WARNING! If you are serious about buying a home in 2010, you might not have much time left! With recession of 2007-2009 fading into history, buyers are returning to the real estate market in droves. However, what most of the buyers don’t realize is that there are many forces working against them that might make it difficult to find real bargains comes spring and summer. Here are five main forces shaping up the market early this year, and you better pay attention to them:
1. Under the provisions of the massive stimulus package designed to support the housing market, the Fed has been buying mortgage securities for over a year in order to maintain liquidity in the housing market, which also artificially supported the rates at sub-5% level. However, this part of the stimulus ER is winding down by March, and it’s already driving the rates higher in anticipation of the program grand finale. What does it mean for the mortgage market? It means that comes March or April, you will not find rates in low or mid-5% any more. The consensus of most economists and finance journalists is that we will have 6% mortgages by the summer time. What it means for you? Have your loan approved and lock the rate no later than Mid-February!
2. With “normal market” demand for mortgage backed securities still very low, the lenders will tighten their underwriting guidelines even more. The preview of this was demonstrated in December of 2009, when following FNMA and Freddy all lenders increased credit score requirements for prime mortgages by 20 to 40 points, FHA followed them with the increase of the minimum score from 595 to 620, and some lenders made 640 as a minimum score for FHA or any other government-backed loans. Comes summer, the credit system most probably will tighten even more, as the banks will have a much smaller market to sell their loans to, which will force them to pick only cream of the crop borrowers to bet on. If you are not one of them, you might need to have at least 25-30% down, ratios below 30% and 750 score in order to have any chance for a home loan.
3. Unnoticed to the buyers, the Government passed a number of new laws in the last two years, of course all of them were done under highly publicized slogans of helping Joe the Consumer. In reality, these new laws practically eliminated a mortgage broker as a viable player in the market place. The government blamed the brokers for pushing “creative” mortgage products onto uneducated consumers who couldn’t afford to pay for them, however the reality is that the brokers were only selling products pushed to the public by BANKS! Truth is that the brokers don’t offer their own products, brokers don’t participate in the meetings of the banks’ boards of directors who decide which financial products to offer to the public, brokers only sell what the banks offer if the public demands it. In 2006 the brokers were responsible for 60% of all loans originated in this country, by the first quarter of 2010 – less than 5%! Why should you be concerned about it? Very simple: while enjoying practically unlimited access to billions and trillions of your taxpayer dollars, the banks succeeded in eliminating the only serious market force that kept their mortgage rates competitive in the last decade. With brokers gone, all loan origination now goes to retail banks with their “friendly and knowledgeable” staff who doesn’t give a rat if you buy their mortgage today at 7% or not, because they are on salary paid for by your savings deposits and unfair bank fees, and because your only alternative is to go to a retail branch of another bank, where you will face just as much competence and desire to lower rates as at the first branch. Consider this: The banks quietly managed to monopolize a market worth $10-15 TRILLION DOLLARS, and their profits (spread between your mortgage rate and the current Fed Rate, which is a 0%) per loan are the highest they’ve been in history! Now, did you get a thank you postcard from your bank’s CEO last year for helping the banks out with some free money?
4. Home buyer tax credit program winds down in April too. You must be in escrow by April 30th and close the escrow no later than June, which means that in March/April we will see crowds of late-comers last-minute shoppers trying to take advantage of the program and the inventory of homes, especially in 200-400K price range will be under serious pressure from the buyers, just like we saw in October and November of 2009, before it became known that the tax credit program will be extended. This time it is different – there will be no more extensions. This was the final extension, and those who missed an opportunity to take advantage of this program because there was no inventory on the market, will try to buy something this time around.
5. Traditionally, March is the first month of the official buying season in San Diego. In my 10-year spreadsheet, March sales represent an average of 30-50% increase in the number of closed sales over February of the same year! Believe me that this year will be no different. However, those who wake up late and start shopping for a house in March will face a much tougher competition and will be forced to bid up on properties beyond what they will reasonably appraise for, which will force the buyers to increase their downpayment or get discouraged and end up on the sidelines again.
Housing market has been battered enough to the point where even the bitter pessimists started talking about a turnaround. Some are still talking about some massive “shadow inventory” of homes that the banks are supposedly holding back to avoid the market collapse and that when it finally comes, the market will tank, however, this talk has been perpetuated since late 2008 and nobody knows when and if this inventory will ever enter the market. Today the banks can dump four or five-times more inventory on the market, where home attract 10-30 offers in the first week, and the buyers will just swallow them and move on.
So, what should you do now in order to take advantage of the situation in what’s left of the true bargain hunting season?
1. Get your loan pre-qualified right now, don’t wait for that tax refund to hit your bank account. If you need to borrow money from the relatives for the downpayment, do it, you can pay it back with the tax credit money, with your tax refund, or do their laundry for the next 30 years, but get your loan fully approved at the highest possible amount and have it available when you are making offers. Nobody seriously looks at your offers today unless you can attach a solid loan approval together with a proof of funds for downpayment.
2. Make sure you have a clear idea what you are looking for and make sure it’s realistic. Don’t ask your agent to send you everything from Bonsal to San Ysidro in 100K to 800K range and expect to work with that agent. Sit down with your agent, outline the areas, types of properties you will target, maximum monthly payments including HOA, Mello Roos, property taxes, home insurance, utility bills and anything else that will become your monthly responsibility. Knowing what you want helps you achieve just that four-times faster!
3. Use technology to your advantage. There are many real estate websites that allow you to set up an automated search page and to receive listings that match your criteria the minute the listings hit the market, or with any other regularity of your choice. Such automated tools allow you to gain an “unfair advantage” over majority of other non-technically savvy buyers and realtors: if you are the first one to know about the listings, you have the advantage of making your offers before everybody else.
4. Make offers, more offers and some more offers! In sub-$300,000 price range in most areas of San Diego it takes now 20-30 offers before you get one accepted, so be patient, but also smart about it. Make offers on realistic listings, where you have a better chance of getting your offer accepted. If you have an FHA loan, don’t go after “investor flip” listings, FHA won’t allow it for 90 days after their original purchase date. Don’t make offers on short sale listings, where the listing agent sends ALL offers to the lender and waits for six months for the lender to accept one offer, which turns the process into a prolonged auction. Don’t subject yourself to some REO listings if the REO listing broker insists on seeing my buyers’ first-borne child, DNA tests and pre-approval by the lender of the listing broker’s choice BEFORE they will even look at your offer. (By the way, whenever the REO agent is asking for the pre-approval by their lender, understand that it’s done solely to facilitate a sales pitch by that lender, so complain about it to California Department of Real Estate, tell them that in your opinion it is against the spirit of California AB957 “Buyer’s Choice Act” of 2009, especially if you already have your pre-approval from another lender in place! If you end up putting 20 offers on REO listings, does it mean that you have to get pre-approved by 20 lenders BEFORE you even know if your offer is going to be accepted? Sounds ridiculous, doesn’t it?)
5. Be creative! If you can’t get what you want directly, look for other ways of achieving the same results. Consider buying a fixer upper and using a rehab loan to do the repairs, consider buying a smaller house and they adding square footage to your desired size of home, consider new construction, lease-options, seller carry-backs or other creative ways of getting in the house. Become familiar with these creative strategies, they may be your ticket to homeownership today.
This is not the time to procrastinate and wait for your April tax refund before you start shopping for a house. Act now, and take advantage of the last several months of the BEST time to buy a house in the last several decades!