Market Update October 20, 2008

Keeping you updated on the market!

For the week of
October 20, 2008

Housing markets never stay down, they come back. Is now the time to buy?

Yes, right now the housing market is battered and bruised. Loans are harder to get, some areas are still in decline, sellers are stressed and buyers are hesitant.

So how did we get to this point?

Post 9/11 the housing market enjoyed robust appreciation, almost 46% - perhaps too much, too soon, too fast. Thousands of first time buyers found access to easy financing and many should or would have never qualified in a saner world. Meanwhile, the global thirst for yield and the creativity of Wall Street pushed the demand to buy riskier loans.

So investors demanded, Wall Street created, bankers loosened, brokers complied, buyers signed and we all roared with praise and approval.

But alas, most commodities including houses are prone to cycles. Yet a boom is not a bubble, land is permanent, limited and in demand – we can live without stock (the tech bubble) but we all need a place to live. So rapid rates of appreciation are great but they’re not perpetually sustainable. The history of real estate proves this. At the same time, declines of great magnitude are limited and largely constrained to where foreclosures and short sales are the majority of the current market. And remember, not all areas are in decline.

So what direction is up?

There is nothing wrong with getting on the train at the station; just make sure it takes you where you want to go. Remember, the statistics you see are all one year versus the prior year and they take on big generalities (whole states, whole counties). Instead, you must look at specifics to get a real feel for the market: the area you are in or looking to buy in, the inventory, the sales, how prices are holding, is lending available, etc.

By the numbers – they tell the Real Story

No one can truthfully say housing has appreciated at an average annual number of “X” then say this month is off by 8% compared to last year. Why? Housing numbers are not only cyclical, they are seasonal to boot. And statistics need to compare “like periods” to be realistic. As for foreclosures; yes, there may be close to 2 million homes going into foreclosure but there are 110 million homes in this country and 46% of those homes areowned free and clear.

Also, in the San Francisco Bay Area, annual appreciation has been 8.4% adjusted for inflation taking into account good markets and bad. Lastly, real estate has the “power of zero.” Every 30 years history has added a zero. Example:

Year Home Cost

1906 $200

1936 $2,000

1966 $20,000

1996 $200,000

2020 $2,000,000 projected

Example: Rentals in San Francisco Bay Area

Year Rent

1906 $10

1936 $100

1996 $1,000

2026 $10,000 projected

Let’s just look at the facts. Prices have fallen in many areas, home sellers are abundant, interest rates are still low, the vast majority of foreclosures are concentrated in 5 states, fear and panic can drive the market but at this point, is it driving us in the right direction?

Remember, there are two sides to every transaction – one selling, one buying. And right now the market favors the buying side. So while many will avoid the market, some will realize the time is right. Why? Get in; get all the tax benefits, give it time to appreciate (at 3-5 years) and you’ll do fine. Others will look back and say “if only we had bought back then.”

Bank of America Settles Suit, Will Modify Loans

An estimated 125,000 Californians who are struggling with risky mortgages

from Countrywide Financial Corp. may get their loans modified and payments reduced under a program to be announced today. The program could reduce Countrywide borrowers mortgage payments. Loans could be reworked and made more affordable. That could include switching customers to fixed-rate loans or reducing the interest or principal.

Bank of America said Countrywide mortgage-servicing employees would be trained to carry out the program by Dec. 1 and would then begin reaching out to eligible customers. The plan includes a foreclosure freeze for borrowers who are likely to qualify until Countrywide has determined their eligibility, the bank said.

The settlement includes a program for California borrowers who are behind on their Countrywide mortgage payments or are having their homes foreclosed by the lender. The program, to be announced today by California Atty. Gen. Jerry Brown, applies to mortgages made before this year.

The program will first identify customers who have fallen behind on their mortgages by more than 60 days or are likely to do so because of loan features such as rate or payment increases. These customers will be contacted by Countrywide starting Dec. 1.

Various options will be considered for eligible customers, with employees handling the workouts instructed to first consider refinancing into a fixed-rateFederal Housing Administration loan.

The options on subprime mortgages also include keeping the initial rate for five or 10 years, having the borrowers pay interest only and reducing the interest rate to as low as 3.5%.

For pay-option loans, many of which now amount to more than the borrower’s house is worth, the options include writing the principal down to 95% of the home’s current appraised value and lowering the interest rate to 3.5%.