Is Sub-Prime To Blame For Broader Economic Downturn?

We've written often in this space about what caused the now-famed "mortgage meltdown" and who or what bears the responsibility. Current concerns, however, are more focused on the health of the broader economy and why markets other than real estate and mortgages are on shaky ground or already failing. An interesting op-ed piece by Paul Krugman in today's Times posits an compelling argument. Krugman suggest that, "Troubles that began a little over a year ago in an obscure corner of the financial system, BBB-minus subprime-mortgage-backed securities, have spread to corporate bonds, auto loans, credit cards and now — the latest casualty — student loans." This perhaps is not a revolutionary concept, but his explanation of how the financial sickness spreads is worth a read.

When Is Your Home Not an Investment?

"Shelter. Memory Box. Labor of Love. Artform. Retirement account. Get rich quick scheme. Showcase for conspicuous consumption.

"The American home has always been a receptacle for our myriad needs and desires. Yet lately many experts have observed that the real estate boom has skewed the meaning of our homes. In the wake of stagnating incomes, regressive taxes and the expectation of Social Security collapse, middle class home owners increasingly looked to real estate as a source of financial redemption. When God, pensions, the stock market and the government failed, the humble house provided more than a modicum of security, and with any luck, several hundred thousand dollars in untaxable capital gains."

These words began Carol Lloyd's "Surreal Estate" column in this Sunday's Chron. Lloyd's column has not always been kind to Realtors, but this week we found her echoing a sentiment we've been sharing with many of our clients lately. Namely that the real estate boom of the last several years severly altered people's sense of what their home was meant to do. For far too many homeowners, their principal residence became the repository of all their financial dreams; a way to pay for early retirement, kids' college tuition, and a chance to drive that fancy car. Along the way, we forgot about a home's first and foremost purpose: a place to live.

This is not to suggest that we shouldn't view our homes as investments. Rather, we only suggest that, unike your I.R.A, 401K, C.D.s and stock options, a home is not purely a financial instrument. Seems so obvious, yet so easily forgotten.

Another Rate Cut

Here's a quick take on how the latest cut to the Fed Funds Rates affects mortgage rates, coutesy of Union Trust Mortgage Services, a loan brokerage affiliated with Pacific Union:

"Jumbo rates decreased 0.125% yesterday (1/22/08) and conforming rates (loan amount under 417K) decreased 0.25%. A Fed cut was already priced into the bond market and that is why we have seen interest rates go down in the last month. Wall Street was counting on a 0.5% cut and now it was 0.75% so that is why we saw just a little drop. If the Fed would have cut just 0.5%, the bond market would not have reacted and we would have seen interest rates stay the same. Remember that mortgage markets are "open" every day whereas the Fed meets just eight times annually. This gives the markets a ton of time to interpret news, listen to Fed speakers, and generally prepare for the next Federal Reserve meeting.

"The big winners yesterday were people with home equity lines of credit, and those that carry credit card balances. Effective January 22, 2008, your borrowing rates just fell 0.750%.

"The Prime Rate is now 6.500%.

"FORECAST for Long-Term Interest Rates: We believe conforming interest rates (loan amounts under $417K) will probably continue to go down another 0.25-0.5% over the next 6-12 months. Jumbo loans are a different story though and we believe those rates will decrease only about 0.125-0.25% since there are still very few lenders that are willing to lend on large loan amounts."

Note that predicting mortgage rates 6-12 months down the road is a little like walking around with something green in your teeth; no matter how confident you are, eventually someone's going to notice and you are going to look foolish. Consider yourself warned...

2007 Round-Up

A belated welcome to 2008 from your favorite intergenerational real estate team. We are rested, nourished, and energized after some fun holiday travel, yummy eats, and a sudden respite from the rain clouds.

A special "thank you" goes out to those of you who bought or sold homes with us in 2007, as well as the many friends and former clients who helped us build our business last year. Your referrals are the the lifeblood of our business. We can't express our appreciation enough. One way we try, however, is to make donations to Ritter Center in Marin County and Glide Memorial Family Services in SF for every opportunity you send our way. We were thrilled to make many donations to both organizations throughout the year. And if the number of calls we've received during the first two weeks of 2008 is any indication, this year will be even better.

While 2007 was a busy year for Next Generation Real Estate, it was not so busy out there in the broader market. The fourth quarter in particular was not kind to sellers. Check out these end-of-year stats for a complete picture. The first number shows the percentage change in the total units sold in 2007 vs. 2006. The second number reflects the Q4 year-over-year change:

San Francisco -9.69% -19.11%
Marin -12.0% -29.0%
Sonoma -23.26% -39.04%
Napa -25.13% -42.02%
Solano -40.02% -48.43%
Alameda -27.53% -42.91%
Contra Costa -29.30% -42.89%

This next set of stats shows the percentage change in the median price in 2007 vs. 2006:

San Francisco +3.25% +4.3%
Marin +4.15% +4.4%
Sonoma -5.91% -13%
Napa +.84% +1%
Solano -8.13% -17.2%
Alameda +1.0% -3.36%
Contra Costa -1.0% -14.35%

As we've noted before, the upper end of the market out-performed the lower end in 2007. This accounts, in part, for why Marin and SF had an increase in median price despite a roughly 10% drop in total units sold.

We think there's good information in the above charts, as well as hints as to where the market may be headed in 2008. Please get in touch if you or someone you know is considering a real estate transaction this year. We'd love to talk about it!

All the best in 2008.

Record NorCal Sale

While we're not in the habit of promoting other listings ahead of our own, we also understand the importance of good cocktail party conversation, especially around the holidays. With that in mind, we thought you'd enjoy reading about the recent $65 million sale in Belvedere. If any of you want to be notified if it falls out of escrow, just shoot us an email.

Local Market Continues to Cool

Check out this nice short article from the Chronicle. Sometimes we look for complicated explanations for market movements when the real explanations are fairly simple. In short, money is harder to get, buyers are more hesitant, inventory is low, and the market is cool. Simple as that...

North Bay Home Search

A while back, we offered up access to our CleanOffer account as a free perk to our friends and clients. Many of you took advantage of this. 2008 is shaping up to be a very good year to buyer real estate. For those who would like to track the market on their own, we've reposted our original invitation below...

Next Generation Real Estate offers CleanOffer to all clients and friends. This site tracks the North Bay MLS (including Marin, Sonoma, Napa, and Mendocino) and allows users to create custom searches, track listings, and review property details. We feel it's the most useful local site for buyers, sellers, and those who just like to keep up on the market in their area. CleanOffer is a pay site. Fortunately, Next Generation Real Estate has purchased an unlimited subscription that allows all our clients and friends to use the site for free. Simply register as our client and you'll get unlimited access. Registration instructions are below:
Click on the link above. (There is also a permanent link in the "Links" section of our blog.)
Click on “Buyers & Sellers Register Here.”
Click “I Agree” on the Membership Agreement page (assuming you do agree).
Fill in the registration form. Type “Jess Pearson” when they ask for agent’s name.
Click “Jess Pearson.”
Click “Submit.”
Click “I accept.”
Click “Submit.”
You’re done. Happy searching!

Who's The Victim?

It's been interesting to listen to the various politicos and economists talking about who's at fault for the "mortgage meltdown." Was it predatory lenders or naive buyers, bad lending rules or bad borrowing habits?

Either way, it's natural to assume that the now-foreclosed-upon borrowers somehow deserved a better fate. Even if they should have read their loan documents more carefully or considered the impact of an inevitable rate hike, there something about a hardworking family losing its home that tugs at the heart strings.

It turns out, however, that not every "victim" of the lending crunch was an "ordinary American homeowner" just trying to get by. According to the Chronicle, "More than one-fifth of 6,557 Bay Area properties that fell into foreclosure from January through September this year were owned by investors." House-flipping, as it's known, had become such a popular regional investment strategy that these small time real estate moguls now account for over 20% of our foreclosure "victims."

Read the whole article to see just how common this has become.

True, it's never a happy story when someone goes belly up, but it's a lot harder to believe that someone who owned eight investment properties didn't know the risk.

Tasty Freeze?

The unfortunate comparisons to drug addiction aside, this SF Chronicle article on the potential fallout of a rate freeze for subprime borrowers is worth a read. As someone currently parenting a three-year-old, I have to wonder if the proposed freeze is a way of rewarding bad behavior. "Since you didn't eat your vegetables, you only get one scoop of ice cream instead of two." Time will tell...

Supply & Demand

A recent Q&A from the Marin IJ featured the following information:
"Between 2000 and 2006, California's population increased 7.6 percent. During the same time period, housing units increased 6.3 percent. When you are talking about a population of 30 million people, a discrepancy of even 1 percent in available housing means there are 300,000 more people competing for a place to live.

"Again according to the Census Bureau, in California we have an average of 2.9 people per household. If you call three people a household, there were still 100,000 more housing units needed..."

While we at Next Generation Real Estate are not census takers, we believe it's safe to assume that the population growth rate will continue to be strong. If anything, however, housing starts have fallen off dramatically in 2007. Normally this would be a sign of broader economic decline. But that's what makes this market downturn so unusual.

Historically, real estate suffers as a result of broader economic troubles. Layoffs, inflation, and high unemployment cause corrections in the national real estate market. This time around, however, those traditonal problems were not the driving force behind the correction.

So we're left to wonder...with interest rates, inflation, and unemployment all relatively low, how long can the correction last? With the decline in new construction, is it possible that demand may outstrip supply by an even greater margin than before? Could the national market come roaring back to its 2005 heights? Stranger things have happened.

Holiday Happenings

The lead is buried half-way down this SF Chronicle article, but it's worth reading for anyone wondering what goes on in the market. It echoes what we're experiencing, especially in the City. Namely, that the market is more active over the holidays than it has been in recent years. Admittedly, not everyone wants to move over Christmas week, but the article makes one solid point: any buyer or seller out there right now is a serious buyer or seller.

Marin Median Home Price Goes Up

Since August, people have been asking us in hushed and hesitant tones, "So how's business going?" And for some reason, no one seemed to believe our answer, "You know things are really going well." So if you won't take our word for it, look at this article from the Marin IJ. We try to stay away from saying that Marin and San Francisco are bullet proof or evergreen markets, but sometimes a headline tells at least some of the story. True, strong sales in the upper end of the market are pulling the median price up. And true, total units sales are down. But for local home owners worried about their investment or for home buyers looking for the deal of a lifetime, the picture couldn't be clearer. The local market is a lot more stable than people want to believe.

Another thing to keep in mind (and something we've harped on before at your favorite real estate blog), there is no one local market. In San Francisco, South Beach can be cool while NOPA is red hot. (This is, in fact, the case.) In Marin, Kentfield sales can be up 63% through November 20th while Novato sales are down 35% over the same stretch. (Also not a hypothetical example.) As always, our local market it more complex than any headline can capture.

Private or Public

Check out this very interesting article from San Francisco Magazine about the world of San Francisco private schools. As a Realtor doing business in both SF and Marin, I can say with some authority that when it comes to buying a home, the "school question" is often as important as any feature of a particular house. And as someone who was raised in Marin and is now raising two kids in SF (not to mention that I went to school in both locations and am married to an admissions director at and SF private school), I can say with equal authority that the primacy of the school question in the minds of home buyers is utterly appropriate and legitimate. Hopefully the article provides some insight for those wrestling with this decision. If so, you might also check out the Marin public school resources in the link list on the right side of the page.

Waving Goodbye to a Local Legend

We're better than two months and 12 posts into your favorite real estate blog. Loyal readers have come to count on this little bit of cyberspace for local, useful, and timely real estate-related information. To date, we have yet to post anything that didn't fall clearly under that stated purview. Today, that's about to change. We promise not to go off topic very often, but we know loyal readers will forgive the rare self-indulgence.

Charlie Deal died last week. Charlie was a fixture in Mill Valley throughout my childhood; a singularly recognizable figure. A quirky, bearded, scraggly character, usually seen riding a rickety bicycle, often with one of his legendary toilet seat guitars strapped across his shoulder. Charlie was harmless; the strangeness of his appearance exceeded only by the gentleness of his spirit. As a bike-bound adolescent in occasionally "Still" Valley, our paths seemed to cross almost daily as we pedaled in opposite directions down Miller Avenue. At an age when I counted irreverence and defiance as my finest personality traits, I always knew enough to acknowledge Charlie with a wave, a "Hey, Charlie," or a doff of the little league cap. Even as an adult, I never failed to pay tribute to the man. In return, I rarely got more than a humbled and mumbled, "Hello." But that was enough.

When I read about Charlie's passing, on the heals of the closing of the Sweetwater and Village Music, I couldn't help but fall into a reflective mood. Mill Valley, still one of the most beautiful places I know, is not the town I grew up in. Of course, it hasn't been for a long time. And that's okay. But Charlie is a little different than Lockwood's Pharmacy, Mosher's Shoes, The Old Mill Bakery, Varney's Hardware and the other venerable institutions of bygone days. If a local drugstore, charming shoe store, or old fashioned bakery were to open in Lytton Square next week, I suspect they'd be welcomed by one and all. But if Charlie Deal suddenly appeared today, I wonder? Would he be embraced? Would he be respected? Is there still a place for the Charlie Deals of the world?

In the end, it doesn't matter. Because there was only one Charlie Deal. Mill Valley, nor any other town for that matter, will ever see his like again. I'm glad I got to wave to him. I wish I'd gotten to wave goodbye.

A Little Perspective, A Lot of Opportunity

A buyer said to me the other day, "It's a shame that now that prices are finally down, interest rates have gone back up." This sent me scurrying for some historical data. The buyer was happy to be reminded that while, on a regional basis, many sellers are more willing than ever to negotiate, 30-year fixed rates are still relatively low, typically below 7%.

A quick snapshot of some historical interest rate climates:
In 1983, the 30-year fixed loan rate was 13.95 percent
In 1987, the rate was 11.36 percent
In 1992, rates dipped below double digits to 9 percent
In 1997, the rate was 8.27 percent
In 2002, the rate was 7.16 percent

As is so often the case, investors willing to go against the grain, to enter a market many are leaving, may be rewarded for their courage down the road.

Just some thoughts for those trying to make sense of a confusing market...