U.S. Residential Real Estate and Mortgage Industry

Here is what has been happening in the U.S. residential real estate and mortgage industry; particular in San Diego. It might seem long but it is something worth reading for potential buyers to make them more prepared.

Values have increased significantly since the mid 1990's in San Diego due to a shortage of inventory, low interest rates continued job growth that has put upward pressure on prices. Currently however, in the last three years sales activity and prices have declined due to an abundance of current active listing inventory and the current impact of past sub-prime and standard mortgage market activity. Currently, there is volatility in the overall mortgage industry due to this reality. The key contributors to this trend are summarized below with bold headings.

The sub-prime mortgage financial crisis refers to the sharp rise in foreclosures in the sub-prime mortgage market that began in the United States in 2006 and became what some analysts are referring to as a current global financial crisis.

During this time adjustable rate mortgages had become popular, however, property value appreciation has ended in most areas with declines in many locales, leaving some homeowners unable to meet financial commitments and lenders without a means to recoup their losses. The rise in delinquencies and defaults has been concentrated in what industry analysts call "appreciation-dependent mortgages", those that worked for borrowers only if their properties appreciated. Large proportions (but not all) of such mortgages were sub-prime.

Speculative Refinancing is a homeowner presumption that their home will appreciate. This has affected the refinance decisions of many borrowers. Some of these borrowers were influenced by a new breed of financial planners and mortgage brokers who promote the view that unused equity should be used for new investment into common stock, real estate or mutual funds.

Some homeowners used the growing equity in their homes as a way to live beyond their means. They have built up credit card debt, and then consolidate the debt into their mortgage through a cash-out refinance. The consolidation, by extending the term of the credit card debt, reducing the rate and making the interest tax-deductible, would reduce the borrower’s total monthly payment. They could then start building up their credit card debt all over again. This process could continue only so long as their homes appreciated. As soon as appreciation stopped, they were stuck with total debt service costs that might be unmanageable, or with negative equity in their house, or perhaps both.

An additional contributor is known as Speculative Purchases as some homes were purchased with 100% loans by borrowers hoping to turn a quick profit from future appreciation. These loans were made for the full amount of the purchase price (or appraised value) and no down payment was required. When property value appreciation ended, homebuyers taking these loans had negative equity the day they closed escrow, forcing many to re-sell immediately. When home appreciation doesn't materialize, even if the payments remain affordable, the financial incentive to continue to make payments is substantially weakened. Most do continue to pay because they will get tired on waiting and will jump in.

There are still some competitive loans out there but be careful of bait and switch. The three things one should look at when comparing loans are: the APR (not interest rate), LTV (loan-to-value, how much the buyer is putting down), and the type of loan (fixed, ARM, hybrid). To get a good rate a good FICO score is required but also more money down will lower the rate.

These are the MLS statistics for the City of San Diego and San Diego County; they include the number of active listings, average days on market, pending sales and sales that have closed in the past 180 days. (As of September 21, 2009)

City of San Diego
Active Listings: 3017
Average Days on Market: 88
Pending Sales: 2250
Completed Sales in last 180 days: 5845

San Diego County
Active Listings: 9076
Average Days on Market: 102
Pending Sales: 6808
Completed Sales in last 180 days: 17,957

Here is the same information taken on August 22 2007

City of San Diego
Active Listings: 5800
Average Days on Market: 79
Pending Sales: 1154
Completed Sales in last 180 days: 5102

San Diego County
Active Listings: 19,586
Average Days on Market: 82
Pending Sales: 3067
Completed Sales in last 180 days: 13,339

One can conclude that with much fewer homes on the market today when compared to two years ago the real estate market is defiantly recovering.

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