Category Archives: The state of real estate

How much longer can southern CA home prices keep going up?

 

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

Source: OC Register

For 62 straight months, Southern California home prices have gone in one direction. Up. Five years ago, you could snatch up a median-priced condo in Orange and Los Angeles counties for about $280,000, 76 percent less than today’s prices. A median-priced house cost $323,000 in L.A. County five years ago and $495,000 in O.C., about $260,000 less than today’s prices in both counties.

What should a buyer do now? Will prices keep rising? Or are prices close to the top?

The OC Register asked a half-dozen economists and industry analysts what the future holds for home prices in the region. Among their answers:

  • Southern California home prices aren’t about to drop. In fact, they believe prices will keep rising for two more years, at least, and possibly longer.
  • The market isn’t in a bubble — yet — although bubble talk is starting to “raise its ugly head” at cocktail parties, one economist said. Some analysts are saying Southern California home prices are showing signs of being overvalued.
  • If you’re thinking about buying a home, now just might be the time to act — provided you don’t overextend yourself and you plan to live there awhile.

Here are five key questions about where Southern California home prices are heading in the future.

Q: Are we at the peak?

A: Not one of the economists interviewed thinks we are, at least not for entry-level homes. Luxury homes, priced at $2 million and up, may have reached a price peak and are facing an oversupply of listings, analysts said.

Nominal home prices have surpassed pre-recession highs in Orange and Los Angeles counties. Riverside and San Bernardino counties are about 18 percent below their price peaks. But none of those counties has reached pre-recession peaks in inflation-adjusted dollars.

If home prices were to keep rising at the current appreciation rate, and inflation were to continue at the current rate, Orange County’s median home price won’t get back to the pre-recession peak after inflation for about two to three years.

Another fact to consider: During the last market run up, Southern California home prices increased year over year for 126 consecutive months, or 10½ years. That’s twice as long as the current streak in home price gains.

Lastly, analysts say home prices aren’t rising that much. Price increases averaged 6.3 percent in Southern California in the past year, ranging from a low of 5.4 percent In Orange County to a high of 7.9 percent in San Bernardino County.

Q: How much longer will home prices go up?

A: Two years at least, most economists interviewed said. Possibly longer.

Projections by the California Association of Realtors show a gradual decrease in home price appreciation over the next few years, said Oscar Wei, a senior economist for the group. For example, CAR projects prices will go up 5 percent statewide in 2017, 4 percent in 2018, and 2.5 percent in 2019.

Assuming the Gross Domestic Product continues to grow at 2.5 percent and mortgage interest rates stay below 4.5 percent, Southern California home prices could be going up at 6 percent a year for the next six to seven years. At 6 percent a year, the median home price could reach almost $700,000 in Southern California by 2023, $500,000 in Riverside County, $800,000 in Los Angeles County and nearly $1 million in Orange County.

Q: Are we in a bubble now?

A: No.  Los Angeles and Orange counties had an 11½-month supply of homes for sale in the spring of 2007 compared with under four months available this year. Riverside County had an 8½-month supply of listings for sale, vs. just under four months today; San Bernardino County had a 16½-month supply, vs. four months today.

In California as a whole, 43 percent of borrowers had second mortgages in 2006, vs. 4.8 percent last year.  California’s median down payment was 11.8 percent of the purchase price in 2006, vs. 18.6 percent last year. To sum up, we don’t have as many people over-leveraging their homes.

Q: When is the next recession?

A: Not for at least two years, economists said. “Over the next two years, the recession probability is very low,” said UCLA economics professor William Yu, a member of the team producing the UCLA Anderson Forecast. “But beyond two years, that is very difficult to say.”

A major global calamity — like a new Korean War, a messy breakup of the European Union or a surge in oil prices — could trigger a recession, but forecasting exactly when is an extremely murky business, said Joachim Fels, a Pimco managing director and global economic adviser.

Q: Is it too late to buy a home?

A: Industry analysts have advised renters for the past four years to get into the housing market while interest rates and prices still are low. While it’s definitely more expensive to buy a home today than it was a few years back, the cost of buying will be even greater down the road.

If you wait, home prices probably will go up about 8 percent or so in the next couple of years. Plus you’re probably going to see some increase in mortgage rates. Analysts predict mortgage rates will go up half a percentage point this year and half a percentage point next year.

Source: OC Register

Understanding building codes and zoning laws

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

Source

When buying (or selling) a home, it’s important to be cognizant of a property’s local zoning and code violations. If you’re thinking about adding onto a property, doing a remodel, maybe subdividing to generate some supplemental income, knowing where your property stands in terms of its code compliance as well as its zoning restrictions can yield lots of crucial information on your house hunt.

What Are Code Violations?

If your home falls short of a county or municipal building code, it has a code violation. Many homes have some form of code violation. This is because building codes change all the time, and a house that was code-compliant when you bought it may now lag behind current standards. These innocent violations are “grandfathered” in, which means they are not regarded as violations if the home was up to code when it was built.

How do you know when a property was built, when any upgrades were completed and whether it’s in violation of codes or zoning ordinances?

See what the OC Property Assessor shows. Call your City’s Building and Code Enforcement Department and ask them for any permits pulled on the property. Ask them about any non-conforming use.  Ask when and how a non-conforming use has to become conforming. Ask if the property is a “legal non-conforming use.” Further, your Realtor should have access to tools that shed a lot more light on the current status of your prospective home from a code and zoning perspective.

Most serious code violations happen because the homeowner adds more living space without the proper permission. Other examples include water heaters or electrical points installed without a permit, failure to use non-flame retardant roofing material and the absence of smoke detectors: the list is endless.

Why are Zoning Laws Important?

Is my home legal? Can I get a loan on my home? Can I rebuild my home if destroyed? These questions can be answered if you know whether your property is in compliance with local zoning codes or not. A property’s zoning status is classified as legal, legal nonconforming (“grandfathered”) or illegal.  Legal compliance means that a property conforms to current code and can be rebuilt if destroyed, and qualifies for a FNMA loan.  Legal non-conforming means that at one time the property complied with zoning code but does not currently comply, but the nonconforming use may continue; generally these homes can be rebuilt and qualify for a FNMA loan.   Illegal indicates that the property does not conform to the zoning code and must be restored or removed, and cannot be rebuilt if destroyed and do not qualify for a FNMA loan.

What about remodeling and illegal uses?  Adding an addition to a home without permits does not automatically make the property illegal; being non-permitted is not the same as being an illegal use in the zoning.  If the addition would normally be allowed by zoning, the issue of non-permitted areas can often be resolved by working with your building department and obtaining letter of compliance or a permit as long as the addition meets code.  However, if the building addition would not be allowed by zoning, the addition will most often need to be removed or significantly modified so that the addition complies with current zoning.

 

Finding a property’s square footage

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

Who is right? The appraiser measures your house, but tax records show something different. Or, maybe you’re walking a couple of different townhomes that appear to have identical floor plans but one listing has a higher square footage estimate than the other. Why is there sometimes a disparity between the all of these square footage figures?

At times, an area such as an enclosed patio, basement, detached studio, porch, or garage is included in the square footage when it really shouldn’t be included. Remember too that an area must have direct access to the main house to even begin to be considered as living area. If you have to exit the home to enter another area, that other area is not considered square footage (it might still have value, but it’s not counted in the total square footage by the appraiser). There is square footage and livable square footage.

What do appraisers INCLUDE in the square footage of a house?

  • Interior spaces that are conditioned spaces (heated, and cooled, if necessary) such as bedrooms, bathroom and living rooms
  • Enclosed patios that are heated and (if the rest of the house is) air-conditioned and are similar in workmanship (quality) as the rest of the home
  • Finished attic space as long as it also conforms to the original structure (can’t just add carpet and call it a bedroom)

What do appraisers EXCLUDE in the square footage of a house?

Some common spaces are not considered to be living space and are therefore not included when calculating the square footage of a house:

  • Screened patios (and open ones as well)
  • Garages, unless they have been converted to living space
  • Unfinished areas, regardless of the level in the home
  • 2nd floor airspace (for example: open space, above an entry, or a vaulted room)
  • The open area above a stairway on the second floor
  • Detached living space such as an office in a extra building on the property – these spaces are measured separately
  • Spaces that are accessed only by traversing non-living space, like an enclosed storage area of a garage

These spaces may be determined to add value to the property upon analysis of the comparable properties in an area, but they are not included in the square footage.

Why this matters: This conversation underscores the importance of marketing your home accurately. After all, it can make a price and value difference whether a property is actually 1500 or 1700 square feet, right? Case-in-point: I recently measured a home for an investor that ended up being the 3400 sq ft model instead of the 3000 sq ft model as tax records incorrectly stated. My advice? If you doubt the accuracy of your square footage, hire an appraiser or someone else who knows how to measure a house accurately. It’s better to be informed up front than leave money on the table unnecessarily.

 

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

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

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%.)