Sunday, August 12, 2007

Manhattan Beach-Beach Cities:Real Estate..Are You a Bull or a Bear?

I 'm going to say this loud and in bold print... I like real estate.. and I think it will always be a good investment... I can't think of any other investment where you can buy an appreciating (long term) asset with so much leverage and over time..with a few exceptions... will always come out ahead on that investment.... and you have the added bonus of having a place to live. Google is a great stock but they won't let you move into the company headquarters.

The credit markets were whirling and twirling last week sending consumers into endless confusion. Much of the Los Angeles County market and our local South Bay-Beach Cities market is dependent on the jumbo loan(over $417,000) and that market is now deemed to be risky.

The reality is that most of the loans that will go into foreclosure are those with conforming loan limits($417,000-) that were made to people with poor credit who couldn't really qualify for them in the first place. Generally those buying in Manhattan Beach, Hermosa Beach, Redondo Beach and El Segundo with jumbo loans were able to afford the financing and are sound financially. The loans are considered risky because they are higher then the norm but our buyers are usually good credit risks. That said, we are in a segment of the market that is considered risky and we will pay a financial price.

One of the difficulties with cheap money is that too many people have used their homes as ATM machines.. not realizing that the cash they get is money they will have to pay back..and we certainly will have a few of those in the Beach Cities.. You can't fix dumb or bad judgment and there will always be a segment of the market that doesn't use good judgement.... whether it is consumers or the Wall Street credit markets.

We bailed out the banks in the 80's and they didn't learn from that fiasco which is why financial institutions are in trouble today.... it's about money and profits and as long as financial markets figure out ways to make money they will continue risky behavior believing the government will bail them out. They might be more prudent in the future if they had to live with their bad choices.

There was no need to stretch financial rules the way banks did in the last few years. Money was and still is incredibly cheap. I've been in real estate 28 years and with the exception of the last 8-10 years lending rates were in double digits. Guess what.. homes were bought and sold at 10%-12% and we thought it was a good market.

Yes we will see problems in the beach cities and if the rates for jumbo loans continue to be high we will see things slow because of the increased cost of money. People who have refinanced until they are out of equity will be in trouble. Does it make real estate a bad investment.. NO.... it means people make mistakes.. Real estate bought for the right reason and purchased within the financial means of the buyer historically is a good investment over the long run.

The key is long term.. real estate is not a short term investment.. it never has been and never will be. Many consumers forgot this in the frenzy to get rich quick. Sure there will be times when you can make a fast buck but historically real estate is a long term investment. In the giddy years of rising prices many lost sight of that fundamental aspect of the market and confused buying a home with playing the stock market...but then so did many of the professional hedge fund players.


Anonymous said...


I hate to be pessimistic but given the recent turn of events, it looks like it will be a very long time before anyone getting into a house today will ever see a positive return on his investments.

If the mortgage industry goes back to "traditional" lending practices (20% down & 3X income max) it could be 25 years before you could sell without having to pay out of pocket.


Kaye Thomas said...

Wow 25 years .. you really are pessimistic.. I don't think we will see that scenario but certainly we won't be seeing any upward swings for a few years..

I doubt lenders will go back to "traditional " lending rules.. but will maintain some sort of hybrid between old and new guidelines.

Lenders like the adjustable programs as they are not stuck with a 30 yr low rate fixed should rates suddenly bounce they will come up with a number of programs to push buyers to those loans. I do think you will see more loans opening in the fixed for 5-10 year range then adjusting to market rate. I think lenders will allow 10% down.. some may go with 5% down but the big changes will be on upfront points and on 2nds to make up the difference...

I think we will see more of the owner carry back seconds.. fully amortized over a 7-15 yr term with interest roughly at current first TD rates. We may also see a return to PMI on loans as an alternative to a constantly adjusting second.

Anonymous said...

The reason that the rates on "jumbo" loans are so high (and getting higher) compared to "conforming" loans is that conforming loans can be sold to Fannie Mae and Freddy Mac, and thereby get a guarantee of repayment when the mortgages are packaged up and sold to investors on the back end. Jumbos don't have that same guarantee. Investors assume that even if things get really bad for Fannie and Freddy, that the US Government has a vested interested in keeping these two private corporations alive, and hence have an "implicit" guarantee from the US Government. Jumbo loans have no such guarantee. Right now, E*Trade bank is quoting me 8% (with one point) on a 20% down 30 year fixed rate jumbo loan...the same loan had a rate of 6.5% or so just a month or two ago.

Kaye Thomas said...

You are correct.. it is one of the reasons that Freddy Mac and Fannie Mae are trying to get the gov't to let them lift loan limits so they can underwrite larger loans..

I just got a quote at 7% for 30 yr fixed with 1 point or 7.25% no points...
5/1 are 6% with 1 point or 6.25% no points..

These all are 80% LTV..and good FICO

Anonymous said...


Thanks for you response. You are always very professional and courteous.

I was wondering what percentage of your clients (say in the last 3 years) bought homes with 100% cash and what percentage were able to buy a home with conforming prime loans (roughly speaking).

I'm sure you know what I'm getting at. Anyone who isn't in these two categories will experience more difficulty finding funding. I was wondering how much of a factor this will play in the Beach Cities.

Take care,

Kaye Thomas said...

Thank you for your kind words.. In the last three years I only had one buyer who did 100% financing but it was not a subprime loan.. everyone else had at least 10% down or more.

Most of my clients did stated income loans.. even if they qualified for full documentation as they were easier and faster then full doc loans.

We discussed this in an office meeting a few months ago and everyone in my office had pretty much the same type of clients.. many with 20%+ down and almost none with less then 10% down. No one had any clients who needed subprime financing.