San Diego real estate – The effect of “qualifying” on prices in higher priced markets. part 2

*See 10-8-07 post for part one of this San Diego mortgage article.

If you recall, one of the most significant issues affecting the San Diego real estate market is the issue of the tighter mortgage qualifying guidelines.  In part one I discussed the issue of how tighter guidelines will impact the inventory of properties for sale in San Diego County.  There is a second issue, as a result of these tighter guidelines.

2)  The tighter qualifying guidelines will also impact (severely, I think) the demand side of the market.  It is tough enough to talk with buyers who want to wait for rates to bottom out (as they think rates will continue to go down) or prices to bottom out (as they think prices will continue to go down) but now potential buyers face far more difficulty in qualifying for a mortgage loan. 

Here are a couple of examples.  The maximum FHA loan in San Diego County is approximately $363,000.  IF a buyer were to buy a property for $375,000 and put 3% down and get a maximum FHA loan of $363,000, they would have payments (on a 30 year fixed rate at 6.5%) of about $3200 per month (including taxes and insurance and so on).  To qualify for the loan, a borrower would need to have verifiable reported income of AT LEAST 2.5 times the payment.  That would be $8,000 per month, and the buyer would still have a house payment that comprises 40% of their gross monthly income.

So, IF you have a buyer who makes $96,000 per year in reported income, has at least $12,000 for down payment (assuming the seller pays ALL closing costs), and has a decent credit history with not a lot of consumer debt, they could buy a $375,000 house.  (I say house because I did not use any HOA dues in the $3200 per month payment calculation.)  How many people in San Diego making nearly $100k per year want the kind of property that they can currently buy for $375,000? 

Ok, that is FHA, but we have some conventional programs that allow a buyer to buy up to $417,000, with zero money down.  In fact, the seller can pay all of the closing costs as well, getting the buyer into the property with a true net $0 out of pocket.  However, they are generally going to need to be as well qualified or more than the buyer that I described above as being eligible for maximum FHA financing.  The only difference is that they would not need the $12000 for a down payment.

Now, let’s move on.  Here is where San Diego is really hurting.  Let’s compare (for a moment) San Diego to a city like Spokane, Washington.  The median income there is close to the median income in San Diego.  However, the median price is less than 1/2 of what it is in San Diego.  In Spokane, a great many of the people making the median income of approximately 54k per year in fact DO qualify for a median priced home in the $230k range.  Better yet, they can utilize low down FHA financing and zero down FNMA financing. 

In San Diego, a great many people making the median income of approx 60k per year in fact DO NOT qualify to buy the median price home of approx $500k.  Worse than that, let's look at the potential financing options for that 500k house.  In January of this year, zero down payment, stated (not verified) income programs, existed to get a buyer into a 500k home with no money out of pocket, and literally with no job or any reported income.  An interest only ARM loan was available at very competitive rates.  All that was needed was a reasonably decent credit score and you were good to go.

Let’s fast forward to the end of September.  Now, a down payment of pretty much 10% would be the minimum needed.  Yes, there would be a few circumstances and programs allowing for less, but they are few and far between and require a high, high level of qualification.  So, how many potential buyers of 500k homes do you think actually have $50k available for a down payment? 

Next is the qualifying.  Stated income loans are still available, but with much higher rates and qualifying thresholds.  They would also likely require more than a 10% down payment.  So, if we DID make a 10% down payment on a 500k home, we'd end up with a payment (principal, interest, taxes, insurance) of approximately $3700 per month.  A potential buyer would need to actually report income of approximately 120k per year to formally qualify.

Keep in mind that in 2005 (latest year that I saw numbers for) that well over 1/2 of the ARM loans done in southern California were of the "stated income" or "no income" variety.  In actuality, many of those buyers had income of less than what it would really take to qualify.  Now that the low down, stated income programs don't exist, the potential buyer pool has shrunk by an extraordinary amount.

Lastly, the current rates for a "jumbo" loan (amount over $417k) are at very high levels compared to the non-jumbo loan pricing.  Non-jumbo loans are readily available at rates in the very low 6% range.  Jumbo loans, on the other hand are close to 7% or higher for all but the very, very strongest and best qualified clients.  Even then, the very high 6's is the best they can do.  Countrywide (the largest U.S. lender) funded over 50% of their business in 2006 as "jumbo" loans.  Their stated intention is to reduce that amount to 10% or less of their overall business.  Right now, there is still very little liquidity in the market, especially for "jumbo" loans.  I do think that this will get better as the months go by, but it will take time. 

I also think there is a good chance that we'll see the government raise the limits for FHA loans (likely) and FNMA loans (maybe) and that would help potential buyers qualify.  

The bottom line though, is that I feel that there is no other outcome other than a pretty significant and steep pricing correction over the next couple of years…..    

The author, GB811 is a top San Diego mortgage broker. email Bob Schwartz if you would like to contact GB811. [tags] San Diego mortgage loans, San Diego home loans, San Diego mortgage lending, San Diego real estate market[/tags] San Diego real estate agents

Related Posts:

• No Related Posts