Welcome to 2016, a year that has started out very rocky with a lot of uncertainty as it relates to stocks, oil, housing and China. Here’s my take on things. Yes I’m a real estate business owner but the way I look at it, everyone has their own biased opinions of things based on how they invest or where they work. Let’s first talk about the housing market and how it’s different now than it was during the subprime crisis 2005-2010.
“The Big Short” came out over the Christmas holiday and I had a chance to see it. It was as I expected, a great movie because it showed what went on behind the scenes with the guys who truly saw how bad these loans were and weren’t blowing smoke at their investors. The movie focused on how the subprime mortgage market was packaging the subprime loans into tranches (pools or bundles) and selling them as triple AAA rated bonds to offset the risk. Many of those bonds were sold to pension funds, cities, countries, all around the world and the money taken in was insane. This created even more demand for more mortgages so what did the lenders do? They lowered the criteria for borrowers. Lower FICO scores, no assets, no income verification, that sort of thing. Lenders used to say “if you could fog a mirror, you could get a loan.”
I was working as a real estate agent and investor during that time period. I worked with investors who would come to Vegas all excited at the prospect of becoming an investor and getting a piece of the appreciation pie. These investors could get as many as 10 loans. It was a crazy time. Then the market turned. I remember the end of summer 2008 after a couple of years of slower appreciation and longer sales cycles, Bear Stearns crashed, Lehman Bros. crashed. I was working as the broker of a company called Investment Riches and I came up the elevator to our office and the doors opened and our receptionist was right there with a flat screen TV on behind her which always had CNBC playing and all the guys from the office were standing around her podium in disbelief at how much the market was down. There were days in a row of 400-700 point drops. It felt like a free fall. I had to get on the phones and call real estate investors around the country to drum up business and everyone was in a sell position, nobody was buying. I also worked for a bank called Indymac which became OneWest and my job was to dispose of their assets. I had to quote them what I could sell their properties for in 45 days or less. The market was correcting so fast we had to guess the monthly declines and even the appraisers were bidding 5% below each last sale so their numbers would be conservative and accurate. Basically lenders went from not caring about the homebuyer’s credit or income to the opposite where you could have an A+ borrower with excellent credit, but the asset became the primary concern. “Will the house go down in value” was a bigger problem because if you lend money at 90% with the borrower putting up 10% of their own funds, and the market declines 20% then you have an upside down asset and unfortunately for many buyers, they hated the idea of paying a monthly payment on an asset that kept losing money. The market in Vegas declined 30% in 3 months and 50%-60% in the next couple of years. There are still many areas that haven’t fully recovered.
Fast forward to 2016. That market is behind us now. We’ve all learned some lessons. Lenders and appraisers are much more responsible. The subprime loan doesn’t exist. Adjustable rate mortgages (ARMS) are a 4 letter word for borrowers. Will that always be the case? I highly doubt it. It’s all supply and demand, basic economics. If there’s not a lot of demand for loans, new products get created. For now though, we won’t see another “Big Short” due to subprime. Typically subprime is considered anything below a FICO credit score of 640. Even for the 97% LTV (loan to value) products, (which I agree are more risky because the borrower has so little equity) the minimum FICO score for both Fannie and Freddie’s 97% LTV product is 660.
The San Diego County market didn’t suffer the way Las Vegas, Miami, and Phoenix did. The market in San Diego has been strong and healthy and the lows during the crisis didn’t reach percentages where buyers walked away. Plus there was never the high percentage of vacant listings here in San Diego County. The inventory here never got out of control. Check out the data on the current inventory and prices in San Diego county herehttp://chriswhittaker.sdcountyhomehunter.com/areas/San_Diego
Zillow reports a 6.8% appreciation rate for San Diego in 2015 and predicts 3% for 2016 which is healthy and in line with normal inflation rates. See the graphs and data for Zillow in San Diego here:http://www.zillow.com/san-diego-ca/home-values/
Along with “normal” appreciation rates we have an unemployment rate in San Diego County which is at 4.6% compared to 5.7% last year https://ycharts.com/indicators/san_diego_ca_unemployment_rate
The unemployment rate for San Diego County is another factor which shows the strength of the real estate market for our area. Yes, there are companies that out-migrate to states like Texas, Florida and Nevada, but when it comes to healthcare, science and technology, military, it seems that we’re in a sort of hub, much like Silicon Valley has their technology hub.
The last factor which will keep the housing market strong in this area of the country is mortgage rates. Mortgage interest rates are still below 4% at the time of this publishing. You can check rates here: http://www.bankrate.com/california/mortgage-rates.aspx
With all the news about the Fed raising rates in December, many real estate buyers got nervous about how that will affect their interest rate on their home loan. The good news is that mortgage rates are more a reflection of the 10 year bond yield, not Fed rates. This is because even though buyers take out a 30 year mortgage, most are sold or refinanced in a 10 year cycle. Quick interest rate discussion: investors turn to bonds as a safe investment when the economic outlook is poor (this can be based on the stock market performance or unemployment or GDP numbers depending on the investor). When purchases of bonds increase, the yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.
– 10-year bond yield up, mortgage rates up.
– 10-year bond yield down, mortgage rates down.
It’s not always so simple, but for the most part this is how it works. A good way to predict which way mortgage rates are headed is to look at the 10-year bond yield. You can find it on finance websites alongside other stock tickers, or in the newspaper. If it’s moving higher, mortgage rates probably are too. If it’s dropping, mortgage rates may be improving as well.
So here we are at the beginning of 2016 and we’re hearing about the stock market being halted twice this week in China and a currency crisis of sorts and China has even changed the rules about selling shares. It’s certainly a mess over there. Here’s more information about the China stock and currency crisishttp://money.cnn.com/2016/01/06/investing/china-stocks-halted/
What we saw a few years back when the Chinese real estate market started crashing was an exodus out of China and into the U.S. Chinese buyers went to London and Australia first but then prices became insane and to Chinese buyers, our prices are reasonable, even in places like L.A., Seattle, N.Y.C. and San Diego. Our neighbor to the north, Irvine, CA reports that 80% of their buyers are Chinese. Realty Trac reports a Chinese buyer increase of 229% in the past 10 years! http://www.realtytrac.com/news/company-news/share-of-chinese-speaking-buyers-paying-cash-for-u-s-homes-increased-229-percent-in-the-past-10-years/
That trend will continue in full force. Foreign buyers love our beautiful, clean neighborhoods, our healthy air, our trustworthy title insurance, higher education, and on and on. I can’t predict if the Chinese government will change the rules but right now it can be easy to purchase in the U.S. for Chinese nationals. I think real estate has once again become a strong place to put large sums of money and hold for a 10+ year period. The real estate market has a 7 year cycle for buyers and sellers. We are entering a hold period where it may be more beneficial to hold than sell so if you’re planning to sell in the next few years, I think 2016 is the year to do it. If you’re a buyer, this is a great year to get in while rates are still amazing, I think as interest rates go up which they will do as long as our economy stays where it currently is or improves more, prices may decline a bit but with higher interest rates the payment stays about the same so if you’re financially able to buy and see yourself living in this home for 5+ years, 2016 is the time to pull the trigger. Buyers need to focus on the neighborhood. Find homes with great schools, parks, amenities, location and possibly room for improvement. Additions and renovations are great value adds and will get you the most return when you sell.
The most important decision you can make with your money is to plan, to think for yourself. Don’t get glued to the news or CNBC because you will become utterly confused. One day it’s up, one day it’s down. This will lead to a mindset full of indecision and uncertainty. Make a decision, gather information and data, then go forward and make things happen for you and your family. Give us a call any time. We are here to answer your questions.
All the best in 2016!
CHRIS WHITTAKER, Full Time Real Estate Agent Since 2000
Text or Call 760.618.1490
Cal BRE: 01895376
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Chris and Dana Whittaker have been in the real estate industry for a combined 30+ years and have helped hundreds and hundreds of buyers and sellers get what they wanted by creating win-win scenarios. “We consider ourselves professional problem solvers and negotiators. We protect your investment like a pit bull. Whether you’re relocating to the San Diego area or thinking about selling your home, give us a call and discover the difference today, 760-618-1490.”