10/24/08

What a year!  2008 has delivered a year of unprecedented change in the residential financing industry.  For months on end, the news has been dominated by headlines that help explain how the real estate market has arrived to where it languishes today.  A lending frenzy from 2002 through 2006 produced an era of easy credit that allowed borrowers to secure financing without income documentation and with minimal or no down payment.  Sub-Prime lenders made financing available to everyone, regardless of a borrower's credit history or ability to demonstrate the capability to actually support the mortgage debt being secured.  This environment created an artificial boom in real estate values that proved to be unsustainable.    

The California median price peaked at $505,000 in February 2007.  Housing prices had finally reached a level at which buyers were no longer comfortable even with a bevy of easy financing options available.  As buyer demand waned, appreciation grinded to a halt and ultimately began to deteriorate.  Property value first began to decline in areas with an over- supply of new construction such as Riverside and San Bernadino county.  As values declined, the initial borrowers to be foreclosed on were those who put no or very little money down.  These borrowers were dependant on value appreciation.  When property values declined, these borrowers owed more money than their house was worth and they were making payments on mortgages that they could barely afford.  Under these circumstances, many owners fell behind on their monthly payments and others simply walked away from their home.  Naturally, as property value continued to decline and the number of foreclosures began to spike, a cycle was born.  Decreasing values increased the number of foreclosures and the booming number of foreclosures flooded the market with empty homes at low prices which continued to put downward pressure on property values.

As this cycle progressed, banks and mortgage companies found themselves in a new role as property owners.  With growing balance sheets full of property that was quickly decreasing in value it did not take long for lenders to start losing money in droves.  The rapid erosion of interest income combined with the swelling inventory of depreciating real estate owned by the banks resulted in an industry wide tightening of lender guidelines.  Of course, making financing more difficult to obtain only increased the momentum of values moving lower.  Ultimately, the financial distress has resulted in the bankruptcy of major players in the industry such as IndyMac, Washington Mutual and Lehman Brothers as well as the forced sale of Wachovia and Merrill Lynch.  Government sponsored entities Fannie Mae and Freddie Mac, the nation's largest purchasers of mortgage debt have been forced into conservatorship.  Most recently, the federal government has announced a $700 Billion bailout/rescue plan in an attempt to stem the bleeding. 

According to DataQuick Information Systems September 2008 housing report, the median home price in California is now $283,000.  This is down 44% from the $505,000 peak reached in February 2007.  Of the homes that resold in September, 51% were foreclosure resales. 

Contrary to what one might believe after being bombarded by such dramatic headlines, residential financing is certainly available for purchase and refinance transactions.  In order to qualify, borrowers must be able to qualify based on their documented income with strong credit scores.  On purchase transactions of an owner-occupied single family residence, borrowers should have at least 10% available as a down payment for loans no greater than $729,750.  On jumbo loans (loan amounts greater than $729,750) borrowers should have at least 20% available as a down payment.

In summary, serious buyers remain in control of the purchase market. The over-supply of housing inventory and lack of qualified buyers has fostered an environment in which asking prices remain negotiable.  For present homeowners, interest rates are generally higher compared to rates available over the past five years.  Refinancing benefits still exist for those who are interested in consolidating debt or eliminating the risk of an adjustable rate mortgage.

If you are in the market to purchase a new home or if you have an interest to refinance your existing loan, call or email me today.

CA. Dept. of Real Estate Agent License # 01231786