Mike’s Monthly Mortgage and Real Estate Update – July

I hope this message finds you well, and I am sure you are all prepared for another fun 4th of July! I am sharing some noteworthy developments in the current housing market that may impact your decisions. A lot is happening, and I’m here to keep you in the loop! The market is buzzing with activity but as the great late coach John Wooden used to say, “Don’t mistake activity for achievement.”

Insurance options are starting to loosen up, as evidenced by a couple of condo projects that were previously partially insured or had excessively high deductibles, now being fully insured with proper deductibles. However, many of them are still underinsured or have a deductible that is too high. State Farm, the number one insurer in California, is still not writing policies, and Farmers is writing only 9,500 policies a month. We have yet to see a decrease in insurance costs, and it may take a few years before we do. We need to get all the major players back to create competition, so we are in a wait-and-see mode here, for sure.

Interest rates are showing a slight decline, but it’s unclear when they’ll reach levels many consider reasonable. The past couple of weeks have seen a rate drop of almost 0.50%, but rates were at relatively high levels before this decrease. Despite high prices and elevated rates, people continue to buy homes. Still, there is considerable hesitation for some, and we have seen a number of them enter escrow only to cancel when the slightest issue arises. From what I have seen, the slightest issue is usually the request for repairs and the amount of credit given by the seller. It’s funny because interest in buying a property remains strong, but follow-through is questionable. The last time I saw this was early in the Mortgage Meltdown years, and it was temporary, and things got better. There was uncertainty about the value of properties or whether a property would decrease in value, but now it is more about uncertainty in other aspects. Most of the people I talk with who cancel say they didn’t like the house enough to spend that much money on something that wasn’t exactly what they wanted. Many of them have found less expensive properties or more appropriate properties, and most have not stopped looking altogether. They want what they want, and buyers finally have a little leverage because the inventory is higher, and they feel they can take a few bucks off the price. This will all go away when rates drop another 0.50%, as people will see that rates are at a three-year low and feel they are getting a bargain at those levels. Please don’t laugh at me if you are sitting on a 2.75% interest rate!

I mentioned inventory has increased, and properties sitting on the market a bit longer. However, many sellers are hesitant to negotiate prices much, holding onto the low interest rates we secured for them a few years ago. For those looking to move up, down, or sideways, we’re seeing a trend where individuals are opting for second mortgages or home equity lines of credit. They’re purchasing their desired home, keeping their current property as a rental. This strategy offers long-term benefits, including paying down the mortgage (approximately $220 per month for every $100,000 owed on loans from a few years ago), tax write-offs, and potential appreciation, all without the pressure of a large new mortgage.

We have just closed a loan for clients who owe approximately $500,000 on a property worth $800,000. They wanted to keep the existing property and purchase a new house for $1,100,000. They had 5% down, so we didn’t touch the equity on the departing residence, but we have had clients that do that. Here is how the math worked for them. If they sold, they would have put $300,000 down and had a payment that would be $2050.00 lower than what they have. I know what you’re thinking - that’s a big difference. Well, it is, and that’s why they kept their house. By making a larger payment on their home, they pay off an additional $220.00 per month. They are paying off over $ 1,200 monthly on the old house, and they feel they can rent that house for $900.00 more than they are currently paying.

Additionally, if the property appreciates by 4% annually, they will earn an extra $2,600 monthly in appreciation alone. In their eyes, and mine too, they are earning $4,920 monthly and paying $2,050, resulting in a $2,870 monthly profit. They still maintain their low tax basis on the other house, continue to profit from their 2.75% interest rate, and get to move into a home that better suits their family. I call that a win-win!

I mentioned insurance briefly above, but another growing concern involves condo and townhouse complexes. Some of these complexes have experienced issues with obtaining proper insurance, some have deferred maintenance, and others have balcony or other structural issues. These issues are causing Fannie Mae, Freddie Mac, FHA, and VA to refrain from financing them until the problems are resolved.

These issues can render the property non-warrantable, limiting financing options, particularly low-down-payment loans, which can negatively impact property values over time. On the bright side, some of these complexes are priced below market, offering a potential bargain. With patience to address insurance or repair issues, they could become excellent rental opportunities. HOA fees have increased primarily due to rising repair costs and higher insurance expenses.

If you’re considering new construction, be cautious. Builders are eager to sell, offering incentives such as lower interest rates, upgrades, or even the first year of insurance - although this is often buried in lengthy disclosures. A cautionary tale: One builder kept HOA fees at $400 per month until their last condo sold, then raised them to $1,100 per month after turning the HOA over to the owners, as they had been subsidizing insurance. This underscores the importance of having strong representation when buying new construction.

Condos are not alone; I had a client buy a home in 5 Points, and the builder told them their insurance was $ 3,000 annually. It was, for one year. Then it went up to $12,000. It was in the disclosures that they supplemented the insurance for the first year, but who reads all 600 pages?

I encourage you to reach out with any questions or for guidance - I’m here to help! Have a great month, and I look forward to speaking with you soon!