Palos Verdes Source

Owner and buyers of Palos Verdes real estate have been treated to a year of low mortgages – a wish come true.  According to a recent Los Angeles Times article, “interest rates are the lowest since Freddie Mac, a government-sponsored corporation that purchases home loans from lenders, began tracking the 30-year loan in 1971″  Click here to view the entire article with rate information.

What an incredible opportunity this has been to both refinance and to purchase a new home.  This year, it seems that many Buyers have decided to stop waiting and buy their new home.  Here on the Palos Verdes Peninsula, we have been blessed with a “softer landing” from the financial crisis than many other areas; our market has been pretty stable this year.  We have great schools, great weather, convenient location to downtown LA, the Los Angeles airport and the Westside.  Buyers have taken notice.

The eternal question is ‘How long will these low interest rates last?”

We spoke (complained), and were heard.  Fannie Mae told lenders on June 30, 2010,  that they “prohibit lenders from changing appraisals” according to a LA Times article yesterday (click here for full story).  This is good news for owners of Palos Verdes real estate and buyers also. 

Here is what has been happening since the new May 2009 Guidelines.  Lenders have been ordering appraisals from Management Companies who sometimes choose an appraiser from out of the area who may have only “minimal access to local realty data” and the appraisal comes in low.  Additionally, “Lenders unilaterally may be lowering the numbers on the appraisals submitted to them to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals.  Such value inflations can expose lenders to ‘buyback’ demands, forcing them to repurchase loans at huge costs,” according to Kenneth R. Harney in his LA Times article.

As of September 1, 2010, the LA Times article goes on to say,  “lenders must contact appraisers to resolve any disagreements about the valuation.  If that’s not possible, they should order a second appraisal – not just chop the value supporting the real estate contract.”  Finally, the voice of reason.

Photo courtesy of Arvin Design

Owners of Palos Verdes homes will be pleasantly surprised to know that the answer is “Yes” according to Kenneth R. Harney in a recent Los Angeles Times article.  I think this is great news and don’t understand why it was buried on the 12th page of the Business section.

“According to the Fed’s most recent ‘flow of funds’ survey, homeowners’ net equity grew by nearly $1 trillion from the recession’s nadir in the first quarter of 2009 through the third quarter. From June 30 through Sept. 30, equity rose by $418 billion….After three years of unprecedented shrinkage in home equity – and three years of rapid expansion in the number of underwater borrowers with negative equity – there are signs the down cycle may be shifting.”

I believe this is another sign of of our real estate market stabilizing.  For recent statistics on our Palos Verdes real estate market click here or on the “Statistics” tab above.

What home improvements and remodeling projects give the greatest return on their investment?  For owners of Palos Verdes homes (and the rest of  Los Angeles County who choose upscale remodeling), the answer for 2009-2010 is siding replacement, window replacement and a grand entrance according to an article in the latest National Association of Realtor’s magazine which came from a survey by Remodeling magazine.

“The majority of the 10 remodeling projects with the best return on investment nationally are a testament to pragmatism.  Six of the 10 projects – siding and window replacement using a variety of materials – involve home maintenance that costs less than $14,000…Additional data prove the value of restraint.  Upgrading kitchens and baths is still a smart bet.  However, home owners will recoup the greatest share of their costs by foregoing super-deluxe projects in favor of mid-range kitchen and bath remodels.  A mid-range kitchen remodel brings an average 72.1 percent return on investment (93.7 in L.A. County), while an upscale kitchen re-do returns only an average of 63.2 percent of the money invested” (78.7 in L.A. County).  That’s a 15 point spread.

Owners of Palos Verdes homes remodel for different reasons, like the need for more space, to improve the functionality of specif rroms and to update them.  Kitchen and bathrooms are usually the most expensive remodel as plumbing and/or appiances need replacing.  There is no specific report for Palos Verdes real estate but there is a Cost vs Value Report for Los Angeles Countywhich is broken down into Midrange priced projects and Upscale priced projects (Reports can be accessed by clicking here on the link above).  When you click on the porject name (i.e. Major Kitchen Remodel) you can then read the features of that price range to compare to your own.

Remodeling just for resale rarely nets you a dollar for dollar return.  Most remodels are done for the enjoyment of the homeowner (who still wants to maximize their return when they do sell).  My experience is that most buyers are looking for newer kitchens, bathrooms, master suites and nice yards.  Curb appeal is important because it is the buyer’s first impression of the home.

Buyers of Palos Verdes homes often ask what a loan point is.  My clients who are refinancing also have the same question.  Here is a very concise explanation provided by a Bank of America loan officer:

What exactly are “points”?  What tax benefits accrue from “points”?  What is the “APR” and in what ways is it important?  And what are the benefits to home sellers who may consider paying a buyer’s “points”?  We look at the basics here, urging you to take your specific questions to your tax advisor, while hoping to help you better formulate those questions.

Traditionally, a “percent” is often expressed as one or more “points.”  Thus, if you pay two percent of the loan amount to originate a loan, you are paying two “points.”  It realy isn’t any more exotic than that.

If the loan is a mortgage, the total origination fee will be a combination of points and fees for services, like the appraisal fee, the escrow fee, the recording fee, and other costs.  If the mortgage is for the purpose of buying a home, known as a “purchase money loan,” then the points are deductible on your tax return for the year in which the home was purchased.  The other fees are not deductible.

Further, points paid on a refinanced mortgage are not fully deductible in the year of the transaction.  Instead, the deduction is spread (or amortized) equally over the full life of the loan.

This raises an important question.  What happens when you refinance a mortgage that has already been refinanced; that is, what happens when you refinance a second or third time?  The points paid for the prior refinanced loan become deductible in the year of the newly refinanced loan.

Points are considered prepaid interest.  They are one part of the overall interest you pay on your loan.  That is why we can deduct them against our ordinary income on our personal tax returns (remembering that the deduction schedule is different, depending on whether the loan is a new purchase money mortgage or a refinanced loan).

Understanding what points actually are and the basics of how they work can open up a world of possiblities.  Consider this: if the stated interest rate on a mortgage is surprisingly low, the lower interest rate may often be counter balanced by higher points.  Thus, one loan may bear an interest rate of 5.5% and another 5.625%.  The first loan obviously looks better than the second – until you look closely at the origination points.  Often the first loan requires slightly higher points, and the difference in the life-of-loan interest costs for each loan could be minimal as a result.

In order to make certain that consumers are aware of the expense that higher points can add to a loan, the government long ago required lenders to provide an “APR” calculation on loan settlement papers.  The Annual Percentage Rate (APR) blends the interest cost of the points and other fees into the potential life-of-loan interest payment, and then provides a new, “adjusted” interest rate that takes into consideration the loan points and associated fees.  This sounds confusing because, frankly, it is.  At best, it provides a way of comparing two loans and seeing which will cost more in the long run.

What makes far more sense is the fact that you can often pay higher points in order to pay down your loan’s interest rate, and make your monthly payment smaller.  You will want to discuss such possibilities with your Mortgage Loan Officer, tax advisor and financial advisor.  You may also want to look at the life-of-loan savings you can create with an accelerated pay-down of your mortgage, adding to each month’s principal payment and thus, if it is a fixed-rate loan, decreasing both the number of years in which you make loan payments or, if it is an adjustable rate mortgage, potentially lowering the monthly payment when the loan adjusts.  In either case, you an lower the life-of-loan interest that you pay.  (Keep in mind that an amortization schedule simply adjusts each payment so that is pays all of the interest owed on the loan balance if paid in monthly payments.  Lower the loan balance by making larger payments to the principal balance of the loan, and you will owe, and pay less interest towards the principal.)

Also worthy of discussion, when you are selling your home, is the possibility of helping the buyer by paying the points on his or her purchase money loan.  Not only is the seller allowed to do this, but the tax deduction for those points can be taken by the homebuyer, which provides a large value incentive for them.  The home not only meets the home buyer’s needs, it also costs less to purchase and decreases the buyer’s tax liability.  Again, be sure to discuss these options with your tax and financial advisors.

Remax Palos Verdes/Execs has formed a new alliance with Bank of America which will benefit our clients in several ways.  We now have access to the largest lender in the jumbo market.  Bank of America will loan 80% up to a $2,000,000 loan to qualifying borrowers.  This will help buyers (and therefore sellers) of Palos Verdes real estate.   Remax Palos Verdes/Execs clients will be given priority and our agents will be given a source code so that we can track the loan through all stages.

We have a local Legacy Bank of America office which has their own loan processing center and underwriting department.  This is very beneficial as a local person is making a decision about a local property which means the file won’t be “rubber stamped” but given personal attention based on our local market.  No more dealing with a loan center half way across the country.  And our clients are promised a better loan rate!

The current rate for a 30-year fixed conforming loan (up to $417,000) is 4.625%;  a jumbo conforming loan ($417,000 to $729,750) is 4.75%; and for a jumbo loan to $1,500,000 the rate is 5.5%.

Both the House and Senate have passed the new extended/expanded Homebuyer Tax Credit and it is now awaiting the President’s signature.  Previously, the first time buyer credit of $8,000 was to expire on November 30, 2009, but it will now be extended to April 30, 2010. 

The new bill also includes a $6,500 credit to qualified homeowners looking to “move up” by purchasing a replacement home for $800,000 or less.   According to the Los Angeles Times, “…the legislation would raise the qualifying income levels to $125,000 for individual filers and to $225,000 for joint filers.”  Please click here to view a full-page version of the chart above from National Association of Realtors.

Both of these credits will help sellers of  Palos Verdes real estate as they increase the pool of buyers for their properties with  ”trickle up” activity from  Palos Verdes buyers who have sold their homes to to first time buyers.  And to date in 2009 Palos Verdes Peninsula has had 40 single family homes and 108 townhomes/condos sell for $800,000 or less.

   Yes, we do have foreclosures in Palos Verdes real estate.  Currently there are 2 active single family residences and 1 condo that are REOs (or bank-owned properties).   669 Via Del Monte, Palos Verdes Estates, is a 4 bedroom, 3 bath, 3,469 square foot home listed for $1,449,900.  4053 Via Pavion, Palos Verdes Estates, is a 4 bedroom, 3 bath, 2,336 square foot home listed for $999,900.  3601 W Hidden Lane #121, Rolling Hills Estates, is a 2 bedroom, 2 bath, 1,131 square foot condo listed for $415,000.

Although Palos Verdes is not immune to foreclosures, our rate is much lower than most of Los Angeles County.  Since the beginning of the year, 10 single family residences and 10 condo/townhomes that have sold were REOs.  There are currently 2 single family residences and 1 condo/townhome that have pending sales and are bank-owned.

According to the Los Angeles Times, “Signs are emerging that a much feared escalation of California home foreclosures may not happen, as banks respond to government pressure and scale back their repossessions of troubled properties.”  It appears the banks are working with homeowners allowing loan modifications and short sales.  This will assist in the stabilization of the real estate market.

Graph courtesy of LA Times

In Washington and beyond, the discussion is stirring as to whether to extend the First Time Home Buyer Tax Credit of $8,000 which is set to end November 30, 2009. I believe extending this credit will benefit homeowners across the board including owners of Palos Verdes Real Estate.

At first glance, it may not look beneficial to owners of Palos Verdes real estate because the applicant’s income cannot exceed $75,000 (or $150,000 for married couples) and property values here begin in the $700,000s. However, there is the trickle up theory. A Palos Verdes home may be sold to a family (Family A) moving from another community with lower prices. And in order for Family A to purchase in Palos Verdes, they must first sell their home. Family B that is buying the Family A home may be a first time buyer who will be assisted with that purchase ultimately benefiting a seller of Palos Verdes real estate.

“Through July, the tax credit spurred about 175,000 home sales according to an analysis by Mark Zandi, chief economist at Moody’s Economy.com. That trend would lead to nearly 375,000 such sales through Nov. 30, he said.” according to a September 25, 2009, Los Angeles Times article.

In the last six weeks interest rates for Palos Verdes real estate have remained fairly steady. The interest rate for a 30-year fixed mortgage going down 1/4 point to 4.75% for a conforming loan and remaining at 5.785% for a jumbo loan. A 5/1 Year ARM is 3.75% for a conforming loan and 5.125% for jumbo loans. A 5/1 Interest Only conforming loan has a 3.75% interest rate and a jumbo loan has a 5.25% interest rate.

Demand is up for U.S. Treasury Bonds. Yesterday there was 3 times as much demand compared to supply for sales of 2-year Treasury notes (investors bidding at 1.035%) . Interest rates for home mortgages have remained low. Conventional wisdom says that when bond rates go up, interest rates usually go down but at this time both are fairly low which is a mixed signal. These are interesting times.