Manhattan Beach home prices are up 9% comparing closed sales over the last 3 months to the same period in 2009. A total of 34 properties sold, 29 of which were single family residences (SFR’s), and 5 condominiums. The story gets better when we look at July 2010 sales versus the same month last year: median prices per square foot (SQFT) have risen a dramatic 20%!

Here’s a snapshot of the month of July:

Fewer properties sold in July of 2010 compared to July of 2009, but median and average sales prices jumped for both SFR’s and condos. Average days on market (DOM) for SFR’s dropped from 82 to 57, while condo DOM remained relatively constant, inching up only 4 days from 118 to 122.

Manhattan Beach real estate is extremely dependent on neighborhood, so the following breakout is illustrative:

The big takeaway is that all Manhattan Beach neighborhoods show price per SQFT increases over the last year. This is even better than June housing sales where 2 of the 6 Manhattan Beach neighborhoods showed price drops over the last year.

It is possible that Manhattan Beach has yet to feel the impact of housing subsidies disappearing, or it is fully plausible that this affluent city never will.

It is very important that your home is insured to value.  Are you aware that most home policies contain a “co-insurance clause” which requires you to insure your home 80% to replacement value or else the policy might not pay out?  This value has nothing to do with the current market value.

As we know many homes have lost market value.  But this is not the same as replacement cost for your home.  Replacement cost is the current construction rates in your area to replace your home.    If your home were to sustain major damage from a covered peril (like fire) then you will need adequate coverage to rebuild at today’s costs for material, labor, and building codes.

For luxury homes in high value markets, like Manhattan Beach, this becomes even more important, since replacement costs for new buildings are escalating faster than inflation.

It pays to work with an Agent/broker who has partnered with multiple A rated insurance carriers which may offer you multiple choices, in terms of price and coverage.  The value of offering various insurance companies allows you to select a competitive price and perhaps a high value insurance carrier, such as Chubb Insurance, Chartis Insurance, Ace Insurance, or Fireman’s Fund.  These insurance carriers offer specialized coverages for homes valued over $1,000,000 such as cash pay out option and large loss deductible wavier.

Additionally you should ask your broker to do a comprehensive computer workup for the replacement cost and a confidential risk analysis of your exposures to determine other types of coverage you may need.

This is a guest post authored by:

Cindie Carey

President of Ortega Ranch Insurance Agency and a Personal Lines Broker since 1984.  You may contact her at ccarey@ortegaranchins.com or 949-218-1020

Higher Down Payments

The first thing that luxury home buyers should realize is that they will need to come up with a higher down payment than the regular buyer. We just lived through an historical credit expansion, the age of lending insanity – interest only mortgages, no down payments, Option ARM’s, negative amortizing notes, and lots of other fun stuff.

Times have changed and borrowers looking to take out multimillion dollar loans are operating in a 40-80 loan-to-value (LTV) environment. This means that creditors now require between 20% to 60% equity investment from investors before they are willing to write mortgages for the remaining purchase amount.

The LTV requirement varies depending on the financial strength of the borrower, price of the loan, and uniqueness of the property. The higher down payment ensures only well off buyers with a good deal of cash will get credit, and the added equity investment makes it less likely for buyers to default on their loans.

Mortgage Interest Deduction Limits

Mortgage interest deductions are a big draw for home buyers, in many cases providing the needed incentive to go from renting to owning real estate. In essence, writing off mortgage interest against income tax liability effectively reduces the cost of debt capital. For example, a home buyer in the 25% income tax bracket who can write off interest on a 4% loan will actually be borrowing money at a 3% effective interest rate – 4% x (1 – 25%).

For high income earners the mortgage tax deduction becomes even more useful. What a lot of people do not realize is that the IRS limits the amount of interest home owners can deduct. The current limit on mortgage interest deduction is $1 million. This means that loans in excess of that will only be able to deduct interest on the first $1 million – the remaining amount will not provide any tax shelter.

Property taxes are still fully deductible.

What’s Available In The Current Market

Current non conforming rates for a loan up to $5 million are in the 4.5 % T0 5.00% range. Interest only rates are available but limits are restricted. Much higher loans are available on a case by case basis.

Stated income loans and adjustable rate mortgages (ARM’s) carry much higher interest rates, and are difficult to find for multimillion dollar luxury homes.

This article was written with information provided by John Devlin, owner and loan officer for Landmark Loan Center.

John can be reached at 714.402.2250, or jdevlin2@cox.net

Here’s a snapshot at how the Manhattan Beach real estate market looked this last month:

Since real estate markets are highly seasonal, it’s illustrative to compare periods across different years to see broader trends. In the table above we compare June 2010 to June 2009 to see how prices, volumes, and time on market compare.

Three clear trends stand out: Prices are up, volume down slightly, and homes are staying on the market longer this year than last. In particular, the condominium market fared pretty poorly. Median sales prices for Manhattan Beach condos are 21% lower this year than last, and are spending 38% more time on the market before closing.

Manhattan Beach SFR’s did much better, with median home prices up 2.5% when comparing year-over-year changes in prices per square foot. The flip side to this story is that homes are sitting on the market for more than twice as long before closing!

There are a couple key characteristics of the Manhattan Beach real estate market that make analyzing its statistics difficult: The market is small, with only about 30, or so, homes closing per month, and properties value significantly in values depending on location. An ocean view can swing values by over a million dollars!

To normalize for these mathematical disadvantages, our firm aggregates quarterly data and computes three month moving averages to discern core trends. The following table takes a look at SFR data for Q2 2010 and compares prices from the same three month period in 2009:

Looking across all Manhattan Beach neighborhoods, we see an 8% year-over-year increase in price levels per square foot. The median price for a SFR in Manhattan Beach over the last quarter was $1,675,000, with the lowest priced property selling for $760,000 and the highest closing for $7,500,000.

The Sand Section saw the largest year-over-year price gain of 12%, followed closely by Mira Costa at 11%. The Tree section and Liberty Village section saw modest price gains of 4% and 3%, respectively, while both the Village Section and Hill Section saw slight price declines. The worst performing neighborhood was The Village, with a 5% price decline over the last year.

The most active Manhattan Beach neighborhoods were the Tree Section, Sand Section, and Hill Section, with 34, 24, and 15 homes sold, respectively. The least active neighborhood was the Village section with only 2 SFR’s closing in the last quarter. This limited volume is the likely culprit for the 5% price decline.

Finally, our firm analyzes total market volume to gauge the overall level of capital entering the Manhattan Beach market:

The second quarter is typically a strong time of year for Manhattan Beach real estate, so the Q2 spike up in sales volume needs to be measured against historical averages. When looking at seasonal volume fluctuations, we find that Q2 2010 sales volume is actually 4.4% lower than the historical average over the last four years (which includes the bad years of 2008-2009).

Looking Forward

Pending homes sales are one way to look briefly into the future. This measurement analyzes sales contracts that are pending close of escrow. In essence, we get a 1 to 2 month preview of sales statistics.

The National Association of Realtors (NAR) just announced a 30% drop in pending home sales for the month of May, which we corroborated by analyzing Manhattan Beach pending home sales data. The report is available on our real estate blog.

Our Manhattan Beach pending home sales analysis points to a 30% volume drop, with a corresponding 5% price decline relative to Q2 levels.

With so much market distortion created by federal and state tax credit and first-time home buyer subsidy programs, we do not expect to be able to gauge the market’s broader trends until 2011. The next two quarters are likely to see declining volume and prices as conditions normalize post-bailout.

Pending home sales data from SoCalMLS does not paint the same dismal picture for Manhattan Beach. A total of 32 properties are listed in pending status, with 28 of them being single family residence (SFR), and 4 being condominiums:

Comparing this to June sales data, a few things jump out right away. Homes are selling much faster now than over the previous few months, with average days on market (DOM) dropping from 83 to 37 for SFR’s. The above data is for properties in pending status,  so even if we assume an average of another 30 days before the bulk of these sales close escrow, we are well below the previous DOM average of 83.

Manhattan Beach sales volume seems to mirror what’s going on at the national level. Assuming that 75 percent of pending sales close in July puts July sales estimates at 21 SFR’s, which is exactly 30 percent below average sales volume over the last three months.

Median home prices for pending sales are roughly 5% below second quarter (Q2) 2010 values of $1,675,000 when all Manhattan Beach sections are considered.

The Merkley amendment doesn’t stop there. It piles on underwriting and verification requirements to all loan programs, including the VA Home Loan Guaranty program. But VA loans don’t need any repairs. Instead, the amendment introduces two hurdles for military families seeking VA loans:

• Lending costs will increase as a result of more stringent underwriting that will take more time. Loans will come with more fees, and veterans will pay more to make use of this exclusive program.
• Veterans and military members who once qualified for a VA loan may no longer be able to.

VA loans already come with strict underwriting and appraisal procedures, so it’s nonsensical to add more layers to the underwriting process. The second problem is a major concern since about 80 percent of borrowers who qualify for VA loans would not qualify for conventional financing options.

Though Merkley’s proposition has legitimate goals to prevent another mortgage crisis, it punishes the safe-lending programs, such as VA loans which have  low default rates.

The Mortgage Bankers Association breaks down the percentage of loans in foreclosure:

For more than 65 years, the VA loan program has helped more than 18 million men and women become homeowners as a reward for serving our country. Thwarting the chance for today’s military members to follow in their footsteps is inappropriate, especially with Memorial Day just around the corner.

This article was written by Jay Buerck. Jay works for VA Mortgage Center, specialists in providing access to credit for military veterans.

Nearly $1.24 trillion of commercial mortgages need to be refinanced over the next four years. With so much debt outstanding and in need of refinancing, the BofA announcement makes a bad situation far worse.

Between 50 percent and 60 percent of loans on skyscrapers, hotels, shopping malls and apartment complexes failed to refinance within a few months of their maturity date this year, Bank of America Merrill Lynch analysts said in a report.

As a comparison of present conditions to what went on during the boom years, we should note that a record of $251.1 billion in bonds tied to commercial mortgages were issued in 2007 compared to $1.7 billion issued so far in 2010.

Commercial real estate firms are increasingly desperate. According to Thomson Reuters there are at least 12 CRE firms planning to sell equity in IPOs over the next year. Given that equity sales earlier this year have either completely failed to materialize, or have been executed at deep discounts, it is not likely that CRE firms will be able to re-capitalize properties that have decreasingly profitable operating margins.

Without a big government bailout, the 41 percent CRE decline since 2007 might just be the start of something much worse.

The Commerce Department released a report today that shows a 32.7% drop in new home sales from April to May, which is 18.3% below last May’s sales rate. Inventories are rising, which means that prices will invariably face renewed downward pressures:

The above chart, provided by CalculatedRISK, shows that housing inventories are once again on the rise after a rather sharp decline from Q408 to Q409. Inventory declines over that period were likely the result of combined fiscal and monetary incentives for home buyers, particularly new home buyers via state and federal tax credits. The CalculatedRISK article points out that inventory levels above 6 months cause downward price pressures.

The Commerce Department’s press release estimates housing inventories to be at the 8.5 month level, given current sales volume. The last time we saw home inventories at that level (Q1-Q2 2007) the Case-Shiller Composite 20 Index had a rate of decline of about 15% month-over-month.

What’s scary is that housing inventories are mounting despite extremely low mortgage rates. As noted in the LA Times:

In a good sign for home loan rates, yields on 30-year mortgage-backed bonds issued by Fannie Mae and Freddie Mac fell on Tuesday to new 52-week lows as long-term Treasury bond yields also slumped. The benchmark Fannie Mae yield slid to 3.87% from 3.92% on Monday; the benchmark Freddie Mac yield dropped to 3.90% from 3.96%.

Both fell below 4% this month for the first time since briefly trading under that level in late November.

Mortgage subsidies appear to be having a diminishing impact on housing markets, especially as fiscal subsidy programs are winding down. Real estate markets certainly have local characteristics, so what’s true for one region may not hold for another. Our Company predicts that for our local market, Manhattan Beach real estate prices will decline between 4% to 9% by the end of 2010. If the inventory to Case-Shiller correlation holds true then we may very well be underestimating the coming decline.

The last couple years have not been good to CRE firms. Cap rates have been creeping steadily higher since 2007 (up 41 bp), but the real story comes when analyzing CRE risk premiums.

When measuring cap rates against 10-yr treasury yields we see that the weighted composite CRE risk premium jumped 222 bp from 2007-2010. On average, investors are now demanding roughly 7% above the risk-free rate to hold high quality CRE (compared to less than 5% in 2007).

The big question is how should investors take this news? Are new CRE IPOs a sign of coming market strength, or continued weakness?

Two recent CRE IPO prospects might help shed some light on what to expect:

Welsh Property Trust Inc (WLS.N), owner of industrial and office properties, scaled back its plans for its roughly $350 million IPO in early June, and then shelved them altogether.

High-end hotel company Chesapeake Lodging Trust (CHSP.N), debuted in late January after first delaying its IPO and then shrinking it by 40 percent. Its shares now trade 14 percent below their reduced IPO price.

So far, not so good. We can also look to Jay Ritter’s seminal work,  The Long-Run Performance Of Initial Public Offerings:

Analyzing IPOs from 1975-1984, Ritter showed that, on average, issuing firms underperform their respective equity indices (CAR = cumulative average return). One reason he cites for this systematic underperformance is that firms tend to take advantage of “windows of opportunity” while stock markets are highly valued to dump their equity onto irrationally exuberant buyers.

With all these considerations in mind, we must ask ourselves if the growing commercial real estate IPO pipeline is a last act of desperation for failing firms holding toxic assets, or if these represent buying windows of opportunity for prudent investors?

In the end, the return on investment for any asset is dependent on its acquisition price. There will likely be good deals and bad deals ahead. Some strong CRE firms will likely issue stock at bargain prices, while other lower quality ones mis-price their equity on the high side.

What we do know is that we don’t really know much about the future. We’ll just have to wait to see what happens when we get there.

The capitalization rate-treasury spread shows how investors value commercial real estate cash flows relative to “risk-free” returns, with the 10-year treasury being the proxy for such a holy grail asset. Capitalization rates (or “cap rates”) are to real estate investors what P/E ratios are to stock investors – they measure the cost of cash flows. You can calculate cap rates by dividing net operating income by the cost (or value) of a property.

The CRE risk premium is a general indicator of how investors perceive the relative merits of this asset class. Right now investors are telling us that CRE is in the dog house:

What’s more telling is that the darling of CRE, Apartment Buildings, has seen its risk premium jump 412 basis points (bp) from its low in 1996. This is even 210 bp higher than its “near term” low in 2007. Apartments are still CRE’s darling class, with cap rates lower than any of the other CRE types:

The worst performing CRE type are Restaurant Properties, with risk premiums jumping to 8.78% this year. The broad spectrum of CRE property types are declining quite rapidly compared to historical trends. Does this mean that now is a good time to buy into commercial real estate, or can we expect further deterioration ahead?

Cap rate data was provided by RealtyRates, and analysis can be found on our Commercial Real Estate page.