Some great past clients of mine have just put the finishing touches on their new web 2.0 project. After taking a peek at Yellowbungalow.com I can say it is truly a fantastic social networking site for home owners.

My clients seem to always be updating, remodeling, and improving their homes and gardens. Now, through the new YellowBungalow site they have access to a network of people that have recently completed home improvement projects. This can help with the thousands of property improvement decisions you will need to make when considering renovations.  I found the resources section of the site to be especially helpful. Here people can post reviews of resources they have used and would (or sometimes more important wouldn’t) recommend, along with photos of the work so you can see the quality and scope of the job.  The ask a neighbor section provides a forum for homeowners to help each other solve many of the home related dilemmas that can occur.

As a real estate agent I have seen many of my clients make beautiful renovations of their homes. I have often thought that others could benefit from the knowledge and experiences that these home renovators have gained. It is my assessment that there are probably an equal number of viewers that are just as curious to see what the renovators have accomplished.  The YellowBungalow before & afters section gives a great display of all the great accolades some of these home owners have achieved. It also gives the renovators a great platform to share their photos and experiences with friends and family.

Like their tagline says it truly is, “inspiring home improvement”. Check it out and let us know what you think of YellowBungalow. 

 
Thanks to .A.A. for this great photo.

Recently, Redfin a discounted real estate brokerage firm has garnished much media attention. Partly because it just received an additional 12 million dollars in venture funding and partly because of their bold claims of changing the real estate industry. I am always interested in new real estate business models and like many other real estate agents this is one that has become fascinating to me over the last couple of years. All this hype made me want to look at the financial benefits of discounted brokerages compared to our full service model.

Redfin is a discount business model. Discounted business models offer real estate buying and selling services at reduced prices. There are many different discount models that all have different pricing strategies. Redfin offers to list your California home for flat fee of $4,000. Discount real estate businesses offer reductions in commision by making a reduction in service. Thus the ultimate consumer question becomes what does the extra full service model get you in return? What services do the discounted models do away with and how does this affect your sale or purchase?

Recently, as I was transacting in the market and I came across a direct sales comparison of the results of a discounted service verses full service. At the end of 2005 I sold a property along the East Bay coastline in a tract housing community called Promentory in Richmond’s Marina Bay. I mentioned that it is a tract, because this illustrates that all the homes are very similar in size and style. Both properties were 3 bedroom, 2.5 bath homes on a 2736 square foot lot. I represented the buyer on one home while an Assist 2 Sell (a discounted broker) represented the seller. I sold the home to my buyer for $610,000. Just next door was the other home and it was sold by a full service agent in the same month for $677,000. That is a $67,000 difference in price. I saw the condition of both the interiors and exteriors of the properties and I can say they were both very comparable. The lots, community locations and views were also very similar. Even if a discounted broker could have eliminated all the commissions (5%) on the $677,000 home It would still have been a huge profit difference of $33,150 compared to the home sold by the discounted broker.  

Just think for a second… If you needed open heart surgery would you look for the low cost leader? Even worse would you do the surgery yourself? My advice would be to find the best doctor available.

Yet, discounted real estate brokers assume people will choose to lop off their financial success with no concern for their financial futures. For most of my client’s their homes are their largest assets. Getting an expert to act and get them the highest price possible is of the utmost importance. Just check out Redfin’s site and read about what they offer. They write a lot about what they are saving their client’s in commission and say little about how they generate the highest possible returns for their sellers. They speak a lot about their supposed negotiating skills and little about how their buyer’s end up in homes that fits their needs and their financial situation.

Marlow Harris at the 360Digest blog has had a lot to say about the current Redfin news. Most interesting to me has been her take on the financial aspects of Redfin. It seems to me they may suffer from the old adage, “we are losing money, but we’ll make it up in volume.”

Last month we listed and sold a home in Oakland’s prestigious Montclair hills neighborhood. 5940 Monzal was listed for $1,599,000. You can check out some of my full service internet marketing at www.5940monzal.com. We generated 7 offers and the property sold for $1,937,000. That is a 698% return on their investment in our commission. Navigating the Bay Area’s complex housing micro climates is not a job for the low cost leader. It’s a job for the avid advisor.

The blaming begins…

Finger Pointing Is In Style

The attached article tells us what is happening on the margin.  The large institutional buyers are declining to buy the CDO’s that they used to buy because they cannot trust the ratings being given by the rating agencies.  This will impact mortgage pricing meaning that the mortgage rates for “A” paper loans (as well as Alt-A and subprime) are rising and risk premiums are increasing significantly.  Further, many of the loans at the margin are simply going away (100% stated, no ratio, no income-no asset loans).  If you want to look a little deeper at what’s happening, follow the link.

Stopping the Subprime Crisis

The attached article tells us what is happening on the margin.  The large institutional buyers are declining to buy the CDO’s that they used to buy because they cannot trust the ratings being given by the rating agencies.  This will impact mortgage pricing meaning that the mortgage rates for “A” paper loans (as well as Alt-A and subprime) are rising and risk premiums are increasing significantly.  Further, many of the loans at the margin are simply going away (100% stated, no ratio, no income-no asset loans).  If you want to look a little deeper at what’s happening, follow the link.

Stopping the Subprime Mess

What has become of us? My inbox and my home mailbox are stuffed with spam, our blog gets 10-20 pieces of spam per day in our comments section. The messages are always ridiculous. My loan is pre-approved evidently at about 100 different places, my pharmacy orders are piling up somewhere and classmates keep sending me e-cards. I won the French lotto recently and a Nigerian woman needs to talk with me about depositing some money for a period of time in my bank account. Just this morning at home, I received a phone call with a recorded message that said, “Please hold, I have a call for you”. I hung up.

While I was writing this, I checked back to my email and here’s a new piece of spam, “Thanks for your Pharmacy order # 01096.” How ridiculous. Do people really fall for this?

Our company has been receiving calls from clients saying that someone is calling them and representing that they are with our company. I’m pretty sure it’s an attempt to get Social Security numbers from our clients or to try to have them refinance their loan thinking they are doing this with a company they trust.

It’s pretty easy to avoid getting caught up in the spam and scam game. Get a good filter to block spam (mine dumps them into a spam folder and keeps them out of my inbox), NEVER respond to a spam message and if someone calls you do not give out any personal information. It’s safest just to hang up. The onslaught of this stuff won’t stop, in fact, I predict it will increase as technology drops the cost to almost zero to send these messages. With a cost of zero, the return is significant if just one client falls for their scheme.

I have to go, evidently I’ve won a free trip and I have to call someone I don’t know to give them my personal information so I can claim the prize.

The Mole is an anonymous CFP giving us the inside scoop on the financial advisory business.  Item #4 is perfect for mortgages too!

4 Always know what you are buying. As a general rule, the more complex it is, the worse it is for you.

This is so true.  Option ARMS are complex and really are a poor choice for MOST borrowers.  Yes, it may be appropriate for a few but for the majority of borrowers, it’s a bad idea.  The mortgage industry pushed this product for its low start rate because they knew that borrowers would believe it was their actual rate.  They also pushed 3 year pre-payment penalties because the loan broker made more money on that product even though it was not in the borrower’s interest to sign up for that.  If it’s very complex, difficult to understand, etc., beware.

The Mole

I recently looked at the National Association of Realtors blog that has a posting entitled, The Truth About Statistics. It got me thinking about the entire data craze that has been penetrating our markets. Our customers seem to want all sorts of real estate and mortgage data, which brings me to this discussion about the value of data in the real estate industry.

Many new offers for real estate related data have been developed to provide more data for buyers and sellers. Take Zillow, Altos Research, and DataQuick to name a few. Yet, I find that many of my clients do not understand what the data will do for them.

Let’s start from the perspective that data is no more then a marker in history. For instance, all this data has no relationship as to whether our market is currently moving up or down. Instead, if it is accurate, it just tells us where we have been. It’s like the common verbiage listed on stock market investment advertisements, “Past performance does not dictate future results.”

So, just to start our discussion surrounding data we need to make some major assumptions. First, lets assume we know where the data came from and the background of the individual supplying the data. Next, let’s assume the data is accurate. We can then acknowledge that the data can not predict the future. So what is data good for at all? Data gives experts the ability to make assessments and speculate about the future. With data an expert in an industry can get a glimpse at the possibilities that may exist in their market. They can make assumptions about where the market is trending.

This is an important time to note that it takes and expert to get a powerful assessment out of data. In other words, the history, experience and background of an individual highly influences the assessments they make. Sometimes we attribute this to what we call experience. The important thing for the consumer to recognize is that not all assessments are equally valuable.

For instance, as I transact in the real estate market I am constantly watching buyers and sellers acting on dangerous assessments of real estate market data. I can often easily see that their assessments are worse then a blind guess, because I acknowledge that the one who made the assessment is speaking from a history they no nothing about. When I think of this philosophy I think of my tax advisor trying to assess my ability to sky dive. This situation could provide me with a thrilling and also deadly experience. Then I imagine him assessing how I can limit my expenses so I can avoid the alternate minimum tax. In which background is he competent to act? The same is true with assessing data within a specific industry.

So, when I look to make an assessment of data, that is outside my domain of understanding, I first look at who is the most competent observer I know in the industry from which the data came. This is often someone who is constantly transacting in the industry and thus has a keen sense of the mechanics of their market. For instance, if I wanted to get advice about large capitalization stocks I might see if Warren Buffett was available to help me make an assessment. I wonder if he would take my call? With Warren’s help I believe I could speculate about how the current stock market data affects my specific stock investment situation.

All of this is not to say there’s no entertainment value in looking at data. Many people get a kick out of looking at what their home was worth last month. Did it go up… Did it go down… But, the reality with data is that its power is in your ability to make assessments with it and then to apply those assessments to your specific situation. Otherwise if you are just looking for real estate entertainment you might check out the new celebrity version of Donald Trumps TV show The Apprentice.
 

The above photo is entitled Light Data and illustrates the history of light caught by a camera at a specific point in time. Thanks pbo31 for the photo. 

The purpose of this blog is to provide essential real estate and financial guidance to Bay Area homeowner’s whose ambitions are to live in the home that is right for their family while at the same time fully funding their retirement, their children’s college education and paying for the high costs of living the SF Bay Area lifestyle.  Our readers tend to be top 5% household income earners ($150,000+), who endeavor to purchase homes that cost $750,000+ and are committed to using their income and assets to their fullest advantage.  Our commitment is to provide valuable philosophy, research, data and opinions to assist these ambitious Bay Area homeowners.

As we have detailed, changes in guidelines are being enacted that will affect nearly every borrower in the future.  The Times is a powerful voice for change, here is their position on the sub prime mess.

July 10, 2007
Editorial

Myths Spun by Lax Lenders

Mortgage defaults are rising, and worse is yet to come. Between now and the end of next year, the interest rates on $660 billion in adjustable-rate mortgages will increase for the first time. Over half of that is in subprime loans — those made to borrowers with weak credit — and is at high risk of default as monthly payments rise. 

In a display of too-little, too-late, federal regulators recently tightened lending standards, requiring what should be obvious: that banks have evidence of a borrower’s ability to repay before making a loan. And yet lenders who hope to dodge even tougher oversight continue to defend reckless lending. Their arguments ring hollow on several counts.

Mortgage lenders often claim that subprime loans have allowed millions of Americans to buy a first home. But most subprime loans were for refinancing, not first-time purchases. And as defaults rise, foreclosures are projected to outnumber first-home purchases — for a net loss of homeownership because of subprime lending — according to the nonpartisan Center for Responsible Lending.

Lenders also assert that borrowers with weak credit had no choice other than costly, adjustable-rate subprime loans. But testimony from Congressional hearings suggests otherwise. During the housing boom, borrowers who could have qualified for higher quality, fixed-rate loans were too often steered into dodgier loans. As rising defaults attest, complex loans have not benefited the borrowers. Rather, they met the lenders’ desire for upfront fees and Wall Street’s demand for loans to package into securities for sale to hedge fund clients.

Subprime defenders also assert that in the end, it’s a borrower’s responsibility to repay. Fine. Now let’s talk about the lenders’ responsibility. During the boom, many subprime lenders did not worry about being paid back over time, because they sold many of the loans to Wall Street. Those who made a lot of money on lousy loans don’t stand to lose their houses now that the game is ending.

It’s up to regulators and lawmakers to impose discipline when the market does not. The Federal Reserve, with authority over unfair and deceptive mortgages, should impose rules on all lenders — banks and nonbanks — deeming a mortgage unfair if it’s issued without evidence of a borrower’s ability to repay. Lenders should also be held to suitability standards, akin to the rules for stockbrokers. Brokers cannot recommend stocks that do not fit an investor’s risk profile. Lenders should not be able to offer loans that do not fit a borrower’s credit profile.

Nathan’s National Hot Dog Eating Contest Held at Coney Island Courtesy of YouTube

For me the 4th of July means good times with family and friends, great food, and relaxation while I watch an enticing Bay Area waterfront fireworks display. As you can see in the above video the 4th of July can be a very different experience for each of us. I just did a little internet search to see what Independence Day means for other people. Let’s start with some interesting historical facts.

The 4th of July is a federal holiday that signifies the United States adoption of the Declaration of Independence on July 4, 1776. This is when the United States declared independence from Great Britain. Fireworks were first associated with the 4th of July in 1777.

Interestingly enough, “Independence Day” as it would come to be known was not established by the US Congress as a federal holiday until 1870. At this time it was deemed an unpaid federal holiday. That must have sounded bogus for the financially ambitious federal government employees in 1870. It was not until 1941 that the US Congress made Independence Day a paid holiday.

Today, the 4th of July seems to mean different things to different people. I found it interesting how people seem to practice different customs. Check out what the rest of the United States is up to on the 4th of July.

The Midwest’s largest fireworks display, called Rhythm & Booms, happens on the Saturday before the 4th of July in Warner Park in Madison, Wisconsin. In its 15th year, an estimated crowd of 300,000 people view the fireworks display, which is synchronized to music.

In Provo, Utah, America’s Freedom Festival is one of the countries largest. It includes one of the largest Fourth of July parades, and the Stadium of Fire.

The town of Bristol, Rhode Island is noted for having the oldest, continuous Independence Day celebration in the United States.

James River Assembly in Ozark, Missouri, hosts the annual “I Love America” Celebration at the Springfield Underground. In 1997, 13,000 people showed up for the first event. In 2006, 120,000 people attended the celebration. Highlights include the choir’s “Living Flag”, the “Concert in the Sky”, nearly 100 games and activities, and a four-hour air show.

As you can see above, in New York hot dogs are all the Independence Day rage. The Nathan’s Hot Dog Eating Contest is held in Coney Island, Brooklyn. It supposedly started on July 4, 1916, as a way to settle a dispute among four immigrants as to who was the most patriotic. It was estimated that Americans would consume about 150 million hot dogs on July 4, 2006, or almost one hot dog for every other person in the United States.

Minor League Baseball and Major League Baseball games are also played on Independence Day.

Since 1959, NASCAR has held the Pepsi 400 on July 4 or the Saturday of Independence Day weekend.

On the Capitol lawn in Washington, D.C., a free concert, A Capitol Fourth, precedes the fireworks and attracts over half a million people annually.

Where ever you may find yourself on July 4th, 2007, we are wishing you a happy Independence Day.

From Mortgage Mania to Credit Crunch: Part IV

Credit to Rachel Van Emon for this article. 

The changes to guidelines are here. Fannie Mae has set a date to begin implementing new policy and guidelines for approving conforming loans.  The rest of the nation is likely to follow.  Here’s why.

Fannie Mae and Freddie Mac purchase loans up to the conforming loan limit (currently $417,000).  In order to sell a loan to Fannie Mae, banks are required to use their Desktop Underwriting System (DU) to process and approve the loan.  Changes in policy and guidelines by Fannie Mae are implemented nationwide by updating the DU system.

What is not widely known is that jumbo loan lenders use DU guidelines as their starting point for loan policies and guidelines.  Fannie Mae and Freddie Mac set the fundamental guides from which everyone else, even the jumbo lenders, write their specific guides.

When there are universal changes to the way Fannie Mae underwrites a loan, these changes typically flow out to the banks and to jumbo lenders and are adopted sooner or later by most everyone.

Here is the news we just received from Fannie Mae:

Effective July 22, 2007, for all loans originated with an IO feature…DU Version 5.7 will use the payments as described below in is risk assessment:

· Interest Only Fixed Rate Mortgage: PITI based on the full principal and interest payment at the note rate, in addition to the taxes and insurance payments, amortized over the full repayment term

· Interest Only Adjustable Rate Mortgage:  PITI based on the full principal and interest payment at the fully indexed rate (index + margin), in addition to the taxes and insurance payments, amortized over the full repayment term

 What will this mean?

 1. Buyers will qualify for smaller loan amounts after this takes effect than they would have before its implementation. 

2. It will be more stringent to qualify for an Adjustable Rate Mortgage than a Fixed Rate Mortgage.  Fixed mortgage note rates are currently in the range of 6.625-6.875%.  This is the rate that is used for qualifying.  A 10-year ARM might have a note rate of 6.5%, but a fully indexed rate of 7.645% (The 1 yr LIBOR index is 5.4 + margin of 2.25).  Whatever the start rate on this ARM, the fully indexed rate will be used for qualifying. 

3. Buyers will qualify for less loan amount which will require a larger amount of down payment or they will need to consider lesser priced homes.

4. Banks may raise their debt to income limits to minimize the impact on buyers.

5. Home sellers will be offering concessions to help buyers with closing costs to free up the buyer’s cash to pay off debts or put more down payment.

6. Lenders and homebuyers will be working closely together to document as much income as possible, to pay off debts to qualify and to structure the deal so it is most advantageous on the financial side of the transaction.

Actions that Realtors® and Mortgage Advisors can do now:

 1) Confirm that all of your clients pre-approvals are still valid. You don’t want to get into contract only to find out the financing is no longer possible.  A pre-approval letter does not ensure the loan program will still be available to that borrower.

2) Encourage clients to act now if they believe that they will not be able to qualify for the same level of financing later.  The client’s situation should be reviewed again by an underwriter using the new guidelines.  If they cannot, then they may consider buying before the changes are implemented.

The subprime mortgage meltdown continues with subprime lenders continuing to exit the business.  If you are reading this blog, it’s unlikely that you have a subprime loan so why care about this?  Here’s why:

Federal banking regulators are setting new rules on how home buyers qualify for adjustable rate mortgages.  The old rule was that a borrower would qualify at an interest only payment on the starting note rate.  The new rules require that the lender calculate the payment based on the fully indexed and fully amortizing rate even if the borrower is going to pay interest only on the lower note rate.  This means that borrowers will qualify for less loan making it more difficult to buy or requiring more down payment.  This will affect home buyers who are well above the sub prime category.

Read on to get the full story:

US Tightens Rules on Subprime Mortgages

In light of the new release of the Apple iPhone my interest in Apple has peaked. This last weekend I watched hoards of people huddled around a AT&T store in San Francisco as I waited at a traffic light. I found it interesting that many of the people in the line looked like they could not afford the $600 price tag. My wife quickly reminded me that many of those waiting in line would soon be selling their new purchase on e-bay for a profit. Below is an interesting Steve Jobs interview where he speaks about the power of the iPhone.

Thanks to creativebits.org for this great clip.