Market Report: March 2008

As the political season unfolds I see a massive bailout for the housing industry in our future. The New Deal is still with us both in legislation and spirit. The sickness in the housing market has metastasized and that fact has reawakened the ghost of FDR.

Where's the Beef?

As reliable as the ground hog, every February buyers emerge with a fury and descend on a limited number of sellers. Prices are quickly bid up, often unreasonably, and homes sell smartly until the kids get out of school. No matter how the previous year ended, agents could always look forward to the market madness early in the year. The fall market of 2006, for example, was disappointing but a fairly robust spring rally still appeared right on schedule in 2007.

It is looking more certain that last springtime was nothing more than a dead cat bounce. If you need any convincing of this, just look at the number of re-sales from January 2005 to today. In my own backyard tracking area, the monthly sales rate over the past six months plummeted from a normal 5.5 to 6 to less than two.

Real estate agents are working hard to put a good spin on these unsettling numbers. Every Sunday in the local paper's real estate section another industry seer touts the opportunities available in this market. Babbit-speak aside, they are dead right. True there are bargains everywhere and sellers are eager to make a deal. But they are missing the point.

Fear Itself

Buyers are choosing to ignore the bounty spread before them. I see them underfoot, eagerly kicking tires but keeping a death grip on their checkbooks. Surely interest rates and the weather remain favorable; there must be other reasons for this state of the affairs. I think there is a new free-floating anxiety about America's future prospects and about the hard road traveled thus far in the millennium. One major presidential candidate has understood this and benefited from this national malaise and discontent. I am not sure a fresh wind will alter the reality on the ground that quickly as real estate markets are the oil tankers of finance. Our next president, in words and deeds, will have to be at least the equal of Franklin Roosevelt.

The ongoing debate amongst the talking heads and pols as to whether or not a recession is lurking around the corner has not helped matters either. Remember the national recession of 2001? Cleveland was in trouble but the San Diego housing market was booming. Early in the decade prices increased at a double-digit rate even as Flint was bleeding jobs and residents. Economists are accustomed to measuring recessions nationally-- globalization may run the credit markets and most of our world, but the viability of the corner store has a greater impact on our real estate future.

The Return of the Safety Net

Buyers are hesitant because many believe, with some justification, that prices will continue to fall as they did last year, another ten percent. This could be a risky bet. From July to December there will be a temporary increase in the conforming loan limit, now set at $417,000. This means mortgages under $729,750 will be in the 'conforming loan' category and will enjoy the best rates. Based on today's quotes, the differential between conforming and jumbo loans is nearly two points! This coupled with the trending down of overall interest rates presents the possibility of a golden window to either refinance or purchase during the second half of 2008. (call Tim Quinn of Scott & Quinn Mortgage for details, 619 368 1533) This potential second-half rally, driven by inexpensive money, may only be a temporary palliative. If you look to the events of 1994, when this city was mired in the worst real estate recession since the bust of 1962, cheap money brought about a six-month rally.

The best indicator to watch is not what pundits and touts are saying but employment creation and job losses in San Diego County. That number trumps all. Washington does not directly control prices and rents in San Diego; in the end it is all about maintaining San Diego's aggregate community income. I am not ignoring the unknown effects of the anticipated wave of foreclosures nationally and the sub-prime workout. These twin perils that have the potential to sink the economy more and bring further losses to local home values. But as I argued last month, the political changes coming next year mean a more activist Federal government no matter which of the three survivors win. If it gets too ugly, there will be a federal bailout. The combination of a fresh administration and the new loan rules should at least give the dead cat one more bounce.

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