Southern California Luxury real estate market – the good, the bad and the ugly.
The good: Lending is alive and well for Southern California real estate.
Banks have money to lend and are anxious to approve well-qualified buyers purchasing homes priced at fair market value. Fannie Mae and Freddie Mac are still the primary investors for loan amounts up to $729,750 in Los Angeles and Ventura Counties, according to Brownie Stanisch of Fieldstone Financial.
Southern California Real Estate Luxury Market Specifically.
Still, many banks are financing loan amounts well above that limit and are placing those loans into their own portfolio until Wall Street secondary markets start to open up again. In fact, we have one client right now qualifying for 1.5 million dollar loan, stated income with 40 percent down.
if you can qualify, you will have some of the best programs and rates ever seen in lending.
The bad: The way lenders define well-qualified and fair market value has changed.
The definition of well-qualified is being driven by the GSEs (Fannie Mae and Freddie Mac) and their ever tightening risk standards. The GSEs (Government Sponsored Enterprises) are constantly re-evaluating their default portfolio and if they see a trend in the borrower characteristics of defaulted loans, they will tighten their guidelines for future loans. A recent example is Fannie Mae’s directive to re-evaluate borrower’s credit immediately before funding to determine if there has been any new debt.
Right now the “new normal” in underwriting is “validate all data and re-validate at closing.”
The definition of “fair market value” is unfortunately still being driven by the Home Valuation Code of Conduct (HVCC). HVCC requires appraisers to be independent from lenders. In order to comply with the required independence, most lenders have contracted the services of an Appraisal Management Company (AMC) who has the task of randomly assigning appraisers to each appraisal order. The problem is that the AMC receives typically ¼ to ⅓ of the appraisal fee, leaving much less for the appraiser.
To compensate for the lost income, appraisers take more orders than they can comfortably handle and accept orders that are beyond their expertise.
Such appraisals may therefore be of questionable quality. It is the questionable appraisals that usually warrant a dreaded review appraisal. Luckily, we have not encountered many instances where a review appraisal was warranted, but we have encountered instances where the original appraisal did not support the purchase price. In those instances, there has usually been a compromise between the buyer and seller; the seller lowers his price a little and the buyer comes in with more money – splitting the difference that was “short.” However, if the appraisal is lower by more than 10%, most buyers would “walk.”
The ugly: Southern California luxury real estate could get worse before it gets better, as each new group of defaults may cause lenders to re-evaluate their underwriting standards.
What is the current market? Diminishing inventory.
Although there are many buyers who would like to purchase homes, they are finding small inventory from which to choose from.
“While a large part of the market consists of distress sales, many sellers are coming back into the market…at least in our market area, and the average sales price is rising from last year”
according to John Mallett of Mainstreet Mortgage. If a seller prices aggressively, he is likely to get multiple offers bidding the value of the property up dramatically. There was a recent story of a San Fernando Valley home priced well under market at $700,000 where the realtor received 35 offers and sold the property at over $1,000,000. In the first-time homebuyer price range of $250,000-$450,000 some REO banks have also taken to that list low-sell high strategy and it appears to be working. Unfortunately, such a bidding frenzy is making it very hard for first-time buyers to get into the southern California luxury real estate market.
We have been in two multiple offers at the 2.6 million range in the last two weeks. Once the sellers reduced the asking price very close to the realistic selling price,the offers came in, and were also realistic. Even at the “über-luxury” level, buyers want a deal. A recent buyer looked at all of our top end listings—including White Stallion—and guess what? The buyer wanted a “deal.” He ended up buying a 19,000 square foot home on a few acres in an exclusive gated community That property was listed for 19 million. The offer was 13 million—”take it or leave it.”
The seller took it, and it was a good deal.