Market for Jumbo Loans Thaws (a Bit)
The weakest part of the housing market right now is the upper end -- specifically, homes in the upper six figures and above.
Why?
The soft economy, the stock market, 9.4% unemployment (make that 9.7% as of Fri.).
However, arguably an even bigger factor is financing.
Two Mortgage Markets
All you really need to know about mortgages at the moment is one number: $417,000.
That's the ceiling (at least in most parts of the country) for what's called a "conforming" mortgage.
Conforming mortgages are insured by the U.S. government, and therefore are considered safe.
"Jumbo" mortgages above $417k are not insured, and therefore are considered much riskier.
Jumbo Mortgage, Jumbo Risk?
To protect themselves, jumbo lenders typically require both a higher interest rate -- as much as 1.5% above conforming loans -- and a much higher down payment.
Whereas home buyers using conforming mortgages can get by with down payments as small as 5%, depending on their profile, "jumbo" lenders can require as much as 30% down.
How significant is that?
Huge.
On a $400k home, a Buyer with strong credit could conceivably put down as little as $20k, or 5%.
On a $1M home, a 25% down payment comes to . . . a cool $250k.
From "All or Nothing" to "Trade-Off's"
Since mid-Summer, there are some signs that the jumbo market is evolving from an "all or nothing" proposition to something more nuanced.
So, at least some lenders are willing to relax their down payment requirements in exchange for a higher interest rate.
Other lenders are differentiating more amongst borrowers based on their credit scores, offering lower rates to the strongest borrowers.
Too, lenders are increasingly willing to "staple" a conforming mortgage to a second, non-conforming mortgage.
All of the foregoing are helping to thaw the market for upper bracket homes.
Now, if only the economy cooperates . . .
Showing posts with label jumbo loan. Show all posts
Showing posts with label jumbo loan. Show all posts
Wednesday, September 2, 2009
Monday, August 3, 2009
Beige Elephants
"The Bigger They Are, the Slower They Sell"
That's from an article in today's Wall Street Journal titled, "High-End Homes Frozen Out of Budding Housing Rebound" (8/3/09).
The thrust of the article -- which I agree with -- is that the lower rungs of the housing market are now stable if not recovering, while the upper bracket is still suffering.
That's because of an upper bracket "triple whammy": 1) less available, more expensive "jumbo" loans, which are typically used to finance expensive home purchases; 2) higher down payment requirements for said purchases; and 3) stock market and other investment losses, which impair the purchasing power of would-be upper bracket home buyers.
"Beige Elephants"
In fact, the very weakest segment of today's housing market is a particular subset of the upper bracket: upper bracket homes that need substantial updating.
Such homes face all the obstacles that other upper bracket homes do, plus one more big one: the cost to rehab and/or update, which often has to be paid out-of-pocket (vs. financed).
For a 4,500 FSF, five bedroom house, the related cost could easily be hundreds of thousands.
Unless that cost can be rolled into a difficult-to-get rehab loan, the prospective Buyer has to have that amount lying around.
Throw in the delay and inconvenience, the myriad design decisions, and the required oversight -- and suddenly, the pool of prospective Buyers for such homes isn't so big.
In today's market, such homes may not be white elephants . . . but they're beige.
The (slim) silver lining is, now is a great time to get bids on a major rehab project.
That's from an article in today's Wall Street Journal titled, "High-End Homes Frozen Out of Budding Housing Rebound" (8/3/09).
The thrust of the article -- which I agree with -- is that the lower rungs of the housing market are now stable if not recovering, while the upper bracket is still suffering.
That's because of an upper bracket "triple whammy": 1) less available, more expensive "jumbo" loans, which are typically used to finance expensive home purchases; 2) higher down payment requirements for said purchases; and 3) stock market and other investment losses, which impair the purchasing power of would-be upper bracket home buyers.
"Beige Elephants"
In fact, the very weakest segment of today's housing market is a particular subset of the upper bracket: upper bracket homes that need substantial updating.
Such homes face all the obstacles that other upper bracket homes do, plus one more big one: the cost to rehab and/or update, which often has to be paid out-of-pocket (vs. financed).
For a 4,500 FSF, five bedroom house, the related cost could easily be hundreds of thousands.
Unless that cost can be rolled into a difficult-to-get rehab loan, the prospective Buyer has to have that amount lying around.
Throw in the delay and inconvenience, the myriad design decisions, and the required oversight -- and suddenly, the pool of prospective Buyers for such homes isn't so big.
In today's market, such homes may not be white elephants . . . but they're beige.
The (slim) silver lining is, now is a great time to get bids on a major rehab project.
Monday, July 20, 2009
"Top-Heavy" Inventory
Jumbo Prices, Jumbo Selection
I'm not a big wine drinker, but I've always believed that wine prices were characterized by a "law of diminishing returns."
In other words, while an average $8 bottle might be twice as good as an average $4 bottle, a $16 bottle probably isn't twice as good as $8 -- and $32 almost certainly isn't twice as good as $16 (I'm sure there are many wine aficionado's who would beg to differ).
Today's housing market seems to be characterized by the opposite phenomenon.
That is, the higher up you go, the better value you find. (see also, "$1 Million Buys a Lot of Home - Again").
$500k as Dividing Line
So, to go back to my wine example, at the moment a $750k house seems to offers more than twice the value as $375k, and $1.5M offers more than twice the value as $750k.
Just to confirm my own, very unscientific "gut sense" about today's housing supply, I ran a search segmenting housing supply by $100k intervals up to $500k, with everything over that lumped together.
I chose $500k because that's effectively the break point between homes that can be purchased with conventional financing (under $417k), putting 20% down, vs. jumbo loans, which are more expensive and difficult to obtain.
For my search area, I chose a broad swath of Minneapolis and close-in west suburbs; the boundaries were roughly Highway 55 on the north, Minneapolis' city lakes on the east, 494 on the south, and between 494 and 169 on the west. That pulled up 866 single-family listings, including homes in Minneapolis and parts of Golden Valley, St. Louis Park, Hopkins, Minnetonka, and Edina.
Here's the distribution I found:
Single family homes under $100k: 4
$100-$200k: 71
$200k-$300k: 212
$300k-$400k: 144
$400k-$500k: 92
over $500k: 343
What are the implications of this?
If you're a Buyer, and you can afford to move up in price, you'll avail yourself of a much greater selection -- and presumably, softer prices.
If you're a Seller with a more expensive home . . . you have lots of competition.
To stand out, you'll need to out-stage, out-market -- and yes, out-price -- your peers.
I'm not a big wine drinker, but I've always believed that wine prices were characterized by a "law of diminishing returns."
In other words, while an average $8 bottle might be twice as good as an average $4 bottle, a $16 bottle probably isn't twice as good as $8 -- and $32 almost certainly isn't twice as good as $16 (I'm sure there are many wine aficionado's who would beg to differ).
Today's housing market seems to be characterized by the opposite phenomenon.
That is, the higher up you go, the better value you find. (see also, "$1 Million Buys a Lot of Home - Again").
$500k as Dividing Line
So, to go back to my wine example, at the moment a $750k house seems to offers more than twice the value as $375k, and $1.5M offers more than twice the value as $750k.
Just to confirm my own, very unscientific "gut sense" about today's housing supply, I ran a search segmenting housing supply by $100k intervals up to $500k, with everything over that lumped together.
I chose $500k because that's effectively the break point between homes that can be purchased with conventional financing (under $417k), putting 20% down, vs. jumbo loans, which are more expensive and difficult to obtain.
For my search area, I chose a broad swath of Minneapolis and close-in west suburbs; the boundaries were roughly Highway 55 on the north, Minneapolis' city lakes on the east, 494 on the south, and between 494 and 169 on the west. That pulled up 866 single-family listings, including homes in Minneapolis and parts of Golden Valley, St. Louis Park, Hopkins, Minnetonka, and Edina.
Here's the distribution I found:
Single family homes under $100k: 4
$100-$200k: 71
$200k-$300k: 212
$300k-$400k: 144
$400k-$500k: 92
over $500k: 343
What are the implications of this?
If you're a Buyer, and you can afford to move up in price, you'll avail yourself of a much greater selection -- and presumably, softer prices.
If you're a Seller with a more expensive home . . . you have lots of competition.
To stand out, you'll need to out-stage, out-market -- and yes, out-price -- your peers.
Wednesday, July 15, 2009
The "It's-All-I-Can-Afford" Offer
Buyer's Budget as Negotiating Leverage
I'm seeing and hearing more instances of Buyers, in the course of negotiating for a home, instruct their Realtors (including, sometimes, me!) to tell the Seller that "that's all I can afford."
Is that a smart tactic?
I discourage it, for three reasons.
One. Sellers tend not to believe such representations.
The only way to really prove that the Buyer's offer is 100% of their budget is to put the Seller in touch with the Buyer's lender, then authorize the lender to share confidential information.
Most Buyers, understandably, would be reluctant to do that.
Instead, the convention has developed for lenders to generate a pre-approval letter verifying that the home in question is within the Buyer's budget.
Two. A home's fair market value and a Buyer's budget aren't related.
Whether Bill Gates or Joe Middle Class is the prospective Buyer, a home's value is still the same: whatever the "comp's" say it is. That is, how much the three most similar, nearby homes fetched, most recently. Period.
That's how Realtors assign value. It's how appraisers determine value. And that's how the Seller's expectations will be framed.
Put it this way: imagine your reaction if the Seller raised their price because you could afford to pay more.
(Can this be a factor in negotiations? You 'betcha. How much do you want to wager that ex-Green Bay quarterback Brett Favre, who's reportedly house-hunting locally, is buying through a corporation or other third party?)
Three. It can spook Sellers.
Signaling that the Buyer is at the very top of their budget can just as easily make a Seller skip the deal as bring them to heel.
That's because any hiccup -- like a jump in interest rates, or the home not appraising -- can derail the sale.
In fact, when I represent Sellers, one of my favorite questions to ask the Buyer's lender (yes, I always call) is how "stretched" or "comfortable" the Buyer is buying the home in question.
Hearing that "it's a close call" would hardly be confidence-inspiring.
Better Tack
Instead of putting a spotlight on the Buyer's finances -- except to establish that they're qualified -- I've found that a better tactic is to focus on value.
Specifically, to make the case that, based on the home's location, features, condition, etc., the Buyer's offer represents fair market value. If not more.
And rattle off all the competing, nearby homes for sale and how they (favorably) compare (assuming that that's true; if not, it can boomerang).
As a general proposition, home sellers usually accept the price they think is the highest they're going to get -- not the highest they believe any particular Buyer can afford to pay.
P.S.: One exception to the foregoing can be when the home's price starts to move out of the range that can be financed with a "conforming" loan (up to $417k). Above that, Buyers need a jumbo loan, which is both much more expensive, and harder to obtain.
I'm seeing and hearing more instances of Buyers, in the course of negotiating for a home, instruct their Realtors (including, sometimes, me!) to tell the Seller that "that's all I can afford."
Is that a smart tactic?
I discourage it, for three reasons.
One. Sellers tend not to believe such representations.
The only way to really prove that the Buyer's offer is 100% of their budget is to put the Seller in touch with the Buyer's lender, then authorize the lender to share confidential information.
Most Buyers, understandably, would be reluctant to do that.
Instead, the convention has developed for lenders to generate a pre-approval letter verifying that the home in question is within the Buyer's budget.
Two. A home's fair market value and a Buyer's budget aren't related.
Whether Bill Gates or Joe Middle Class is the prospective Buyer, a home's value is still the same: whatever the "comp's" say it is. That is, how much the three most similar, nearby homes fetched, most recently. Period.
That's how Realtors assign value. It's how appraisers determine value. And that's how the Seller's expectations will be framed.
Put it this way: imagine your reaction if the Seller raised their price because you could afford to pay more.
(Can this be a factor in negotiations? You 'betcha. How much do you want to wager that ex-Green Bay quarterback Brett Favre, who's reportedly house-hunting locally, is buying through a corporation or other third party?)
Three. It can spook Sellers.
Signaling that the Buyer is at the very top of their budget can just as easily make a Seller skip the deal as bring them to heel.
That's because any hiccup -- like a jump in interest rates, or the home not appraising -- can derail the sale.
In fact, when I represent Sellers, one of my favorite questions to ask the Buyer's lender (yes, I always call) is how "stretched" or "comfortable" the Buyer is buying the home in question.
Hearing that "it's a close call" would hardly be confidence-inspiring.
Better Tack
Instead of putting a spotlight on the Buyer's finances -- except to establish that they're qualified -- I've found that a better tactic is to focus on value.
Specifically, to make the case that, based on the home's location, features, condition, etc., the Buyer's offer represents fair market value. If not more.
And rattle off all the competing, nearby homes for sale and how they (favorably) compare (assuming that that's true; if not, it can boomerang).
As a general proposition, home sellers usually accept the price they think is the highest they're going to get -- not the highest they believe any particular Buyer can afford to pay.
P.S.: One exception to the foregoing can be when the home's price starts to move out of the range that can be financed with a "conforming" loan (up to $417k). Above that, Buyers need a jumbo loan, which is both much more expensive, and harder to obtain.
Tuesday, June 23, 2009
"Housing Market for Dummies"
Upper Bracket Squeezed by Jumbo Bottleneck
Mortgage Update: Jumbos Remain Elusive
At a time when some mortgage products are showing signs of life, jumbo mortgages are hard to get and expensive, making it difficult for many would-be move-up buyers to take action.
--Minneapolis Association of Realtors (6/22/09)
Want a quick, simple handle on today's housing market?
Take $417,000, the limit for conforming loans (vs. jumbo loans); then divide by 80% (that builds in a 20% mortgage, which is the typical threshold for avoiding mortgage insurance).
The result: low $500's.
Below that threshold -- especially well below, where first-time buyer incentives dominate -- the Twin Cities housing market is doing OK.
Above, well, things aren't so great.
Saturday, May 2, 2009
Sellers Offer Goodies in lieu of Price Cuts
A Price Cut By Any Other Name
When is a home price cut not a price cut?
When it's billed as "Seller financing" (or other creative Buyer inducements).
In a soft rental market, landlords will do practically anything to entice prospective renters without actually lowering their nominal rental rates.
By far the most popular gambit is free rent (typically, one or even two months). Next most popular are "freebies": free plasma TV, free tickets to Hawaii, etc.
Similarly, home owners who are loathe to take (more) price reductions are starting to offer other Buyer incentives.
Anecdotally, I'm seeing more instances of Sellers who are trying to move upper-bracket homes dangle attractive financing terms: second mortgages on attractive terms; contracts for deed (essentially, a Seller-provided mortgage, but one where title doesn't transfer until the last payment is made); etc.
Which makes sense: one of the big impediments to selling an expensive home today is the premium attached to jumbo loans.
I've yet to see the "Buy this house, get the [collector sports car in the garage free] pitch," but it may very well be coming . . .
When is a home price cut not a price cut?
When it's billed as "Seller financing" (or other creative Buyer inducements).
In a soft rental market, landlords will do practically anything to entice prospective renters without actually lowering their nominal rental rates.
By far the most popular gambit is free rent (typically, one or even two months). Next most popular are "freebies": free plasma TV, free tickets to Hawaii, etc.
Similarly, home owners who are loathe to take (more) price reductions are starting to offer other Buyer incentives.
Anecdotally, I'm seeing more instances of Sellers who are trying to move upper-bracket homes dangle attractive financing terms: second mortgages on attractive terms; contracts for deed (essentially, a Seller-provided mortgage, but one where title doesn't transfer until the last payment is made); etc.
Which makes sense: one of the big impediments to selling an expensive home today is the premium attached to jumbo loans.
I've yet to see the "Buy this house, get the [collector sports car in the garage free] pitch," but it may very well be coming . . .
Saturday, March 21, 2009
High-end Double Whammy
Jumbo Loan Premium to Shrink
Ordinary economic mortals are probably not feeling much empathy for the relatively affluent these days -- especially if they have a connection to Wall Street.
However, today's housing market has delivered an unprecedented wallop to upper bracket Buyers: at the same time their wealth has been whacked -- in some cases by more than 50% -- by falling asset prices, their loan costs are at (relatively) nosebleed levels.
While "conforming" (under $417k) mortgages dropped to as low as 4 1/2% last week, so-called jumbo loans still cost 6 1/2% or more.
It's tough to be rich, huh?
Actually, that's a huge gap, and arguably, an unfair one. More to the point, closing it offers lenders some tantalizing profits.
So, as Harney is reporting in his weekly column, a number of lenders (including Bank of America and ING) are rolling out jumbo loan products that aim to slice this premium. (The impact is less in the Twin Cities than on the coasts, because home prices here are much lower.)
With the collapse last year of the private mortgage bond market on Wall Street, home buyers, builders and refinancers who relied on jumbo financing were left with few sources except at punitively high interest rates and huge down payments.
--Kenneth Harney, "A Big Boost for Buyers Seeking Jumbo Loans" (The Washington Post; 3/21/09)
Ordinary economic mortals are probably not feeling much empathy for the relatively affluent these days -- especially if they have a connection to Wall Street.
However, today's housing market has delivered an unprecedented wallop to upper bracket Buyers: at the same time their wealth has been whacked -- in some cases by more than 50% -- by falling asset prices, their loan costs are at (relatively) nosebleed levels.
While "conforming" (under $417k) mortgages dropped to as low as 4 1/2% last week, so-called jumbo loans still cost 6 1/2% or more.
It's tough to be rich, huh?
Actually, that's a huge gap, and arguably, an unfair one. More to the point, closing it offers lenders some tantalizing profits.
So, as Harney is reporting in his weekly column, a number of lenders (including Bank of America and ING) are rolling out jumbo loan products that aim to slice this premium. (The impact is less in the Twin Cities than on the coasts, because home prices here are much lower.)
Thursday, January 15, 2009
Money's Fungible . . Borrowers Aren't
One Size, er, Rate Doesn't Fit All
One of the more noteworthy features of today's mortgage market, besides greater volatility and generally declining rates, is the wide range in quoted interest rates.
For sterling credit risks -- credit scores in the high seven hundred's or above, plenty of existing home equity (or a fat down payment, if buying new), stable jobs, etc. -- the gates of "(re)financing heaven" are very much open. If that's you, you can walk through and borrow at 30 year rates well below 5%.
However, if you don't meet those criteria -- and anywhere from half to two-thirds of all prospective borrowers/re-financers now don't -- Fuhgettaboutit.
It's also the case that people applying for jumbo loans are being quoted substantially higher rates than for so-called conforming loans (generally, under $417,000), because the latter can still be re-sold on the secondary market, while the former can't.
What that means for consumers is that there isn't one prevailing interest rate anymore -- they're dozens, depending on your profile and borrowing needs.
Amongst other things, that makes using the Internet and shopping for rates a little more daunting now. It also makes good lending relationships more valuable.
That's because, while money may be a commodity ("fungible") . . . prospective borrowers are unique.
One of the more noteworthy features of today's mortgage market, besides greater volatility and generally declining rates, is the wide range in quoted interest rates.
For sterling credit risks -- credit scores in the high seven hundred's or above, plenty of existing home equity (or a fat down payment, if buying new), stable jobs, etc. -- the gates of "(re)financing heaven" are very much open. If that's you, you can walk through and borrow at 30 year rates well below 5%.
However, if you don't meet those criteria -- and anywhere from half to two-thirds of all prospective borrowers/re-financers now don't -- Fuhgettaboutit.
It's also the case that people applying for jumbo loans are being quoted substantially higher rates than for so-called conforming loans (generally, under $417,000), because the latter can still be re-sold on the secondary market, while the former can't.
What that means for consumers is that there isn't one prevailing interest rate anymore -- they're dozens, depending on your profile and borrowing needs.
Amongst other things, that makes using the Internet and shopping for rates a little more daunting now. It also makes good lending relationships more valuable.
That's because, while money may be a commodity ("fungible") . . . prospective borrowers are unique.
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