Six months ago, the real estate market appeared mortally wounded. Today, however, many sellers are receiving multiple offers on their homes; lower prices make this a great time to be a buyer or get your property taxes reduced; and low interest rates make this an ideal time to lock into a great long-term mortgage. Whether you’re an owner, buyer or seller, there are several factors to keep tabs on in today’s rapidly changing local real estate market.
Property Tax Reduction
If you own real estate, this may be the easiest time ever to obtain a property tax reduction. If the market value of your property (residential or commercial) is less than the property tax assessment value, then you may be able to reduce your property taxes. The closer to the top of the market you purchased, the greater your savings could be. Properties are valued by the county assessor every January 1 and the reduction filing period runs from July 2 to November 30 based on that value. You will need evidence to support your proposed valuation, but you may only use sales price data prior to March 31 to refute the Assessor’s January 1 value.
Your appeal can be submitted in two ways: via an application for a formal hearing or via a mail-in appeal. If you live in a neighborhood with similar homes, the sales price data is usually easy to compute and a mail-in appeal is generally sufficient. However, the more custom your home or location, or if the property is commercial, a successful appeal can be more difficult, but also more significant. Currently, due to the large number of appeals, it may take 6 or more months to secure a hearing date, and you’d better come prepared. At the hearing, you’ll be up against the Assessor’s office, and it will be your data versus their data. In this type of situation, I highly recommend using a professional service to represent you. However, be wary of the many scams that are surfacing requiring upfront payments followed by little or no work to obtain your property tax reduction.
It’s a Lender’s Market
Most real estate cycles are described as either being a “seller’s” or “buyer’s” market depending on whether prices are rising or falling and who is in control of the transaction. Today’s environment, however, is neither…it’s a lender’s market, because more than at any time in the past 50 years, it’s tough to get a mortgage. It’s more difficult to secure a mortgage now because of all of the cumulative abuses of recent years. The pendulum has swung the other direction—likely too far—and it will eventually swing back. However, most all the current problems would have been avoided had we just honored some simple lending requirements: Everybody should have to put 20% down and use either a 15- or 30-year fixed mortgage with reasonable and verified debt-to-income ratios. To secure any other type of alternative mortgage, the buyer should have a higher credit score and better debt-to-income ratios than those necessary for a traditional mortgage. But this is not the world we live in so many mortgage options are available, even to those who shouldn’t use them.
George Savile, a 17th century English statesman, once said “A prince who will not undergo the difficulty of understanding must undergo the danger of trusting.” Americans have become too trusting of their mortgages. To understand the various types of mortgages and when to use them is not rocket science, but it takes some time and is best done in context with your own personal situation. What tends to happen is the buyer goes out and finds a house they want. They then use a lender (who is generally not financially savvy and does not know enough about the buyer’s personal financial situation and goals) to find a loan that allows them to qualify to purchase the house. However, just because the buyer can “qualify” doesn’t mean it’s the wise thing to do! Caveat Emptor—this famous Latin phrase meaning buyer beware—applies all too well to mortgages. What has generally been necessary to make the numbers work are alternative mortgage products such as ARMs, Convertible ARMs, Option ARMs, Interest-Only, etc. While these alternative mortgages often make it easier to qualify for a loan, they can lead to unaffordably high future payments.
Fixed or Adjustable?
I must admit that I’ve never been a fan of adjustable mortgages. My business partner, on the other hand, has been very successful over the years just using adjustables, but he works at it and his timing has been good. However, we have been in a period of generally falling interest rates for the past 25 years so it has been easier to refinance at better rates every few years. While this has worked for both fixed and adjustable mortgages, it has been really good for adjustables. At some point the trend will reverse and it will be difficult to impossible to pull off what has been so easy in the past. Going forward, fixed rate mortgages may well be the better way to go.
If you already own your home, now is a great time to refinance and get rid of that adjustable loan and lock into great long-term fixed financing. If you are looking to buy, begin working with a lender before making an offer so that you understand your financing options. Currently, the fixed mortgage market is split into two camps. First, for larger loans over $1,000,000 your best place to start is a large institutional lender where jumbo, fixed rate loans are available. Second, for loans under $750,000, a good place to start is with an independent mortgage broker. If your loan amount is in between, you may need shop between the two in order to determine the best source.
Time to Buy?
History doesn’t repeat itself, but it does rhyme. So, I believe it will be helpful to look at the last LA/Ventura County housing bubble to gain some insight on the current situation. The last bubble started in 1985 and ended in 1989, with prices rising about 40% over 4 years. It then took almost 6 years (1995) to bottom at 1985 prices and another 3 years (1998) before it began to move back up. That’s 9 years from the market top to the point where we could feel the market moving up again. This current bubble started in 1998 and rose steadily through 2001, where it reached the previous 1989 peak, and then rose very sharply through 2005, with prices going up 125% over 7 years. Prices have been much quicker to drop this time, already falling back to 2001 levels in many areas by December 2008. Prices would still need to fall another 25% to reach the previous lows of 1985 and 1995.
Recent data still shows home prices continuing to decline, but the volume of home sales is finally on the upswing. A stabilizing of consumer confidence; government programs slowing foreclosures, providing tax credits, and modifying loans; along with record low interest rates (with government help) have all worked together to bring buyers back to the market. However, given the strength of this recession, and the fact that real estate markets don’t turn on a dime, we’re still likely to see more price declines, mixed in with several years of leveling off before prices eventually gain traction and begin to rise again. Further, all of the current government programs will be hard to sustain, creating more downward pressure on prices as these programs are terminated or modified. It may be 3-5 years before we see a more normal real estate market.
So, is it time to buy? In my opinion, only if you plan to keep the house for 5 or more years and you can get a 15- or 30-year fixed mortgage, then it may be a good time to buy. Interest rates will likely be higher in the future, so now is not a great time to use adjustable mortgages hoping to refinance at better rates in the future. A year from now, prices may be lower, but rates may be higher, and we could easily find ourselves just half way through a long, drawn-out recovery period. You won’t miss a big recovery by waiting a year or two, but you might miss out on an incredible foreclosure deal, your perfect dream home at a reasonable price, or historically low mortgage rates. So, be a selective buyer and use a traditional fixed mortgage to protect yourself.
Now is a great time to lock in great long-term financing or reduce your property taxes. Given current lending conditions, certain lenders are better for jumbo loans and others for conforming loans. My office maintains a list of trustworthy and skilled professionals who have been successful in helping our clients in today’s real estate environment. Please call if you would like a confidential referral.