Wednesday, December 31, 2008
Happy New Year!!
While 2008 Has Been Difficult Lets look forward to 2009 as a year of opportunities. Have Happy and Prosperous 2009.
How Much More Decline Are We Going To See?
This will be the last post of the year and I wish the news were more positive than what we are seeing. Today was release the latest S/P Case-Shiller update on home prices. The report provides additional information on how values of real estate markets have moved in the past year and it is not pretty. On average in the 20 major metropolitan areas prices have declined by 18%. I am expecting as we have discussed in a previous post to see a continuing decline in 2009 across markets.
If we look at the San Francisco market as a whole the market saw a decline of 31% on average. For a number of people that I know and who are in San Francisco, this may come as a shock as the San Francisco market has the reputation to be strong. As everything else, the real estate market reality is different from perceptions.
Where to go from here, from a commercial perspective, I believe that we are going to start seeing significant decline in values. Commercial real estate has not been affected the same way as residential. Most commercial properties were underwritten and lending was approved based on property’s income. This was providing the commercial real estate market a better sense of reality. However, due to businesses closing and companies going out of business more commercial properties will loose revenue and potentially go into default. In addition, the lack of financing available makes it more difficult to complete transactions. The commercial real estate market is going to go down and in areas where prices were not correlated to propertyies' income higher drop will be expected.
For residential markets its going to continue to go down, however, the biggest down turn is going to happen in area that are just starting to experience a slowdown. In areas such as the California Central Valley, the blue collar suburbs etc… where price have declined up to 80% maybe there will be a further decline but to a much smaller extent. In the middle to upper end of the market we can expect to see 15% to 20% further decline. In the blue collar markets maybe an additional 5%.
If we look at the San Francisco market as a whole the market saw a decline of 31% on average. For a number of people that I know and who are in San Francisco, this may come as a shock as the San Francisco market has the reputation to be strong. As everything else, the real estate market reality is different from perceptions.
Where to go from here, from a commercial perspective, I believe that we are going to start seeing significant decline in values. Commercial real estate has not been affected the same way as residential. Most commercial properties were underwritten and lending was approved based on property’s income. This was providing the commercial real estate market a better sense of reality. However, due to businesses closing and companies going out of business more commercial properties will loose revenue and potentially go into default. In addition, the lack of financing available makes it more difficult to complete transactions. The commercial real estate market is going to go down and in areas where prices were not correlated to propertyies' income higher drop will be expected.
For residential markets its going to continue to go down, however, the biggest down turn is going to happen in area that are just starting to experience a slowdown. In areas such as the California Central Valley, the blue collar suburbs etc… where price have declined up to 80% maybe there will be a further decline but to a much smaller extent. In the middle to upper end of the market we can expect to see 15% to 20% further decline. In the blue collar markets maybe an additional 5%.
Friday, December 26, 2008
Residential Values by Market Segments – Here it is!
A few months ago, we were looking at real estate property values and the state of the financial industry and thinking that values were going to continue to go down. In the past few weeks, we wrote about this subject again. Now, we are going to look at real estate values in terms of the different market segments. As the data is showing, property values are going down overall, but, looking at the numbers more closely, we are starting to see noticeably different trends in different market segments. Despite these differences, though, it is still the case that all markets and market segments seem still to be negatively affected, regardless of whether you are looking at the upper end or the lower end of the market.
The good news is that some markets have, I believe, reached the bottom. In a post earlier, we were mentioning an economist from UCLA’s Anderson School who said that some markets might have bottomed out. DataQuick’s numbers appear to confirm this trend and also show new ones. Although the entire country is showing some similar overall trends, regional markets still exhibit distinctive characteristics. For example, Detroit may be seeing far more severe problems than Boston as its primary industry is going through difficult times. Similarly, the New York City metropolitan area had held up fairly well compared to the rest of the country until the financial storm decimated local jobs, whereas the San Francisco area has experienced a more nuanced downturn.
The lower market, considered the market for “blue collar” homes, had borne the brunt of the sub-prime market debacle, but it is now stabilizing in regard to prices in some places. These markets have lost up to 75% of their values. The good news is that these markets have started to see a significant increase in the number of transactions in some places. Numerous buyers (including some investors) are flocking to these markets and acquiring properties. However, this increased buying seems centered primarily in the surrounding areas of major metropolitan cities that have not experienced major economic problems. For example, in the San Francisco Bay Area’s Contra Costa and Alameda Counties, we are seeing increased buying, as indicated in the San Francisco Chronicle article.
The middle and upper markets have now been hit too, as illustrated by the article in the Boston Globe and the previous SF Chronicle article. Most of these markets were stable until late September and even early October, but with the repercussions of the financial crisis, they are now also suffering. These markets are going to experience sharp downturns within the next 6 to 9 months, because white collar workers are losing their jobs and the net worth of many of these individuals have been halved (partly because dramatic stock market losses have lead to major drops in 401k plan holdings or IRA portfolios).
Looking at 2009, there is hope because we are seeing the beginnings of a bottoming out.
The good news is that some markets have, I believe, reached the bottom. In a post earlier, we were mentioning an economist from UCLA’s Anderson School who said that some markets might have bottomed out. DataQuick’s numbers appear to confirm this trend and also show new ones. Although the entire country is showing some similar overall trends, regional markets still exhibit distinctive characteristics. For example, Detroit may be seeing far more severe problems than Boston as its primary industry is going through difficult times. Similarly, the New York City metropolitan area had held up fairly well compared to the rest of the country until the financial storm decimated local jobs, whereas the San Francisco area has experienced a more nuanced downturn.
The lower market, considered the market for “blue collar” homes, had borne the brunt of the sub-prime market debacle, but it is now stabilizing in regard to prices in some places. These markets have lost up to 75% of their values. The good news is that these markets have started to see a significant increase in the number of transactions in some places. Numerous buyers (including some investors) are flocking to these markets and acquiring properties. However, this increased buying seems centered primarily in the surrounding areas of major metropolitan cities that have not experienced major economic problems. For example, in the San Francisco Bay Area’s Contra Costa and Alameda Counties, we are seeing increased buying, as indicated in the San Francisco Chronicle article.
The middle and upper markets have now been hit too, as illustrated by the article in the Boston Globe and the previous SF Chronicle article. Most of these markets were stable until late September and even early October, but with the repercussions of the financial crisis, they are now also suffering. These markets are going to experience sharp downturns within the next 6 to 9 months, because white collar workers are losing their jobs and the net worth of many of these individuals have been halved (partly because dramatic stock market losses have lead to major drops in 401k plan holdings or IRA portfolios).
Looking at 2009, there is hope because we are seeing the beginnings of a bottoming out.
Sunday, December 21, 2008
Today’s Secret to Hard Money
Getting a hard money loan is evolving as the rest of the market is changing. What was considered a loan for a hard money lender 6 months or even 3 months ago is not the same today. Until recently, most loan officers and real estate professionals were considering hard money for people who could not document income, had bad credit and/or needed special consideration. As long as enough equity in the property was available then the loan was most likely funded.
In the last three months everything has changed, the economy has taken a sharp downturn and fewer banks are offering financing for both commercial and residential real estate. The lack of available capital to be lended and the economy have made hard money lending one of the primary sources of financing for real estate. Loans that were considered a perfect fit for hard money lenders a few months ago are not anymore. In addition, because of a significant increase in demand the cost of hard money loans has increased by at least one percent on the rate and one point. Were you had 3 points loans today a borrower will pay 4 points.
Due to the increase in demand for hard money, lenders are becoming more and more demanding in regard to the quality of the files they are looking at. For investment properties either commercial or residential property’s income is becoming crucial. Most lenders are now looking at a property real or potential income. Other factors that are going to make a difference are borrower strength you are starting to see more and more files with borrowers that have great credit sometimes above 700. In addition, a property location is going to be important, the better the location the better the LTV.
While, getting hard money is more difficult than it was it is not impossible. Borrowers are realizing that there is a cost for money and that they have to adjust to the new financial reality. The good news is that if you (loan officer, real estate professional) work with a lender that has experience and is flexible most likely you will have an increase chance to make a financing happen. Also, I would recommend for all the party involved to be flexible hard money lending has guideline, but everything is about flexibility.
In the last three months everything has changed, the economy has taken a sharp downturn and fewer banks are offering financing for both commercial and residential real estate. The lack of available capital to be lended and the economy have made hard money lending one of the primary sources of financing for real estate. Loans that were considered a perfect fit for hard money lenders a few months ago are not anymore. In addition, because of a significant increase in demand the cost of hard money loans has increased by at least one percent on the rate and one point. Were you had 3 points loans today a borrower will pay 4 points.
Due to the increase in demand for hard money, lenders are becoming more and more demanding in regard to the quality of the files they are looking at. For investment properties either commercial or residential property’s income is becoming crucial. Most lenders are now looking at a property real or potential income. Other factors that are going to make a difference are borrower strength you are starting to see more and more files with borrowers that have great credit sometimes above 700. In addition, a property location is going to be important, the better the location the better the LTV.
While, getting hard money is more difficult than it was it is not impossible. Borrowers are realizing that there is a cost for money and that they have to adjust to the new financial reality. The good news is that if you (loan officer, real estate professional) work with a lender that has experience and is flexible most likely you will have an increase chance to make a financing happen. Also, I would recommend for all the party involved to be flexible hard money lending has guideline, but everything is about flexibility.
Tuesday, December 16, 2008
The Competition for Money
In my last few post, I started to address the subject of capital availability. The picture is not any prettier today; in fact, it’s actually getting worse. This week, I was made aware of a number of new lenders that have stopped lending either because they are out of available capital to lend or just because they are shutting down programs. Professionals are roaming all over the world trying to drum up sources of capital to invest in American real estate.
During the past 30 days, a number of factors have made capital less and less available. More and more banks have restricted their lending abilities in the residential real estate markets. Numerous banks do not make any more such loans, while others are ceasing operations. A good source for this type of information is the blog Mortgage Lender Implode. What was once limited to the residential market is now also affecting the commercial market. More and more lenders in the commercial market are also not lending anymore either because of a lack of funds due to an increase in defaults or because they are going out business.
The lenders that are still lending are currently overwhelmed by the demand for funds. Today, lenders that have money are in the driver’s seat, and it may stay this way for the next 6 to 12 months. What was once considered expensive or excessive lending terms are today considered normal. In addition, if loan applications are not put together well, most likely financing will be denied.
My recommendation for professionals and borrowers alike is to do your homework. Don’t try to be clever if you have reasonable loan terms for today’s environment; just accept them. Make sure the information you provide is consistent and accurate. Be prepared to document information and to be as reasonable and precise as possible regarding values, incomes, reserves, etc. Be engaged and proactive in the process and cooperate with the lender. Have reasonable expectations. A loan approved today may not be available tomorrow. The situation is not likely to improve any time soon and may worsen.
During the past 30 days, a number of factors have made capital less and less available. More and more banks have restricted their lending abilities in the residential real estate markets. Numerous banks do not make any more such loans, while others are ceasing operations. A good source for this type of information is the blog Mortgage Lender Implode. What was once limited to the residential market is now also affecting the commercial market. More and more lenders in the commercial market are also not lending anymore either because of a lack of funds due to an increase in defaults or because they are going out business.
The lenders that are still lending are currently overwhelmed by the demand for funds. Today, lenders that have money are in the driver’s seat, and it may stay this way for the next 6 to 12 months. What was once considered expensive or excessive lending terms are today considered normal. In addition, if loan applications are not put together well, most likely financing will be denied.
My recommendation for professionals and borrowers alike is to do your homework. Don’t try to be clever if you have reasonable loan terms for today’s environment; just accept them. Make sure the information you provide is consistent and accurate. Be prepared to document information and to be as reasonable and precise as possible regarding values, incomes, reserves, etc. Be engaged and proactive in the process and cooperate with the lender. Have reasonable expectations. A loan approved today may not be available tomorrow. The situation is not likely to improve any time soon and may worsen.
Monday, December 15, 2008
Appraisals and Values -- Getting it Right
As usual this week, most news relating to finance or the economy was not good or just depressing. However, some hope was provided to us via an interview in the California Report from Jerry Nickelsburg, an economist with UCLA’s Anderson School. Jerry mentioned that some real estate markets might have started to bottom out. These markets are the ones that have already seen a drop of up to 75% in value or more. Other markets are now seeing the effect of the lack of capital and might bottom out in 2009.
It is clear today that property values are linked to the economy in general and the availability of funds. If there is no money to borrow, then properties are not traded or traded only at lower prices. If people are losing their jobs, then they are not able to make their mortgage payments, thus starting to default, which increases the number of properties being foreclosed, etc. If people do not buy products in stores, then companies will start closing stores and laying off people, which worsens the downward spiral and directly affects the demand for commercial real estate. Bad economic times imply lower property values, especially in today’s environment. If you are wondering what the value of your real estate is, most likely it has gone down during the last year, even in popular resilient up-scale markets, like the good neighborhoods in San Francisco.
Knowing what we do about market conditions, it is surprising to still find appraisers, real estate owners and real estate professionals who believe that the market is doing better than it is. Every week, I come across numerous appraisal reports or property valuations, which for one reason or another show an increase in market values. How can we take these reports seriously? This week, an appraisal I received was so out of touch with reality that I took the pains to go over it in detail with the loan officer.
Today, we can only close a transaction if we make sure we understand the realistic current value of the property. This applies both to commercial and residential properties. Most of the loans that are funded now are funded because the loan officer and the borrower have a clear understanding of what the property value is. Serious and meaningful appraisal reports are very valuable, but difficult to come by. Since there are so many tools available today to estimate property values, there is no excuse for getting it wrong and for having inaccurate expectations. My recommendations are to do your homework thoroughly before you start any real estate financing process and to be conservative in estimating property values
It is clear today that property values are linked to the economy in general and the availability of funds. If there is no money to borrow, then properties are not traded or traded only at lower prices. If people are losing their jobs, then they are not able to make their mortgage payments, thus starting to default, which increases the number of properties being foreclosed, etc. If people do not buy products in stores, then companies will start closing stores and laying off people, which worsens the downward spiral and directly affects the demand for commercial real estate. Bad economic times imply lower property values, especially in today’s environment. If you are wondering what the value of your real estate is, most likely it has gone down during the last year, even in popular resilient up-scale markets, like the good neighborhoods in San Francisco.
Knowing what we do about market conditions, it is surprising to still find appraisers, real estate owners and real estate professionals who believe that the market is doing better than it is. Every week, I come across numerous appraisal reports or property valuations, which for one reason or another show an increase in market values. How can we take these reports seriously? This week, an appraisal I received was so out of touch with reality that I took the pains to go over it in detail with the loan officer.
Today, we can only close a transaction if we make sure we understand the realistic current value of the property. This applies both to commercial and residential properties. Most of the loans that are funded now are funded because the loan officer and the borrower have a clear understanding of what the property value is. Serious and meaningful appraisal reports are very valuable, but difficult to come by. Since there are so many tools available today to estimate property values, there is no excuse for getting it wrong and for having inaccurate expectations. My recommendations are to do your homework thoroughly before you start any real estate financing process and to be conservative in estimating property values
Monday, December 1, 2008
Property Values Are Gone
A friend of mine who is also in real estate went to a professional conference last week. One of the speakers was from the California Association of Realtors. This speaker told the attendees that, based on the Multiple Listing Service (MLS) value, single family residences in California have lost, on average, 46% of their value. The speaker added that, on the coast, the values were a little stronger than inland. This means that, in some areas of California, single family residence values have dropped as much as 75%. From what I am seeing, even property values in areas where single family residences have held up reasonably well so far are now starting to decline.
In the hard money world, there is starting to be a noticeable shortage in the availability of funds as numerous borrowers who cannot qualify for agency loans have turned to us. This shortage of funds and the decline in home values have made securing a loan from private money sources much more difficult than it was even a month ago. This lack of funds has also driven up the cost of money. On average, the cost of money has gone up by 1% for the interest rate and by 1% in points. This trend may continue for the next six months and may even worsen.
In today’s environment, getting financing for borrowers who need private money is difficult. As a loan officer, broker or borrower, be aware that if you want your loan to be funded, you need to make it as easy as possible for the lender. As a start, you need to make sure that the estimated value of your property is reasonably accurate - be realistic with estimating property values and make sure that the value you are using can be easily supported without being merely a figment of your imagination. While, in the past, hard money loans were typically provided on the basis of stated income, this has changed in today’s environment such that many borrowers are now expected to provide full documentation.
To succeed in this lending environment, borrowers, brokers and loan officers need to work well together and be realistic. Brokers and loan officers especially need to make sure clients understand the challenges that currently exist when funding loans.
In the hard money world, there is starting to be a noticeable shortage in the availability of funds as numerous borrowers who cannot qualify for agency loans have turned to us. This shortage of funds and the decline in home values have made securing a loan from private money sources much more difficult than it was even a month ago. This lack of funds has also driven up the cost of money. On average, the cost of money has gone up by 1% for the interest rate and by 1% in points. This trend may continue for the next six months and may even worsen.
In today’s environment, getting financing for borrowers who need private money is difficult. As a loan officer, broker or borrower, be aware that if you want your loan to be funded, you need to make it as easy as possible for the lender. As a start, you need to make sure that the estimated value of your property is reasonably accurate - be realistic with estimating property values and make sure that the value you are using can be easily supported without being merely a figment of your imagination. While, in the past, hard money loans were typically provided on the basis of stated income, this has changed in today’s environment such that many borrowers are now expected to provide full documentation.
To succeed in this lending environment, borrowers, brokers and loan officers need to work well together and be realistic. Brokers and loan officers especially need to make sure clients understand the challenges that currently exist when funding loans.
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