Monthly Archives: March 2017

Beginner’s guide to loans

Home for sale in Dana Point. Click photo for details.

How much home can you afford? There are several loan programs available, and depending on your credit history, there is bound to be one that is perfect for you. Here are a few examples of the most popular programs offered today:

Fixed-Rate Loans

The fixed-rate mortgage is the most popular mortgage program in use today. Fixed-rate loans offer the borrow a fixed interest rate for the life of the loan, typically 15 to 30 years. Borrowers have peace of mind knowing that their monthly payment will not change over time. Conventional fixed-rate mortgages have underwriting requirements established by Freddie Mac and Fannie Mae, and require certain down-payment and debt-to-equity ratios to qualify. Fixed-rate loans are especially attractive to buyers who plan to stay in their home for more than a few years.

Adjustable Rate Loans

With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, and payments go up or down accordingly. Rates are tied to an index that reflects the cost of money at any given point in time. Generally speaking, lenders charge a lower initial interest rate for the ARM than for the fixed rate mortgage. If you are expecting interest rates to decrease in the future, or if you are trying to maximize your purchase power today knowing your income will rise in the future, then this loan may be right for you. Adjustable rate loans are attractive for buyers who expect to be in the home for a short period of time.

FHA and VA Loans

The Federal Housing Administration (FHA), offers loans for low-to-moderate-income home buyers. FHA loans have lower down payments, and have relatively easier requirements than conventional fixed-rate mortgages. FHA mortgages have no income restrictions and even those with lower credit scores may be considered. Past bankruptcy does not necessarily disqualify borrowers from using this program.

In addition, the Department of Veterans Affairs (VA) offers a zero-down mortgage program. To take advantage of this program, borrowers need to be among those listed as veterans and service personnel in the U.S. military. One of the biggest benefits of this program is that it eliminates the need for private mortgage insurance.

>> Review common mortgage terms

A rookie’s guide to buying a rental home

Duplex for sale in Dana Point. Click photo for details.

Source: OC Register

As rents hit record highs, here’s a rookie’s guide to buying a rental home

Hugh Siler had a vision when he bought a full block of small houses in Orange this spring. He would restore the homes, built in the early 1900s and long fallen into disrepair, to their original state. After that, he’d rent them out at top dollar.

One house is done, and if it’s any sign, his payoff will come sooner than later. The 450-square-foot, one-bedroom cottage on Palmyra Avenue near Orange Plaza rented for $1,850 a month – immediately.

“Literally, it rented before I even stuck a sign in the ground,” Siler said a couple of weeks ago. His tenants, a young couple, plan to move in by the end of November.

As rents break records, apartment vacancy rates stay low, and millennials delay homeownership, buying houses to rent appeals to investors large and small. But the foreclosures of the Great Recession have been receding for years, and bargains can be hard to come by in Orange County, where the median home price was $640,000 in September.

That’s led many local buyers to set their sights on less pricey property in the Inland Empire and sometimes other states.

“Most investors still invest in their backyard,” said Daren Blomquist, spokesman for Irvine-based Attom Data Solutions. “So for those folks in Orange County, Riverside and San Bernardino are good options.”

Of course, risks abound, including the impact of housing and economic policies to be shaped by a new president, albeit a real estate developer. Also, Federal Reserve Chair Janet Yellen said last week the U.S. central bank is ready to lift interest rates. The hike is expected in December.

Earlier this year, real estate adviser RCLCO predicted, “If household income growth for lower and middle-class Americans remains slow relative to historic gains, and home mortgage standards do not loosen for subprime borrowers, it is likely that the recent boom in single-family rentals is here to stay.”

Here are five additional things investors and would-be landlords should take into account.


Attom released a report in October showing potential profits on rental homes throughout California. The analysis included capitalization rates – or rates of return on a real estate investment property based on the income the property is expected to generate.

With a potential annual gross rental yield of just 4.3 percent, Orange County came in at No. 461 out of 473. By comparison, San Bernardino County has a 7.6 percent potential capitalization rate, ranking No. 311. Riverside County has a 6.1 percent potential cap rate, ranking No. 399.

So where else are Orange County investors looking?

The company did an analysis for the Register last week and found the top 10 counties where Orange County residents own investment homes are led by Riverside, Los Angeles and San Bernardino counties.

Those places were followed by Clark County, Nev.; Maricopa County, Ariz.; San Diego County; Mohave County, Ariz.; Kern County; Wayne County, Mich.; and Harris County, Texas.


Many investors specialize in one type of residential property, whether it’s single-family houses, mobile homes or apartments.

Siler has found a niche within a niche: restoring and renting out historic homes.

It can be a difficult proposition. For one thing, he said, a bidding war ensued over the five homes – one a duplex – that he purchased in April. He said he spent a total of $1.62 million to come out the winner.

Then, there’s the exacting work of creating authentic restorations. “Most people would say I’m fairly nuts to take this on,” he said. Compared with remodeling homes from the 1970s or ’80s, “When you do a vintage home, the template goes out the window.”

He’s had some experience, restoring the historic Shaffer Cottages, a set of four tiny, attached apartments he bought elsewhere in Old Towne Orange for $585,000 in 2011. That project saw him spend about $175,000 and some 4,000 hours on refurbishing and restoration.

At least he could count on some future cost-cutting. The original, refinished floors eliminate the need to buy carpeting for every new tenant, and it takes only a gallon or two of paint to refresh a small interior.


One of the most dramatic shifts in the U.S. housing market in the past decade was the “unprecedented” increase in single-family home rentals, RCLCO said in a report this year.

But, the firm added, “While there has been widespread discussion of the economic and demographic shifts affecting the U.S. multifamily rental market, a major component of the overall rental market – single-family rentals – has been largely overlooked.”

Reis Inc., which tracks apartment rents, said rates went up in all 79 major U.S. metro areas it studies. The average rent for all metros was $1,271 a month, up 19 percent over the past 4 1/2 years.

In Southern California, rents hit all-time highs. Orange County rents were the ninth highest among the top 79 U.S. cities.

The average asking rent for an Orange County apartment climbed to $1,781 a month, following 61/2 years of steady hikes, according to Reis. In the past 4 1/2 years, rents shot up 14.3 percent, or $223 a month.

In Los Angeles County, the average asking rent reached $1,676 a month, rising nearly 18 percent over the past 41/2 years, Reis reported. In the Inland Empire, the rents were up 17 percent to $1,239.

Meanwhile, homeownership has been dropping, and millennials are expected to rent for longer than their parents did.

John Burns, an Irvine-based real estate consultant, predicts an overall 60.8 percent homeownership rate among all age groups by 2025, the lowest since the mid-1950s.


Still, investors can face plenty of uncertainty, starting with their newly purchased property.

For one thing, often, a home inspector won’t find everything, Siler said.

“So make sure to set aside an additional fund of money – about 15 percent of your overall renovation budget,” he said, “and call it your ‘just in case’ fund.”

Investors also say it’s best to have at least six months of reserves in the event a renter doesn’t turn up right away.

Institutional investors – those with 10 properties or more – have purchased more single-family rental properties this year, even though average returns dropped to a nine-year low, Attom said in an Oct. 27 news release. But, the data firm said, “After a drop-off in single-family purchases by both individual and institutional investors over the past two years, we’re starting to see investor acquisition activity pick up again.”

Blomquist said it’s a good idea for smaller investors to pay attention to what the larger, better-capitalized investors are doing.

“In some cases it may be so the smaller investor can simply follow the lead of larger investors who have found a market or strategy that delivers strong returns,” he said. “But in some cases, it may be to avoid the strategies and markets employed by larger investors, so the smaller investor doesn’t have to compete.”


A lot of mom-and-pop investors like the idea of collecting monthly checks, but balk at the hassle of finding renters or fixing dishwashers. Or they worry about being too far away to handle the upkeep.

An Irvine company is one of one of several online investment management firms helping buyers more easily pick up single-family rental homes in lower-cost markets where returns are higher.

HomeUnion acquires the property on behalf of the investor, completes the documentation online, lines up property management, and later helps the investor figure out when to sell. Transaction fees are 3.5 percent of the purchase price; management fees are 10 percent to 10.5 percent of the rent.

The company, operating in 18 U.S. markets, has penned the motto, “You invest, we do the rest.”

It appears to be working.

The firm recently announced plans for an initial public stock offering.

How renters should prepare for home ownership

Source: OC Housing News

To prepare for home ownership, rent a property using 23% or less of your gross income. Save 8% of your gross income in a special down payment account you don’t raid for other lifestyle expenses or purchases. In less than two years, you will have the down payment to purchase a property comparable to your rental using FHA financing. With the discipline you gained from living within your means and saving for a down payment, you will succeed as a home owner and build equity through paying down a mortgage. You might even be rewarded by the appreciation fairies and complete a move-up once you have about 30% equity in your home and you can sell, cover the closing costs and still have 20% for a down payment on a nicer property.


PITI is short for principal, interest, taxes and insurance, but it also includes other known costs such as HOA dues and private mortgage insurance. When a lender calculates the maximum loan they will extend a borrower to buy a particular property, they start with the borrowers income and apply the maximum debt-to-income ratio, currently 31%. They take this number and divide it by 12 to come up with a maximum PITI. For example, let’s say a borrower making $100,000 per year wants to buy a home. The lender will allow them to put $31,000 per year ($100,000 x 0.31) or $2,583 per month to cover PITI.

Maximum loan balance

When lenders calculate your maximum allowable loan balance, they back out taxes (including Mello Roos), insurance, and HOA dues to calculate the remaining amount left over to cover the payment, which includes principal and interest. Generally, about 25% of PITI is consumed by taxes, insurance and other costs. Let’s assume $583 is consumed for these backed-out items. The remaining $2,000 is available to make a payment. From that, lenders use another formula that takes into account the interest rate to calculate the maximum loan balance.

If we stay with our example from above, a borrower making $100,000 per year making a $2,000 monthly payment can borrow $440,000 using 20% down conventional financing or $381,175 using FHA financing.

Rent and Savings

A renter making $100,000 a year should be paying about $1,900 in rent and saving about $700 per month toward a down payment. That translates to a 23% rent-to-income ratio.

From the above example, a $440,000 conventional loan balance leaves a $110,000 down payment to purchase a $550,000 house. At $700 per month, it will take 158 months to save the $142,052 for a down payment. Thirteen years is a very long time. That’s why so many people opt for FHA financing with 3.5% down. At $700 per month, it only takes 20 months, or just over a year and a half, to save the $13,825 required to cover the FHA down payment on a $395,000 property.

Did you notice the catch to using FHA financing? People who don’t have a 20% down payment have to settle for much less house on the same income. This is why the tradition of buying a starter home, waiting until it accrues 20% equity, then selling for a move-up is such a big part of our housing market.

People still flock to California, despite high costs

As a follow-up to my post earlier this week…

Don’t Buy the Hype; California is Still a Top Destination for Homeowners

Source: Orange County Register

I tend to believe the idea that larges masses of Californians are moving out of the State may be a bit overstated.  California certainly has its faults, notably a high cost of living and steep educational and professional requirements for many of its fast-growing professions. But the latest Census Bureau data actually shows California’s per-capita out-migration percentage to be among the lowest nationwide.

Home for sale in Dana Point. Click photo for details.

When the Census Bureau recently reported California had a “negative out-migration” to other states – 129,233 in 2015, largest since the recession ended and second largest in the nation – many people said “I told you so.” But when you account for California’s largest-in-nation population (38.7 million in 2015), you find the net departures equal a barely perceptible 3 folks leaving us per 1,000 residents. (And by the way, 14 states performed worse.)

California did lose 3.5 million people to other states in the 2010-2015 period. People move. And big states will lose plenty of people, no matter what. But that number is tiny in comparison. Remember, California is huge. So, that outflow of 3.2 million folks translates to an average annual 1.55% of California residents moving out of state during the 2010-15 period. No state had a lower per-capita movement rate than California. Yes, we Californians are the least likely to move out! Next best state for keeping its citizens? Texas at 1.6 percent annually, then Ohio and Michigan at 1.8 percent.

So how does California consistently have significant net out-migration to other states? We’re definitely not good at attracting people from other states. California took in 2.9 million people from other states in 2010-15. Only Florida (3.2 million) and Texas (3.1 million) had more. But look at arrivals on a per-capita basis and you’ll see that in those six years California got new residents from other states at a yearly rate averaging 1.3% of its population. That’s well below the U.S. rate 2.3 percent of residents moving interstate and the worst in the nation, with Michigan and New York next at 1.4 percent.

So how does California’s population grow if we’re not attracting fellow Americans?

Well, new babies help, but the state’s birth rate is historically low. The real secret is California’s attractiveness to folks from foreign lands. In 2010-15, California totaled 1.7 million new residents from outside the U.S. That’s well ahead of Texas, 1.2 million, and Florida, 1.1 million. Foreigners added to the population at a 0.76% annual rate since 2010, a pace running above the nation’s 0.6% rate and 8th highest in the Union over that span.

California may look crowded and costly to other Americans. There’s a different view in the rest of the world.

It’s getting harder to afford a house in Orange County

Home for sale in Dana Point. Click photo for details.

Source: Orange County Register

The California Association of Realtor’s measure of what it took to buy a local home in the fourth quarter shows three of four Southern California counties with falling affordability. This index tracks what share of households can afford a median-priced, single-family house.

  • Los Angeles County: It was the only local county with improving affordability, as 28% of households could afford to buy. At year’s end, an L.A. household must earn at least $99,230 to afford the typical monthly house payment of $2,480 on the $503,400 median-priced home.
  • Orange County: The least affordable county in the region with 22% Households must earn $146,880 to comfortably pay house payments of $3,670 on the $745,160 median-priced house.
  • Riverside County: Affordability fell to 41%. Households must earn $70,250 to comfortably pay the house payment of $1,760 on the $356,380 median-priced home.
  • San Bernardino County: This is the region’s affordability hotspot at 54%. Households must earn $49,500 to comfortably pay house payments of $1,240 on the $251,100 median-priced home.

Statewide affordability in the fourth quarter was 31%, the same as the previous quarter but up a notch from 30 percent in 2015’s fourth quarter.

Least affordable counties? San Francisco (13%), San Mateo (15%) and Santa Cruz (17%.)

Home sales likely to fall in 2017

Home for sale in Dana Point. Click photo for details.

Source: OC Housing News

High house prices and rising mortgage rates will hurt affordability and offset any gains from wage growth and an improving economy.

Have you looked for a home to buy lately? They’re expensive, and although 4% mortgage rates enable buyers to finance those prices, mortgage rates only make houses affordable at levels below 4.5%.

Over the last four years, all lenders revamped their loss mitigation procedures to can-kick loans if borrowers default until house prices exceed the balance of the loan. No matter what else happens in the market, unless the banks are forced to change their policies by the government regulators or the federal reserve (a very unlikely event), lenders will continue to kick the can with loan modifications and suspend homes in cloud inventory for as long as it takes.

Since problems in the market cannot be resolved by lowering price, the inevitable problems that arise will cause sales volumes to remain weak. As a result, you can expect years of low sales volumes in residential real estate.

One of the major hurdles facing a sustained rally in real estate prices is the relative absence of first-time homebuyers, the bedrock of the market. First-time homebuyer participation is near historic lows. Banks restricted inventory to push up prices, but what happens to the market if prices are so high that first-time homebuyers can’t afford them? Some first-time homebuyers will hold their nose and substitute down to lower quality properties, but many will simply not buy and chose to rent instead. The result will be fewer transactions and low sales volumes.

There are three reasons we don’t see many first-time homebuyers. For one, many are unemployed. People without a job don’t buy homes (anymore). Further, many potential first-time homebuyers have too much debt. They have large student loan payments, excessive credit card debt, and the lease their cars. They don’t have any money left over to save for a down payment, and even if they had the savings, they don’t have the qualifying back-end debt service ratio required to get a loan.

In the recent new mortgage regulations, back-end debt-to-income ratios were capped at 43% for all qualified mortgages. If the borrower wants to max-out their loan with a 31% front-end ratio, they can’t spend more than 12% of their gross income on student loans, credit cards and car leases combined. Many young people spend that much on each of those. Any potential homebuyer with a student loan and a car payment — which is most of them — is unable to qualify for a loan. And that’s a good thing because if they got a loan, they couldn’t afford the payments anyway.

And finally, after witnessing the catastrophic collapse of home prices that trapped the preceding generation in their starter homes, many potential young buyers simply don’t want to take the risk. Perhaps rising prices and endless NAr bullshit will force kool aid down the gullet of this generation, but many will learn the hard lessons of the housing bubble and refuse to overpay for a house.

Suddenly, home sale agreements nationwide are falling apart

… A Trulia analysis of U.S. listings shows that 3.9 percent of homes that moved from for-sale to pending moved back to for-sale again, nearly double the rate in 2015. Such “failed sales” increased in 96 of the 100 biggest U.S. metros, with big swings in areas large and small, rich and poor. That includes Los Angeles and Charleston, S.C., as well as San Jose and Akron, Ohio.

In Ventura County, Calif., where the median home value is $548,000, 11.6 percent of prospective sales failed to close in 2016. That’s the highest in the U.S., up from 3.1 percent in 2015. Tucson, where the median home price is $176,000, had the second-highest rate of failed sales, at 10.8 percent, up from 3.5 percent the year before.

The problem of failed sales has been most acute for cheaper homes and older ones: Some 6.3 percent of sales of starter homes fell through last year, according to Trulia’s analysis, compared with 3.6 percent of so-called premium home sales. Homes built in the 1960s had the highest fail rates, while sales of newer and older houses were more likely to go through.

Trulia’s data don’t explain why listings reverted from pending to for-sale.

Why are more listings failing to close? High prices are the likely culprit. Realistically, it’s because buyers are extending themselves to the limit of their ability to finance, and any small problem is likely to kill the deal, particularly with first-time homebuyers with less savings, more debt, and limited credit histories. As mortgage rates rise and marginal deals become even more marginal, I expect the fallout rate to continue to rise.

Remember 2007

Everyone is lamenting the lack of MLS inventory, but even if we had an explosion of cloud inventory, it wouldn’t change much. Inventory that’s priced above what people can afford is the same as inventory that isn’t there. Back in 2007, we had an explosion of inventory.

Many observers mistakenly believe the influx of inventory in 2007 pushed prices down. That isn’t the case. In 2007 the normal listings that came to market found no buyers. Prices fell steeply in 2008 despite declining inventory for most of the year. Transaction volumes dried up in 2007 because the toxic financing was taken off the market and people couldn’t finance the large sums necessary to pay peak prices (see red line below).

Since that 2007, mortgage interest rates have fallen from 6.5% to 3.5% thus allowing buyers to finance mortgage balances similar to those during the housing bubble.

Price or volume but not both

Lenders hope to have it both ways. They want the high prices of the bubble, and they want high transaction volumes so they can clear their inventory of bad loans. Unfortunately, they can’t have both. As a result, they will accept lower sales volumes and a much longer time to clear the market. By the time they are done, some borrowers will have squatted in their homes without making payments for 10 years or more. Not a bad deal for them.