Summertime weather is still with us in the North Bay. Locally and in many other parts of California and the nation, the residential real estate market seems to be warming up a little, too.
In some respects, the worst may be over. Signs point to the housing market stabilizing. Loan defaults continue to decline, with the percentage of both prime and subprime mortgages that are seriously delinquent well below the 2010 peak. At the same time, home values appear to be nearing the end of their depreciation cycle.
Moreover, mortgage interest rates are still hovering near historical lows—enabling attractive financing opportunities for credit-worthy homebuyers and the resurgence of 30-year fixed mortgages with 20 percent down payments. Most of the loans being issued today by Bank of the West in the Bay Area are 30-year fixed.
Home affordability has rarely been better overall. The combination of current loan limits, a number of low down payment options and low rates make today a strong buyer’s market. Here in the North Bay, average home prices for starter homes are well below $500,000 and even move-up homes are more affordable than ever. The dip in values this past spring—possibly due to the wet weather keeping buyers at home combined with excess inventory—may add to the thought that we’re near or at the bottom of values, presenting great housing value for the dollar compared to prior markets.
Renting instead of buying
With rates and prices so low, why aren’t more people buying homes? Consumer confidence is one reason. Sentiment remains below pre-recession levels and consumer spending has been weak due in large part to a slowdown in sales of big-ticket items.
While consumers have been cautious, real estate agents should encourage prospective clients to do the math to determine which option—renting or buying—is more prudent.
In 2010, the median price of advertised rents rose 4.1 percent year over year, according to the Harvard University’s Joint Center for Housing Studies and the Associated Press. As rental costs rise, CBRE Econometric Advisors says the national average monthly cost of renting or buying a home is about the same. In fact, the ratio is the closest to one-to-one in 25 years.
In some cases, owning a home with a 30-year-fixed mortgage for five years or more may prove to offer a better monthly value than renting.
The renting-versus-buying scenario may look a little different in the North Bay, since home prices tend to be higher than national averages, but it’s a telling reminder that the buying opportunities we have today are rare.
Buyer considerations
If your client is ready to buy a home, taking action now might be wise.
• Encourage clients to capitalize on low interest rates, high housing inventories and values that may have reached the bottom…or close to it.
• If price and value are a top priority, examine communities with the highest percentage of lender-owned homes listed on the market.
• Determine the buyer’s need for long-term stability and predictability. Given lenders’ extraordinarily low rates, strongly consider securing a 30-year-fixed product but also examine the extra affordability of an adjustable rate mortgage.
When to make a move
While it’s difficult to envision a strong recovery anytime soon, showing too much patience might not be a virtue. How long will rates and home prices stay low? Earlier this year, Freddie Mac Chief Economist Frank Nothaft said he expects housing prices to gradually increase in 2012. A rise in interest rates may be harder to predict.
Pending reforms in Washington and speculation on economic developments that drive the housing market should be monitored closely, as they have the potential to change the housing market.
Coming out of Washington beginning Oct. 1 are reduced limits on loans backed by Fannie Mae, Freddie Mac and the Federal Housing Administration, which buy or guarantee approximately 90 percent of all U.S. mortgages. Although it varies by market, the maximum eligible conforming loan will drop from $729,750 to $625,500. Non-conforming loans typically come with a higher interest rate ranging from 0.50 percent to 1.5 percent above conforming-rate loans.
According to the U.S. Department of Housing and Urban Development, lower loan limits mean Marin County’s loan limits will drop to $625,500 from $729,750; Sonoma County’s will be reduced to $520,950 from $662,500, and Napa County’s limit will drop to $592,250 from $729,750.
At first glance, this may seem like a blow to brokers, real estate agents and borrowers working through these channels; but it’s important to remember that very few Fannie Mae, Freddie Mac and FHA mortgages have exceeded the new average limit nationally.
California could be hit a little harder than the national average since mortgages here tend to be larger, but just how profound any impact may be remains to be seen. In Napa, for example, the median home price is hovering around $350,000. However, people who have been sitting on the sidelines may want to make a purchase before Oct. 1 if their loans will exceed $625,500.
Rare opportunities in uncertain times
Some of the worst elements of the declining real estate market may be over. But as home prices level off and regulatory reforms including lower loan limits likely take shape, the golden opportunity available to buyers could change subtly or even significantly in the coming year. Now may be the right time for your clients to take action.
Cyndee Kendall is vice president and Bay Area regional sales manager at San Francisco-based Bank of the West. You can reach her at Cyndee.Kendall@bankofthewest.com.
