Real Estate Column: Buying a Home After the Subprime Fiasco
by Robb Fleischer

The news headlines surrounding housing and subprime lending has left many homebuyers concerned and confused about making a decision to purchase real estate.
However, savvy buyers who do their homework and carefully study historical real estate market trends can find that market condition correction periods like today can also be an opportunity to secure your dream house due to increased inventory and lower demand.

The “subprime fiasco” refers to a culmination of factors that has led to a massive tightening in credit standards among lenders, with varying impact across local, state and U.S. markets.

This is due to an excessive number of mortgages that are both delinquent and in default. As a result of tighter credit standards and the devaluation of mortgage-backed securities, global investors are shying away from purchasing additional pools of loans, causing over 100 lenders to close and leaving many homebuyers and homeowners unable to locate financing alternatives.

Subprime lending made it possible for borrowers with lower credit scores to qualify for up to 100% financing. These loans were often Adjustable Rate Mortgages (ARMs) with monthly mortgage payments scheduled to increase after one, three or five years after the origination of the loan.

This resulted in many borrowers being unable to afford the increased payment, further compounded by property devaluation, particularly in areas with high new home construction. Fortunately, due to demand and a general housing shortage, these conditions have not had the same extreme consequences to the San Francisco real estate market as in many other regions of the country.

“Sales have declined in all areas of the state, but higher-end markets have experienced somewhat smaller declines,” said Leslie Appleton-Young, vice president and chief economist for the California Association of Realtors (CAR). “Sales are weakest in areas that had a lot of new home building in recent years or those areas that had been popular for second home purchases. Similarly, higher-end markets have seen greater price stability, with the median price of a home declining slightly, if at all.”

According to a recent CAR report, the median sales price of an existing detached home in San Francisco Bay region was $841,660. Although this represents a decrease of one percent from June 2007, it is an increase of 6.9 percent from June 2006. The number of homes sold shows a decrease of 7.3 percent in July 2007 compared to June 2006 and a 9.8 percent decrease from July 2006.
From an affordability standpoint, the monthly loan payment in April 1989 adjusted for inflation was $2,106 compared to $2,120 in October 2005 for California.

Although the future and outlook of our real estate market is driven by other economic factors, I have found that sharing with buyers that the median price of a detached home in our region was below $400,000 in January 2000, below $500,000 in January 2002, below $600,000 in January 2004, and slightly above $700,000 in January 2006 helps put into perspective whether the market is bottoming out today. Over time we have benefited from healthy appreciation during less favorable economic conditions.

In summary, our trends show long-term appreciation in real estate. While sellers need to be realistic about home prices, potential homebuyers need to make their purchase decision based on what they can afford for monthly housing expenses including loan payments (and forecasting for ARM rate adjustments), taxes, insurance, homeowners dues, and maintenance.

Getting pre-approved by a mortgage professional in advance will make the buyer better prepared to search for a home within the price range established and better positioned to make an offer when a desirable property is located.

Corona Heights resident and homeowner Robb Fleischer, GRI is the CFO and Broker/Realtor with American Marketing Systems Inc. He can be reached at 415-447-2009 or robb@fleischer.com. Visit amsires.com/staff/robb or my94114.com for additional information.

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