Rate Cuts and Bold Predictions

We’ve tried to keep an even keel during the past three months of roller coaster (if roller coasters went almost exclusively downhill) news stories. In fact, dating back to the first hints of the lending crisis back in September of 2007 (check our archives), we’ve tried not to overreact to bad news or trumpet promising moves by the Fed. It’s just too easy (not to mention, false) to extrapolate a single economic event and assume some kind of global impact on the market. There are too many factors playing out for that to be the case.

However, this week’s rate cut may be the exception to all of this. We’re not saying that it’s going to save the real estate market, let alone the economy. But a few years from now, when we look back on when the turnaround began, we may recall December, 2008.

To be sure, the lower rates are not going to save the houses (or owners) currently in foreclosure. They are not going to jump start housing starts. But what they will do is save some real people real money. They may not spend it right away. There are too many other scary things on the economic horizon. (The rash of recent layoffs hasn’t even shown up in unemployment reports yet. Welcome to Washington, Mr. Obama. Would you like some double digit unemployment numbers with your new presidency?) But some homeowners will feel safer. They’ll feel like their houses are worth more simply because it’s costing them less to own them. They’ll have more money at the end of the month. And this time they’ll save it instead of buying a new SUV. And then they might even start see their bank balances rise.

Since it’s still tougher to qualify for mortgage, these rate cuts will primarily benefit people who can now refinance. Yes, there will be a few more buyers out there, too, which is always good. But just as importantly, the cut will allow people who might have needed to sell, to stay in their homes a little longer. Baby boomers might wait another couple years to cash-out, now that their house payments are lower. (And they can leave money in securities markets while they recover, partially stemming the tide of sell-offs.) People whose mortgage payments were making them house poor can now stay put. Instead of frowning over the declining value of their homes, people will smile at the lower number on their monthly mortgage statement. In short, homeownership will feel good again. It may sound trite, but that’s half the battle.

So the upshot will be that resale housing inventory will finally drop sometime later this year, especially as the speculators finish snapping up the foreclosures. And demand will tick up slightly among those who can qualify for loans. We’ll have lower supply and higher demand. Not much of either, but enough. Just watch. Come the third or fourth quarter of 2009, you’ll see headlines exactly the opposite of the ones you’ve been seeing. They’ll say things like, “Housing Sales Drop as Prices Stay Flat” and then, “Resales Continue Decline as Median Price Rises for First Time in 18 Months” and finally, in early 2010, “Median Price Rises for Second Month in a Row: Sales Stabilize.” And when you wonder what finally caused the market to start its long slow recovery, think back to December, 2008. These rate cuts won’t be the only reason, but they may be the first one.

Is this too rosy an outlook? Maybe. Are we trained economists who have real insight into market matters? No. But do we understand the psychology of buyers and sellers of residential real estate? Absolutely.

So we’ve made our bold prediction. Now we get to see who gets to say I told you so.

Inner Circle

It was hard to miss the article on the front page of today's Chron. Bad news for sellers of SF real estate (and good news for buyers, of course).
Those of you who read our snail mail newsletter may recall the piece I mused about the two models of a boom and bust market. We called the second model "The Pebble in the Pond." Here's what we wrote:
"This requires some visualization. Imagine tossing a stone into a pool of still water. The rings or ripples created by the stone get larger as they get farther away from the point of impact. In this model, the point where the stone meets the water represents San Francisco and Marin (or New York, Boston, Seattle, or any other market that’s performing better than average). The concentric rings are the outlying communities. The smaller rings are, perhaps, Albany, San Carlos, or Petaluma. Larger rings represent Tracy, Morgan Hill, or Santa Rosa. Do you have the picture in your mind? Okay, here’s where the real estate part comes in.

According to this theory, when the market starts booming, the first signs of strength will be in the regional center (i.e. San Francisco and Southern Marin). As buyers get priced out of these markets, they will look to the next concentric ring, or the next, or the next, and so on. In time, the boom market affects the whole region. Then the bust comes…

But the bust follows the reverse pattern. The outermost rings will feel it first. Just as we’ve seen now, outlying communities (especially those that thrived on new construction) see property values fall and foreclosures rise. Slowly, the chill moves to the smaller, inner rings and soon all but the markets in the middle are feeling the cold. And, brace yourself, those of us at the center are the last to experience the bust. But we will feel it. Possibly even as the outer rings are starting to stabilize. If this model is “correct”, we may be tricked into thinking that we’ve avoided the bust altogether, but it’s only a matter of time. And our time may be here soon."

Or it may be here now.

Get What You Pay For?

This morning's Chron features an article about Bay Area homes listed for under $100,000. Thankfully, the article points out that many of these homes will bring headaches to equal the money saved. In truth, buying a home in the greater Bay Area for around $100,000 is probably a pretty smart play, but please talk to us about the pitfalls before you start writing offers. And assuming you don't plan to live in the house, expect to pony up at least 30% down for any non-owner-occupied property these days.

Speaking of financing, our local rag also has a useful article about the current mortgage lending climate. This is a nice reality check. In short, lenders are lending. When you're hearing that it's hard to get a loan, that's primarily a reference to the past few years when nearly anyone could get a home loan. All that's really happened is that lenders have returned to responsible lending practices. What a concept!