While the media may not have caught up to the increase in sales activity in the Trivalley for the past three months…I have.  The chart seen below, displays the increase in activity in home sales for the TriValley since the beginning of 2008.  The increase in home sales can be attributed to several factors including a dramatic spike in rental prices, aggressive sellers willing to wheel ‘n deal, and historically low mortgage interest rates.

So, are we at the bottom?  Is this the time to buy?  Quite honestly, I don’t know.  But here is something interesting to think about.  Maybe you should buy BEFORE we hit the bottom (this is not a typo).  Here’s why.

If we are 6-18 months away from the ‘bottom’ and prices are going to slide down further, then maybe it is a good idea to wait it out until then.  However, if we are 3-6 months away from the bottom, then I think that would be the best time to buy. 

(Keep in mind this analysis is only for individuals who are currently renting and thinking of entering into the housing market.  If you currently own a home and are thinking of moving up, you have no worries because you would be selling and buying in the same market, whether it is a hot or cold market)

Let’s take a look at the chart I have drawn up.  Letter “A” represents the market if we are 6-18 months away from the bottom.  With a possible year and a half of price correction left to go, it would most likely be wise to wait on the sidelines until things were closer to letter “B”. 
The only way we know we have hit the bottom of the market by definition is only after we have bounced back as represented by letter “C”.  As the chart suggests, the prices we see right before the bottom would be similar to the prices right after the bottom, hence a buyer buying at point “B” or point “C” would be buying while the market price would be the same.  While the market price would be similar in this scenario, there would be a significant difference in the purchase price and terms.

At point “B” the market has still not recovered and the economy is suffering.  As a result, interest rates will be lower and banks would be competing for the business of the buyers.  Capturing a lower interest rate, can save you thousands in the long run even if you pay a higher price than someone who buys the house for cheaper but pays much more in interest over the years. 

Further at point “B” the other buyers are still on the sideline waiting and waiting and waiting.  This allows you to be selective and not have to fight over best house deals in the neighborhood.  When you put in your offer, the sellers are nervous of losing you and your offer and as a result would be willing to negotiate price and terms much more aggressively and in your favor.

In review, point “B” allows you to purchase in an environment which would share similar market prices compared to the market once we bounce back from the bottom, you are able to capture in most cases a lower mortgage interest rate, pick out your favorite home from a large selection and negotiate a better price and terms with sellers who are afraid they may lose you if they don’t deal…sounds good to you?

And what if you wait until point “C”.  Point “C” represents the market after prices have jumped back up and everyone knows we are back at a regular increasing market.  The media is back on the housing bandwagon remembering that real estate is still the best investment.  The federal reserve is again raising interest rates making mortgages more expensive.  Open houses are busy with buyers and the best homes on the block receive multiple offers.  You put in an offer and the seller now knows that we have hit the bottom and they are no longer willing to negotiate as they did just months ago.

So, are we at the bottom should not be the question because we will never know until we bounce back.  Are we 3-6 months away from the bottom…now that’s a good question!

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It appears as though the decrease in home values and the tightening of the credit crunch have caught up not only to home buyers and sellers, but homeowners.  While not very prominent, some of the major banks including Bank of America and Washington Mutual have begun freezing existing borrowers home equity lines on their existing home.

While it is unclear on what will raise a flag which may freeze your existing line of credit, it is clear that you may not be immune from it.  These freezes have nothing to do with the borrower’s credit score or repayment schedule.  In efforts to protect their own interest and stay ahead of the curve, the banks are reducing, readjusting and removing existing lines of credit in certain situation based solely on property value from their automated programs.

In certain markets, where prices have adjusted downwards 10% or more, it only makes sense that the banks would do this when presented with the opportunity.  The bank’s chief equation for determining how much to lend is based on the loan to value, or how much money is borrowed compared to the going market rate for the home.  For example, a home buyer purchasing a $1,000,000 home may have borrowed $900,000 which would have included an $800,000 first loan and a $100,000 second home equity line.  The combined loan to value (LTV) for this situation would be 90% ($900,000/$1,000,000).

Fast forward two years and now the home buyer has paid down their home equity line to zero, so in essence they have only one loan outstanding with $800,000.  The home equity line which is now paid down to zero typically acts as an open line of credit, so traditionally speaking, the borrower would have unrestricted access to pull up to the original balance of $100,000 should they need the money for an emergency or remodeling.  What is recently occurring however is that the banks are freezing the home lines of equity because of the decreased they are seeing in the housing markets.

Take our example of the $1,000,000 home and a decline of 10% in the market value to give a new value to the home of $900,000.  And remember that the banks agreed to lend up to 90% loan to value of the property.  So if we take the new price of $900,000 and lend 90% that would result in total loan commitments of $810,000.  Since there is an existing first of $800,000 we may see the second line of equity being capped at $10,000 thus maintaining the original 90% LTV or a maximum loan amount of $810,000.

Many home owners such as myself pay down the equity line because of the convenience of being able to tap into the funds if needed.  Now with this latest developments, nervous homeowners are prematurely drawing the funds available from the equity line and placing the money in another financial institution to ensure that should they need this money, it is available for them to access.  While we have not seen this move from the banks occur too many times, it has happened enough where you should be aware of the situation.  If you or someone you know may be in this situation, please contact me or your financial professional to see what your options may be.

Chris Kamali is a TriValley Real Estate Agent, helping clients buy and sell homes in Dublin, Pleasanton, San Ramon and Livermore.

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Below are the housing stats for the city of Pleasanton, Dublin, San Ramon and Livermore. If you have any questions or would like any detailed information, please let me know.

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Below are the housing stats for the city of Pleasanton, Dublin, San Ramon and Livermore.  If you have any questions or would like any detailed information, please let me know.   

Continue Reading

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