Mortgage Modifications

Last Thursday evening I hosted a Town Hall style meeting on Mortgage Modifications.  The speakers were Mr. Ande McCarron from Harbin & McCarron and Sergio Soberanes, the Branch Manager of Wells Fargo in 4S Ranch.  The speakers and I agreed ahead of time that there would be no written material handed out as each bank is changing its requirements and it would not be to anyone’s benefit to have dated material in circulation that people are using as a guide. 

There were however, a few very good points made that bear putting down as information; with the caveat that they are applicable today, January of 2009:

To help understand the bank’s point of view, realize that in many (if not most) cases, they are the middle man.  Your loan is held by someone else (or pieces of it could have been broken up and sold to several people) and the bank is just servicing it.  So while on your side the home has gone down in value and the payments have gone up, understand that if the bank makes a modification favorable for you, they have to go to that person who is loaning you the money and explain why that person has to take less money than they were promised.  It is easy to get angry at a bank or institution, but if you start to look at the other side as a single mom whose retirement plan loaned you that money and she is depending on it put her kids through school, then you can see that there is more to it than the bank.

There were a couple of people who have 3/1, 5/1, or 7/1 ARMs that are about to start adjusting.  Sergio brought up the fact that most ARMs have a feature where you can convert them to a 30-year fixed at any time.  The new rate would be tied to Prime or LIBOR, etc.  The interesting thing is that those rates are a lot lower than when you took out your loan, so you may actually get a drop in payment while giving yourself the stability you need.   Just as important – this is not a re-finance.  You do not have to qualify.  If it was built into your loan, you still have the option.

Most loan modifications and government assistance are for primary residences only.  Investment property does not qualify (in most cases).  The government is interested in keeping people in their homes, not helping investors who made bad decisions.

We are not seeing many (if any) principle reductions.  Most of the modifications are to lower your payments by either lowering interest rates or extending the loan.  If you think success in a loan modification is reducing your principle by $200k, you are likely to be disappointed.  The investor on the other side still wants his money, but may be willing to wait a little longer for it.  However, it is important to note that you still have to be able to qualify for the new loan.  Nobody is looking to delay the inevitable.  If you really can’t afford the modified loan, the banks aren’t going to do it for you.

If you are in a situation that will require a loan modification or a short sale, do it sooner rather than later.  Your credit will start to recover after two years and for some government programs you can buy again in two years (four if you do a foreclosure).  The market is going to go down for another year or so and then level out.  If you take the credit hit now and repair your credit while you save up a down payment, you may be able to get back in at a lower level than we are today.

That’s it.  If you would like to talk about this further, feel free to call or shoot me an email.  I would be happy to put you into contact with Ande or Sergio also.  If you missed this seminar, we will probably do another one in a couple of months.

How Far Have We Fallen? Downtown San Diego

How Far Have We Fallen?

Downtown San Diego

This is the first article I am writing comparing sales data in specific areas of San Diego over time. The reason for this is that I am not satisfied with the simple “averages” that are put out by industry groups and wanted to see if we get different numbers when we look at it different ways. I apologize ahead of time that this is quite long, but I did not know another way to present the information.

The first area I look at is Downtown San Diego. For this article, I used all closings in the 92101 zip code. I looked at the fourth quarter of each of the last four years (I used a quarter’s worth of data so that the sample size was large enough that a couple of unusual sales would not overly influence the numbers the way it would if I only looked at one month).

The first thing I looked at was the average sales price and number of sales. They broke out like this:

Q4 – 2005
Q4 – 2006
Q4 – 2007
Q4 – 2008

# of sales
210
143
142
166

$ per Sf
$625
$562
$504
$421

Ave sf
1,159
1,185
1,083
1,163

% change from previous year

-10%
-10%
-16%

% change from 2005

-10%
-19%
-33%

From these numbers, it looks like the drop in prices accelerated in 2008, and this makes sense. I wanted to look a little closer at specifics to see if things were changing; when I did this analysis for a client late in 2007, we discovered that there were three different markets:

The Entry Level was taking the hardest hit.

The Mid Level (priced above $500k) was holding firm.

The Upper Level (priced above $1M) was actually increasing.

To determine if this was still the case, I looked at units that sold in the fourth quarter of 2008 that had also sold sometime in the previous 4 years.

Lower Level Units (Valuation Wise)

Address
Price sold Q4 2008
Price Previously Sold
Previous Sale Date
% Change
% Change per year.
Notes

1643 6th Ave #214
$185,000
$344,000
Q1 2006
-46%
-16%
REO

1642 7th Ave #422
$200,000
$401,500
Q1 2005
-50%
-12%
REO

1465 C St #3417
$223,500
$259,000
Q3 2004
-14%
-3%

425 W Beech St #333
$235,500
$500,000
Q1 2007
-53%
-28%
REO

702 Ash St #405
$209,000
$690,000
Q3 2006
-70%
-27%
REO

425 W Beech St #538
$240,000
$499,000
Q1 2007
-52%
-27%
REO

425 W Beech St #808
$225,000
$342,000
Q1 2005
-34%
-8%

1435 India St #502
$201,500
$360,000
Q4 2005
-44%
-13%
REO

515 17th St
$184,500
$425,000
Q3 2004
-57%
-11%
REO

1150 J St #503
$190,000
$293,000
Q3 2005
-35%
-10%
Short Sale

Middle Market Units

Address
Price sold Q4 2008
Price Previously Sold
Previous Sale Date
% Change
% Change per year.
Notes

801 Ash #1101
$460,000
$579,000
Q4 2006
-21%
-10%

950 6th #542
$435,000
$698,000
Q3 2006
-38%
-15%
REO

1240 India St #1112
$440,000
$735,000
Q4 2006
-40%
-18%
REO

1465 C St. #3505
341,500
$464,500
Q4 2004
-27%
-6%
REO

801 W Hawthorn St #204
$360,000
$515,000
Q2 2004
-30%
-6%
REO

445 Island #317
$465,000
$700,500
Q3 2006
-34%
-14%

877 Island #218
$385,000
$665,000
Q3 2005
-42%
-11%

High End Units

Address
Price sold Q4 2008
Price Previously Sold
Previous Sale Date
% Change
% Change per year.
Notes

1199 Pacific Hwy #3304
$865,000
$869,000
Q4 2004
-1%
0

1199 Pacific Hwy #2205
$953,000
$1,185,000
Q2 2005
-20%
-5%

1205 Pacific Hwy #1902
$935,000
$1,100,000
Q2 2006
-15%
-6%

700 West E St #3703
$1,000,000
$1,230,000
Q1 2008
-19%
-26%

550 Front St #801
$1,075,000
$775,000
Q4 2005
39%
11%
Seller was original owner.

550 Front St #1104
$1,100,000
$725,000
Q4 2005
52%
15%
Seller was original owner.

100 Harbor Dr. #3002
$1,500,000
$1,537,000
Q3 2005
-2%
0

550 Front St #2301
$1,950,000
$1,934,500
Q1 2006
1%
0
Prev owner made 79% in 2 mos.

Ok, what does this mean? Well, if you look at each segment of the market, it looks like the bottom end has fallen an average of 15.5% a year, the middle at 10.0% a year, and the top, or exclusive properties have fallen only 1% a year. However, the number for the exclusive properties is a bit deceiving as three of the units were in Pinnacle, and two of the sellers had bought from the builder prior to construction. So, they took advantage of 2-3 years of appreciation before the closed on their units. If you take the Pinnacle units out, the fall averages 7%.

This makes sense. The lower end units had the shakier financing and were likely to feel the crunch sooner, while the high end units benefit from both the fact that their owners have deeper pockets and better financing, and the fact that there is more demand for large ocean view units than small, street level units. So, the lower end units fall first and faster, highlighted by the fact that many of those sales are after the lender has foreclosed and is “dumping” the unit below market to free up cash.

So, are we at the bottom here? No. But we could be close. I believe that a lot of the recovery will be from investors. It is going to be pretty hard to absorb all the inventory that is coming in the next 6 months unless investors step in and buy a lot of them. I just don’t think there are enough individual buyers who can qualify for a loan with the new standards to absorb all the inventory. For investors to enter the market, most of them want to generate decent cash flow (under the condition of putting 25% down).

Let’s look at the property at 1150 J #503.

<!–[if !supportLists]–>· <!–[endif]–>This unit sold as an REO (Real Estate Owned by the bank) for $190,000.

<!–[if !supportLists]–>· <!–[endif]–>25% down would be $47,500, leaving a loan of $142,500.

<!–[if !supportLists]–>· <!–[endif]–>For an investor, let’s be conservative and say the payment is about $950 a month.

<!–[if !supportLists]–>· <!–[endif]–>The HOA is $300 a month.

<!–[if !supportLists]–>· <!–[endif]–>Taxes would be about $200 a month for a total of $1,450 a month.

<!–[if !supportLists]–>· <!–[endif]–>The unit one floor above (#603), is currently listed for rent at $1,500.

<!–[if !supportLists]–>· <!–[endif]–>So, if the investor is paying the standard 10% management fee, they would be losing $100 a month.

So, an investor would have to put $47,500 down, repair the unit and then rent it at a loss of about $1,200 a year while the value is still going down. I don’t think too many investors will sign up for this until they are confident we have reached the bottom and the market has turned upwards. So, I think we still have about 10% to fall in the low end of the market (as long as rents do not keep falling). I expect the middle and high ends to be closer to a 5% drop in the next year. However, if rents keep falling, look for the lower end to drop up to 20% more. The high end, which is not as dependent on rental income will fluctuate more based on the overall economy and the stock market as major investors owning downtown units as a second or third home, may be forced to liquidate to free cash if their other investments decline.

Now, I am not bashing downtown at all. I think it is a great area and believe it will be one of the strongest in the recovery. I have several investors waiting to purchase downtown. But, as a Realtor who only makes money when clients buy or sell a property, I am telling my investors to wait. I still love downtown as an investment and think it will be one of the leaders in the recovery – just not yet.

Median Price – Overstating the Problem

I was preparing my market update email and was looking at the early statistics for December sales (San Diego County) and was reminded of something that many people do not understand. That is the Median Price. People assume that median is the same as average, and while it is an average, it is not the average that most of us are used to. The average we are most used to seeing is fairly simple, you take all the numbers, add them up and divide by the number of numbers. While the median is the value of the middle number (ok, it’s really simpler than it sounds). For example:

Let’s look at a neighborhood with 1/2 the homes being detached and 1/2 being mobile homes. The sales prices in a period are:

Home 1 – $100,000
Home 2 – $100,000
Home 3 – $500,000
Home 4 – $500,000
Home 5 – $500,000

The average price of these homes is $340,000 ($100,000 + $100,000 + $500,000 + $500,000 + $500,000) divided by 5.
The median price of these homes is $500,000 (the price of Home 3).

This is important because of what happens the next period when the sales look like this:

Home 1 – $100,000
Home 2 – $100,000
Home 3 – $100,000
Home 4 – $500,000
Home 5 – $500,000

You can see that prices did not change. The only difference is we sold one more mobile home and one less house. However, here is what the averages now look like:

The average price of the homes sold is now $260,000 ($100,000 + $100,000 + $100,000 + $500,000 + $500,000) divided by 5.
The median price of these homes is now $100,000 (the price of Home 3).

Now, it would be bad enough if the news reported that the average price had fallen from $340,000 to $260,000, a drop of 24%. However, they report the median which in this case is a drop from $500,000 to $100,000, or 80%.

Did the market fall 80%? No. In fact, the market did not fall at all in our example. Mobile homes still sold for $100,000 and houses for $500,000. What changed was the number of each type of home that sold. That is why in good times the reported gain is larger than the true gain (more houses sell) and in bad times the reported drop is larger than the true drop (more mobile homes sell). That brings me to the December numbers for San Diego.

The early December numbers for detached and attached homes (I actually exclude mobile homes) look like sales increased strongly to 2,334 from 1622 a year ago, an increase of 44% (this is great, but those of you who get my weekly update know the main reason for this). However, those same numbers show that the median price fell from $548,000 to $375,000 a drop of 32% in one year. If we were really seeing 32% drops in value across the board, a recession would be the least of our worries. But, what do we now know about the median price? It overstates both increases in good times and decreases in bad times. To show this for San Diego, let’s look at the median home sold in December of 2007 and December of 2008.

2007
The Median home in December sold for about $548,000. This is best represented by a home in Oceanside at 1180 Players Dr. that was purchased directly from the builder. This home has 5 bedrooms, 4.5 baths and is 3,352 square feet.

2008
The Median home in December sold for about $375,000. This is best represented by the home at 1853 Sheep Ranch Loop in Chula Vista. This home was purchased from the bank (as a foreclosure) and has 3 bedrooms, 3 baths and is 1,780 square feet.

The importance for you and me is that while the newspaper may report that the median price is down by 32%, the price of your home did not fall by 32%. Prices did fall, but a lot of that 32% is the difference in a 3,352 sf home sold by a builder and a 1,780 sf home sold by the bank.