Real Estate and Mortgage Market Insights

This article is being written in August 2007, and by the time you read this some things may have changed, yet I hope to provide insight into the real estate and mortgage markets. It can be difficult to understand what’s happening and the media can add to the confusion. There are mixed opinions out there, but I hope to help clarify things.

Santa Barbara has fared well despite national trends and seen strong numbers through 2007, although we aren’t immune to national trends and markets are always changing. Comparing 2007 to 2006, as of the beginning of August, the number of sales is up 15.5%, sold volume is up 22.3%, and the median price is slightly up. Short-term, we are seeing a panic, but in the long-term markets historically correct themselves. Real estate has seen an average annual appreciation of 6.9% over the last 50 years and has continued to be a great long-term investment.

The definition of “subprime” is broad, but overall this term represents the “risky” loan market. Subprime loans are usually made to borrowers with questionable credit histories or to people who have over-extended themselves with too much debt compared to their income. To compensate for the added risk, lenders charge higher fees and interest rates on subprime mortgage loans. Mortgages typically get bundled and sold off in the form of Mortgage-Backed Securities (MBS’s), and due to the subprime lending troubles, it is difficult for investors to value these products and it’s caused a “liquidity crunch” because this has caused the buyers of the MBS’s to freeze. This has affected the guidelines and monies available to lend to people who are currently out shopping for homes, although many types of loans are still readily available for those who do have good credit ratings.

The Fed has stepped in and taken action to get money flowing and to help financial institutions better weather the current storm. The Fed has lowered the Discount Rate and may lower the Federal Funds Rate soon. The Discount Rate is the rate at which banks can borrow money directly from the Fed, and the Federal Funds Rate is the rate which directly affects mortgage rates and rates on home equity lines of credit.

Per Seth Streeter and Brad Stark of Mission Wealth Management, we may see more pain over the next year or two as more adjustable rate mortgages reset to new interest rates. They said not to panic because cash flow makes our economy run, and they advised to keep everything in perspective as you make financial decisions. The circumstances this time are different than in the 1980’s in that today we have a very strong economy. Interest rates are still historically low, the Fed sees the problem and has already taken action, and like I said, we may even see interest rates be lowered. No one wants to see the housing market go into a serious decline, not the Fed, Wall Street, banks, or consumers, but we have seen a correction occurring since 2005.

Good information is the calm in the storm. Houses are being bought and sold, and many types of mortgages are still available, so be sure to work with experienced professionals. Consult your financial planner, your Realtor ™ and your mortgage broker when considering making financial decisions. Emily reviews real estate statistics at the beginning of each month, and there is a Real Estate & Economic Outlook occurring on September 20th, so call Emily McBride at 805.252.2773 if you would like current information.