Santa Cruz Real Estate Experts Team Sedenquist

Here is more fallout from the increasing numbers of defaults on risky mortgages and the “Subprime mess” that we’ve written about (see Blog 3-26-07).  Some of the largest mortgage lenders in the country are going to start requiring that borrowers actually have a small down payment in order to buy a home.  Wow, what a concept.

Zero-Down Mortgages Get Harder to Find

Countrywide Financial Corp. has instructed its brokers to no longer offer zero-down mortgages as an option for borrowers, the Wall Street Journal reports.

That's because such loans are among the biggest reasons for a recent and sharp increase in the level of delinquencies at U.S. home lenders.  Countrywide joins such other companies as General Electric Co.'s WMC Mortgage and Washington Mutual Inc. in requiring that loan applicants have at least a 5-percent stake in their homes.

Previously, "if you breathe and have a Social Security number . . . you were going to get a house," notes Mark Cady of Market Street Mortgage in Houston. Now, lenders are demanding that applicants have higher credit scores and contribute a bigger down payment, among other requirements.

While the flow of money available to the subprime borrower community is likely to slow considerably as a result of this trend, observers note that lenders not subject to federal regulation will continue to offer higher-risk products such as 100-percent financing and interest-only loans.

Sources: Wall Street Journal, Houston Chronicle

There is a new form of real estate ownership that is becoming common.  Called “TICs” or Tenants in Common ownership, some investors are exchanging their equity that has built up over time in their traditional existing rental properties into larger properties throughout the country that they don’t have to manage, and that ‘guarantees’ a certain rate of return on their investment over time.  Usually the partnership that puts together the TIC provides the management of the property.  It is somewhat uncertain how all states and the fed will continue to recognize and tax these TICs over time, so get good advice from your attorney and CPA before jumping into one of these groups.  I was reading on-line this week and discovered another use of these TICs.

Home Buyers Use TICs to Sidestep High Prices

San Francisco home buyers are side-stepping high prices by banding together to buy an entire building as TICs, or tenants in common.

As a result, the price of each housing unit will be about $100,000 to $250,000 less than it would be if the buyers had each purchased a single apartment. Mortgages for these kinds of ventures can be pricey — usually at least 1 to 1.5 percentage points higher than the buyers would pay if they were financing a standard condo.

But the cost per square foot is so much lower that they come out ahead.

A binding legal agreement divides up the living spaces, and describes what happens if a partner wants to sell. After all, the owners must share a mortgage.

Observers say the idea is likely to spread to other pricey cities around the country, especially if institutional investors have the option to buy packages of TIC loans — a change that would lower mortgage rates.

Source: Kiplinger’s Personal Finance Magazine, Patricia Mertz Esswein (04/1/2007)

Lynette and I have noticed over the past few years that we are seeing more single women buying homes in our market.  Santa Cruz County is not alone.   Here are excerpts of an article based on 2006 National Association of Realtors market research showing that single women form an increasing market for real estate throughout the nation.

Single-Women Home Buyers: A Market Worth Watching
by Paul Bishop and Harika "Anna" Barlett

A significant share of home buyers are single women. Indeed, the percentage of single-women buyers has increased from 14 percent in 1995 to 22 percent in 2006.These home purchasers account for the second largest share of adult households who purchase homes.

Below we look results from the most recent home buyer survey that focus on single-women purchasers.

The Single-Female Population
According to the latest U.S. Census Bureau statistics, just over half – 51 percent – of the U.S. population are females over the age of 15. The Census Bureau also reports that:

• 9.4 percent are widows
• 11.5 percent are divorced
• 2.6 percent are separated (and describe themselves as single)
• 25.5 percent have never married

The largest share of women in the population is those that are married. But more than 25 percent are or have never been married. Not surprisingly, most of those who have never married are between the ages of 15 to 19 years. But women aged 20-34 years old account for the largest percentage of single females.

Single Female Home Buyers
As mentioned above, 22 percent of home buyers in 2006 were single women. The median age of all home buyers was 41 compared to 43 for single-female buyers. Among single-female home buyers, 46 percent were first-time buyers, compared to 36 percent of all buyers.

The median household income for single-women home buyers was less than that for home buyers as a whole. Single-female home purchasers reported a median household income of $48,100 in 2005,compared to $71,800 for home buyers in general. This is not surprising since 68 percent of all home buyers are couples, many of whom probably have two incomes. On the other hand, single-female home buyers earned more than the median income for all households – $46,326 in 2005. They were also less likely to have children. Survey results show that 76 percent did not have children living at home, compared with 62 percent of all home buyers.

What They Buy
Single female buyers are more likely to purchase an apartment/condominium or a townhouse than are home buyers in general. Still, the majority of single women purchase a detached single-family home. And while the majority of single women purchase a home in a suburb or subdivision, they are also more likely to purchase a home located in an urban or central city location than are home buyers as a whole. Single women tend to buy smaller homes.

Because their household income is less than home buyers in general, it is perhaps not surprising that single female home buyers purchase homes that cost less than those purchased by the general home buyer population. The median price paid by single women buyers in 2006 was $169,370 compared to $214,000 for all buyers.

Why They Buy
A majority of home buyers purchase a home because of their desire to own a home of their own or establish a household. The same is true for single-female buyers, but to an even larger degree. While nearly a third of all home buyers purchase a home for this reason, 44 percent of single women buy a home because they want to own a home of their own.

Compared to all home buyers, less than half of single-female buyers purchase a home due to a job-related location or move. But they are more likely to buy due to a change in family situation compared to home buyers in general. Single females were also more likely to have rented an apartment or house prior to their home purchase than were home buyers as a whole.

Use of the Internet
One fifth of home buyers who used the Internet in 2006 to search for a home to purchase were single females. And single-women were more likely to be Internet home-searchers than were single-male buyers or unmarried household buyers. In fact, among single-female home buyers, the majority of them used the Internet to search for homes.

Have you heard the phrase “Subprime Lending” or read anything about the growing concern for the financial condition of our nation’s mortgage lenders?  If not, you will be hearing more and more about the home loans that lenders made to unqualified Buyers during the heat of the hyperactive real estate market of the past few years.  As interest rates climb, borrowers are now defaulting on these questionable loans at an increasing rate.  Already lenders are tightening down their lending requirements making mortgage financing a little more difficult to arrange.

What does this mean to you?  If you pay your debts in a timely basis and keep a good credit rating, probably nothing.  If you are a person that pushes the limits and has a poor credit rating, it will be harder to get credit in the future.

Here is a good analysis of the Subprime situation by David Lereah, the chief economist for the National Association of Realtors.

The Subprime Mess
by David Lereah, NAR Chief Economist

Just as children in an orderly classroom stir up a wild ruckus when the teacher leaves the room, some people and businesses stray from fundamental behavior during a frenzied market environment. It happens every time. During the savings and loan crisis of the 1980s, S&L senior management wastefully purchased expensive fine art while their institutions were crumbling. Investors purchased company stock at triple-digit price/earnings multiples during the giddy 1990s dot.com boom, ignoring fundamental investing principles. And in the aftermath of the nation’s biggest real estate boom, we learn once again, about behavior in a frenzied environment. I call it, the subprime mess.

How it Began
Caught in the real estate boom’s great momentum, lenders granted mortgage loans with low starter (teaser) interest rates to high-risk borrowers without sound underwriting. Many of these loans were made to borrowers with little or no documentation of their financial capacity to service debt and required little or no down payment, leaving borrowers with virtually nothing at stake in the property if something went wrong. Of course, something went wrong -- it always does.

Lenders bet that property prices would continue to rise, thus enabling borrowers to “refinance their way” out of trouble or sell for a nice profit. When property prices flattened or fell in many of the post-boom markets across the nation, that could no longer happen. Poor underwriting has lead to higher delinquencies and foreclosures as the teaser rate periods end and monthly mortgage payments are re-set at higher interest rates. Over 30 subprime lenders that have made problematic loans have gone belly up with more on the way. Large lenders (insured banks and other lenders) and Wall Street companies that provide funding for the subprime marketplace got caught with their collective financial pants down. Now they and many of their borrowers are paying the price. Banks regulators -- the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Federal Reserve tolerated a level of risk which was, in retrospect, excessive. And now the regulators have begun, justifiably, to toughen lending standards.

Hold On, Chicken Little
So now we are left with a subprime mess. The media is all over this, calling it a subprime tsunami, a debacle, a crisis. The regulators are responding with tough lending standards and restrictions. And Congress is holding hearings which promise to lead to tougher consumer protection laws. Some analysts are predicting that subprime problems will do meaningful harm to the housing sector, possibly leading to an economic recession. But let’s take a deep breath and assess the situation, before succombing to a subprime tsunami.

The subprime mortgage market comprised about 20 percent of the nation’s lending volume during the past two years. Clearly, the recent fall-out has stifled subprime lending activity today. Many subprime lending companies have closed their doors and their sources of funds—the large banks and Wall Street—have tightened credit. The regulatory agencies have proposed stricter subprime lending guidelines, emphasizing sound underwriting, greater documentation, a debt-to-income analysis that includes taxes and insurance, and qualifying borrowers on a fully indexed mortgage rate rather than the starter rate.

The Fall Out
What’s ahead? I would expect a drop-off of subprime originations this year and next. Yes, it is possible that half of the subprime high risk borrowers will be unable to get a loan, thus depressing overall home sales. But that is not likely. Many of these households will seek mortgage loans from a revitalized FHA, from lenders making loans that meet Fannie Mae and Freddie Mac standards, and from other lenders offering fair and affordable mortgage options to subprime borrowers. Remember, many of these borrowers are low-income, minorities and first-time buyers -- all important participants in the home buying marketplace. Tougher lending standards imposed by the market (i.e., Wall Street and banks) and the regulators are necessary, but we need to be mindful of overcorrection. Responsible lending practices are what the doctor orders, not practices that cause a credit crunch.

On balance, I expect about 10 to 25 percent of subprime households to be unable to secure a mortgage loan because of today’s stricter lending standards. However, many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so (e.g., saving for a down payment, growing their income). So the long-term health of the housing market will probably stay in tact. In the near-term, I would expect home sales to fall by 100,000 to 250,000 annually during the next two years due to tighter underwriting practices, slowing the nation’s housing recovery.

As for the over 8 million adjustable-rate loans (25 percent of which were subprime) originated during the past three years, First American Corelogic estimates that about 1.1 million of them totaling about $326 billion are likely to end up in foreclosure. A bit over $300 billion of subprime adjustable mortgage loans are due to re-set by October 1st of this year. Most lenders will attempt to work out problem loans by refinancing borrowers into other mortgages. A disproportionate share of these foreclosures will occur in high cost regions, like California. Certainly, a rise in foreclosures results in an upward blip in housing inventories, depressing home values. But the good news is that these foreclosures will occur in relatively healthy local markets that boast decent levels of economic activity and job creation, improving the prospects of selling the foreclosed properties in a reasonable amount of time. Foreclosures will create temporary inventory problems, but inventories will be eventually worked out.

The Big Picture
Today’s subprime problems are most certainly going to spill over into the housing sector and the economy a number of ways. First, if lenders exercised poor underwriting in the subprime market, it is likely that these practices carried over into their Alt A and possibly even their prime lending markets as well, suggesting that delinquencies and foreclosures in these markets may reach higher than historical levels. Second, going forward, lenders that are tightening underwriting standards in the subprime market may be overcautious and tighten standards in the prime market, keeping some households from purchasing with prime loans even though they are well able to afford them. Third, continual problems and media reports about subprime activity may reduce overall consumer confidence in the housing sector, bringing some home buyers to the sidelines. And fourth, an increase in foreclosures could raise the inventory of homes in a local market, soften prices and the demand for homebuying.

But from a broader perspective, today’s subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy.

Lyn and I are remodeling our home again.  We like to stay current on new construction materials and are always on the lookout for trends on how people will be using their homes to accommodate their changing lifestyles in the future.  I was surprised to read about this latest trend though.

The New Luxury: Dual Master Bedrooms

His and Her bedrooms are the hot new trend in custom homes.

In a February survey by the National Association of Home Builders, builders and architects predicted that more than 60 percent of custom houses would have dual master bedrooms by 2015, according to Gopal Ahluwalia, staff vice president of research at the builders association.

Snoring and other wee-hour disruptions are at the source of the trend. According to the National Sleep Foundation in Washington, 75 percent of adults frequently either wake up in the night or snore — and many of them have taken to separate beds just for those reasons.

Source: The New York Times, Tracie Rozho, (03/11/2007)

As Rosanne Rosannadanna used to say, “It’s always something.”

Whoa now, readers. After last week’s crazy stock market activity, real estate is looking again like a safe haven, even with alarming media headlines like this one.

Home Prices Fall at Fastest Rate in 14 Years

U.S. home prices fell 0.7 percent in the fourth quarter, according to Standard & Poor’s inaugural release of the national Case-Shiller price index.

This is the fastest rate home prices have fallen since 1992. Overall home prices rose only 0.4 percent last year.

On an inflation-adjusted basis, national home prices are down 1.6 percent in the past year. Prices in the top 10 metro areas are down 2 percent.

Among the 20 cities included in the index, the biggest gains in the past year were in Seattle (up 12.1 percent), Portland (up 9.9 percent) and Charlotte (up 6.7 percent). The biggest losses in the past year were recorded in Detroit (down 5.9 percent), Boston (down 5.1 percent) and San Diego (down 4.2 percent).

Source: Dow Jones Business News (02/27/07)

We understand that our median housing price started climbing again slightly in February to $720,000.  Be glad you don’t live in Santa Barbara (see below). Here are some interesting housing-related Fast Facts provided by the California Assoc. of Realtors (C.A.R.)

Calif. median home price - January 07: $559,640
Calif. highest median home price January 07:  Santa Barbara So. Coast $1,150,000
Calif. lowest median home price January 07:  High Desert $317,380
Calif. First-time Buyer Affordability Index - Fourth Quarter 06:  25 percent

Mortgage rates - week ending 3/8:  (Source: Freddie Mac- FHLMC)

• 30-yr. fixed: 6.14%; Fees/points: 0.5%
• 15-yr. fixed: 5.86%; Fees/points: 0.5%
• 1-yr. adjustable: 5.47%; Fees/points: 0.6%

Lynette found this article through the National Association of Realtors website that seems right on the mark.  Builders and home remodelers take note!

Designing homes for women, who make 83 percent of U.S. consumer spending decisions, was an important topic at the International Builders’ Show earlier this month.

Architect Ann Olson and Designer Paul Foresman offered this advice to housing professionals that they dubbed the "10 commandments of women-centric home design."

1. Pay attention to de-stressing areas. Women want options in the master bath.
2. Rear foyers are important. Don’t call it a mudroom and do include lots of storage.
3. Don’t forget that people gather in the kitchen, and size matters.
4. Consider unique needs of blended families who don’t want to share bathrooms.
5. Busy women demand closet organization systems.
6. Women crave kitchen storage. They are cooking less, not eating less.
7. Natural light makes her happy: in the master suite, over the bath tub, and in the shower.
8. Outdoor maintenance is a burden to women, so use things like maintenance-free decking.
9. Women like change, so incorporate flexibility into designs.
10. Home-based businesses are female dream jobs, so include home offices where it can happen.

Source: Hanley Wood News Service, Pat Curry (02/09/2007)

I have a confession to make.  I like reading about real estate and enjoy spotting trends in real estate market statistics.  Here are some market factoids taken from the “State of the California Housing Market” section of the California Assoc. of Realtors website.

MARKET ACTIVITY

• “Home buyers with zero-down payments increased significantly from 4.5 percent in 2000 to 21.1 percent in 2006,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Two out of five first-time buyers made a zero-down payment on their home purchase”.
• “The interest rate environment also played a significant role in the housing market of the past few years,” she said. “From 2002 through the first half of 2005, interest rates were either expected to fall or remain at attractive levels. When the fixed-rate temporarily exceeded 6 percent in 2003 and 2004, sales slowed. But in each case, market activity accelerated when the rate fell below that threshold.”
• Home sales in California fell in 2006 after four years of expansion. Sales in the Bay Area housing market fell at a slightly lower rate than for the state as a whole. After peaking in 2004, Bay Area sales declined 10 percent in 2005 and then 19 percent in 2006. The median price in the Bay Area -- the highest of any region in the state -- continued to increase by small single-digit increments throughout 2006, in part because of inventories that were well below the statewide levels.
• Home sales in the Southern California region followed the general direction of the state, declining 23 percent from the record level of 2005. Inventory levels in this part of the state nearly tripled from a year ago, to levels in the range of their long-run average. The Central Valley had the largest decline in sales activity among the three regions in California.
• More home buyers used 100-percent financing to purchase their home. About a fifth of all homes purchased (21.1 percent) were financed with a zero-down payment mortgage compared with 19.7 percent last year. Recent use of zero-down mortgages has increased significantly since 2000, when they were used by just 4.5 percent of buyers. Two of five first-time buyers (40.9 percent) made a zero-down payment on their home purchase, while just one in 10 repeat buyers (11.3 percent) purchased their home with no down payment.

WHO IS BUYING HOMES?

• The typical first-time buyer had a median age of 35, earned an annual household income of $80,000, and purchased a home with a historically high median price of $450,000.
• Fifty percent of all first-time buyers were married and 35 percent of them were singles. The share of married first-time buyers has been declining slowly but steadily since 2000. Meanwhile, first-time buyer households with two or more individuals declined from 16.2 percent in 2005 to 13.5 percent in 2006.
• The typical repeat buyer had a median age of 45, earned an annual household income of $120,000, and purchased a home with a historically high median price of $618,000.
• Six of 10 repeat buyers were married, a quarter of them were singles, and one of eight were buyer households with two or more individuals. Repeat buyer households with two or more individuals have increased from 6.6 percent in 2002 to 12.7 percent in 2006.
• Almost half of these home buyers were married (47 percent), 37.6 percent were singles, and 13.4 percent were households with “two or more individuals.”
  

WHO IS SELLING HOMES?

• The typical home seller was 50 years old, had a two-member household, earned an annual household income of $100,000, and lived in the home for five years before selling it.
• Fifty-five percent of all sellers were married and 27 percent were singles. Households with two or more individuals accounted for 12 percent of all sellers in 2006, virtually unchanged from that in 2005.
• After peaking in 2005 at $220,643, the median net cash gain by sellers from all home sales declined 8.4 percent to $202,000. It was the first time since 1997 that the median net cash gain fell. The median net cash gain for single-family detached homes increased 1.6 percent to $250,000, while the median net cash gain for condo/town homes declined 2.7 percent to $180,000.