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California Real Estate and Young Couples

Last night, I got into a good discussion with some family and friends about how things have changed in Real Estate...Specifically...For Young Couples!

Over the past few years, there have been some MAJOR changes in the Real Estate Market!

Homes across the United States have doubled, tripled and even increased in some parts by 5-600%! I know condos in Southern California that were selling for $150,000 that are now appraising and on the market in the mid $500,00's! A half a million dollars for a 1000sq foot condo! And, the association dues are a couple hundred dollars a month as well! Ouch!

The game has changed up drastically...and you want in the game! Or maybe you don't want to be in the "game", but you simply want to take part in the pride of ownership to provide for your family like your parents have and you're simply trying to figure out a way to get there...

Everyone in my age bracket (late 20's) is in the same boat. Our parents started off their families and were able to save the 20% to put down on a home (which wasn't that much in the scheme of things...often borrowed.) Back then, many of them purchased their first home for the average price of a new car these days...Have times really changed that much over time? Sure, interest rates were higher and wages were lower back then...But was it REALLY THAT MUCH DIFFERENT? I think proportionally, it's MUCH DIFFERENT!

Now we must work more hours, invest wiser, find higher paying jobs, save more and have a great budget in place...Not an easy thing to do with my generation. One that has a "have it now" personality..That's right..Have it now...pay for it later!

So...What can you do?

Lenders have "First Time Home Buyer" programs that allow you to finance up to 106% of the purchase price on a home. That's right, you can increase the purchase price and have the sellers offer you a closing credit at the close of escrow to take care of your closing costs. This reduces the amount of cash that you need to come to the table with to purchase the home.

Affordability Factor? In California, I've read statistics that vary between 12-14%. That means that out of 100 people, 12-14 people are in a position to afford that home. Many assume that they are the ones that wouldn't qualify...You might be suprised! The only way to find out is to put yourself out there and try. Find a mortgage professional that understands and can identify with your situation. The worst thing that can happen is you find out where you lie if you don't qualify...but you can set-up a game plan with goals to put yourself into a situation to increase your chances of qualifying.

What are many of us doing?

Moving to areas that are more affordable - I moved my family to Chico, California. We purchased a new home in late 2006 for under $300,000! More home for less...Many of our parents are even making the decision to move to a more affordable area...Why? Most of their net worth is in the form of equity in their home. So, they are "cashing out" and moving to a place where they can get more square footage for less...

Interest-Only Loans -Many of the loans in California are on an Interest-Only product. This means that you are paying what is due to the bank in interest and that's it...no more..no less..So, do you think property values will continue to go up? If so, this might be a loan product for you! The alternative is a "fully ammortized" loan, which will reduce the balance of your mortgage on a monthly basis.

Lease with the option to buy transactions -Young couples that have little,no or bad credit can lease a home from the owner with the option to buy. In such a transaction, the homeowner allows for a "predetermined" amount of your rents to be placed towards the purchase price...Not a bad deal and it works quite well for those that wouldn't traditionally qualify for a home loan.

Purchasing a home is one of the biggest decisions that you can make! Be sure to work with a mortgage professional that takes the time to go through your scenario, treating you with the respect you deserve. You'll be glad you did!

Scott Gormley

Broker/Owner

Oak Valley Mortgage

Direct: 530.592.8362

eMail: Scott@OakValleyMortgage.com

Website: http://www.caloan.com/

Blog: http://www.caloanblog.com/

Posted by Scott Gormley on 12/24/2006 11:42 AM

Comments (23)

california, real, estate, first time home buyer, first time home buyers, market, home, loan, finance, young, family

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23 Comments on California Real Estate and Young Couples

DEC

2006

Scott,

Good ideas here but I thought interest only loans have come under criticism of late...

AJ~No. I think what has come under criticism are "Option Arm's" with a start rate of 1-3% and are "potential negative-ammortization" loans that can put a borrower upside down real quick if not used properly...

Scott

Great post Scott, I feel lucky that I live where homes are more affordable!!!

Prices are so high there that the poor couple in your blog can't even afford shoes. :-(

Oops, I was the wise a... in the previous post - have we always had to add our name and email??

LOL...

Yea..

Scott

In California in order to buy a home whether or not its your primary or secondary home a couple must both work. A dual monthly income is necessary to afford a mortgage based on californias home values.

I figured it out Scott. I wasn't logged in.

Great Blog !!

I think interest only loans are great if the the appreciation is strong. I wouldn't do an interest only loan on my primary residence here in Texas because at the time I bought this house the appreciation rate was only 3%.... I do have an interest only loan on my condo that is right on the Gulf of Mexico...The appreciation was at 18% at the time I bought the condo.

I'm no fan of interest only loans when they're used as an "affordability" tool. If a standard 30 year mortgage puts a homebuyer in a pinch then that homebuyer should think twice before they make the deal work using creative finance.

Yes, Option Arms (a.k.a. NegAm, pick-a-payment, deferred interest mortgages) have gotten a lot of negative press as the worst of the exotic mortgages, but a homebuyer who uses an interest-only mortgage to afford a home in a region with skyrocketing values is putting herself at risk as well. Yes, in some cases this might be a smart move, but I suspect that many times homebuyers don't understand the risk they're taking on.

As for lease-to-own: investors love these. Why? The vast majority of lease-to-own renters simply leave without exercising their purchase option, which significantly inflates the return for the investor they're renting from. You pay for the lease-to-own option by paying higher rent...so make sure you compare the alternatives.

It does seem as if the world is full of 'have' and 'have nots'. I remember when I was in Elementary School in the early 70's, watching films that predicted that every American would work from home, grown their own food and have more leisure time. So much for predictions.

You mention young couples. The way real estate is prised in California these days, I think we're on our way to legalizing polygamy. Three spouses work to pay the bills so one can stay home with the kids!

Seriously, you'd be surprised how many SFRs are being used by multiple families nowadays, especially immigrants.

Will this ever change? I doubt it. As long as people will pay, the price will rise.

106% loan, IO loan, and add in selling costs, people run into any trouble at all it is either foreclosure/short sale or hope appreciation has bailed you out. In a boom-bust market such as California, with most markets on the just on the other side of the "boom" and moving into bust, it simply doesn't make sense to buy now, especially with the "affordability" products and no-money down.

Good post, Scott, with some terrific information. I can't imagine trying to get started in the market today, at least here in Southern California, adn places like NYC and Boston - but then there are many more options (some good some not) than there used to be.

Are you getting a good response to the loans for first time buyers? (Cal-HFA, Acorn)

Most recent stats I saw for California regarding affordability is an idex of 24% overall that can afford the MDN priced home. Here is the south there are towns where it is less than 10%.

I find that many clients don't fit "within the box" for the special programs and they are shifted to aggressive investors in the marketplace that will touch the deal. I would be REALLY SUPRISED if the index for CA overall was at 24%! But I could certainly see Orange County,LA and San Diego in the 10% or less category...

-Scott

Scott, first time homebuyers are having a hard time affording that first home even here in Connecticut, and the prices here are much less than in California.

BTW, the price of my first house was $27,000 and the second $57,000. This is the amount of a downpayment these days.

Scott, have a happy and Blessed Christmas, and lets hope for a great 2007

My market area in the Central Valley of California is #9 in over-valued homes according to SmartMoney magazine and we also have been projected to have the highest failure rate (26%) for sub-prime loans in the country. We have to get back to the basics where buyers only buy homes they can actually afford. No Stated income for wage earners, no option arms for wage earners and qualifying buyers on at least 2% over the start rate on adjustables. If we don't educate buyers, Big Brother will pass enough regulation to scare off lenders and make it even more difficult for the marginal borrower.

Three Counties in the Central Valley, San Joaquin, Stanislaus and Merced are expected to have 1.8 billion in losses from foreclosure in the next 3-5 years. In my estimation, that is a whole layer of trade-up buyers. We have got to get back to the basics to help our clients, not harm them, present company excluded.

The affordability index was recently (last December) changed by the CAR due to the fact that it was getting so low, they now assume a ARM (lower interest rate), less downpayment (10% iirc), and less than a median price home (but they assume a median income).

If you go by the National Association of Home Builders affordability index (which assumes 20% down, median priced home, 30 yr fixed) LA county affordability is something like 2% for median incomes (found here http://www.nahb.org/page.aspx/category/sectionID=135) .

I forgot the DTI ratio, the CAR also assumes a 40% DTI.

Scott.... good post with some good topic of discussion.

I just wanted to add an FYI in regards to the lease to purchase option. Be careful.... make sure you lender knows how to instruct you now, not later. Meaning.... is the seller giving back to much credit from the rents that you are paying them. When appraised, the appraiser needs to do a rent analysis and I have sometimes seen a deal blown because the buyer couldn't receive much money. Sometimes just ripping up the lease to purchase contract and do a regular purchase agreement....and having the seller give back a seller contribution. Again.. just an FYI on this.

Overall..... yes, you saw many younger kids per se do the Pay Option Arm, because their payment would be much cheaper now...... as you said.... get now, pay later... :o)

Hey Scott I was just having this conversation today with my husband. My son is getting a new apartment and the cheapest 1 bedroom he could find is $850/mth. I thought if we looked real hard for a 1 bedroom condo fixer upper we might get it for around $150 and therefore he could pay a little more a month but he would own it. Well that is a joke, there is nothing like that for $250K, anywhere.

My first house was a 3 bedroom with a large eat in kitchen and big yard for $33,500. I feel bad for kids starting out today, it is not easy, something has to give real soon.

Phyllis Pafumi