On May 6, 2008, Fannie Mae made an announcement to improve the new Jumbo Agency program pricing to be closer to Conforming Agency pricing throught the end of the year. As a result, the rate difference between Conforming Loans ( Loans under $417,000) and “Jumbo Conforming” loans ( Loans between $417,000 and $729,750) shrank from about 0.50% to 0.125%.

This means that “Conforming Jumbo” Loans are at an interest rate of approx.  5.875% at .50 point Cost ( As of 5/7/08)!   Apr 5.937%. Keep in mind that these new increased “Jumbo Conforming” loans are due to expire at the end of this year, so now is a great time to consider buying a home, especially a condominium in the South Bay and the Palos Verdes Peninsula. When the conforming loan limits drop back to $417,000 at the end of this year, loans in excess of this amount will be at a much higher interest rate ( Jumbo loans cureently are at an interest rate of approx. 7.1%).

The media has been pounding us over the head with doom and gloom reports of the real estate market. It is true that most of the markets nationally, and many in Southern California, have been significantly impacted, however the story in the South Bay of Los Angeles is much different. Although sales volume has plummeted, home prices in the South Bay, particularly the more expensive markets of the Palos Verdes Peninsula and Manhattan Beach/Hermosa Beach, have not been nearly as severely affected. For instance, it was widely reported that the Median Sales price of homes sold in Southern California plunged 23.8% compared to a year ago, however the Median sales price of homes in Manhattan Beach and Palos Verdes have actually increased 12 to 19% compared to a year ago. The average price per sq. ft. for homes sold in the first quarter 2008 compared to the 2007 first quarter has only fallen modestly in these markets, as noted below, as the median sales price has been skewed upwards due to a continuing strong market for more expensive homes.

Location	2008 Sales Price /Sq.  Ft.	% Change From Prior Year Sales Price Per Sq. Ft.       Sales  Volume
Palos Verdes Peninsula	$541	( 5%)                      ( 39% )
Manhattan  Beach/Hermosa Beach	800	4%                       ( 42% )
Redondo Beach	539	( 2% )                     ( 54% )
Torrance	433	( 12% )                   ( 47%)
San Pedro	388	( 13% )                   ( 52% )

 The most significant effect of the mortgage meltdown has been felt in those communities where homes were primarily financed with no down payment variable rate loans, many with first time home buyers, which is not the typical buyer in the South Bay. For instance, the median home price for homes sold in Hemet was down 48% compared to a year ago.

Buyers sitting on the sidelines should remember that trying to call the bottom of any market is extremely difficult, If you are buying a home to live in, not a speculative investment, you should be buying for the long term. Today’s market gives buyers and sellers the opportunity to negotiate a reasonable deal for both parties. Interest rates are also at an historical low. For instance, even if prices fell an additional 10%, decreasing the mortgage required to buy a property from $500,000 to $450,000, if interest rates increased from 5.6% to 6.6%, the mortgage payment on the $450,00 mortgage would be the same as the previous $500,000 mortgage. Inflationary pressures continue to increase, due to increases in gas and food prices. With increased inflation, comes higher long term interest rates.

Whats happening in our South Bay Cities?

Inventory - The average number of days on the market for properties sold in the first quarter of 2008 in the South Bay has increased to approx. 70 days, an increase from approx. 50 days a year ago.  We have about a 7 month inventory at this time. For most of the last 2 decades, Los Angeles County has averaged an 8 month inventory.

Sellers reluctant to adjust to today’s ”picky buyers”, are having a harder time finding a willing buyer. Homes well located and presented and priced right sell!

Incentives Some sellers have been asked by buyers to help with closing costs, HOA dues or other incentives that are acceptable to the loan company.

Staging - Staging homes is more important than ever.  It is important to show a homes best attributes so the buyer gets a sense of real value in the home and feel a strong emotional connection. When buyers are holding back like many are now - Staging can be the catalyst to encourage buyer’s to offer.

Pricing Too High, In the Middle, Too Low… What should I do??  When the price reflects the merits of the property, good or bad, the home usually sells. It is not always that clear but is more times than not. Demand for well located properties is stronger than ever. Buyers are also looking for as much remodeling completed as possible, or if it’s fixer, then the price needs to be appropriate.  Families are stressed with work and school schedules and prefer to buy a property that is new or has been updated already.

1. Sales Activity:

Palos Verdes Peninsula - 71 single family residences were sold during the first quarter of 2008, compared to 117 during 2007 ( a 39% decrease). The inventory of homes, condos and townhomes as of 3/31/08 has increased 38% from this time last year on the Palos Verdes Peninsula to 297 homes and condos/town homes. This equates to a little more than a 7 month supply.2.  Home Prices (Average Price Per Sq. Ft. )

Palos Verdes Peninsula- During  the first Quarter of 2008 the average price per sq. ft. of homes sold showed a decrease of approx. 5% over the comparable period of 2007 (to an average price per sq. ft. of $541), but a decrease of approx. 11% from the peak during the third and fourth quarters of 2007.

Home prices for sold properties, on average in the South Bay, have been approx. 95% of the list price during the 1^st quarter of 2008.

Detailed market reports for the Palos Verdes Peninsula and each city in the South Bay can be viewed at my website http://www.maureenmegowan.com

Interest rates on jumbo 30 year fixed rate mortgages (loans in excess of $729,750 ) have increased over the last quarter to an average rate of approx. 7.17% from 6.75%, and are significantly higher than conforming loans (loans of less than $417,000) which are at approx. 6.0%. The spread between loans below the old conforming loan limit of $417,000 and over the new jumbo loan cutoff of $729,750 is now approx. 1.2%,

This large spread is amazing considering that prior to the mortgage loan melt down, spreads between conforming and jumbo loans were only approx. .2%.  Legislation was recently passed creating a new loan category between $417,000 and $729,750. Interest rates for these new “Increased conforming loans” have ranged somewhere between the old conforming loans and the higher Jumbo loan limits, and are currently approx. 6.6%.

The Federal Reserve Bank has recently significantly cut short-term rates, however long-term rates have remained stubbornly high due to bond market changes. Problems in the sub-prime mortgage markets has led to less investors interested in investing in mortgage-backed securities (which provides funds to make new jumbo loans), resulting in an increase in the “spread” over underlying Treasury note rates for mortgage rates. Lenders have tightened their lending requirements, making it more difficult for buyers to secure 100% financing.  FICO scores over 700 are expected.

How can you get prepared to buy or sell in this market?

We have a tremendous internet presence both locally and across the country. Don’t miss this very important sales tool.  Most buyers begin there search on the internet today.  I can also help you maximize your homes best attributes for an optimal selling price and fewer days on the market.   My website is filled with ideas to get your home ready, or it can be professionally staged.  Now may be the best time for the foreseeable future to put your house on the market while the conforming loan limit is higher during 2008, rates are low and buyers are re-entering the market. In the future, interest rates may increase, possible tax reform measures may be passed, and the market may continue to cool.

Want To Buy A Home or Investment Property?  For buyers, this is an excellent time to be in the market. Sellers are more willing to negotiate price and interest rates have remained low. Reasonable offers are receiving serious consideration by sellers, and the ability to buy the home of your dreams is a real possibility. If you wait to try and hit a market at its bottom, and more buyers begin to return to the market, you face the probability of competing for that home that you finally found that you love with several other buyers, and have to face the prospect of losing your dream home to another buyer.

The following are excerpts from the weekly newsletter of HSH Assoc. for the week ending April 18, 2008:

“True conforming 30-year FRMs jogged higher by 16 basis points this week, pressed higher by rising Treasury yields. Preliminary results for the “expanded conforming” FRMs found an increase of nineteen basis points (0.19%) as lenders and investors remain unsure of the market for them. True jumbos, already elevated in relation to those underlying rates, ticked just two basis points higher from last week’s 7.17%.

The Fed next meets a little more than a week from now, and there is at least some expectation of a quarter-point cut in key short-term interest rates. Those rates have already been lowered by some 225 basis points since January, and have moved in sizable blocks this year amid an intensifying downturn. With “real” (inflation-adjusted) rates already near zero, the Fed may be approaching the point where leaving rates alone could be the best course of action.”

The following are excerpts from the 2 month Mortgage Rate forecast and newsletter published by HSH Associates :

“Mortgage markets were abuzz with the prospect of Fannie Mae’s and Freddie Mac’s new ability to purchase as much as an additional $200 billion worth of mortgages, due to OFHEO’s 30% reduction in the amount of reserves the GSEs were required to hold against loans.As the possibility of more and faster loan purchases (by FNMA) came into light, conforming mortgage rates fell sharply, running below 6% for the first time in about five weeks and closing HSH’s weekly survey at 5.91%. Jumbo markets, still impaired, saw little change in pricing, with the average Jumbo 30 year FRM landing at 7.22%.” The spread between loans below the old conforming loan limit of $417,000 and the new jumbo loan cutoff of $729,750 is now approx. 1.3%, a large jump from the spread of approx. .84% just a month ago, and is primarily due to a drop in conforming loan rates. This large spread is amazing considering that prior to the mortgage loan melt down, spreads between conforming and jumbo loans were only approx. .2%.

“There is no doubt that mortgage markets will remain challenged, or that the former subprime and Alt-A markets will continue to remain “former.” True jumbo rates will likely remain elevated relative to their conforming counterparts, and the gap between them may widen more (as a result of a decline in conforming rates, not necessarily a rise in jumbo ones). The new “expanded conforming” loans (now for loans generally less than $729,750) should provide at least some new liquidity to parched jumbo markets, while FHA-backed lending should help those more on the fringes of traditional lending. ” Pricing for the new increased conforming loans are expected to be somewhere between the previous conforming loan rates and the jumbo loan rates.

“For the rest of the world, we think that mortgage money may become available at lower rates — perhaps much lower rates — as Fannie Mae’s and Freddie Mac’s newfound purchasing power begins to hit the markets. We don’t usually forecast conforming or jumbo loan price ranges, but if we’re correct in that rates will decline, and if much of the decline is in conforming rates, we could see conforming 30-year FRMs with average rates close to 5.50% — low enough to spark a fair refinance boomlet. Pricing for the new “expanded conforming” loans are just starting to make it to market, while short-term rates are low enough as to obviate the ARM reset problem for many homeowners.”

It now appears that those jumbo loans which are made under the new higher loan limits to be established by the Dept. of Housing and Urban Development (”HUD”) will be combined and marketed as separate pools of mortgage-backed securites by FNMA, separate from those loans made under the prior conforming loan limit of $417,000. If this occurs, the interest rate for these new “conforming” jumbo loans are not expected to be the same as for current conforming loans, as they are expected to trade at higher interest rates due to their perceived higher risk profile.  The current spread between conforming loans and jumbo mortgages is approx. .84%, but early hopes that the new higher loan limits would provide much lower interest rates for the new higher loans made is fading, and that there will still be a substantial spread between the old conforming loan limit of $417.000 and the new higher conforming loan limit loans, although it should still be less than the current spread between conforming loans and jumbo loans.

Conforming 30 year fixed mortgage rates average approx. 6.24%, with jumbo 30 year mortgage rates averaging approx. 7.08% according to HSH Associates newsletter for the week ending February 22, 2008. Both rates increased more than a quarter of a percent in the last week. Other excerpts from their newsletter:

“The economy is soft, perhaps still softening, but that’s yesterday’s problem. Freshly in focus are concerns that inflation is getting more of a toehold, and that yield-eating problem was at least part of the reason for a sharp rise in fixed mortgage rates this week. The combined average for the 30-year FRM leapt 27 basis points (0.27%), ending the week at 6.62%, the highest such reading of 2008. Hybrid 5/1 ARMs, quickly becoming a viable alternative (though still being shunned in the market, like nearly all ARMs) closed HSH’s survey at an average 5.84%.

One of the primary reasons for the increase in rates is that inflation simply refuses to die, and is becoming more troublesome. The latest reading for the Consumer Price Index found a 0.4% increase in costs; ‘headline’ prices have now risen by 4.4% over the past year. To be sure, they are goosed by skyrocketing food and energy costs, but even excluding them from the picture still leaves a less-than-optimal inflation situation. ‘Core’ CPI climbed by another 0.3% in January and is rising at a 2.5% annualized rate, a full half-point above the Fed’s preferred speed limit. Over the past three months, the annualized rate of inflation is 6.8% for the headline and 3.1% for the core, so the recent experience is that more inflation, rather than less, is in store.

The running of investor sentiment from one side of the seesaw to the other — from recession worries to inflation concerns and back to recession worries — makes the mortgage market especially unpredictable. Presently, there are simply too many open variables.”

Are you trying to figure out the direction of the real estate market? In the Palos Verdes and South Bay real estate market we are in a transition. But to what?  Here´s what’s happening:

Real Estate continues to show strength all along the California coastline. That being said 2008 will be a tough year and we should pull out in 2009. The really stressed areas will take longer. For buyers sitting on the sidelines, however, they should remember that trying to call the bottom of any market is extremely difficult, For those people buying a home to live in, and not as a speculative investment, they should be buying for the long term, and trying to wait until the absolute bottom of a market will lead to lost opportunities to buy the perfect home for you. The hot real estate market of a couple of years ago led to many disappointed buyers who, after finding the home of their dreams, were locked in bidding wars with other buyers and were unable to buy the home that they truly wanted. Today’s buyers market gives the savvy buyer the opportunity to negotiate a great price without the competition of multiple buyers competing for the same property.

Despite the mortgage woes and “doom and gloom headlines” relating to the real estate markets, most of the bad news relates to other areas of the Southland, the country or the State, such as Riverside County, Sacramento County, Las Vegas & Florida. The most severely hit areas are those that had a large amount of new home development. Price depreciation has occurred in these areas due to builders drastically cutting their prices in order to get rid of unsold inventory. This has therefore had a strong impact on home resale prices in areas near the new home development. Areas with limited new home construction, low inventory of homes for sale, and higher priced homes (such as the South Bay beach communities) have had a much smaller impact from the recent housing market turmoil.

California Real Estate statistics show that the average sales price of Homes valued at $1 million dollars and less, have decreased by 25%. Homes valued at $1 million plus have decreased on average only  one-half of one percent.                                                                    

What happened when the market collapsed in the early 1990’s is NOT what is happening now. Then, the market corrected from THE TOP ON DOWN following a large recession and loss of jobs, which is the EXACT OPPOSITE OF CURRENT CONDITIONS, which is due to the mortgage meltdown where over extended families were approved for loans that they could never pay back once the short term teaser rates expired. This time the bottom of the market is in trouble and it will take 3 – 5 years to get the supply and demand in balance.

What’s happening in our South Bay Cities? 

Prices are generally down a bit in the South Bay and the Palos Verdes Peninsula, and most homes are taking longer to sell. The average number of days on the market for properties sold in the fourth quarter of 2007 in the South Bay is still only a bit over 40 days. Many homes that are not properly priced reflecting today’s market, continue to sit for sale, however. We have about a 5 month inventory at this time. Some sellers are still reluctant to adjust to today´s  ”picky buyers”, though more homes are priced aggressively.

Incentives - Some seller’s are offering to “buy down” interest rates and are either offering or are asked in the offer to help with closing costs. Staging homes is more important than ever.  It is important to show a homes best attributes so the buyer gets a sense of real value in the home and feel a strong emotional connection. When buyer’s are holding back like many are now - something has to spark them into action!

Pricing – Too High, In the Middle, Too Low… What should I do??  When the price reflects the merits of the property, good or bad, the home usually sells. It is not always that clear but is more times than not. Demand for well located properties is still strong. Buyer’s also want as much remodeling completed as possible, unless they want to fix up a place and then the price needs to be appropriate.  Today’s families are stressed with work and school schedules and generally prefer to buy a property that has already been remodeled. There have even been a few bidding wars for these type of properties. It is true: The Market Sets The Price.

1. Home sales activity for the Palos Verdes Peninsula and the South Bay actually increased compared to the prior year.Palos Verdes Peninsula - 533 single family residences were sold during 2007, compared to 527 during 2006 ( a 1% increase). The inventory of homes, condos and townhomes as of 12/31/07/07 has increased 9% from this time last year on the Palos Verdes Peninsula to 215 homes and condos/townhomes,. This equates to a little more than a 4.8 month supply. There are strong indications that the market is “bottoming out”.Beach Cities  - Manhattan Beach and  Redondo Beach had a modest decrease in sales in 2007 compared to  2006, however San Pedro and Torrance had an approx. 15% drop in sales compared to 2006.

2.  Home Prices (Average Price Per Sq. Ft. )Palos Verdes - During  2007 prices showed an increase of approx. 2% over the comparable period of 2006 (to an average price per sq. ft. of $594).    South Bay Cities – Most showed decreases over the comparable period last year, with Redondo Beach   -6% ( $587 Sq Ft.), Manhattan/Hermosa Beach   -2% ($778 per sq. ft.), and San Pedro -7%($437 per sq. ft.), with Torrance ($488 per sq. ft.) remaining the same compared to the prior year.Detailed market reports for the Palos Verdes Peninsula and each city in the South Bay can be viewed at my website http://www.maureenmegowan.com 

Interest rates and Financing –  Interest rates on jumbo 30 year fixed rate mortgages (loans in excess of $417,000 which are called “conforming loans”) have decreased a bit over the last quarter to an average rate of approx. 6.75%, but are significantly higher than conforming loans which are at approx. 5.75%.. Congress is considering passing a bill that would raise the conforming loan limit to approx. $675,000 for one year, which would enable many borrowers to obtain a mortgage at a significantly lower interest rate for a new home purchase or refinancing. Passage of this bill is not expected earlier than mid March. The Federal Reserve Bank has recently significantly cut short-term rates, however long-term rates have increased due to bond market changes. Problems in the sub-prime mortgage markets has led to less investors interested in investing in mortgage-backed securities (which provides funds to make new jumbo loans), resulting in an increase in the “spread” over underlying Treasury note rates for mortgage rates. Lenders have tightened their lending requirements, making it more difficult for buyers to secure 100% financing.  FICO scores over 700 are expected.

How can you get prepared to buy or sell in this market?We have a tremendous internet presence both locally and across the country. Don´t miss this very important sales tool.  Most buyers begin there search on the internet today.  I can also help you maximize your home´s best attributes for an optimal selling price and fewer days on the market.   My website is filled with ideas to get your home ready, or it can be professionally staged.  Now may be the best time for the foreseeable future to put your house on the market while rates are still relatively low and buyers are re-entering the market. In the future, interest rates may increase, possible tax reform measures may be passed, and the market may continue to cool.  

Want To Buy A Home or Investment Property?  For buyers, this is an excellent time to be in the market. Sellers are more willing to negotiate price and interest rates have remained low. Reasonable offers are receiving serious consideration by sellers, and the competition to buy the home of your dreams is back to a more normal market.

The following are excerpts from the newsletter from HSH Associates for the week ending January 11, 2008:

“Mortgage rates continue their 2008 march downward, Conforming 30-year fixed rates averaged 5.87%, their lowest point since late September 2005. The average 5/1 ARM hit its lowest point in nearly two years.”

 30 Year fixed rate Jumbo loans are in the range of 6.75 to 7.25%, while 5 year ARM loans are in the low 6% range.

The following are excerpts from the newletter from HSH Associates for the week ending December 14, 2007:

The bond markets, after weeks of fretting that the economy would continue to sink, now seem to think that the economy might skirt a significant downturn after all. Of course, a more-firm economy brings potential for higher inflation pressures, and that in turn presses interest rates higher — and higher they are.

The pain was spread all around: fixed-rate conforming loans moved 19 basis points higher to 6.18%, while jumbos moved a full 21 basis points higher, climbing back over 7% for the first time since mid-October.

The Federal Reserve, in conjunction with 4 other European Central Banks have created a new credit facility for banks to borrow money. This move is important for mortgage borrowers since it’s directly aimed at lowering the rates being charged between banks on the London Exchange, called LIBOR. LIBOR rates have been mostly rising as banks have become concerned about keeping enough cash on hand to meet their needs and suspicious of the quality of assets being pledged as collateral for loans.

As we wrote last week, a borrower with a Treasury-based ARM is seeing interest rates reset to favorable levels. Presently, a borrower with a 3/1 TCM-based ARM has been enjoying an initial interest rate of about 4.75%, and six months ago would have faced a reset into the low 7% range. Fast forward through more troubled economic times, and add in cuts in short-term interest rates of 100 basis points (1%), and that borrower now may face a reset to only the upper 5% range for their ARM, with about a 12% rise in payment. That same borrower with a LIBOR-based ARM would see a reset rate at or about 7% or more today, with a corresponding 22% rise in payment, making a LIBOR-based ARM more likely to experience default. Since most subprime ARMs and many Jumbo ARMs are keyed to LIBOR, the central bank’s move to break the lending logjam should help to press those index rates downward. This in turn could make resetting mortgages more manageable for borrowers, and should help to ease the mortgage crisis a little.

With an economy holding on, concerns about inflation renewed, and potential ’solutions’ to mortgage and liquidity issues hitting the market, mortgage rates really don’t have much room to fall, absent any especially bad news.

The Federal Reserve cut its fed funds rate by .25%, making the third consecutive monthly cut by the Fed since the credit crisis deepened in August. Although this decrease will help those homeowners who have home equity lines tied to short term interest rates such as the Prime Rate, these cuts in short term interest rates generally have an opposite effect on long term mortgage rates, which are much more affected by inflationary expectations. Aggressive cuts in short term interest rates are seen by most investors as stimulating inflationary pressures.

Several factors continue to impact the cost of home financing. Both Fannie Mae and Feddie Mac, the two large government sponsored morgage investors who purchase home loans after they are originated and thus provide on-going capital to fund new mortgages for loans with a limit of $417,000, have recently instituted a .25% up-front charge on all new mortgages that it buys or guarantees. On a $400,000 loan, this will increase closing costs by an extra $1,000.  Additional surcharges are also being charged borrowers with credit scores of less than 680, with some lenders even raising their level of what they consider to be good credit risks to 720.

People with good credit scores and an adequate down-payment can still get a “conforming” loan of up to $417,000 for approx. 6.14% (per HSH Associates), however the spread between the rates for conforming loans and jumbo loans (those in excess of $417,000) continues to widen, with borrowers with good credit and down payment are paying an average of 7.13%, a full percentage point higer than conforming loans. Normal spreads, before the credit crisis began, ranged to only 2/10th of 1%. 

This large spread recognizes that there is almost no market available to sell new jumbo loans to after they are originated as investors who used to invest in mortgage backed securites (pools of mortgages bundled together and sold to investors) have almost completely stopped investing in these securites. Because of this, there is a real shortage of capital available to make new jumbo loans. Most new jumbo loans are being made by investors who have capital available to hold these new mortgages in their own portgolios.

The interest rates quoted above are for what are called “full doc” loans, where the borrowers income can be fully documented, compared to “stated income” loans where the borrower simply attests to his income. Interest rates for “stated loans”, where available, can be up to an additional 8/10ths of 1%.

Money is available to credit worthy borrowers with down payments of 15 to 20%, and although more expensive than 6 months ago, rates are still at historically attractive levels.  Financing for borrowers with down payments of less than 15% is available, but will require more expensive mortgage insurance payments and higher interest rates.

As the credit crisis settles out, and investors become more comfortable that additonal large decrease in home values will take place, investors will once again begin to invest in mortgage backed securites, which should begin to reduce the spread between conforming loans and jumbo loans.