"Fear Not" Santa Monica, Beverly Hills and Malibu

Well-heeled Westside Angelenos were awakened this morning with dire headlines about their local real estate market. On their doorsteps, denizens of this high-end market read the grim LA Times headline: "Westside Housing Goes South."

The story goes -- as real estate prices plummeted in far-flung SoCal regions -- conversations at Santa Monica sushi bars and Beverly Hills steak houses concerned only multiple offers and escalating prices.

No longer, says the local Paper of record. The article reports that home prices "in Beverly Hills, Santa Monica and Malibu ... finally tanked at the end of the year, losing between 26% and 30% of their value in just a few months".

Now, before spitting out their mouthfuls of hamachi-shisho leaf roll or petit filet mignon sauce homard, Westsiders should take a deep breath and analyze the truth behind the numbers.

The Los Angeles Times' statistics determine the 'median' by sorting the sales in a given period by price and picking the middle value. The true "median" home price would involve assessing the value of every property in that market and selecting the middle value.

Let's analyze the stats of a fictional Santa Monica real estate market. In 1st quarter 2007, in a "hotter" real estate market with loans of all values being underwritten, there were 7 sales at the following prices:

- $8 million

- $6 million

- $3 million

- $2.5 million

- $2 million
- $1.8 million
- $1.4 million

Median home price: $2.5 million.

In the 4th quarter 2008, the market has cooled substantially. Loans of over $625,000 are in the 7+% range -- and are only obtainable with fully-documented income (how many Westsiders are 'salaried' employees?) With the ongoing "worst financial crisis since the Great Depression", only the most motivated buyers are buying (the speculators are gone). There are only 5 sales that quarter at the following prices:

$6 million

$2.5 million

$1.5 million

$1.2 million
$1 million

The headlines read: "Santa Monica median price tumbles 40%. Sales volume plummets 29%"

What's happening is that sellers at the high end are not selling (most are not motivated to do so, why sell in a time like this?) Buyers who can benefit from low-interest (jumbo-conforming) loans are buying at the lowest end of the price range.

The truth is, buyers are still clamoring to purchase any property in Santa Monica. First-time buyers or "move-up" buyers from less pricey neighborhoods are fulfilling their dreams and moving into this community during this down market.

"Move up" buyers in the $1.5 million+ range can't get loans and are staying put -- for now.

Individual homes have not declined 40% in value. Sale prices have skewed to the lower end. The Los Angeles Times is making the alleged "26%" to "30%" declines sound like the S & P rout -- creating (false) news and contributing to the vogue of financial fear and panic.

Granted, some Westsiders may find themselves in distress after recent stock market gyrations. Some may be forced to sell, and yes, their homes will sell at lower prices.

The stats generated by the Los Angeles Times, the Case-Schiller Index, etc. need to be examined in greater detail before being taken as mantra. Real estate is hyper-local, and local values must be analyzed hyper-critically.

Jamie Adner
http://www.adnergroup.com/

4 Things You Need to Know to Get Pre-Approved for a Home Loan: FICO, Loan Limits and Beyond

The constantly shifting tectonics of the financial world have created a home loan market that has been upended. Volatility is an understatement: mortgage rates fluctuate and are updated to loan brokers three and four times daily. The good news is that interest rates in are the lowest they've been in nearly forty years.

The goal is to learn how to take advantage of these low rates. The popular media has given the impression no banks are giving loans. Not true. But buyers and those refinancing will face the scrutiny of banks. Here are four steps to prepare you for obtaining a loan and obtaining the best rates.

1. Know your FICO Score:

The higher your FICO score, the lower your mortgage rate. Your FICO score (short for Fair Isaacs Corporation, the most widely used credit score model) is determined by a cryptic algorithm by the mysterious Big Three credit rating agencies -- Experian, TransUnion and Equifax. The range for FICO scores is 300 - 850 or 900. In general, a FICO score above 720 will make you eligible for the best rates. Buyers with lower credit scores can get loans -- just at higher rates.

The government has mandated that you can get a FREE copy of your credit report at AnnualCreditReport.com (you will have to pay only to get your FICO score). A FICO high score is more critical than ever when applying for loans. If you are planning on buying (or refinancing) even many months from now, review your credit report and take care of any items that need attention.

Advice: Everyone should annually review their credit report to make sure it is consistent with your financial activity. Also prevent identity theft by verifying your report.

2. Assemble Your Downpayment:

Assess how much cash you have that can be used to purchase a property. If funds are going to be borrowed, consult your sources and discuss loan terms for the downpayment. If stocks or other securities are going to be liquidated for the purchase, identify them and make a plan to generate cash.

If you have less than 20% downpayment, you will typically pay mortgage insurance on the property (PMI = private mortgage insurance). Amounts vary, but it could add a couple of hundred dollars per month to your "nut". FHA (FHA = Federal Housing Authority = government-backed) loans allow you to put down as little as 5%. Even if you don't have a signifcant downpayment, a home purchase may still be an option.

Advice: The greater the downpayment, the better the loan terms. Analyze your finances and evaluate how much money you can afford to allocate to a downpayment leaving you enough reserves for an emergency.

3. Understand Loan Limits:

There are 3 basic categories that determine loan rates in California ($ amounts for single family homes/condos are below):

Conforming -- Under $417,000 -- Best rates -- a few weeks ago, these were in the 5.0% range (updated 1/26/10).

Jumbo-conforming -- $417,001 - $729,750 -- about .5% higher rate than conforming loans

Over $729,750 -- Jumbo loans -- the rates are up to 1.5% higher than jumbo-conforming rates

For 2 - 4 unit properties, jumbo-conforming loan limit: (updated 1/26/10)

2 Units -- $934,200

3 Units -- $1,129,250

4 Units -- $1,403,400

Advice: Understand the "moving levers" of loans. "Discount points" means a percentage of the loan the Buyer/Refinancer must pay to obtain a loan -- one "point" = 1% of the loan. 5/1 loan means fixed for five years, then adjusting every year afterwards. "Fully amortized loan" means payments include interest and principal and over the course of the loan term (e.g., 30 years) the loan will be paid off in full. If you don't know financial terms, ask your lender!

4. Get a Pre-qualification Letter:

Go to a mortgage broker or another lender (your bank or credit union) and have them review your finances to see how much you will qualify for. Mortgage brokers shop from a number of available loan programs on the market and tend to get better rates than banks (that are selling only their loan products.) In this market, experience matters, entrust yourself who a professional who knows how to close a deal.

Advice: Get recommendations and find an experienced lender. Have them review your finances and find out how much a bank will lend you. Discuss how you can lock a rate to purchase a home or investment property.

New York Times: "Credit Scores: What You Need to Know"