foreclosed upon in
stated the possibility exists that the United States could lose its
the South Bay looks like this: Manhattan Beach – 69, El Segundo
– 27, Hermosa Beach – 56, South Redondo Beach – 84, Palos AAA rating as a creditor by the rating agencies. Next, we got a few
Verdes, Rolling Hills – 53, Rancho Palos Verdes – 105, San Pedro flickers of positive economic news. Not good news—just econom-
– 384, Torrance – 624, Hawthorne – 513, Lawndale – 222, North ic data that disappointed less! But what really caused a mortgage
Redondo – 112, Lomita – 81, Harbor City – 161 and Gardena bond selloff and drove rates up is what some are calling “the Fed’s
– 605. As you can see, sellers are still weathering the storm. dilemma.”
On the national real estate scene, the Mortgage Bankers Associa- As we may recall, mortgage rates initially dropped at the end of
tion reports that during the first quarter of this year, 12 percent of last year. The Fed made the announcement that it was going to buy
all homeowners with a mortgage are behind in their payments. And mortgage-backed securities from Fannie Mae and Freddie Mac di-
half of those, or six percent, are borrowers with good credit and rectly, and committed $600 billion toward that end. Accordingly,
fixed rate mortgages! This tells us that job losses are wreaking havoc rates dropped from the 5.25-5.50 percent range to the 4.50-4.75
with the well qualified borrowers as well. This is in stark contrast to percent range virtually overnight. Because the Fed became a buy-
almost 46 percent of all subprime mortgages currently in default. er, it decreased supply and increased investor demand, ultimately
For buyers, however, and especially first-time buyers, you could pushing rates lower.
find yourself in the eye of the storm with blue skies and warm Now, however, the Fed is issuing record amounts of treasury
weather. The affordability index in the Western States has in- bonds to finance the corresponding record amount of spending.
creased 40 percent from a year ago and is at a 30-year high. This is That is creating a glut of supply, weakening demand from investors
due to a combination of falling prices and historically low mortgage and pushing rates up. So the Fed is buying mortgage bonds, try-
rates. If that doesn’t lift the gloom, there is a federal tax credit of up ing to push mortgage rates lower, with money borrowed from sell-

12 S o u t h B a y B u s i n e ss I n s i d e r M a g a z i n e 2 n d I ss u e 2 0 0 9
For buyers, however, and especially first-time buyers, you could find
yourself in the eye of the storm with blue skies and warm weather. The
affordability index in the Western States has increased 40 percent from a
year ago and is at a 30-year high.
ing treasuries causing rates to go up. This the previous lows to the mid-five percent here in the South Bay, they may have bot-
is kind of like that time the kitchen sink range currently. Many feel (and many more tomed out as well. The affordability index
was stopped up and you took the plunger hope) that the bond market sell-off was an is the best in decades. Generous tax credits
to the left side of the sink and pushed the overreaction and that it is just part of the are available for home buyers. FHA financ-
water down only to have it rise right back incredible volatility we continue to experi- ing allows buyers to purchase with as little
up on the right side! The Fed needs to find ence in the stock and bond markets on our as 3.5 percent down. Conventional financ-
a way to continue to pressure mortgage long journey back to economic recovery. ing requires just 10 percent down with loan
rates lower again until the economy truly And participation at the treasury auctions amounts up to $729,750. With 20 percent
finds a foothold and moves in earnest to- has been met with reasonably good partici-
down, there is financing available on loan
ward expanding again. Part of the trick will pation by foreign investment.
amounts up to $1 million; and from 25
be to convince foreign investors like Japan We don’t know how low rates will go as
percent down to $2 million.
and China to continue to buy our trea- a result of this rally. What we do know is
So if you’re a first-time home buyer or
suries, which will help mop up the excess that the economy may be finding a bottom
supply that is hitting the market. If foreign soon. Some feel the so-called “Great Reces- looking at making a move-up purchase,
demand wanes, it causes bigger supply and sion” may officially be over this year. But it your timing couldn’t be more perfect. You
less demand, forcing up rates to attract in- may take far longer for a new crop of jobs may find yourself one happy camper who
vestment dollars. to be cultivated. That’s what the average made hay while the sun shines!n
The good news as of this writing is that American really needs to see in order to de- Ken Roberts is a mortgage planner with
mortgage bonds are starting to rally again, clare the recession is history. over 30 years experience in the South Bay real
causing mortgage rates to improve. Rates Mortgage rates are good and improving estate market. Ken can be reached at (310)
had increased about one percent from again. Real estate prices have declined and 534-6200.

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