After the subprime mortgage crisis shook up the real estate
market, lenders have entered survival mode, loaning money, but only
when it’s safe.
GILROY
After the subprime mortgage crisis shook up the real estate market, lenders have entered survival mode, loaning money, but only when it’s safe.
“Theoretically, it’s what they should have been doing all along,” said Stu Carson, a long-time local broker and president of Realty World in San Martin. “These days, they’re being very cautious about who they should lend to.”
Patty Filice, a sales agent with Intero Real Estate Services, has been in the business for 25 years and agreed that banks lent money to those with dubious credit who might not be able to keep up with payments.
“If you could walk and chew gum, I could probably get you a loan,” she said of past practices. “That’s not right.”
During the winter months, her business is quieter than during the rest of the year but this winter is quieter than normal, she said.
“The interest rates will help when the spring market comes, but how much?” she said. She added that there’s no quick fix to the complicated problem but that a number of factors will contribute to the rejuvenation of the market.
Rampant lending gave way to an all time peak in home ownership of 69.2 percent in 2004, according to the U.S. Census Bureau. Meanwhile, housing prices rose 124 percent between 1997 and 2006, according to the S&P/Case Shiller national home-price index, attracting subprime borrowers with the expectation that the value of their investment had nowhere to go but up. They were wrong.
Now that the bubble has burst, financial institutions have recognized billions in subprime related losses. But South Valley National Bank is still generating new loans, said Russ Miller, the vice president and regional manager of the mortgage division for Pacific Capital Bank Corporation, the parent company of South Valley.
“The pendulum in the industry seems to swing too far one way or the other, and we have a hard time, as an industry, finding that middle ground,” Miller said. “There are times when we’re too tight or too loose.”
While Miller is seeing homes moving on the upper end, entry level home buyers are having problems affording their payments. Often with little equity to refinance their homes, they default on loans with adjustable rates that spike after several years, and eventually surrender to foreclosure.
“People were putting very little or no money down and three years down the road, they have no equity and payments they can’t make,” he said, “which resulted in rapid foreclosures and people in default.”
Nearly 1,300 homes in Morgan Hill, Gilroy and Hollister are in varying states of foreclosure, including pre-foreclosure, auction and bank-owned homes, according to RealtyTrac.com.
Predicaments like these often result in the brokering of a short sale, a way for a lender to recover as much money as possible after a house has lost value since the initial loan.
“Because 80 percent of something is better than 100 percent of nothing,” Miller said.
Talk of eliminating the “phantom tax” on foreclosures and short sales could play a role in the upswing of the market, Miller said. Currently, borrowers must claim the money they save on a short sale as a form of income on their taxes. Eliminating this could factor into stimulation in the real estate market.
At a time when real estate agents and lenders are coming up with flashy gimmicks to attract customers, the pendulum is bound to swing in the other direction, Carson said. In addition to the elimination of the phantom tax, many factors will contribute to the stimulation of the housing market and Carson points to the U.S. economic stimulus plan as a good start. One proposal increases the maximum amount of a loan before it falls into the jumbo loan category and a higher interest rate bracket.
Currently, any loan more than over $417,000 is labeled a jumbo loan and subjected to significantly higher interest rates. Given that median home prices in Gilroy, Morgan Hill and Hollister are $639,080, $747,036 and $545,261, respectively, according to CNNMoney.com, the average homeowner in South County would have to apply for a jumbo loan to purchase their home. The interest rates of conforming loans, or loans lower than $417,000, are the low ones, at 5.49 percent for a 30-year fixed rate mortgage, according to Bankrate.com. Meanwhile, a 30-year fixed jumbo mortgage’s interest rate jumps more than a point, to 6.56 percent.
Also, Carson said that sellers have continued to adjust home prices to increasingly lower levels.
“Sellers are discovering there is a price at which every home will sell,” Carson said. “Realistic seller expectations have resulted in homes prices at a point that, this spring and summer, buyers may finally begin to take notice.”
Carson pointed out that, as of Feb. 2, 16 homes in Morgan Hill were priced lower than $500,000.
Finally, he added that investors are key to stimulating the market.
“Investors are coming out of the woodwork wanting to buy properties,” he said. “They always show up at the right times. These people have a sense of timing. Buy low, sell high is how they’ve got to where they are, and they know now is the time to buy.”
Carson said within the last three months, the number of investors looking to find rental properties has tripled at his business. With spring around the corner, he predicts that “values will hold steady, months of inventory will begin to drop and the number of sales per month will climb.”
“It’s a waiting game,” he said.
