Thursday, February 05, 2009

South Bay-Beach Cities Home Sales: Will $15 K make a difference


The U.S. Senate in an effort to customize their version of the Bailout Bill and add a few more perks the House missed, voted to give home buyers a credit of 10% of the sale price or a maximum of $15,000 on a home purchase. Of course the bill is not actually a done deal... It has to go back to The House and then be signed by The President before it takes effect. Right now I'm guessing the bill will be changed along the way and won't be ready for consumers anytime soon... if ever.



Unlike the previous version of a $7500 tax credit that must be paid back..the new bill will not require buyers to reimburse the government...ie taxpayers... for the money. I understand the idea behind the bill but once again I think the folks in DC are off the mark.



Would a $15,000 credit stimulate sales in the South Bay-Beach Cities...yes and no. Certainly getting an extra $15K credit looks like a good deal for anyone buying but the problem is that while the credit is nice, it's pretty useless if banks are not making loans. And therein lies one of the major problems with many of the ideas about real estate and the housing market floating around Washington.



You can pass stimulus packages 'til the cows come home..but they are pretty useless if consumers can't use them. If the boys in DC are really serious about doing something about the housing crisis then I would suggest that the first step is putting a few conditions on the money they are passing around to lending instutions... namely if you want money from the government you have to make loans on homes.

20 comments:

Anonymous said...

Kaye,
What were total sales in Jan 09 in all of MB?

getting divorced? said...

Please help. I'm looking at houses and would like to take advantage of the proposed government $15K tax credit. I understand it's for 1st time buyers.

I've never owned a house but my wife owned a condo with her ex-husband more than a decade ago. Is it true that ther prior ownership would disqualify ME from getting the $15k?

Should we get divorced for a year?

Kaye said...

anon 2:27,
From the MLS... 7 homes and 2 townhomes closed escrow in January.. I haven't checked to see about income property or off MLS sales. I will be posting a Market Snapshot in a few days and will post that information at that time.

Kaye said...

Getting Divorced,
Usually a first time homebuyer is one who has not owned a home for the last three years.

However with this bill being a first time homeowner may not be an issue and the bill may not get signed in its present form.. Lots of ifs on this one...

My advice.. stay married ... it will probably cost more then $15K to get divorced...LOL

Anonymous said...

Check the rules on the 15-K, people. Income phases it out. It is EXTREMELY unlikely that you can afford the cheapest house in MB and take advantage of the 15-K.

Forget about it.

Kaye said...

Anon 8:18,
I was actually thinking that this might be valuable for buyers looking in Redondo, El Segundo and Torrance.

mookie said...

Kay, you said, "If the boys in DC are really serious about doing something about the housing crisis then I would suggest that the first step is putting a few conditions on the money they are passing around to lending instutions... namely if you want money from the government you have to make loans on homes."

Kay, this comment is actually pretty clueless. The fact of the matter is that buyers who have documented income and assets with good credit can get a loan without much problem at all. Rates, on average, are fairly attractive, so buying a home is no problem for many people. You actually believe that banks should start lending again to those who are not good credit risks. Isn't that what got the RE market in trouble in the first place? So, in essence, you're saying that if a bank takes TARP money that they should be forced to make loans to the same type of risky borrowers who are not able to pay their mortgages today. I've heard this arguement everyday for the past few months from politicians and those in the press. It is completely ass backwards.

Think about it... Are you saying you want banks to start lending to those who can only put 5-10% down, who may have a low credit score, who probably have little savings on top of their down payment to weather their future unemployment or economic hardship? Because that is who the banks would have to start lending to under your theory that banks should be forced to lend in order to get the housing market going again. We both know how that will eventually end- which is more foreclosures. Be careful what you wish for.

As for the first round of TARP money... Don't you realize that Citi, BofA, Wells, Zions, Fifth/Third, Regions, NatCity, and all of the other major regional banks who took TARP money during the first round did so to shore up their balance sheets or many would be taken over by the FDIC or forced to merge with stronger banks? That's how bad it was, and still is. This is a game of survival for many of these banks. Forcing them to lend to unworthy borrowers isn't the answer. They need to go back to the days of old where they made quality evaluations of a buyers ability to repay a loan. Forcing them to abandon that metric will only continue/lengthen this entire housing demise.

Kaye said...

Mookie,
I'm not talking about risky buyers. Getting a loan is not quite as easy as you believe..even for the extremely well qualified.

While conforming loans are fairly easy to find...trying to find a jumbo loan at a semi decent rate can be difficult... and that's with a hefty down.

Then there is the matter of appraisals. Union Bank,ING and a few others are hacking all their appraised values...no matter where the appraisal comes in.

I have been around for a number of the good old days and banks are being more then overly cautious. It isn't that they don't have the money as in previous times. It isn't that you are dealing with flaky buyers. Many banks are just sitting on funds...perhaps rightly so... but not when those funds were meant to loosen up the market.

Like my Daddy used to say... as long as you keep putting your chair at my dinner table... I get to make the rules. If banks want to be saved from their stupidity.. and don't think they didn't know exactly what would happen because they did... then they should have to follow some guidelines to get the money.

mookie said...

Kay, that's my point. It used to be that buying a home required at least 20% down. That wasn't 50 years ago, that was 10-15 years ago. That was good banking and good credit evaluation. Since 2000 the standards have gotten so loose that anybody could basically get a loan. Simply put, we are currently back to standards of smart lending, the way it was 15+ years ago. If you want the Feds to force banks to lend then they will HAVE to subsequently lower their standards and give loans to many people that aren't deserving. That is what got us where we are today.

Now, here is what I believe you don't understand. When TARP first came out many believed those funds were going to be used to lend money. The problem was, and still is, that banks are in such bad shape they need the money just to stay solvent. To ask them to lend right now is to basically ask them to start digging their grave. JPM, BofA, Wells, and others have made 100B+ loans in the past 3 months. Those loans, for the most part, have gone to qualified borrowers, both in business as well as in residential RE. There were 700,000 people who just lost their job in January. 2mm in the past 4 months and 3.5mm over the past year. Are you suggesting they should have let those people take a mortgage out? There will be 2mm+ more people out of work in the next 6 months, maybe sooner, should they relax their requirements for them and let them buy a home right now? No, now the banks need to be even more prudent.
I'll say it again, qualified buyers have NO problem getting a loan. It might not be perfect, but the banks will lend them money, as they have been asked to do. My company is making loans everday to those that have the right collateral. We've tightened a little bit, but if you have the collateral you get the loan. Are there some people who are qualified that can't get a loan, sure, but that is always the case. However, in an environment like this I know I'm personally not going to lend money to somebody who isn't going to collateralize their loan properly and I certainly wouldn't loan them money if I thought they were a skeptical credit risk. Why should banks act any different.

Kaye said...

Mookie,
There ia a huge difference between getting a loan 10 years ago and obtaining one today...even for the qualified.

I don't know what your companuy is doing... thought you wre in stocks??...but even the qualified are having some problems.

My statement still stands... if you take $ from the gov't then there should be rules about what you are supposed to do with the money... if you don't take gov't money you can do anything you want.

mookie said...

OK, so what should the rules be? What is the minimum down payment one should have to get a mortgage? What is the minimum credit score? How much should one have in the bank on top of their down payment?

What drove RE since 2001 is the millions of homebuyers who should have never been homebuyers. That is what drove prices up and that is what kept the machine going. Even if the banks lower their standards from where they are today, in no way will they loan to the millions of subprime and option ARM buyers of the past 5 years. That in itself will keep demand down significantly. To stabalize home prices the banks will need to lend to unqualified buyers to get the demand back to equilibrium. That, once again, will lead to future foreclosures, as we know they won't be able to pay their mortgage over time, especially as millions of more people lose their jobs and millions of others see their income stay flat or decline, like what typically happens in recessions.
You just don't get it. It isn't as simple as forcing the banks to lend money. For every action, there is a reaction. The action of forcing the banks to lend in order to stabalize housing will only be met if they significantly lower their standards to the 2001-07 days, as that is the only way the demand side can soak up all of the supply. The other alternative, and the better one, is to let prices drop to levels where there are enough qualified buyers to soak up inventory. If MB dropped back to levels where they became more affordable to buyers, inventory would decline and prices would flatten, and maybe even rise.

Kaye said...

Mookie,
I must not be making mysef clear... so will try again.

If banks take money from the FEDS that is meant to loosen the credit markets with the purpose that the funds be used to make loans for both homes and business enterprises; then that is what they should do...make loans not sit on the cash. If they don't want to make loans then they should not take the money.

Banks are sitting on cash, buying other banks,renovating and in general not using the cash for the intended purpose. This has nothing to do with underwriting rules. Of course banks need to stop making ridiculous loans and 20% down is certainly a reasonable requirement on jumbo loans.

If you have less down, then you will need an owner carry back or stay within the conforming limits and get an FHA loan. You will need to truly qualify. That said, I think you will see stated income loans return with stringent requirements about assets and down payments as we are no longer a nation of W-2 employees.

However that is not where this discussion lies... Obtaining a loan in todays's market ...even for the very qualified buyer is not an easy task because banks have gone from ridiculous lending practices of loaning to anyone who breathed to the equally ridiculous of making it very difficult for the best buyers to get loans.

As far as dropping back to affordable levels.. just what levels are you talking about? What makes you think we are not at affordable levels based on the new crop of buyers coming into our town. Do you think prices need to fall another 10% or 50%. What income level should be used as a base...50K a year or $300K. You can't force or dictate affordable. The truth is all of this becomes moot if banks are not lending.

Affordable is based on what the market dictates not what consumers would like. If enough people are able to afford to buy in MB at current price levels then that is market value. If you can't afford MB prices then you might have to look at Hermosa, Redondo or El Segundo. That's what used to happen.

You are wrong...I do get it. I understand why the FEDS gave money to certain banks in an effort to keep the financial markets somewhat sound. However they should have put a few restrictions on the money...namely we are helping you.. not giving you more cash to make bad decisions. We didn't do that.

Frankly, I don't think government should be involved at any level in the financial markets other then possibly setting up a system similar to that used in the 80's with the Resolution Trust...where we actually made some money over the long run. The gov't should not be artificially propping up the housing market. Most of the people in trouble can't be saved. We are going to throw good money after bad. They are just prolonging a bad situation and it is beyond dumb.

wayne said...

"The new crop of buyers coming into town"? Where is this new crop coming from in the middle of a recession????

The new crop of buyers has come and gone. Those are the ones that Mookie is talking about, the ones who shouldn't have been getting loans.

It's a fervent delusion that the rise in prices in the beaches is unrelated to the rise in prices elsewhere in the same period--that there are other factors that caused the skyrocketing in MB that are not subject to the same contraction, or some miraculous other phenomena that will counter it. Simple common sense and mathematics says they are, the contraction just takes longer because of the higher level of disposable income.

Prices in the beaches will ultimately fall right back in proportion with the rest of the country, it's just a matter of how long that will take. If anything, Leo Nordine is being optimistic when he predicts 2010 prices in 2000. As incomes have not changed substantially since then, that would be affordable. If it happens, then the pace of sales will return to normal, as it is starting to in some other areas of the country. The alternative is for the correction in the beaches to drag out over years, with sales remaining sorely low and prices only gradually falling until inflation elsewhere catches up.

It's not that hard to estimate what is "affordable".

mookie said...

Kay, let me urge you to read the Feb 9 issues of business week to get a glimpse of how bad things are. For example, thus far BofA has taken 45B in Federal money. You actually think they should use all of that to go out and lend. Well guess what, at the same time, the Feds are telling them to raise their Tier 1 capital ratio and to lower their leverage. They can't do both because if they lend their Tier 1 ration declines and their leverage increases. So before they can lend they have to shore up their balance sheet. The Feds came in and backstopped about 120B of their assets, but they are on the hook for the first 10B in losses. How quickly do you think they want to take those? Additionally the guarantees DON'T cover about 500B in other problem assets, including about 90B of loans made by Countrywide. How do you think those loans will look over the next year as unemployment increases and those option ARMs reset?

Remember, banks are NOT forced to mark to market all of their assets like GS and MS had to, before becoming bank holding companies. If they claim those assets are held for investment they can mark to maturity. BofA claims their assets exceed their liabilities by 210B right now, but if they had to mark to market you'd quickly determine they are an insolvent bank. Same for Citi, close for Wells. God forbid we take a look at the regional banks. One analyst thinks BofA needs another 80B to withstand their coming losses on EXISTING assets. You can imagine what Citi must look like. Imagine if they start to lend to more homebuyers when another 2-3mm people will lose their jobs this year. Where those who are stockbrokers will see their incomes down by 20-30% year over year. Where private equity and hedge fund guys won't see a bonus for a while do to performance issues. Where commercial RE salespeople and residential realtos will see their incomes halved. On and on. Of course banks need to raise their standards for mortgages in an environment like this. To ask them to do anything else is utter foolishness.

Roubini thinks we need another 1-1.4 TRILLION in capital just to shore up banks. Yet you think that banks should start lending again. The more they lend, the more capital they'll need on top of the trillions Roubini is referring to, especially if they ease their standards.

There is a reason inventory in the US is close to one year. It is affordability. Nothing more, nothing less. If people lower their prices then those that can afford will buy. That is simple supply and demand. A 800B stimulus plan won't change things overnight and will take years to implement. The bad bank idea is a good one, but taxpayers will get screwed in the end. I admit there is no easy answer. Not even close. But forcing banks to lend since they are given money to stay solvent is definitely not the answer. And by the way, if the likes of Citi and BofA and the major regionals go bust, you'll be wishing for the "good times" when Lehman went under, because that will make the Great Depression look like a picnic. That is how bad things are.

Kaye said...

Wayne,
Sorry but the mix of people buying in MB has changed over the last 8-10 years to a far more affluent crowd. If you live here you know that to be true. When that happens the term affordable becomes relative.

Certainly low interest rates and an overall hot housing market were factors in the rise of home prices but hardly the only reasons. You forget that we came out of a period of major unemployment in the South Bay.

There was a lot of pent-up demand once people found jobs and could afford to buy. Nor was this particular run up in prices an isolated incident. It happened in the 70's,80's and 90's. After each downturn prices went up again to levels higher then those reached at the top of the market in the prior cycle.

There is no question that prices are going to decline more but they are probably not going to go down as much as you are hoping to see; and they will go back up sooner then you expect. It seems to be the normal cycle of South Bay-Beach Cities real estate.

Kaye said...

Mookie,
Actually B of A is making loans as is Wells Fargo. In fact Wells Fargo has a policy that if you put money in their bank you can obtain a preferred rate. I think that is very smart... you attract new business for deposits and are making money. It is also the way banks did business for a number of years. I have no complaints about either company.

No question affordability is a big issue across the country. FYI: The number of REO's and short sales just east of us in Hawthorne, Lawndale, Gardena and east Torrance have sparked multiple offers and bidding wars with prices exceeding the list price. That low end home market under $350,000 is very hot. So if that is the market in those areas do you really think you are going to see homes in MB at $400,000 or $450,000? I'm doubting it.

As I noted in my previous comment,
I agree we had to shore up the financial markets. There was no way they could allow a collapse of the credit markets. What I'm not totally sure about is whether or not we have put the fox in the hen house.

I don't believe just throwing money at these companies is the answer. The situation is very complicated. Along with financial aid there should be a return to some of the regulations we have so blithely thrown out over the years .

mookie said...

That's my point Kay. BofA and Wells, even Citi and other crappy banks are making plenty of loans... to those that qualify for the standards that should have been in place all along. Those that need a mortgage can get it, provided they are a good credit. Forcing banks to lend is not a good thing. It brings us right back to where this mess started. They'll be forced to lend to unqualified buyers who will default during this recession, and later.

In essence, there are two different problems. The first is the need to shore up balance sheets. That will take years because there is still so much crap on bank's balance sheets. The second is the need to lend again. You can't get that until #1 is solved. For those banks that have good balance sheets, they'll capture tons of market share and come out of this bigger and better than ever. But you can't force banks to lend again until they get their own house in order, and for most of them, that will be when our taxpayer money gives them billions more. If we don't, depression here we come. We don't have much of a choice, unfortunately.

Kaye said...

Mookie,
Not all banks are lending.. Citi only decided to make an effort about 10 days ago...and we know they are still in some trouble.

We keep coming up on this impass... while there may be a few non-qualified buyers in the market the overwhelming majority of those who are thinking of buying at this time are qualified with decent down payments. However 20% is not enough down at this time as lenders keep upping the ante. Jumbo loans are difficult to obtain as many lenders do not offer them...and if they do the rates are far higher then they should be. They are pricing risk at a higher level then is perhaps warranted. That tends to make buying in our market a tad difficult.

I agree there are two separate issues. What I question is can or should we keep throwing money at banks or homeowners without pre-conditions about the use of the money. We know that left to their own devices both groups will revert to the behavior that got them in trouble in the first place.

Anonymous said...

Sorry, Kaye. But MB homes under $500K was common prior to '02 and will be again.

Kaye said...

Anon 3:16,
Per the MLS:

In 1998 there were 560 single family homes sold...153 were under $500,000.

In 1999 there were 433 homes that closed escrow...106 were under $500,000.


In 2000 there were 547 single family home sold...71 were under $500,000.


In 2001 there were 473 homes sold and 53 of those were under $500,000.


In 2002 there were 565 homes sold and 29 of those were under $500,000.

You have to go back 10 years to find a large segment of the homes sold in MB under $500,000. The toxic loans didn't become popular until 2003/2004 so most of the rise in prices was not because of low rates and/or liar loans. Is it possible for prices to drop to 90's levels... sure... anything is possible. The question is whether or not it is very likely.