Help For Jumbo’s

jumbo

I was going to use a photo of an Elephant, but I decided that I liked this Hong Kong tourist trap better. Of course, neither image is even slightly relevant to this post so it doesn’t make much difference anyway!

One of the most difficult aspects of the Real Estate business in this area has been the difficulty in obtaining  a jumbo mortgage loan. Most of all the talk about low interest rates on home loans has pretty much been focused upon conforming loans, or loans of $415,000 or less. These loans are backed by Fannie Mae, Freddie Mac or FHA and are typically not the type of loan needed by most buyers of single family homes in Foster City…or elsewhere in the Mid Peninsula. Not only has the criteria become more rigid but the interest rates on jumbo loans have really been significantly higher than on conforming products.

Now it would appear that some major banks are heading into the jumbo market again and are now originating loans at much more affordable rates…in fact under 6% in many cases. Since it’s entirely possible that all 39 of Foster City’s active single family listings could have buyers that would need a jumbo loan, this could be a really good thing for the local marketplace and the stability of home values here. We’ll see…

Here’s a link to a Washington Post article from Saturday about this topic:

Washington Post Jumbo Article

Comments

  1. Hmmm, not according to an article on CNBC today:
    http://www.cnbc.com/id/29836875

  2. Jim Minkey says:

    That’s hysterical! Nothing like the media contributing polar opposite stories within the span of a few days. Pretty funny. The good news is, I called some friends at BofA and, sure enough, jumbos are under 6%…today. Who knows about next week…or next month?

  3. The spread between conforming loans and even conforming jumbos (up to $729,750 for the mid-peninsula) has been consistently 1% or more as the CNBC article posted by Stan mentions. The reason the jumbos might be below 6% has as much to do with regular conforming loans falling below 5% as with jumbos becoming more affordable. This spread does not make a whole lot of sense as Freddie and Fannie do buy the conforming jumbos.

    Certain credit unions altogether stopped financing conforming jumbos earlier this year after participating in the program last year. Pure jumbos (loans over $729,750) are in a different league and were the ones referenced in the Washington Post article.

    Assuming a 20% down payment, the maximum price that a purchaser can pay and still get a jumbo conforming loan works out to $912,187. This might partially explain the high inventory of homes priced over $1 million.

  4. Even with 0% interest rates, there’s only that many people “able and willing” to buy a 900k+ home. The sooner everyone (sellers, realtors) face up to this reality, the sooner we can all move on with our lives.

    The only reason that ppl were able to ‘afford’ such prices (yes prices, not ‘values’), were the Option ARMs, Interest only loans and all the other funny loans that were out there. And look where that has brought our country to!

  5. Jim Minkey says:

    Asif: No question the inventory in Foster City has been impacted by higher rates on jumbos…but fear is by far and away the biggest factor. Alot of that fear has proven to have been justified too. We certainly are going to find out if a change in jumbo rates have an effect on both the fear and the local real estate market.

    AR: So I’m interested…how do sellers and realtors “face up” to the “reality” you speak of? Why was it in 2005 97% of single family homes sold did so with multiple offers…usually at least 7 of them too. I personally had a listing in FC in 2006 that got 13 offers…all of them with 20% down and using traditional financing. Wasn’t that reality? Right now I have 34 buyer prospects in my system all of whom are well qualified, with plenty of down payment…and all of whom are planted firmly on the fence.

    Are you suggesting that sellers and realtors need to drop their prices 50%? That all homes in Foster City be priced between $500,000 and $800,000? Good luck! Who get’s to “move on with their lives” if that happens? Certainly not the sellers. The realtor’s will get paid though…is that a good thing at the expense of their clients?

    Having said that, I agree that many of the prices out there right now are figments of the seller/realtor’s imagination. There are simply too many overpriced houses in town. I’m telling you this as honestly as I can…I think I only had 2 or 3 clients in the last 10 years that used a sub prime loan to purchase…and that’s out of 100’s of transactions. Escalating property values in FC did not happen because people were using junk loans to leverage into houses they couldn’t afford. This is simply an amazing area and, inevitably it’ll come back.

  6. “Why was it in 2005 97% of single family homes sold did so with multiple offers…usually at least 7 of them too. I personally had a listing in FC in 2006 that got 13 offers…all of them with 20% down and using traditional financing. Wasn’t that reality? ”

    Er… mania? bubble? I agree, that was the reality then. You know better than me, that the reality has changed.

    “Are you suggesting that sellers and realtors need to drop their prices 50%? That all homes in Foster City be priced between $500,000 and $800,000? ”

    You say this, as though that were the bad thing! Isn’t this where we were when the bubble started? Or maybe even lower? I guess I dont understand the mentality that $4 gas is bad and million dollar homes are good. Is there a rule that every homeowner needs to sell their homes at huge profits? After how many years? Didn’t you yourself agree that many of the prices today are a figment of the seller’s imagination?

    If you consider housing a necessity, then prices need to be inline with incomes. If you consider them to be investments, then they need to be inline with rental income (after taking into considerations all the costs of ownership and mortgage income deduction ).

    “Who get’s to “move on with their lives” if that happens? Everyone 🙂

    Sellers – I assume people put their houses on the market because they want to sell? They want to move, move up or move down right?

    Buyers – People who really want to buy and have the wherewithal (like your 34 prospects) can actually buy a place to raise their families without committing financial suicide.

    Realtors/others in the RE business – Isn’t a normal, functioning market good for them as well??

  7. Jim Minkey says:

    This is actually kind of fun AR! Really! So, in that spirit let’s role play a little. Let’s pretend that YOU are the seller and I am your agent.

    Jim: Hi AR, I think it’s time that we got serious about dropping the price on your house. It’s at $1,350,000 right now, but I think that’s clearly unrealistic in this market. I think we should reduce the price down to $850,000…that’ll be more in line with reality.

    AR: Huh…er…What? But Joe’s place two doors down sold for $1,425,000 last June! You can’t seriously be suggesting that our value has dropped half a million dollars in less than a year?

    Jim: It’s the bubble AR…it’s burst. It’s time we all got real around here. Who would have ever thought these places would ever sell for over a million dollars anyway?

    AR: But all these other houses in town are still at their prices! Plus, a detailed analysis of the comparables shows that values have only fallen to 2004 levels at worst. What you’re suggesting would represent a 2000 level value. Why should I do that?

    Jim: Wake up and smell the coffe AR. You want to move on with your life, don’t you?

    AR: Yes, but I paid $850,000 for this house in 2000 and we put at least $100,000 into it. After we pay you we’ll lose money selling it for that. I still don’t understand why I should pioneer a price range that’s 4 years earlier than the current market’s decline would dictate? The Foster City market only fell roughly 7% last year and maybe another 10% at best so far this year.

    Jim: Yes, yes, but the buyers in this market are just not motivated to pull the trigger right now and we have to reach out to them. I happen to know a bunch of really nice folks at Oracle (and elsewhere) that would probably buy your place if you dropped it 40 or 50%. They’re going to be motivated if it’s a really good deal like that.

    I think this conversation wouldn’t go over real well with any seller I’ve ever known. I’m not saying it’s impossible that the market could fall that much…I’m saying it’s never going to happen like this. If it does it’ll take a couple of years for that to happen…at best. I think the corner will be turned in our economy long before that. Over 500 single family homes sold in Foster City since 2000. I can’t imagine many of them will be too crazy about the idea of taking a big loss just to move on with their lives. Would you?

    I really hope this doesn’t sound snippy or aggressive on my part. Your opinion is certainly not uncommon and I really appreciate you opening a dialog. I just honestly don’t believe that the values around here are a complete house of cards. People can in fact afford these prices…they just don’t want to right now.

  8. I think very high HOA dues add a hardship to a seller. For example, if you pay 450 in monthly HOA dues over ten years it becomes 12x450x10, and plus, about 5K in property tax each year. So if you’re selling your condo or a townhome what’s left of the appreciation?…

  9. One thing that keeps a lid on FC home prices is the high school situation. Many young families move here for the elementary schools, but when it’s time to move up or if the kids are going to high school, they tend to move to similarly priced neighborhoods in San Carlos, Belmont, Burlingame or PA. For families who have kids getting close to high school, they tend not to want to spend $1mil+ and then have to worry about the high school situation.

    AR – agree with your thoughts. Jim – you make good points from the seller’s perspective. I think AR was just pointing out the current reality which is that FC prices haven’t corrected enough to reflect the current environment.

    FC prices will not correct as rapidly b/c there are fewer foreclosures to reset prices. The effects of lower employment and wages take longer to play out, but they do play out. Relative values between regions historically change very little absent major changes in community features or makeup (i.e. FC will see declines similar to surrounding communities which have fallen further, but it will happen more gradually).

    Regarding interest rates, don’t think any buyers need to worry about it for at least a year if not longer. The Fed is determined to keep long-term rates row to stabilize the economy. They are much more worried about deflation and growth than with inflation which is easier to control later. That is probably the right move for the country.

    I also am not convinced this housing market is driven by fear or emotions. It is more a new mindset that buyers want to be conservative (ex: be able to pay mortgage with one income and not two) and buyers see little reason to buy a home that can be bought cheaper in 6mo or a year (don’t agree with view that things turn on a dime – just doesn’t work like that, and if it does, it would be downward pressure on values).

  10. Good points FCR and Richard, and well taken.

    Jim, I am not a buyer/seller/anyway connected with the RE industry. Nowhere did I suggest that every seller in Foster City should drop their prices 50% today! Your fictitious seller bought a home for 850 in 2000 and a short 9 years later wants 1.3 million for it! Is this realistic today? Thats all I am asking.

    Please consider the unemployment rate, shakiness of the existing job market that exists today vs 3/4/9 years ago.

    As a responsible member of the community and country, we all have to ask ourselves the question, what did we do wrong and what we can do to make things better. All I see is the blame game “sellers are greedy”, “buyers want dirt cheap homes”, “appraisers/brokers/realtors only care about commission”, “banks were greedy”. Who cares? Whats done is done. The question is where do we go from here?

    That was my only rationale for the above post. No offence intended and none taken, I hope.

  11. Jim Minkey says:

    It’s all great stuff! I love blogging because it allows discussion like this and I appreciate all of your opinions! There’s no question that prices need to come down if the current crop of sellers are going to actually sell. 2009 is going to be a pretty interesting year.

    FCR…can’t resist a couple of comments. In 20 years I’ve never had a buyer tell me they didn’t want to live in Foster City because of the High School situation…outside of voices here on this blog. Foster City came down in value less than San Carlos did in 2008 too. We’re certainly not seeing any lid historically on values in San Mateo because of their High Schools…and those are Foster City’s High Schools too. I think it’s a shame that FC doesn’t have a High School…I wish there was one here, but hundreds of houses sold in Foster City over 1mil in the last several years and a High School of lack of one didn’t matter at all. I respectfully disagree with your point here.

    I would also argue with the point that market’s don’t “turn on a dime”. I think they have…and they do. The market here was reasonably healthy until 9/15/08 when Lehman imploded and AIG got bailed out followed by the stock market tanking. It clearly turned and began the fall we’re in right now and it all happened virtually overnight. I also remember at least 2 occasions where the market went from dead to crazy in a period of a couple of months at most. October 2001 was really dead and nobody was buying anything….January 2002 was insane and there were multiple offers on everything again. Small points….

    Anyway…Thanks for participating FCR! Hope to see you again!

  12. Very timely and informative on jumbo mortgages. Thanks for sharing this.

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