Bob Schwab: Is the real estate market finally going back to normal?

Our in-house lender Bob Schwab recently sent an article about the housing market and its ups-and-downs over the last decade-plus. He thinks it’s about time that the real estate market goes back to normal.  Here is what is says, with my take at the end!
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The housing market has been anything but normal for the last eleven years. In a normal real estate market, home prices appreciate 3.7% annually. Below, however, are the price swings since 2007 according to the latest Home Price Expectation Survey:
After the bubble burst in June 2007, values depreciated 6.1% annually until February 2012. From March 2012 to today, the market has been recovering with values appreciating 6.2% annually. These wild swings in values were caused by abnormal ratios between the available supply of inventory and buyer demand in the market. In a normal market, there would be a 6-month supply of housing inventory.
When the market hit its peak in 2007, homeowners and builders were trying to take advantage of a market that was fueled by an“irrational exuberance.” Inventory levels grew to 7+ months. In this simplified view, with that many homes available for sale, there weren’t enough buyers to satisfy the number of homeowners/builders trying to sell, so prices began to fall.
Then, foreclosures came to market. We eventually hit 11 months inventory which caused prices to crash until early 2012. By that time, inventory levels had fallen to 6.2 months and the market began its recovery. Over the last five years, inventory levels have remained well below the 6-month supply needed for prices to continue to level off. As a result, home prices have increased over that time at percentages well above the appreciation levels seen in a more normal market.
That was the past. What about the future?
We currently have about 4.5-months inventory. This means prices should continue to appreciate at above-normal levels which most experts believe will happen for the next year. However, two things have just occurred that are pointing to the fact that we may be returning to a more normal market.
Listing Supply is Increasing
Both existing and new construction inventory is on the rise. The latest Existing Home Sales Report from theNational Association of Realtors revealed that inventory has increased over the last two months after thirty-seven consecutive months of declining inventory. At the same time, building permits are also increasing which means more new construction is about to come to market.
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Buyer Demand is Softening
Ivy Zelman, who is widely respected as an industry expert, reported in her latest ‘Z’ Report“While we continue to expect a resumption of growth in resale transactions on the back of easing inventory in 2019 and 2020, our real-time view into the market through ourReal Estate Broker Survey does suggest that buyers have grown more discerning of late and a level of “pause” has taken hold in many large housing markets. Indicative of this, our broker contacts rated buyer demand at 69 on a 0- 100 scale, still above average but down from 74 last year and representing the largest year-over-year decline in the two-year history of our survey.”
With supply increasing and demand waning, we may soon be back to a more normal real estate market. We will no longer be in a buyers’ market (like 2007-February 2012) or a sellers’ market (like March 2012- Today). Prices won’t appreciate at the levels we’ve seen recently, nor will they depreciate. It will be a balanced market where prices remain steady, where buyers will be better able to afford a home, and where sellers will more easily be able to move-up or move-down to a home that better suits their current lifestyles.
Bottom Line
Returning to a normal market is a good thing. However, after the zaniness of the last eleven years, it might feel strange. If you are going 85 miles per hour on a road with a 60 MPH speed limit and you see a police car ahead, you’re going to slow down quickly. But, after going 85 MPH, 60 MPH will feel like you’re crawling. It is the normal speed limit, yet, it will feel strange. That’s what is about to happen in real estate. The housing market is not falling apart. We are just returning to a more normal market which, in the long run, will be much healthier for you whether you are a buyer or a seller.
Note:  This is a nationwide overview, but there are always micro areas that buck the trend.

Borrowers beware of Google: JVM Lending

Jay Vorhees at JVM Lending wrote another great blog about Google, and how it can be both a friend and enemy. I have my own story about Google, but I’ll get to that at the end. First, read Jay’s take on why borrowers should beware of Google:

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One of the reasons loan officers and borrowers were able to get away with so much fraud prior to the mortgage meltdown was the lack of public records and information in general. That is no longer the case, and borrowers need to be extra careful nowadays because underwriters Google everything – borrowers, employers, self-employed businesses, and even renters.

We recently had a transaction questioned because the borrowers rented out their $500,000 departing residence to a person who already owned a $1.5 million home. The underwriter Googled the name on the rental contract and rightfully wanted to know why the renter would want to downsize into a rental that was much smaller and in a vastly inferior neighborhood.

We had another situation where the borrower was subject to numerous criminal allegations that will likely prevent him from garnering business for his consulting firm (killing the deal), and this too came up with a Google check because it was all over the news.

Underwriters also Google employers to make sure they exist, no longer exist (if the application says a business with losses is closed down), or that public records match what is stated on the loan application. We have had borrowers, for example, claim to not have ownership interest in a business to avoid providing corporate tax returns, but the internet made it clear that they were owners.

Sometimes borrowers try to fool us, and sometimes they are just not careful enough when filling out their loan applications. Either way, they need to be ultra-careful these days because there really is no getting away with anything. In addition, once an underwriter thinks the borrower might be trying to mislead, she will not want to approve the loan under any circumstances because of the risk.

Kristin’s take: This is a great blog. My own Google story is about sellers who Googled the buyer, and some criminal allegations showed up. We only had one buyer, so we accepted the offer, but we figured out from the internet that he wasn’t the most stand-up individual. Sure enough, we had problems closing. They were contingent on the sale of their condo, and that also did not go smoothly, between the two, we were delayed a month.   In this situation I had no control over the other parties or the process.  In the middle of all this, our buyer went out and bought a vehicle, which changed his debt-to-income ration and had to be paid off with some of the proceeds in addition to a tax lien. It dragged out the process and naturally, the sellers were very frustrated. That was just one of many issues that were not shared with me.   If my clients had another offer I believe after their Google search they would  have never accepted the buyer but they were prepared for a rocky road;  none of us knew how painful it was going to be.

Moral of the story? Always Google, and be prepared to be Googled.

Are homebuyers going to hit the pause button?

Mortgage Consultant Bob Schwab posed an interesting question on his blog recently: is purchase demand softening? He writes that over the last several years, buyer demand has far exceeded the housing supply. This has led to home prices appreciating by an average of 6.2 percent each year since 2012.

The Foot Traffic Report, Realtors Confidence Index (both National Association of Realtors), The Showing Index (ShowingTime), and The Real Estate Broker Survey (The Z Report by Zelman and Associates) are the four major reports used to measure buyer activity. Three of the four have revealed that the purchase demand may, in fact, be softening:

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The Foot Traffic Report

Latest reports say buyer demand remains strong, due to supply and new construction remaining unable to keep up with buyer demand – despite a healthy economy and labor market.

The Showing Index

In July 2018, the Showing Index recorded buyer interest deceleration compared to the previous year for the third month in a row. They think buyer demand is softening.

Realtors Confidence Index

This measure reported slower homebuying activity in July 2018, down from the same month one year ago. It is the fifth straight month they’ve seen a decline, so they agree buyer demand is softening.

The Real Estate Broker Survey

The Z Report also finds buyer demand to be softening, stating that “a level of “pause” has taken hold in many large housing markets.” Their buyer demand rating of 69 (1-100 scale) is above average, but down from 74 last year.

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When most of the major measures of buyer activity report that demand is softening…it may just be true. According to Bob, the strong buyers’ market directly after the housing crash was followed by a six-year stretch of a strong sellers’ market. If demand continues to soften and supply begins to grow, as expected, there will be a return to a more neutral market. Though that wouldn’t favor buyers or sellers immediately, it is a better long-term look for real estate.

A direct quote from Bob: The era of cheap money might be coming to an end. Interest rates on mortgages are up three-quarters of one percent in the last year. The Federal Reserve is expected to raise short-term rates one-quarter of one percent at their September meeting and another one-quarter of a percent in December. Come October, bonds will have to stand on their own feet again as the Fed will officially end its “quantitative easing.” There are also some early signs of wage inflation as the unemployment rate continues to improve and businesses struggle to find employees. As I always remind my clients, mortgage rates are still fantastic from a historical perspective. They are still sitting in the mid to high fours. If you are considering buying a home or refinancing a mortgage this would be a great time to make a move.”

And my take: As rates and prices have increased, we are starting to see homes sit on the market longer and sell for less than they did six months ago. It really depends on the home and location. In Parkmead, buyers seem to want single story homes with current updates and a flat yard, as with the sale of 1691 Lilac. We still have an inventory shortage, but buyers are now taking their time, and a shift isn’t necessarily a bad thing. We will see if the lull is seasonal, but it most likely we will see the rate of appreciation slow down and sellers may have to adjust what they believe the value of their home is and buyers may not get as good of a deal as they expected. 

Eliminating PMI (private mortgage insurance)

According to my friend Jay Vorhees at JVM Lending, there are three options for eliminating the private mortgage insurance (PMI) obligation associated with a conventional loan plan. We go over his three options below, with a little input from yours truly:

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Option #1: Refinancing

If your property appreciates to the point where we can garner a new appraisal to support a value high enough to reduce your loan-to-value (LTV) ratio to 80 percent or less, you can refinance into a new loan with no PMI. This assumes, of course, that rates remain favorable. Keep in mind that most appraisers will correlate to the purchase price for the first six months, making it wise to wait at least this long to start the refinance process.

Option #2: Paying down

You can eliminate PMI by paying your loan down if you notify your servicer with your request, have a good payment history, and are willing to prove to the servicer that your property has not depreciated with an appraisal in some cases. This can help you pay down your loan to an amount equal to 80 percent of the original purchase price.

Option #3: Proving home

If your loan is owned or backed by Fannie Mae or Freddie Mac, you can eliminate PMI by notifying your servicer with your request, as long as your loan has seasoned for two years with a good payment history. You’d also have to provide a current appraisal with high enough value to support a 75 percent LTV. If your loan is more than five years old, your LTV can be 80 percent. If you prove your home has appreciated to the point where the LTV is at 75 percent or less, you can eliminate PMI this way.

As rates increase, the option of refinancing becomes less feasible. There are currently loans called 80/10/10 or 80/15/5 where you take a HELOC (home equity line of credit). The buyer puts down 10 or 15 percent and the HELOC covers the balance and there is no PMI. The only issue is the HELOC has higher rates that tend to move with the market. They work well if one gets abonus or is expecting a pay increase and the HELOC can be paid off quickly. Always speak to your lender about the various options. I know from experience if you work with JVM, you are in good hands!

Is the housing market shifting, an opportunity for some?

Is the housing market going to start shifting in the direction of price reductions at the higher end of the spectrum? According to Zillow Senior Economist Aaron Terrazas, it could happen. Approximately 14 percent of homes for sale underwent price reductions back in June, and most of them happened at the more expensive levels.

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Over the last two years, the housing market has tilted sharply in favor of sellers. But this might be an early warning sign that the tide is turning a little bit. Although it’s too soon to officially call this a buyer’s market, this data does indicate that the trends in the housing industry may be normalizing. In speaking to my title rep, Jason Webb at Fidelity, I asked what he is seeing in the industry. His response was that there are currently more contingent offers, homes taking longer to close, and more demands to close escrow. I am personally experiencing all that in one escrow and it is not fun!

In my situation, the sellers have already moved and the buyer (who did not have a contingency on selling their condo) is delayed on it closing by three weeks. It was originally supposed to close by tomorrow. The agent representing the seller of the condo and the buyer on my listing is a rookie agent who has not been great at communicating the status. My sellers are frustrated and gave a demand to close escrow, but it was really to get them to push on the buyers of the condo, as I had no control and no authorization to speak to them.

We will now most likely close in another week on my my clients’ home because the buyer decided to go out and buy a new car. That caused his debt-to-income percentage to be too high, and now the car has to be paid off with proceeds from the sale of his condo. That causes further delays in our closing because the lender needs to see it get paid off. Another interesting component to this was that my clients Google’d the buyer and the results were…surprising. We knew it could be a challenging process, but we didn’t think it would be this much of a wild ride!

I believe we will see more of these types of issues as the market softens and reverts to a better balance. We can’t keep increasing, and it is time for the market to come down off this upward trajectory. There are some positive outcomes to a correction, but it is change and change is hard for most people; especially sellers when they still expect a higher price than their neighbor.

Twilight Tour with wine and cheese on Friday 9/7!

With the kids back in school and the last wisps of summer fading away, you might be busier than ever. You might just need your own little Open House night to wind down and get away from it all for a few hours! If that’s the case, stop by 1947 Eagle Peak Ave. in Clayton for a wine and cheese Open House event!

This condo is so beautiful, it could star in the next Better Homes and Gardens Magazine. It’s a quiet respite with breathtaking views, top-of-the-line finishes and a serene appeal. It boasts 3 bedrooms, 2.5 baths, a deck overlooking the cozy backyard, and modern updates.

As usual, we will have our normal Open Houses this Saturday and Sunday from 1-4 p.m. each day, but you don’t want to miss the chance to see the house on Friday night from 5:30-7 with wine in hand. Join the neighbors for this exclusive event and take a look at this stunning space!  I would love to see you! If you like what you see, contact me at www.kristinlanham.com , 925.899.7123 or kristin@lanham.com. I’m happy to help with sell or buy the perfect home for you!

Today’s housing market vs. 2008’s market

Consultant Bob Schwab has a few interesting thoughts on the difference between the housing market in 2008 and the housing market today. He essentially points out that the landscape of today’s market is radically different than 10 years ago, so comparing the two era’s – even if numbers look similar – is tricky. Here are his thoughts below:

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Some are attempting to compare the current housing market to the market leading up to the “boom and bust” that we experienced a decade ago. They look at price appreciation and conclude that we are on a similar trajectory, speeding toward another housing crisis.

However, there is a major difference between the two markets. Last decade, while demand was being artificially created by extremely loose lending standards, a tremendous amount of inventory was coming to the market to satisfy that demand. Below is a graph of the inventory of homes available for sale leading up to the 2008 crash.

A normal market should have approximately 6 months supply of housing inventory. As we can see, that number jumped to over 11 months supply leading up to the housing crisis. When questionable mortgage practices ceased, and demand dried up, there was a glut of inventory on the market which caused prices to drop as there was too much supply and not enough demand.

Today is radically different!

There are those who believe that low mortgage rates have created an artificial demand in the current market. They fear that if mortgage rates continue to rise, some of the current demand will dry up (which is a possibility).

However, if we look at supply again, we can see that the current supply of homes is well below the norm of 6 months.

Bottom Line

We will not have a glut of inventory like we did back in 2008 and home values won’t come tumbling down. Instead, if demand weakens, we will return to a normal market (approximately a 6-month supply) with historic levels of appreciation (3.6% annually).

Separate from the Schwab blog, NAR Chief Economist Lawrence Yun says, “It’s important to note that despite the modest year-over-year rise in inventory, the current level is far from what’s needed to satisfy demand levels. Furthermore, it remains to be seen if this modest increase will stick, given the fact that the robust economy is bringing more interested buyers into the market, and new home construction is failing to keep up.”

And First American Chief Economist Mark Fleming says, “Millennials’ lifestyle and economic decisions are some of the main reasons we currently have a lower homeownership rate than expected, based on our Homeownership Progress Index. Yet, it is reasonable to expect homeownership rates to grow as millennials continue to make important decisions, including attaining an education and, later in life, getting married and buying a home.”

Glen Bell, a very analytical realtor in Berkeley, shared some charts with us, which also give additional insights into the disparities in the market:

Zillow_June_Numbers

Bell says he predicts a recession in 2019 or 2020, and that the real estate market will be a minor factor in it. Rising interest rates may offset some buying opportunities. It’s also hard to predict how much tax reform will play into this. Prices continue to rise and might be causing more people in the middle class to flee the Bay Area.

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Glen's Numbers pg 1

Glen's Numbers pg 2

What happens in a slowing market?

Consultant Kitty Cole has some interesting thoughts on the slowing market that got me thinking: what exactly happens in a slowing market? I’ve re-purposed parts of her blog below and added my own thoughts on the market at this pace, as well as interest rates in terms of what somebody can buy.

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So, is this market change normal or is the slowing a correction? Here are a few thoughts from Kitty’s blog to help you figure it out:

The market has begun to change, albeit slowly. A small segment of the market has slowed down in several Bay Area counties, including San Francisco. The indicators of a slowing market are that the number of active listings rise, the “Days on Market” increases and price reductions occur. You may also see more contingent offers (but fewer with no contingencies at all).  My two cents: In Contra Costa County, we are in line with these indicators. The outer-lying areas such as Concord is where I am really seeing the price reductions and increased time on market. However, if the property is remodeled and priced right, there are still multiple offers, just not as many.

The buyer pool for your property has decreased in the last year because the interest rates have risen more than a full point. For every full percentage point they rise, the buyer’s purchasing power goes down by almost 10%. Buyers who could afford a home worth $1 million last year, can now afford $905,000. That alone will significantly impact the buyer pool.

As far as projections go, CAR and NAR both feel that there will be a slower 2019. They forecast a slow-down in the 2nd half of next year, but Kitty’s theory is that it will happen a bit sooner since some market segments are showing signs of correction. The economy is healthy and the unemployment rate is hovering consistently. The Fed has stated that there will likely be 2 interest rate hikes this year, which will price out some buyers. Given how long we’ve been in recovery mode in the real estate industry, it’s normal to expect a correction.
The economy: The economy is healthy (the GDP was 2.0% for the first 3 months and 4.2% for the 2nd quarter) and the unemployment rate is hovering around 4.2%. There have been 9 + years of recovery in the economy. There have been 5 and half years of recovery in the real estate market.
More of my two cents: Many analysts are predicting 2020 for a correction. Most are saying there will be a correction, the question is just “when?” We still have low inventory and our local economy is robust, so for me, the question is “will it pick back up in September and October after all the summer vacations are over and the kids are back in school?” Or, are these current changes going to continue? Nobody has a crystal ball, so we will see. Sellers who are on the fence will be considering “is this is about as high as the market is going to go for the near future?” If you believe that, then it is time to sell.

Bay Area rent prices are out of control

According to the San Jose Mercury News, the top three most expensive places for renters in the entire nation are in the Bay Area. We knew it was bad, but this is a whole new level of shocking. In that article, the author writes that with San Jose’s $13.50/hour minimum wage, a person would have to have more than 3 1/2 minimum wage jobs just to afford average rent. Crazy!

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To nobody’s surprise, the San Francisco, San Jose and Oakland areas were top three in the nation, but the East Bay isn’t much better off. You’d have to earn $93,000 per year to afford average rent in the East Bay. Given the costs of pretty much everything around here rising, it’s no surprise.

In the real estate market – whether buying, selling, or renting – you have to expect to pay a premium in the Bay Area these days. That’s where people like me come in handy! We can give you expert advice and help steer you in the right direction. Remember, the most expensive direction isn’t always the correct one.

Here are a few more interesting tidbits from the article:

  • 2-bedroom apartments in the South Bay will require you to make about a $50/hour
  • In San Francisco, Marin and San Mateo counties, it’s closer to $60/hour
  • This is a national issue: there is no state, metro area, or county in the U.S. where workers earning minimum wage can afford a two-bedroom rental home by working 40 hours per week
  • Five years ago, about 3,000 people came to the Community Services Agency for food – it’s now over 7,000.

Why bank statements are so important!

Our friend Jay Vorhees at JVM Lending has shared another important blog recently: why bank statements are so important for borrowing and financing for a home. You’ll want to read on to see what Jay says, especially if you’re in the market for a new home. You’ll find a copy of the (slightly re-formatted) blog copied below:

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STRONG BORROWER DENIED FINANCING – WHY?

We once had a borrower who qualified for financing in every way (income, assets, credit, etc.) but she was denied financing. The reason?  She had five unexplainable overdraft charges on her bank statements that indicated she could not manage cash.

Every borrower has to provide bank statements for every account used for “cash to close” (down payment and closing costs). There are no exceptions because lenders have to ensure that down payment funds were not recently borrowed or obtained through illicit means.

“Borrowed” down payment funds are not considered “seasoned” and they create debt ratio issues b/c they need to be paid back. In any case, lenders are required to go through every bank statement with a fine-toothed comb to look for every irregularity. Irregularities include overdraft charges, unusually large deposits, and unexplained regular monthly deposits or withdrawals, among other things.

Unusually large deposits have to be paper-trailed and explained or they are assumed to be borrowed funds (and they can’t be used for a down payment/closing costs funds). And unexplained regular monthly deposits and withdrawals often indicate the existence of undisclosed side businesses, support payments or other liabilities.

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In any case, borrowers often get frustrated when we ask them to explain so many things that are buried in their bank statements. But, we have to ask because bank statements tell lenders so much more than meets the eye.

This is, in fact, often one of the most time-consuming aspects of the loan approval process.

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On a related note, Jay discusses something at the footnote of this blog: rates have climbed recently after a stretch of stability. President Trump’s comments about the Fed raising rates too quickly were the primary cause, but, according to the Wall Street Journal, the Fed may now be more likely to raise rates than it was prior to the President’s comments. This is because it will want to prove its independence from political pressure. How ironic!