The Housing Market – Have We Hit Rock Bottom?

As I have been a Realtor for many years, I am constantly receiving information that is directly related to the housing industry. Most of the time it predominates the State of California, but frequently includes what is going on in the rest of the country.In my most recent Real Estate magazine there were a number of articles that discussed the housing market and where we stand and how long it is expected to remain in a downward slope. Additionally, I have attended numerous seminars and conferences and they have all indicated that the slow market is expected to remain until the latter part of 2008.A panel of major economists spoke at a discussion aptly called “Up, Down, or Sideways: What’s Next for California’s Housing Market.” These economists were: Frank Nothaft, chief economist for Freddie Mac; Richard Green, Oliver T. Carr, Professor of Real Estate Finance at The George Washington University; and Kack Kyser, chief economist with the L.A. Economic Development Corporation.Richard Green indicated that the economy as a whole if fairly healthy, but the housing market is not. The top states for negative-amortization purchase loans in March 2007 were California (number two) and Florida. These loans count on house prices going up faster than inflation.The good news is that loans that are fundamentally sound will still be fundamentally sound. Wall Street doesn’t understand this, and it’s important to the housing recovery for Wall Street to understand this. That’s why it’s also important to understand that California has among the highest prepayment rates in the country. California’s housing turnover rate is not particularly high, largely because of Proposition 13. As for subprime mortgage delinquencies, there are pockets of California-Stockton, Fresno, San Bernardino County and Riverside County where this is a real problem. Overall, as a state, it doesn’t rank among the states with the worst rates of subprime delinquencies. It’s important to make a distinction here between nontraditional products and subprime products. Subprime loans per se are not the problem: Exotic mortgages are the problem.What produced this crisis? Partly, it’s a private label market that Wall Street charges for credit. This market creates securities that slice up mortgages to be rated by rating agencies. The rating agencies looked at the tranches between 1997 and 2005, when there were almost no default losses, and concluded they were safe. Problem is, we had no history of observing what these people looked like or their default behavior.Second, there are a couple of problems between borrowers and lenders, including the nature of disclosure. Does the typical borrower really understand the HUD-1 form? But on the flip side, which borrowers are going to take on a 2/28 loan? (2 years 4 months) Speculators. If the value of the house goes down, you walk away.Finally, originators and investors. Originators have an incentive to originate, thereby creating a lot of moral hazard based on compensation. The don’t have an incentive to do quality control on the kind of loan that they’re selling to Wall Street. The mystery is why Wall Street didn’t understand this.Right now, we are outside the economic models. Anyone who thinks he knows when issues will be resolved is deluding himself. The bottom line is the key statistic you should watch is the months’ supply of homes available for sale. When that number starts shrinking, the bottom is coming. Until that number starts shrinking, you don’t know when it’s coming.Some Hot Metro Areas
The “animal spirits” are back in San Francisco and San Jose. Technology is back and Biomed is performing strongly. They are looking at about a 2.3% growth in jobs in San Francisco Metro area this year and about 2.1% next year and in San Jose, 2.1% this year and 2% next year. That will help increase the housing market. Los Angeles County has been insulated from some of the lows of the housing market. Expect a 1.5% growth in 2008.Several other markets throughout the United States will be showing similar trends with certain areas growing faster than others, but on the whole, we should start to see a trend by the end of the year immediately following the elections. This has happened before and will happen in the future, but rest assured, once we come out of the slump, we will have learned something and will be able to avoid another downfall for a number of years to come.

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