Market Report: April 2007

Dear Friends;
 
March was a very busy month. Sales and prices were very much like 2004. I am not sure this spring rally is that meaningful as I am always busy at this time of the year. The real tell will come in June.

--Jim

The Sub-prime Problem and Other Thoughts

The results of sales during the first quarter have been entirely unsurprising. The rate of sales has been unchanged from those of 2005 and 2006. The constants are just as easy to predict; copious amounts of hand-wringing and gently sliding prices. The latter is a concern since the downward direction was last since in these parts about fifteen years ago. Prices are off about 10% from the market peak and that decline has taken about two years. To compare, between 1991 and 1993 prices dropped about 30%.

Volume has always been the litmus test of our residential market. The rate of sales remains tepid but no so much as to alarm. Buyers are still in the hunt and show no signs of a mass retreat a la 1991. Quality product at ordinary prices will sell quickly and all of the others will have to wait their turn. But in all cases, their turn will come. This point decidedly sets off this market from that of 1991-1994. But what about the sub-prime issue?

Real Estate's Dirty Bomb

You have read the stories. I am not so worried about since most media coverage is more national. What is often lost in the words is a better analysis how it will affect the metro market here in particular.

First, sub-prime borrowers are not necessarily people with bad credit and shaky employment prospects. They could easily be a period with a substantial six-figure income but with no down payment. That sub-prime borrower is not a real credit risk. Second, loans that are going to foreclosure and those that may in the future tend to be concentrated in certain price classes and regions. Michigan, Ohio and other rust belt states come to mind.

Assuming the worst case scenario of mass quantities of foreclosures followed by cascading prices, the original question is still in play. If banks have a growing inventory of seized homes, how they dispose of those properties will either exacerbate or minimize the problem. One should also note the problems are coming because of the two headless horsemen of declining prices and rising interest rates. Also remember the Federal Reserve and step in and alter the latter which will affect the former.

Zealous bank examiners and the misguided Resolution Trust Corporation conspired to cook up the last nasty recession. I hope the Feds and bank regulators learned something from that unnecessary debacle. Thus far the evidence is that they are more inclined to work with troubled homeowners. Before you get too comfortable, this effort could also be creating a bigger problem downstream.

So the jury is still out on this one. I for one applauded the advent of these loans. They have been useful socially in that these loans enabled more people to join the real estate party. Homeownership is good for our society and these loans, even with some fallout ahead, have been a net positive.

Density and Politics

All of this recession talk means little to most homeowners. Real estate is a long game and over time there are market forces that only mean long term upward pressure on prices. The only counter-weight I know of is either massive job losses or substantial increases in supply. The body politic has little to say about the former but plenty about the latter. How we collectively manage future growth will drive future prices, at least as long as San Diego remains relatively attractive to immigrants from this and other countries.

Click here to see Jim's past Market Reports. You can also download Jim's 26 page research paper on San Diego County apartments.

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