California real estate creating financial madness

If there is a real estate bubble, many economists could agree that California is one of the leading bubble markets. With a median home price of $542,720, only about 15 percent of the state's population can afford to buy a home according to a new Reuter's article.

So, how have California home buyers managed to increase homeownership in the state to almost 60 percent, the highest level of homeownership ever?

Creative financing.

It would take an income of almost $125,870, based on an average mortgage interest rate of 5.71 percent and assuming a 20 percent down payment, to afford the median priced California home.

Thus, ARMs and other Interest-only loans have become the tool of choice for a significant percentage of buyers. For example, 59 percent of home buyers in San Francisco are using Interest-only loans, and in San Diego that number is a staggering 62 percent.

What happens if rates go up, or if it becomes harder to refinance? Ultimately, home buyers in California are taking on considerable risk in order to purchase homes. If there is one thing that could pop the real estate bubble, aside from massive job loss, it is definitely bad financing.

Still, it is good news that the Mortgage Broker's Association reported that refinancing activity has been rising, as many buyers with variable rates convert to fixed-rate mortgages.

Downtown Los Angeles real estate market

Caught Ken Brown, real estate writer for the Wall Street Journal, on CNBC this morning talking about the real estate market of downtown Los Angeles. In particular, the segment focused on the question of whether downtown LA will become a vibrant residential community.

Mr. Brown noted that $10 billion worth of projects will be developed through 2010. Anchored by the Staples Center and the new Disney Concert Hall, the developments will include more than 20 condo towers, one of which will also offer a new Ralph's grocery store - the first grocery store in downtown LA in 50 years.

Only time will tell, Mr. Brown noted, whether downtown LA will become a popular place for residential living. Why wouldn't it? There are lots of jobs downtown and Los Angeles traffic is only increasing. With excellent job access, subway access, and lots of entertainment and new retail offerings, downtown residential growth is inevitable.

Mortgage rates up, mortgage applications down

Many real estate analysts have noted that one of the keys to the nation's housing boom has been historically low interest rates.

But what happens if rates go up?

When rates went up last Spring, mortgage application activity slowed. Now again, rates are showing steady growth upwards, and every time the Fed raises rates, the inevitability of higher rates seems more obvious. Thus, the fact that, according to the Mortgage Bankers Association, mortgage applications have dropped for the third straight week is a bit alarming.

Even more disconcerting; however, is the fact that ARM loans are heating up as fixed-rate loans are cooling? Why? It seems that the high price of homes have limited the financing options of many homebuyers. Additionally, flippers love to use ARMs.

If mortgage rates continue to rise, by the time these ARMs convert to variable rate notes, the additional costs could be staggering for many new homeowners. Yet, if mortgage applications continue to decline, the cost of homes will have to go down, leaving many home owners 'upside down' and possibly in financial trouble.

All the data seems to indicate a couple of things. Homeowners should be on fixed rates and the price of homes for sale should stabilize and probably trend lower.

San Diego: Southern California real estate barometer?

According to an LA Times article, All Eyes on Home Market in San Diego San Diego was the first ultra hot Southern California real estate market and thus, might be the first Southern California real estate market to hit the 'slowdown' side of the real estate cycle.

So where is the San Diego real estate market? "After more than doubling in the last five years, jumping almost 30% in one 12-month period, San Diego-area home prices are rising more modestly at 6.3% on a year-over-year basis as of June." The article further notes that home sales are not turning into bidding wars. In fact, homes are staying on the market longer and many sellers are even lowering sale prices.

So is the Southern California bubble bursting? Alan Gin, an economics professor at UC San Diego, told the LA Times, "What you've got here is a slowing situation and not much of a chance of a severe downturn," he said. "To have a downturn, you need a triggering event, such as massive job loss."

What does this mean for the rest of Southern California real estate? Orange Country,Ventura County and Los Angeles County have also showed signs of slowing, though not as much as San Diego. Still, it is economically depressed areas of Los Angeles County, for example, that offer the biggest gains in home appreciation. Areas such as, Lawndale, Pico Rivera, or Palmdale are leading the way for Los Angeles County.

With mortgage rates almost certain to rise, the slowdown in the real estate market is almost guaranteed to continue its slowing trend. Without a "triggering event"; however, the slowdown probably won't lead to a bubble burst - at least not in the short term.

Sell your house now, or else, maybe!

That is the message John Rutledge of Rutledge Capital gave to CNN this morning. He said that 10 year bonds indicate the mortgage rates are going up. Additionally, he noted the Fed will again raise rates on Tuesday. Already, mortgage applications continue their decline and combined with increasing rates, Mr. Rutledge believes, something will have to give and that give will be home prices. Within 3 -4 months, significant cooling should begin to occur. While Mr. Rutledge didn't predict a crash, he does predict lower home prices. Thus, Mr. Rutledge believes potential sellers should sell now, not a year from now. Likewise, if you are in the market to purchase a home, wait a year. Additionally, fix your rate if you are not selling.

Mortgage rates up, jobs up, real estate down?

Mortgage rates have risen for the fifth straight week, something that many real estate analysts had expected many months ago. Additionally, job growth has continued to remain steady, with July's growth surprising most economists. If job growth continues at its current pace, many economists believe interest rates will have to go up. Could this push mortgage rates up surprisingly higher?

While mortgage rates have surprised analysts by staying lower longer, almost every analyst believes they will go up, and as rates go up the real estate market should cool. Does this mean that home prices will drop? Probably not in the short term, but it could cool the market enough to stabilize prices, or cause some minor depreciation in home prices in some areas.

One thing seems clear, however, if you are currently using a short term ARM to finance your home, you should think about some sort of fixed mortgage soon.