Thanks H Dickens for this flickr photo. 

I have recently written about how the current volatile market has created many windows of opportunity for buyers and sellers in the real estate markets. Yet, I had not realized how the current market volatility had also created an opportunity for inner family wealth transfer. I just read an article in the Wall Street Journal, titled With Shares Tanking Think About Gifting, which illustrates this situation. When investments are down and the value is less, then there may be an opportunity to transfer these assets to family with the strategy of building wealth once the market recovers. Many wealth advisors are also speculating that congress will reform the gift and estate tax system. When you put all of this together the current volatile market may be an opportunity to pass an estate onto the next generation at a reduced cost.

This year I have had several clients take action to pass property and other assets to their children. There is great opportunity in change if you have a competent team to help you assess the different possibilities and then advise you on the prudent actions to fulfill on your ambitions. 
 

There is no doubt that we are in turbulent financial times. Yet in volatile markets are opportunities. Katie and I are committed to producing a competitive advantage for our clients to achieve their financial and lifestyle goals. We do this by designing effective strategies for our clients, taking into account their specific situation, wherewithal and ambition. With our team of financial, investment, mortgage, insurance and tax advisors, we are able to help our clients take advantage of the unique opportunities made possible by the current real estate market.

We believe the main stream media has overemphasized the threats and tragic stories of owning real estate. This is not a big surprise since the media’s job is to sell news and entertainment. Therefore sensationalism works. But in this approach the media disregards any financial benefit associated with real estate and masks the new opportunities that are now possible for buyers and sellers. For this reason, we thought it would be helpful to share with you some of our recent transactions that demonstrate our ability to create and implement strategic plans that opened major opportunities for our clients.

• Last month one of our clients was able to purchase a million dollar home in San Francisco with a 15% down payment. (If you are wondering, being able to buy at that price range with 15% down in this market is just short of a miracle.) Our client was able to finance the purchase with a 1st mortgage for approximately 75% of the purchase price at an interest rate of 5.5%. For the balance, we were able to get him a home equity line of credit (HELOC) at prime minus 1%! This is a concrete example of the superior help provided by our financial & mortgage provider who was able to accomplish this in a market where the common media is saying mortgage rates are close to 7% and HELOC’s do not exist.

• Other clients of ours recently acquired their dream home a $500,000 home on 5 acres with an apricot orchard. This same home would have sold for close to $800,000 in 2005. We put together a strategy where they could sell their current home or rent it and keep it as an investment. After exploring selling their current residence they decided to rent it instead. This has increased their investment capacity while they have acquired a replacement property at an opportune time when values of real property are artificially low due to the liquidity crisis.

• This month we formulated an uncommon strategy for one of our clients who was looking to move into a larger home to better care for his family. We found that the San Francisco market he currently lived in was not nearly as affected as the market he wanted to move to in Concord. We sold his 1936, 1,450 square foot home in San Francisco for $566 per square foot and helped him buy a brand new 3,856 square foot home in Concord for $272 per square foot. The 2 properties are only about 30 miles from one another, but have a difference in cost of $294 per square foot. This strategy helped our client transition to a new home with a significant profit. Volatility means there is more risk in the marketplace. It also means there is more opportunity. In order to take advantage of these opportunities, we have found that it is necessary to have a powerful team of financial, investment, tax and real estate advisors. We and our network of professionals have demonstrated our ability to help our clients to take advantage of the current market.

We thank all of our clients that have transacted with us in the past and we look forward to helping many of you in the future. Please contact us if you need assistance or if you know of anyone else who may need our services. It would be our pleasure to assist them with the same care as we have provided you.

There are a number of important tax law changes that take effect this year, including three changes that will affect some homeowners. There are also changes that impact business owners.

While you won’t see the impact of these changes until you file your returns early in 2009, it helps to know about them now so you can keep proper records and make the smartest decisions for your money.

Take a few minutes to review the changes so you can keep them in mind as you devise your 2008 tax strategies.

Changes for Homeowners

Homeowner’s Exemption: In the past, taxpayers have taken the opportunity to convert a rental property or vacation home into their primary residence and then later sell the property. This allowed them to take advantage of the Homeowner’s Exemption which allows a taxpayer to exclude up to $250K ($500K for married couples) of gain realized on the sale of a primary residence. An example of a common strategy has been:

• Taxpayer acquires rental property in 2000 for $100K.
• Taxpayer rents the property out for three years.
• In 2003, taxpayer moves into the property as his/her primary residence.
• In 2005, taxpayer sells the property for $600K.
• Taxpayer (married couple) avoids paying taxes on the entire gain ($500K).

(more…)

Following is an excerpt from John Mauldin’s “Thoughts from the Front Line” and a link to the entire piece. It’s lengthy but a great articulation of the current financial situation and proposed government intervention. It is in the form of a letter to Congressman Joe Barton, TX, a top Republican House leader. John Mauldin is a multiple NYT Best Selling author and recognized financial expert. He has been heard on CNBC, Bloomberg and many radio shows across the country. He is the editor of the highly acclaimed, free weekly economic and investment e-letter that goes to over 1 million subscribers each week.

It’s the End of the World As We Know It

Dear Joe,

I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don’t understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.

MORE

One of the costs of living in the Bay Area, and California for that matter, is that you are much more likely to owe AMT (Alternative Minimum Tax) when you file your personal Federal Tax Returns. Other than an act of congress to change the tax law, there’s not much you can do about it. The silver lining on this cloud has to do with… your mortgage.

The original AMT established in 1970 targeted tax shelters used by a few wealthy households and was greatly expanded in 1986 to aim at a different set of deductions that most Americans receive. The AMT sets a minimum tax rate of either 26% or 28% on some taxpayers so that they cannot use certain types of deductions to lower their income tax obligation. Sounds reasonable, right? I mean, why should people who are making millions of dollars be able escape paying their fair share of income tax!? Well, because of the way the AMT is structured, welcome to the life of the rich and famous!

According to the Congressional Budget Office, “Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.” That will be over 30 million household.

But why are we Californians affected more than the rest of the population? First, incomes in the Bay Area are statistically higher than the rest of the country. But here is the more specific reason: two of the disallowed deductions through the AMT schedule are state income tax and real estate tax.

As of 2007, the highest rate of state income tax is that of California, with a maximum rate of 10.3%. Under the standard 1040 tax schedule, if you itemize your deductions, you are allowed to deduct what you pay in state income tax. Not so under the AMT schedule. Despite the real estate downturn over the past year, values in many places in the Bay Area have remained stable and are still one of the highest priced areas in the US. Property taxes are often a significant part of one’s housing expense, to the tune of 1.25% per year of the assessed value of your home. This too is excluded under the AMT. So what’s a newly rich & famous person to do?

Generally speaking, the interest that you pay on your mortgage for your home remains deductable under AMT. That’s a bit of a blanket statement, so don’t take it as gospel. I’ve discussed this with the brightest of CPAs and they still will say “well… there may be some other issues”. The point being talk with your CPA or Tax Advisor. Nonetheless, let’s go through an example of how this can remain a tax benefit of having deductable mortgage interest on the AMT.

Let’s say you have a $500,000 qualified mortgage and pay 6% interest (and for simplicity let’s say your mortgage payment is interest only). You would have paid $30,000 of interest over the course of the year. If you are subject to the 26% AMT rate and approximately 10% California tax rate, that $30,000 would give you an approximate $10,800 reduction in your tax liability. This basically means that because of the deduction (even under the AMT), that 6% interest rate is costing you about 3.8% on an after-tax basis. Not bad.

What the moral of the story? Tax Efficiency. In the words of Ben Franklin… “In this world nothing can be said to be certain, except death and taxes.” If you accept that premise, then it would be wise structure your mortgage and money to be tax efficient. It’s not too complicated but it can be complex. For the do-it-yourselfers, run through pro formas on your Turbo Tax or other income tax preparation programs. For the rest of us, get good help from a skilled CPA or tax advisor. You need to do this whenever you are buying, refinancing or messing with your mortgage. You could inadvertently make a move that would eliminate your tax benefits.

Fannie Mae and Freddie Mac were taken over by the US government on September 7th, 2008. This is result of the unprecedented changes that are occurring in the US financial and real estate markets. And there is no doubt at this point that the effects of our liquidity crisis will be felt worldwide. Yet, what does it mean for top 1% income earners that are also consumers of US mortgages? (If you’re wondering, you are in the 90th percentile of income earners if your annual household income is over $150,000; top 1% is above $250,000.) It has been almost two decades since the recession and real estate downturn of the early 1990s brought on by, among other things, the Savings & Loan crises. As we learned back then, top 1% income earners are not immune. I’d like to offer my speculation about the risks and opportunities available in the current volatile marketplace.

In the short term, I believe we will see falling interest rates as the US government touts increased liquidity and the international markets cheer the savior of their large investments in the US mortgage markets. This drop has already occurred as rates fell more than 1/2% in the last couple of days in treasury yields and certain conforming and so-called conforming-jumbo mortgages. This could be positive for a large group people currently holding US properties encumbered with interim fixed period ARM loans that are due to reset in 2009. I believe we are going to see a massive refinancing movement while these rates are low and this may act to lessen the blow of the second wave of foreclosures due to hit the US next year. Rates on many 30 year mortgage products are now at or below 6% which is extremely low in terms of historical averages at 9%. Note that many property owners will still not be able to refinance due to the drop in property values and the lack of their ability to get a satisfactory appraisal, as well as stricter underwriting guidelines. Yet, I think it is safe to say that this second wave of foreclosures is going to be less dramatic than the first wave that was primarily attributed to defaults of sub-prime mortgages. The first crippling wave of foreclosures during 2007 and 2008 was a product of highly risky sub-prime loans done in mass and then abruptly stopped as the markets collapsed.

Yet, it is my belief that unabashed glee is short sided. The takeover will shift Fannie Mae and Freddie Mac’s losses to US tax payers. If you are a taxpaying US citizen who does not own real property, then you are exposed to the financial burden without any of the benefits of owning real estate. Someone will eventually have to pay the piper for these losses and it now appears that this burden will be heaped on top of the US’s national debt that is already staggeringly high. Just like individuals cannot expect to heavily leverage themselves without consequence, neither can governments. Thus I speculate that in order for our government to strengthen its position in the global economy we will need to drastically cut debt and this translates into increased taxes and slashed government programs. We are already experiencing this issue of increasing taxes and reducing government programs at the state level as California once again struggles to pass a balanced budget. An increase in taxes means additional financial pressure that will have to be levied on US citizens at some point in time. This will be a destructive consequence to the US economy.

Now more than ever top 1% income earners who endeavor to capitalize on their existing assets and/or enter the real property markets need superior help. Questions such as whether or not to refinance existing debt, if to sell and/or buy now, trade up, what financial structures are most tax efficient, and so forth, are vital to answer in order to preserve and increase their wealth. The answers to these questions will significantly impact the profitability or loss in your real property transactions, whether for investment or for your personal residence. It is critical that your financial, real estate and tax advisors are able to make powerful interpretations of your current and future situation. When there is a disruption in the marketplace, such as our current economic situation, there is heightened risk and also amplified opportunity. Make sure that your advisors are capable of handling all of your concerns during this turbulent time. If you are looking for financial, mortgage or real estate assistance feel free to contact us for a free initial consultation so we can adequately assess your needs.

Trulia just released a new application, that will allow the user to get open homes and open house information on their iPhone. Check out the video demo. It looks interesting.

Being that I just purchased a BlackBerry phone, I have found e-mail and data on the fly is a very powerful tool. I wonder how many home seekers will use this new Trulia application? At first glance this appears to be a great tool for Sunday open house searchers. It would be great to turn your phone on and have all of the open house data in your vicinity. One question I have is, does this service have all the MLS listed homes on it? If not, how soon until your local MLS designs a copy cat service? 

Thanks JPhilipson for this flicker photo.
I have many times said on this blog that this is the best residential real estate buying environment I have seen in my career. I have also said, that rising rates would be devastating to buyers in this market. I just read a convincing article on the Behind the Mortgage blog that alludes to the negative effect rising rates can have for buyers.

First, this market is currently suffering from a lack of liquidity and the restrictive guidelines that mortgage banks are imposing on buyers. Buyers must now have higher credit scores, more down and the property they buy is under much more restrictive scrutiny from appraisers. This has led to many buyers being cut out of the housing markets, which in turn has dropped demand and thus lowered housing values.

Second, rates have until now remained relatively low. This means that qualified buyers are cleaning up in this market. I speak from experience in this market, while I am seeing buyers get some great deals on property, and also get great 30 fixed rates.

We all know that markets are constantly changing and drifting. The current market chatter alludes to rising rates as the economy rebounds and the Federal Reserve puts as much upward pressure as they can on rates to quell the potential inflation fears. As I wrote in my post, Buyers Could Get Caught Waiting For The Sky to Fall, the deals in the market may begin to vanish as the cost of capital increases. A risk for buyer’s now becomes that real estate prices have already been squeezed so rising rates will not necessarily drop property values in conjunction with increased cost of capital and the rising difficulties of getting approved.

It is interesting to see that Wachovia just tightened its guidelines on its, “pick a payment” loans. This is especially interesting to me, because at the beginning of the year we had a presentation at our office from a World Savings executive that touted the flexibility of this loan. My opinion is well reverberated in Mike Mueller’s recent post on the Lenderama blog.

“Seriously, The Neg Am loan has a very valuable place in the finance world when properly used.  I believe Wachovia (world Savings) had the highest performing Neg Am Portfolio in the biz.”

These mortgage products do have there place in the financial world. I also agree with the executive that visited our office at the beginning of the year. These products are useful and powerful for the right individual situation. Maybe, the changes in Wachovia’s policy have more to do with their own business concerns and buying Golden West mortgage, then with the validity of the product that was successful for Word Savings for so many years. Just check out this CNN Money story that illustrates how 3.8% of Golden West’s pool of pick a payment mortgages went belly up after Wachovia purchased them in 2006.

The answer is that there are no bad loans in the marketplace. Loans are not people thus they can’t act good or evil. Mortgages are either placed by a person with the strategic knowledge to effectively care for an individual’s entire financial situation or they are not. I have many clients who have taken World Savings pick a payment loans and they have met their financial strategies without causing any despair or foreclosures.

I think the conversation in the marketplace needs to change from the loan product, to who is doing your loan. Are they competent to take care of your mortgage concerns with out betraying the other financial concerns that you have? Many banks and brokers have done mortgages with a blind eye to the customers financial situations and concerns. Often, you can’t even blame the person doing the loan, because they are not even competent to take care of their own financial concerns, let alone yours. Maybe contracting guidelines is not the answer for banks. Maybe, they should start to think about how they operate in regards to the knowledge of the people they have doing the loans. Maybe if they observed, assessed and acted to care for a clients mortgage in the context of their total financial situation they would have a huge stack of loans that could sell on Wall Street as mortgage backed securities. Warren Buffet eloquently explained the breakdown in the mortgage markets when he said, “In extreme cases, mark-to-market degenerates into what I would call mark-to-myth.”

Thanks Ocean Flynn for this flicker Photo.

Thanks to Todd Derick for this flicker photo.

I just read an article on the Blown Mortgage blog. It had a graph showing new and existing home sales. Of course in this market both are down. In fact, the Blown Mortgage blog is claiming that the volume of existing home sales is down 15% from last year.

First, it is important to note that just because the volume of sales are down, it does not mean that values of homes are dropping. In fact this can be quite the contrary in certain areas. This is the case certain segments of the Berkeley California market where many listings are still transacting with multiple offers. Just a month ago I saw a home get 15 offers and sell at a price way above the average median price for a home of this size and location.

Second, I found it interesting that the existing home sales have begun to diverge from new home sales. In this graph since January of 1994 existing and new home sales tracked each other fairly steadily. Yet, we can see in January of 2008 that the curves are fairly far apart with the number of existing home sales beginning to level off while new home sales volume is still plummeting.

I speculate this is because many developers have stopped projects that were in the pipeline if they could. We have seen this effect in the drop in new home permits as well. We are seeing that the average homeowner in an existing home is still transacting while the investor/speculator is not. This makes sense for many home owners must sell and buy in any market. For instance, life ensues in any market and homeowners are relocated to new jobs all the time.

Does this indicate the bottom of the market? I am not sure, but it does indicate what we can expect from our market without a large volume of speculated dollars being spent to drive up prices. The air was let out of the real estate bubble for more then one reason. The constriction of financial liquidity in the mortgage markets started the deflation. Once the mood was set, the exit of speculators and investors, drove the market down further. Now we are seeing buyers who were over leveraged get caught in the falling values and go into foreclosure. I suspect that when we see the developers begin to return to the market and banks begin to loosen their guidelines, we will see a more robust market again. I also speculate that we should see a return in existing home sales before we see it in new home sales, for the mechanics of the entitlement and permitting processes means that it takes time for developers to ramp back up into production.

Interesting news on he mortgage front in California is that FHA is now offering 3% down on loans up to $729,750. FHA also allows for a 3% credit towards buyers non-reoccurring closing costs. This means that buyers can be 0% down once again. I view this as a drastic loosening of the mortgage guidelines. One blockade down… So, where are those speculators?

I have written several postings in the past about all of the unimaginable things going on with real estate development around the world. Many of my posts have focused on Dubai where whole islands are being literally raised out of the sea.

Recently, I ran into a new concept that is in the process of being designed and building. Each story of the building actually rotates independent of the others. This means that the building is constantly in motion, so that it supplies every view possible to the occupants of each unit. What an interesting idea for a building that actually shifts its shape. It sounds as interesting for the people who view it on the street as it does for its occupants.

The renowned architect David Fisher is the visionary of this project. Of course Dubai is going to be one of the first cities to receive on of these animated projects. Check out the building in motion on the architects web site at: http://www.dynamicarchitecture.net/intro-high-resolution.html

Divorce, or variations on that theme, is starting to look almost as certain as death and taxes… the national average seems to be holding with about 1 out of 2 marriages ending in divorce. Among my friends, family and clients, it seems the number of couples around me calling it quits has escalated over the past few years. I suppose it could simply be my age, the circles I travel in and living in California. With splitting couples, very often their home will be their single largest asset. They may even fight tooth-and-nail to keep the home and send their “ex” packing. Here’s the thing: this could be a huge financial mistake. Often the consequences are not realized until long after signing the settlement agreement. Generally there are three issues around real estate that come up that are often overlooked in a divorce.

The first issue has to do with the property as an asset class and liquidity. Let’s say a couple (Popeye and Olive Oyl) owns a home worth $1,000,000 free & clear, i.e. no mortgage. And in addition, they have $1,000,000 of cash and invested assets. They agree to split everything 50/50. But Olive Oyl wants the home. So she will give Popeye her half of the cash in trade for his half of the house. Though Olive now has a place to live, she has 100% of her assets invested in real estate with no liquidity (unless she sells or finances some of the equity out of the property). This is equivalent to having all of your money tied up in one single, privately held investment… not real consistent with Modern Portfolio Theory.

The next issue has to do with affordability and qualifying. Let’s say Popeye and Olive have a $500,000 mortgage. The payment on the house with property taxes and insurance is $4000 per month. Olive only has to give Popeye $250,000 of her cash to buy him out. So she has $250,000 left in cash plus the house with the mortgage. The first question is can she afford the payment? That’s a much bigger question than I can address here, so let’s say she thinks she can handle the payment. But Popeye doesn’t let her get off the hook so easy. Since both signed the mortgage obligation when they were married, Popeye will remain liable from the lender’s point of view even though he may not be on the title as an owner of the property. If Olive can’t qualify on her own either for a new mortgage or in assuming the current one, Popeye may be very reluctant to go along with this.

Last, and probably one of the most overlooked issues with taking the home, has to do with . . . taxes. Popeye and Olive bought their home for $500,000 a while back. Since the value has doubled, they would have a $500,000 gain if they sold the home today. Because it was their principal residence for two out of the last five years, they would be able to exclude all $500,000 of the gain from being taxed as a married couple (see IRS Publication 936 at www.opesadvisors.com/resource/links.html). But if Olive buys out Popeye and at some point in the future she sells the home, she will only be able to exclude $250,000 of the gain as a single person. This means she will take on about a $62,000 tax burden that she will realize when she sells the home (assuming the tax laws don’t change… so could be more!). Additionally, if Olive sells the property and pays a real estate commission, she will incur 100% of that expense, as opposed to splitting it with Popeye. This could easily be another $25,000 she would have otherwise not paid (50% of a $50,000 commission). Olive has now blown about $90,000, or 12% of the assets she received out of the divorce settlement, without even knowing it.

For those of you that are able, consider working to have your marriage not be the one-out-of-two that divorce. For the other half, seek out financial, tax and legal advice prior to settling the terms of your agreement. Your attorney may be very skilled in representing you legally, but unlikely to know all of the finance and real estate consequences to your decisions.

Copyright © Jeffrey T. Smith • (415) 464-9500 • jtsmith@opesadvisors.com Jeffrey T. Smith is a financial advisor and the Marin Manager for Opes Advisors, a Wealth Management Firm specializing in Mortgage Banking and Investment Management.

A good friend and past client just sent me this National Public Radio podcast that explains how the Liquidity Crisis was born. I had listened to this on the radio the other day. It gives a real ground level, human perspective of how we ended up where we are today.

You can download the pod cast for $.95 or listen to it for free online. It is 1 hour long but worth the time spent if you want to understand why the liquidity crisis occurred and who it affects. Click the link below and give it a listen.

http://www.thislife.org/Radio_Episode.aspx?episode=355

I wanted to also thank my client who sent me this pod cast link. In his e-mail he said that this pod cast helped him to have a much more in-depth understanding of the Liquidity Crisis. His contact gave me a chance to reflect in this post and also gave me some more in-depth thinking about why our clients have fared so well in this crisis. The good thing I see about the Liquidity Crisis is that it has gotten our clients to take a closer look at their finances.

For years, we have been offering our clients financial help when buying and selling property. We did this because we could see how easy it could be for a buyer or seller to betray their financial concerns in a transaction without even knowing they had. I believe this is why my clients have prospered during this crisis while I have watched other home buyers and sellers suffer. As I have long said, “Real estate agents must be competent to care for all of their clients concerns.” Thus, as stated in the previous posting called, Guidance Verses Advice: Which Is A Philosophical Standard Of Care, this is why I distinguish myself as real estate advisor not as a typical realtor. The tactic of making a real estate transaction is simple and often fairly standardized, but creating strategies that care for your client’s futures and putting them in a better situation after the transaction than before is a completely different story.

I just read an article posted on The Real Estate Bloggers stating that Zip Realty an online discount real estate firm based in Emeryville, California just had a first quarter 2008 loss of 7.2 million dollars. It does not surprise me.

Don’t get me wrong, I applaud the real estate firms that are using new technological tools of communication to drop the cost of a real estate transaction. Yet, I see the biggest problem is not the technology, but it is in the lessening of service with the lessening of fees. I have had many transactions with discounted brokers and I have found that throughout the transactions they are constantly trying to cut their cost even if it is not in the best interests of their clients. They consistently attempt to save time or cut corners. I don’t think they are bad people, but they have to discount their services and increase their volume of transactions in order to make a living. My question is does this model best benefit the consumer? I would say that that as illustrated by Zip Realty’s large losses it does not.

As our market shifted, so did the total volume of transactions. As regional volume diminished the ones most effected were those who counted on it. Through our volatile market we are also seeing a shift where buyers and sellers are needing more powerful advice in order to take care of all their concerns. Thus, discounted brokers are being suffocated in both directions. The less volume means less revenue on an already slim budget. The increased care needed means that they cannot compete with the more robust services that full service agents provide. There is now a lack of efficiency in the market that makes a cookie cutter approach to buying and selling real estate obsolete. Gone are the days of putting a sign in the front yard at 9:00am and having hoards of buyers by 12:00pm.

I am all for cost conservation, but I have found that I make and save my clients far more money through our complete services then I would by giving back some of my commission. Dropping margins only puts agents and their clients at odds with each other in a time where the customer needs more help than ever before if they want to avoid unwanted consequences in a vastly changing marketplace. I believe that buyers and sellers need top notch service in order to gain competitive advantage. Sellers need heightened property visibility and superior strategies for selling their homes in a slowing market. Buyer’s need knowledgeable agents who can make powerful observations and assessments. They both need a competent adviser who can offer them the capacity to get the best deal possible.

Thanks mj*laflaca for this photo

Big ups and big downs create interim situations that can favor the bulls and the bears. I always liked the Warren Buffet’s quote, “When the tide goes out we get to see who is not wearing a bathing suit!” I can just visualize Warren selling a surprised naked swimmer a pair of shorts for 10 times the value Nordstrom’s would charge. Yes, abrupt changes in the market do show us weaknesses, but they also expose opportunities.

We all know that the markets will inevitably go up and down. Yet, people often get caught up in the change and miss the opportunity that is created. I know this is true for residential real estate. I have seen many people sit and watch the market move around them. These folks tend to be purveyors of disaster. They might say, “I can’t believe the stock market dropped 200 points today. Yikes!” Others are realizing opportunity in this market and buying homes whose sales prices look more like 2005 ’s median price than 2008’s. I am also watching some listings receive multiple bids and sell for over the asking price. I even had a buyer who recently purchased a luxury home for less than it would cost to construct the home in todays market. Opportunity exists in both bull and bare markets.

I have also recently been looking at the big changes ahead in commercial and residential income real estate. I find it interesting that Shorenstein (one of the largest private real estate investment funds) has just raised its largest fund ever ($2.06 billion). It is interesting to see how the current market volatility has made for some amazing opportunities to raise real estate investment capital.

It has been interesting for me to note that powerful investors make moves when the future seems the most unclear to the masses. This is because value in real estate often occurs when the market is most inefficient. Currently the liquidity crisis has made our financial markets very inefficient. This has also translated in to inefficiency in residential real estate sales. The efficient days of placing a sign in the front yard and having 10 bidders at your doorstep have been replaced by an ebbing and flowing market. When everyone is running away from investing in the market, and the tide goes out, the professional investors begin to pick away at the deals that are left behind.

Most surprising in this market are the individual emotions and moods that tend to amplify the tides. I have often heard people say, “My friend said the real estate values are falling everywhere.” Often I have seen that the friend does not own a home. Yet, the ripple they create with their hysterical mood will affect the actions of a few. Savvy buyers and seller ground their moods with data and facts. They can then take powerful confident action in the market. They learn the characteristics of their market and then act when opportunity arises.

There are plenty of great opportunities in this market, as its ebb and flow opens and closes opportunities for selling and buying.

The Federal Reserve Bank of New York has put together a great National interactive heat map that overlays the residential loan data of sub-prime mortgage holders. I am bringing this to the attention of our readers as I just witnessed a home in inner Berkeley that received 14 offers. I also just read a post on 3 Oceans Real Estate that concurred that homes on the peninsula are also receiving multiple offers and counter intuitive to what is going on Nationally, selling for over the asking price.

Since the beginning of the liquidity crisis I have been posting that many Bay Area cities were not experiencing as severe a decline as the national news media had indicated. I also stated that if we were to see a rise in interest rates coupled with a stagnation or rise in median home prices (instead of falling median home values as the media had speculated), then many home buyers would get caught waiting for the sky to fall. Having watched the Bay Area real estate markets closely over the past year I have begun to see interest rates rise due to the lack of liquidity in the banking industry. Yet, in many popular Bay Area markets the median home values have not fallen significantly as many have projected. Of course this is not true for all cities, zip codes and houses. Thus, getting the advice of a local competent real estate adviser is of the utmost importance when considering purchasing a home. Through transacting in this market I have seen for both my buyers and sellers that in volatile times there is great opportunity for both.

The interesting thing about these heat maps is that they show the strength of the Bay Area’s home owners to wait out a real estate storm. Thus, the most desirable Bay Area houses have been very resilient to the housing down turn, while in the less desirable areas I have seen sharper drops in values. In Berkeley we are seeing a lack of desirable housing inventory. This has meant the desirable housing stock is receiving lots of buyer activity and often receiving multiple offers. I believe that this is because as these heat maps illustrate the East Bay and Most of the Bay Area is not inundated by as many short sales and foreclosures as many other parts of the Nation. The maps also indicate that the East Bay has home owners who have steady jobs, strong FICO scores and lower loan to values then say California’s Central Valley.

I just read an interesting perspective on the currently most asked question of 2008. So, Is now a good time to buy? We have written many different posts stating why it’s an excellent time to buy in the Bay Area. The main reason is that we are seeing negotiating opportunities for our buyer clients while currently we are still seeing historically low rates.

Yet, Dan Green of the Mortgage Reports has an interesting mortgage brokers perspective on why now is a good time to buy. His main reason is that there are drastic changes still taking place in the mortgage markets. Banks are still introducing new guidelines and tightening credit. That from Dan’s perspective the known is always better then the future unknowns.

I also found it interesting that Dan has an article on how the feds drops in interest rates are actually pushing long term interest rates upward. This brings me back to one of my old posts, where I discussed that rates can rise while property values can stagnate. This can squeeze buyers into paying more even though prices have fallen. A Bay Area buyer only has to look at Berkeley to see that many areas values have not fallen through the proverbial floor.

So, as I have stated before… Now is a great time to buy for those that are long term (3-5 year) buyers that are well qualified with good credit and down payments.

Susan McHan, CEO & President of Opes Advisors, a Bay Area wealth management company specializing in mortgage banking and investment advising, was recently interviewed on ABC7’s The View From The Bay on the current mortgage & real estate environment.

This is a great take on where we are in the real estate and mortgage markets (locally, state and nation), where it may go from here and what actions to consider. You can watch the approximate 5 minute interview here. Be informed by someone with an historical and personal experience perspective (bio).

Recently, past clients have asked me if this is a good market to sell their homes and move into better homes in better neighborhoods. This is an uncommon thought as compared to the typical national market sentiment that sellers should stay put in the current market turmoil. In working with these clients I have found that this market is a great opportunity for some move up buyers. The general discussion goes like this…

You will be taking less profit on the sale of your home, but you also will be buying for less on the other end. Usually, I am finding that this opportunity is open to clients whose income has risen since they bought their homes, thus they can afford to buy into nicer neighborhoods. Anti-intuitive to the current market mentality, I have found that it may make better sense to make the move now, then it did in the hot market.

2 years ago move up buyers were selling their homes and getting more money then they ever thought possible. Yet, they would also be competing against many others and buying homes at higher prices. This market fed itself with sellers cheering the competition when selling and dreading it when buying. It also usually meant increased capital gains taxes on the sale and increased property taxes on the purchase.

Now, as the market has changed, home owners have been watching as median home prices have fallen off of their record highs. Yet, buying at a cheaper price means that you save on annual reoccurring taxes. As a buyer you now have the ability to negotiate with sellers who are lacking multiple bidders. We are also still seeing historically low interest rates that are still making loans very attractive to buying. Not to mention the Federal Government that is creating incentives for buyers, by lowering prime interest rates and raising conforming rates nation wide.

Here is a recent example. I recently completed 2 transactions for a client who sold their 1.5 million dollar plus home and traded for a more expensive home. On the sale I estimate that they took about $200,000 less then the top of the market price. Yet, on the purchase they bought a home which cost less then the current cost to construct the home (the price per square foot was less then current cost to construct the home). I estimate the savings to be approximately $200,000 on the purchase. They bought into a situation where their new home has a better potential for future appreciation. They bought a home that is 1,000 square feet larger than their previous home, in a better neighborhood for them. Their taxes ended up being approximately $3,000 less per year then if they had purchased at the height of the market. They got a great interest rate on the portion of the home they leveraged. They got less profit on their sale, but gained even more on their purchase.

Just as in the hot market, the trick to moving up now is a financial and real estate team devoted to developing an uncommon strategy to better your situation. I have found that this market is a great opportunity for many move up clients.

Thanks Kerrythis for the car image above.

I know, alphabet soup… Welcome to the world of government acronyms and abbreviation. In lay terms, the 2008 Economic Stimulus Bill has cleared the way for three channels of mortgages (FHA, Fannie Mae & Freddie Mac) to increase their loan limits. Good news for most of California because these three types of loans generally have lower interest rates and/or easier qualifying criteria and/or higher loan-to-value limitations (the amount of a mortgage relative to the value of the home).

Earlier this week, HUD (Housing and Urban Development) released the new FHA (Federal Housing Administration) loan limits for California, with the remainder of the country soon to follow. (You can read more about the FHA limits at this link.) And today, the OFHEO (Office of Federal Housing Enterprise Oversight) that oversees Fannie Mae and Freddie Mac announced the loan limits for those counties and Metropolitan Statistical Areas (MSAs) that are affected by the new loan limits. Data for all areas are available on the HUD Web site at this link.

Ten counties in the greater Bay Area will have their limits raised to the new maximum loan limit of $729,750 for all three types of loans (FHA, Fannie Mae, Freddie Mac). Those 10 counties are: Alameda, Contra Costa, Marin, San Francisco, San Mateo, San Benito, Santa Clara, Santa Cruz, Napa and Monterey.It will still take time before anyone can act on the new, higher, loan limits. How long? We don’t know yet, but our speculation is in the next 4-8 weeks. And we still don’t know how these loans will be priced (i.e. interest rate you can get). Although most lenders can do conventional (Fannie Mae & Freddie Mac) loans, not all lenders can do FHA loans. So don’t assume your friendly mortgage broker necessarily can. This is good news for the CA real estate and mortgage markets. It won’t solve all California issues, but it certainly will help.