Perhaps inspired by such television shows as “Date My House” and “Sleep On It,” home sleepovers are becoming a real-world phenomenon in the modern real estate transaction. It makes sense if you consider that most buyers visit a home upwards of four times before making an offer. In the case of a sleepover, a buyer is seeing the house from all angles and at all times of day. He can even experience just how quietly the house settles in at night, what neighborhood activity there might be, and all pros and cons of the house from the point of view of actual inhabitance.

Not all sellers and agents are amenable to this sort of arrangement, however, citing that in spite of a prospective buyer being able to take in all the positive attributes, there is the chance that negative aspects could reveal themselves as well. And of course, even if the buyer falls madly in love with the house after the overnight, there is still a chance that it isn’t enough to make the sale. Whether or not this unconventional means of home selling is for you or your client, it is advised that, as always, some sort of written agreement is in place before engaging in an overnight stay arrangement. Both insurance broker and legal counsel should always be consulted to help create or just reinforce the infrastructure of such an agreement.

Mortgage Rates

By long term trends, 2007 interest rates were extremely low. The Federal Reserve Board lowered rates an aggressive half-point in September to 4.75% "to foster price stability and sustainable economic growth." The pool of home buyers is smaller but more qualified to make good on their loans.

Housing Demand

While 2007 didn’t match 2005 and 2006 in housing sales volume, it was still the fifth best housing sales market in history. Houses were being bought and sold while solid mortgage loans were being made throughout the year.

The Economy

Unemployment held low and steady at 4.6% for the previous two years. To put that fact in context, that’s better than all but three years in the last 30. U.S. personal income held steady in 2007.

There were definitely great things happening in the real estate market in 2007. Here’s to an even brighter 2008.

When your home is losing value and your family is under financial stress, the last thing you need is… higher taxes. So I’m working… to pass a bill that will protect homeowners from having to pay taxes on cancelled mortgage debt."

President George W. Bush, September 1, 2007

The President took steps to make good on that promise yesterday by signing H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007. The act helps Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages.

Under current leislation, if the value of a property declines and the lender forgives a portion of the mortgage, the forgiven portion is taxable. This can lead to higher taxes, and for many families already feeling the financial strain of a subprime mortgage, this tax makes a difficult situation even worse.

The bill crates a three-year window for homeowners to refinance their mortgage without having to worry about paying taxes on any mortgage debt that is forgiven. This allows families to seek lower mortgage payments through refinancing without having to worry about increased taxes.

This is an excellent first step to address the challenges in the housing market, and now Congress has to do its part by doing the following:

1. Congress must enact responsible legislation to modernize the Federal Housing Administration (FHA). This bill will give the FHA the flexibility to help hundreds of thousands of families qualify for prime-rate financing.
2. Congress must pass legislation allowing State and local governments to help troubled borrowers by issuing tax-exempt bonds for refinancing existing home loans.
3. Congress must pass legislation to reform Government Sponsored Entities (GSEs) like Freddie Mac and Fannie Mae.

The Administration has moved forward with the actions announced in August by the President to assist homeowners:

1. The Administration has launched a new initiative called FHASecure which expands the FHA’s ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payment programs.
2. Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson have assembled the private-sector HOPE NOW alliance to help subprime borrowers who can afford the current, starter rate on a subprime loan but would not be able to make the higher payments once the interest rate increases.

This is an important first step in addressing the subprime mortgage crisis, and we hope that the many families out there feeling the pinch this Christmas season because of their mortgage woes can take comfort in knowing that things are turning the corner.

In the fourth part of our series on the subprime crisis, we focus on the new opportunities surfacing and how to take advantage of them. Need to read the previous installments? Check out The Subprime Crisis: A Beginner’s Guide, Subprime Crisis Effects in Los Angeles, and Subprime Crisis Challenges.

The subprime crisis presents unique opportunities for those willing to take advantage of the new real estate landscape emerging from the ashes of the old. There are proven strategies for real estate success in any market condition, and the changing environment brought about by the subprime crisis presents the perfect opportunity to explore them.

We’ll first look at a successful strategy used at the height of the unprecedented seller’s market we experienced in Southern California until the onset of the subprime crisis. Then we’ll look at a strategy for dealing with a depreciating market should the subprime crisis sink its teeth in the Los Angeles Metropolitan Area.

These strategies share the following characteristics:

1. Identifying market conditions
2. Tailoring the strategy to one’s own risk profile
3. Formulating an exit plan for both the best- and worst-case scenarios.

Seller’s / Appreciating Markets

The unprecedented boom market we’ve been experiencing until recently was a fantastic opportunity many savvy homebuyers took advantage of to participate in the American Dream of being a homeowner, and, subsequently, into becoming a real estate investor. Historically low interest rates made owning a home far more affordable, and many buyers used the opportunity to turn homeownership into not only an escape from renting but a bona fide financial investment.

Selling Strategy

For sellers in an appreciating market, the general strategy outlined below will help maximize your sale price:

• Set the asking price to maximize offers. This may mean pricing your home below what you and your real estate agent feel comparable properties would allow. This will position your home as a "bargain" and attract more potential buyers to bid on the property, and, hopefully, bring about a sale price above asking. In less aggressive markets, this may mean pricing the home at what you feel is its true value.
•  Know your bottom line. What’s the lowest offer you would accept for your home? What will you need to use as a down payment for your next property or to retire debt?
• Be aware of your risk profile. Even in an appreciating market, a seller who’s asking for more than the market will bear risks having his home on the MLS for a long time. Buyers and their agents are aware of properties which aren’t selling and, like anything in nature, inertia can take over. The property may develop a reputation for being difficult and see fewer and fewer offers being made over time. Are you willing to take this risk by rejecting an offer that’s $10,000 below your ideal? $5,000 below?

Buying Strategy

The general buying strategy to use in an appreciating market is as follows:

• Make an offer quickly. In boom markets, good properties usually move quickly. Be decisive and act accordingly. Have a pre-approval letter ready. Pre-approval letters show the seller that you’re prepared and serious about doing business. In cases of multiple offers, pre-approval letters can make the difference between having your offer accepted or being a "backup."
• Consider using your home’s equity to finance additional properties. Owning additional properties may be an excellent opportunity to profit from a rapidly appreciating market. Real estate is an excellent long-term investment for many people, so if being a landlord is within your risk tolerance, consider this option strongly.
• Understand your event horizon. Most people will not live in their first property for more than five years. Knowing this, would you like to keep it as a part of your investment portfolio or would you like to sell it outright so as not to worry about landlording? If you know that this property will be part of a larger real estate portfolio, would taking a 30-year mortgage be your best choice?
• Choose a mortgage based on your event horizon. If you know you’ll be leaving or selling the home in five years, would taking an adjustable mortgage instead of a 30-year mortgage be a better choice? Which of your choices fits with your risk tolerance?
• Have a plan if the market suddenly turns against your expectations. If you have an adjustable mortgage, will you be able to make the payments? Will you be able to sell your home at a profit? Loss? Break-even?

One of our clients exemplifies the general strategy to use in a booming market. He began his journey into homeownership in the mid-90s as a 26-year-old with excellent credit but very little money to use as a down payment. Undeterred, we helped him scrape his way into his first property: a 2-bedroom, bank-owned property in the heart of West Hollywood.

In the next four years, using the money he made from the sale of that first property, he was not only able to retire all of his debt, he was able to acquire 3 additional properties with a combined worth of over $1.2 million. He subsequently sold those properties when he sensed the market was about to change and now lives in a $1 million property in the heart of Hollywood.

Buyer’s / Depreciating Markets

Nationwide, it’s now a buyer’s market, but the local real estate market is still holding strong. This has created an interesting phenomenon in the Westside: a Non-Depreciating Buyer’s Market.

In previous downturn cycles in real estate, when market advantage shifted from sellers to buyers, a concommitant depreciation in prices was seen. Buyers facilitated a depreciation in home prices by making low-ball offers. Seller’s did their part by accepting them.

So far in Los Angeles, this hasn’t been the case. Buyers have been leery of making offers below asking. This has created an interesting phenomenon in which instead of seeing a depreciation in prices, we see a lengthening of days on the market. Sellers are supporting this phenomenon by holding to their original asking price. Eventually, a buyer who is comfortable with the asking price submits a suitable offer and the transaction is closed.

Another significant divergence from previous downturns is the fact that usually, higher interest rates accompany a decline in home prices. The scenario presented by the subprime crisis is different: interest rates have been lowered by the Fed to help bolster the real estate market and the American economy, so the normal lowering of prices seen in buyer’s markets has not been seen so far in the Los Angeles buyer’s market.

Will this unusual trend continue? As we mentioned in a previous post in this series, Los Angeles and the Westside have bucked the national trend of depreciation. If the tide should change, what shifts in strategy should buyers and sellers employ?

Selling Strategy

The following tactics can help maximize your sale price, even in a depreciating market:

• Hire a seasoned Realtor ®. Especially in sophisticated, competitive market such as Los Angeles, Beverly Hills, Glendale, and Hollywood, hiring an established professional is the best decision you can make when putting your home on the market. A true professional will be able to market your property far more successfully than you can alone. A Realtor has access to industry-specific information and services that the general public is unaware of. Many buyers will arm themselves with their own Realtor, so why put yourself at a disdvantage by going it alone? As with any professional you hire, make sure the relationship is built on trust and open communication. They’re investing time, money and resources into marketing your property. You’re investing patience, energy, and a commission. Make sure you’re all getting a great return on the investment.
• Have a team me
  ntality. Hiring a realtor means forming a team, and being a part of a team means letting other people do their work. The seller’s function is to make decisions based on the market picture the realtor compiles using his professional resources. If you’ve chosen your agent wisely, respect the information they give you. Keep the flow of communication open and be clear from the very beginning about your expectations in terms of price, mrketing strategy, days on the market, and number of showings.
• Price according to the market. The biggest mistake sellers can make is not recognizing that we’re now in a buyer’s market. Pricing your home using the same market mentality as when you purchased is a costly mistake. Your home will sit on the market, and buyers will easily dismiss a home and look elsewhere, possibly without offering, if your price is too far out of line with reality. Make sure you listen to your real estate agent about what price the market will bear. If you don’t like what you hear, ask other agents (but be cautious of agents who’ll tell you anything just to get your listing). If agents you trust and respect send the same message, act accordingly.
• Stay calm and optimistic. You’ve established a plan with your agent. Stay on course. A mistake many sellers make is wavering from their original purpose. For many it’s because it was never clear or accurate to begin with which is why it’s imperative you establish these expectations in the very beginning of your relationship.
• Expect longer days on the market. This means having the home in open house/ immaculate order longer than in seller’s markets.
• Be willing to look at lower offers. Don’t be insulted by low-priced offers. You can bargain them up.
• Be ready for picky buyers. In depreciating markets, it’s the seller’s responsibility to woo the buyer, not the other way around. Buyers will be pickier than in appreciating markets so adopt the right mindset in dealing with them.
• Offer incentives. That beautiful flat-screen tv you’ve mounted on the living room wall is beautiful. Why not offer it as an incentive?
• Understand and be open to creative financing. If your financial situation doesn’t require a large sum of cash at close, why not entertain creative financing strategies in buyer offers.

Buying Strategy

The general buying strategy to use in an depreciating market is as follows:

• Make a Market-Based Offer. Regardless of asking price, make an offer based on what you and your real estate professional believe is the true value of the property given current local market conditions. Enlist the listing agent’s support in having your offer accepted. Sellers who price their properties above what the market supports are doing themselves, and their listing agents, no favors. Give them a necessary reality check if appropriate. In the end, everyone wins.
• Look for Hidden Gems. In appreciating markets, there can be such a buying frenzy that even poorly maintained properties with poor photographs can be snapped up. In depreciating markets, the typical buyer expects to be catered to by sellers, leaving them open to dismissing hidden gems—properties which may not shine but which will with a little extra TLC. Don’t let this be you!
• Keep a detailed property log. Keep a record of all the properties you see in case you need to go back to one. In a seller’s market, you usually didn’t have the opportunity to research and mull over an offer. In a buyer’s market, having more time can work in your favor, but you still need to stay organized to stay ahead of other savvy buyers. Take pictures and notes of the properties you see, so when you do finally make a decision, you’ll be ready to pounce.
• Use the internet. In a fast-moving appreciating market, listings found on the internet could quickly become outdated. Many buyers didn’t put a lot of of faith in the accuracy of internet listings because of this. Now that extended days on the market are being seen in the marketplace, the information is likely to be more current. Use this medium to your advantage.

Regardless of which way the market progresses, smart home buyers and sellers are prepared to utilize the right strategy to maximize their dollar. These were just a few ideas to help you formulate a strategy for your unique financial situation. We’d be happy to discuss additional ways to help you profit from the Los Angeles Real Estate Market, however the subprime crisis plays out.

In the third part of our series on the subprime crisis, we focus on the challenges presented to homebuyers. Need to read the previous installments? Check out The Subprime Crisis: A Beginner’s Guide and Subprime Crisis Effects in Los Angeles.

The subprime crisis affects everyone. "But I have excellent credit," you might be thinking. "Why would I be affected?"

Regardless of your credit score, the subprime crisis touches your financial outlook in some way. Because financial institutions have suffered, many banks and mortgage companies have increased their scrutiny of mortgage applications and tightened their lending criteria. Even those with excellent credit scores may face a longer approval time for loans as lenders, still reeling from their lax lending practices in days past, tighten their monetary belts.

Fewer borrowers may be approved than before which may result in a chilling effect on the real estate market. Fewer qualified borrowers result in fewer home sales. Fewer home sales decrease liquidity in the market, forcing sellers to become more competitive with each other. It will also result in longer days on the market for the average propety.

Fewer homebuyers will also result in fewer opportunities to trade up to a larger property. Many homeowners contemplating moving to a larger home would rather sell their current property than act as landlord of it. If those owners can’t sell, they won’t buy up either.

Even now, as the effects of the crisis are just beginning to be seen, wary buyers and sellers are playing a cat–and-mouse game. Sellers still remember the rapid appreciation in value properties saw until recently, and many are afraid of pricing their homes too low. On the other hand, buyers, wondering if the beating the real estate market is suffering on the national level will soon be felt in the the local market, are staying on the sidelines, afraid to make an offer that’s too high. This is resulting in homes staying far longer on the market than they would have just several months ago, even in areas where foreclosures have seen little to no increase during the crisis thus far.

The current climate creates new opportunities for buyers and sellers willing to change gears and come up with new strategies to profit from real estate. Like the stock market, there’s always a way to make money in real estate, regardless of whether the market is going up or down.

In the next installment of our series, we’ll explore some of those real estate strategies.

In the second part of our series on the subprime crisis, we focus on how Los Angeles has been affected. Need to read the first installment explaining the crisis? Read The Subprime Crisis: A Beginner’s Guide.

The City of Los Angeles has avoided the effects of the subprime rampage many parts of the country have seen. While major media sources including The Los Angeles Times have been quick to correctly point to Southern California as an epicenter of the subprime debacle, those same news sources have been slow to point out that Los Angeles and its Westside neighbors have been spared from the foreclosures seen in other parts of the Southland.

Yes, areas of the San Fernando Valley, Los Angeles County, and many areas of the Inland Empire—San Bernardino County and Riverside County—have been hit hard by the subprime situation, but the real estate market in the City of Los Angeles and other parts of the Westside area has remained strong.

The local media has been criticized in recent weeks by many real estate professionals for failing to report on the distinction between the Southland as a whole and Los Angeles in particular. The difference is stark and deserves to be identified.

They could just as easily have included facts—even just a sentence or two—about the strength of the real estate market in the Westside instead of their uniformly ‘doom-and-gloom’ outlook.

"I understand that the [Los Angeles] Times needs to make a buck, just like everybody else, and sensationalistic headlines certainly sell papers," says one colleague who’s definitely taken umbrage with the one-sided reporting on the subprime situation.

"But they could just as easily have included facts—even just a sentence or two—about the strength of the real estate market in the Westside instead of their uniformly ‘doom-and-gloom’ outlook. That would have given their readers a more complete picture of local conditions."

This juxtaposition of fortunes may be due to the fact that as home prices increased in the popular Westside area, many homebuyers were forced out of the market and bought homes in the Inland Empire instead. Many of these same buyers used subprime loans to finance their purchase and are now seeing their mortgage payments grow beyond their ability to pay.

According to RETRAN data, there were only 8 total foreclosures for the third quarter of 2007 for the following areas of the Westside:

• Brentwood
• Bel Air
• Beverly Hills
• Malibu
• Marina Del Rey
• Pacific Palisades
• Santa Monica
• West Hollywood
• Westwood (90024)
• West Los Angeles (90025).

In fact, according to DataQuick, of the 13,583 total Notices of Default issued (this is before foreclosure actually begins) for either single-family residences or condominiums in the Los Angeles area for Q3 of 2007, less than one-half of one percent were from the Westside.

Given that affluent and not-so-affluent areas of the San Fernando Valley, San Gabriel Valley and the Westside are still experiencing brisk sales activity, especially on well-priced homes, the broad strokes painted by The Los Angeles Times and other media outlets have given many potential homebuyers a false impression of current market conditions.

2007 has been kind to the Los Angeles real estate market. Buyers who are waiting for a potential glut of foreclosures to flood the market may be better-advised to set their sights on areas other than the resilient Westside of Los Angeles.

Will this resilience continue in 2008? We’re about to find out.

But do you really know what subprime means? What effect has it had in Los Angeles? What challenges does it present, even to those with excellent credit? What opportunities does it reveal?

To answer these questions, let’s start at the beginning…

Understanding Mortgage Lending

Traditionally, mortgages were financed by banks. This meant that a bank was limited in its lending based on the deposits they received from their customers.

Recent changes to this model, however, paved the way for the current situation to arise. Banks moved to a new lending model in which the mortgages they held were sold to the bond markets. This freed banks from lending based solely on their customer deposits.

The boon to this new model was that more money was available to help people buy homes. The downside, unfortunately, was that banks no longer had as much pressure to verify that the mortgages they issued were solid. Knowing that the mortgages they created would eventually be sold, banks took on riskier loans than would have been prudent in the more traditional lending era.

The Mortgage Bond Market

Until recently, the mortgage bond market was heavily dominated by government-sponsored agencies such as Freddie Mac. Since 2002, however, the private sector asserted itself in this market with a vengeance.

With new mortgage vehicles such as jumbo loans, and sub-prime loans to borrowers with poor credit histories and/or weak documentation of income who were rejected by prime lenders like Freddie Mac, the private sector significantly increased its role in the mortgage bond market.

The rise of private sector participation catapulted the mortgage bond market to a worth of $6 trillion, making it the largest part of the $27 trillion bond market. The mortgage bond market is now even bigger than the Treasury bond market.

Foreclosures Emerge

Many homeowners were lured by brokers selling subprime mortgages who explained that the equity in homes could be turned into cash by refinancing. What brokers failed to explain in many cases was that the mortgage interest rates would double after 2 years.

A wave of foreclosures began appearing, first in inner-city areas, then across the entire country, starting in 2005.

By that point, 20% of all mortgages were subprime. They were especially popular among recent immigrants in the competitive housing markets in New York City, Arizona, Nevada, Washington, D.C. suburbs, and Southern California.

Consequences

Foreclosures are predicted to rise over the next two years as many sub-prime mortgages fall outside of their initial 2-year period, causing interest rates to become variable and, in many cases, double. It is estimated that as many as 2.4 million homeowners are in danger of foreclosure because of subprime loans.

The dramatic rise in foreclosures has had such a strong impact on the price of homes that we now see the first national decline in housing prices since the 1930s. A glut of 4 million unsold homes is depressing prices, forcing builders to lower prices to rid themselves of remaining inventory.

The building industry, comprising 15% of the economy, is expected to halve its output, causing a loss of over one million jobs. Related industries such as manufacturers of durable goods, e.g. washing machines, home improvement stores, furniture makers, may also take a hit.

Banks and the bond market are also feeling the crunch. Banks have already lost $60 billion, and bondholders (such as pension funds) who have bought subprime mortgage bonds have seen a sharp fall in value of those instruments. Estimates of the total financial loss for these institutions run as high as $450 billion.

Since lenders have suffered badly, they are more stringent with any new loans they make, resulting in a tightening credit supply for consumers. Mortgages, especially non-traditional ones such as subprime and jumbo loans, are now more difficult to obtain.

Now that the basics are covered, in subsequent wp_posts, let’s answer the questions we originally asked:

• What effect has it had in Los Angeles?
• What challenges does it present, even to those with excellent credit?
• What opportunities does it reveal?

To read more about the subprime situation, check out the following links:

• The Subprime Crisis In Graphics
• Subprime Crisis Timeline
• Wikipedia’s Page on the Subprime Mortgage Crisis