Weekly Rate & Market Update 11-4-16

Question: I am going to purchase a condominium unit, what should I be looking at besides the actual unit?

Answer: Condos are a great option for many people. There is not as much upkeep as a home, if you like to travel you can generally shut the door and go, you are in a small community which allows for closer relationship with your condo neighborhood, and if you want to move to a detached single family residence later in life often your condo can become a nice investment option if you convert it to a rental.

There are many issues that can crop up with a condo purchase that you should be aware of before you commit to purchasing. Here some important issues you need to know about:

Is it really a condo? This comes up more often with “townhome” style units where buyers think they are purchasing a home, but the unit is really a condominium, however it happens the other way as well. What’s the difference and why does it matter?

The primary reason it matters is that rates are higher for condominiums than for single family residences if you have less than 25% down payment. The difference between a condo and a “townhome” is not the style of the complex but rather what you own. The simple way to tell the difference is that if you own the land under your unit the property is considered to be a PUD (Planned Urban Development) and priced as a single family residence for your mortgage. If you have an undivided interest in the entire complex, inclusive of land and buildings, then you own a condominium. In a condo you own the cabinets and counters in your kitchen, the Association owns the studs in the wall, the roof and the foundation.

Is there a lawsuit? This should be the first item checked off any list when looking at a condo complex. Not all lawsuits can prevent a new mortgage, but plenty of them can. If the Homeowner’s Association (HOA) is suing an owner for breaking the rules that is not generally an issue. If the HOA is suing the builder for major defects that is an issue and can put the complex on the Do Not Lend list with Fannie Mae, Freddie Mac, FHA and most lenders. With all the new condos put on the market through development and building conversions throughout Southern California in the past decade or so there has been a corresponding increase in lawsuits for building defects. This past week we had a client looking to purchase in one of the newer buildings in downtown Long Beach that has a major lawsuit against the developer for issues with the roofs, balconies, plumbing, electrical and other structural issues. The project is on the “Denied” list with Fannie and Freddie, meaning no loans will be made regardless of down payment using conventional financing.

Why does this matter to you as a buyer? Besides not being able to get a loan the price of the units will begin to drop precipitously since buyers can only buy with all cash or with subprime loans—if even those. The lack of availability of mortgages for the complex severely limits the market for buyers, lack of demand leads to lower prices.

Is the HOA solvent? Part of your purchase contract allows you to review the financial status of the Homeowner’s Association. This is important and many buyers do not undergo this review. Often we are required to review the financial statements of HOAs if prompted to do so by Fannie, Freddie or the lender, but not always.

What do you look for when reviewing the financials? Several items:

What is the delinquency rate of HOA dues? If there is a sizeable amount of unpaid dues that can lead to higher dues in the future for all owners.

Are there sufficient reserves? Does the HOA budget for future capital improvement/replacement projects? How old is the roof and will there be funds available for when will it need to be replaced? Are the funds for future upkeep and maintenance for painting, re-stuccoing, landscape and hardscape? A condo complex is like a giant house, and like a house it needs constant repairs and maintenance. Does the HOA set aside sufficient funds for necessary capital improvement projects?

Is there plan for future increases in HOA dues? Which leads to when was the last increase in dues? If dues are increased on a regular, annual, basis what is the reason? Poor budgeting? Increase in service fees for management, insurances, vendors? This can be the sign of a disengaged board that rubber stamps every suggestion from the company that manages the HOA (it is rare that condo associations manage their association themselves, generally they contract with a professional management company).

What is the owner occupancy rate? Does the complex have a significant number of units that are rentals? This may impact the ability to obtain financing, as well may affect the overall quality of life in the complex and future market values. Higher owner occupied neighborhoods (and a condominium complex is its own neighborhood) are shown to have lower public safety issues, cleaner environments, easier dispute resolution, and longer term residence which leads to stability. If there is a large number of rental units in a complex there is greater risk to units being abandoned if market declines, or landlords selling below market to rid themselves of the investment—thereby setting comparable sale prices for appraisals.

Does one entity own a significant number of units? This goes along with the prior question of owner occupancy. Single entity ownership is relevant in a few ways. First, many lenders will not loan in a complex if one person or company (other than developer when selling units for first time) owns 10% or more of a complex. Second, that one entity can control the market for the complex. If one person owns six of fourteen units and puts them all on the market at the same time it will depress values. As well if the entity is having financial issues and does not pay HOA dues or all its holdings go to foreclosure will have negative impact on the complex.

How many units are for sale? If a significant number of units are for sale at the same time, other than initial offering, this can be a signal that something is not right in the complex. It could be issues with the governing board, the management company, an owner that is constantly causing issues for everyone else, or an environmental issue such as noise. Also if there has been a large turnover in ownership in the recent past that may be a warning sign; have your agent provide you with sales in the complex over the past twelve to eighteen months.

How do the HOA dues compare? For a complex of its size and amenities provided are the HOA dues significantly higher or lower than comparable complexes in the immediate area? Too low can signify either incredible management or perhaps mismanagement not collecting enough which could lead to future assessment increases. Too high can signify lack of reserves and planning in the past that has led to increase in dues to bring the financial health of the Association back to normal.

How onerous are the CC&R’s? Covenants, Conditions and Restrictions are the governing rules of the Homeowner’s Association. Are there some items in the CC&R’s that bother you? If so don’t buy thinking you can change them as it is very difficult to get an Association to vote to change its rules. Are pets allowed but the rule says something like “dogs are permitted but total weight cannot exceed 45 pounds?” A Yorkshire Terrier averages seven pounds, can someone have six Yorkies because combined they do not exceed 45 pounds? Sounds ridiculous but such is the basis of potential lawsuits. Are visitors only allowed to park in guest spaces for two hours, or is there no limit? The former may be good if you have a relative visiting that you can only take for two hours, the latter allows for the guy down the hall to have his partner to become a permanent resident without paying for a parking sticker.

There are many more factors to consider when purchasing a condo than a single family detached residence. Primarily because once you purchase a unit you become a business partner with every other owner in the complex. You are tied to them financially on both a short and long term basis. Before making a condo your home do your due diligence to check out the entire project and your business partners to ensure you enjoy all aspects of your new home not just the spiffy kitchen and great location.

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Lots and lots of economic data this week. Leading the way was Personal Income, Consumer Spending and Price Index numbers for September were released Monday. Income was up slightly, but not significantly—neutral for rates. Spending was up pretty strong at 0.5% from August, mostly from auto sales—pushes rates higher. The Price Index continues to be stagnant at 1.7% year over year growth—positive for lower rates. Overall the news was shrugged off by investors as it did nothing to increase or decrease future rate predictions.

Fed does nothing. The minutes from the most recent Open Market Committee meeting for the Federal Reserve were released and to the surprise of no one the decision was to not increase the Fed Funds Rate. The language in the release gave no indication of a rate move in December, but the overwhelming consensus (80%) is that there will be a rate hike in December by the Fed. Unknown is how much will the hike be? News was market neutral.

New jobs not inspiring. This morning the Labor Department released employment data for October and the numbers did not inspire confidence of a strong labor market. Only 161,000 total jobs were added in the economy, of which only 142,000 were in the private sector. Considering between deaths and people coming of working age is around 193,000 per month there was a deficit of 32,000 jobs created versus needed. A bright spot was an increase in hourly earnings of 0.4% from September, though the average workweek has been stuck at 34.4 hours for months—keep in mind the definition of full time under the Affordable Care Act that mandates health benefits is 30 hours per week. The headline number is always the unemployment rate which declined from 5.0% to 4.9%, however this is mostly due to contraction of those looking for employment. Also dropping was the labor participation rate to 62.8%. Overall the news is positive for lower mortgage rates.

Rates for Friday November 4, 2016: Rates drift sideways for another week. There is quite a bit of nervousness in the markets this week as investors look to next week. The week is short (Veteran’s Day on Friday) which always leads to choppy trading, add to the short week the elections on Tuesday and there is a lot of unknown. Pouring through different analysis of “what if X wins..or Y wins…” the consensus seems to be the initial market reactions will be more muted if Clinton wins than if Trump wins under the “better the devil you know…” theory on Wall Street. If this is the case then the don’t-hold-me-to-it prediction for Wednesday is that rates will either remain stable or drop since if the “devil you don’t know wins” and spooks investors a lot then money in these situations typically flows out of stocks and into bonds, which leads to lower rates. However this is such a unique election cycle we could see everyone sell everything and go to cash and just sit on it. Volatility means one thing: lock when you can.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.

Wednesday night’s Game 7 of the World Series had 40 million viewers, the most for a baseball game since Game 7 of the 1991 Series (perhaps the greatest Series ever with five one run games including the 1-0 extra inning final game). This puts Super Bowl viewing in perspective as Game 7 was the most watched TV show this year since the Super Bowl—which had 112 million viewers.

While Game 7 wasn’t great from a pure baseball standpoint it was outstanding for drama and excitement. Congrats to the Cubs who were able to give their fans a long, long, long awaited Championship. Unfortunately for the Indians they now replace the Cubs as longest suffering team in the four major sports without a championship…

Have a great week,

Dennis