To be a successful real estate buyer a few years ago, “showing the money” was about offering the highest price. Times have changed. Today, the strength of an offer relies less on price than on terms. A buyer’s ability to demonstrate a meaningful down payment (over 25%) is often one of the most important considerations in the strength of an offer. The reason is that securing financing is subject to a high degree of uncertainty, even with a lender’s pre-approval. A substantial down payment helps to reduce the risk associated with the appraisal process and increases the pool of potential loan packages that are available. Of the 12 properties I sold during the most recent quarter, one third experienced a financing related issue resulting in a delay of closing, reduction in price or a change in lender.

Why the financing uncertainty? First, lenders are taking longer to underwrite and review loans. Second, lenders are now re-running credit reports immediately prior to closing and verifying borrowers employment on the morning of funding. If a borrower has taken out new credit cards or increased his or her consumer debt during the escrow period, the lenders can turn down the loan or repeat the underwriting process based on the new information. In addition, lenders won’t fund the loan until they can confirm employment. Third, lenders are using out of area appraisers who may be unfamiliar with the relative strength of our local market compared to weaker outlying areas. This may result in properties appraising for less than the purchase price, forcing a buyer to increase their down payment in order to secure the home. And finally, appraisers are now required to appraise properties based solely on information in public records. If bedrooms or square footage have been added without proper permits or were not properly recorded with the assessors office, they are excluded from the consideration of property value. In short, obtaining the appropriate financing to complete a transaction is far from a sure thing.

Despite these challenges, we experienced the third consecutive quarter of improvement in our local market* that began late last year. 367 homes were sold at a median price of $762,000, up from 311 homes sold (+15%) at a median price of $742,500 (+3%) in the same quarter last year. At July 2nd, there were 342 active listings representing 3 months of inventory, up from the 2 months available at the beginning of last quarter.

Although the market faces significant headwind this summer in the face of sobering economic headlines, poor stock market performance, continued lending hurdles and the expiration of the federal and state home purchase tax credits, the early signs are positive. Pending home sales (homes that are in contract but not yet closed) were relatively strong at 181 properties, providing a jump start to the third quarter. Over the next few months, I expect that buyers with good credit and substantial available funds will find excellent opportunities. There is a larger selection of homes available and interest rates are at historic lows. For sellers, homes priced correctly continue to sell well with many homes experiencing multiple offers.

*detached homes over $450,000 in Albany, El Cerrito, Kensington, the hill areas of Berkeley and Oakland and Piedmont