The big news of the week was that our mortgage giants have started a new program called “Home Possible Advantage” in which qualified homebuyers will only need 3% in order to purchase.

This puts them in a great position to compete with FHA for Buyers who want to minimize the liquid assets that are putting into an owner-occupied property.  Those who have discussed this subject with me will remember that I feel the FHA’s decision over the summer to make their mortgage insurance a permanent part of the loan was a real misstep as it will force refinancings in the coming years and thereby shift interest rate risk onto the Buyers (you used to be able to shed the mortgage insurance once you gained enough equity in the property).

This new program is only available to owner-occupiers of single family homes.  I’ve had questions about how this will affect the overall market; it will increase the number of potential Buyers, especially younger ones who do not have family to help with a down payment.

The debt to income ratios remain however, so purchase prices will remain firmly tied to incomes, so I don’t expect it to increase appreciation significantly.

The new 97% LTV loans will allow homeowners to purchase properties for just 3% down, a reduction from their previous requirements of 5%. Although this is only a small drop, it is the hope of these government-sponsored enterprises that by decreasing the loan amount required, more individuals will be able to purchase a home.

via Breaking News: Fannie Mae and Freddie Mac Drop Some Down Payment Requirements to 3%.

Studying demographics isn’t exactly on the top of the most people’s lists of ways to spend our small amount of leisure time (I’m an outlier in this regard).

It does matter if you are making investment decisions now that won’t play out for years to come, such as purchasing your first single-family home.

Regular clients know that one of my primary discussions with them prior to a purchase is how long they intend to stay in their home.  These decisions have big implications, the largest probably being interest rate risk.  Also very relevant, though, is keeping an eye on who will be looking to purchase your property when you decide to sell.

One of the best resources I’ve come across for this information is blogger Bill McBride, whom I’ve been reading on a daily  basis for years now.  For anyone unacquainted with his work, a look at his website Calculated Risk is encouraged.  For a quick synopsis of some of his thinking, please see the Business Insider article on him linked below.

While I’m heartened that Bill is very encouraged by the growth in the economy and the potential support for single-family housing given the demographic trends – I still think we should keep a close eye on the income levels Millennials will be able to maintain, and whether this will be enough to support the purchase of the assets Boomers will be selling to fund their retirements.

McBride argues that currently, with so many 20-to-24-year-olds, the demographics are very favorable to apartment renting. And so of course these days, the multi-family housing sector has been leading the way. And you hear all these stories about how people aren’t into homeownership anymore. But the demographics that are currently favorable to apartments will turn into demographics favorable to homeownership, as the cohort gets older, moves into higher paying jobs, and wants more space for those new babies.

via Calculated Risk Demographics – Business Insider.

Developers seem more optimistic that funding will be available to increase our high-rise rental stock around the Lake.   Let’s just hope that construction costs don’t continue to rise and scuttle these potential deals:

“High-rise development is starting to show signs of life in Oakland for the first time since the Great Recession, with a 298-unit apartment building on the brim of Lake Merritt expected to receive entitlements early next year.

Lake Merritt Boulevard Apartments, set to rise 270 feet on a vacant site on 12th Street and 2nd Avenue, needs the City Council to greenlight a redevelopment plan for the surrounding Lake Merritt BART station area this month in order to skate through environmental review.”

via With Lake Merritt residential tower, highrise development restarts in Oakland – San Francisco Business Times.

Much has been made of the increase in housing costs that will come about when mortgage rates inevitably increase from their historic lows.  What is less discussed, but has been referenced by the Fed more often recently, is how our booming venture capital-backed economy in the Bay Area could suffer if rising rates began to cool the demand for riskier returns.

While I would not choose to be on the opposite side of an argument with Ken Rosen, eloquently referenced in the article below, I currently suspect that any significant increase in rates will be further in the future than currently predicted.  With little to no median wage growth in most of the country, Japan embarking on a massive QE program and a rising dollar – we still have some way to go before the threat of deflation is behind us.

“San Francisco’s economy has been riding high in part because of technology companies’ easy access to capital – gobbling up venture capital dollars and taking advantage of stock gains to buy smaller companies and hire more workers. That employment growth helps feed real estate demand in the city, putting apartment and condo building pace at a peak.”

via Are Republican gains in Congress bad news for the San Francisco real estate market? – San Francisco Business Times.

Now that the City Council has signed off on the West Oakland Specific Plan, which increases the potential amount of land zoned for residential use, will we at last see more viable projects move from entitlement to reality?  The San Francisco Business Times article linked to below is hopeful.

West Oakland Train Station

City Ventures to invest hundreds of millions into West Oakland development

“The on-again, off-again revival of West Oakland is on again.

California infill-housing builder City Ventures is diving deep, with four West Oakland housing and mixed-use parcels in its sights. The private company, which is internally capitalized, expects to invest hundreds of millions of dollars in the neighborhood, Northern California President Philip Kerr said.”

The West Oakland Train Station is at the heart of the specific plan for the neighborhood.

Photo by Spencer Brown

via City Ventures to invest hundreds of millions into West Oakland development – San Francisco Business Times.

For the data-driven like myself, our local MLS’s inclusion of a “Number of Offers” field last year was a very welcome gift.  I’ve since kept tabs on how many bidding wars we’ve been getting ourselves into, and the numbers align with the re-balancing of the market we’ve seen underway.

At our peak, a stunning 45% of the homes offered for sale in Berkeley received more than five offers.  That number has since dropped to 22% for August.  Unsurprisingly, the most active listings were on the lower to mid-range for the area (in Berkeley the average list price to receive the highest number of offers was $759k).

How much did these bidding wars help the Sellers?  Average overbid on my Berkeley sample was a whopping $223k over list price.  I expect the number of bidding wars will continue to decline as the market stabilizes.

Now that our property markets seem to be balancing and the days of double-digit appreciation have subsided, I’ve had many conversations with investors over what the medium-term outlook for the Bay Area could be.

The obvious factors are all in play; interest rates, demographics, supply increases and rising incomes.  One of the hardest to pin down is the inflow of buyers from overseas, which has been increasing mightily over the last two years.

This recent WSJ article does a good job of laying out both the attractions for migration and the scale of the potential; it quotes a recent study finding that 64% of wealthy Chinese had plans to leave and points out why:

To be sure, the departure of China’s brightest and best for study and work isn’t a fresh phenomenon. China’s communist revolution was led, after all, by intellectuals schooled in Europe. What’s new is that they are planning to leave the country in its ascendancy. More and more talented Chinese are looking at the upward trajectory of this emerging superpower and deciding, nevertheless, that they’re better off elsewhere.

The decision to go is often a mix of push and pull. The elite are discovering that they can buy a comfortable lifestyle at surprisingly affordable prices in places such as California and the Australian Gold Coast, while no amount of money can purchase an escape in China from the immense problems afflicting its urban society: pollution, food safety, a broken education system. The new political era of President Xi Jinping, meanwhile, has created as much anxiety as hope.

via The Great Chinese Exodus – WSJ.

That said, one ex-pat I’d been discussing this with reminded me that all of the rules regarding capital controls are still on the books in China.  What remains to be seen is how quickly the PRC could begin to enforce them should they want to stem the tide.