How the Credit Crunch is affecting Santa Barbara Real Estate

Most experts point to the unprecedented rash of sub prime lending over the past several years as the main cause of today’s credit crunch.  While there were virtually no sub prime loans made along the South Coast, we are still feeling the impacts of the tightened credit market.  In fact, because of our home values are significantly higher than most communities across the nation, one could argue that we are more affected by the credit crunch.

Despite government efforts to assist banks, lenders are still nervous about extending credit and continue to tighten their lending standards.  For example, almost all lenders no longer offer “stated income” loans (also known as easy-qualifier or low documentation loans) where borrowers with 20-25% down and good credit do not have to verify their income.  These types of loans were particularly popular among self employed borrowers and became a mainstay in our area.  In fact, it is estimated that prior to the mortgage meltdown approximately 65% loans issued along the South Coast were stated income loans.  Eliminating this mortgage product has eliminated many potential home buyers in our area because they can no longer qualify for a loan that requires full documentation.

Another factor that has changed the lending climate in our area has to do with the size of a loan.  For decades there has always been something called a “conforming” loan amount which increases a little each year (based on rising home values).  Conforming loans are much easier for lenders to sell on the secondary market (Fannie Mae and Freddie Mac) and therefore have almost always had better pricing for borrowers than larger loans known as “jumbo” loans.  Historically, borrowers have seen the interest charged on a conforming loan be .25 to .50% less than the interest rate charged for a jumbo loan.  The credit crunch has made it virtually impossible for lenders to sell their jumbo loans on the secondary market; therefore they are charging significantly more to do so.  Right now we are seeing a spread in interest rates between a conforming and jumbo loan in the neighborhood of 2.5%.  For instance, a lender that is currently charging 5.0% for a 30 year fixed conforming loan is now charging about 7.5% for a 30 year fixed jumbo loan.  So while conforming loans are current hovering at historic lows, jumbo loans are not.

Currently, the conforming loan limit is $417,000; however, in an effort to stimulate the housing market, it is being increased much more than usual and will be at $603,750 for our area in 2009.  This increase is great news for home buyers who can purchase a home and take advantage of the increased conforming loan limit and near historic low rates.  Unfortunately, those buyers purchasing more expensive homes that still require jumbo financing won’t be able to obtain these same great rates.

Because jumbo loans are much more expensive and because stated income loans are no longer available, our upper end properties are being more impacted by the credit crunch than our lower end properties.  For example, a typical home buyer with a 20% down payment can purchase a property in the $750,000 price range and take advantage of extremely low rates; however, someone purchasing a more expensive property will have to put down a larger down payment to benefit from the low rates.  The higher a property is priced, the greater the likelihood a buyer will need jumbo financing.  Not surprisingly we are seeing a very strong pick up in our market for properties below $750,000, but continued softness in our above $1 million market.

Now may be an excellent time for the “move up” buyer who is selling a home in the more active lower end market and taking their equity to purchase a more expensive home while staying in the conforming limit.  For those that still need a jumbo loan, they may want to consider a hybrid loan that is fixed for the first 5-10 years and then goes to an adjustable rate loan.  These loans are currently available in the 6% range.

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