Conforming Increase On Its Way

According to about 5 of my mortgage friends (who emailed me within hours of each other), Congress is fast tracking a bill that will put California into the “high cost” category for housing which will raise the level for our conforming loans from $417k to $625k which is enjoyed by Alaska and Hawaii.  Further, they are then going to increase that $625k to $725k for a period of one year.  This is great news as loans that fall under the conforming level are easier to qualify for and there are more flexible programs available for buyers who would otherwise be viewed as borderline by banks.

Expect this bill to be on the President’s desk by the middle of February.  The change will help homes in the lower and mid range of the market which is where our recovery is most likely to start.

Big Rate Drop Today

Ok, I promise I did not have the inside scoop on the rate drop when I wrote yesterday’s post.  My initial reaction was that this is just what the market needs.  My thoughts were that this will help keep people’s loans from adjusting to an overly high monthly payment which in turn would keep some people out of foreclosure.

In checking with several people involved in the foreclosure market, their thoughts are more along the lines that this will help a smaller number of people than I thought.  Apparently (according to them), there are too many people in the negative amortization loans who are making only the minimum payment and will not be able to handle the interest only payment regardless of the rate.  They see this rate drop as help to people with good credit who will get a break in their payment, and also as an aid to people purchasing – it will allow them to pay more which will hopefully prop up prices a bit.

So, it might not be “just what the market needs”, but I think it is a good step in the right direction.  Now, let’s get the conforming loan limit up to $625k!

Market Bottom?

I have been reading up (as usual) on various forecasts by “experts” in the industry.  As usual, the “experts” can’t agree.  I have read on one extreme that we have hit bottom and on the other that the real drop is still to come.  Sorting through the arguments, I think that both extremes are incorrect.

The feeling among agents is that there is currently an increase in activity, but that the buyers are still scared and “on the fence”.  Those who are buying are making offers significantly below asking price.  In terms of supply and demand, there are more homes on the market now than at the same time last year (by 3% in San Diego County), and it looks like the number of closings will be off for the quarter.   In terms of what will happen over the rest of the year, there are a few points keep in mind and then two factors that could help a lot:

• There will be more supply this year than last year.  This will lead to continuing softness in the market.
• Qualification standards are higher.  This has taken many buyers out of the market as loans are harder to come by.  The caveat here is that for well qualified buyers, rates are coming down.
• How many foreclosures will we see and are the focused in certain neighborhoods.  Foreclosures are definitely rising at a brisk pace, but will they be concentrated in areas with a high number of Alt-A type loans (like the downtown condo market), or will it spread to all areas?

Where we need help:

• Conforming Loan Levels – If the conforming loan level for California is raised from the $417k it is now to closer to the $625k in Alaska and Hawaii, we will see a pick up in the mid-level of our market as people can afford more.  This is key as any recovery is going to begin at the lower and middle ends of our market.  In an election year, look for this to happen during the first quarter.
• Interest rates.  With the higher qualification standards, lower rates will not necessarily lead to a large increase in buyers, but it is HUGELY important in terms of foreclosures.  Many people who have loans that are set to adjust this year cannot afford the increase in payments and will not qualify for the existing relief act.  However, if mortgage rates drop a point or more this year, the increase will not be as bad (some people may actually see a drop in payment) as people fear.  This would help keep inventory levels from shooting up and would help support prices and ruin the doom sayers forecasts.
• Rent Increases.  This may seem odd, but rents have quickly increased which is good for the market.  Investors are, for the most part, staying out of the market.  Once we get to a point were an investor can purchase a home with 20% down and run at a positive cash flow, we will start to see investors enter the market.  This will be a huge plus because investors may purchase several homes over a short period of time, helping to significantly reduce inventory.  We are still 10-25% away from this level, but that doesn’t mean prices have to fall that far, with rents increasing as quickly as they are, we could hit this point early next year.

So, to add my forecast to those many that are out there, I see the market continuing to slip a bit this year.  A strong drop in interest rates could keep the bottom of the market at about 10% under where we are now with recovery starting early 2009.  If we don’t get the rate drop, I think the market drops about 15% and starts to turn around the first quarter of 2010.

Now that I’ve put it in writing, watch the market do something else completely!

Mortgage Qualifications vs Interest Rate Reductions

Several people have asked me in the last couple of weeks if  the reductions in interest rates are going to help the real estate market.  My answer is “not really”, and here is why.

While a drop in interest rates will allow a buyer to qualify for a higher loan amount it is the qualifying requirements that have been a big change.  For example a buyer buying a home who can qualify to spend $4,000 a month for loan payment, taxes, HOA and insurance can afford qualify for an interest only loan of about $600,000 at 6% interest and for a loan of about $650,000 at 5.5% interest.  That’s a nice increase, but here’s the catch.  If that same buyer has $1,500 a month in credit card bills and car loans, then a year ago they had to say they made over $150,000  a year.  Now, they have to prove it – and have 10% down – and have another $20k for reserves.  That is why the number of buyers has fallen so dramatically.