Market Report: October 2007

Dear Friends;
 
It has been a turbulent summer in the local real estate world no doubt reflecting the larger economic picture. I have not written in several months because the market I write about has been of late directionless, duplicitous and generally uninteresting. Not that the recent interest rate reduction will change much of that although it will provide welcome relief for most consumers. More cuts are in order; if none are forthcoming we have more of the same ahead of us.

--Jim

Bernanke Cuts Rates! (yawn)

The Fed's recent half-point reduction is notable only in that it signals the central bank's concern about a potential recession. Troubled sellers who have been treading water waiting for the new guy to toss out a life ring are going to be disappointed. While I applaud the action I fear it will not save some folks from drowning. The cut was not aimed at saving troubled homeowners and their lenders. The Fed wanted to coax more liquidity from the banking community, provide payment relief for the debtor class and perhaps most importantly, signal the financial community that the Fed was carefully handling the tiller.

For the beleaguered housing sector, this move is a day late and dollar short. The action of the Fed will not bring shock and awe to the housing sector. Buyers still have a firm grip on their checkbook. To refresh your memory, the early years of the millennium featured four percent fixed rate mortgages and incredibly cheap and plentiful refinance money. To stave off a recession born of the dot com implosion, Mr. Greenspan made sure we were awash in cheap cash. Too much cash began chasing too few properties. You know the rest of the story.

The Board is loath to engage in the practice of bailing out a particular segment of the economy even though their fingerprints are all over the current meltdown. The Fed and the U.S. Forest Service share a lot in common when it comes to their respective operating philosophies; both believe in measured and regular destruction as the way forward to long-term healthy economies and forests. They believe occasional calamities are both beneficial and inevitable.

By ruthlessly pumping liquidity into the system over the past few years, (and tacitly encouraging loose lending practices) the Fed must shoulder some of the blame for the debris littering the forest floor. I know they have no sense of guilt when in comes to current circumstance. All of Mr. Bernanke's public pronouncements make it clear the fire will burn for a while longer so that the free market can finish off those guilty of financial excess.

Lenders and Credit

Lenders are the more immediate problem. They are temporarily restricting housing credit because they are having a much harder time pedaling their newly minted loans in the secondary market. Their unhappy customers are now stuck holding securities backed by numerous non-performing loans. It is hard to believe these geniuses, on both sides of the transactions, were not aware of this. It proves they are not any different that the rest of us; they gambled rising home prices would save all marginal loans. Greed does not discriminate.

Since Wall Street isn't buying any more bridges these days, the lending community is looking for any excuse not to make loans. You can imagine how helpful that is to the housing market. They cannot, in the long run, keep denying credit to good borrowers or risk losing their hard-won market share. So it should be business as usual by next spring.

Prices and Jobs

It is easy to blame the banks who always seems to either be too parsimonious or too eager when it comes to loaning money. Unless the Fed is willing to bring mortgage rates back to the levels of 2004, their actions to lower rates will largely be irrelevant in invigorating the local real estate market.

Buyers will respond to lower prices far more than good news from the Federal Reserve. I am not unaware that many frustrated sellers find themselves with no or negative equity. The combination of purchases made in 2005 and 2006 and the boom in refinancing has created a large pool of sellers with no room for price cuts. They may want to meet the market but cannot. Many of these owners are going to be thrown under the bus as escalating payments (and common sense) leave no alternative but to give the keys back to the bank.

Last time this happened lenders showed no mercy and they themselves later became victims of a purge engineered by the ill-directed Resolution Trust Corporation. I sense the lending community has learned from past mistakes and will make an effort to help homeowners hang on to their properties. But in the end, the borrower with no equity has to have enough income to survive. They will sacrifice if there is a possibility of a reward downstream. There is where our current crisis lies. Until that belief is restored, it may make more economic sense to give up. I think most homeowners in trouble should find a way to keep their property. The present and future consequences of walking away are harsh. Just as forest fires always end, this market will be back.

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