Weekly Market Watch

A Second Week of Financial Unrest
Where do we go from here?

Does it feel like the movie Groundhog Day? Following the second straight week of economic unrest, watching coverage from the trading floors on Wall Street resembled an endless video loop, replaying the same performance day after day. The U.S. stock market endured its worst five-day performance since 1932 on fears of a severe economic downturn. Two days later (on Thursday), stocks plunged in the final hour of trading, sending the Dow Jones industrial average down more than 675 points or more than 7% to its lowest level in five years. In response to this news, overnight stocks plunged in Europe and Asia, as well. Most notably, Japan’s Nikkei fell more than 10 percent Friday.

We’re all affected by this, whether or not we have 401k’s and stock portfolios suffering large losses. The business owner who may be completely detached from the stock market personally, and fortunate enough to not be in need of a commercial loan to make payroll, is still affected by his or her customers who are experiencing actual losses. Many consumers were afraid to open their third quarter 401K statements as they arrived this week in the mail. Others are making countless calls to their financial advisors in hopes of a miracle or a quick fix to stop the decline. Still others are choosing to ignore it with the “ignorance is bliss” philosophy. The bottom line is, we’re all in this together.

What I am thankful for is that I am not hearing very many instances of our customers who are qualified for loans by today’s standards not being able to get loans. I am meeting very regularly with our Princeton Capital president Rob Reid over the subject, and we just aren’t seeing situations where loans are being pulled or denied unreasonably at the last minute. I have heard from some agents that they’ve dealt with a lender that had a buyer qualified for 25% down, and then changed the requirement to 30%. This is by far the exception rather than the rule. To date, most loans opened in the past 30 days are funding as they were packaged. Naturally, jumbo loan resources are fewer today, but there is enough money out there at very reasonable rates to satisfy the current demand.

Last week’s passing of the Emergency Economic Stabilization Act of 2008 should help to alleviate some strain as one of the goals of the act is to unfreeze the credit markets to encourage intra-bank lending. Once we start to see this, banks should begin to lessen their stringent requirements and consumers should be able to once again see more resources for mortgages, auto, and school loans.

Historically speaking, during times of economic crisis consumers tend to invest their money in tangible assets, like real estate. We expect that this may be the case in the months ahead as consumers look to buy homes for all of the lifestyle reasons that prompt people to buy (i.e. marriage, births, divorce, deaths, retirement, job relocation, etc.) but also with a consideration of the historic long-term appreciation that makes homeownership a valuable investment over time.

Earlier this week, Bloomberg.com reported, “Rates are low enough that some consumers stung by losses in their portfolios may want to pull the trigger on a purchase or refinance if they can lower their payments.”

Indicative of this fact, the article went on to report, “A nationwide survey of consumer credit rates showed 30-year fixed rate mortgages averaged 5.8 percent yesterday, according to Bankrate.com. Rates were 6.26 percent on August 29 and also July 31, in the same survey. Home-loan applications rose 2.2 percent last week, according to the Mortgage Bankers Association and purchases were at a six-year low the previous week.”

We certainly are in a time of uncertainty. But while many sit glued to CNN and others fret over their investment portfolios, the housing market continues to labor on in the Bay Area. Because the beautiful thing about real estate is that it’s not just an investment—though it may be one of the most important investments a consumer will make in his/her lifetime. Your home is where you raise your family and plant your roots. It’s where you hang your hat and make memories to last a lifetime.

You can’t live in your stock portfolio - which is why some people will always need to buy or sell a home, regardless of the state of the national economy. Here’s what was going on in our local markets:

East Bay—A very mixed bag in the East Bay this week. Castro Valley—a market which has been successful in sales for most of the year thanks to bank-owned properties—seems to finally have slowed down a bit as its REO inventory decreases. Berkeley seems to be feeling the hit of the economic freeze as buyers seem to be hesitant to make offers. Oakland concurs noting that “Buyers are on the fence about price. We are seeing offers coming 10% below the asking price and not coming together.” This is an important fact for sellers to think about as they are pricing their homes in today’s market. Affluent San Ramon Valley is starting to see an increase in REO activity. While just six to nine months ago, REOs were the exception to the rule, today only two of the office’s new sales are not REOs. Fremont seems to be a bright spot reporting, “Even in light of the recent economic news, listings and sales are still active. The REO market is very active. Buyers previewing at open houses are surprisingly active.” Livermore is seeing quite a bit of activity in the REO market noting that five of seven pending sales this week were REO. The upper-end of Livermore is stagnant.
Monterey County—Buyers were very hesitant this week in light of the economic turmoil. We had fewer opened escrows last week than we usually do.
North Bay—Greenbrae is reporting that “confusion and uncertainty has led to a paralysis in the market, though lenders are still lending and there are still great deals to be had.” Nearby San Rafael notes that there was a slowdown this week in open house activity and Southern Marin concurs noting that it had no new sales for the week as buyers remained cautious. Sonoma County seems to be feeling the strain as well though Santa Rosa did note a bright spot: the $500,000 to $1 million range—which has been sleeping for a good part of ’08—seems to have awakened over the last three weeks. Though three weeks does not define a trend, it is a sign of good things to come as we need the move-up buyers to be moving in order for the upper-end to pick-up.
Peninsula—Overall optimism is high along the Peninsula right now. We had two very competitive multiple offers out of our Burlingame office this week which have yet to be ratified. While at the same time, we had a few nervous buyers back out of an offer and then attempt to renegotiate on the same deal. Half Moon Bay saw open house activity pick-up this week thanks to the LPGA tournament and a few high end deals that continue to be negotiated. Our Menlo Park Santa Cruz Avenue office is reporting that things are slow though the office is quick to note that “savvy buyers are taking advantage of the great opportunities.”
San Francisco—Agents are finding that some of their buyers are holding tight right now waiting to see what is going to happen with the economy before they are willing to write an offer. In a sign of good things to come, open houses were well attended in some areas. City buyers are just waiting for that perfect opportunity to swoop down on the best deals. Sellers take note: the buyers are out there so if you price your home competitively from the beginning, you should be able to attract some interest.
Santa Cruz County—No information provided.
Silicon Valley—People are concerned. There’s no question. Buyers and sellers alike seem to be in a wait and see mode. Buyers want to see what is going to come of the market over the next several weeks and most sellers are only selling if they really need to put their homes on the market. The bright spot? Some buyers are seeing the opportunities available in today’s market despite what is going on in Wall Street. Bank-owned properties also continue to drive many of our outlying markets and we do continue to see multiple offers on such properties. Our San Jose Almaden office is reporting that we are having trouble with financial commitment from some lenders. Agents are now trying to get financing contingency to remain in effect until the loans are funded.
South County—The local market continues to be dominated by bank-owned properties. Prices continue to drop but buyer interest is very high as interest rates are good and prices become increasingly attractive. Moderately priced homes are selling fairly quickly—if they are priced right and show well. Activity with higher-end homes has slowed as there are not many “move-up” buyers. Lending continues to be a challenge. Buyers who once could get into a home with just 10-% down are now required to have 20% to 30%.

As you can see, overall the housing market for the week was a bit of a mixed bag. Areas that have a high REO rate continue to see quick sales. More affluent regions seem to be feeling the wait and see philosophy. And for most, the ability to get a mortgage seems to be more of a psychological challenge rather than an actual one, at least at the moment.

I agree with many of my colleagues that Q4 could be the best opportunity in a long time to purchase real estate. Buyers should understand that the best time to buy is when others are not.
Until next week,
Rick

Rick Turley
President, San Francisco/Peninsula/North Bay
Coldwell Banker Residential Brokerage