AN UP BEAT ON THE DOWN SIDE

According to the most recent report released by Harvard's Joint Center for Housing Studies, the housing market has definitely entered a down cycle, but is unlikely to suffer or have a severe reversal.

Even in the face of rising interest rates, crumbling affordability and rising inventories the market will experience a modest downturn, unless jobs growth and the broader economy collapse, according to the study.

"There may be tough times ahead, but housing will emerge stronger than ever," says Nicholas Retsinas, director of the Joint Center of Housing.

The number of homes needed to fill demographic changes and populations over the next 10 years will likely exceed 18.1 million units built from 1995 to 2004.

While the study rates the risks associated with adjustable rates, easy down payment requirements, and liberal underwriting standards as "uncertain" and "worrisome" it does not see a rush of foreclosures and forced sales.

"Having significant home equity is the best protection against foreclosure because homeowners can sell at a profit if they cannot cover their mortgage payments," says Mr. Retsinas.

Factors that support a continued solid housing market include:

Thriving household growth - Over 1.37 million new households will be added nationwide this year from population growth and foreign immigration.

Boomers going gray - The aging ranks of boomers is increasing the ranks of investors with vacation or second homes. This trend will increase as they near retirement.

Household composition changing - There is an increasing trend of more single-person households through divorce and adult children moving out on their own. Family size is shrinking creating more households from the same population.

Minorities on the move - The past 10 years have seen great strides in homeownership among Black and Latin minorities.

Government influence - Land use restrictions, zoning laws and building are limiting the suppy of housing. Retsinas says, "In many areas we see such an anti-development bias. And the trend is to more restrictions, not less, even though markets are softening.

Bottom Line - Retsinas summarizes, "Long term fundamentals are still positive, but some areas may be more susceptible to a slide."

How Adjustable Rate Mortgages Work

During the last decade, Adjustable Rate Mortgages (ARMs) have increased in popularity among consumers. These days, few homeowners (especially first-time buyers) remain in their homes for more than seven years. In this case, it often makes sense to get an adjustable rate mortgage with a lower rate, especially one with a 5-year or 7-year fixed portion, since they won't have the loan long enough to be concerned about rate fluctuation.

Adjustable Rate Mortgages have three main features: Margin, Index, and Caps. The Margin is the fixed portion of the adjustable rate. It remains the same for the duration of the loan. The Index is the variable portion. This is what makes an ARM adjustable. Margin + Index = Interest Rate.

It's important to understand that there are many different indices: The 11th District Cost of Funds (COFI), the Monthly Treasury Average (MTA), The One Year Treasury Bill, the Six Month Libor, etc. Each index has its own strengths and weaknesses; some are slow moving, others are more aggressive.

The third and final component of Adjustable Rate Mortgages is Caps. Caps limit how much the rate can fluctuate over time. Annual Caps limit changes to the annual rate, whereas Life Caps provide a worst case scenario over the life of the loan.

Survey: Younger Generations Spend More on Housing

(May 10, 2006) -- A recent survey of home buyers in three generations — Gen Y (those born between 1979 and 1994), Gen X (born between 1978 and 1965), and baby boomers (born between 1946 and 1965) — show that Gen X and Gen Y are outspending boomers in their first home purchase.

Both of the younger generations also devote a larger portion of their salaries to housing costs, according to the survey, conducted by Century 21 Real Estate. The goal of the survey was to understand and compare the experiences of the first-home purchase among members of three different generations.

Unlike boomers who purchased their first homes in response to life events such as a marriage or birth, financial incentives motivate both Gen X and Gen Y buyers with investment value cited as the “key driver” by the Century 21 survey with 42 percent of Gen X respondents and 39 percent of Gen Y respondents citing a “safe investment” as the reason for purchase.

A similar business-like approach is applied to the home search and purchase. “These guys don’t get caught up in the process. They’re very bottom-line oriented and results oriented,” says John Tuccillo, former NAR chief economist and principal of John Tuccillo Associates, an economics and business consulting firm in Virginia.

“Don’t expect them to fall in love with the property,” he cautions. “What matters is whether the house works for them and whether it’s a good deal.”

“Real estate professionals shouldn’t only get to know this group, they should also begin to look at their own materials, particularly Web sites, from the perspective of this demographic,” Tuccillo says.

A higher proportion of younger buyers use the Internet. For Gen Y it ranked as the primary source of home shopping information according to the survey. Experts such as Tuccillo and Melody Bohrer, vice president for education for ERA Real Estate say that being able to remain anonymous while they gather information is a top criterion for younger buyers.

Less relationship oriented than boomers, younger buyers are also more likely than boomers to say “next” if a salesperson doesn’t meet their expectations. However, Bohrer says, “They will be loyal if you work the way they want.”

— By Camilla McLaughlin for REALTOR® Magazine Online

Housing Takes Breather, But Strong Year Still Expected

May 9, 2006) -- The housing market is settling but should experience its third-best year in 2006, with job creation and a growing economy offsetting some of the effects of rising interest rates, according to the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, says the market is adjusting to higher mortgage interest rates. “Coming off a prolonged period of record sales, housing is taking something of a breather this year,” he says. “Even so, interest rates remain historically low, we’ve added about 2 million jobs over the last 12 months and the economy continues to grow – that will sustain healthy levels of home sales in 2006, but they’ll stay below the peaks experienced during the last two years.”

Lereah forecasts the 30-year fixed-rate mortgage to rise to 7.0 percent this summer and hold at that level during the second half of the year. The unemployment rate is expected to average 4.7 percent, compared with 5.1 percent in 2005, while growth in the U.S. gross domestic product is seen at 3.5 percent in 2006, the same as last year.

Existing-home sales are likely to fall 6.4 percent to 6.62 million in 2006 from a record 7.08 million last year. New-home sales are projected to drop 11.6 percent to 1.13 million from last year’s record of 1.28 million. Housing starts should decline 3.7 percent to 1.99 million this year compared with 2.07 million in 2005.

NAR President Thomas M. Stevens from Vienna, Va., says home prices are returning to normal patterns.

“Since the supply of homes on the market has improved to roughly balanced levels, overall home price appreciation has cooled to single-digit rates,” says Stevens, senior vice president of NRT Inc. “Most of the country is now entering a period of equilibrium in the housing market, which is good for the long-term health of the sector. Owners in most areas can now expect steadier and more normal rates of return on their housing investment.”

The national median existing-home price for all housing types is expected to rise 5.7 percent this year to $232,200, while the median new-home price is forecast to increase 2.2 percent to $242,500.

Inflation as measured by the Consumer Price Index is projected at 3.4 percent in 2006. Inflation-adjusted disposable personal income is likely to grow 3.4 percent this year.

—NAR

Housing market feeling cooler, but not chilly

The Bay Area housing market is showing signs of cooling alongside more significant slowing in once-hot markets like Phoenix.

Housing appreciation in the Bay Area dropped below double-digit figures for the first time in more than two-years in February, according to DataQuick Information Systems.

The median-home price rose 9.6 percent to $763,000, the research firm said.

"We're in a definite market cycle. The market is adjusting right now," said Ed Krafchow, president and co-owner of Prudential California, Nevada and Texas Realty. "We're not in a buyer's market. We're in a buyer's sympathetic market."

But any sympathy cards might have to be directed to sellers who have enjoyed rapid appreciation in recent years.

"We expect the pace of price appreciation to slow from the 13 to 17 percent range of 2005 to 10 percent this year as rising inventory levels mitigate some of the upward pressure on home prices," said Leslie Appleton-Young, chief economist for the California Association of Realtors. "Unsold inventory rose again in February to a 6.7-month supply, one of the highest inventory levels in several years."

That means it would take 6.7 months to sell all homes on the market at today's sales pace, and it has some worried the housing slowdown could be more painful that expected.

Plus, the CAR's forecast for 10 percent appreciation this year is a statewide average, with appreciation in the mid-single-digits for coastal regions like the Bay Area and greater than 10 percent appreciation in inland areas.

"This is a spotty market," said Prudential's Krafchow, who says he's weathered three or four real estate cycles over the course of his career. "There are pockets of real active areas, pockets with little activity and some with no activity at all."

He points to Oakland's popular Montclair neighborhood as an area where home sellers are still receiving multiple offers. But he cites Marin County as an area of concern -- despite anecdotal evidence suggesting that Marin is still doing well.

"A $4 million house is a discretionary purchase," Krafchow said.

That point is echoed by others.

"The activity where there's more discretion in the buying decision seems to be much more slower," said Paul Zeger, president of San Francisco-based Pacific Marketing Associates.

Real estate agents also are seeing more buyers sit on their hands as long-term interest rates have begun to move higher in recent weeks.

Home builders are moving aggressively to unload inventory since they have to pay carrying costs for unsold properties.

Centex Homes sparked a buzz in January with its advertisements touting price reductions of up to $100,000 for new homes in San Ramon and other Northern California cities. Now price reductions on new construction are a common feature of the Sunday real estate ads.

Outright price reductions -- rather than help with closing costs or throwing in free upgrades -- raises the concern that comparable sales will begin to fall, making it difficult for other buyers in the market to secure financing especially in a rising-rate environment.

"The attitude has changed," Zeger said of sellers. "It has turned very much to, 'What can I do to help you?'

"Everyone is offering an incentive," Zeger said, noting some condo sellers are offering a $10,000 credit that can be used for closing costs or other purposes to get a buyer into a new condo.

While San Francisco appears to be an epicenter of condo conversions, Zeger sees the East Bay at greater risk.

"The place that's probably the biggest risk right now is the San Ramon Valley, which has about 4,000 units that have been put into the conversion pipeline," Zeger said.

But Wells Fargo CEO Dick Kovacevich told shareholders at the bank's annual meeting April 25 that he's not worried about a national housing bubble because of the local nature of housing sales.

"There hasn't been a 'national' housing market since the Great Depression," Kovacevich said.
Mark Calvey covers banking and finance and Ryan Tate covers East Bay real estate for the San Francisco Business Times.

California foreclosure activity up

First-quarter foreclosure activity throughout the Bay Area and all of California rose to its highest level in more than two years as home price increases slowed, according to a report released May 2.

DataQuick Information Systems reported that 2,583 notices of default were filed in the nine-county region, an 8.3 percent increase over the same period last year and an almost 13 percent increase over the fourth quarter of 2005.

In Santa Clara County, there were 527 notices of default, a 5.4 percent increase over the year-ago period.

In Monterey County there were 129 notices, a 63.3 percent increase.

In San Mateo County, there were 186 notices -- one of the few places that saw a drop. In the year-ago period there were 188 notices.

Marshall Prentice, DataQuick president, said a number of factors are driving defaults higher. "Home values are rising more slowly than they have the past couple of years, which makes it more difficult for homeowners to sell their homes and pay off the lender."

The median first-quarter default amount on a primary mortgage was $9,220 on a loan of $280,000. On second mortgages and lines of credit, the median amount owed was $3,386 on a loan of $56,760.

In Southern California, the default rates for the quarter were much higher, with a 33 percent jump to 11,102 notices.

DataQuick, a subsidiary of Vancouver, B.C.-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide.

What Constitutes Closing Costs?

Mortgage Rate Update

What Constitutes Closing Costs?
Closing costs are expenses that cover fees associated with the transfer of property ownership, fees paid to state and local governments, and the costs of obtaining a mortgage loan. Some of these fees are negotiable, and could be paid by either the buyer or the seller. Some costs are one-time fees (non-recurring closing costs, such as title search, termite inspection, appraisal, etc.); while other fees such as homeowner's insurance or property taxes are things you will expect to continue to pay on a regular basis as a homeowner.

As part of the loan selection process, your mortgage consultant should be giving you some idea of how much money you should have in reserve to cover your end of these costs. The Real Estate Settlement Procedures Act (RESPA) requires the lender to provide you with a Good Faith Estimate within three days of the submission of your loan application.

RESPA also states that as a home buyer, you have the legal right to request a copy of the HUD-1 Settlement Statement 24 hours before your closing is scheduled. The HUD-1 clearly defines all closing costs, including those that are to be paid by the buyer and the seller. It's a good idea to have both of these forms before your closing transaction.

Simple Things Mean a Lot in Home Sales

In a crowded field of houses vying for a buyer, here are some things that sellers can do to make a home more saleable. Most of these ideas are from Boston-area decorator Sarah Krieger.

Lighten up.
Open up all the curtains and blinds. Add floor lamps and upturned lights. Add mirrors and lots of glassware to make a house reflect light.

Do the floors.
Nearly everybody likes shiny hardwoods. If the floors aren’t wood and the carpeting is old, replace it.

Beautify the bath.
Caulk the tub and the sink and replace broken floor tiles. If the fixtures are outdated, replace them with stylish, lower-priced fixtures from Home Depot.

Paint the walls.
White is cold, but bright colors don’t sell either. Roll on a soft taupe or a light green.

Clean up the kitchen.
Replace old appliances. Stash countertop clutter.

Source: Boston Globe, Emily Lapkin (04/02/06)

IGNORANCE IS NOT BLISS

According to a new study by Fed economists many home borrowers are confused about the terms of their adjustable-rate mortgages (ARMs) and underestimate the amount by which their payments could jump.

The study's most astounding findings are the percentages of borrowers who have no clue about the key features of their ARMs such as:

- Maximum rate that can be charged (40% were clueless)
- Maximum rate change at any other time (35% were clueless)
- Index used to determine rates (28% were clueless and many others gave incorrect answers, such as consumer price index or "the going rate")
- Original interest rate (20% were clueless)
- How often rate can change (17% were clueless)

Many, like Stella Adams, executive director of the North Carolina Fair Housing Center, place the ignorance factor squarely on loan officers and mortgage brokers who are either misleading or at the very least not fully informing their borrowing clients.

"What they are told is, "Don't worry about it because you can refinance before the adjustment hits," Ms. Adams says. "Consumers think that if the broker says I can afford this, [then] I can afford this."

There is wide spread difference in understanding of ARM terms between income groups. According to the study 13% of borrowers with $150,000 plus annual income were unaware of the maximum amount their monthly mortgage payment could increase at one time. In contrast 40% of borrowers with annual incomes under $50,000 did not know the cap on those increases.

Sadly, many borrowers using ARMs chose their loans based on the initial monthly

Low-price housing tough fit in Coyote

In a rare show of consensus for constituencies often at odds, a group of affordable housing advocates and home builders are pushing the city of San Jose to retool how it intends to produce below-market-rate homes in Coyote Valley.

If the city does not adopt more flexible positions for the 3,500-acre region, they warn, it runs the risk of creating only housing affordable to moderate-income families and excluding the region's poorest. That would undermine the city's stated goals of having a truly diverse Coyote Valley community that is as self-contained as possible.

City housing staff is giving limited indication that it is willing to adopt policies unique to the south-county region, however, saying they lack the management bandwidth to oversee different programs for different parts of the city.

At the same time, some affordable housing advocates say the city should not shoulder any of the expense of putting up the 5,000 affordable homes proposed for Coyote Valley. Instead, they say the area's housing developers should assume the entire expense, including the cost of building 2,900 apartments and 100 for-sale homes for the region's poorest residents.

That standard exists no where else in San Jose, says Housing Department Director Leslye Krutko. "I do not know if it is financially feasible," she says.

Such units require deep subsidies that could reach as much as $298,000 an apartment for the lowest-income residents, according to an estimate prepared for the city by a Berkeley economist. Conceivably, the housing developers could defray some of that cost with money from sources other than the city, such as the state and federal governments.

Whatever that outcome, the burden would be on top of an estimated $1.5 billion in infrastructure costs that Coyote Valley property owners already face. The bulk of the $1.5 billion, up to as much as $1 million an acre, is slated to come from home builders, and ultimately market-rate home buyers. Industrial property owners and developers are not expected to bear any of the cost of the affordable housing.

"Affordable housing is definitely a huge cost for this project," says Kerry Williams, president of the Coyote Housing Group, a partnership of Coyote Valley property owners including some home builders. The group is financing the Coyote planning effort, which so far has cost $13 million.

The San Jose City Council has said only that it wants at least 20 percent of the 25,000 homes built in Coyote Valley to be "affordable." But council members have not defined "affordability" with precision. Housing for the lowest-income families requires greater subsidies than for those at higher income levels.

Affordable housing is a long-term issue in SIlicon Valley. The region's global economic competitiveness suffers because people working in the area spend so much of their pay on housing or so much of their time commuting to less-expensive shelter in outlying areas.

A goal for Coyote Valley is to put homes near industry and shopping, allowing people to walk, ride a bike or take public transportation regularly. Without enough housing affordable to all income levels, the fear is that the area will contribute to, rather than reduce, congestion on local freeways and air pollution.

"I was pretty flummoxed," says Stephanie Schaaf, a public education and advocacy official with San Jose nonprofit housing provider EHC LifeBuilders, of the city staff's resistance to adopting new affordable housing methods for Coyote Valley. "It was really inspiring to have folks from the privates and nonprofits come to some agreements on goals and targets, and everyone was taken a bit off guard" that staff did not embrace the momentum more fully.

Complicating matters are the city's internal financial problems. By year's end, the city projects that it will have produced 10,000 new affordable homes in San Jose in the last eight years in addition to other work such as helping families rehabilitate existing homes.

But city money to subsidize housing is running low and, given projections of property tax revenue, the production of new homes is expected to fall considerably in the years from now until 2010. According to documents filed by the city with the federal government last year, in the next five years the city expects to build and rehabilitate fewer than 6,000 affordable homes. That's roughly 10 percent of projected need based on federal definitions that stipulate that people should be spending no more than 30 percent of their incomes on housing.

Those realities, says long-time affordable housing advocate Saul Wachter, treasurer of the Affordable Housing Network of Santa Clara County, mean Coyote Valley should be forced to bear its own housing costs internally. Beyond that, he and other affordable housing advocates say, the city must turn its focus to providing housing for the area's poorest people, who earn less than $32,000 a year to support a family of four and whose needs are among the most unmet in the region.

"Our position is that (affordable) housing has to be built in Coyote Valley without city money because the city doesn't even have enough money for housing that is needed in the city as it currently is," Mr. Wachter says. "We think developers can take a portion of the money that they are going to earn on their higher-value homes and along with land donation provide homes for extremely low-income families."

Discussions on affordable housing in Coyote Valley are continuing and no final decision is expected for months.

SHARON SIMONSON covers real estate for the Business Journal. Reach her at (408) 299-1853.

5 Tough Questions for Sellers

Selling a home is getting more difficult these days and sellers are going to be asked some difficult questions that buyers in tighter markets may not have had the time or inclination to ask.

Here are five questions a seller should think about and be able to answer — just in case they are asked.

1. Why are you selling this lovely home?
The buyer wants to know just how desperate the seller is. Desperation equals a lower offer, so answer carefully.

2. How much did the seller pay for this house?
The amount is a matter of public record and a real estate professional can find it easily. One answer a seller might consider is some variation of this: "I got a bargain purchase price when this was a run-down shack before I renovated it so my purchase price is irrelevant to today's market value."

3. What defects does the home have and have there been any recent professional home inspections?
It’s a good idea for the seller to have a home inspection before the home is put on the market, so any defects can be repaired or, at least, potential buyers can be told about them before they make an offer.

4. What problems have you had with this home?
In most states, court decisions and statutes do not require home sellers to reveal past problems that have been corrected.

5. What is the quality of the public schools?
Even buyers who don’t have children can be concerned about this and a seller should know the answer.

Source: Inman News, Robert Bruss (3/24/06)

Bridging the Gap

Here are some financing arrangements that could help you cover your down payment and closing costs if you buy a new home before you sell your old one.

BRIDGE LOAN

Short-term financing intended to fund your down payment and closing costs while waiting to sell your house. The loans are usually short-term and carry high interest rates.

Pros: Provides flexibility by allowing a home buyer to proceed with closing a deal to buy a new house before selling his or her current home.

Cons: If potential buyers become aware that the homeowner has secured a bridge loan, it can serve as a red flag that the homeowner is under pressure to sell, which could elicit lower offers.

BRIDGE LOAN WITH DEFERRED INTEREST PAYMENTS

The bank provides a loan that pays off the current mortgage and allows the seller to use remaining funds to finance the down payment and closing costs on a new home purchase. The payment on the bridge loan is deferred for a set amount of time, usually six to nine months, while the homeowner tries to sell the existing home. When the borrower sells the home, he repays the bridge loan plus the interest.

Pros: The home buyer eliminates mortgage payments on the old house and the bridge loan payment is deferred. The upside for the seller is he seals the deal to sell his house without having to agree to a contingency on the sale, such as waiting until the home buyer sells his existing house before closing.

Cons: If a person is unable to sell his home before the term of the bridge loan expires, he will owe the interest that has accrued in one lump-sum payment. The bank may offer to extend the loan until a sale goes through but the borrower will still be liable for the interest that accrued during the first term on the loan.

100% FINANCING ON THE NEW MORTGAGE

The home buyer obtains 100% financing on the new mortgage and needs no down payment for the home, allowing him to buy even if he hasn't yet sold his current house, providing the buyer can get approved to hold two mortgages.

Pros: Allows the buyer to proceed with purchase without getting a bridge loan.

Cons: Mortgages with 100% financing are considered high-risk mortgages, primarily because they have allowed many people to purchase homes they can't really afford.

Weekly Market Report for the Week of March 5th-11th, 2006

The majority of our Silicon Valley offices reported multiple offer activity this week. Sunnyvale is one of the hottest markets in the area as reported by our office and by several agents in the field.

2-3 offers is more the norm in today's market and one entry level property received 8 offers.

Santa Clara County inventory is on a slow but steady climb and eclipsed 2700 this week for the first time since early December 2005. During 2005, we did not reach the 2700 mark until sometime in August. We are still trending slightly ahead of 2004 figures. The inventory peak of 2004 was right around 3000 and we hit this around July of 2004.

Some experts believe that we reach an equilibrium (balanced market- not a sellers or a buyers market) around 3800-4000 properties in Santa Clara County. Based on that theory we still have a way to go and continue to be in a low supply market with relatively strong demand.

Lenders wary of losses tighten mortgage criteria

By Mark Schwanhausser - Mercury News

WORRY ABOUT LOSSES FROM RISKY LOANS GROWING

Lenders are growing wary of the riskier yet more flexible mortgages favored in Silicon Valley, even as rising interest rates are making it tougher for buyers to afford the region's high-priced homes.

Make no mistake about it: As the spring home-buying season begins, the mortgage industry remains robust. Lenders are expected to churn out $2.2 trillion in mortgages nationwide this year. And they still offer a broad menu of loans designed to insulate borrowers against rising rates and squeeze payments within cramped budgets.

Behind the scenes, however, lenders, regulators and investors are making changes that could make it harder for borrowers to stretch into homes or refinance existing mortgages.

The changes could act as a gentle but largely invisible brake on real estate sales just as the home-buying season historically hits top speed, experts say.

"It's still not a bad time to be getting a loan,'' said Mark Milner, chief risk officer for PMI Mortgage Insurance in Walnut Creek. "But given the potential for rising interest rates and a slowdown in appreciation, this is probably not a good time for people to be stretching.''

There are few places where the changes will be felt as deeply as in Santa Clara County, where the median price of a single-family home topped $700,000 in January. In the San Jose area, half the home purchases relied on loans that require borrowers to pay just the interest, according to LoanPerformance, a San Francisco company that tracks mortgage data.

During the real estate boom, many Bay Area borrowers moved away from the traditional fixed-rate mortgage that charges the same monthly payment for the life of the loan. Instead, they've embraced a slew of exotic loans that require little or no down payment, delay paying down the principal or charge temporary ``teaser'' rates.

While such loans have lubricated the Bay Area's high-revving real estate market, there are growing concerns that lenders are more vulnerable to losses if buyers can't pay. And now that home prices in some areas are flattening and interest rates are flirting with three-year highs, there are mounting signs the loan industry is becoming more cautious.

In December, federal banking regulators proposed guidelines to rein in lenders peddling loans that offer below-market introductory teaser rates, interest-only loans and payment-option loans that permit payments that don't cover even the interest.

Tightened criteria
Just days before those long-anticipated guidelines were released, Washington Mutual, the nation's third-largest lender, acknowledged it had tightened its underwriting criteria on payment-option loans. It's now analyzing the borrowers' ability to pay after the introductory starting rate expires.

Industry experts are beginning to see additional changes that could affect borrowers who want to buy homes or refinance. Some lenders are less willing to let customers take out loans bigger than their incomes typically would justify. Some are shaving their predictions of how quickly rising home prices will provide equity that can cushion homeowners and lenders alike. There's more wariness of stated-income loans -- also known as ``liars' loans'' -- that don't require self-employed or borrowers with lower credit scores to document their income.

Also falling out of favor are so-called piggyback loans that add a second loan for buyers who need to borrow the down payment, said Anthony Hsieh, president of LendingTree.com, an online company that refers borrowers to lenders. Some lenders now require borrowers to pay off or refinance the balance of the second loan within two years.

Meanwhile, Wall Street agencies that grade the risk of mortgages sold to investors have made it more expensive for lenders to sell bundles of exotic loans to investors. Some smaller sub-prime lenders, who cater to borrowers with sketchier finances, are charging higher interest rates to compensate, said Grant Bailey, a director for Fitch Ratings, a bond-rating agency.

It's all adding to the anxiety of an already nerve-racking process for consumers.

Radio ads increasingly are playing off the fear of rising rates rather than the temptation of low monthly payments with an interest-only loan, said Robert Kleinhenz, deputy chief economist for the California Association of Realtors.

Panicked, ready to refi
Wells Fargo says it's getting a stream of calls from skittish homeowners holding these unconventional mortgages who want to refinance before their monthly payments vault.

And then there are home buyers who feel buffeted by rising interest rates and the risks of exotic loans. Twenty-four-year-old Catherine Gutierrez is two weeks from closing a deal for a new $305,000 condominium at the Brickyard that's just a three-minute drive from her job at Studio S(s2) Architecture in downtown San Jose. It boasts granite countertops, stainless steel fixtures and cherry-stained cabinets. She already has picked out a deep purple hue called "Sweet Truffle'' to paint the kitchen, living room and her bedroom.

"It looks sleek, it looks clean, and it's so what I am,'' Gutierrez said.

Uneasy about terms
But Gutierrez was uncomfortable when one mortgage broker first steered her toward piggyback loans, then recommended a payment-option plan that would cause her loan to grow whenever she elected to pay only a portion of the monthly interest.

"He was saying the property will appreciate more than what would be added on top'' of the original principal, Gutierrez said. ``I just didn't want to take that risk and put that much faith in the market.''

Instead, Gutierrez plans to get financial help from a parent and take out an 80 percent interest-only loan that would guarantee her five years of payments at a fixed rate.

Is she confident she can still make the payments or refinance when the payments jump in five years?

"I think so,'' Gutierrez said. ``After that I would see what rates are doing. You can't predict the future. You either jump or you don't. I'm jumping

Bay Area home sales fall to 5-year low; prices still rising

Silicon Valley/San Jose Business Journal - by Sharon Simonson

The pace of home sales continues to slide in Santa Clara County with 268 fewer homes and condos, or 14.2 percent, trading hands last month than in February 2005, according to numbers released Thursday by a Southern California company.

Despite the slowing, the median price of the 1,614 homes sold countywide rose 14.5 percent to $663,000, DataQuick Information Systems said.

That compares to a Bay Area median of $616,000, up 12.2 percent from the same month a year ago.

DataQuick uses public records to reach its conclusions.

Home sales in the nine counties typically identified as the Bay Area regional housing market were at their lowest level in five years with 6,206 new and resale homes and condos changing hands. That compares to 7,463 in February 2005, though it was up about 200 units from January's threshold.

The slackening pace does not spell doom to him, said Marshall Prentice, DataQuick president, in a prepared statement.

"We'll know more about what's going on once next month's numbers come in," he said. "March sales have a more typical purchase pattern than February's or January's. Right now we don't see anything ominous in the numbers, just a real estate cycle that is past the frenzy phase."

Foreclosure rates, while rising, are not above normal, the company said. Adjustable-rate mortgages are also declining in popularity among Bay Area buyers, and down-payment sizes are stable.

Fred Hibbert, a Coldwell Banker managing broker who tracks weekly sales data across Santa Clara County for the company, said the year has begun differently than is typical, with sales clearly slowing and fewer sellers coming into the market. The number of homes pulling multiple offers has also fallen below 50 percent, he estimated.

Still, he said, "Good locations and property presented properly still draw lots of interest."

Pros and Cons of a 40-Year Mortgage

Real estate brokers and lenders say consumers are being resourceful in taking out 40-year loans when double-digit home price appreciation has become the norm.

"Most borrowers do not plan to live in the house for 30 years, so a longer term is of no consequence," said Diane Saatchi, senior vice president with the The Corcoran Group, a major residential real estate firm.

"They figure to sell in about seven years; having 23 or 33 years left on the term is inconsequential," she said.

But 40-year loans have their critics, like Schatsky, who does not recommend them to to his clients unless they are severely cash-strapped or have a clear sense of future income streams.

Another research group, Bankrate.com, notes that interest rates on 40-year mortgages are generally 0.25 to 0.50 percentage point higher than on traditional fixed 30-year loans. That difference negates some of the benefits of the lower monthly payment.

Even with the same rate as on a 30-year loan, the 40-year loan's savings appear negligible.
For example, a $200,000 mortgage financed for 30 years at a fixed rate of 5.75 percent would carry a monthly payment of $1,167.15, Bankrate.com said.

By stretching the loan term an additional 10 years, borrowers, even at an identical interest rate, reduce their monthly payment by just over $100, to $1,065.78. However, the borrower also would have $16,389 less in equity at the end of the first decade of payments and would have paid an extra $4,200 in interest.

"This all stems from affordability and borrowers stretching themselves beyond their reach to get into a home they can't afford," said Economy.com's Chen. "What's next, a 50-year loan?"
Recent anecdotal evidence indicates that home price increases are beginning to decelerate, a sign the housing sector is starting to cool.

"When housing cools, so will these loans," said Schatsky. "If a consumer has to take out this loan to qualify for a home, their goal of homeownership needs to be seriously reevaluated."

Weekly Market Report for the Week of February 26th- March 4th, 2006:

Is the market "normal" or "mixed?"

Buyers are certainly out there and activity is healthy but moving at a significantly slower pace than last year. Buyers are being much more selective and are seeking out the best properties, in the most desirable areas and at the "right" price. Prices are holding steady and the average sale price is up over 10% this year to date in Santa Clara County. The number of sales are still lagging behind 04' and 05' figures.

Santa Clara County inventory is a little under 2700 total properties for sale. This is ahead of the same time last year (1550) and very near the 04' mark during the first week in March (2200). Some offices reported 50% of their transactions involving multiple offers while others reported none. High end homes have been moving in select areas. On the Monterey Peninsula, for example, approximately 20 properties between $2-20 million have closed escrow over the past few months. The Peninsula has also reported several properties over $30 million selling in the most prestigious locations.

Inventories throughout the bay area including Santa Cruz, Santa Clara County, the Peninsula and San Francisco are still historically low. Some agents are reporting a "pick-up" in sales activity while others are reporting that "it seems too quiet for the time of year." Whatever the case might be, demand is healthy and there is still much more demand than supply.

The mixed signals are making it difficult for the market to get into a steady rhythm. In the meantime, Sellers should be sensitive to pricing their properties while buyers are processing through the reality that the "bubble" the media has been so fixated on has not come to fruition.

HOT RENTAL MARKET

Many U.S. metros are in the hottest rental market in over 5 years according to M/PF YieldStar, a Texas based research firm. According to Greg Willit, vice president of research at M/PF "2006 should be the big price correction" for rents. "Everything is really underpriced in many markets around the U.S."

- National apartment occupancy rose 1.6% to 95.2% in 4Q05, the highest point since fall of 2001.

- The average rent climbed to $940 in 4Q05.

There are several factors at play that will likely keep the heat on high:

Increasing demand - Rising building cost, coupled with strong new job growth, is creating a growing pool of renters.

- San Francisco had 96.4% occupancy with an average rent of $1,573.

- Los Angeles was the fifth-tighest rental market with an average occupancy rate of 97.1% and an average rent of $1,421. In LA it can take up to 8 years to get a project built.

- New York City topped with 97.1% occupancy with an average rent of $2,400, according to real estate data firm, Reis Client Services.

Other metro areas expected to see increases in occupancy and rent include Las Vegas, NV; Phoenix, AZ; and Austin, TX, where demand has outpaced construction and job creation is growing at record pace.

In some of these markets rising home prices have so widened the gap between renting and owning that many believe there will be a landlord's market for many months.

Shrinking new supply - In many communities the cumbersome building processes and skyrocketing construction costs have placed the price of new homes beyond the mainstream buying market.

Shrinking existing supply - Condo conversions are eating up inventories. In high rental demand markets the existing supply of rental units is rapidly shrinking. So strong is the demand that it is increasingly feasible for developers to convert existing apartment units, considering the high cost of buildable land, excessive planning and permitting time; and high cost of new construction.

Local forces - Natural disasters like Katrina produce strong demand for rental housing.

- Though short-termed the aftermath of Katrina created a sharp demand for rentals (In Houston, TX occupancy jumped to 94% and rents by 3% to an average of $692). The markets of Nashville, Dallas, Birmingham, and Atlanta, all benefited from the Katrina aftermath as evacuees relocated to new communities.

All of these factors are forging a strong investors' rental market into the near future.

GLOSSARY OF REAL ESTATE TERMS

Agent - An individual who represents a seller, a buyer or both in the purchase or sale of real estate. Since the commission for the sale of a house is almost always paid for by the seller, buyers are able to get assistance and information from Real Estate Agents, usually at no cost to them. It is for this reason that the vast majority of homebuyers employ the services of an Agent for their purchase. In addition, since most houses are listed by Real Estate Agencies, it gives them the maximum number of available properties to consider.

Amortization - The schedule of loan payments that establishes the amount of payment to be applied to the principal and the amount to be applied to interest, usually on a monthly basis, for the full term of the loan.

Annual Percentage Rate (APR) - The TOTAL interest rate of a mortgage, including the stated loan interest as well as any upfront interest paid in securing the loan. The APR will invariably differ from the mortgage rate quoted due to the inclusion of these items.

Appraisal - An estimate of value of a Real Estate property by a professional third party. Virtually all non-owner financed mortgages will require an appraisal and is generally paid for by the buyer.

Adjustable Rate Mortgage (ARM) - A mortgage in which the Interest rate is adjustable, meaning that the rate can go up or down according to prevailing financial market conditions. Probably one of the reasons that buying a home is such an emotional experience is because of the fact that not only do you have the actual house buying to deal with, but for most homebuyers you also have the mortgage process to encounter. This can be a smooth and almost uneventful process, or an unnerving one. A great deal depends on the preparation of the buyer as well as the selection of an efficient mortgage company.

Assessment - The value of a property as determined by the local tax jurisdiction which is used to determine the amount of your property taxes.

Buyer's Agent - A Real Estate Agent that has made an agreement to represent the buyer exclusively, rather than the seller. The Agent, unless specifically disclosed otherwise, represents the seller in any transaction for the sale of a home. It is that Agent's fiduciary duty (where their loyalty lies) to protect the seller's position at all times.

Buyer's Agency, however, may be an option available to you. Simply put, it allows the Agent with whom you are working to be your representative and to put your interests above all others.

Comparable Market Analysis (CMA) - A comparison of the prices of similar houses in the same general geographic area. A CMA is used to help determine the value of a property, either for a seller or a buyer. A Comparable (or Comparative) Market Analysis is developed by an Agent to compare similar properties in the same general neighborhood. It is an essential tool when attempting to determine the market value of a specific home.

Closing - The process that affects the final transfer of the deed from the seller to the buyer, as well as finalize all aspects of the mortgage of the property. After the searching for a home is done, the negotiations have been completed, the house has been inspected, and the mortgage has been applied for and committed to, the focus suddenly turns to the Closing, Settlement, or Escrow as it is known in some localities. For simplicity, in our discussions here we will refer to the process when it all comes together and you finally own the home as Closing. An understanding of the elements of and players in the closing, as well as a concise preparation for it, will eliminate many nervous hours as the day approaches.

Closing Costs - Funds needed at the time of closing (separate from and in addition to the down payment). Loan origination fees, discount points, Attorney fees, recording fees and pre-paids are some items that may be included. They often will total from 3% to 5% of the price of the home, payable in cash (cashiers check).

Contingencies - These are conditions-or "safety valves" written into Real Estate offers and contracts to prevent a buyer from being forced to buy a house that is unsatisfactory either structurally or financially. Examples of contingencies are "This contract is subject to the buyer obtaining a satisfactory whole house inspection." or "Subject to the buyer being able to obtain a mortgage."

Condominium - Housing where the owner owns only the unit in which they live-from the interior walls inward, generally-as well as a portion of the common area.

Debt to Income Ratio - The ratio of a borrowers total of debt as a percentage of their total gross income.

Deed - The document that, when recorded with your local government, determines ownership of a property. Transferred from seller to buyer at closing.

Dual Agent - A dual agent is a real estate agent who has signed a buyer agency agreement with a buyer who wishes to purchase a listing held by the agent or the agent's firm. In states where dual agency is allowed, it must usually be agreed to by all parties in writing.

Earnest Money - Money that is submitted with an offer to purchase which indicates a buyer's seriousness and good faith. In virtually all cases, earnest money will need to be submitted at the time of the offer and remains in escrow until the time of closing, at which time it becomes part of the downpayment.

Equity - The difference between the value of a property and the total of any outstanding mortgages or loans against it.

Escrow - Funds held in reserve both prior to closing (for example the earnest money and deposit) by a third party and after closing by the mortgage company to pay future taxes and homeowners insurance. In some areas, "escrow" also refers to the closing process.

Fixed Rate Mortgage - A mortgage loan where the interest rate is established at its origination and continues unchanged through the life of the loan.

FSBO (For Sale By Owner) - Real Estate that is sold without the assistance of an Agent. FSBO can refer to both the individual selling the property "They are a FSBO," or the property itself "that house is a FSBO."

Foreclosure - The process through which a lender takes back property from a defaulting owner and re-sells it.

Homeowner's Association - An owners group, whether in a condominium, townhouse or single-family subdivision that establishes general guidelines for the operation of the community, as well as its standards.

Inspection - A whole house inspection of a home being considered for purchase that looks for defects in the property.

Interest - That portion of a mortgage payment that is the "charge" for the using the lender’s funds.

Lien - A legal claim against a piece of property that can prevent it from being sold unless the lien is satisfied (paid off). Liens can be filed by unpaid contractors or other debtors in a legal process so that they will be paid when a property is sold.

Listing - A property for sale by a Real Estate Brokerage and Agent.

Listing Agent - The person who has obtained a listing of real property to act as an agent for the compensation to sell the property or find or obtain a buyer.

Loan Origination Fee - A charge imposed by the lender, payable at closing, for processing the loan.

Lock-in - An agreement by the lender at the time of mortgage application or shortly thereafter, to write the mortgage at a specific interest rate, whether rates rise or fall up to the date of closing. Obviously a good move if rates are rising, not so good if they are falling. Lock-ins have specific expiration dates, such as 30, 60 or 90 days in the future.

LTV (Loan to Value) - The ratio of the amount of the mortgage as a percentage of the value of the property.

MLS (Multiple Listing Service) - A listing (almost always computerized) of all the properties for sale by Real Estate Brokerages in a given geographical area.

PMI (Private Mortgage Insurance) - Required on virtually all conventional loans with less than 20% downpayment. Although the payments for PMI are included in your mortgage payment, it protects the lender should you default on the loan. On FHA loans, you will pay a MIP (Mortgage Insurance Premium), which accomplishes the same purpose.

Points - 1 point is equal to 1% of the loan value, paid at closing. Points can be loan origination fees or "discount points" which reduce the interest rate of the loan (you are actually paying a finance charge up front). When a lender, for example, quotes a rate of 8 1/2% with 1 + 1 points, 1 point is for the origination fee and 1 point is for the discount fee.

Prequalification - The first stage of a mortgage application where the lender will run a basic credit report and determine your debt to income ratio in order to see how much mortgage you qualify for.

Pre-paids - Paid for (in cash) at closing for such items as homeowners insurance for one year and real estate taxes for several months.

Principal - The amount borrowed for a mortgage loan. Your monthly mortgage payment will be applied to both the interest and the principal (be assured, though, that the lions share will go to the interest portion in the first years of the loan).

Property Tax - An annual or semi-annual tax paid to one or more governmental jurisdictions based on the amount of the property assessment. Generally paid as part of the mortgage payment.

Recording - The act of entering deed and/or mortgage information into public record with your local government jurisdiction.

Selling Agent - This term includes (1) a listing agent who acts alone to sell a listing that he or she obtained; or (2) an agent who acts in cooperation with a listing agent and who sells or finds a buyer for the property; or (3) an agent who has located a property for a buyer for which no listing exists and presents an offer to purchase to the seller. Generally speaking, the selling agent is the person who works with the buyer.

Title Insurance - Protects your title: your ownership rights, from claims against it. Paid at closing, title insurance may be the responsibility of the buyer, the seller, or both, depending on what is traditional in your locality.

Warranty - Covers either most of the house in a new home, or selected items (for example the heating and air conditioning system or the water heater) in a used home. Warranties can vary widely and are optional in used homes (paid for by either the buyer or the seller).

Zoning - Laws that govern specifically how a zoned area can be used. For example, an area may be zoned for single family residential, condominiums, commercial or retail, or a mix of two or more uses.

What to Expect When Closing on a Home

Go to any local courthouse and you can find property records detailing real estate ownership in your community -- sometimes records that date back hundreds of years.

These records are important because they provide today's owners with proof that they have good, marketable and insurable title to the property they are selling. Equally important, such records enable buyers to provide proof of ownership when they sell.

The closing process, which in different parts of the country is also known as "settlement" or "escrow," is increasingly computerized and automated. In many cases, buyers and sellers don't need to attend a specific event; signed paperwork can be sent to the closing agent via overnight delivery.

In practice, closings bring together a variety of parties who are part of the "transaction" process. For example, while the history of property ownership has been checked, it's possible that the records contain errors, unrecorded claims or flaws in the review itself, thus title insurance is necessary. At closing, transfer taxes must be paid and other claims must also be settled (including closing costs, legal fees and adjustments). In most transactions, the closing agent also completes the paperwork needed to record the loan.

What to expect.
Settlement is a brief process where all of the necessary paperwork needed to complete the transaction is signed. Closing is typically held in an office setting, sometimes with both buyer and seller at the same table, sometimes with each party completing their papers separately.

Whatever the case, the result is that title to the property is transferred from seller to buyer. The buyer receives the keys and the seller receives payment for the home. From the amount credited to the seller, the closing agent subtracts money to pay off the existing mortgage and other transaction costs. Deeds, loan papers, and other documents are prepared, signed and filed with local property record offices.

What you need to do.
One of the best parts of settlement is that buyers and sellers need to do very little.

Before closing, buyers typically have a final opportunity to walk through the property to assure that its condition has not materially changed since the sale agreement was signed. At closing itself, all papers have been prepared by closing agents, title companies, lenders and lawyers. This paperwork reflects the sale agreement and allows all parties to the transaction to verify their interests. For instance, buyers get the title to the property, lenders have their loans recorded in the public records and state governments collect their transfer taxes.