The California Association of Realtors reported the other day that a big chunk of potential home buyers in the state are being shut out. The culprit? Rising home prices and rising mortgage interest rates.
During the first quarter of 2013, C.A.R. reports that the statewide median home price was $350,490. In the second quarter, it had risen to $415,770. Ouch!
The minimum income required to purchase a home at this price “soared” from $66,800 in the 1st quarter to $79, 910 in the 2nd quarter. Ouch! Ouch!
Wealthy coastal communities are driving this rise. Only 17% could afford to buy a home in San Francisco and San Mateo Counties, 23% in Orange County( South of Los Angeles).
Richard Green is Director of USC’s Lusk Center for Real Estate. He says the decline in affordability is just the latest indication of wage stagnation. “People are not making more money, except at the high end. This gets at the broader problem, which is not a housing problem. It seems to me the problem is much more of an income one.”
Everyone in the real estate industry knows that the lack of inventory has been a huge issue as well. Realtor.com reported that nationwide inventory dropped over 5% from July 2012 to July 2013. But, in my state, California, the biggest inventory increase in the nation was 26% in Riverside and San Bernardino Counties – areas that were hit very hard as the housing market tumbled. This is good news for folks in those counties.
These statistics, along with reported drops in mortgage refiancing, will leave a certain number of otherwise “qualified” buyers on the outside looking in. These folks may not have enough cash for a 20% downpayment, or sterling credit histories and scores to get the most favorable mortgage rate from a lender. Or, maybe they really can’t afford the home of their choice given their income level. But the marketplace always finds a way to fill a void, so that some of these folks can in fact buy a home. How? Seller carryback.
Several years ago, as the housing market spiraled downward, people who owned a property they wanted to sell would offer a seller carryback. Their motivation was “to sell the property”, and as a result, they found buyers who had little or no cash for a downpayment and poor credit. The seller would agree to terms totally favorable to that buyer – little downpayment, no credit check, low interest rate, interest only payments, balloon payment in 3-5 years. At best, a high risk transaction. At worst, a disaster and foreclosure waiting to happen. But, the seller “sold his property.”
Today’s sellers have learned from these mistakes. Working with an otherwise “qualified” buyer, the parties can agree on price and terms that protect both of them, and make for a sound transaction. If not a 20% downpayment, maybe 10%. If not a 5% interest rate, maybe an 8% to recognize the risk being absorbed by the seller. An amortized loan, not interest only payments. Maybe “stepped up payments”. A third party servicing agent to monitor payments. A credit check by the seller upfront so he knows what he is working with. Perhaps a conversation about the buyer’s desire to refinance a few years into the transaction, strengthening his credit posture and paying off the seller early. Or, the seller who wants to cash out, can go into the market place and sell his note to a reputable notebuyer. A well constructed transaction should find a willing buyer easily enough.
Not every seller is a candidate to offer a seller carryback. Not every property sales situation calls for a seller carryback as the solution. It’s an option. And where appropriate, the parties can play a small role in helping the housing market get back on a solid footing.
