Los Altos Real Estate Blog

In case you hadn't heard, the banking industry and the Federal government settled the "robo-signing" fiasco that resulted in a significant number of improper foreclosures.  The bottom line is that people caught in this mess that haven't lost their homes will get a break and assistance with modifying their mortgages.  The folks who had their homes literally stolen through improper foreclosure procedures get...wait for it...$2000.  You can't even buy a decent car for that much, let alone a house.

How is this a "win" for the American homeowner?

Here's a bigger question - Why are we protecting the banks?  They literally stole property from hundreds of thousands of people and the only compensation offered is barely enough to cover rent.  The banking industry made money when all these loans were made.  They made money on the downturn and got a bailout.  The banks walked away from all this unscathed.  In fact, they still owe $133 billion to the federal government.  Who is looking out for the guy who lost his house?

Bryan's Scorecard on the Foreclosure Fiasco...

• Banks - Winners!
• Investors -Winners!
• Existing homeowners - Winners!  (sort of)
• Former homeowners - Shafted!  (royally)

This sort of "up yours" attitude from the banks and the Federal government is likely to undermine belief that homeownership is an important part of the American lifestyle.  It's also likely to widen the gap between the "haves" and "have nots".  How can we convince all these people who were improperly foreclosed on that they should EVER buy a home again?  Did we just lose 750,000 potential home buyers because they got burned by the system?

In my opinion, NAR should be all over this to speak on behalf of homeowners who otherwise have little voice.  This settlement will have a negative, long-term impact on the faith American homebuyers have in home ownership.

You could be a home buyer or seller, it doesn't make a difference.  In the process of selling a home, both are impacted by an appraisal that's wrong.  What's the first reaction of the agents, the buyer, the seller, and the banks?  Frustration, panic, anger, I could go on and on.  Once you get past the myriad emotions, you need a rational response.  I just got an appraisal back that I don't agree with and here's what I looked at to make sure the appraisal is done right.

Market Conditions

In most appraisals they'll be ranked as "Inclining", "Stable", or "Declining".  This is the first thing you check because if the appraiser is looking at the market as too large an area, such as a county, then the home might be undervalued.  Make sure the market the appraiser is considering is the local market (town, subdivision, or neighborhood) and not a general one.

Home Size

The appraiser should take measurements of all the rooms to get the interior dimensions.  The home size used in the appraisal should be all living space but if the comps include both living space and garage space (which often happens), then make sure the appraiser includes the garage space.  Appraisers will balk at this, claiming it's not appropriate, but if a comp shows up as 20% larger because the listing agent included the garage space, make the appropriate adjustment.

Comps

The appraiser should have at least 3 comps they used as the basis for their opinion. Check each one and make sure it's really in similar condition, close by, similar street location, and similar age.  A home on a corner lot on a busy street isn't a suitable comp for a home on a cul-du-sac.  Check these detail because appraisers do make mistakes.  The two most contentious I've seen are age and condition.

Now what do you do?  Take what you find back to the appraiser and ask them to reconsider the factors in their appraisal.  The purpose of this response is to present facts in a logical manner.  If the appraiser is doing their job, they'll consider what you have to say and fix whatever mistakes they've made - if they made them.

Just be very clear in reading what the appraiser wrote in their report.  If you don't like the results but they're based on sound facts, which is most often the case, then you'll just have to live with it.  But if they do get it wrong, be prepared to do what's needed to get it fixed.

The 30 year conforming interest rate has dropped under 4% to 3.94% for the first time ever.  This unprecedented opportunity should spur more buyers to step up and get into a home while locking in a rate that makes borrowing effectively free.  With a 3.94% loan, the amount of interest you're paying over 30 years is a fraction of what it would be at 5, 6, or 7% rate available in the last few years.

For buyers, keep in mind that what you're buying is a home as well as an investment.  You want to know how people keep making money in this market?  They get cheap money to put it in to things that generate more return than the cost of borrowing.  Over time, real estate has generated returns well above the current cost of borrowing.  That said, each area is unique so talk to your agent.

If rates keep dropping should I wait?  You could but you might miss the opportunity to buy the home you want.  Buyers are constantly looking for "the next best thing" and wondering if a better home will come along.  Well of course it will!  But, rates could rise and so could prices.  In fact, prices are rising in many markets, especially here in Silicon Valley.  Find a home you like and get on board with being a homeowner while rates are this low.  It may not last.

Today the stock market is down substantially, dipping below 11,000 again.  Last week it swung up and down like a whipsaw and the rest of this week it'll probably do the same.  There's been lots of discussions about who's causing it and why.  The concern from many people watching the stock market is the role these swings will have on the economy especially job creation, consumer spending, and real estate.  As a former pattern day trader who regularly made hundreds of thousands of dollars in trades in a single day (sometimes a single hour), I can tell you that these swings are all part of a carefully orchestrated game.  Just keep in mind that the people running the stock market always seem to come out winning.  Which leads me to the first reason the stock markets are swinging:

#1)  TRADERS ARE SHEEP.  The stock market is dropping some days because markets around the world dropped overnight.  If the Nikkei and FTSE drop, it's a sure bet the Dow will drop as well.  It's a tug-of-war on who drops and the news is almost irrelevant.  Today's cause for concern is European debt.  Big swings are caused by scare tactics from the media.  The S&P downgrade of the Fed's credit caused a stir but when people actually thought about it, the markets came back strong.

#2)  BAD NEW SELLS.  There's nothing better for news coverage than the drama of a stock market drop.  Notice how many times you'll see the word "plunge" when the market only drops 1%.  Of course, if the media stokes the flames of panic you'll see more selling.  Right now, media outlets are focused on bad far more than good.  Traders always "sell the news" - meaning sell when news comes out, sometimes even if it's good.

#3)  EUROPE AND ASIA ARE A MESS.  Anyone who has watched the European economy for a few decades knows that the strongest economies carry the weak ones.  Germany, France, and England have been carrying the rest for a long time.  Now, with Greece and others looking like they'll default on their debt more often than not, every time the European economy (or Asia for that matter) shows any signs of weakness we'll see it as a drop in the Dow.  Why?  Because foreign countries buy our debt and products.  It's a global economy now and we all have to play along.  Did you know that China almost had a real estate bubble caused by speculation like the US?  They buy our bonds.  If their economy collapses we'll feel it - big time.  Keep that in mind.

#4)  STATISTICS LIE CONSTANTLY.  The media will get a report of some statistic, sucha as unemployment, that's preliminary.  They'll announce this fake number likes its gospel and the markets will take it at face value to buy or sell stocks.  These numbers are always off by a month or so.  Now, a few weeks pass by and the real numbers come in.  They're always off from the preliminary numbers and are called "revised numbers".  These could be good or bad and cause another ripple.  Traders don't like to wait so they'll use these numbers, both fake and real, to justify market swings.

What's all this mean to the Average Joe just trying to buy or sell a home?  FEAR!  Most people don't understand the underlying mechanics of the stock market and if they did, they'd probably get really angry.  So, all this movement causes fear.  That fear translates into a few things:

• Not selling
• Not buying
• Cancelling a contract
• Trying to renegotiate an existing contract

Try to enlighten your clients that most of this wild movement means nothing in the long term.  Don't panic and stay focused on their long-term goal of owning a home.  In 10 years none of this will matter and they'll still have an asset worth more than when they bought it.

My prolific writing go the attention of one of the fine writers for MSN Real Estate who sent me an email asking if I would answer a few questions for an article she was writing.  I'm always flattered when someone wants to get my opinion so I followed up and we set up an interview.  It was a great conversation and I thoroughly enjoyed the writer's professionalism.  She took copious notes during the interview and asked for clarification as were spoke.  Afterward, she followed up several times with questions to clarify what I had said and confirmed each quote.

The article talks about many things but one topic it discusses that I'mespecially passionate about is appraisals.  You can read the article for their evaluation but I'd also like to add that appraisals around silicon Valley are a major issue.  I still have problems with appraisers who don't use appropriate comps or banks that see the area as a "declining market" and thus reduced an otherwise accurate appraised value.  This can often lead to problems with closing if the buyer is coming in with 20% or less down.  Appraisers have made this market harder than it has to be by either not paying attend to market trends or doing poor quality jobs.  Worse yet is that banks are still using general market stats to modify the appraisal value.

What the banks tend to do is take the performance of a county and apply it to any town within that county.  That just won't fly in Silicon Valley.  We have several markets doing extremely well including Los Altos, Mountain View, Palo Alto and others which are steadily moving up in contrast with the county in general.  This is just another example of irreponsible lending done by the banks.  My adivce to a buyer faced with this issue is to find a local lender who understands or get another appraisal.  However, a second appraisal may not always get the job done.

The article on MSN is entitled "5 Nasty Surprises That Can Stop Your Home Purchase Cold".  I'm a big fan of the articles on this site and I encourage you to read to your hearts content.

I have no sympathy for second mortgage lenders who made loans at high interest rates during the boom years and then got even more greedy in the downturn by asking for too much money during a short sale.  Those lenders have made short sales all around the country extremely difficult and stressful for many homeowners.  The good news is that in California, and perhaps other parts of the country, there is relief in sight.

The secret is bankruptcy.  As the law currently exists today, when a person files bankruptcy the second mortgage can be considered unsercured debt, even if the lender is on title.  That debt can be wiped out if the value of the home is less than the first mortgage, which is often the case in short sales.  This also prevents foreclosure and allows the homeowner to stay in the home.  In high-priced California, this has a seldom talked about but extremely valuable tool to enable homeowners to avoid foreclosure and say in their homes, even in bankruptcy.

Once in bankruptcy, the overall debt can be restructured and a payment plan put into place to get the borrower in line with their debts.  As part of that, once the secondary debt is paid off and the borrower is on track with their first mortgage, the second mortgage is eliminated.  The potential is to save tens of thousands of dollars, if not more.  While the bankers don't like this approach, I think it's brilliant.

I hear and read many stories from homeowners who try to conduct short sales only to have second mortgage lenders hold them hostage with unrealistic settlement amounts that make the transactions falls apart.  The investors behind these loans refuse to get a reality check as to propetry values and end up hurting everyone in the process.  Homes that go to foreclosure typically sell for 15-20% less than they would have as short sales.  This hurts the markets and the banks in addition to putting the former homeowner  out on the street.

So, the secret is bankruptcy.  I highly recommend consulting an attorney for more details and to determine if your situation will benefit from this approach.

The media has grabbed hold of the meltdown in the commercial real estate market because bad news sells papers. However, what they fail to mention is that this is because of declines in business performance the last 2 years.

Here's an article from MSNBC that talks about it:
http://www.msnbc.msn.com/id/33404369/ns/business-personal_finance/

The bottom line is that commercial property owners are facing foreclosure just like residential customers. However, the difference is that recovery in values typically takes longer, mortgages are shorter, and the impact on banks is less severe (the commercial market is about 1/3 of the residential market).

What this means to our local economy is that while jobs may be plentiful and home sales improving, if banks are burdened with losses due to mortgage failures in the commercial real estate market the ability to lend will be compromised. Without money to lend to residential customers, the residential market will stall as well as the overall economic recovery.

What does this mean for local real estate prices? Not much for the time being but it does cast a level of doubt on the overall economic recovery. That may mean some buyers wait for more good news and some sellers will put off listings until spring when the economy is expected to be stronger and the local real estate market gets its normal seasonal "pop".