And California Gets It Again

We all know that Shrub has never been a friend to strongly-democratic states such as California or New York, especially to the populous cities where he isn’t popular. Well, he just did it again.

According to the papers (there’s another good summary in the Washington Post), Shrub announced some steps to help in the current mortgage crisis:

  • He said he would take steps to allow the Federal Housing Administration (FHA), which insures the mortgages of low- and moderate-income homeowners, to guarantee the loans of some borrowers who are more than 90 days behind in payments of the loans.
  • He would seek to temporarily change a provision of the tax code that now penalizes homeowners who refinance their mortgages to reduce the size of their loan payments or who lose their houses to foreclosure.
  • He also called on Congress to pass his proposal to reform the FHA, in part by raising those loan insurance limits to $262,000 in most states and $417,000 in pricier areas.

It is this last one that is significant. Shrub is proposing raising the FHA insurance limit, basically to bring it in line with the limits of the loans that can be handled by Freddie Mac and Fannie Mae. With a 20% down payment, that’s just over $500K… well below the median prices of housing in these higher price areas.

The problem is that once you are above the Fannie Mae/Freddie Mac limits, rates are becoming exhorbitant. This is because below those limits, these quasi-government agencies will buy the loans, ensuring the brokers of their needed secondary markets. Above the limits, however, private or market purchasers must be found. With the liquidity crisis, that’s harder, which is what is raising the rates. What needs to be done reformation of more than just the FHA insurance limits: there needs to be reform of these Fannie Mae and Freddie Mac limits. That’s why I support the move by the California Assn of Mortgage Brokers to increase the Fannie Mae/Freddie Mac limits. If California was declared a high-cost state, it would place it among select regions where the conforming rate limit is about 150% higher. Other high costs areas include Alaska, Hawaii, Guam and the U.S. Virgin Islands. Such a move would make mortgages in LA, SF, and NYC more affordable.

However, Shrub is not supporting the increase in the conforming loan limit to realistic values (say, 110% of the median home value in a given county). I wonder if it is because most of these “high cost” areas tend to be areas that support the other party. I’m sure politics has nothing to do with it.


[Apologies to tsgeisel for deleting the earlier version of this post. I needed to find the correct facts.]


Reading the Tea Leaves – Followup

Folks may remember my post last night about reading the tea leaves on where home mortgage interest rates were going. Well, mediocre minds run in the same gutter. Today’s LA Times has an article on just that subject: what to do if you are facing potential refinancing sometime in the future. In short, their recommendations are:

  1. Shop. Shop around for the best loan, for rates now vary widely. For example, on Tuesday, banks listed on BankRate were quoting rates from 6.4% to 8.1% for a $500,000, 30-year, fixed-rate mortgage for a credit-worthy borrower in Los Angeles.
  2. Lock. Lock in your rate early, both to guarantee a good rate and to make it more likely the loan will go through.
  3. Conform. If you are below the $417K confirming limit, there are still reasonable rates to be had for borrowers with good credit.
  4. Split. Depending on how close you are to the $417K conforming limit and interest rates, it make may sense to do a conforming loan and a second, as you may save money.
  5. Wait. This will eventually straighten itself out. Exactly when the pundits don’t know, and interest rates could rise for other reasons. Still, if you don’t need to refinance now, don’t.
  6. Negotiate. If you are buying a house, you’re going to find desparate sellers. Use that to your advantage.

A very interesting article; well worth the read.

ETA: The New York Times also has a good article on the cyclical tightening of the credit market.


Reading the Tea Leaves…

Back in 2005, I did a number of posts about the Los Angeles housing marking, convincing myself that (a) the bubble would last, and (b) if you handled it right, some of the newer loans weren’t risky. Well, time has proven me wrong on (a) as California real estate tanks, and partially right on (b). The Option ARMs were OK… if you didn’t treat them as Option ARMs (i.e., paid the full payments).

We refinanced in early 2006 to a 5/25 loan (i.e., 5 years fixed at 5.625%, then adjustable), and so I’ve been trying to follow the news to determine where the loan market will go. All the subprime mess has me worried (although I’m nowhere near subprime), especially as it is spreading. I am worried about the end of cheap financing, as that means the market for cheap financing in mortgages is drying up. The mortgage security business is running scared. Today, there was even an article about how problems are spreading into the jumbo market (i.e., non-conforming loans), with Wells Fargo now posting rates of 8%, up from 6.875% the week before, and well above the 0.5% to 0.75% spread that is normal for jumbos. As our loan is a jumbo (whose isn’t in the LA market), that’s worrisome.

Now, our loan doesn’t move out of the fixed area until at least 2010. That’s well after the next election, and for all I know, the loan marketplace will be completely different by then. So, O LJ Oracle, what do you see happening? Is this something I should worry about, or will it be a completely different market in 2.5 years when I consider refinancing?


An Economic Idea

Driving the van home today, I had an odd economic idea as I was listening to all the reports on loan problems. I wonder if it is something worth suggesting to my congress-critter, so I thought I would ask you, my gentle readers.

Suppose the government created a new government-funded loan program. This program would have a low interest rate, fixed for 30 years based on when you got the loan, based on whatever rate is set by the fed plus a small percentage. This loan, plus any conventional first mortgage you might have on your house, could only fund up to 80% of the assessed value of your house at the time of the loan… plus, the government loan could make up no more than 50% of that loan.

In short, the notion is that the government would provide the loan for 50% of your loan amount. However, the interest on the government portion of the loan would not be tax-deductable. You would instead get the savings by having the significantly lower interest rate for half of your mortgage. My guess is that the interest on the program would provide the operating costs for the program, and the government would bring in significantly more funds in current tax dollars.

However, I don’t have the math or accounting background to know whether this is a reasonable or a hare-brained idea. For example, I have no idea where the government would get the funds to loan. But it might be an intriguing way to address this sub-prime problem. So where are the flaws?


Living under a Protective Wing

The Ventura County Star has an interesting report today about an unusual traffic stop made by the CHP. Specifically, the CHP stopped a truck on the Conejo Grade carrying the 80-foot-long right wing of a Boeing 747 jet. The wing weighs about 25,000 pounds and can hold 200,000 pounds of fuel. It was bound for the Camarillo Airport, where it will be stored until the owner moves it to her property in the hills northwest of Malibu by helicopter. There, it will become the roof of a house that will incorporate almost all of the parts of a decommissioned Boeing 747.

The 747 (specifically, a decommissioned Boeing 747-200 that still carries the faded logo of defunct Tower Air) is owned by Francie Rehwald, whose family founded one of the first Mercedes-Benz dealerships in Southern California. She’s using it to build a home on her 55-acre property on the Ventura County end of the Santa Monica Mountains. The wings, at 2,500 square feet each, will act as the home’s roof. Other parts of the jet will be used for the house and a few outlying buildings on the property, including a meditation temple made from the nose of the 747.

There’s an article on the architect (David Hertz of Santa Monica), including some conceptual pictures, here. Mr. Hertz intends to assemble a compound of buildings connected by narrow dirt paths. The jet’s wings will rest on thick concrete walls, forming the roof of a multilevel main house. The nose will point to the sky, becoming a meditation chamber, with the cockpit window a skylight. The first-class cabin will be an art studio. The signature bulge on the top of the 747 will become a loft. A barn will house rare domestic animals such as the poitou donkey. A yoga studio, guest house and caretaker’s cottage will round out the compound. The ailerons will be used to control the awning on the patio by the swimming pool. The eight buildings will be scattered across the terraced hillside as if it were a “crash site.” As it happens, the site lies under a jet flight path into Los Angeles International Airport. That concerns the Federal Aviation Administration, which has asked the architect to paint special numbers on the wing pieces to alert pilots that Ms. Rehwald’s retreat is not a crashed jumbo jet.

My favorite quote on this effort: Noting that they had to meet with county engineering officials to persuade them that the jet parts could withstand the strong winds that sometimes buffet Ms. Rehwald’s property, the team noted, “It’s difficult to get a city engineer who is used to working with 2-by-4s and plaster to realize that an airplane that flies 500 miles per hour can stand up to 40-mph winds.”

I think this is really cool. Wouldn’t it be great to have the cash to be able to do this?


“Don’t Believe the Pundits” or “Timing is Everything”

In early 2005, we were looking to move out of our house in North Hills. At that time, I extensively followed the real estate market. In March 2005, I wrote:

First, no one is predicting that the prices will go down; rather, they will just slow. The speculator factor that led to the crash in the early 1990s isn’t there. Rather, the rate rise will slow. However, as long as it is well above the salary increase rate, housing will still increase faster than incomes, and more will be priced out. Don’t believe me? Housing values are currently increasing at just over 20% per year. Let’s assume they slow to 10%. How many professionals are seeing 10% annual raises. Unless appreciation goes negative, it still makes sense to buy now and refinance when rates drop.

In April 2005, I wrote:

The Daily News has an interesting article on the fluctuating housing market here in California. The data over the last 37 years shows that the up cycles, like this one, are strong and long, and the down cycles are on the weak side and short. Over the past 37 years, California’s median price soared 1,843% versus 821% for the nation. But the nation’s median price never fell, though some annual gains were anemic. Sales in California have fallen 11 times since 1968. The important thing is that the longest periods of decline were three years each, first starting in 1980 and then in 1990. The first was due to a huge spike up in interest rates and the second due to a nationwide recession, which in California felt like a depression. That doesn’t appear to be happening this time.

So the pundits were predicting that the bubble wouldn’t burst. In January of this year I noted:

The Los Angeles Times is reporting that Southern California home prices rose last month at their lowest rate in nearly four years while the pace of appreciation for all of 2005 slowed for the first time since 1999. Specifically, the median home price in December is 13% higher than a year earlier, at $479,000. Many homes are taking longer to sell, with the average duration on the market about three months compared with one month a year ago. According to the Daily News, next year appreciation could be in the 5% to 7% range.

By May it was:

According to today’s Daily News, “In May of 1990 we could look back and say the market tanking started in November 1989.” We bought our house in Northridge, CA (“Donna”) in June 2005. According to the same article, “Reports last week from the Southland Regional Association of Realtors and DataQuick information systems showed that the annual rate of appreciation of previously owned homes sank into single digits here and across Los Angeles County for the first time since 2001.”

This evening, I opened up yesterday’s Daily News. What did I find? An article noting “This real estate market is in a dark period, and it’s just not the time change either. Pain is trickling down.” Basically, their point is that it is a dismal market, and won’t improve soon. What are they predicting for the October numbers? “…a sales decline in the high 20 percent range and the median price of a previously owned home close to where it was this time last year.”

When we bought our house in North Hills in 1989, the market tanked shortly thereafter. Looks like its doing it again. My wife wanted to buy sooner. This is what I get for not listening to my wife. I should know better, after 20 years 🙂


My Timing is Great…

Sometimes, I need to wonder about my timing with respect to Real Estate.

In September 1989, we bought our house in North Hills, CA (“Natick”).

According to today’s Daily News, “In May of 1990 we could look back and say the market tanking started in November 1989.”

We bought our house in Northridge, CA (“Donna”) in June 2005. According to the same article, “Reports last week from the Southland Regional Association of Realtors and DataQuick information systems showed that the annual rate of appreciation of previously owned homes sank into single digits here and across Los Angeles County for the first time since 2001.”

Translation: Although we won’t be seeing the same price drop we saw in 1990, we’ll be seeing single-digit appreciation for a while to come. Let’s just hope that interest rates don’t go back to the 1989/1990 levels, when 10%-12% was a good loan.


Timing It Right

Last year at this time we were just getting ready to place an offer on a house in Northridge, moving out of our house of 18 years in North Hills. ellipticcurve was about to close on her new home in Granada Hills, and the bug had bit us. Because of the timing (buying the new place before selling the old), we had gone with a 40-year option ARM (yes, we know). Our intent (which was achieved) was to always make the fully-amortized payment, if not a bit more.

All thoughout the year we have been watching the rates. Until a month or so ago, the Option ARM still had a significantly lower rate. But the rate had crept over 6%, and so we started looking. Unfortunately for us, we were still in the jumbo loan range… which means higher interest rates. The 30-year fixed was resulting in a payment that was uncomfortable, but I didn’t like the direction of the Option ARM. So, we gambled on a 5-year fixed/hybrid (fixed for the first 5 years, then adjusts). We figured this was the right range to put us after the election, when hopefully the rate raising of the fed will be past, and rates will (hopefully) go down.

I’m beginning to think we timed it better this time. Our rate (the loan closes Monday) is 5.625%. According to the Los Angeles Times, 30-year fixed rates are now averaging 6.53%, with the 5-year hybrids at 6.16% (and those rates are for conforming loans; jumbos have higher rates).

Now, to just finish unpacking from last year’s move… but not this weekend; it’s time to play on the trains.