Real East Bay - News and Opinions about the East Bay Real Estate Market

With the recession and the drop in prices buyers feel (and rightfully so) that this is their chance to get a great deal on a house. But this being the Bay Area I am often in the position of bursting bubbles.

This maybe obvious but bears repeating.

You cannot buy a three bedroom house with a yard, that is a cosmetic fixer, using an FHA loan, where the house has charm and great layout, in a safe neighborhood for under $300,000. Oh, and not on major street and preferably with a fantastic view.

Not in Alameda. Not in Oakland, and not in Berkeley. Now go define safe-neighborhood! It’s a very personal choice. But that's the challenge clients come to me with every day.

Something's gotta give. Is it neighborhood? Maybe a condo and not a house? Maybe it’s gotta be an itty bitty house first time around. Maybe it has big structural issues and the buyers will have to forgo any luxury in order to fix it up. Maybe two of those.

I encourage buyers to look at things in their price range. if you don't like what you see either look at spending more. Or if that's not possible or desirable then change your parameters. Asking for the same parameters in the same price range even after repeated failure is like banging your head against a wall.

I feel your pain though. Prices remain high in the Bay Area. Thinking that asking for a house in a less coveted neighborhood in Oakland or Alameda is the way out, may not be satisfying since prices are relatively high even in those areas.

The lower prices set by those selling homes in short sale situation or foreclosures seems like it is mocking the buyer who is out there looking for a bargain. Beneath every super-low price are multiple offers. The buyer may not even see that a property has an accepted offer at a much higher price than that showing in their online search because the short sale process is long and it looks like the property is still active when in fact twelve offers have been received and the bank is lowly going through its process with a chosen offer.

Have your agent look at solds. Those are the only true indication of what the market price really is, and your agent who is out there every day knows the selling value of properties in the area you are searching.

I don't want to dishearten anyone since I think this is a phenomenal time to buy and good deals are out there to be had. But the good deals are relative to the area we live in. And the future value of the purchased property will reflect that same reality. You, I and the folks competing with you for that great deal all want to be here and nowhere else. The Bay Area after all is Nirvana; with a price to match.

If you’ve been out at open houses over the weekend you know that there are many buyers looking at properties. This is partially a normal real estate cycle and as we get deeper into spring inventory will go up and more buyers will come out. But there are other reasons the traffic is high. Three important deadlines are coming our way:

The Fed Deadline

For more than a year, the Federal Reserve has been buying mortgage-backed securities. The Fed has said repeatedly that the goal was to keep mortgage rates down. It appears that the plan worked. In October 2008, the month before the Fed announced its mortgage-buying plan, the 30-year fixed averaged 6.49 percent in Bankrate's surveys. Last month, the 30-year fixed averaged 5.19 percent.

(Graph<http://www.bankrate.com/funnel/graph/Default.aspx> the trend of mortgage interest rates.)

The Fed says it is gradually slowing its purchases of mortgage-backed securities and that it will stop buying them by the end of March. What will happen after the Fed withdraws from the mortgage market? Predictions vary widely. Some predict that there won't be much change in rates; others predict that rates could rise a percentage point. The rough consensus is that rates will rise about half a percentage point, but not overnight. It might take a few weeks.

FHA premium increase

Many buyers are relying on FHA loans. FHA loans are easier to qualify for, they require only 3.5% down and they allow a higher loan to income ratio. When you get an FHA-insured mortgage, you pay the premiums in two chunks: First, an upfront premium that is paid at closing, and then an additional premium every month. The FHA will raise the upfront premium in April. Right now the upfront premium is 1.75% of the sales price, but come April it will rise to 2.25% of the loan amount. That's a premium increase of $500 for every $100,000 borrowed.

Also in April, the FHA will reduce the "seller concessions" that it will allow. These concessions can be closing costs, paying discount points on the loan or HOA fess. Your agent is likely to write them into the contract as a credit for either just “closing costs” or “nonrecurring closing costs”. FHA allows seller concessions of up to 6% right now. In April, the maximum seller concessions fall to 3%. This is more like conventional loans, although loan products vary and you should examine each individually.

Homebuyer tax credits

The first-time homebuyer tax credit of up to $8,000 with a tax credit of up to $6,500 for repeat buyers. The tax credit will apply for transactions entered into by April 30, and closed by June 30.

I caution buyers not to rush just because they want the tax credit or other concession. The decision to buy is too great to feel pressured by a $6,000 bonus. But keep in mind that once added up the combination of higher interest rates, greater FHA premiums, and loss of tax credit can have a significant impact on your ability to buy. Choices should still be cautiously weighed but some sense of urgency does not seem out of place.

But alas homebuyer, do not despair, because there are first time homebuyer programs that can help. (Sort of!)

Many find themselves in the bind of being too rich for the program, but too poor to buy. Or even worse, poor enough for the program but too poor to get the loan. Most down payment assistance programs are best when used either by a bigger family, or for a very modest property, like a condo or townhouse.

Let’s look at the options.

Alameda, San Leandro, San Mateo and a few other towns have contracted out their first-time buyer programs to the Bay Area Home Buyer Agency (which in turn is part of First Home). You can find them online here.

Alameda has a great program, which has been funded again for 2010. The money in the pot is limited and is given out on a first-come, first-served basis – assuming one qualifies, of course. The program provides amounts of either $50,000 or $80,000 for down payment assistance, depending on whether a household is seen as low- or moderate-income.

Qualifying depends on income and family size. So two working adults with no dependents are unlikely to qualify, but the family with one salary and one stay-at-home parent of two could make the program’s guidelines even if that one salary is over $100,000.

The down payment assistance can be part of the 3.5 percent down payment required for an FHA loan, so essentially a family only needs closing costs to be able to buy a property. The loan is interest-free for five years. If the amount has not been paid back after five years, then amortized payments begin, including equity sharing on the rise in value proportional to the program’s loan and the price of the property. So a $400,000 home whose owners used $50,000 in down payment assistance will see one-eighth of the increase in their home’s value (if there is one) go to back to the program. This recycled money can then help other first-time buyers in Alameda.

I have had clients tell me recently that their lenders told them to not pursue down payment assistance programs because they never work out. I find that unfortunate, because I know several people who have been able to buy because they used the program. It does require the lender to do more work, and your real estate agent has to be proactive in pursuing the program administration. The Bay Area Home Buyer Agency is more responsive to the lender and agent in my experience than they are to the borrower.

To start on your path to using any down payment assistance program, you need to make sure your lender is willing to do the leg work, and then attend one of the agency’s scheduled workshops. The workshops are free and you can register by going to the agency’s website. Sellers may be cautious about accepting an offer that comes with money from a down payment assistance program, so try to have as many of your ducks in a row as you can so you are ready to offer a reasonable closing timeline.

The Bay Area Home Buyer Agency’s next workshop is from 9 a.m. to 2 p.m. Saturday, February 13 at the East Oakland Senior Center, 9255 Edes Avenue, Oakland. For more information on this and other workshops, you can go to the agency’s website.

In 2005 you bought a property for $600K and took one of those fancy 100% loans that let you pay a minimum payment smaller than “interest only”. So now your debt is well over $800K and the property is worth $650K. You cannot meet the payments on the property once it adjusts in the spring.

What do you do now?

Option One – RENEGOTIATE THE LOAN

Some have succeeded and some have failed. Those who have succeeded have one thing to say; “be persistent”. It takes literally dozens of calls and constitutes a half time job pestering the lender and getting through to the right person. Stick with it.

Loan remodification can take two forms; principle reduction or interest reduction. Some combination is the most effective. The government did institute a plan to encourage banks to help homeowners stay in their homes.

In February of 2009 President Obama unveiled a plan to help beleaguered homeowners just like you modify their loan if they had been faithfully paying their loans and were underwater. The idea was to get payments for housing back to a 38% of income rate.

The plan was stymied by lenders from big to small. In fact the Home Affordable Modification Program (HAMP) funded at $75 Million was supposed to help as many as 4 million borrowers obtain mortgage workouts. By the end of 2009 though, it had produced fewer than 70,000 permanent modifications and another 800,000 or so homeowners were in a trial-modification phase. On Tuesday of this week, Bank of America Corp., the largest U.S. bank by assets, became the first mortgage servicer to agree to lower or eliminate payments on second mortgages. This federal initiative, called the Second Lien Modification Program, pays incentives to second mortgage holders to work closely with first mortgage holders under the Home Affordable Modification Program (HAMP).

First mortgage holders have been reluctant to lower payments when there was a second lien involved because they did not want to take on losses while leaving payments on the second mortgages intact. The lack of an agreement with second lien holders has been a major impediment to getting successful modifications done. It's estimated that as many as half of at-risk mortgages are burdened with second liens.

Acting now and being persistent are key to making this option work.

Option Two – SHORT SALE

Sell the property as a short sale. The process can be torturous but if for eighteen months you have not slept, and fear is gnawing at you night and day, the process may be easier than living with the knowledge that you can’t make payments.

In a short sale you the seller sign the purchase agreement but using a short sale addendum the contract does not go into effect until the lender has approved the sale at the value. In a short sale the lender absorbs the difference between the sale price and your loan. Assuming closing fees and commission payments that amount can grow to vast proportions. It is still better than a foreclosure for the bank in many cases but the processes the banks have in place for decision making can take months. The process is rendered even more unwieldy if there is a second lien holder. Short sales are far more likely to work out if there is just one loan.

Some lending professional I have queried tell me the hit on credit scores in a short sale are smaller than in a foreclosure. Others say it’s the same. The situation seems to be case specific. In both cases the borrower’s credit score will take a major hit of 100 to 300 points.

Option Three – FORECLOSURE

Walk away and let the bank foreclose. That seemed like a coward’s way out a year ago, but the reality is that banks were helped by the government to make home retention possible and they have lagged on the job. Having a home foreclosed puts some of the responsibility back on the lenders who approved shaky loans, and then misused the government assistance garnered over the last 24 months.

Foreclosure would have carried a social taint with it a decade ago, but as the housing market reconstitutes itself you will not be the only homeowner to have suffered foreclosure.

In Summary

If you ask me the best option by far is loan renegotiation; but it is not always possible. And there is also a caveat (there always is). If even loan remodification leaves you unable to make payments and just draws out the inevitable it may be time to look at one of the other option. There are professionals who offer to take on the process of negotiating a new loan for you, but I would tread carefully and make sure that you are not paying upfront for a process that may fail. Your own calls can be as effective if you are persistent and provide your lender with all the documents they require.

A short sale is best handled by a pro-active real estate agent who will manage expectations and doggedly pursue lender approval.

In both the foreclosure and the short sale situation you should check with a tax professional to see what the ramifications of debt forgiveness will be.

Sharon Alva is a real estate agent with Alain Pinel, living in Alameda. You can reach her at sharon@alvaproperties.com.

Have you seen a great property, made an offer and then found you could not get a loan because it had changed hands just two months prior?

Many have.

As of February 1st the FHA loan guidelines will allow buyers to get an FHA loan for properties that have been owned for a brief period. Until now a property that had been owned briefly, ostensibly by investors or "flippers", was not eligible for an FHA loan. That prohibition hs been suspended for the next year.

On the other hand the FHA powers that be have decided to no longer allow spot approvals on condominium projects. So a project that was not approved (usually done at development) will not qualify for an FHA loan. Town houses are largely exempt for this. Speak to your lender for more details.

In case you missed it we got a apecial new year's gift from Uncle Sam.

The homebuyer tax credit was extended to April 30, 2010. And deal was sweetened: the law increases the limit for couples to $225,000 in annual income, roughly $55,000 more than the existing law.

Plus, it adds a nice $6,500 carrot for those who’ve lived in their homes for five of the prior eight years to buy up or buy elsewhere.

The transaction has to be in escrow on April 30...and closed by June 30th. This might have seemed like a no brainer back in the day but with the new laws affecting loans, and the added timeframes if you are buying a short sale, keep your eye on the calendar if you want to take advantage of the tax credit.

No one taking even the slightest interest in real estate will be surprised to hear that in 2009 real estate was hot and the number of transactions rose. At the same time prices dropped. While nationally the numbers reflecting this basic reality were dramatic Alameda’s ever resilient real estate market was in calmer waters.

We had a 3% increase in the number of residential units sold, from 422 to 435. But the median price fell from $650,000 to $550,000. Inside that bigger number hides some interesting information. Single family homes overall actually rose in value by a touch. The fluctuation of 2.5% could be attributed to the rush of first time homebuyers to purchase their first home. Multiple offers in fact were par for the course this last year. Condos did lose some value, and townhomes lost a whapping 7.6% of their value over last year. Since we had already seen significant losses to town homes the previous two years the aggregate loss in value since 2005 (the peak year) for town houses in Alameda is 21.4%.

If you were looking to buy a home there were a few incentives in 2009. The interest rates were great, and will likely continue to be bright into 2010. The government credit for first time homebuyers of $8,000 took the bite out of closing costs. The credit was extended to transactions opened by April 30^th of the new year, as long as they close by June 30^th. In fact the credit now extends to people buying a home, even if not for the first time. That credit is just $6,000. There are income limits to the federal tax credits.

The benefits drove first time buyers to buy. New buyers had not absorbed the credit score hit of short sales or foreclosures and could take advantage of the great rates. But once they set off to look at properties, eager first time buyers found that Alameda inventory of housing had shrunk.

First time buyers of three years ago, or even five years ago, could not get out of difficult loans, depreciated values from the peak period, or their changed employment, so there were fewer houses to buy. The pressure to buy bigger homes was not as great since the growing family was often trapped in their smaller home. Inventory has been low all year. As of this writing there are only 65 units for sale on the island, including houses, condos, and townhouses. If I wanted to show a typical first time homebuyer a house for sale there are only 16 houses listed at $600,000 or below, about 1/4 of them quirky or very small.

If we look just a little off our island shores the real estate picture is very different. In neighboring San Leandro saw a 12.9% loss in value to houses. Buyers expecting a crash in Alameda prices were often willing to leave the island to take advantage of the drop in value next door.

There was also an obvious shift from home owners selling their homes in traditional sales to an increase in short sales and bank owned (or REO) properties. It is hard to gauge how many sales were short saled or bank owned in 2008 since the multiple listing service only required listing agents to make such notes after June of 2008. In 2009 though we can see a steady increase in non-traditional transactions. 2.7% of our sales in 2009 were from properties held by banks and a few were short sales. These transactions are more complicated than traditional sales so buyers often found themselves making more offers and eventually going in and out of more contracts than had been the case in previous years.

As for 2010…the crystal ball is still somewhat cloudy. We can assume that interest rates will stay low in the short run but predictions for the second half of the year are for higher rates as money shifts back to the stock market. How high and when?

The inventory may grow as people can no longer wait to sell due to personal circumstances. Or more happily people will choose to sell feeling more secure in their jobs. Negative employment news though would throw all these predictions right out the window.

It seems inevitable that we will see more short sales, and the ensuing foreclosures and bank-owned sales because outlandish loans will come due. There are still negative amortization loans out there, and as they adjust the banks will repossess and sell.

We spent the day at the Monterey Bay Aquarium. Turns out the way male penguins entice the female of the specie, is to collect as much nesting material and build the best nest. Snappy dressers and good real estate. What more could a girl (penguin) ask for?!

Have you noticed how hard it is to find complete listings for open houses in the East Bay?

You can get on my email list for the Alameda Open Homes, the East Bay Open Homes or both. The Alameda listings go out on Fridays and are quite complete. The East Bay wide listings rae not complete but I am looking to beef those up as well.

Go to www.alvaproperties.com/EastBayOpenHomes and fill in the form. You'll get a Friday email with Alameda, and a Saturday email with the East Bay listings.