QM: What’s all the buzz abouttttt

On January 10, 2014 another aspect of the Qualified Residential Mortgage Rule passed by our friends in Congress as part of the Frank-Dodd Legislation from 2010 will go into effect. Designed to protect consumers against mortgage fraud, the question remains if it will improve or hinder our local housing recovery.

The essence of the Qualified Residential Mortgage is to ensure the ability of the borrower to repay the mortgage through extensive investigation by the mortgage lenders into credit worthiness and income evaluations. Certain considerations made by lenders will include:
(1) current or reasonably expected income and assets, (2)current employment, (3) monthly payments on covered transaction, (4) monthly payments on simultaneous loans, (5) monthly payments for mortgage related obligations, (6)current debt obligations, alimony and child support, (7) monthly debt-to-income ratios or residual income and (8) credit history.

While the previously proposed required down payment rule was aborted, the QRM does have a debt ratio guideline that might affect buyers. The debt to income ratio can not exceed 43% so if you are thinking of purchasing a home, you might want to put off buying that new car. This one aspect is the most troubling for all the consumer protections it touts. Mortgage experts state that 20% of loans presently originated have higher than 43% consumer debt ratio, so to take a potential 20% of buyers out of the housing market may certainly impact our recovery.

The benefits to the consumer can be seen in the prohibition of negative amortization and interest only payments. Also, mortgage loans can not exceed thirty year repayment period. And the QRM does have a limitation on points and fees that can be charged which is generally about 3% of the loan amount. For borrowers, predatory lending has been curtailed and the likelihood of overselling and becoming “house-poor” will be a notion of the past.

For mortgage companies the changes have little effect on how they have been doing business since they tend to be risk adverse anyway. After all, making certain that the borrower can repay a loan is the cornerstone of that industry. But now with the threat of having to buy back a bad loan, the mortgage companies will be more diligent in their scrutiny of every hopeful borrower.

For anyone who has been around the sun a few times, you know that if it was made by Congress you can bet that they made it with loopholes and the QRM is no exception. There are guidelines for loans that exceed the debt to income ratio to create more flexibility. Just who will fall into these guidelines is a mystery. Fortunately, Fannie Mae and Freddie Mac have an exemption to the 43% debt to income ratio which may still be discretionary, but at least there is hope. Not all qualified borrowers with a higher debt to income will be excluded from the market.

For loans originating after January 10th, it may seem as though an IRS audit would be easier to deal with then qualifying for a mortgage but if it results in stability in the housing market and protection of homeowner wealth, we are all for it. We applaud the prevention of predatory lending practices and the aim to prevent another recession by easy access to money. Getting rid of mortgages that borrowers can only afford for the first year is a good thing. And saying goodbye to those get rich quick seminars that promise real estate investors quick return with no money down and no qualifying is also a good thing. However the reality is that every borrower is a risk and we don’t want to see Congress enacting over-stringent guidelines that will squeeze out the hard working individual who is trying to achieve the very essence of the American Dream and that is home ownership.

The Lost Art of Negotiating

As real estate brokers we basically negotiate in our sleep, its true! As we have our coffee in the morning and talk about our dreams, it often goes like this. “I had a weird dream we were really close to settling the Jones and then the buyer insisted on the fridge.” When it comes to negotiating, the one constant is that we want to win, and that’s not a bad thing or just a guy thing. Think back to those Girl Scout cookie sales and that one girl who always seemed to out sell everyone, and not by a little. It didn’t matter that she had her mother and aunt and a whole army of helpers out selling 24/7, she was a winner.

 

That’s what we want for our clients; we want them to be winners. In order for that to happen the process needs to be artfully crafted. So that brings in our first rule of negotiation, win-win or no deal. This may seem difficult since real estate markets tend to favor either buyers or sellers. In a buyer’s market it would seem unlikely that a seller can come out a winner, but he can. For many sellers, winning usually means price but to become a winner a seller needs to do three things. First, determine motivation. Second, establish the goal and third lay out at least three main elements that support that goal.

 

If a seller is not really motivated it’s impossible to determine a winning solution. In a market where there are eight sellers for every buyer, the seller probably won’t get to the negotiating stage anyway. But if motivation is strong, say to move closer to the grandkids, then the goal of selling your house can have real meaning. Now the elements that support the goal such as price, closing dates, inclusions and concessions become the artful part of the process.

 

Avoid framing any element as winning or losing but simply as an exploration into potential outcomes. For sellers to win in a buyer’s market they must overcome the price objection. Keep in mind that that market value is not the fault of the buyers and for all the showings, these people actually made an offer. Next, when it comes to inspection objections, think outside of the box. If the buyer wants a new cooling unit and you know that the old one is fine, offer a home warranty instead. You won’t have to pay for a new unit and the buyer gets the assurance he won’t be stuck with surprise expenses. Buyers have a list of win items, too, and something as simple as moving a closing date may save them thousands or give them peace of mind so explore ways for both parties to win and don’t be afraid to ask for what you want.

 

The most important way to become a winner is to keep your emotions in check. Emotions are inevitable but they tend to make bad business partners. Never let them affect your mindset or your ability to get to the “win” objective of the deal. When making concessions always keep an eye on the bottom line and have your broker prepare a net-out sheet before submitting your response. More often than not your broker will need to negotiate with you before she can negotiate for you so don’t think she is working against you. She is really trying to help you succeed with your goal. Closing is a natural progression to successful negotiations and if both the buyer and the seller get what they want, isn’t that the best outcome of all?

Third Quarter Santa Fe Real Estate

Last month, we went to Austin, Texas for a national real estate conference and met brokers from all over the country. The majority were thoroughly amazed when we spoke of our market, the current difficulties, and the days on market. Most we conversed with had markets with an average 90 days selling period. Sure, they had short sales and foreclosures, too, but their markets were far improved. Since we rely heavily on our feeder markets and Santa Fe was the last to feel the decline, we saw this as a sign that we, too, would be on the mend.

The Santa Fe Association of Realtors recently published their 3^rd quarter statistics so it’s time again to look at the numbers. While the summer is believed to be the best to sell real estate, the wildfires kept buyers at bay. Both closed sales and pending sales were down slightly from same time last year but new listings were down, too, with 687 properties listed versus 816. Also improved was days on market at 224 for the 3^rd quarter versus 243 for 2010. The average sales price was $453,823 which was a 3.8% increase over the prior year. While the median sales price dropped a fraction 1%, the average sales price tells us that the entire market is recovering.

For the different city areas, the big winner in activity goes to the Southeast city limits with a 54% increase in closed sales and a 34% reduction in overall inventory. Our runner-up was the Airport/Agua Fria district with a 27% increase in closed sales and a 9% reduction in inventory. With 90 homes still available on the market and a median sales price of $183,100 it is no wonder that Santa Fe’s housing affordability index has increased to 107, an all time high.

The Northeast city limits saw a 9% reduction in new listings and an increase in the median sales price year to date (YTD) of $560,000 over $517,500 for 2010. The Southwest city limits saw a reduction in new listings to 315 properties versus 400 for 2010. Here, the median sales price declined to $207,000 from $225,000 from the previous year. The toughest area in the city, Northwest city limits, had a 20% increase in new listings and a 26% drop in closed sales. The median sales price YTD is $266,000 down from $340,000 of 2010.

For the county, the busiest area was Las Campanas with a 76% increase in closed sales YTD. However, the median sales price here has plummeted to $860,000 from $950,000 from the previous year. The areas surrounding Las Campanas had a 26% reduction in new listings but a 7% drop in median sales price to $637,500. Tesuque experienced a 50% increase in closed sales but a 12% decline in median selling price to $695,000 from $792,500 from 2010.

Old Las Vegas Highway and surrounds had a 31% increase in closed sales and a decline in new listings. The median sales price here was $345,000. Highway 285 had a reduction in new listings but a drop in closed sales. The median sales price was $402,000. Eldorado has been consistent in closed sales YTD with a small drop in median price to $319,000. Inventory here hovers around 10 months. The area of Rancho Viejo saw a big drop in new listings and a 16% drop in closed sales. The median sales price increased 4% to $295,000. The Southwest county had a 17% increase in median sales price to $280,950 but the inventory here remains high at 26 months.

It will be worthwhile to look at the numbers again in a couple of months to see how Santa Fe finishes the year. While not all good news, there is certainly evidence that the market is improving and that is the best news!

Second Quarter 2011

Real Estate Report Card

 

It’s that time again as we review our real estate report card by way of our 2011 Second Quarter Statistics. How did our enchanting city do? Our real estate road to recovery appears to be a long and winding road.

 

The greatest news we have to focus on is the decline in new listings, down 22% from last quarter. That means the total month’s supply of homes for sale has decreased from 19 months to 15. Other good news, closed sales were up from last quarter and also from same time last year. Remember, last year the market was inspired by the Home Buyer Tax Credit. This year ready buyers and outstanding prices were the impetus to beat last year’s figures.

 

Certain segments of the market faired much better than others. The city limits Northeast saw a positive change in median sales price to $545,000 and a 50% increase in closed sales to 72 homes sold Year to Date (YTD). But, Days on Market (DOM) has increased to 289 and there was an overall decline in listing price received to 84%. The Tesuque area saw a large reduction in new listings, down 37%, to 63 homes and but the median sales price fell to $712,500 from $792,500.

 

Across St. Francis Drive, the city limits Northwest is still struggling. Closed sales are down 35 % and DOM has increased 65% to 203 days. Prices have fallen hard here; the median price is now $227,500. Down Cerrillos Road, the Southwest city limits is also very soft. New listings did decrease over 20%, but the median sales price here is now $209,000. The good news is that Santa Fe’s housing affordability index has increased to a 97. This means that the median household income is 97% of what is necessary to qualify for the median priced home. Santa Fe saw a low affordability index of 55 in the spring of 2007.

 

The city limits Southeast saw a big decrease in its median sales price, from $550,000 for 2010 to $415,000 for 2011. But, DOM has also decreased to 208 days while the percent of listing price the seller receives has gone up to 91%. That suggest sellers are more aggressive in this area and they need to be because closed sales have also dropped over 20% to 37 sold YTD.

 

The Eldorado market has cooled a bit from the same quarter 2010 with closed sales down almost 10% to 43 sold homes YTD. The median sales price is also down somewhat to $319,000 and inventory here has actually grown a bit to 11 months. The Highway 285 area has seen a positive change in inventory with 72 homes for sale and a small increase in closed sales for the last quarter but overall the area is still falling, the median price now $429, 750 from $445,000 last year.

 

Las Campanas saw a huge increase in sales, up over 100% from the same quarter last year to a total of 27 sales YTD. A reduction in new inventory plus a small decline in selling price has given this area a boost. The Northwest quadrant saw a big decrease in new listings, down 37% to 123 homes for sale. The month’s supply here has been almost cut in half and the median price has increased over 20% to $673,000.

 

Airport Road is still suffering with a decrease in selling price, down to $190,000 and an increase in DOM to 156. Rancho Viejo and surrounds saw an increase in selling price to $310,000 but a reduction in closed sales. Inventory here hovers around a one year’s supply. Highway 14 and La Cienega saw a positive increase in median sales price up to $285,000 but a small decrease in inventory. Glorieta and Pecos saw a huge decline in median sales price, now down to $205,000.

 

Taking the good news with the bad, our market is surviving. Thriving here, suffering there, all part of the process on our long and winding road to recovery.